Letter to BC Ferry Commissioner - June 28, 2011

Letter to BC Ferry Commissioner - June 28, 2011

Posted in:

        Saturna Island Property Owners Association 
      P.O. Box 27, Saturna, British Columbia VON 2Y0

June 28, 2011

BC Ferry Commission 
RPO Hillside
P.O. Box 35119
British Columbia
V8T 5G2

Attention: Mr. Mr. Gordon Macatee

RE: Response to Request by the Commissioner for Comments on the Price Cap 
Decision, BCFS's Response and well as Materials Supplied to the Commissioner by 

Dear Sir:

The Satuma Island Property Owners' Association (SIPOA) wishes to provide comments 
to you in your capacity as the BC Ferry Commissioner, primarily regarding the input to 
be provided to BCFS by the Commissioner in your deter ruination of price caps for 
Performance Term Three. SIPOA represents close to 50% of the property owners of 
Satuma Island. We have been guided by the instruction of the Commissioner to 
comment as per item M of the Commissioner's Price Cap Decision, which reads as 

    The commissioner is today publishing this Order and the attached Report and is 
    requesting comments from the public through June 30, 2011; and, as required by 
    s.40(2)(a.1) of the Act, he is also requesting public comment on BCFS's 
    submissions, and its Annual Reports and Quarterly Reports under s.68(3).

SIPOA comments recognize the restrictions placed on the Commissioner's mandate, as 
guided by the Coastal Ferry Act.

For the record, SIPOA will provide extensive commentary over the next 5 to 6 months as 
input to the review of the Coastal Ferry Act, which SIPOA believes to be deeply flawed 
and highly discriminatory regarding the basic access needs of rural British Columbian 
families, and, in particular, to those serviced by BCFS's minor routes designation.



The Coastal Ferry Act provides principles to guide the Commissioner in his or her 
determination of price caps. SIPOA finds it of interest that the Act refers to "ferry 
operators" in its guiding principles, where in fact, after 8 years, there is still really only 
one operator.

However, SIPOA also acknowledges that the Commissioner, in performing his role, is 
bound by the principles set out: priority (our bold font) for the financial sustainability of 
the ferry operator; a move to a user pay system; no cross-subsidization from the major 
(profitable) routes to other routes; encouragement of a "commercial approach" 
approach; and that operators be encouraged to seek additional or alternate service 
providers (i.e., to find competitors to themselves).

Given the constraints imposed by the Coastal Ferry Act, SIPOA believes the 
Commissioner has done a reasonably good job (with one important exception), in also 
attempting to consider the interests of ferry users, which is a consideration included in the 
Act but subordinate in order to the principles previously noted.


SIPOA believes the approach to the review as undertaken by the Commissioner is also 
reasonable. However, SIPOA will comment on the Assumptions for Taxpayer Funding as 
provided to the Commissioner by the Province for Performance Term 3 (PT3). While 
SIPOA is pleased that the roughly $4.6 million Provincial Service Fee and Federal 
Subsidy from Route 3 (Horseshoe Bay to Langdale) is being transferred to the Northern 
and "Minor" routes, it does not understand the Province's logic in directing the 
Commissioner to apportion the subsidy between the Northern and "Minor" routes in such 
a way as to balance the price cap increases of the two route groups.

This direction from the Province ignores the increase in the Provincial Service Fee of 
88%, or $22 million, in 2006 for the Northern Routes, as well as the payment of $5.5 
million to the Northern Routes in 2007. The "Minor" routes have seen 0% increase in the 
Provincial Service Fee and have received no additional provincial funding to offset rising 
fuel costs.


The Information Submitted by BCFS

SIPOA assumes that the information made public by the Commissioner from BCFS on 
September 30, 2010 was essentially all of the information provided to the Commissioner. 
The Commissioner refers to "the Company's responses to follow up questions". Without 
knowledge of the number of questions and responses, SIPOA cannot possibly comment


on the adequacy of BCFS's information. However, based on the information provided 
publicly, and on which the Commissioner has sought comment, SIPOA finds BCFS's 
information (including publicly available annual and quarterly reports) very inadequate in 
a number of important areas.

BCFS has provided very detailed information in some areas, and virtually no relevant 
information in other areas. Passenger, vehicle and related forecasts comprise over 36 
pages that describe the results and methodology used in developing forecast passenger 
loads. And yet the end result is deemed inconclusive due to the large number of 
unconstrained variables so BCFS suggests using the fiscal 2010 forecast (the 12 
months ending March 31, 2011). The use of this forecast holds special meaning to 
SIPOA, which will be covered later in this commentary.

Productivity Improvements

In BCFS's submission regarding "productivity improvements", there is virtually no 
relevant empirical data provided. We are advised of numerous investments that produced 
a reduction in direct costs. No mention is made of the size of investment, change to 
indirect costs or other collateral impacts. It is impossible to determine if there were a net 
productivity improvement.

Under technology enhancements, various systems have been put in place, new buildings 
purchased, and websites developed -- but there is no mention of the capital cost and/or 
expense associated with these investments, and only limited and qualitative references to 
savings. Without a business case, there is no measure of productivity improvement.

In the area of fuel conservation, no quantitative information is provided, but we are told 
that a wide variety of fuel conservation measures have been put in place and that BCFS 
vessels burn biodiesel. We don't know how much was invested, nor what the savings 
were, nor do we know if biodiesel is less expensive or more expensive than regular diesel 

Another example of a so-called productivity improvement that lacks a business case (and 
there are unfortunately many such examples) is BCFS's claim that redesigning interiors 
on vessels improved "passenger flow and onboard spending", citing an increased 
expenditure per passenger of $1.30. This is absolutely meaningless in the context of 
improved productivity. Of somewhat more relevance would be the (total annual) margin 
generated by the expenditure against the capital cost of the upgrade (allocated to 
improved retail space). Without that information, the "redesign" could be a very poor 
business decision, with a negative return on capital employed. SIPOA has heard the 
views of its members on the $900,000 rebranding of our local Mayne Queen ferry, and 
the response has been uniformly and loudly negative.

BCFS lauds its investment in BC Ferries Vacations, and includes in its productivity 
section the "$1 million investment in downtown Vancouver, complete with a 37-foot 
interactive media wall display". BCFS claims, "It is expected that this will expand the


Company's market reach and increase BC Ferries' profile in the Lower Mainland and 
within the tourism industry". Yet SIPOA asks this: Where is the productivity 
improvement? What is the total operating cost of BC Ferries Vacations? How many staff 
had to be hired and trained in this new venture? At what cost? What revenues can be 
attributed to BC Ferries Vacations? SIPOA suggests that there is no information showing 
BC Ferries Vacations to be a productivity improvement.

SIPOA posits that BCFS had virtually no resident business expertise in "vacation 
packaging" that would justify this investment, whereas many private companies that have 
operated for years in BC do, and have long provided such services. Instead, BCFS uses 
its position as a subsidized public corporation to enter into a (crowded) marketplace in 
which it has limited expertise. And this same "innovative" approach is also included in 
the BCFS's productivity section under "drop trailers", where the commissioner found 
BCFS was using its subsidy to price below the private sector.


BCFS suggests that the HST has already added $28 million to its planned capital 
expenditures in PT3, and $5 to $6 million in operating costs. BCFS has not identified any 
savings that may accrue to it from implementation of the HST other than to say the 

    It is unclear as to what extent, if any, that offsetting benefits from the change to 
    HST will be passed on to BC Ferries by the Company's suppliers and contractors

SIPOA wonders if BC Minister of Finance Hon. Kevin Falcon would agree with BCFS's 
position. As a large corporation purchasing significant quantities of goods and services 
within the province, there are really no identifiable savings and only significant 
identifiable costs associated with the HST. This appears to be, in SIPOA's view, a 
disingenuous representation of the application of HST's impact on BCFS.


SIPOA's singular comment in regard to Alternate Service Providers is that BCFS has 
failed to find such alternatives. It comes as no surprise to SIPOA that an incumbent, in 
control of basic terminal infrastructure and an existing subsidized fleet, would have 
difficulty finding "alternatives" either to put itself out of business or to negatively impact 
its existing business. It is no wonder to SIPOA that time after time, BCFS finds itself "the 
lower cost service provider".



SIPOA notes that BCFS has indicated that Transport Canada revisions to staffing levels, 
as well as revised sewage disposal costs have had, and will continue to have, a substantial 
negative effect on its financial performance over the term. SIPOA notes with interest that 
BCFS has declined to provide the specific impact, either in increased capital or operating 
expenses, of such revisions. BCFS capital associated with revised sewage is conveniently 
aggregated with terminal improvements, vessel upgrades, dock rehabilitation and other 
capital expenditures. BCFS declines to share the specific capital costs for "competitive" 
reasons, which SIPOA finds to be without merit, as the specific capital costs will be 
available upon completion. And nowhere are the incremental crewing costs associated 
with revised Transport Canada regulations identified. This information is available to 
BCFS, it identifies it as significant, yet BCFS chooses not to provide it. The omission is 

BCFS's performance insofar as adhering to its capital plan in PT2 is unimpressive. 
Actuals are over $100 million higher than forecast and would be more than double that 
had BCFS not applied for "duty remission". BCFS crows proudly about its application 
for duty remission, stating "BC Ferries bore the cost of this initiative but 100% of the 
value is being passed on to the benefit of the customer and/or the taxpayer." It strikes 
SIPOA that applying for duty remission is a nonnal course of business and not something 
to single out as an extraordinary initiative.

SIPOA notes one element of BCFS capital spending which is extraordinary for a 
company failing to meet its capital plan, in a market BCFS claims is structurally 
changing and shrinking, and in an acknowledged poor economic climate — that is, sale of 
its headquarters for $9.3 million and replacement with a new headquarters with a capital 
lease value at $50 million. This might be appropriate for a highly profitable company in a 
growing market, but even then one would expect a proper business case and return on 
investment criteria to justify such actions. Apparently BCFS, notwithstanding 
extraordinary executive staffing and compensation levels (to run a monopoly with 
defined service levels), does not feel compelled to provide such information, or otherwise 
to justify its decision. It is reasonably transparent that BCFS wanted new offices, so they 
went and got them — assuming, of course, that ferry rates would be adjusted upwards to 
provide the stream of revenue necessary to fund this decision.


