A Brief Introduction to
Least Cost Planning

Least cost planning (LCP), also called least cost analysis, is the best practice1 technique for making decisions about transportation or other (e.g., energy or water) infrastructure. It results in the optimizing of both the aggregate level of expenditure on transportation infrastructure within a region (usually an urban area) and the mix of individual projects that comprise that investment.

At its core is cost-benefit analysis, which has long been used by economists to evaluate and prioritize individual projects.2 LCP differs from cost-benefit analysis, however, in that it evaluates the entire range of alternatives and treats them all on an equal footing3. This includes looking not only at all of the alternatives on the supply side, but also at all of those on the demand side. That is, it considers demand management solutions in addition to just strategies to increase supply or capacity.

In the case of transport, LCP also reduces the bias that has typically existed in the U.S. towards over-investment in road and parking capacity by giving full consideration to alternative modes of transportation as well as to transportation demand management (TDM). This can result in not only a lower total cost to consumers but also in greater consumer choice, enhanced mobility and increased overall consumer satisfaction.

TDM encompasses a wide range of measures, Among them are improvements in mass transit that more effectively utilize the existing infrastructure4, road congestion pricing5, changes in urban design6 and the encouragement of telecommuting. Such measures are often the most cost-effective solution to congestion7 and other transport and environmental problems.

LCP was first developed for use in energy planning. During the past several decades decision makers became increasingly aware of the fact that in many cases the net benefit to society could be greater by investing in relatively simple conservation measures (e.g., requiring the use of double glazed windows and promoting the use of energy-efficient appliances) rather than by constructing costly new electrical generation and transmission capacity.

Because the concept is still relatively new and there are typically a variety of obstacles to its implementation, the full range of TDM options has rarely been applied to any urban area, and thus the effects have usually been relatively minor to date. One of these obstacles is powerful business interests, such as construction contractors, that generally stand to gain far more from construction than from demand management. Likewise, local government officials often can personally benefit (e.g., faster promotions, larger staffs and favors from private sector contractors) far more from promoting large investment projects instead of TDM.

There are also legal and institutional barriers to implementing TDM, including the fact that many states restrict the use of gas tax revenues to road expenditures. In addition, many transportation professionals and decision makers are not familiar with LCP, and often they do not even truly understand cost-benefit analysis.

However, this situation may be gradually changing. One reason is the rapid rise in the costs and environmental effects of major transportation infrastructure projects in recent years (such as Boston's notorious Big Dig highway construction project) and the growing realization that viable alternatives have been given less attention that they might deserve. Also important have been the increasing (but still small) familiarity with LCP and changes in legislation, both at the state and federal level, that are facilitating its implementation and in some cases even making its application mandatory.

In the State of Washington, regional transportation planning organizations have been required (RCW 47.80.030) from July 1, 1994 to apply LCP to transportation infrastructure planning.7 However, implementation has seriously lagged. This is clearly illustrated by the massive Roads & Transit (RAT) measure scheduled for the November ballot and the Puget Sound Regional Council's (PSRC) severely flawed BNSF Corridor Preservation Study9, neither of which has even made any pretense at employing LCP. In fact, neither has even attempted to use cost benefit analysis -- or any recognized form of economic analysis!

A claimed lack of understanding of LCP is sometimes used by regional planning agencies as an excuse for failing to utilize it in infrastructure planning. However, this is not a good excuse. For one thing, it is not that difficult to understand LCP's basic concepts, particularly by someone with even a modest background in economics. Moreover, even a good faith attempt to use LCP, or to use cost-benefit analysis at a very minimum, would likely produce results far superior to completely ignoring it.10

1Best practices refers to techniques or methodologies that have been shown to be the most effective and are regarded by a consensus of experts in the field as models for others to follow. The term is commonly used in the fields of business management, medicine and software development, and it is increasingly being used in government as well. Best practices can, and frequently do, evolve over time.

2Cost-benefit analysis is a tool that is widely used by economists to evaluate projects. It basically consists of comparing the total costs of a project with the total benefits. Both costs and benefits include not only easy-to-quantify monetary items but also other items which can be more difficult to measure, including effects on the environment and public health (e.g., traffic accidents, effects of exhaust gasses on heart disease, cancer and other diseases, and physical fitness). Those projects for which the aggregate costs exceed the aggregate benefits obviously will make society worse off and should thus be rejected. Among those projects for which the benefits exceed the costs, those with the highest benefit to cost ratios should be selected.

