Post on 27-Mar-2015
Tradable Priority Permits
Prof. Charles R. PlottDr. Joseph P. Cook
2
Overview
Problem
Possible solutions
Proposal– General
– Proposed policy features
Experimental Testbed
Expected effects– What will be the relationship of prices?
– What happens to profits?
– What types of traffic benefit and what are hurt?
Logic of the Expected Results
3
The Problem to be Solved
Lock outages, both scheduled and unscheduled, are one source of congestion leading to delay.
– Greenup lock on the Ohio River: planned 18 day outage stretched to 52 days.
– Lock 27 on the Mississippi River: auxiliary lock delayed by an average of 25 hours in the peak month.
Delays caused by lock outages have significant costs: congestion on one lock costs $209 million annually (MARC 2000).
Cargo choices are impacted by uncertainty as is competition with other modes of transportation.
Location of potential demanders impacted by delay and uncertainty.
4
Possible Solutions
Lockage Fees– Panama Canal
– Washington DC Metro System
Scheduling and Priority– Air Traffic Control
– Panama Canal
Command and Control Regulations
Tradable Permits– OTC NOx Budget Program
– Los Angeles RECLAIM project
5
Expected Effects – Traffic Types
The risk of lock delay impacts the nature of the cargo and contracts transported through the river system.
The ‘first-come-first-served’ policy discourages high value contracts with fast delivery requirements.
The introduction of a system of tradable priority permits changes the distribution of the types of contracts found in use.
Contracting shifts to the more valuable types of contracts and fills the available capacity for such contracts.
The priority permit system operates to maximize total profits of operators.
TRADABLE PRIORITY PERMITS
6
General Proposal
System will be flexible to deal with unforeseen delays (e.g. weather, unplanned outages, etc.)
System will reduce the costs of congestion
System will reduce uncertainty
7
Proposed Policy Features
Tradable Priority Permits: – “A permit will give to the holder the right to move ahead of all barges
waiting for access to the lock and traveling in the same direction, up to the holder of a permit in the queue being exercised with equal rights.”
Features– Master Instrument and Two-week Permits
– Marketable and Transferable
– Priority in levels
– Initial allocation could be based on historical usage
– Permits will be numbered and recorded by the Corps
– Lock masters and the Corps will be responsible for enforcement
8
Experimental Test Bed
In order to demonstrate the effects of the proposal, an experimental test bed was set up with the following parameters:
– One lock
– Nine lockages per day
– Nine barge operators
– Each barge operator owns five tug or tug/barge combinations
– Each period represents 5 days
– Twenty-two periods
– First ten periods are under “first-come-first-served” rule, the rest are under the “priority permit” rule
– Each operator’s boats arrive randomly at the lock
9
Theoretical Prices
Theoretical Prices and Cargo Values with Priority Permits
PriorityMeasure Altered 1st 2nd 3rd 4th
(a) (b) (c) (d) (e)
Theory price 900 300 100 0Cargo value 1000 (A) 400 (B) 200 (C ) 100 (D)
---------------------------------(value)---------------------------------
10
Expected Effects
Relationship of Prices
– Graphs will show the markets for Priority 1, 2, and 3 permits.
– Markets for Priority 4 and Priority 5 permits: Only three trades in the two markets in periods 11 through 22.
What happens to profits?
What types of traffic benefit and what types are hurt?
11
Expected Effects - Prices
Market for Priority 1 Permits After Priority Permit Trading Begins
0
100
200
300
400
500
600
700
800
900
1000
11 12 13 14 15 16 17 18 19 20 21
Period
Pri
ce
Source: Testbed Data.
Theoretical Price
Actual Price
12
Expected Effects - Prices
Market for Priority 2 Permits After Priority Permit Trading Begins
0
50
100
150
200
250
300
350
11 12 13 14 15 16 17 19 20 21
Period
Pri
ce
Theoretical Price
Actual Price
Source: Testbed Data.
13
Expected Effects - Prices
Market for Priority 3 Permits After Priority Permit Trading Begins
0
50
100
150
200
250
300
11 12 13 14 15 16 17 18 19 20 21
Period
Pri
ce
Source: Testbed Data.
Theoretical Price
Actual Price
14
Expected Effects - Profits
Number of Contract Types Shipped
0
5
10
15
20
25
30
35
40
45
0 5 10 15 20 25
Period
Nu
mb
er o
f C
ontr
acts
Contract A Contract B Contract C Contract D
Source: Testbed Data.
Priority Permit Trading Begins
15
Expected Effects - Profits
Average Value of Contract Shipped
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
1,200
0 5 10 15 20 25
Period
Val
ue
Contract A Contract B Contract C Contract D
Source: Testbed Data.
Priority Permit Trading Begins
16
Expected Effects - Profits
Accumulated Profits by Individual Shippers After Priority Permit Trading Begins
0
5,000
10,000
15,000
20,000
25,000
30,000
0 5 10 15 20 25
Period
Acc
um
ula
ted
Pro
fits
Shipper 1 Shipper 2 Shipper 3 Shipper 4 Shipper 5 Shipper 6 Shipper 7 Shipper 8
Source: Testbed Data.
Priority Permit Trading Begins
17
Expected Effects - Profits
Total Profits to All Shippers
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0 5 10 15 20 25
Period
Pro
fits
Source: Testbed Data.
Priority Permit Trading Begins
Total Profits
18
Expected Effects – Traffic Types
The risk of lock delay impacts the nature of the cargo and contracts transported through the river system.
The ‘first-come-first-served’ policy discourages high value contracts with fast delivery requirements.
The introduction of a system of tradable priority permits changes the distribution of the types of contracts found in use.
Contracting shifts to the more valuable types of contracts and fills the available capacity for such contracts.
The priority permit system operates to maximize total profits of operators.