Fuel Surcharges: Allocating the Increased Cost of Fuel U.S. railroads, including Bur...

Fuel Surcharges: Allocating the Increased Cost of Fuel U.S. railroads, including Burlington Northern Santa Fe Corp (BNSF) and CSX Corp., began using fuel surcharges in 2001 to recapture some of the additional costs due to the sharp rise in fuel costs in late 1999, continuing into 2000. Fuel costs have continued to increase and the fuel surcharges have continued to increase as well, accounting for approximately 12% of BNSF’s revenues in the third quarter of 2008. Companies that use the railroads for shipping agricultural, chemical, and other commodities have been critical of the allocation methods the railroads use to apply the surcharges. The railroads have used surcharges based on a percentage of charges for the shipment. Shippers have argued that an allocation based on miles traveled in the shipment or other usage-based measure would be preferable. To resolve the conflict, the Surface Transportation Board (STB) in January 2007 prohibited the use of a surcharge based on shipping rates. Though it did not require the use of mileage, it required that railroads must use a method to allocate fuel surcharges that correlates with actual fuel costs. The STB is an economic regulatory agency within the Department of Transportation that Congress charged with the fundamental missions of resolving railroad rate and service disputes and reviewing proposed railroad mergers. After spiking in 2008, the cost of fuel fell in 2009 and 2010, but it has risen substantially in early 2012 to near the peak levels of 2008. While the increase in fuel costs has put pressure on railroads to raise rates (BSNF, one of the large rail shippers, doubled its surcharge in January 2011), rising fuel costs have helped increase rail traffic, as some shippers switch from less fuel efficient trucks to more fuel efficient rail transportation.

Required

1. How would you propose that the increased cost of fuel be charged to shippers by the railroads?

2. Do you think the STB ruling should solve the problem?

3. What are the key sustainability issues for a consumer of rail transport?