Summary of the Puget Sound Regional Council�s Examination of

Summary of the Puget Sound Regional Council’s Examination of Transportation Pricing Strategies January 2002 Background Metropolitan regions throughout the United States face the converging challenges of providing for the basic mobility needs of their residents while also attempting to manage growth in personal vehicle travel. Limited public financial capacity for transportation infrastructure investment has encouraged transportation professionals and regional policy makers to begin discussing the potential benefits associated with reforming the way we pay for, and finance, transportation. The discussion of transportation pricing/finance reform in the central Puget Sound region of Washington State was initiated by policies contained in the regional transportation plan. As a first step, the Puget Sound Regional Council (PSRC) created a Transportation Pricing Task Force in 1995 to carrying out the policy directives. The Task Force was comprised of local elected officials, transportation professionals, area business representatives, and environmental and public interest group advocates. The Task Force's mission was to educate and inform, and provide public and elected officials with a framework for discussion and problem solving. The research effort, summarized here, analyzed options for reforming transportation finance, through the introduction of more market-oriented finance tools, to better ensure that public revenues are adequate to maintain, preserve and improve the region's transportation system, and to better balance transportation supply with demand. marginal investments in roadway infrastructure. Often, it is these peak trips that are incorrectly or non-optimally priced, and these price distortions lead to increased cost to the region in the form of congestion delay and inefficient investments. The decline in traditional transportation revenues and the public sector's limited ability to provide capacity investments where and when they are most needed are leading regions in the U. S. and abroad to increasingly consider various forms of market, or use-based value charging. Market pricing approaches are based on a sound principle that we pay for what we use. In this way, market pricing can help improve equity. Pricing policies can reduce congestion on major transportation facilities and reduce vehicle emissions associated with engine starts and fuel consumption. Prices tied to use can ensure that revenues are available for maintenance, preservation, and capacity expansion when and where they are most needed. This helps service providers make rational investment decisions, while at the same time helps consumers to make rational travel decisions. A balanced set of financing and pricing policies, combined with a balanced set of transportation investments, provide additional travel choices for individuals. A rational transportation investment strategy looks to peak users to pay for additional capacity investments. Peak demand drives the need for new capacity, and it is peak period users who are the primary beneficiaries of capacity investments. Asking peak period users to finance major new investments in transportation infrastructure helps transportation providers to identify, and build, only those projects that are truly valued: projects for which users are willing to pay. Growing travel demand, along with limited improvement in transportation system performance, Current Methods of Pricing and Financing Transportation Within regions with relatively mature transportation systems, peak period demand drives the need for 1 despite major investments in infrastructure and services, makes a compelling case for some type of pricing and finance reform in the region's future. In addition, the major funding shortfalls associated with meeting the region's identified transportation needs adds even greater rationale for doing something other than "business as usual" in the future. there are considerable potential advantages associated with the application of market logic (marginal cost pricing, investing based on long-run analysis, benefitcost decision rules, etc.) to public provision of goods and services. The renewed interest in the explicit management of transportation prices stems from the recognition that there is currently a significant divide between the personal and social costs of travel. In the 1920's Arthur C. Pigou highlighted the potential benefits of imposing a capacity burdening tax on roadway use. Pigou demonstrated that congestion tolls could improve social welfare through reducing total travel time on specific road facilities. Even without private ownership of transportation infrastructure, market forces can be captured to assist in the efficient provision and management of the infrastructure. Later, the Nobel Prize winning economist, William Vickrey, carefully examined the relationship between short-run marginal cost pricing, facility management and optimum investment strategies. In his own words, Vickrey stated “As you know I am kind of hipped on the idea of marginal-cost pricing: the use of pricing as a device for improving the efficiency with which we use various facilities.” If transportation investment and finance policy is to benefit from insights gained within the field of transportation economics, then non-economic issues must also be considered. These policy issues include concerns over social equity and privacy protection, land use and development pressures, and determination of the appropriate use of user-fee or market-based transportation revenues. These issues and others are being investigated around the world as part of numerous pricing demonstrations and applications. Guidance from Transportation Economics The premise of transportation pricing analysis is that current prices, the direct costs experienced by users of