Truck Tolling: Understanding Industry Tradeoffs When Using or Avoiding Toll Facilities (2012)

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5 | P a g e Chapter 1 Background An economic rationale has long been made for the use of tolls as a funding mechanism for roadways, bridges, and tunnels in the United States. Additionally, tolling is advocated as a means of allocating scarce roadway capacity among users and achieving an array of other policy and environmental objectives. Toll facilities can improve traffic flow along congested corridors and facilities and raise new revenue for investment in transportation infrastructure and services. However, significant concerns remain among key stakeholders regarding the value of tolling. Goods movement businesses (trucking companies, shippers, and receivers) represent some of the most ardent critics of using tolls to address the nation’s congestion, environmental, and roadway transportation infrastructure needs. As the national discussion of transportation investment and financing needs progresses, particularly in light of congressionally-established commissions to address such issues, research was needed to understand how goods movement businesses assess tradeoffs in using or avoiding tolled facilities. Recent TRB forums that brought advocates and analysts of tolling together with trucking industry representatives highlighted the lack of understanding by advocates and analysts of the business of trucking. Some interviews with freight stakeholders have been conducted through FHWA and are documented in Issues and Options for Increasing the Use of Tolling and Pricing to Finance Transportation Improvements, Final Report, Work Order 05-002, prepared for FHWA Office of Transportation Policy Studies, June 9, 2006. This research project, “Truck Tolling: Understanding Industry Tradeoffs When Using or Avoiding Toll Facilities” (Jointly Funded as NCHRP Project 19-09), was sponsored to foster a further understanding of industry tradeoffs when using or avoiding toll facilities. NCHRP 19-09 Research Objective The objective of this research is to identify the value that goods movement businesses seek from the transportation roadway network and their willingness to pay tolls for that value. Hypothesis The goods movement industry is not homogeneous. Shippers, third party logistic service providers, and trucking companies have some influence over “who pays the freight” and how. Trucks and drivers can be operated by a company for hauling its own products (i.e., a private fleet); “for hire” carriers are trucking companies (for example, Schneider, Swift) that haul cargo for other businesses; and the trucking industry can further be classified by the type of transportation services they provide, such as truckload, less-than-truckload/parcel, drayage and specialty. The hypothesis of this research is that by classifying the trucking business in a number of dimensions, a “willingness to pay” tolls could be established for each of a number of actors in the trucking transaction. Shippers and third party logistics providers were identified as other sectors to examine, to determine their willingness to pay tolls or influence over a trucking company’s decision to use or avoid toll facilities. This research considered the following factors that might impact the willingness to pay tolls. Position in the Trucking Transaction

6 | P a g e • Driver: representing the employee who has the primary interface and decision with tolling • Dispatcher/fleet manager: representing a truck driver’s manager, who would direct a driver to use or avoid a toll route • Shipper/receiver/third-party logistics agent (3PL): representing the cargo owner, and/or the entity that arranges freight transportation, including cost and service parameters, and possibly accessorial charges such as for fuel and tolls. Type of Trucking Service • Local delivery • Drayage • Specialized • Local LTL • Private Fleet TL • For hire TL, Carrier/contract • For hire TL, self employed Owner Operator Other Factors • Toll reimbursement policies • Party responsible for trip routing (owner, dispatcher, driver) • Industry Tenure • Typical Haul Mileage • Typical Driving Environment • Opportunity/Familiarity with Toll Roads Methodology To examine the research hypothesis, the research team utilized three primary research methods. The first was a literature review and telephone interviews with trucking companies, 3PL’s, and shippers to determine their attitudes about tolling and factors that would influence their use of toll facilities. Information derived from this research helped to shape the instrument used for the web-based survey and personal surveys at industry trade shows. The second research method was a survey, distributed through a project website, which examined respondents’ attitudes toward toll roads and willingness to pay for them. The survey was publicized through industry trade newsletters, social media websites, and state trucking associations. The third research method involved conducting short, personal interviews at trucking industry trade shows in Charlotte, North Carolina and Dallas, Texas. The three modes of research used standard definitions of the trucking business and types of trucking operations. Since they used different survey approaches, the data could not be combined into one database for statistical analysis. Rather, statistical analysis was performed where appropriate to the data, and from these analyses, a narrative was developed to address the research objective.

