What is Rail Fuel Surcharge and Why is it Important?

What is Rail Fuel Surcharge?

Simply put, Fuel Surcharge is a tool that was designed for railroads to recover the cost of fuel consumed to move railcars. Fuel Surcharge came about when the cost of fuel increased, and the railroads decided to pass the excess cost onto shippers. The railroads will apply Fuel Surcharge on a per car basis based on the rules within their published Fuel Surcharge provision. This cost is a supplement to the rail freight rate and can add a material amount to an invoice. If unexpected costs on an invoice are troubling to you, it is best to understand Fuel Surcharge, so you know what you are looking at.

Rail Fuel Surcharge is Additional Revenue to the Railroad

In many cases, the amount of Fuel Surcharge applied exceeds the railroads’ actual fuel cost. This can occur since the railroads take their fuel costs into account when they set their rail rates. Then, they receive Fuel Surcharge in addition, to recover their costs. Depending on how reasonable your rail rate is, the total revenue may be excessive.

Rail Fuel Surcharge Re-Baseline of Rates

Throughout the years, the railroads have re-baselined their rates as it relates to Fuel Surcharges. Over the past 15 years, when Fuel Surcharges increased to a higher level, the railroads would apply a lower surcharge and add the differential to the base rate. Below is an example:

fuel surcharge rebaselined rates example

The negative issue for shippers in this case is that the re-baselined rate will now be subject to the traditional annual rate increase of 3.0%, which translates into a larger increase per car. Also, when the Fuel Surcharge levels fell to a point where the surcharge was 0%, all the railroads (with exception of the BNSF) never compensated shippers back. Fortunately, we have not seen the rail carriers re-baselining in recent years since Fuel Surcharges have been relatively low.

How is Fuel Surcharge Calculated?

The U.S. Energy Information Administration (EIA) publishes two key fuel prices that the Railroads will use to calculate their Fuel Surcharge. The first measurement is the previous month’s On Highway Diesel Fuel average, which is the average price of diesel for motor vehicles plus tax. The second measurement is the previous month’s West-Texas Intermediate Crude Oil average, which is the average price of crude oil produced in Texas and Southern Oklahoma, which is used as a pricing basis for other crude oil markets. The railroads will use these monthly prices to assess either a Mileage Based Fuel Surcharge or a Percentage Based Fuel Surcharge. Mileage Based Fuel Surcharge utilizes the mileage a car travels for the calculation, while Percentage Based Fuel Surcharge uses the rail freight rate for the percentage calculation.

What have Fuel Surcharge prices been doing, and where are they going?

The price of fuel has seen ups and downs over the past five years. More recently, the price of fuel took a sharp decrease as a result of COVID-19 in 2020. Fuel prices began slowly increasing over Q3 and Q4 of 2020. These trends indicate that Fuel prices will continue to increase over the course of 2021.

fuel surcharge rates trends

How RSI manages Fuel Surcharge

The complexity of fuel surcharge can make planning for rail costs difficult. So how can shippers get ahead of this constantly changing cost? RSI has been developing the best practices for managing fuel surcharge to build a comprehensive database of fuel prices. We are constantly reviewing changes in fuel prices and the many different fuel surcharge provisions that the railroads use. Our RSInet application can then use these prices to automatically calculate the fuel surcharge that will appear on rail invoices.

In addition, with our Rail Rate Analysis Software, you can evaluate both your rail rates and the Fuel Surcharge applied to determine where your rates are out-of-line and where you may have leverage in negotiations. We also offer access to valuable information, training, and support to enable you to be more effective in your rail rate management efforts.