5
Finance Reform Proposals
Toll Road Expansion and Road Use Metering

This chapter and Chapter 6 review proposals for changes in revenue sources and other financing arrangements for highways and transit in the United States. The proposals are diverse and from a variety of sources, and they have been useful resources to the committee in forming its conclusions. The proposals are also valuable because they shed light on the nature of the finance problems confronting transportation agencies that have motivated calls for reform.

The diversity of reform proposals reflects different points of view on how the underlying problems of transportation finance should be defined. The proposals all recognize, to some extent, dual goals of finance policy: to assemble a collection of revenue flows adequate to support a desired level of spending and to establish practices that promote investment in high-return projects and efficient operation of existing facilities. The starting point of proposals from government sources and transportation interest groups tends to be spending needs (generally seen as greater than present revenues can support). Proposals from academia and other independent sources tend to emphasize the importance of finance practices that provide incentives for better spending and operating decisions and usually avoid judgments on the proper levels of revenue and taxes.

Each of the proposals described in the two chapters concentrates on particular aspects of the finance structure—for example, user fee collection techniques or the definition of federal and state responsibilities—rather than on comprehensive reform. However, decisions about changing any of these elements of the finance scheme in the future will be unavoidably linked, and proposals sometimes overlook these essential connections. Therefore, in comparing proposals, it will be



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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 5 Finance Reform Proposals Toll Road Expansion and Road Use Metering This chapter and Chapter 6 review proposals for changes in revenue sources and other financing arrangements for highways and transit in the United States. The proposals are diverse and from a variety of sources, and they have been useful resources to the committee in forming its conclusions. The proposals are also valuable because they shed light on the nature of the finance problems confronting transportation agencies that have motivated calls for reform. The diversity of reform proposals reflects different points of view on how the underlying problems of transportation finance should be defined. The proposals all recognize, to some extent, dual goals of finance policy: to assemble a collection of revenue flows adequate to support a desired level of spending and to establish practices that promote investment in high-return projects and efficient operation of existing facilities. The starting point of proposals from government sources and transportation interest groups tends to be spending needs (generally seen as greater than present revenues can support). Proposals from academia and other independent sources tend to emphasize the importance of finance practices that provide incentives for better spending and operating decisions and usually avoid judgments on the proper levels of revenue and taxes. Each of the proposals described in the two chapters concentrates on particular aspects of the finance structure—for example, user fee collection techniques or the definition of federal and state responsibilities—rather than on comprehensive reform. However, decisions about changing any of these elements of the finance scheme in the future will be unavoidably linked, and proposals sometimes overlook these essential connections. Therefore, in comparing proposals, it will be

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 helpful to keep in mind a definition of a generic, comprehensive reform package. Such a package would have five components: Defined goals: The proposal should define what the finance scheme is intended to accomplish, with reference to overall transportation policy goals. Finance system goals should not only refer to revenue adequacy but also acknowledge that finance provisions influence transportation program outcomes, including operating efficiency and the quality of investment decision making. Assignment of responsibilities among the federal, state, and local government and the private sector: The appropriate assignment of responsibility will depend in large part on revenue sources, so if new revenue sources are contemplated, it will be necessary to think through the implications for spheres of responsibility. For example, to the extent that local and state governments have mechanisms to charge all users of roads within their jurisdictions rather than just residents, the need for involvement of higher levels of government is lessened. Changes in the control of revenue will translate into changes in control of spending and operating decisions. User fee and pricing rules: The proposal should identify sources of funds and, assuming user fees are employed, should specify how rates would be set. Today, federal and state elected officials directly decide the distribution of the burden of taxes and fees supporting transportation among categories of users (e.g., between light vehicles and large trucks) and the public. These decisions are influenced to an extent by transportation agencies’ needs studies and cost allocation studies. In a finance scheme that relied heavily on revenue from tolls or mileage fees, success or failure would depend on the rules determining the levels of tolls and fees and the fee differentials corresponding to characteristics of users, traffic, and the facility. Revenue and demand management are not necessarily incompatible pricing objectives; however, both consequences of pricing decisions would have to be taken into account. Rules on disposition of revenues and on budget and project selection decision making:Today, as a consequence of the mechanisms of dedicated taxes and trust funds in federal and state transportation programs, transportation program spending is constrained by revenues during the intervals between legislative rate adjustments. Individual project selection is also influenced through the details of federal-aid program rules, such as matching share and project design requirements. A new finance scheme could involve different forms of connections between revenue and spending, or it could suppress any direct linkage. For example, if tolls or mileage charges become important sources of revenue, the revenue-raising potential of new road projects is likely to become a factor in project selection decisions, and components

