Advancing Automated and Connected Vehicles: Policy and Planning Strategies for State and Local Transportation Agencies (2017)

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16 C h a p t e r 3 This chapter examines why and how state and local trans- portation agencies can intervene in the market to nudge private-sector choices in ways that would benefit society. Simultaneously, it describes the potential of AV and CV tech- nologies to disrupt the traditional activities of state and local transportation agencies, making such interventions difficult. Policy and Planning to Mitigate Impacts The role of state and local transportation agencies is to develop, maintain, manage, and improve the transportation system in a way that enables individual mobility, supports eco- nomic activity, and improves quality of life. As government entities, these agencies aim to serve a broad public interest and provide services that might not otherwise be provided in the market. In many cases, public agencies further achieve these goals by providing services for vulnerable and dis enfranchised populations and planning for the future. In order to continue to meet these expectations, state and local transportation agencies must strive to understand the impacts of AV/CV technology. Planning and policy decisions should be made to maximize the positive effects and minimize the negative effects on society. Conventionally, public agencies intervene in market activi- ties when there are goods or services that may not be efficiently or equitably provided by the market. Private actions that gen- erate externalities are a classic example of a situation in which government intervention in markets is warranted. Pollution, for example, may be created by the otherwise-desirable opera- tion of a steel-producing company. The consequences of that pollution are imposed on individuals living near the factory in the form of higher medical expenses, poorer quality of life, reduced property values, and so forth. A government agency may be justified in imposing a regulation that charges the company in proportion to the negative consequences. Society would benefit from the internalization of these externalities into private-sector decision making. Intervention into mar- ket activities can also be designed to maximize the benefits of activities that might otherwise be under-provided in markets. Education is an example of a positive externality because the long-term benefits of investing in education are not always internalized by individuals or the organizations that would receive those benefits. Public agencies, unlike private companies, are expected to consider the range of societal goals (equity, economic, safety, security, quality of life) in their decisions. One chal- lenge lies in the fact that public and private interests do not always align. Public agencies are expected to consider the interests of individuals and organizations with the under- standing that individual interests and the common good do not always align perfectly. The deployment of AV/CV tech- nologies in the market will have effects on producers and consumers in the market, on public agencies themselves, and on third parties who are not involved in the market of buying and selling AVs and CVs. It is the role of a pub- lic agency to consider the interests of all these groups, and, in cases where those interests do not align, intervene in the market to maximize potential benefits and minimize negative consequences. Mechanisms to Align Public- and Private-Sector Interests The mechanisms by which public agencies typically achieve their broad goals include economic, regulatory, and plan- ning instruments. Strategies from all categories can internal- ize externalities; the main distinction lies in how these tools accomplish their goal. Economic Instruments Economic instruments are tools that “provide an explicit price signal to regulated firms and individuals” (Hepburn 2006). With these tools, governing bodies are able to affect an externality in two ways: Role of State and Local Policy and Planning

