2

The Public Interest in the Upper Mississippi River

Investment in and management of an inland waterway is affected by the fact that almost all investment in navigation enhancement and river-training facilities is public and almost all use of the waterway is private. No federal agency would want to assume direct control over the multiple uses of inland waterways. Privatizing these facilities and services is an even less attractive option. A company that controlled commercial navigation would find itself making decisions that affected not only navigation, but also municipal water supply, recreation, irrigation, flood damage reduction, and environmental quality. Privatization would not work well unless the controlling firms faced the proper incentives regarding each possible use of the waterway. There are also disagreements over the goals to be achieved in managing a waterway; a proposal to turn over waterway operation and maintenance to a private firm would be met with intense opposition from almost all constituents. Thus, tensions of public ownership and private use are inherent in U.S. inland waterway systems.

Under present management practices, shippers and towboat operators are mainly motivated to consider their own costs while neglecting the government's costs. For example, a current controversy is whether "industry self-help" should be used to reduce congestion by speeding the locking process. Industry self-help imposes costs on towboat operators, but costs the government nothing. In contrast, extending locks shifts the costs of reducing congestion from towboat operators to the government (a portion of the project costs are paid by the fuel tax that goes into the Inland Waterways Trust Fund 1 ).

The federal government, through the Corps, is responsible both for investing in navigable waterways and for managing their operations and for minimizing or mitigating environmental side effects. The implicit goal of inland waterway management has been to provide low cost freight transportation to all users. This goal has been manifested as providing equal access to all on a “first-come, first-served” basis, and expanding the system when congestion becomes a

1  

The Inland Waterways Trust Fund was authorized by two separate acts of Congress (1978 and 1986) and imposes a waterway fuel tax on users of many U.S. inland waterways. The tax has increased over time, starting at a rate of 4 cents per gallon in 1980, increasing to a rate of 20 cents per gallon after 1994. As of the year 2000, the total in the fund stood at $388 million. The fund expenditures are transferred to the Corps for disbursement to contractors or to reimburse Corps civil works for in-house costs.



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INLAND NAVIGATION SYSTEM PLANNING: The Upper Mississippi River—Illinois Waterway 2 The Public Interest in the Upper Mississippi River Investment in and management of an inland waterway is affected by the fact that almost all investment in navigation enhancement and river-training facilities is public and almost all use of the waterway is private. No federal agency would want to assume direct control over the multiple uses of inland waterways. Privatizing these facilities and services is an even less attractive option. A company that controlled commercial navigation would find itself making decisions that affected not only navigation, but also municipal water supply, recreation, irrigation, flood damage reduction, and environmental quality. Privatization would not work well unless the controlling firms faced the proper incentives regarding each possible use of the waterway. There are also disagreements over the goals to be achieved in managing a waterway; a proposal to turn over waterway operation and maintenance to a private firm would be met with intense opposition from almost all constituents. Thus, tensions of public ownership and private use are inherent in U.S. inland waterway systems. Under present management practices, shippers and towboat operators are mainly motivated to consider their own costs while neglecting the government's costs. For example, a current controversy is whether "industry self-help" should be used to reduce congestion by speeding the locking process. Industry self-help imposes costs on towboat operators, but costs the government nothing. In contrast, extending locks shifts the costs of reducing congestion from towboat operators to the government (a portion of the project costs are paid by the fuel tax that goes into the Inland Waterways Trust Fund 1 ). The federal government, through the Corps, is responsible both for investing in navigable waterways and for managing their operations and for minimizing or mitigating environmental side effects. The implicit goal of inland waterway management has been to provide low cost freight transportation to all users. This goal has been manifested as providing equal access to all on a “first-come, first-served” basis, and expanding the system when congestion becomes a 1   The Inland Waterways Trust Fund was authorized by two separate acts of Congress (1978 and 1986) and imposes a waterway fuel tax on users of many U.S. inland waterways. The tax has increased over time, starting at a rate of 4 cents per gallon in 1980, increasing to a rate of 20 cents per gallon after 1994. As of the year 2000, the total in the fund stood at $388 million. The fund expenditures are transferred to the Corps for disbursement to contractors or to reimburse Corps civil works for in-house costs.

