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

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

A-1 | P a g e Appendix A: Literature Review The objective of NCFRP 19: Truck Tolling--Understanding Industry Tradeoffs When Using or Avoiding Toll Facilities is to identify the value that goods movement businesses seek from the transportation roadway network and their willingness to pay tolls for that value. This literature review examines the extent to which existing journals, program accounts and industry research sources have confronted those same issues. To accomplish this, literature was selected with an eye for concerns noted by trucking specialists. Documents were sourced from the TRB’s TRIS database, as well as DOT websites and the research team’s internal documents. While there is a large body of literature on traffic modeling in general, only broad generalizations exist for predicting the percentage of trucks that will take or avoid a toll facility. Standard Methods of Modeling Truck Toll Traffic In the feasibility studies and environmental impact statements reviewed, a well-developed set of methods are used to produce toll traffic and revenue forecasts. Although these methods are accepted practice, their variability (particularly during the ramp up period) demonstrates the difficulty of making any traffic forecast accurately. The document Estimating Toll Road Demand and Revenue found that only two of 26 toll roads opened in the US between 1986 and 2004 were able to forecast revenues within 10 percent (Kriger, et al., 2006). Furthermore, it was noted that results did not improve with newer facilities or for a given authority. Most toll revenue forecasts begin with a model that describes current traffic flow. In the case where the facility already exists, the model is typically taken as the baseline for volume and percentage of trucks (Washington State Department of Transportation, 2010). When there isn’t a facility already, analysts amalgamate a baseline using local traffic count observations and predictions from nearby regional models. These methods are intended to describe the pre-tolling traffic flow, so that planners can estimate how tolling might affect traffic flow and generate revenue. Planners predict traffic flow and revenue potential from assumptions about user preference. The most common survey types –stated preference and revealed preference—attempt to quantify how travelers respond to different toll scenarios. Stated preference surveys estimate the value of time by determining how road price affects route selection by asking respondents for their preferences (URS Corporation, Vollmer Associates, 2005). In this way, stated preference surveys estimate the value of time and how that value changes throughout the day. These analyses are used for developing a value of time (VOT) matrix. VOT is the financial value travelers ascribe to their travel time (Kriger, et al., 2006). Forecasters use VOT as the driver’s rational route choice decision. A driver elects to use a tolled facility, rather than a non-tolled route, from a cost- benefit decision rationalizing that individual’s highest economic advantage. The matrix is comprised of categories including trip purpose, mode, income level, direction, or time of day. Analyses that measure freight VOT are often supplemented by industry wage data for freight vehicle drivers. In most cases, VOT is adjusted to 50 percent of the average gross wage rate, though there are

A-2 | P a g e also studies where VOT is offset by a as little as 22 percent or as much as 100 percent of the wage rate (Washington State Department of Transportation, 2010). A criticism of this method is that even an adjusted value of time doesn’t capture an individual driver’s preferences; a truck cannot have a VOT, only a driver or firm can. Neither do they account for the wide range of incentives that affect a driver’s route choice (Kriger, et al., 2006). Methods for establishing toll-rates –the calculated auto toll multiplied by the number of axles (Washington State Department of Transportation, 2010) —assume a freight carriers’ value of time is derived by the same factors that influence route selection for total mixed population. This is often too simplistic. Factors Affecting Truckers’ Willingness to Pay Tolls The willingness of a truck driver to pay a toll is typically discussed in terms of price elasticity and diversion. Price elasticity is a general economic term defined as the change in quantity demanded divided by the change in price. Price elasticity is discussed in toll revenue models to assess how much revenue will change given an incremental price change. Price elasticity of tolls for trucks varies greatly by facility, observed at 0, or completely inelastic at the low end, up to -0.95 at the upper limit in the documents reviewed (McKnight, et al., 1992). For toll facilities, price elasticity is usually discussed in terms of diversion. Diversion is the change in behavior due to a toll facility. Diversion can take the form of choosing an alternate route, changing the time of day of travel, changing the mode of transportation (e.g. rail), or canceling the trip altogether. The discussion below outlines some the factors affecting the willingness to pay tolls, with estimates of elasticity where available. Alternative Routes One of the largest factors determining the price elasticity and diversion of trucks from tolled facilities is the availability of alternative routes. A study of the New York Tri-Borough area bridges and tunnels revealed price elasticity ranging from 0 (completely inelastic) to -0.95 (elastic) for trucks depending on the size of truck and bridge studied (McKnight, et al., 1992). The Verrazano Narrows Bridge has no reasonable alternative routes for truckers, causing price inelasticity and low diversion since truckers are veritably forced to pay tolls. At the other end of the spectrum, tolling of I-80 in Wyoming is expected to cause 46 percent of freight traffic to divert at the revenue-maximizing truck toll of $116 per trip (Parsons Brinckerhoff, 2009). Inflexibility of Receivers Freight companies have cited the inflexibility of receivers as a reason for not diverting to another time of day or alternate route. One study evaluating the time of day pricing initiative of the PANY/NJ found that 6.1 percent of carriers shifted their time of travel in response to new toll rates. A majority of carriers Figure 14: Price Elasticity of Demand