transportation systems, are not economically efficient prices. Efficient prices are those based on analysis of short-run marginal social costs, which is to say that efficient prices are likely to be significantly more variable than current prices. Optimal prices vary considerably by the specific travel conditions experienced such as mode of travel, time of day, type of vehicle, and travel route utilized. It is the lack of variability and accuracy in pricing that contributes substantially to common problems associated with the public provision and management of transportation systems, including excessive environmental degradation and urban traffic congestion. Where market inadequacies do not exist, it is generally accepted that the efficient exchange of goods and services is facilitated through the functioning of open private markets, supported by clearly delineated property rights and leading to a wide array of consumer choices. Historically, the provision of transportation infrastructure and services has undergone a transition from private delivery to public provision and management due to factors limiting easy market transactions. Changes in technology, and policy direction in other arenas, have eliminated some traditional barriers to the private, competitive provision of road infrastructure, in particular. For example, roadway pricing, using electronic fee collection applications have significantly reduced transaction and enforcement costs, allowing for relatively efficient market exchanges. Yet some political and administrative barriers to privatization remain, such as concerns over consumer privacy, sentiments that support the broad notion of free unlimited personal mobility, and the popular belief that the social economic benefits of transportation investments are measurably larger than the benefits directly enjoyed by the actual users of the investments. For many decades, economists and policy analysts have recognized that even when privatization of public services may not be socially and politically appropriate, We Are Not Alone Market approaches to pricing use of transportation infrastructure and services are receiving increased attention from Federal, State, and local transportation policy makers. Many states, such as California, Florida, Texas, New York and New Jersey are currently testing the real world application of a number of use-based market financing approaches. Numerous countries, England, the Netherlands, France, Singapore, and Sweden, to name a few, are increasingly relying on transportation prices based on the full marginal costs of travel (including congestion) to bring transportation supply and demand into balance. The experience of these regions demonstrates that carefully implemented market pricing can help improve mobility, reduce congestion, finance transportation 2 investments, and help achieve environmental and growth objectives. The thoughtful design of any program, however, appears to be significant. Market finance mechanisms face considerable political and implementation challenges. There are concerns about privacy issues, possible adverse effects on low-income drivers, and simple opposition to paying more for travel. Privacy issues, and equity issues can be addressed through a carefully designed program. Concern over paying more for transportation, however, requires that revenues from market finance mechanisms be used to benefit users of the transportation system. Revenues could be dedicated to transportation investments, and/or could directly off-set other fees or taxes paid by transportation system users. Use-based financing approaches were shown to be a significant source of potential new revenues; sufficient to pay for some, or all, planned transportation investments. The generation of sizable revenues for transportation investments relates closely to issues about whether all planned investments are necessary once existing facilities are managed more efficiently. An additional question emerges relating to how revenues, other than those that are dedicated to efficient investments in transportation infrastructure, should be dispensed. Should tolls be reduced, should "excess" revenues off-set other taxes or be returned to residents of the region in some other manner? The analysis conducted so far has been academic in nature, evaluating the relative benefits of broad approaches to financing transportation investments through user charges. The work of the Task Force lead to policy recommendations included in the central Puget Sound region’s transportation plan relating to long-term transportation finance and system management (listed below). There is general agreement that the introduction of new transportation pricing mechanisms will be incremental and targeted, focusing increased attention on the possibility of developing implementation pilot programs. Central Puget Sound Analysis In our region, the Regional Council's travel demand model was used to simulate pricing policies operating within the region's road and transit networks. Model output data was then used as input to a benefit/cost model developed by the consulting firm ECONorthwest. The results of the benefit/cost model were intended to guide discussion of the various broad market financing approaches tested: ubiquitous congestion (peak period) pricing; mileage charges; fuel tax increase; charges on employee parking; and high occupancy toll lanes. Results indicated that region-wide congestion pricing could yield the greatest net benefits to society. Congestion pricing, in the form of optimal tolls on all freeways and arterial streets (a test scenario, not an implementation alternative), resulted in significant travel time and vehicle operating cost savings for all income classes of users. High-income users realized the greatest benefits, but all income classes realized net benefits. Congestion pricing