Discussion on Characteristics and Price Regulation of Urban Rail Transit

Discussion on Characteristics and Price Regulation of Urban Rail
Transit
YANG Liu, ZHENG Xiang
School of Economics and Management, Beijing Jiaotong University, Beijing, P.R.China, 100044
[email protected]
Abstract: Urban rail transit all around the world is generally under strict price regulation imposed by
concerning urban government authorities. Such regulation as price-caps, comprehensive cost recovery,
standard cost comparison and etc. are popular with cities as Beijing and Seoul. Experiences of Tokyo
and Shanghai show that it’s imperative to regulate urban rail transit price according to a comprehensive
model. Urban rail transit has such characteristics as network economy, public goods, and marketability,
which determine and imply the importance of fiscal subsidy and operational cost. Price regulation
should comprehensively take subsidy, electricity, CPI, PPI and transportation volume into consideration.
In fact, urban rail transit price regulation should not only compensate operational cost, but also
introduce market incentive.
Keywords: Urban Rail Transit, Characteristics, Price Regulation
1 Introduction
Urban rail transit (URT), characteristics differ from those of inter-city rail transit, dedicated passenger
line or high speed railway, they are built when industrialization, urbanization and transportization
developed into a specific period. Adopting wheel and track technology, organization pattern as “small
trainset, high density, quick speed”, URT can satisfy passenger’s traveling demand in urban and
suburban areas with specific metropolitan at the core. With rapid social and economic development and
expansion of cities, various scares economic resources begin to cluster in big and medium sized cities in
large scale. Thus, planning, construction, investment and operation of URT enter into a rapid
development phase. Simultaneously, social capital flows into various business sectors of URT through
financial innovations of BOT, BT, TOT, PPP and etc. However, URT price is still under strict
government regulation. Cities such as Beijing, Shanghai, Guangzhou, Nanjing, Shenzhen, HongKong,
Tokyo, Seoul, Newyork and Paris regulate URT from perspectives of price level and structure, financial
subsidy, ticket mechanism, ticket form, entrance and exit, and etc., see Tab.1.
No.
1
2
3
4
5
6
7
8
9
10
11
City
Beijing
Shanghai
Guangzhou
Nanjing
Shenzhen
HongKong
Tokyo
Seoul
Newyork
Paris
Moscow
Tab.1 Price regulation status quo of URT
Whether Regulate or How to Regulate
Price Level and
Financial
Ticket
Ticket Form
Structure
Subsidy
Mechanism
Regulated
Yes
Single
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Single
Various
Regulated
Yes
Distance-based
Various
Regulated
Yes
Single
Various
Operator
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Entry Regulation
Obviously, URT price is under strict regulation by urban authority worldwide. There are few disputes
about whether it’s imperative to regulate URT theoretically or practically. However, there exists great
dissension about what kind of price regulation should be adopted, namely, return on investment
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regulation, price cap regulation, yardstick competition, or other kinds of price regulation. In fact, in
Japan, price regulation for Tokyo URT experienced 3 stages: (1) Stage 1 is before December, 1996 when
comprehensive cost pricing mode is adopted; (2) Stage 2 is between December, 1996 and July 31st,
2006 when price cap regulation mode is adopted based on comprehensive cost. (3) Stage 3 is after
August 1st, 2006, when standard cost comparison mode is adopted. Thus, what kind of factors lead to
the change of URT price regulation, and what is its internal economic logics?
2 Function Definition and Features Analysis of URT
2.1 Function Definition of URT
URT is a specific transportation mode which differs greatly from other rail transportation, and it serves
urban and suburban transportation including metro, light track, tramcar, suburban railway, etc, as shown
by Fig.1. URT is an indispensable part of urban comprehensive transportation system. In developed
countries, URT shoulders most part of transportation demand and connects bus, taxi, regional railway,
and aviation through urban transportation terminals.
