Thursday, June 11, 2015

More Isn’t Always Better

EPA to propose stricter Phase 2 GHG Standards for new HD engines
There seems to be little respite for the heavy duty trucking industry when it comes to emissions reductions in this day and age. While California toys with the idea of a zero-emission, all-electric fleet, the Feds have again thrown down the gauntlet in their efforts to squeeze  additional Greenhouse Gas (GHG) reductions from the heavy duty trucking fleet via “Phase 2” new engine standards to take effect in 2018 with full implementation in 2027. 

While some regulators and politicians have described the industry as a “necessary evil”, industry members themselves are passionate defenders of their work, pointing to the fact the vast majority of Americans would be “naked and starving” if the trucking industry stopped moving.

Of course, no one in the industry wants to stop moving and they especially don’t want their customers naked or starving.  That brings us to a crossroads; the economy needs the industry to help maintain and grow economic activity and the industry needs a strong economy to maintain and grow the industry, it is a symbiotic relationship. As goes trucking, so goes the economy. The industry is the proverbial canary in the coal mine when it comes to the economic health of the country.

So a healthy trucking sector is a good thing, for everybody. There is a concern that as the cost of doing business rises, especially in relation to new and used truck prices, fleets will need to become more efficient to compensate for higher costs in order to remain competitive. Today, every model year new truck prices go up approximately $3,500, a new truck that would have cost $84,000 15 years ago now costs upwards of $120,000.
Although inflation and peripheral costs related to manufacturing contribute to this increase, the main culprit is the complicated engine emissions controls that are found on every new heavy duty engine (HD) and really every HD engine built since 2007.

Profit margins are near razor thin in trucking; regulations are everywhere and costs are only going up. These EPA proposed efficiency mandates are appreciated in the abstract, but are doing nothing to stop the upward trend of truck prices happening today.

For the industry, the assumed future cost savings of increased efficiency across unique sectors is a tough pill to swallow, especially when it is coming from the same folks who are doing the regulating. They, along with a host of environmental groups claim the higher equipment costs will be made up in future fuel savings. Future savings do nothing to lower upfront costs. Somebody has to pay.

The reality is, as has been evidenced here in California, the general public doesn’t want to pay more for the goods and services they consume, and the shippers and cargo owners do not want to pay more for the goods or services they produce or provide. 
When a trucking fleet is faced with higher costs of doing business (high cost of equipment, fuel, workman's comp, payroll, etc…) more often than not, to keep existing customers or attract new ones,  fleets will to operate at a loss to maintain that business relationship or  perhaps build new ones.

Shippers and cargo owners do not give rate increases out of the goodness of their hearts.
In California, the trucking industry has been mired in a regulatory cyclone with emission control requirements for their engines, efficiency upgrades for their trailers, stricter engine standards for their refer units, requirements for forklifts, as well as off-road yard hostlers, underground or above ground storage tanks and even portable and stationary generators.

The costs of upgrading for these rules have been bore by the industry alone.
Complicating this matter is the fact that customers are reluctant to pay a higher rate to one carrier for a California move when another down the street (or out of state) can do the same haul for cheaper. Since they do not face the same costs, either because of size,  scope or their “inability” to meet imposed in-use emissions standards,  a lower freight rate can be charged.  Nevertheless, these cost discrepancies not only stem from ability between fleets to meet air quality rules, but also from the general business climate in California (which in and of itself is a whole other topic).  

For national fleets operating outside of the Golden State, and other out of state fleets who vow to “never, ever, ever, over my dead body” enter California again, the only emission control technology they are subject to is the kind that comes from the factory in the form of a new truck engine.
Outside a select number of ports, the US trucking fleet does not have California-like turnover or control standards requiring cleaner in-use operation. While some states such as Oregon examine potential rules, California remains the only state with emissions standards for in-use HD vehicles.  

For California, this is not the first time at the dance. The in-use California only truck standards were preceded by separate California only diesel fuel standards as well as stricter control levels for new engines sold only in California and other opt-in states.

While California still maintains the designation as a “fuel island” because of CARB Diesel #2, the California only engine controls eventually spread to the entire country via Federal decree after everyone from the Engine Manufacturers to EPA to CARB were done suing each other, well sorta.   
Suffice it to say and putting it mildly, over the years California has helped drive Federal engine standards. The resulting engine standards for 2007 and 2010 model year were primarily geared towards criteria pollutants such as Particulate Matter (PM) and Oxides of Nitrogen (NOx). Lately, the Feds have started to move beyond criteria control towards efficiency upgrades for GHG reductions.

The Phase 1, GHG/Carbon Dioxide (CO2) thresholds for 2014 through 2018 engine model year standards required up to a 20% efficiency improvement for combination vehicles. The next phase, Phase 2, includes an additional 20% efficiency improvement through 2027. That equals a 40% increase in fuel efficiency over 2010 standards.

This type of mandate typically results in millions of dollars in R&D leading to sophisticated technology adoption, all resulting in higher costs to the end user with the usual promises of future savings.
The industry will always look towards any cost savings that helps maintain competitive rates while lowering the cost of doing business. But in an industry weary of promises for newer, cleaner, technology that will pay for itself in no time at all, full end user buy-in requires more than just lip service.

When struggling to survive as a for hire motor carrier, dollar and cents matter. More expensive trucks are just that, more expensive. Grants, potential tax incentives and creative financing can all help offset these higher costs, but for the small to mid-size carrier that is easier said than done.
So if the technology can actually deliver real world savings, fleets will adopt it. The Feds are seeking to reduce fuel consumption of HD engines, and since fuel is the number one cost for fleets, any little bit will help, especially since there are other costs that go beyond annual emissions escalators for new engine standards.

The proposed future savings may be lost in required maintenance procedures for complicated technology that may potentially be more prone to failure, resulting in down time and lost revenue for fleets. In the “just-in-time” freight network, if a delivery is missed because of a truck breakdown, carriers can usually expect to not carry that load for that customer again.
The durability of emission control technology is not a new concern. Hopefully the Feds will recognize the major investments fleets will be making into the 2027 standards and provide manufacturers enough flexibility to meet the requirements without sacrificing product quality just to meet imposed thresholds.

All in all, the quest for greater efficiency is a worthy endeavor; it must however consider the real world challenges of Heavy Duty Truck operation and effort towards a measured approach to implementation while avoiding impediments to implementation.
Unfortunately, once such impediment towards greater efficiency may come from the same state that started the ball rolling on new engine emission controls in the first place. California always has something to say if the Feds are considering Heavy Duty (HD) engine standards, this is no different.

In the recently released Sustainable Freight Plan, CARB has boldly lain out a strategy to request stricter NOx controls for new engines manufactured for sale in the US. They make no bones about their willingness to pursue a California only standard if the Feds do not act, both on the Phase 2 standards and the new California lower NOx proposals.
There is precedence for California only engine standards and whether the industry will need to suffer again through 49 and 50 state engines remains to be seen.

Nobody wants a California only rule, not the Industry, not the Feds, not even California. So, the Feds will have their work cut out for them, especially if California forces the mandate of lower NOx standards.
The bottom line here is that although regulators and environmentalists point to future cost savings from more efficient engines, the annual up front cost escalations for emissions controls in new heavy duty trucks are pinching an already squeezed industry. And with the Golden State cultivating their low NOx vision through federal action, things can only get more complicated from here on out.

And, it is quite possible that as costs continue to rise, small independent trucking companies will find themselves behind a wall of debt unable to pass on cost increases while waiting ever patiently for the fuel savings pay back promised by the very regulators who put them in that precarious position in the first place.

Stay Tuned!

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