17 • Directly, by changing the price or by imposing a tax or providing a subsidy. • Indirectly, by imposing controls on the quantity of a good that is produced or sold—most often through a cap-and- trade-style system. Either of these economic instrument types provides an incentive to market participants to, ideally, change their behav- iors that negatively affect society (van Essen et al. 2012). The literature identifies two circumstances where eco- nomic instruments are most useful (Hepburn 2006). The first occurs when the appropriate policy response varies between different firms or actors. In other words, if a market has a wide variety of different actor types to be influenced, the appropri- ate response for all these different actors may vary. An eco- nomic signal affecting price or quantity will, however, send a uniform signal that will influence all actors in the market, despite their differences. The second circumstance under which economic signals are most useful occurs when the regulator has imperfect infor- mation about the cost structure of firms or entities to be regu- lated (Hepburn 2006). In other words, if the governing entity has very good information about the costs of producing a good, a regulator might be able to put specific regulations on the industry to address the issue without imposing undue burden or cost. Without good information, however, the gov- erning body would be unable to craft such targeted regula- tions and would be better off sending a clearer signal affecting price or quantity with an economic policy instrument. Regulatory Instruments Regulatory instruments, also known as command-and- control instruments, require “firms or individuals to comply with specific standards, such as technology or performance standards” (Hepburn 2006). With these tools, governing bodies can affect behaviors or processes related to externali- ties by establishing or changing regulations directly, rather than relying on price signals to encourage actors to make socially optimal choices. Regulatory instruments can take a variety of forms. For example, a requirement that all vehicles have safety equip- ment (e.g., seat belts) and a requirement that motorists use the safety equipment are regulatory instruments. The liter- ature notes a few criteria to help identify when regulatory instruments are useful (Hepburn 2006): • The regulator has good information. • The risk of government failure is low. • The objective is best achieved by imposing similar require- ments on different firms and individuals. Good information implies that the regulator has sufficient knowledge about the industry to determine the optimal level of the regulated good. For example, the United States has determined that certain particulates and pollutants, such as lead, are unacceptable at any level. In this case, a regulator can determine that the socially optimal level of lead in gasoline is zero; the optimal policy would be an outright ban. The risk of government failure is an important consideration since a reg- ulation is only binding if it can be enforced. The government already regulates petroleum production, processing, and sale, so removing lead as a gasoline additive—for example— would be relatively easy and unlikely to fail. The final criterion implies that, despite differences in the actors and firms in the market, the same standard or requirement will be effective. To continue with the example, despite the variety of actors in the market (e.g., manufacturers, distributors, and users), banning lead additives would be both appropriate and effective. Structure of Private Rights Agencies may, if they have the authority, restructure civil and criminal liabilities in order to shift risk and alter pro- ducer and/or consumer behavior. One method for addressing the issue of risk associated with driving is requiring vehicular liability insurance by drivers. At the time of publication, the states of Nevada, Florida, Michigan, and California have spe- cific insurance requirements for the testing of AV systems. The current structure of the insurance market may be changed sig- nificantly if AVs and CVs do, in fact, reduce vehicular crashes. Researchers have posited that liability for vehicular incidents may ultimately shift from the driver to the auto manufacturer (Douma and Fatehi 2016). Service Provision By providing or investing in particular services, an agency can change how it provides its current range of transporta- tion services. For example, an agency in charge of operat- ing a managed lane facility might adjust eligibility rules for free access in order to encourage use by certain user classes. Or, an agency might make changes in transit operations to accommodate new user groups. In some cases, it may be that a private-sector market for a good or service does not exist or cannot exist absent government intervention. Financing and Contracting In some cases, it may be that a private-sector market for a good or service does not exist or cannot exist absent gov- ernment intervention. In these cases, a transportation agency may establish the market itself or work in partnership with the private sector to establish the necessary environment for the market to flourish. State and local agencies are also gen- erally free to enter into an array of public-private partner- ships in order to provide enhanced transportation services. States may need to pass enabling legislation to facilitate these partnerships.

18 Information and Outreach Public involvement and education are used to inform the planning process. This step is also a planning activity that can have a direct influence on the behavior of consumers and pro- ducers in the market. Transportation agencies may, through any number of mediums and strategies, provide information to consumers as a means of encouraging desired behavior. For example, to encourage consumers to purchase CVs with safety, mobility, or environmental applications, transporta- tion agencies can report and communicate the various bene- fits that have been identified through analysis and evaluation. Agencies may also coordinate with departments of transpor- tation, metropolitan planning organizations, other rural and regional planning organizations, transit agencies, and other stakeholders. For example, agencies can report information about AV/CV system performance and the effectiveness of plans and programs. They can also coordinate and form part- nerships with the private sector to speed commercialization of CV technologies. In general, as AV and CV technology is developed and deployed, new information should be relayed to the public to expand its understanding of the technologies. Potential Public-Sector Impacts Adopting mechanisms to align public- and private-sector interests in AVs and CVs will be complicated by the potential of these technologies to also disrupt the traditional activi- ties of state and local transportation agencies. Such disrup- tion has happened before. The rapid development and future deployment of AV/CV technologies in the U.S. market has the potential to produce positive and negative effects on society. These changes will likely affect the way that transportation agencies function as well. The central issues that transporta- tion agencies typically address—safety, mobility, congestion, and land use—may be transformed by the introduction of AV/CV technologies, although exactly how is still uncertain. As these developments unfold, transportation agencies will need to prepare for changes in their own activities and in how they serve the public interest through the provision of transportation infrastructure. New innovations, like AV and CV technologies, can dis- rupt an industry by improving on existing technologies and expanding rapidly in a market, often in unexpected ways. In the transportation realm, the introduction of global posi- tioning systems that automate the manual process of map- ping transportation assets, along with the proliferation of mobile devices, changed the way that individual travelers find routes and traffic information. Traditional skills—such as surveying—and traveler information systems—such as radio reports—once central to the activities undertaken by transportation agencies are being replaced by these new technologies. The deployment of AV/CV technologies has the potential for even greater upheaval. The research team summarized the potential impacts to transportation agencies in three categories: institutional, operational, and funding/ financing aspects. Institutional Impacts Institutional impacts affect a transportation agency’s focus, areas of authority, and/or organizational structure. This includes how an agency prioritizes its responsibilities and chooses to allocate its funding. Proliferation of AVs and CVs could increase transportation agencies’ focus on non-safety goals; increase responsibility for data integrity, security, pri- vacy, and analytics; and increase reliance on outsourcing to the private sector for functions better suited to it. Operational Impacts These are impacts on how an agency develops, maintains, operates, and manages transportation infrastructure and transportation-related services. Proliferation of AV and CV technologies could cause existing ITS investments to become outdated, reduce or shift demand for transit and parking ser- vices, or increase maintenance requirements. It is uncertain whether the technologies will mitigate or exacerbate current deficits in available roadway capacity. Funding and Financing Impacts These are impacts to the funding and financing sources available for transportation infrastructure and related ser- vices. AV and CV systems could exacerbate funding deficits through increased costs for maintaining and operating road- ways. A proliferation of shared AVs (SAVs) could reduce the amount of revenue from driver licensing, vehicle sales tax, vehicle registration, moving violations, transit fares, and fed- eral funding associated with ridership levels. CV technology could potentially increase revenue from road user charges by providing a platform that supports usage-based revenue measurement and reporting. Table 4 summarizes potential impacts of AVs and CVs on transportation agencies. While presented independently, all three of these families of impacts are related. Funding and financing impacts may shift how a transportation agency pri- oritizes its activities at the institutional level, which in turn impacts how assets are deployed and managed at the opera- tional level. It is critical that policy strategies at the state and local lev- els are mindful of these potential impacts to transportation agencies. Agencies may have to adjust their institutional, operational, and financial frameworks.