7 | P a g e Profile of Businesses that are Involved in Toll Decision Making Transportation policy makers tend to view trucks or the trucking industry as homogeneous, but in fact the industry is tremendously varied, and a profile was required to help examine the factors that influence different industry segments’ rationale in making decisions to use or avoid toll facilities. Since the trucking industry is in fact heterogeneous, a classification of the different types of trucking firms and customer-carrier relationships is instrumental in identifying the “willingness to pay” for tolls. Business Classifications The research team examined the common types of businesses involved in trucking transactions, and then interviewed a sample of those businesses, to investigate their decisions involving fleet routing and the decision to use or avoid toll roads. For purposes of this exercise, the research team considered the following “stakeholders” in the trucking transaction: • Shippers • Private Fleet Truck Operations • For-Hire Truckload Companies • For-Hire Less Than Truckload (LTL) Trucking Companies (includes Parcel, Express) • Drayage/Cartage Companies • Brokerage/Third Party Logistics Companies • Specialized Trucking Companies While this classification is helpful to the discussion, note that there are a number of cases that defy the classification; for example, independent owner-operators are involved in almost every industry segment, augmenting company drivers for a private fleet, for example, or hiring out as small truckload operators. Although exceptions to this industry classification are inevitable, the classification allows for deeper understanding of the factors involved in using or avoiding toll facilities. It is also instructive to consider the size of the U.S. truck fleet. While trucking conjures images of five- axle semi tractor-trailers, the fleet is diverse in terms of the size of trucks and their configuration. Table 1 below provides statistics on the U.S. truck inventory based on Census data (2002).

8 | P a g e Table 1: U.S. Truck Vehicle Inventory, 2002 Thousands of Trucks Gross Vehicle Weight Rating Examples Light Trucks Less than 6,001 lb 62,617.3 Class 1 Full Size Pickup, Minivan, SUVs 6,001 to 10,000 lb 17,142.3 Class 2 Crew Size Pickup, Full Size Pickup, Minivan, Step Van, Utility Van Medium Trucks 10,001 to 14,000 lb 1,142.1 Class 3 City Delivery, Mini Bus, Walk-In 14,001 to 16,000 lb 395.9 Class 4 City Delivery, Conventional Van, Landscape Utility, and Large Walk-In 16,001 to 19,500 lb 376.1 Class 5 Bucket, City Delivery, and Large Walk-In Light-heavy Trucks 19,501 to 26,000 lb 910.3 Class 6 Beverage, Rack, School Bus, Single Axle Van Heavy Trucks 26,001 to 33,000 lb 436.8 Class 7 Furniture, High Profile Semi, Medium Semi Tractor, Refuse, Tow, City Buses 33,001 to 40,000 lb 228.8 Class 8 Cement Mixer, Dump, Panel, Fire, Tanker, Heavy Semi Tractor, Refrigerated Van, Semi Sleeper 40,001 to 50,000 lb 318.4 50,001 to 60,000 lb 326.6 60,001 to 80,000 lb 1,178.7 80,001 to 100,000 lb 68.9 100,001 to 130,000 lb 26.4 130,000 lb or more 6.3 Total, Class 3 - 8: 5,415.3 Notes: Average vehicle weight is the empty weight of the vehicle plus the average load of the vehicle; excludes vehicles owned by Federal, state, or local governments; ambulances; buses; motor homes; farm tractors; unpowered trailer units Source: U.S. Census Bureau, 2002 Economic Census: Vehicle Inventory and Use Survey: United States, EC02TV-US (Washington, DC: 2004). Shippers The trucking transaction begins with a shipper: the manufacturer or value-added producer of products, shipments from a warehouse, shipments from a port, or shipments from an intermodal facility. The shipment could be carried by a company’s own trucking fleet, or carriage could be contracted to a for- hire trucking company on a contract basis. The terms of sale in a trucking transaction determine which party pays for transportation costs. “FOB Origin” or “FOB Destination,” for example, indicates that the price of the shipper’s product includes delivery at the shipper’s expense to a specified point. This designation determines the responsibility and basis for the payment of freight charges, as well as the point at which the ownership of cargo passes from seller to buyer. With many variations, the two main terms of sale are:

9 | P a g e • FOB Origin: the buyer pays the freight charges and assumes title to the cargo upon pickup from the seller. • FOB Destination: the seller pays the freight charges and owns the cargo until delivery to the buyer. Large shippers tend to control the terms of transportation due to the savings they can negotiate based on large volumes and economies of scale. Three shippers were interviewed to investigate the treatment of truck tolls in their transportation contracts. One company is a major supplier to a large fast food restaurant chain; one company is a multi-national baker of cookies and snack crackers; and one company is a large retailer catering to small markets in the Upper Great Plains states. None of these shippers had any provisions to recognize tolls in their contracts; information on toll charges was not collected, and toll charges were not reimbursed as a separate line item in their freight contracts. With freight contracts silent on tolls, the implication is that shippers feel that the route selection and the hands-on knowledge of tolling charges is a responsibility of the carrier, leaving the decision on routing (and toll road avoidance) to the carrier. The more prominent concerns of the shipper are reliability and cost; shippers specify the parameters of service they need (e.g., delivery windows) and seek the best cost from competing carriers. To the extent toll roads are part of the routing, toll charges become part of the price, and the shipper is unaware if the price does or does not include tolls. Private Fleet Private fleet operations typically refer to a fleet of trucks owned and operated by a company to carry out their primary business; for example, Wal-Mart or Safeway. Private fleets typically operate both Truckload (TL) and Less than Truckload (LTL) operations. Safeway might deliver one trailer to one store (TL) or have a driver make stops at several stores delivering a specific commodity (LTL). In the case of produce, the load would possibly be considered specialized, since a refrigerated trailer would be used. Firms with private fleets have chosen to take control of their own trucking services rather than use the services of for-hire motor carriers, often as a way of increasing reliability and service for regular route customers. Drivers of private fleet vehicles are generally company employees and are not short-term contractors. This direct ownership arrangement allows private fleet operators to manage the transportation of goods, often with specialized equipment and services, more closely. The fleets are dispatched and managed by a fleet manager in charge of routing and communication with customers and drivers. Private fleets are typically managed as a division of a company’s overall transportation department. Most private fleet routes are predictable and structured based on repetitive movements linking a distribution center to stores. Some trucks are routed back to the distribution center via an inbound vendor location in an effort to reduce empty miles. Local and regional hauls account for almost half of all truck revenues and are the dominant arrangement for private carriers, in contrast to the longer hauls usually handled by the other types of carriers. Many private fleet hauls are less than 100 miles, with an industry segment average length of haul at 51 miles (U.S. Internal Revenue Service, 2011).

10 | P a g e Private trucking fleets make up the vast majority of commercial trucks on the nation’s roads. According the National Private Truck Council’s report titled “America’s Private Fleets” (Schulz, 2010), over 79 percent of the commercial truck fleet in the United States is represented by private trucks (excludes Class 1 and 2 from Table 1 above). Private Carriers are overwhelmingly concerned with their delivery performance. Private fleets often have to deliver to stores or destinations when labor will be available to off-load and inventory the delivery. One example might include a delivery to a restaurant where inbound trucks are only accepted during off-peak hours. To fill additional transportation needs, private fleets are sometimes supplemented by for-hire trucking fleets to perform additional services on a contract basis. Solutions for controlling operating costs are constantly under review by private fleet owners seeking to maximize the efficiency of their operations. The utilization of new technology, such as fuel consumption monitoring systems, is one example of a method fleet owners use to help address operational costs. Other ways fleet managers and owners are coping with increasing operating costs include cutting out operating inefficiencies originating from old or malfunctioning equipment , or re-routing drivers to better routes. Fleet managers interviewed as part of a University of Michigan Transportation Research Institute study titled, “Analysis of the Potential Benefits of Larger Trucks for U.S. Businesses Operating Private Fleets” reported fuel cost, congestion, improved distribution efficiency, and driver availability as their main concerns about operating a private fleet in the coming years, consistent with the concerns of other private fleet operators stated above (Schulz, 2010). Three private fleet operators were interviewed to determine their qualitative opinion of toll road value. One was a fleet that transports beverages for a large brewery; one provides fresh bakery and food service items; and a third which moves retail merchandise to stores in 13 northern and western states. Two of the