Ferry Fuel Surcharge and Fuel Cost Mitigation Report

8/9/2019 Ferry Fuel Surcharge and Fuel Cost Mitigation Report

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Washington State

Transportation Commission

WSDOTFERRIESDIVISION

&

WASHINGTONSTATETRANSPORTATION

COMMISSION

FUELCOSTMITIGATIONPLAN

AJointReportonFerryFuelCostSavingStrategies

andaFuelSurchargeBusinessPlan

Preparedfor:

TheSenate&HouseTransportationCommittees

and

OfficeofFinancialManagement

January,2010


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FuelCostMitigationPlan

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WashingtonStateTransportationCommission

WSDOTFerriesDivision


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Contents

ExecutiveSummary.................................................................................................................................. ES1

ApproachtoManagingFuelCostRisk................................................................................................. ES2

CostManagementRecommendations................................................................................................ ES2

RevenueEnhancement(FuelSurcharge)Recommendations............................................................. ES2

TimingImpactsonDifferentFareMedia............................................................................................. ES4

FuelMitigationStrategyReporting...................................................................................................... ES5

FuelCost

Mitigation

Plan

Next

Steps

...................................................................................................

ES

6

Background,contextandfuelcostmanagementchallenge......................................................................... 1

RecentFinancialChallenges...................................................................................................................... 1

HistoricalFuelPrices................................................................................................................................. 2

LongRangePlanStrategy......................................................................................................................... 4

WSFscostmanagementPlantoAddressFuelcostVolatility...................................................................... 4

FuelConservationMeasures..................................................................................................................... 5

CurrentWSFFuelContract....................................................................................................................... 6

MarketExposure:FuelPriceHedging....................................................................................................... 6

MarketExposure:DeterminingthePriceofFuelforWSFBudget........................................................... 7

FuelSurchargeBusinessPlan........................................................................................................................ 8

WSTCandDepartmentRoles.................................................................................................................... 9

MechanicsofApplyingtheFuelSurcharge............................................................................................. 10

SettingtheThresholdPriceofFuel......................................................................................................... 11

Revenues

and

Ridership

Effects

..............................................................................................................

12

TimingandFrequencyofSurchargeChanges......................................................................................... 13

SurchargeRulemaking............................................................................................................................ 16

AppendixA:DraftCommissionWACLanguageforferryfuelSurcharge................................................. A1

AppendixB:FuelSurchargeExamples....................................................................................................... B1


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WashingtonStateTransportationCommission


FerryOperators...................................................................................................................................... B1

OtherPublicTransit............................................................................................................................... B2

PackageandFreightShipping................................................................................................................ B2

Airlines................................................................................................................................................... B3

Trucking&Cargo.................................................................................................................................... B3

AppendixC:OptionsEvaluated................................................................................................................. C1

Fuelchargesettorecover100%offuelcost......................................................................................... C1

Fuelsurchargesettokickinoncebasefuelistriggered....................................................................... C1

FuelSurchargebasedonatraditionalshareofcostsapproach........................................................ C3

FuelSurchargetiedtobudgetedfuelcosts........................................................................................... C4

FuelStabilizationFund........................................................................................................................... C4


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WashingtonStateTransportationCommission PageES1


EXECUTIVESUMMARY

The Washington State Ferries (WSF) LongRange Plan, adopted in June 2009, included a number of

initiativesdesignedtomanagedemandandfinancialrisksforasystemthatisfacingsignificantfunding

shortfallsoverthenext20years.Onerecommendationwastodevelopandimplementafuelsurcharge

programto

mitigate

the

financial

risk

of

future

fuel

price

fluctuations.

The

Washington

State

TransportationCommission(WSTC)incorporatedthisrecommendationintoitsLongTermFundingStudy

finalrecommendations.BothstudieswereavailabletotheLegislatureasmembersdeliberatedoverthe

FY200911Budgetandconsideredfundingandpolicyissuesinthe16YearLegislativeFinancialPlanfor

Transportation.

ThisFuelCostMitigationPlanwasdeveloped inresponsetotwoprovisoscontained intheFY200911

adoptedbudgetforWSFandtheTransportationCommissionregardinginitiationofafuelsurcharge:

FortheDepartmentofTransportationMarine:If,afterthedepartment'sreviewoffaresand

pricingpolicies,thedepartmentproposesafuelsurcharge,thedepartmentmustevaluateother

cost savings and fuel price stabilization strategies that would be implemented before the

impositionof

afuel

surcharge.

FortheTransportationCommissionFuelsurchargemethodology:Ifthecommissionconsiders

implementinga ferry fuel surcharge, itmust first submitananalysisandbusinessplan to the

office of financial management and either the joint transportation committee or the

transportationcommitteesofthelegislature.

Thegoalofthisplan istocombinebothelementsoftheprovisos intoadocumentthatbothdescribes

WSFsfuelcostmitigationplansandpresentsarecommendedapproachandimplementationplanfora

fuelsurchargemechanism.Towardthisend,WSFhascollaboratedwithasubcommitteeoftheWSTCon

therecommendedfuelsurchargeapproach.

Based on the understanding that this plan will satisfy the Transportation Commissions proviso

requirement above, the Governors Proposed Budget, released December 9, 2009, included the

followinglanguage:

For the Transportation Commission: The commission shall impose a ferry fuel surcharge

effectiveMay1,2010,inordertoprovideamechanismforraisingadditionalrevenueinatimely

mannertohelpcoverincreasedcostsofferryfuelthatexceedanadoptedbaseleveloffunding.