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 of the transportation system that raise surplus revenue (e.g., the roads under control of a toll authority) may be able to claim priority in new spending plans. Also, new finance arrangements might alter the rationale or need for modal cross-subsidies. A transition strategy: Fundamental changes—for example, development of a new base revenue source or a substantial scaling back of the present federal role in finance—would have to be preceded by a coordinated program of research, planning, and communication among government officials and the public. The transition might involve large-scale trials and progress through a series of interim stages. A road map and schedule for the transition would be an essential part of a complete reform proposal (although the road map would be subject to revision throughout the process). Given the complexity of the problem, it is not surprising that past proposals have not attempted to specify all these aspects of a finance scheme comprehensively. Nonetheless, as reforms are implemented over time, the inherent connections among the aspects will become evident. Therefore, it would be an error to plan at the outset to alter one aspect, for example, to replace the fuel tax with another form of user fee, while disregarding how the change might affect the other aspects of the finance system. The review in this chapter covers two categories of proposals: first, substantial expansion of toll roads of the existing design; that is, limited-access roads whose users pay a fee, commonly upon exit and depending on the distance traveled and possibly on time of day; and second, direct metering of use of all roads within a geographic area [for example, by using Global Positioning System (GPS) technology], with charging based on distance traveled and possibly varying with the road, traffic conditions, or time of day. These proposals focus on developing new basic revenue sources and would require a period of years to implement (although toll road development is taking place today and may be stimulated by provisions of the 2005 legislation reauthorizing federal surface transportation aid programs). Chapter 6 describes proposed reforms that retain the basics of present arrangements, in particular, reliance on dedicated revenue from fuel taxes and other existing user fees. These concentrate on more effective use of existing instruments and could be implemented more quickly. In its ultimate form, the road use metering concept would be a comprehensive approach to road pricing and finance reform. After a certain date, all vehicles would be required to have metering equipment, travel on all roads within the jurisdiction would be subject to charges, and the revenues would constitute the basic funding source for the transportation program. In contrast, toll road expansion proposals embody a more gradualist vision. The mileage of toll roads and tolled lanes would grow over time, both supplanting and supplementing traditional forms of funding and management. Eventually all the roads most suitable for

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 tolling with today’s conventional technology (mainly urban arterial limited-access routes and major intercity expressways) would be tolled. These three categories of reforms certainly are not mutually exclusive; rather, they could be complementary: reforms within the present system could be part of a phased transition strategy to a system that relied on tolls or mileage fees. (As an example, the Oregon road user fee proposal described below contains elements of all three categories.) General road use metering might emerge as a natural consequence of a program of expansion of conventional toll roads. The goal of examining the proposals is to assess the contribution that each of them might make to a finance scheme that promoted efficient operation and development of the transportation system. TOLL ROADS AND TOLL LANES It was noted in Chapter 2 that highway and bridge tolls account for 8 percent of U.S. highway user revenues (Table 2-2). This share has been nearly constant since the 1950s. Tolling of public roads has long faced opposition; the original federal-aid program for highways in 1916 banned tolling of roads receiving aid (P.L. 64-155, Section 1). Consideration was given to toll financing in the earliest stages of planning for the Interstate highway program, but a 1939 congressionally commissioned study concluded that most highways on a nationwide network would not generate sufficient revenue to be self-supporting, and later finance proposals all focused on the suite of fees and taxes in place today (Weingroff 1996). Except in some special cases, the federal-aid highway program does not allow states to collect tolls on Interstates or other roads built with federal assistance, although some preexisting toll roads were incorporated in the Interstate system and continue to collect tolls. In contrast with the United States, several countries, including Italy, Spain, Portugal, and France, have relied heavily on toll finance to develop their national expressway networks (Table 2-7). Several recent developments have increased interest in (if not application of) toll finance. Information technology has greatly reduced the cost and inconvenience of toll collection. Today nearly every major toll facility provides for electronic toll collection. Communications devices in vehicles and at tollway entrances record the passage of a vehicle and charge the owner (for example, the E-ZPass system in place on most toll facilities in the northeastern United States). In addition, the search for additional revenue sources for transportation, especially in the states experiencing the highest rates of traffic growth, and hopes of attracting private investment in highways have stimulated attention. The first subsection below surveys examples of proposals for expansion of the scope of tolling in the United States. In the second, the relation of tolling to private-sector participation in provision of roads is examined. The third describes

