Bringing Market Forces Into America’s Highway System

Table of Contents

Executive Summary

I. Tomorrow’s Highway Crisis

II. Road Pricing-Threat or Promise?

III. What Other Countries Are Doing

IV. Where Is the United States on These Issues?

V. A Pro-Mobility Approach to Pricing and Highways

VI. Policy Implications

VII. Why the Highway Community Should Embrace the New Approach

Executive Summary

America’s excellent highway system faces serious problems in the new century: traffic congestion, difficulties in adding needed capacity, funding shortfalls just when much of the system will need rebuilding, and the formidable opposition of a well-organized anti-highway coalition.

Many other countries increasingly make use of tolls and public-private partnerships both to add new highway capacity and to modernize existing capacity. Road pricing in the United States is being advanced by various parties-some hostile to capacity expansion, some favorable to it, and some focused more on efficiency than on expansion. Thus far, states have taken the lead in experimenting with new uses of tolling, advanced technology, and privatization. All such projects, thus far, involve adding capacity or making better use of existing capacity (such as under-utilized HOV lanes).

A market-oriented, pro-mobility approach to a 21st-century highway system would seek to turn the upper-level highway system (urban freeways and major inter-city highways) into high-tech, customer-responsive, network utilities, analogous to the airline and telecommunications systems. While still governed by state agencies, much of the system would be financed, built, and operated by privately franchised firms, responding to customer demands for various kinds of mobility. Services would be more fine-tuned to the needs of trucking firms, time-sensitive deliveries, high value-of-time commuters, and transit users. This kind of new paradigm would be introduced gradually, over a period of decades.

Bringing about this kind of market-oriented highway system would require new policies and a revamped highway coalition. Issues like equity and double taxation would need to be addressed, as would the development of initial steps such as the introduction of specialized express lanes for cars and for trucks in urban areas, and perhaps specialized inter-city lanes for heavy trucks. Much opposition can be expected from today’s anti-highway coalition, though some environmental groups may support the new approach.

There are good reasons for the traditional highway community to embrace this new approach, since it is likely to be one of the best ways to deal effectively with the problems of traffic congestion, capacity expansion, and funding shortfalls.

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I. Tomorrow’s Highway Crisis

America has the world’s largest highway system, and certainly one of the best. Trucks carry the majority of all freight, and trucking’s market share has continued to increase during the second half of the 20th century. Autos carry 95 percent of all individual surface trips, despite combined taxpayer expenditure of some $350 billion on mass transit over the past 35 years. Clearly, the highway system is Americans’ mode of choice for both freight and personal transportation.

Yet underlying trends suggest that all is not well for the future of this system. At least four major problems plague America’s highway system-and little is being done to address them. Merely continuing with current policies and trends will not suffice, if America is to continue to reap the benefits of a flexible, decentralized highway-based transportation system in the 21st century.

A. Traffic Congestion

Urban traffic congestion (defined as stop-and-go traffic, where traffic exceeds the design capacity of a freeway) is a major national problem. According to the Texas Transportation Institute, congestion costs drivers in the largest 68 metro areas $72 billion (in terms of wasted time and excess fuel consumption) per year. Not quantified by TTI is the additional cost to urban air quality from stop-and-go traffic conditions.

Large-scale traffic congestion has a number of adverse consequences for a highway-based transportation system. It makes driving (especially commuting) an unpleasant, stressful experience, creating negative associations with using one’s car. It plays havoc with freight movements, especially with increasingly important just-in-time delivery requirements. Moreover, unresolved congestion gives advocates of mass transit an emotionally appealing (though usually factually wrong) argument for shifting increased amounts of gasoline-tax revenues to transit.

B. Difficulties in Adding Highway Capacity

During the 1950s, 1960s, and into the 1970s, the obvious response to traffic congestion and/or suburban growth was to add highway capacity. For several reasons, however, the rate of growth in highway capacity slowed dramatically in the 1980s and 1990s. One factor was stronger political opposition to new freeways that would cut through established areas, requiring the demolition of homes and businesses. Another was growing political support for spending transportation capital funds on transit, rather than highways-despite the very poor cost-effectiveness of transit (especially rail transit). A third factor is ISTEA’s requirement that projects adding capacity in areas defined by the Environmental Protection Agency as “nonattainment” areas demonstrate conformity between their air quality plans and their transportation plans-which often appeared to virtually rule out building ordinary freeway lanes in many congested urban areas. And a fourth factor was growing intellectual opposition to capacity expansion, on the grounds that “we can’t build our way out of congestion”-i.e., that any new lane-miles would quickly fill up with drivers attracted back by the increased capacity, thereby restoring gridlock.

C. Highway Funding Shortfalls

According to a recent report by the U.S. Department of Transportation, the past decade has seen highway travel increase dramatically while highway capacity remained essentially constant. Specifically, from 1987 to 1997 highway lane miles increased by just 2.7 percent, while vehicle miles traveled increased by 33.7 percent. One result is huge congestion costs mentioned previously.

On an inflation-adjusted basis, highway expenditures per vehicle mile of travel have declined steadily between 1970 and 1995, from about 1.9 cents to 1.3 cents. As a result, this nation is now spending far less than necessary even to maintain the existing highway system in its present condition. According to FHWA, the total 1997 capital outlay on highways at all levels of government was $43 billion. To maintain that system in its present condition would require spending, instead, $51 billion, while improving it (including both capacity expansion and improved conditions) would require $83 billion. Thus, this nation could usefully invest essentially double what it currently invests each year in the highway system–and at a minimum should be spending $8 billion per year more. The new TEA-21 legislation will, at best, increase highway spending by about $6 billion per year, meaning that we are still not investing even enough to maintain the asset value of our existing highway infrastructure-let alone adding needed capacity.

Portions of the traditional highway community are beginning to realize that the prospect of large gasoline tax increases to meet this shortfall is not likely. For example, for several years the American Road & Transportation Builders’ Association has been holding annual conferences on public-private ventures in transportation infrastructure. As Peter Samuel reports, the October 1996 conference “saw widespread agreement that tolling needs to move from building mere fringe-area additions to highway capacity into rebuilding and managing the core expressways of American cities and suburbs.”

