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Transportation & Logistics Research

John Larkin, CFA [email protected] (443) 224-1315

Michael Baudendistel, CFA [email protected] (443) 224-1357

David Tamberrino, CFA [email protected] (443) 224-1356

John Larkin

Good morning, everyone. We are very fortunate to have two fine guest speakers with us today to address the hot

topic this year, the Federal Motor Carrier Safety Administration’s (FMSCA) Compliance, Safety, Accountability

(CSA) initiative. Our first speaker is Tom Sanderson. Tom is Chairman, Chief Executive and President of Trans-

place, which is a private equity owned logistics company based in the Dallas area. Tom has more than 20 years of

industry experience in the logistics technology and services space. Before joining Transplace he was CEO and

President of Clicklogistics, which was a technology solution based company. Before that he was President and co-

owner of PTCG. Prior to that Tom worked at J.B. Hunt and before that at Schneider National. So he has some real

world experience with the asset-heavy carriers. He also spent five formative years at Mercer Management Con-

sulting, which is the old Temple, Barker & Sloane, now called Oliver Wyman, which I have always thought was—

certainly back in those years—the best transportation consulting firm.

Why CSA Is Not Fit for Shippers and Brokers to Use

Conference Call Featuring Tom Sanderson and Henry Seaton, Esquire

January 5, 2012

The following is an edited transcription of a December 20, 2011 conference call hosted by Stifel Nicolaus, which

featured Tom Sanderson, CEO of Transplace, a leading provider of transportation management services, and

Henry Seaton, Esquire, partner in the Seaton & Husk law firm and member of the Association for Transportation

Law, Logistics, and Policy. Tom has more than 20 years of industry experience in the logistics technology and ser-

vices space. Henry’s focus in the legal profession is on the transportation industry’s contracts, commercial litiga-

tion and bankruptcy. Stifel Nicolaus expresses no opinion on, and is not responsible for, the views expressed inthis transcript by participants who are not employees of Stifel Nicolaus.

Stifel Nicolaus does and seeks to do business with companies covered in its research re-

ports. As a result, investors should be aware that the firm may have a conflict of interestthat could affect the objectivity of this report. Investors should consider this report as

only a single factor in making their investment decision.

All relevant disclosures and certifications appear on pages 27-28 of this report.



Why CSA Is not Fit for Shippers and Brokers to Use

January 5, 2012 - 2 - Stifel, Nicolaus & Company, Inc.

Tom is joined on the call by a very fine attorney named Henry Seaton, Esquire. Henry is a partner at Seaton &

Husk in Vienna, Virginia and has always had his ear to the ground as it pertains to transportation regulations and

related matters. His focus in the legal profession is on the transportation industry’s contracts, commercial litigation

and bankruptcy. He often can be found writing columns for august trucking magazines like Overdrive Magazine,

the Commercial Carrier Journal, Big Rig Lease Magazine, et cetera; so he is very active in the transportation indus-

try.

With that as an introduction, I’ll turn the call over to Tom and Henry.

Tom Sanderson

Thank you very much John and thank you to everyone who has dialed in.

Our key message today is that shipper’s and bro-

ker’s should not be using the Safety Measurement

System (SMS) data (formerly known as CSA) in the

selection of carriers. There are several reasons for

that statement, as shown in Exhibit 1, and I think

we have plenty of data, which is the FMCSA’s own

data, to prove our point as to why that is the case.

First, you would be needlessly exposing yourself to

additional vicarious liability and negligent selection

lawsuits. It is far superior to rely on the FMCSA,

who is obligated by federal law to determine which carriers are fit for use for shippers and brokers. Secondly, and

we will present some data on this, the SMS scores themselves have no relationship to accidents per million miles.

As such, you are not doing anything to improve highway safety by failing to use or refusing to use carriers that

have this so called ‘alert’ on one of the particular BASICs (Behavior Analysis and Safety Improvement Catego-

ries). By using CSA/SMS data, you would also be harming small businesses. The SMS methodology is very un-

fair to the smaller carriers and the trucking industry’s lifeblood, of course, are those many thousands of small carri-

ers out there. Denying those carriers access to freight will exacerbate a capacity problem that we should all be

worried about as shippers or as logisticians regarding how tight capacity is going to be in 2012. We do not need to

needlessly drive smaller providers out of the marketplace. Finally, it would cost your company money to deny it

access to carriers that are approved for use by the FMCSA; these are carriers that have insurance and that have

satisfactory safety ratings—you would be fundamentally costing your company money and harming your service

by not utilizing them. We will show in the data that over half of all the carriers that have a BASIC score alert or a

golden triangle indicating that they are subject to further investigation by the FMCSA. An alert does not mean that

Source: Transplace

Exhibit 1: Today’s Key Messages





a shipper or broker should not use that carrier and we have the language from the FMCSA’s own website to dem-

onstrate that point. As such, our first main point is that you should not be using the scores to select carriers.

Our second point, which goes beyond our first main message, is that we believe the FMCSA should stop publish-

ing these scores. It would be fine for the FMCSA to use the methodology to determine which carriers should be

further scrutinized, but we should not have a mathematical model that is based on flawed data to determine which

carriers are fit for use for the shipping public. Furthermore, carriers should have the right to due process in chal-

lenging the numbers that are out there.

