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Incentivizing Truck Retrofitting in Port Drayage - Truck Driver Research Results

Kristen Monaco, CalState-Long Beach researched truck driver/ owner-operator economics for the port clean air program

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Incentivizing Truck Retrofitting in Port Drayage:

A Study of Drivers at the Ports of Los Angeles and Long Beach
Draft Final Report
Metrans Project 06-02
January 2007

Kristen Monaco
Department of Economics
California State University Long Beach
Long Beach, CA 90840
The following excerpts are presented to give a general overview of the research being conducted into options to improved diesel pollution mitigation caused by the trucking of goods to and from the Ports of Los Angeles and Long Beach. These excerpts are only highlights of this lengthy, well prepared report. We encourage you to contact the researcher to read the complete report.

The San Pedro Bay (SPB) ports are the major gateway to the U.S. for Asian imports. They serve a key role in the national economy; the flow of goods into the country through this region leads to lower transportation costs and allows for increased trade. It is widely recognized that while the benefits generated by the SPB ports accrue to both the region and the nation, the external costs (eg. pollution and congestion costs) directly impact only the region. This paper attempts to assess the feasibility of different truck mitigation proposals by examining the operating margins of port truck drivers.

The Provisions of the Clean Air Action Plan

In November, 2006, the Ports of Los Angeles and Long Beach jointly issued their “Clean Air Action Plan,” (CAAP) which proposes new requirements to reduce air pollutants stemming from port-related activity at SPB ports. The “control measures” listed in the plan cover ocean going vessels, cargo handling equipment in the terminals, and rail locomotives and other rail equipment. Perhaps the most significant (and costliest) proposals pertain to heavy-duty vehicles, the diesel trucks that call at the ports.

The Ports divide trucks involved in port drayage into two categories:

    those are frequent callers (seven or more trips to the ports per week)
  • and semi-frequent callers (those making 3.5 to seven trips per week)

The CAAP calls for frequent caller trucks model year 1992 or older to be replaced with trucks that meet 2007 EPA standards.

Semi-frequent caller trucks model year 1993-2003 will be retrofitted to meet the CARB emissions standards.

Though it is not clear how the plan to retrofit and replace trucks will be implemented, it is clear that given the age distribution of trucks (with a median of model year 1995-1996) a large change in the port drayage industry is imminent.

Possible implementation strategies outlined in the CAAP Technical Report include

  • truck leases,
  • government-backed loans,
  • franchises, and
  • the formation of a joint powers trucking authority.
In addition to assessing the current financial situation of drivers (with a focus on truck financing), a goal of this study is to ask drivers about their preferred truck replacement scheme as well as their ability to share the costs of truck retrofitting.
  • Assess the current financial situation of drivers
  • Truckers preferred truck replacement scheme
  • Ability to share the costs of truck retrofitting
Although there is no market for air quality,
one can argue that individuals in a society
value high air quality more than poor air quality.

Truck Driver Demographics

  • The average age of drivers is 38.7 years (with a median of 39 years).
  • The mean number of years as a driver is 8.7 years, with a median significantly lower, 6 years.
  • Over three-quarters (78.8 percent) are married and have an average of 2.31 children.
  • As was found in prior studies, the majority of drivers are Hispanic (91.2 percent), with 5 percent of drivers reporting African American, 1 percent reporting Asian, and 2 percent reporting White as race.
  • Fifty-six percent of respondents reporting being U.S. Citizens.
  • The mode level of education is less than a high school degree (48.7 percent), with 33 percent reporting a high school degree as their terminal level of education, 16.5 percent with some college education (including vocational or technical school) and 1.5 percent with a college degree or higher level of education.

Truck Driver Work Lives

  • Over three-quarters (78.5 percent) of drivers reported working as owner operators.
  • The median driver reports working five days per week, with the mean slightly higher at 5.3, implying that a number of drivers work six or even seven days per week.
  • Twenty-five percent of drivers report working six days per week.
  • It is rare for drivers (port drivers or otherwise) to work a “standard” forty hour week. The drivers in the sample average 57.7 hours per week with a median of 60 hours. This is key, since under the Federal Hours of Service (HOS) regulations, drivers are limited to 60 hours of work in a seven day period (work time includes both driving and non-driving time – such as waiting time).
  • Ten percent of drivers report working 72 or more hours in a typical week.

