Revenues: Smart Pricing and Charging for Parking

The purpose of fares is to help pay the cost of providing the best possible transit system, recognizing that there will always be limits to government funding. Current fare policies do not always achieve this objective.

TTC and most regional operators have flat-fare systems that have changed little over the years. Historically, they were set at a level that recovered costs. This approach worked fairly well when ridership was “captive,” but as transit began to face competition from the car, governments began to pay subsidies, assuming that reduced fares would attract more riders and thereby reduce road congestion. Some cities even experimented with free transit.

However, simply subsidizing fares, especially with a flat-fare system, is a relatively ineffective way to encourage increased ridership. The main beneficiary of fare subsidies seems to be existing transit riders. New riders are attracted to transit by better services, not lower fares. Motorists will not get out of their cars even if transit is free unless the service is also comfortable, fast, and convenient to use.

Toronto began subsidizing TTC operations in the early 1970s, shortly after the decision not to build more radial expressways. At the same time, the zone-fare system was abolished. The effect was a one-off increase in ridership. However, financial pressures eventually precluded service expansion.

The introduction of operating subsidies coincided with the last period of subway expansion. TTC subsidies cost the government $450 million in 2011.[1] Even in the 1970s, TTC argued that low fares might not be a good policy. Higher fares might deter a few riders, but if they funded better services, they might attract even more new riders.

More complex fare structures can attract more riders, while raising more money to fund further service improvements. Many cities operate zone fare systems, as Toronto did until 1971. Zone fares more closely match transit prices to the cost of alternative modes. While fares for longer trips may be higher, fares for shorter trips can be lower. Some cities, including London, England, and Washington, D.C., offer lower off-peak fares, an approach that encourages travel outside peak hours.

With a zone fare system and some differential for peak and off-peak prices, TTC might be able to recover all its operating costs from fares, while attracting more riders. The current operating subsidy of about $450 million could instead fund service improvements and further capital investments.

Using PRESTO to boost TTC revenues

Currently TTC charges $3 adult cash fare per ride (less for those who buy several tokens or tickets at a time), with free transfers between bus, streetcar, and rail on a single journey. GO charges $5 to $7 for rail trips within Toronto. There is no variation by time of day or direction, and no daily cap on the amount that riders can pay. A commuter from Scarborough to the University of Toronto could pay $20 per day using TTC and GO, even if the trip is taken at midday. The trip could also be made for $3 each way entirely on TTC, but might take 2 hours or more. No wonder so many people drive, especially for off-peak and short trips.

Backgrounder: Smart Pricing on London’s Transit System
Over the past 30 years, Transport for London has gradually introduced a fares system that attracts more riders, while also generating higher revenues. This reduces dependence on subsidy, or (alternatively) raises more funds for service improvements. TfL’s system includes the following features:
  • Single-trip fares are high and are paid mostly by occasional riders. Currently this is £4.50 on the underground (subway) if paid in cash, but varies from £2.10 to £3.00 ($3.30 to $4.80) with the Oyster smartcard depending on whether one, two, or three zones are crossed.
  • The single bus fare is lower, £2.40 cash but reduced to £1.40 ($2.30) using the Oyster card.
  • There is no free transfer with a single fare. Instead, the daily fare is “capped,” with unlimited free travel after a certain number of trips each day. For travellers who use buses only, the cap is at £4.40 ($7.30) and similar to the price of two TTC tickets. So single bus fares are actually lower than in Toronto, and after the third bus trip, further bus trips are free.
For users of the rail system, the cap depends upon when they travel, and how many zones they cross. The daily cap for a passenger travelling in the peak, across 3 zones, is £11.00 ($18). This is more than the TTC day pass, currently $10.75, but less than a TTC day pass plus a return trip on GO from one of the stations within Toronto. Again, once the Oyster card hits the £11 cap, additional bus and rail trips are free, so regular commuters don’t need to pay a full extra fare for a bus to and from their local station. And if they need to take a bus or streetcar at the other end to finish their trip, it is effectively free.
People who can avoid travelling before 9:30 a.m. have a lower cap of £8 ($13.30). And passengers who travel within only one or two zones, and do not travel before 930 a.m., have an even lower cap of £7.30 ($12).
Regular commuters can also buy a monthly or annual Travelcard, which brings the cost per weekday down to about £5 ($8), similar to two trips on the TTC, but in London this includes travel on the commuter rail system as well.
TfL also has a policy of raising fares each year 1% to 3% above the rate of inflation. The rationale is that passenger incomes rise above inflation, as do labour costs. Above-inflation increases give TfL the money to continue improving services, just as the quality of other goods and services rise.
TfL management believe their pricing strategies raise 10% to 20% more income, while also attracting 10% to 20% more riders. 

TTC buses that cross the city boundary into York or Peel region charge a small fare supplement. TTC also sells one-day and monthly passes, but about 99% of riders pay the same amount, whether they are travelling 1 km on a half-empty streetcar, in the middle of the day, or commuting 50 km across the city in rush hour, squeezing onto crowded buses and subway trains.

Since 1970, TTC has been expected to recover about 70% of its operating costs from fares. Capital costs are funded separately, usually by grants from the City, Province, and occasionally the federal government. TTC’s flat-fare system allows it to recover about 70% of annual costs. For many passengers, the flat fare is a bargain. They pay $3 for a trip that they would willingly pay $5 or more to make. But many other passengers drive, because for short trips with free parking, the car is cheaper. And some trips are not made at all, because the $3 fare is too high, even though it may be far above the incremental cost to carry a passenger. Ideally, fares should be set to maximize system ridership, within the limits of public funding support.

