CA-91X:Wilson Admin Nixed

Dean Dunphy, secretary for transp in the previous Wilson Admin in California rejected a proposal from the owners of the 91-Express Lanes (91X) concession to turn it into a private non-profit. Dunphy confirmed this in an interview with TRnl.

“They stood to make a rather startling return on capital invested, and we didn’t feel the new arrangement they proposed offered the people of California a fair deal. I didn’t like the signal it might send.”

We’d been told previously that after several discussions between the 91X concessionaire California Private Transportation Company (CPTC) and Caltrans officials about turning the concession into a private non-profit that Dunphy had said: “Not on my watch.” Dunphy told us he did not recall using precisely that phrase but that he said he judged the non-profit proposal not to be in the public interest and suggested to CPTC that they wait and try the idea on the next administration. The current administration says it has received no new representations or proposal from CPTC.

Rejected before Revealed

Officials told us that CPTC was pushing the idea of refinancing the concession as a private non-profit in the summer of 1998 several months before this was announced publicly in a CPTC press release (see TRnl#31 Sept 98 p1), and indeed the proposal had been rejected by Caltrans before being announced as if it were something new. The terms of the concession prohibit CPTC from disposing of its interest in the project without the written consent of Caltrans. Dunphy and present Caltrans officials, who said they could not be quoted, both told us they consider permission to transfer the concession cannot be given unless they see the transfer as being “in the public interest.”

CPTC in none of its statements alluded to any efforts to get Caltrans agreement, let alone that it had already been turned down. Indeed CPTC officials suggested that state approval was a mere formality. In fact Caltrans has full veto power over a transfer of title. Article 17 of the concession agreement between CPTC and Caltrans states under the heading of Assignment that “CPTC may not, without the written consent of Caltrans, assign, pledge, mortgage, or otherwise encumber its interests in this Agreement...” And it is clear that, contrary to CPTC statements, state officials see this as a matter of serious state discretion.

Fairy Story

After being rejected by Caltrans CPTC attempted to get us (and local press) to print a false account of the origins of the non-profit. They claimed they had been approached to sell the 91X concession by an independent locally formed non-profit called Newtrac though Newtrac was in fact CPTC’s idea and its creation. Moreover Newtrac was to give CPTC a longterm operating contract ensuring it would continue to profit from the road.

Until recently, Caltrans officials maintained silence over the summer negotiations with CPTC, and the Wilson Administration’s rejection of the proposed transition to non-profit status remained secret. But an official told us about it recently. He explained:

“These concessions were structured very carefully and deliberately to encourage longterm investment. They allow a high rate of return on capital precisely because we were looking for longterm investment and a longterm commitment The concession was not structured to attract a get-rich-quick kind of developer. It was designed to provide the benefit to the concessionaire over a long haul of for-profit management with a focus on the bottom line. The law under which the concessions are issued provides for the investors to be rewarded for being cost-conscious, innovative, risk-taking and customer-oriented. It was not designed for some kind of contract or cost-plus operation. We’ve got plenty of that already.”

Dunphy, the former head of the department overseeing Caltrans, was not quite as outspoken in his on-the-record interview with TRnl, but what he said was consistent with the other account. Dunphy told us: “I want investors who risk their capital to make a profit, and I certainly don’t want to discourage private investment in roads. We need the benefit of investor-built and operated roads. There is a definite place for toll roads, and investor built toll roads. The community needs the ability to tap private capital because there are periods when the state or counties simply won’t have the money, and when we need new roads. And we need to reward the investors for succeeding in the very difficult process of getting environmental approvals for new roads and enduring the other uncertainties. But the scheme they (CPTC) proposed (for transferring title to a non-profit) was not, in my judgment, in the public interest. I suggested they might try persuade my successor of the merit of their proposal.”

Dunphy stepped down at the turn of the year when a Democratic administration took over.

CPTC wanted to transfer ownership to a private non-profit entity called Newtrac which CPTC would set up and control for the remainder of the term of the concession. Moreover CPTC was proposing a minimum 12-year operations and maintenance contract with its own private non-profit, the official told us.

Dunphy said that CPTC kept telling him they had a small window of opportunity to refinance the concession to the non-profit. This appeared to be an effort to force the issue last summer. In fact bond rates have continued low, and are if anything more favorable to a refinancing now than last summer when CPTC came to Caltrans.

The former department head was also concerned that neither state nor local government would have any say in the running of the non-profit since CPTC would appoint the board and have full control. He thought that the scheme needed more safeguards for taxpayers, he told us. He was also concerned about whether a non-profit would have the incentive to put necessary investments into the road in the future.

