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May 06 2014

Sunday Train: Freight Transport and the Highway Funding Crisis

(2 pm. – promoted by ek hornbeck)

Belated edition ~ technical difficulties interfered with posting to Soap Blox blogs

We are going to be hearing increasingly this year about the Highway Funding Crisis. Much of that discussion will be directed toward exploiting the political leverage that our car addiction gives to the Highway Lobby.

But there is the other side of the Highway Funding Crisis, which is freight transport. Our freight transport system has been as deliberately addicted to road funding as our passenger transport system, and in the process is quite heavily addicted to diesel fuel.

Now, the Sunday Train has frequently tackled this issue from the side of the physical unsustainability of our dependence on petroleum based fuels for a majority of our transport. However, its also the case that the system of public finance upon which we built our road transport system is becoming more and more financially unsustainable.

1. America’s Underfunded Road Infrastructure

In 2013, the American Society of Civil Engineers (ASCE) issued their “Infrastructure Report Card”. In that report, America’s roads were given a grade of “D” (1):

The infrastructure is in poor to fair condition and mostly below standard, with many elements approaching the end of their service life. A large portion of the system exhibits significant deterioration. Condition and capacity are of significant concern with strong risk of failure.

According to the ASCE, it would cost $101 billion to maintain the nation’s highways in their current state. And the state of the nation’s highways at present is not what it should be, with 42% of the nation’s major urban highways congested. In addition, 32% of America’s major roads are not in a state of good repair, in either poor or mediocre condition, with 54% of highway vehicle miles on pavements that do not provide good ride quality.

The Federal Highway Administration estimates that $170 billion in new investment per year would be required to substantially improve conditions, with $85 billion required to improve existing highways so that 74% of vehicle highway miles are on pavement in a state of good repair. In other words, a total of $186 billion annually is required to bring our existing highway network to a state of good repair, with an addition $85 billion required per year to address bottlenecks in the nation’s highway network as we presently use it.

When we look to the funding provided, Federal, State and Local governments are only spending $91 billion annually on highway investment. And a part of this is for the construction of new road projects, which will increase the maintenance burden in the future.

Looking more broadly than highways alone, road spending on both highways and local roadways totaled $192.7 billion in 2008. With a funding shortfall in 2008 estimated at 13% of that total, total funding requirements were about $220b, with 43% met by user fees and 45% as subsidies funded by other taxes. State governments are the most important source of funding, meeting 44% of the need, followed by local governments meeting 24% of the need, and finally the Federal government meeting 19% of the need. (2)

The more local the level of government, the more heavily it relies on tax subsidies. In 2008, less than three tenths of Federal government funding were subsidies funded from other tax revenues. About four tenths of state government funding were subsidies, and a dominant nine tenths of local government funding were subsidies. (2) Therefore, if shortfalls in Federal funding spill over to shortfalls in state funding, which force local governments to spend more, this also results in an increase in the share of road costs covered by subsidy.  

Meanwhile, the largest individual source of highway funds, the Federal Highway Trust fund, is funded by gasoline and diesel taxed that has been set at the same nominal amount since 1993, 18.4 cents for gasoline and 24.4 cents for diesel. According to Kevin DeGood at the Center for American Progress: (3)

  • In inflation-adjusted terms, the gas tax is worth only 11.5 cents today.
  • In 1993, the gas tax represented 18 percent of the cost of an average gallon of gasoline. Today, it represents only 5 percent.
  • If gas and diesel taxes had been indexed to keep pace with inflation, today they would be 29 cents and 38 cents per gallon, respectively.
  • The corporate average fuel-economy standards will rise to 54.5 miles per gallon for cars and light-duty trucks by model year 2025. This will approximately double the efficiency of vehicles compared to current levels and dramatically reduce the amount of tax revenue flowing to the HTF, crippling federal surface transportation programs.

The Federal Highway Trust Fund would be facing a shortfall over the long term simply due to the fact that it is not corrected for inflation, while the cost of maintaining each mile of the highway system increases annually. However, the damage done to the road network is based on miles driven and vehicle weight, not on the amount of energy required to drive those miles and move that weight.