Theplanrecommendsamultipartstrategytoaddresspricevolatilityandcostrisksassociatedwiththe

fuelbudget forWashingtonStateFerries.Foreachoftherecommendedelementsan implementation

schedule isdiscussedandrolesandresponsibilitiesdefined.Aseriesofappendicesareattachedwhich

provideadditionalsupportinformationincluding:

DraftrulemakinglanguagedescribingtheauthorityandmethodologyoftheproposedsurchargeprogramtobeaddedasanewsectionoftheWashingtonAdministrativeCode;

BackgroundandcontextofcurrentfundingchallengesfacedbyWSFandhowafuelsurchargefitsintotheoverallstrategyofaddressingthesechallenges;

Analysis of other industry fuel surcharge programs, including ferry systems, public transitagencies,andprivateenterprises;

DiscussionofWSFcostmanagementstrategies including those targetingconsumptionof fuel,budgeting,andhedgingstrategiestoreducevolatility;and


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needstobeanautomaticfunction,withnoadministrativediscretion.Forafuelsurchargemechanismto

operate in a timely manner, the Commission must adopt a fuel surcharge methodology in the

Washington Administrative Code (WAC), through the regular rulemaking process, and then the

methodologymustdictatewhenandhowthesurchargewouldbeapplied.

It is the intent of this recommendation that the fuel surcharge be a mechanism to allow for partial

mitigationof

costs

associated

with

unexpected

increases

in

fuel

prices

between

budget

setting

opportunities. The mechanism that is proposed is designed to work within the framework of the

legislativebudgetprocessand toneither limitnor imposeanyparticularbudget solution.Rather, the

goalistoprovidethelegislaturewithanadditionalmechanismwherebytheriskassociatedwithfuture

unexpectedincreasesinfuelpricescanbesharedbetweencustomersandstatetaxpayers.

Theproposed surchargemechanism isdesigned tobeboth transparent and simple to calculate.The

intentofthefuelsurchargeistoreducebutnotcompletelyeliminateWSF'sexposuretotheeffectsof

fuelpricevolatility.Thepurpose isprimarilytomanagebudgetriskbetween legislativebudgetsetting

opportunities.Asproposed,thesurchargewouldworkasfollows(seepage10fordetails):

1. Acalculationofcostsofdieselfuelwouldbebasedonamonthlyreviewprocessthatusestheindexes

of

Tacoma

and

Anacortes

fuel

price

data,

weighted

according

to

WSF's

purchasing

pattern,andwouldserveasareadilyavailableproxyforfuelcostsbymonth.

2. Ifactualcostsoffuelarehigherthanthebudgetedpriceoffuel,asadoptedbythelegislatureinthe ferry operating budget, then a fuel surcharge would be triggered. For example if actual

prices for thepreviousmonthaveraged$2.20per gallonand thebudgetedpriceof fuelwas

$2.00,thenfuelcostsforthatmonthwouldbe10%overbudgetedprices.(Ifhedgingactivities

have reduced the cost of fuel, these gains would be factored into the average price of fuel

calculation).

3. Sincefuelaccountsforapproximately20%oftotalcostsa10% increase infuelwouldmeananoverallcostimpactonferriesoperatingbudgetofapproximately2%.

4. Torecoverthesecosts fromoperatingrevenues,revenueswouldneedto increaseatahigherpercentagethancosts,sinceWSFonlyrecoversabout70%ofitscostsfromoperatingrevenues.

So a fuel surcharge would need to be set to about 3%, to recover the higher costs from

operating revenues (3%ofoperating revenueswouldbeequalto2%of totaloperatingcosts,

sincecostsarehigherthanoperatingrevenues).

5. The3%surchargewouldthenbeappliedtoallfarecategoriesThefollowingaresomeofthemoredetailedelementsofthehowthesurchargemethodologywouldbe

implemented:

DuetoWSFsregionalfare integrationagreements,anypricechangesmustoccuronthe1stofthe

month.

Monthlyfuelsurchargeadjustments,wherewarrantedbyfuelpricechanges,couldandshould be made automatically, as per a set formula established by the Washington State

TransportationCommissionandadoptedintheWashingtonAdministrativeCode.

ThebudgetedpriceoffuelwouldbeestablishedbythemostrecentWSFbudget,andwouldbe"reset"bysubsequentlegislativebudgetaryactions.


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Acalculationofcostsofdieselfuelwouldbebasedonamonthlyreviewprocessthatusestheindexes of Tacoma and Anacortes fuel price data, weighted according to WSF's purchasing

pattern,andwouldserveasareadilyavailableproxyforfuelcostsbymonth.

Thefuelsurchargewouldbedeterminedsolelybasedonthedegreetowhichactualfuelpricesdiverge from the threshold price of fuel established in the WSFbudget. Possible elasticity

effectsof

higher

prices

would

be

ignored

for

the

purposes

of

calculating

the

surcharge.

Tointegratethesurchargewiththehedgingprogram,anygainsfromhedgingactivitiesmustbe

accounted for in the calculation of actual fuel prices. In effect, if hedging has limited WSFs

exposure to the full impactofmarketprices, thenanygains fromhedgingwouldbeused to

discounttheindexofmarketpricestoreflectWSFsactualfuelcostsforaparticularmonth.

Fuelsurchargeswouldberoundedtothenearestfivecents,wouldbeseparatelyidentifiedfromregularfares,andtherevenueswouldbesegregatedwithintheFerryOperatingAccountsoas

tobeusedsolelytodefrayfuelcosts.

