Fact File 2015

BC Ferries – Governance and Regulation

British Columbia Ferry Services Inc. (BC Ferries) is one of the largest ferry operators in the world, providing year-round vehicle and passenger service on 24 routes to 47 terminals, with a fleet of 35 vessels. In April 2003, the Coastal Ferry Act transformed BC Ferries from a Crown corporation into an independent, commercial organization under the Company Act, with the BC Government as the sole shareholder.  The Company is governed by an independent Board of Directors appointed by the B.C. Ferry Authority.

The BC Ferry Authority is a non-share capital corporation whose purpose is to hold, administer and sell a voting share in BC Ferries, elect directors to the board of BC Ferries and to approve compensation plans for the directors and executives of BC Ferries. The nine-member board of the BC Ferry Authority comprises four directors representing the coastal regional districts, one representing the BC Ferry and Marine Workers Union and four other suitably qualified candidates.

BC Ferries is the operating subsidiary of the BC Ferry Authority.

In addition to the creation of BC Ferries as a wholly-owned subsidiary of the Authority, the Province established the initial capital structure of BC Ferries though the issuance of preferred shares. The Province owns the terminal lands and leases them on a long-term exclusive basis to BC Ferries.

A 60-year Coastal Ferry Services Contract exists between the Province and BC Ferries. The contract specifies service levels and transportation fees (financial support) for 21 out of the 24 coastal ferry routes. The contract is framed around four-yearly performance terms and is subject to amendments for each new performance term coinciding with price cap reviews conducted by the BC Ferry Commissioner prior to the start of each performance term. Performance Term 3 (PT3) runs from April 1, 2012 to March 31, 2016.

Within this framework, BC Ferries has direct access to capital markets and carries responsibility for raising the funds necessary to maintain and replace its assets; the company’s borrowing is therefore not treated as a government debt.

The BC Ferry Commission is a quasi-judicial regulatory agency operating under the Coastal Ferry Act.  The commission regulates the ferry operator on its 24 saltwater routes. The Commission is independent of both the provincial government and of BC Ferries.

The primary responsibility of the Ferry Commissioner is to regulate ferry fares.  The commissioner sets a ceiling or “price cap” on the average level of fares which BC Ferries can charge. The goal in setting the price cap is to balance the interests of ferry users with the interests of taxpayers while protecting the financial sustainability of the ferry operator.

Who’s responsible?

responsible

 Government funding for coastal ferry services

Financial support for BC’s coastal ferry services comprises two distinct elements:

  • A Federal/Provincial Subsidy Agreement, currently $28.4 million per annum
  • Ferry Transportation Fees payable by the Province of British Columbia ($143.9 million in 2013/14), of which $87.5 million underwrites the operation of the 18 minor routes, with the remainder allocated to maintaining the northern ferry routes. No support is payable for the four major routes serving the lower mainland (routes 1, 2, 3 and 30)

In addition, the Province funds a Social Program to provide concessionary travel for BC Seniors, Disabled people and their escorts, Students and travel for approved medical appointments. In 2013/14, Social Program Fees amounted to $30.6 million. Social Program Fees are directly linked to the number of journeys undertaken by qualifying passengers.

Although the Federal/Provincial subsidy increases annually with inflation, payments from the Province were set in 2003 with no automatic indexation. The expectation at the time was that ferry users would be expected to meet any increases in operating cost incurred by BC Ferries.

As a result, Provincial support remained static since 2003, except for a 4% adjustment made in 2009 to offset the capital costs of replacing two northern ferries. Not surprisingly, by 2011 the gap between Provincial support and operating costs was becoming unsustainable, and in 2012 the Province was forced to inject an additional $79.5 million funding for the remainder of PT3.

Provincial Service Fees

The additional $79.5 million in Provincial funding comprised of a “bottom line” payment of $25 million made at the end of 2011-12 to underwrite losses from PT2, and yearly payments of $21.5 million, $10.5 million, $11 million and $11.5 million in fiscal years 2012-13, 2013-14, 2014-15 and 2015-16. Right now there’s no guarantee the extra funding will continue into PT4.

Conditional upon this additional funding for PT3, BC Ferries was tasked to provide $54 million in efficiency savings over the four years and $30 million in net savings from service reductions. Originally, these service reductions were planned to take effect in April 2013, but the Provincial election in 2012 caused the cuts to be deferred for 12 months, for which the Province injected a further $7 million into the service fee for 2013/14. For the minor routes, this represents $87.5 million in 2013/14, though this is projected to fall back to the planned level of $81.7 million in 2014/15 and 2015/16.