D. Growing Success of Anti-Highway Forces

Over the past decade, the previous de-facto alliance of anti-highway forces has become far better organized and politically more effective. Broadly speaking, the alliance consists of urban planners, transit advocacy groups, environmental groups, and suburban anti-growth groups. Political scientist James Dunn has termed this coalition “the Vanguard.” A typical umbrella coalition group is the Surface Transportation Policy Project, which until very recently received significant EPA funding as part of that agency’s “Transportation Partners” program advocating alternatives to highway expansion.

One ongoing objective of this Vanguard has been to divert an ever-larger share of highway user tax revenues away from highways and into transit and other purposes. By the time the Intermodal Surface Transportation Efficiency Act (ISTEA) was enacted in 1991, nearly one-half of all federal highway user revenues could be legally used for transit and other non-highway purposes ($71.5 billion of ISTEA’s projected $155 billion).

Unresolved traffic congestion gives Vanguard groups emotionally appealing arguments for heavily taxing or regulating single-occupant vehicles in urban areas. The highway community has lost battle after battle to these forces over the past several decades, to the point where (for example) in California only half of highway-related tax revenues actually go toward the capital and operating costs of the state’s highways. On a national level, while local, state, and federal governments collect some $114 billion per year in taxes from highway users, they spend only $76 billion on road-related expenses. Urged on by environmental groups, Congress and the EPA have attempted to impose costly and largely ineffective mandates for employer-based ride-sharing in urban non-attainment areas. Overseas, Athens and Mexico City have imposed odd-even driving days (based on license plate numbers), a move which EPA has threatened to impose (e.g., in its proposed Federal Implementation Plan for greater Los Angeles).

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II. Road Pricing-Threat or Promise?

One of the key ideas being discussed by both advocates and opponents of improved highways is road pricing. Highway advocates who favor pricing focus on the ability of toll-funded projects to add to the total amount of highway investment. By contrast, some highway opponents have seized on pricing (in the form of congestion charges or congestion taxes) as a way to force drivers to pay far more to use existing highways (and hence to force a portion of them out of their cars).

For whatever reason, the past several years have seen a significant rise in interest in road pricing in the United States. The 1991 ISTEA legislation reversed the historic federal policy of opposing tolls, removing previous restrictions on tolling all but Interstate highways. During the past decade 16 states have enacted legislation providing for public-private transportation partnerships, most of them aimed at facilitating privately franchised toll roads. The Transportation Research Board of the National Research Council in 1994 published a major report, Curbing Gridlock, on the potential of peak-period fees (congestion pricing) to relieve traffic congestion. In 1997, shortly before his death, Columbia University’s William Vickrey, the dean of U.S. road-pricing advocates, received the Nobel Prize in economics. And, as a sign of the times, The Economist devoted a cover story to the subject of road pricing in December 1997.

There are four distinctly different factions interested in and promoting the wider application of forms of road pricing in the United States, as explained below. Coalitions are possible among some-but not all-of these groups.

A. Transportation Economists

As it has become more difficult to respond to congestion by adding capacity, transport economists have grown more interested in making better use of existing capacity. Hence, their growing interest in “congestion pricing”-the imposition of road-use charges during peak periods to better balance supply with demand. If such pricing could be implemented on a widespread basis, it would significantly improve freeway speeds and modestly reduce vehicle emissions. For example, Wilbur Smith Associates recently studied the possible application of congestion pricing to the greater Los Angeles freeway system. Using a 10 cents/mi. charge on heavily congested freeways and 5 cents/mi. on less-congested freeways (both charges applying only during peak hours) would increase rush-hour speeds on congested segments from 34 mph to 42 mph (a 24 percent increase) with no significant adverse network impacts.

Several governments overseas have implemented forms of congestion pricing in limited areas, including France, Norway, and Singapore. Thus far, experience shows that peak-hour pricing does reduce volume so that traffic can flow more smoothly. Congestion pricing is also being used to manage traffic demand and to repay investors in the privately developed 91 Express Lanes on the congested SR 91 freeway in Orange County, California and on Toronto’s Highway 407 Electronic Toll Road.

The focus of most transport economists is on efficiency. Under the congestion pricing model envisioned by most such analysts, a state would authorize its urban areas to replace the present gasoline tax (and other highway funding sources, such as California counties’ dedicated transportation sales taxes) with congestion pricing, adjusting the starting rates to generate the same annual revenue as the current user taxes. Based on recent research, such a system would be more equitable than the current funding system, and in no sense would represent a “new tax” on mobility. Other economists assume the existing gasoline tax would remain, but that the revenues from congestion pricing would be rebated to all motorists or all taxpayers in some way that would respond to equity concerns. Some environmental groups such as the Environmental Defense Fund, and moderate-liberal think tanks such as the Brookings Institution support this version of congestion pricing, rather than the punitive approach favored by more extreme environmental groups (see below).

The problem with this approach, from the standpoint of highway advocates, is that it may be politically naïve to expect that public officials faced with the prospect of reaping billions of dollars in new revenues from adding congestion pricing to crowded freeways would resist the temptation to see drivers as a new cash-cow to be milked. Transit advocates, too, can be expected to push hard for large-scale diversion of pricing revenues to their favorite subway and light-rail projects, rather than either rebating the revenues to drivers or taxpayers or substituting them for existing transportation taxes. Thus, while in theory the addition of pricing to congested freeways could lead to large efficiency gains and improved mobility, it carries significant risks to auto-mobility.

B. Environmental Advocates

Some recent converts to the idea of congestion pricing include anti-auto environmental groups as the World Resources Institute and the Surface Transportation Policy Project. They view such pricing–which they seek to set at arbitrarily high levels–as a punitive measure aimed at radically reducing driving. They also see it as a potentially major source of revenues to fund large-scale transit, bike paths, Amtrak, and other non-highway projects. Clearly, if added onto an otherwise unchanged tax-funded bureaucratic system, congestion prices could turn into congestion taxes, further reducing the user-friendliness of the auto-mobility system.

