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Appendix A British Columbia (Canada) Case Study

A1. Ferry Legislation and Licensing

Introduction

A1.1 The British Columbia, Canada, ferry market has historically been a monopoly, where the Crown Operation BC Ferries has been the sole operator. The Coastal Ferry Act of 2003 ratified the situation. Under the new Act, the ferry market aims to:

• Adopt a more commercial approach;
• Increase efficiency;
• Eliminate cross-subsidy;
• Move towards greater user pay and less subsidies; and
• Charge reasonable tariffs.

A1.2 There are currently two types of ferry routes in British Columbia: designated routes and unregulated routes. The 25 designated routes are under the jurisdiction of the BC Ferry Commission, which regulates the prices and services along these routes. An operator that wishes to operate on the regulated routes must enter into a contract with the British Columbia government.

A1.3 British Columbia Ferry Corporation ( BC Ferries) is the current contracted operator for the regulated routes under a 60-year Coastal Ferry Services Contract (dated April 2003), with the British Columbia government.

A1.4 Eight unregulated routes ( e.g. Bamfield-Barkley Sound-Port Alberni) do not come under the Commission's jurisdiction. BC Ferries is responsible for negotiating and administering contracts with independent operators on certain unregulated routes. Under the Coastal Ferry Services Contract, the Province provides funding to BC Ferries to supplement the revenue from such unregulated services, in return for a guaranteed sailing pattern / schedule. The Ferry Commission, however, has no part in these contracts.

A1.5 During the 2002/03 fiscal year, the major operator BC Ferries (as its predecessor, the British Columbia Ferry Corporation), carried 21.6 million passengers and 8.3 million vehicles, generating CAD$490 million in revenue.

Domestic ferry services

A1.6 BC Ferries operates almost all of the ferry services in British Columbia. This is despite the Coastal Ferry Act, which allows "entities which have been authorised to operate ferries on more routes under contracts with the Province". In truth, only BC ferries is regulated under this Act.

Table A1.1 Main Ferry Routes in British Columbia

Operators

A1.7 Ferry operators who wish to operate in British Columbia can enter the market in three different ways:

• Entering into a contract with the BC Government;
• Sub-contracting with the contracted operator; or
• Operating on the unregulated routes.

A1.8 To date, BC Ferries is the only operator with a contract with the British Columbia Government to operate the designated (loss-making) routes.

BC Ferries
A1.9 Almost all the market is currently served by BC Ferries, a publicly owned independent operation. Historically, BC Ferries was a crown corporation under the name of British Columbia Ferry Corporation. The Government of British Columbia owned the preferred shares (non voting) of the company.

A1.10 On 2, April 2003, after intense examination by the provincial government and the BC Ferries Board of Directors, the company was officially re-launched as a new, independent commercial company and was renamed British Columbia Ferry Services Inc.

A1.11 The British Columbia Ferry Authority has ownership control of BC Ferries, owns the BC Ferries common shares (voting), and appoints its Board of Directors. BC Ferries is a self-financing company with a mandate to widen travel choices for users and to improve the quality of services. The company has to undertake major investments over the next years and this new form is supposed to attract new private investors.

A1.12 Section 69 of the Coastal Ferry Act places specific requirements on BC Ferries. These include:

• BC Ferry must seek additional or alternative service providers to provide, under contract, franchise agreement or otherwise, ferry services on the designated ferry routes in an effort to reduce the costs of providing those services;
• BC Ferries must prepare a plan for seeking such additional or alternative services.

A1.13 The Coastal Ferry Services Contract also designates BC Ferries to be the integrator of ferry services. In that capacity, BC Ferries is responsible for coordinating ferry transport activities in the BC ferry system.

Other ferry operators
A1.14 A ferry operator can operate without having a contract with the Province either by subcontracting with an operator that currently has a contract with the Province ( BC Ferries) or by operating an unregulated route.

A1.15 BC Ferries can subcontract one of its routes with another operator via a franchise. This is encouraged by Section 69 of the Coastal Ferry Act. In each performance term, BC Ferries must seek such additional or alternative service providers in an effort to reduce the costs of providing those services.

