- Mileage-based user fees now, via AET
- Long-term highway leases and intergenerational equity
- Congress’s gift to HOV and HOT lanes
- Not enough private activity bonds?
- Stated preference vs. revealed preference in housing and land use
- Business helping truckers pay tolls
- Upcoming Conferences
- News Notes
- Quotable Quotes
I continue to be amazed that the need to start phasing out per-gallon fuel taxes and phasing in per-mile user charges is not spurring more action. One of the biggest stumbling blocks, in my view, is the utopian one-size-fits-all model that most MBUF advocates either explicitly or implicitly assume. By that I mean that a single system, generally assumed to be an expensive GPS box mandated to be in every vehicle, must be used to track every single mile driven anywhere in the country. And for many advocates, this same device must charge highway users for every conceivable externality-conventional tailpipe emissions, CO2 emissions, number of passengers, type of propulsion, etc. That grandiose vision not only implies a very costly system but is also guaranteed to create huge political opposition on Big-Brother, social-engineering grounds.
By contrast, if we (1) redefine the principal need as just creating a more robust, long-term sustainable source of highway funding, and (2) are willing to implement mileage-based charging in an incremental manner, the outlook is radically different. That’s because we already have low-cost technology for mileage-based charging-in the form of state-of-the-art all-electronic tolling (AET). The implications of this quiet revolution are spelled out in a new Reason Foundation study: “Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century.” The four researchers, led by Daryl S. Fleming, Ph.D.,PE, explain how far AET has come since it was first implemented on Toronto’s Highway 407ETR back in 1997. In particular, they present strong evidence that the cost of AET, using a streamlined business model, is competitive with the cost of collecting fuel taxes. (http://reason.org/news/show/myths-toll-and-gas-tax-collection)
In particular, they review recent research on the cost of collecting fuel taxes, which conventional wisdom puts at about 1% of the revenue collected, and show that when evasion, exemptions, and hidden taxes and costs are considered, the full cost is more like 5% of the revenue collected. Then they review recent studies on the cost of toll collection, finding that they are mostly or entirely looking back at what toll collection costs have been (with large fractions still done using toll booths) rather than looking forward to the emerging world of AET and a best-practices business model. After documenting three small all-AET operations using an aggressive business model to reduce collection costs, they conclude that with modest economies of scale, AET can be done at a cost of collection approaching 5% of the revenue collected, especially in urban areas where toll rates will be higher than on rural roads. And that means collecting highway revenue with AET will cost about the same (as a fraction of the revenue collected) as doing so via fuel taxes.
To be sure, it would be very costly to equip every local street and two-lane highway with all the equipment needed for AET. But that gets back to my point about dividing up the problem and starting implementation with the easiest cases. Accordingly, the authors suggest we could start now to shift funding for maintenance and modernization of the limited-access highway system-basically the Interstates and urban expressways-to AET. A system like the one that has worked well on Highway 407ETR for 15 years would equip only the on-ramps and off-ramps with antennas and cameras. A vehicle’s transponder or license plate would be read when it enters and again when it leaves the limited-access highway, with the charge based on the type of vehicle and the number of miles traveled. On urban expressways, this charge could also vary by time of day.
Speaking of urban expressways, the authors also make an intriguing case for AET-based congestion pricing. We know such pricing works, and we know the annual cost of congestion in America’s urban areas: just the wasted time and fuel is in the vicinity of $100 billion per year. If expressway pricing via AET could reduce that by 10%, that’s an annual savings of $10 billion per year (or about 15% of the annual yield from federal and state fuel taxes). Therefore, staying with fuel taxes for urban expressways, rather than shifting to per-mile pricing, has an opportunity cost of about 15% of the revenues collected in fuel taxes. If you add that to the estimated fuel tax cost of collection (5% of revenues), the total cost of using fuel taxes for highway funding approaches 20% of the revenue collected.
There is already a lot of industry buzz about this new study, so I urge you to download and read it.
There’s been a lot of discussion in some transportation circles about a paper in the November 2012 issue of Public Administration Review: “The Indiana Toll Road Lease as an Intergenerational Cash Transfer.” Author John B. Gilmour is a professor of government at the College of William and Mary. His summary of the paper says that it “finds that the majority of benefits, in the form of road construction, are enjoyed in the early part of the lease, while the bulk of the costs [to the public] fall late in the lease, raising important questions about intergenerational fairness.”