Indeed, this sort of punitive approach is being explicitly advocated by advocates such as Charles Komanoff, who sees pricing as a tool to “reduce highway travel” and warns against the prospect that it could “jump-start highway expansion by providing [increased] construction funding.” He warns environmental advocates of the danger of setting a bad precedent by agreeing to support initial pricing projects that add lanes or facilities (as EDF has been willing to do), because this will further associate tolls with added capacity in people’s minds.

C. Public-Sector Advocates

A small but growing number of public officials have concluded over the past decade that the gasoline tax, which has shrunk in real terms over the past two decades due to major improvements in fuel economy, will not remain viable as a funding source in the 21st century. Alternative fuels and/or continued increases in fuel efficiency will continue to erode the revenues produced per vehicle mile traveled, making it impossible to sustain our present highway infrastructure without huge (and politically unrealistic) increases in the gasoline tax.

One popular supplemental source of transportation funding in California–local-option transportation sales taxes–was dealt a serious blow several years ago when the state supreme court ruled (in the Guardino case) that such taxes must be approved by a 2/3 voter margin-which makes unlikely the enactment of new taxes of this kind, or even renewal of most of the existing ones when they expire over the next 10-15 years. This change has prompted some metropolitan planning organization (MPO) officials in California who were previously hostile to toll roads to embrace tolls and pricing as among the few good options left to meet the needs of growing suburban areas.

Here again, however, despite the good intentions of these transportation planners, there are other MPO officials who would love to get their hands on congestion pricing revenues for any number of worthy projects, some of which have nothing to do with transportation, let alone highways.

D. Private-Sector Advocates

The fourth group proposing road pricing consists of those who favor the introduction of new models for the provision of highway infrastructure via commercialization, privatization, or public-private partnerships. Internationally, the World Bank has become the leading advocate of this approach, as set forth in its new book, Commercial Management and Financing of Roads and a number of other studies and monographs. This approach is supported by large global infrastructure firms (such as Bechtel, Parsons-Brinckerhoff, and Fluor-Daniel) and investment banks. It is being encouraged under public-private partnership laws enacted in 16 states and by the public-private partnership provisions included in ISTEA in 1991. And it is supported by free-market think tanks such as the Cato Institute and the Reason Foundation.

Under this approach, the highway system would become a kind of public utility, more like electricity and telecommunications. It would be funded by prices charged to customers rather than user taxes. Providers would respond to demand for better service by investing in improved capacity. To implement this approach, major components of the urban freeway system would be leased to user-funded corporations, paid directly by user charges and responsible for meeting user needs in the corridors in which they won long-term franchises. With a ceiling on their overall rate of return (with any excess revenues going to a state transportation fund to pay for rural highways), such corporations would have strong incentives to develop innovative ways of using both pricing and technology to meet the needs of their users. A similar system of long-term franchises could be used to rebuild and modernize–with tolls and technology–major intercity highways.

While this approach may sound rather like science fiction, many elements of it are in place or being developed in numerous other countries.

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III. What Other Countries Are Doing

A. New Toll Roads via BOT

Following World War II a new approach to infrastructure was implemented in a number of countries. Rather than the government itself financing, building, and operating major highways, water systems, or energy projects, the government would award a long-term franchise (via competitive bidding) to a private-sector team that would design, finance, build, and operate the project for a sufficiently long period to enable it to recover its investment, after which it is transferred back to government. This general model is called build-operate-transfer (BOT). It is the method used to develop the modern toll motorway systems of France, Italy, and Spain during the 1950s and 1960s. It was rediscovered in the 1980s by the developers of the Channel Tunnel between Britain and France, and subsequently endorsed by the World Bank and other development agencies as the key to better infrastructure in developing countries.

Traditional BOT methods are applied to the creation of new infrastructure. This was certainly the case with Europe’s postwar toll motorways, and with the extension of this idea to the former communist countries of Eastern Europe (where BOT tollways are being developed in Hungary and Poland to give these countries their first modern highway systems). It is also the model being pursued in Australia, Canada, and Israel for new urban expressways. All of the new expressways in Sydney and Melbourne over the past decade have been developed as BOT projects. Toronto’s fully-automated (no toll booths) Highway 407, which went operational in October 1997, originated as a BOT project but ended up being financed by the then-socialist provincial government (though developed and operated by a private firm, under long-term contract). But in the winter of 1997-98, the now-conservative provincial government announced that the project would be privatized. The winning bidder will be the team that offers the best deal for extending the tollway both east and west while owning and operating it as an investor-owned utility. Israel in early 1998 awarded a BOT franchise for the Cross-Israel Highway to the same international team that developed Toronto’s 407. It will be Israel’s first modern limited-access highway, and will use the same fully automated tolling system as the 407. Other countries using the BOT model for new infrastructure include Lebanon, India, Malaysia, Mexico, the Philippines, and Thailand.

B. Long-Term Modernization Franchises

A variation on the BOT model is being applied in a growing number of developing countries to upgrade existing highways, especially inter-city routes. A typical two-lane highway with a known traffic flow is offered to the private sector on a long-term franchise basis (generally termed a concession) to be upgraded and modernized into (typically) a four-lane, divided tollway. Based on the franchise agreement, the private firm is able to finance the modernization, recovering both its capital and operating costs from toll revenues.

Argentina pioneered this model in South America, and it is now being replicated in Brazil, Chile, Colombia, Panama, and other countries in the region. South Africa is using this model to upgrade major motorways linking its principal cities, as well as a key cross-border link to Mozambique.

From an investment banker’s standpoint, a project to modernize an existing highway is generally less risky than a project to develop an entirely new highway. The geography and geology are already well-known, thereby reducing construction risks. And an established history of traffic growth exists, thereby reducing the revenue risk compared with a brand-new project.

C. New Zealand’s Commercialization Model

As one of the last stages in a comprehensive liberalization (or “marketization”) of its entire economy, the New Zealand government has embarked on a major program to commercialize its highway system. Under the plan developed over the past two years, all roads would be divested to a small number of government-owned but commercially run highway corporations. Each corporation would be expected to support itself from road-user charges, pay taxes, and make a profit (a return on investment) for its government shareholder. At the same time, private firms would be free to develop and operate new highways interconnected with the existing highways, on a level playing field, legally and financially. The plan is currently being debated by the New Zealand parliament. Interestingly, the Transport Minister under whose auspices the plan was developed, Jenney Shipley, is now the Prime Minister.

