Port of Los Angeles Clean Truck Program

Presentation to the Los Angeles Board of Harbor Commissioners

March 6th, 2008

Context and objectives for this meeting

This document was presented by members of The Boston Consulting Group, Inc., to the
Los Angeles Board of Harbor Commissioners on March 6, 2008 in Los Angeles, CA
During the presentation, the slides served as the focus for the discussion; they are
incomplete without the accompanying oral commentary. This document will be most
meaningful, therefore, to those who attended the meeting
BCG was retained by the Executive Director of the Harbor Department to conduct an
analysis of and create a business case for the Clean Truck Program (CTP). This
presentation summarizes the outcome of BCGs analysis. This presentation is an extract
from a longer document containing all of BCGs findings and analysis.
The objectives of this meeting is to provide the Board of Harbor Commissioners with an
opportunity to review the draft findings from the BCG analysis and
Understand the approach used to evaluate the CTP
Review the CTP options considered

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Truck drayage is a key element of the complex port goods

movement system
Example: Import system
National / State / City governments
Port of LA / LB
Drayage includes trucks and
truck drivers serving Port to
move containerized goods

Drayage

Rail

Distribution
Center

Shipping
Line

Terminal
Operator

Manufacturer
or
Consolidator

Terminal
Operator

LMC
Beneficial
Cargo
Owner
(BCO)

Port imposed fees

Store-Door contracts
Flow of goods
(imports)
Flow of payments

freight
forwarder

Permitting

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Pre-CTP

Today: Current state of SPB drayage market

Trucks

~16,800 frequent and semi-frequent trucks complete 80% of SPB drayage1

~24,000 non-frequent trucks complete remaining 20% of SPB drayage1
~2,000 frequent and semi-frequent trucks servicing the port are pre-19892

Drivers

Most drayage drivers (85% or more) are Independent Owner Operators (IOOs)2
Estimated 15-22% of drayage drivers ineligible to receive TWIC certification2
Drayage drivers earn an estimated average net income of $11.60-$12.70/hr3

LMCs

There are 800-1,200 LMCs with drivers servicing the SPB ports2
Majority of LMCs are small, carrying the services of less than 75 IOOs4
Driver payments represent ~68-72% of LMC revenues5
Most LMCs have low margins (~5%) and few capital assets2
Entrepreneurial culture, start in drayage but prefer more lucrative trucking4

1. SPB Ports CAAP Technical Report, trucks with at least 0.5 trips/day 2. John Husing, SPB Ports CAAP Economic Analysis of CTP 3. Kristin Monaco and CGR Management Consultants
SPB Ports driver surveys 4. Interview with Tom Brightbill, CGR Management Consultants 5. Husing report and Interview with Bob Curry
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Current drayage market creates externalized costs

Cost bearer

Truckers
and LMCs

Externalized cost examples

Overall burden of operational inefficiency e.g.
truck under-utilization from port, freeway congestion
port congestion
Potential lack of benefits

Public
health1

Premature death
Hospital admissions
Respiratory illness and acute symptoms
Workday and school-day loss
Restricted activity

City and
community

Enforcement and other administrative costs

Road maintenance
Vehicle and driving safety
Environmental damage
Residential neighborhood impacts from truck parking and
ingress/egress

1. Husings SPB CAAP Economic Analysis report states cost estimated at $1.7-10.1 billion with a median of $5.9 billion (analysis by CARB)
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

CTP objectives

The Ports objectives for the CTP span three dimensions:

environmental, port operations, and safety/security

Environmental

Port operations

Reduce emissions from

drayage (port trucking) to
comply with CAAP
guidelines

Improve stability of the

port trucking market
establish stable drayage
service business
avoid service disruptions
during implementation

By 2011, CAAP requires

an aggregate reduction in
pollutants from all Port
sources including trucks
47% DPM
45% NOx
52% SOx
Enable continued
migration towards newer
and cleaner technologies
over time

Safety and security

Ensure compliance with
safety standards
vehicle safety
driver
Ensure that port security
objectives are met

Ensure long term

sustainability
truck fleet and market
participants
incomes that attract and
retain drivers
Enable green growth
improvements in trucking
operational efficiency
and reliability

Source: CTP / CAAP presentations, 2006 CAAP Overview

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

CTP components

There are five interlocking elements in the CTP

CTP
components

Ports intent

1 Environmental
Cargo Fee

Generate revenues for the grant program

Ensure BCOs internalize pollution costs
Credit positive investment in trucks and incent turnover of dirty trucks

