Tolls, the Dulles Greenway and Elasticity of Demand

An interesting experiment in the sensitivity of motorists to increases in toll charges is taking place in the Dulles Greenway. For the first three quarters of 2006, traffic is down 6.6 percent, despite soaring population growth in Loudoun County, in the aftermath of a $.30 toll increase. “The 2006 traffic drop is likely a real indicator of elasticity as the average toll has increased by 30 percent between December of 2004 and September of 2006, well above an inflationary increase,” reports Fitch, the bond-rating service, in giving the Greenway a BBB rating.

October results suggest, however, that demand may be on the upswing again. Meanwhile, toll revenue for the first three quarters of 2006 is up 20.8 percent over the same period in 2005. Revenue has been maximized by the toll increase, application of the peak toll to all hours of weekday traffic, and also aggressive enforcement action, including a $25 administrative fee.

According to Fitch, the TRIP II partnership that owns the toll road has submitted a rate increase application to the State Corporation that would jack up the maximum toll from the current cap of $3.00 to $4.00 by 2012. The application also requests the ability to use variable pricing that would raise the peak hour toll in 2012 to $4.80.

The Macquarie Infrastructure Group, of Australia, is the managing partner of TRIP II, and has agreements to acquire 100 percent ownership by 2020. Details can be found in the Fitch press release.

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20 responses to “Tolls, the Dulles Greenway and Elasticity of Demand”

  1. Larry Gross Avatar
    Larry Gross

    This is working according to what the DOT document about congestion pricing was asserting.

    Like gasoline, the initial reaction to a toll increase (not disimiliar to a gasoline price increase), people will avoid driving on the tollway… but then reality sets in…

    It’s obvious though that the toll road has to provide value that cannot be duplicated by diverting to other local roads.

    This is the problem that the Pocahontas Parkway ran into in Richmond. People had easy alternatives and paying a toll did not return sufficient value.

    Enforcement. The technology is quickly advancing to the point where the camera captures your plate.. passes it to a computer – which figures out what the number/letters are then sends it on to the computer that has your name/address/registration, etc.

    Note also – this “works” not only for enforcement .. but it could also “work” for TOLLS.

    For instance, if you had your plate registered for use on the TOLL road with a valid account that can be charged.. you could use the road without a transponder.

    A toll road in Florida has a pilot project right now for this.

    I’m convinced that this is the wave of the future – if not for just having the ability to construct roads that have no other way to be funded… forget that… and concentrate on the concept of managing peak-hr congestion – which could be very effective.

    It could be so effective, in fact, that Congestion Pricing could be a competitor to Metro because both of them are targeting the same problem. Metro requires tax dollars. Congestion pricing not only does not require tax dollars.. it actually can generate money.

    Ahh… so now one can see how this might play out… Congestion Pricing… proceeds .. deal with bottlenecks… and other surface street optimizations… and anything left over goes to Metro. 🙂

  2. Ray Hyde Avatar

    I don’t think so, Larry.

    The way I read this, toll revenue was maximized, and not toll road throughput, which is what I predicted would happen.

  3. Ray Hyde Avatar

    “…both of them are targeting the same problem.”

    That’s right. They are a system, and the goals should be to get the best and cheapest use out of the system, not assuming thqat one is “better” than the other.

    Both of them are targeting the same problem, and that problem is that too many people are trying to go to the same place at the same time.

  4. Larry Gross Avatar
    Larry Gross

    re: toll roads – maximum throughput vs maximum profits

    I had just assumed that these two would be one and the same.

    The DOT report stated that with tolls could be set to maximize throughput and that heavier flows
    would actually result in LESS car volume.

    But perhaps Ray is right – but how would one know if that was happening?

    In the case of the Pocahontas Toll road – the toll actually was causing even further reductions in traffic that took it below the revenue necessary just to service the bonds.

    So, lets say for the sake of argument that there is truly two possible outcomes and that it would be possible to charge too high a toll.

    What mechanism would one use to determine that that was going on?

    what mechanism would one use to dictate to the private entity – operational criteria that prevented excessive profit-taking?

    Finally – again – assuming this might be true (Ray is going to have to convince me) – here’s the $64 question:

    Why not have a congestion pricing toll road …. owned and operated by VDOT? What’s the argument against that?

  5. Larry Gross Avatar
    Larry Gross

    re: “problem is that too many people are trying to go to the same place at the same time”

    The more relevant question in my view is – do all of those folks trying to get to the same place at the same time have absolutely no choice? Is every trip at peak hour a mandatory trip?

    The DOT document asserts that this is NOT the case and that congestion pricing – ferrets out what trips are necessary and which ones are not – can be deferred or don’t need to be a trip to start with.

