# Regulatory Evaluation for the New Starts NPRM

FTA has determined that this is a significant rule under E.O. 12866
because it will affect transfers (i.e., grant payments) of more than
\$100 million annually. This preliminary regulatory evaluation is
undertaken to analyze the effects of proposed changes to the New Starts
program on program implementation, transit capital expenditures, and the
allocation of funds by transit agency size. The proposed rule will
result in a reallocation of \$100 million or more from the New Starts
program to the Small Starts program. This change may alter the pattern
or timing of major capital investment expenditures, with a possible
change in costs and/or benefits to individual transit agencies and their
stakeholders. However, the effect of the Small Starts set-aside is
primarily a transfer between governmental entities -- neither a cost nor
a benefit. Each significant change proposed in the regulation will be
examined with regard to its likely effect, and a determination will be
made as to whether the effect can be quantified with available
information or with information that may be provided by commenters to
the rule. Several questions will be raised in this analysis where
additional data may help FTA to quantify some benefit or cost of the
regulation. In the absence of this data, FTA will discuss the costs and
or benefits in a qualitative manner in the next rulemaking action for
this program.

The proposed rule is not intended to address a market failure, rather it
is intended to both make the regulation consistent with the recent
changes to 49 U.S.C. § 5309 and address a problem with the way projects
are currently evaluated. Under the existing regulation, all non-exempt
New Starts projects are evaulated using the same process without regard
to the size of the investment. This results in a more rigorous
evaluation of smaller projects than is needed given the size of the
Federal investment. Thus, this proposed rule would vary the level of
evaluation based on the size of the project and the size of the Federal
investment based on the changes recently made to 49 U.S.C. § 5309.

## 1. Small Starts

The single largest change in the New Starts program is the creation in
SAFETEA-LU of the Small Starts program to which FTA has added the Very
Small Starts designation. Projects with a total budget of less than
\$250 million that seek less than \$75 million in Section 5309 Capital
Investment funds are eligible to compete for Small Starts funding.
Certain projects that are less than \$50 million in total cost and less
than \$3 million per mile of guideway may qualify for funding through a
proposed program category known as Very Small Starts. In FY 2008,
\$100 million of the New Starts program is requested in the President's
budget for Small Starts projects, and four projects were recommended to
receive funding under this program. Three of the recommended projects
are Very Small Starts. In FY 2009 and beyond it is expected that
\$200 million will be set aside annually for Small Starts projects. Over
the first ten years of the Small Starts program, therefore, the
cumulative impact of the set-aside will likely be \$1.9 Billion, with a
Net Present Value (NPV) of \$1.311 Billion using a discount rate of
7 percent. This effect is difficult to characterize in terms of cost or
benefit, as it simply represents a "transfer of a transfer" from one
governmental entity to another, but the magnitude of this transfer is
not easily quantified, as discussed below.

The President's Budget for FY 2008 capital investment grant program
(Section 5309) apportionment proposes \$1.399 Billion. Of this amount,
\$100 million was set aside for the Small Starts program. The intent
behind the set-aside was to provide a separate discretionary allocation
of funding for smaller projects -- meritorious projects that might not
otherwise compete on an equal basis with much larger transit capital
investments.

Presumably, the smaller projects would be proposed by smaller transit
systems. In that context, the set-aside would represent a transfer from
larger transit systems (and their urbanized areas) to smaller transit
systems. In fact, the projects recommended for funding are in Los
Angeles, California; Springfield, Oregon; Kansas City, Missouri; and
King County, Washington. Two of the four recommended recipients are very
large transit agencies serving major metropolitan areas that have
benefited from New Starts previously. Thus, it cannot be said with
certainty that the set-aside for Small Starts will in all cases result
in a transfer from one size or type of FTA grantee to another.

The Small Starts program may result in a different mix of transit
investment than the experience to date. Over the past 20 years, the
majority of fixed guideway projects funded under the New Starts program
have been rail projects. The four projects recommended for Small Starts
funding in FY 2008 are Bus Rapid Transit (BRT). This represents the
largest expenditure for projects other than rail in a single year.
Whether this New Starts expenditure level of Section 5309 Capital
Investment funds for bus projects will continue into the future cannot
be determined at this stage, as start-up light rail or streetcar
projects may qualify under the Small Starts program as well. If this
expenditure level continued over time, it would be necessary to
determine how much of the new Section 5309 Capital Investment
expenditure in BRT projects was substituting for bus capital
expenditures that would have occurred under the discretionary bus and
bus related grant or the urbanized area formula grant programs.

## 2. Streamlined Process

Under the New Starts program, a project is approved by FTA to proceed
from alternatives analysis to preliminary engineering, then to final
design and construction, and finally to a Full Funding Grant Agreement.
The Small Starts program is intended to advance projects into project
development through a streamlined evaluation process resulting in a
Project Construction Grant Agreement (PCGA). This allows these
relatively smaller projects to apply for funding through a simpler and
quicker project development process, hopefully lowering related costs as
well. In this way the rigor of the evaluation process will better match
the size of the project and the size of the Section 5309 Capital
Investment. The Very Small Starts category proposed by this rule would
extend this principle further. This attempt to match the evaluation
process with the size of the investment is expected to result in a more
efficient allocation of Section 5309 Capital Investment funds.

The Small Starts program remains in its early stages, however, so FTA
has no information on which to base an estimate of time savings from the
streamlined process. FTA would be interested in receiving comment on how
long a fixed guideway transit project -- including BRT -- takes to
complete alternatives analysis, and what portion of time this represents
in the entire project planning and development process. It would also be
helpful to receive comments on the time and expense required to complete
financial plans for a Small Start compared with a New Start.

FTA is interested in receiving comment on how to estimate the project
cost-savings and effects on the transportation system user benefits from
completing the project development phase more expeditiously.

## 3. Economic Development

SAFETEA-LU places increased emphasis on the economic development impacts
of a transit investment as an evaluation factor for New Starts.
Determining how this increased emphasis may affect project justification
ratings depends upon the measure that is used to estimate economic
development impact. FTA has requested information on what metrics should
be used to measure economic development effects. FTA is interested in
receiving comments on the economic development effects of New Starts
investments that are not accounted for by the existing factors used to
assess the land use criterion -- that is, additional development that is
expected in close proximity to the proposed transit project at higher
density or greater mix of uses than would be expected without the
transit project. This additional development would be a benefit directly
related to the project.

## 4. Earlier Cost Estimation

The NPRM proposes an earlier establishment of the project baseline cost
estimate, and resulting financial plan. The proposal is for the Section
5309 Capital Investment dollar amount of total project costs to be fixed
as a condition for completion of preliminary engineering. Early
completion of the baseline cost estimate and financial plan may foster
significant project delivery and management benefits, not least of which
may be to facilitate the use of design-build procurement for project
delivery. FTA is interested in public comment on the potential benefits
of early development of the baseline cost estimate and Section 5309
Capital Investment share, and the likelihood of an increase in the use
of design-build procurement as a result.

FTA considered three approaches to changing the timing of the
established baseline cost estimate from the status quo, two of which
were considered the most viable from a project development process. One
was to require the establishment of the baseline cost as proposed here -
a condition for entry into Final Design. The other approach was to allow
the project cost to be set by the contract award to the primary
construction firm, or the execution of a Design/Build or similar turnkey
contract.

The second option would have been only slightly different from the
status quo, as it would have resulted in significant project cost
negotiations taking place after preliminary engineering, as this is the
soonest that awards for construction can take place under current law.
The reason for seeking the change in timing is to increase financial and
project certainty. Once the project cost and Federal contribution are
set, subsequent project design and construction can be adjusted to the
baseline cost estimate. Setting the baseline cost estimate as a result
of construction contract awards would in all likelihood increase
uncertainty, rather than lessen it.

The same holds true for a turnkey contract award. Since only a limited
amount of project design can take place prior to completion of
Preliminary Engineering, a fixed-price turnkey contract would be highly
uncertain for the contractor -- a significant financial risk. This would
likely force the turnkey contractor to enhance the fixed price of the
contract (the baseline cost), thus putting the project at a disadvantage
vis-à-vis other projects competing for New Starts funds.

The option selected for this NPRM provides both the project sponsor and
the potential contractor with certainty at a critical time in the
project development process. It establishes the baseline cost when the
project is ready to proceed into Final Design and Construction, which is
also the appropriate time for the project sponsor to publish its
Requests for Bids. It sets a baseline against which subsequent project
changes can be assessed, but at a time when it is still possible to
adjust project scope or introduce value engineering measures with
minimal project disruption. If cost increases or unforeseen conditions
force such changes once construction has begun, the change orders
themselves add further to the cost, and ultimately they may cause a
change in the FFGA scope which must be negotiated with FTA and for which
notice must be give to the Congress.

## 5. Congestion Relief

Relief of congestion is a top priority of the Department of
Transportation, as reflected in its recently announced Congestion
Initiative. The proposals made in this Notice include several features
which are designed to assure that Major Investment projects contribute
to reducing congestion. For example, as noted below, FTA intends to take
account of, as a part of its review of "other factors," the degree to
which a project is supported by an effective congestion relief strategy
including variable pricing.

FTA proposes to continue to include highway user transportation
benefits, such as travel time savings from reduced demand on the highway
system, as part of its measure of transportation system user benefits
used to calculate mobility improvements and cost-effectiveness. However,
while this factor has been included in the definition of user benefits
for some time, as described above in response to Question 10 under New
Starts, reliable estimation of these benefits has been problematic. FTA
intends to continue to work closely with the Federal Highway
Administration to address the improvements needed in travel models to
assure that reliable estimates can be developed and included in the
measurement of transportation system user benefits.