According to these statistics, though port drivers are less likely than long haul truck drivers to violate regulations, more than ten percent of them significantly exceed the mandated maximum hours of work.

Given that the bulk of drivers haul containers within the Southern California region, it is not surprising that their annual miles are very similar to non-port local drivers. They report an average of 1179 miles per week (with a median of 1000 miles). On an annual basis, drivers report a mean of 63,188 miles. The median is significantly lower at 50,000 miles.

Driver Earnings and Expenses

Drivers were asked to report their weekly gross earnings. For owner operators these are their earnings before expenses for fuel, insurance, truck payments, and maintenance are deducted.
  • The mean and median reported weekly gross are similar to one another at $1596 and $1500, respectively.
  • Assuming 50 weeks worked per year, this would be equivalent to an annual gross of $75,000 per year for the median driver.
  • Scaling down to an hourly wage, at a median of 60 hours per week and a gross of $1500 per week, an estimate of the median driver’s hourly gross is $25 per hour.
  • For employee drivers, the weekly gross would be equivalent to their weekly net, as they should not be carrying the truck expenses.
  • The median employee driver reported weekly earnings of $800, corresponding to annual earnings of $40,000.

It is difficult to compare the earnings of employee drivers to owner operators since the owner operators are reporting what is essentially the weekly revenue of their businesses. We asked owner operator drivers a series of questions about their expenses over different lengths of time: diesel expenses were reported for a typical week, truck insurance and truck finance payments for a typical month, and truck maintenance for a typical year.

  • The median driver reported paying $450 per week for diesel and the mean was higher at $500 per week.
  • Combining these figures with the weekly grosses reported above, it appears that approximately 30-33 percent of a drivers gross pay is devoted to fuel expenses.
  • The mean and median for monthly truck insurance premiums are $606 and $600, respectively.
  • There is considerably more dispersion in the distribution of annual truck maintenance costs. The mean is $7044 and the median is $5000. We would expect this dispersion due to the considerable dispersion in the distribution of truck model years (presumably a major factor in the amount of maintenance a truck would need).
  • The mean truck model year is 1995 with a median of 1996. The oldest truck was from 1974 and the newest from 2006.
  • The oldest 25 percent of trucks were from 1994 or earlier.
  • Seventy-five percent were from 1998 or earlier.
  • The average driver reported owning his current truck for five years, with a median of four years.
  • Three-quarters of drivers had been driving their trucks for 6 years or more.

    The fact that drivers are primarily using trucks from the mid-1990s but have not owned them very long makes is clear that drivers are buying used trucks.

  • In fact, the average driver in the data set purchased a truck that was 7 years old.
  • One-quarter purchased a truck that was 9 years old (or older) and 10 percent purchased a truck that was 13 years old (or older).

    The means of financing these trucks varies considerably.

  • The mean price paid for a truck was $24,177 (this figure is not adjusted for inflation).
  • Nearly one-half (47 percent) of drivers report financing the purchase of their truck through a loan from a bank or other financial institution;
  • 7 percent report that they received financing through a trucking company;
  • 4 percent received financing from the truck manufacturer;
  • 17 percent received a loan from family or friends, and
  • 24 percent report paying cash for the purchase of their truck.

    Among those who financed their truck, the interest rates were rather high –

  • a mean of 14.7 percent and a median of 14 percent.
  • Many drivers had paid off their truck. The median driver had a monthly payment of $0 and no months remaining on their truck loan.
  • Among those still paying for their trucks, the mean monthly payment is $892.

    Given the data on income and expenses, we can estimate weekly net earnings of owner operator drivers and compare those to the weekly earnings of employee drivers.