  6. Larry Gross Avatar
    Larry Gross

    Here is something else worth thinking about:

    (excerpted from Toll Road News)

    Texas first transponder & video tollroad to toll from 1 Dec

    Transponders usable include [names the transponder types]….
    .. and then note this part:

    “Those without a transponder will have their license plate imaged by toll cameras and will receive a toll bill in the mail monthly…”

    and then this:

    “It’s a toll road without toll booths. You can pay with an electronic toll tag (transponder) or without one. Either way, there’s no stopping or slowing down to pay.”

    What this means – is that the technology allows tolls to be charged … on ANY ROAD.

    Combine this capability with the concept of congestion pricing…. on major arterials… subject to rush hour conditions – and you now have a way to help “shape” congestion AND to raise funds for road improvements.

    I’m not advocating… necessarily – only pointing out that an option exists and is now on the table that previously was not…. and it does not require complex GPS tracking… schemes…

    Bring this home… We could implement this system.. right NOW… today… in the NoVa area and other urban areas.

    Imagine deploying this to HR.. where they want new water crossings…. this year.. not in 2010… 2013, etc.

  7. Jim Bacon Avatar

    In regard to the issue of toll roads charging rates that mazimize revenues vs. rates that maximize throughput. Here’s how I would come out on the debate.

    If a private entity finances construction of a toll road without state assistance, that entity has the right to charge whatever it wants — in other words, to charge rates that maximize revenue and profit.

    If a facility is built by the state with public funds, even partial public funds, and tolls are imposed later, or extended after the construction bonds are paid off — as in the Dulles Toll — then the purpose of the tolls should be to maximize throughput.

  8. Larry Gross Avatar
    Larry Gross

    yeah… but HOW do you know when profit is affecting throughput?

    Especially – if you’re entertaining PPTA proposals and are trying to decide if the prospective
    road will be better as a PPTA or better as a publically-operated TOll Road?

    What criteria, performance measure…tells you this?

  9. Larry Gross Avatar
    Larry Gross

    Here’s another question …

    If .. right now… we have the technology to collect tolls on a per user basis…. via transponders
    and/or license plate photos…

    … THEN … Are the House Republicans essentially correct .. that we don’t need a tax increase?

    What is the argument to tax everyone rather than collect tolls from folks who drive?

  10. Jim Bacon Avatar

    Larry, This is an issue that transportation policy makers in Virginia have not addressed. What is the proper role of tolls — to maximize revenue, or to maximize throughput? As Dulles Greenway illustrates, those are two very different goals.

    I retreat to my position: If the private sector is putting up all the money and taking all the risk, they should have the right to charge what the market will bear — to maximize revenue. If the public sector is involved in any way, either putting up money or putting the faith and credit of government behind the bonds, then the public priorities should prevail — and that means generating enough revenue to pay off the bonds but otherwise maximizing throughput.

  11. Toomanytaxes Avatar

    The owners of any toll road must be permitted to earn a fair profit given their risk. But toll roads are also in the nature of a public utility. The business is affected with the public interest. It is not unreasonable, therefore, for the Commonwealth to exercise some reasonable regulation, so long as the owner’s opportunity to earn a reasonable rate of return on its investment is protected.

    I would think, for example, that it would be reasonable for the Commonwealth to approve a toll schedule that had a positive impact on transportation, just as the Commonwealth reviews rate proposals from Virginia Power to encourage energy conservation. A balanced result is possible.

  12. Larry Gross Avatar
    Larry Gross

    Sounds like folks would advocate an approach like Virginia’s State Corporation Commission takes with regard to Dominion Power electric rates…..

  13. Ray Hyde Avatar

    “I had just assumed that these two would be one and the same.”

    Nah Uh. They are not even close. They may even be unrelated.

    It doesn’t matter in the leat that the technology is available. What matters is that it has not been deployed. The cost of deploying it will be subtracted from the revenue extracted, and the difference is the excess in unneccessary tax increases requiered to simply provide the roads needed to provide the same benefit.

    In addition, you will also have to pay for profit. And ANOTHER overhead in addition to the state overhead for overseeing the process.

    This is a loser.

    At first I was tempted to agree with Bacon. But it doesn’t matter whether it is fully or partially funded by the state. Those profits could not exist without approval from the state and some level of state intervention to subsume the land.

    This is just another version of tearing down a country store to put up a mall – for more taxes.

    I don’t think there is any doubt that if we approve building a road we want maximum throughput for the money we spend – whether it is our money or not. We can either invest in state expenditures, or we can invest in private expenditures.

    Either way it takes money.

    I’ll agree the state wastes a lot of money. I’ve mentioned the T intesection near me before. But at least it gets fixed, even if it is a waste. Private enterprise might well just leave it to ruin, because there is no profit.