3The term equal footing means that all of the alternatives are treated solely on the basis of their economic and other merits (e.g., environment and public health) and not as more or less worthy on ideological grounds or because of institutional restraints or political factors. For example, road projects should not be given preferential treatment just because a planning agency is dominated by road advocates or because laws exist that prevent gas taxes from being used for other transport modes.

4Examples with regard to bus service include the marking of special lanes for busses, modifying traffic signals to give priority to busses, increasing the frequency of service and increasing the efficiency of fare collection. These are components of so-called bus rapid transit (BRT).

5Road use pricing can reduce congestion by charging drivers to use specific roads or areas according to their level of congestion (or on the basis of the time of day and day of the week as a convenient proxy). It also has other benefits, including reducing pollution, speeding up busses and other surface transit, and facilitating movement by ambulances, fire trucks and other emergency vehicles. In addition, the considerable surplus funds generated from road pricing (i.e., after paying for the costs of implementing it) can be used to upgrade transit, thereby providing an improved alternative for drivers.

Recent advances in technology have greatly reduced the costs and inconvenience of implementing road use pricing. They include advanced cameras and other electronic devices for detecting and recording the entry of individual vehicles into specific areas at specific times. Road pricing is now being employed in central London and Singapore as well as on some suburban toll roads in the U.S.; there has been growing interest in extending its use to other major cities as well, both in Europe and in the U.S. (including in New York City and San Francisco).

6An example of a change in urban design is the encouragement of the development of high density neighborhoods, which can make both walking and transit more convenient and thereby reduce the demand for more expenditure on roads. This can be accomplished at low cost by such measures as changes in zoning regulations, in building codes and in tax laws as well as the establishment of green belts and strictly enforced urban-rural boundaries. For example, the requirement (which is nearly universal in the U.S. except for a handful of the largest cities) to provide a certain number of parking spaces per inhabitant for new construction could be relaxed or eliminated, thereby not only promoting walking and transit use but also saving space and lowering housing costs. Also, the implementation of requirements such as for improved soundproofing on new residential construction would help make higher density living more attractive for many people.

7In fact, in some cases such measures are the only solution to congestion. It has been demonstrated in city after city that constructing more road capacity is typically not an effective solution to reducing congestion, as it only encourages more use of cars.

8Least cost planning is defined in the Washington Administrative Code (WAC 468-86-080) as: "The methodology shall consider direct and indirect costs and benefits for all reasonable options to meet planning goals and objectives. The methodology shall treat demand and supply resources on a consistent and integrated basis. The regional transportation planning organizations shall consult the guidelines set forth by the department for implementing a least-cost planning methodology. Regional transportation plans should incrementally incorporate least-cost planning methodologies as these concepts are developed. The regional transportation plan adopted after July 1, 2000, shall be based on a least-cost planning methodology appropriate to the region."

9For more about this report, see Eastside Rail Now's Testimony at the September 13 PSRC Board Meeting.

10One reason for this is that cost-benefit analysis can initially weed out projects for which there would be a net loss to society (i.e., for which the costs exceed the benefits), thereby allowing planners to at least focus on those projects for which the benefits exceed the costs. An outstanding example is Sound Transit's proposed $3.9 billion East Link light rail line between Seattle and Bellevue, for which a preliminary (and still unpublished) study by Eastside Rail Now! found that the costs exceed the benefits by a large margin and that there are far more worthy (i.e., the benefits greatly exceed the costs) transport projects in the region that it is ignoring (namely, retaining and utilizing the Eastside railroad). Although Sound Transit clearly has the funds (and presumably also the capabilities) to conduct such a study (or to hire an unbiased outside consultant to conduct such study), it has steadfastly refused to do so, apparently for political reasons. (This comment is not meant to pick solely on Sound Transit, as other transportation organizations in the region have likewise failed to use LCP and to perform true cost-benefit analysis.)

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This page created September 19, 2007.
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