DC Velocity - March 2016

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46 DC VELOCITY MARCH 2016 www.dcvelocity.com SURCHARGES EXPLAINED

Surcharges have three compo-
nents: An index that sets fuel pric-
es and serves as a benchmark for
the surcharges; a “peg” or contrac-
tually negotiated price above or
below which surcharges are or are
not imposed; and an “escalator,”
which determines the actual sur-
charge amount based on the average
mpg of a carrier’s fleet. Most of the
industry uses an index published
each Monday by the Department
of Energy’s Energy Information
Administration (EIA) that surveys
about 400 nationwide locations and
determines national and regional prices.
The EIA index includes a nationwide
average price, as well as prices broken
down by various regions.

The “peg” can be set anywhere from zero to more than $2 a gallon, depending on a shipper’s volume and its preferences (more about that later). From there, the “escalator” formula kicks in, with a 1-cent surcharge imposed for every 5 or 6 cents by which prices in the EIA index exceed the peg rate. The surcharge paid by the user is the difference between the peg and EIA prices, multiplied by the miles traveled.

For example, a shipper and truckload carrier agree to a peg price of $1.20 a gallon, a level that is fairly common. If weekly pump prices hit $4 a gallon and the interval of increase is set at 6 cents, the surcharge amount comes to 46.6 cents a mile. A load moving 1,000 miles would thus have a $466 surcharge tacked onto the base rate.

The 5- to 6-cent intervals have held sway for years because they match the historical number of miles a heavy-duty truck traveled on a gallon of fuel. However, truckload fleets with modern equipment get between 6. 3 and 6. 5 mpg, according to various estimates. Some trucks get as much as 7 mpg, but that isn’t the norm.

Because the EIA numbers are nearly always above the pegs, surcharges have become a part of everyday shipping. However, with the weekly EIA nationwide price sitting below $1.80 a gallon at press time, prices are approaching pegs that have been set at the upper end of the range.

TAKE THIS PEG AND ...

Here’s where it gets interesting. Though a higher peg means a smaller fuel surcharge, it also translates into a higher line-haul rate, since the carrier needs to recoup the forgone surcharge revenue one way or another. While a lower peg results in higher surcharges for the shipper, it would, at least in theory, be offset by declines in the base rate because the carriers were receiving more compensation for fuel.