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 proposals and recent actions to change federal highway aid program rules to promote toll road development. The final subsection is a summary. Proposals for Expanding Toll Roads The four proposals described here are representative of efforts to work out a practical basis for increasing reliance on tolls in transportation finance on the basis of present tolling technology. The first, HOT (high-occupancy/toll) networks, is a conceptual proposal for a scheme that might allow relatively rapid development of a rational system of urban tolled lanes by starting with conversion of existing high-occupancy vehicle (HOV) lanes. The second, FAST (fast and sensible toll, or freeing alternatives for speedy transportation) lanes, is the original version of a proposal that was enacted in modified form on a trial basis in the 2005 federal surface transportation program reauthorization legislation. The underlying concept is similar to HOT networks, but the proposal is concerned with changes in federal law to give impetus to toll lane development rather than with laying out how the toll system should develop. Both proposals call for toll lanes rather than toll roads because offering motorists a choice between tolled and free lanes is viewed as a way to mitigate public objections to placing a toll on previously free facilities. The third proposal described is for development of toll lanes restricted to use by large trucks. The final proposal (a measure adopted by the state of Texas) is a plan to restructure state transportation programs to allow tolls to take on a greater role in funding. HOT Networks The HOT networks concept, proposed in a 2003 study of the Reason Public Policy Institute, is an example of an incremental approach to expanded use of tolls for finance and facilities management (Poole and Orski 2003). The authors call for development of networks of HOT lanes on limited-access expressways in congested urban areas. The lanes would be open toll-free to multioccupant vehicles (as are today’s HOV lanes) and to single-occupant vehicles paying a toll. Toll collection would be electronic, and the fare would be varied according to actual traffic conditions to maintain freely flowing traffic at all times. The lanes also would be open to express buses to provide low-cost, high-speed public transit. Development of the system would start with existing infrastructure by converting existing HOV lanes to HOT lanes, and additional mileage of lanes and interchanges would be added to create a rational network in each metropolitan area. The proposal incorporates features aimed at broadening public acceptance. HOT lanes would be marketed as a premium, congestion-free service option, with drivers offered the choice of congestion-free toll lanes alongside more crowded free lanes, and the system would improve transit as well as private auto mobility.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 To illustrate the proposal, the authors present maps, cost estimates, and revenue estimates for HOT networks in eight highly congested U.S. metropolitan areas. The networks range from 240 to 1,000 lane miles each and total 4,400 miles in the eight cities (Washington, D.C.; Miami; Atlanta; Dallas; Houston; Seattle; San Francisco; and Los Angeles). The estimated construction cost is $44 billion (not including the cost of constructing the HOV lanes already in place). Toll revenues are estimated to be $2.9 billion per year and to be sufficient to cover two-thirds of the debt service on the construction cost, with average peak-period tolls around $0.26 per mile. The authors propose that the federal government take the lead in implementing the plan by offering aid within the structures of the existing federal highway and transit programs. FAST Lanes FAST lanes was a legislative proposal, originally put forth in 2003, to lift the prohibition in federal law on collection of tolls on federal-aid highways for new lanes, lanes on new highways, or existing HOV lanes that are converted to toll lanes, provided that the highway has a free lane parallel to the toll lane. A version of the proposal, entitled the Express Lanes Demonstration Program, was enacted as a trial in the 2005 federal surface transportation program reauthorization legislation [Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), Section 1604]. The secretary of transportation is authorized to permit 15 projects with the following features: A state or a state-authorized public or private entity may impose tolls on an existing HOV lane or a newly constructed lane on any road, including Interstate highways. Capital expenditures for the project will be eligible federal-aid expenditures. The purpose of the tolls must be to manage congestion, reduce emissions, or finance the lane addition. The state must set performance goals for the project and monitor and report performance. Revenues are to be used first to pay for debt service (presumably on debt incurred to construct the facility), for a “reasonable return on investment of any private financing,” and for operation and maintenance of the facility. Any surplus is to be used for any federal-aid highway or transit project. Former HOV lanes converted to toll lanes must have variable pricing by time of day or by level of congestion. Newly added lanes may use variable pricing but are not required do so. Toll collection must be automated, and the U.S. Department of Transportation is to set standards to ensure interoperability of tolling equipment.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Another section of the same legislation (SAFETEA-LU, Section 1121) authorizes conversion of HOV lanes on federal-aid roads to HOT lanes. Design and operating requirements are similar to those of the Express Lanes Demonstration Program listed above, but there is no restriction on the number of projects. How the two provisions of the act will work together has not yet been established. An analysis of the potential extent and feasibility of FAST lanes projects (Poole 2003) considered a scenario in which states decided to add two FAST lanes to all Interstate highway segments classified as severely congested by the Federal Highway Administration (with volume–capacity ratio over 0.95 in the peak direction during the peak hour). There are 3,600 miles of such routes, nearly all in urban areas. Estimated construction costs were $57 billion to $84 billion, and toll revenues were estimated to be sufficient to cover between 33 and 57 percent of these costs. It was noted that FAST lanes on high-volume expressways in smaller urban and rural areas might be better able to pay for themselves because construction costs would be much lower than in the largest urban areas, although such projects would yield lower travel benefits. The inability of HOT network or FAST lane projects in major urban areas to pay for themselves would not be surprising and would not necessarily imply that such projects were economically unjustified. The lanes would all be competing with untolled and hence underpriced capacity, including the adjacent free lanes that are part of the design of these projects as well as alternate routes over the urban network. Also, it is likely that highway agencies would choose not to build some of the capacity expansions that are included in the estimates of cost and revenue described above because their construction and operating costs would be too high in comparison with toll revenue and benefits. Eliminating the least attractive projects would boost the ratio of revenue to costs. Features of the FAST and HOT lane concepts that are aimed at increasing public acceptance—the adjacent free lanes and the guarantee of free-flowing traffic at all times in the premium lanes—compromise their effectiveness and financial viability. One study illustrating this difficulty used a travel demand model to compare the performance of a hypothetical expressway with congestion tolls on both lanes in one direction with performance with only one lane tolled (Parry 2002). The study estimated that the economic benefit from providing both a tolled and a free lane would be no more than a third of the benefit of tolling both lanes. (The benefit is the value of travel time savings and of new trips resulting from the increase in speed in the tolled lane, net of the loss to travelers who are displaced by imposition of the toll.) The optimum toll on a single tolled lane would be only a fraction of the optimum toll if both lanes paid. If the single-lane toll were increased above its optimum level, the cost of added congestion caused by diverted traffic in the free lane would exceed the added benefit of reduced congestion in the tolled lane. Also, providing separate tolled and free lanes may add to the construction