  • The mean weekly net income is estimated at $731 and the median is close to this figure ($738).
  • Again, assuming a driver works 50 weeks per year, this corresponds to annual income of $36,550 for the median driver, approximately $3000 less than the estimated annual earnings for employee port drayage drivers.

    It should be noted that though we have deducted the major truck expenses for drivers, these figures have not deducted all truck driver expenses from the gross.

The advantage of these annual estimates as a measure is that they incorporate the detailed questions on expenses by component (fuel, insurance, maintenance, monthly truck payment).

We also asked owner operators to report their earnings over the past 12 months net of truck expenses.

  • The mean net annual income reported is $34,749, with a median of $32,543.

    The fact that these numbers are closely correlated gives us a sense of the reliability of the estimates. Taking the median figures from the annual estimate ($36,550) and the reported annual net ($32,543) and given that the median driver reports working 60 hours per week,

  • we can estimate an hourly wage (again, assuming a 50 week work year). The median hourly wage would be $10.85 at the lower bound and $12.18 at the upper bound, assuming no overtime pay.

Drivers’ Reactions to Pier Pass

PierPass is a program intended to increase the amount of freight moving at “off-peak” hours and accomplishes this through a fee imposed on containers moving during peak hours.

We first asked drivers whether they tended to drive peak or off-peak.

  • Over three-quarters of drivers report driving mostly or only during peak hours and
  • 23.7 percent report driving mostly or only during off-peak hours.

We next asked drivers whether they felt PierPass increased the number of hours they worked over a typical day and whether their earnings had increased as a result of the PierPass program.

  • 62 percent of drivers reported working more hours and
  • 46 percent reported an earnings increase as a result of PierPass.

TRUCK RETROFITTING AND REPLACEMENT

Given that one of the key provisions of the Clean Air Action Plan is to require that trucks that pick up/drop off freight from the SPB ports meet 2007 emissions requirements and given that the median truck model year in our data set is 1996, it is clear that there will be significant changes in the capital required to operate in port drayage. In most cases, drayage drivers and/or firms will be required to replace their trucks with newer models. In some cases, late model trucks may be retrofitted to meet 2007 emissions standards.

Truck Replacement

There are extant programs designed to facilitate truck replacement, notably one funded by the Gateway Cities program. This program provides a grant to fund a significant portion of the cost of a late-model truck. It does require a financial contribution from the driver.

Conversations with drivers and drayage companies suggest that some drivers do not take advantage of this program as it

  • requires drivers to sign a contract stating that they will continue to drive at the SPB Ports and also
  • requires the drivers to pay tax on the value of the grant.

Given the relatively low margins under which drivers operate, it is not surprising that drivers cannot afford to participate in this program.

THE research question:

“Please assume you will be required to drive a truck that is at least model year 2007 in order to enter the ports. Suppose the price of a 2007 model year truck is $50,000. There are various ways to acquire this truck. Please rank the options below:

a. participate in a grant program that will give you $37,500 towards the cost of the truck. You will have to pay $12,500 for the truck and must sign a contract that states you will continue tto drive your truck at the ports for the next 5 years.

b. Lease the truck for 36 months. You will not be required to sign a contract stating that you will continue to drive your truck at the ports.

c. Purchase the truck at a low interest rate (2% APR). In order to receive this low interest rate, you must sign a contract that states that you will continue to drive your truck at the ports for the next 2 years.

d. Purchase the truck at an interest rate of 10%. You will not be required to sign a contract stating that you will continue to drive your truck at the ports.

Results

Option”a,” the subsidized truck replacement had a large number of “1” rankings. It is notable, however, that the distribution of responses for this option had a large number of “4” rankings as well.

The lease option is perhaps the least popular program as it has the higher percentage of “3” and “4” rankings. This is somewhat logical as an owner operator would technically no longer be an “owner” under a lease program – perhaps reducing the “entrepreneurial” aspect of the job for the driver.

Option “d”, a “traditional” truck purchase program also has a large percentage of “3” and “4” rankings, though it also has the second most frequent occurrence of “2” rankings.

A program that has not widely been considered, but appears to resonate with drivers is option c, the low interest loan option. This option has a higher percentage of “1” and “2” rankings than the grant-based truck replacement program.