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IV. Where Is the United States on These Issues?

A. Traditional Toll Roads

Beginning with the Pennsylvania Turnpike prior to World War II, a number of states developed major toll highways mostly in the pre-Interstate era. Many of these highways were incorporated into the Interstate system and permitted to retain their tolls (which were required to pay off outstanding bonds). In a few cases (e.g., Connecticut) the tolls were removed at some point after the original bonds were paid off, though in most other states the tolls have remained and been used to maintain and expand the original system (e.g., Illinois, Oklahoma, Pennsylvania, etc.). These tollways are generally created and operated by special-purpose public authorities, which operate as quasi-businesses, though in some cases they have become heavily politicized.

In a few cases, fast-growing urban areas have created similar toll authorities to develop much of their urban expressway system. The leading example is the Orlando/Orange County, Florida area, but other practitioners include Miami/Ft. Lauderdale and Tampa in Florida; Dallas and Houston in Texas; and Orange County, California. In these suburbanized metro areas, the traditional motorist opposition to tolls has apparently been overcome by the evident need to create more capacity, more quickly, than would be possible using traditional methods and pay-as-you-go gas-tax financing.

B. The New BOT Private Toll Roads

In 1988, thanks in part to the efforts of former UMTA Adminstrator Ralph Stanley, Virginia became the first state to enact a measure permitting private toll roads on the BOT model. The next year, stimulated by a Reason Foundation policy study, California enacted a similar law (actually calling for a variant on the model, BTO, under which title would shift to the state at the time the tollway opened, but with the private firm operating it for the 35-year franchise life). Both laws required entirely private financing, with the winning firm required to pay for all costs, including local property taxes and highway patrol costs.

During the 1990s, Puerto Rico and a number of other states enacted similar, but more flexible, laws; as of 1999, some 16 states now have such measures on their books. Most permit both BOT and BTO and provide for some degree of risk-sharing and cost-sharing between the state and the private sector. The 1991 ISTEA legislation added a federal endorsement to this trend, by authorizing states to enter into public-private partnerships for both new capacity and modernization of existing capacity, for all federal-aid highways except the Interstates. Under its provisions, states can use private funds to match federal funds, reserving their state funds for other projects.

Although there has been considerable interest in public-private tollway projects, only a handful have actually been built thus far. Only four are in operation: the Dulles Greenway in Virginia, the 91 Express Lanes in California, the Lake of the Ozarks Bridge in Missouri, and the Moscoso Bridge in Puerto Rico. The first is in financial trouble, and neither of the others is yet performing up to projections, though they have been highly popular with motorists, offering major time savings. Other projects are under way in California, South Carolina, Texas, and Virginia-but a number of others have foundered due to local political opposition in Arizona, Minnesota, and Washington. It is proving more difficult and more risky than proponents imagined to finance and build entirely new toll roads in urban areas, competing with “free” government roads.

C. The ETC/ITS Revolution

In parallel with the rise of urban toll authorities and the wave of BOT/BTO measures, new technology has made toll collection much less costly and more user-friendly. Although several different versions of the technology are in use in the United States, all major systems equip each vehicle with a credit-card-size tag which can be interrogated by a low-power radio signal as the vehicle passes a toll-collection point (typically, an antenna mounted on an overhead gantry). The tag’s account number is read and the person’s account is debited for the amount of the toll. This electronic toll collection (ETC) system eliminates the need for toll booths and toll collectors for those vehicles equipped with tags. It also greatly speed up toll collection, since (if the lanes are designed to accommodate high speeds), the tags can be read at speeds in excess of 100 mph.

ETC is but one of a range of new technologies under the umbrella term Intelligent Transportation Systems (ITS), which has attracted the interest and funding of a considerable array of electronics, communications, and information companies. Other ITS applications include in-vehicle navigation, two-way information services, emergency location, automated or semi-automated driving, etc. All involve adding value to the vehicle by incorporating additional technology, and all are intended to add value for drivers.

The initial impact of ETC has been primarily to provide a non-stop toll-payment option on existing toll roads and bridges. Especially during the last few years, virtually every existing toll agency has undertaken large-scale efforts to market tags to users and to outfit existing toll lanes with antennas and related equipment. New toll roads, both public and private, are being designed from the outset to make automated payment the rule and toll-booth payment the exception: toll booths are located off-line, while ETC users remain on the main road, passing under a gantry at highway speeds. Some also charge lower rates to tag-holders than to those paying manually.

The most advanced ETC system to date is Toronto’s fully automated Highway 407. Developed by Hughes Transportation (now Raytheon), the system dispenses entirely with toll booths on this urban tollway with numerous on-ramps and off-ramps. Regular users pay via dashboard-mounted tags, at a lower rate than others. Non tag-holders are billed after the fact, based on a video record of the license-plate number, from which the vehicle owner’s address is derived from motor-vehicle records. Thus far, the system has been in full operation since October 1997, with high levels of customer acceptance and high levels of performance. The same team, with the same technology, recently won the competition for the Cross-Israel Highway. And a similar technology from a European consortium was selected for the fully automated $1.2 billion Melbourne Citylink, now nearing completion in Australia.

D. Value Pricing via ETC

Electronic toll collection greatly simplifies market pricing of road use, since it makes it far more feasible to vary the charge by time of day (or extent of congestion, or any other variable), without all the constraints of coin machines and change-making at toll booths. Three applications of ETC-based value pricing are in operation in North America today:

  • Toronto’s Highway 407 charges three different rates: peak, shoulder, and off-peak, based on the average congestion levels expected at these various times of day. It also charges a higher rate to those who opt to be billed via license-plate reading rather than paying via a dashboard tag.
  • The privately developed 91 Express Lanes on Southern California’s Riverside Freeway (SR 91) charge rates which vary by time of day and day of week from a low of 60 cents to a high of $3.25. The explicit purpose of the toll schedule is to guarantee uncongested conditions to drivers at all times, so that they can realize the promised time savings by choosing these premium lanes over the congested regular freeway lanes right alongside.
  • San Diego in 1997 converted an under-utilized high-occupancy vehicle (HOV) lane on I-15 into a congestion-priced lane, permitting paying customers to join those who could already use the lanes based on vehicle occupancy. In March 1998 San Diego converted from a monthly fee to real-time value pricing, under which the charge can be adjusted every few minutes, based on the actual level of congestion in the tolled lanes.

