Vehicle Pricing

Mileage-Based Automotive Leasing and Vehicle Taxation

Pay-As-You-Drive Automotive Insurance

By converting automotive insurance from a fixed to a per mile cost, insurance companies more accurately bill their customers based on crash risk and provide them a financial incentive to drive less—reducing crashes, public infrastructure costs, congestion, and environmental degradation. The variance in insurance rates based on vehicle miles traveled (VMT) is generally insignificant today, although only a small percentage of insurance claims are made (such as for theft) when a vehicle is not being driven. Studies estimate between a 10% to 20% reduction in VMT would result if all fixed automotive insurance costs were converted to pay-as-you-drive (PAYD). With a nationwide $0.10 per mile increase in PAYD costs, there would be an estimated $44 billion in congestion reduction benefits over twenty years.

Progressive Auto Insurance has piloted PAYD insurance with over 1,200 Texas drivers, charging them by the amount of time, time of day, and place of their driving. This allows them to save money by spending less time in their vehicles, particularly during congested periods when trips take the most time. Standard insurance rating factors—such as years of driving experience, moving violations, and previous crashes—are incorporated in vehicle usage charges, which rise with increased driver risk. Thus, the financial incentive to drive less is particularly pronounced for drivers with the highest crash risk profiles, so that the largest reductions in driving and crashes can be expected from these drivers. No real-time data on driving patterns were gathered in Texas before the new insurance pricing structure was applied, so before/after comparisons are not possible.

The Federal Highway Administration’s Congestion Pricing Pilot Program is now providing funding for before/after PAYD insurance simulation pilots in Georgia and Massachusetts. The Georgia pilot will, after gathering baseline data, provide payments to participating households that reduce VMT and thus their crash exposure. In a second phase, payments will be provided to households that reduce all crash exposure factors (VMT, risky driving behavior, and driving in dangerous corridors and at risky times). A similar pilot simulation is being conducted in Massachusetts. In addition to gathering before and after data, this simulation is designed to provide the Massachusetts Division of Insurance with the data it needs to allow PAYD insurance to be offered on a permanent basis.

The opportunity to offer PAYD insurance is rapidly expanding with increased penetration of in-vehicle global positioning system (GPS) units. Already, for example, OnStar’s GPS units will be either factory-equipped or available as an option on thirty-six 2002 vehicle models. Additional GPS penetration is also expected from the increased availability of low cost, aftermarket products that include many new features desired by consumers. PAYD insurance, however, requires regulatory approval in each state that it is offered.

For more information, contact Allen Greenberg, Federal Highway Administration Office of Policy, at 202-366-2425 or allen.greenberg@dot.gov

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Mileage-Based Automotive Leasing and Vehicle Taxation

Over 80% of the costs of owning and operating a vehicle are fixed. Once a person has chosen to acquire a vehicle, there is typically little financial incentive not to use it heavily. Automotive leasing and taxation are promising places to look for converting some fixed vehicle costs to a pay-per-mile or pay-as-you-drive (PAYD) basis, thereby financially rewarding consumers for reducing their driving and related congestion and vehicle emissions. Approximately 30% of new vehicles in the U.S. are acquired through leases. With the Automotive Lease Guide and Edmunds Used Car Buyers Guide clearly linking vehicle depreciation to mileage, PAYD leasing holds promise for reducing vehicle miles traveled (VMT) while meeting the needs of vehicle manufacturers and dealers, transportation officials, and consumers.

The Minnesota Department of Transportation (MnDOT), with the support of the Federal Highway Administration Congestion Pricing Pilot Program, is just beginning a pilot to simulate such changes in lease costs (by substantially reducing fixed lease costs but charging for every mile of travel) as well as the conversion of state sales and vehicle registration taxes on automotive leases to mileage charges. Additionally, MnDOT will simulate converting taxes on the purchase of new and used vehicles to mileage charges. The consumers’ sales, registration, and vehicle related personal property taxes, due at lease payment or purchase, will be paid by MnDOT and the consumer will be charged a per mile recuperation fee for some period of time (such as for three years). Global positioning system technology is being deployed to remotely gather and communicate vehicle usage data for appropriate charging and to discern the effects of the price changes on VMT and peak period travel.