Federal and Provincial support to individual routes is allocated according to a notional formula which has no direct relationship to the financial performance of the route – hence there are some routes which produce a surplus at the end of each year and some that show a deficit. There is no obvious logic to the allocation, as the table below indicates:

Support by route

Ferry fares and the Price Capping process

Ferry fares are regulated by the Ferry Commissioner, who is responsible for setting a Price Cap on the average fares paid by ferry users. The process is conducted along the following lines:

  • BC Ferries presents to the Ferry Commission their forecast of expenses, traffic and revenue for the upcoming performance term, assuming the same service level;
  • The Commission reviews the BC Ferries submission, trims it where deemed appropriate, and assuming existing service levels and government service fees, arrives at a preliminary price cap;
  • Government reviews the preliminary price cap, existing service levels and existing contribution, and determines what (if any) adjustments to the service fee and service levels are necessary to arrive at a final price cap;
  • The Commission factors in any adjustments to the service level and service fee, along with any recommended BC Ferries efficiencies, and calculates a final price cap.

The Price Cap represents the maximum permitted increase on the average fare paid across the whole ferry system. The average is calculated from a basket of vehicle and passenger fares, so fares on individual routes may, at times, increase above or below the level of the price cap. Should BC Ferries’ average fare exceed the level permitted under the price capping process for 3 consecutive quarters, the company is required to adjust the level of fares charged to bring the average back to the level determined by the price cap.

This last happened in March 2014. Such adjustments can take the form of a general fare revision, or adjustments (promotions) on specific routes. In previous years, Coast Saver promotions on the major routes have been used to bring down the average fare, however in March 2014 the Ferry Commissioner agreed that the excess income earned over the previous three quarters should be transferred to the Fuel Deferral Account, to reduce pressure on fares caused by rising fuel prices.

average fare index

In 2012, the Province announced an increase of $79.5m in financial support for PT3 (coupled with the targeted efficiency savings from BC Ferries and the savings from service reductions). This enabled the Ferry Commissioner to reduce the level of the price cap provisionally set for PT3 (originally 4.15 per cent for the major routes and 8.23 per cent for other routes). reducing the price cap for 2012-13 to 4.15 per cent for all routes. Price caps for the remaining 3 years of PT3 were subsequently set by the Ferry Commissioner at 4.1%, 4.0% and 3.9% respectively.

Fuel Surcharges and Rebates

The Fuel Deferral Account is a separate regulatory account through which BC Ferries must balance the effect of changes in fuel prices (from those predicted at the start of the Performance Term) by the use of fuel surcharges or fuel rebates. For PT3, the Ferry Commissioner assumed that fuel prices would increase by 2% annually from the base price of $0.933 established at the start of 2012.

At the end of 2013, bulk fuel prices had risen to $0.14/litre above the levels predicted and the deficit on the fuel deferral account was approaching $6 million. In January 2014, BC Ferries imposed a fuel surcharge averaging 3.5% on ferry fares as a means of recovering that shortfall. By the end of 2014, the balance on the account had been substantially reduced and the fuel surcharge was removed on December 17, 2014. Continuing low fuel prices will enable BC Ferries to reduce the balance to zero by mid 2015.

fuel deferral

Increases in ferry fares on Route 19 since 2003

The inevitable impact of the government’s decision in 2003 to freeze the financial support to BC Ferries and recover increasing costs from ferry users has been a continual rise in ferry fares over the period. The charts below show how fares between Nanaimo and Gabriola have risen over the period (excluding any temporary fare surcharges or rebates). Prepaid fares were available as paper tickets until 2009; from 2010 these were replaced by Experience Cards for frequent users.

fares 2003-14

fares graph

Experience Cards

Experience Cards offer [approximately] a one-third discount on standard vehicle and passenger fares for regular users. In order to obtain the discount, Experience Cards need to be preloaded with a cash balance that is designed to be sufficient to cover at least one round-trip on the longest ferry route covered by the scheme, hence the minimum top-up balance is currently $115 to obtain discounts for vehicle and passenger fares, or $65 for passenger-only fares.

In reality, this means that on shorter routes, customers are pre-paying the equivalent of three or four round trip fares, which some find to be unaffordable.

Nevertheless, the take-up of Experience Cards has increased progressively since 2010 and currently about 82% of vehicle fares (and 63% of passenger fares) to Gabriola are purchased using an Experience Card. A comparison of the take-up on a group of similar routes is shown below, demonstrating the high level of take-up on Gabriola.

exp card sales

Experience Cards are transferrable between family members and secondary cards may be registered using a single top-up account to reduce the overall financial burden. Some small communities have provided assistance to low-income families by supporting pooled cards for community use. BC Ferries has suggested similar schemes could work elsewhere.

