Shippers have the economic responsibility to pay for the fuel that moves their goods to market. Traditionally, shippers reimburse their carriers for fuel with a national average diesel fuel price provided by the Department of Energy, in conjunction with a shipper’s predetermined base rate. Together, these components make up a shipper’s fuel surcharge schedule.
The base rate is the price per gallon of fuel that a shipper requests a carrier to include in their linehaul rates, usually between $1.15 and $1.25. The base rate is commonly paired with a fuel “escalator”, meant to represent fuel efficiency and the scale at which the fuel surcharge goes up.
*Example of a Fuel Surcharge Schedule based on a 6.5mph and $1.20 base rate
Most shippers still set base rates based on a number representing the average price of a gallon of diesel fuel in 1979. This was enacted as a common practice when the trucking industry was deregulated, and carriers needed to protect themselves from soaring fuel costs during the 1979 oil crisis.
This practice, however, is no longer necessary because the retail price for a gallon of diesel has not dipped below $2.00 since 2005. Base rates based on fuel prices in the 1970’s are not relevant in today’s market and serve as a largely arbitrary means of accounting for fuel costs.
The common fuel surcharge structure and the use of base rates are inaccurate and outdated practices that shippers and carriers have grown accustomed to overtime. Luckily, Breakthrough has the data and technology necessary to eliminate the practice and provide direct line-of-sight to fuel costs for both shippers and carriers.
Breakthrough Fuel Recovery accounts for the exact price of fuel on every freight movement in a shipper’s network, providing the most accurate means of calculating fuel costs in the industry. This market-based approach provides shippers and carriers with clear and accurate calculation of true fuel costs, eliminating the need for a fuel surcharge program altogether, including the base rate.
How to Maximize Fuel Efficiency Savings and Cost Reductions
Base rates are one of the ways the true cost of the fuel required to move goods to market gets hidden. The solution is simple—moving to a base rate of $0. As Breakthrough founder Craig Dickman explained in a 2016 interview with DC Velocity …
“Everything other than a zero base is artificial and manipulated.”
Despite the fact that base rates lack accuracy and transparency, many shippers and carriers stick to the status quo and abide by this antiquated industry practice. As long as base rates are still utilized, neither party is able to fully manage fuel costs or elevate their fuel strategy.
Take fuel efficiency increases for example. The average fuel efficiency used to account for fuel today is around 6.5 MPG, however, many carriers achieve 8 MPG or higher across their entire fleet. As shippers align to higher, more representative fuel efficiencies, fewer gallons of diesel fuel are accounted for, ultimately lowering the cost associated with moving their goods to market.
Organizations that continue to operate with a base rate of $1.20—as many shippers still do—only remove the cost per gallon above the base rate, muting the benefits of fuel efficiency increases. Fuel management strategies that reimburse carriers using a $0 base rate remove the full cost of a gallon when fuel efficiency increases. This, in turn, results in significant savings and increased incentive to align fuel efficiencies across a shipper’s network to industry best practices.
Implementing a zero base ensures that the focus between both shippers and carriers is on the value of the service and capacity delivered by the carrier. Shippers reap the full benefits of reducing cost, consumption, and emissions from their supply chain, while carriers experience more stabilized margins.
Implementing a Fuel Recovery program and moving shippers toward a zero base rate is a key part of the roadmap to build a more transparent supply chain strategy propelled by accurate data.
Breaking it Down | Zero Base Rate Explained