Operation
Entity
Fast Transportation
National Railway
Metro
Local Railway
Light Track
Suburban Rail
Tram
Railway
Classification
Serve Target
Urban Rail Transit
Inner and Near City
Regional Railway
Far from City
(around 100kms)
Medium
Distance Intercity
Transportation
Trunk Railway
Long
Distance Intercity
Transportation
Fig.1 Railway classification and urban rail transit[1]
From Fig.1, we can see that URT mainly serves transportation inside, outside metropolitan within
certain distance. It’s generally agreed that railway lines serving commuter transportation whose distance
is less than 100 kilometers from city center belong to URT, while lines between 100 and 300 kilometers
are regional intercity railway, for lines with distance more than 300 kilometers, they must belong to long
distance or trunk intercity railway.
Therefore, functions of URT include but not limited to: (1) Connecting large transportation terminals,
URT concentrates in certain urban area and makes transit between different terminals convenient and
economic. (2) URT serves regular transportation demand such as commuter and commerce travel. (3) In
contrast to private transportation, URT is usually a public transportation railway under strict government
regulation. (4) Generally, URT service is operated with electrical multiple units (coaches). (5) URT runs
at a comparatively high speed linking important satellite cities. (6) URT is organized in with small
trainsets, high density, quick turnover, and unified dispatching command. (7) URT is a kind of light
track weight lines. (8) URT is a part of urban transportation system, and its planning, investment,
construction, operation, and price level have to be regulated by municipal authority. (9) Investment
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mainly comes from public finance while some fractions originated by social investors. (10)
Transportation oriented development (TOD) can enhance industrial structure adjustment, transportation
structure optimization and environment improvement.
2.2 Characteristics of URT
URT has such features as network economy, quasi-public good and marketability which determine
reliability of price regulation on cost and financial subsidy. In other word, URT price regulation has to
take subsidy, transportation volume, electricity, CPI, PPI, and other factors into consideration.
2.2.1 Network economy[2] of URT based on scale economy and scope economy.
URT has obvious feature of network economy, which is composed by scale economy and scope
economy and transform into density economy and size economy in transportation sectors as shown in
Tab.2.
Scale Economy and
Scope Economy
Tab.2 Network economy of URT
Density Economy
URT Transportation Resources and Network
and Size Economy
Economy
Natural
Monopoly
City train passage density
Track Network
Scale
Economy
Density Economy
Concurrent usage with national
and regional railways
Large trainset numbers and cabin type (A type) per
km
URT terminal capacity
Scope Economy
Size Economy
Line extension and network
concentration
Small trainset, high speed,
stop at more stations
Large network
Average
cost
decreases or
so called
“cost
subaddivity”
phenomenon
Connectivity
improvement
Scale economy refers to the phenomenon that URT average cost decreases with an increase in
transportation volume. Furthermore, URT achieves scale economy when average cost of one
transportation operator is less than that of several competitive independent rail operators, that is, cost
subaddivity appears in URT sector. Scope economy refers to the phenomenon that URT average cost of
multi-product production is lower than that of single product production. Because of technology,
transaction and market limitation, concentrated mass production can obtain cost economy than scattered
one.
URT carries out its production in certain space time condition on rail transportation network, thus, scale
economy transforms into density economy, scope economy into size economy. Density economy refers
to the economic phenomenon of average cost reduction under the condition that, within unit space or
distance, transportation volume increases when capacity of track network, movable equipment, trainset
number, and terminal scale expand gradually. Size economy refers to average cost reduction
phenomenon of URT when the length or density of URT or scope of service targets increases.
URT has significant network economy. For example, marginal cost per person for line 1 and line 2 of
Beijing metro is RMB0.4928, for line 13, RMB1.6235, for Batong line, RMB2.358,[3] which manifests
that line 1 and 2 have lower marginal cost and have more significant network economy than that of other
lines. If price regulated is set according to the principle of marginal revenue equaling marginal cost, it’s
unavoidable that URT will suffer operational loss and government subsidy will become an indispensable
part of overall regulation policies.
