Regulatory Update: Playing by the Rules

Tags: 3PL, Trucking, Warehousing, Supply Chain Management, Legislation, Public Policy, and Regulations, Rail, Food Logistics, Specialized Logistics, Transportation, Logistics

Mark our words: Legislative and regulatory resolutions could spell trouble for shippers and carriers in 2015.

"Almost anything would look like action compared to 2014," says Bruce Carlton, president and CEO of the National Industrial Transportation League (NITL), an Arlington, Va.-based pro-shipper lobby.

Given November 2014's electoral outcome, and Republican control of both the Senate and House of Representatives, 2015 should be a referendum on what Americans want—better still, what America needs. The problem is, it takes time.

Consider current circumstances:

  • President Obama's 2011 Food Safety and Modernization Act—the first such piece of food safety legislation in more than 70 years—remains roiled in rulemaking. A resolution is mandated for 2015.
  • December 2014's omnibus package rolled back the Federal Motor Carrier Safety Administration's (FMCA) 34-hour restart provision in the much-maligned Hours-of-Service (HOS) rule.
  • The Surface Transportation Board (STB) has been laboring for nearly four years over NITL's Ex Parte 711 resolution regarding competitive rail switching. The STB is waiting to decide on whether it should decide.

Such are the vagaries of legislative meanderings and regulatory pomp. Circumstance is usually an afterthought. And the transportation and logistics sector is always the first to pay.

"Transportation is an 'ol-timey' business," explains Randy Mullett, vice president, government relations and public affairs for Ann Arbor, Mich.-based transportation company Con-way. "It doesn't get the same kind of research and development credits that high-tech or newer industries receive. The transportation sector pays the established corporate tax rate, so anything that reduces that rate is a huge benefit."

Debate over tax reform will shade many of the hot topics in transportation and logistics, Mullett contends. But he's unsure whether 2015 will actually bring more action.

"Tax reform might be more visible because the press will play it up as Republicans wanting to change something, and President Obama wanting to get something done in his last two years," Mullett says. "Many of these rulemakings have been in flight for a while. Government is just working hard to get them out now."

Case in point: At the end of 2014, The National Labor Relations Board (NLRB) was busy pumping out a series of different complaints and rules pertaining to ease of organization, access to employee emails, and exempt employee status, among other things. The board has five members, three of whom always represent the President's party. But one of those three Democratic appointees expires in December.

"I guarantee Republicans won't approve another appointee in 2015, so it leaves the board deadlocked at 2-2," Mullett says. "Looking at a situation where it might not be able to take action for another two years, the NLRB was trying to push action through at the tail end of 2014. Many of those rules will take place in 2015."

Then there is the Keystone XL pipeline conundrum, which will likely be the first bill that comes across President Obama's desk in 2015. The bill has major implications not only for U.S. energy development, but for transportation as well. When crude oil inevitably moves off the rails—how much remains to be seen—it creates extra bandwidth elsewhere in the system.

So much of U.S. regulatory policy has an impact across industry and transport modes, which makes the consequences that much more compelling.

Highway Trust Fund

The biggest issue on the docket for transportation and logistics players is the Highway Trust fund. Everyone agrees that infrastructure need is acute, but consensus remains fleeting on how to fund projects.

"The Highway Trust Fund is one of the most important, long-term issues for carriers," says Tom Vandenberg, general counsel for Green Bay, Wis.-based truckload carrier Schneider. "It's funded through the fuel tax, which was last increased in 1993. Schneider supports a user-pays-user benefits approach to highway funding."

The authorization expires at the end of May 2015. For Carlton, only one question is on the table: "How will America pay for infrastructure investment moving forward? It's not free, so the money has to come from somewhere. Congress makes that decision.

"We're all looking up to the Hill," he adds. "But we can't predict whether Congress will come up with a sustainable way to pay for it, or kick it down the road again."

