Fuel surcharges should approximate actual added fuel costs.

May 2006 railroad fuel surcharges for grain range from 9.46 percent to 16 percent
of tariff. Even though each railroad has unique characteristics that affect its fuel usage, it
is unlikely that one railroad would need nearly twice the fuel surcharge as another. Thus,
it would appear that at least some railroads must be profiting from fuel surcharges.

USDA asserts that railroad fuel surcharges should closely approximate the actual
added fuel costs caused by increased fuel prices; they should not be allowed to become a
profit center or a means of hiding increases in tariff rates. Formulas used in the
calculation of fuel surcharges should be reviewed periodically to ensure that they fairly
reflect cost increases due to fuel prices.

Should railroads hedge their fuel costs, both the gains and losses from hedging
should accrue to the railroad. If railroads are allowed to keep hedging gains, they should
not be allowed to recoup hedging losses from shippers.

USDA supports the use of on-highway diesel fuel prices in the calculation of fuel
surcharges rather than the use of West Texas intermediate crude oil prices. On-highway
diesel fuel prices are more closely related to the actual change in railroad fuel costs due to

increasing fuel prices.

Fuel surcharges should reflect additional fuel costs of individual shipments.

Tariff-based fuel surcharges do not correlate closely with the additional fuel costs
attributable to individual shipments because of the wide-spread use of differential pricing.
With differential pricing, the tariff rate is based upon the value of service rather than

upon the actual cost of handling a shipment.


CERTIFICATE OF SERVICE

I, Barbara Robinson, certify that on this 27th day of April, 2006, I caused a copy of the
foregoing document to be served by first-class mail, postage prepaid, on all parties of

record in STB Ex Parte No. 661.

SuhaalTMC

Barbara Robinson

Deputy Administrator

Transportation and Marketing Programs
U.S. Department of Agriculture
Washington, D.C. 20250


surcharges in the same manner, shippers have concerns that they may be paying for fuel

costs generated by other shippers.

COMMENTS

The availability of rail transportation at a fair price is critically important to
agricultural shippers. Agricultural shippers depend on rail in many markets because of
the long distances agricultural products are transported. Since agricultural producers are
“price-takers,” higher transportation costs result in producers receiving lower prices for
agricultural commodities, which result in reduced producer income. Lower producer
income affects the ability of producers to borrow funds and impacts the economic
prosperity of rural regions.

With fuel surcharges comprising a significant portion of the cost of rail
transportation, it is important that railroads assess these surcharges accurately and fairly
among the users of the rail system. Inaccurate fuel surcharge assessments can
significantly distort shipper economic choices and unfairly exclude shippers from
markets.

USDA asserts that the current system of assessing rail fuel surcharges based upon
rail tariff rates is seriously flawed because it can result in railroads collecting surcharges
exceeding actual increased fuel costs and that it unfairly apportions costs among users.

The major concerns of USDA are discussed below.


As a result of differential pricing and the use of tariff-based fuel surcharges, those
most dependent upon rail service not only pay higher tariff rates but also pay higher fuel
surcharges. USDA contends that those shippers in regions most reliant on rail service
should not be expected to bear more than their fair share of fuel surcharges.

In addition, tariff-based fuel surcharges result in different surcharges, based upon
the commodity shipped. The table in Attachment 2 shows that the fuel surcharge for a
shuttle train originating in Minneapolis, Minnesota, and terminating in Portland, Oregon
ranges from $375 to $467, a $92 difference. USDA contends that it takes no more fuel to
ship wheat to Portland than it does to ship corn.

Furthermore, some railroads charge a higher tariff rate if the shipper uses a
railroad-owned railcar than if the shipper uses a shipper-owned railcar. USDA contends
that a fuel surcharge should not vary based upon who owns the railcar.

Only BNSF has been responsive to shipper concerns regarding the use of tariff-
based fuel surcharges. Beginning in January 2006, BNSF began using a mileage-based
fuel surcharge for grain and coal, a practice more closely related to the costs of individual
rail shipments.

USDA supports the use of mileage-based rather than tariff-based fuel surcharges
because the mileage-based fuel surcharge is more likely to be fair and appropriate for

individual movements.

Fuel surcharges should be equitable among shippers.