To make his case, Gilmour uses the example of the 75-year lease of the Indiana Toll Road, in which the state government received the entire lease payment as a lump-sum, up-front payment of $3.8 billion. All toll revenues over the lease period will accrue to the concession company, which is required contractually to operate and maintain the highway in accordance with pre-defined performance measures. The state of Indiana, after paying its outstanding toll road bonds, dedicated nearly all the remaining proceeds to fund a 10-year capital investment program, upgrading highways statewide. Thus, these funds were not used for short-term budget-balancing purposes but were invested in long-lived infrastructure producing benefits over coming decades.
Gilmour attempts to model the incidence of costs and benefits over the 75-year term of the lease. And here is where his analysis goes off track. Although earlier in the paper he wrote about two main benefits-the up-front payment and the outsourcing of toll-setting from the legislature (which had let toll revenues languish over nearly two decades)-in the benefits calculation he includes only the up-front payment. He concedes that proper maintenance over 75 years might also be a benefit, but does not quantify this, saying that it cannot be assessed. Yet this dismissal ignores both strong contractual provisions (including penalties) for proper maintenance and the concession company’s self-interest in making the toll road better than competing free roads, in order to attract paying customers. So clearly, the state is avoiding 75 years’ worth of maintenance that it would otherwise have to provide, a benefit that should be straightforward to estimate.
In comparing the lease with a hypothetical case in which the state continued owning the toll road, he makes the historically unjustified assumption that the state would implement annual toll rate increase of 3, 4, or 5 percent (in different scenarios) for 75 years, without political backlash. There has never been such a case with a state-owned toll road, and I doubt there ever will be.
His long-term benefits vs. cost calculations also depend critically on the discount rate used. His most dramatic results-the ones he emphasizes-come from cases using discount rates of 0% and 2%. After presenting the results of these calculations, he states that the choice of a “high” discount rate (by which he means 4%) “reflects an initial normative judgment that the analyst does not care much about future generations and considers their well-being less important than that of the present generation.”
On the contrary, it represents an effort to be realistic about the time value of money. I’m neither an accountant nor an economist, but my coursework in engineering economic analysis gave me a basic grounding in the time value of money and the standard techniques for taking this into account. Gilmour refers to an OMB circular on this subject, but the fact is that OMB for many years, including today, requires federal agencies to use a 7% discount rate for doing net present value (NPV) calculations. A long-time colleague who does toll revenue feasibility studies advised me about 10 years ago that 6% was more realistic than the OMB number in that field, and in a recent exchange he suggested using 5% these days, in view of where long-term revenue bond interest rates are. All of those numbers are far higher than what Gilmour uses in attempting to make future costs look far higher than they should.
Gilmour also has limited knowledge of the useful lives of major infrastructure. He makes the absurd statement that Hoover Dam will last 1,000 years, but considers 30 years the useful life of major highways and 50 years for bridges. He uses those numbers in quantifying the benefits of the highway projects Indiana is building using its lease proceeds, when the real numbers-at least for Interstates like the Indiana Toll Road– should be more like 50 years for highways and 75 years or more for bridges. He ignores the fact that even at a useful life of 50 years (rather than 30), the Indiana Toll Road will have to be reconstructed, at the concession company’s expense, within the 75-year lease term. They are also contractually required to add lanes in order to maintain uncongested performance as traffic volumes grow. The benefits to Indiana of not having to make those investments are absent from Gilmour’s benefit calculations.
I do agree with one of his recommendations: that states might be wiser to receive some or all of their lease payments on an annual basis, rather than all up front. (In fact, that is what I advised Indiana to do, when they asked.) This would tend to align the incentives of both parties to the lease over its full term. A long-term public-private partnership is and ought to be something like a marriage, and should be structured as a win-win deal over its entire duration. I profoundly disagree with his proposal that states amend their constitutions to prohibit leases of infrastructure longer than 30 years.
In short, this is a seriously flawed paper. Its conclusions about intergenerational wealth transfers are due to omitting significant benefits and using a grossly unrealistic discount rate to do the net present value calculations. As a guide to wiser long-term PPP agreements, it is of little value.