A-3 | P a g e that did not change behavior (67 percent) cited the inflexibility of receivers to accept off-peak deliveries as the key reason. Carriers suggested that, in order to move truck traffic to off-peak hours in significant numbers, comprehensive policies targeting receivers and carriers must be implemented (Holguin-Veras, et al., 2005): [The commercial focus group was] very skeptical that they could influence the receiver to accept goods off-peak if that was not the receiver’s typical schedule. They believed that receivers would only do it if the receiver got a big benefit from it and the trucker benefited from going at night. Otherwise, the receiver would have to put on more personnel to accomplish the same task with no apparent incentive. Time of Day Peak period of travel is different for trucks than it is for automobiles (Kriger, et al., 2006). While truck traffic remains relatively constant throughout the workday, automobile traffic tends to peak between 7am and 10am and 4pm to 7pm in urban areas. These times represent lower reliability for trucks as the general congestion can cause delays. Urban Compared to Rural Environments Urban freight movements are generally more time sensitive as daily delivery schedules must be met in congested conditions. Urban trucking is dominated by shorter, local delivery movements, with drivers who are familiar with the road system, alternative routes, toll facilities, and traffic patterns. Truckers can easily evade toll roads if a suitable alternative exists, but as we discuss in section on local delivery in Section 2, delivery schedules, reliability, and operating costs (especially fuel consumption) are more important factors than using or avoiding a toll road. Compared to urban areas, rural roadways typically provide a venue for large numbers of long distance hauls. Over longer distances, carriers and truckers frequently have more route options. Accordingly, diversion rates are higher on rural roads, as seen in the case of the Ohio Turnpike, and predicted in the case of Virginia I-81. Special Restrictions: Oversize and Overweight Trucks There are three subgroups of trucks with special restrictions: over dimensional vehicles operating under a permit, longer-combination vehicles (LCV’s) regulated to certain roads, and non-permitted (illegal) overweight vehicles. Over dimensional vehicles operate under a permit from a state authority, which specifies the route a vehicle must take. Routes are determined by considerations such as overhead clearance, turning radii, and bridge weight limits. If a toll facility is the route specified in a permit, drivers will generally conform to the route specified. LCV’s have a different regulatory regime, with states heavily regulating where such trucks can operate. For example, triple trailer combinations, which are legal in many western states, are generally banned in the eastern U.S. A prominent exception is the Ohio Turnpike, where triple trailers are legal, but must be broken down (to single or double trailers) elsewhere in Ohio. As with over-dimensional permitted

A-4 | P a g e vehicles, legal compliance with routing is quite good, and LCV drivers rarely, if ever, deviate from their legal route. There are of course some truck operators that exceed legal weight limits, without permits. There are economic incentives to exceeding legal weight and enforcement of weight limits is never perfect. The tradeoff between toll charges and greater truck productivity was the subject of a 2002 study, which suggested that by allowing longer combination vehicles, a toll facility may encourage operators to switch from hauling a standard combination vehicle to long-combination vehicle (LCV), reducing operating costs and increasing productivity (Samuel, et al., 2002). Border Crossings Border crossings and truck toll diversion are a unique case of study. For the busiest border crossings, congestion delay is severe and there is little opportunity for diversion. The border crossing between Detroit, MI and Windsor, Ontario is an example: the Ambassador Bridge is a toll facility but there are few alternative truck routes. In Texas, the Camino Columbia Toll Road (SH 255) outside of Laredo eventually faced foreclosure when toll revenue did not reach predicted levels. The 21.8-mile facility was primarily intended as a bypass for trucks, although passenger vehicles are allowed on the roadway as well. Truck tolls were originally set at $16, with truck traffic expected to be 1,500 per day. Truck traffic never materialized, however, with actual volumes only reaching 40 to 100 trucks daily, leading to foreclosure of the $90 million facility. After foreclosure, the roadway was sold at auction to one of its investors, John Hancock Life Insurance, for $12.1 million, and was subsequently sold to Texas Department of Transportation (TxDOT) for $20 million (Cortez, 2004). The Camino Columbia Toll Road officials cited numerous reasons for failure of the roadway. The project was initially conceived to relieve heavy congestion on I-35 in Laredo. But concurrent to the toll road opening, TxDOT opened the new “World Trade Bridge,” which was closer to Laredo and I-35 and attracted much more traffic: 6,300 trucks per day of the total 7,800 handled by all Laredo border crossings. Toll road officials also hoped that the North America Free Trade Agreement would eliminate cross border drayage, allowing direct flow of commerce between the U.S. and Mexico without an exchange of equipment and drivers at the border; so far, that provision of NAFTA has not been implemented. TxDOT reopened the roadway with tolls of $2 for automobiles and $2 for each additional axle ($10 for most trucks). In June 2009, tolls were increased and the facility decided to implement all-electronic tolling. The road continues to struggle to attract traffic, averaging only 870 vehicles per day (Samuel, December 2003). In the Niagara area of New York, two toll bridges, the Lewiston-Queenstown Bridge and the Peace Bridge serve freight traffic entering Canada. The delays at these toll bridges have prompted two projects aimed at relieving congestion: a potential widening of the Peace Bridge and the conversion of an old railroad bridge to a crossing for freight dubbed the Harriet Tubman Truckway (HTT). William

