9.1.06

NEVER CLEAN OUT YOUR RESEARCH FILES COMPLETELY. Rip Track complains about railroad fuel surcharges on freight rates.

Anyone who ships by rail today is aware of the "Fuel Surcharge", a tariff that is added to all published freight rates. Several months ago when the surcharge was initiated, rates would fluctuate somewhere between 2% and 4.5% to 5%. Then everything changed. As Autumn '05 approached, the surcharge ballooned to 10%, 11%, and 12%, finally resting at an unbelievable 18.5% for BNSF Shippers for December 2005!

One problem is obvious for Rail Shippers. If you work up a competitive quotation, and base your freight component on a lower surcharge, the increases which we have recently seen blow your bid out of the water. The difference between a 4% fuel surcharge and a 12% fuel surcharge will ultimately mean a financial loss for such a project as bid. And guess what? No owner who awards a contract based on your bid will cut much slack here. All things equal, you lose!

Another problem: The 18.5% Fuel Surcharge for the BSNF was announced to shippers on the first day of November. At that time, is was an accurate reflection of fuel prices. Guess what happened? If you recall, fuel went down in price. But the BNSF, in this case, did not lower their surcharge, it remained in place.

Years ago, I participated in some research on automatic fuel cost adjustments to electricity rates. (Was it really thirty years ago this month I started working on it?) The purpose of those adjustments was to spare the utility regulators the difficulty of holding a full-blown rate hearing each time the utility's fuel bill changed. The point of the research was to identify the extent to which power companies used relatively more fuel-intensive technologies so as to be able to recover more of a cost change more rapidly. (They did, to the extent of several millions of 1972 dollars in additional costs to consumers. The inefficiencies haven't gone away. More recent researchers have proposed transferring the fuel price risk to the futures market as an alternative way of reducing the inefficiency.) But those adjustment clauses (I read them. All of them. For several different volumes of the long-lost National Electric Rate Book) required rate reductions if the utility's delivered costs of fuel fell below some baseline. Did Burlington leave something out of its tariffs that shippers completely missed?

Rip Track has a request to the railroads.
Please, Class Ones, do this. If you are a high-powered exec, you can even take credit for thinking it up. The solution? Admit that fuel prices are not going back to the levels of late 2004. Simply raise your published tariffs so that the fuel surcharge can be lowered to a much smaller and more controllable percentage.
In the regulated utilities, this arrangement would involve a partial or full hearing to change the base delivered price of fuel above or below which the fuel adjustment would take effect. For completeness, a shipper who has the opportunity to shift sufficient traffic to Union Pacific or CN to matter ought inform Burlington that an escalator clause without a base delivered price for fuel and the possibility of lower tariffs in the event of fuel prices below that base.

On the other hand, don't do that. Leave these escalator clauses in place as they are for about five years. I know exactly how to identify the deadweight losses that would result. All I have to do is cultivate some shippers who will provide me with the text of the surcharge clauses.

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