One of my pet peeves for years has been that many of the HOV lanes in the largest metro areas (Atlanta, Los Angeles, Miami, etc.) routinely fail to meet FHWA performance requirements-but nothing is done about this. In exchange for having received federal funds to create the HOV lane, the operator is supposed to ensure that during morning and evening peak periods, average speed in the lane must exceed 45 mph 90% of the time during any 180-day period. HOV lanes that fail to meet this requirement are considered “degraded,” in that they cannot reliably offer faster trips to those choosing to carpool-which was the original purpose of creating the HOV lanes.
The primary reason for degraded performance is that the HOV lane becomes overcrowded-so many carpools (and violators) crowd into the lane during peak periods that speeds decline, in some cases to stop-and-go conditions. The obvious remedy for this is to increase the required occupancy, which in most cases would be from two persons to three. And in the rare cases of lanes that are HOV-3 but still congested, occupancy should be increased to four. State DOTs and other HOV lane operators hate doing this, because they expect significant backlash from carpoolers and elected officials.
For several years, in this newsletter and in presentations, I have urged FHWA to seriously enforce its HOV non-degradation requirement. The usual sanction for not complying with a federal requirement is loss of some federal funding, and that would certainly get the locals’ attention. More important, if that kind of enforcement existed, state DOTs could do the right thing (increasing occupancy) with much less fear of backlash-“because the feds made us do it.”
To my pleasant surprise, at the recent AASHTO annual meeting in Pittsburgh, I learned that the MAP-21 reauthorization law does include a new HOV non-degradation enforcement provision. MAP-21 retains the current performance standard, but DOTs and other HOV operators are now required to cure the degradation within 180 days, either by increasing the occupancy requirement, increasing the capacity of the HOV lane (not likely!) or if it is already operating as a HOT lane, by pricing out some or all of the non-HOV users. And if the state fails to do this, FHWA must impose sanctions-such as withholding funds, withholding project approvals, or any other appropriate action.
This is a gift from Congress, and I hope DOTs and MPOs welcome it as such. For those committed to retaining HOV lanes in principle, this is a way to restore them to the originally promised time-saving advantage. For those wanting to convert from HOV to HOT, my advice is to make the occupancy change first, in response to the federal requirement. Then, when the number of carpools in the lanes falls off dramatically (since in general it’s much more difficult to form and maintain three-person carpools than two-person ones, including fam-pools), the newly experienced excess capacity can be priced and sold to one- and two-occupant vehicles.
The SAFETEA-LU legislation authorized the US Treasury to approve the issuance of up to $15 billion in tax-exempt private activity bonds (PABs) for PPP surface transportation projects. The past year has seen a proliferation of such projects, and their primary senior debt source has been shifting from bank loans to PABs. As this trend continues, the question arises of when the $15 billion total may be reached. The July-August issue of Public Works Financing provided a useful recap, summarized here.
As of July, according to Jack Bennett of U.S. DOT, six project sponsors had issued $2.8 billion in PABs for the following projects:
Another seven projects have been allocated $4.7 billion in PABs that had not, as of then, been issued:
||$600M (used only $261M)|
Were all of those on the second list to be issued in the amounts shown, that would leave $7.5 billion still to be allocated. As of August 2012 when this article appeared, there were already $4 billion worth of requests awaiting DOT’s credit committee review and approval. That would leave just $3.5 billion of available bond capacity, with nearly two years to go until the next reauthorization (assuming Congress enacts a successor as soon as MAP-21 expires on Sept. 30, 2014). With so many PPP megaprojects in the pipeline, and Congress having experienced multi-year delays in passing both MAP-21 and SAFETEA-LU, it is likely that demand for this kind of PAB will have reached or exceeded the current $15 billion cap well before the next reauthorization.
If Congress should somehow find time to do a technical corrections bill next year, increasing the PAB cap for surface transportation should be high on the agenda.
Early in my transportation career, I learned to be very skeptical of stated preference surveys. Sometimes, as with introducing something completely new (e.g., the first express toll lanes), stated preference may be the only tool available. But survey writers can slant the results by how they word the questions, and respondents sometimes tell pollsters what they think is the politically correct answer (or what they might do if the alternative were better than what would actually be available).