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 cost of the facility by complicating interchange design. Similarly, guaranteeing free flow in the tolled lane can reduce the public benefit compared with allowing some degree of congestion there, if diverted traffic increases delay in the free lanes enough to offset the benefits to users of the tolled lane. In one simulation study (Small and Yan 2001, 321), guaranteeing free traffic flow in the tolled lane harms overall public welfare under nearly all assumptions. Imposing a toll on a single lane will not necessarily harm users of the free lanes. If the tolled lane had been congested to the point of stop-and-go traffic flow conditions before tolling, then imposing a toll will increase throughput on the tolled lane and may decrease congestion in the free lane. Also, if the tolled lane was previously an HOV lane, it may have been so lightly utilized that opening it to toll-paying vehicles will decrease congestion in the free lanes. Regardless of prior conditions, however, the optimum toll generally will still be lower than if all lanes were tolled. Truck-Only Toll Lanes Another possible near-term application of specialized toll lanes is new lanes for trucks only on Interstate routes with heavy truck traffic. A 2002 analysis of such facilities estimated the potential productivity gains of truck-only toll lanes on long-distance Interstate routes and concluded that in many cases truckers would willingly pay tolls in the range of 40 to 80 cents per mile to obtain the increased payload benefits (Samuel et al. 2002). That study proposed that longer combination vehicles (for example, a tractor pulling two full-sized semitrailers) be required to use the truckways but that conventional heavy trucks, which are legal on all Interstates, have the option of using either the truckway or the regular lanes. The rationale for such facilities is partly fiscal and partly operational. On the fiscal side, states see toll financing as a means to finance widening of heavily traveled Interstate highways over the next 20 years. The operational rationale is a combination of safety and productivity. Separation of cars from heavy trucks is expected to produce significant safety gains. Also, if heavy trucks operate in barrier-separated lanes, there should be fewer safety objections to longer and heavier combination vehicles, which can significantly increase the productivity of trucking by permitting a single rig and driver to haul more payload. In urban areas, relief from freeway congestion should further enhance productivity gains to truckers. The voluntary approach, with free lanes and toll lanes accessible to conventional trucks, might have more success in gaining trucking industry support than mandatory tolls, which the industry has opposed (McNally 2005). Truck-only toll lanes feature in the plans of several public agencies. In 2005 the Virginia Department of Transportation was considering proposals of a private-sector bidder for an $11 billion project to add two truck-only toll lanes in each direction to all 325 miles of I-81 in Virginia. The possible tolling of all lanes on

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 I-81 is under consideration as part of this project (Bowman 2004; VDOT 2005). In Texas, the first of a number of long-distance trans-Texas corridors has entered the negotiation stage with the Texas Department of Transportation’s selection of a winning bidder for the first major segment of the corridor that will parallel I-35. This $6 billion project will initially build a four-lane divided toll highway open to all traffic. When it is subsequently expanded to as many as 10 lanes, the original four lanes will become truck-only lanes (Powers 2004). In California, the 2030 long-range transportation plan adopted in 2004 by the Southern California Association of Governments includes a $16.5 billion system of toll truckways, in part to serve the ports of Los Angeles and Long Beach (Southern California Association of Governments 2004). Texas Toll Road Authorizing Legislation Programs created by a referendum passed in 2001 and subsequent legislation seek to integrate use of toll roads and debt finance as components of the Texas state transportation program. This ambitious reform package is too new to allow an assessment of its impact, but it is being cited as a model for other states. The new law authorized creation of county-level or multicounty toll road authorities, called regional mobility authorities (RMAs). RMAs must work with the existing metropolitan planning organizations, which retain authority over planning transportation development in their local areas. The goal of the RMAs is to give metropolitan areas greater control over development of their highway systems and to accelerate projects that would not receive high priority in the statewide program (TxDOT 2004; Orski 2004; Urban Transportation Monitor 2004). RMAs can issue bonds backed by toll revenues, develop projects, operate toll roads, and contract with private-sector firms to build and operate toll roads. They also have access to regular state highway funds and federal aid to the extent allowed under federal program rules. The law provides for payments of per-vehicle fees, called shadow tolls or pass-through tolls, to RMAs by the state to compensate the RMAs for the costs of roads they provide to the state as part of the state highway system. The provision’s purpose apparently is to allow the state to subsidize low-revenue toll projects with general state highway user fee revenue or to associate a revenue stream with untolled RMA projects for financing purposes. At the state level, the new laws created the Texas Mobility Fund and authorized the state to sell bonds to finance new road construction. The commission has required the state department of transportation to evaluate all new state construction for feasibility of tolling. Three RMAs have been formed, and two more are being organized. RMA projects involving more than 100 miles of road construction costing several billion dollars are in early stages of development. The Texas program is noteworthy as an

