Dulles Greenway gets green light from regulating staff for 13%/33% toll increases

Staff at the Virginia State Corporation Commission (VSCC), regulator of the Dulles Greenway say the tollroad's proposed toll increases satisfy legal requirements. The concessionaire, Toll Road Investors Partnership II (TRIP2) controlled by Macquarie, has applied for an increase in maximum tolls on Jan 1, 2009 of 13% from $3.00 on July 1, 2007 to a $3.40 base rate for cars at the mainline plaza, and for the right to charge $4.00 "Congestion Management Tolls" in peak hours, a 33% increase on the mid-2007 rate from Jan 1 2009. 85% of tolls are at the mainline plaza.

Tolls could increase further 18 months later on July 1, 2010 to $4.00 base rate, and to $4.80 Jan 1, 2012 in peakhours, increases over five years of 33% and 60%. (see table)

TRIP2 are also asking for authority to institute an axle based toll classification in place of the simple cars and larger vehicles in use now.

Three legal requirements

Staff in testimony said the toll rate proposals meet the three legal requirements that:

- tolls are reasonable in terms of benefits to road users versus the cost

- tolls do not unduly discourage use of the road

- they provide no more than a reasonable return on investment

At present toll rates the average motorist receives benefits from using the road in peak hours of $9.76 or 3.7 times the toll and in off-peak periods $4.04, 1.6 times the toll, according to calculations presented to the commission, leaving a wide margin of benefits to support the higher tolls.

The commission staff looked at historic data of toll rates and traffic and calculated very low elasticity of demand, or small likely diversion of traffic from higher toll rates: -0.18 overall, -0.13 in peak hours, and as low as -0.07 for transponder users in peakhours. This, they said, satisfied the second legal requirement, though they noted that 2006 traffic has been soft and might indicate an increase in price sensitivity. Down 6% on 2005 traffic may have also been motorists reacting to extensive 3rd laning roadwork on the tollroad plus toll plaza widening at a time when earlier roadwork was complete on competing VA28 and VA7, giving them a temporary competitive advantage.

HISTORY

The Greenway was built by a local family company led by Michael Crane, smaller shares being held by Autostrade of Italy, and Brown & Root, their equity contributions supported by loans from two insurance companies. The road which serves the developing fringe area of Loudoun County north of Dulles Airport provides the only expressway standard road between the end of the Dulles Greenway at the interchange with VA28 on the eastern front agteway to Dulles Airport and the city of Leesburg, and the infill development occurring in between. The VA7 (Leesburg Pike) and VA28 are high quality signalized arterials that provide a competing alternative to the Greenway.

Opened in recession

The tollroad opened Sept 29 1995 in the middle of a recession in development and traffic was way below forecast - less than 10k/day for the first six moths vs 30k in the business plan. Tolls were halved from $2 to $1 in March 1996 and traffic more than doubled to the low 20ks/day mid-1996, but in the first couple of year revenues were insufficient to service debt and the company defaulted immediately to the insurance companies. Later refinancings managed to repay the debtors.

Traffic & revenue history

Daily traffic/incr/toll revenue/incr:

1996 17.4k ------ $6.3m ---

1997 23.8k 1.366 $8.8m 1.40

1998 27.6k 1.162 $11.3m 1.28

1999 33.9k 1.230 $14.0m 1.24

2000 39.8k 1.173 $19.7m 1.41

2001 44.5k 1.119 $22.9m 1.16

2002 47.8k 1.072 $26.0m 1.14

2003 52.3k 1.086 $32.9m 1.27

2004 60.8k 1.140 $40.2m 1.22

2005 61.2k 1.011 $44.5m 1.11

2006 57.3k 0.936 $53.7m? 1.21

This is average annual growth of traffic of 15% in a county which has had average annual population growth of 8% to approximately double in population 1995 to 2005. The Greenway's share of total corridor traffic is estimated to have grown from 25% in the early years to 35% now.

Losses down this decade but continued

The company declared losses averaging $45m/yr 1996 through 1999 and averaging $32m/yr 2000 through 2005. Debt which began at $350m increased to about $700m with refinancings before the Macquarie purchase.

Back in 1990 when the Greenway concession was approved the VSCC established maximum allowable rates of return and a so-called Reinvested Earnings Account (REA) which accumulates the difference between authorized profits (starting at 30% return on investment and declining to 14%) and actual results - to allow future profits to make up for early losses. The REI grew to $1.18b by end-2005.

This has been misconstrued by some critics as growth of debt. In fact it is a regulator's accounting artifact to allow failure to make allowed profits in the early years to be rolled over into the future to allow catchup profits later.

Two Macquarie entities (MIG of Australia and the US-based MIP) now own 100% of the Greenway through full purchase of the general partner but only 13.4% of TRIP2 though they have options to buy it fully from the Crane family Shenandoah companies. The Macquarie companies lent the Shenandoah companies $500m as part of their buy-in which cost about $625m.

Concession extended

The concession period, originally 40 years was extended by negotiation with the VSCC to 60 years - to 2056. That was part of a deal in which the concessionaire committed to major improvements to the tollroad including completion of third laning, improved connections to Dulles Airport, new interchanges and toll plaza expansion.

Only in 2006 did the Greenway become barely profitable while the VSCC had in approving the project in 1990 approved returns on equity of 14% to 30%, so it is nowhere near the allowable return on capital now.

Local residents attending meetings of the VSCC, several town councils, and area politicians have in the past few months complained about the proposed toll increases, but with the favorable report by VSCC staff it seems almost certain they will proceed.

Wot next?

Staff now have to write a formal report for the VSCC commissioners who then have to formally consider the report and make their decision. This is likely to be several months at a minimum, according to VSCC spokesman Andy Farmer.

TOLLROADSnews 2007-03-14