The Texas Department of Transportation (department) adopts new Subchapter E, §§5.51-5.59, concerning pass-through tolls. Sections 5.51, 5.53, 5.54, 5.57, 5.58, and 5.59 are adopted with changes to the proposed text as published in the February 13, 2004, issue of the Texas Register (29 TexReg 1316). Sections 5.52, 5.55, and 5.56 are adopted without changes to the proposed text as published in the February 13, 2004, issue of the Texas Register (29 TexReg 1316) and will not be republished.

EXPLANATION OF ADOPTED NEW SECTIONS

HB 3588, 78th Legislature, Regular Session, 2003, enacted Transportation Code, §222.104. This section authorizes the department to enter into an agreement with a public or private entity to provide for the payment of pass-through tolls as reimbursement for the construction, maintenance, or operation of a toll or non-toll facility on the state highway system by a public or private entity. A pass-through toll is defined by the statute as a per vehicle fee or a per vehicle-mile fee that is determined by the number of vehicles using a facility.

This new program offers the department a new method of financing needed highway projects. It also offers local interests an opportunity to expedite the development of a highway that they desire, but that the department is currently unable to fund. The developer of the project is responsible for building the facility with its own funds, and has the assurance from the department that the state will repay the developer through a payment based on the number of vehicles using the facility or the vehicle miles traveled. If use of that facility is high, typically as believed by the developer, then the developer will be paid back at a quicker rate. If traffic is lower than projected, repayment will occur over a longer period.

The rules prescribe the policies and procedures governing the department's implementation of Transportation Code, §222.104.

Section 5.51 states the purpose of the subchapter, which is to implement Transportation Code, §222.104(b).

Section 5.52 defines words and terms used in the subchapter.

Section 5.53 describes how a developer can submit a proposal to the department. To allow the department and the Texas Transportation Commission (commission) to properly consider the merits of a proposal and consider the criteria described in §5.54, the proposal must include: a description of the project; a statement of the benefits of the project; a proposed project development and implementation schedule; a description of the qualifications and experience of the developer; if available, a proposed pass-through toll payment schedule; a statement indicating whether the proposer intends for the project to be tolled, and if the proposer intends for a tolled project to be first opened to traffic as a non-tolled highway, the approximate date on which the highway will begin to be tolled; and a statement indicating whether the proposer intends to enter into a comprehensive development agreement, if the proposer is a private entity. The section authorizes the department and a private entity to agree to develop a project under a comprehensive development agreement (CDA) if authorized by law. Rules governing CDAs will governing the solicitation, advertisement, negotiation, and execution of a CDA.

Section 5.54 lists the factors the commission will consider when deciding whether to approve a proposal and authorize the department to negotiate an agreement. To help ensure that a proposal is beneficial to the State of Texas, the commission will consider the financial benefits of the proposal. Consistent with the department's historical practices, the commission will consider local support for the project. To help ensure that the project will benefit the state's transportation system, the commission will consider whether the project is in the department's Unified Transportation Program, the extent to which the project will relieve congestion on the state highway system, and the compatibility of the proposed project with existing and planned transportation facilities. To help promote public health, and consistent with state policy, the commission will consider potential benefits to regional air quality that may be derived from the project. To help ensure that a private developer will deliver a quality facility, the commission will consider the qualifications and experience of the proposer to accomplish the work.

Section 5.55 provides a competitive process for proposals submitted by private entities, if the proposal has been approved by the commission under §5.54. The department will publish notice in the Texas Register and one or more newspapers for the purpose of soliciting competing proposals. The section sets out a competitive selection process very similar to the unsolicited proposal process the commission has prescribed for comprehensive development agreements. This process ensures fair competition that will allow the department to select the proposal with the best value to the state.

Section 5.56 provides that the department will submit a summary of the final terms of a successfully negotiated pass-through toll agreement to the commission. The commission may authorize the department to execute the agreement if it finds that the agreement is in the best interest of the state, and that the project is compatible with existing and planned transportation facilities and furthers state, regional, and local transportation plans, programs, policies, and goals. This section is intended to provide another level of oversight to ensure that the result of the negotiations is positive for the state and for transportation.

