Saturday, September 29, 2007

Value Pricing of Transportation Services

The Value Pricing Argument

Professor Joseph Schwieterman is the director of the Chaddick Institute for Metropolitan Development at DePaul Univeristy. His recent commentary in the Chicago Tribune urged the CTA to adopt value pricing, namely, fares that vary by the time of day and the distance traveled. Referring to the latest CTA "doomsday" plan, Schweiterman observed:

If there was any silver lining in the doomsday budget, it was the reluctant acknowledgment that its archaic one-price-fits-all fare structure cannot effectively serve such a massive system. The plan called for higher cash fares ($3) during the rush hour than other parts of the day ($2.50).

According to Schweiterman:

it's a promising sign that the CTA now recognizes that charging all riders the same fare is as obsolete as a steam locomotive. Not only does this practice turn a blind eye toward basic economics and compound the agency's financial woes, it discourages short trips and makes fare increases more politicized than necessary. Yet it has stuck with us like a bad dream.

Schweiterman doesn't stop with the CTA. While strangely he fails to mention Pace, where one can travel for even greater distances for the same fare than on the CTA, he criticizes the failure of Illinois governments to make effective use of variable pricing in both transportation and non-transportation contexts:

Why has it taken so long? Perhaps because other local agencies set a notoriously bad example. Chicago is the only major city in the country that still charges most residents a flat fee for water, regardless of usage. In 2005, the tollway authority adopted a system that apparently makes the average fee paid by rush-hour commuters lower than that for those who travel at off-peak times due to their varying use of I-Pass. And we do virtually nothing on our roads to reward carpoolers. Those who doubt the impact of such incentives need only look at the effects that time-of-day pricing is having on trucks using the tollways.

Analysis

This blog already has featured discussion of the pros and cons of value pricing of transit service. (Here and here.) While Schweiterman's case for value pricing is strong, his commentary has several weaknesses.

First, Schweiterman supports his argument with the assertion that "the CTA remains one of the world's largest rapid-transit systems that doesn't set fares based on distance." This statement may be literally true (I haven't checked), but it lacks nuance. What I have checked is the fare policies of the ten largest U.S. rapid transit system. Only two of those ten systems--WMTA in Washington D.C., and BART in the Bay Area--appear use value pricing. Thus, the flat fares charged by the CTA are not nearly as aberrational as Schweiterman portrays.

Second, Schweiterman states with respect to the higher fares the CTA would charge during peak periods that "these fares would be too high for many who are dependent on mass transit." Yet, Schweiterman fails to address how the CTA or someone else should respond to the needs of the transit dependent who Schweiterman says can't afford a $3 fare during rush hour.

Had he addressed this issue Schweiterman might have argued that there are many government services that not all people can afford. There presumably are plenty of people, for example, who cannot afford U.S. Mail overnight express mail for their primary mail service but can afford a first class stamp. Schweiterman might have argued that the population unable to afford a $3 fare is relatively small compared to the population benefiting from a more economically efficient transit agency and, well, life is tough sometimes.

Alternatively, Schweiterman might have addressed the social justice issue by arguing for some form of social program that would provide financial help to impoverished transit-dependent people. One way would be through reduced fare cards targeted at low-income commuters.

His failure to address the serious social justice issue he raised unfortunately plays into public perceptions that the the advocates of value pricing are callous bean counter types who don't appreciate the challenges facing poor people. That perception makes it difficult to shift from flat fares to value pricing. (It would be an interesting academic study to determine if poor people in Chicago would be better or worse off on average if value pricing were adopted. Perhaps based on their residential locations and travel patterns they would be better off.)

Finally, Schweiterman suggests that value pricing will make the CTA better off financially than a uniform increase in flat fares. This conclusion is not immediately obvious, especially when Schweiterman lauds programs that give away transit rides in central business districts (a practice that has social justice implications of its own). Schweiterman should have explained why. Perhaps it is because value pricing will reduce demand during peak periods, cutting costs. Perhaps it is because value pricing rectifies below market pricing of peak period and long distance transit travel. Whatever Schweiterman's theory for why value pricing will lead to a financially stronger CTA, it would have been nice to have heard it explained.

Despite these shortcomings, Schweiterman's commentary is a welcome addition to what hopefully will be a vigorous debate over the hows and why of pricing both highway and public transit services in Illinois.

5 comments:

Edna Welthorpe said...

Welcome back, sir/ma'am.

There are at least three ways to vary fares. You can vary them by distance, by the time traveled, or by bulk purchase. All are appropriate in many situations. All would require some stretch for any of the local transit agencies to implement-- not just stretches of existing technology, but also stretching the ingrained concepts of how transportation services should be sold. And in a business where the local commuter rail system still relies entirely on human beings to sell and check tickets, that can be quite a stretch. (Memo to Metra: No, we're not just picking on you, though you might stick your head down the hallway at Union Station and see what ticket vending machines are. They're pretty nifty, really... oh wait, you have some of them over at Randolph St. Would you mind terribly borrowing some of them for Union Station?)

The bulk purchase system (or monthly passes, etc.) is easy enough to implement-- remember, it was an add-on to the farecard system. And it has plenty of history in the Chicago region-- except, of course, for the weird years when the CTA board got a notion that "abuse" of monthly passes was money outta their pockets. There's much more than any of the Chicago transit providers could do with bulk purchase-- employer paid passes, annual passes, and the like are much more common in other areas-- but at least the monthly passes are here, and they're not a bad proxy for peak pricing, though an off-peak pass product would be a good addition.

Proper peak/off-peak pricing is largely unknown here, and there's not much excuse for not doing it. Peak services cost more to provide, and if you don't discount the off-peak, you're effectively undercharging the peak people and overcharging the off-peakers. Social justice issues should be examined, sure, but there's not much evidence that underpricing peak travel helps more people than overpricing the off-peak hurts.

Distance pricing isn't quite as unknown as all that. Besides Metra, BART and WMATA, fares are distance-based on the San Diego and Portland light rail systems, as well as dozens of overseas systems. All of them require some method of enforcement, and you can either take a capital-heavy approach, as BART and WMATA do, with equipment that checks the ticket on the in and out, or you can do the low-tech, proof-of-payment (POP) approach. POP for CTA would require trashing the exising fare equipment and replacing it with... well, with much cheaper equipment, and probably less of it, if policies are changed to provide a greater emphasis on sales thru grocery stores, currency exchanges and the like.

A full embrace of one type of pricing variance doesn't mean a transit agency will endorse another. As Mr. S. noted, CTA doesn't much go for time or distance variation. Metra is OK with bulk purchase, but doesn't do off-peak to speak of, and even its distance pricing is blunted by its refusal to sell single-trip interline tickets.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

edna,

Notice the new blog title on the main page "Illinois Transportation Issues" and the caption underneath it. Seems there's a new focus, and moderator.

But I do want to point out Metra's weekend pass as an off peak pricing strategy, of sorts...

j schwiet said...

The central message of my Chicago Tribune article is that the CTA has not, despite its rapidly deteriorating financial condition, pursued opportunities to improve its revenues through “value-based” pricing.

You are correct that no major big-city transit system in the U.S. has made the conversion from a flat-fare system to a distance-based system. However, I am unwilling to let the CTA off the hook so easily for its relatively primitive pricing practices. Outside the U.S., nearly all major systems have made the conversion to more sophisticated pricing structures, and as I explain below, other agencies in the U.S. have been more vigorous in pursuing “value-pricing” options than the CTA.

Of course, the CTA’s options for adopting value-based or distance-based pricing are now greatly constrained due to its decision to invest in the present farecard/turnstile system. This huge investment was made in 1997 without, to my knowledge, a serious evaluation of its entire fare system. I have spoken to numerous people, including some transit insiders, who share my view that this was a major mistake.

The recent actions of New York, however, suggest that the CTA still has many viable options. The MTA has a large system of express buses in which prices are set at $5; it also charges a hefty price ($5) for passengers riding its “Air Train” to JFK. Last week, the agency unveiled a proposal to adopt peak/off-peak pricing for the entire system, touting it as an effective way to both raise revenue and smooth out traffic patterns (see link below).

http://www.nytimes.com/2007/09/25/nyregion/25fare.html?ref=todayspaper

The board will apparently vote on this proposal sometime this fall. Why aren’t we seeing a comparable debate in Chicago?

In Los Angeles, the local transit provider (LACMTA) charges a premium of up to $1.20 for bus routes that use local expressways. A study by Matt Smith, a researcher assistant at UIC, shows that many systems around the country have adopted some form of value-based or distance-based pricing. Although I’m not familiar with the measurement criteria that Smith uses, he offers an interesting discussion about the benefits of value pricing that can be accessed via the link below. There is table (pg 16) comparing the status of various pricing strategies in U.S. cities that helps illustrate my point.

http://cta21.utc.uic.edu/Presentations/TransportChicago07/Matt%20Smith.pdf

As the CTA sinks into deeper financial trouble, it is frustrating to me that we are not having a serious debate about creative ways to improve its revenue, outside of draconian “doomsday” budgets. The CTA has far more pricing power than most other transit agencies due to the size and strength of Chicago’s central business district. Plus, we face significant congestion on certain rapid-transit lines at the height of rush hour, which makes providing additional capacity costly.

Value-based pricing is less viable in cities with a smaller rapid transit system, where the price elasticity of demand is higher (partially due to the lower price of downtown parking) and congestion is less severe on trains and buses at peak times. (I did not mention Pace Suburban Bus in my article since I do not believe the agency, with its present route system, has much pricing power.)

This blog raises an excellent point that, even if the infrastructure issues associated with distance-based fares (including the need to install turnstiles that read farecards when passenger exit stations) could be resolved, Chicago’s economic geography makes this type of pricing politically and socially complicated. Some of the poorest neighborhoods, such as Austin and Englewood, are a considerable distance from downtown, which makes the distributional consequences of distance-based fares more than a trivial concern. The economic geography is less problematic in Washington, D.C. or San Francisco, where the poor tend to be concentrated in close-in neighborhoods.

However, the stations that are the farthest out from the city on the CTA “L” system, including O’Hare Airport/River Road, Evanston, and Oak Park/Forest Park, could easily support high fares. (It is my understanding that years ago the CTA dropped its surcharges on several routes, including the Evanston Express, for political rather than economic reasons.) Express bus routes using Lake Shore Drive are also good candidates for higher fares, while short routes in the downtown should probably have lower fares.

It is not clear whether it would be cost-effective for the CTA to modify the present farecard/turnstile system (presumably by installing the previously-discussed exit farecard equipment) at certain stations, such as O’Hare, to allow it to impose higher prices. However, this would be the simplest way to make the fare system more rational. Passenger exiting at these stations would pay a surcharge; those starting their journey at these stations would pay both the basic fare and the surcharge all at once.

Alternatively, the CTA could simply still charge premium prices only for originating passengers at certain stations (while allowing arriving passengers to pay only the basic fare), which would obviate the need for installing new turnstile equipment. I agree that this approach is imperfect, but it would be administratively simple and easy for travelers to understand. (Some highways have different tolls based on the direction of travel).

Moreover, the Chicago Card, introduced in 2000, provides an excellent opportunity for building greater pricing flexibility into the system and could help alleviate the pain of collecting surcharges if the CTA were to reinstitute the practice of collect surcharges on certain routes, such as the Evanston Express (Purple Line) times.

It is true to that value-pricing would result in some travelers either opting for other modes of transportation or traveling less. The assumption behind value-based pricing, however, is that the benefits, in the form of increased financial solvency of the transit provider and less severe “peaking” of demand, exceed the social costs.

It will take a lot of political will for the CTA to adopt value-based pricing in a large-scale way. When evaluating the actions of other cities, I was struck by the propensity for some cities to build new light-rail routes with flat-rate fares. Los Angeles has built an entire light-rail system around a flat-fare system. The cost of riding the Los Angeles-Long Beach Blue Line, which stretches 22 miles, is just $1.25. (It is not surprising that its farebox recovery ratio is so poor!). This seem absurd to me, considering the relative ease of zone-based and time-of-day-based pricing on these systems, which can rely on the “honor system” (with enforcement).

The new light-rail system in Minneapolis has both distance-based and time-of-day based pricing, making it a prototype for other to emulate.

None of this is intended to suggest that distance-based or value-based pricing would be a quick fix. It would probably increase revenues only modestly until a general retrofit of station equipments becomes possible, which is hard to imagine right now. Adopting it system wide would be a long, difficult road. But incremental steps could pay dividends, and give us hope that the CTA is waking up to the need for run itself more like a business.

Anonymous said...

"Sadly, the CTA sent packing the last remnants of value-based pricing years ago when it eliminated surcharges on certain express routes."

CTA rail and bus riders currently pay different cash fares, which sounds to me like value pricing. Rail customers are less price sensitive. Higher cash than card fares, too, are an instance of using pricing to change behavior. A simple entry surcharge for cash fares at O'Hare & Midway would be simple and profitable, since air travelers are price insensitive. (Airport workers probably use passes.) All of these ideas came from current CTA employees, btw, as did the rush hour surcharge.

Also, NYC MTA does not run the AirTrain; that would be the Port Authority, which also runs the airports.