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 effort to mainstream tolls as an element of state transportation finance. It focuses on metropolitan areas and gives metropolitan areas lead responsibilities since these areas are where most of the promising toll projects will be located. Programs similar to the Texas RMAs exist in other states. In Colorado, the 1987 Public Highway Authority Law allows cities and counties to create special authorities with the necessary powers to construct and operate toll roads. Two authorities operate toll roads in the Denver area under the law’s provisions, one funded entirely by toll revenue and the other by a combination of toll revenue and a special local vehicle registration fee (E-470 Public Highway Authority 2005; Northwest Parkway Public Highway Authority 2004). The state also has created the Colorado Tolling Enterprise, which is authorized by the legislature to issue bonds and construct and operate toll roads at any location in the state, consistent with the state and regional transportation plans (Colorado Tolling Enterprise Board 2005). In Florida, independent regional expressway authorities in Miami, Orlando, Kissimmee, and Tampa operate networks of toll roads. Private-Sector Participation and Toll Finance The possibility of increasing the resources available for expanding capacity by eliciting private-sector participation has begun to receive serious attention. Most such projects and proposals have been for toll roads constructed entirely or partially with private-sector capital and operated by a private entity.1 Nearly all U.S. toll roads today are operated by publicly controlled special-purpose authorities. Tolls are the obvious choice for funding privately operated roads because an identifiable revenue stream is necessary for attracting private capital and because one of the hoped-for benefits of such projects is an improvement in efficiency through operating the road on business principles, including charging for use. Thus measures to promote toll finance of U.S. roads may also increase the opportunity for private-sector participation. The number of such projects carried out in modern times in the United States is small thus far; a 2004 General Accounting Office (GAO) report identified five private toll roads (GAO 2004). Two of the most prominent projects are located in Southern California. The State Route (SR) 91 Express Lanes project, 10 miles of tolled express lanes with variable time-of-day pricing, constructed in the median of an existing freeway, opened in 1995 as a privately operated road. The facility was later purchased by a public authority because the government wished to construct parallel capacity in violation of its noncompete clause with the franchisee. 1 The most common form of public–private partnership, as the term is used conventionally in U.S. transportation, is a contract in which a private firm takes responsibility for design, construction, and often operation and maintenance of a road and bears part of the risk of cost or schedule overruns or performance failures (USDOT 2004). These arrangements and other management controls to make available resources go further are described in Chapter 6.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 The second California project is a new 10-mile expressway, a section of SR 125, scheduled to open as a privately operated toll road in 2006. In 2005, in the first privatization of a public toll road in the United States, the city of Chicago turned over operation of the Chicago Skyway, an 8-mile expressway constructed in 1958, to a private firm under a 99-year lease. The operator will receive all toll revenue (which amounted to $43 million in 2002) in return for a $1.8 billion payment to the city. The operator has instituted time-of-day pricing for trucks. The California private toll road projects were developed through the program created by Assembly Bill 680, 1989 California legislation that authorized the state transportation department to enter into agreements with private entities for construction and operation of four toll road projects, as demonstrations, to be carried out without state funds. The statement of findings introducing the law indicates that the program is to develop alternative funding sources “to augment or supplement available public sources of revenue,” to “take advantage of private-sector efficiencies in designing and building transportation projects,” and to “allow for the rapid formation of capital necessary for funding transportation projects” (Caltrans n.d.). In a presentation to the committee, a California official emphasized that the state saw the AB 680 projects primarily as a way of supplementing funding. The law was enacted at a time of exceptional constraint in the state transportation budget. During the 1990s, growth in state revenues and federal grants diminished interest in recruiting private capital for road development. However, interest has been renewed now that transportation budgets are tightening again. Similarly, the SR 125 franchisee described the project’s funding arrangement to the committee as a means of allowing construction of a road for which funding would otherwise not have been available. Enabling Legislation Provisions in state law that set ground rules for participation in road development are seen as critical to the prospects for these kinds of projects. For example, AB 680, the legislation governing the California projects, authorized up to four projects subject to the following provisions: Projects are to be constructed entirely at private-sector expense. Roads are to be leased by the state to the private operator for 35 years and then revert to state operation. The state transportation department “may exercise any power possessed by it” (presumably a reference to eminent domain) to facilitate projects. The state can provide planning and environmental certification services, with costs to be reimbursed by the operator.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 known as DSRC (dedicated short-range communication). Vehicles passing under the gantries at normal motorway speeds are identified and their operators assessed charges corresponding to the road link and vehicle type. Charges are €0.13 to €0.273 per kilometer ($0.28 to $0.58 per mile), depending on vehicle type, and all revenues are dedicated to expenditures on the motorways (ASFiNAG n.d. a; ASFiNAG n.d. b). The Austrian system is essentially a large installation of an advanced version of the automated toll collection technology that has become standard on most toll roads. The design would allow toll collection to be extended to all vehicles on the expressways but generally is regarded as impractical as a means of assessing mileage fees on all roads because of the great number of stationary sensors that would be required. Finally, the Swiss system, in operation since 2001, employs both DSRC (that is, short-range communications with roadside sensors) and GPS. Vehicles over 3.5 tons are assessed mileage charges for travel on all classes of roads in Switzerland. An onboard computer records the vehicle’s mileage from the odometer. The computer determines mileage within Switzerland by sensing border crossings. It uses either DSRC with overhead gantries at major border crossings or position information from GPS to detect border crossings on minor roads. Operators must periodically forward the data recorded in the onboard computer to the road authority. Foreign operators who do not choose to install the onboard equipment must record and report mileage manually. Rates are higher than in Austria and Germany and are calculated to include a charge for environmental externalities as well as road authority costs (Sorensen and Taylor 2005, Appendix J). Implementation Issues Serious and credible technical proposals have been made for road use metering and mileage charging in the United States, and the essential components of such a system have been demonstrated in the truck mileage-charging schemes in operation in Europe. The U.S. proposals have been motivated by concern for the future viability of present funding sources as well as recognition of the benefits of pricing: more efficient operation of roads, better investment decisions, economies in the provision of capacity improvements, and avoidance of arbitrary or unfair distribution of the cost burden of road transportation. However, challenging problems remain to be solved before mileage charging could become the basis of U.S. highway funding. Among them are the following: Gaining public acceptance: It can be anticipated that the public and elected officials will be skeptical of a road use metering system that could be used by the government to track individuals’ movements and activities. Road users who expect to pay more than they do under present charges or to be compelled to curtail their travel will also object, and the public and interest