The other official who will be unnamed also told us that the management contract for CPTC could be construed as a way of getting future profit out of the road without having any normal investor equity or risk. He said: “Clearly, 91 Express Lanes is very successful financially.” He said he did not blame CPTC for wanting to capitalize on their profits by refinancing and offloading their future risks to a non-profit, “But this is not what the concession was structured for.” Officials have praised 91X saying it is one of the best built bit of highways in the state, “built to last” as one put it. The contrast with the San Joaquin Hills (CA-73) toll road quality is striking. With Caltrans guaranteeing maintenance TCA saved every dollar possible on construction knowing the state would be maintaining the road. It is falling apart only a couple of years after opening.

With a for-profit concessionaire on 91X there was an incentive to built the road right to start with, and some officials think it would be a pity to lose this example. The refinancing proposed by CPTC would reduce interest on debt from over 8% to about 5%. This would enable CPTC to “walk away with a very big capital gain” while leaving motorists and taxpayers with far less assurance of continued good management of the facility, said an official.

There is also the strong likelihood that transfer of the CPTC franchise to a non-profit entity would be illegal and would be annulled in the courts. The franchise was granted under Calif. law AB680 which authorizes “private entities” to operate toll road franchises structured to provide a “reasonable return” on investment with specified “incentive returns” on investment beyond that. Accounting and reporting requirements of the law and of the franchise agreement are tailored to an investor financed for-profit operation on 91X (See extracts bottom p2). How could a franchise agreement structured around rates of return on investment be legally administered for a non-profit? Even if Caltrans were to go along with the formalities of a transfer to a non-profit, the first person with a grievance against Newtrac could go to the courts and charge that its operation of the toll road was in violation of both law AB680 and Caltrans franchise agreement. A court would be hard put to find a legal basis for any non-profit operation of the road under the terms of an agreement that is clearly based on for-profit arrangements.

Who would lend to a private non-profit whose only legal basis was a franchise granted to a quite differently structured for-profit entity, under a law clearly envisaging for-profit franchises? What officials in Caltrans would go along with such a scheme by providing the required “written consent” to a sale by CPTC with such potential for a legal fiasco?

Litigating Capacity vs Safety

Early March CPTC announced it was suing Caltrans to stop a project to add auxiliary lanes on CA-91 in Riverside Co immediately east of the end of the express lanes. CPTC maintains that the proposed auxiliary lanes breach the no capacity enhancement clause of its concession agreement with the state, which provides for an “Absolute Protection Zone” along the corridor within which Caltrans will not issue any other toll franchise or use public funds to effect expanded free capacity. A Caltrans spokesman said the auxiliary lanes project is for safety, not extra capacity.

The proposal is to add 13th and 14th lanes to the outside of the freeway where it is currently 8-lanes free and 4-lanes toll at the eastern ends of the CA-241 (Eastern Toll Road) ramps for some 7km (4mi) eastward to CA-71 (Corona Fwy) in Riverside Co. The eastern end of the ‘aux-lanes’ which would be 11th and 12th lanes will end by the CA-71 interchange a few miles inside Riverside Co. The 7km widening is about a $25m project, officials say. It does not require any property acquisition and involves new pavement and shoulder on fill and some bridge widenings.

Eric Haley, director of transp in Riverside Co says he strongly supports the auxiliary lanes. He says traffic to and from CA-241 (Eastern Toll Road) has trouble merging and weaving in the eastern part of CA-91 and that the turbulence is a safety problem that only auxiliary lanes can correct.

An Orange Co official has a different angle: “This is really a dispute between two toll roads. The TCA (county toll agency) wants to facilitate traffic entering its Eastern Toll Road (CA-241) and 91X obviously wants nothing done to help its competitor.”

But it has also become something of a clash between Caltrans and its concessionaire.

There was a silly exchange in the local press with Caltrans being portrayed as saying the aux-lanes are for safety and CPTC saying they add capacity, when most independent observers would say that they do both. The franchise agreement does provide that Caltrans may make any necessary safety improvements. But safe merging hardly needs 4mi of extra lane! So CPTC will have a strong legal case against Caltrans because safety issues could surely be addressed without 8 lane-miles of extra road, which seem to add to capacity in breach of the concession agreement.

Misuse of Safety

What credibility would any no-capacity enhancement clauses in future concessions have if all the state road authority had to do was invoke the word ‘safety’ to justify capacity enhancements? It is well-established in the safety literature that, for example, an undivided 2-lane road has about three times the accident rate of a 2x2-lane divided road, so safety could validly be invoked as a reason for doubling road capacity parallel to a franchise. Or since signalized intersections have an accident rate about five times that of a grade-separated interchange, safety could also be used to justify an upgrade from a signalized arterial to motorway, which would also increase capacity about 2.5 times. Such ‘safety enhancements’ would very effectively torpedo a toll franchise’s revenues and the basis for its investment.

