Wicked Problems

I finally completed the white paper I promised back in October about wicked problems. Here it is.

Electromagnetic road pricing

Many ideas are bubbling up to address the driving range of electric vehicles (EVs). This one (thanks Leon), albeit with a large infrastructure hurdle, would compound the need for road pricing, because the road itself would be charging the batteries.

There is also a lot of resistance to the electric vehicle. David Booth (aka Motormouth), is adamant that EVs are losers and is one of Canada's leading automotive journalists. We should ask why, shouldn’t we?

Booth is adamant EVs are losers in order to sell print. Few readers of newsprint want to read that EVs are improving, that there is a small and growing market, that current demand outstrips supply, that there are many thousands of engineers working on the problem? Such readers want to know which car to buy now. This year.

And no one wants a lecture about how demand grows markets, that markets push technology, that disruption feeds demand, that unexpected breakthroughs happen, and that tomorrow is generally like today only in structure but never in detail. Not everyone needs to buy an EV to change the equation Booth thinks cannot change.

But what happens after 10% do?

~~~~~

Booth is one of Canada's leading automotive journalists, because newspapers sell cars, and damning EVs is good for the ad-men for the internal combustion engine (ICE). The truth about EVs is that at some point there will be a lot more of them, that they will serve some subset of the market (likely between 20-60% by 2050), that they will demand some thought from engineers that worry about electricity grids (they are already thinking), that they will worsen congestion, that as soon as they hit 5-7%, they will force the institution of road-use charging, that users of ICEs will pay both fuel tax and road use charges, and that that will accelerate EV sales.

Booth is right that only a small group of greenies will today sacrifice long-haul travel for the feel-good of owning an EV. But as soon as that small group is large enough to force government’s hand to deal with mess road funding is currently in, a tipping point will occur. The evolution of battery and charging technology is just that – evolutionary. The revolution will come from a tax shift.

If Booth were to encourage readers to anticipate the EV, a small percentage of people might wait one or two more years before they get their next car – just in case selection improves. This is not a good thing for newspapers who rely on automotive ads.

How electric cars and pay-as-you-go are connected

Shifting to electric vehicles interests me for two issues: How do we encourage people to switch and how will they pay for road use after they switch?

In the past, I have discussed a new market ecosystem for power, e-cars and road-pricing. As well, I noted the manner in which the Danes elected to encourage the uptake of electric cars (excessive, perhaps, but right-minded).

Recently, Streetsblog, described a new report (Exploring Electric Vehicle Adoption in New York City) from the Mayor’s Office of Long-Term Planning and Sustainability. (more)

To summarize the summary for the twitter attention span:

1. Electric vehicles could help achieve New York City’s sustainability goals.
2. The Federal Government is aggressively supporting EV development.
3. There is a potentially large group of early adopters willing to change behavior to accommodate electric vehicles.
4. These early adopters will likely outstrip the available supply of EVs to the New York market for at least the next five years.
5. The study suggests targeting early policy actions to those issues that early adopters find most important. Efforts focused on other consumer segments should wait for several years.
6. Early adopters do not appear to need a high-density public charging network or local tax incentives.
7. The projected level of adoption of EVs should not threaten the stability of the electric grid as long as most chargers are “smart”, allowing charging to take place during off-peak hours.
8. An opportunity exists for industry stakeholders to partner to prepare for, and encourage, EV early adoption.

The study also suggests targeting early policy actions to the issues that early adopters find most important. Efforts focused on other consumer segments should wait for several years. I would suggest, instead, focusing on ways to expand the pool of early adopters. The very early adopters hardly need incentives.

So what about pay-as-you-go?
The Mayor's report (above) lists a number of early incentives on page 19. Some of these can be delivered and the list can be extended with on-board devices that manage parking (for payment automation, parking finders, loyalty programs and green-rewards), and pay-as-you-drive insurance. So on the uptake side, technology can deliver value to encourage EV purchase, but once penetration starts, how are these vehicles to pay for road use? You can forget taxing electricity at the rates required for road user fees. The answer is some form of road-use charging, and TDP is the best. So if NYC said, "here are a handful of financial incentives, and the easy way to get them is with a road-use meter," NYC would have those early adopters establish the installed base of road-use meters for road use charging by 2015-2020, as will be needed anyway.

Win-Win.

Toronto public parking and the upcoming municipal election

Toronto Councillor Karen Stintz mentions the possibility of monetizing Toronto Parking in a BOT guest blog, today:

While talk about selling any one particular asset is premature and distracting, it is not premature to figure out how we might be able to do it. … For example, consider the Toronto Parking Authority (TPA). Currently, the TPA provides low-cost parking to residents and returns modest revenues to the City. The strategic objective of the TPA is to consolidate land and in some instances, sell it off for development purposes. In its current form, there is no reason that the city needs to manage this asset. However, the TPA has the potential to become a vital component in the green agenda if parking lots can also be used as filling stations for electric cars. Suddenly, the public interest is very different from our original thinking.

The subject of selling, or more likely leasing, City assets is critical and not at all premature. There are many pros and cons. There are many ways to make errors. And we clearly need to manage debt.

There are two key criteria: The first is that the use of proceeds must replace value lost with even greater new value gained. Today at the board of trade, Dana Levenson from the Royal Bank of Scotland described several asset sales made by the City of Chicago as returning great value to the citizens of that city and others that performed less well. Toronto Council members should closely study those lessons.

The second is that the assets under consideration need to be correctly valued. And here I am concerned that Toronto’s public parking garages, lots and street meters are very likely to be critically undervalued.

An article in the National Post on Monday Jan 18th included a very short mention of the possibility of monetizing an operating contract for these Toronto Parking Authority assets. To quote from the article “The city's wholly owned parking operations generate about $55-million in profit every year. …anywhere from $200-million to $500-million could be made if the operating contract was monetized…’. You will recognize the text-book “7-times revenue” equation for valuation.

When Chicago monetized its public parking a short while back, the new operator almost immediately raised prices, extended hours and turned a poorly-managed city asset into a far more efficient money generator for its shareholders. This tells me that in the City’s (Chicago’s) hands that asset was underperforming and by extension was underpriced when monetized.

Toronto’s public parking assets are worth much more than $200-500 million both to Toronto’s bottom line and to our city’s livability, if left in the city’s hands and re-priced to market value – i.e., prices made variable, raised to achieve Shoup’s 15% vacancy, hours extended to 70% vacancy, and priced parking deployed far more broadly (which also reduces congestion).

If our City currently generates $55M net as the Post article claims, then the City’s gross revenue would be on the order of 150-160M given that municipal parking operations (when they are as badly underpriced as they are in Toronto) consume between 60% to 70% of revenue. If pricing were doubled (which is likely a minimum needed for the effects listed), and the operator kept hours and enforcement methods the same, the operating profit would be more like $210M – a far cry from 55M. Suddenly the asset would be worth between 800M and $2B, using the same multipliers as the Post implies, since the new revenue all go to Toronto’s bottom line. If hours and areas were extended, valuation further increases dramatically. Your idea of charging electric vehicles adds yet more to the livability equation.

But without Councillor courage, we are better to monetize the asset for the immediate financial relief and let the new operator raise prices to market value and charge electric vehicles in order to make our city more livable.

But what a shame that we ‘poor voting members of the public’ might not share in that new revenue. Any such ‘poor voter’ who thinks he or she will continue to get “low-cost parking” after monetization, as you correctly describe this gift to our motorists, is fiddling while our City burns.

Fix parking pricing and you fix a lot of other things with it.

Americans Abroad

Over the past few months a group of 10 US transportation experts from USDOT, six state DOTs and a private-sector consultant, engaged in a fact-finding mission re what the rest of the world is doing re road pricing. They called their project: “International Scan: Reducing Congestion and Funding Transportation Using Variable Road Pricing” and visited or examined the usual suspects: Germany, London, Netherlands, Singapore, Stockholm, as well as the Czech Republic, newly added to the slowly growing list.

Last Wednesday, 2010.02.03, the group presented a 90-minute webinar, which I recommend to road-pricing newbies. The recording of the webinar will be posted here by 2010.02.10. In Europe, where I have focused much of my work in the past seven years re road pricing, I have more than once heard the comment that "Americans do not learn from us". That is clearly not true in this case (as an American, the criticism had rankled me).

Something new that I learned from the Webinar: “Singapore estimates that the gas tax would need to be raised by $3 to achieve the same traffic reduction results as a $1 increase in their electronic road pricing system due to transparency of the charge.” This is not surprising in principle, but it is in scale. I wonder if any economists can comment?

There is a lot to learn from the European experience. We can learn about behavioral effects, expected decrements in bad things and increments in good things, about the quicksand of referenda (although our own Johanna Zmud can teach us as much), we can learn about expense, courage and complexity and perhaps something about attitudes (although that is blunted by our poor comparative record on fuel taxation so Americans' entitled attitudes toward "paying differently" will be harder to crack than the Europeans’ (except for the Brits')).

But there is also a lot not to learn. We should not copy any European system wholesale -- in fact, I hope no EU jurisdiction does (although Gothenburg threatens a carbon copy of Stockholm), as each of the current examples has flaws (the London Congestion Charge), each had specific constraints (the Swedish tax law), specific geographies (the most successful was a peninsular island, the most scared is below sea-level), specific leaders (Livingston), specific types of government (Singapore) and specific and twisted deployment histories (Czech Rep and Germany).

It is also the case that the technology developed by 2009 is far more economically efficient and effective, such that if re-done using what is now available, London would not likely be using fixed-position cameras (not because of privacy, since they already have cameras galore, but because those cameras robbed TfL of system flexibility, extensibility and scalability. It is known that Singapore is looking to upgrade (for the second time!) to a newer technology. One cannot make this claim about Stockholm, because it is their atavistic tax laws that chose cameras (only their 2nd best technical option at the time and now their 3rd best), nor would Germany’s system be very different from what it is, except it would be less expensive -- but that is always to be expected.

As an example of cross-fertilization of ideas I wrote How to toll a country for free for the Czech Republic. It's an extension of the some forward American thinking out of the FHWA in the face of the two most difficult American stumbling blocks to TDP road use charging (variable VMT charging): hyper-dependency on the automobile and a badly-misshapen fuel-tax policy history.

The future of car use payment is here

Here is a preview of car rentals and car sharing. [thank you Russell] Hop in, record usage by distance and duration, and hop out. Only two things are missing – time of trip and location of travel. Imagine adding, as almost certainly will be added, a variable fee depending on time of day/day of week and place of travel – specifically set up to charge less for uncongested times and places. [Just like the airlines do, now.]

A small on-board computer – a “road-use-meter” – will translate location time, place and distance information into a fee in a way that protects privacy (even providing anonymity) and charges the user appropriately.

Why do all this? Well, it is easy to see that the company that owns the cars will want to be paid according to how long a car is in the possession of a user (duration) and by how much wear-and-tear has occurred (distance driven). As well, distance driven will relate to a road-use fee, since the subject vehicles do not use petrol.

But why time or day of trip? And why location of travel? These latter two measurements relate to congestion. If usage-prices differ in these ways, then traffic managers can reduce congestion by charging less at non-peak times and places.

As well, road-use pricing like this is expected be used before long for privately owned cars, whether they are propelled by an electric motor or not.

Programs like these mean we’ll need to build fewer roads, we’ll generate fewer emissions and we’ll endure less gridlock for the same vehicle miles traveled. In many countries – those with currently high fuel taxes – it will be possible to lower travel costs for those drivers who can avoid peak times and places.