Exhibit 2 will help us give a quick background on

the original purpose. CSA, or Comprehensive

Safety Analysis 2010 as it was originally known,

was intended to find, monitor and rate, through en-

hanced roadside inspections and additional data

collection, information about the 750,000 carriers

that are out there. It is now no longer called CSA

2010 or Comprehensive Safety Analysis; instead it is Compliance, Safety, Accountability. Originally, the intention

was good. It was a way for the FMCSA to determine which carriers should be receiving more scrutiny and com-

pliance reviews as well as to work with carriers to resolve potential problems before it got to the point of a condi-

tional safety rating or, certainly, an unsatisfactory safety rating.

So that was the original purpose. But as we see in

Exhibit 3, it has not really worked out as originally

intended and, as it typical is, the devil is in the de-

tails. It turns out that the FMCSA can only measure

about 12% of the carriers it regulates. That equates

to a little less than 100,000 of the mainly larger for-

hire carriers that are being measured by SMS. The

system, originally intended to be a progressive

monitoring system to help the FMSCA determine

which carriers to scrutinize further, has evolved

into, unfortunately, the FMCSA trying to shift the burden for determining which carriers are fit from service from

themselves to the shippers or brokers based on these percentile rankings, which are not an absolute measure of

carrier safety but a relative measure where, just the way the math works, about half of all carriers who are meas-

ured are going to end up failing to get under the limbo bar on one of the BASICs. The FMCSA began publishing

Source: Transplace

Exhibit 2: Original Purpose

Source: Transplace

Exhibit 3: The Devil is in the Details





five of the seven BASICs for public scrutiny in December of 2010, thus we have a year’s worth of data now. As

we will see, over half of the carriers that are big enough to measure currently have an alert on at least one of the

five BASICs.

Henry Seaton

I would add that of the 12% that are measured, or what we would really call in the ‘radar zone’, they are the largest

carriers, but they also are predominantly the for-hire over-the-road carriers and that 100,000 number of measured

carriers goes all the way down into the 10-truck operators. So while one might say, “in terms of affecting small

businesses, are we only measuring the 12% of the largest carriers and the small carriers are getting a free ride?”

That is not the case for a transactional broker such as Transplace or people who are hiring for-hire carriers. Basi-

cally, the small carrier, what we define as the 10 to 20 truck operator, is being measured and is being harmed under

the system. As Tom will quickly show, there are large numbers of regulated carriers that have one or two trucks

and who may be undangerous to the highway but they do not cross the scale, so they are not measured in the sys-

tem. That is one of the key flaws that we see in the methodology is that there is inaccurate data to effectively

measure the motor carrier populous.

Tom Sanderson

One thing that is positive that we can say about our federal government is that they make a lot of data available tous over the Internet, so we should at least give them credit for that. We downloaded the data set in mid-October of

all of the SMS data scores for every carrier; that data set had 768,000 total carriers. In order to have a score, the

first thing the carrier has to have are inspection records; the data we downloaded shows ( Exhibit 4) us that less

than half of the carriers out of that 768,000

have even a single record of inspection in

the last 24 months, which is the period of

time the data covers. Now, there needs to

be a certain number of inspections before a

carrier can have a score on one of the five

public BASICs; we see from the exhibit

that about 92,000 carriers are being meas-

ured by SMS, i.e. 92,000 out of 768,000

have a single score. But then when look-

ing at those 92,000, 51,000 of them have aSource: FMCSA, Transplace

Exhibit 4: CSA SMS Data Summary





score that is over the threshold on at least one of the public BASICs. So it is remarkable that 56% of all the carri-

ers that are being measured have a score above the intervention threshold on at least one of the BASICs. I would

think most people on this call are very familiar with the phenomenal record of improvements in highway safety

that the trucking industry has been able to accomplish—probably since deregulation but certainly in the last 10 or

12 years. For those not familiar, there has been a phenomenal decline in accidents per million miles and highway

fatalities; to think that a system could consider 56% of the carriers that it measures to somehow be requiring fur-

ther intervention in safety is just ludicrous.

Henry Seaton

I would point out that if you are not familiar with how the CSA/SMS data methodology works, there are artificial

percentile cut offs for signaling out a carrier, i.e. giving them an alert or what we now call a ‘gold triangle,’ indi-

cating that they require increased monitoring. It is a matter of pure math that if you put all 768,000 carriers in all

of the five reported BASICs, well over two-thirds of them would be labeled as under alert, regardless of how well

they preformed under the methodology. So it is not an objective standard at all. It is an arbitrary grading-on-the-

curve percentile that, if used as a safety fitness determination in its current format, brands well over two-thirds of

the carriers under alert, if they are measured on all the data. The reason that, in this case, it is 56% of the 92,000

carriers with a score is very simply that of the five BASICs, a lot of those 92,000 carriers are only measured in one

or two of the reported five.

Tom Sanderson

You may hear the FMCSA occasionally talk about only 7%, 10% or a low-teens percentage of carriers having a

score over the threshold, it is a very disingenuous argument because as you can see, while mathematically that is

true, only 51,000 out of the 768,000 have an alert, if you will, and it is really only fair to measure it out of 92,000,

i.e. it is over half of the carriers that are actually

measured as opposed to the total number of carriers.

To Henry’s point and looking at Exhibit 5, for each

of the five BASICs, about 92,000 have a measure

on at least one of the BASICs. However, when you

look at the five public BASICs, you can see how

much more thin the coverage is: for unsafe driving,

which includes things like traffic tickets, only

32,000 or 4% of the population even have a meas-

ure; for fatigued driving, which accounts Hours-of- Source: FMCSA, Transplace

Exhibit 5: CSA SMS Data Summary (Continued)





Service violations, mainly in the form of filling out logs, only has 50,000 or 7% measured; vehicle maintenance

has the highest measured with 73,000; and, driver fitness and controlled substance have almost been completely

unmeasured. As such, the SMS system is simply not measuring most of the carriers, i.e. the vast majority of the

carriers who are operating on the highways.