A state official told us CPTC cannot prevent the extra CA-91 aux-lanes being added, saying there is “no way that would ever fly” adding “They’d be laughed out of court.” But he also indicated possible grounds for a settlement saying that the company may be able to demonstrate a valid case for some kind of compensation.

“I would guess we’ll end up getting some independent expert assessment to establish how far this does or does not enhance capacity and how much it affects their revenues. And we should be able to sort this out fairly to both sides.”

The 91X concession offers arbitration as an option in cases of dispute, but CPTC chose a law suit alleging breach of contract, and has sought a court injunction preventing work on the aux-lanes from proceeding.

BACKGROUND: CPTC is a limited partnership of Peter Kiewit, one of the US’s largest road building companies based in Omaha NE, Cofiroute the investor-owned French toll road company, and Granite Construction the largest west coast roadbuilder. CPTC marshaled $130m to build the 4-lane divided Express Lanes facility a bit over 10mi (16km) in length which extends between the IC with CA-55 in Anaheim where it has direct connectors to both CA-55 and merges with the free lanes of CA-91 eastward to the Riverside Co line. The X-lanes are separated from the free lanes by plastic delineator sticks located at 3.6m (12') intervals.

91X opened for business late Dec 95 and announced it had reached cash flow profitability last summer. It charges tolls ranging between 75c and $3.50 depending on hour and day of the week according to a published schedule. HOV3s get a half-toll break, and there are a variety of accounts structured to encourage frequent use. The facility has no manual payment provision so all lawful users must have a toll transponder on their windshield and tolls are levied at full highway speed as cars travel under a gantry about midway down the road. An average of 30k vehicles/day use the road and in rush hours it carries similar traffic per lane as the free lanes but at about twice the speed, because inefficient stop and go breakdown in flow is avoided with the pricing. Whenever 91X management detects imminent regular congestion it revises its toll rate schedule to deter excess traffic.

Opinion surveys have indicated good public support for the 91X toll operation, and it is seen as a success story. It was the second investor financed toll road to be built in the US in the automobile era (The Dulles Greenway VA opened four months earlier) and the first in the world to open relying entirely on electronic transponders and the first to implement the principles of variable pricing. The company developed the term Value Pricing, now favored by the Federal Hwy Admin.

Extensions

CPTC is active in discussions on an extension of toll lanes eastward from their present eastern terminus at the county line 13km (8mi) further east on CA-91 to I-15. Under its state concession it has a first right refusal on tolling there but it will have to reach an arrangement satisfactory to the county. Eric Haley of Riverside Co says consultants will shortly be making recommendations to a 4-county task force on what upgrades can be made to the southern portion of CA-71 and to the interchange CA-91/CA-71. Haley told us this may involve a complete interchange with direct connector ramps, including separate ramps into the toll lanes that could enhance the 91X facility. He expects construction to be somewhere in the 2004-09 timeframe whereas the Caltrans aux-lanes could be in operation before 2004.

Haley’s predecessor Jack Reagan proposed study of a scheme for eliminating central piers of overpasses on CA-91 between CA-71 and I-15 to allow a moveable barrier solution with 2 or 3 new central lanes to provide a HOT facility in Riverside Co. (Contacts Jim Drago Caltrans 916 654 4677, Greg Hulsizer CPTC 714 637 9191x328, Eric Haley R’side Co 909 787 7141)

OUR ATTITUDE: We admire CPTC for the pioneering job they have done in establishing toll express lanes on 91X, and consider them entitled to good profits for their investment, enterprise and hard work. But they submitted the 91X project under a law providing for longterm for-profit operations and then entered into a franchise agreement to build and operate the facility as a longterm for-profit venture. The CPTC proposal now to transfer title to a non-profit has no solid legal basis or social rationale.

For-profits have the merit of having owners with a stake in efficient consumer-oriented operations in pursuit of the bottom line, and they have a stake in preservation and enhancement of the capital of the enterprise and its assets. Investor ownership and for-profit operation is the way we in America produce most of our goods and services, and 91X was an innovation in bringing this economic normality to the conduct of a road.

Public non-profits with their management on salaries are less motivated to efficient and enterprising operation, but they are an established governmental form, providing some accountability via the political process. But private non-profits offer little accountability to anyone except the small self-appointed clique who run them, which seems to account for the abuses so constantly revealed in outfits like the Olympic Games committees, United Way and others so loudly and righteously proclaiming their only interest to be the public interest. Therefore we thought the Newtrac proposal was a horrible backward step, from something better than government operation to something much worse, but that’s an opinion. And we are skeptical about business people who suddenly see higher virtue in a charity. We did get cranky about being fed fairy tales about the status of the 91X non-profit proposal, because that kind of silliness undermines trust and makes our job of reporting the facts more difficult, but heck, that wasn’t the first time, and unfortunately won’t be the last time, it’s been tried. The spin attempts just become part of the story. No hard feelings. PSam