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Reason Foundation

Surface Transportation Newsletter #107

How NOT to rebuild interstates, self-driving cars, 3 private rail projects

Robert Poole
September 19, 2012

In this issue:

How Not to Rebuild an Interstate with Toll Finance

Regular readers know I have long argued that the best way to pay for the enormous cost of reconstructing and modernizing this country’s aging Interstate highway system is via what I call “value-added tolling.” That means only instituting tolling where doing so provides significant new value for those now being asked to pay tolls—such as for a brand new toll road, new toll lanes, or replacing an aging and obsolete non-tolled highway with a state-of-the-art all-electronic toll road.

Unfortunately, the first of three states in the federal pilot program to reconstruct an Interstate via toll finance—Virginia—is going about it all wrong. The original plan was to create only two tolling points along the 179 miles of I-95 from the North Carolina border to the Capital Beltway near Washington, DC. That was bad enough, but this month the state scaled the plans back even further, to a single tolling point near the North Carolina border. The rationale for both plans was to hit through traffic with tolls while letting most Virginia residents avoid paying.

That approach is wrong in principle, and it is proving to be a disaster in practice, arousing even more opposition than the original plan. It’s wrong in principle because if the idea is to reconstruct and modernize I-95, that’s a benefit for everyone who uses it, not just out-of-staters. Virginia DOT estimates that I-95 needs $12.2 billion worth of reconstruction and widening over the next 25 years, but likely federal and state fuel tax funds will cover only about $2.1 billion, leaving a gap of over $10 billion. Who, if not the users, should be paying for that?

And by scaling back to a single tolling point, which happens to be in an economically depressed portion of the state, VDOT is further shooting itself in the foot. Besides foregoing most of the potential revenue, it has aroused a firestorm of opposition from local residents as well as from Republican Senate candidate (and former governor) George Allen.

VDOT has also been losing the rhetorical battle. Nearly every news story I’ve seen over the past year has adopted the trucking industry’s terminology, characterizing the state’s proposal as “installing a tolling facility on I-95 near the NC border”—rather than as a plan to pay for the otherwise unaffordable $12 billion replacement and modernization of I-95. VDOT has not set forth and publicized a complete 25-year plan to reconstruct and widen I-95, but has only provided examples of possible near-term improvements, such as rebuilding the interchange with I-85 and US 460 in Petersburg.

By contrast, the other two pilot program states have far better plans. As I’ve written before, Missouri--along with three other states--has developed a comprehensive plan to rebuild I-70 all the way from Kansas City to eastern Ohio with added truck-only lanes. And North Carolina has developed a $4.4 billion plan to widen all of I-95 there, tolling it from border to border, with electronic toll collection points every 20 miles. By contrast, two states that did not get approved for the pilot program—Connecticut and Rhode Island—seemed likely to go with border-tolling on the same politically motivated basis as Virginia.

Frankly, with the rapid emergence of all-electronic tolling, the simplest and fairest way to implement tolling to finance Interstate reconstruction and modernization is to equip only the on-ramps and off-ramps. That way, customers of the Interstate would pay for exactly the number of miles they drive—no more and no less. That model was first introduced way back in 1997 on Highway 407ETR near Toronto, and has worked well ever since. This would be a great way to pioneer mileage-based user fees on America’s most important highway system.

Let me close by quoting a few sentences of commentary from Tollroadsnews about VDOT’s revised plan:

“You have to think the Feds will be wondering whether this plan from Virginia is a serious proposal; tolls play such a small role. Since this is the last ‘slot’ in the Interstate System Reconstruction & Rehabilitation Pilot Program, they’ll have to be asking if this isn’t a waste of a scarce slot. Little Rhode Island’s plans for their segment of I-95 are way more serious than this proposal from Virginia. Connecticut and South Carolina, too, would make better use of the opportunity to toll I-95. And it bears no comparison with North Carolina’s plans. Sheer fantasy is their notion that a ‘gap’ of $9 billion 2015 to 2049 is going to be filled with new tax money. Fuel taxes are in decline so there will be less tax money, not more . . . let alone a huge amount more as VDOT’s application suggests.” (www.tollroadsnews.com/node/6172)