Due to the lack of readily available information, shippers are concerned that they

are paying fuel surcharges that are not fair in relation to that paid by other shippers. This


ATTACHMENT 1

20%

15%

10%

5%

As a percent of tariff

Railroad fuel surcharges

North American weighted average*
13.1%
1 Up 29% from May 2005;
up 139% from 3-year average.
28ss83 333888 8 8 8
PEG EEELTERPERPEaE:
5S <4 6 §$ ££ 5 s 5 5 <

* Weighted by each Cl

<
lass I railroad's proportion of grain traffic for the prior year.

|

ATTACHMENT 2

April Tariff Rail Rates from Minneapolis, Minnesota to Portland, Oregon

Crop Tariff rate Fuel surcharge at 12.4%
Wheat $3,763 $467
Cor $3,024 $375
Soybeans $3,170 $393



Date:

April 27, 2006

BEFORE THE

SURFACE TRANSPORTATION BOARD

STB EX PARTE NO. 661

RAIL FUEL SURCHARGES

COMMENTS OF THE

U.S. DEPARTMENT OF AGRICULTURE

Chuck Lambert

Acting Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington, D.C. 20250


is particularly true in the case of contract rates that may increase at a slower rate or have
no provision for the railroad to recover unexpected costs. Fuel surcharges should be
equitable for all classes of shippers, and shippers should not be charged excessive fuel

surcharges due to the railroad undercharging other customers.

CONCLUSIONS

USDA encourages the Board to use its broad authority over railroads’ business
practices to require that fuel surcharges closely approximate the actual additional fuel
cost of individual shipments. Such rules should also ensure that individual shippers

would not pay for fuel costs generated by other shippers.

Respectfully submitted,

Certs O Lonubast

Chuck Lambert

Acting Under Secretary

Marketing and Regulatory Programs
U.S. Department of Agriculture
Washington, D.C. 20250



AUTHORITY AND INTEREST

The Secretary of Agriculture is charged with the responsibility under the

Agricultural Adjustment Act of 1938 and the Agricultural Marketing Act of 1946 to

represent the interests of agricultural producers and shippers in improving transportation
services and facilities by, among other things, initiating and participating in Surface
Transportation Board (Board) proceedings involving rates, charges, tariffs, practices, and
services.

The Department of Agriculture (USDA) represents U.S. farmers and agricultural
shippers, and the vitality of their livelihood is our primary interest. Our interest is in
preserving an efficient and competitive transportation sector that serves U.S. agriculture
effectively.

USDA commends the Board for soliciting rail shipper, railroad, and public views
regarding railroad fuel surcharges. USDA encourages the Board to use its broad
authority over railroads’ business practices to require that fuel surcharges closely
approximate the actual additional fuel cost of individual shipments. Such rules should
also ensure that individual shippers would not pay for fuel costs generated by other

shippers.

BACKGROUND

Recovery of unanticipated fuel expenses by railroads is legitimate, but it should
more closely match the additional cost of fuel used by each shipment. Since 2000,
railroads have used fuel surcharges to recover unexpected fuel costs from tariff shippers

and usually have used the Rail Cost Adjustment Factor to adjust contract rates. Due to


convenience and ease, railroads chose to levy rail fuel surcharges based upon a
percentage of tariff rates. The fuel surcharge varies according to the price of a
benchmark fuel, which typically includes the price of West Texas intermediate crude oil
or the price of on-highway diesel fuel.

Tariff-based fuel surcharges do not correlate closely with the additional fuel costs
of shipments because of the wide-spread use of differential pricing. With differential
pricing, the tariff rate is based on the value of service rather than on the actual cost of
handling a shipment. While fuel surcharges remained less than 5 percent, the adverse
effects of imprecise allocations of increased fuel costs was relatively unimportant; fuel
surcharges were only a minor portion of the cost of rail transportation.

Since mid-2004, railroad fuel surcharges have become a significant portion of the
total cost of rail transportation. In addition, these fuel surcharges are likely to remain
high in the foreseeable future. The weighted average railroad fuel surcharge for May
2006 is 13.2 percent compared with a record 16.3 percent in December 2005 and only 1.1
percent in January 2003 (Attachment 1). Since crude oil prices have reached record
highs in April 2006, it is likely that railroad fuel surcharges will again exceed 16 percent
by June.

As railroad fuel surcharges began to exceed 5 percent, shippers have increasingly
voiced concerns to the Board that railroad fuel surcharges recover amounts over and
above increased fuel costs. In addition, shippers have voiced concerns that the fuel
surcharge formulas used by railroads are not closely correlated with the actual fuel cost of

specific shipments. Furthermore, because all shippers are not assessed railroad fuel