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INLAND NAVIGATION SYSTEM PLANNING: The Upper Mississippi River—Illinois Waterway problem. Shippers have been reluctant to seek innovative, nonstructural ways to reduce congestion; reductions in congestion would reduce river traffic (at least at peak times), thereby reducing the benefits of lock extensions. Unfortunately, the “first-come, first-served” rule is an inefficient way to manage river traffic, as it results in higher systems costs (costs to all shippers) than if there were a system explicitly designed to reduce congestion. Better management of waterway traffic should result in improved service and lower total shipping costs—with benefits to most waterway shippers. In particular, farmers would benefit from lower shipping costs. Large amounts of waterway traffic, and the hydrodynamic changes caused by the series of navigation pools, have effects on aquatic habitat and species. The many federal, state, and local environmental conservation laws, such as the Clean Water Act and the Endangered Species Act, reflect public concern for protecting the river and its ecosystems. In addition, environmental protection provides tangible benefits from tourism, recreation, and the production of food and fiber. Estimates of the annual revenue generated by tourism and recreation in the Upper Mississippi range from $1.2 billion (Carlson et al., 1995) to $6.6 billion (cited in UMRCC, 2000). The vast river–floodplain ecosystem of the Upper Mississippi River basin also provides a range of ecosystem services, including drinking water, food (fishes and waterfowl), groundwater recharge, purification of polluted waters, and flood retention. The Upper Mississippi River ecosystem is a storehouse of biodiversity, which produces social benefits today (e.g., food and fiber), and may produce additional benefits in the future (e.g., medicines). On the other hand, intensive use of the waterway has negative effects on river ecology and, in turn, on these various social values and goods. The construction and subsequent operation of the dams and navigation pools on the UMR–IWW has also resulted in a range of environmental effects. Given these external costs, the multiple uses of a river and waterway system must be considered explicitly when deciding how much traffic should be permitted on the waterway and whether locks should be extended in order to accommodate more traffic. The public interest would be best served by river traffic management practices that are environmentally sustainable; that is, strategies that promote both a better flow of river traffic and the maintenance of ecosystem habitat and processes. The Corps has viewed its responsibility as providing adequate capacity to serve all waterway users; for example, deciding on the proper investments and determining the best time to make those investments. These decisions are guided by federal laws and congressional guidance (a fuller discussion of which is provided in Chapter 3 ). The Corps has given little or no attention to allocating the waterway among all those who wish to use the locks when there is congestion. The best solution to the problem of waterway congestion would be to simultaneously optimize access to the locks and to determine when public investment to extend the locks might be warranted. Instead, access to the locks is determined on the basis of delays caused by having to wait for others to clear the lock. Long waits to transit the locks indicate either that the locks should be extended or that current demand for the locks is being managed poorly. The public interest requires that the relevant government agency have responsibility for both managing the traffic and investing in lock extensions. Approaches for traffic management include nonstructural options such as tradable permits, congestion tolls, scheduling traffic, and charging for the time taken to transit a lock. This management problem interacts with a larger, more contentious one. Midwest grain could be moved on several routes for export. In addition to going by barge