E. HOT Lanes: A New Opening for Pricing

In 1993 two transportation economists proposed that the most politically feasible way to introduce market-based road pricing was not to attempt to convert existing freeways from free to priced. Rather, following the model of the 91 Express Lanes, they proposed that instead of adding HOV lanes to freeways, cities should instead add HOT (high-occupancy/toll) lanes. Compared with HOV lanes, HOT lanes would be more popular because more people could use them-and they would not later become congested (assuming the price could be raised as demand grew). Compared with adding regular lanes, they would generate project-specific revenues to cover some or all of their capital costs.

The Federal Highway Administration at first resisted the inclusion of HOT lane projects (which they termed “HOV buy-ins”) in the congestion pricing pilot program authorized by ISTEA. But after about a year, they relented, and even offered support to the proposed I-15 HOT lane demonstration project. They subsequently funded a HOT lane pilot project in Houston, and have encouraged applications from other cities, such as Minneapolis and Hampton Roads, Virginia. As of 1998, the Reason Foundation had identified some 18 HOT lane projects either under way or on the drawing boards in metro areas in eight states.

The 1998 TEA-21 legislation includes funding for a new “value pricing” program to replace ISTEA’s congestion pricing pilot program. Up to 15 projects can be authorized and assisted by FHWA, and all 15 can be on urban Interstates. This modest breakthrough for road pricing at the federal level would permit most or all of the proposed HOT lanes projects to go forward.

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V. A Pro-Mobility Approach to Pricing and Highways

Based on the global success of the BOT model in adding new highways and modernizing existing ones, road pricing could be the key to both expanded highway capacity and effective congestion management. But of the various forms which road pricing could take, several are frought with danger to auto-mobility. But the status quo is also fraught with danger. Each time the federal transportation program is reauthorized, a larger fraction of highway user-tax revenues is allowed to be diverted to non-highway purposes. Federal agencies fund and work closely with anti-highway, anti-auto groups like the Surface Transportation Policy Project. The current system is manifestly failing to meet drivers’ and truckers’ needs for better mobility-relief from congestion, predictable arrival times, better real-time information. It still operates on a top-down, centrally planned, one-size-fits-all model that has been rejected as outmoded in virtually all other forms of infrastructure-and replaced by decentralized, competitive, market-driven systems. Is it time for bringing market forces into highway infrastructure-in the interest of highway users?

In the early years of the auto era, the Good Roads Movement and other pioneers developed the ideas and funding methods that led to our national system of highways. The key funding innovation was the idea of a tax on gasoline, reserved exclusively for highway purposes via a highway trust fund. During the 1920s most states and the federal government adopted this innovation, leading to major national investment in creating our initial highway system, and culminating in the Interstate system launched in the 1950s and completed in the 1990s.

As we approach the beginning of the 21st century, an equally bold innovation is called for to rescue the auto-mobility system from the problems of congestion, revenue diversion, under-funding, and unresponsiveness to user needs. This innovation is what we might call the commercialization of the highway system, bringing to bear the advantages of entrepreneurship, market pricing, and high technology. To appreciate the how powerful this new approach would be, consider the contrast between the highway system and the telecommunications system.

A. The Telecommunications Analogy

In his pathbreaking book, Roads in a Market Economy, former World Bank transport economist Gabriel Roth makes a provocative analogy. He contrasts the performance and user-friendliness of two of our most vital forms of infrastructure: telecommunications and surface transportation. The former is owned and operated by private enterprise; the latter by bureaucratic government agencies. The former charges market prices for its services; the latter charges indirectly, via a tax loosely related to usage. The former varies its prices to better match demand with capacity; the latter does not. As a result, the former is seldom overloaded even at peak times of day, but the latter is frequently overwhelmed. Especially since it was opened to competition, the former responds to high demand by adding capacity; the latter has virtually ceased to do so. The former actively seeks to introduce value-added services to better meet user needs; the latter offers virtually the same product today as it did 50 years ago.

As Marxists like to say, “it is no accident” that these two different institutional arrangements produce such different results vis-a-vis their users. Telecommunications firms have powerful economic incentives to meet the needs of their users. If a major trunk line goes out of service, a phone company loses revenues for every minute or hour of that condition. By contrast, a highway agency that shuts down lanes or a whole freeway segment for repairs loses no revenues and takes little account of the huge costs it imposes on its would-be users.

Roth makes a persuasive case that we should seek to reform the highway system to make it far more like the telecommunications system. In brief outline form, the major institutional principles of the telecom system are:

  • Interconnected networks from multiple providers, open to individual users on nondiscriminatory basis;
  • Infrastructure owned/operated on commercial principles;
  • Market-based pricing to balance demand and supply;
  • User-funded capacity expansion, in response to incipient congestion;
  • System invites/exploits technology advances;
  • Ownership provides incentives for proper maintenance;
  • Strong incentives for user-responsiveness.

Roth believes all of these principles can be applied to the highway system as we move into the 21st century. And in fact the proposed New Zealand highway commercialization (described earlier) is directly inspired by Roth’s ideas.

B. The Transcorps Vision

A somewhat similar vision for future surface transportation systems has been set forth by Steve Lockwood, former Associate Administrator for Policy at the Federal Highway Administration. In an evolving presentation delivered over the past two years to a number of transportation audiences, Lockwood has set forth his vision of the future, presented as a look back from the year 2050. He suggests that by 2025 many states had developed priced toll networks on their upper-level highway systems, using technology for advanced traffic operations and demand management. Some of these were government-operated and some were private franchises.

In Lockwood’s scenario, the demands of operating and financing this high-tech system led to the consolidation of highway agencies and major private transportation and technology companies into regional “transcorps,” operating on a multi-jurisdictional basis (crossing, where applicable, both county and state lines). In 2050, shares in these transcorps trade on the stock market, raising capital for the emerging systems. Congestion has become an obsolete concept, due to variable pricing and capacity management. The transcorps leverage information and prices to moderate demand and operate the available capacity on a demand-responsive basis. The systems make use of real-time traffic information to provide routing advisories to individual vehicles; they also take reservations and guarantee arrival times, greatly improving both freight and passenger reliability.