The last finding is important as there is currently an assumption by many parties that the truck replacement program under the CAAP will have to be funded either through government funds or through fees assessed on cargo passing through the SPB ports. Under either of these models, a subsidized truck loan program has the potential to spread the cost of the program over more years and to potentially cost less than a a grant-based program.

Truck Retrofitting Program

As previously mentioned, truck retrofitting will also be a possibility under the CAAP, however, retrofitting is only viable for late-model trucks. We ask drivers about their willingness to pay for a device that would retrofit their truck to reduce emissions

The question:

Assume that you are required to retrofit your current truck with a device that would decrease pollution. This device would not affect the fuel efficiency of your truck. The price of this device is $16,000. Suppose the State of California will help you pay for some of this device.

Could you afford to pay…

a. $4,000 for this device? Yes No

b. $8,000 for this device? Yes No

c. $12,000 for this device? Yes No

The Results:

  • Over one-half (104) drivers answered no to all three scenarios.
  • Many drivers reported that they could afford to pay $0 for the device. The 10th and 25th percentiles are both $0.
  • The mean amount a driver reported he would be able to afford is $569, with a median of $200.
  • The 75th and 90th percentiles are $1,000 and $2,000, respectively.

MODELS OF RETROFITTING AND REPLACEMENT PREFERENCES

  • As hypothesized, higher pay is associated with higher willingness to pay for truck retrofitting.
  • Model year is also positively related to willingness to pay for retrofitting.
  • Years as a driver, however, are negatively related to willingness to pay for retrofitting. This would imply that drivers with more experience are less willing to retrofit. This might reflect changing attitudes in trucking or it may reflect the relationship between age and years of experience (and reflect that younger people – drivers and non-drivers – are more willing to pay for pollution reduction).
  • Drivers are more likely to rank the truck leasing program first if they have lower net/gross ratios.
  • Given that these drivers are less “profitable” it would make sense that they would be more willing to choose a program that does not come with truck ownership and should be associated with lower costs.
  • Older drivers and those drivers who paid cash for their trucks are more likely to rank a subsidized loan program first, relative to the grant program.
  • Older drivers are also more likely to prefer a “no subsidy” program relative to the grant replacement program. These two findings may reflect that older drivers are more skeptical of the grant program and prefer a program that allows them to finance the replacement of their truck.

CONCLUSIONS AND RECOMMENDATIONS

Recently more attention has been focused on the economics of port drayage. Much of this has come as the result of the provisions of the Clean Air Action Plan, which will require that truck drivers who frequently call at the San Pedro Bay ports drive trucks that meet 2007 EPA standards.

Given the relatively low pay of drivers (net pay ranges from $32,000 to $36,000), it is unlikely that owner operators will be able to purchase new trucks without any assistance

While we find that many drivers are amenable to grant-based truck replacement programs, many also have a stated preference for interest-subsidized loans. Based on these results, we would recommend that policy makers consider these preferences when establishing truck replacement programs.

While little attention has been paid to interest-subsidized loans for drivers, it is clear that these might be a way to smooth the considerable costs associated with truck replacement (whether these costs be borne by shippers or taxpayers). We also note that drivers exhibit a willingness to financially contribute to truck retrofitting programs.

This section on "POLLUTION" presents the rationale for the clean air program being studied for implementation:

POLLUTION

Air pollution has become a growing concern for many living in Southern California. Los Angeles ranks as one of cities in the nation with the poorest air quality (EPA, 2006). A variety of sources such as auto emissions from trucks and cars, industry activities such as refining, among other things are attributed to poor air quality. Diesel emissions from port activities are of major concern due to the expected increase in port traffic as international trade continues to grow. Over the next fifteen years, the Los Angeles and Long Beach Ports are expected to see one hundred percent growth in the volume of containerized cargo passing through (Clean Air Action Plan Overview, 2006).

As a result, there is a plan in place to reduce overall emissions from the ports. The Port of Los Angeles/Long Beach’s Clean Air Action Plan calls for incentive programs aimed to reduce emissions and to become compliant with the NAAQS.

