U.S. post office struggles with alternative fuel delivery: Kemp

LONDON Mon May 28, 2012 10:57am EDT

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LONDON (Reuters) - If any organization has the incentive and the scale to roll out a fleet of alternative vehicles, it should be the United States Postal Service (USPS).

The post office operates the largest civilian vehicle fleet in the world, with more than 210,000 vehicles travelling almost 1.3 billion miles a year.

The agency has a powerful reason to switch from expensive petroleum-derived fuels as rising fuel costs make a small but significant contribution to its mounting financial problems.

Its struggles to find cost-effective alternatives, however, highlight the obstacles to rolling out alternative vehicle technologies across the United States.

RISING FUEL BILLS

In fiscal year 2011 (FY2011), the 12 months from October 2010 to September 2011, the postal service made a net loss of $5.1 billion. It would have been even worse if the agency had not deferred making retirement-linked payments to the U.S. Treasury.

Losses are being driven mostly by employment costs, including legislative requirements that mandate pre-funding of retiree health plans. Workers compensation, benefits and retirement funding account for 75 to 80 percent of total operating expenses, compared with under 10 percent for transportation and fuel. Nonetheless, the rising prices of gasoline and diesel contribute to the agency's woes.

In FY2011, a 25 percent increase in gasoline and diesel prices wiped out all the efficiency gains USPS made from better route planning, which cut the number of miles driven by 88 million or 5.4 percent. As a result, highway transportation costs rose $138 million or 4.3 percent to $3.343 billion.

ALTERNATIVES TO OIL

The post office therefore has a sharp financial incentive to shift from using expensive petroleum-derived fuels to alternatives such as ethanol (E85), biodiesel, electric hybrids, or vehicles using gas-derived fuels such as compressed natural gas (CNG) and liquefied natural gas (LNG).

It also has a legal obligation to use more alternative fuel vehicles. The Energy Policy Act of 2005 requires that 75 percent of new vehicles acquired by federal fleets must run on alternative fuels. The mandate applies to fleets with 20 or more vehicles in metropolitan areas, capable of being centrally fuelled, with exceptions for some law enforcement, emergency and military vehicles.

Under the 2005 law, fleets must actually use alternative fuels in dual-fuel vehicles, unless they receive a waiver from the secretary of energy ("U.S. Postal Service: Fleet Alternative Fuel Vehicle Program Report for Fiscal Year 2011" Feb 2012).

The postal service is not technically covered by executive orders issued by President George W Bush in 2007 and President Barack Obama in 2009 requiring agencies to reduce their consumption of petroleum-derived fuels.

Nor is it subject to Obama's 2011 presidential memorandum requiring federal fleets to acquire only alternative fuel vehicles by the end of 2015. But the postal service has chosen to follow all these presidential directives as far as possible.

ALTERNATIVE VEHICLES BUT NO FUEL

USPS has a substantial number of alternative fuel vehicles. Out of a total stock of 212,000 vehicles in 2010, almost 44,000 (21 percent) were alternative fuel vehicles, according to the annual report of the Federal Fleet Policy Council. The largest number were flex-fuel vehicles capable of running on E85, which accounted for 39,000 vehicles.

The postal service has always been at the forefront of new transport technologies. USPS is also working with manufacturers to pioneer and test the latest generation of alternative vehicles and is currently testing vehicles made by E-Ride, Vantage, Navistar and Grumman.

The problem is not the vehicles, however, but availability of alternative fuels to use in them. In FY2011, USPS vehicles consumed just 782,000 gallons of alternative fuels (on a gasoline equivalent basis) out of a total of 155 million gallons, less than 1 percent. Most of the time, dual fuel vehicles have been filled with regular gasoline and diesel.

CREDIT CARDS AND FILLING STATIONS

As the USPS annual fuel report states: "the postal service has made a concerted effort to increase alternative fuel use by issuing memoranda to field operations to utilize alternative fuels without compromising our mission". It has even written alternative fuel use into the performance indicators used in annual employee reviews.

"Unfortunately, the cost of alternative fuels, in most cases, is higher than the petroleum fuel; this further exacerbates the postal service's strained financial position," according to the agency.

"The vast majority of fuel used for daily mail delivery is purchased from local merchants using the Voyager Fleet Credit Card. Letter carriers refuel their vehicles at locations along their routes where possible, thus avoiding the higher costs (in terms of work hours and added fuel consumption) associated with travelling to more distant or specialized fuelling points."

"The potential to utilize E85 and other alternative fuels is limited by their commercial availability. Like the general public, the postal service relies on local commercial infrastructure to supply convenient and competitively priced fuel," the report writes.

"If alternative fuel locations are not conveniently located and competitively priced, the postal service cannot access and utilize them in its delivery fleet."

"While the postal service provides information on (alternative fuel vehicle) deployment to interested suppliers and industry advocates to assist in development of fuel infrastructure, postal fleet demand alone may be insufficient to make new installations cost effective for commercial fuel providers."

ROLLOUT OF FUEL INFRASTRUCTURE

The post office's problems with adopting alternative fuels have been made worse by its poor financial condition, tough competitive environment and universal service obligation. But they also point to issues that are likely to shape the take-up of alternative fuels more widely.

The concept of alternative fuels covers a wide range of substitutes for gasoline and diesel. Not all have the same cost advantages. LNG and CNG-fuelled vehicles are benefiting from the sharp drop in natural gas prices, but biofuels do not share this competitive advantage. Private sector companies planning a switch are mostly focused on gas-derived fuels. Unfortunately the postal service is stuck with a strategy based around E85.

Initial use of alternative fuels is likely to be faster where services rely on (privately owned) central refueling stations rather than public filling stations. United Parcel Service is expanding its LNG truck routes eastward from Ontario, California, according to my colleague Jason Lange. UPS bought 48 LNG-powered big rigs last year and recently opened new routes between Las Vegas and Salt Lake City and has plans to extend the network to Denver.

UPS is rolling out LNG trucks on a small number of routes using dedicated refueling facilities. To do the same on all of its network, the postal service would have to re-engineer the way it plans routes and acquires fuel to centralize its refueling, which is very unlikely.

But other government agencies operating medium and large fleets from central locations might be able to put in place or adapt their own refueling systems.

At least 12 agencies have received funding to build out their own alternative fuels infrastructure, including the Pentagon, each of the armed services, the Defense Logistics Agency, the Bureau of Prisons, the Federal Bureau of Investigation and the Department of Agriculture, according to the Government Accountability Office ("Renewable Energy: Federal Agencies Implement Hundreds of Initiatives" Feb 2012).

The Air Force initiative, for example, includes "planning, operation and infrastructure at Air Force facilities to dispense alternative fuel as well as bulk purchase of alternative fuel to supply this infrastructure. The Air Force has worked with the Military Exchange System and the Defense Logistics Agency to install E85 dispensing pumps at Air Force installations."

The Bureau of Prisons has installed E85 dispensing pumps at four refueling stations, and all new refueling facilities will be built with this capability in future where fuel supply is available. The FBI has done the same at its academy in Quantico, Virginia.

But these closed refueling systems are small. The big prize of shifting the postal network from gasoline and diesel is still some way off. Private operators such as UPS are likely to get there first.

(John Kemp is a Reuters market analyst. The views expressed are his own)

(editing by Jane Baird)

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