Exhibit 6 shows a little bit of data on carrier size from the same data set. As most people are aware, the industry is

made up of many small companies. The chart on the left shows the number of carriers by fleet size; 93% of carri-

ers have less than 10 trucks and 99% of carriers have less than 50 trucks. Yet some people will minimize the im-

portance of that by saying, “those small carriers do not account for many of the trucks that are on the road.” As

such, the chart on the right breaks the industry into percentages by fleet size, i.e. the number of trucks in the differ-

ent carrier fleet sizes as a percentage of the total industry trucks. One can see, 50% of all the trucks that are on the

road are members of trucking companies that have less than 50 trucks, which is where the CSA score coverage is

very minimal. The largest block, which is the carriers with over 500 trucks’ block, also picks up the trucks in the

UPS and FedEx networks, which the CSA/SMS methodology is not as relevant for.

Exhibit 7 shows the breakdown of the SMS data by fleet size. The total (the bar on the far right) indicates that

only 12.9% of all carriers that have an SMS score (Note: the fleet size data presented includes roughly 700,000

carriers, as opposed to the population of 768,000 discussed earlier, as roughly 70,000 carriers truck numbers were

undeterminable). The blue portions of the stacked bars, which are sorted by fleet size, represent the percentage of

carriers that do not have a single inspection in the last year. The red portion of the stacked bars indicates the per-

centage of the fleets that have had an inspection but no scores. Finally, the green portion indicates the percentage

of the fleets in each fleet size that have a single SMS score. So one can see for the one truck fleets, only 5% of

Source: FMCSA, Transplace

Exhibit 6: FMCSA Carrier Size Data





363,000 carriers (roughly 52.2%, from Exhibit 6,

multiplied by 700,000 total carriers) are picking up

a score on even one of the five BASICs. Looking at

the 2 to 10 truck fleet size, there are 280,000 carri-

ers in that bracket and 15.6% have at least one

score. In the 11 to 50 truck fleet size, where 42,000

trucks operate, about half have an SMS score. No-

tice that as you get into the larger size fleets, i.e. 50

trucks and up, the system is capturing more of the

truck population and scores do exist for those carri-

ers.

The data on the alerts is shown in Exhibit 8. We

are now looking at those 92,000 carriers (from Ex-

hibit 4) and only 46% of that population does not

have an alert, i.e. they do not have a golden triangle

on the FMCSA website. 37% have one alert, 13%

have two alerts, and 5% have more than two alerts.

Again, for a shipper or broker to utilize this data,

they are eliminating more than half of all the carri-

ers that have scores. What do you do with the carri-

ers that do not have scores? Are you going to deny

your company the use of those carriers and deny

those carriers the business? That does not make any

sense.

We break out the same data in Exhibit 9 by fleet

size and show the percentages that have no alerts,

one alert, two alerts, and two or more. It is interest-

ing that even for the fleets with more than 500

trucks, 38% have at least one alert—it is just impos-

sible to believe that roughly 40% of the largest

trucking companies in the country could bear fur-

ther scrutiny on safety, given the highway safety

record of the trucking industry. In the 100 to 500

Note: Total population of carriers drops to 694k for carrier size analysis.


Exhibit 7: SMS Data by Carrier Size


Exhibit 8: Carriers Over the Limbo Bar


Exhibit 9: Alerts by Carrier Size





truck fleet size, 68% have no alerts; however 32%, or roughly one-third, have at least one or more alerts. You can

also see the impact as you get into the smaller carriers, who are disadvantaged by the law of large numbers, that

they are not getting enough inspections, so any one inspection carries a lot of weight. As such, only 33% of the

one truck fleets and 41% of the 2 to 10 truck fleets are operating with compliance to all five BASICs, or at least all

the ones that are measured for them underneath the intervention thresholds. That, however, does not mean those

carriers are not safe. As we will see in Exhibit 10, there is no correlation between the SMS scores and accidents

per million miles. For the top 200 North American trucking companies, the top chart plots the number of accidents

per million miles (vertical axis) versus the Unsafe Driving BASIC (horizontal axis); no correlation between the

SMS scores and accidents per million miles could be determined.

Henry Seaton

In this regard, remember that we have a system that is set up to measure compliance. In order for it to have any

validity, in terms of making a safety fitness determination, there has to be a demonstrated correlation between the

compliance and safety. These two exhibits (Exhibit 10 and 11) deal with the two most critical BASICs from the

FMCSA’s point of view, i.e. the two BASIC areas that they say have the greatest correlation to safety. For the

FMCSA to prove that their measurement system is a safety measurement system, as it relates to Unsafe Driving

Source: FMCSA, Anthony Gallo, Wells Fargo Securities, LLC

Exhibit 10: SMS Scores Are Not Related to Carrier Safety Performance





and Hours-of-Service (Fatigued Driver BASIC), the trend lines on these charts, which are based upon the largest

carriers at which you have the maximum number of data points, should demonstrate some correlation. However, I

think that we can see from the trend lines shown that, if anything, the exception is the rule. Any kind of statistical

analysis would say that this demonstrates a corollary that is far too weak to say, for example, that a carrier who has

a high score is going to be more crash prone.