Over the years, Highway Trust Fund expenditures have progressively expanded to include concerns beyond road construction and maintenance. In today's world, public transit, bike paths, sidewalks, recreational trails, landscaping, and historic preservation count as infrastructure enhancements, therefore straining resources.

Transportation funding was a focal point at the state level during November 2014's mid-term elections. Wisconsin and Maryland voters notably voted in favor of allocating transportation revenues specifically for transportation-related projects rather than as part of a general fund.

While lingering acrimony over the Affordable Care Act will likely fuel Congressional business in early 2015, the highway bill and conversations on how to fund it is expected to dominate conversation. "If fuel taxes go up, the cost of fuel increases and shippers' fuel surcharges escalate," Mullett says.

As oil prices drop, a fuel tax increase might be the only realistic measure to help fund and sustain U.S. infrastructure needs.

"Our analysis suggests a 15- to 20-cent- per-gallon increase is necessary to maintain current transport infrastructure performance," says Vandenberg. "In the long term, we see a vehicle mileage tax. But that's not ready for prime time right now."

On the Road

Truck size and weight is another area of contention legislators will have to tackle in a MAP-21 Surface Transportation bill extension, pitting railroads and the public against over-the-road carriers. It's a public relations struggle the trucking industry will never win—regardless of reason. Carriers want double 33-foot trailers to replace twin 28-footers where they can run them. On the truckload side, heavy commodity haulers are hoping for 97,000-pound weight limits for six-axle equipment. Both initiatives offer economy and environmental benefits.

NITL fully supports efforts to give states the right to increase weight limits with six-axle vehicles, as well as extend trailer lengths.

"Heavier and longer both make sense where states determine it works best," says Carlton. "That will not work on Fifth Avenue in New York City, but it will on cross-country moves. It's efficient, reduces trips, and benefits the environment. And we see negative safety implications."

Trucking companies are also dealing with the rollout of mandatory electronic logging devices (ELDs)—on-board recorders in pre-MAP-21 verbiage. ELDs are a front-and-center concern on carriers' regulatory dashboards. Many larger trucking companies—Schneider for example—have already made necessary investments in such technology.

"Electronic logging will be significant in 2015," says Vandenberg. "The recent omnibus bill pressed the Federal Motor Carrier Safety Administration to finish its rulemaking by June 15, 2015, which pushes the deadline forward by three months. It likely won't be fully implemented for two years."

Smaller trucking companies and owner operators are concerned about perception. Any forced compliance that adds cost, however beneficial, runs the risk of alienating those on the margins. And as FMCSA hits the reset button on Hours-of-Service rules, there's no shortage of inquiries.

"The bigger question for shippers is whether ELDs will have an impact on capacity," says Carlton. "Will they disaffect drivers, and cause more to leave the business than otherwise expected?

"In the non-regulatory, non-legislative world, a dark cloud hangs over the whole capacity issue—both in truck and rail," he adds.

Mullett doesn't anticipate the new ELD implementation rules will take effect until 2017 or 2018—so an impact won't be felt for a while. However, FMCSA is ready to move on enforcing speed limiters on trucks, and creating a 65-mile-per-hour national speed limit.

FMCSA's Compliance, Safety, and Accountability (CSA) scorecard program has similarly constrained driver recruitment. But compared to HOS, there has been far less outcry within the industry. It's hard to outwardly criticize any measure that properly vets drivers and carriers, and emphasizes safety.

Drug Testing: Just Say Yes

But that may not be enough. FMCSA is also proposing a national drug and alcohol-testing clearinghouse that could diminish an already vanishing driver talent pool even further. Current federal regulations require employers to conduct mandatory pre-employment screening of commercial driver's license (CDL) qualifications based upon a person's record.

To date, no federal repository records positive drug and alcohol tests by CDL holders.

