FHWA Operations Support – Port Peak Pricing Program Evaluation

3.0 Market Analysis

This section presents the work conducted under Task 2 – Market Analysis of the study. The objective of this task was to profile key market conditions (success/relevance factors) that exist at the San Pedro Bay ports and compare with other regions of the United States to determine the relevance and/or impact the success of a peak pricing program similar to the PierPASS OffPeak program, This regional analysis was accomplished through the use of representative ports in the Pacific, Atlantic, and Gulf coasts and resulted in the development of a matrix detailing the performance of each port against the various success/relevance factors.

The key steps involved in accomplishing the objectives of the market analysis task included the following:

• Selection of representative ports on the Pacific, Atlantic, and Gulf coasts of the U.S. for the market analysis;
• Identification of a set of relevance/success factors for the performance analysis of each port; and
• Analysis of the relevance/success factors at each port, and development of a performance matrix profiling the performance of each port under each relevance/success factor with respect to the implementation of a peak pricing/extended gate operations program.

3.1 Selection of Representative Ports

The selection of ports for the market analysis was based on considerations of the following important factors:

• Magnitude of Containerized Trade/Traffic – Serious landside transportation and environmental impacts of port activity are being experienced at some of the largest container ports in the U.S., such as the San Pedro Bay ports.
• Geographic Location – The geographic location of the port governs the types of global supply chains relying on the port, which might impact the success of a program similar to the PierPASS OffPeak program (for example, the types of shippers/importers and supply chain characteristics such as amount of rail intermodal traffic at the Port of Houston on the Gulf Coast are different compared to the San Pedro Bay ports).
• Interport Competitiveness – The success of a peak pricing program at a port could be impacted by interport competitiveness, particularly in the case of discretionary cargo which can divert to other ports due to an unfavorable price environment created by a peak-pricing program. This could also be an issue for ports in close proximity to each other that also compete for local cargo (such as the Ports of Seattle and Tacoma);
• Environmental and Congestion Issues – The selection of ports was also governed by air quality/environmental issues, and truck traffic congestion at port terminals and on major highway corridors. For example, ports located in large metropolitan areas are under higher regulatory pressure to take action (such as implementation of extended gate operations, etc.) to mitigate the environmental and congestion impacts of port activity in the region.

Table 3.1 presents the representative ports in the Pacific, Atlantic, and Gulf coasts that have been selected for the market analysis. Due to constraints on the scope of this study, other important ports, particularly those in the Southeast United States (such as the Port of Savannah, Miami/Everglades, and Jacksonville) were not profiled as part of the market analysis. The strategic location and the rapid growth in container volumes at these ports in the future (fueled partly by the expansion of the Panama Canal) is expected to result in congestion and environmental issues being at the forefront of the challenges that these ports and their surrounding communities would potentially face in the future.

Table 3.1 Ports Selected for Market Analysis

Location	Port
Pacific Coast	Port of Seattle, Washington
Atlantic Coast	Port of New York and New Jersey
Atlantic Coast	Port of Virginia
Gulf Coast	Port of Houston, Texas

3.2 Identification of Relevance and Success Factors

After the selection of the representative ports for the market analysis, the next step is the identification of the set of relevance and success factors to be analyzed in this task. For the purpose of this analysis, the relevance and success factors are defined as follows:

• Relevance Factors: Relevance factors are defined as those factors that make a peak pricing and extended gate operations program particularly relevant to consider for implementation at a port. These factors are identified by answering the key question “What factors or conditions present at a port justify the implementation of a peak pricing and extended gate operations program at a port”? These include, but may not be limited to, terminal and/or highway congestion; and air quality problems (nonattainment) in the region.
• Success Factors: In addition to relevance factors, it is also important to consider success factors at each port in the performance analysis. Success factors are defined as factors that will govern the successful implementation of a peak pricing/extended gate operations program as well as the success of the program in achieving its intended objectives related to mitigating congestion and environmental impacts, improving reliability of cargo movements, etc. Success factors are identified by answering the question “What factors or conditions at the port will ensure that a peak pricing and extended gate operations program is successful in meeting its intended objectives?.” Examples of success factors include, but may not be limited to, shipper characteristics (types of cargo, night-time warehousing operations), carrier characteristics (owner-operators or employee drivers), and interport competitiveness issues.