Section 5.57 describes the policies governing the payment of pass-through tolls. The department will reimburse the developer, through the periodic payment of pass-through tolls, an amount equal to the department's estimate. The department's estimate will be developed or updated after receipt of the proposal. It is an estimate of what it would cost the department to construct the project. Payment of this amount will ensure that the developer is not overcompensated for the work. The commission may direct the department to reimburse the developer an amount less than the estimate if the project's estimated benefits to mobility do not warrant full reimbursement or the construction will result in a significant economic gain to the developer. This policy is intended to ensure that the public's interest is safeguarded. The commission may also direct the department to reimburse the developer an amount less than the estimate if the developer proposes to share in the cost of the project. The commission may direct the department to reimburse the developer an amount greater than the estimate if the commission determines there will be a financial benefit to the state, through the avoidance of inflation, as a result of the earlier completion of the project. The department would pay this additional amount if the project was developed using traditional methods. Accordingly, the increased payment to the developer reflects what it would cost the department to construct the project if a pass-through toll agreement was not used, and ensures that the developer is not overcompensated for the work. The amount of reimbursement above the estimate may not be more than the amount of the financial benefit determined by the commission.

Section 5.57 provides that the payment schedule will be based on the department's traffic projections and a contract period to be negotiated between the department and the developer. The payment schedule may include a maximum and minimum annual amount. A guaranteed minimum will assist a developer in arranging financing and help ensure that it gets reasonable compensation for delivering a needed asset. A maximum payment will ensure that the department is not required to expend an amount of funds in a way that could jeopardize funding for higher priority projects.

Section 5.57 provides that the developer is responsible for cost overruns unless the department agrees to share identified cost overruns. This policy provides some flexibility for the parties to share certain identified risks in order to prevent an unjust result, yet places the primary responsibility on the developer. To provide an incentive for developers to participate in the program and reward them for innovative construction, the section also provides that the developer is not required to repay the department the difference between the actual costs and the amount designated in the agreement.

Section 5.57 provides that if traffic volume exceeds projections, the department will not be responsible for annual payments above the maximum amount designated in the agreement. If traffic volume is less than projected, the department will pay at least the minimum amount designated in the agreement. If traffic volume exceeds projections, the department may agree to reduce the time period in which the developer is reimbursed the amount designated in the agreement. If traffic volume is less than projections, the term of the agreement will be extended until the developer is reimbursed the amount designated in the agreement. This policy places the burden on the developer to attract traffic, complete construction of the facility, and keep the facility open by providing quality construction. It also allows for minimum and maximum payments to provide for the necessary flexibility discussed previously.

Section 5.58 describes the responsibilities of the developer in developing and constructing a facility. An environmental review must be completed in accordance with the commission's rules governing department transportation projects. The facility must be designed and constructed in accordance with department standards and criteria unless exceptions are approved by the executive director.

Section 5.59 provides that a pass-through agreement may provide for a developer to operate a highway. A developer may operate a highway that it has constructed. A developer may also propose to operate an existing state highway. Except as provided in the agreement, the developer is responsible for performing all of the work required to operate the highway. In performing work, the developer must meet or exceed the most current Texas Maintenance Assessment Program minimum rating requirements for non-interstate state highways as established by the commission. A developer may receive approval to use alternative maintenance standards if the executive director determines that the alternative standards are sufficient to protect the safety of the traveling public and protect the integrity of the transportation system. This section ensures proper maintenance and operation while providing some flexibility for the developer to be innovative.

COMMENTS

On February 24, 2004, a public hearing was held to receive comments, views, or testimony concerning the proposed new sections. Several comments were received from Terry Hughes, representing the City of Weatherford at this hearing. The City of Weatherford and John Langmore Consulting (JLC) also submitted written comments on the proposed new sections.

Section 5.52, Definitions

Comment: JLC argued that the rules should allow the option for a pass-through toll project to be carried out under a comprehensive development agreement (CDA). JLC suggested adding a definition of "agreement" to read: "A pass-through toll agreement with an authorized entity, which may include a comprehensive development agreement as defined in Section 361.302, Transportation Code and which shall include those provisions set forth in Section 5.58(e) of these rules."

Response: Under current law, the department may use a CDA with a private entity to finance, design, construct, maintain, operate, or expand a department turnpike or the Trans-Texas Corridor. So a private entity developer who is developing a turnpike or a facility that is a part of the Trans-Texas Corridor under a pass-through toll agreement may, if agreed to by the department, do so under a CDA. The department agrees that the rules should be clarified to acknowledge the possibility that a pass-through toll project may be developed under a CDA under some circumstances. Instead of doing so through a new definition, §5.53 is revised to allow for proper notification to the commission of the developer's intent and to provide some explanation to the public. Section 5.53(a) is revised to require a private entity proposer to submit in its proposal a statement indicating whether the proposer intends to enter into a CDA. Subsection (a) is also revised by changing "developer" to "proposer" to be consistent in terms. A new subsection (c) is added to state, "The private entity and the department may agree to develop a project under a comprehensive development agreement if authorized by other law. Notwithstanding any other provision of this subchapter, Chapter 27, Subchapter A, of this title (relating to Policy, Rules, and Procedures for Private Involvement in Department Turnpike Projects), applies to the solicitation, advertisement, negotiation, and execution of a comprehensive development agreement." This last sentence is added to clarify that the department's CDA rules will govern a CDA executed as part of a pass-through toll agreement.