private fleet operators engage company employees as drivers; for distribution routes which use toll roads, their tractors are equipped with transponders. The toll costs are absorbed as part of the operating cost within the company’s overall cost for transportation. These companies indicated that toll costs are a small percentage of the total route cost, so their drivers were not encouraged or instructed to avoid toll facilities. Fleet managers were more concerned about asset productivity and driver productivity as measured by hours of service rules, than avoiding a toll. In the other case, the fleet operator outsourced most of the routes to a truckload carrier, which managed the fleet of company-owned trailers. In this case, the fleet operator directed that all tolls be included in the rates charged by the truckload service provider, and therefore was not directly involved in the route—and toll road avoidance issues. This case illustrates that, even with private fleets, operations can be outsourced to another party. For-Hire Truckload “For Hire” Truckload (TL) Carriers are trucking companies (for example, Schneider, Swift) that haul cargo for other businesses. In the past, there was more specialization of for-hire carriers in either TL or LTL operations, but with consolidation in the industry, most of the largest for-hire companies now operate

11 | P a g e both TL and LTL divisions. This section focuses on the TL operation, which simply means that haul between shipper and receiver is a full TL, rather than a LTL load with multiple pickups or deliveries. Full truck loads moving in enclosed dry van trailers are the most prevalent vehicle in the commercial truck fleet (Alam, Maks, et al., 2007). The types of goods carried by dry vans include mostly packaged or palletized cargo, general merchandise, tools, machines, consumer products or other dry packaged products. Cargos such as paper products are a good example of the commodities carried by dry van trucks (i.e. no need for special handling, driver skills, etc). The vast majority of dry van hauls (92 percent) are less than 500 miles (Bryan, Joseph, et al., 2007). A prominent operational issue cited by drivers of for-hire TL business is long waiting times at pick-up and drop-off points. Since for-hire drivers are paid by the mile, and are evaluated on service performance, drivers can’t afford to be late for pick-up or delivery appointments. Appointments are often made at the shipper or receiver’s convenience and this potentially leaves drivers with dead time in their schedules. In response to changes in hours of service regulations, trucking companies have increased accessorial fees for driver wait time at the customer’s dock in an effort to improve driver productivity and reduce the time a driver spends waiting for freight. Important metrics used in the TL industry include average length of haul, empty “deadhead” miles, revenue per loaded mile, revenue per shipment, and shipments per business day (Cottrell, 2008). Generally, these metrics have to do with the efficiency of trucking operations in terms of how loaded trucks are over their total distance traveled to complete a haul. Trucking companies strive to minimize the amount of empty miles traveled in order to maximize revenue. Irregular route truckload carriers typically charge rates by the mile (some large carriers hire Independent Contractors (IC’s) on a load-by-load or short-term basis to fill in when demand is high.) Irregular route drivers are essentially for-hire truckload drivers, who are almost always paid by the mile, not salaried. Pay scales vary based on type of work, team drivers get paid more than random route drivers, who are paid more than private fleet or “dedicated” route drivers. Many large trucking company operators have multiple business units which offer different types of trucking services to help the parent company provide a full set of transportation services for customers, in an effort to be a “one stop shop” for trucking. Most carriers are unable to recoup tolls as a separate line item on invoices, although some larger more sophisticated companies, with intricate activity-based costing models, can accurately assess tolls by location and time of day. As a general practice, carriers must estimate tolls (some tolls vary by time of day) and include them in the base cost of service. For some transportation contracts, carriers are able to capture tolls, if they are large (for example the $40 per truck George Washington Bridge toll). Trucking companies consistently face increasing operations costs associated with fuel, insurance and equipment costs. To offset these increases, companies focus on driver productivity, asset utilization, and fuel consumption through seeking the shortest routes with the highest average highway speeds. These attributes result in the best driver and equipment utilization, which translates into lower operating costs.

