Wednesday, October 3, 2007

More Schwieterman On CTA Value Pricing

Professor Joseph Schwieterman graciously submitted a lengthy response to my recent post discussing his Chicago Tribune commentary advocating that the CTA adopt value pricing. In view of the importance of the issue and the thoroughness of the comment, I've reprinted his comment here:

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).

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.

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.


jackonthebus said...

Until the late 1990s, CTA did charge a 25 cent surcharge for express bus trips leaving the loop. Also, there was a surcharge from Evanston or Skokie to use the Evanston Express south of Howard, requiring the purchase of an express pass (looked like a transfer), which was inspected by a conductor between Howard and Belmont. Rather than political reasons, it appears that these ended as the CTA became more dependent on fare and transfer cards and passes, rather than the driver monitoring what was dropped into the fare box. Of course, the elimination of conductors ended inspections on the Purple Express (which isn't very express anymore, either).

While CTA has always claimed that there were technical and public education problems associated with collecting distance based fares on its grid system (see Krambles and Peterson, CTA at 45, pages 130 to 132), the grid was partially severed in this sense by the 2005 decision not to issue transfers with cash bus fares. The increase of the initial rail fare by 25 cents for transit card users also does away with the cost advantage resulting from transfers between rapid transit lines being free.

Krambles also said that "advances in microprocessor technology and magnetic card reading ... may one day be solved" to allow distance based pricing, but the question is whether the users could be compelled to scan their cards when leaving (as was required on the Metra Electric--or maybe back then it was still the IC--to get through the exit barriers when its automated ticket system was in operation). Could "I Pass lanes" be put at both the front and back doors of buses, and distinguish those boarding and leaving, and could they be effective if a smart card is not a prerequisite to boarding?

The biggest breakdown in distance based fares was when the RTA allowed transfers between the CTA and suburban lines, theoretically allowing a ride from the south surburbs to the north ones, if the last link could be initiated within 2 hours.

As I previously mentioned, the increased rush hour fare that CTA made part of its contingency plan made economic sense, in that CTA claims that it is scheduled to capacity during rush hour. We can debate its merits, but it appears that it is off the table so long as retaining current service and fare levels is the announced quid pro quo for any legislative effort to avoid the doomsday scenarios.

HealthyCity said...

While I'm sympathetic to Schwieterman's argument (I generally support distance and peak fares), I feel that he's over emphasizing the importance of this right now. The lack of peak/distance pricing is not why CTA's in the hole right now and implementing won't fix that hole either. Now I know that Schwieterman is not saying that exactly, in fact, his reply today goes to great pains to point out that pricing changes are a long-term policy fix, but his timing for this particular nuanced discussion, considering everything going on with transit right now, just stikes me as so odd.

Early posts by the Moderator spoke of the low quality of the "regional team" (government analysts, academics, etc.) of which I disagreed. But this is a case of one of the region's most respected, transportation experts, entering himself into the debate at a potentially historic moment in the region's transportation history, basically to make a case for a wonkish esoteric point. Don't get me wrong, that wonkish point is important to make--I like that wonkish point--but it just seems to me so NOT the time to be making it.

I don't understand where it's coming from.