Flexibility and Design Options Analysis of a Streetcar System in Madison, WI

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

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

3. East Isthmus Route (Yellow) University of Wisconsin Campus Commercial Area Residential Area Central Loop Route (Blue) Student Residential Area State Capital Convention Center Commercial Area Residential Area Park Street Route (Purple) Industrial Area 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

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

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?

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)

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

10. Lattice Analysis of Closing Option • Analyzing closing option in Central Loop route • Closing option is valued at $67,476

11. Add PV cash flow from the first state in the path from a lattice not accounting for option execution 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 Yes Execute decision after current state? No Add PV cash flow from next state in path from a lattice not accounting for option execution Path Enumeration and Valuation 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

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)

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