Tag Archives: public utility

Governing transit: the regulated public utility

Public utilities, from Chris Potter. CC BY 2.0

Public utilities, from Chris Potter. CC BY 2.0

The MBTA is struggling, but they’re not the only transit authority facing both near and long-term challenges. The MTA in New York is trying to find the funds for its capital plan; WMATA is facing systemic budget deficits while trying to restore rider confidence in the system.

For-profit corporations such as airlines aren’t the right answer to govern transit in an American context. So, what kind of structure could work?

Writing at Citylab, David Levinson made the case for structuring American transit operations as regulated public utilities, able to pull the best elements of private sector management and pair them with the fundamentally public purpose required for urban mass transit.

David cites seven key elements of this model:

  1. Competitive tendering for services
  2. The ability to raise fares (with regulatory approval)
  3. Using a smartcard as a common platform for fare payment
  4. Specific contracts with local governments to operate subsidized service
  5. Ability to recapture land value through land ownership and real estate development
  6. Access to private capital markets
  7. Local governance, funding, and decision-making

These elements aren’t substantively different from the elements of German public transport governance reforms outlined by Ralph Buehler and John Pucher: competitive tendering for many services, increased fares, investments in technology to improve capacity, efficiency, and revenue. Public regulation oversees these efforts to operate the core business more efficiently.

Lisa Schweitzer (USC Professor focusing on urban planning and transportation) offered extensive feedback on her blog (in several parts). All are worth reading, I’ve linked to each and included a short summary and/or quote:

1. On the regulated public utility concept: “First of all, even though quangos [a British term: quasi-autonomous non-governmental organizations – what we’d usually refer to as a public authority] are somewhat insulated from voters and politics, they still have play with budgetary politics, and those games are where lots of stupid enters into transit provision.”

Schweitzer identifies three main problems with applying the concept to transit. First, unlike water or electric service, the demand for transit use isn’t universal. Aside from a few dense cities, there isn’t necessarily a built in customer base. Second (and related to the spotty demand for transit service), some jurisdictions can/do opt out of transit service, hurting the overall network. Third, unlike water or electricity, there are many different levels of transit service.

2. The challenges of competitive tendering: the devil is in the details for how to successfully structure operations contracts: “And that’s a really the key point for competitive tendering and service quality gains you hope to achieve: if you are going to to do this, you need to be clear on service expectations. The reason the cable guy gets to treat you like crap is that’s not part of the franchise agreement which centers on channels and rights for particular sports events–not customer service response times.”

3. Farecards and technology: Schweitzer notes that most transit agencies already offer smart farecards, but perhaps a regulated utility would have more incentive to invest in technology to collect additional revenues or adopt policies (such as all-door boarding, or proof of payment) that would speed operations and improve efficiency. This is really a matter of institutional incentives rather than simply adopting farecards.

4. Capital cost recovery: While Levinson argues that new transit lines should only be built if they can break even on fare revenues and value capture from adjacent land, Schweitzer counters that this formulation depends on the mode and the type of transit line:”Right now, you have jurisdictions with people who are very avid about wanting rail transit. We must have rail now.”

“You want a train? Fine. Either let us build 70 100-story apartment complexes next to the station (if it pencils for us) or you pay whatever portion of the capital and operating costs that apartment complex would have covered for the utility. Your choice. Again, rich districts can have their single-acre lots if they want, and they can have their trains if they want them–even if nobody wants to take the train and they just use it as decoration. They just can’t stick the rest of us with the bills for those trains.”

5. Asset values and access to private capital: This isn’t exactly a silver bullet. For as well as competitive bidding worked for London’s buses, the similar deal for the Underground flopped:” The Metronet-London Underground deal came about in 1998 in part because the transit provider, Transport for London, was financially stretched and their capital stock decayed. This is a big deal: taking over large capital stocks is risky, let alone doing so because you have to bail somebody out. It means you probably have crumbling assets with an uncertain price tag to fix.”

In London’s case, one rail company delivered on their agreements while another operator came back to the public for additional funds and eventually went into bankruptcy: “While newspapers blamed the public sector partner for failing to manage the contracts properly, the public audit on the deal cited Metronet’s own corporate governance and poor management as the primary reason for the failed partnership.”

6. Local funding: While Schweitzer sees the virtues of local funding, there are risks to completely forgoing federal funds. If there is a chance to reform things, it will likely involve the feds: “If we really do believe that there are normatively better ways for cities to be, then there is a role for federal governments to play in setting standards and incentives.”

David, freed from the space constraints of Citylab when writing via his own blog, responded in depth:

1. The regulated public utility model: “I imagine like most reforms, it would be phased in, tested, refined, and revised in the various laboratories of democracy. Some city has to go first, some other city has to go second, and hopefully learn from the first, before every last city does.”

2. Competitive tendering: “…the answer is quite complicated about how to configure to maximize consumer welfare, and experimentation is probably required. Just giving the system away is certainly not the answer. Having the franchises be of a limited duration (5-7 years, e.g.) is better than a 20-30 year franchise. This is feasible for buses where the capital is the ultimate in mobile capital. It would be much harder for a traditional utility where the infrastructure is expensive, embedded in the ground, and long-lived.”

In other words, it’s a lot easier to structure a deal for competitive contracts for bus operations than it is for fixed, naturally monopolistic rail services – both in terms of structuring the deal, and in terms of attracting operators.

3. Farecards: “I would go further and say we should have pre-payment via stop-based farecard reader, i.e. all significant bus stops should have arterial BRT like payment”

4. Capital cost recovery: “Capital investments are new stocks while operating expenditures are continuing flows. From a public policy perspective, continuing with existing commitments (which may be an implied social contract) may be more important than making investments that bring about new commitments. Thus new commitments (such as new rail lines which have irreversibly embedded immobile capital) should only be undertaken if we believe at the outset (admittedly a forecast, which have problems) that they have cost recovery.”

5. Asset values: “Investing in new infrastructure is a lot riskier than investing in already built infrastructure (thus the early financiers of the Channel Tunnel got wiped out twice, similarly the Dulles Greenway and many other privately funded pieces of new infrastructure that were either more expensive than expected, or built too far in advance of demand.”

The broad concept of a regulated public utility has a lot to recommend: it threads the needle between the public purpose inherent to modern transit, while also pulling the best elements from private enterprise and the benefits of running a service-oriented business like a business.

While demanding additional efficiency from transit operators, German public policy worked in concert with these reforms – traffic calming, dense development around transit stations, and increased taxes and fees on car-based transport both improved transit’s attractiveness and also provided new revenue sources.

As Dr. Schweitzer notes, the single biggest take-away from Levinson’s article is the concept of transit as a public utility in the first place. Getting over that mental hump can open doors to plausible reforms.

What might those reforms be? In addition to Levinson’s list, Ralph Buehler and John Pucher offer their lessons from the German experience:

  • Encourage regulated competition; take advantage of private sector expertise
  • Collaboration between local governments, transit operators, and labor unions
  • Focus on profitable services – not to ignore ‘equity’ services. Jarrett Walker would refer to this as a focus on ‘ridership’ routes instead of ‘coverage’ routes – and building political consensus around this isn’t an easy task!
  • Collaborate with other transit operators; encourage easy exchanges between systems for passengers, interoperable systems, etc.
  • Improve service quality; focus on customer service.
  • Increase transit’s competitiveness with complimentary public policies – for example, increased fees on driving/owning a car, encouraging dense development near stations, etc.

All in all, the list is quite similar to Levinson’s.

However, in Germany, the push towards some of these reforms came from the outside (EU regulations); existing transit operators viewed them as a threat forcing reform and a new focus on customer service, efficiency, and overall quality – all while working to reduce costs. Similar to an airline facing bankruptcy, German operators used the EU mandate to find common purpose with their unions to improve efficiency and reduce overall costs.

Both Schweitzer and Levinson sing the virtues of local funding, but reform of this magnitude might require outside stimulus. In the same vein as Schweitzer’s defense of federal experimentation in policy, the federal government is well suited to fill that role. However problematic the federal focus on streetcars may be, the federal focus has certainly shifted the attention of local governments; the TIGER grant process shook up the traditional relationship between the FTA serving a few transit authority grantees. The projects might not be the best investments in mobility, but it does reveal the potential for the feds to drive change in transit governance.

Airlines: the strengths and weaknesses for corporate transportation governance

CC image from Christian Junker.

CC image from Christian Junker.

David D’Alessandro’s review of the MBTA’s finances came to a stark conclusion: “A private sector firm faced with this mountain of red ink would likely fold or seek bankruptcy.” That red ink is thanks to a systemic operating deficit; yet as a provider of a key public service, the MBTA was also “too big to fail” and therefore cannot simply cease operations. Likewise, though municipalities and public authorities can declare bankruptcy, they seldom do.

However, there are examples of transportation operators declaring bankruptcy in the face of systemic deficits: airlines. Comparing for-profit airlines to subsidized urban transit might seem like a stretch, but consider the similarities:

  • Both provide a transportation service
  • Both require capital-intensive operations
  • Both are historically a low-margin business; transit has been largely subsidized for generations in the US; historic profitability for airlines is slim-to-nonexistant.
  • Labor is a significant cost for both; both featured highly unionized workforces.
  • Both are sensitive to swings in energy prices
  • Both include a high level of coordination with the government (regulations, funding for facilities, etc)

Reform proposals for the MBTA set goals for reducing operating costs, but didn’t necessarily give the MBTA the tools to reach that goal. Compare that to the major airline reform – the Airline Deregulation Act of 1978. Prior to deregulation, all air routes needed approval from the Civil Aeronautics Board (CAB). Matt Yglesias explains:

Passenger aviation clearly needs some regulation for the sake of passenger safety, pollution control, and the community impacts of airports. But in the early decades of the industry, CAB went far beyond that to regulate what fares airlines were allowed to offer and which routes they were allowed to fly. This became a classic case of regulatory capture. Airlines cared a lot about the actions of CAB while ordinary voters had bigger fish to fry. As a consequence, the board ended up creating a cozy cartel where airlines didn’t compete much and certainly didn’t compete on price. With price competition off the table, airlines invested lavishly in offering a high level of service. Labor unions got in on the act, using their clout to force managers and owners to share with workers some of the excess profits generated by CAB.

Removing regulatory approval for new routes unleashed new competition, dramatically lowering airfares for consumers. Airlines explored new route network concepts, eventually leading to the dominance of today’s hub-and-spoke system. Existing airlines still had to work within their cost structure, based on the old regulated business model. Soon, many airlines also faced a sea of red ink. Faced with the same choice David D’Alessandro saw for the MBTA, many airlines either ceased operations or entered bankruptcy.

Today, airlines use bankruptcy as a tool to lower labor costs by renegotiating contracts. Yglesias, writing about the 2011 bankruptcy of American Airlines, notes “the real aim of the filing, in the words of S&P 500 analyst Philip Baggaley is to ’emerge as a somewhat smaller airline with more competitive labor costs.’ ”

While the MBTA Forward Funding plan set goals to reduce operating costs, it did not include the tools to make those cost reductions happen. Using bankruptcy as a tool to reduce structural costs, as airlines have done, might technically be available to a public authority like the MBTA, political pressure often prevents this course of action.

In a look at sustainable transit funding, Ralph Buehler and John Pucher study the fiscal sustainability of German public transport systems. The abstract:

Over the past two decades, Germany has improved the quality of its public transport services and attracted more passengers while increasing productivity, reducing costs, and cutting subsidies. Public transport systems reduced their costs through organizational restructuring and outsourcing to newly founded subsidiaries; cutting employee benefits and freezing salaries; increasing work hours, using part-time employees, expanding job tasks, and encouraging retirement of older employees; cooperation with other agencies to share employees, vehicles, and facilities; cutting underutilized routes and services; and buying new vehicles with lower maintenance costs and greater passenger capacity per driver. Revenues were increased through fare hikes for single tickets while maintaining deep discounts for monthly, semester, and annual tickets; and raising passenger volumes by improved quality of service, and full regional coordination of timetables, fares, and services. Those efforts by public transport agencies were enhanced by the increasing costs and restrictions on car use in German cities. Although the financial performance of German public transport has greatly improved, there are concerns of inequitable burdens on labor, since many of the cost reduction measures involved reducing wages or benefits of workers.

The outcomes aren’t all that different than those achieved by airlines utilizing bankruptcy. Unlike either US airline deregulation or the MBTA’s Big Dig deal on transit expansion as mitigation for a massive increase in urban highway capacity, German reforms also included policies aimed to shift the market in favor of public transportation. Fares and schedules are coordinated though a verkehrsverbund, or transport association.

Setting fares, coordinating routes and timetables sounds awfully similar to the Civil Aeronautics Board. However, because air transport is expected to operate profitably and urban mass transit is not. The middle ground is a structure that can combine the best elements of a for-profit corporation (“run it like a business”) with the public purpose of a government agency or public authority. Writing at Citylab, David Levinson makes the case for governing transit as a regulated public utility, operating as a business and billing the public for the full cost of services:

Like any other enterprise, transit should be successful and cover its costs. This is entirely feasible if we change the model of transit finance from a branch of government to a regulated public utility, as is done in much of Europe and Asia. A public utility provides a service, and in exchange, it is compensated for that service. The compensation comes from consumers (e.g. users, riders), and from the public for any unprofitable services that it wishes to maintain for other (e.g. political) reasons.

Just as the public sector pays the electric utility for street lights, it should pay the transit utility for services that the government insists on but that the transit provider cannot charge users enough for.

The public utility model provides a more realistic model for mass transit than airlines do. The lack of an inherent profit motive makes the direct comparison for airline governance a mis-match; yet there are elements of the private corporation that would inherently benefit public transit, thanks to the similiar roles for airlines and transit agencies.