Highway 407 Revisited

Just as Highway 61 (running from New Orleans to Duluth, Minnesota) kept reappearing in Bob Dylan’s life, Highway 407 ETR keeps reappearing in mine. I co-authored a book about it six years ago (If You Build it … at www.407etrbook.com), and I get asked to comment on its ongoing controversies.

I was just on Goldhawk Live on Rogers television, along with Ontario Transport Minister Jim Bradley, NDP transportation critic Peter Tabuns, Toronto Star reporter Jack Lakey, editor of Road Today magazine Manan Gupta, and a host of irate callers. The callers were incensed about several billing policies, including Ontario vehicle license denial for unpaid bills, attempts to collect unpaid balances going back up to 15 years, and 27 percent annual interest rate charges.

At the outset, it’s important to understand that 407 ETR’s business model is unlike most services in the economy (including old fashioned toll roads with collection booths) in that you can use it before you pay for it. This gives the operator, 407 ETR Concession Company Ltd., an incentive to be aggressive in collecting unpaid bills. What the operator prefers is that users lease transponders and have charges automatically billed to their bank account or credit card. Transponders are accurate virtually all the time. The $3.50 per trip collection fee imposed on video imaging is a strong incentive to lease a transponder, which costs $21 for a yearly lease.

By way of personal disclosure, I should say that I make about 20 trips yearly on 407 ETR and have had a transponder since the highway opened in 1997. I’ve had two small problems, a transponder’s battery wearing out and a transponder not functioning because I had placed it behind a metallic windshield sun shade, and both were handled quickly and videoimaging charges were refunded.

My guess is that somewhere in excess of 80 percent of the operator’s revenue comes from transponder users like me. As Pareto’s Law would predict, the administrative problems come from users who don’t have transponders. In an interview two years ago with co-author Chandran Mylvaganam and me, the operator’s spokesman told us that approximately 4 per cent of 407 ETR’s traffic is not billed, which includes both licenses that are not readable and those that are not billable because they are from jurisdictions that have not agreed to make their vehicle license data available. License plate denial is a very powerful mechanism for ensuring that Ontarians pay up, but of course it doesn’t extend beyond Ontario’s borders.

We heard numerous complaints on the program and it is hard to assess their validity. The most common complaint linked the three issues mentioned at the outset, claiming that the operator was deliberately taking its time billing, letting interest accumulate at a very profitable 27 percent per annum, and then using the threat of plate denial to collect.

If these accusations are true, they are a legitimate public policy concern. The question for a policymaker is what to do about them. Ontario Transport Minister Jim Bradley, citing the province’s failure to challenge the original privatization agreement in court, said that there was essentially nothing that could be done. The other panelists, myself included, weren’t so sure. Two possible approaches are suasion and legislation. Suasion would involve the government (perhaps the Ministry of Consumer Services rather than Ministry of Transport) gathering information about these complaints and presenting them to 407 ETR’s ombudsman and then the operator.

The operator is a Spanish-Australian consortium that has preferred to maintain a low public profile and collect the revenues rather than present itself as a high-profile good corporate citizen. This would suggest the government would get nowhere with suasion and the implicit threat of “naming and shaming,” but would have to legislate.
The legislative approach would not involve challenging the lease agreement, which the courts have already defended, but rather drafting consumer protection legislation applicable to all current and future Ontario toll roads, or perhaps even more broadly. This would require legal advice as to whether the courts would likely rule that such legislation contravenes the operator’s lease agreement.

Lurking down the road is an issue mentioned by Minister Bradley in the discussion, namely the development of Highway 407 East, a toll road running from the eastern end of 407 ETR in Pickering to Highway 35/115. The minister promised that the government would not repeat the mistakes of the past and 407 East would be built and run entirely by the government. A moment’s consideration suggests that likely will not come to pass. If it did, people would have to carry two transponders, one for 407 ETR and the other for 407 East, and would receive two bills for a single trip using both parts of the highway.

While the minister claims that this will lead to competitive benchmarking because drivers will compare the two operations, it is more likely that drivers will tell the two operators to get their acts together. In addition, obvious economies of scale will give both an incentive to make their technologies at least interoperable, and more likely completely integrated. Finally, by virtue of having developed and operated 407 ETR for over a decade, 407 ETR Concession Company Ltd. will have an enormous advantage over any other potential bidders for contracts on the development of 407 East. When the government moves to the contracting stage for Highway 407 East, it and 407 ETR Concession Company Ltd. will have to begin talking in earnest.

So if I were the Ontario Government, what would I do now? I’d gather information about billing practices and, if there are some that appear questionable, I would meet with the ombudsman and the operator. I would also get counsel to look at the question of whether consumer protection legislation would escape being over-ridden by the lease agreement. And I’d recognize that Minister Bradley’s “two operators, one highway” line will ultimately be untenable, and the two operators will have to talk about interoperability and integration.

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