12 | P a g e The research team interviewed three full truckload carriers which were representative of the industry. A large truckload carrier (12,000 drivers, full logistics services) indicated that their shippers ask them to put the tolls in the rate structure to simplify bid response calculation. They also indicated that for “incremental freight,” which may fall outside of contract bids, tolls are listed in the accessorial sheets. Carriers estimated that only 90 percent of the toll revenue billed, is collected as billed—some shippers cut the invoice and dispute the tolls. A regional carrier in the southern U.S. reported that tolls are not a big enough issue to warrant special treatment. Rather, including tolls in their base rate is easiest and reduces the administrative burden for the carrier and the shipper. A smaller carrier (30 drivers) operating in the central states reported that they would reimburse drivers if they presented a toll receipt, but they had no way to pass these tolls onto shippers. While the company uses toll transponder tags in the Upper Midwest, it had no standard accessorial sheets to pass on tolls to customers in other areas of the country. This is typical of smaller companies which are not making sophisticated cost calculations for carrying a load; instead, the carrier might run a quick calculation of time and mileage with a line item for “other” where tolls would be included. Any ability to shrink the costs in the “other” category translates directly into net revenue. For-Hire LTL Trucking (includes Parcel, Express) LTL trucking means that more than one shipment is contained within the shipped trailer. This requires the driver to make more than one “delivery” as part of the same shipment. While parcel delivery is typically LTL (though a UPS tractor-trailer delivering a trailer full of packages from one sorting facility to another is TL), the most typical type of LTL shipment is a large truck delivering pallets of cargo directly from a warehouse or other logistics facility to manufacturers or retailers. Depending on the size of the business, they will have an employee with a forklift to unload their specific shipment, or the driver will unload using a forklift or other equipment. The three main service offerings in the package or parcel market are overnight air, two-three day air, or ground shipping. Parcel carriers are also called “integrated carriers” since they integrate different modes (trailer trucks, local delivery trucks, rail, air, etc.) to deliver their cargo on time and in the most efficient manner. From an operating perspective the parcel business is comprised of two segments: local pick-up and delivery and line haul. Local pick-up and deliveries are often contracted out to IC’s, while line haul services which connect sorting hubs are handled by IC’s or company drivers. Typical trips would include moves from a hub or sort center to a customer office or retail strip mall location (local), or the line haul service which moves between hubs or sort centers. Parcel carriers often own and maintain transportation fleets. Pricing for shipments is based primarily on weight of the parcel being shipped, as well as the distance over which the parcel must travel to its final destination (Morlok, et al., 2000). The most important performance metrics in the industry have to do with cost and parcel time-in-transit (Kewill, 2008).

13 | P a g e Based on the nature of the service, many shippers’ packages are loaded into a single vehicle; the ability to pass tolls on at the package level does not exist today, so carriers build tolls into their rates. Carriers view increasing tolls and fees as part of their cost structure and pass congestion delays and toll expenses on as part of the costs of doing business. The research team contacted LTL firms in New England and along the East Coast to interview based on the density of toll routes in that part of the country. One carrier who operates exclusively in the Northeastern quadrant of the U.S. with an annual revenue of $400 million and 6,000 trailers reported that they spent over $1 million in tolls on turnpikes and bridges in 2009. On the topic of avoiding toll roads, the carrier estimated that since their labor cost is approximately $60 per hour (direct labor, with no equipment costs included) it would make no sense to avoid a $5 toll. Where tolls are greater—such as the George Washington Bridge which is $40—they must include the charge in the base rate or agree to the toll as an accessorial fee as a condition for shipment. For example, this carrier has set a minimum fee of $130 to go anywhere in Manhattan. Other issues highlighted the interest in parcel and expedited pick-up and delivery shippers’ avoidance of tolls. Based on several interviews, the location of the hubs, sort centers and customer store/kiosks locations, toll routes are not always the most direct path between route collection points. Some companies observed that large national carriers have much less exposure to tolls, as measured by “tolls as a percentage of total