Easing the Pain of Fuel-price Surges
By Henry E. Seaton
December 1999
Reprinted from etrucker.com

After a long period of low fuel prices, the average diesel price has increased more than 25 cents per gallon since February. Depending on your trucks’ fuel economy, your costs have increased by 4 cents or 5 cents per mile. Unless you can recoup these costs, a fuel spike like this can easily wipe out your profit margin. Wildly fluctuating fuel costs are nothing new to the trucking industry. During the Carter administration, mechanisms were developed to pass the increased cost of fuel on to shippers in the form of a mandatory fuel surcharge imposed by the Interstate Commerce Commission. Both the ICC and the File Rate Doctrine are now gone, so it’s up to you to recoup this increased cost from your customers.

Start by adopting a standard benchmark for fuel prices. The industry generally has used the Department of Energy’s average national fuel price, which is posted each Monday afternoon and is available on the Web at www.eia.doe.gov/oil_gas/petroleum/pet_frame.html and each week in Transport Topics.

Most fuel surcharges establish a DOE fuel price peg, such as $1.20 per gallon, and provide for increased compensation to the carrier of 1 cent per mile for every 5- or 6-cent increase in the DOE weekly average over the fuel peg. When rates are expressed as flat charges or in cents per hundredweight, the increase often is expressed as a percentage of revenue that approximates the effect of escalating fuel prices. Although most shippers are familiar with fuel surcharges that kick in between $1.16 and $1.20 per gallon, in designing and proposing your own fuel surcharge you must take into account the price of fuel when the rates were negotiated.

Now comes the hard part: After you establish your fuel peg and the rate of increase or decrease you want to assess, you must gain the shippers’ agreement.

Small carriers are often bashful about seeking fuel surcharges and worry that their business will be jeopardized if they seek an increase. Don’t be overly timid. Virtually all major carriers have fuel surcharge provisions in their tariffs and negotiated fuel surcharges as schedules in their long-term contracts. Knowledgeable large shippers also expect to pay for the increased fuel cost. Many won’t offer you additional money unless you ask for it, but don’t be surprised to learn, when you ask, that they have already approved their own uniform fuel surcharge provisions and are willing to extend them to you.

A fuel surcharge becomes a legal accessorial charge in one of two ways. If you include a fuel surcharge in the rules tariff you provide shippers upon request, the surcharge provisions are incorporated into every shipment that does not move under contract. But if a contract excludes application of your rules or accessorial rates, you must get the shipper to agree to a surcharge and include it as a signed addendum.

Be as consistent as possible in applying your fuel surcharge. It is easiest on your rating and billing department to calculate a single fuel surcharge rate or percentage every week and apply the same rate to as many of your loads as possible. This might require some adjustment in your permanent pricing to match the uniform fuel peg, and your rating and billing department must watch for special exceptions. Some of your shippers will have their own fuel surcharge formulas, and it generally is assumed that spot market rates for one-time shipments include fuel surcharges unless otherwise noted.

If you don’t already have fuel surcharge provisions in place, adjust your rates to reflect current fuel prices, and establish and enforce a variable fuel surcharge program. Profit margins as a percentage of total revenue are too thin for you to ignore a spike in the cost of fuel.