House adopts surprise fuel surcharge regulation

Shippers, carriers are caught off-guard as lawmakers slip a provision mandating fuel surcharges into the federal highway bill.

By James A. Cooke, Executive Editor -- Logistics Management, 4/1/2005

WASHINGTON—As if soaring oil prices and rising fuel surcharges weren't enough to contend with, shippers may soon have yet another fuel-related obstacle to overcome: government regulation. When the House of Representatives passed its version of the federal highway bill (H.R. 3) last month, lawmakers inserted a last-minute provision that would establish mandatory procedures for calculating fuel surcharges.

If it becomes law, the surprise addition could have profound implications for the trucking industry. "This is the single largest regulatory trucking issue since deregulation," said Jeff Tucker, chief executive officer of the Tucker Co., a freight broker and contract logistics company in Cherry Hill, N.J.

The House action comes at a time when crude oil prices have topped $55 a barrel and shippers are confronting steep hikes in fuel surcharges. Many motor carriers include clauses in their contracts that allow automatic increases that are tied to rising diesel fuel prices. Less-than-truckload (LTL) carriers adjust their fuel surcharges weekly, while truckload carriers tend to do so bi-weekly, according to Chad Bruso, a trucking analyst with brokerage firm Morgan Stanley.

Every one-cent increase in the average weekly price of diesel fuel triggers a specified percentage increase in fuel surcharges for LTL carriers, said pricing consultant and Logistics Management columnist Ray Bohman. "The prices come out on Monday afternoon, and most carriers make their changes on Wednesday."

Most fuel surcharges are pegged to the national average price for a gallon of diesel fuel, as determined by the federal government. But because diesel fuel costs more in California, some western motor carriers have begun tying their fuel surcharges to prices in that part of the country. "Carriers have gone to customers with western freight and put in special surcharges that peg it to the cost of diesel in the West or a certain amount above the national average," said Bruso.

Like gasoline, diesel prices climbed dramatically last month. American Trucking Associations economist Robert Costello noted that in March, the average nationwide price of diesel fuel remained above $2 a gallon; in California, the price hit almost $2.50. "For a typical truckload carrier, fuel can be 20 percent of its operating expense," Costello noted.

Spiraling petroleum prices provided the backdrop for the fuel surcharge provision in the House version of the highway bill. That provision was included at the behest of independent owner-operators, who often subcontract with truckload carriers and transportation brokers but may not receive the extra money shippers pay for fuel surcharges.

The provision stipulates that shippers pay a fuel surcharge when diesel rises above $1.10 a gallon. It also specifies that the surcharge be calculated based on the average retail price in the Defense Department district or subdistrict where a shipment is physically tendered to the motor carrier, broker, or freight forwarder, as published by the Energy Information Administration for the Petroleum Administration.

The provision even specifies how to apply the surcharge. Shippers would be required to calculate the amount of diesel fuel used for each shipment by assuming that each 5 miles uses up one gallon of fuel. That mileage would be determined under the "Defense Table of Official Distances" issued by the Surface Deployment and Distribution Command of the U.S. Department of Defense.

Some trucking groups, including the Truckload Carriers Association (TCA), support the concept of mandatory fuel surcharges but do not endorse the current House version because of such restrictions as pegging travel calculations to a particular mileage guide.

But other groups, such as the National Small Shipments Traffic Conference (NASSTRAC), the National Industrial Transportation League (NITL), and the Transportation Intermediaries Association (TIA), were sounding alarm bells about the potential impact of government regulation of fuel surcharges. TIA president Robert Voltmann, for one, expressed concern that such regulation could prompt a raft of lawsuits in which owner-operators sue shippers for fuel surcharges that weren't correctly reimbursed by a motor carrier. "Two years from now, a lawyer could talk to a group of owner-operators who hauled for a company, analyze the sub-district and the mileage, and then bring a class-action lawsuit," he said. "There's no limit on how far you can look back on this."

At press time, the Senate had not yet drafted its version of the highway bill, but industry groups were already mobilizing to remove the fuel-surcharge provision before it became law. "We are putting together a coalition to kill this in the Senate," Voltmann said.