A1.16 BC Ferries is responsible for negotiating and administering contracts-for-service (Operator Contracts) with independent operators on the eight unregulated routes. Under the Coastal Ferry Services Contract, the Province provides funding to BC Ferries ($1.7 million per year) flow-through for private operators for the first performance term. BC Ferries channels the subsidy to the operator of unregulated routes to supplement revenue in return for guaranteed sailing pattern/schedules and possibly tariffs.

A1.17 The unregulated routes can sometimes be supplementary to the designated routes. In June 2003, a Request For Proposal was issued by BC Ferries to provide ferry service for the student population on Cormorant Island to attend school in Port McNeill. There were three bids, and an agreement was subsequently reached, where the unregulated service has been provided by a third-party operator.

A1.18 No ferry operator without a contract from the Province is constrained from providing ferry services. However, a major challenge for such an operator is to secure suitable terminals, especially if the operator intends to carry vehicles or freight which may require costly docks and ramps, back-up lands for parking and storage, and highway access. BC Ferries is not obliged to share its terminals, which are leased from the Province.

A1.19 BC Ferries is responsible for renewing or soliciting proposals from operators who are interested in providing services on the unregulated routes at the end of each performance term (five years in the first performance period, 4 years thereafter). At this time, BC Ferries will negotiate with the BC Ferry Commission on the funding arrangement for the unregulated routes, or whether the unregulated route should become regulated. If the letter were the case, the Coast Ferry Services Contract would be amended to include the former unregulated route, and a price cap and services requirements will be imposed.

Legislation

A1.20 The Coastal Ferry Act (2003) ¹ is the coastal and island ferry legislation in British Columbia. Bill 18 of the Act, among other things:

• Establishes and defines the corporate structure of the BC Ferry Authority;
• Defines the relationship between British Columbia Ferry Corporation and the Authority;
• Lays down the rules and structure of the ferry system in British Columbia, including ferry service contracts;
• Defines the responsibilities and rights of the ferry regulator, the Ferry Commissioner; and
• Specifies the obligations of ferry operators.

A1.21 The 60-year contract between the Government of British Columbia and BC Ferries can be considered legislation, as its contractual terms govern rules of engagement in the ferry market. Under the contract, BC Ferries provides passenger and freight services that would otherwise be loss-making, and in return the Government of British Columbia pays BC Ferries a service fee that is a subsidy paid on a per-sailing basis.

A1.22 The current contract was drafted in 2003 ². The contract details fares charged on services, schedules, vessels, and sub-contractual arrangements between BC Ferries and other operators along regulated and unregulated routes.

Regulator

Vessel Safety
A1.23 Vessel safety, as well as environmental, labour, land use, etc. is monitored by different federal, provincial and municipal governmental bodies. FIGURE A1.1 summarises the roles of each of the actors.

Figure A1.1 Roles Diagram

Licensing
A1.24 The British Columbia Ferry Commission is responsible for the economic regulation of fares and services.

A1.25 The Coastal Ferry Act defines ferry operators as the entities that have been authorised to operate ferries on one or more routes under a contract with the Province. To date, the only operator regulated under the Coastal Ferry Act is BC Ferries.

A1.26 There are two other ways in which a ferry operator can operate in this market and not be required to sign a contract with the Province. The first one is through subcontracting or obtaining a franchise from BC Ferries, as the Coastal Ferry Act recommends, on one of its 25 routes. The second way is to operate an unregulated route, which is not under the Ferry Commission's jurisdiction. In this case, BC Ferries is responsible for administering and negotiating these contracts.

