$30 Million Gamble

Port expansion project has uncertain future

Back Longreads Oct 1, 2012 By Allen Young

The ports of West Sacramento and Stockton are betting that a $30 million public investment in new infrastructure will convince local importers and exporters to transfer their method of goods movement to the San Francisco Bay from trucking to barge shipping.

Supporters of this so-called Marine Highway project say it will draw more world trade to the Capital Region while reducing pollution and traffic congestion caused by trucks.

But the endeavor is risky because demand for the service is largely unknown. Before they sign up for an unproven alternative, shippers say they need to know whether the costs and timelines of barge shipping will be competitive with trucking. While some details have emerged, there are still lots of unanswered questions.

“It’s a little bit of a field of dreams. When you build it, let’s see what happens. Maybe we will come,” says Richard Coyle, CEO of Devine Intermodal, a freight shuttling service that operates 200 trucks in the central valley.

The $30 million investment, part of the federal stimulus act, went toward the purchase of new cranes and infrastructure in Stockton and West Sacramento. If the barge service proves unsuccessful, port operators say the equipment is still needed to support current operations, so it would not be a waste of taxpayer dollars.

The plan involves floating hundreds of 20 to 40-foot containers on a barge ship across the Sacramento and San Joaquin Rivers to the Port of Oakland and back.

The venture is especially significant for Stockton, which made national headlines this summer as the biggest U.S. city to ever file for bankruptcy. Local economists are crossing their fingers that a successful Marine Highway brings jobs to an area where unemployment rates are more than double the national average.

Stockton port officials expect to have started the barge service by the time this article is published. The commencement was originally slated to begin in February. Observers note that the operation needs to start soon because the primary agriculture export season goes from September to December. West Sacramento plans to begin their barge service in about a year.

This short-sea shipping practice is common in other countries, but not in the U.S.

Half a century ago, the ports of Stockton and West Sacramento employed container shipping, but the expansion of California’s highway system paved the way for truckers to win that business away.

The container-on-barge service has the potential to considerably expand operations, but in the first few months and years, the endeavor would only be a small part of the port’s overall business, which has decreased by more than 50 percent since the onset of the recession.

Under the current system, the inland ports transport cargo in bulk and break bulk. For example, grains are transported in bags and cement is funneled directly onto a ship. Port operators hope the new container-on-barge service would bring in new customers because containers would not have to be unloaded at every point of transfer.

A successful barge service would require enrollment from local exporters, such as wine and nut producers, as well as companies that import retail goods from Asia and elsewhere. While port operators acknowledge there will be many challenges to overcome in the early stages, they believe the service will ultimately be successful because they have convenience on their side.

“We’re providing more certainty to our shippers in the Sacramento valley. They know that they can drop their container off here and be done with it,” explains Mike Luken, director of the West Sacramento port.

Representatives from the Stockton barge operator, Utah-based Savage Cos., did not return calls for this article. But the company told Rebuild the United States (RBTUS), a coastal freighter advocacy group, that shippers would save an estimated 15 percent by using their barge system. Under the plan, two barges would make weekly trips transporting up to 350 containers per day. According to Stockton port officials, pricing schedules have not yet been released and will depend on a number of conditions including the price of fuel.

In an attempt to gauge the demand for the new service, calls were made to numerous agriculture product producers as well as big-box importers, steamship operators and local truckers. The overwhelming response from those potential customers was to wait and see.

“There are definitely some agriculture exporters who have expressed great interest in this option. Whether that interest converts to actual shipments will be seen once the service begins,” says Peter Friedmann, the executive director of the Agriculture Transportation Coalition, which represents most of the nation’s export growers.

Another key player in the project is the port’s labor union, and port officials say negotiations with the International Longshore and Warehouse Union (ILWU) are still active. Observers note that the union deal presents a major challenge because workers charge for each time they lift a container on or off a barge. Port of Stockton officials say staffing levels have been worked out and they are confident the final price structure will be competitive. Union representatives did not return calls for this story.

“It is so important to get the customers in the boat before you run the short sea service. If you have to convince them afterwards, you have to fight the truckers, and the truckers fight back.”
— Rudy Mack, former COO, American Feeder Lines

Logistics experts have discussed a container-on-barge service running through the Capital Region for decades. The closest attempt began in 2004, when a second-generation trucker named Ron Silva tried to pioneer a short-sea shipping system that would incorporate both the ports of Oakland and Los Angeles. Silva won federal backing for a logistics study and spent the next several years enthusiastically trying to capture stakeholder support and funding.

“This little trucker tried to put the next mode of transportation together,” says Silva, CEO of Westar Transport, a freight service that operates 50 trucks out of Selma, near Fresno. “It started with a few phone calls, and it blossomed into something and it got into a study. I got a lot of people excited about it, and one day I just told my wife, ‘You know, maybe. I don’t know. Things do happen.’”