Tom Sanderson

The bottom chart in Exhibit 10 breaks out the largest carriers, i.e. the top 20 North American carriers. Again one

can see that there are carriers with very low accidents per million miles that have high Unsafe Driving BASIC

scores and carriers with higher, but still good, accident per million mile rates that have low scores on the Unsafe

Driving BASIC.

Exhibit 11 shows the same kind of charts for the top 200 North American trucking companies but plots accidents

per million miles compared to the Fatigued Driving BASIC and the Driver Fitness BASIC. Again, you can see in

both of those cases that no correlation between accidents per million miles and the scores on those BASICs pre-

sents itself.

Source: FMCSA, Anthony Gallo, Wells Fargo Securities, LLC

Exhibit 11: SMS Scores Are Not Related to Carrier Safety Performance (Continued)





Exhibit 12 graphs the truck safety records from 1998 to the most recent data. One can see that the fatality rate per

million miles is declining at a remarkable pace (left chart). The same type of decline can be seen regarding the

large truck injury rate per million miles traveled (right chart). I think the trucking industry does a fabulous job of

managing safety. Additionally, we are all in favor of safety—we are not arguing against safety—but the current

method is unfairly penalizing carriers without any benefit to safety on the highways.

Henry Seaton

We are now going to examine the effect of SMS methodology on shippers and brokers ( Exhibit 13). It is our be-

lief that publication of this data combined with the frightening aspect of vicarious liability or negligent selection

suits has scared the shipper and broker community into feeling as though they must restrict their use of motor carri-

ers to only those that the agency has ultimately de-

termined are fit to use. In other words there has

been a higher limbo bar established as a result of the

release of this methodology and that higher limbo

bar is affecting small businesses, is reducing com-

petition and having an adverse impact on the public.

We say often that ‘Joe is not a plumber, Joe is really

a trucker’ and that this methodology is a regulatory

overreach that will have an anticompetitive effect

on small businesses.

Source: U.S. Department of Transportation, Transplace

Exhibit 12: Trucking Industry Safety Record

Source: Transplace

Exhibit 13: Shipper and Broker Liability





There are 600,000 small business enterprises that represent the motor carrier industry and the benefits of deregula-

tion that was granted in the ‘80s was based upon the idea that there would be competition on routes, rates and ser-

vices, but not competition on safety. Safety was to be an absolute standard enforced by the federal government,

not enforced by the shipping public. But unfortunately as time has passed, plaintiff’s bar has, using state law,

taken the position that shippers and brokers have additional credentialing obligation under state law. I think most

people listening are aware of a few bad decisions in which large judgments have been rendered against shippers

and brokers as liability attempts to go up the supply chain.

Under SMS methodology, the way it is established, either 35% or 20% of the carriers measured in each of the

seven BASICs will be branded as unfit for use if the shipper and broker community thinks they must use these

scores to credential carriers. As Tom has clearly indicated, there is a real data inadequacy situation here; but even

with respect to the 92,000 carriers they can measure, half of them exceed these arbitrary thresholds.

There was a lawsuit last year when SMS methodology was first

released. It was brought by three small trade associations who

said that publication of this data, coupled with the agency’s

insinuation to the public that they should use this methodology

to credential carriers, was going to have an adverse economic

effect on the small carriers. As a result of that lawsuit (Exhibit

14), which was brought in the United States District Court for

the District of Columbia, the agency fairly quickly came up

with a settlement. Exhibit 15 shows that settlement language (note: SMS is the new name for CSA 2010). Essen-

tially it says that the SMS data is used by the FMCSA and the enforcement community. A golden triangle (alert or

warning signal) indicates the FMCSA may increase monitoring on a particular motor carrier. Additionally, the

data is not intended to imply a federal safety standard rating pursuant to the existing law, which is cited. Further-

more, the reader should not draw conclusions about a carrier’s overall safety condition simply based upon this

data; unless the carrier has received an unsatis-

factory safety rating or has otherwise been in-

structed to discontinue operations, it is author-

ized to operate on the nation’s roadways. Note

that this settlement language then addresses the

shipper or brokers to look at licensing and in-

surance. It is important to understand that it is

the position of a large number of old lawyers

like myself that the federal government’s job is

Source: Transplace

Exhibit 14: The Lawsuit—2010

Source: FMCSA

Exhibit 15: New SMS Disclaimer





to certify safety so that the shipper and broker community does not. One of the hallmarks of the U.S. Constitution

is that the federal government is responsible for interstate commerce and we should be allowed to rely on the

agency’s ultimate determination just like you rely on the FAA when you decide whether to get on an airplane. We

are seeing, in response to this whole SMS methodology, a transferral of regulation of safety from the federal gov-

ernment to the shippers and brokers, with the governing law not being a uniform federal law but state law. As a

result of that change, over the past few years the promises of deregulation are indeed being circumvented.

Notwithstanding the settlement, fear mongers and a few bad

cases have frightened the shippers (Exhibit 16). There is an-

other study out here that shows that 55% of the shippers re-

port that they are too frightened to use carriers with even one

score over the limbo bar. Representing small carriers, we are

seeing carrier after carrier being denied freight because ship-

pers have been frightened by SMS methodology. In fact, the

U.S. Department of Transportation is now using these artifi-

cially constructed thresholds as a basis for barring small carri-

ers’ access to U.S. government traffic. Furthermore, vendors selling monitoring systems, large carriers seeking a

competitive advantage, and the agency itself are touting SMS methodology as appropriate for shipper use. We

believe that this should not be conceded or accepted quite so quickly.

