FINAL REPORT Price Elasticity of American Toll Roads: Historical Evidence, Panel Data Analysis, and Policy Implications Date of report: August 2017 Jeong Yun Kweun, Graduate Research Assistant, George Mason University Shanjiang Zhu, PhD, Assistant Professor, George Mason University Jonathan Gifford, Professor, George Mason University Prepared by: Side and Reva Dewberry Department of Civil, Environmental, and Infrastructure Engineering, George Mason University 4400 University Drive, MS 6C1, Fairfax, VA, 22030 Prepared for: Transportation Informatics Tier I University Transportation Center 204 Ketter Hall University at Buffalo Buffalo, NY 14260 1. Report No. 2. Government Accession No. 3. Recipient’s Catalog No. 4. Title and Subtitle 5. Report Date Price Elasticity of American Toll Roads: Historical Evidence, August 2017 Panel Data Analysis, and Policy Implications 6. Performing Organization Code 7. Author(s) 8. Performing Organization Report No. Jeong Yun Kweun, Shanjiang Zhu, Jonathan Gifford 9. Performing Organization Name and Address 10. Work Unit No. (TRAIS CEIE, George Mason University, 4400 University Drive, 11. Contract or Grant No. MS6C1, Fairfax, VA, 22030 DTRT13-G-UTC48 12. Sponsoring Agency Name and Address 13. Type of Report and Period Covered US Department of Transportation Office of the Final 10/2015 – 08/2017 UTC Program, RDT-30 1200 New Jersey Ave., SE 14. Sponsoring Agency Code Washington, DC 20590 15. Supplementary Notes 16. Abstract Empirical analysis of price elasticity on U.S. toll roads is urgently needed in policy debates and investment decision-making as the transportation infrastructure needs grow rapidly and the market for Private-Public Partnership is expanding in many States. This project first reviews the historical evidence on toll elasticity reported in literature, and then developed a database of U.S. toll road to examine both the traveler’s responsiveness to road pricing and whether functional class and geographic coverage of the toll facility explains the variation in estimates of road pricing elasticity of demand. A dynamic panel data analysis of travel demand data for 64 U.S. toll roads in 15 states from 2004 to 2013 shows that the short-run price elasticity is smaller for urban toll roads than intercity roads and smaller for interstate than non-interstate toll roads. One explanation is that despite the availability of free alternative routes in urban areas, free routes are not practical to use due to higher travel cost and reduced travel time savings because of congestion in urban areas. Implications for transportation policy are also discussed. 17. Key Words 18. Distribution Statement Toll elasticity, American toll roads, private-public partnership, No restrictions. This document is available from the National Technical Information dynamic panel data analysis Service, Springfield, VA 22161 19. Security Classif. (of this report) 20. Security Classif. (of this page) 21. No. of Pages 22. Price Unclassified Unclassified Complete Acknowledgements This study is funded by the TransInfo University Transportation Center. The authors would like to thank CDM Smith Inc. for providing the original panel data on toll roads in the U.S. The authors would also like to thank the Schar School of Policy and Government and the Center for Transportation Public-Private Partnerships at George Mason University for their support. This report represents the views of the authors, who are responsible for any errors or omissions. Disclaimer The contents of this report reflect the views of the authors, who are responsible for the facts and the accuracy of the information presented herein. This document is disseminated under the sponsorship of the U.S. Department of Transportation’s University Transportation Centers Program, in the interest of information exchange. The U.S. Government assumes no liability for the contents or use thereof. Contents 1. INTRODUCTION .................................................................................................................................... 5 2. LITERATURE REVIEW ........................................................................................................................ 8 3. METHODOLOGY ................................................................................................................................. 10 4. EXPERIMENTAL PERFORMANCE OF INTEGRATED MODEL ............................................... 15 5. EXTENSION TO COMBINE VARIABLE MESSAGE SIGN AND RAMP METERS ........ ERROR! BOOKMARK NOT DEFINED. 6. CONCLUSIONS ..................................................................................................................................... 19 7. REFERENCES ....................................................................................................................................... 