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Managing Congestion Through Innovative Pricing and Financing
By Ronald F. Kirby

The ITE 2007 Technical Conference and Exhibit was held in cooperation with the Federal Highway Administration (FHWA). FHWA’s sponsorship of four transportation professionals at the conference assisted ITE in sharing information and continuing the dialogue generated on congestion issues. During the closing session of the Technical Conference, professionals shared their perspectives on the presentations they heard. ITE continues the dialogue via this special issue of ITE Journal and four ITE Web briefings on congestion issues.

This feature reviews key findings from the pricing/financing/policy track of the ITE 2007 Technical Conference and Exhibit, “Managing Congestion—Can We Do Better?” Formal presentations and conversation circles focused on the potential of innovative pricing and financing techniques for tackling steadily worsening congestion on critical segments of the U.S. roadway system. It was generally agreed that many opportunities exist for implementing high pay-off management and investment strategies and that innovate pricing and financing techniques are likely to play a rapidly increasing role in advancing these strategies to implementation.

The Policy Context
Numerous studies and reports over the past two decades have documented steadily increasing congestion on critical segments of the U.S. roadway system. Concern over the costs of this congestion to commuters, shoppers, vacationers and shippers of goods has grown rapidly. The U.S. Department of Transportation (U.S. DOT) recently announced a significant new initiative to combat congestion and is currently conducting a major campaign to demonstrate and promote effective strategies at the metropolitan and corridor levels throughout the United States.

In opening remarks to the ITE 2007 Technical Conference and Exhibit, Tyler Duvall, assistant secretary for transportation policy in the U.S. DOT Office of the Secretary, noted that the U.S. DOT congestion initiative has two main themes:

Duvall noted that implementing these strategies will require a greater focus on system performance in the planning process: better coordination among metropolitan planning organizations, state departments of transportation and transit agencies; federal support for innovation at the metropolitan and corridor levels; a greater focus of research funding on key elements of the policy debate; and reform of the “overwhelming” approval process for major new investments. He also noted that the next reauthorization of the federal surface transportation program offers a great opportunity to redefine the federal program to address current problems and policy failures.

Additional commentary on the overall policy context was provided by Jay Etta Hecker, director of physical infrastructure at the Government Accountability Office (GAO), in a panel entitled “Moving Congestion Pricing forward in North America.” Hecker described a “looming fiscal crisis” facing the United States due to an unsustainable long-term structural deficit and reported that GAO is calling for a re-examination of programs across the government with a focus on performance and accountability.

She noted that GAO had placed transportation financing on a list of “high-risk” programs needing fundamental re-examination and that the current federal role in transportation financing is unclear and diffused.

She stated that the federal role needs to be restructured into a performance-based system that provides incentives to promote efficiency as well as to maintain national standards, and that incremental changes to the current federal program will not be sufficient to move us forward.

It is widely recognized that reliance at the federal and state levels on gasoline tax rates that have not been indexed to reflect inflation has resulted in the deterioration of the buying power of these revenues. Further, the fact that the gasoline tax is a poor proxy for the costs of road use has resulted in excessive demand and serious congestion on under-priced segments of the transportation system.

Efficient pricing of transportation facilities could contribute to both of the themes of the U.S. DOT congestion initiative: by managing demand for and improving productivity of the existing system and by generating revenue for financing beneficial capacity increases in the system.

Against this policy context, speakers and participants at the ITE Technical Conference reviewed recent experience with a variety of pricing and financing initiatives from both a global and a national perspective and attempted to formulate lessons and guidelines for future professional practice. Topics discussed involved the “monetization” of existing transportation assets; the applicability of London, England’s style of cordon pricing in the United States; parking pricing; county-wide impact fee programs; the provision of new travel options through pricing strategies; and public involvement in decision-making.

Monetization of Existing Transportation Assets
A great deal of attention has been paid to a small but growing number of recent cases in which revenue-generating publicly owned transportation assets have been leased to private sector initiatives for very long time periods in exchange for substantial up-front payments. Pension funds and other private investment funds are showing increasing interest in the long-run, low risk, reliable cash flow of revenue-generating transportation infrastructure.

In addition to the $3.8 billion paid by the Macquarie Infrastructure Group/Cintra for a 75-year lease of the Indiana Toll road and the $1.8 billion paid by the same group for a 99-year lease of the Chicago Skyway, the Pennsylvania Turnpike, the New Jersey Turnpike and Chicago Midway airport are reportedly under consideration for multi-billion dollar “privatization” deals.