Automated highway technology fosters improved crash avoidance and has led to intercity speed limits of 105 mph, as well as advanced urban buses and trucks operating under automated control (“platooning”). Electronic billing services keep track of time, distance, and type of service. Customers receive transportation bills consolidated with their communications bills, so they can make the appropriate personal trade-offs among alternative times and modes.

To move toward this vision, Lockwood suggests five major points:

  • Transportation services must be provided more like other public utilities, especially at the upper levels;
  • Service-based pricing must evolve, based on improved service and real-time information;
  • Sector roles must be re-allocated, with public agencies focusing more on policy, regulation, and performance measurement; most ITS applications are not within the capacity of most public agencies;
  • New forms of public-private collaboration are needed, re-allocating risk and reward, as is now happening in many other countries;
  • “Transcorps” should be pursued as a new form of public-private partnership, delivering innovative service to transportation customers priced according to the market yet responsive to public policy objectives.

Intriguingly, the chief transportation policy analyst for the Environmental Defense Fund, Michael Replogle, has been making a similar argument for converting urban freeways into corporate entities akin to public utilities.

C. An Evolving Scenario

Just as telecommunications deregulation began in the 1970s with an obscure microwave transmission company and unfolded over the following two-decade period, and as electricity deregulation began with a 1978 act legalizing alternative generation sources and is still evolving, so any transformation of the highway system toward commercialization and pricing could only occur in gradual steps over a number of decades. The initial experiments with private toll roads, congestion pricing pilot projects, and HOT lanes during the 1990s could be the precursor of an evolving commercialization that would realize the vision of thinkers such as Roth and Lockwood. How might such a scenario evolve?

A first step might be the replacement of existing HOV lanes with HOT lanes in major urban areas, with these projects carried out by private firms under long-term franchise arrangements so as to prevent revenue diversion to non-transportation purposes. HOT lanes would demonstrate the viability of nonstop ETC systems and the ability of pricing to offer something of value (real time savings and predictability) to those willing to pay extra. A related next step would be truck-only toll lanes, offering similar kinds of time savings and reliable delivery times to urban-area truckers in exchange for a fee, as recently incorporated into the 20-year transportation plan adopted by the MPO for the greater Los Angeles area. This kind of pricing, in which people pay on a voluntary basis only where they clearly perceive value-added from the transaction, is now being called “value pricing” as distinguished from “congestion pricing,” which refers to the top-down imposition of mandatory pricing on an entire (congested) freeway system.

A second element in the evolutionary process would be the encouragement, via revised public-private partnership statutes, of new private or public-private toll roads to meet the expressway needs of growing suburban areas, as is occurring in the two Orange Counties of Florida and California. This, too, would expand the capabilities of the private sector, increase the market penetration of ETC tags, get relatively affluent suburban motorists and taxpayers (who are high-propensity voters) used to the public-private partnership concept, and get them to make the connection between paying a toll and getting a better quality of highway service.

Another step would be to address the funding shortfall that will become a major issue as large portions of the inter-city Interstate system reach the end of their useful life over the next decade and need major reconstruction and modernization. The long-term franchise model now being used to upgrade and modernize Latin America’s highways will have a decade’s worth of experience and credibility by the time of the next federal highway reauthorization in 2004-an opportune time to repeal the remaining ban on using tolls on the Interstate system. Pro-highway forces advocating such a change should couple it with safeguards to ensure that the new toll revenues are used only for capital and operating expenses of the highways involved.

A last, and perhaps most complicated, step in this evolution towards a commercialized highway system would be to franchise out existing congested urban freeways-to be modernized with increased capacity and improved safety in return for being market-priced. Most of the ways in which capacity can be increased in built-up urban areas will be quite costly: adding second decks, boring tunnels under developed areas to avoid destroying what is on the surface, possibly enclosing certain segments to contain their noise and treat their emissions. But these capital costs which appear beyond the reach of existing highway budgets would be feasible with the kinds of revenues that a market-pricing system could generate. Several simulation studies of the greater Los Angeles freeway system estimated annual pricing revenues in the $3-4 billion range. That kind of revenue stream would support scores of billions of dollars in toll revenue bonds for ambitious, user-serving highway improvements.

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VI. Policy Implications

If the highway commercialization vision is attractive to supporters of a highway-based transportation system, what issues must be dealt with to start making it a reality? One of the most important is the equity issue: the claim that road pricing or congestion pricing is regressive and therefore should not be pursued. A second is the double-taxation issue, which has led highway user groups to oppose tolls. Another is the need to rebuild the traditional auto/highway coalition in ways that are friendly rather than hostile to tolls and privatization. And yet another is the willingness to take on the already existing anti-auto coalition composed of various environmentalists, urban planners, and transit advocates. This coalition supports a diametrically opposite vision and will probably fight harder against highway commercialization than they do against the status quo.

A.The Equity Issue

It has become a cliché to assert that “congestion pricing is regressive.” But the relevant question that is seldom asked is: “Compared to what?” USC transportation researcher Genevieve Giuliano points out that since nearly all existing sources of transportation funding are regressive, “it is likely that the net incidence of direct costs and benefits of highway services is regressive.” Thus, to the extent that a priced system such as the commercialization scenario proposed above were to gradually replace today’s highway funding system, it would mean replacing one regressive system with another that might be somewhat more or somewhat less regressive. But it would clearly not mean replacing a progressive or neutral system with a regressive one, as is implied by those who object to pricing on this basis.

Advocates of the traditional top-down version of congestion pricing (i.e., most transportation economists) point out, correctly, that if government collects large new sums from time-varying charges on an urban freeway system, it can use those revenues in ways that compensate for the “inequities” created by the pricing. For example, Kenneth Small has proposed a multi-part division of the revenues into transportation improvements, employee commute allowances, a reduction in the gasoline tax in those counties employing pricing, and rebates of that portion of property taxes used to fund local streets and roads. In a more recent assessment of the impact of proposed congestion pricing on the Los Angeles freeway system, Wilbur Smith Associates found that by using 90 percent of the estimated pricing revenues for either transportation improvements or rebates to individual drivers, every income quintile could be made better off.