Remove heaviest polluters in a timely fashion to ensure emissions

targets are achieved

Truck ban
3

Safety &
security

4
Concession

5 Truck financing
program

Comply with national security standards for port safety, enhance local
enforcement
Improve vehicle safety and driver safety
Achieve environmental, operational, and safety / security goals through
improved Port control and oversight of trucking fleet
Assure competition: adequate service level and level playing field
Assure driver supply: incomes and living standards to attract truck operators
Incentivize replacement or retrofit of dirty trucks with newer, cleaner
technology
Force scrapping of old trucks so emissions cannot be shifted elsewhere

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Our evaluation carefully considered the interactions

between the different pieces of the CTP ...
+/-

Safety &
Security

IOOs
take
trucks

Driver
Supply

Concession

maintenance

+/Clean
trucks
supply

Dirty
trucks
supply

scrap

new truck

exemptions

Environmental
Cargo Fee

Truck ban
5

Truck financing
program

+/-

Encourages

Discourages

balance budget?
drive particular behavior?

While drayage is a small part (usually <10%) of total shipping costs,

increases in drayage costs can cause diversion, especially for the 68% of
container moves that are discretionary (i.e. for outside So Ca)
Source:

BCG analysis; Moffet and Nichols Data Container Breakdown by Mode with ACTA data.xls, Economic Analysis of the Proposed SPB Clean Trucks Program, by John Husing and
CGR Consultants

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Analytical Approach

... And the market for trucks and drivers

Example: Trucker Supply stack shows potential drivers and their required labor rates
Nationals
$24.785

Adjusted rates ($/hr)

25

Current drayage
driver time demand1
~26 M hrs

20

Current weighted average

drayage effective wage
rate ~$11.60/hr

15

Blend of heavy
trucks and
tractor trailers3

10

Pre1989
trucks

19891993

19941995

19962003

200420062

19891993

Pre1989
trucks

19962003

IE
LA

19941995

IE

IOOs IOOs

LA regional
employee

Construction/

employee

substitutes

driven

driven

0
0

Labor segments:

Drivers:3
Rate to attract
to drayage:3

40

20

Frequent/semi-freq
Drayage

Freq/semi-freq:
Non-drayage

60

160

LA
IOOs

IE
IOOs

LA regional
employee
driven

Construction and
other substitutes

SPB ports
drayage
supply
IE employee
(M hrs)
driven

~16K

~16K

~8K

~11K

~32K

>150K4

~23K

$11.60

$15.32

$15.32

$20.08

$21.27

$21.97

$22.67

(1) Private fleets and infrequent IOOs account for ~6M hrs demand. (2) 2004-2006 supply to small to be seen on chart (3) Estimates based on reports and conversations with John Husing and
Tom Brightbill (4) 2006 CA EDD data for Los Angeles County construction (5) Average wage rate for UPS and Yellow trucking
Sources: CTP Technical report, Husing SPBP CAAP Economic Analysis Proposed CTP, CGR SPBP Driver Survey, Tom Brightbill, CRT and LMC interviews, BCG economic model
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

We evaluated three options for the CTP

I: Basic plan
Approach to
achieve CTP
objectives

Levers designed to minimize

disruptions to drayage
market

Environmental
Cargo Fee

$35 / TEU, exemptions based

on truck technology, funding
source, and timing of purchase

5
Truck financing
program

Require trucks to be driven

by employees to achieve
CTP goals

$35/TEU, optimized exemptions to encourage

cleaner technology and private funding

TWIC criteria as mandated by TSA

Safety and
security

Concession

Actively incent cleaner

technology

Progressive truck ban as outlined

Truck ban

II: Enhanced model

with market incentives

III: Enhanced model with

market incentives and
employee commitment

Basic operational criteria

allowing LMCs to use
employee and IOO drivers

Subsidies to IOOs and LMCs to

fund upgrade of banned trucks
(scrap required)

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

More stringent operational

criteria to help maintain oversight
(without employee commitment)

PLUS: added control, training

and compliance among
employees (via concession)

PLUS: explicit commitment for

drivers to become employees
over a set period of time

Subsidies given to authorized concessions only (scrap required)

PLUS: dirty truck buyback program for IOOs and LMCs

Our rationale in Option II is to encourage long term

development of an asset based drayage model ...
LMC asset based

IOO ownership

Market
dynamics

LMCs own and maintain trucks,

employ drivers
Higher barriers to entry

Drivers own and maintain trucks,

independently contract with LMCs
Low barriers to entry

Incentives

LMC motivated to maximize efficiency

Of truck and driver
LMC must internalize costs: total costs
integrated into decision making