"The trucking industry is required to perform urine drug tests in three scenarios—pre-employment, at random, and post-accident," explains Vandenberg. "Schneider and some other carriers are now testing hair samples for the presence of drugs. It's expensive. But the positive hit rate for hair testing on pre-employment is 3.5 percent, compared to .003 for urine testing. If drivers stay clean for a few days, they may be able to beat the urine test."

FMCSA's proposed rule would create a database for collecting and storing this kind of data. It would require employers to conduct pre-employment searches for all new CDL drivers, as well as annual searches on current drivers.

Driver employment is also a focal point in FexEx Ground's ongoing legal wrangling with the NLRB regarding independent contractors—an issue that resonates for many in the transportation space. The heart of the matter is whether subcontracted truck drivers are independent or full-time employees—and therefore entitled to healthcare insurance and other benefits.

Such precedence could extend well beyond the parcel business. As capacity tightens, and same-day delivery demands challenge traditional delivery paradigms, contractor-subcontractor relationships are becoming more important.

"The contractor issue is not just a FedEx issue," says Mullett. "It impacts all drayage companies and a lot of long-haul carriers as well."

Food for Thought

The Food Safety and Modernization Act (FSMA) has been languishing in review and rulemaking for the past few years—but for good reason. The original draft was flawed in many ways. Pat O'Connor, counsel for the International Warehouse Logistics Association (IWLA), previously raised concerns that lawmakers were drafting rules that impacted third-party logistics (3PL) providers—not knowing what a 3PL is.

"It's mandated that FSMA's final rulemaking happens in 2015," says Mullett. "Congressional timelines for agencies have a tendency to slip, but this act has a lot of people frozen in place. It's important that it gets done."

The food supply chain will feel a cost impact. Many large players are already compliant with track-and-trace provisions and process protocol that will eventually be required. But for smaller businesses, the impact could be far greater.

Some companies have been hesitant to get out in front of the government on something that is still not 100-percent certain. "It's difficult to out-guess a rule," notes Mullett. "Making a big investment and guessing wrong puts a company at a big competitive disadvantage. There's little benefit to leading with your chin unless a number of large customers want you to act, and are willing to pay for it."

IWLA, which represents a number of large public warehouses and 3PLs, has also been proactive in lobbying for legislation that codifies 3PL or warehouse responsibilities and liabilities—or lack thereof—when moving controlled substances through the supply chain. Who owns the products? Who's responsible for reporting? What kind of background checks do companies need for employees? What level of security is required for facilities?

These are important considerations, especially when a company is working in a shared warehouse environment where requirements vary.

"Because the FSMA regulations are more onerous—as are FDA drug rules—the de facto effect will concentrate among larger players that have the means to actually meet these new mandates. While that's not the intent, ultimately it's what will likely happen," Mullett adds.

A number of legislative items in the railroad industry threaten to derail progress at a time when business is booming. Reciprocal switching has been a contentious issue between Class I and captive rail shippers for several years. NITL is the voice for many of these rail customers, and its Ex Parte 711 initiative on competitive switching has become a rallying cry.

The issue is simple in theory, but difficult to execute. Rail shippers don't want to be held captive to one Class I carrier. They want railroads to be responsible for switching carloads to other Class I carriers within 30 miles of a terminal, creating more competition.

Railroads counter that the time and cost associated with reciprocal switching would have a deleterious impact on service—at a time when the industry faces increasing scrutiny over winter 2014's operational delays.

"Currently, all we're asking STB to do is make a decision on whether to move forward with a rulemaking," says Carlton. "We're not asking for it to decide on the merits of the argument right now; rather to give the shipper community and railroads an opportunity to comment formally on a new rule."

As divisive as reciprocal switching has become, it has taken a legislative back seat since the 2013 Lac Mégantic derailment in Quebec, Canada. The accident put a public face on the safety and security of growing crude-by-rail traffic—as well as North America's energy boom and the lack of adequate pipeline infrastructure necessary to match demand.

