New study makes the case for changing rail fuel surcharges

Jeff Berman, Senior Editor -- Logistics Management, 3/15/2006

GAITHERSBURG, Md.-A new study from Escalation Consultants, an energy and railroad consultancy, makes the case for rail shippers as to why certain fuel surcharges need to be changed and offers them insight to help reduce their fuel surcharges expenses.

The company's Railroad Fuel Surcharge Study examines the recovery of fuel costs from the major railroads primary fuel surcharge programs. These costs are based on the change in fuel cost recovery between the fourth quarter of 2001 and the fourth quarter of 2005.

The cost of fuel

One reason for the significant year-over-year increase in fuel surcharge expenses, according to Jay Roman, president of Escalation Consultants, is the high price of fuel. Fuel surcharges are based on fuel costs in effect in late 2001 and early 2002. The railroads current surcharges assume that the rate increases shippers have received for their movements since 2001, have nothing to do with the increased cost of fuel in their movements, noted Roman.

Many shippers’ rail rates have increased 30 percent to 50 percent since 2001, which makes this a very difficult assumption to accept. “Up until now there has not been a negative for railroads having a high over-recovery of fuel costs from their fuel surcharge programs," said Roman.  “There has been an information vacuum. None of the railroads have provided any detailed numbers to show how accurate their programs are.”

Fuel surcharges

The "until now" that Roman refers to do pertains to the Surface Transportation Board's (STB) announcement yesterday that it plans to hold a hearing on May 11, regarding rail fuel surcharges. The objective of the hearing is to "provide a forum for the expression of views by rail shippers, railroads, and other interested persons, on the manner in which fuel surcharges are calculated and charged by railroads," according to the STB.

A significant obstacle shippers face, in regards to fuel surcharge rates, is dealing with the roughly 100 percent year-over-year increase for fuel surcharges from Class I railroads. "Fuel surcharges have increased dramatically," said Roman. “Surcharges of 15 percent to 18 percent of the total rate for movements have become commonplace and shippers see a lot of inequity in these provisions.”

A major shipper complaint is that "a rail shipper with a captive movement, with no competition, can easily be paying a rate that is 100 percent higher than a rate where there is competition.”  He says this means that when a fuel surcharge is applied against rates in a train that has two movements of the same commodity, that originate and terminate in the same area and that use almost identical amounts of fuel, one movement can have twice the fuel surcharge expense. “If one rate is twice as high as the other it will have twice the fuel surcharge expense of the other because fuel surcharges are applied against rates," said Roman. “Many shippers believe this is taking a problem of high rates and making it worse."

For more information on Escalation Consultants' Railroad Fuel Surcharge Study, go to www.escalationconsultants.com.