Prior to beginning the pilot, sample calculations for Minnesota were performed on a typical mid-size car (Ford Taurus) to project likely VMT reductions. For two-year and five-year leases, respectively, estimated VMT reductions are 9.05% and 6.2% when only mileage-based depreciation charges are applied. When state sales and registration taxes are converted and added to per mile fees on the two-year lease, a 12.05% VMT reduction is projected. For the purchase of a new and used (model year 1995) Ford Taurus, converting state sales and registration taxes to per mile fees over a three-year period would lead to VMT reductions of 4.3% and 2.3%, respectively, for that three-year period. While real world results might differ, potential benefits are clearly substantial.

By collecting all charges, including mileage ones, on an ongoing basis, automakers too would benefit by no longer losing the 68% of end-of-lease mileage fees that are never collected. Many consumers would choose to drive less if doing so saved them money. If up-front costs were reduced because of per mile fees, consumers could also afford to lease and purchase more new vehicles (which pollute much less than older ones). Top.

For more information, contact Allen Greenberg, FHWA Office of Transportation Policy Studies, at 202-366-2425 or allen.greenberg@dot.gov.

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Car Sharing

Car sharing, or automated hourly neighborhood car rentals that substitute for car ownership, is an innovative, voluntary transportation pricing measure. About 80% of the costs of driving in the U.S. are fixed. Car sharing encourages individuals to limit their driving by converting these fixed ownership related costs to variable driving costs.

Car sharing is a major phenomenon in Europe and is growing exponentially in the U.S. Mobility CarSharing Switzerland, for example, has 1,700 cars in 900 locations serving 350 communities and 43,000 customers as of October 15, 2001. Former car owners who became Mobility CarSharing customers reduced their annual mileage driven by 72%, while new car sharers who had not previously owned cars did not drive more than they did before (when they borrowed vehicles instead of car sharing). In Europe and the U.S., car sharing members reduce their vehicle usage over time as the transparency of the usage-based cost encourages them to explore alternative transportation options.

Today in the U.S., there are active and growing car sharing programs in Seattle, Boston, San Francisco and Portland, Oregon, and substantial new launches in Chicago and Washington, D.C. The Congestion Pricing Pilot Program (VPPP) has provided funding to implement and assess the driving and congestion-reduction impacts of car sharing in San Francisco. Since providing this initial funding, substantial growth and interest in car sharing nationwide has created additional opportunities to assess the effectiveness of this approach in other regions.

Car sharing is an important strategy in addressing urban parking woes. Twenty households typically share each car sharing vehicle, reducing parking needs for office and housing developments and their costs. There is no greater inducement to car sharing than high neighborhood parking costs for personal vehicles. San Francisco’s City CarShare is working with developers and the City in offering car sharing while reducing parking requirements. Flexcar, also with VPPP funding support, is offering downtown Seattle building owners an opportunity to alleviate parking demand by encouraging parking "cash-out" in conjunction with providing car sharing vehicles on site.

New car sharing concepts that could reduce congestion and expand market penetration include: peak period pricing of car sharing, car share ridesharing (half-priced car sharing is facilitated by modifying existing car sharing reservation systems), dynamic ridesharing (real-time carpool matching coupled with financial inducements for ridesharing with personal vehicles already on the road), and temporary lease-back programs (compensating car owners for providing their vehicles for car sharing fleet usage during certain times). When combined with road pricing concepts such as HOT lanes, FAIR lanes and higher peak period tolls on toll facilities, these innovative concepts could have a synergistic effect on congestion reduction and would provide excellent opportunities to demonstrate the effectiveness of road pricing and improve its political acceptability.

For more information, contact Allen Greenberg, Federal Highway Administration Office of Policy, at 202-366-2425 or allen.greenberg@dot.gov.

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