The degree to which such monetization deals contribute to the goal of managing congestion is unclear. Although the proceeds of the Indiana lease went to improving other transportation infrastructure statewide, the proceeds of the Chicago Skyway were devoted to non-transportation purposes. Operation of these and other “underperforming” transportation assets by the private sector may result in more efficient operation and pricing strategies than would have occurred under public ownership. If the proceeds of these long-term leases of existing assets are devoted to non-transportation purposes, however, the benefits in terms of congestion reduction could be minimal. Furthermore, because proposals to date have been confined to existing revenue-generating facilities and political “push-back” against privatization proposals is developing in some locations, the opportunities for such lease arrangements on the U.S. highway system may be limited.

London-Style Cordon Pricing
The successful implementation of cordon pricing in London in 2003 stimulated renewed interest in such an approach for U.S. cities, particularly for New York City, NY, USA, where Mayor Michael Bloomberg recently proposed a daily charge of $8 for traveling in Manhattan’s central business district (CBD) (south of 86th Street) between 6:00 a.m. and 6:00 p.m. It was pointed out at the ITE Technical Conference that inconsistent pricing on New York City bridges results in many diversionary vehicle miles of travel, and that a pricing scheme aimed at the CBD during congested hours when good transit alternatives are available could generate benefits similar to the London scheme.

The benefits of the London scheme have been reported to include reduced roadway congestion, vehicle emissions and crashes; substantial revenue generation; associated transit infrastructure investment; and increased transit usage. Only modest negative impacts have been experienced on nearby roads, and businesses on the whole have not suffered. The success of the London scheme and a more recent scheme in Stockholm, Sweden, has been attributed in large part to an extensive public education effort—an important lesson for U.S. proposals of this kind.

Parking Pricing
Parking pricing has long been advocated for encouraging the use of high-occupancy travel modes for commuting trips. Over the past two decades, an increasing amount of employer-subsidized parking has been treated as taxable income to employees, and the amount of tax-free employer-subsidized transit has been gradually increased to reduce the differential between tax-free parking and tax-free transit allowances.

In addition, parking cash-out schemes have been advocated, under which employees receive cash in lieu of free parking. Parking still receives more favorable treatment as a tax-free employee benefit than does transit, however, particularly in suburban office locations with plentiful free parking and limited transit services. Closing this gap continues to be a worthwhile policy objective.

Another parking strategy that can reduce congestion is managed meter parking in active business districts. A policy of setting meters to ensure a 15-percent vacancy rate has been advocated to minimize unnecessary circling in search of parking and to ensure easy access to small businesses. Provision of convenient off-street parking for employees and other long-term parking needs can complement aggressive on-street parking pricing and provide an effective overall parking strategy.

The City of Pasadena, CA, USA, is frequently cited as having formulated such a successful parking strategy, with meters operating until midnight to serve shoppers and diners and free off-street parking for other parking needs. A conversation circle discussion emphasized, however, that parking policies need to be tailored to respond to different local conditions, including different locations within the same city or urban area.

County-Wide Impact Fee Programs
Many local jurisdictions throughout a county have impact fee or proffer programs under which developers contribute to the costs of providing roadway or transit infrastructure at a level commensurate with the new demands their developments are expected to place on the transportation system. These programs have become increasingly important as traditional sources of transportation financing, such as gasoline taxes, have failed to keep pace with infrastructure investment needs.

To the extent that impact fees or proffers can be related to the demands generated by new development and applied to associated infrastructure improvements, they provide a means of ensuring that the costs of new transportation infrastructure are taken into account when development decisions are made rather than imposed on other transportation users later in the form of increased congestion.

A number of challenges and issues associated with impact fees and proffer programs were discussed at the ITE Technical Conference. The overall technical challenge is to identify the portion of future demand on the transportation system that is attributable to new development and to identify critical intersection, roadway, or transit improvements needed to respond to the increased demand. Travel forecasting models are used to track trip patterns and allocate responsibility to new development. A typical cost allocated to a new single family household might be $3,500, for example.

Successful application of impact fee and proffer programs requires a structured and transparent technical process to ensure legal defensibility; a public education and involvement program to achieve broad public support; and ongoing communication with the development community to address issues of fairness in the fee structure. Refinements in technical procedures such as varying projected trip length estimates by development; ensuring that impacts on state and federal facilities as well as local facilities are included; and fully incorporating transit needs all would be desirable, although such increased complexity might increase the likelihood of legal challenges.

Overall experience with these impact fee and proffer programs indicates that they can be successful and legally defensible ways of financing transportation infrastructure based on expected development impacts and that further technical and procedural refinements are likely to occur as more experience is shared among professionals and participating jurisdictions.

