Fueling a false economy

If you were one of the thousands of truckload carriers that struggled a few years ago with the simultaneous demons of rising diesel prices and softening freight volumes, you may think that the federal government should step in and force shippers and brokers to pay fuel surcharges. Surcharges certainly have become an economic necessity, but a federal law governing them – especially the proposed legislation now before Congress – would be bad for the industry and ultimately ineffective.

One argument for mandatory surcharges is that small carriers have less market power than large carriers to insist on surcharges or to lower fuel prices through volume purchasing. So it’s hardly surprising that the Owner Operator Independent Drivers Association, which represents the very smallest of motor carriers, is author and chief proponent of surcharge legislation in the House-passed version of the highway bill.

There’s no question that in a deregulated industry, larger competitors enjoy pricing advantages. Smaller competitors, however, often have lower overhead and better employee retention. Somehow, even without mandatory surcharges, many small carriers find a way to be profitable. When the economy softens, poorly managed carriers – large and small – will go out of business. But that doesn’t mean we should install government controls to prop them up.

Times are good today because freight demand has been outpacing capacity. Eventually, demand will soften and the need for capacity will decline with it. A mandatory surcharge will – in theory – impede this natural rebalancing. But in reality, if demand starts significantly lagging supply, market realities – not fuel prices – will force weak carriers out of business.

When freight turns south, rates will soften. Shippers will deal with the surcharge by simply forcing rates down further to offset it. That’s bad news for carriers, but OOIDA has supposedly taken care of this for anyone working with an intermediary: A mandatory pass-through that would force brokers, carriers and freight forwarders to pay a surcharge to the party that pays for fuel.

Again, if market conditions are poor, a government mandate won’t matter much. Although carriers can’t reduce owner-operators’ settlements to offset a surcharge, there’s nothing to prevent them from simply reducing their compensation package. When freight slows, owner-operators will be desperate for miles – at any rate. Alternatively, carriers might just hire fewer owner-operators.

This is speculation based on proven market dynamics. But there is one clear outcome from OOIDA’s proposal – costly litigation. The legislation includes a private right of action – in other words, the ability to sue. All parties – carriers, brokers, owner-operators, forwarders and shippers – would have this right.

OOIDA has aggressively pursued carriers on leasing regulations since owner-operators won a private right of action nearly 10 years ago. It won’t hesitate to litigate on surcharges. A private right of action is fair, especially when government regulators are likely to ignore enforcement. But all the litigation OOIDA can muster won’t change the fact that the market always beats regulation. OOIDA can bolster membership by touting its efforts to win a mandatory surcharge – and to enforce it in court if the legislation passes – but ultimately no one will be the better for it. Except OOIDA.

One real injustice that OOIDA’s proposal addresses is a broker or primary carrier that collects a surcharge but doesn’t pass it on. That’s clearly unethical, but it’s not a problem if you avoid hauling freight without a surcharge.

Surcharges are mandatory, but that’s between you and your business partners. Let’s leave the neighborhood federal judge out of it.