Risk sharing in contracts : the use of fuel surcharge programs

Abstract

Various industries employ risk sharing contracts to manage the risks and volatility associated with commodity prices, inaccurate customer demand forecasts, or unpredictable events. For example commodity futures that enable hedging, vendor buy-back programs, and insurance policies are examples of risk sharing contracts. The volatility in the price of fuel in the latter part of the twentieth century to the present has required the various parties involved in the trucking industry to employ risk-sharing contracts as an addendum to payment for services in the form of fuel surcharges. Fuel surcharges are effective in the sense that their structure transfers risk of fuel price volatility from carrier to shipper, and that industry participants typically understand the implications and reasoning behind the fuel surcharges. That said, there is no universal industry standard, and current fuel surcharge schedules remain based off of legacy diesel fuel prices in the range of $1.10-1.50 per gallon. Through mathematical analysis of a large shipper's annual costs, interviews with large shippers that have recently made transformations in their fuel surcharge schedules, a survey that gathered the thoughts and opinions of approximately one hundred motor carrier representatives, and multiple interviews with motor carrier representatives, the authors conclude that the fuel surcharge system can be improved for industry-wide benefit. Transition to a zero trigger point-based fuel surcharge schedule, the use of a carefully selected escalator, and the use of the national Department of Energy (DOE) retail price of diesel will prevent underbidding on lanes, increase transparency, reduce administration, and further increase the resilience of the United States truckload (TL) industry.