DALLAS — Tolled traffic lanes can be an effective way to fund expensive highway projects, but investors need to consider the volatility of the revenues, Wells Fargo Securities senior analyst Randall Gerardes said in a research report on highway congestion relief.

Revenue from managed lanes, with tolls that can vary depending on factors such as the time of day, volume of traffic and the direction of travel, present a higher level of risk than do more traditional toll revenue-backed system credits, according to the report.

“Investors should recognize that managed lanes are likely to have greater traffic and revenue volatility compared with other toll facilities within the same corridor and need to incorporate this into their analysis and ultimately their investment decision,” the report said.

Concerns about the looming insolvency of the federal Highway Trust Fund and an opportunity to relieve congestion on heavily traveled highways are leading transportation planners to incorporate managed toll lanes alongside free lanes, the report said.

“The managed lane concept may provide a more efficient means of adding new capacity while limiting capital costs,” it said. “However, there are no free lunches, and this new capacity offers a unique risk profile compared with traditional toll facilities.”

The managed lane concept is most viable in urban areas, Gerardes said, where highways are congested and commuters value the time they can save through the tolled lanes.

“Depending on who you can talk to, there are 18 to 20 managed lane systems in at least 10 states in some phase of operations,” Gerardes said. Others are under construction and at least 28 proposals, mostly in California or Texas, are in planning stages, he said.

The concept of converting high occupancy vehicle lanes to managed toll lanes is fairly new, he said, with little track record on which to base revenue projections over 20 to 30 years.

“The first year of revenues is very important, but it usually takes at least five years to ramp up the revenue system to get a good handle on it,” Gerardes said.

A dynamic pricing system with revenue-optimized tolls that can quickly rise and fall depending on traffic volumes could lead to steep tolls that put more vehicles onto free lanes at peak times, he said. One the other hand, Gerardes said, tolls intended to smooth demand and avoid peak congestions can lead to lower-than-optimum revenues.

“Maintaining a “goldilocks” pricing scheme that is neither too high nor too low is challenging operationally and increases risk relative to more traditional toll roads where the price is static,” the report said.

The public-private LBJ Express partnership rebuilding the I-635 LBJ Freeway in north Dallas will open its first 3-mile segment of managed toll lanes in mid-December. When completed the $2.7 billion project will include four to six adjustable-tolled lanes extending for more than 13 miles along the 17-mile highway.

The rebuilt highway’s TEXPress tolled lanes, which parallel a number of rebuilt free lanes, will be the first dynamically priced system in the United States with a guaranteed average minimum speed at all times, said Michael Morris, director of transportation for the North Central Texas Council of Governments.

The managed lane system will also be incorporated into two other highway projects under construction in the area, he said. “You should be able to go 50 mph if you want to, any time of day on any one of these corridors in the TEXPress Lanes,” Morris said.

Tolled lanes are an attractive option for funding highways in an era of constrained public budgets, said Jeff Austin, 3rd, a member of the Texas Highway Commission. “Managed lanes are a unique opportunity to address congestion while giving motorists a choice, and providing for more reliable commutes,” Austin said.

The Wells Fargo report can be obtained by contacting senior analyst Randall Gerardes at randall.gerardes@wellsfargo.com.

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