A2. Designated Services

Public Interest Services

A2.1 The Coastal Ferry Act (Section 38 Article 1) sets out six principles which the regulator (Commission) has to follow in the course of its regulatory activities. These serve to define what is meant by the public interest in the provision of coastal ferry services:

• Priority is to be placed on the financial sustainability of the ferry operators;
• Ferry operators are to be encouraged to adopt a commercial approach to ferry service delivery;
• Ferry operators are to be encouraged to seek additional or alternative service providers on designated ferry routes through fair and open competitive processes;
• Ferry operators are to be encouraged to minimise expenses without adversely affecting their safe compliance with core ferry services;
• Cross subsidisation from major routes to other designated ferry routes is:
• to be eliminated within the first performance term of the first Coastal Ferry Services Contract to be entered into under this Act, and
• before its elimination, to be minimised.
• The designated ferry routes are to move towards a greater reliance on a user pay system so as to reduce, over time, the service fee contributions by the government.

A2.2 Currently, BC Ferries has the only 60-year Coastal Ferry Services Contract with the Government of British Columbia to provide the designated services.

A2.3 The objective of the contract between BC Ferries and the Government of British Columbia is to ensure that the basic mobility needs are fulfilled. Each line is defined individually (not as a package) and therefore some routes are only for passengers, and others are for cars and passengers.

History of Government Intervention in the Ferry Market

A2.4 The Union Steamship Company of British Columbia Ltd, incorporated in 1889, served the coast extensively until the mid 1950s. Together with the Black Ball Line, which dominated ferry operations in the U.S. Puget Sound directly south (with a BC subsidiary) and the Canadian Pacific Railway's BC Coastal Steamship Service, Union served the needs of the province without major upset until the acceleration of post-war development. The main services to Vancouver Island relied on miniature ocean liners which became inadequate with swelling demand for transport of highway vehicles.

A2.5 The early 1950s saw Union Steamship rapidly expand its cargo fleet, but it started losing long-haul passenger traffic. Expanding air services became serious competition securing, for example, almost all Queen Charlotte Islands passenger traffic. Indeed, passengers were forced to use the airlines when Union's entire coastal operations were strike-bound for two months. In 1956, Black Ball displaced Union to serve Bowen Island. Stiffer competition on main cargo routes, declining passenger revenues and lack of economical fleet replacements contributed to Union Steamship's downfall. Negotiations to increase federal subsidies on Union routes collapsed and the company decided to discontinue passenger services. Union's cargo services continued through 1959 when sold its assets to competitor Northland Navigation.

A2.6 Black Ball and Canadian Pacific's ferry services were also in difficulty. A crisis occurred in 1958, when Canadian Pacific's employees struck for more pay and were joined in sympathy by Black Ball's workers. The BC Cabinet invoked the Civil Defence Act, which allowed the government to take possession of, and use the property and undertakings of, Black Ball for such periods as might appear necessary. (Note that Canadian Pacific's services were under the jurisdiction of the federal government, which elected not to intervene).

A2.7 But Black Ball employees struck again in defiance of the Act and ignored an injunction to return to work. Simultaneously the Premier announced that the government would establish its own ferry service to Vancouver Island forthwith, declaring that the Government of British Columbia is determined that, in the future, ferry connections between Vancouver Island and the Mainland shall not be subject either to the whim of union policy nor to the indifference of federal agencies.

A2.8 Further, in 1959 Canadian Pacific withdrew its night steamers from the Vancouver-Victoria run and reduced winter service. This may have precipitated action by the province which then declared that it was entering the ferry business only to provide a connection between lower Vancouver Island and the Mainland, because of the decline in Canadian Pacific's service.

A2.9 The government scheduled its entry into the ferry business for the summer of 1960 with a service from Tsawwassen to Sidney (for Victoria). It constructed two roll-on-roll-off vessels in provincial shipyards and terminals were built. Initially, private competition continued in parallel, with Black Ball serving the Horseshoe Bay to Nanaimo and Horseshoe Bay to Langdale runs. The government bought out Black Ball in 1961, acquiring five of its vessels, and also acquired five small vessels of the Gulf Islands Ferry Company. Canadian Pacific continued but in 1962 cut back its services on the Vancouver-Nanaimo run, eventually retiring to freight only services.

A3. Operation of the Public Interest Services

A3.1 The Coast Ferry Services Contract specifies the routes, fares, and schedule of the designated routes.

Routes

A3.2 The Government of British Columbia is responsible for defining the routes and therefore signing the one contract that covers the routes as a network. If a route within the network is self-financing, no money is given for that specific route.

A3.3 BC Ferries receives public funds for 22 of the 25 routes it operates, under a single contract. Through this contract, the government pays BC Ferries a defined annual subsidy, or "service fee", in return for making specified numbers of ferry sailings on specified routes, with a maximum total value of $106 million per year. The terms of this long-term contract are to be reviewed next in 2008, and thereafter every four years.

A3.4 The three major routes (the three routes between Vancouver Island and the BC Lower Mainland) are self-supporting and receive no service fee from the provincial taxpayer funds.

A3.5 BC Ferries can subcontract one of its routes to another operator via a franchise. It could also negotiate a contract for one of the other unregulated routes. BC Ferries operates almost all the routes, both those that are financially supported by the government and the three that are not.

Fares

A3.6 The BC Ferry Commission regulates ferry fare levels on the 25 routes operated by BC Ferries. These routes are divided into seven groups. The largest group has 16 routes in it, while the smallest groups have only one route. Generally, the routes in a given group have common characteristics. For instance, the "major route group" comprises the three busiest routes which connect the British Columbia Lower Mainland with Vancouver Island.

A3.7 Every three months, BC Ferries must report to the Commission the actual average level of fares paid by its customers, reporting a single figure for each of the 7 route groups. The figure is a weighted average for all the routes in the group, combining all the different traffic types (passengers, autos, trucks, buses etc.), the different times of the week (weekend and midweek), the different peak/shoulder/off peak fares charged in that quarter, and other variables. This is a complex calculation and the Commission dictates the raw data, formulas and assumptions that BC Ferries must use.

A3.8 BC Ferries has the freedom to restructure the fares within a route group ( e.g. offering special discounts, charging premiums, making package offers). For the purposes of regulation, only the weighted average of all these fares (for a given route group) is taken into account.

A3.9 In addition, the Commission computes a maximum permitted level of average ferry fares for each route group. The Coastal Ferry Act sets the initial cap at the level of the fares when the Act was passed, and it allows the price cap to rise annually by 2.8% for the major route group, and 4.4% for the other six route groups through the year 2007. Starting in the fall of 2006, the Commission will begin a review process to establish the price caps for 2008 onwards ³.

A3.10 BC Ferries must not allow the average level of ferry fares for a route group to rise above its price cap. If it does so, and after a short grace period, the Commissioner can order BC Ferries to reduce its fares. If BC Ferries fails to do so, the Commissioner can reduce the price cap as a penalty to BC Ferries. Since the start of this method of controlling ferry fares in April 2003, BC Ferries has in fact kept the average fares at or below the price caps, for all seven groups so the Commission has not had to take any enforcement action.

A3.11 The Commission can make adjustments to the price cap under extenuating circumstances ( e.g. if fuel prices take an extraordinary jump and BC Ferries applies to the Commissioner for relief). To date, BC Ferries has not made such an application.

Service Levels

A3.12 Minimum service requirements are set by the Government of British Columbia in the 60-year service contract ⁴. The contract defines for each route the core service requirements, which consist of the hours of operation, number of round trips per day, during peak and off peak periods, total number of round trips to be delivered, etc.

A3.13 The Coastal Ferry Act says that BC Ferries must not reduce service on a route unless it first obtains the authorisation of the Commissioner.

A3.14 BC Ferry Commission regulates the service provided on a ferry route in a number of ways:

• It monitors BC Ferries' adherence to its contract with the Province, which commits BC Ferries to provide a specific number of sailings per day on each of its 25 routes. There is an allowance of 20 consecutive days and/or a cumulative total of 30 days each calendar year for Temporary Service Disruptions which fall within the following categories:
• Vessel or dock breakdown or mechanical failure
• Situations that compromise safety
• Tasking of vessels for emergency response
• Bad weather
• Maintenance to vessels or docks
• Sinking or grounding of vessels
• Fire
• Labour disputes, except lock-outs initiated by BC Ferries
• It requires BC Ferries to report quarterly on its on-time performance for each route, and on the number of overloaded sailings.
• BC Ferries must submit its annual Customer Satisfaction Tracking Survey to the Commission.
• BC Ferries cannot stop serving a route or cut back service on a route without the Commission's permission.