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A Mostly Sensible Assessment of Self-Driving Cars

I’ve been reading articles about self-driving (or “autonomous”) vehicles for several years now, with my engineering enthusiasm competing with my natural skepticism. So much of what I’ve read in the popular media seemed like awful hype, ignoring all sorts of technical and legal complications. With Google announcing in mid-August that its small fleet of self-driving cars had accumulated 300,000 miles without accidents, it was time for a serious report. And that, for the most part, is what KPMG and the Center for Automotive Research released last month. “Self-Driving Cars: the Next Revolution” is well worth reading. (www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/self-driving-cars-next-revolution.pdf)

The report begins by pointing out the many potential benefits if self-driving cars prove to be feasible and cost-effective: significant accident reduction, more-intensive use of existing highway capacity, ability to make vehicles smaller and lighter (presumably assuming greater car-truck separation), and the eventual ability of variously disabled people to use personal vehicles. But the subsequent chapters get into more sobering detail about what it will really take.

Like many recent news/background articles, Chapter 2 documents the growing use of sensor-based driver-assistance technologies (such as adaptive cruise control and lane-departure systems), which are moving the industry in incremental steps toward autonomous vehicles.  It also addresses the possible emergence of “connectivity-based solutions” such as vehicle-to-vehicle and vehicle-to-roadside communications systems, under study for years by the auto industry and U.S. DOT. It suggests that neither sensor-based nor connected-vehicle systems alone will provide a robust basis for autonomous vehicles, but that a convergence of the two could do so. Since I’ve been an even bigger skeptic about the cost-effectiveness of vehicle-to-roadside systems than of autonomous vehicles, this idea of convergence gave me a fresh frame of reference for considering such connectivity-based solutions (as key enablers of self-driving cars).

The report’s Chapter 3, on prospects for adoption of autonomous vehicles, rests on two key assumptions: that the technologies mature and that convergence occurs. Assuming both happen, this chapter puts forth three possible adoption scenarios, and acknowledges at the outset that “[G]etting there will require that many pieces of a large puzzle fit together. When and how that will happen remain open questions.”

One interesting suggestion is that self-driving vehicles could initially operate only in special lanes—HOV/HOT lanes as pathways for self-driving E-ZPass-equipped cars. Also, this chapter deals honestly with the need to get costs way, way down. Several surveys show that many drivers would be willing to pay about $3,000 more for a car with self-driving features. But as the report notes, just the LIDAR on the roof of Google’s cars costs $70,000. And nearly all current concepts for autonomous vehicles require LIDAR, radar, video cameras, GPS, and a central computer, let alone vehicle-to-vehicle and/or vehicle-to-roadside communications. So cost will be a huge challenge.

So will be the legal framework, especially to address the question of liability for accidents when something goes wrong. The auto industry does not want this liability, nor do roadway infrastructure providers (mostly state DOTs). But drivers of such vehicles will clearly point to someone other than themselves if an accident occurs while the vehicle was supposed to be driving itself. On the other hand, the auto insurance industry is starting to see value in some of the current sensor-based technologies. The Wall Street Journal reported in July that a study by the industry’s Highway Loss Data Institute found significant reductions in rear-end collisions for vehicles equipped with active forward collision avoidance systems that apply the brakes when a crash appears imminent.

Given all the cautions analyzed in Chapter 3, I found the concluding Chapter 4 to be unduly optimistic, indeed, almost giddy in its predictions of sweeping change. Self-driving vehicles will no longer need airbags, roll cages, or other such safety features (which appears to assume they will never encounter 18-wheelers). Demand for highway patrol officers will “plummet.” Highway capacity will “increase exponentially without building additional lanes or roadways.” People won’t need or want to own cars—the future belongs to companies like Zipcar (but try to imagine everyone finding one available at 5 PM to get home from work). We won’t need street lights. And on and on in that vein.

So while the KPMG report provides a serious look at the complexity of bringing about autonomous vehicles, I found its conclusions to be wildly over-stated.

