U.S. Railways to Change Fuel Charge Calculation

WASHINGTON - Aug 8/06 - SNS -- The decision by the Surface Transportation Board (STB) to force railways in the United States calculate and assess fuel surcharges was applauded by the National Grain and Feed Association (NGFA).

In a potentially significant and far-reaching decision, the STB found that the formulas currently used by most carriers for assessing fuel surcharges - which are applied without regard to the increased fuel costs actually incurred on a particular movement - constitute an "unreasonable practice."

If the ruling stands following the STB's review of input received during a 30-day public comment period it provided when issuing the decision, the NGFA said five of the six Class I rail carrier fuel surcharge programs would be subjected to substantial changes.

The sole exception likely would be the BNSF fuel surcharge programs for grain and coal, which already utilize a mileage-based approach that attempts to reflect the increased fuel costs incurred on shipments. All other Class I rail carriers compute a percentage surcharge index that is applied to the rail freight rate, which the STB decision found to be an "unreasonable practice."

The NGFA for more than two years has been urging rail carriers to adopt more equitable approaches for assessing rail fuel surcharges to reflect the increased fuel costs actually incurred on individual shipments. At a May 11 public hearing conducted by the STB, the NGFA provided data conservatively estimating that all six Class I freight rail carriers during the fourth quarter of 2005 overcharged shippers for fuel by between $10 to $80 per car, compared to base fuel costs.

The NGFA had joined with three other national shipper organizations to finance a study in 2005 that documented that surcharges assessed by some railroads far exceed the level of fuel price increases actually incurred. Subsequently, the NGFA and other organizations met with each of the six Class I railroads to encourage them to reexamine the methods used to assess rail fuel surcharges, with mixed results.

Among the six Class I carriers, only the BNSF and Canadian National Railway (CN) responded positively by making voluntary changes to their fuel surcharges. The BNSF changed its method for calculating fuel surcharges, while the CN has implemented several reductions in the level of its fuel surcharge.

At the STB's May public hearing, NGFA Rail Shipper/Receiver Committee Chairman Dan Mack, vice president, transportation for CHS, St. Paul, Minn., had said that rail carriers have a legitimate right to recover unanticipated fuel costs that exceed levels already being recouped through freight rates. But in reality, the NGFA had said, there is a "fundamental bias" in the fuel-surcharge formulas currently used by most carriers and urged the STB to act "if the carriers continue to ignore calls for correcting fuel-surcharge formulas that are clearly excessive and fail to address the equity issues that have arisen involving different types of shippers."

In its Aug. 3 decision, the STB positively addressed several of the inequities cited by rail shippers. For instance, in response to shipper arguments that rail carrier fuel surcharges should be reasonably related to the increased cost of fuel on individual movements, the STB ruled that a carrier wishing to assess what it purports to be a fuel surcharge would need to develop a means of computing the surcharge that is attributable to the movement to which the fuel surcharge is applied.

Specifically, the STB stated in its decision that " . . . because differences in base rates are not pegged primarily to differing fuel costs, we do not believe that it is a reasonable practice for railroads to compute fuel surcharges as a percentage of existing rates." In addition, the STB stated that cost-based surcharges could be achieved through mileage-based surcharges, ton-mile based surcharges or alternative methodology, so long as the methodology resulted in surcharges reasonably related to the additional costs of particular movements.

The STB ruling also would prohibit another inequitable practice engaged in by some rail carriers cited by the NGFA and other shipper groups - the "double-dipping" on fuel surcharges. "Double-dipping" occurs when carriers recover a significant portion or all of their increased fuel surcharges through a so-called rail cost adjustment factor (RCAF) that is included when calculating the freight rate, and then collects it again by imposing a separate fuel surcharge that is added to the rate.

The STB ruling also prescribed a single fuel index - the U.S. No. 2 diesel price at retail - for railroads to use when calculating fuel surcharges. The STB reasoned that this was the broadest-based index that was available with the shortest time lag in reporting.

Currently, several rail carriers calculate their fuel surcharges based on a formula tied to fluctuations in crude oil prices. The NGFA at the May STB public hearing had testified that while crude oil and diesel prices move in the same general direction, diesel fuel prices typically do not increase to the same degree because refining and marketing costs remain a significant part of the spread between ready-to-use fuel and crude oil.

In addition, in response to the NGFA and other shipper organizations' call for rail carriers to be more transparent in how they calculate and apply fuel surcharges, the STB requested that carriers immediately begin reporting monthly their total expenditures for fuel; total gallons of fuel consumed; increases or decreases in their cost of fuel from the previous month; revenue tons for the month; and revenue tons to which the fuel surcharge was applied.

The STB decision also addressed a fundamental legal issue raised at the May public hearing - whether rail fuel surcharges could be considered "an unreasonable practice" subject to STB oversight or instead should be considered part of the freight rate, and therefore unchallengeable unless the shipper proved that the carrier had "market dominance" using the rigorous and costly product- and geographic-competition criteria stipulated by the agency when implementing the Staggers Rail Act of 1980.

On this issue, the STB stated that its decision was confined to addressing what it believed was an "unreasonable practice of applying what the railroads label a fuel surcharge in a manner that is not limited to recouping increased fuel costs that are not reflected in the base rate. The measures we are proposing are designed to preclude such an unreasonable practice." The agency said it was not proposing to limit the total amount a carrier could charge, through a combination of base freight rates and surcharges.