As we pursue greater fuel efficiency to reduce the pollution and greenhouse gas impact of each mile driven, we further reduce the payment made by cars and trucks for each vehicle mile and ton-mile of use of the road.

At the time of writing, the Highway Trust Fund is projected to exhaust all but emergency reserves within the calendar year, if nothing is done to provide new revenues. However, even if a short-term fix is provided, the long term problem remains that we are not keeping up with the maintenance costs of our road network, even as we continue to add to that network, and over the medium to long term, an increasing reliance on electric cars will undermine that part of our highway funding which is derived from vehicle fuel taxes.

This is challenge is both substantial and complex challenge, and it calls for policy responses on multiple dimensions of the problem at once.

We can respond to this shortfall on the funding supply side, by looking for ways to increase the revenue devoted to road maintenance. We can also respond on the demand side, by looking for ways to reduce the need for maintenance generated by road users. The challenge is substantial enough to justify pursuing both approaches. The focus here is on the demand side, to develop demand-side policies can offer a useful complement to efforts to make progress on the supply side.

Passengers carried on light vehicles and buses, and freight carried by heavy trucks quite distinctive types of transportation tasks. They both contribute substantial shares to the unfunded demand for road maintenance, and it is worthwhile to consider demand reduction policies for both types of road users. The focus here is on demand side policies to reduce the wear and tear generated by heavy trucks, to develop demand-side policies for freight carries by heavy trucks that can complement demand-side policies for passenger traffic carried by light vehicles and buses.

 

2. The Role of Freight Shipments by Truck In Our Highway Funding Crisis.

Any comprehensive demand-side policy for the road-funding shortfall must consider truck freight, since a substantial share of road costs can be attributed to truck freight. Starting with the 1997 Federal Highway Cost Allocation Study (4), both Federal and state studies of the allocation of costs between light and heavy vehicles commonly find that heavy vehicles are responsible for 30% to 40% of total highway expenditures. (5) Much of the focus of these studies are on whether the distribution of revenue and costs are equitable, but given spending that is falling short of need, perfect equity means that all users bear equal responsibility for the shortfall.

It is also important to distinguish between between maintaining the system that we have and bringing it up to a state of good repair, and expanding the system that we have. Maintaining the system we have and bringing it up to a state of good repair reduces our unfunded future road liability. Expanding the system, by contrast, increases our unfunded future road liability.

Trucks play an especially prominent role when we consider focus on the cost of maintaining our current system and bringing our current system up to a state of good repair. For example, in the 1997 FHA Highway Allocation Study, it was estimated that 44% due to semi-trailer and multi-trailer trucks, 16% due to heavy unit trucks, and 40% of the cost for system preservation due to passenger vehicles and light trucks. So a policy of reducing the shortfall by reducing the damage done to our roads gains the most leverage from diverting some share of freight carried by multiple unit trucks from road to some other means of travel. (4)

Wear and tear from heavy trucks is concentrated on those roads that are most directly exposed to the funding difficulties faced by the Federal Highway Trust Fund. The highest volumes of truck traffic occurs on National Highway System (NHS) roads. Federal Highway Administration (FHA) day indicates that 22% of NHS roads carry high volume truck traffic, more than 10,000 trucks daily, and a further 13% carry moderate volume truck traffic, between 5,000 and 10,000 trucks daily. By contrast, fewer than 1% of the miles of non-NHS roads carried moderate or high volumes of truck traffic. Among NHS roads, high volume truck traffic is further concentrated on the Interstate System, with 77% of urban Interstate System miles and 64% of rural Interstate System miles experiencing high volume truck traffic. (6)

If there are ways to ship freight with substantially lower maintenance costs per ton-mile, it is possible to reduce the unfunded road maintenance burden by shifting road freight shipments to that alternative. In this policy, there is substantial leverage available in focusing on “long haul” shipments over 250 miles. After all, shifting a single shipment of 500 miles has the same benefit as shifting ten 50 mile shipments, while shifting a single shipment of 2,500 miles has the same benefit as shifting fifty 50 miles shipments.

There are substantial opportunities for shifting long-haul truck freight, since while trucking dominates short haul freight traffic, it also carries a substantial share of all long-haul freight traffic in the country. When national freight traffic is broken down by distance, truck carries a majority of ton-miles for shipments shipments between 250 and 750 miles, and for shipments over 2,000 miles, and over 30% of the ton-miles for shipments between 750 and 2,000 miles. And trucking dominates freight of certain types of goods at all distances, so that for either mixed freight or machinery, a majority ton-miles are carried by truck.

The primary alternative means of carrying long-haul freight are air, water, and rail. Shifting substantial truck freight to air is moving in the wrong direction, since the infrastructure, energy, and environmental costs per ton-mile of air freight are higher than truck freight. Shifting truck freight to water freight is a useful alternative where it is feasible, since well-regulated water born freight offers the lowest infrastructure, energy and environmental costs per ton-mile. However, many truck freight routes lack a viable water born alternative, and many freight customers demand a higher speed than water born freight can deliver. This leaves rail freight as the primary alternative to long haul truck freight that offers lower maintenance, energy, and environmental costs per ton-mile of freight moved.

 

3. Achieving A Big Enough Mode Shift to Electric Rail To Make A Difference.

If a mode shift from truck freight to freight rail offers these potential benefits, why aren’t we already pursuing it? Turning to the policy proposals contained in the 2013 NREL study on road to rail mode shift (7) reveals a set of policies that are incapable of achieving a mode shift of sufficient scale to make substantial progress on the problems of energy waste, greenhouse gas emissions, or unfunded road maintenance associated with truck freight.

The 2013 NREL study identifies seven possible Federal policies that could affect the share of different transport modes (p. 50). Expanded reliance on direct-user fees and investment in rail corridors have moderate potential to drive shifts from truck to rail. Increasing the federal fuel tax, regulating or pricing greenhouse gas emissions, or modifying commercial vehicle hours of service regulations would all have low potential to drive shifts from truck to rail. And two policies, increasing truck size and weight limits and re-regulating freight rail rates not only have low mode shift potential but would likely shift freight from rail to truck.

The problem is the characteristics of rail freight make it an unattractive choice for a large number of specific freight shipments. This becomes is reflected in what called the “cross-price elasticity” of truck to rail shift. That is what percent of shift from truck to rail results from a 1% increase in the price of truck freight relative to rail freight. For a wide range of types of freight, these cross-price elasticities range from about 0 (no response at all), to about +1 (p. 30), indicating that customers for most types of freight shipping are relatively unresponsive to relative price changes. As the NREL 2013 study notes:

Regardless of distance, service, or rail technology, there are certain types of commodities for which the railroads are not competitive. Certain automakers, for example, insist on trucking because of special handling requirements; shippers of time-sensitive freight require the flexibility that trucking provides; and bulk commodities may need to move in smaller quantities than can be handled efficiently by rail or to places not served by rail.

In addition, infrastructure improvements might be necessary to make rail more competitive with truck movements along some corridors. Many rail lines have significant speed restrictions and without improvements will not be capable of competing with trucks for short- or medium-haul traffic. One of the largest challenges is removing height clearance obstructions that prevent double-stack intermodal service. (p. 34)

A useful in-depth examination of the potential for investment in rail infrastructure to divert long-haul freight from truck to rail was undertaken by the Virginia Department of Transport in a technical appendix to its Environmental Impact Study of projects for adding lanes to I-81 through Virginia. (9) In the technical report, a no-build bases case is compared to three levels of infrastructure investment in the Piedmont corridor:

  • In the no-build, case, the effective transit speed is 22.5mph, the transit time reliability index is 0.45 (the index measures variability, so the lower, the better), rail load/unload times are 34mins on average and congestion on I-81 is expected to drive a 1.5% shift of long-haul truck traffic – truck traffic over 500 miles – onto rail.
  • With a $111m infrastructure investment, the effective transit speed is 24.8mph, transit time reliability improves slightly to 0.44, and with no change in rail load/unload times there is an expected 2% shift of long-haul truck freight.
  • With a $267m infrastructure investment and $229m in rolling stock, the effective transit speed is 28.1mph, transit time reliability improves to 0.43, and rail load/unload times improving to 9mins, there is an expected 8.2% shift of long-haul truck freight.
  • With an additional $13m in infrastructure investment to make $280m in infrastructure investment and $229m in rolling stock, the effective transit speed can rise to 33mph and transit reliability improve to 0.42, with an expected 10.1% shift of long-haul truck freight.

However, the most substantial improvements are offered by a fourth investment alternative, the “Steel Interstate” alternative along the Shenandoah corridor proposed by a citizen’s advocacy group. This involves substantial dual tracking and grade separation, so came with an estimated infrastructure cost of $3.2b, and $300m investment in rolling stock. This investment is similar in size to the roadway alternatives of expanding I-81 to a uniform 6 lanes, at $4.9b, or adding 1 lane throughout, at $5.1b. The capital cost would be fully recovered by user-fees, as compared to the majority of the ongoing maintenance cost of an interstate highway expansion project being covered by tax-subsidy or unfunded road wear.

This investment was projected to deliver an average freight transit speed of 40mph, a transit time index of 0.38, more than 10% better than the base case, and an average 9min load/unload time. The impact of the improved rail freight performance was projected to be a 16.6% diversion of long haul truck freight to rail. However, while the original “Steel Interstate” proposal was for a multi-state rail corridor, the Virginia study was limited to investments in the state of Virginia, and this was a critical limitation:

Based on the findings of the previous studies and using information obtained from Norfolk Southern, DRPT, and Reebie Associates, this report concludes that there may not be sufficient rail capacity on the Norflok Southern Piedmont rail line to service future base load rail traffic. While the scope of this study is primarily based on the future needs of I-81, some assumption of rail capacity was necessary to determine whether and at what point freight diversion to rail would not be possible. It is a distinct possibility that future diversions of truck freight on I-81 to rail mode could be restricted unless additional public investments are made to the rail infrastructure both inside and outside the Commonwealth of Virginia. (p. ES-4)

So investment in rail infrastructure, financed by public authorities and funded by user fees, is capable of attracting a substantial shift from rail freight to truck freight. Based on the study of potential rail diversion by the Virginia DOT, the key factors driving this shift are increases in average rail freight transit speed, improvements in rail freight transit time reliability, and reductions in rail freight load/unload times. However, since it is long-haul truck shipments of 500 miles and longer that are most readily shifted from truck to rail, the full benefit of these investments will only be available if the investment is directed to a rail corridor of suitable length.

 

4. Public Institutions to Harvest the Benefits of a Truck to Electric Rail Mode Shift.

The institutions that we have to both fund and finance freight transport infrastructure are specialized to the freight transportation system that we presently have. Under our current system,   payments to cover a large part of the cost of building and maintaining road infrastructure for freight are funded in roughly equal amounts by tax-subsidies from general income and sales taxes and by user fees. At the federal level, there is a cross-subsidy from user fees collected from passenger cars and light trucks to cover part of the costs imposed by heavy trucks.

Competing means of hauling freight operate on a user-pays basis, specializing on segments of the freight market where their specialized advantages outweighs the tax-subsidies to truck freight. Much infrastructure for water-born freight relies on federal and state public works funded by user fees, and so is, in effect, financed at the lower interest rates available for public debt. Most infrastructure for rail freight is privately owned infrastructure and so is financed at the higher interest rates that must be paid by very capital intensive private going concerns.

So the United States has the market shares for various means of freight transport that we would expect given the public funding and finance of road freight infrastructure, private funding and public finance of water born freight, and private finance and finance of rail freight infrastructure.  We subsidize the least energy efficient means of hauling freight, and as a result have an energy inefficient system that exposes our economy to serious risk in the face of oil price shocks. We subsidize the means of hauling freight that emits the most greenhouse gases per ton-mile, and as a result freight transport is responsible for tens of billions of dollars of damage from greenhouse gases annually. We subsidize the means of hauling freight that is most expensive to maintain per ton-mile, and as a result we have a funding crisis where even after substantial tax-subsidy, highway maintenance spending falls behind highway maintenance needs.

The United States can have a freight transport system that delivers more benefit at lower cost to freight customers, to public authorities funding road infrastructure, and to the general public in terms of both out of pocket costs for goods and services and unfunded environmental costs. One part of doing so will be to establish institutions to support investments that will enable a mode shift of long haul truck freight to electric rail, contracted to make use of recently established carbon neutral electrical power sources.

Given the substantially lower maintenance costs of rail freight per ton-mile, it will be possible to get started on this process by offering public finance for privately funded infrastructure. To get an idea of the advantage offered by public finance, consider that in the cost of capital to BNSF has been found to be 11.25%, while as of May 1, 2014, yield of municipal bonds from the state of Washington range between 1% and 6%, and Federal 10-year Treasury bonds have a yield of under 3%. A $3.2b project, such as studied by the Virginia Department of Transport, financed over a period of 30 years at 11.25% requires annual funding of $380m. The same project financed at 6% requires $230m annually, and financed at 3% requires $160m annually. So public finance at 6% can reduce the annual funding cost by 38%, and public finance at 3% can reduce the annual funding cost by 56%.

Note that providing public finance will offer a substantial private benefit to the railways or railways that have this publicly-owned infrastructure built on their privately owned right of way. For this reason, the investment should be undertaken by a public authority with the capacity to oversee the project, in addition to raising the required funds. This requires a multi-state regional development bank, with the authority to raise funds for infrastructure investment on both publicly and privately owned right of way, with funding provided by user fees and investment on privately owned right of way guaranteed by commitments from the right of way owners to make use of the infrastructure. When this is established, it is vital to set down ground rules that ensure that the development bank pursues the full public interest. This includes ensuring that publicly provided finance will be refunded from user fees, and also includes the public interest in establishing carbon-free transport options.

This development bank system can be used in two ways to reduce both the unfunded maintenance liability and unfunded environmental costs of our highway system. First, it will allow the establishment of electric freight rail on substantial mainline transcontinental rail corridors, allowing freight to be shipped on the using corridors with renewable electric power. Electrifying an entire transcontinental corridor ensures that the commercial benefit of electric freight rail is available to the long-haul shipments that are the primary target for shifting from truck to rail. It also directly expands the capacity of the rail corridor to cope with new traffic, as an electrified rail corridor enjoys an increase in capacity of over 15%.

Once the corridor is electrified, then the development bank will be in a position to invest in new rail capacity to support rapid freight rail shipping. The study of rail investment alternatives by the Virginia Department of Transport established that increasing freight transit speeds from 22mph to 40mph would result in a substantial shift of long haul freight from truck to rail. It is feasible to design single stack freight railcars to carry freight long distances at 90 mph, which implies freight transits of over 80mph for long-haul freight.

A substantial commercial obstacle to rapid freight rail on the current mainline rail system are increased maintenance costs. Operating freight at speeds above 80mph, up to 110mph, requires that the track be maintained to Class 6 standard, which is substantially more demanding than the Class 4 standard that allows a 60mph freight speed limit or the Class 5 standard that allows an 80mph freight speed limit. The cost of maintaining track to Class 6 standard escalates for track that experiences substantial heavy bulk and double-stack container traffic.