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The Perils of Availability Payment Concessions

Mention transportation mega-project concession agreements, and most people assume they will involve tolls. After all, if a consortium is going to tap the capital markets for a billion dollars to construct the project, it needs a revenue stream to repay its lenders and (they hope) provide a return to the equity investors. That’s certainly the prevailing model for highway concessions in Australia, Latin America, France, Italy, and much of Spain and Portugal.

However, our British friends developed an alternative way to finance concession projects (most of them involving public buildings, but some also in the highway sector). Under the Private Finance Initiative (PFI) of the New Labor government, the state commits itself to making annual “availability payments” over the life of the concession. Concession companies can take that commitment to the finance community and raise the capital to build the project, presumably with less inherent risk than if they had to use a stream of somewhat uncertain toll revenues or rent payments.

But there are two big problems with availability-pay concessions. First, even though the private sector is often willing to take traffic-and-revenue risk, when the state agrees to make availability payments for 35 years, it (meaning its taxpayers) bears that risk, rather than it being borne by sophisticated investors. At a time when governments at all levels are plagued by huge unfunded liabilities, it is unwise for them to be taking on even more risks and liabilities. And from a transportation policy perspective, an availability-pay concession brings no net new money into transportation infrastructure. It is merely a financing tool, not a new funding source. By contrast, if the state opts to procure a needed highway or bridge via a toll concession, those toll revenues represent a net addition of funds into the transportation system.

I am dismayed to report that there is a serious trend in U.S. transportation public-private partnerships from toll concessions to availability-pay concessions. A table in the June issue of Public Works Financing quantifies this trend:

As Neil Young sang in “Rockin’ in the Free World,” there’s a warning sign on the road ahead. At the end of August, the Miami Herald reported that the fiscally strapped City of Miami may have to make a $45 million note payment in January (on behalf of its fiscally strapped redevelopment agency) in connection with the Port of Miami Tunnel, under construction as an availability-pay concession. If the city has to make that payment, “It could drive the city into bankruptcy,” said City Commission Chairman Francis Suarez. Miami is one of the three governments contractually committed to 35 years of availability payments for this concession project.

And in a related development two weeks later, The Bond Buyer reported that Fitch Ratings has downgraded 11GARVEE bond issues, due to uncertainty about federal transportation funding. Like availability payments, GARVEEs are a financing tool, not a source of new funding. And like availability payments (and promises of lavish pension benefits to government employees), they sounded good to then-current office-holders, looking mostly at the short-term benefits rather than at long-term liabilities.

I repeat: long-term concessions or PPPs are not, per se, a source of funding. They are a project delivery mechanism. If they are based on availability payments, they create a huge liability for taxpayers extending over the life of the concession agreement. Only if they are financed by new tolls do concessions/PPPs bring about net new investment in transportation infrastructure. At a time when governments desperately need to reduce their liabilities, loading up on new ones is the last thing they should be doing.

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Private-Sector Passenger Rail: Three Projects

By my count, there are now three private-sector efforts under way to provide inter-city passenger rail service: in Florida, Texas, and California. None are seeking federal grants, and two of the three have announced that they will be entirely financed by investors; the third is seeking a federal loan.

As I’ve reported previously, All Aboard Florida is a 230-mile project of Florida East Coast Industries, parent company of freight railroad FEC. It plans frequent daily service between Miami and Orlando, with intermediate stops at Fort Lauderdale and West Palm Beach. With top speeds of 110 mph, it would take just over three hours between Orlando and Miami—faster than driving and potentially competitive with airlines, on a total trip-time basis. FEC already owns the right of way up the east coast, and needs to acquire only about 30 east-west miles to link its mainline to the Orlando Airport, where its station will be located. FECI is a major real estate owner, including nine acres in downtown Miami where it will build not only its passenger terminal but also an extensive mixed-use development. On August 8th, the company announced that its due-diligence phase had proved the project’s viability, and construction will begin early next year. It also hired a 40-year railroad expert, Eugene Skoropowski, as its new senior VP of passenger rail development.

