July 20, 2008

To: Jeff Yarema and Transportation Finance Commission Members

From: Ed Regan -- Wilbur Smith Associates

COMMENTS AND RECOMMENDATIONS -- TOLLING, PRICING AND VMT FEES

Jeff:

Thanks for sending a copy of the Commission's initial thinking on
solutions to future transportation funding challenges. I think there are
some very sound , and courageous, ideas, although some of your
alternatives are clearly in conflict. I sincerely hope the Commission
will recognize the severity of the problem, and the singularly unique
opportunity it has to make recommendations that will provide long term
solutions.

Regarding the second to last paragraph in your document, I would suggest
that you do need to be "realistic" in your statement of the problems
facing transportation finance... the solutions of which will no doubt
need to reflect major changes from the way we are doing things today.
The key to getting "listened to" is not shying away from tough choices
and courageous recommendations... but rather making clear that the
"status quo" won't work and the "tough choices" are the only choices!

First, I would like to provide a few minor comments on the draft you
submitted, and then get into some specific and detailed additional
recommendations:

1.  The document understates the significance of the coming movement
    (some call it a coming "war") against global warming. The movement
    is gaining strength and transportation will be a major focal point.
    Experts in this area refer to future strategies as a "three-legged
    stool", namely:

    a.  Technology improvements (increased fuel efficiency and reduced
        emissions;

    b.  Reduced trip making and reduced VMT; and

    c.  Increased transit options in urban areas.

2.  All three of these will have major impacts on transportation
    funding, including significant further erosion of the gas tax
    viability and the need for increased funding for transit. Stress
    this issue more, particularly in dimensioning the problems facing
    transportation finance in the future.

3.  You are suggesting increases in the gas tax (short term) as well as
    indexing to either inflation or VMT or PPI. I suggest these all be
    included in the establishment of the index... needs will increase as
    VMT increases and costs increase with inflation.

4.  I don't agree with the suggestion (page 2 item 5) to allow states to
    opt out of the federal gas tax if they transition to VMT system. As
    I will note in more detail below, I strongly believe the move to VMT
    pricing is an issue of national significance and should be initiated
    by at the federal level not at the state level.

5.  On page 3 you have a few suggestions on Carbon tax... is this \$0.13
    per gallon in addition to the other recommended increases? Also, as
    noted above, I think these two items understate the heavy importance
    of this issue, and also that this issue will strike a nerve with
    many in Congress.

6.  Great stuff on the VMT system, but as big a supporter as I am, full
    deployment by 2015 is a bit aggressive. 2020 would be a good
    target... at the national level not simply a few states. Also, this
    is where you will need the strongest "why" in the report. To me a
    key will be the need to drive home the point that the problem with
    the gas tax is [not]{.underline} that it is inefficient. It *is*
    efficient. The problem with the gas tax is that it is [not
    sustainable]{.underline} and therefore must be replaced. What I have
    seen often is that the VMT idea looks more complicated and more
    costly than the gas tax. It is. But that's not why we need it. We
    need it because the gas tax is not sustainable!!

7.  Your suggestions (page 4) for pilot programs and a "major national
    study" are fine, but as I note below, I would hope you would be a
    bit more visionary and stronger in your recommendations.

8.  Not sure you want to go too far in "adopting the Oregon
    recommendations". Great research, but the use of the data collection
    at the gas pump is only good as long as we use gas... this weekend I
    saw remarks from someone in the oil industry that proclaimed within
    25 years there will be no more cars sold with fuel burning internal
    combustion engines. GM will start selling full electric "plug in"
    vehicles in 2010. Definitely don't push "fuel dispensing stations"
    and the taxing mechanism.

9.  Last bullet on page 4 talks about "pricing to supplement the gas
    tax". That is true during a transition period, but when we
    ultimately move to a "per mile" basis of taxation it should be
    intended to replace, not supplement, the gas tax.

10. Regarding tolling the interstate, I am very glad to see strong
    support for removing restrictions on tolling. I understand this is
    not unanimous, and I also understand that tolling only new capacity
    has a better chance of acceptance. However, as someone who has been
    involved with almost every HOT/ Managed lanes/ express toll lane
    project in America, I can tell you that the number of potentially
    viable opportunities for tolling only new lanes will be less than
    you think. The financial [success]{.underline} of these lanes
    depends on the operational [failure]{.underline} of the competing
    free lanes (ie congestion). The states biggest needs for funding in
    the future will be the cost of "rebuilding the interstates", not
    building new capacity. This may also be a great opportunity for
    private sector involvement and the creation of long term
    "performance" concessions including maintenance and operations.
    Until we completely transition off the gas tax, the states will
    urgently need tolling to generate the dollars needed to finance
    interstate reconstruction; it would be much better to not restrict
    this to new capacity. This may be one of your most important
    recommendations!

11. I would disagree with limiting tolling on interstates to urban
    areas... those states which have proposed interstate tolling to
    finance interstate reconstruction (eg. Mississippi, Missouri,
    Pennsylvania, Virginia, North and South Carolina) have all done so
    with respect to rural interstates that are falling apart.

12. You have some strong ideas on the top of page 6 on creation of a
    National Infrastructure Bank. However, you might consider requiring
    a detailed cost/benefit and life cycle performance justification for
    NIB participation. Also, you might consider some possible linkage to
    achievement of future national goals on climate change??? Just a
    thought... makes sense and may build support for the idea from
    global warming advocates.

**[National Pricing System]{.underline}**

The more I have thought about this, the more I have come to believe that
we need to move toward implementation of a national pricing system. The
system I envision will be used for VMT pricing in all states and
regions, but will also be designed to be used in congestion pricing,
special municipal or regional pricing zones, parking and even transit.

As I mentioned at the meeting in April, the system would ultimately
envision every vehicle in America equipped with devices that could
accommodate all transportation revenue collection, and also serve as a
"conduit" for VII and other third party ITS services such as dynamic
route guidance. This is a very big issue... and following my discussion
of this at our April meeting I have had discussions with Tom Kern of ITS
America who was an observer at the meeting. They are very interested in
the link between pricing systems and ITS services.

If we are smart we can design the system in a way in which a single
account (or a single "stored balance smart card" for those travelers
with privacy concerns) can be used throughout the US, for state, local
and federal revenue collection. It should also be integrated with
transit in a way which would enable strategic pricing initiatives aimed
at encouraging mode shifts and achievement of integrated regional
transportation solutions and to meet "global warming" objectives.

Sounds like a lot to ask; actually I have already developed a concept
(strictly a rough concept at this point) but one which would not even
challenge the limits of technology which is already available today. I
was asked to come up with this vision for a presentation I made at an
IBTTA Summit last weekend, and I thought I would share it with you. A
copy of my powerpoint is attached with this email.... just as a means of
helping explain the concept. Frankly, I think the Commission should
strongly build the case to move off the gas tax (which you seem to be
doing) and moving toward the development of a "national pricing system"
which can meet the future transportation finance needs of local, state
and federal governments.

**[Building the Case]{.underline}**

I know you realize most of this already, but the situation has worsened
dramatically over the last six months with the run up in fuel prices.
This will make it much easier for members of Congress to understand the
problem... they are all faced with trying to deal with gas prices. But
what is the cause and effect of the price run up? It is caused by a
dramatic increase in fuel demand by China, India and other developing
countries that are "awakening" to the automobile and the benefits of
personal mobility. Yet even with the recent increases we are still
seeing only the tip of the iceberg**.** Auto ownership rates in China
are still less than 5% of the US... ie the demand for scarce global fuel
supplies is only going to get worse.

There have been several important, and immediate, responses to the price
increases, including the expectation that higher gas prices will be the
norm for the future, not the exception. We have already seen:

-   An immediate shift in consumer preferences toward hybrids and other
    fuel efficient vehicles and away from SUV's, trucks, etc.

-   The auto industry is undergoing a massive retooling to meet this
    changing demand

-   There are already major movements toward the search for alternative
    fuels, driven both by increased price and the compelling need to
    reduce greenhouse emissions. This will further accelerate the
    transition off gasoline, dramatically worsening the funding crisis,
    if we remain tied to the fuel tax as the primary source of funding.

Each of the above new trends will accelerate the demise of the viability
of the gas tax...even beyond the levels which has already been
recognized by the Policy Commission when it did its work in 2006 and
2007. Also, as pointed out in the "minority opinion" of the Policy
Commission document, there is a major p[olicy conflict]{.underline} in a
system of finance which depends on the taxation of a commodity of which
we are trying to discourage the use! This is a big problem. Simply
stated, the motor fuel tax is [not sustainable; it is no more
sustainable than our dependence on motor fuel itself for transportation
in the future.]{.underline}

Right about now, I can see your members saying "that may be true, but it
is decades away". But keep in mind, you are charged with suggesting a
long term solution to a long term problem; and the horizon I am
suggesting is the next 15 to 20 years (if not sooner); I suspect that is
well within the term of your Commission's outlook.

There are many other reasons we need to move to more direct road user
charging, such as the need to manage demand and establish a more direct
link between revenue collection and use of scarce capacity. Doing so
will help achieve one of your other recommendations, that being an
emphasis on cost justification and performance. By moving to a fully
priced system, new investments will be made where there is sufficient
demand (and revenue potential) to justify it. It will be much harder to
justify earmark type projects.

Congestion management may be the biggest reason of all to move to a per
mile basis of taxation, especially if we design it to allow variation in
rates on congested facilities or congested areas. Strategies such as the
proposal to price access to lower Manhattan would be infinitely easier
if all vehicles were equipped for non-stop automated revenue collection.

I'm sure you've got a dozen other reasons why the status quo is not
sustainable. I urge the Commission to be detailed and strong in showing
why the gas tax will not be sustainable in the future, and make the
point that it is because of this that we need to begin now to design the
national system of the future ... that can be fully implemented by 2020.
Remember, it is doubtful that the national pricing system I contemplate
will be as efficient as the current gas tax system... but efficiency is
not the problem. We need a system that will be [sustainable]{.underline}
in the future.

One other significant point. There is, for some reason, an assumption
that the movement toward VMT taxation will be lead by the states, not by
the feds. Honestly, when I last spoke with Tyler Duval (Assistant USDOT
Secretary for Policy) about the feds needing to lead the way toward a
national VMT system, he chuckled. Tyler is a strong advocate for moving
off the gas tax, as you know. But he said he did not see Congress ever
agreeing to it, and the best chance was for it to be implemented at the
state level.

I could not disagree more. The whole reason we don't have national
standards for electronic toll collection today is because of a lack of
leadership at the national level; as such each vender has endeavored to
have their own product become the "de facto" standard in different
areas. It will be difficult for individual states to do this on their
own, but if the federal government leads the way, and develops the
overall national system architecture with the needs of the states in
mind, it will lead to the equipping of every vehicle in the country
(much the way almost every truck in the EU has now been equipped for the
German GPS Autobahn truck charging system). Each of the states can then
easily opt in and simply replace their gas taxes by joining into the
national system. The current administration (including Duval) strongly
suggests that the federal role should be reduced to transportation
issues of "national significance". In my view, no issue can be of
greater national significance than the entire sustainability of future
transportation finance in the face of increasing fuel efficiency and the
aggressive search for alternative fuels!!

**[National Pricing System Concept]{.underline}**

You might want to take a quick look at the powerpoint I presented to get
an idea of what a national pricing system might look like. I have
identified several key challenges that must be met in establishing a
viable system, that might ultimately be publically and politically
acceptable:

-   Dealing with privacy concerns (big brother issue)

-   Perceived high complexity and cost (as compared with the simplicity
    of the gas tax)

-   Equity issues (must be able to be used by all drivers, from all
    incomes, with or without credit cards or bank accounts)

-   Reliability and accuracy issues

-   Enforcement and security issues

-   Desire to have system be Multi-modal

-   Ability to use a single account or prepaid card for all
    transportation pricing in the country

-   Reliable distribution of revenue from multiple sources to numerous
    agencies and service providers

-   Ability to be sustainable even when we substantially or totally move
    off gas powered vehicles in the future.

-   Potential for integration with other ITS services for improved
    safety and demand management.

As shown in the presentation, the system would assume every vehicle
would be equipped, including truck and cars. A key to the proposal is
the use of a smart card system. The on board device would include a card
reader; each licensed driver would be provided a national transportation
card. The user would have two options:

-   Establish a national account, which would be linked to a credit card
    or bank account, a convenient system which would be for those not
    concerned about privacy; or

-   A stored balance (electronic purse) card, in which a prepaid amount
    of transport "cash" would be stored on the card itself, which would
    be transferred directly by the on board unit for all transportation
    charges. Card replenishment would be through kiosks in various
    locations, which would accept cash or credit cards. This option
    would deal both with the privacy issue and the equity issue.

The system on board unit would also include both GPS/GSM and DSRC
elements. The GPS system would be used for VMT related charges, possibly
including multi-tier VMT pricing by state and region or municipalities,
or even special charging zones (such as the previously proposed
Manhattan pricing plan). VMT charging would be accumulated by
jurisdiction, but would not likely be route specific. Our concept
envisions VMT collection networks to be established in each state. Note
that data would be "downloaded" via GSM (cellular) communication, not at
the time of refueling (deals with future scenario where we have plug in
electric or other non-fuel vehicles).

The DSRC element (probably 5.9GHz such as being considered for VII now)
will be used to communicate with roadside readers for special direct
pricing applications such as managed lanes, toll roads, congestion
pricing cordons, toll bridges and tunnels, parking and other
applications which required high precision on lane or facility
placement, time of day and other info. This would also permit immediate
revenue transfer to private or public operators rather than everything
being processed through state and federal distribution channels. The
DSRC element would also serve as an important portal for other vehicle
to roadside or vehicle to vehicle communications for VII and other ITS
services. Keep in mind, in this model, every vehicle is equipped, so the
potential ITS benefits are almost limitless.

The OBU could also include an ignition interlock. If a valid card was
not inserted (or other means of securing revenue as might be
determined), the car would not start. This would be similar to the
ignition lock now in use for DUI drivers, who must pass an in-vehicle
breathalizer test before the car will start. This could be somewhat
controversial but would be a great way to ensure a high level of
enforceability. In the same way, the only way to currently avoid paying
a gas tax is to not purchase gas. If you did that, eventually, the car
would not start.

The OBU would also include a small display. This would be used to keep
the driver informed about payments, balance on smart cards, etc, and
could also be used to display ITS information, such as dynamic route
guidance information.

The national "accounts" would be maintained at some type of national
clearinghouse, which would enable the same card to be used for travel
anywhere in the US. The accounts would be linked to credit cards or bank
accounts. A direct billing system could be used with commercial
accounts, something that would be extremely valuable to the trucking
industry. Stored balance card users would not have national accounts,
rather travel cash would be stored on the card and no records kept of
motorist travel at all. A network of kiosks would be established for
easy replenishment of card balances.

By using the travel card concept, it would also be possible to use the
same card for transit fares or even cab rides, etc. This would meet the
goal of the system being multi-modal, which I believe will be very
important in the future, especially as related to the battle on climate
change.

Individual states, toll operators and other service providers would make
"claims" against the national travel accounts, and revenue would be
redistributed. This would include the distribution of VMT taxation
revenue to the respective states, localities and the federal government.