A good example of the difference between stated preference and revealed preference results turned up in a recent New Geography article on California housing. A paper by Prof. Arthur Nelson (University of Utah), “The New California Dream: How Demographic and Economic Trends May Shape the Housing Market,” was published recently by the Urban Land Institute. It identifies a strong trend in California’s four major urban areas away from single-family houses on conventional lots and toward multifamily housing and single-family homes on small lots. According to article author Wendell Cox, Nelson’s paper has proved influential with transportation and housing officials in the Golden State, who are revamping land-use plans toward higher densities.
Cox points out that Nelson’s trend projections are based on data from three stated preference surveys conducted by the Public Policy Institute of California in the early 2000s. From these data, Nelson estimated demand for single-family/conventional, single-family small-lot, and multifamily housing in 2010, 2020, and 2035. His figures show demand for higher-density housing far greater than recent supply, and supply of single-family/conventional housing to be more than twice as great as demand.
But revealed preference data are available from the Census, enabling Cox to do a reality check on Nelson’s 2010 trend prediction. From 2000 to 2008, 51% of new occupied housing in the four metro areas was detached housing on conventional lots, compared with Nelson’s prediction of 16%. Here is a summary comparison:
|Housing Type||2010 Predicted Demand (stated preference)||2000-2008 Actual Demand (revealed preference)||Supply in 2000 (actual)|
|Detached, conventional lot||16%||51%||42%|
|Detached, small lot||22%||30%||15%|
It appears that developers were misled by projections such as Nelson and many others were making, as well as changed government housing and land-use requirements, to under-supply single-family homes on both conventional and small lots, and to significantly over-supply multifamily housing.
One reason planners (and survey question writers) think higher density is a good thing is their assumption that this will lead to shorter commutes. Yet assuming “shorter” means fewer minutes, there is no data supporting this. To be sure, data from the Southern California Association of Governments (included as a chart in Nelson’s paper) do show that as housing density increases, average commute distance decreases. But the chart also shows that commuting time is virtually the same regardless of density, evidently because many commutes from low-density suburbs are not to a far-off central business district but to a suburban edge city.
Survey respondents also generally are positive about living within walking distance of a transit stop. Some 87% of people in the four major California metro areas have such a transit stop near their residence. But data from a recent Brookings report reveal that the average resident in those four areas can reach only 6% of the jobs in their region by transit within 45 minutes. Respondents to a stated preference survey have no conception of these numbers when they reply favorably about transit access-hence the large difference between stated and revealed preference on this aspect of housing choice.
The conventional wisdom says truckers hate tolls. And I suppose that’s true of many truckers, especially owner-drivers who pay the toll out-of-pocket and can’t directly pass it along to their customers. But big rigs are important users of toll roads like the Pennsylvania Turnpike, New York State Thruway, Florida’s Turnpike, etc. These toll roads offer a value proposition that makes sense to many trucking companies, compared with the alternatives.
I was pleasantly surprised to learn of the existence of a company called Bestpass that offers trucking companies convenience and economies of scale in paying tolls. Companies that sign up with Bestpass receive a single monthly bill for all their tolls (rather than one from each toll road). They get guaranteed access to any available fleet toll discounts, offered by toll roads in Maryland, New Jersey, New York, and Pennsylvania. And Bestpass partners with HELP, Inc.’s PrePass service, which offers weigh station bypass services. The company also handles oversize and overweight permits.
According to a recent article in the Albany Times Union, BestPass was begun in 2001 by the New York State Motor Truck Association. It was so successful that the organization spun it off as a wholly owned business, able to offer its services nationwide. It has 1,800 trucking company clients thus far, in 13 northeastern and midwestern states, and is seeking to expand to toll roads in North Carolina, Florida, Texas, Oklahoma, Kansas, and Colorado. It manages accounts for 78,000 vehicles, more than twice as many as in 2009, just three years ago. And while its clients include FedEx Freight, US Express and CR England, it has not yet landed majors J.B. Hunt and Schneider National.
As tolling becomes more common, BestPass’s business will grow, and they may even find competitors entering this market.
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.
