Surcharges Should Be Mandatory
By Henry E. Seaton

July 2008
Reprinted from

Q We are a small carrier, and we have been following the legislative efforts by the Owner-Operator Independent Drivers Association at mandating a “truth in contracting” statute that would require the pass-through of any fuel surcharge to the ultimate purchaser of the fuel. We have a broker affiliate, and such legislation does not threaten us because we disclose and pass through any fuel surcharge we get. We think it is only ethical to do so. Unfortunately, the fuel surcharges paid by shippers are all over the lot, and there is no consistency for long-term pricing. Today’s flat rate is not compensatory for tomorrow’s freight. Back in the 1970s, the Interstate Commerce Commission imposed a mandatory fuel surcharge that applied across the board. Has anyone suggested reimposition of this concept?

A I think you have an excellent idea. Few of us remember the ICC, and even fewer remember it fondly. But the old mandatory fuel surcharge you mention was based upon the Department of Energy average and established a benchmark for pricing that seems sorely needed in today’s marketplace. With more perceived capacity than available freight, many shippers have moved the traditional set point of $1.16 or $1.20 per gallon, are trying to insist on fuel formulas in excess of 6 miles per gallon, or otherwise are wringing additional compensation out of the increasing cost of fuel. One novel plan even insists on lane-by-lane pricing free from the published DOE matrix with compensation predicated on rack plus 2 cents per gallon.

A small carrier or owner-operator cannot even buy fuel at this rate, much less be compensated for idling and deadhead costs. When brokers buy into these confusing and noncompensatory fuel surcharge schemes, deduct their margin and then flat-rate the small carriers and independents, the resulting call for congressional action should come as no surprise. Most small carriers do not have the 12 to 15 percent profit margin enjoyed by some large brokers. Monkeying around with the customary fuel surcharge when fuel costs approach 80 cents per mile quickly becomes a life-or-death issue to the small carrier.

Recent truck reports show that dry van brokers are increasing market shares at the expense of large and mid-sized asset-based carriers, as shippers increasingly engage brokers to look for ways to lower their overall transportation costs in the expensive fuel environment. Clearly, shipper and broker lobbyists oppose litigation and claim on the Hill that free market principles are self-correcting and that no legislation is needed. This laissez-faire attitude may be shortsighted if failure to address the fuel surcharge issue with standard pricing runs small carriers out of business.

At the end of the day, tinkering with the fuel surcharge should not be used by design or deception as a way to negotiate freight rates. Likewise, carriers must avoid colluding to set surcharges at specific levels. But a standard reasonable fuel surcharge, whether arrived at by consensus or by legislative imposition, certainly seems needed and fair.
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