April 8, 2005

April 8, 2005 | WebMemo on Regulation

Mandated Fuel Surcharges: Will the Highway Bill Re-Regulate Trucking?

Twenty-five years ago, Congress freed truck companies and their customers from government limits on what they could charge for their services and where they could offer them. But within the House's version of the highway bill, passed last month, is a provision that would bring back a degree of price regulation in trucking. Given the great success of the deregulation of trucking, particularly for consumers, this would be an unnecessary and dangerous step backwards.


The positive effects of ending price regulation can still be felt today. Deregulation not only led to lower shipping rates-saving consumers some $15 billion each year-but also to better service. The increased efficiency and flexibility of the deregulated transportation industry has been credited with improving the U.S. economy as a whole. Even the Internet owes a debt to deregulation, as today's e-commerce is built upon a market-oriented transportation system that can swiftly and inexpensively deliver goods when and where they are needed.


It is hard to imagine anyone ever wanting to turn back the clock and re-impose regulation. Nevertheless, legislation in Congress now would take the first step in that direction. Deep within H.R. 3, the highway reauthorization bill passed by the House of Representatives last month, is a provision requiring customers to pay a government-defined surcharge to truckers whenever the price of diesel fuel exceeds a certain amount. Meant to provide truckers relief from high fuel prices, the proposed regulation is fundamentally misguided. The marketplace-not federal regulators-should decide on the prices charged for services in this competitive industry.


It is no secret that fuel prices have skyrocketed in recent months, as anyone who has visited a gas pump recently can attest. Like the gasoline used in most cars, diesel fuel has become more expensive, by about 40 percent over the past year. With fuel typically constituting a quarter or so of a trucking company's operating expenses, this translates into a significant increase in overall trucking costs.


In response to trucker complaints, congressional leaders added the fuel surcharge provision last month to H.R. 3. Section 4139 of that legislation requires that "any contract or agreement" for truckload transportation "include a requirement that the payer of transportation charges pay a fuel surcharge" to compensate for higher fuel costs. The bill specifies detailed formulas-based on average truck mileage, Department of Transportation price indices, and even Department of Defense distance tables-in order to determine the amount of the surcharge.


The system is certain to invite endless squabbling and litigation. Who is to get the surcharge? Can other fees be altered, even if that offsets the surcharge? Will all fee changes be subject to challenge? Does the shipping contract already provide compensation for fuel costs? Is that compensation sufficient? Who decides? The inevitable disputes would be a bonanza for lawyers, as every shipping contract becomes subject to review in the courts. That may be good for lawyers, but it would be a disaster for truckers, shippers, and consumers.


At the same time, the mandated surcharge would undermine incentives to use fuel more efficiently. While no one likes high prices, they do encourage firms to use resources more carefully. As prices rise, a firm that has more fuel-efficient equipment or operates equipment in more economical ways has a competitive advantage in the marketplace. Blunting these incentives will mean a less efficient industry in the future.


A federal mandate, moreover, is not necessary to ensure that increased fuel costs are adequately accounted for in trucking rates. In competitive markets, prices constantly change in response to changes in costs. Trucking is no different. In fact, many trucking firms already pass most, if not all, of higher fuel prices on to shippers. This deregulated pricing system has worked well for 25 years, and there is no indication it is not working now.


But that is not to say that Congress can do nothing to ease the burden of high fuel costs on truckers. First, it should look to its own contribution to costs and reduce excessive federal taxes. Moreover, it should look at reducing regulatory burdens-including restrictions on oil exploration and refining that increase costs and reduce supplies.


The next stop for the highway reauthorization bill-and the proposed fuel surcharge-is the Senate Commerce Committee. Hopefully, legislators there will carefully consider the dangers of this new federal mandate. Consumers have long benefited from the competitive trucking marketplace created by deregulation of the industry. Putting Washington back in the business of controlling prices would be an unnecessary and dangerous step backward.


James L. Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies