Monday, October 3, 2011

In Which the Author Proves by Mathematics that Implementing EZ-Pass in New Hampshire Was a Poor Financial Decision

The busiest of New Hampshire’s toll plazas stands in Hooksett just north of the junction between the Interstate 93-293 division that one uses when driving south from Concord to Manchester, Salem, Nashua, or beyond to Lowell, the 128-I95 corridor, and Boston. From the north, one drives down a long, hilly, three-lane stretch unbroken by exits or signage, the only distraction being the state liquor stores flanking both sides of the highway where out-of-state patrons can purchase alcohol and tobacco products for much less than they’re accustomed to. After that, the road widens, the lines vanish, the cars slow down (but not to the extent required by law), and one is forced to choose between getting off at Exit 11 or merging into the Any Vehicle or EZ-Pass lanes.

EZ-Pass (for those readers outside the northeast) is a small, plastic transponder box that allows motorists to pay tolls without cash by fastening it to the inside of their windshields. The box is scanned by the reader when the car passes through the toll gate, automatically deducting the fee from the user’s EZ-Pass account. The system offers numerous advantages, specifically the benefit of not having to stop at toll plazas (traffic permitting), plus a 30% discount in New Hampshire. (Interestingly, Japan uses a similar system in which vehicle transponders require a separate highway card. The chief benefit of the Japanese system is that one card can easily be used in multiple vehicles, as opposed to the American system, which requires unfastening the EZ-Pass and having the passenger hold it crookedly against the inside of the windshield while the driver slows down enough to catch the signal.)

I do not deny that EZ-Pass is a fine system—my chief qualm is that it displaced New Hampshire’s earlier, more cost-effective system of highway tokens.

When I first became a licensed driver, these tokens were sold by operators in the Any Vehicle lanes of New Hampshire’s toll plazas, where motorists could purchase them as they paid their tolls. (The tokens were not advertised anywhere, I suspect, to keep them a secret from out-of-staters.) A roll of forty tokens cost five dollars. That’s twelve and a half cents per token. But the tokens were worth twenty-five cents each at the tolls. That means that using tokens, one could merge from Route 101 on to I-95 for only twenty-five cents, or pass through the Hooksett toll plaza for thirty-seven and a half cents (the cost of which has since been raised to a dollar). This is less than the price of a candy bar.

When New Hampshire adopted the EZ-Pass system in 2005 (before which time it was the only New England toll-collecting state not to offer an electronic alternative), it discontinued the token system. (It also eliminated the Exact Change lanes with the baskets you had to throw your coins into, though these can still be seen along the Everett Turnpike in Merrimack.) The savings rate was also reduced from fifty percent with tokens to thirty percent using EZ-Pass. That loss of twenty percent was presumably a trade-off for the convenience of the new system. Tokens had to go because it would silly to offer two money-saving alternatives. Besides, a twenty-percent difference is a small price to pay for convenience. Or is it?

Let’s say that a motorist commutes from his home in rural Hopkinton, through the Hooksett toll plaza, to the large, windowless manufacturing building off Exit 2 in Salem that houses his workspace. Let’s also assume that his company grants him one week off at Christmas during shutdown, plus another weeklong vacation of his choosing. (There are of course other company holidays and sick days, but to keep the numbers round, let us also say that he takes various unrelated trips through the toll plaza that cancel out these days.) That means that our hypothetical commuter crosses the toll plaza an average of ten times a week (once northbound and once southbound), fifty weeks a year, at the cost of one dollar per toll.

Using cash, this would cost $500.
Using EZ-Pass, this would cost $350.
Using highway tokens, this would only cost $250.

However, I have neglected to include the initial cost of the EZ-Pass, which the New Hampshire Department of Transportation currently sells for $20.95 (or $33.04 for exterior transponders). This raises the cost of using EZ-Pass to $370.95, meaning that tokens are now the cheaper option by $120.95 the first year.

This twenty ninety-five (which was actually less for those who purchased transponders during the transition period from tokens to EZ-Pass), can, however, be viewed as an investment for those who still want to save some money. Again, using the Hooksett toll plaza as an example, EZ-Pass users save thirty cents at each crossing. This means that users can recover their initial costs after approximately seventy trips. This is opposed to a roll of tokens, which pays for itself after five trips; or the equivalent $21 in tokens, which still pays for itself after only twenty-one trips. The reason for this striking difference is that EZ-Pass, as added equipment, puts only thirty percent of the toll fee towards recovering the initial investment, as opposed to tokens, which, as a form of currency, allow one hundred percent of the toll fee to go towards recovering the initial investment.

Let’s also consider the long-term impact of using EZ-Pass over tokens. Let’s say our hypothetical commuter lives in Hopkinton and works in Salem (or some other office complex in Hudson, Nashua, Merrimack, or Northern Massachusetts) his entire working life, from age twenty-two until age sixty-five, maintaining the same toll-use frequency outlined above. (This seems a reasonable estimate, considering that time spent living or working outside the toll zone will probably cancel out non-commuting trips taken between the ages of sixteen and twenty-two, or between ages sixty-five and death.) Let’s also assume that the Hooksett toll rate stays at one dollar for those forty-three years.