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 groups will object if the new charging scheme is perceived as unfairly favoring some categories of road users over others or as increasing the disadvantages of the poor. Making the transition from present to new revenue sources: If mileage fee revenue is to wholly or partially replace revenue from present highway user fees, highway agencies will need to establish procedures for fitting vehicles and infrastructure with the necessary equipment, discontinuing collection of the old fees, and commencing collection of the new fees, with minimum disruption to revenues or inconvenience to travelers, over a transition period that may last a decade or more. Setting appropriate prices: Because of inexperience, highway agencies do not now have the competence to set mileage fees that maximize the benefits of the transportation system or to use the information provided by fee revenues to improve the payoffs from capacity expansions. Improper pricing practices could degrade system performance and harm the public welfare. Appropriate technical design of metering and charging systems will be part of the solution to problems in each of these areas. For example, technical design features can help ensure privacy, the transition will be eased if systems allow users to choose to pay through either the old or the new charging scheme, and a system that is flexible enough to allow individual jurisdictions to set their own pricing policies and observe the results will speed the process of learning to set mileage fees. These three categories of problems and the problem of choosing a technical design are examined in the following subsections. Gaining Public Acceptance The likely objections to metering among the public and politicians are the same as those listed above with regard to toll roads: the scheme would be expensive and a nuisance, it would create perverse incentives influencing government transportation policy (e.g., increasing congestion could increase revenue), the fees would be unfair because they would be regressive and would reserve the best transportation service for the rich, and giving the government the capability to track the daily movements of all highway travelers is unacceptable. Several analyses of the possible distributional consequences of road congestion pricing have indicated that the effects would be complex and would vary greatly depending on the nature of the pricing and road finance scheme, travel patterns and transit alternatives in the urban area, and travelers’ occupations and household characteristics, and that a prediction that the wealthy would gain and the poor would lose would be an oversimplification (Santos and Rojey 2004; Safirova et al. 2004; Nash 2003; Sorensen and Taylor 2005, 58–60; Appendix C of this report). Nonetheless, there could be substantial numbers of people who found themselves

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 paying more and traveling less, at least in the early period of implementation of a congestion pricing program. Objections from this group could lead to failure of the program (Giuliano 1994, 273–276). Road congestion pricing, especially pricing applied to nonfreeway arterial roads (as, for example, the Oregon road use metering proposal would allow), holds promise as a means to greatly improve the speed, reliability, and ridership of bus transit; reduce average costs; and generate sufficient new fare box revenue to pay for expanding transit service to meet increased demand. Transit gains would result from reduced road congestion and higher out-of-pocket costs for peak-period automobile travel, regardless of whether any road toll revenue was dedicated to transit (Small 2004). In addition, carpooling would become a more attractive travel alternative. These improvements would benefit lower-income households, and in some cities the benefits to this income group could be comparable in magnitude to losses suffered from being priced off roads or required to pay tolls (Kain 1994, 508–510). Congestion pricing in urban areas would be a likely, but not essential, application of any future general road use metering and mileage-charging installation. Estimates have not been carried out of the distributional impacts of replacing or supplementing existing highway user fees with a mileage charge that could vary by jurisdiction but did not feature congestion pricing. Regardless of the exact character of impacts, planning for mileage charging should include identification of techniques to offset undesirable distributional effects without seriously eroding the potential benefits of the new form of charging (Nash 2003, 346). One possible solution would be direct compensation to low-income or other disfavored households. For example, transport vouchers that could be used to pay road tolls or transit fares could be distributed. In defense of tolls and congestion pricing, it may be noted that present highway user fees may be regressive, if low-income drivers are likely to pay a larger share of their income for fuel tax and registration fees than high-income drivers [although the difference in shares among income groups may be small (Parry 2002, 31)]. If pricing is in effect, the motorist who chooses to pay the fee and use the road always gains in the transaction, since the use of the road is worth at least as much to him or her as the fee. Pricing can be regarded as fair in this sense. The response to privacy concerns most commonly proposed is to construct the metering system so that the central facility is incapable of tracking individuals’ travel. The Oregon and New Approach proposals both include such a design as an option: the onboard unit in each vehicle collects all information necessary to calculate the toll owed, and only this total amount need be transmitted outside the vehicle. This approach may be acceptable but has at least two drawbacks: enforcement and settlement of billing disputes might be more difficult than if detailed central records were kept, and information on the toll revenue generated by each segment of the road network would not be directly available.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Jurisdictions owning roads are likely to demand that mileage fee revenue be distributed accurately according to travel on each jurisdiction’s roads. (Jurisdictional boundaries do not correspond to road ownership.) In addition, if jurisdictions had detailed information on the revenue generated by each road segment in their networks, they would be able to predict and observe the revenue effects of individual road improvements on their own or their neighbors’ roads. Revenue impacts would influence investment choices and the evolution of the transportation system. This connection between demand and investment might be one of the most significant consequences of the metering and charging system. The most direct and accurate way to determine travel by jurisdiction or road segment would be to maintain a central facility that collected information from vehicles on fee revenue generated by each road, but this practice would provide the facility with information about individuals’ itineraries. An alternative that preserved privacy would be to provide the information by sampling, either by vehicle counts conducted independently of the road use metering system or by recruiting a sample of vehicle operators who would allow their movements to be tracked. Ultimately, if public acceptance is attained, it will come about over time as the result of experience with various forms of road use charges on the part of the public and road operators. Development of conventional toll roads and applications of variable pricing and automatic toll assessment and billing systems are expanding and will be important sources of experience. Openness in the development process and demonstrations of effectiveness in early implementation will also be important in forming the views of motorists and the public. Making the Transition The Oregon Road User Fee Task Force and the New Approach proposals for conversion from the fuel tax to mileage charges both envision the need for a prolonged period during which fuel taxes and mileage fees would be collected simultaneously. Most motorists would switch from paying fuel taxes to the mileage fee only when they bought new vehicles with the necessary onboard metering equipment. In contrast, the German Toll Collect truck mileage-charging system appears to be on a faster track. Operators using the Autobahns regularly are installing the new equipment in their trucks, and most revenues will be derived from automatic metering and charging almost from the outset of the program. The transition task is far simpler for Toll Collect than it would be for the entire motor vehicle fleet of a state or of the United States (since Toll Collect involves only a small number of vehicles in a regulated industry), but the experience may contain some generally applicable lessons. Two options that could speed the transition may merit exploration. First, retrofitting of metering devices on existing vehicles could be subsidized by the government out of user fee revenue. Second, fuel taxes could be abolished early in the