  14. Larry Gross Avatar
    Larry Gross

    “It doesn’t matter in the leat that the technology is available. What matters is that it has not been deployed. The cost of deploying it will be subtracted from the revenue extracted, and the difference is the excess in unneccessary tax increases requiered to simply provide the roads needed to provide the same benefit.”

    geeze Ray.

    Ask yourself why we have the financial “crisis” that is driving the argument about higher taxes for roads in the GA – as we speak..

    It’s the fact that Right NOW almost ALL of the monies collected from the gas tax ARE being spent for road maintenance – and according to JLARC – ALL of it should be spent because about 80% of the bridges are in need of it.

    Now go back and look at that TOLL road… in terms of the NET money it will bring in EVERY year – to go into a continuing maintenance fund for that road.

    THAT road … will NOT require future taxes increases to pay for its maintenance….

    Further, if that toll road is congestion-priced – additional money CAN (if that is the will of people) be used to fix bottlenecks and perform other optimizations…. in the vicinity ….

    But I’m still asking the question. Tell me what the performance criteria IS for determining if a road is bringing in more profit than is necessary for throughput.

    If you think they are so very different… then tell me HOW you’ll see that difference when the road is operating?

    If the road is full of cars and has excellent throughput.. could one say that the tolls are “too high”.

    Isn’t the idea to keep raising the toll… until the total volume is reduced to the point where there IS good

    How would one be able to determine… if tolls were “too high” – at the expense of “throughput”?

  15. Larry Gross Avatar
    Larry Gross

    “I’ll agree the state wastes a lot of money. I’ve mentioned the T intesection near me before. But at least it gets fixed, even if it is a waste. Private enterprise might well just leave it to ruin, because there is no profit.”

    Not if the state REQUIRES excess tolls to actually go into a VDOT-controlled maintenance fund.

    Toll Roads .. have the potential to not only self-fund their own maintenance but to use excess toll revenues for maintenance of other non-tolled roads.

    This is really a peculiar aspect of roads in my view.

    How would you feel if every time Dominion Power had to do maintenance work on one of their generation plants – that they required a rate-increase? Every time they needed to build a new plant or new power lines – a rate increase?

    This is the basic argument going on with roads right now. The argument is that we need to raise taxes to pay for maintenance and new construction … AND we all know.. in a few years when all those newly-built roads have been added to the existing list of roads that need to be maintained – they’ll, once again, be out of money, and have to come back for yet another tax increase.

    In other words.. as far as the eye can see … we’ll need ever increasing taxes to pay for roads.

  16. Toomanytaxes Avatar

    Also keep in mind the air quality issue. If NoVA cannot build more “general-purpose” roads because of air quality issues, why should we pay more “general-purpose” transportation taxes?

  17. It is pretty simple. We know that the maximum throughput occurs at 35 MPH and three car lengths apart.

    If you have more traffic than that you are charging to little, and if you have less traffic than that, then you are charging too much.

    If the toll road is charging too much it goes into the pocket of the owner, not to other infrastructure.

    Almost all the monies for the gas tax are being spent for maintenance because the gas tax is per gallon and not per dollar, and it hasn’t been raised on a per gallon basis since 1986. Go look at the Ohio graphs I posted, they seem to have enough money, but then, they have raised taxes periodically.

    I don’t care if you do it through tolls, partially, but tolls cannot, and should not, be the only source of funds. To the extent that you add tolls, you are raising taxes. To the extent that you add new infrastructure and technology to collect those taxes you are raising overhead and that makes the tax increase more than necessary.

    In my opinion, when you get done you will have a system that is more expensive, has more leakage, and is no more fair than the sytem we have.

    Even if it is more fair, we have no way to prove that it is. And if it is more expensive than it needs to be, I have a hard time seeing that it can be more fair than the system we have.

  18. 40%of air pollution comes from dwellings. If NOVA can’t build more roads because of air quality concerns, then pretty soon they’ll have to restrict dwellings, too.

    Then what?

  19. Larry Gross Avatar
    Larry Gross

    re: “to the extent that you add tolls, you are raising taxes.”

    I really beg to differ.

    You pay taxes whether you want to or not.

    Comparing tolls to taxes is like saying that charging for electricity is a “tax” because you must have electricity. The difference is the AMOUNT of electricity you use IS up to you.

    I’d say this. Do the tolls and do consumption taxes adjusted for inflation.

  20. Larry Gross Avatar
    Larry Gross

    re: “40%of air pollution comes from dwellings.”

    you’ve got two problems here..

    First it would be nice if you could cite a reference for the 40% for dwellings. I’m a bit doubtful.

    Second.. to be honest.. if you’re alluding to electricity.. you need to admit that the air quality
    issue is with respect to the NoVA region… If electricity is generated outside of this region,
    it will not affect the air quality issues inside of the NoVa region.

    or were you alluding to other sources of pollution?

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