There was an outcry last week in Washington when many commuters found themselves paying an unusual and unexpected toll for their drive into the city: $47.
This to drive the few miles from the Beltway (I-495) into the city on Interstate 66. Introduced in December 2017, the tolls on I-66 are a mix of congestion pricing and funding, for the ongoing widening of the highway. While there were predictable complaints leading up to the introduction of the toll – a free infrastructure service was no longer to be free – these complaints were nothing compared to those when the $47 toll hit. And… it was not the first time it happened. January 18, and January 24, saw similar tolls.
There is a lesson here with regard to pricing of infrastructure services. And it is a topical lesson for several ongoing debates.
The first part of the lesson is that pricing is important. Failure to charge for infrastructure services is an idea whose time has long gone. It made sense once upon a time, when practically all infrastructure was delivered by the government, and paid for through general taxes. “Free” infrastructure, though it was only free in the sense that users were unaware of what they paid for it, avoided the practical complications of implementing payment mechanisms, or the political implications of pricing debates and complaints. Today, in an era where no government – with the exception of China – has the fiscal space to fully address its infrastructure issues, “free” infrastructure is far more trouble than its worth. The I-66 story is a clear example: congestion on the corridor has been steadily worsening for decades, and neither the Federal government nor the state of Virginia have been able to fund needed expansions; tolls – users paying to use the service – became a critical piece of finding the money to expand the road. Virginia has actually become a national leader among US states in the development of transport solutions relying on user fees – generally in the category of Public-Private Partnerships, and a successful track record helped get the I-66 expansion project approved.
The second part of the lesson is that variable – or dynamic — pricing makes sense, at least when demand for the service is variable. Power utilities in developed markets have adopted this principle for years, as of course have airlines. Dynamic pricing provides guidance to consumers or users, and helps reduce congestion and its associated costs. Another good example of this as a policy issue can be found in debates on congestion pricing, as being currently considered by New York City. An excellent recent review in the New York Times of congestion pricing approaches in three cities – London, Singapore and Stockholm – illustrated potential pricing approaches and their advantages and disadvantages. London’s congestion charge has the simplest approach, a flat daily charge of £11.50. Singapore has the most complex approach, which varies in response to real-time congestion, as is the case for the Washington area’s I-66 toll above. Stockholm’s is in-between, charging rates which vary but are predictable (i.e. there is a higher charge at rush hour). As the article indicates, London’s initial reduction in city traffic has more recently become offset by more ride-sharing and delivery traffic, and there are calls to review the pricing mechanism. A variable price is likely coming. Singapore has not seen a reduction in congestion, though there has been a shift in share of traffic towards mass transit. The Stockholm case is a clear positive, with the time for trips through the city center being cut in half. The examples illustrate the advantages of variability – at least a minimum of variability, in infrastructure pricing.
New York currently plans to start congestion pricing on the London model, with a flat fee (expected to be about $11.50 per day). As a starting point, this may have an advantage of simplicity. Yet we would bet this “flat fee” approach may prove short-lived, and that both London and New York wind up with at least the Stockholm approach of a higher rush hour price. Washington DC’s subway flows this approach as well.
The third, and last, part of the lesson is that details matter. A lot. One could get essentially the same results, in terms of revenues and congestion effects, without the political complications and blowback. As the congestion pricing article in the NYT lays out, any kind of pricing guarantees some degree of complaints – consumers always favor free goods when they are an option. But as all politicians know, what matters is how much complaining there is – small amounts are fine, large amounts are a threat. The issue on the road toll – as it would be for any infrastructure price — lies in the predictability or lack of predictability of the service price. A $47 toll, when tolls typically range in the mid-to-high single digits, will be traumatic for users. For most users, especially recurrent users, some degree of variance is tolerable, but a large variance is not (airlines get around this problem, given their highly volatile ticket pricing, by offering large discounts to volume consumers). So the trick is the marry the need for dynamic pricing, with predictability within a reasonable range. Something which could be achieved by a simple fee-cap mechanism. Capping the maximum fees at some “reasonable” number ($15? $20?) would achieve the same goals without risking strong pressure on the concept itself. Regulators, and policy-makers, trying to find revenues to pay for infrastructure, should try to strike this kind of balance every time.