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 transition, after a short period during which all new vehicles sold would be equipped with road use meters, and replaced with higher annual vehicle registration fees for unmetered vehicles. Under this option, vehicle operators would have the choice of paying mileage charges or the flat fee. The European truck mileage-charging systems contain similar features. In Toll Collect, installation of metering equipment is free of charge to the vehicle owner and is funded from toll revenue. In Toll Collect and the Austrian system, trucks not equipped with the metering devices can travel on the expressways but must pay fees in advance. Similarly, the Oregon truck weight–distance tax provides for payment of a flat fee in lieu of the mileage charge. Transition alternatives are among the design issues that should be evaluated in pilot studies of road use metering and mileage-charging systems. Retrofitting may be a poor option for automobiles, because the added equipment would be vulnerable to tampering. Equipment installed in new vehicles during construction could be made highly tamper resistant by using techniques similar to those that protect emissions control equipment from tampering today. The experience of Toll Collect will reveal whether retrofitting is practical for commercial vehicles. The European experience also suggests that requiring operators of large trucks to undertake early conversion to road use metering would be technically and economically feasible as a step in the transition process. This would allow highway agencies to gain experience in managing the system before a general conversion occurred. The growing popularity of optional equipment in private vehicles that utilizes GPS and cellular communications could facilitate a transition to mileage charging. For example, General Motors has 3 million subscribers to its OnStar GPS navigation and communication system and has announced that OnStar will be standard equipment on all its vehicles sold in the United States by 2007 (General Motors Corporation 2005). Taking advantage of this trend may require development of standards defining the equipment capabilities necessary for the mileage-charging application. Consideration of the challenges that the state of Oregon would face in implementing its proposal suggests that a single state would have difficulty adopting road use metering and mileage charging on its own. Out-of-state traffic and the high fixed cost of the onboard equipment would be problems. However, as part of a national program with federal leadership, one state might be compensated for start-up costs as a large-scale pilot implementation. Setting Appropriate Prices The Oregon proposal indicates how jurisdictions might approach pricing if given the option of mileage charging. The Oregon task force recommended a base fee for automobiles of $0.012 per mile (the present average state fuel tax revenue per mile of light vehicle travel) plus a charge to cover the state’s added fee collection

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 costs (which the report estimates would be small under the proposed scheme). Higher per-mile fees would be charged during peak periods on all roads within the boundaries of urban areas, as congestion charges. The congestion charge could vary by hour of the day and by city, but not by road and not in response to immediate traffic conditions. Charges would be indexed to compensate for inflation (Road User Fee Task Force 2003, 31–41). The report does not address how the levels of congestion charges would be determined, but it mentions congestion reduction and revenue raising as goals, so presumably officials would set rates by trial and error to achieve a desired mix of these outcomes. As noted above, the SR 91 Express Lanes in California have rates set so as to maintain free-flowing service at all times, because the facility is marketed as a premium alternative to the untolled lanes. Proposals for new HOT lanes or FAST lanes also incorporate this pricing practice. Neither of these pricing rules—charging a flat base rate per mile to meet a revenue target or setting congestion fees so as to eliminate congestion—is likely to be the best from the standpoint of overall performance of the transportation system. The flat mileage fee may overcharge for some highway trips and thus needlessly discourage some worthwhile travel. Guaranteeing free flow on tolled lanes may divert so much traffic to congested lanes that the net benefit of the highway to all users is less than if brief periods of degraded service were tolerated on the toll lanes. Systematic experimentation and evaluation will be required to design fee schedules that maximize the public benefit from the roads. It is not only ignorance that might lead to improper pricing. State or local governments with control of mileage fees would find that they had opportunities to extract monopoly profits from critical roads (Nash 2003), export traffic and congestion to neighboring jurisdictions (De Borger et al. 2005), or attract development from competing jurisdictions by underpricing of roads for certain categories of traffic. Such practices may be justifiable in some circumstances, but balancing competing interests affected by pricing decisions will be difficult. If mileage charging comes into general use, the state and local authorities responsible for road construction and operation ought to control the pricing policy and revenue of the roads they own. It is unlikely that mileage charges could be implemented without adherence to this rule. Along with local control, some safeguards against improper use (that is, practices such as price gouging to gain local advantage at the expense of the general welfare) will be needed. Safeguards could include systematic monitoring, analysis, and publication of impacts of pricing decisions; development of national best-practice guidelines; and possibly creation of a regulator with authority to oversee roads as public utilities. The problem of inappropriate pricing policies could be lessened by aligning governmental responsibility for roads with the nature of the traffic. That is, local governments could be given control of roads carrying predominantly local traffic and states given control of roads carrying significant regional and interstate passenger or commercial traf-