Over his lifetime, using cash, that commuter would pay $21,500.
Over his lifetime, using EZ-Pass, that commuter would pay $15,050.
Over his lifetime, using highway tokens, that commuter would pay $10,750.

The tokens are now the cheaper option by $4,300 ($4,320.95 if one counts the initial transponder cost). I consider that a large price to pay for a little convenience.

Unfortunately, the issue isn’t worth debating, because tokens are gone forever and they’re never coming back. EZ-Pass of course frees motorists from having to roll down their windows and fish out their cash, makes sense in congested urban areas, and saves a lot of time (including the time it takes to buy tokens), but it also eliminated an option that saved people a lot of money. And not having that option bothers me. Like so many other cost-effective choices, tokens have been replaced by newer, more popular technology that people can use easily while feeling confident that they’re keeping up with the changing times. We live in a more expensive world, but mean incomes haven’t gone up very much in the past few decades. We’re also in the middle of an economic crisis where people are burdened by joblessness, high debt, mortgage foreclosures, home repossessions, large student loans, skyrocketing health insurance costs, strict borrowing guidelines, high gas prices, low savings rates, and an increasingly unreliable Social Security system.

I don’t think the government should force anyone to save money by using tokens instead of an EZ-Pass. But shouldn’t it at least have given them the option?

As a consumer who prefers saving money over convenience, however, I’ve made my decision. I’ll take Route 3A instead.


Mike said...

I think the state needed more highway income. If they had kept the tokens, they probably would have significantly raised the toll amounts themselves, and decreased the savings that the tokens offered.

They saw in the switch to EZ-Pass a good opportunity. They may say the lost savings is paying for the expense to set up and maintain the convenience of EZ-Pass, but I highly doubt it costs so much to maintain.

It's true that we are living in a world of rising costs. The rising costs are for everyone, including highway departments. If there were still tokens, you wouldn't be getting them at 50% off.

Ian said...

I agree that the state was going to raise toll amounts anyway (which they did, from 75 cents to one dollar), but I also think that lowering the discount was based on the extra costs of EZ-Pass, especially starting out. After adding up all the receivers, construction, new signs, processing paperwork, and probably a trademark, there's a lot of extra money to be accounted for, especially since the costs of maintaining the token system (printing, rolling, selling, etc) were already in place and functioning smoothly.

Of course, there was also the "Whelp, people probably won't notice the change in discount!" mentality.

Mike said...

I'm willing to bet that the initial cost of installing EZ-Pass is long accounted for. The upkeep of the system is probably comparable to what the token system cost, perhaps less since there is no more minting and rolling to do. EZ-Pass accounting is all computer automated, and transponders are paid for by drivers.

And I bet, that if the old token system were still alive today rather than EZ-Pass, you would be paying something like $7.50 a roll, because the state likely can't afford to offer a 50% discount any longer. I mean, how else is all the exit 3 construction getting paid for?

Someone needs to open the books on NH highway income to settle this debate once and for all.

Ian said...

I wish I knew exactly how much each system cost to upkeep each year, along with the startup costs for EZ-Pass, and how this compared to the discounts offered by each. Was the discount reduced to pay for the extra cost, or to make more money? Or both?

Also, I don't think that the state would have ever raised the cost of a roll of tokens; they would have instead raised tolls for everyone to distribute toll increases more fairly. If only the cost of tokens is raised, then those who need to save money end up paying more, while those who do not take advantage of the discount (because they don't know about tokens, are too lazy to buy them, are too rich to care, or are from out of state) pay the same amount. And that doesn't seem fair.

But, if the cost were raised for everyone, and more people bought tokens, those who did would only pay a 50% increase. But would this make enough money?

This is the reason that governments commission studies to look at this kind of thing, instead of just debating it on online message boards.

Mike said...

OK, the books are open, now who wants to actually dig in and do the research? :)

Mike said...

From the "Official Statement" release from 2009:

In Fiscal Year 2006, the discounts on tolls changed with the conversion from token and commercial charge card programs to the E-ZPass program. Beginning July 2005, the discount on tolls was reduced from 50% to 30% for passenger vehicles and from 30% to 10% for commercial vehicles participating in the New Hampshire E-ZPass program. The conversion was completed in August 2005.
The commercial charge card program was effective through September 30, 2005 and tokens were accepted through December 31, 2005, at a discount of 30% and 50%, respectively. This impacted revenue in Fiscal Years 2006 and 2007, as the market share for E-ZPass continued to grow once these programs were discontinued and replaced with the lower discounted E-ZPass program.
The transition to E-ZPass and related upgrades to toll collection systems initially affected the Turnpike System’s earnings and cash flows. The capital costs were largely funded using federal funds, thus minimizing impact to Turnpike finances. Operating start-up costs associated with E-ZPass were offset to some extent by the elimination of the token and commercial charge discount programs and efforts by the Turnpike System to reschedule renewal and replacement projects and to control expenses generally.

Mike said...

and from the Jacobs Traffic & Revenue study:

Toll revenues grew at a greater rate than usual in the past several years due to E-ZPass
implementation and the end of token sales in FY 2006 (increasing the tolls for discounted trips),
and the October 2007 toll increase.

Ian said...

Well-played and well-researched. This further proves that convenience is a profitable industry.