Exhibit 17, do not use SMS methodology. The use of SMS methodology by shippers and brokers, I believe and

this is purely my opinion, is a bad idea. If a shipper or broker

uses SMS methodology, it assumes a risk of non-compliance

and a higher duty than the duty required by statute for the

government to do. You cannot stop introduction of SMS

methodology or challenge its validity if you use it and are

sued in a court. In essence, you lose the ability to rely upon

federal preemption and the government’s ultimate safety fit-

ness determination as the gold standard. Additionally, you

lose the argument that the regulators, not the consumers,

should be responsible for carrier fitness.

It is our belief that, in addition to the numbers that Tom has shown which demonstrate that the system is not com-

prehensive and it is not effective, the system is systemically flawed ( Exhibit 18). First of all, it would make safety

a question of a competitive grade-on-the-curve type of situation regardless of how well the motor carrier industry

Source: Transplace

Exhibit 16: Shippers are Scared and Confused

Source: Transplace

Exhibit 17: Do Not Use SMS Data





performs. This is illustrated by the situation where in any of the peer groups, half of the class would fail under the

golden triangle standard if employed by shippers. It

is based upon artificial peer grouping of carriers by

size and enforcement instances, which result in cer-

tain rating anomalies that I will explain. So there

really is no objectivity in the system the way the

grade-on-the-curve applies.

One of the key factors in determining safety fitness is the

crash data (Exhibit 19). However, crash data is not currently

released to the public. In fact, they only have crash data on

16,000 of the 768,000 carriers; so if you say that in some

sense we are trying to connect the dots between roadside

compliance and safety, we have too small a database on

crashes to even connect the dots. Moreover, with respect to

actual crashes, the crashes that are reported contain both preventable and non-preventable accidents and the last

standards we have seen show that as much as 59% or 60% of the crashes involving large trucks are not the large

trucks’ fault. So how do you build a satisfactory statistical model when there is a data inaccuracy? The old saying

about “garbage in, garbage out” certainly applies. As a stand alone basis for making a safety fitness determination,

the data quality necessary to make these determinations simply is not there.

Some of the statistical anomalies and problems are

illustrated in Exhibit 20. First of all there is a ques-

tion of underreporting. Roadside truck inspections

are the data source that feed this system. It is not

just how well carrier A performs, it is how well

carrier A performs with respect to carriers B, C and

D. In most of the reported BASICs, the ultimate

algorithm is based upon how many good roadside

inspections a carrier receives compared to how

many bad roadside inspections they receive. At that

point in time, the carrier is totally dependent upon

the roadside inspector. A lot of carriers who have bad scores will run through a scale, will get a level two inspec-

tion and ask the inspector, “look if I am clear, will you write this down so I get credit for it?” Only to be told, “we

do not write good inspections at this scale.” So there is a question of data inaccuracy. It essentially depends upon

Source: Transplace

Exhibit 18: SMS Methodology is Systematically Flawed

Source: Transplace

Exhibit 19: SMS Data Challenge

Source: Transplace

Exhibit 20: SMS Data Flaws





the whims of the local police officer who writes the inspection. Moreover, the system only captures traffic viola-

tions that result in an inspection. For instance, if a carrier receives a speeding ticket in Nashville, Tennessee, but

the arresting officer is not qualified to do a truck inspection, it never is entered into the system. As a result of this

anomaly, a lot of carriers who operate locally and not over the interstate system may in fact be exceeding the speed

limit far more frequently than the over-the-road carriers but their data simply does not get entered in the system.

There is also an issue called profiling. The agency profiles carriers for inspection if it does not have enough data

on a carrier or if it perceives a carrier to have a high score; as such the officer is told before the truck hits the scale

that a certain carrier may have an Hours-of-Service problem. That is called profiling. As a result of that, a carrier

who has high scores is more apt to keep his high scores. Carriers without scores are more apt to receive passes by

the scales.

There is also an issue surrounding geographical anomalies. Remember the BASIC category Unsafe Driving? This

represents the accumulation of speeding tickets and speed warnings per 100,000 miles on a scale that assigns a

truck a mileage ratio—I will not get into the vagueness of that other than to say that a carrier’s rating in Unsafe

Driving may be more an effect of where they operate than how they operate. This is because five of the states

write 42% of the speeding tickets. There is a legal anomaly in play where authorities, under certain state laws,

cannot inspect the truck unless they first stop them for a traffic violation. In the states that have that law—what are

called ‘probable cause’ states—far more drivers are stopped and given warnings; this is not that they are given a

ticket, not that they have a chance to go in court, it is simply a warning. That warning is entered into the system

against the offending motor carrier. In fact, I have one client who is a large national carrier who was able to pre-

pare a graph and showed that he was 22 times more likely to pick up tickets in Michigan than he was Arizona, but

he is peer grouped with carriers who operate only in Arizona. So as you can see, when this game is a question of

competitive safety, these geographical anomalies can play a large roll.

Tom Sanderson

It is important to remember that it is not how safe the

carrier is, instead the scores are determined by a com-

parative rating system, making the SMS data flawed

(Exhibit 21). I will reiterate the aforementioned point

that half of the violations in the Fatigued Driving BA-

SIC are due to form and manner violations relating to

those who maintain paper logs, i.e. it is not that the

Source: Transplace

Exhibit 21: SMS Data Flaws (Continued)





driver has exceeded the actual Hours-of-Service time limitations. Thus, only carriers who have paper logs are go-

ing to have those types of violations. The larger carriers that have electronic logging systems are not going to have

that type of violation. Furthermore, any carrier operating within the 100 mile exception is not going to be subject

to that type of violation. So it is really an apples to oranges comparison between the carriers in some cases.