Sounds like it would be expensive. I have reason to believe that the
OBU's including all the elements I have described above, would be in the
\$250 range, probably lower in the future. That would mean that if we
just went out and equipped every vehicle in America next year (not
practical) it would cost about \$50 billion. But keep in mind, even if
we did expend that amount in a single year, it would still be only about
20% of the \$300 billion total annual transportation funding which most
people agree is needed in the US. And keep in mind, the national system
would be used to collect all transportation revenue, from all sources,
through the same device. Another way of looking at it:

-   The \$250 cost of the in vehicle system would be less than 1 % of
    the cost of the car

-   The \$250 cost of the device would be less than 2% of the total
    revenue collected by the device assuming an 8-10 year life.

Annual systemwide operating costs might reach \$25 billion or more...
much higher than the cost to administer the gas tax. But much of this
cost would be offset by fees paid by service providers, I suspect the
net public sector cost would be in the range of 5-7% of annual revenue
collected.

**[Recommendation]{.underline}**

I am not suggesting you should recommend going with this specific
system. I have presented this to you merely to demonstrate the potential
feasibility of the concept, and to show how the system could be designed
to deal with all the challenges we are facing. Most important, it would
ensure a sustainable financial future for transportation, which is
really the issue.

What I do suggest the Commission recommends is:

*The Commission recommends the ultimate establishment of a national
transportation pricing system which can be adopted to replace the motor
fuel tax at all levels, federal, state and local. The system should be
designed to be multi-modal and provide a single mechanism which can be
used for all transportation taxation and pricing, including:*

-   *VMT fees at multiple jurisdictions, including federal, state and
    local*

-   *Toll facilities (public and private)*

-   *Congestion pricing applications*

-   *Managed lanes*

-   *Parking charges*

-   *And other vehicle related charges.*

*To the extent possible, the system should consider use of smart cards
which can be used both with the in vehicle units, as well as separately
for transit fare payment. The system should anticipate the all vehicles
in America would ultimately be equipped, including private autos and
commercial vehicles. The system must be designed to provide a
sustainable transportation revenue source for the future, for all types
of vehicles regardless of whether they use motor fuel, electric motors
or other alternative fuel sources.*

*The national transportation system shall be designed to meet the
revenue collection needs of the federal government as well as the state
and local levels. States would not be required to join into the system,
but would likely found it beneficial to do so since all vehicles would
be equipped and a single system or national account would be usable for
all transportation taxation and fee payment throughout the United
States.*

*The national system should also have the following characteristics:*

-   *It must provide a means for preserving privacy and allow for
    anonymous operations for those motorists desiring such protection.*

-   *It must permit a single card or account to be used for all
    transportation charges in all jurisdictions.*

-   *It must permit the variation in taxation rates based on time of
    travel, region of travel and emission characteristics of vehicles.*

-   *It should include both GPS and DSRC subsystems to enable both VMT
    fee accumulation by jurisdiction as well as direct payments for
    specially priced facilities and service providers.*

-   *To the extent possible, it should be designed to facilitate
    integration with VII and/or other ITS services.*

-   *The system must be reliable, secure, protect against identity
    theft, and enforceable, and permit the efficient transfer of revenue
    between multiple states and jurisdictions and service providers.*

-   *This technology of the system should be designed with an open
    specification to allow multiple equipment providers.*

*The system should be designed to maximize cost effectiveness. The total
annual net cost of operation should be less than ten percent of the
total revenue collected.*

*The Commission further recommends that the system be able to be fully
implemented by 2020.*

*The Commission further recommends that Congress mandate, and fully
fund, the necessary studies, planning, design and testing of the system
within the next national transportation authorization cycle, such that
the final system plan can be adopted by 2015 to permit implementation by
2020.*

\* \* \* \* \*

Sorry about the length of this document, but I really think this is a
very unique opportunity to "get it right".

I appreciate you taking these thoughts into consideration.

Thank you.