2.2.2 Quasi-public good characteristics of URT based on product classification.
Goods can be classified into private goods, quasi-public goods, pure public goods according to its
degree of unrivalness and unexclusiveness. Unrivalness refers to the situation that marginal cost is zero
when one more unit product is consumed, while unexclusiveness refers to the situation that consumption
of one person doesn’t affect that of the other person. Before transportation volume reaches a certain
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degree, URT has unrivalness; after that, traffic congestion appears and marginal cost increases
dramatically. Under such a circumstance, exclusive arrangement should be set up in order to avoid
excessive usage of URT facilities. Thus, URT is a typical quasi-pubic goods.
There are different kinds of public goods, and government subsidy and market competition mechanism
can be applied accordingly. We can classify URT development into 3 periods, that is, primary period,
development period and maturity period. (1) In primary period, transportation volume is low, congestion
point is not reached, and private capitals are reluctant to participate in investment and operation
businesses. Thus, government shoulders responsibilities of investment and operation subsidy. (2) In
development period, URT transportation volume increases gradually, profit making capability becomes
better off, private capitals have desire to take part in investment and operation businesses, and market
mechanism begins to gain its ground. (3) In maturity period, transportation volume increases by a large
margin. Market revenue can cover variable cost expenditure and some part of fixed cost, traffic
congestion becomes prominent, rivalness and exclusiveness are significantly high, it’s suitable to hand
over URT operation to private sectors. Since URT has natural monopoly characteristics, it’s necessary
for government to regulate its price, service quality, safety and etc. in order to control potential market
power of private operators.
2.2.3 Marketability of URT.
Marketability refers to ability that goods or service can be divided into small units with clear property
right boundary, sold in the marketplace and receive corresponding revenue to compensate production
cost. Operationability is defined at the same time. Generally speaking, the higher the marketability, the
better the operationability; the lower the marketability, the lower the operationability. Marketability is
the precondition for operationability, which is shown by Tab.3.
Tab.3 Marketability and operationability of URT
Potential
Public
Characteristics
External
to Cover
Service
of Goods or
Environmental
Cost by
Obligation
Service
Factors
Fare
extremely
extremely
public goods
no
high
high
club goods
low
high
high
club goods
medium
medium
medium
Units of
URT
Competition
Potentials
Planning
no
Track
Station
Rolling
stocks
low
medium
high
private
Electricity
medium
private
high
private
high
private
very low
medium
Track
maintenance
Rolling
stocks
maintenance
Dispatching
command
Financial
subsidy
high
Marketability
Index
Operationability
Index
no
no
low
medium
low
medium
low
low
high
high
low
very low
very high
very high
very low
very low
very high
very high
very
high
very low
very low
very high
very high
common
resource
very low
very high
low
very low
very low
public goods
no
very high
extremely
high
medium
medium
very
high
very
high
very
extremely
No
extremely low
extremely high
high
high
Note: The author combines characteristics of URT and literature Report on infrastructure investment and financing
comparison in China[M]. China Construction Industry Press, 2002.
Labor
very high
private
From Tab.3, we can see that marketability and operationability of components of URT varies from each
other. For planning, track, dispatching command, financial subsidy, and etc., there is low possibility to
introduce market mechanism, while for station rolling stocks, maintenance and labor, there is high
potential to adopt market mechanism.
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3 Analysis on Price Regulation Mode for URT
Characteristics of URT imply that we have to take government subsidy and PPI into consideration
besides electricity, salary and welfare, CPI and etc.
3.1 Several Modes for Price Regulation of URT
Price regulation modes for URT include: (1) Specific cost compensation mode, that is, government only
covers specific cost such as salary and electricity. (2) Comprehensive cost compensation, that is,
government pays for internal cost and external cost shouldered by URT operators. (3) Income cap, that
is, regulation focuses on total income control, or puts limitation on return rate on capital. (4) Price cap,
that is, once total cost is checked and ratified, price adjustment has to be connected with Consumer Price
Index (CPI), Producer Price Index (PPI). (5) Standard cost comparison or yardstick competition mode,
that is, standards for cost compensation are determined by regression results of several URT operators.