revenue,” than local or regional carriers. Interviews with the regional carriers validated that observation. In summary, LTL firms view reliability as their most important metric, and speed a secondary concern. There is an acceptance of tolls generally, and carriers are willing to pay, provided that there is a clear relationship to asset efficiency, a positive relationship to drivers’ hours of service compliance and reduced fuel consumption. Drayage/Cartage Companies Drayage or “cartage” trucking involves the transport of trailers or containers between facilities within the same geographic region, typically for further transportation outside of the region via trucks or other transportation modes (Tioga Group, 2009). A common haul involves the movement of cargo containers from a freight facility such as a port, rail terminal, airport, or border crossing to a different freight facility or warehouse. Drayage hauls are generally over relatively short distances and involve mostly intra-city trips since freight facilities are typically located in urban areas, though in some instances longer trips occur between cities. A survey at the Port of Houston showed the average dray haul was 60 miles and the average number of trips to the port per day was 3.2. Similar studies in the New York – New Jersey region calculated the average dray haul at 75 miles, with the average trucker making 2-3 trips per day (Tioga Group, 2009). The most important operational metric used in the drayage industry is truck turn time (Tioga Group, 2009), which is defined as the duration it takes a drayage truck to complete a transaction such as picking up an import container or dropping off an export container, excluding time in gate queues.

14 | P a g e Many drayage companies act as brokers who hire IC’s to move loads between rail terminals and customers, or between port terminals and rail terminals or between equipment depots and customers or rail terminals. Toll reimbursement, if any, tends to vary based on regional factors. Bridges and tunnels are a common toll item but most tolls are included in the rate structure. The majority of drayage firms are paid by the move and not by the mile, so driver productivity is very important. Tolls are typically not reimbursed for short movements, or inter-terminal transfers, but for longer distance shipments (for example from Chicago to Indianapolis or Chicago to Milwaukee, tolls are reimbursed. To further explore the question of toll road avoidance in this industry segment, drayage companies in Philadelphia, Chicago and Los Angeles were interviewed. In California bridge tolls are the dominate toll type and they are included in the drayage company’s rate. For a Philadelphia-based drayage company, tolls for shipments crossing the George Washington Bridge in New York City are charged to the customer; this company reported that up to 15 percent of the line item bridge tolls invoiced per year go unpaid by the shipper and have to be written off as uncollectable. The drayage carrier speculated that due to the large number of drayage companies in the area, and the wide array of business practices, customers can get away without paying; they “short pay” the invoice, and carriers find it exceedingly difficult to collect the balance. The largest drayage company in the United States is based in Chicago, with 80 percent of their business being cross town shuttles between rail yards. Average length of haul is 20 miles, with 70 percent of revenue paid by the railroads. Work is paid for as a flat fee. The broker pays the IC’s a percentage of a set fee and does not reimburse for tolls locally for movements between rail yards. IC’s will often choose to pay tolls locally if the improved productivity will allow them to get one more load per day. For interstate runs to a pick-up or customer delivery, tolls are often billed to the customer as a separate line item. The interviews reveal the preponderance of IC’s involved in this market segment. Drayage companies are primarily brokers who dispatch IC’s against assets they do not own. So a key variable here is the labor solution—IC’s—and the toll road decisions of IC industry drivers. Brokerage/ Third Party Logistics Companies Logistics involves the process of planning, implementing, and controlling procedures for the efficient and effective transportation and storage of goods, from the point of origin to the point of consumption. Third party logistics companies (3PL’s) are, in general, responsible for managing the above functions for large manufacturers or other entities in need of outside expertise in supply chain management. The Council of Supply Chain Management Professionals (CSCMP) defines a 3PL as, "A firm which provides multiple logistics services for use by customers.” Preferably, these services are integrated, or “bundled” together by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers, and finished products from manufacturers to distributors and retailers. Among the services provided by 3PL’s are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding.