Specifically, Lac Mégantic has raised concerns about the DOT-111 tank cars that are currently used to transport crude oil. Starting in Canada, and now the United States, consensus is building that equipment needs to be upgraded.

"We're awaiting the new tank car rule from the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration, which is expected to come out in late winter or early spring 2015," says Carlton. "This has huge implications for any company moving hazardous materials."

Shippers have billions of dollars at stake because they generally own and lease tank cars. Regardless of how the final rule takes shape in terms of mandated retrofits, and the construction standards for new car buildings, costs will increase significantly.

"The new rule will be expensive," says Carlton. "The questions remain: Will the timelines be rational for both retrofits and the delivery of new cars? And is it doable?"

Revenue Challenge

Another important issue that NITL and its rail shipper constituents are keeping an eye on is STB's assessment of the railroads' revenue adequacy regime—Ex Parte 722. Shippers want the STB to examine the methodology for determining revenue adequacy and how it should be used in judging the rationality of shipper-challenged freight rates. Many believe it's out of date.

"Elements of the methodology are meaningless to the investor community, which does its Wall Street MBA analysis on Class I performance," explains Carlton. "Some have asked the board to recognize that, and to re-write or re-invent the methodology for dealing with captive rates on captive shippers.

"The captive shipper, by law, has the right to go to the board and argue it's paying too much," he adds. "The process that is wrapped around that simple right is broken. We want the STB to move forward on that as well."

Finally, as pressure on Capitol Hill builds to better appropriate funding for necessary transportation infrastructure investment, it will be interesting to see how high-speed rail and transit projects fare.

"If infrastructure investment continues, it increases the flexibility and capacity of the freight rail system. I anticipate that might be a significant outcome, given the change in Congress," says Mullett.

As North America's oil and shale gas boom continues unabated, cheaper energy prices portend a manufacturing renaissance. There are clear signs that reshoring is already becoming a reality in some industries.

Fueling New Directives

The drop in diesel fuel prices changes the economics of alternative fuels. A Republican-led Congress might very well play with the U.S. Environmental Protection Agency's existing renewable fuel directives.

Regardless, heavy-duty vehicle fuel economy standards are changing. The first iteration of newer engines is coming out in 2016.

"We anticipate that, like any other EPA-mandated engine change, the price of a truck will increase $5,000 to $7,000," says Mullett. "The more we think we're getting a break on fuel costs, the more other factors offset that."

One "sleeper reg" in the works could have a major impact on the U.S. logistics sector, according to Mullett. The Environmental Protection Agency (EPA) has proposed lowering ozone standards for the United States as a whole. That could place a large portion of the country in "non-attainment"—areas that are considered to have air quality worse than the National Ambient Air Quality Standards as defined in the Clean Air Act Amendments of 1970.

"Whether you agree with the EPA or not, the proposal has a practical impact," notes Mullett. "Companies in a non-attainment zone, which accounts for 65 percent of the country, won't be able to take any action that increases greenhouse gases.

"Suddenly, companies can't site a warehouse where they want to, or expand a distribution center, because it creates more truck trips or rail car moves," he adds. "Ultimately it comes down to choice, capacity, and cost—the three factors that matter most in warehousing and logistics."

One legislative initiative could have a significant impact in the airfreight industry. The House Transportation Committee has been bandying about the idea of privatizing the U.S. air traffic control system as part of the Federal Aviation Administration reauthorization bill. The consensus is airlines will fare better by separating from the Federal Airline Administration (FAA).

"Everything in the airfreight sector will revolve around the NextGen air traffic control program," says Mullett.

NextGen is the FAA's multi-billion-dollar project to switch from a ground-based radar system to a satellite-based control network.

"The switch has huge implications for increasing air space in major metropolitan areas," adds Mullett. "Theoretically, it allows carriers to move flights closer together more quickly. It will provide greater flexibility to the airline industry, both for passengers and freight."

Regardless, FAA direction is likely to come under more scrutiny as the privatization play runs its course.n