For example, if average electricity cost per person kilometer is α, average electricity cost for operator
one is β, if then β>α, the gap β-α will not be covered by government subsidy. Tab.4 illustrates five URT
price regulation modes.
[4]
Tab.4 Price regulation modes for URT
Factors
Factors
Covered
Neglected
No. Price Regulation Mode
，
Linkage Mechanism
1
Specific cost compensation mode
P, Cx
Q Cn
Cx and P linkage
2
Comprehensive
mode
P, Q, Cx, Cn
----
Cx ,Cn and P linkage
3
Income cap adjustment mode
( return on investment mode)
P, Capital, I,
---Cx, Cn
Q and Cx, Cn, I, Capital, then
links P
4
Price cap adjustment mode
P
Q, Cx, Cn
CPI, PPI, X% and P, whereas X%
refers to technology improvement
rate
5
Standard cost comparison
( yardstick competition mode)
----
Cost linkage
operators
cost
compensation
mode several
enterprises
among
URT
Note: P—Price, Q—Quantity produced, Cx—External cost which cannot be controlled by operator, Cn—Internal
cost
In Tab.4, there 3 main kinds of URT price regulation modes: (1) Cost compensation mode, it includes:
Specific cost compensation mode, that is, only costs of electricity, maintenance and etc. are taken
into consideration.
Comprehensive cost compensation mode, that is, all cost expenditures are
calculated.
Income cap mode, or return on investment mode, of which, three factors –– P, C and Q
— are considered. (2) Price cap adjustment mode, that is, only CPI, PPI and X% are taken care of when
P of URT is going to be adjusted. (3) Standard cost comparison mode, that is, average cost level is
determined by several URT operators’ historical cost data through estimation methods, and is used as
benchmark for cost comparison and government subsidy quantity.
①
③
②
3.2 Comprehensive Price Regulation Mode for URT
In reality, neither price regulation mode can fit for the need of URT. Only we combine main factors
which affect URT price regulation, can we find out a comparatively suitable price regulation mode.
3.2.1 Calculation of general price level of URT.
Price level of URT cannot be determined completely by demand and supply factors in the marketplace.
Because of its commonweal and externality characteristics, URT price regulation is determined by
government subsidy, transportation volume, fixed and variable cost and etc. comprehensively.
13
General price level is illustrated by formula (1).
pt =
Ct ( E , S ,..., Others ) − St
Qt
(1)
In formula (1), pt stands for price level of period t, Ct stands for total cost for period t, including
electricity cost E, salary expenditure S and other costs. St is government subsidy for period t, and Qt
is persons transported in period t.
3.3.2 Adjustment of general price level for URT.
Within a certain period of time, price level for URT keeps constant, however, because the change of CPI,
PPI and volume transported, price regulated has to be adjusted accordingly, see formula (2).
pt =
C0 + C E × ∆Ce + CS × ( CPI t − CPI 0 )
Qt
＋C
Else
× ∆PPI
(2)
C
In formula (2), pt is price level, C0 is cost after deduction of financial subsidy, E is electricity
expenditure, ∆Ce is price increase rate for electricity, CS is salary expenditure, CPI t is consumer
price index for period t, CPI 0 is consumer price index for base period zero, CElse is other production
cost, ∆PPI is the change rate of producer price index, and Qt is quantity transported for period t.
Historical cost method, that is, we admit
In formula (2), C0 can be determined by two ways:
historical cost completely or partially and put it as the cost for base period zero.
Standard cost
comparison method, that is, we select historical cost data of several URT operators of different cities,
make regression on their line cost, communication and signaling cost, rolling stock cost, trainset
operation cost, station cost, etc., then obtain basic cost benchmark for price adjustment. Cost benchmark
is illustrated by formula (3).
yi=aixi1 (bixi2)+ci (i=1, 2, ……, n)
(3)
In formula (3), yi is the specific cost for URT operator i, ai and bi are constant term, xi1 stands for factor
or activity input 1 of operator i, xi2 stands for factor or activity input 2 of operator i, ci is also a constant
term. Through statistical calculation, we determine ai and bi, which is the benchmark cost for all URT
operators. For cost in excess of the benchmark cost, excessive cost will not be accepted and has to be
covered by concerning URT operator. For cost lower than benchmark cost, certain percentage of the
savings will reward concerning URT operators.
