Sunday, February 24, 2008

You can't spend it if you don't have it

There was an article in the Boston Globe today about Gas costs forcing drivers to cut back.

"Until then, Stone said, she hadn't thought much about gas prices or filling the tank of her Acura, which she did a least twice a week. Now Stone, 55, a teacher, limits hergas budget to one fill-up or no more than $25 a week. She carefully plans her travel, sticking to the shortest route and avoiding spur-of-the-moment side trips.

When she fills a prescription, she shops for food at a supermarket around the corner. Other times, rather than driving across town, she walks to the small grocery store near her home. When she needed light bulbs and other items recently, she stopped at a hardware store along her route and spent a little more, rather than driving farther to a supermarket where prices were lower."

In just a matter of weeks, not only has Ms. Stone got her household budget under control, she has also halved her CO2 emissions. If everyone in America followed her example, we would reduce US CO2 emissions by a whopping 10% ! This month. We would also reduce the trade deficit, dramatically improve our “energy security,” and eliminate the endless debate over drilling in the Alaska Wildlife Refuge.

What I found interesting in the article was that there was no talk about how cutting back had required difficult sacrifice. Rather, those interviewed talked about adjusting their habits to take efficient travel into account.

"Towle, 44, now limits herself to one fill-up a week. She puts off buying more milk until she needs a bigger shopping trip. She used to drop her 13-year-old daughter off at basketball practice, make the 15-minute drive back home, then return to pick her up at the end of the 90-minute session. Now, she waits at the school."

Ridesharing, going loco, is another tool for the adjustment, and a pleasant one at that. I know my 14-year-old finds the carpool to and from her rock-climbing practices a valued part of her social life.

According to US Department of Energy numbers, the last four weeks have shown a flattening and a decline (depending on the location) in demand for gas, the first time in many years. The Globe article attributes these recent reductions to consumer realization that these high prices are here to stay, and so they need to adjust.

I think there is a different reason. Very high prices in home heating fuels drained low income Americans of their cash reserves. This happened in the fall. With Christmas, we saw credit card nonpayment surging. MacDonalds also saw a decline in revenues throughout the fall. With their credit pushed to the limits by heating needs and Christmas, and luxuries like eating-out reduced, petrol has finally risen to the top of the discretionary spending list for many Americans.

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Saturday, February 16, 2008

99 years: the Road to Financial Wellville?

Over the last thirty years, it feels like the worst of our political system has driven our financing of transportation infrastructure. No one has had the political will to raise gas taxes, established in 1993, and therefore grotesquely inadequate. [Who among us would be satisfied with a 1993 budget for our own households?] And many of the significant infrastructure projects that have been financed by Federal funds have risen to the top based on politics rather than merit.

The result is that every state’s transportation infrastructure is in financial crisis. One of the proposed – pushed – solutions coming out of Washington is to privatize public highways and bridges. This is a solution that ducks the fundamental problem of a broken financing system, and gives states another few years to avoid the central problem.

[Quick definition: road privatization is when a section of road is transferred to a private company for a term of contract, typically in exchange for an up-front payment and a fraction of future toll revenues. The private company is responsible for all road maintenance and repair and has prescribed abilities to increase tolls over the years.]

I’m told by a colleague who does this sort of thing (Henry Lee at Harvard) that my issues could be solved with the right contracts. Perhaps. If that is the case, here are the major problems with privatizing public roads as it is now practiced (Indiana and Chicago) and hopefully these snakepits can be avoided:

Term of Contracts Too Long. These privatization contracts have enormously long terms – 75 and 99 years. That is just too long in the extremely dynamic world in which we live. One of the bankers brokering these deals told me his primary job was to make sure the contract could accommodate any eventuality. Then he went on to deride me that he couldn’t “predict the future.” Exactly. So don’t make the contracts so long. How about 15-20 years?

Loss of Network Integrity. One of the beautiful things about all networks is that they are connected. When you put a chunk of it under someone else’s control – even 2% -- the system as a whole is devalued and the network loses future flexibility. For example, over the course of 99 years, you might decide to take advantage of the extended rights of way to run fiber optic cables, or decide that certain sections would make great wind farms (NIMBYism wouldn’t be an issue). Implementation of these ideas would be dramatically complicated by having a separate owner for a piece of the ROW.

Private ROI trumps Public Good. Over the course of 99 years (yes, I’ll repeat that clause again and again), it may turn out that it is in the public interest to find a higher user for the ROW than the contracted revenue stream it gets from the private company. For example, it might be in the public’s interest to convert a lane to a high speed bus lane or light rail in order to maximize people throughput per vehicle or lane, or to minimize CO2 emissions per person. This desire would run counter to the private owner’s focus solely on vehicle count.

Valuation of Assets too Low. In a 99-year contract, you’ve basically discounted the future down to nothing, meaning you have basically sold the asset (yes, yes, I know the state gets it back after 99 years). But the lump up front sum -- that is so incredibly appealing to states ($3.85b in Indiana; $1.8b in Chicago) -- is nothing like what it would cost to actually build these stretches of highways or bridges from scratch. The costs of amassing the land and the rights of way alone, would be cost as much, even before we add in construction costs. These deals are selling off – sorry, “leasing” – our public assets at a fraction of their value. See commentary re Indiana.