19 Table 4. Impacts on transportation agencies. Potential AV/CVOutcome Transportation Agency Impacts Institutional Impacts AV and CV systems could reduce crashes and increase overall safety Increase focus on non-safety goals, such as maintenance and preservation, systems management and operations, and data management Commercial and transit AV fleets could reduce reliance on professional drivers, which increases safety by reducing vehicle incidents AV and CV systems could raise road users’ expectations for ITS-related services for which transportationagencies lack institutional expertise Increase reliance on contracting, new relationshipswith the private sector AV and CV systems could require physical infrastructure assets, data management, and ITS services for which agencies lack funding Increase reliance on private-sector investmentmodels AVs could require changes in basic road design and geometry in the long run to accommodate safe and efficient operations Change roadway construction practices AV and CV systems could increase reliance on data-intensive services and applications Increase responsibility for data integrity, security, privacy, and analytics AV and CV systems could provide added value to existing operations and maintenance, particularly safety benefits in transit operations Change maintenance/operations practices CV applications could provide asset health information Improve operational awareness Operational Impacts Technology assets could become obsoletewith rapidly changing technology Outdate ITS investments SAVs could increase average vehicle occupancy and usage, improving systemmanagement and reducing congestionwithout the need for traditional ITS Various communications technologies used in CV and AV applications could provide ITS-type traveler information to drivers within the vehicle itself AVs or SAVs could reduce demand for transit and other non- passenger vehicle modes, including traditionalparatransit Reduce emphasis and stimulate loss of value in transit investments SAVs or usage of Level 5 AVs could reduce need for urban parking Reduce emphasis and stimulate loss of value in parking investments AV systems could increase need for visible lane striping, more visible signs, and removal of roadwayobstructions Increase maintenance requirements Commercial AV fleets could increase volumes (by lowering shipping costs), thereby increasingwear and tear on the system AV systems could increase the developmentof low-density suburban development by lowering the cost of commuting, thereby increasing the infrastructurenetwork to be maintained CV systems could facilitate the more efficient movement of vehicles through congested intersections Mitigate capacity issues associatedwith recurring and non-recurring congestion AV and CV systems could provide enhanced transportation system asset awareness by transportation agencies AV and CV systems could allow transportationagencies to better use existing capacity through various ITS management and operations practices CV systems could provide travelerswith dynamic, real-time informationon construction projects that impact mobility AV and CV systems could provide drivers with information on impending bad weather and weather-related road conditions AV systems could lower the cost of driving, thus increasing VMT Exacerbate capacity deficit AV applications could require additional headway relative to human drivers, thus reducing available capacity (continued on next page)

20 Funding Impacts AV and CV applications could increase passenger and commercial VMT, increasing the costs associatedwith maintaining and operating roadways Exacerbate funding issues AV and CV systems could increase need for visible lane striping, more visible signs, removal of roadway obstructions, physical infrastructure to support CV applications, and detailed infrastructure-related data to support CV applications SAVs could reduce the amount of revenue derived from vehicle registration fees Reduce vehicle registration, sales tax, or licensing revenue SAVs could bring about a decline in vehicle ownership and then a decline in vehicle production (and associated decline in vehicle sales) SAVs could result in fewer professional drivers and traditional taxi services, thus bringing about a decline in revenues from sources such as commercial driver’s licenses and taxi medallions AVs could be deployedwith electric-motor-based technologies Reduce fuel tax revenue AV and CV systems could increase VMT and include technology for usage-based revenuemeasurement Increase revenue frommileage-based usage AV and CV systems could reduce driver error Reduce revenues frommoving violations AVs or SAVs could reduce mass transit utilization Reduce transit fares and federal funding associatedwith ridership levels Potential AV/CV Outcome Transportation Agency Impacts Table 4. (Continued).