HOT & Bothered: Virginia’s HOT lane experience offers lessons for NC

Last lets us know how this whole process went for Virginia:

Here is how the market solved the Springfield mixing bowl: In 2002 the state of Virginia decided to get into the HOT lane business. It solicited bids to add HOT lanes to the Virginia portion of the Capital Beltway and in 2005 entered into a deal with an Australian company, Transurban, to build HOT lanes along a 14-mile stretch of I-495. The cost was estimated to be $900 million, and the project was to be completed by 2010. At the time of the agreement, the sources of funding for this public-private partnership were, as they say in baseball trades, to be named later. This omission made it difficult to tell whether the Transurban proposal was any good. But then, there wasn’t much basis for comparison anyway: The Australian company was the only bidder.

By 2007, when Democrat Tim Kaine was governor, the launch date had been pushed back to 2013 and the project cost had almost doubled, to $1.7 billion. Even so, the private partners generously committed to providing $1.3 billion of the necessary funds. In return, they would be granted a 75-year concession to operate the lanes and would share 30 percent of toll revenues with the state of Virginia.

There was, however, some fine print. Revenues would be shared with the state only after all operating costs and project debt had been repaid. The budgetary math suggested this moment would arrive roughly the third Sunday after Never.

Makes you feel all warm inside, huh? :

And it turned out that most of the “private” money would be coming from the public, too. By the end of 2007, the projected cost was up to $1.9 billion—these deals rarely get better as they go along—and Transurban announced that it had secured $1.2 billion in sweetheart loans and “private activity bonds” from the U.S. Department of Transportation and the state of Virginia in addition to the $409 million Virginia had already committed to spending for the cause. In the end, Transurban plunked down just $350 million of its own money.

As this game of financial Twister was playing out on the I-495 project, Transurban signed another deal with the Virginia Department of Transportation to begin work on converting the HOV lanes on I-95/I-395 into HOT lanes, too. Your average consumer might have waited to see how the vendor performed on one project before signing on for another. But then, government is not the average consumer, and the singular joy of public-private partnerships is that all money can be seen, after a turn, as other people’s money.

[…] The projected price tag for I-95/I-395 looked like a bargain: just $940 million for 29 miles of HOT lanes. And this time Transurban committed to paying a huge chunk of it, $843 million, with Virginia on the hook for only $97 million. Except that nearly $600 million of Trans-urban’s contribution again came in the form of government bonds and loans. And again, no other companies bid on the project. The I-95/I-395 HOT lanes are being built at this very moment. 

Mind you, when we talk about the state being “on the hook” for a certain share of costs, that doesn’t really tell the whole story because the state also gave away the land underneath the HOT lanes. And then, buried in the 172-page final agreement for the Beltway project was a peculiar clause. You’ll recall that on Virginia’s HOT lanes, vehicles carrying three or more people are allowed to travel toll-free. (They signal that they’re in HOV compliance by flipping a switch on their special E-ZPass transponder. This transponder costs $12 a year to rent. So even if you never pay to use the HOT lanes, you have to pay for the ability to signal that you’re not paying.)

In any event, Transurban was concerned that these carpooling freeloaders would eat into its profits. So the stipulation was inserted that if HOV traffic exceeds a certain percentage of total drivership (24 percent) then the state of Virginia will have to pay Transurban for the carpoolers. How much? Up to 70 percent of the prevailing toll rate for each HOV vehicle. And this provision isn’t just to keep Transurban from going out of business: It doesn’t sunset until Transurban clears more than a 12.98 percent profit from the project. The arrangement is every capitalist’s dream: free land, developed with taxpayer money, for privatized profits and socialized losses.

Thus far, the HOT lane experiment on the Beltway has had poor results. The lanes officially opened on November 7, 2012. The original Transurban proposal projected that 66,000 cars a day would use the express lanes; during the first six weeks they averaged 23,308 vehicles per day. Transurban said not to worry—this was just a “ramp up” period. By the close of 2013, a full year into the project, the average number of daily trips was up to 41,327—still nearly 40 percent off the projected pace. On the HOT lanes’ single biggest day ever, only 46,975 vehicles used them. What this means, practically speaking, is that most of the time the HOT lanes sit relatively empty while traffic crawls along in the main lanes. Traffic engineers call this excess capacity. Drivers call it a waste.

[…]

The question is whether in practice HOT lanes are superior to general purpose lanes. The evidence on this score is mixed, and the anemic ridership on the Capital Beltway in Washington, D.C., isn’t unique. Washington state, for instance, began a pilot HOT program with 10 miles of lanes on SR-167, outside Seattle, in 2008. After four years, revenue was less than a third of initial projections. The best that can be said about HOT lanes is that they may work, in some configurations, in some places—provided the government drives a hard enough bargain and the planning and modeling for the project are sound.