could be expected to generate enough revenue to finance all identified regional transportation needs over the life of the Metropolitan Transportation Plan. The mileage charge and gas tax increase led to the greatest reduction in vehicle miles traveled and the highest switch from low to high occupancy travel modes for all trips, but did less to manage transportation facilities for efficient vehicle travel. Employee parking charges achieved the greatest shift from low to highoccupancy travel modes for work trips, but much of the freed roadway capacity was filled by non-work automobile trips. In the long run, employee-parking charges may also result in more diffuse firm locations in selected instances, having uncertain implications for the regional adopted growth policies. Task Force Findings and Recommendations During the fall of 2000 the Pricing Task Force developed a set of findings and recommendations that were incorporated into the region’s unanimously adopted regional transportation plan Destination 2030. Below are the findings and recommendations of the Task Force. Findings It is important to understand the full costs of transportation. 2. The current transportation finance structure no longer serves the region. 3. It is important to clearly define policy objectives. 4. Pricing structures should be designed to achieve multiple benefits as well as finance transportation investments. 5. Variable roadway pricing produces the greatest societal benefits. 6. Implementation will need to be phased over time. 7. Pricing must be part of a comprehensive transportation and land use strategy. 8. It is essential to invest in mobility alternatives. 9. Technology and privacy issues are no longer major concerns. 10. Public acceptance improves with familiarity. 11. Private sector advocates for efficient pricing are a precondition for reform. 1. 3 Recommendations 1. Transportation financing based on use should be part of the preferred Destination 2030 Plan alternative, with phased implementation. The long-term goal is to introduce variable roadway pricing where and when it is appropriate. Step 1: Step 2: Step 3: 2. Employ broad use-based financing mechanisms to fund basic transportation needs. Consider self-financing through marginal cost pricing for major new infrastructure investment. Consider using prices to improve efficiency and provide societal benefits use charges. And in most cases, even after new capacity is added, all of these projects are expected to experience demand for use in excess of capacity for at least some portion of the average workday. As a result of this substantial set of challenges, pricing will need to be further examined as an option in the implementation of these projects. To this end the central Puget Sound region, with support from the Humphrey Institute at the University of Minnesota and the Federal Highway Administration, is hosting a national conference on transportation pricing. The region is also in the process of developing a pricing demonstration project, which can familiarize the broader public with transportation pricing applications and issues. The Regional Council should continue to explore and adopt transportation demand modeling improvements, and other analytical tools, that better assess traffic management strategies. The Regional Council should work with communities, WSDOT, and local authorities, to plan, design and implement a demonstration program prior to 2006. Targeted outreach is important for furthering the regional dialogue relating to transportation pricing and finance reform. The Regional Council should develop and fund a detailed outreach effort, which seeks to inform, engage and build regional consensus around implementation of transportation pricing alternatives. 3. 4. This paper is part of a series produced by the Puget Sound Regional Council. Research and analysis for this paper series was conducted under guidance from the Transportation Pricing Task Force, an ad hoc committee of elected, business, and civic representatives. Dr. Randall Pozdena, and the consulting firm ECONorthwest, provided technical assistance. For additional papers in this series, or more information contact: Information Center Puget Sound Regional Council 1011 Western Avenue, Suite 500 Seattle, WA 98104 Phone (206) 464-7532 Email infoctr@psrc.org Future Steps The use of market pricing strategies is a policy alternative consistent with the increasing need to manage transportation systems for efficient operation. Selected transportation facility improvements may incorporate pricing as part of a financing approach, while broader system management oriented approaches will remain long term options for better managing transportation facilities, and for helping to finance transportation investments in a sustainable and equitable manner. In specific these tools can be used to reduce travel delay and travel time, more effectively utilize existing facilities prior to making new investments, and strengthen the equitable relationship between system costs and travel benefits. The utilization of these tools will clearly require additional, carefully designed analysis to ensure that policy objectives are achieved and to control for any adverse consequences of finance reform. Our region currently has transportation project needs that will cost many billions of dollars. There is no reasonable set of assumptions that can finance all of these investments without some reliance upon increased 4 Briefly papers: Summary Infrastructure Investment Pricing and cost recovery Pricing and investments rules The economics of pricing Costs and Benefits The Congestion Case Pricing and the Use of Revenues Pricing and ITS Pricing: part of a strategic finance package Pricing and Facility Management Pricing and Equity Pricing and the Environment Pricing and Growth Management Pricing Around the World Pricing and choice 5