When parameters in formula (3) are determined, we can then fix price level of URT operators, as shown
by formula (4).
①
②
＋
n
∑ C ×x
it
pi t =
it
i =1
Qt
− St
(4)
Formula (4) is the typical standard cost price regulation mode or yardstick competition pattern, of which,
pit is price level for period t, i is integer from 1 to n, Cit is the standard cost for production factor or
xit
refers to quantity of production or activity i for period t, St stands for
government subsidy for period t, and Q t is quantity transported for period t.
activity i for period t,
3.3.3 Summary for URT comprehensive price regulation.
The overall thought for URT price regulation and adjustment is “respect historical comprehensive cost,
adopt price cap regulation for specific production factors, introduce standard cost comparison method,
take government subsidy, transportation volume, depreciation, salary cot, electricity, standard cost and
etc. into consideration, and form a comprehensive URT price regulation mode”.
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4 Positive Study on Price Adjustment of Beijing URT
（
＋
We use formula (5) for price adjustment of Beijing URT.
＋
）
(5)
∆Pt = P0 × δ × ∆Ce β × ∆CPI γ × ∆PPI
In which:
Pt -- price adjustment rate;
P0 -- ratified price level for base period zero, and P0=income of base period/volume transported of base
period;
-- proportion of electricity to overall cost expenditure, that is, =electricity cost of base period/total
cost of base period;
Ce – change rate of electricity price;
– proportion of salary to overall cost expenditure, that is, =(salary of base period + welfare of
base period)/total cost base period;
CPI – change rate of consumer price index;
– proportion of other cost, that is, =1- - ;
PPI – change rate of producer price index.
We can calculate cost structure in accordance with historical data, see Fig.2.
Δ
δ
Δ
β
Δ
γ
Δ
δ
β
γ δβ
35.00%
30.68%
30.00%
22.92%
25.00%
20.00%
15.00%
12.85%
11.15%
8.31%
10.00%
6.95%
4.30%
5.00%
2.84%
0.00%
salary
management
cost
op eration
cost
electricity
tax
maintenance
cost
welfare
rolling stock
maintenance
cost
Fig.2 Cost structure for Beijing URT
δ
If we take the year of 2003 as the base period, then, proportion of electricity expenditure
is 11.15%,
salary and welfare
is 34.98%,
is 53.87%. Then we can get conclusions as follows: (1) To 2008,
electricity price increased by 5.5%, which will lead to price increase by 0.6133%. (2) To 2008, CPI
increased by 2.52%, which will lead to price increase by 0.8815%. (3) To 2008, PPI increased by
27.24%, which will lead to price increase by 14.67%. In sum, if P0=RMB3, then price will increase by
RMB0.485.
β
γ
5 Conclusion
URT is a special kind of railway which differs from regional, trunk railways. With dedicated network
formation, URT has its special characteristics at infrastructure level, operational level, enterprise level
and policy level. URT network concentrates in urban and suburban area, operation mainly satisfies
commuter transportation demand, enterprise organization has special governance structure which
combines both public and private contracts, and a transportation policy cannot take effect without strict
government regulation. URT price is under severe regulation worldwide, and price cap mode,
15
comprehensive cost compensation mode and etc. are popular for many big metropolitans. URT has such
features as network economy, quasi-public goods, marketability, which determine or imply the
importance of government subsidy and reliability on operational cost. URT price regulation involves
factors of financial subsidy, electricity cost, salary and welfare cost, CPI, PPI, and transportation volume.
Therefore, it’s imperative to form a comprehensive price adjustment model for efficient and sustainable
URT investment and operation.
Acknowledgements:
The research has been financially supported by the key project (07JZD0012) of China MOE Foundation
for Social Sciences, Ministry of Railway Project (2008F011) and by Beijing Jiaotong University
Foundation Project (2007XM080)
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