BILL ANALYSIS
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 528
SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: negrete
mcleod
VERSION: 2/27/09
Analysis by: Jennifer Gress FISCAL: no
Hearing date: May 12, 2009
SUBJECT:
Public-private partnerships (PPPs): just compensation
DESCRIPTION:
This bill prohibits the payment of just compensation to the
lessee of a transportation facility for the loss of revenue due
to the development, operation, or lease of supplemental
transportation projects.
ANALYSIS:
Effective May 20, 2009, current law allows regional
transportation agencies and the California Department of
Transportation (Caltrans) to enter into an unlimited number of
lease or concession agreements with private entities for the
design, finance, construction, maintenance, or operation of
highway, street, or rail projects, subject to specified terms
and conditions. The authority to enter into these arrangements,
referred to as PPPs, sunsets on January 1, 2017.
Existing law provides that lease agreements may not infringe on
the authority of Caltrans or a regional transportation agency to
develop, maintain, repair, rehabilitate operate, or lease any
transportation project; however, they may contain provisions
regarding payment of just compensation to the lessee if Caltrans
or a regional transportation entity makes an improvement to a
facility, with some exceptions, that results in the loss of
revenue by the lessee. Under current law, just compensation may
not exceed the difference between the reduction in toll revenues
and the amount necessary to cover the costs of debt service on
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any debt incurred by the lessee for the development, operation,
maintenance, or rehabilitation of the facility.
This bill provides that a lease agreement entered into on or
after January 1, 2010 may not provide for compensation to the
lessee for the adverse effects on revenue due to the
development, operation, or lease of supplemental transportation
projects.
BACKGROUND:
In 1989, the Legislature approved AB 680 (Baker), Chapter 107,
which authorized Caltrans to enter into up to four lease
agreements with private entities for the construction and
operation of transportation facilities. Under that bill, a
private entity could obtain an exclusive development agreement
for 35 years to construct a toll road facility. Only two
projects were constructed with this authority: The SR 91
Express Lanes in Orange County and SR 125 in San Diego County.
SR 91 Express Lanes. The SR 91 Express Lanes are high-occupancy
toll lanes, ten miles in length, located in the median of SR 91
from SR 55 in Orange County to Interstate 15 in Riverside
County. The SR 91 Express Lanes generated substantial
controversy. A clause in the lease agreement between Caltrans
and the California Private Transportation Company (CPTC)
prohibited Caltrans from granting similar franchise rights to
third parties or developing any public transportation facility
within an "Absolute Protection Zone." This zone was comprised
of the area 1 miles on either side of the centerline of the
toll road facility. This restriction, commonly referred to as
the "non-compete clause," was deemed necessary to protect the
toll road's profitability and CPTC's investment.
Caltrans proposed to make a number of "safety" improvements
totaling $30.6 million, in order to curb the growing number of
congestion-related accidents. Caltrans' accident statistics
indicated that the accident rate on this portion of the freeway
was approximately 72 percent higher than on comparable freeways
in the state. In response to the proposal, CPTC filed a lawsuit
against Caltrans for violating the non-compete clause of its
franchise agreement, arguing that the proposed project was not
safety related, but in fact designed to increase capacity.
Caltrans settled the lawsuit on October 12, 1999.
Congestion on SR 91 continued to worsen. In 2002, AB 1010
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(Correa), Chapter 688, allowed the Orange County Transportation
Authority (OCTA) to purchase the franchise rights to the toll
lanes from CPTC, effectively repealing the non-compete clause
and facilitating improvements along the corridor. OCTA acquired
the SR 91 toll lanes for $207.5 million, making California's
first operational private toll project a public facility.
SR 125. The SR 125 highway project consists of a 3.2-mile
public, non-tolled segment (referred to as the "Gap and
Connector" project that will be operated by the San Diego
Association of Governments, or SANDAG) and a 9.3-mile privately
operated, tolled segment. Together, this highway connects SR
905 near the international border to SR 54. Both segments were
constructed by California Transportation Ventures, Inc. (CTV), a
wholly-owned subsidiary of Macquarie Infrastructure Group, but
CTV is only responsible for the costs of the private segment.
Under the lease agreement with the state, CTV will charge tolls
for 35 years in order to recoup its costs and earn a reasonable
rate of return on its investment. The lease agreement does not
include a "non-compete clause," but it does provide for just
compensation if competing facilities are developed that result
in reduced toll revenues for CTV.