Provision of New Travel Options Through Pricing Strategies
Perhaps the most promising set of pricing and financing strategies for addressing congestion in the near term are those focused on the conversion of high-occupancy vehicle (HOV) lanes to high-occupancy toll (HOT) lanes and the provision of new limited-access highway lanes where pricing varies in accordance with demand. In these cases, pricing serves to manage demand and maintain high levels of service, and revenues contribute to the cost of constructing, maintaining and operating roadway and associated transit facilities.

Pioneering applications of this approach on State Route 91 and Interstate 15 (I-15) in California have been followed by projects on the I-10 Katy Freeway in Houston, TX, USA; I-394 in Minneapolis, MN, USA; and I-25 in Denver, CO, USA. A number of other projects are well along in the development process, with State Route 125 scheduled to open in San Diego, CA, in 2007, followed by an extension to I-15.

Where new highway capacity is being constructed, as for State Route 91 and proposed new HOT lanes on the Capital Beltway in Virginia, toll revenues may have to be devoted almost entirely to the construction, operation and management of the highway lanes. Where existing HOV lanes are being converted to HOT lanes, as for I-15 in San Diego and I-25 in Denver, some revenue may be available to support additional transit services on the facility.

The opportunity to offer high-quality express bus services along with HOV and toll-paying low-occupancy vehicles in one well managed facility can provide several high-quality travel alternatives to use of congested conventional lanes.

One special consideration with respect to the inclusion of express bus services is that minimum acceptable speeds may be mandated as a policy requirement to ensure unimpeded transit service, as occurred for I-25 in Denver. A further requirement applies to cases such as the I-95/I-395 corridor in the Washington, DC, USA, region, where existing HOV lanes with significant bus operations were previously classified as fixed guideway miles for purposes of the funding formulas administered by the Federal Transit Administration (FTA).

In these cases, FTA will continue the fixed guideway classification after conversion to HOT lanes only if the lanes meet federal standards for free-flow traffic conditions (Federal Register, Thursday, January 11, 2007). Requirements on maintaining speeds for bus services will need to be factored into projects that include bus transit as a major service option.

A further consideration with regard to HOV use of HOT lanes is the occupancy requirement for free or discounted travel by HOV users. HOV-2 and HOV-3 occupancy requirements are common on HOV facilities throughout the United States.

Robert Poole suggested in his presentation at the ITE Technical Conference that many low-occupancy car pools are in fact families traveling together (“fampools”), not arrangements between unrelated individuals formed specifically to gain access to exclusive lanes. He suggested that to provide significant congestion relief through shifts to higher-occupancy vehicles, only vanpools and buses should be allowed free access to HOT lanes. The best policy, he suggested, may be to allow only buses free access to HOT lanes, creating a “virtual busway” as part of priced highway lane projects, a concept he described as super HOT (SHOT) lanes.

Clearly, the vehicle occupancy requirements for free or discounted use of HOT lanes can have a significant impact on demand, service levels and revenues from HOT facilities and need to be carefully considered in project planning, not only for the short run but also as demand increases over time.

The role of the private sector in the development, implementation and ongoing operation of new priced lanes was the subject of much discussion at the conference. Some of the existing priced facilities have been developed and operated by the public sector (I-15, I-394 and I-25). State Route 91 initially was built and operated by the private sector but was subsequently purchased by the public sector to avoid a restriction on the construction of new competing lanes that was included in the original agreements with the private entity. Several other projects such as State Route 125 in San Diego and the I-95/I-395 and I-495 projects in northern Virginia are being developed by private entities in cooperation with public sector agencies.

While recognizing the creative financing opportunities and potential construction and operating efficiencies that the private sector can offer, participants in conference discussion circles expressed concerns about “locking in” key project specifications and parameters through lease agreements covering long periods of several decades. The “non-compete” provision in the State Route 91 agreement was cited as an example of a project parameter that needed to be changed after a few years of operation, with the result that the facility was brought back into the public sector.

Participants noted that long-term lease agreements for transportation infrastructure are lengthy and complex, with some details being discussed under non-disclosure provisions to protect proprietary private sector business practices. Decisions about the value of long-term leases; caps (if any) on toll rate increases or overall rates of return; facility maintenance
and performance requirements and penalties; enforcement and incident management practices; and responses to changes in demand due to new development or new competing transportation services all must be made with a view to not only the present but also the potential need for “re-opening provisions” for the long-term future.

Participants familiar with the details of such private sector agreements noted that much is being learned as each new agreement is developed and implemented and that new issues are likely to arise as more complex projects are developed. It was noted in particular that almost all of the projects developed to date have been stand-alone facilities that did not interact directly with other priced facilities.

As connected networks of priced facilities are developed with potentially different HOV occupancy requirements and different private sector operators on different segments, the challenges of coordination between public sector agencies and private sector operators are likely to grow significantly.