The identification of the set of relevance and success factors to be considered for the Task 2 analysis relies on the results from the work conducted in Task 1, which involved a detailed review of the PierPASS OffPeak program at the San Pedro Bay ports.

Observed Factors at the San Pedro Bay Ports

Following are a set of key factors that were observed to have played an important role in leading to the implementation and success of the PierPASS OffPeak program:

Market Characteristics

The Task 1 effort involved comprehensive research on the key characteristics of the import and export market at the San Pedro Bay ports that were particularly important in ensuring the success of the PierPASS OffPeak program. According to Bruce Wargo, General Manager of PierPASS, Inc., the primary features of the Southern California market that played an important role in program success include:

• The presence of high-volume importers (big-box retailers such as Wal-Mart and Target) that own warehouses/DCs in the region that operate 24-hours a day;
• The presence of low-margin shippers exporting through the port, such as shippers of wastepaper products; and
• The presence of off-dock rail shipments, due to the ability to shift truck moves to off-dock terminals from day to night-time periods.

Degree of Midday Congestion

As seen from the Task 1 results, the degree of congestion observed at the ports, both in terms of the contribution of port trucking activity to congestion on major highways around the ports, such as the I‑710, and congestion at terminal gates and within the terminals, was a precursor to the legislative introduction of AB 2041, which led to the eventual implementation of the PierPASS OffPeak program. With the level of congestion and the need to add infrastructure capacity, the OffPeak program was implemented as a way of maximizing system capacity utilization without adding infrastructure capacity, which faced fierce opposition from community and environmental groups.

Air Quality/Environmental Issues

Another key reason why the ports receive so much regulatory attention is the environmental issues in the South Coast Air Basin (SCAB), where the ports are located. Air pollution is considered to be one of the most serious impacts of increased trade through the ports, and this is a particularly important issue in the region, because the SCAB region has some of the worst air quality in the nation. The U.S. Environmental Protection Agency (EPA) has designated the SCAB region as being in nonattainment of the National Ambient Air Quality Standards (NAAQS) for Ozone and Particulate Matter less than 2.5 microns (PM2.5). The concentration of Diesel Particulate Matter (DPM), in particular, which is a primary pollutant from port-related sources due to their reliance on diesel fuel, has also been identified as a major public health concern in the region, since more than 70 percent of the potential cancer risk from toxic air contaminants, according to the California Air Resources Board (CARB), can be attributed to DPM.

The air quality issues in the region and the ports’ contribution to the air pollution are mainly due to truck idling at terminal gates and congestion on the I‑710 corridor. These key factors, coupled with the degree of congestion lead to the introduction of the AB 2041 legislation with the intention of developing a program that would relieve day-time congestion, and reduce air quality impacts from port activity.

Interport Competitiveness Factors

Interport competitiveness was a particularly important issue for the ports because of the close proximity of the ports. Since the ports are strong competitors in international container trade, the implementation of the program called for a collective collaboration among the MTOs at both the ports (through antitrust immunity under the Shipping Act of 1984). The implementation of the program by just one of the ports would have potentially resulted in some loss of container market to the other port (particularly for those shippers not having night-time warehousing/DC operations, and who are not bound by long-term contractual obligations with certain ocean carriers).

In the analysis of the success of the program at the ports, it is also important to pay attention to the competition faced by the ports from other U.S. west coast ports for Asia-Pacific container traffic. The San Pedro Bay ports account for the bulk of the west-coast container market (owing to the presence of extensive warehousing and distribution facilities and strong intermodal connections to the eastern U.S.). Owing to their shear market dominance on the west-coast for international container traffic, the ports were able to implement a peak pricing program without fears of losing some of the market share to other ports on the west-coast.

Consequently, interport competitiveness, from the perspective of competition from neighboring ports competing for the market over the entire port market coverage area, would be an important factor to consider in analyzing the success of a peak pricing program.