LMC and IOO motivated to minimize

costs, IOO motivated to maximize work
Many costs externalized: only variable
costs integrated into decision making

Risks

Higher cost of employees and assets

Higher compensation and wage
rates to attract employees
Overhead costs of employee
drivers, trucks and maintenance
Less flexibility to cope with peaks, e.g.
Overtime, temp, part time
Access to additional trucks

Unreliability of supply as IOOs service

many different markets
Few incentives for system wide
operational efficiency
High administrative costs and burden
Risks if marginal LMCs/IOOs unable to
comply with new standards

Enforcement

Easier as LMC is accountable for both

employees and assets

More difficult with large number of

IOOs

Source: BCG analysis; Haveman and Thornberg (Beacon Economics), Clean Trucks Program, February 2008
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

10

... Option III goes further and creates the requirement for an
employee based drayage market
Objectives of the employee commitment:
Ensure continued supply of drivers through creation of positions offering attractive incomes
and benefits, while
Maintaining a reliable and responsive supply of trucks and truckers to accommodate peaks
and troughs in demand, and
Ensuring LMCs held accountable for safety and security
Benefits of an asset and employee based drayage system
Creates reciprocal obligations
Port provides concession and demands performance in return
LMC invests in drayage capacity (trucks and employees) and obtains benefit from
income generated through concession
Creates aligned incentives e.g. both parties benefit from improvements in operational
efficiency through better utilization of assets/trucks and employees
Strongest basis for ensuring highest levels of accountability
Environmental e.g. truck maintenance to keep up green performance
Safety and security e.g. employer accountable for employee
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

11

We built an analytical model to compare the three options

Sample comparative output

Environmental

Operations: Drayage labor

supply

Operations: Drayage
market

Operations: Drayage costs

(transload to rail)

% of drayage by clean trucks

Avg. drayage income ($/hr)

% of drayage by employees

Avg drayage cost per container

100

20

100

200

80

80

15

150

60

60
10

100
40

40
5

50

20

20
0

2007 2008 2009 2010 2011 2012

2007 2008 2009 2010 2011 2012

2007 2008 2009 2010 2011 2012

2007 2008 2009 2010 2011 2012

Expect some shift to

employee base under
option II assuming no
marginal IOOs
Shift to employees under
option III phased in over
time

Increase in costs in 2008

driven by ECF and TWIC
impact on labor supply
Shift to employee adds
costs to drayage

Clean trucks enter system

more quickly under
Options II and III due to
optimized exemptions and
financing

Near term rise from TWIC

under option I. Drayage
incomes rise under option II
if marginal IOOs cannot
access truck financing
Under options II and III
supply/demand brings in
higher wage demanding
substitute labor in out years

Option I
Option II
Option III

Source: BCG drayage market dynamics model

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

12

We considered the benefits and risks for each model in

both the near and longer term
Option I
Basic plan

Option II
Enhanced model with
market incentives

Option III
Enhanced model with
market incentives and
employee commitment

Near term (1-5 years)

Ban satisfies immediate
environmental changes
No change in port
operations and minimal
improvements in safety and
security

Near term (1-5 years)

Creates conditions to
accelerate switch to greenest
trucks
Limited change in port
operations
Discourages marginal LMCs

Near term (1-5 years)

Creates conditions to
accelerate switch to
greenest trucks
Potential risk of diversion
as BCOs face uncertainty
of employee commitment

Long term (5+ years)

Fails to create a sustainable
long term drayage market
that will enable continued
progress in improving
environmental outcomes
and enabling green growth

Long term (5+ years)

If LMCs hire employees will
create conditions for
sustainable green growth, but
Risk that long term
sustainable environmental
and operational stability
undermined if undercapitalized IOOs remain
significant factor in market

Long term (5+ years)

Most likely to guarantee
sustainable environmental
and operational
improvements
Employee and asset
based model enhances
ability to improve safety
and security

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Benefits
Risks
13

Our overall conclusion: Option III provides the best path to

long term sustainability, but with near term risks
I: Basic plan

Current state

Short
term

Long
term

II: Enhanced model with

market incentives
Short
term

Long
term

III: Enhanced model w.

market incentives &
employee commitment
Short
term

Long
term

(1)

Environment

(1)

(2)

Port Operations
Truck & trucker
supply

Safety and
security

Worse

Better

1) Risk of failure to create sustainable market structure enabling continuing investment in newer greener trucks and enforceable safety/security
2) Risk of near term disruption caused by BCO diversion
Note: Short-term represents a 1-5 year time span and considers system condition and risks, while long-term represents 5+ years and is primarily based on sustainability
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