The peer group creep is another methodology issue

(Exhibit 22). Essentially, a carrier could add a

truck or two and as a result they move up to the next

fleet size group, i.e. to a different peer group. So

while nothing changed at all about that carrier’s

safety, since everything is on a relative/percentile

basis, just because they either added or subtracted

trucks they have a different scoring under the SMS

methodology.

Henry Seaton

In that regard, the compounding of these situations is very frustrating to a carrier who is trying to manage his

scores. For instance, we have small carriers with 10 trucks who will have 8 to 10 clean inspections and if you

looked at their inspection ratio it would show improvement, but their CSA scores may not have moved at all. Then

there are other carriers in the smaller groupings that neither accumulate nor lose any points month to month, but

find their CSA scores fall by 20 or 30 basis points. So there is certainly the sense among the small carriers that

they cannot control their own destiny in this because it is not objectively measuring performance and that the sys-

tem is basically bankrupt. This is particularly the case when the agency or a shipper comes around and tells the

carrier they have a score of 85 and, “we are not going to use you until your score drops below 65,” and the carrier

has no control over or ability to do anything to change their score.

At this point, we discuss driver qualifications, drug and alcohol and securement BASICs that measure too few car-

riers to get any kind of accurate data. Earlier Tom illustrated that there were far more carriers measured in at least

one area of inquiry than were ranked. That is because the agency actually recognizes a statistical argument called

the law of large numbers, where the analysis needs to have a whole lot of data points in order to get an accurate fix

on trend line. If we apply this to a small carrier that has one, two or three roadside inspections, they may be un-

rated; all of a sudden, they pick up their fourth inspection and the small carrier shows up with an 80 or an 85 per-

centile ranking. Is the carrier any more unsafe on Tuesday than he was the Wednesday before it was released?

Source: Transplace

Exhibit 22: SMS Methodology Issues





The answer is no. Does he lose business as a result? Yes. Continually we are seeing carriers who are losing busi-

ness because of improper use of this methodology by the shipping public.

Tom Sanderson

Is it too late to stop this train wreck about the trucks? No. I make it a point, as does Henry, when we see articles in

magazines suggesting that this SMS methodology is a fait accompli, we take exception to that and write letters to

the editor opposing that (Exhibit 23). Certainly the

shippers and brokers need to pay a lot of attention to

the FMCSA’s five year plan. The FMCSA wants

the authority to regulate shippers and brokers and

they do not have it today—that would be a major

concern for our business as well as many others.

Senate Bill 1950 takes a step in that direction; it is

the FMCSA’s attempt to influence, through law,

shortcuts to put in these types of rules in place. We

really need to make an effort to stop that.

As such, we call you to action (Exhibit 24). If you are a shipper or a broker, do not use the CSA/SMS scores to

select carriers. If you are a carrier—and some of the large carriers do this, thinking that this is a competitive ad-

vantage for them—we urge you to compete based on service and based on price, not based on safety. While you

may have a good SMS score today, you may be caught above that limbo bar tomorrow and it could work against

you. These scores, as we have shown, do not have anything to do with actual safety. We think the FMCSA should

stop publishing the scores and abandon the efforts

to mathematically determine which carriers are

safe to use. We urge you to write your congres-

sional representatives. There has been an out-

pouring of support against the Hours-of-Service

changes that are proposed. We do not know

whether we will win that argument or not, but

certainly when you have Speaker Boehner talking

in our favor against the changes to Hours-of-

Service, we have reached the elected representa-

tive. We have a blog at our Alliance for Safe,

Source: Transplace

Exhibit 23: Take Action

Source: Transplace

Exhibit 24: A Call to Action





Efficient and Competitive Truck Transportation (ASECTT) website and urge you to get onboard through the blog

or directly through contacting myself or Henry.

Question & Answer

John Larkin: Well, thank you, Tom and Henry. That was certainly very stimulating; there is no doubt about how

you come out on the CSA program and its implementation—that is for sure. It would seem to me that normally

when you have a regulatory issue like this, the American Trucking Association (ATA) would come out and take a

higher profile than they have. Why do you think the ATA has not come out as strongly as you just did against im-

proper use of the CSA data by shippers and brokers?

Tom Sanderson: I think part of the problem is that there are a number of large carriers who do have good scores

and they see this as a potential competitive advantage to win more business. I think that is a mistake, but I think

that carries weight with the ATA. I do not like to bash the trucking industry—it is a great industry and I have spent

time there—but if there is a capacity shortage, what happens? Prices go up. So I think there is a little conflict of

interest. I am hopeful that they will come around and realize that safety is an area for absolute and not relative

ratings.

John Larkin: These BASICs were revealed about a year ago, so shippers have had about a year to try and digest

the information. I have heard a number of them comment to me that they actually do use the scores to select carri-

ers. I have also heard a couple of brokers say the same thing. I wonder if you have seen the amount of available

carriers shrink noticeably over the year as a result of some carriers, who perhaps have weak scores, being closed

out of the brokerage community as well as a portion of the shipper community? Has it accelerated the rate at

which carriers have either had to downsize or go out of business all together?

Henry Seaton: It is my perception that it has had serious adverse consequences. It becomes a wild card in terms

of future planning and decisions to or not to make additional investment in new equipment. Among the small car-

riers, and the associations that they represent, it is more than anecdotal; we have seen clients lose as much as 50%

to 60% of their business. There is actually a surplus of freight right now because of the restriction to availability

that has happened over the past few years. Hopefully some of those people who have been barred from the larger

accounts have otherwise been able to use the equipment—how long will they be able to hold on? I really cannot

tell.