15 | P a g e The services provided by 3PL’s are in contrast to traditional transportation contracts involving only two parties: shipper and carrier. In general, many companies break from this traditional relationship in order to achieve cost reductions, or increases in the efficiency of their transportation or supply chain activities. Among the detailed reasons cited by the International Warehouse Logistics Association for using the services of 3PL’s are: • Reduced total delivered cost for customers • Local expertise in new markets • Improved customer service through shorter shipment times • Reduced inventory costs through better management • Cost benefits through volume shipping discounts • Improved focus on core competency • Increased shipment visibility • More scalable logistics operation and cost model • Improved variety of technology and services • Risk reduction • Increased expertise in supply chain security • Reduced inventory holding costs As noted in a prominent 2009 study on 3PL’s, shipper respondents most frequently outsource logistics activities that can be characterized as transactional, operational and repetitive, and less frequently those that are more strategic, customer-facing and information technology intensive (Langley, Jr., 2009). These include domestic and international transportation customs brokerage, warehousing, and forwarding. Shippers want responsive supply chains capable of reacting more quickly to changing customer preferences. Some important metrics for shippers to measure the success of 3PL relationships are cost reductions in inventory, logistics, and fixed assets. Other metrics include decreases in order cycle time, and increases in order fill rate percentage, and order accuracy percentage. Total landed cost is another important metric used by the sector, which can be defined as the sum of all costs associated with producing and delivering products to the point where they produce revenue (Bianco, 2006). 3PL’s typically begin their relationship with shippers by taking over the management of the company’s carrier contracts. After a short introductory operation period the 3PL typically begins to optimize the freight across multiple modes and at that time may begin to change modes, carriers and freight routes. 3PL’s hire carriers to move the freight; tolls are expected to be included in the base rate. This category of transportation has many types of carriers and carrier relationships. Some movements are short haul and paid by the load or the trip; other contracts are based on mileage. Toll payments are subject to contract terms. Typically the tolls are expected to be part of the rate with the exception of certain areas of New York where bridge tolls can be very expensive. One 3PL creates rates on a zip code to zip code matrix; tolls are not separated as a line item because it would increase the administrative costs of managing the transaction.

16 | P a g e 3PL’s get paid based on a variety of metrics which include cost savings and service performance. Due to these two factors tolls are typically seen as a cost of doing business and are included in the carrier rates. 3PL’s manage all types of carriers which include full Truckload, LTL, Parcel, Heavy Haul, Containers and some air cargo. Specialized Trucking Operations Specialized trucking provides freight transportation services for shippers who require “specialized” or single purpose equipment. The cargo maybe considered “specialized” because of shipment characteristics relating to size, weight, shape, etc. Specialized freight includes fuels, refrigerated/heated goods, some types of forest products, and dangerous/hazardous materials. Specialized trucking equipment includes flatbed trailers, tankers, or refrigerated trailers, as well as item-specific equipment like car carriers, livestock trailers, industrial glass racks, etc. This segment also includes the furniture- moving industry, which hauls used household, institutional, and commercial furniture. Like general freight trucking, specialized freight trucking is subdivided into local and long-distance transportation of freight. Most commonly, the loads carried by specialized trucking involve construction materials, gravel, ready- mix concrete, grain, milk, petroleum products, and garbage or waste (US DOT, 2000). The transportation of specialized freight differs from the handling of normal freight in that the product being carried is typically not transloaded (unloaded and shifted to another trailer), but is typically only loaded and unloaded once over the haul. This reduces the risk of damage to the goods being hauled. The research included interviews with three specialized carriers based in Oklahoma, with fleets ranging from 150 – 200 trucks, and license to operate in 34 southern states. These companies handle products which range from heavy oil drilling rigs to tank trucks which require periodic washing. Company officials noted that toll roads are used if they are the most direct route, and expressed little concern about the cost of tolls in the context of overall operating costs. Perspective from Trade Associations The Owner Operators Independent Drivers Association (OOIDA) representatives highlighted the fact that 96 percent of the trucking companies in the U.S. operate twenty or fewer trucks and are not well positioned to collect toll reimbursement if they do not contract directly with a shipper. If they are contracted to provide service to a larger trucking company who has a direct relationship with the shipper, being reimbursed for tolls is more likely. Another representative of the OOIDA spoke about toll charges in relation to invoicing, observing that shippers and carriers are careful to leave no “open” or undefined service provisions for variable charges, in an effort to reduce the uncertainty of freight charges or payments. Any charge which is variable (for example a toll charge which may vary by route time of day) creates exceptions in the payment cycle. Most large companies have many rate transactions on a daily basis (driven by different lanes, weights and products). Most invoices are computerized to accelerate cash transactions. Any exception to an automated billing process results in manual oversight and slow payments.

