TORONTO:407-ETR drops peak/off-peak differential

Morrey Rae Hutnick, spokesman for the company, said it wanted to minimize the toll increase on frequent users who are its most valuable customers. And she said conversations with customers indicated they favor a simple toll schedule. Many said they wanted a flat-rate toll.

Under the new schedule peak-hour users face only a 5% increase from 10c/km but out-of-peak (10am to 3pm and 7pm to 11pm) weekday and weekend (6am to 11pm) drivers face an increase of nearly a third in their toll rates (from 8c to 10.5c/km). The night toll (11pm to 6am) goes up from 4c/km to 5c/km.

Another major change is a 50% increase in the premium for toll by license plate reads from (US65c to $1) C$1.00 to C$1.50. Hutnick says this brings the charge into line with the company’s extra cost in managing pay-by-plate as compared to a transponder transaction.

Transponders are described as ‘mandatory’ for heavy vehicles (over 5t or 11k pd) but when they drive on the road without a transponder they get hit with a C$25 ($16) surcharge.

407-ETR has two classes of heavy vehicles (1) single-unit heavies which pay twice the light vehicle toll rate, now C21c/km days, 10c/km nights and (2) multiple-unit heavies which pay three times the light vehicle toll rate.

WSA favored differential

Wilbur Smith Assoc calculated that the 407-ETR would make more revenue with a peak/off-peak differential, but the new management does not have a high regard for that company’s modeling and has returned to a more traditional approach to setting toll rates. The only previous change in toll rates by the company was to reduce the differential between peak and off-peak rates by raising the off-peak weekday rates from C7c/km to C8c/km.

They appear to calculate that the decline in off-peak traffic from the higher toll will be less than a third (the amount of the increased toll) and so they will be ahead on revenue.

Hutnick says the company’s traffic and revenue expectations are ‘proprietary’ information. She says transponder transaction continue to be about 70% of the total, with 367k transponders on issue at the end of March. She says transponder use may grow with the higher pay-by-plate surcharge but the company is mainly concerned to cover its costs.

The 407-ETR concession contains no direct controls over toll rates that the concessionaire can charge, but it provides an elaborate system of incentives to the tollster to attract traffic. There are also financial penalties payable to the province equal to twice any revenue gained from exceeding a toll rate threshold. However these only fall on peak-hour or maximum toll rates.

Prospectus praised peak/off-peak

The initial assessment of the investor group was that variable pricing was advantageous. In their bond prospectus they said: “Variable tolling will maximize revenue by allowing the operator of the highway to charge based on usage, by time of day, by vehicle type, and by section of highway” (p13) [see TRnl#40 Jun99 p10] Maybe this judgment is clouded by the concession constraints being targeted at the top toll rates?

Until the full 108km (68mi) of the road is in operation – the 39km (24mi) of extensions are now under construction, due to open in the fall of 2001 – the concession contract provides for what is called a Toll Threshold of C11.2c/km for light vehicles as of May 5 this year, increasing by 2% plus inflation in subsequent years for a total real increase in the toll rate over the term of 99 years of 30%.

When the full 108km road is opened a Traffic Threshold is established based on the year’s peak hour throughput/lane. This Threshold grows at 1% to 3% depending on the previous year’s growth of peak traffic, to a maximum of 1,500 vehicles/lane/hour. So long as actual traffic is below the Threshold traffic level for the year, toll levels higher than the Toll Threshold will trigger a penalty equal to twice the revenues gained in excess of the Threshold toll. If actual traffic exceeds the Threshold level there is no penalty for toll increases beyond the Toll Threshold level.

This is apparently designed to deter the tollster from following a high toll/low traffic strategy, dumping traffic on the public street system. It is designed however to allow the tollster to deal with rapidly growing traffic with higher tolls, adding an element of congestion pricing.

However if the traffic flow exceeds specified rates per lane per hour an extra lane has to be built by the tollster at his expense, and opened within two years.

Penalties apply to deter administrative fees above C$60/yr for transponder users, video fees increasing from C$1.00 by more than C50c/year to a maximum in 1999-$s of C$3/trip, off-peak toll rates higher than peak toll rates, and an increase in heavy vehicle multiples of the light vehicle toll rates. (Prospectus p18)

407-ETR charges a C$10.70 activation fee for each transponder, levies a C$2 monthly account fee for the first transponder and C$1 for each additional transponder per account, charges C$50 replacement fee if a transponder is lost and hits late paying patrons with a C$30 late payment charge.

Because there are no toll plazas with any patron fare display the 407-ETR transponders are equipped with lights and a beeper which are activated on exit. 4 short beeps and a green light on the transponder indicate a toll debited to a healthy account. A continuous beep and yellow indicate a good toll transaction but a low account balance and require the patron to call the customer service center. A red light and a longer beep mean a no funds account and no toll transaction, and also require the patron to call 407-ETR.

Extra lanes 2002 to 2004

An official at 407-ETR told us on a recent visit that based on projected growth of traffic two legs of the Central section (69km) will need extra lanes in 2 to 4 years. These are (1) H-401 to H-410 in Brampton going from 2x2-lanes to 2x3-lanes, and (2) H-427 to H-400 North York from 2x3-lanes now to 2x4-lanes. Most of the highway is designed to be widenable inward into the grass median to 2x5-lanes without moving to the outside ande affecting ramps.

As well as extending the road 24km west and 15km east, present construction involves work at 8 interchanges to add missing movements and construct several new ones. Customer service is costing the concessionaire company more than the province was spending, and the central offices are bursting at the seams. New employees are located in former storage space and trailers. Telephone lines are being increased from about 20 to 100 in order to turn around what the company says was a crisis in customer service.

Non-billable trips – where the toll cannot be collected – are running at just over 6 percent.

Trips are running around 300k/weekday. The company took over from the province March 17, 1999. In the 41 weeks to the end of 1999 the company reported toll revenue of C$112m, or US$95m/yr. On an annual basis in US$s, toll collection was costing $22m, maintenance $7m, and administration $5m for an operating profit of $61m. Against this was assessed depreciation & amortization of $17m, tax of $4m, and interest expenses of $72m for a net loss of $33m.

Some $1.8b in bonds have been sold to refinance short term debt and pay for extensions. It has bought out the Canadian Highways and Raytheon subcontract companies and put most of their staffs on salary. The president and CEO is Jose Maria Lopez de Fuentes, a senior executive from the group’s leading shareholder CINTRA, of Spain. Lopez in his mid 40s is a vigorous, confident man with considerable experience running toll roads in Europe and South America. (M R Hutnick 905 264 5374 www.407etr.com)

GLOBE & MAIL sensationalism

The opposition Ontario Liberal Party reacted to the toll increases with demagoguery, the dep-leader Sandra Pupatello calling them a “rip-off of commuters.” Now commuters are people who travel in peak hours and the toll increase was concentrated on non-peak and weekend drivers!

Another Liberal MP, Gerry Phillips claimed that 407-ETR tolls “can be increased without limit” and claimed that “the details of the deal between the government and the new owners has not been released.” In fact the “details of the deal” are all there in the bond prospectus issued by 407-International - at www.sedar.com . Together with the concession contract’s controls over toll rates, they can be found by anyone in the world. Except apparently a leftist loudmouth right there in Toronto!

The GLOBE & MAIL (Apr 14 00 A19) which prides itself on being the serious newspaper of Toronto printed these three falsehoods without correction in a piece of sloppy sensationalist reporting.