I think that the language that we got in February—the material went live in January and the settlement was in Feb-

ruary—went a long way to holding the line on what otherwise was really going to be a train wreck as the language

that I showed in Exhibit 15 was adopted by the Transportation Intermediaries Association as their credentialing

standard, and fortunately they did not set a higher bar for the industry.

From making presentations to groups, I get the real sense that the shipping and broker community is nervous. We

have been able to convince a number of shippers and brokers not to use these limbo bars, but we are constantly

combating the fear of possible vicarious liability suits. That is unsettling in the industry. Ultimately it needs to be

resolved. From my point of view it needs to ultimately be resolved by affirmation that we can rely on the agency’s

decision. Maybe the shippers and brokers need a Graves Amendment like the leasing companies got if the plain-

tiff’s bar thinks that the federal law is unclear.

Tom Sanderson: I do not have any data that carriers have gone out of business, but there are numerous cases of

shippers that have refused to do business with carriers because they have one alert, two alerts, or whatever different

mechanism they have come up with on their own to try to utilize the SMS data to select carriers.

John Larkin: I believe that before the scores were revealed, there was a public comment period on this process?

Henry Seaton: No.

John Larkin: There was not?

Henry Seaton: No. That is in essence the grist of our original lawsuit. The agency released this information to

the public before it was approved for the agency’s own use. The methodology to be used as a safety fitness deter-

mination is required to go through the Administrative Procedure Act and to receive comments. The agency made

this public in December of 2010 because it was called CSA 2010. In fact, they told Congress they were going to

release the data but not fully implement it so that it would not run afoul of the Administrative Procedure Act.

There is still, absent Congress trumping it, a rulemaking proceeding that the agency purports to release sometime

in February or April, at which time the comments that have been covered today will be made. I doubt the listening

audience has heard these kinds of systemic arguments made before because the press has been embracing CSA

methodology. There are these unanswered questions and the Administrative Procedure Act offers us an opportu-

nity to raise those issues and to demonstrate the effect that this will have on efficiency and competition in small

businesses. That’s part of what ASECTT is aiming to do—not only to alert the public and Congress, but also to

present these issues and rulemaking.





John Larkin: Well, that is interesting. Perhaps one of your most compelling points here is that if the data really

is not fit for use in selecting a carrier—and really the FMCSA admits that by virtue of the comments that they have

placed on their website, subsequent to the settlement—then why do they not retract all the data and use it them-

selves to decide who they are going to audit more carefully? But given some of the flaws in the data, it does not

seem to have much public use per se and can be pretty easily misused—that is the core of your argument?

Tom Sanderson: That is right.

Henry Seaton: It is the core of our argument that it is a loaded shotgun that may have more blowback effect than

it does positive effect. What John suggested would be a compromise that I think the industry would support. If

they wanted to use this as a credentialing mechanism, the fact that it may have data flaws, the fact that it may not

represent everybody, that it is not a perfect solution, does not have any great adverse consequences if a carrier ulti-

mately is evaluated on objective standards and only receives an unsatisfactory rating after a progressive interven-

tion. We are not opposed to that. We are opposed to the branding effect and the idea that you can grade carriers

based on a curve.

John Larkin: That is interesting.

Listener #1: Tom, in terms of the position that you are taking, do you think it is more effective for brokers to rely

upon the large base of small carriers to provide capacity as opposed to the bigger trucking companies—who would

have a different view on it—because of the inherent interest in the small carriers?

Tom Sanderson: Well, many brokers do use tens of thousands or thousands of small carriers—in Transplace’s

case, we do tend to use more of the larger carriers so that is not much of a factor for us.

Listener #1: Okay. I understand there are some flaws in the way they provide this information. I do not know if

they will every come up with the perfect solution, but in absence of that, if it is one of the several ways to evaluate

the quality of a carrier, do you still have the same negative views about the value of this?

Tom Sanderson: Yes. We think the FMCSA should uphold it’s obligation to determine which carriers are fit for

service and that we ought to select carriers based on their on-time pick-up and delivery performance, the quality of

their equipment, and the prices that they offer. That is where the marketplace should be competitive.

Listener #1: And not safety reports that they have with state troopers and other government agencies?





Tom Sanderson: Absolutely not.

Henry Seaton: This revolves around the fact that a speeding ticket or a violation such as that may be a key to say

that you need to examine the company and make a safety and fitness determination; certainly you would not make

a decision in the airline industry, where there are six major airlines, that mathematically half of them have to have

a warning outside the gate that says ‘not fit for use.’ The premise of regulation is that people are certified on a

pass/fail basis so that the consumer—in this case, the consumers are the shippers and brokers—can rely upon the

government’s determination. When you vary from that and it is put in the hands of the plaintiff’s bar, you lose this

open and free marketplace, which in trucking is the driving factor in the national transportation policy. So that is

the reason that we say that the government cannot say well, “we are being transparent so we are putting it out there

so you can assess your risk.” Instead, we are saying is the government should certify on a pass fail basis; if the

carrier is not safe to operate, the government is the expert and they need to take them off the highway. Do not

leave us with an obligation to have to second guess your ultimate determination.

Listener #1: A lot of the data presented, the number of carriers et cetera, is this the company’s own data or is it

from government sources?