A3.15 The Coastal Ferry Services Contract permits BC Ferries to apply to the Commission for authorisation to discontinue a route after April 1, 2006, but not before. To date, BC Ferries has not applied for permission to stop serving any of its 25 routes.

A3.16 According to the Coastal Ferry Act, in assessing an application for authorisation to discontinue service, the British Columbia Ferry Commission must consider whether any of the following applies:

• Another form of affordable transportation exists or is likely to be established to link the locations served by the designated ferry route;
• It is possible to operate the designated ferry route economically at an affordable tariff level;
• The Province is willing to reduce the core ferry services required on, or increase its service fee contribution for, the designated ferry route;
• An extraordinary drop in traffic has occurred because of a change in the local economy or some other unanticipated factor.

A3.17 The Commissioner must not authorise the discontinuance of a designated route unless :

• BC Ferries has made a suitable economic case for the route's discontinuance
• The Commissioner is satisfied that increasing tariffs on the route would not, because of a reduction in user demand or otherwise, result in revenues on the route increasing to the extent necessary to enable economic operation of the route.

A3.18 In some situations, BC Ferries may temporarily cut back on the number of sailings it has agreed to make in its contract with the province. The Commissioner may authorise a reduction in service if the Commissioner is of the opinion that it is for a temporary period and for an extraordinary situation.

A3.19 So far, the Commission has given such authorisation once, on the Tsawwassen-Nanaimo route.

Carrying statistics

A3.20 The Government of British Columbia provides in the contract with BC Ferries very detailed statistic of each of the routes regulated under the contract ⁵.

Vessels

A3.21 BC Ferries' fleet is made up of 35 vessels, representing a wide range of sizes and classes. Some these vessels can accommodate up to 2,100 people and 470 vehicles, some smaller ones carry 133 people and 16 vehicles. In addition, BC Ferries also own fast ferries.

A3.22 Fast ferries, however, are believed to add pressure on the financial viability of BC Ferries' operations on the high-traffic routes, e.g. the Departure Bay- Horseshoe Bay route.

A4. Financial and Commercial Support

Financial Support

A4.1 The financial support given by the Government of British Columbia to BC Ferries is referred in the contract as "Service Fee". This service fee has three components.

A4.2 The first component is the "Ferry Transport Fees", not exceeding $91.9 million in total, for ferry transportation services on the routes defined in the contract (Designated Ferry Routes). Each of the routes has a different subsidy amount, adding up to the contracted lump sum.

A4.3 Secondly, the service fee includes a reimbursement to the operator ( BC Ferries) in whole for any forgone revenue with respect to provincial social program discounts, e.g. students, disabled people, senior and medical travel assistance program discounts.

A4.4 There is also an "unregulated route fee", which is financial support for the unregulated routes up to $1.7 million per year for the first performance term (first 5 years). This amount has to be paid by BC Ferries to the companies which operate the ferry unregulated routes. In the event that aggregate costs payable by BC Ferries to those operators exceeds $1.8 million per year, the Province will pay an additional fee equal to the excess costs above $1.8 million to a maximum of $200,000.

A4.5 In addition, the 22 subsidised routes also receive provincial taxpayer support.

Ferry Transport Fees
A4.1 A "Ferry Transportation Fee" is applicable to the 22 regulated (loss-making) routes, amounting to $91,9 million. These amounts are defined in the contract.

A4.6 This fee is paid monthly to BC Ferries. There is a quarterly reconciliation between the operator and the government according to the service provided in that period.

Reimbursement of Social Program Discounts
A4.7 Reimbursements for the "Social Programs" are made to BC Ferries 30 days after receiving the invoice.

Competition

A4.8 Regulated services do not overlap with unregulated ones.

