Feds move to prevent repeat of Pennsylvania's Act 44 - must get market valuation for concession to toll interstate

The Federal Highway Administration is moving to prevent repeats of Pennsylvania's attempt to hand I-80 to the state Turnpike for tolling to generate funds for other state projects. Under a proposed formal Rule (Federal Register 73/196 p58908 2008-10-08) state DOTs will be required to obtain a fair market valuation as part of a concession agreement for tolling facilities built with federal dollars.

Also they could permit private entities to compete head-to-head with public agencies for toll concessions.

The rule applies to any facility acquired or constructed with any federal funds - whether an interstate, US or state route or other road facility in which some federal funds are used.

The background to the rulemaking supports the principle of tolling facilities built with federal funds and of toll concessions, stating:

"Concession agreements are very important tools that state and local agencies may use to enhance their transportation program. By entering into a concession agreement, not only can the state accelerate an expensive and needed infrastructure improvement, but the state can, under certain statutory provisions, allocate its budgetary resources to other highway projects and use the proceeds from the concession payment to supplement its overall transportation program. Given these benefits, many states are beginning to view concession agreements as a vital and indispensable part of their transportation programs, given that traditional methods of taxing and spending have largely proven to be ineffective in addressing congestion, performance, reconstruction, and development issues." (We've corrected the rulemaker's incorrect use of a capitalization for the generic word state. In contemporary English capitalization is reserved for proper names, or the first letter of a sentence. Editor)

The state of Pennsylvania in writing Act 44 granted the state Turnpike Commission a 50 year concession to toll I-80. The US Government rejected the application on the grounds that the the payments to the state were not based on a fair market valuation of the concession and were not allowable as operating costs under federal law.

Turnpike Commission officials said they was surprised by the decision because the fair market valuation was not explicit in federal law or regulations.

The introduction to today's Feds' rulemaking acknowledges that while the principle of market valuation is already required for property sales and leases for non-transportation purposes, other disposals are exempt including utilility uses, sale and lease for a Title 23 (transportation) use. The term "lease" is often used (misused in our opinion) by states to describe longterm toll concessions although traditionally a lease has been a much more limited rental contract, traditionally for use and is not the transfer of a whole business, as in a concession.

The Feds want to make explicit in a formal Rule that a fair market valuation is a requirement for toll concessions even if called leases, claiming this is the intention of the law for projects in which federal funds have been used.

In a clear reference to the Pennsylvania episode in the background to the rulemaking the Feds say:

"The FHWA considers concession payments, which are substantively lease acquisition payments, to be included in the costs incurred by the concessionaire to operate the facility and operational costs for purposes of the toll revenue use restrictions under the Federal toll programs. However, the amount of the concession payment must be based on the market value of acquiring an interest in the facility. The concession amount may not be based exclusively on factors unrelated to the market value of the facility, such as State transportation program funding needs or shortfalls in other areas such as transit or bridges. This change would bring consistency with other pilot programs such as the ISRRPP, which require a similar showing of an arm’s length transaction. Otherwise, the concession payment is not a valid operating cost and simply becomes a means to create excess toll revenue.

Current Texas law gives Regional Mobility Authorities (RMAs) and other local public agencies first option on toll projects and private entities can only compete if the local public option is not exercised. The proposed federal ruling only allows head to head competition by private entities with a public toll agency, but does not require it.

A competitive process is held to be one method for establishing market value.

The rule making is called Fair Market Value and Design-Build Amendments FHWA Docket-2008-0136 (We're not interested in the DB part).

Relevant pages of Federal Register:

http://www.tollroadsnews.com/sites/default/files/FMV.pdf

TOLLROADSnews 2008-10-08