14

Conclusion
1. Option I will not create a sustainable long term drayage market that will deliver reliable
supply, ensure continued progress in improving environmental outcomes, and enable green
growth (e.g. through creating incentives for operational efficiency)
2. Both Options II and III have the potential to create a drayage market that meets the CAAP
and CTP objectives (environmental, operational and safety/security) not only in the near term
(the terms of the ban) but also in the long term (creates a sustainable drayage market)
3. Option II carries the risk that long term sustainability is undermined if market participants or
third parties find ways to hold employee incomes below prevailing levels needed to ensure a
reliable supply of truckers (e.g. by financing existing IOOs)
4. Option III directly addresses this risk and offers the best guarantee of long term
sustainability, but at the cost of introducing a new element of operational uncertainty
5. One potential outcome could be that the ports of Long Beach and Los Angeles adopt
different programs. The Port of Long Beach has adopted a program like Option I. Were the
Port of Los Angeles to adopt either of Options II or III there is risk that volume of containers
and supply of truckers could divert from Los Angeles to Long Beach.
6. In conclusion we recommend that decision makers seek a unified approach to the San Pedro
Bay Clean Truck Program. Decision makers preference between Options II and III will hinge
on the relative weight they give to risk of LMC/BCO actions versus risk of market participants
exploiting loopholes to sustain a lower wage, marginal economics based SPB drayage
market and failure to achieve sustainable advantages in line with CAAP goals
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

15

Agenda

Appendix: Description of the three options

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

16

Option I: Basic model

Lever
1

Environmental
Cargo Fee
2

Truck ban
3

Safety &
Security
4

Concession

Truck financing
program

Rationale

$35 / TEU fee with some exemptions:

Privately funded (post 10/08): CD with scrap ($17.50
fee), LNG / alt. fuel with scrap ($0 fee), (pre 10/08
same exemptions but scrap not required)
CTP funded: No exemptions

Encourage rapid adoption of cleaner truck technology

Promote the use of private investment

Progressive ban on the dirtiest trucks:

Oct 1, 2008: All pre-89 trucks
Jan 1, 2010: All 89-93 and un-retrofitted 94-03
Jan 1, 2012: All trucks not meeting 07 standards

Ensure heaviest polluters are removed from the Port

drayage market

Comply with TWIC criteria as mandated, but full

enforcement not active till January, 2009

Compliance required by law, but the infrastructure

required for enforcement may take time to implement

Requirements: TWIC/registered drivers, prove health insur.

offered, clean truck compliant, RFID tags, truck maint.
schedule, and follow existing on-street parking restrictions
concession for 5 years, fee of $250 plus $100/year/ truck
Allows LMCs to use employee and/or IOO drivers,
preference for drivers with previous port drayage work

Provides Ports with greater oversight of trucking

operations
Allows opportunity for large portion of current
drayage operators (LMCs and IOOs) to continue
serving the market

Criteria for financing: scrap old trucks, must be frequent /

semi-frequent, priority given to oldest trucks (pre-89) and
applicants with previous port drayage work
Financing options:
Lease to own (7 years, $500-700/mo),
Grant for purchase ($60-75K / CD, $90-120K / LNG),
Grant for retrofit (up to $20K, can re-apply for
purchase grant in future net of retrofit funds)

Subsidies will provide one time assistance to ensure

sufficient truck supply
Most IOOs assumed to need financial assistance to
switch to using a clean truck

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

17

Option II: Enhanced model with market incentives

Lever
1

Environmental
Cargo Fee

Concession

Truck financing
program

Rationale

Exemption amount
(net fee)

Privately funded: CD ($0 to 17.50 TBD), LNG / alt. fuel / hybrid ($0)
CTP funded: CD ($35), CD after financing paid off ($0), LNG / alt.
fuel, hybrid ($0)
Prior to Oct 1 ($0) grandfathered for any clean truck

Exemption timing

Flat across time with rights to adjust in future as needed

Concession recipients

LMCs only

Concession criteria

Parking requirement (inspected off street)

Strict revocation if trucks not properly maintained
Identifiable place of doing business

Price of a Concession

~$2000-3000 TBD for concession, $100 per truck

Right to change price of concession in future

Concession term

5 years standard
May be revoked for any infractions

Exceptions

Day passes for trucks servicing port less than X visits per year

Financing recipient

LMCs only for new trucks

LMCs or IOOs for truck buyback for scrap
Small business program for transition assistance

Amount of CTP
financing

CTP Grant: ~80% for New Diesel, Up to 80% for LNG/Alt.

