Problems for Penn Pike in getting Feds OK to toll I-80 in legal counsel Memo

A previously unpublished Memorandum written by the Federal Highway Administration's (FHWA) chief counsel at the time, Marcus J Lemon, explains rather clearly the thinking behind the US Government rejection last September of the second Pennsylvania application to toll I-80. Together with comments Lemon made after we questioned him on the copy of his memo that we'd obtained, Pennsylvania's chances look slight of getting I-80 tolling approved within the terms of the current state enabling legislation, Pennsylvania Act 44.

The former chief counsel endorses the view, expressed independently by Governor Ed Rendell last week, that the state needs to take a new approach rather than simply reapply, as suggested by Turnpike chairman Allen Biehler. Jon Schmitz in the Pittsburgh Post Gazette quotes the Governor as saying: "I told him (Biehler) I thought it was a waste of time and he shouldn't waste his energy on it."

Governor thinks Biehler is wasting his time

Rendell said in remarks to the Pittsburgh newspaper states financial needs can only be met by allowing them to levy tolls on any interstate highway: "Tolls are user fees and user fees are the fairest way to do this."

"We obviously have to amend Act 44," the Governor said, underlining his view that a simple reapplication to toll I-80 won't fly.

The Lemon Memorandum is more forceful in rejecting the Turnpike's application than the publicly released memorandum by Associate Administrator for Infrastructure at USDOT, King W Gee, and now posted on the Turnpike website: http://www.paturnpike.com/i80/

Lemon's Memorandum is addressed to Gee and headed up "Use of Toll Revenue under ISRRPP."

It says under the ISRRPP (Inter State Reconstruction and Rehabilitation Pilot Project) law the use of toll revenue from a leased interstate can be applied to lease payments since these are typically considered part of normal business operating expenses. However, says Lemon, the statute "requires the cost to be necessary for the proper operation of the facility."

He then writes in scathing fashion about Pennsylvania's application: "Here, the record and application are completely devoid of any discernible evidence indicating that the lease payments have any rational relationship to the market value of I-80 or the actual market-based costs to the PTC in acquiring an interest in the facility. 

"The lease was not negotiated pursuant to an arms length transaction nor was the price established through a competition.  Rather, the lease amount appears to have been predetermined by the Pennsylvania General Assembly in Act 44 based on the Commonwealth’s transportation funding needs.  Given the way the lease payment was determined, the lease payment does not reflect a cost that is necessary for the proper operation of the facility. 

"Therefore, because no market-based analysis was conducted in establishing the lease payments for I-80, it is my opinion that the lease payment proposed under Pennsylvania’s tolling application does not meet the requisite statutorily prescribed uses of toll revenue."

Other problems in the submission

Lemon told us today that the Memo of his which we obtained bears on only the one problem that disqualified the state application.

He said the lack of any competitive bids or investment grade traffic and revenue study which might establish the Turnpike payments to the state DOT as reasonable lease payments was the killer which decided the Feds they couldn't move the application further.

Lemon tells us there were other major problems in the application not covered by his Memorandum..

FHWA was concerned, he says, that I-80 was far from being the neediest interstate for reconstruction and rehabilitation in the state. I-95 through the Philadelphia area was in far worse shape. I-76, the Schuylkill Expressway also needed far more work, more urgently than I-80, federal officials thought.

I-80, while needing some work, had had quite a lot done on it in recent years, and was far from obvious as a priority candidate for ISRRPP tolling.

Unconstitutional

Another problem with the Pennsylvania Turnpike's tolling scheme, Lemon told us, was that it was "probably unconstitutional."

This was because it was blatantly designed to favor in-state motorists over interstate motorists by allowing large numbers of free local trips while placing the major toll burden on truckers and other motorists driving right across the state. This discrimination against out-of-state travelers is reflected in the Act 44 requirement that there be a maximum of twelve toll points in a highway with about 60 interchanges, allowing many local trips to go toll-free.

Toll agreements under Sec 129 better than ISRRPP

Lemon said Pennsylvania would be much be better off applying for toll powers under Section 129.  This requires toll agreements between the state and the US.

It is explained by the FHWA:

"If Federal-aid funds are used for construction of or improvements to a toll facility or the approach to a toll facility or if a state plans to reconstruct and convert a free highway, bridge or tunnel previously constructed with Federal-aid funds to a toll facility, a toll agreement under Section 129(a)(3) must be executed. There is no limit to the number of agreements that may be executed.