Toensurethatthesurcharge isappliedonlywhenthere isareasonablysubstantial increase infuelprices,thesurchargewouldonlybe implemented ifthesurchargepercent isgreaterthan

2.5%.

To provide customers with some relative certainty about potential surcharge impacts, theproposedmethodologywouldcapthesurchargeat20%.Exhibit ES1 presents an example of the impacts of the proposed methodology on several example

fares. Intheexamplebelow it isassumedthatthethresholdpriceoffuel isequalto$2.58(proposed

budgetpriceforFY2011).Ifpricesincreasedto$3.00(netofhedginggains),thena4.3%fuelsurcharge

wouldbeautomaticallyapplied,whichwouldresultinafuelsurchargeof50cents,increasingthetotal

priceforaSeattleBainbridgecar&driverfarefrom$11.85to$12.35.

ExhibitES1

ImplicationsofProposedFuelSurchargeMethodology

Exhibit ES1 is only an illustrative example. The actual implications would depend on both the final

budgetedpriceoffuelestablishedbytheLegislatureaspartofthebudgetprocessandtheactualprice

offuel

once

asurcharge

mechanism

is

in

place.

Also,

the

example

only

highlights

the

effects

on

three

example fares. If implemented, thesurchargewouldapplytoall farecategoriesonallroutes,placing

theburdenofexcessivefuelcostsonallferrycustomers.

TimingImpactsonDifferentFareMedia

Thefuelsurchargewouldaffectvariousfaremediadifferently.Someriderswouldntpaythesurcharge

untiltheirpreviouslypurchasedticketswereusedup;conversely,someridersmayprepurchasetickets

atahigherrateandoverpayifthesurchargewerereduced.Fareswillfallintothreedifferentcategories:

ThresholdPriceofFuelequalto$2.58(ProposedBudgetforFY2011)Hedging

Adj.Actual

FuelPrice

Increase

over

Threshold

Surcharge

Amount

Fuel Surcharge TotalPrice



$2.58 0.0% 0.0% $0.00 $11.85 $0.00 $6.85 $0.00 $37.90

$2.75 6.6% 1.8% $0.00 $11.85 $0.00 $6.85 $0.00 $37.90

$3.00 16.3% 4.3% $0.50 $12.35 $0.30 $7.15 $1.65 $39.55

$3.25 26.0% 6.9% $0.80 $12.65 $0.45 $7.30 $2.60 $40.50

$3.50 35.7% 9.5% $1.15 $13.00 $0.65 $7.50 $3.60 $41.50

SeattleBainbridgeIsland MukilteoClinton AnacortesFridayHarbor


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Category1Faresthatcouldbeoutofsynchwhenimplementingorremovingafuelsurcharge. The

totalfareamountwouldgouponthefirstofthemonthofanewsurcharge. Riderswouldhavethe

ability tobuyand store inadvanceata lowerprice (good for90days)but could run the riskof

overbuying at a higher rate if total fare amounts drop below their purchase price when a

surchargeisreducedoreliminated.Thiscategoryincludesthefollowingfares:

SinglefullfarepassengerandvehicleWave2Gotickets(includingoversizedvehicles). Singlesenior/disabledpassengerandvehicleWave2Gotickets(includingoversizedvehicles).

Category2Faresthatwould likelyalwaysbeat leastpartiallyoutofsynchwithafuelsurcharge,

suchasmultiridecardsandautomaticrevaluecards.Thiscategoryincludes:

Multiridecardsforpassengersandunder20vehicle/driverfares.Riderswouldhavetheabilitytobuyandstoreinadvanceatalowerprice(goodfor90days)butcouldruntherisk

ofoverbuyingatahigherrateiffaresdroppedbelowtheirpurchaseprice.

Multiridecardsforpassengersandunder20vehicle/driverwithautomaticrevalue. Multiridecards(referencedasbundledsinglefaresintheWAC)forsenior/disabled

passengersand

under

20

vehicle/driver

with

automatic

revalue.

Category3Faresthatwouldalwaysbeinsynchwithafuelsurcharge.Thiscategoryincludes:

MonthlyPassengerPassesthisfaremediaisgoodforasinglecalendarmonthandisavailable onaWave2GocardorontheORCAcard(exceptfortheAnacortes/SanJuan

Islands/SidneyB.C.servicearea).Thepriceofthepasswouldgoup(ordownifcomingoffa

surcharge)accordinglystartingwithitsavailabilitytwoweekspriortothefirstofthemonth

whenrevisedsurchargefaresgointoeffect.

SinglefullfarepassengersusinganepurseontheORCAcard. Senior/DisabledpassengersusinganepurseontheORCAcard.

FuelMitigation

Strategy

Reporting

Since the fuel surcharge is part of a broader fuel cost mitigation plan that is designed to be

complementarytotheregularbudgetprocess,itisrecommendedthatWSFprepareanannualreportto

theLegislature,OfficeofFinancialManagement (OFM),andWSTC summarizing theperformanceand

effects of the surcharge on both revenues and ridership. This would include reporting on all three

elementsoftheferryfuelcostmanagementprogram:fuelpurchasingandthefinancial impactsofany

hedgingstrategiesemployed;fuelsavingsmeasures,bothprogressontheprogrammaticelementsand

any serviceadjustments implemented toconserve fuel;and theperformanceand impactsof the fuel

surcharge.

