The National Grain and Feed Association (NGFA) has urged the federal Surface Transportation Board (STB) to either eliminate or significantly modify a provision of its rules that currently immunizes railroads from being required to refund rail fuel surcharges that exceed their incremental internal fuel cost increases so long as they base their surcharges on a specific fuel-cost index.

In 2007, the agency prohibited rate-based rail fuel surcharges as an "unreasonable practice" by railroads. But when doing so, it established a so-called "safe-harbor" provision that carriers could "rely on" to measure changes in fuel costs that could be reflected in fuel surcharges, as long as such costs were not imbedded already in the underlying freight rate. Known as the highway diesel fuel (HDF) index, it is based on the Energy Information Agency's calculation of "U.S. No. 2 diesel retail sales by all sellers." When issuing its decision, the STB noted that alternative indices could be used by rail carriers to calculate fuel surcharges, but that doing so could expose them to unreasonable-practice rulings on a case-by-case basis.

Subsequently a major shipper of agricultural products challenged rail fuel surcharges imposed by the BNSF Railway, contending BNSF's mileage-based fuel surcharge program constituted an unreasonable practice because it extracted "substantial profits" on the affected traffic that far exceeded the actual increased cost of fuel. But in a decision issued on Aug. 12, 2013, the STB ruled that since BNSF had used the HDF index to measure changes in its internal fuel costs for purposes of calculating fuel surcharges, the agency also needed to rely on the same index given the existence of the safe-harbor provision. Thus, even though the STB found that BNSF's incremental fuel costs, as calculated under the HDF, exceeded its actual internal incremental fuel costs by $181 million, the agency ruled against the shipper.

In its 2013 decision, the STB said the result in the BNSF case "concerned" the agency, and that it had not "rejected...lightly" the shipper's allegation that BNSF had used its fuel surcharge program as a "profit center." At the time, the agency said it and others had not "foreseen a situation where the spread between a rail carrier's internal fuel costs and the HDF index would diverge" as much as it had in the BNSF case. The STB also said it was "unclear" whether the fuel-cost recovery by BNSF was a "unique situation" during a period of high fuel-price volatility, or "a more widespread phenomenon" that could give railroads an 'unintended advantage" by allowing them to recover "substantially more than (their) incremental internal fuel costs yet still be permissible under the safe harbor."

In a statement submitted Aug. 4, the NGFA urged the STB to either eliminate the "safe-harbor" provision or modify it so it no longer immunizes rail carriers when they cannot demonstrate adequately that a "reasonable nexus" exists between their fuel surcharge formulas and their actual internal incremental fuel costs. 

"The NGFA's policy that it is reasonable for a railroad to recover unanticipated increased fuel expenses through a separate 'fuel surcharge,' provided the surcharge is reasonably related to the increases in market fuel costs they have incurred, and are over-and-above the fuel costs recovered in the base rate," the NGFA told the STB. Pointing to the need for additional fuel-cost data from railroads to make such a determination, the NGFA said that if railroads "expect their customers to compensate them for increased fuel costs, they should be willing to provide appropriate documentation to demonstrate they are assessing only those charges that recover actual net fuel costs, and nothing more."

In its statement, the NGFA did not urge the Board to eliminate use of the HDF Index as a benchmark for measuring fuel costs. Instead, the NGFA strongly recommended that reliance on the HDF Index by granting it "safe-harbor status" should not immunize rail carriers from being challenged for setting fuel surcharges at levels that exceed the net incremental fuel costs actually incurred. As evidence, the NGFA provided the accompanying chart from the Securities and Exchange Commission showing the percentage increase in grain fuel surcharges that exceeded growth in rail fuel costs.

In urging the STB to either eliminate or modify the safe-harbor rules so as not to immunize rail carriers that implement fuel surcharge formulas that generate revenues that exceed their actual internal incremental fuel costs, the NGFA urged the STB to require railroads to report the following additional information as part of their Quarterly Reports of Rail Fuel Surcharges for each major commodity group (e.g., agricultural products, chemicals, coal, etc.):  

  1. Total fuel costs already recovered through their respective base-rate structures; 
  2. The difference between internal fuel costs recovered through base-rate structures and the amount collected through fuel surcharge revenues; and 
  3. Any other relevant information that would limit, if not circumvent, the need to file a complaint under 49 U.S.C. § 10702(2) in order to ascertain whether a fuel surcharge formula that relies on the HDF Index "safe harbor" is enabling the carrier to recover no more than its incremental fuel costs. 

Further, the NGFA urged the STB to require carriers to delineate by major commodity group the following data that they already submit to the STB:  

  1. Total fuel cost; 
  2. Total gallons of fuel used; 
  3. Total increase or decrease in the cost of fuel; 
  4. Total revenues from fuel charges; and 
  5. Revenue from fuel charges on regulated traffic. 

"Data provided through Quarterly Reports of Rail Fuel Surcharges should make determining whether and by how much a rail carrier's fuel surcharge program is over-recovering fuel costs more transparent than it is today," the NGFA wrote. 

Finally, the NGFA urged that any future use of the HDF Index should be subject to the STB's paramount objective of preventing fuel surcharges from becoming profit centers for railroads or from sanctioning over-recovery of net incremental additional fuel costs actually incurred by carriers. If the latter occurs, the Board should be empowered to direct railroads to promptly refund overcharges to their rail user customers, the NGFA said.

For more information, download the complete statement.