Fuel/Hybrids/New technology
Truck scrap program: starting with ~$5000 per pre-89 truck,
requires prior SoCal registration and history of SPB drayage
No retrofit financing, unless technology meets 2007 standards

Financing criteria

Financial requirements set by commercial partner

Dray frequency going forward for new truck of at least (#) visits/week

Note: Truck ban schedule and TWIC security requirements as per Option I
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Cleaner ahead of
ban, green growth
Encourage private
investment

Create orderly
market
Set minimum bar
Ensure sufficient
supply
Improve security
Improve safety
Improve worker
condition
Reduce negative
impacts on local
community

Cleaner trucks
Reinforce orderly
market
Support upstanding
small businesses
Reinforce
sustainable market

Blue = adjustment from Option I

18

Option III: Enhanced model with market incentives and an

employee commitment
Component
1

Environmental
Cargo Fee

Lever
Exemption amount
(net fee)

Privately funded: CD ($17.50 or less), LNG / alt. fuel / hybrid ($0)

CTP funded: CD ($35), CD after financing paid off ($0), LNG / alt.
fuel, hybrid ($0)
Prior to Oct 1 ($0) grandfathered for any clean trucks

Exemption timing

Flat across time with rights to adjust in future as needed

Concession recipients

LMCs only

Concession criteria

Concession

Truck financing
program

Rationale

Parking requirement (inspected off street) and identifiable place of bus.

Strict revocation if trucks not properly maintained
100% employee commitment (phased in over 5 years) priority to be
given to existing truckers when creating new employees
Certification of employees having completed mandated safety training

Price of a concession

~$2000-3000 TBD for concession, $100 per truck,

Right to change price of concession in future, or offer seasonal

Concession term

5 years standard
May be revoked for any infractions or lack of performance

Exceptions

Day passes for trucks servicing port less than X visits per year
Option to relax employee commitment at times of peak load

Financing recipient

LMCs only for new trucks

LMCs or IOOs for truck scrap
Small businesses program for transition assistance

Amount of CTP
financing

CTP Grant: ~80% for New Diesel, Up to 80% for LNG/Alt.

Fuel/Hybrids/New technology
Truck scrap program: starting with ~$5000 per pre-89 truck, requires
prior SoCal registration and history of SPB drayage
No retrofit financing, unless technology meets 2007 standards

Financing criteria

Financial requirements set by commercial partner

Dray frequency going forward for new truck of at least (#) visits/week

BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

Cleaner ahead of
ban, green growth
Encourage private
investment

Create orderly
market
Set minimum bar
Ensure sufficient
supply
Improve security
Improve safety
Improve worker
condition
Reduce negative
impacts on local
community

Cleaner trucks
Reinforce orderly
market
Support upstanding
small businesses
Reinforce
sustainable market

Red = adjustment from Option II

19

We used information from many previous studies

Sources of secondary information used by BCG
American Shipper: The Monthly Journal of International Logistics. February 2007.
CGR Management Consultants. A Survey of Drayage Drivers Serving the San Pedro bay Ports. 2007.
Clean Air Action Plan Technical Report. San Pedro Bay Ports. 2006. http://www.portoflosangeles.org.
Goodchild, Anne, and Karthik Mohan. "The Clean Trucks Program: Evaluation of a Policy to Influence Marine Terminal Operations." Working Paper (2008).
Goods Movement Action Plan. CARB. 2007.
Haveman, Jon and Christopher Thornberg. Clean Trucks Program. Beacon Economics. 2008
Husing, John E. Economic Analysis of Proposed Clean Truck Program. 2007.
Leachman, Robert C., Theodore Prince, Thomas Brown, and George R. Fetty. Port and Modal Elasticity Study. Southern California Association of
Governments. Los Angeles. 2005.
Moffatt & Nichol, and BST Associates. Container Diversion and Economic Impact Study. 2007. http://www.portsoflosangeles.org
Monaco, Kristen. Incentivizing Truck Retrofitting in Port Drayage: a Study of Drivers At the Ports of Los Angeles and Long Beach. Metrans. 2007.
Southern California Association of Governments. Goods Movement in Southern California: The Challenge, The Opportunity, and the Solution. 2005
Starcrest Consulting Group. Draft Methodology for Estimating Heavy Duty Diesel Truck Activity at the Ports of Los Angeles and Long Beach. 2006
The Tioga Group. San Pedro Bay Cargo Forecast. 2007
U.S. Department of Energy. Norcal Prototype LNG Truck Fleet: Final Results. 2004

Our research was supplemented by interviews with the

study authors and many market participants
BCG presentation to LA Harbor Commission 06Mar08 - Final.ppt

20