Tom Sanderson: Good point. This is data we pulled down from the FMCSA website and encourage anyone who

is listening on the call to utilize any of the graphs that we have provided here.

Listener #1: Okay, thank you.

Listener #2: I want to make one comment to see if it was accurate and then I have a question as well. Regarding

the confusion in terms of the ATA and other larger groups being involved, my impression of the timeline of how

CSA came to be—you already commented that there was no commentary or rulemaking—when it first came out

that it was overly complicated. There have been tons of studies and the methodology itself is extremely thick; as

such, I want to thank you for clarifying it so much more simply in this presentation. I think that confusion has

been one of the biggest challenges for the industry in regards to everybody getting on the same boat. Everybody is

making different arguments, but if we all make different arguments, nobody really wins. It becomes a divide and

conquer. Along those lines, regarding some of the recent studies that have come out, for instance the University of

Michigan study that justifies CSA, do those studies do anything to correlate actual crash predictability? It was my

understanding they do not. Do those studies more or less state the obvious, i.e. if you do shorter interventions, you

can do more of them. Do you agree with that?





Henry Seaton: Yes, I think everyone was waiting on the University of Michigan’s study to connect the dots be-

tween compliance and safety. I do not think it really did. If anything, there is language in there that suggests that

the correlation is not at all that accurate. As we know, with regard to some of the BASICs, even University of

Michigan admitted there was no correlation; however, that report has been spun on hits head a bit and looks like it

is apologetic for the fact that progressive intervention works, which is simply saying that we are going to send out

letters and a monitoring system and alert people when we think they have a problem before we come in guns blast-

ing with a full onsite audit. I do not think anyone in the industry objects to that. But to say that it has been effec-

tive in heightening a culture of safety awareness does not really address the issue. I think the agency views it as a

success because the industry is alarmed and concerned about safety to a level it has never been before. How does

that correlate through to a safety fitness determination and the adverse consequences on competition? The Univer-

sity of Michigan study has not been subject to any independent peer review or any criticism; the way it has been

rolled out is before it is in rulemaking. Clearly in rulemaking there will be comments made about the University of

Michigan study which stands in stark contrast to the study that Tom showed.

Listener #2: All right. I have been reading every single study and every single article regarding CSA, including

the multiple methodology releases for the past couple of years. I think that Henry and Tom have done a really

good job of simplifying it. They are really the only group that I have seen that has compiled the issues together in

such a way that one can really understand what is wrong with the program. I do not know how familiar everybody

on the call is with all the details, but if you are not and you are looking for a source to stay up to date, I would

really encourage you to keep up with them and where their messages are going to go from here to other different

groups, possibly the ATA and on from there. So thank you guys, I appreciate it.

Henry Seaton: Thank you.

Tom Sanderson: A good time to mention that we put a lot of information like this on the Transplace blog, which

is blog.transplace.com.

John Larkin: There are a number of other safety rules and regulations coming down the pipeline, one of which is

supposed to be revealed soon regarding the Hours-of-Service (HOS) revision. I believe there also is the electronic

on-board recorder (EOBR) rulemaking that has been held up by some litigation brought by the Owner Operator

Independent Drivers’ Association. Are any of these various safety initiatives interrelated and also flawed? In your

opinion, how do you think the summed total of all these different rules and regulations are going to play out here

over the next couple of years? Will they have the net impact as most people on Wall Street believe of reducing

capacity in the industry, therefore tightening up supply and demand and perhaps having a positive effect on pric-

ing, or will the impact be something other than that?





Tom Sanderson: Regarding the HOS, we are hoping there is some sanity in that, i.e. that we are not going to see

a reduction in actual hours-of-service or a modification to the restart rule—that would take a lot of effective capac-

ity off the road without any positive implications for safety. I think whatever happens, however the ruling is made,

it is going to result in a lawsuit. As such, that will probably drag out in the coming year.

Regarding the EOBR, Henry may be on opposite side of this one, I am a proponent of the EOBR—that technology

has come down dramatically in price. I do not see that as negatively impacting the smaller carriers. If we could

have better logging accuracy and better data coming from the truck, I think that it is a positive—it is like the airline

black box for the trucking industry. I would like to see that rule come through.

Henry Seaton: Tom and I do disagree just a little bit on the EOBR rulemaking. One of the factors that we dis-

cussed for the Hours-of-Service BASIC was that half of the accumulated points go to those who have to keep a

paper log and their form and manner are last change of duty violations, which are paperwork violations. If a car-

rier is going to obtain good scores in Hours-of-Service, then they are going to need an on-board recorder because

people with on-board recorders get a 50 percentile rank in this whole issue. I recommend to people they get the on

-board recorder. I am not libertarian enough to say that the government should mandate it, for the government to

ultimately start mandating sleep apnea apparatuses for folks with large necks, or for the government to start putting

cameras in trucks—I think there is going to be some backlash on that. I think we have a lot of age 55 drivers in the

industry who are safe drivers that going to be urged to go to early retirement because of some of the overregulation

issues. I think all the rules are cut out of a similar cloth, which is a far more interventionist regulatory environment

than we have had in the past. I just do not think the safety numbers justify a lot of them.

John Larkin: Well, Henry and Tom, just an absolutely tremendous presentation; thank you for putting together a

great deck of slides that contained a lot of really interesting data. I would also like to thanks Anthony Gallo at

Wells Fargo for allowing the use of the correlation work, which is just absolutely outstanding stuff. Additionally, I

thank those that asked questions. Thanks again for the great job today and we wish everybody that listened a won-

derful holiday season.

END





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