Which is fine, so far as it goes. The catch is, adding basic, general-purpose lanes works 100 percent of the time. This is particularly important in the case of the I-95/I-395 project, where the state is giving away two lanes that are open to the general public for 19 hours a day and turning them into HOT lanes full time. The problem with general-purpose lanes isn’t practical, it’s political: Environmentalists and progressives hate them; politicians don’t want to pay for them; and there’s no way for sharp-eyed private companies to extract money from them.

[…]

 Yet populist concerns about HOT lanes aren’t specious. For one thing, citizens should always be wary when the government conveys public land to a private entity. They should be doubly so when the private party gets the land free. And triply so when the private party has no competition for the gift.

HOT lane advocates are quick to point out that surveys suggest a wide spread of income among users. Indeed, it seems that most drivers use HOT lanes only occasionally and that “regular” customers are a minority. Even so, the income of HOT lane users does tend to be higher than average, which makes it hard not to see the lanes as a transfer of wealth up the economic ladder. The government gives away public land. It funds the public portion of the construction costs. It provides loans and bonds to the private construction company. And then, once the HOT lanes are operational, it pays for the state troopers who patrol them and the crews who keep the snow off of them. That’s an awful lot of public resources being lavished on a good designed for folks at the higher end of the earnings scale in the name of some nebulous public benefit. It’s a bit like the massive government handouts to electric car manufacturers, such as Tesla, which have had the effect of subsidizing luxury cars for the rich and famous. Only it’s more obnoxious, because when Ben Affleck drives around in his Tesla, he has to sit in the same traffic as you do in your Ford. That is, unless he hops on a HOT lane. In which case your tax dollars will have made his drive both nicer and faster.

Yet what makes HOT lanes truly unfair is that they discriminate on price, not value. Think about the economic choice offered to a driver as he approaches a HOT lane on-ramp at the Springfield mixing bowl. At the moment he arrives, both the HOT and main lanes look clear. The HOT sign flashes a price at him. Perhaps it’s $3.85. The key to understanding the nature of HOT lanes is that at that moment the driver has no idea what the price represents.

In order to make an informed decision about whether to pay the toll, our driver would need to be able to compare travel times to his destination in both the main and HOT lanes. Obtaining this information isn’t difficult; highway administrators do it all the time. Drive down any stretch of freeway in America these days and you’re likely to see signs estimating travel times to points in the medium distance: Exit 160: 13 miles, 14 minutes. And yet the signs for HOT lanes in Virginia won’t tell you anything about travel times.

Withholding this information gives away the game. After all, for a price to communicate useful information, it must be attached to a good. Yet HOT lanes are deliberately opaque as to what they are offering for purchase. In reply, apologists will tell you that what HOT lanes are really selling isn’t saved time but a guarantee that, no matter what, traffic will move at some minimum speed. As Poole and Orski put it, “Saving time is only one of several reasons for using [HOT] lanes. Other perceived benefits include increased reliability, greater safety, and superior predictability of arrival time.”

That “perceived” seems important. What with the no-competition contracts, the government loans and bonds, and the HOV subsidies, HOT lanes have meandered far, far away from free-market principles. And by admitting that they’re not actually selling a good—time—but rather a panoply of intangible benefits, the advocates have gone farther still. In fact, we’ve reached the point where you can see why progressives like HOT lanes as much as libertarians do.

For all the talk of pricing and value decisions, in reality, the new Virginia HOT lanes will function something like Obamacare’s-individual mandate: You either sign up to use them and pay the cost of doing so, or you pay a penalty in the form of increased traffic. And the function of this mandate is to discourage a lifestyle—suburban, middle-class living—that both progressives and libertarians find distasteful.

Consider a commuter making his way north on I-95 toward Washington at 9:30 in the morning. With the HOV restrictions lifted—they run from 6:00 a.m. to 9:00 a.m. and from 3:30 p.m. to 6:00 p.m.—he can cruise along in the open express lanes. Yet the traffic in the main lanes will continue to crawl slowly until close to noon on most days—because there are relatively few points at which drivers can enter the express lanes.

Once the HOT project is complete, however, our suburbanite who has diligently arranged his commute to off-peak hours will no longer be able to use the express lanes for free. Instead, he’ll have a choice: move into the morass of traffic on the main lanes, adding perhaps an hour a day to his commute, or pay the toll for the HOT lanes, which is likely to run somewhere between $1,500 and $2,000 a year.

For some people—specifically the kind for whom that sort of money is merely the cost of doing business—this might turn out to be an improvement. For the median household, it will be the imposition of either a financial or a temporal burden. But of course, that’s the point.

Because like everything else the government does these days, the HOT lane project is ultimately about picking winners and losers.