On the other hand, if one envisions instead the gradual evolution of highway infrastructure toward a commercial model, like that of telecommunications, electricity, and water, the equity problem seems less problematical. After all, in 21st-century America, telephone, electric power, and water are no less essential than highways. Yet we do not agonize over the regressive nature of market pricing for those vital infrastructure services. In some communities, special “lifeline” rates are offered to those meeting certain low-income criteria, allowing them to obtain a basic level of service that is cross-subsidized by higher charges paid by others. During a gradual change to a commercialized highway system, there may be a role for similar lifeline rates in certain cases.

It should also be noted that the poorest Americans are generally those without cars, and who are therefore transit-dependent. Since buses and vans remain the predominant form of mass transit, those vehicles will benefit from road pricing’s reduced congestion and reliable arrival times just as much as will cars and trucks.

B. The Double-Taxation Issue

Organizations such as the American Automobile Association, the American Trucking Associations, and the American Highway Users Alliance have traditionally opposed any expansion of tolling. Their argument is along the lines of: users are already paying for the highway system via the current system of user taxes. Requiring them to pay tolls in addition represents a kind of double taxation. This argument was used recently by an ad-hoc coalition of highway user groups and taxpayer organizations to nip in the bud a tentative proposal by the Arkansas DOT to take advantage of a pilot program in TEA-21 under which up to three states would be permitted to rebuild Interstates using tolls, if they could show that conventional user-tax revenues were not sufficient for this purpose.

This concern needs to be taken seriously in developing a new highway coalition. Users of toll roads should not also pay fuel taxes for the miles they drive on toll roads. One initial step would be to exempt from fuel taxes all fuel sold at service plazas on toll roads. On a longer-term basis, as ETC becomes widely available, each toll road’s accounting software could compute the miles driven by each tag-holder as the basis for periodic rebates of fuel taxes (based on average fuel consumption per mile by that category of vehicle). This kind of policy would permit states to choose between tolls and fuel taxes for both new highways and for major reconstruction, without subjecting toll road users to double taxation.

C. Rethinking Traditional Lobbying Positions

The traditional highway coalition-the auto industry, the oil industry, auto clubs, trucking associations, and highway builders–have historically defended and lobbied for what has become today’s status quo. This includes support for the gasoline tax and for preventing further diversion of fuel-tax revenues to non-highway purposes, opposition to tolls (especially on the Interstates), neutrality or opposition to privatization and public-private partnerships, and opposition to devolution of federal funding and responsibility. Support for evolution toward the commercial paradigm would mean rethinking many of these positions, and offering qualified support for a number of alternative policies:

Foster Public-Private Partnerships: An auto-mobility coalition could develop more flexible approaches for true public-private partnerships in highways, drawing on nearly a decade of experiments in this field. One approach might be a model law promoted to state legislatures nationwide, building on previous model-law proposals by the American Legislative Exchange Council and the Reason Foundation. A major focus of such a model law should be on modernizing and rebuilding existing highway facilities, as opposed to the new-highway focus of most previous partnership measures.

Remove Barriers to Pricing: In the context of a movement towards commercialization and public-private partnerships, the new highway coalition should support (with appropriate safeguards-such as the elimination of double taxation) the removal of the remaining federal ban on tolling the Interstates, together with removal of any remaining state measures prohibiting toll financing.

Link Pricing and Partnerships: If highway pricing can be linked inextricably with project-financed road provider organizations (which could be single-purpose public agencies as well as private consortia), then the toll charges will be used exclusively for the capital and operating costs of those transportation facilities, with any excess (above a normally competitive rate of return) earmarked for the state highway or transportation fund (as per California’s public-private partnership franchise law, AB 680). This linkage provides a vital safeguard against the diversion of toll revenues into general government coffers as a new source of tax revenue.

Promote HOT Lanes as First Step: In those metro areas where HOV lanes have already become a standard part of the highway infrastructure (and especially where they have developed a constituency), the best approach is to seek to build any remaining additions as HOT lanes, while aiming to convert HOV lanes to HOT lanes either when they are greatly under-utilized or when they reach the point of over-use at HOV-2 and must make the painful shift to HOV-3. In those metro areas where HOV lanes are not already in place, a simpler alternative approach would be to dispense with the car-poolers-go-free feature and simply introduce priced express lanes (which might be dubbed FA$T Lanes). This approach is technically simpler (from an enforcement and operational standpoint, since there is no need to verify compliance with ride-sharing provisions) and still provides incentives for ride-sharing (since the toll can be spread over several people). Specialized toll lanes can also make sense in certain circumstances for trucks, as noted previously.

Consider the Case for Defederalization: With the completion of the Interstate system, the Federal Highway Administration has lost its principal rationale for its current size and scope. While research and national standardization (e.g., of overpass dimensions, weight limits, ETC compatibility standards, etc.) continue to be national issues, it is not clear that a continued federal tax-collection-and-redistribution system is needed in order to continue to have a high-quality national highway system. And if the new model calls for shifting major responsibility from government to commercialized highway providers (whether public or private), state and metro-area governmental units would appear to be the obvious public-sector partners, not the federal government. There is also the question of whether progress toward this new model for highways would occur more rapidly under federal leadership or via natural competition among the states, functioning as the “laboratories of democracy.” In fact, significantly greater use of public-private partnerships has been made by the states, acting on their own, over the past decade, while there has been almost no utilization of the federal ISTEA public-private partnership provisions.

D.Taking on the Anti-Highway Vanguard

Within the past decade a large and well-funded coalition has been assembled to fight against highways and auto-mobility. Called the Surface Transportation Policy Project, it includes many environmental groups (Natural Resources Defense Council, National Wildlife Federation, Friends of the Earth, etc.), political action groups (AARP, Citizen Action, Union of Concerned Scientists), urban planning groups (National Association of Regional Councils, American Planning Association, American Institute of Architects), and transit groups (American Public Transit Association). STPP produces a monthly newsletter, commissions and publishes policy studies, and generally serves as a networking organization for the entire pro-transit, anti-auto coalition. STPP is funded by a group of left-liberal foundations (Cummings, Gund, Joyce, Rockefeller, etc.), but its credibility and resources are considerably enhanced by grants from and joint projects with the Federal Transit Administration and the Environmental Protection Agency.