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INLAND NAVIGATION SYSTEM PLANNING: The Upper Mississippi River—Illinois Waterway to New Orleans, grain could be shipped by rail to St. Louis and then by barge to New Orleans. It could also be shipped by rail to the Great Lakes or by rail to the Columbia River, then by barge or by rail to West Coast ports such as Portland. Thus, in addition to farmers, towboat operators, and recreational users, railroads, and ports (such as New Orleans, St. Louis, and Portland) also have a large stake in the issue of lock extensions and grain transportation on the UMR –IWW. Demand for waterway transportation is a derived demand that depends on demand for grain in other nations and the cost of shipping grain to the customer. Iowa grain competes with Illinois grain, as well as with Argentinian, Brazilian, and Canadian grain. Shipping costs are an important determinant of which grain is cheapest in Yokohama or Shanghai. Congestion at Mississippi River locks could result in Brazil getting the sale and Iowa land being used for other crops. The combination of fertile land in the Upper Midwest and a cheap water transport system has conveyed a large advantage to American grain. Fundamentally, Congress directs the Corps to conduct the wrong analysis in assessing the benefits and costs of lock extensions under the current approach to waterway traffic management. Improving traffic management is a more immediate, cost-effective, and environmentally sustainable way to handle congestion than through traditional capacity (supply side) expansion. Because traffic is managed by waiting time and service rules that were not designed to internalize congestion costs, lock demand is artificially high. If the benefits of lock extensions are based on waterway traffic levels without any type of traffic management system, the analysis will thus overstate the social benefits of extensions and could lead to lock extensions where none are justified. If traffic on the waterway was properly managed, the economic justification for some lock extensions would disappear. Congress has the authority to determine public policies for inland waterways and has the responsibility to make such determinations. If Congress believes that the public interest is served by subsidizing navigation on these waterways, it is within Congress' authority to subsidize navigation. This committee notes that past decisions by Congress and the Corps imply that both believe that commercial traffic on inland waterways is of great value to the public. Benefits are thus estimated on the basis of serving demand, where the level of demand is determined by private costs, rather than by the higher, collective costs of all of the system's users. We note this implicit assumption and the bias in the resulting analysis. Having done that. we now proceed to advise the Corps on how to conduct a benefits analysis under their assumptions. Allocating Use of a Waterway In Garrett Hardin's classic commons problem (Hardin, 1968), it is assumed that herdsmen are motivated by their individual benefits and costs. Because the benefits to a herdsman of grazing an additional animal on a communal pasture (the commons) outweigh his costs, every herdsman adds animals to the common, eventually resulting in overuse and gross mismanagement of the public good. On the UMR–IWW, shippers, towboat operators, and others who desire to use the waterway for navigation, recreation, and other purposes, likewise view their benefits of using the waterway as exceeding their costs of using the waterway. As a result, the Upper Mississippi River–Illinois Waterway system is intensively used. This results in increased congestion and environmental

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INLAND NAVIGATION SYSTEM PLANNING: The Upper Mississippi River—Illinois Waterway degradation. Several ecological indicators on the Upper Mississippi River—such as the viability of native populations and their habitats, the ability of the ecosystem to recover from disturbances, and ecosystem sustainability—are in decline (USGS, 1999). The causes of these effects are multiple and difficult to precisely ascribe. Commercial navigation is but one of several factors that have affected the river ecosystem. The Corps projects additional congestion in the future, based on projections of increased grain exports from this region. The Upper Mississippi River–Illinois Waterway system serves a diverse clientele who seek different services. Furthermore, some uses and users impinge negatively on others in “oneway” types of externalities. For example, barges on the river have significant and damaging effects on fish; but fish do not negatively affect the barge industry. Striking the proper balance between the multiple uses and users and thereby protecting the public interest requires denying some potential users access when they want it. Rationing access could be done by regulation: for example, commercial traffic could be given priority over recreational boating, or tows could be forced to sign up for a schedule long in advance. Rationing could also be done by pricing, since some of these users would be willing to pay a great deal to use these services, while others would be willing to pay almost nothing. The methods of allocating access differ with respect to their efficiency and equity. The point is that allocating access is better than overusing a public resource. If access is allocated by charging for it, there is a natural relationship between a congestion toll and the decision to expand capacity. A congestion toll provides a monetary value of the user's willingness to pay for use of the lock and is a clear indication of the public benefits of expanding capacity. In contrast, when there is no toll for use, users' willingness to pay for use of the waterway is not as clearly expressed. Investment decisions for the UMR–IWW system are complicated by (1) multiple values, uses, and users of these waterways, (2) contradictions between public ownership and private use, and (3) the lack of a system for managing congestion, which leads to market failure. The first two problems are inherent in the system. The third problem requires a solution before intelligent decisions can be made about investments in increasing lock capacity.