Under this plan, by 2011, trucks calling at the ports at least semi-frequently will be cleaner than the EPA 2007 on-road particulate matter emissions standards and will be have the latest technology for reducing nitrogen oxide emissions. The other standards proposed in the plan aim to reduce pollution associated with all other aspects of port activity. Implementation of this plan will be difficult without the proper funding as the estimated costs range from $194 million to $2.6 billion.

Finding funding for trucks is admittedly the most difficult task (Clean Air Action Plan Overview, 2006). However, reducing the amount of truck pollution is essential for a cleaner Los Angeles County.

Many studies have been conducted to determine the health effects of diesel emission exposure in humans. Over ninety-four percent of diesel emissions are less than 2.5 microns in diameter, making them easily inhale-able. Additionally, diesel exhaust consists of over forty substances classified by the EPA as hazardous air pollutants, and fifteen of these are classified by the International Agency for Research on Cancer as carcinogenic to humans or possible/probable carcinogenic to humans (Air Resources Board, 1998).

Of the six pollutants used by the EPA to determine air quality (EPA Green Book, 2006), five are found in diesel emissions, namely ground-level ozone (O3), nitrogen oxides (NOx), carbon monoxide (CO2), particulate matter (PM), and sulfur oxides (SO2). The EPA has established thresholds for human exposure to these pollutants, which are outlined in the National Ambient Air Quality Standards (NAAQS) and the results for Los Angeles County are discussed later (EPA NAAQS, 2006).

The air quality in Los Angeles-Long Beach area is improving (EPA Air Trends, 2005). From 1990 to 2005, all levels of pollutants given by the EPA’s trend statistics fell. Despite the improvement, however, air quality in Los Angeles County is still among the poorest in the nation.

The EPA’s Clean Air Act of 1990 requires that counties meet the National Ambient Air Quality Standards (NAAQS). The primary standards are set at a level meant to protect the public including people with increased sensitivity to air quality, such as children, elders, and those with asthma. Los Angles County, with a population over 9.5 million, is in non-attainment of the NAAQS for O3 and PM2.5.

During 2005, the PM2.5 concentration in Los Angeles County was measured at ... 150 percent above the national standard (EPA Air Trends, 2005).

Such high levels of O3 and PM2.5 do not bode well for the respiratory health of Los Angeles County citizens, especially children. Children are of particular concern because they are inherently more vulnerable to the negative effects of air pollution than adults for a variety of reasons.

First, children are generally more active than adults are when outside.

Further, the average child spends over 20 percent of day outside compared to an average adult who spends as little as five percent of the day outside.

Couple this with the fact that children are typically outside when air pollution is at its worse.

Additionally, children take in as much as 20 to 50 percent more air per unit of body weight at high activity levels compared to an adult at a similar activity level.

The fact that children are still growing and developing, and more specifically, their lungs are still developing necessarily implies a higher susceptibility to the adverse effects of air pollution

In 1995, the major sources of diesel exhaust emitted was estimated at 27,000 tons per year (ARB, 1998).

Diesel exhaust is different from the exhaust emitted from automobiles because diesel releases particles at a greater rate. One way to reduce the level of air pollution is to reduce the amount of diesel exhaust emitted into the air.

In 1998, the California Air Resources Board declared diesel particulates to be a carcinogenic air contaminant.

AQMD’s “Multiple Air Toxics Exposure Study II” found that about seventy percent of the total cancer risk from all air pollutants in the Los Angeles area is a result of diesel particles.

In addition, research by the Health Effects Institute has shown that the number of particles emitted from a 1991-model engine was fifteen to thirty-five times greater than the number of particles emitted from a similar engine from 1988 despite the fact that the weight of total emissions was significantly reduced. This indicates that the technology improvements are simply making the emitted particles smaller, leading one to wonder whether the trade-off is worthwhile (ARB, 1998). Clearly, more research will need to be done to determine this.



Edited by Carolyn Allen, owner/editor of California Green Solutions
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