A-5 | P a g e Truesdale, a former regional director of the U.S. government’s border crossing operations and head of the company behind the HTT, had the following opinion of truck tolls at border crossings: Toll costs are often not the major consideration at border crossings. Waiting in line for customs, immigration, and security checks is often a much larger cost. An hour's delay may be $100 cost for a truck (Samuel, July 2003). Although little in the way of literature exists about border crossings effect on tolls and diversion, it appears that a truck driver’s willingness to pay tolls might be eclipsed by the wait times associated with the border crossing itself, rather than the toll to use the road or bridge. There are also differences between Mexican and Canadian border crossings. With a prohibition on Mexican trucking firms operating in the U.S., border crossings are limited to drayage operations that drop trailers at warehouses and terminal facilities just over the border. U.S.-Canadian truck traffic, by contrast, involves long haul trucks which operate across the border through to destinations in either country. Type of Carrier The only traffic forecasting literature addressing differences in the type of carrier evaluated the simple distinction of independent owner/operators, and private carriers. Independent owner/operators are defined as trucking operations where the truck driver is self-employed. This segment of truckers typically has more discretion in deciding whether or not to pay a toll, and may or may not be reimbursed for toll expenses. Private carriers, as described in this document, are companies operating fleets of trucks, either on a “for-hire” basis or to support their own business operations. Private carriers are more inclined to have set routes and/or policies in place determining whether or not a truck will use a toll road on a given route. A trucking value-of-time study found that 1) for-hire fleets tend to have higher values of time than company private fleets and 2) companies with hourly pay seem to be associated with higher values of time compared with fixed salary- or commission-based companies. This same study determined that the size of shipment did not seem to affect the carriers’ willingness to pay a toll (Kawamura, 2000). Standard Bid, Tariff, and Contract Language The research team analyzed contracts for a variety of carriers, shippers, and third party logistics arrangements. Examples were as diverse as a contract for hauling medical waste, sample broker-carrier agreements, and parcel company contracts. To protect the confidential nature of these business agreements, the parties are not identified and the focus of the analysis is limited to toll payment provisions and route specification (i.e., any specification regarding the use or avoidance of toll routes). In the case of the medical waste hauler, compensation is made on a per-trip schedule. The contract specifies that the carrier is responsible for all costs and expenses, including “fuel, personnel compensation and benefits, tractor maintenance and repair, depreciation, tolls, taxes and assessments and all other expenses” (emphasis added). The contract is silent on toll routes, other than the direction that the carrier will transport trailers “…in the shortest practical time consistent with safety and by the shortest practical route to their destinations…” Assuming that the shipper received quotes or bids for these services, it is clear that the carrier had to develop an estimate of its costs for this service, and build

