Fuel Surcharge Alternatives September 22, 2008 Steve Graham Schneider National

Fuel Conservation and Management Symposium Fuel surcharge cost has risen 380% in the last 4 years. $ 1,086 FSC 35% overall increase Line haul rate Hypothetical example using typical industry data Why is fuel surcharge a big issue?

Fuel Conservation and Management Symposium A representative index of the true change in the carrier’s cost of fuel. −Ability to audit the fuel charges −Transparency to fuel costs Reduce my budget variances. −Hedging solutions Commitment to improve mpg. −Competitive advantage vs. industry advancement What are customers asking for?

Fuel Conservation and Management Symposium 1.The “Trigger” - the point where fuel surcharge starts. As long as the index price of fuel stays below this point, no fuel surcharge is applied. If price falls below this point, contracts may contain a provision for the carrier to credit the shipper. 2.The “Peg” - the ratio that converts a cents per gallon cost change into a cents per mile surcharge rate change. A peg of 5 or 5:1 assumes that the carrier’s consumption rate is 5 miles per gallon on the miles paid to the carrier. A 5 cent increase in fuel cost converts to a 1 cent increase in fuel surcharge. 3.The “Index” – the trusted source of fuel price information that a shipper and a carrier agree best represents the upward or downward movement in the carrier’s true cost of fuel. Fuel surcharge has 3 components.

Fuel Conservation and Management Symposium Paid based on “shortest” miles, but travel practical miles. Differences between the “peg” and the carrier’s actual paid miles mpg. Difference between regional fuel cost and DOE National Retail Average (mostly due to fuel tax differences). Discounted actual fuel cost vs. DOE National Retail Average. Sometimes, weight, terrain, city driving and other factors favorably or unfavorably impact fuel economy. Carriers adjust base rate to cover differences between true cost and fuel surcharge recovery.

Fuel Conservation and Management Symposium Shippers generally pay carriers for loaded miles only. The miles paid are based on Household Movers Guide “shortest.” Schneider routes drivers based on “practical” route/miles. Definition of miles using a hypothetical load and industry average inefficiencies Miles billed to customer – Household Movers Guide (HHG) “shortest” 80 miles Difference between HHG/PC Miler Shortest and HHG/PC Miler Practical4 miles (Practical is the likely/most efficient route taken by the driver) Miles incurred to fuel, take breaks, conduct truck maintenance,6 miles take detours, avoid congestion and get the driver home Empty miles from last drop to next pick up10 miles Total odometer miles or true traveled miles100 miles Gallons of fuel consumed by carrier16.66 gal. Using this example the carrier’s odometer mpg is 6.0 based on 100 miles traveled, but only 4.8 mpg based on 80 miles billed to the customer. A 6 cent peg is inadequate to cover the carrier’s rising cost of fuel.

Fuel Conservation and Management Symposium Carriers that do not have adequate recovery through fuel surcharge do not stay in business when fuel prices rise sharply. If fuel surcharge is inadequate, then a carrier must make assumptions about the direction of fuel price when submitting a base linehaul rate.

Fuel Conservation and Management Symposium Paid based on “shortest” miles, but travel practical miles. Differences between the “peg” and the carrier’s actual paid miles mpg. Difference between regional fuel cost and DOE National Retail Average (partially due to fuel tax differences). Discounted actual fuel cost vs. DOE National Retail Average. Sometimes, weight, terrain, city driving and other factors favorably or unfavorably impact fuel economy. Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery.

Fuel Conservation and Management Symposium Through a true up process, trucks pay state/provincial fuel tax based on the miles traveled in the state/province, and not where the fuel was purchased. Canadian Conversion 1 US gal = ltrs Blue = High Tax States/Prov. Green = Low Tax States/Prov. Yellow = Medium Tax States/Prov. Fuel tax is as low as 13 cents per gallon in Oklahoma to as high as 43 cents in Connecticut. Current Federal tax is 24.4 cents per gallon for diesel fuel.

Fuel Conservation and Management Symposium In addition to a national average, the EIA/DOE provides regional indices which may be preferred by regional shippers /- expressed in cents per gallon difference to EIA/DOE Diesel Fuel National Retail Average from June ‘07 through June ‘08

Fuel Conservation and Management Symposium Paid based on “shortest” miles, but travel practical miles. Differences between the “peg” and the carrier’s actual paid miles mpg. Difference between regional fuel cost and DOE National Retail Average (mostly due to fuel tax differences). Discounted actual fuel cost vs. DOE National Retail Average. According to Pilot Travel Centers, approximately 80% of trucking companies receive a discount off of retail price. Sometimes, weight, terrain, city driving and other factors favorably or unfavorably impact fuel economy. Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery.

Fuel Conservation and Management Symposium Paid based on “shortest” miles, but travel practical miles. Differences between the “peg” and the carriers actual paid miles mpg. Difference between regional fuel cost and DOE National Retail Average (mostly due to fuel tax differences). Discounted actual fuel cost vs. DOE National Retail Average. Sometimes, weight, terrain, city driving and other factors favorably or unfavorably impact fuel economy. Carriers adjust base rate to cover difference between true cost and fuel surcharge recovery.

Fuel Conservation and Management Symposium The dynamics of truck stop pricing which converts to the fuel surcharge that shippers pay carriers.

Fuel Conservation and Management Symposium But… New York Mercantile Exchange (NYMEX) Major spot market price Wholesale price Retail price

Fuel Conservation and Management Symposium Through a true up process, trucks pay state/provincial fuel tax based on the miles traveled in the state/province, and not where the fuel was purchased. Canadian Conversion 1 US gal = ltrs Blue = High Tax States/Prov. Green = Low Tax States/Prov. Yellow = Medium Tax States/Prov. Fuel tax is as low as 13 cents per gallon in Oklahoma to as high as 43 cents in Connecticut. Current Federal tax is 24.4 cents per gallon for diesel fuel.

Fuel Conservation and Management Symposium No retailer wants to be the first to raise retail price for fear of driving business to another retailer who delayed the increase. Consequently, retail margins compress when the truck stop’s fuel costs rise and grow when fuel costs fall.

Fuel Conservation and Management Symposium Cents per gallon Through all of the volatility, trend on retail gross margins remains flat at 11 cents, therefore, no trended advantage of wholesale price basis vs. retail price basis.

Fuel Conservation and Management Symposium NYMEX HO, Platts Spot and OPIS Wholesale prices change daily and EIA (DOE) National Retail Average changes on Monday of each week. EIA (DOE) National Retail Average buffers the volatility of wholesale (OPIS) and spot (Platts) pricing. Good time to buy using retail index Good time to buy using wholesale index

Fuel Conservation and Management Symposium Fuelsurchargeindex.org powered by ProMiles An option to the EIA/DOE weekly average is lane specific, daily reset pricing.

Fuel Conservation and Management Symposium Fuel tax cost is based on the miles traveled through states and provinces. Fuel cost is based on the weighted average cost of fuel on the lane.

Fuel Conservation and Management Symposium A Third Option Replacement of a variable index based fuel surcharge with a fixed fuel cost. Heating Oil Buy NYMEX HO future contractBuy the NYMEX HO to DOE basis Or carrier simply buys physical fuel at a fixed price and provides the shipper with a fixed rate per mile, including fuel, for the duration requested by the shipper. + +