Transportation Research Board 92nd Annual Meeting, Jan. 13-16, Washington, DC (Adrian Moore and Robert Poole speaking). Details at: www.trb.org/AnnualMeeting2013/annualmeeting 2013.aspx.
Moving Georgia Ahead: What’s Coming Down the Pike, Jan. 24, Georgian Club, Atlanta, GA (Robert Poole speaking). Details at: http://weblink.donorperfect.com/LeadershipBreakfastRegistration.
Advancing Transportation Infrastructure through Public Private Partnerships, Jan. 28, Northwestern University, Evanston, IL (Robert Poole speaking). Details at: www.transportation.northwestern.edu/lipinski/index.html.
Private Resources for New York’s Future: Public-Private Partnerships, Feb. 12, Hotel Albany, Albany, NY (Shirley Ybarra speaking). Details at: www.ncppp.org/calendars/Albany_1302/NY2013flyer.pdf.
More Elevated Express Toll Lanes in Florida? Pasco County, just north of Tampa, has commissioned URS Corporation to do a feasibility study of elevated toll lanes built above the median of SR 54, a major east-west highway. The project would extend for 33 miles, from US 19 to SR 301. It is intended to be part of a future outer beltway for the Tampa metro area. The inspiration for the project is the successful elevated express toll lanes on the Selmon Expressway in Tampa, owned and operated by the Tampa Hillsborough Expressway Authority.
Ohio DOT Seeking Managed Lanes Advisor. The Division of Innovative Delivery of Ohio DOT has requested letters of interest from consultants interested in a study of possible use of priced managed lanes in the state. Phase 1 will define a managed lanes methodology and conduct a statewide assessment of where MLs could play a useful role. Phase 2 will advise ODOT on developing an initial ML project.
Chinese Firm Lands Toll Road Concession in Jamaica. The Economist (Oct. 27, 2012) reports that China Communications Construction (CCC) signed an agreement in July for a 50-year PPP concession for a new highway in Jamaica. No further details were provided.
Positive Developments for Pennsylvania Turnpike. Responding to the state Auditor General’s assessment that Act 44 has put a “financial noose around the neck of the Turnpike” and should be repealed, state Sen. John Rafferty says there is bipartisan support to at least amend that law. Act 44, passed in 2007, requires the Turnpike to provide $450 million per year for non-Turnpike transit and highway projects statewide, which has led to enormous toll rate increases since then. Meanwhile, in an effort to reduce its operating costs and improve customer service, the Turnpike has set a goal of converting to all electronic tolling (AET) by 2017.
AAA Knocks Latest Ethanol Mandate. The EPA’s June 2012 decision approving the sale of E15 (gasoline with 15% ethanol) should be overturned by the White House, AAA argued earlier this month. Using fuel with that high a concentration of ethanol could damage the engines and fuel systems of as many as 228 million vehicles and void their warranties. As of now, only about a dozen gas stations nationwide are selling E15 fuel.
TIFIA Loan for Virginia I-95 Express Lanes. The nearly $1 billion project to convert the existing carpool lanes on I-95 in northern Virginia to express toll lanes has been awarded a $300 million loan from the federal TIFIA program. The project will add a third lane to the existing reversible HOV lanes and extend them as express toll lanes further south, to a total length of 29 miles. It is being developed by the same Fluor/Transurban team that last month opened to traffic the new Express Lanes on the Capital Beltway, I-495. There will be a direct connection between the Beltway express lanes and those on I-95.
Moody’s Downgrades GARVEES. Following soon after similar action (reported last issue) by Standard & Poors, Moody’s Investor Services has downgraded 27 GARVEE bonds totaling about $10 billion. The company cited the shorter-than-usual term of the latest reauthorization bill, MAP-21, as creating increased uncertainty about the future federal grant money that states pledge for debt service on GARVEES, as well as the stagnation of gas tax revenues and the uncertainty of continued bailouts of the Highway Trust Fund with general fund money.
Myths about TIFIA. Joung Lee of AASHTO has written, an excellent overview, for the Eno Transportation Foundation, of the expanded TIFIA program. It is online at: www.enotrans.org/eno-brief/five-myths-about-the-tifia-credit-program.
Tesla Model S Is Car of the Year. Motor Trend magazine has named the Tesla Model S all-electric car as its Car of the Year. Its selection parallels recent acclaim for the new model in other automotive magazines such as Car & Driver, which recently featured it as its cover story.