TheregularannualreportwouldbeincludedaspartoftheDepartmentsbudgetsubmittalsandwould

provide the necessary supporting information for the Governors Office and the Legislature to make

budgetdecisionsregardingboththefuturespendingauthorityforfuelpurchaseaswellaswhetherto

assumerevenuesfromthecontinuationormodificationoffuelsurcharges.

In addition, for the fuel surcharge, WSF would publish the supporting documentation for how the

surcharge iscalculated.Thisdocumentationwouldclearly identifythesourceof fuelprice information

andhow the surchargepercent is calculated.Thiswouldbeupdatedas the surcharge isadjusted to

actualchangesinfuelprices.


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FuelCostMitigationPlanNextSteps

Sincethisfuelcostmitigationplanintroducesanewcomponenttothefarestructureaswellaschanges

to WSF operations and budgeting, there will be multiple development and implementation steps

occurring in thenext three fiscalyears.Eachof theprimarycomponentsandproposedschedulesare

brieflydescribedbelow.

1. ImplementFuelSurcharge(AssoonasMay2010).WSFissupportiveoftheGovernorsprovisoto the Commission that it put in place a fuel surcharge by May 1, 2010. The Commission is

interestedinmakingsurethatthefuelsurchargemechanismisavailabletotheLegislatureand

OFMassoonasthisdate,pendingLegislativedirectiononthisissue.Therefore,theCommission

has taken the first step in the rulemakingprocess,providingnotice to thepublic thata fuel

surchargemaybeimplementedpendingfurtherdirectionfromtheGovernorandLegislatureon

anagreedtotimeframeforimplementation.

2. ContinuetoPursueFuelSavingStrategies(Ongoing).WSFhas implementedanumberoffuelconservationinitiativesandcontinuestoevaluateandimplementadditionalfuelsavingsactions

in the 200911 biennium. These initiatives aim to reduce fuel consumption through vessel

upgrades,running

on

fewer

engines,

alternative

docking

procedures,

more

efficient

loading

and

unloading, and slowing vessels down during nonpeak periods. WSF will continue to pursue

thesestrategiesandinvestigateotherpossiblemethodsofreducingfuelconsumption.

3. ReviseBudgetPractices forFuel (Base201113budgetonnewpractices).For thebalanceof2010, WSF will work with Office of Financial Management (OFM) and the Transportation

Revenue Forecast Council to develop an alternative approach to current fuel budgeting and

forecasting practices. An emphasis will be placed on strengthening the nearterm fuel price

forecast by identifying a consensus forecast of fuel prices that would incorporate multiple

industryperspectivesand then incorporating thisnearterm forecastwithGlobal Insights16

yearlongrangeforecast.

4. Develop and Implement Price Hedging Policy (201113). Efforts have begun to develop ahedging policy, identify the most appropriate hedging technique, and gather information

neededtomakeadecisiononwhethertoproceed.ItisexpectedthatWSFshedgingpolicyand

programwillbeincludedinthe201113budgetproposalandstartinFY2011.Oncethehedging

programis implementedanygainsfromhedgingshallbeusedtodiscountthe indexofmarket

pricestoreflectWSFsactualfuelcostsforaparticularmonth.


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BACKGROUND,CONTEXTANDFUELCOSTMANAGEMENTCHALLENGE

RecentFinancialChallenges

WSFfacestwodistinct,butequallysignificant,financialchallengesasitcontinuestooperatethelargest

ferrysysteminthenation.Thefirstisafundingchallengethatreliesonincreasinglyscarcetaxdollarsto

supplementWSFsoperatingandcapitalbudgets.Thesecondchallengeinvolvesmitigatingthefinancial

risks associated with being among the states largest fuel consumer in a time period that has

experiencedwildswingsinthepriceoffuel.

Priorto

1999,

WSF

received

almost

20%

of

its

operating

support

and

75%

of

its

dedicated

capital

funding

through theMotorVehicleExciseTax (MVET).WSF lost this revenuesource inNovember1999when

votersapprovedI695andtheLegislaturecodifiedMVETtaxreductions.Inordertoreplacethegapleft

bythelossofMVETandincreasetheoverallfareboxrecoveryrates,fareshavebeenincreasedbetween

37%and122%,varyingby route,since1999.While these fare increaseshave resulted inasignificant

increaseinoperatingrevenues,theoveralleffectoncostrecoveryrateshasbeenmodestbecausefuel

costsareathistoricallyhighlevelsoftotalcosts.

AsillustratedinExhibit1,between1991and2008fuelcostshaveincreasedfromanaverageof10%of

WSFstotaloperatingbudgetthroughoutthe1990stoconsistentlymorethan20% inthepastseveral

years.Rapidly increasing fuel costshaveoffsetmostof the farebox recoverygainsmade in theearly

2000s.The

recent

increases

in

fuel

prices

have

pushed

fuel

costs

from

approximately

$10M

per

year

duringthe1990stomorethan$50MinFY2008.Giventhatthededicatedtaxesandoperatingrevenues

are insufficienttorecoveroperatingcosts,mostoftheadditionalfuelcostshavebeenbornebystate

taxpayersasgeneralgastaxfundsareredirectedbytheLegislaturetocovertheseunexpectedcosts.

Withfuelpricesnotexpectedtoreturntothelowerlevelsexperiencedbetween1980and2000,WSFis

consideringoptionstomeetthechallengesposedbyhigherandmorevolatilefuelprices.Thechallenge

is findingabalancebetweenconsumptionbasedcostmanagementstrategies,hedgingstrategies,and

increasingfareboxrevenues,perhapsthroughtheimplementationofafuelsurcharge.