One of the very sad facts about road privatization, is that the public is ill-informed about what it means. The carrot of the large sum of cash upfront is tantalizing (and programmed to be spent in usually less than 10 years leaving 89 years without the carrot), and the rising tolls is presented as a non-issue over a short fixed period of time. But as residents of Toronto discovered after they privatized a highway, tolls were eventually raised and so they complained. It should be interesting for politicians to note that they can't hide behind the private sector company doing the dirty work: most Torontoans put the blame squarely on the government that cut the deal. In a January 2008 article in Governing magazine, the same is said of the Governor of Indiana, who privatized a significant part of that state’s highway system and lost control of his state house in a subsequent election.

At the end of the day, we have to and will pay more to drive. The private companies will increase the tolls, or the government can do it. The path of doing nothing is what we have followed for the last few decades. The question for the public, and for states contemplating privatization: What serves the public interest in the long-term? Say, over the next 99 years.

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Tuesday, February 12, 2008

Biofuels Bad; Efficiency Good

A recent article in the popular press (New York Times) reporting on the scientific press (Science) laid out the researched case that many of us had intuited. Use of biofuels will result in increases in CO2 emissions because of changes in land use -- increased deforestation -- despite vows to guard against it.

Biofuel crops grown in the US on previously plowed fields result in a decline in yields of whatever was planted there before, increasing the price of that former crop (soybeans, corn). Therefore:

• new land is deforested in other countries to plant this displaced crop which now has an economically more compelling value; and

• new land is deforested in other countries to plant the biofuel itself, which of necessity has a higher value than the crops it is displacing.

A nice quote puts the order of magnitude into perspective, from the New York Times article:

The clearance of grassland releases 93 times the amount of greenhouse gas that would be saved by the fuel made annually on that land, said Joseph Fargione, lead author of the second paper, and a scientist at the Nature Conservancy. “So for the next 93 years you’re making climate change worse, just at the time when we need to be bringing down carbon emissions.”

Another negative, which doesn't contribute to global warming but does contribute to global suffering, is the effect of higher prices of basic staples (corn and food oil) on the very poorest among us.

Using biofuels that are not a bi-product of some other crop (sugar cane stalks, for example) is just plain a bad idea. Conservation is the best alternative fuel in the transportation arena that we have in the near term. And of course, I have to say it, a carbon tax would go a long way towards encouraging (enforcing?) the judicious use of fossil fuels.

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Monday, February 4, 2008

Achieved: 17% reduction in CO2 emissions in 6 years

Who’d a thunk it? Boston’s Logan airport is as an example of good transportation practice.

Last year, Logan served virtually the same number of passengers as in 2000 (28.5 million) with an incredible 16.7 percent fewer total flights (95,000 fewer). That meant 16.7% fewer trips (miles flown and CO2 emitted), 16.7% fewer landings and take-offs bothering neighbors, and a heck of a reduction in capital assets and costs for the same amount of mobility. All that achieved within 6 years.

What happened? Could we replicate it on the roads?

After September 11, 2001, demand for air travel plummeted. Airlines had to weigh the variable costs (fuel, incremental staffing, landing fees) against the benefits (revenue from passengers) of every flight. To reduce costs, first they cut flights, and then over time, they cut and chose new planes that had better fuel/passenger load efficiencies.

Basically, variable costs were high enough to trigger behavior change, and it was someone’s job to make sure that benefits (revenues) exceeded costs. I would guess (but don’t know) that airport infrastructure enjoys dramatically lower subsidies than road infrastructure. The cost to land and park a plane at Logan, as well as counter real estate, is probably very close to the real cost of building and operating the airport. [In fact I think Massport runs cash positive.]

The environment for the average car driver is quite different. His user fees (gas taxes, tolls, and parking) are an insignificant percent of the true costs (my google search produced numbers all over, putting the gas tax at between 50 and 5% of the real costs). His benefits aren’t easily quantified, and his real variable costs are hidden by the cloud of time. His perception is that the cost of driving is primarily gas, with the occasional toll or parking fee thrown in.

If we charged the real costs of driving – preferably per mile – our driving behavior would be dramatically different. We’d see trip reductions of 17% or better, and probably in a much shorter time period than 6 years. No doubt many more people – like the airlines – would combine trips benefits (many errands accomplished on the same trip!), would choose alternative modes where available, and would make the effort to rideshare a larger fraction of their trips (using GoLoco, of course).

Logan has another practice in place that intrigues me. They are the only airport in the country to have a congestion pricing rule in place. When flights exceed 120 planes an hour (in fair weather), a congestion pricing premium is applied. Interestingly, the airport has agreed to make this congestion tax result in reduced landing fees in off-peak hours, for a promise of revenue neutrality. This is really intriguing. Does this promise of revenue neutrality make congestion pricing more acceptable while still achieving the desired behavioral changes?

[BTW, Logan has yet to hit a traffic load that would trigger the congestion tax.]

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