Ferry Ridership

The combination of rising fares and a general economic downturn has resulted in an ongoing decline in ferry use since 2008. This has been felt throughout the ferry system and has inevitably contributed to the government’s decision in 2013 to impose service reductions on many of the minor routes.

By the end of 2014, traffic had declined almost to 1990 levels, and this has been further impacted by the service cuts to the minor ferry routes in April 2014.

traffic levels

Looking forward to Performance Term 4 (PT4), the combined impact of ongoing traffic decline, further increases in operating costs and, more specifically, the need to invest in a $3 billion programme of vessel replacement and upgrading, will impose additional pressure on the level of government funding required if the target to reduce the Price Cap to the level of inflation is to be delivered.

Almost certainly, the government will be looking to the Ferry Commissioner to prescribe a package that will moderate the level of future fare rises by seeking further measures to improve efficiency and [possibly] further service reductions if the 2014 service cuts fail to deliver the anticipated savings. The Ferry Commissioner is due to announce a preliminary Price Cap for PT4 by the end of March, 2015.

Route 19 Performance

Recent government actions have targeted those routes that are performing below the expected levels in terms of route capacity utilisation [measured by reference to the number of vehicles transported as a % of the vehicle capacity provided].

Performance across the system varies widely, as the following table, compiled before the implementation of the service cuts, demonstrates:

utilisation

For Route 19, the average route capacity utilisation declined slightly from 45.5% in 2012/13 to 44.4% in 2013/14. However, as these charts demonstrate, capacity utilisation varies significantly both by time of day, and seasonally.

r19 utlisation 1

r19 utilisation 2pass ex Gab

pass ex Nan

The following charts show how traffic on Route 19 has continued to decline in recent years.

These charts are updated monthly and the latest version can be viewed on the recent performance page

veh graph

pass graph

The black line [depicting 2013 data] indicates that traffic levels had started to stabilise, but compare the red line [2014] which clearly shows the combined downward impact of the April 2014 service reductions, the 4% fare increase and the imposition of a half fare for BC Seniors.

There is no reliable method to attribute traffic loss to any one of these factors in isolation, though as the following charts demonstrate, the impact varies somewhat between those routes that saw little or no change in April 2014 and those that experienced more significant cuts in service levels (particularly routes 6, 19 and 21).

veh chane

pass change

Inevitably, local factors will have influenced the outcomes, but the data suggests that fare changes (including seniors) contributed to a 1% traffic reduction across the system in 2014. Any additional traffic loss was almost certainly attributable to the service reductions.

Route 19 : Financial & Operational Performance (to March 2014)

financial performance

operational performance

Route 19 : Customer Satisfaction (2010 to 2013)

BC Ferries is required to commission an independent report of customer satisfaction as part of its annual report to the Ferry Commissioner. The results are based on surveys undertaken by the Mustel Group on a sample of ferry routes, including Route 19 to and from Gabriola. The 2013 survey provides the benchmark from which customer reaction to the April 2014 service cuts will be measured.

Customer satisfaction is measured on a range from 0 (very dissatisfied) to 5 (very satisfied).

 

custsat1

custsat2

Route 19 : Recent traffic trends

BC Ferries routinely reports traffic volumes on a monthly basis, with annual reporting based on their fiscal year (April 1 to March 31). One result of this is that BCF’s annual statistics can be difficult to compare year-on-year because of the distortion created when Easter falls in March one year and April the next. Most of the FAC reporting is therefore based upon calendar years, which are more readily comparable.

In the year to December 31 2014, there is clear evidence of the impact of the April service cuts. Year on year, vehicle traffic is down by 5.8%; passenger numbers down by 4%. As already indicated, the combined impact of the April 2014 fare increase and the introduction of half fare travel for seniors is believed to have caused about 1% of that decline; the remainder is almost certainly a direct result of the service cuts.

drivers-nondrivers

Initially, it appeared that there would be a significant shift towards walk-on passenger traffic; however the proportion of non-drivers to drivers on the ferry has risen by just 1% this year to 56%.   Typically, each vehicle transported carries 1.5 passengers, so a reduction of 20,000 vehicle journeys will represent 30,000 lost passenger journeys – almost exactly the number by which passenger journeys have fallen, suggesting no obvious decline in the number of walk-on passengers.

This Fact File can also be downloaded as a pdf file : click here to download

 

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