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Exhibit1

WSFFuelCostsand%ofTotalOperatingCosts(FY1991FY2009)

12%10% 11% 9% 9%

10% 9% 8% 7%

11%

14%

10%

12% 13%

18%

21%20%

23%

21%

$0M

$10M

$20M

$30M

$40M

$50M

$60M

Source:WSFRouteStatements (FY19992009)

HistoricalFuelPrices

The average price per gallon of diesel fuel, as displayed below in Exhibit 2, grew slowly in nominal

dollarsupuntilthemid1970s,whentheoilembargodrovepricesupsignificantlybeforedroppingback

downtoanewhigherlevel.Intheearlypartofthiscenturytherewasasecondmajorpriceadjustment.

While prices have declined somewhat in the last year due to the weak global economy, high fuel

inventories,and

declining

global

oil

demand,

most

forecasters

expect

oil

to

stabilize

at

ahigher

price

pointgoingforward.

Mostlongtermprojectionsoftheglobalfuelmarketdepictfuelpricesincreasingonaverageabout2%

to4%peryearoverthenext15years.Thisrateofpriceinflationwouldsuggestthatfuelpriceswillgrow

atorsomewhatabovegeneralinflation.Marketinstabilityandshorttermpricefluctuationswillbethe

norm going forward. As a result, fuel costs actually present two separate but interrelated financial

challengesforWSF:

(1) Therehasbeenastructuralshiftinfuelprices,withfuelaccountingformorethan20%ofWSFoperatingcosts,versus10%formuchofthepast30years.WSFrevenuesourceshavenotbeen

adjustedtoreflectthisstructuralshift.

(2) Fuelpricevolatilityhas resulted in frequentbudgetadjustments,puttingadditional strainonlimitedstatetransportationfunds.


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Exhibit2

HistoricalU.S.FuelPrices(19202010)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Ferry System Owned andOperated by WSFNominal $/gal

Inflation Adjusted $/gal

Exhibit 3 presents projected fuel expenditures (excluding taxes) for the next 16 years based on the

baselineforecastoffuelpricesfromeachofthepreviousthreequarterlyrevenueforecasts.

Exhibit3

Actual&ProjectedFuelExpendituresFY1991FY2025

$0M

$10M

$20M

$30M

$40M

$50M

$60M

$70M

March 2009 June 2009 September 2009

Actual Expenditures Projected Expenditures

Source:OFMTransportationRevenueForecasts;WSFFuelConsumptionEstimatesandRouteStatements


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LongRangePlanStrategy

TheWSFLongRangePlan,adoptedinJune2009,includedoperatingandpricingstrategiesdesignedto

managedemandandreducefinancialrisks.Theoperatingstrategiesproposed,suchasvesselupgrades

andslowingboatsinoffpeakperiods,focusedonreducingfuelconsumptiontoreduceexposuretofuel

priceswings.

Theprimarypricing strategy thatwas recommendedwas todevelopand implementa fuel surcharge

programtomitigatethefinancialrisksoffuturefuelpricefluctuations.Thebasicconceptsofapotential

fuelsurchargeplanwerepresentedtotheLegislatureanddiscussedduringthe2009legislativesession.

Thefundamentalsofthefuelsurchargeplan,aspresentedtotheLegislature,included:

A fuel surcharge thatwouldautomaticallyadjust faresupanddown to reflect increasesanddecreasesinfuelpricesaboveapredeterminedbasefuelprice.

Thecustomerstotalfarewouldbesubjecttoautomaticincreasesinperiodsofrapidfuelpriceescalation, effectively passing on this direct operating expense to those benefiting from the

service.

Thebase fuelpricewassetatapricethatwasequaltothe inflationadjustedaveragecostofdiesel

from

1952

to

2008

($2.15

per

gallon),

the

time

period

over

which

the

State

has

owned

andoperatedtheferrysystem.

The structural shift tomuchhigher fuelprices relative tohistorical levelshascreatedadifficultstate

budget problem. The solution to the problem would combine additional revenue support, fuel

conservationmeasures,andpricehedgingstrategies toeffectivelymanage future fuelcosts.WSFhas

begunto implementfuelconservationmeasuresandhastheauthoritytoenter intohedgingcontracts

tostabilizefuelprices.Thequestionofhowtogenerateadditionalrevenues(i.e.whoshouldpayforthe

increasesinfuel)becomesthecentralpieceofWSFsfuelmanagementstrategy.

ThecommonlyheldviewoftheWashingtonStatehighwaysystem isthatdedicatedtaxdollarsshould

be used to support the overhead, capital expenditures, and maintenance of highways. Under this

construct,tax

dollars

received

by

the

ferry

system,

amarine

highway,

should

support

Department

overhead, WSDOT overhead, terminal maintenance, and capital expenditures. Operating revenues,

including fare revenues, would conversely generate the revenue needed to fund costs that are not

typical of the highway program,particularly vessel operating expenditures (including labor, fuel, and

maintenance) and terminal operations. Under this paradigm, a policy case could be made that the

higher level of fuel costs should be passed through to the customers that are using the system.

However, it is unrealistic to assume customers could always assume the full burden of fuel costs,

especiallyinanenvironmentwherepricesareincreasingveryrapidly.