Somewhat more ambitious is the proposed Texas Central High Speed Railway, intended to provide 200 mph passenger service between Dallas/Ft. Worth and Houston. Headed by long-time Houston official Robert Eckels and backed by Central Japan Railway Company, one of the leading privatized railway firms in that country, the project is explicit about rejecting public-sector funding. At a high-speed rail forum in Irving in July, Eckels said, “This is designed to be a profitable high-speed rail system that will serve the people of these two great cities and in between and, ultimately, the whole state of Texas.” And he added, “If we start taking the federal money, it takes twice as long, costs twice as much. My guess is we’d end up pulling the plug on it.”

Conceived as businesses, both projects avoid the temptation of serving numerous intermediate points in order to garner more political support, which conflicts with offering short travel times. They both plan to make as much money as they can from adjacent real estate development, as the Japanese passenger rail companies have done successfully in Japan. While both projects still seem to me to be gambles, as long as they are risking only investors’ funds, not those of taxpayers, I will cheer them on and look forward to being one of their passengers.

I cannot say the same about the proposed Xpress West (formerly known as Desert Xpress), from Victorville, CA to Las Vegas. To begin with, to serve the tourist market between greater Los Angeles and Las Vegas from Victorville (about one-third of the way to Vegas) strikes me as a non-starter. Once you have driven as far as Victorville, you have passed nearly all the congestion and have a straight shot up I-15 to Vegas. Plus, you have your car with you so you don’t need to rent one when you get there. Consequently, as Wendell Cox points out in a new Reason Foundation study, the ridership forecasts are likely overstated by about 70%. This is more than simply an academic point, since the company expects to get about 90% of its funding from a $6.5 billion loan it has requested from the Federal Railroad Administration, under the Railroad Rehabilitation and Improvement Financing (RRIF) program (which has heretofore made mostly small loans to short-line railroads). Commenting on the study, my Reason colleague Adrian Moore noted, “If the train fails, the company defaults on the loan and taxpayers are stuck with the losses. This train is far too risky to gamble taxpayer money on.” (http://reason.org/news/show/xpresswest-train-to-cost-taxpayers)

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Managed Lanes Projects Proliferate

The summer months brought more announcements of priced managed lane projects, both brand new toll lanes and conversions of existing HOV lanes to HOT lanes. A project that combines both is the $925 million I-95 project in northern Virginia (unrelated to the project to reconstruct the rest of I-95 in Virginia), which reached financial close as a toll concession in early August. The Fluor/Transurban team will convert the existing two-lane reversible HOV lane facility to three reversible HOT lanes extending 29 miles south from the I-95 interchange with the Capital Beltway. There, the I-95 HOT lanes will connect with the same team’s I-495 HOT lanes, set to open this winter. Virginia DOT has also announced it is studying possible HOV-to-HOT conversion on I-64, also as a toll concession.

Florida has two new express toll lane projects moving forward. The first will add one priced lane each way to congested I-295 in Jacksonville, with the first phase in 2013-14 and the second phase in 2016-17. Estimated construction cost is $150 million. A much larger express toll lanes project is planned for about 20 miles of congested I-4 in Orlando. Adding two toll lanes each way and reconstructing that stretch of I-4 is estimated to cost about $2 billion, and FDOT has begun sounding out potential concession companies. This project has been on FDOT’s drawing boards for more than a decade, but was blocked by a provision of the SAFETEA-LU legislation that expired when that federal law was replaced by MAP-21 earlier this year. In addition to the Jacksonville and Orlando projects, FDOT is studying possible toll lanes for Tampa, and construction is under way on Phase 2 of the I-95 Express Lanes in southeast Florida, extending them another 14 miles to Fort Lauderdale.

Texas continues to launch new express toll lane projects, with the most recent ones being in the DFW Metroplex and Austin. TxDOT last month issued a Request for Qualifications from firms interested in a toll concession project to upgrade nine miles of the Airport Freeway (SH 183), which runs east-west just south of the DFW Airport. The initial phase will add one toll lane each way, with subsequent phases reconstructing the whole freeway and adding additional general-purpose and toll lanes. In Austin, the Central Texas RMA will add one express toll lane each way to the MoPac Expressway, a major north-south highway roughly parallel and to the west of I-35. It will be procured as a design-build project, with CTRMA taking the traffic and revenue risk.