A-6 | P a g e toll charges (if any) into its price. But nothing in the contract specifically addresses the use or avoidance of toll roads, nor is there a separate payment provision. The broker-carrier agreements were silent on toll charges, other than implying that “other accessorial charges” are to be included within the specific rates charged by the carrier. The brokers’ responsibility is to offer a minimum frequency of shipments to the carrier at an agreed upon rate, which in one example includes the following: “Rates or charges, including but not limited to stop-offs, detention, loading or unloading, fuel surcharges, or other accessorial charges, tariff rates, released rates or values, or tariff rules or circulars, shall only be valid when their terms are specifically agreed to in a writing signed by both Parties.” The carriers’ responsibilities include providing drivers and equipment for transport, having insurance, and taking responsibility for the cargo while in transit. Also included in the agreements are general contract requirements such as the time period of the agreement, definition of key terms, contract dissolution, and method of dispute resolution. As with the previous example, there were no special provisions to separately account for or pay toll charges. A number of parcel delivery company contracts were reviewed, but none had specific provisions relating to tolls or specifying routes. This reflects the nature of the parcel delivery business, where packages from literally thousands of customers are collected, sorted and delivered each day. With parcel carriers involved in both local delivery and line-haul services, and each individual customer having a relatively small financial stake in the transportation business decision, it is not practical for customers to dictate (or concern themselves with) routing and toll payment decisions. If there was a special concern reflected in these contracts, it was for fuel surcharges. Some contracts include a schedule of fuel surcharges as a percent of the overall rate; in accordance with certain diesel fuel price thresholds, contract rates change on a percentage basis. The greater emphasis on fuel versus toll cost is easily understand, as fuel costs exceed toll costs by a wide margin, and fuel costs can be highly volatile. The research team also examined data related to for-hire carriers and their treatment of toll charges. Two types of for-hire carriers are more likely to charge tolls to shippers as accessorial charges, rather than include them in base rates: Dedicated Contract Carriers and Expedited Carriers. A recent industry technology summit identified five types of payment arrangements for toll charges: 1. Toll cost not included in base rate (carrier estimated zero toll cost when quoting base rate) 2. Toll cost included in base rate (carrier estimated a particular toll cost when quoting base rate) 3. Actual toll reimbursed as an accessorial, according to supporting documentation (image of toll invoice or toll receipt) 4. Toll reimbursed as an accessorial, according to a pre-agreed toll rate chart 5. Toll reimbursed as an accessorial, according to a pre-agreed particular toll calculation program (such as PC*MILER or IntelliRoute)

A-7 | P a g e Of these five, types 3 through 5 may or may not have an option for the shipper to reimburse the carrier for toll cost back to the terminal or to the next pickup. The review of these contracts is revealing. For the most part, the documents are silent on routing and toll issues, leaving those details to the carrier, who in turn builds toll charges (if any) into its bid. From the shipper’s or broker’s perspective, this makes intuitive sense. It would be a greater administrative burden to specify routes, which would in turn require some verification that the carrier is taking the specified route. Similarly, specifying the use or avoidance of toll roads would require contract provisions—such as special toll payment terms—that would add complexity to the billing process. It is far easier from a contracting and operations standpoint to relegate those decisions to the carrier, and let their price reflect the routing/toll road decision. Psychological Factors The underlying assumption in all toll modeling is that potential toll users will make rational economic decisions. The reality is that users may not make rational economic decisions because psychological factors, such as toll aversion, may unduly affect the decision-making process. Unless there is explicit direction otherwise, the decision whether or not to pay a toll is a human one. Some individuals have an aversion to the idea of tolling. As one independent owner/operator stated, “Toll roads are a bad idea. …money should come from the government with taxes. I pay taxes to fund roads and everything. Paying money for tolls is giving them extra money out of my pocket.” Generally speaking, these views are fairly common among owner/operators and less so for private carriers (Goodin, et al., 2004). This introduces a real issue where the utilization of a toll facility could be diminished despite economic incentives to use the facility. This phenomenon is difficult to model and largely ignored in traffic analysis although it can represent a real reduction in toll revenues. Other factors may be even more difficult to quantify: a particular user’s preference for a certain stop being on a particular route, apprehension due to unfamiliarity with the toll systems, or a carrier not realizing the true economic savings of the toll facility in time and reliability. All of these could potentially lead a carrier to choose one route over another without making a purely economic determination. Deficiencies of Current Toll Estimation Methods Many toll revenue models simply assume the same methodology for estimating toll revenues as automobiles. While assuming a higher value of time for trucks is standard industry practice, methods for developing that value of time varies widely. A common treatment for including truck or commercial traffic is to factor the resultant automobile forecasts on each link according to the observed proportion of trucks or commercial vehicles in the observed traffic mix (according to traffic counts). Although this provides a simple technique for capturing the “full” mix of traffic on a particular facility, on its own it provides no way to account for tolling, other changes to the transportation system, or changes in demand.

A-8 | P a g e Consequences of Inaccurate Toll Estimation Trucks typically pay 200% - 1,000% the automobile toll rate at toll facilities (Kriger, et al., 2006). This translates to a significant effect on revenue: an inaccurate estimation of truck users will have a larger effect on revenue per vehicle than the same miscalculation of automobile traffic. The overall effect on revenue depends on the facility type and expected traffic mix. From the perspective of the financial community, a more detailed truck traffic analysis was recommended in one report as the higher revenue margin created by trucks is an important component of a forecast, especially when trucks are projected to be a significant percentage of traffic (Kriger, et al., 2006). Literature Review Summary Very little in the literature addresses the question of trucks using or avoiding toll facilities, other than sensitivity models that predict diversion. In terms of traffic and revenue forecasting, little distinction is made between types of trucks and their willingness to pay for tolls. While this is presumably fine for traffic forecasting, there are other non-economic reasons for predicting trucking behavior, such as the development of programs and facilities to address air quality and congestion concerns. With the literature on the subject largely deficient, the line of investigation must focus on studying individual segments of the industry, which is the topic of the next section.