WSFSCOSTMANAGEMENTPLANTOADDRESSFUELCOSTVOLATILITY

Inorder

to

address

fuel

price

volatility

and

reduce

its

exposure

to

increasing

fuel

costs,

WSFs

options

includereducingoperatingcostsand/orincreasingrevenues.WSFhasalreadybenefitedfromsomecost

savings through fuelconservationmeasures.Beyond thesemeasures,WSFsoptions for reducing fuel

expendituresincludefurtherconservationmeasuresoreliminatingsailings.Fuelconservationmeasures

were proposed in the WSF LongRange Plan and JTC Vessel Sizing study related to reducing fuel

consumptionthroughvesselupgrades,alternativedockingprocedures,andslowingvesselsdownduring

nonpeakperiods.Ontherevenueside,WSFcanmitigateitsexposuretofuelpriceshocksthroughafuel


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surcharge. WSF is also exploring fuel price hedging to reduce volatility. Additionally, new revenues

generatedthroughtaxescouldhelpoffsetfuelpricespikes.

FuelConservationMeasures

WSF implementedanumberof fuelconservation initiatives inthe200911biennium.These initiatives

aim

to

reduce

fuel

consumption

through

vessel

upgrades,

running

on

fewer

engines,

alternative

docking

procedures,andslowingvesselsdownduringnonpeakperiods.Anestimated2.9milliongallonsoffuel,

ormorethan9%,wouldbesavedannually ifWSFcould implementallthefuelconservationmeasures

displayedbelowinExhibit4.

Exhibit4

FuelConservationMeasures

VesselSpecificStrategies

JumboMarkII OperateontwoenginesImplemented

exceptduringlandings

540,000gal/yearfor3ferries

Implemented

JumboMark

I

Upgradecontrol

systems

to

run

vessels

on

3

enginesinsteadof4142,000

gal/year

for

2ferries

Awaitseatrials&establishmentof

operationalprocedures

SuperClass Upgradeenginesandassociatedsystemsto

enablerunningon2enginesinsteadof4

387,000gal/yearfor3ferries

InEngineeringDesignphase

IssaquahClass Runninginsplitmode Notyetdetermined

Tobeinvestigatedthrough

operationaltesting

IssaquahClass Usewasteheatrecoverytoheatvessels Upto61,000gal/yearpervessel

Investigatingwhetherinstallationcost

canbereduced

SystemWideOperationalStrategies

Developalternatetieupmethodforvessels,

allowingareductioninshaftspeedwhile

docked

145,000gal/yearpervessel

Awaitapprovalofgrantrequestedfor

pilotproject

Slowvesselsdown0.5to1.0knots(seeError!Reference source not found.)

Upto2.5%savingsfor0.5knot

reductionand5%for1.0knot

reduction

Assessingserviceimpactsatroute

level

Improveloadingandunloadingtimes Notyetdetermined

Source:WSF2009LongRangePlan

Theuncertaintyofhowmuch fuelpriceswill fluctuate in the futureandmore importantlyhow long

priceswillstayhighrelativetohistoriclevelsmakesitdifficultforWSFtomeaningfullymanagefuelcost

risk on the consumption side only. WSFs ability to respond to shortterm price spikes is relatively

limited, and longterm fuel consumption options such as eliminating sailings, routes, or operating a


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smallerfleetsizewouldbecostlyandnegativelyimpactthelevelofservicegoalsestablishedinthe2009

LongRangePlan.

WhilethestrategiesidentifiedintheLongRangePlanandsummarizedinExhibit4havebeendesigned

tobalancefuelconservationwithminimalservicedisruptions,WSFmayneedtoconsidermoresevere

consumptionreductioneffortsinperiodsofparticularlyhighorquicklyrisingfuelprices.Forexample,it

maybe

desirable

to

consider

options

such

as

eliminating

low

productivity

sailings

altogether,

which

wouldreducethefrequencyofdeparturesduringlowerdemandperiods.Clearlythisoptionwouldhave

amoreseverecustomer impact,butwouldalsosavesignificantfuel.Thekey issue,especially ifafuel

surchargeisavailable,willbetoweighthepotentialserviceimpactsonrelativelyfewcustomersversus

theimpactofhigherfaresonallcustomers.Forexample,sincethesurchargewillonlymitigatesomeof

thefuelcostexposure,WSFwillfacechoicesaboutwhethertoreducecoststhroughlowerconsumption

asawaytofurtherlimitthecostimpactsonthebudget.

CurrentWSFFuelContract

WSFcurrentlyprocuresallof itsfuelthroughastatecontract.Pricesarepaidtovendorsthreetofour

timespermonthandarebasedmostlyontheTacomaOilPriceInformationServices(OPIS) index,but

alsothe

Anacortes

OPIS.

Prices

paid

to

vendors

include

fees

and

applicable

state

and

local

taxes

(includingretailsalestaxes).TheLegislatureamendedRCW43.19.642inthe2009legislativesessionand

mandatedWSFtouseaminimumoffivepercentbiodieselfortheoperationofvesselsaslongastheper

gallonpricepremiumpaidforthebiodieselblenddidnotexceedfivepercentofregulardiesel.Allother

stateagenciesarerequiredtouseaminimumoftwentypercentbiodiesel.

MarketExposure:FuelPriceHedging

TheLegislaturepassedHouseBill (HB)2746during the2008 legislative session,nowcodifiedasRCW

47.60.830,authorizingWSFtoexploreand implementfuelpurchasingstrategiessuchaspricehedging

toreducetheoverallcostof fuelandmitigatethe impactofmarketpricefluctuations.WSFmaintains

flexibility in determining the type of hedging strategies that might be implemented, and must

periodicallyreport

back

to

the

legislative

transportation

committees

the

status

of

implemented

strategiesbeginningoneyearafterthe initialyearof implementation.Effortshavebeguntodevelopa

hedging policy, identify the most appropriate hedging technique, and gather information needed to

makeadecisiononwhethertoproceed.