Both the tolled and non-tolled segments have experienced
significant cost overruns and project additional future costs.
The principal drivers of the cost increases include
environmental and community mitigation measures, rights-of-way
acquisition, and compensation for competing facilities.
SANDAG is planning three projects in the adjacent I-805 corridor
that are not included in the
lease agreement. These projects are expected to be completed in
2012, 2015, and 2030. Under
the current lease agreement, CTV will be due compensation for
any traffic and revenue
reductions that these three projects create.
To provide a mechanism for SANDAG and CTV to determine how these
increased costs will be
addressed, the Legislature passed SB 463 (Ducheny), Chapter 446,
Statutes of 2006, to extend
CTV's lease agreement from 35 to 45 years and the period of time
that tolls may be charged for
use of the facility. Extending the lease agreement and charging
tolls for a longer period of time
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are expected to provide sufficient revenue to cover the
compensation CTV will be due.
California's experiences with PPPs highlight how non-compete and
just compensation
provisions can serve to increase the costs of transportation
facilities for public agencies and for
toll payers.
COMMENTS:
1.Purpose . According to the author, this bill will eliminate
compensation agreements from future public-private
partnerships for the development of toll roads when the state
or a regional transportation agency makes roadway improvements
that are not identified in the regional transportation plans,
or not an exempted safety improvement project.
This bill is needed, according to the author, to save taxpayer
money from going to private corporations and prevent the
situation that occurred with the development of the State
Highway Route (SR) 91 Express Lanes in Orange County. This
will untie the hands of regional transportation planners so
they can make needed improvements without having to pay the
private toll road operators for the loss of toll revenues.
2.Arguments for and against just compensation . Generally
speaking, providing for payment of just compensation is viewed
by investors as a means to protect their investment and help
ensure that they earn their desired rate of return.
Furthermore, to the extent that a project is financed by debt
equity (e.g., bond funds), debt holders may in fact require
some assurance that the debt will be repaid. Allowing for
just compensation to cover lost toll revenues due to competing
facilities is one mechanism for providing this assurance.
Prohibiting just compensation entirely may diminish investor
interest in financing a transportation facility through a PPP.
Paying just compensation, however, increases the costs that
the public sector bears to make needed improvements to nearby
facilities. Furthermore, some argue that the potential for
facility improvements is part of the risk that a private
partner should assume when entering into a lease agreement.
3.Just compensation revised . As part of the state budget
enacted in February of this year, the Legislature passed SB
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4xx (Cogdill), Chapter 2, Statutes of 2009-10, Second
Extraordinary Session, to expand the authority for Caltrans
and regional transportation agencies to enter into PPPs. The
measure removed the limit (which had been four) on the number
of projects that could be financed through a PPP, expanded the
type of transportation facilities that could be undertaken,
and extended the sunset date from 2014 to 2017. In exchange
for this broader authority, the bill also enhanced some
protections for public agencies that opt to do a PPP. One
such protection is to limit the payment of just compensation
to the "difference between the reduction in those revenues and
the amount necessary to cover the costs of debt service,
including principal and interest on any debt incurred for the
development, operation, maintenance, or rehabilitation of the
facility."
The law in effect prior to this bill provided that just
compensation be due to cover "reduced toll or user fee
revenues," regardless of whether toll revenues were sufficient
to pay debt service or provide a reasonable rate of return to
investors. Previous law, therefore, had the potential to
increase costs for the public agency when making improvements
to nearby facilities, assigning it more risk in the
partnership. Under SB 4xx, just compensation is only due to
cover that portion of debt service that the private entity is
unable to pay because of toll revenue reductions, thereby
protecting debt investors while also reducing the amount that
a public agency may have otherwise had to pay.
4.Need to redraft the bill . Because this bill was introduced
prior to the passage of SB 4xx, the bill amends law that will
no longer be in effect come May 20th. For this reason, once
the provisions of SB 4xx go into effect, the author will need
to redraft the bill so that it amends what will then be
current law. Presumably, the re-drafted version will continue
to delete the authority to provide just compensation for
competing facilities.
POSITIONS: (Communicated to the Committee before noon on
Wednesday,
May 6, 2009)
SUPPORT: Professional Engineers of California Government
OPPOSED: None received.