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 fic. Privatization of the operation of certain kinds of roads could also help insulate pricing decisions from narrow or short-term considerations. (For example, a private operator would have no incentive to subsidize any class of user or exclude any user who was willing to pay the appropriate toll.) Designing and Testing Options The Oregon and New Approach proposals call for trials to evaluate the reliability, flexibility, cost, security, and enforceability of alternative designs for systems to monitor mileage and assess mileage fees. In addition to evaluating technological options, pilot studies should ideally be designed to gain information about the institutional requirements for administering such systems and about user acceptance and the cost and convenience of use. Evaluation of the behavioral impacts of mileage charges could be an objective, with appropriate research design, but it might be most practical to defer study of this question until after an initial stage of technological and institutional evaluations was carried out. These goals imply that large-scale pilot studies will be needed that simulate as realistically as possible the important aspects of systems, including the setting of rates, the billing and collection of fees, enforcement, and the handling of system malfunctions. Pilot studies must follow scientific research design principles—that is, specific objectives, hypotheses to be tested, and evaluation methods must be defined at the outset. Alternatives to government-led development of the technology of road use metering are conceivable. One such proposal, Certified Wide Area Road Use Monitoring, received some consideration in Australia and New Zealand (Malick 1998; Sorensen and Taylor 2005, 19). In this approach, government would publish performance specifications for a road use metering and mileage-charging system and allow private-sector firms to offer competing products and services to the public that meet the government’s requirements and that might have additional utility to motorists. The firms could be made responsible for collecting fees and transferring them to the government. A second necessary research track will be studies with the goal of providing guidance to highway agencies on the proper application and management of road use metering and charging systems. The starting point for this research should be evaluations of the growing number of road pricing systems now in operation. Among the topics the research should address are the following two issues: first, how road agencies are actually using pricing (that is, the goals, performance measures, and institutional constraints that are guiding their decisions about pricing, marketing, and other operational issues); and second, the impact of pricing on travel behavior and the costs and benefits of transportation systems. To address questions of possible impacts and management problems beyond those directly observable in existing road pricing implementations, modeling and simulation studies will be needed.

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The Fuel Tax and Alternatives for Transportation Funding: Special Report 285 Finally, planning studies will be needed to lay out possible routes to widespread application of road use metering and pricing. The studies should address the responsibilities and relationships of federal, state, and local governments as well as the relationship of government to private-sector participants—developers of metering technology, motor vehicle manufacturers, and highway developers and operators. SUMMARY This chapter has surveyed options for changing the system of charging and paying for highways in ways that would improve the delivery of transportation services. The measures considered involve more direct means of charging road users, through tolls on limited-access highways and through metering and charging for use of all roads. The potential of tolls assessed by the technologies presently in use in U.S. highway finance is limited: such tolls can be applied on only a fraction of the road system (i.e., to limited-access expressways), and therefore toll roads must always compete with untolled roads. A reasonable target for an ambitious program of toll conversion and new toll road development, following the models of the HOT networks and FAST lanes proposals, might be to raise additional revenue equal to the tolls already being collected on U.S. highways (that is, about $10 billion per year or less). Imposing tolls on all lanes of selected heavily traveled intercity routes (on the model of the existing turnpikes) could generate additional revenue, but this measure would be likely to face public opposition and is not receiving serious consideration. The net increase in highway budgets would be less than the added toll revenues because legislatures would be likely to adjust other fees to offset the new revenues. The following are among the possible benefits of a toll program on this scale: it could serve to concentrate spending on meritorious highway projects, it would improve traffic flow on the tolled facilities, and it might allow the public to learn about road pricing and decide whether more extensive application would be desirable. Attracting private-sector participation to the highway program by franchising toll roads could have public benefits as well. Road use metering and charging systems offer great potential benefits to the public if the challenging obstacles to implementation can be overcome. There is a need for rigorous evaluations of options for the technical design of road use metering systems. More fundamentally, definition of the institutional framework for administration of mileage charges is at present undeveloped, and planning studies are needed on basic design questions: how fees should be set, who should control revenue and fees, the disposition of revenue, and the relation of revenue to transportation investment. One strategy for introducing road use metering is to start with a system for commercial vehicles. Some European road authorities have taken steps in this direction.

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