Fuelpricehedging isatoolusedto improvebudgetstabilitybymitigatingexposuretoshorttermfuel

pricevolatility.Pricehedging isparticularlyusefulforbusinessesthatbuy largeamountsofafueland

want to limit theirexposuretopricevolatility, i.e.smoothout thepeaksandvalleysofhighlyvolatile

fuelpricesandmakebudgetedfuelcostsmorepredictable.

TherearemanydifferenttypesofhedgingtoolsavailabletoWSFandmostcanbeseparated intotwo

broad categories: (1) Financial and (2) Physical. Physical price hedging involves contracting for the

purchaseof

fuel

at

adetermined

fixed

future

price.

Physical

price

hedging

is

convenient

from

an

accountingstandpoint in that fuel issimplypaid forwhen it isconsumedat thepredetermined fixed

price.

Financialpricehedginginvolvestheuseoffinancialinstrumentsthatderivetheirvaluefromthepriceof

fuel.These instrumentsareused inordertopartiallyorcompletelyoffsettheriskassociatedwithfuel

pricefluctuationsbylockinginthepriceonsomeoralloftheprojectedfuelconsumptionforaspecified

periodoftime.Financialhedging instrumentsexistandoperate independentlyofWSFfuelpurchases.


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Theyare linkedonlybythefactthatwhenthecostoffuelfromthesupplierchanges,thevalueofthe

hedginginstrumentchangesinproportiontherebyoffsettingsomeorallfuelpricechanges.

Fuel price hedging is common for private businesses, particularly transportation firms, in which fuel

pricefluctuationswouldseverelyimpactbusinessperformance.ManylargetransitagenciessuchasKing

CountyMetro,TriMet (inPortland),BCFerries,andWashingtonMetropolitanAreaTransitAuthority

engagein

fuel

price

hedging.

It

is

uncommon

for

businesses

to

hedge

100%

of

their

fuel

purchases.

However, many do hedge 50% to 90% of total fuel purchases within a contract period and typically

overlap hedge contracts. A key factor in choosing what portion of fuel thatwould be hedged is the

degreeofpredictability intheorganizationsconsumption.Themorepredictabletheconsumption,the

highertheshareoffuelpurchasesthatcouldbeeffectivelyhedged.

MarketExposure:DeterminingthePriceofFuelforWSFBudget

Determiningthepriceof fuel forbudgetingpurposes isdifficult.CurrentlyWSFsbudgetrequestsrely

primarilyuponone forecast,providedbyGlobal Insight, todetermine itsexpected fuel costs for the

remainderofthecurrentfiscalyearandsubsequentbudgetperiods.Inrecentyears,theforecast,which

is updated quarterly, has changed substantially for the same expected budget period. For example,

betweenthe

time

the

Governors

Budget

was

proposed

last

year

(December

proposed

budget,

using

the

NovemberForecast)andwhenthebudgetwasadoptedbytheLegislature(April,basedontheupdated

MarchForecast), the forecastaveragepriceof fuel forbudgetyearFY2010decreasedby33% (from

$1.95to$1.30).

While inhindsightthisreduction inthepriceassumed forthepurposesofsettingthebudgetappears

difficult tojustify, it important tonote thatwhen theMarch forecastwascompleted, the recent fuel

pricehistoryshowedthepriceoffueldroppingfromitshighof$4.62pergallononJuly14,2008toalow

of $1.25 per gallon on March 16, 2009. At that time there was much uncertainty about the future

directionof theUSandworldeconomies,which isa significant factor in theworldpriceofoil.As it

turnedout,thismarketwasatthebottomofthepricedropandpricesreboundedmorequicklythan

expected.

Whatthisexampleshows isthatnotonly isfuelpriceforecastingchallenging inthebestoftimes,but

that precisely because of these forecasting challenges, by basing a budget on only one forecast,

additionalbudget risk is introduced into theprocess. In thiscase, theMarch forecast forFY2010and

FY2011turnedouttobeoutlierswhencomparedtoforecastsbeforeandsince.Thisiswhyrelyingona

singleforecastplacesmoreriskaroundbudgetstability.TheGlobalInsightforecastdoesprovidea16

yearprojectionof fuel costs,which isnecessary fordeveloping the longterm financialplan forWSF,

howeverthebudgetstrategiesproposedinthissectionfocusontheneartermpartoftheforecastand

thedesiretoreducetheamountofbudgetuncertaintywithinatwoyearbudgetwindow.Someofthe

neartermstrategiescouldinclude:

1.Averaging

most

recent

forecasts.

WSF

can

mitigate

some

of

this

budget

risk

by

using

a

weighted

or straight average price of prior fuel forecasts or a consensus of multiple published fuel

forecasts.Exhibit5below illustratestheeffectofaveragingusingthe lasteight isto forecasts

for FY2010 fuel prices as an example. In this example, the last four Global Insight forecasts

would be used, and the most recent forecast is given the most weight in determining the

average.Thisweightingschemeplacesthegreatestweightonthemostrecentinformation,with

50%ofthepricebasedonthisforecast,withthepreviousforecastaccountingfor25%,15%and

10% respectively.Theeffectofeithermethod is to reduce thequarterbyquartervolatility in


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priceforecasts,whichwouldreducetheriskoffallingonanoutlier,wherethebudgetedpriceof

fueliseitherunusuallyhighorlowinrelationtorecentforecasts.