Regulatory Issues

As discussed earlier in the report, legislative pressure through AB 2041 was the single most important factor that provided the political cover and impetus for the development and implementation of the PierPASS OffPeak program. In the absence of political pressure, competitive conditions between MTOs would have made it difficult for them to come together cooperatively to develop such a program structured primarily on changing their existing business models.

Institutional Issues

Institutional issues, such as longshore labor contracts between the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU), had an impact on the OffPeak program. Most notably, the labor work shifts stipulated under the longshore labor contracts impacted the gate operating times for extended gate operations, as well as the truck operational characteristics under extended gate hours.

Among the set of factors discussed above, congestion and air quality and other environmental issues can be categorized as relevance factors (as these issues determine if a peak-pricing program would be relevant for implementation at a port), while market characteristics, interport competitiveness, regulatory, and institutional issues fall into the category of “success” factors (as these issues determine if a peak-pricing program, if implemented, would be successful at a port).

Table 3.2 lists the relevance and success factors that have been selected for the Task 2 analysis. Regulatory and Institutional issues, which have been excluded from the analysis in this task, will be discussed in Task 3 and Task 4 of the study.

Table 3.2 Selected Set of Relevance and Success Factors

Category	Type of Factor
Relevance Factors	Air Quality/Environmental Issues
Relevance Factors	Congestion
Success Factors	Market Characteristics (Number of High-Volume Shippers, Volume of Low-Margin Shipments, Amount of Off-Dock Rail, etc.)
Success Factors	Interport Competitiveness

3.3 Summary of Findings from Port Market Analysis

As part of the Task 2 – Market Analysis effort, a detailed evaluation of conditions at each selected port was conducted with respect to the various relevance and success factors identified above. It is important to note that the objective of this analysis was not to assess the need for application of a peak pricing and extended gate operations program at these ports per se, but to demonstrate the approach used to analyze the identified set of relevance and success factors at these representative ports. Additionally, the results from this analysis also provide some useful insights into why, if so, are certain ports, based on some specific characteristics, observed to be particularly suitable to peak pricing programs compared to other ports. The results from the performance analysis of selected ports are presented in Appendix A. The following sections provide a summary of the key findings from the port market analysis:

• The results indicate that though some of the ports selected in the analysis are observed to have the conditions that would make a peak pricing/extended gate operations program relevant for future consideration, none of the ports replicate the exact same conditions/issues experienced at the San Pedro Bay ports. The results also corroborate the fact that like the San Pedro Bay ports, each of the selected ports is facing a unique set of conditions/issues, the implications of which, from a peak-pricing program perspective, might be unique to each port. This is an important inference, particularly from a policy development standpoint, potentially calling for considerations of different sets of criteria for implementation and success of the program based on conditions pertinent to each port. For example, a policy framework providing guidance on interport collaboration approaches to address port competitiveness issues in the implementation of port pricing programs might be relevant for consideration at some ports (those facing competition from adjacent ports) but not at others. Similarly, ports have differences in their institutional arrangements (for example, landlord versus owner-operator ports), and the policy considerations in implementing peak pricing programs will be different based on the type of port institutional arrangement.
• The results shed light on the differences in market characteristics at each of the ports that would be important to consider in analyzing the success of peak pricing programs. For example, consider the case of a port having a large share of its container market moving via off-dock rail and another port having a significant local container market dominated by high-volume shippers. These ports have very different market characteristics but both the ports have favorable market conditions for peak pricing programs. This is because truck trips associated with both these markets would be potentially favorable to diverting to night-time periods under a peak pricing program. Information on port market characteristics is also expected to be a key input for the development of evaluation guidelines to analyze the success of port peak pricing programs.
• The results also elucidate the impacts of issues related to market dominance and interport competitiveness on the success of peak pricing programs at the selected ports. It is observed that large ports having a dominant share of the local container market (and with local market accounting for a large share of their total container market) are not too concerned about interport competition. Though discretionary cargo is a key market segment that these ports are vying for in the future, they perceive peak pricing programs to have a marginal impact on any potential losses in market share, either because majority of the cargo moves by on-dock rail, or the perception that truck trips associated with off-dock rail moves will be favorable to diverting to night and/or weekend time periods.

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