And in Connecticut, CDOT is considering the conversion of 38 miles of HOV lanes to HOT lanes in the Hartford area, on I-84, I-91, and I-384. A feasibility study got under way this spring, with results expected by October 2013. Usage of the HOV lanes peaked in 2005 and has declined steadily since then.

The conversion of HOV lanes to HOT or express toll lanes is an ongoing trend. The MoPac environmental assessment explains some of the rationale for this trend:

“HOV lanes have often not maximized corridor capacity . . . . DOTs across the country have been unable to manage HOV lanes effectively so that reliability is maintained on the facility . . . . For example, HOV lanes set at two-person occupancy limit are often congested, while those with a three-person limit are often underutilized, causing resentment among travelers in congested GP lanes. Therefore, many DOTs have replaced HOV lanes with other options, such as express lanes or have added a tolling component to their HOV lanes (HOT lanes). . . . Without a dynamic pricing component that ensures a minimum level of service on the HOV, reliability of the facility cannot be assured. . . . In addition, occupancy enforcement can be a challenge. There is currently no reliable automated enforcement technology. . . . Furthermore, without a tolling component, the funds to implement this alternative currently are not available.”

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Upcoming Conferences

Note: I don’t have space to list all the transportation conferences going on; below are those that I am (or a Reason colleague is) participating in.

2012 GPPF Georgia Legislative Policy Conference, Sept. 21, W Atlanta Midtown, Atlanta, GA (Baruch Feigenbaum speaking). Details at: www.gppf.org/default.asp?pt=eventdescr&EI=96

2012 ARTBA P3 Conference, Oct. 10-12, Renaissance Downtown DC Hotel, Washington, DC (Bob Poole speaking). Details at: www.artbap3.org

Keystone to Pennsylvania’s Transportation Future, Oct. 16, Hilton Harrisburg, Harrisburg, PA (Shirley Ybarra speaking) Details at: www.ncppp.org/calendars/Harrisburg_1210/HarrisburgPAflyer.pdf

Transpo2012, Oct. 28-31, Hyatt Regency Coconut Point, Bonita Springs, FL (Bob Poole speaking). Details at: www.itstranspo.org.

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News Notes

U.S. CO2 Emissions at Lowest Level in 20 Years. Emissions of carbon dioxide in the United States for 2012 will be 14% less than in 2007, based on data from the Energy Information Agency on emissions during the first five months of this year. While the ongoing economic slowdown played a part, the main contributor to this decrease is the ongoing shift from coal to natural gas, says statistician and political scientist Bjorn Lomborg. Coal’s share in electricity generation has dropped from its historic level of about 50% to 32%, while natural gas has climbed from 20% to about the same 32% as coal. More details are in Lomborg’s piece, “A Fracking Good Story.”

Overview of U.S. Tolling. The International Bridge, Tunnel & Turnpike Association has assembled an excellent overview of the extent and nature of tolling in the United States. How much toll revenue is generated each year? Which states have toll roads and which have PPP laws? Which are the 10 largest toll-road systems and the 10 with the greatest revenue? And what are the answers to frequently asked questions about tolling and toll facilities? All this and more, in a nicely done eight-page format. You can download “The U.S. Tolling Industry: Facts in Brief 2012 from: www.ibtta.org/Files/PDFs/Facts%20%20Stats%20Final.pdf?navItemNumber=6265.

Myths and Facts on Transportation PPPs. With Ohio pondering whether to lease the Ohio Turnpike, as Indiana has done, the Buckeye Institute in Ohio turned to the Reason Foundation for advice. The result is a new document, released jointly by Buckeye and Reason: “Ten Myths and Facts on Transportation Public-Private Partnerships,” coauthored by my colleague Leonard Gilroy and me. (http://reason.org/news/show/myths-facts-transportation-ppp

PPP Toll Road Gets 85 mph Speed Limit. This November, when the new 41-mile SH 130 opens, travelers between Austin and San Antonio will have a tolled alternative to congested I-35. Their time savings will be increased even further by the 85 mph speed limit that was approved August 30th by the Texas Transportation Commission. The legislature last year approved the new limit for certain new highways, and SH 130 will be the first of these. According to an AP article on Sept 6th, this will be the only highway in America to offer 85 mph; some others in West Texas and Utah are posted at 80 mph.

