What is the cost allocation model?

The cost allocation model is a financial model designed to share the costs incurred under the National Land Transport Programme in a given year between vehicles of different types, according to the differences in the costs they generate for the road network.

The model calculates rates of road user charges that would recover those costs. These rates are used to inform the Ministry of Transport’s advice on the levels of road user charges.

How do the existing levels of road user charges relate to the cost allocation model?

The current charges were set in October 2010. On average, they are about 20 per-cent below the levels that the cost allocation model indicated were justified at that time. The extent of under-recovery varies between vehicle types, but in general heavier vehicles currently pay a slightly higher proportion of their allocated costs than lighter vehicles.

Why do charges not precisely reflect the cost allocation model?

The model has no legislative status and the government can also take other factors into account when setting rates of charges. For example, in 2011 the government decided not to increase charges due to economic conditions at the time.

The charges generated by the model are not a precise measure of the actual costs being generated by vehicles at the time they use the roads. They are only an estimate, based on historical expenditure in a given year.

Changes in the pattern of expenditure in the National Land Transport Programme can have a significant influence on the way the model distributes costs. This means that if charges had to accurately reflect the model they would move up and down from year to year in a way that would be unpredictable to vehicle operators.

Why has the model been reviewed?

The review arises from a recommendation of the Independent Review of the Road User Charges System, in 2009. The recommendation was that the Ministry of Transport re-examine the allocation of costs between the use-related parameters in the model. This recommendation reflected concerns that, by international standards, the model allocated a relatively high proportion of costs to the effects of road wear.

What is the “fourth power rule” ?

The fourth power rule is a widely used assumption that the road wear increases by the fourth power of the load transmitted to the road surface through the vehicle's wheels.

Did the review address the “fourth power rule” ?

The fourth power rule was not part of this review. That rule refers to the way road wear costs are allocated between vehicles of different types and weights. The recent review looked instead at the size of the total pool of road wear costs.

How was the review undertaken?

The Ministry of Transport contracted Australian consultants GHD Meyrick and the ARRB Group to carry out the review. The consultants presented a draft report in June 2010, which was distributed to stakeholders for comment. After considering the comments received, the consultants presented a further version of their report, recommending a significant reduction in the amount of costs allocated to road wear by the model.

The effect of this reallocation would have been a redistribution of costs from heavy vehicles to light vehicles. In view of the implications for charges, the Ministry commissioned a peer review of the statistical analysis in the consultants’ report. This was carried out by the UK Transport Research Laboratory in early 2011 and concluded that there were significant limitations with the analysis of road maintenance and construction costs undertaken by GHD Meyrick and ARRB.

The consultants’ report and the peer review were subsequently released to stakeholders. Following further discussions and submissions, the Ministry recommended that only minor changes be made to the model. This was agreed to by the Minister of Transport in March 2012.

What changes have been made to the model as a result of the review?

The main recommendations for change that have been accepted are (in order of significance for charges):

  • updating of the axle reference loads used in the model as indicators of the road wear effects of different vehicle types at equal weights
  • grouping all costs not attributable to a specific measure of road use to “common costs” and allocating these costs to powered vehicles only
  • creating a new cost parameter for a small portion of costs that are attributable to heavy vehicles, but do not vary with weight.

What is the impact of the changes to the model on costs allocated to different vehicles?

There are some changes in the relativities between vehicle types due to the updated axle reference loads and a transfer of costs from trailers to powered vehicles as result of the allocation of the “common costs” category. Overall, the changes to the model result in redistribution of about 2 per-cent of costs from heavy vehicles to light vehicles.

How do the agreed changes to the model affect the charges that will come into force on 1 August 2012?

The changes to the cost allocation model have only a limited effect on the charges being implemented on 1 August 2012. This is because the new charges have been set in two steps:

  1. A revenue neutral transition from the old system of nominated weight charges to the new RUC weight based charges. This involves keeping the revenue collected from each vehicle type at the same level as under the existing system. Effectively, this means that the base charge for each vehicle type and weight band under the new system is determined using the old model.
  2. A 4.1 percent average increase in charges on top of the revenue neutral figures. This increase has been distributed in proportion to the costs allocated by the new model to each vehicle type and weight band.

Will the model still be used to inform advice on charges under the new road user charges system?

The new charges that come into force on 1 August are still derived from the cost allocation model. The main difference is that the new charges involve a greater degree of averaging due to the change from nominated weight to RUC weight. In most cases the charge for a weight band under the new system is an average of the charges that would apply for the related vehicles under the old system.

What further work is being done that may result in future changes to the model?

The NZ Transport Agency is undertaking research on road wear impacts of different axle loadings on pavements used in local road construction. This work is expected to be completed in 2013/14. The findings will be relevant to whether the model continues to distribute costs between vehicles of different weights on the basis of the “fourth power rule”.