SIPOA has significant reservations about the accuracy of the route statements provided 
by BCFS to the Commissioner and, in particular, the statement pertaining to Route 9. 
This is relevant due to BCFS's position that (ferry) traffic cannot be modelled accurately, 
and that the fiscal 2010 forecast forms the basis for the PT3's yearly forecasts by the 


The Route 9 Statement provided by BCFS to the Commissioner shows a forecast 24.2% 
DECREASE in operating revenue in fiscal 2010. Almost all other routes show either flat 
revenues or increased revenues, which is somewhat intuitive given the large fare 
increases provided BCFS by the Commissioner. In the prior year (Fiscal Year 2009), 
Route 9 recorded an increase in operating revenues of 8.4%, so this is not an extension of 
a downward trend. Nor does it appear to be an anomaly regarding how BC Ferries books 
revenues as nothing appears in BCFS's public information that refers to any significant 
change. Interestingly, and notwithstanding a massive increase in revenues (and 
presumably traffic), BCFS is forecasting a 20% increase in operating expenses for Route 
9. No other route is forecasting this size of increase.

The massive shift downward in revenue, coupled with wildly escalating operating costs, 
effectively doubles the loss on Route 9 (from $7 to $14 million annually). This may have 
influenced the BCFS's recommendation for the elimination or restructuring of Route 9, 
or vice versa.


SIPOA is very disappointed that the Commissioner has generally endorsed BCFS 
initiatives, specifically the elimination or restructuring of Route 9. Elimination of Route 
9, according to BCFS's own submission, would increase transit time by "3 or 4 times" 
the current transit time, and Mayne Island, Saturna Island and Galiano Island would be 
most affected.

SIPOA believes the Commissioner has erred in supporting this initiative without 
identifying the elimination option as "not in the interests of ferry users". Tripling or 
quadrupling transit time is effectively abandoning realistic access.

BCFS provides access from Tsawwassen to Duke Point (Nanaimo) at an annual loss of 
$30 million, yet one can access Nanaimo from Horseshoe Bay, or alternately, via Swartz 
Bay from Nanaimo. These alternate options add an increment of 0.75 times additional 
travel time.

SIPOA notes the irony of both of BCFS's position on Route 9, but also that of the 
Province. It has been perversely suggested that the solution to the Route 9 dilemma is 
another act of gross negligence on the part of BCFS — such as the sinking of the Queen of 
the North. This tragedy resulted in a massive subsidy increase to that route, and 
additional monies to cover fuel. SIPOA obviously doesn't support this — the sinking of 
the Queen of the North resulted in the loss of life. But SIPOA questions the efficacy of 
supporting routes that offer "cruise-ship" amenities when basic access to the Southern 
Gulf Islands from the Lower Mainland is considered for elimination.

SIPOA agrees that restructuring Route 9 has merit if costs can be reduced without 
significant impairment of service.



In summary, SIPOA finds that the Commissioner has, given a very narrow mandate, done 
a reasonably good job of interpreting the sparse, conflicting and questionable data 
provided by BCFS. The elimination of Route 9 is one exception, and one with which 
SIPOA cannot agree.

As far as BCFS's response to the Commissioner regarding his price cap decision is 
concerned, SIPOA finds little or no merit to BCFS's 48-page treatise, which appears 
geared solely to maintaining BCFS poor record of cost control, capital planning, dubious 
reporting and unsupported productivity claims, while expecting ever-increasing rates, 
oblivious to the impact on the BCFS's customer base.

Claims that the Commissioner is in breach of the Coastal Ferry Act for using historic 
book value on minor routes and replacement value for major routes are geared solely to 
increase BCFS revenue through (statutory) rate increases. There is no cross-subsidization, 
as most of the major routes have newer vessels, the minor routes do not. SIPOA finds the 
Commissioner is using good sense and prudent judgment, particularly in light of the 
uncertain future facing minor route vessels and their configuration (and potential 
financing). SIPOA wonders how much BCFS spent in preparing their 48-page "rebuttal" 
to the Commissioner's price cap decision, including legal fees, to provide argument as to  
the Commissioner's jurisdiction — money that would have been better spent improving 
vessel reliability and BCFS cost containment, if nothing else.

SIPOA also advises the Commissioner, and the Province, of its intent to provide more 
fulsome comment and a suite of suggested solutions in connection with the 
Commissioner's review of the Coastal Ferry Act. SIPOA's comments will reflect a 
predisposition for support of families, which we understand the current government 
believes to represent a foundation for development of a healthy economic and social 


Murray Rankin 

Hon. Blair Lekstrom, Minister of Transportation and Infrastructure 
Mr. Murray Coell, MLA
Mr. Donald Hayes, Chair, Board of Directors, BC Ferry Services Inc. 
Mr. David Hahn, President and CEO, BCFS Inc.