Pavement Warrantee Guidelines. The National Cooperative Highway Research Program has issued Report 699, “Guidelines for Pavement Warranties on Highway Construction Projects.” Printed copies are available at $39.75 for TRB affiliates and $53 for others. It may also be downloaded from the TRB website.

Follow-up to Smart Growth in Britain. My article in the July issue about questioning of Smart Growth policies in the U.K. apparently only scratched the surface. One reader emailed to say that “There is already a rich vein of academic analysis in Britain that is absolutely damning of growth constraints,” after some 60 years of practice. An introduction to this literature may be found at www.performanceurban planning.org/academics.html. Another archive is at www.spatialeconomics.ac.uk.

Costly Passenger Rail in Britain. The UK newspaper Daily Telegraph last month compared the out-of-pocket cost for travel in Britain by passenger rail, airline, bus, and personal car. For 47 out of 50 trips analyzed, bus (“coach”) was the least costly. Of 24 trips that could be made either by air or rail, air travel was cheaper on 13 (54%). Travel by car for one person was less costly than taking the train on 16 out of 50 trips, with “cost” being only the marginal cost of fuel. However, had the study included auto depreciation and maintenance, it’s likely that family trips would still have been less costly by car than by rail. (www.telegraph.co.uk/travelnews/9479994/Planes-cheaper-than-trains-on-half-of-routes.html)

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 Quotable Quotes

 “No matter how you slice it, the American taxpayer has gotten precious little for the administration’s investment in battery-powered vehicles, in terms of permanent jobs or lower carbon dioxide emissions. There is no market, or not much of one, for vehicles that are less convenient and cost thousands of dollars more than similar gas-powered alternatives—but do not save enough fuel to compensate. The basic theory of the Obama push for electric vehicles—if you build them, customers will come—was a myth. And an expensive one, at that.”
—Editorial, “GM’s Vaunted Volt Is on the Road to Nowhere Fast,” The Washington Post, Sept. 12, 2012

“The bigger problem with this spending is that it went against the economic tides. Last year Mr. Obama boasted that America would soon have 40% of the world’s manufacturing capacity in advanced electric-car batteries. But with electric cars still a rounding error in total car sales, that capacity is unneeded. Many battery makers are struggling to survive. Makers of solar panels face cheap competition from China, while natural gas from shale rock has undermined the case for electricity from solar and wind. As for high-speed rail, extensive highways, cheap air fares, and stroppy state and local governments make its viability dubious. A $3.5 billion grant to California may come to nothing as the estimated cost of that state’s high-speed rail project runs out of control.”
—“End-of-Term Report,” The Economist, Sept. 1, 2012

“The last time we had a presidential election, the U.S. was going to run out of oil. Since then, U.S. oil production has grown about 25%. As has happened in the past, technology has opened doors people didn’t know were there or didn’t think could be opened. We expect to see tight-oil production [oil extracted from dense rock formations] grow dramatically over the rest of this decade. If you take what’s happening in the U.S. and what’s happening in Brazil and Canada, we’re going to see a rebalancing of global oil flows. By the end of this decade, the Western Hemisphere will be importing very little oil from the eastern hemisphere.”
—Daniel Yergin, Cambridge Energy Research Associates, interviewed by Angel Gonzalez, “Making Sense of the U.S. Oil Boom,” The Wall Street Journal, Sept. 17, 2012

“If this [gas-tax funded Interstates] was such a great model, why do we find ourselves in a transportation funding crisis? The conflict is once again about the balance between equality and liberty. To tax in the name of infrastructure and then use those funds for other purposes is seen as a breach of trust at all levels of government. The politicization of decision-making has created a vacuum on the national stage. Today, transportation investments are more about doling out monies to special-interest issues and agendas.”
—Rakesh Tripathi, “Distaste for Toll Roads,” Engineering News-Record, July 30, 2012

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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