17 | P a g e Analysis and Summary There was consensus across all segments of the trucking community regarding the need to maximize driver productivity and reduce fuel costs. Tolls in general are a small percentage of the total cost of trucking, compared to the cost of driver recruiting and retention, fuel, insurance, equipment and the administrative costs of invoicing. In most cases the costs of toll avoidance is generally not economically justifiable. Certain exceptions occur when the time between a pickup and delivery have extra time built into the move to optimize the loading or unloading facility operations. Newer hours of service regulations increase emphasis on productivity, providing another incentive to pay tolls. Most shippers avoid the issue of tolls on the premise that the actual route selected is the carrier’s decision, based on service requirements for any given lane or truck movement. While the shipping community does not advocate avoiding tolls, their contracting policies generally do not recognize tolls. Shippers expect the carriers to build toll costs into their base rates. Toll prices, by their nature, can vary and this variability can create exceptions in the payment cycle. Based on the high volume of transactions for truck movement, most shippers do not want any charges on an invoice that cannot be electronically settled in the billing process. A few exceptions to this finding include “New York surcharges,” which capture a premium rate for certain urban zones based on the toll charges and congestion fees associated with freight moving to or from New York City. The shippers’ attitudes toward tolling makes intuitive sense: those interviewed wanted to reduce the variability in rates charged on repetitive routes. Variability in the billing process leads to increased administrative burdens in the settlement of revenue for the transportation process. A common message from shippers was that it is up to the carrier to know their rate structure and since they are out on the nation’s highways daily, it is up to them to know their highway costs. The trucking industry is generally opposed to tolling, sometimes referring to tolls as a “double tax,” because they also pay fuel taxes. However, this general opposition is exacerbated in situations where 1) revenues are diverted to purposes not related to improving the highway (even worse when revenues are diverted to non-transportation purposes), and 2) tolls are posted at state borders in an attempt to avoid impacting the voters in a particular state. No particular segment of the industry—shipper, carrier, or 3PL—indicated that their trucks either actively used or avoided tolls. Rather, the use of toll roads is often an individual decision of truck drivers. Where toll roads offer value for money in terms of congestion, non-stop toll payment, and road quality, then there are incentives for truck drivers to pay tolls. Still, there appear to be some psychological factors involved in the toll decision, which are not purely economic. Distance could be a factor in avoiding toll roads. The type of fleet and the distance it travels can dramatically impact the likelihood of paying tolls. There are a number of computer software programs for routing which also calculate the amount of toll charges, mileage, and travel time. Longer distance truck operations often have more alternatives to avoid tolls, and still be on time, than trucking operations in congested urban areas.

18 | P a g e IC’s, or owner operators, are estimated to account for 11 percent of the 3.2 million truck drivers in the US (Estimates of the US truck driver population vary widely depending on source. The 3.2 million figure comes from the Bureau of Labor Statistics based on the 2000 US Census; at the higher end of the spectrum, the Federal Motor Carrier Administration estimates the US truck driver population at 5.6 million (Commercial Motor Vehicle Facts, April 2011)). They are involved in every segment of the industry, and are often used to supplement trucking capacity. These IC’s often lack the staff, software and/or sophistication to recoup toll charges, unlike large carriers who can document the costs, and make the case with shippers in select instances for toll recovery. Some IC’s have been successful in including toll reimbursement provisions in sub contracted work. The fact that tolls are ignored in most transportation services contracts have been primarily driven by the administrative difficulties that toll charges represent. The fact that tolls are not uniformly passed through to the shipper, like fuel surcharges, provides some incentive to avoid toll roads.