TTC is joining the PRESTO Smartcard system, which will simplify travel that involves multiple operators, and reduce cash-handling costs.[2] However, until TTC implements a more sophisticated pricing structure, fares will still be too high for some trips, so potential riders will drive, and still too low for others, denying TTC of revenue it could use to improve services.

Revising the TTC fare structure is long overdue. Change may be unavoidable as the subway is extended across the city boundary into Vaughan. Many students who travel from places like Woodbridge and Brampton to York University, using the VIVA or Zum express buses, will instead be expected to transfer to the subway at the Vaughan Corporate centre and use the subway to finish their journey. This may save them a few minutes, and it will allow Zum and VIVA to save a substantial amount of money. However it will be deeply unpopular with travellers if it means they must pay a $3 extra fare each way. TTC’s problem is that it has no way of distinguishing whether passengers boarding at Vaughan are travelling just to York University, or all the way into downtown Toronto.

A more intelligent fare system for Toronto might copy that of London, which has a system of radial zones, with a premium for use of faster modes (commuter rail and subway) (but not a full additional fare), and with reductions for off-peak travel.

To introduce “smart pricing,” TTC would need to introduce “touch out” points at station exits, just as GO now does at rail stations. We do not know the details of the PRESTO contract, but extending the features used on GO to the TTC system should be a priority, and the payback would be relatively rapid. Assuming, very conservatively, that TTC generates 5% more revenues, the additional income would be about $50 million per year or $1.15 billion NPV. It should also generate at least 5% more riders, or about 50,000 more per day, bringing the same again for total revenue uplift to $2.3 billion NPV.

For example, Zum passengers boarding the subway at Vaughan would have $3 in their card PRESTO put into “escrow”; most or all of this would be returned when they “touch out” at York University. Zum would share some of its revenue with TTC for these trips. Similarly, passengers boarding at York would have $3 put into “escrow”; most of this amount would go Zum if the passengers travel into Bramalea.

There will also be significant road user benefits. Many TTC passengers would use PRESTO to make fairly short trips (because those are the trips for which the current fares are, at present, too high). If 50% of the 100,000 new daily riders are attracted off the road system, and assuming a benefit to other road users of $1 per car (1/20th of the rate used for the GO Electrification Study for new GO rail trips), the benefit is $15 million per year or about $345 million NPV.

Smart pricing should be a very effective way to achieve the Metrolinx objectives. Many passengers will pay lower fares, in total. And it will actually raise more money.

Peak pricing on the GO system

GO Transit operates a distance-based fare system, achieving more than 80% recovery of operating costs. However, it has no peak/off-peak fare differential and limited integration with TTC fares. A slightly higher peak fare, and an offsetting reduction in the off-peak fare would encourage some people to change their travel patterns.

GO’s biggest capital cost is rolling stock, which must be purchased to carry peak demand. Peak fares can “flatten” the peak, saving millions of dollars. Peak riders are mostly “captive”: driving is not an attractive option, usually because of traffic congestion and the high cost of parking in downtown. Off-peak passengers are more price-sensitive. Lower off-peak fares can attract more new riders than the higher peak fares would deter.

Charging for parking at GO stations

GO currently provides free, all-day parking at most stations.[3] Most GO rail passengers drive to their station, and free parking is part of the GO transit “offer.” If GO were to charge for parking, it would be equivalent to a fare increase for most riders. However, some passengers do not drive: they use feeder buses, they are driven (or share a car), and some even walk. They do not benefit from the free parking. Parking is now fully used at many stations, and GO is building multi-storey car parks at several stations, at considerable expense. At some stations, parking may be scarce or unavailable during the day, deterring casual or off-peak use of the system.

By comparison, TTC charges for parking. Prices vary depending on the location and the time of day. For example, at Kennedy the price is $5 a day, reduced to $2 from 3 p.m. onwards. The all-day price at the east lot, further from the subway (but actually closer to the GO platform) is $4. These charges seem to make sense.

GO has more than 60,000 parking spaces. It would seem that GO could increase both transit ridership and revenues, by:

  • Reducing peak fares (arriving in downtown before 9:30 a.m.) by $0.50 (about 10%) and off-peak fares by $1 (about 20%);
  • Charging $3 per day for car parking, reduced to about $2 after 3 p.m.

Existing riders who drive alone would pay $2 more per day, net, about a 17% increase on a typical $12 return fare. Assuming there are 50,000 riders in this group, GO would increase its revenues $25 million per year.

Peak riders who use transit, walk, or car-share to go to the station would pay $1 less per day. Riders who can shift their trips outside peak hours would save even more. Total ridership and revenues would both increase. GO would have more money to improve services. GO also might not need to buy so many additional trains to carry the peak-hour passengers.


Notes
[1] TTC Annual Report 2011.
[2] It will also end the annual “token famine” when passengers hoard tokens in anticipation of a fare increase.
[3] GO does offer reserved parking at many stations, for $80 per month. At some stations within the City of Toronto, GO does not provide parking. Parking may be offered by TTC, for example at Kennedy and Kipling.