A4.9 BC Ferries has an exclusive contract for the subsidised services to these off-shore islands, and face no competition in that market. The contract itself is a barrier to market entry, hence competition, by other operators.

A4.10 However, the Coastal Ferry Act (Bill 18, Part Three Division One) does stipulate that the Minister may, with the approval of the Lieutenant Governor in Council, enter into one or more contracts with one or more persons under which the Minister agrees, on behalf of the government, to authorise the other contracting party to operate one or more ferries on one or more specified ferry routes.

A4.11 BC Ferries also face little competition in the unregulated market, because they have advantage over other operators in the use of ports and harbour facilities. A major challenge for other operators to enter the unregulated market is to secure suitable terminals, especially if the operator intends to carry vehicles or freight which may require costly docks and ramps, back-up lands for parking and storage, and highway access. BC Ferries is not obliged to share its terminals, which are leased from the Province, with other ferry operators.

A4.12 During 2003/04, BC Ferries received a number of inquiries from interested parties who wanted to operate on the Designated Ferry Routes. However, no unsolicited proposal was received.

A4.13 BC Ferries did have a request for a proposal in December 2002 for its passenger-only service from Langdale to Gambier and Keat Islands. The results of the RFP demonstrated that another operator could deliver the service at 5% to 10% cheaper than BC Ferries.

A4.14 In June 2003, an RFP was issued to provide a ferry service for the student population residing on Cormorant Island to attend school in Port McNeill. Three bids were received in response to the RFP, of which two proposals offered vessels which met the vessel capacity requirement. An agreement was reached with the successful proponent and service has been provided by this third party operator since August 22, 2003.

Cost Risks

A4.15 Under Section 42 of the Coastal Ferry Act , BC Ferries can apply to the Commission for a fuel surcharge on fares.

A4.16 Instead of doing so in times of highly volatile fuel prices, BC Ferries has asked for a change in their accounting procedure to keep track of variations in fuel costs above and below a "set price" in a temporary "deferral account". Only the "set price" will be used in reporting expenses appearing on the company's income statement, so its reported earnings will be smoothed from the effects of fuel price changes. If in future fuel prices fluctuate back to earlier levels, the balance in the deferral account may disappear. If the balance does not, a fuel surcharge (or, in theory, a discount) or other adjustments ( e.g. at the time of the next general price cap review effective 2008) would be applied to eliminate it. This application was approved by the BC Ferry Commission ⁶.

A5. The Contract

Structure of the contract

A5.1 The contract for the bundle of 25 routes is a net-cost service contract with the Province of British Columbia (the government) and BC Ferries. Through this contract, the government pays BC Ferries a defined annual subsidy (service fee) in return for making specified numbers of ferry sailings on specified routes, with a maximum total value of some $106 million per year.

A5.2 The terms of this long-term contract are to be reviewed next in 2008, and every 4 years thereafter.

A5.3 BC Ferries takes the risks from the operation. However, the subsidy amount (service fee) could be reviewed if any extraordinary circumstances arise. The Ferry Commission is responsible for evaluating whether this review is necessary and in what quantity.

Tendering

A5.4 No tender competition was held for the current, 60-year contract that was signed in April 2003. BC Ferries were awarded the contract as a result of historical circumstances.

A5.5 Other operators, however, can get into the market either as subcontractors to BC along one or more of the designated routes, or on one of the unregulated routes.

A5.6 An RFP in 2002 for the passenger-only regulated Route 13 (Langdale to Gambier and Keats Islands) resulted in a contract between BC Ferries and the successful proponent.

A5.7 In June 2003, an RFP was issued to provide ferry service for the student population on Cormorant Island to attend school in Port McNeill (unregulated route). Three bids were received, and two of which met vessel and capacity requirements. An agreement was reached with the successful proponent and the third-party operator has been providing the service since August 2003.

Anticipated Changes

A5.8 Future activities are planned for the BC Ferry Commission. These include the review of price caps, service level changes, and policies on asset deployment ⁷.

A5.9 In addition, the Commission will be making a determination on the removal of a route designation for a route upon which sufficient competition exists so that regulation of that route is no longer necessary.

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