1. Flexibility and Design Options Analysis of a Streetcar System in Madison, WI Paul Grogan ESD.71 Application Portfolio Massachusetts Institute of Technology December 2, 2008 Paul Grogan, Dec. 2008 Slide 1

2. Problem Statement “Pedestrian Accelerator” proposed in Madison, WI –Add sustainable commuting options –Encourage economic development along route Modeled after similar success stories –Portland, Oregon –Little Rock, Arkansas –Tampa, Florida Initial feasibility study finished October 2007 Paul Grogan, Dec. 2008 Slide 2

3. Park Street Route (Purple) Central Loop Route (Blue) East Isthmus Route (Yellow) University of Wisconsin Campus Commercial Area Residential Area State Capital Industrial Area Student Residential Area Convention Center Residential Area Commercial Area Paul Grogan, Dec. 2008 Slide 3 1 mi

4. Ridership Uncertainties Expected initial ridership from feasibility study –2,828 daily riders throughout entire area Expected growth rate from feasibility study –0.6% per year increase without considering economic growth –1.5% per year increase considering economic growth Paul Grogan, Dec. 2008 Slide 4 Route Construction Cost Population Use Factor Expected Ridership Low Ridership (-20%) High Ridership (+50%) East Isthmus – Campus$82.6m40%1,1319051,697 Park Street$93.9m45%1,2721,0181,909 Central Loop$61.2m30%8486791,272

5. Route Design and Options Option A: Large Scale, Fixed Design –Implement all three routes at same time –Save on construction costs ($237.7 million  $200.7 million) Option B: Phased, Flexible Design –Implement Central Loop route initially –Decide whether to expand to East Isthmus – Campus or Park Street expansion route after ten years Uncertainty includes initial ridership level and average ridership growth rate between years 10 and 40 Paul Grogan, Dec. 2008 Slide 5

6. Paul Grogan, Dec. 2008 Slide 6

7. Decision Tree Analysis of Route Flexibility and Expansion Strategy: build flexible route, do not expand Both design options have very negative net present values –Ridership levels cannot support large initial investment –Is NPV an appropriate valuation metric for a public service? Paul Grogan, Dec. 2008 Slide 7 MeasureFixedFlexible Expected NPV$ (181m)$ (55m) Maximum NPV$ (160m)$ (49m) Minimum NPV$ (200m)$ (61m) Initial CAPEX$ 201m$ 61m ENPV / CAPEX$ (0.90) ENPV / Rider$ (1,070)$ (827)

8. Decision Tree Analysis with Additional Ridership Levels Thought experiment: boost ridership levels 400% higher than expected to repay initial capital expenses Flexibility limits downside risk, but also limits upside potential (traditional result) Paul Grogan, Dec. 2008 Slide 8 MeasureFixedFlexible Expected NPV$ 19m$ 26m Maximum NPV$ 129m$ 102m Minimum NPV$ (68m)$ (21m) Initial CAPEX$ 201m$ 61m ENPV / CAPEX$ 0.09$ 0.43 ENPV / Rider$ 8$ 27

9. Lattice Analysis Setup Ridership growth model fitted to Madison Metro Bus system ridership from 1971 – 2007 Low R-squared value (0.1337) Period in 1980’s of ridership increase may be similar to late 2000’s Lattice analysis variables Ridership distribution after six years VariableValue V0.52% σ 15.77% U117.1% D85.4% P51.6% Paul Grogan, Dec. 2008 Slide 9

10. Lattice Analysis of Closing Option Analyzing closing option in Central Loop route Closing option is valued at $67,476 Paul Grogan, Dec. 2008 Slide 10 Year0123456 Expected Future NPV ---- Decision $728,108 - $1,154,294 - $1,526,719 - $1,776,965 - $1,834,112 - $1,624,138 - $1,052,779 - $180,640 - $478,653 - $751,209 - $918,785 - $898,597 - $621,415 - $(90,356) CLOSE $69,498 - $252,706 - $369,287 - $306,718 - $(156,258) CLOSE $(90,356) CLOSE $(13,200) CLOSE $77,134 - $(212,547) CLOSE $(156,258) CLOSE $(90,356) - $(260,625) CLOSE $(212,547) - $(301,690) -

11. Path Enumeration and Valuation Add PV cash flow from the first state in the path from a lattice not accounting for option execution Execute decision after current state? Add PV one-time cost of executing option (e.g. capital expense or penalty) Add PV cash flows from remaining states in path from a lattice accounting for option execution Add PV cash flow from next state in path from a lattice not accounting for option execution Yes No In this analysis, the one-time cost is assumed to be zero In this analysis, the lattice accounting for option execution is simply zero cash flows Paul Grogan, Dec. 2008 Slide 11

12. Lattice Valuation Option is executed (close operations) in 34 of 64 paths (50.1% chance overall) –Good chance that revenue can’t cover operational costs Flexibility limits downside risk but does not affect upside (traditional result) Paul Grogan, Dec. 2008 Slide 12 MeasureFixedFlexible Expected NPV$ 660,632$ 728,108 Maximum NPV$ 2,859,137 Minimum NPV$ (756,570)$ (17,393)

13. Conclusions Expected ridership levels are not high enough to support a streetcar system of the studied scale Under expected ridership levels, a closing option is used a very large percentage of the time (~50%) Under higher ridership levels, a flexible, phased design produces significantly higher net present value Including a closing option increases net present value but does not take into account the construction cost losses Paul Grogan, Dec. 2008 Slide 13