NCHRP Reports on Tolling and Pricing. The Transportation Research Board’s National Cooperative Highway Research Program has produced a two-volume report on “Assessing Highway Tolling and Pricing Options and Impacts.” Volume 1 is titled “Decision-Making Framework,” and the second volume is “Travel Demand Forecasting Tools.” NCHRP Report 722 can be accessed on the TRB website (www.trb.org).
Reason Interviews with State DOT Innovators. My Reason colleague Len Gilroy recently interviewed Florida DOT Secretary Ananth Prasad and Ohio DOT Director Jerry Wray, for Reason’s ongoing “Innovators in Action” series. Both interviews are on the Reason Foundation website, as follows:
One-Stop Shop on Innovative Program Delivery. A very useful source of information on PPPs, tolling and pricing, TIFIA, and related topics is the FHWA’s Office of Innovative Program Delivery. It includes descriptions of all OIPD programs as well as up-to-date information on technical tools such as Private Activity Bonds, FHWA tolling programs, federal-aid funding and availability payments, etc. Go to: www.fhwa.dot.gov/ipd.
“An increase in the federal gasoline tax is not popular among the congressional rank-and-file . . . . Lawmakers see the pressure to raise the tax as coming not from their constituents but from a narrow coalition of liberal advocacy groups and transportation stakeholders that benefit from increased federal transportation spending. Nor is the Obama administration eager to advocate a tax increase whose burden would fall most severely on the middle class-precisely the constituency it wishes to protect from the pain of any further tax increases. Given this perception, it is almost certain that a federal gas tax increase will remain off the table in the ‘fiscal cliff’ negotiations during the lame duck session and very likely throughout the next session of Congress.”
-Ken Orski, “Higher Gas Tax Is Unlikely to Gain Congressional Support,” Innovation NewsBriefs, Nov. 28, 2012 (www.innobriefs.com)
“I think the problem for the Western world is that our politicians all grew up in an era when the question was how to divide the increase in government revenues each year. Do you give it to roads, hospitals, schools? Do you reduce taxes, increase minimum wages, add new programs to the safety net? The fights were about who got the increases. Now the world has changed. Given the low-growth economies of Europe and to a lesser extent the United States, it’s about cutting programs, not ‘cutting’ increases. Birth rates are crashing. Russia’s population is shrinking, Japan’s as well, and Germany’s population wills start shrinking in about five years. The game is different now. It’ll be up to another generation of politicians to figure it out. This bunch are like the dinosaurs after the comet has struck.”
-George Hamilton, “Political Dinosaurs,” Public Works Financing, November 2012.
“I was a Tesla skeptic, having once penned a scathing column suggesting the Model S was essentially vaporware, and Tesla’s business plan didn’t add up. I was wrong about the Model S, and while I’m still concerned about Tesla’s financial fragility, I wouldn’t bet against company founder Elon Musk. He’s put most of his own money into two of the riskiest businesses imaginable-space and automobiles-and in the same year he sent his own rocket to the International Space Station and back, he released one of the world’s most impressive new luxury cars. I’m hoping most people will see this new Tesla for what it is and what it represents. The Silicon Valley-born Model S is a genuinely remarkable achievement bred of optimism and entrepreneurial spirit. It is, therefore, a quintessentially American automobile.”
-Angus MacKenzie, “Shock Therapy: Is America Ready for an Electric Car of the Year?” Motor Trend, January 2013
“[D]emand estimates from The New California Dream are being relied upon in regional transportation plans being developed by California’s metropolitan planning organizations (MPOs). This is particularly risky because these same MPOs have been granted greater power over housing under California’s Senate Bill 375, goaded on by a sue-happy Attorney General’s office. The attempt by MPOs to impose their housing plans and regulations on consumers could well backfire, for investors in condominiums and multifamily housing. This would not be the first time that developers followed urban planning illusions like lemmings over a cliff, to which huge losses in the last decade attest. The more destructive efforts, however, are likely to be paid by households and the economies of California’s metropolitan areas.”
-Wendell Cox, “A Housing Preference Sea Change? Not in California,” New Geography.com, Nov. 13, 2012