Given public finance, new Class 6 track can be built next to existing Class 4 and Class 5 track. This track can be used for freight in three ways. First, it can be used to provide freight rail paths with freight speed limits of up to 90mph for single stack rapid freight rail trains. Second, it can be used as the return path for trains consisting of empty bulk freight and/or empty containers, which have much lower weight per axle and therefore do not escalate the cost of maintaining Class 6 track. Third, sections of the high track can be switched to the neighboring track to use as a passing siding. These would either be sections where curves impose a lower speed limit on the rapid freight rail in any event, so may be maintained as Class 4 track in any event, or else the heavy freight would be limited to low speed siding operations that avoids imposing undue additional maintenance cost.

The cost of building and maintaining this public rapid freight rail throughway, or “Steel Interstate”, would be recouped through access fees to operate on this track. We will therefore gain the public benefits from the investment in this Steel Interstate by virtue of providing public finance for the infrastructure investment, but without requiring substantial public tax-subsidy of the infrastructure. The development bank will not proceed with the project unless it is projected to attract sufficient use to refund the borrowing – and will likely require some guarantee of use of the Steel Interstate by the railway receiving the Steel Interstate investment in its right of way. Since the largest untapped markets for freight rail are markets dominated by truck freight, we can be confident that the private interests using Steel Interstate projects will be pursuing a shift of freight from truck to rail. The primary moral hazard in setting up these development banks is therefore the risk that they invest in entrenching our reliance on unsustainable energy sources for transport.

Thus, to guarantee the broadest possible public benefits from these investments, the development bank should be limited to financing transport projects that will be entirely sustainably powered, or that share of the project that represents a reduction in unsustainable energy required. Therefore, 100% funding a project by the development bank will only be possible for investment in transport infrastructure that eliminates the requirement for unsustainable power. By contrast a project that reduces the requirement for unsustainable power by 10% will only be eligible for 10% funding from the development bank.

 

Sources

(1) American Society of Civil Engineers. “Report Card for America’s Infrastructure”. March, 2013:  http://www.infrastructurerepor…

(2) Victoria Transport Policy Institute. “5.6: Roadway Facility Costs.” In Transportation Cost and Benefit Analysis II – Roadway Costs. 28 August, 2013. pp. 5.6-6. http://www.vtpi.org/tca/tca050…

(3) Kevin DeGood. “Understanding the Highway Trust Fund and the Perils of Inaction”. Center for American Progress, February 20, 2014: http://www.americanprogress.or…

(4) Federal Highway Administration. “1997 Federal Highway Cost Allocation Study –

Summary Report: V – Highway Cost Responsibility.” 1997: https://www.fhwa.dot.gov/polic…

(5) Oregon Department of Administrative Services, Office of Economic Analysis. “Highway Cost Allocation Study 2013-2015 Biennium.” January 2013: http://www.oregon.gov/DAS/OEA/…

(6)  Federal Highway Administration, U.S. Dept. of Transportation. “FHWA Freight Management and Operations – Chapter 5: Capacity and Performance Analysis.” August 10, 2011: http://faf.ornl.gov/fafweb/Dat…

(7)  Office of Energy Efficiency and Renewable Energy, US Dept. of Energy. “Freight Transportation Modal Shares: Scenarios for a Low-Carbon Future.” March, 2013: http://www.nrel.gov/docs/fy13o…

(8)  Inter-agency Working Group on Social Cost of Carbon, United States Government. “Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866.” May 2013: http://www.whitehouse.gov/site…

(9) Virginia Department of Transport. “I-81 Corridor Improvement Study: Freight Diversion and Forecast Technical Report.” March, 2007: http://www.virginiadot.org/pro…

 

Conclusions & Conversations

The Sunday Train does not end at the end of the essay … rather, the end of the essay is just the beginning of the conversation.

And, as always, any topic in sustainable transport is on-topic in the Sunday Train. So feel free to talk about CO2 emissions reduction, energy independence, suburban retrofit and reversing the cancer of sprawl over our diverse ecosystems, or the latest iPhone or Android app to map you bike ride. Whatever.

On this particular topic, what are your thoughts on how to address the problem that the road network that our freight transport is so heavily dependent upon is both ecologically and financially unsustainable?

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