In 2007, The Broe Group, a Denver-based transportation management firm, took over the barge project that would run out of the Port of Stockton. But after three years and spending $1 million in private funds trying to launch the service, the company conceded it could not produce a viable business model. Silva reached the same conclusion. According to both Silva and a former Broe employee, a primary hurdle was the recession, which plummeted the cost of goods movement and allowed truckers to undercut all proposed container-on-barge models.

“Pricing competitiveness rates had fallen. People were dropping the price for trucking. Truckers outcompeted the project,” says Joe Cutrera, a former vice president with Broe who now works for Omnitrax, a railroad management company.

The same year Broe backed out, the Obama administration announced a federal stimulus program that would breathe new life into the project. In 2010, Stockton received $13 million in federal grants and bought two mobile harbor cranes for $5 million apiece and made other port modifications. At the same time, West Sacramento received $8.5 million for similar purchases.

In December 2011, Savage Cos. took over the project. Port officials in West Sacramento plan to watch and learn from the Savage experience and hire their own management company to begin the Sacramento operation in about a year.

A word of warning has come from waterborne freight operators on the East Coast. In April, American Feeder Lines (AFL), a container liner service, shut down after suspending a nine-month service from Halifax, Nova Scotia to Portland, Maine; and Boston, Mass.

Short-sea shipping was the initial component of a much bigger plan to link container shipping through a series of Atlantic ports, but the service did not generate enough volume of cargo to continue.

In the case of AFL, the shipping distance was more than 500 miles, but former employees argue that parallels can still be drawn between that company’s experience and the Stockton/West Sacramento operation. Rudy Mack, former AFL chief operating officer, says California barge operators must prepare for opposition from the trucking industry.

“It is so important to get the customers in the boat before you run the short sea service. If you have to convince them afterwards, you have to fight the truckers, and the truckers fight back. It will make it much more difficult,” says Mack, who now works in New York as a transportation consultant.

As it stands, the California trucking community is skeptical of the container-on-barge effort. “Our members and others don’t really see that as being feasible because a lot of the agricultural products have a lifespan, and the longer they spend sitting, waiting to move, is less quality they have when they reach their destination,” says Michael Shaw, spokesman for the California Trucking Association.

“That’s one of the reasons why some of these other means of transportation are not as good as trucking. Trucking can move things more efficiently and quickly,” he says.

Aside from cost, the second fundamental question in many shippers’ minds is how long it would take a container loaded up in Stockton or West Sacramento to ultimately leave Oakland for its final destination. Vessel service along the Sacramento River can sometimes be shut down due to fog.

Moreover, as pointed out by Sacramento-based international trade economist Jock O’Connell, exporters want to know the amount of time it will take to fill up a barge with containers, how many filled containers the barge would need to haul in order to make each trip cost effective, and how long containers would have to sit at the Port of Oakland until they were placed on an outgoing vessel.

Shippers might be willing to endure longer wait times if the price were right, says O’Connell. But the added complexity of the service amplifies that pricing question.

“That’s, in essence, the question that has everyone scratching their head,” O’Connell says. Like many in the trucking industry, O’Connell does not believe the service can work without an operational subsidy from the government, which has not been offered.

Port operators respond that they are confident the endeavor will ultimately pencil out. “We’ve contemplated all those issues, and we have come up with a plan that addresses all those issues,” says Mark Tollini, deputy director of the Port of Stockton.

There are other signs that the project could prevail this time.

The trucking industry is under pressure from clean air regulators to replace trucks with costly new equipment, and the challenge arrives as trucking companies grapple with a national driver shortage (see sidebars). If the industry becomes as devastated by these developments as some truckers believe it will be, the cost of driving cargo would increase significantly, especially as the economy grows and demand increases for imports and exports. That would bode well for a waterborne shipping service.

Agriculture producers are also scanning for a new export option for logistical reasons. Since California does not provide truck drivers with roadways that allow vehicles to exceed a federal weight limit, shippers complain they must leave containers partially empty when loading them for truck travel. Conceptually, the container-on-barge service would allow shippers to move several truckloads a day to an inland port instead of making a day-long trip with a light container to Oakland.

Port operators say that the Marine Highway’s success will rely on customers courageous enough to try something new. Government officials have articulated a moral and economic imperative to help clean the air and preserve roads by diminishing truck traffic. And as local economists note, the Marine Highway also presents an opportunity for companies to build new distribution centers here and transform the region into a high volume logistics hub.

“The story is about potential,” says Jeffrey Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton. “[The Marine Highway] has the potential to really generate new businesses and new industries for this region, which are badly needed.”

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Oct 1, 2012 Allen Young