Comment: JLC suggested adding a definition of: "entity" as any public or private entity authorized to enter into a pass-through toll agreement; "agency" as a public entity authorized to enter into a pass-through toll agreement; and "developer" as a private entity that enters into a pass-through toll agreement. JLC offers these definitions as a method to make the rules easier to follow, particularly in light of various other JLC suggestions and for the following reason. JLC argues that the pass-through toll statute, Section 222.104, contemplates the use of pass-through tolls under two circumstances. Subsection (b) applies to an agreement with a public or private entity for payment of pass-through tolls as reimbursement for construction, maintenance, or operation of a state highway. Subsection (c) applies to an agreement with a public or private entity for payment of pass-through tolls as compensation for the costs of maintaining a state highway converted to a toll facility. JLC argued that by defining a "developer" as either a public or private entity, it becomes difficult to use the term "developer" in those contexts that apply (or do not apply) solely to private entities.

Response: The department disagrees with these suggestions. The rules are intended to only implement subsection (b) of Transportation Code, §222.104. Section 5.51, Purpose, is revised by adding subsection (b) to the legal cite to clarify the scope of the rules.

Comment: The term "Department estimate" is defined as an "estimate of what it would cost the department to complete the work proposed by the developer. The estimate is developed or updated by the department after receipt of a developer's request and prior to the time the department executes an agreement with the developer." JLC argues that parts of the definition are not consistent with the statute in that the term "estimate" is only referenced in subsection (c) of the state law. JLC further argues that the definition does not state by which method the department's cost of construction would be determined. For instance, an estimate using a CDA may be lower than an estimate using design-bid-build. JLC suggests revising the term so that it only applies to the maintenance of an existing facility by a public entity.

Response: The department disagrees with this comment. The statute provides for the department to "reimburse" the developer. The statute further grants the commission rulemaking power to implement the program. The department was obligated to develop a method by which it would determine the amount of reimbursement. The commission, by rule, chose the department's estimate. This method not only helps ensure that the department receives fair value and protects the taxpayer, but it also appropriately places the risk on the developer to design and build the project efficiently and innovatively. The department does not agree that it would be practical or beneficial to either the department or the developer to attempt to describe, by rule, a method by which the cost of construction will be determined.

Comment: JLC suggested amending the definition of "Pass-through Toll" to add, "The per vehicle fee may vary by agreement within different bands of traffic volume and by type of vehicle using the facility."

Response: The department agrees with this comment. This addition will help to further inform the public and potential proposers of the alternative methods by which the department may reimburse the developer. The department, however, does not agree that this revision belongs in a definition. The following language has been added to §5.57, Payment of Pass-through tolls, under subsection (b): "Variable payments. The per vehicle fee may vary within different levels of traffic volume and by type of vehicle using the facility." The department believes that the term "levels" is more informative than the term "bands." It is not necessary to say, "by agreement" since the payment schedule and method is already required to be mutually agreed upon.

Section 5.53, Proposal

Comment: JLC asserts that developers may want to propose a series of projects in one pass-through toll proposal. The section requests proposers to submit information on one project. JLC suggests revising the section to allow the submittal of multiple projects.

Response: The department agrees with this suggestion. This concept may help expedite the development of multiple projects. Subsection (a) is revised to allow a proposer to submit a project or a series or projects.

Comment: Subsection (b) provides that, if requested, and unless prohibited by law, the department will release to the public a proposal submitted under this section. JLC argues that some pass-through toll facilities may be proposed as candidates for comprehensive development agreements (CDAs), and that this provision appears to contradict legislative intent set forth in Transportation Code, Section 361.3023.

Response: The department disagrees with this comment. The rule provides "unless prohibited by law" to ensure that the department does not violate a statute applicable to a particular situation.

Section 5.54, Commission Approval to Negotiate

Paragraphs (4), (6), (7), and (8) were revised to correct non-substantive grammatical errors.

Section 5.55, Proposals from Private Entities

Comment: Subsection (e) provides that the original proposer may submit a revised proposal in response to a notice requesting competing proposals. JLC stated that if a fee is required for the original proposal submitted as a CDA, it should be clarified that the original proposer is not required to submit an additional fee.

Response: The department's CDA rules will govern this circumstance. Those rules only require the proposer to provide a proposal review fee with the original unsolicited proposal. No change is needed to this section.