Monday, February 19, 2007

Selling HOV lane access in California

Think about this for a minute. Were consumers really buying a hybrid vehicle or a right to drive in the HOV lane (and save a bunch of commuting time.)

In 2006, the California legislature authorized the state Department of Motor Vehicles to distribute 85,000 stickers to the owners of gasoline-electric hybrid cars. The stickers allow drivers to travel without passengers in all of the state's high occupancy vehicle (HOV) lanes, which were formerly restricted to cars with two or more passengers. A report determined that California's HOV lanes were operating only at two-thirds of their capacity and not easing congestion as much as they could; the idea was to stimulate demand for hybrids and thus reduce the emissions of greenhouse pollutants.

The sticker distribution did exactly what it was supposed to do. People wanted to shave time off their commute, and the stickers drove up demand for hybrids for the Toyota Prius and Honda Civic hybrid (the only cars that qualified for stickers), so much so that the small Prius has been selling for over $30,000, and until recently had waiting lists. The Civic hybrid has carried a dealer "added premium" to the manufacturer's suggested list price of as much as $4,000 (with the hybrid Civic total price nearly $7,500 higher than the quoted price of a non-hybrid Civic).

It is also interesting to note that the right (sticker) stays with the vehicle. That significantly changes the value of the vehicle.

Now that there are no more stickers for distribution, what can be expected to happen in the California market for hybrids?

First, we should expect a drop in the demand for new hybrids at dealers, along with a drop in their negotiated sale prices. Buying a new hybrid Civic instead of a non-hybrid Civic has been difficult for even warm-hearted environmentalists to justify, since the hybrid would very likely have to be driven over 500,000 miles before the savings in gas (at current prices) could offset the added purchase price plus the cost of replacing the hybrid battery (most likely within 10 years), and the additional sales tax and interest cost on financed vehicles. However, those added car costs can be easily justified by a commuter who earns $40 an hour and who, with the stickers, can save an hour a day commuting to and from work. Such drivers can cover the added hybrid costs through lower commute costs within nine months.

Since the HOV-lane stickers stay with the hybrids, the demand for used hybrids can be expected to rise, along with their prices, perhaps dramatically, especially since Honda and Toyota can no longer accommodate the demand for reduced commute times with more cars.

My thought is that you determine how many stickers to issue each year and you auction them off. The right would be good for a year and as well as being transferable. I suspect it would be at least as good at reducing pollution as the California program, and it would raise revenue for the state rather than dealers.

To say it another way, didn’t California really just give a subsidy to auto dealers that sold it to the highest bidder?

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