20 1. INTRODUCTION Road pricing, a fee related to using a road facility, is one of the main instruments used in transport regulation to raise revenue for infrastructure investment, and much later, to manage externalities such as congestion. The idea of road pricing was proposed in the 1920s by Pigou (1920) and Knight (1924), but practice followed slowly over a period of one hundred years. In the United States, public toll authorities were established between the 1920s and 1950s to manage user fees for constructing limited access roads and bridges, resulting in more than 3,000 miles of toll roads by the end of the 1950s (Garrison and Levinson 2006; Dyble 2010). As the paradigm of infrastructure development shifted toward more federal funding and no user charges during the construction of the interstate highway system throughout the nation from 1956 to 1991, only 1,000 miles of new toll roads opened and the collection of user fees was prohibited on federally funded roads (Gómez-Ibáñez and Meyer 1993). Transport regulations have seen significant changes since 1991 at all levels of governments, and public authorities have begun to consider road pricing as an instrument both to supplement funding sources and as an effective measure for travel demand management. In 1991, the Intermodal Surface Transportation Efficiency Act (ISTEA) authorized the Congestion Pricing Pilot Program to examine the effectiveness of congestion pricing in managing traffic in five selected project areas. In 1998, the federal government authorized the Interstate System Reconstruction and Rehabilitation Pilot Program (ISRRPP), which for the first time allowed toll collection on segments of federally funded interstate highways in three selected states: North Carolina, Missouri, and Virginia. In 2015, the Fixing America’s Surface Transportation (FAST) Act proposed by the Obama administration pushed forward the idea of charging user fees on existing interstate highways by imposing expiration timeframes on the three states selected for the ISRRPP, opening the door for other states to participate if any of the three states fails to implement the program within a limited timeframe. During the process of reauthorizing the transportation bill in 2014, the outcome of which was the FAST Act, the Obama Administration proposed the GROW AMERICA (Generating Renewal, Opportunity, and Work with Accelerated Mobility, Efficiency, and Rebuilding of Infrastructure and Communities throughout America Act) bill, which radically departed from the no tolling on federally funded highways policy. The bill proposed to give states the right to toll interstate highways, to use variable pricing strategies to manage congestion, to expand the scope of toll revenue usage, and to use all-electronic toll collection systems. Although the GROW AMERICA bill failed to gain enough votes from the Congress, the bill illustrated the extent to which policymakers are willing to adopt road pricing in the U.S. Also, the bill introduced the possibility of implementing road pricing on federally funded roadways throughout the nation. Some in the toll road industry predicted that road pricing would eventually be implemented on interstate highways nationwide as a tool to manage growing congestion and raise funds for building and maintaining transportation infrastructure (from the conversation with the toll industry representatives at the 2014 International Bridge, Tunnel and Turnpike Association Annual Meeting in Austin, Texas). One of the biggest challenges in building consensus and effectively implementing a road pricing policy is the lack of evidences on how travelers will respond to road pricing. Road pricing elasticity of demand is one of the most important parameters for understanding travel demand for toll roads and has significant implications for transportation policy and investment decisions. The price elasticity of demand measures the relative sensitivity of a change in quantity demanded to a change in price, where sensitivity could also be understood as responsiveness. The concept of price elasticity is especially relevant for the analysis of toll roads because it relates price choices to total revenue for toll authorities or operators, and to welfare changes which are crucial for policy debates. The theory predicts that inelastic demand will lead to higher total revenue with a price increase compared to the scenario under elastic demand. In practice, practitioners use measures of elasticity in traffic and revenue forecasting studies and policymakers rely on the price elasticity of demand in their decision-making processes. The existing empirical studies on toll road provide a wide range of estimates of road pricing elasticity