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Fitch Ratings Tracks the Growth of Managed Lanes as a Business Model in the US

Thursday, April 6, 2017 5:57
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Broadly speaking, there are two different entities called managed lanes in U.S. transportation circles these days. One of them consists of a high-occupancy vehicle (HOV) lane whose operator has decided to sell its excess capacity to willing customers, using variable pricing. In this column, I’ll refer to these as high-occupancy toll (HOT) lanes. The other consists of new lanes whose developer/operator aims to sell faster and more reliable travel to willing customers—and may or may not allow certain kinds of HOVs to operate either free or at a reduced toll rate. I’ll refer to these as Express Toll Lanes. Many elected officials don’t really understand the difference between the two kinds of managed lanes (ML), but the differences are profound.

A new “Peer Review of U.S. Managed Lanes,” released this month by Fitch Ratings, focuses on revenue-financed Express Toll Lanes and illustrates these differences very clearly.

As of this year, Fitch maintains ratings on 11 Express Toll Lanes projects. Seven of these operate as public-private partnership (P3) concessions, while three others are financed based on their toll revenues by transportation agencies. The odd man out is the original P3 Express Toll Lanes project, the 91 Express Lanes project in Orange County, California, which was bought by the Orange County Transportation Authority 15 years ago and is now operated by that agency.

For those who feared that revenue-risk projects were on their way out, the fact that Fitch added two more to its ratings last year (SH 288 near Houston and I-35E in Dallas) is evidence to the contrary. Other relatively new projects include C-470 Express Lanes in Denver and the Riverside County Express Lanes on SR 91, extending the original 91 Express Lanes eastward to I-15 in Riverside County; that project opened to traffic this month.

Fitch acknowledges that revenue-risk projects are unlikely to get an investment grade much higher than A, given both the ramp-up risks common to all new tolled projects and the greater volatility of traffic and revenue for toll lanes side-by-side with “free” lanes. That said, all the Express Toll Lanes projects Fitch rates have investment grade ratings of BBB or BBB- (except 91 Express, at A). That speaks well of the various state transportation departments that selected these particular projects and the scrutiny of their developers and financiers.

On the revenue front, Fitch points out that two of the relatively new Express Toll projects now in operation—I-95 Express in Northern Virginia and North Tarrant Express in Fort Worth, Texas—are ahead of their early-year revenue projections, while the LBJ Express Lanes project in Dallas was a bit behind for its first year but is expected to be on target by the end of year two.

It’s when we get into the details of rating factors that the differences between Express Toll Lanes and HOT lanes really come into focus.

The most dramatic difference concerns policies toward HOVs.

Most HOT lanes around the country give free access to HOV-2s. Fitch points out that “free access policies for HOVs with two or more passengers (HOV-2) will prove problematic over time as non-tolled vehicles crowd out paying vehicles,” which happens today during peak periods on the I-110 HOT lanes in Los Angeles. Fitch goes on to say, “The exclusion of HOV2 from free access is generally a minimum requirement for an ML facility in order for it to have adequate revenue capability.”

The Fitch analysts also state that a HOT lane operating with a high fraction of non-tolled vehicles will also undercut the pricing power of its variable toll rates, leading to congestion that not only reduces revenue but also undercuts the proffered speed and reliability benefits. The report also notes the beginning of a trend to offer no HOV freebies, citing the new SH 288 Express Toll Lanes as an example. (I will add the Express Toll Lanes on I-95 in Maryland and the new ones on the Mopac —Texas State Highway Loop 1— in Austin as further examples.)

Looking at design questions that make Express Toll Lanes more or less viable as customer-satisfying businesses, the analysts point out the obvious benefits of two lanes per direction rather than one (for reliability reasons, especially)—though traffic volume may not always be sufficient to justify two lanes. They call into question a minor trend toward allowing “open access” to managed lanes, which means that motorists can enter and leave whenever they wish, rather than having only a limited number of ingress and egress points. They conclude, without elaborating, that a “ML configuration that has continuous access from GP [general purpose] lanes would be one example of an extremely inefficient configuration.”

Data compiled by University of California at Berkeley researchers demonstrate that continuous access on Bay Area HOV lanes leads to a “friction effect”: when the general purpose (GP) lanes slow down to a crawl, so to the HOV lanes, since frustrated drivers in the GP lanes dart into the HOV lanes hoping to go slightly faster, thereby congesting them. Yet continuous access is being planned for the network of HOT lanes in the Bay Area.

Yet another ratings factor is the price-setting framework that applies to an Express Toll Lanes project. While all the projects Fitch rates “are required to adjust toll rates to maintain specified speed levels,” some of them have “soft caps” on toll rates. This is not exactly a price ceiling (which would be totally counterproductive), but appear to be a political device to assure nervous politicians that toll rates will not go to “unconscionably high” levels. Such a cap exists in Florida and it been increased twice so far for the I-95 Express Lanes in Miami. One hopes that as the benefits of variable pricing become better understood, these attempts at token price control will fade away—but as Fitch notes, they are a potential longer-term risk factor.

It’s refreshing to see that a major ratings agency has come to appreciate revenue-risk Express Toll Lanes as a customer-serving business, rather than the social engineering exercise that seeks to reward virtuous behavior by exempting carpools, hybrids, electric cars, etc, from being subject to pricing. Across America, a natural experiment is under way between these two kinds of MLs—HOT lanes and Express Toll Lanes.

May the better model win.

Robert W. Poole is director of transportation at Reason Foundation.


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