"The toll agreement must require that all toll revenues are first used for any of the following: debt service, reasonable return on private investment, and operation and maintenance, including reconstructing, resurfacing, restoring, and rehabilitating work.

"The agreement may also include a provision regarding toll revenues in excess of those needed for the required uses outlined above.

"This provision would allow these excess revenues to be used for highway and transit purposes authorized under Title 23 if the state certifies annually that the toll facility is being adequately maintained.

"The issue of whether a toll facility is to become free when debt is retired or at some other future point in time or whether tolls are to be continued indefinitely is a matter to be determined by the state.

"Decisions regarding the amount of tolls charged are made by the toll authority subject to requirements under state and local laws and regulations. These decisions require no review or input from the Federal Highway Administration (FHWA)."

(NOTE: We've corrected their spelling above. FHWA make it a practice to ungrammatically capitalize "State" which is a generic noun and should be "state"? Since somewhere around 1800 capitalization has been reserved for proper nouns and for the first letter of a sentence - editor.)

see http://www.ops.fhwa.dot.gov/tolling_pricing/toll_agreements.htm

Copy of text of the Lemon Memorandum September 11, 2008

Subject: Use of Toll Revenue under ISRRPP                   

Date: September, 11, 2008   

From: Mr. Marcus J. Lemon                            Reply to   
    Chief Counsel                                Attn. of:    HCC-30       


To:    Mr. King W. Gee
        Associate Administrator for Infrastructure
       

"On July 22, the Pennsylvania Turnpike Commission (PTC) and Pennsylvania Department of Transportation’s (PennDOT) submitted their revised application to toll I-80 under the Interstate System Reconstruction and Rehabilitation Pilot Program (ISRRPP), established by § 1216(b) of the Transportation Equity Act of the 21st Century (TEA-21), Pub. L. No. 105-178 (1998).  This revised application was submitted in response to the Federal Highway Administration’s (FHWA) December 12, 2007, comments and questions regarding their initial October 15, 2007, application.  In reviewing the application, an issue has arisen as to whether the lease payment identified in the application complies with the statutorily prescribed uses of toll revenue under § 1216(b)(5)(A).  After reviewing the statute, it is my opinion that the lease payment regarding I-80 does not meet the statutory requirements.

"Under § 1216(b)(5)(A), the use of toll revenue under the ISRRPP is limited to only (1) debt service, (2) reasonable return on investment for a private entity financing the project, and (3) the costs necessary for the improvement and proper operation and maintenance of the facility.  The statute does not discuss what costs are necessary for the proper operation of a toll facility.  However, under normal business standards, rent or lease payments are typically considered to be normal business operating costs.  Under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), where a statute is silent or ambiguous, an agency may provide a reasonable interpretation of that statute.  Thus, the agency’s view that lease payments are valid operating costs under the ISRRPP within the meaning of the statute is a valid interpretation and will withstand scrutiny. 

"While lease payments are considered operating costs within the meaning of the ISRRPP, the statute requires the cost to be necessary for the proper operation of the facility.  Here, the record and application are completely devoid of any discernible evidence indicating that the lease payments have any rational relationship to the market value of I-80 or the actual market-based costs to the PTC in acquiring an interest in the facility.  The lease was not negotiated pursuant to an arms length transaction nor was the price established through a competition.  Rather, the lease amount appears to have been predetermined by the Pennsylvania General Assembly in Act 44 based on the Commonwealth’s transportation funding needs.  Given the way the lease payment was determined, the lease payment does not reflect a cost that is necessary for the proper operation of the facility. 

"Therefore, because no market-based analysis was conducted in establishing the lease payments for I-80, it is my opinion that the lease payment proposed under Pennsylvania’s tolling application does not meet the requisite statutorily prescribed uses of toll revenue.  While the agency’s view that a lease payment is an operational cost is reasonable, the lease payment proposed under the I-80 toll application is clearly not a legitimate and valid operating cost, born solely from a need to fund other transportation needs in the Commonwealth, using the ISRRPP and tolling as a funding mechanism, despite the condition rating of the facility.

"If you have any questions or wish to discuss this opinion further, please contact me at your convenience. END FULL TEXT

Lemon is presently a partner with the transportation law firm Baker & Miller in Washington DC.

TOLLROADSnews 2009-06-01