STPP and its allies relentlessly promote the ideas of the “New Urbanism,” which include transit-led development, limitations on parking, extensive land-use controls to reduce suburbanization and force higher densities, and peculiar theories of residential architecture. They lobby extensively to impose numerous planning requirements on metro areas, to make as large a fraction as possible of federal gasoline tax funds “flexible” (i.e., divertable to non-highway uses), and to include mandated set-asides in ISTEA for non-highway purposes such as “enhancements” and “congestion management and air quality.”

This coalition over the past decade has aggressively promoted the idea that rail transit is a good investment, that expanding freeway capacity is pointless, and that Americans suffer from an irrational “love affair with their cars.” They will be a formidable opponent of any serious effort to move toward a driver-friendly, commercialized highway system. Those intending to work toward such a system must be prepared to do intellectual and political battle against these veteran fighters for their causes.

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VII. Why the Highway Community Should Embrace the New Approach

A highway-based mobility system means more than just adequate pavements and reduced congestion. Highway customers want better service from the infrastructure, such as responsiveness to their demands for higher speed, much greater reliability of trip times, improved safety and security, and assistance with finding destinations and services. Many are willing to pay for greater options and value-added services. Thus, “pricing” needs to be reconceived for the 21st century as something far broader than old-fashioned tolls to pay for the construction of the physical infrastructure. Pricing is the key means by which customers and service providers will communicate about the appropriate mix of automobility services in the 21st century.

Hence, our contention is that the traditional highway coalition should seriously consider a fundamental rethinking of how we fund and manage highway transportation. Specifically, we contend that:

Addressing congestion with pricing and new capacity is better for users than the status-quo.

The key to gaining support from auto clubs and trucking associations may be the link between pricing and added capacity/improved service. If the status quo continues, cities may begin to ration driving via such measures as rush-hour truck bans (seriously proposed in Los Angeles) and odd-even driving days (proposed by the EPA). But if we can develop policies that earmark the revenues from pricing strictly for improving the highway system (including adding capacity where needed), then tolls will not be seen as tax increases but rather as a way of permitting highway users to buy better service. As an example, the recently adopted Regional Transportation Plan for the greater Los Angeles area calls for adding some $8.2 billion of truck-only toll lanes to severely congested LA-area freeways over the next 20 years. Projected time savings for commercial shipments are projected to be worth more than the cost of the tolls.

Nonstop ETC/open-road tolling makes tolling very user-friendly.

Much of the perceived public opposition to tolls is actually opposition to toll booths and waiting lines. Those who actually use nonstop ETC find it user-friendly, especially where it gives them new mobility options (as with express lanes on congested freeways). At least one survey of auto club members has found surprisingly strong support for toll-funded new capacity, and 1996 Southern California surveys gave HOT Lanes majority support.

AHS and other ITS features work best with priced lanes operated by commercialized providers.

Traditional public sector agencies have great difficulty offering premium services to a select segment of the public, especially at market prices. It will be very difficult for motorists and truckers to take full advantage of what ITS has to offer without the ability to separate fully-equipped vehicles into specially equipped lanes charging appropriate prices for these value-added services. This is an ideal function to be provided by the private sector under public-private partnership arrangements.

Cars-only express lanes can add capacity at less cost than conventional highway expansion.

Adding capacity does not necessarily mean adding all-purpose lanes with their traditional 12-ft. width and 16.5 ft. clearance height. In fact, two auto-size-vehicle lanes, stacked one above the other, can be built in less space than needed for a single conventional lane. Such configurations are already in use in France, developed and operated by the private sector on a BOT basis.

Increased emissions from new capacity can be offset via emissions trading with stationary sources.

Many proposed capacity expansions will face the obstacle of having to demonstrate “conformity” with the region’s air quality goals. One innovative solution would be to expand the Clean Air Act’s current emissions trading principles to permit trading between mobile and stationary sources. Thus, a developer seeking to add express lanes to an existing freeway (which might add to the region’s mobile source emissions) would be allowed to purchase the needed emissions credits from stationary source emitters in the region. The price of the emission credits would be reflected in the tolls to be charged for using the express lanes. This kind of trading would be virtually impossible under current highway funding arrangements, since the extra cost of the permits would not be reflected in the amounts paid by the users of the new lanes.

Devolution opens the door to selective replacement of fuel taxes with pricing revenues.

While devolution per se would not lead to pricing, it would eliminate the federal ban on tolling Interstates. It would also remove a whole layer of government from the structure of transportation funding, making it far simpler for a state to permit an urban area to replace fuel taxes (and other transportation taxes) with direct pricing. Replacement of taxes with prices would remove the “double taxation” argument against tolls and congestion pricing.

The auto industry will benefit greatly from this new approach.

In addition to helping to retain for autos and trucks the lion’s share of vehicle miles traveled, this new commercialized approach to infrastructure will speed the introduction of numerous high-tech features in the vehicles themselves, increasing the value (and hence the price) of future vehicles. But these features will not be demanded by vehicle buyers unless the infrastructure facilitates their widespread use.

U.S. firms should be able to apply these principles worldwide.

Major urban areas worldwide are choking on urban freeway congestion, as rising affluence leads to greater auto ownership that generally outpaces the growth of highway capacity. Effective models of highway corporations that make full use of ITS and pricing capabilities to deliver higher-quality services should be transferable to Buenos Aires, Santiago, Sao Paulo, Seoul, and other major urban areas. U.S. auto companies, as well as infrastructure developer/operators, will be at a disadvantage if they fail to keep pace with their overseas counterparts. For example, Saab owns Combitech, one of the leading global electronic toll collection firms, and until recently GM owned Hughes Transportation, developer/operator of Highway 407’s advanced-technology automated tolling system. Australian, French, and British toll road developer/operators already have a strong competitive advantage over would-be U.S. firms in global competitions, since the United States does not possess a real tollway industry, as yet.

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