The complexity of the planning and environmental impact statement (EIS) processes was another concern for private sector project development. It was noted that the State Route 25 South Bay expressway project in San Diego took 13 years to go through the EIS process, which created significant financial challenges for private sector sponsors. Such long development cycles coupled with shifting political leadership and priorities unfortunately are not atypical for large transportation infrastructure projects in the United States and may discourage the participation of private development and funding entities.

Public Involvement
The importance of an extensive public education effort to the success of the London and Stockholm pricing programs was noted as a significant lesson for U.S. practice. Pricing projects implemented to date or currently under development in the United States have raised numerous questions in the public arena with regard to who stands to benefit from the new services and who might suffer as a result of new pricing or access policies.

Design and operational details such as lane and shoulder widths; target operating speeds; transit service levels; likely toll levels at different locations and times of the day; enforcement and incident management procedures; and the locations of access and egress points all are potentially of significant interest to elected officials and the public.

The distribution of revenues produced by newly priced facilities can be a significant factor in gaining public acceptance. Dedication of surplus operating revenue to increased express bus services on priced facilities generally has been well received. On the other hand, concerns about consumer “gouging” through high tolls enacted by profit-making private entities may need to be addressed through measures such as returning revenues in excess of maximum rates of return to the public sector.

Overall, public reception to the use of pricing to finance and manage new transportation facilities and services appears to be growing. Ensuring that all affected parties are engaged in and informed about pricing proposals as they are developed, with no surprises or missing details, should provide a sound basis for developing the public support needed to advance these concepts successfully into practice.

Outlook
Ever-increasing concern about congestion on critical segments of the U.S. roadway system, coupled with severe limitations on available funding for major and costly capacity increases, has brought innovative pricing and financing techniques to the forefront of the policy debate. Pioneering projects such as State Route 91 and I-15 in California have become prototypes for similar projects around the country. Many well-informed observers believe that perhaps half of all future capacity increases on U.S. limited-access roadways will be toll-financed, with electronic variable pricing schemes used to manage demand and ensure congestion-free travel.

Other pricing and financing techniques discussed at the ITE Conference, such as parking pricing and county-wide impact fees, will continue to be important tools for tackling congestion and raising badly needed revenues for new roadway, transit and parking infrastructure. Continued refinement of these tools through research and sharing of real-world experience will be a high priority for promoting wider professional appreciation and application of these approaches.

The potential for London-style cordon pricing in U.S. cities and more broadly for the application of congestion pricing to existing non-tolled highway lanes was the subject of much discussion and speculation at the ITE conference. To date, there have been no U.S. examples of pricing being applied to existing non-tolled roadway facilities. An informal poll conducted in one of the conference conversation circles found few professionals who expected such policies to be implemented in the foreseeable future. However, on April 22, 2007, Mayor Michael Bloomberg proposed applying congestion changes on roadways in the Manhattan central business district.

Within the overall transportation policy context, innovative pricing and financing techniques are receiving increasing attention and application in the effort to improve the productivity of the existing system and to finance high pay-off increases in system capacity.

Despite the enthusiasm for innovative pricing and financing techniques, however, some observers caution that such techniques can be applied to relatively few locations and areas in the foreseeable future, and the involvement of the freight community in tolling proposals has been very limited to date. Toll revenues are unlikely to exceed 10 percent of total transportation revenues nationwide, and traditional sources such as the gasoline tax (perhaps with indexing or a gradual shift to vehicle miles of travel fees) will continue to be needed to support maintenance, operation and capacity expansion on much of the U.S. highway and transit system.

In summary, innovative pricing and financing techniques are commanding growing attention in the transportation planning and engineering professions, many new proposals and projects are under development and the potential exists for making a significant impact on congestion in critical locations of the U.S. transportation system. The ITE Technical Conference and Exhibit provided a timely opportunity for professionals to share and discuss recent experiences with these promising tools for better managing congestion.

Ronald F. Kirby is director of transportation planning for the National Capital Region Transportation Planning Board (TPB) at the Metropolitan Washington Council of Governments (COG), a regional organization of 18 Washington, DC, area local governments providing a forum to develop regional responses to issues such as the environment, economic development, human services and transportation. The TPB is the designated metropolitan planning organization for the Washington region. Since joining COG in 1987, he has been responsible for long-range planning for highway and public transportation systems in the Washington metropolitan region; assessment of the air quality implications of transportation plans and programs; and a regional commuter assistance program. Previously, he directed the transportation program at the Urban Institute. He is the author of numerous papers and recently completed a three-year term on the Executive Committee of the Transportation Research Board, National Research Council. He received his undergraduate and doctoral degrees from the University of Adelaide in South Australia.