Fuel Surcharge

trainHelping Railroad Customers Manage Fuel Price Risk
One of the key issues facing railroad customers today are escalating fuel surcharges that reflect escalating fuel costs.  To address this important industry issue, TEGMA advocates for development of a market-based solution that will allow shippers to better manage their fuel price exposure through an over-the-counter hedging tool.  

Current Fuel Surcharge Formulas Restrict the Effectiveness Of Hedging Tools

  • Under the current system, rail carriers have a large degree of flexibility in determining the fuel surcharge rate levels as well as the underlying index used to calculate the rate.  The highly individualized formulas that result from this flexibility hamper the ability of the marketplace to structure an effective hedge instrument.
  • As a result, shippers cannot, in a cost-efficient manner, hedge the risk of fuel cost escalation through the use of existing futures instruments or over-the-counter products.  If railroad customers are unable to manage their fuel price risk, it jeopardizes their ability to competitively serve their customers.

The STB Needs To Promote Uniform Application Of Fuel Surcharges

  • To effectively implement an over-the-counter instrument to hedge rail fuel surcharges, there must be uniformity in their application.  TEGMA believes the following principles are key to identifying the most appropriate underlying index:
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    •  The index must reflect wholesale price instead of retail price in order to negate the changing and variable tax applications;
    • For greater transparency and accuracy, the index must be published regularly, publicly available, searchable, and reflects the type of diesel fuel used by rail carriers; and
    • It should demonstrate a strong correlation to a hedgeable exchange-traded contract because this would allow shippers to develop an efficient, competitively priced risk management instrument.   
  • TEGMA has hosted an industry forum, met with STB commissioners, submitted a public comment letter and testified before the Agency to urge the STB to do everything in its power to promote such uniformity among Class I rail carriers, which would create the transparency necessary to build a useful hedging instrument

If U.S. rail carriers adopt a mileage-based fuel surcharge formula and use a common fuel price index, such as NYMEX Heating Oil or the National US Average On-Highway Diesel Fuel Prices index, an effective hedge tool could be built by those in the futures and derivatives industries for railroad customers.  This solution would allow railroad customers to go to the market and hedge their exposure.  TEGMA’s proposal relies on the market to help companies manage their individualized exposure and balances the interest of both rail carriers and their customers.  

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