Creating a Market for Road User Charging

The US Government and other governments in the developed and developing world have a problem: autonomous, motorized surface transportation (e.g., car, truck, bus and motorcycle) as it is currently powered and as its requisite infrastructure is currently funded, is unsustainable. Whether this is viewed from the perspective of demand management, environment, highway funding, or peak-oil the simple fact is that the fuel tax as a funding mechanism is grows more economically inefficient each day. As we look forward to increasingly efficient engines and alternative fuels, two of the problems (demand management and funding) will get rapidly worse.

Some form of road-use charging, whether instead of or in addition to fuel taxes and other administration fees, is the solution most often proposed and defended. There are numerous proposals for collecting such charges using dedicated collection mechanisms.  None of these are cheap to provide or trivial to enforce. In many countries, the total cost of collecting such fees using dedicated methods range from 20 to 50% of the fees that are or could be levied.

It can be argued that for commercial vehicles (buses, trucks) who directly use roads for profit that payment for use is not only justified, but that their operators likely have recourse to mitigating any incremental costs. It is harder to make this argument for private commuter vehicles. For this reason, acceptability of this impending tax shift requires that collection costs be arranged to be as close to zero as possible, so that such a shift can be expense neutral to the private commuter prepared to make slight adjustments in route, travel time or modality.

We have a precedent for this in the cost of fuel tax collection – usually around 1% of revenue. The requirement to bring extreme cost control to the collection of road use charges is foreshadowed in the recent demand of the Dutch government that its now-delayed road use charging program cost no more than 5% of revenue – a demand that would have been challenging to meet.

In the United States, where the level of fuel taxation is much lower than that in the Netherlands, the challenge will be far greater. A recent NCHRP study was designed to explore the type, scope, size and structure of system trials that policymakers might pursue. [1] One of the key questions examined was who should lead the deployment design of such a system.[2] Should the federal government plan a national system of VMT fees (federal framework)? Should the federal government help states help themselves (state framework)? Or should government foster a market for in-vehicle travel services (market framework)?

The basis of the third idea has two components. First, it assumes that road use charging technology could be “just one application on” a telematics platform of the sophistication of a smart phone. Second, it assumes that such a telematics platform can support numerous useful and desirable applications, some of which would be payment services that support a profit, such as parking or pay as you drive insurance (PAYDI). Given these two factors, such payment services combined with the kinds of safety and traveler services proposed by other telematics programs such as Intellidrive in the US or CVIS as in the EU would comprise an attractive package that some drivers would voluntarily adopt and pay for.

The attached ANNEX includes the full text of the description of the “market framework” as described in the NCHRP study by Sorensen (RAND). That description includes the proposal: “the federal government would let contracts with several firms (the initial “competitors” in the market) to provide metering devices and collection services and help enroll trial participants”. On reflection, it may make more sense to sell three or four automotive payment services licenses to significant telco providers. Such licenses would carry certification-level responsibility for protecting privacy, managing a high degree of charging performance, offering to state and federal government road-use metering and billing services at a pre-determined cost far below what would be expected from a dedicated road-use charging system.

Such operating licenses, to be purchased by the telcos, would provide these firms with the market protection needed to invest significantly in telematics-based payment, safety, and other traveler apps in a market structured to deliver smart-metering apps in the same way smart phone apps are delivered today. The federal government should in turn use the revenues from these licenses to incent insurance companies to reform their insurance premium determination programs and municipalities to reform parking management.

It is through fostering and initially protecting a market for telematics payment services that the United States can start building an attractive, for-profit, in-car payment service platform for a volunteer population. The telco providers of such a platform would be regulated for privacy protection and the protection of other consumer interests (fairness, equity, correct charge assessment, etc).

The goals of reducing congestion and beginning the gradual shift from the way we now pay for roads, parking and insurance can begin immediately at far lower cost to the US taxpayer and with the promise of attractive services to volunteer motorists and a profit opportunity to telcos and their providers.

_____________

ANNEX

(NCHRP study “System Trials to Demonstrate Mileage-Based Road Use Charges”. P.78-80)
http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_w161.pdf

 “6.2.3. Foster a Market for In-Vehicle Travel Services (Market Framework)

This last framework, which represents the greatest departure from conventional thinking about how to accomplish a transition to VMT fees, is intended to address several goals in parallel: overcoming public acceptance challenges through voluntary adoption, implementing a fully operational (if initially voluntary) national system of VMT fees as quickly as possible, and reducing the cost to the government of collecting VMT fees.

In essence, this framework envisions, and seeks to foster, the emergence of a market for in-vehicle metering devices and billing services that are capable of levying VMT fees and simultaneously supporting numerous value-added services, such as automated payment of parking fees, PAYD insurance, real-time traffic alerts, and routing suggestions based on current traffic conditions. Firms (e.g., device manufacturers, software developers, system integrators, telecommunications providers, toll road operators, and the like) would compete to provide these services, thereby driving down the cost of the required technology. Additionally, because firms would be able to collect payment for some of the additional services (e.g., a small percentage of parking fees or PAYD insurance premiums), the amount that they would need to charge the government for collecting VMT fees would be reduced. The main goal of the trials in this framework, then, would be to support and accelerate the development of this market. To do so, the federal government would let contracts with several firms (the initial “competitors” in the market) to provide metering devices and collection services and help enroll trial participants. In parallel, the federal government would fund or subsidize states that wished to examine VMT fees, cities or counties that wished to explore automated parking payment or local VMT fees, and insurance firms that wished to offer PAYD policies. These parties would then link up with one or more of the technology vendors to conduct the trials. After several years, the trials would evolve to full-scale implementation of an initially voluntary system. Trial participants that valued the additional services would become the initial adopters, and additional drivers would be able to adopt the in-vehicle equipment on a voluntary basis as well. After several more years, once it had been demonstrated that the system was operating successfully (i.e., that it was collecting fees, preventing evasion, and protecting privacy as planned), the government might then mandate the adoption of VMT fees for all vehicles. This approach to trials and implementation is described in greater detail by Grush (2010a)[3].

Note that the role of private firms in providing metering devices, billing services, and other value-added offering would be possible in the other frameworks as well, but would not be the only approach that might be contemplated (e.g., a particular state might choose to examine the collection of VMT fees with registration in a publicly-administered system). In this framework, in contrast, the involvement of multiple competing firms in the provision of metering and billing services would be viewed as a critical component in achieving the goals of driving down costs and stimulating the development of value added services to promote voluntary adoption.

Advantages. This framework offers several conceptually compelling advantages:

• The opt-in period would allow time to demonstrate the effectiveness of privacy protection, fee collection, and enforcement strategies through the participation of voluntary adopters. This should reduce the current degree of public and political skepticism surrounding VMT fees, making it less difficult to mandate the adoption of VMT fees at a later date.
• To gain market share, competing firms would be motivated to provide as many valuable add-on services as possible. This would help to maximize the benefits of the considerable social investment in in-vehicle metering technology.
• Because the service and technology providers could collect revenue from a broader range of sources, the cost to the government for installing equipment and collecting VMT fees should be reduced.
• On a related note, the cost to conduct the trials, on a per-participant basis, might be reduced in this framework. Provided that the government clearly signaled its intention to transition to a national system of VMT fees, firms might choose to cover some of the trial-related costs with their own resources in order to prepare a successful bid to participate in the trials, which would in turn position them as an early market leader. On the other hand, as expressed by one of the workshop participants, many firms have been “burned” by investing their own resources in European trials that did not lead to implementation and might therefore be less willing to do so again. This potential benefit is therefore far from certain.
• The cost of installing equipment in vehicles would not be lost; rather, the same equipment would continue to be used when the trials phased directly into implementation and trial participants became early system adopters.

Potential Drawbacks. This framework also faces several risks and obstacles:

• In a voluntary opt-in framework involving privately provided equipment and services, it is conceivable that drivers would choose to adopt the equipment for PAYD insurance, for the chance to automate the payment of parking fees, and to enjoy other services but then choose not to pay mileage-based fees. Assuming a relatively flat per-mile rate structure, drivers of highly fuel-efficient vehicles, in particular, would be better off paying current fuel taxes than mileage fees. In order to increase voluntary payment of federal road use fees, the government would likely need to create some form of incentives. For example, it might set federal fuel taxes somewhat higher than mileage fees and then rebate fuel taxes to adopters, or it might institute some form of federal registration fee (collected by states and remitted to the federal government) that would be rebated for VMT-fee system adopters.
• Under this framework, since it is envisioned that the trials would evolve directly to full-scale implementation, it would be appropriate to develop an initial set of interoperability standards and corresponding certification process in advance of the trials. Though possible, this would be challenging to achieve within just a year or two.
• As a corollary to the preceding point, it would be necessary to make certain system design decisions—for example, the decision that fee collection would be handled by multiple private firms operating in parallel, rather than by a single firm or by the public sector—in advance of the trials. There would not, therefore, be the opportunity to inform such decisions based on lessons learned during the trials themselves.
• With independently funded technology and service providers, states, cities, MPOs, insurance providers, research institutions, and the like, it could prove more difficult to manage and coordinate the trials under this framework.
• The success of an industry-led model would depend largely on voluntary consumer adoption. The assumption is that consumers would be willing to purchase devices to have access to the add-on services. However, it is not certain that a mass market will emerge for these devices. For example, while some drivers would undoubtedly find the prospect of paying for parking via an in-vehicle device appealing, a large share of drivers have free parking for most trips and would not be interested in this application. Moreover, many of the envisioned services, such as routing assistance or stranded driver assistance, are already available on other platforms. If relatively few consumers voluntarily chose to adopt the equipment in order to gain access to the value-added features, greater government subsidies or mandates could be required. Related to this point is the observation, offered by a private sector representative, that from the service provider perspective, the “base” business case has to make sense (i.e., the ability to earn some return on investment by charging for the collection of VMT fees); it cannot be assumed that firms would recoup all of their investment from value-added services.
• An industry-led model would create not one but two enforcement challenges: the potential for tax evasion by drivers, as well as the possibility that the firms or consortia collecting the fees would not remit them in an accurate or timely fashion. Firms might be responsible for collecting billions of dollars annually, necessitating sufficient staff on the government side to carefully monitor contracts and audit accounts as well as a plan for penalizing firms found to be in breach of contract. The federal government would also need to either augment its own enforcement resources or rely on state support to help prevent driver attempts to evade fees.[4]

---

[1] Sorensen, P. (The RAND Corporation), “System Trials to Demonstrate Mileage-Based Road Use Charges”, National Cooperative Highway Research Program (TRB), October 2010, p.xv.

[2] ibid, page 73-80

[3] Grush, B. 2010a. http://grushhour.blogspot.com/2010/04/no-more-ruc-trials-please.html

[4] As the author of this blog, I respectfully disagree. There are low-cost ways to set up metering and billing services to counteract both consumer and service-operator fraud. To the degree that payment via telematics can be maintained on a voluntary basis versus s fixed administrative fee that must be pre-paid to retain an vehicle license, fraud can be minimized at a cost lower than that of current enforcement systems.