2. Gathering additional information on nearterm fuel using futuresmarket. Fuel futures areshorttermpriceexpectationsforfuelthatcovera3to24monthtimeperiodandcanprovide

additional informationthatcould impacttheunderlyingassumptionsusedtodetermineWSFs

fuelbudget.

The

use

of

fuel

futures

market,

such

as

heating

oil,

would

be

preferred

since

heatingoilfuturesarehighlycorrelatedtothepriceFerriespaysforitsfuel.

3. IncorporatingWSFactualhedgingpositionsintobudgetdevelopmentprocess.Oncehedgingisunderway, a portion of future fuel costs will be known and should be factored into

determiningthebudget.

4. Building a consensus nearterm forecast. Use multiple respected sources such as theDepartmentofEnergys ShortTermEnergyOutlook todetermine thebudgetedpriceof fuel.

ThiswouldallowWSFto incorporateadditionalperspectivesonshortterm(1236month)fuel

pricesmovement.Thisconsensus forecastwouldbe integrated intoWSFsongoingbudgeting

practicesandwouldalsobesynchedupwithGlobalInsights16yearforecast.

Exhibit5

IllustrativeExampleofEffectofAveraging(FY2010PriceofFuel)

Note: Lines showing the rolling averages of the most recent four forecasts start in November 2008 and reflect the

averages of current forecast plus the previous three.

FUELSURCHARGEBUSINESSPLAN

It is the intent of this recommendation that the fuel surcharge be a mechanism to allow for partial

mitigation of costs associated with unexpected increases in fuel prices between budget setting

opportunities.Workingcooperatively,WSFandtheTransportationCommissionidentifiedthefollowing

organizingprinciplesthatwereusedtofullydevelopthefuelsurchargeprogram:

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Fuel Forecast Wei ghtedAverage StraightAverage


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The intentofa fuelsurcharge is toprovideanimblemechanism that is responsive tovolatilefuelpricesthatexceedLegislativeexpectationsasidentifiedintheWSFbudget. Thesurcharge

would provide additional revenue to cover fuel costs in situations of extraordinary and

unpredictedpriceincreases.

Monthly adjustments, where warranted by fuel price changes, couldand shouldbe made,based

on

the

date

of

ticket

purchase,

except

for

monthly

passes,

which

would

be

based

on

the

monthofusage.

Customers would be notified 30 days in advance of any imposition or modification to a fuelsurcharge. Inaddition to using itswebsite, broadcast emails andother customer notification

channels, WSF will issue press releases and work with local news organization to ensure

accurate information isefficientlydisseminated.TherewillbeadedicatedsectionontheWSF

website todescribe thebasisof the surcharge, showhow the calculation worksand informs

customersofanyupcomingchanges.

Inorder toprovide thepublicwithaclearunderstandingofhow the fuel surchargeprogramwouldwork,theproposedmechanismwouldbebothtransparentandsimpletocalculate.

Thekeyelementofthismechanism isthethresholdpriceoffuel,whichdefinesthebaselineprice

above

which

asurcharge

would

apply.

The

recommended

approach

is

to

use

the

per

gallon

priceoffuelusedbytheLegislaturetodeveloptheWSFbudgetasthethresholdprice.

Fuelsurcharges,roundedtothenearestfivecents,wouldbeseparatelyidentifiedfromregularfaresand the revenueswouldbe segregatedwithin theFerryOperatingAccount soas tobe

usedsolelytodefrayfuelcosts.

A calculation of costs of diesel fuel would be based on monthly indexes of Tacoma andAnacortesdata,weightedaccordingtoWSF'spurchasingpattern,andwouldserveasareadily

availableproxyforfuelcostsbymonth.

To integrate the surchargewith thehedgingprogram,gains fromhedgingactivitieswouldbeincorporatedintotheindexoftheactualpriceoffuel.

Basedontheseprinciples,itisbesttothinkofthefuelsurchargeasawaytohelpminimizetheimpact

ofincreasing

fuel

prices

between

budget

setting

opportunities.

Such

afuel

surcharge

program

must

be

designed to work within the policy and mechanical structure to be set by the Transportation

CommissionandfitwithintheframeworkofWSFsoperatingbudget.Currently,theonlywaythatfuel

pricesaredirectly incorporated into theWSFbudget ison theexpenditure side.When theGovernor

proposesabudget,thecostoffuel isbasedonthegallonsneededtosupportaparticularserviceplan

andaforecastoftheaveragepriceoffuelforthenexttwofiscalyears.Whenthelegislaturepassesits

budget,itincludesanexplicitappropriationtocoverfuelcosts.ItisimportanttonotethatWSFcannot

spend more than this appropriation, so if prices go up after the budget is passed, then WSF must

requestadditionalbudgetauthoritythroughasupplementalbudgetrequest.

WSTCandDepartmentRoles

Implementation of this proposed fuel surcharge program is within the WSTCs existing statutory

authoritytomanageandregulateferryfares.Toproceed,WSTCwouldneedtoestablishthesurcharge

mechanismviarulemaking,asaseparate,secondcomponentofthefarestructure.Theseruleswould

becodifiedintheWashingtonAdministrativeCode(WAC)andthussubjecttotheregularcoderevision

processandpublicreview.OncetheWACrulesareinplace,theimplementationofthesurchargewould

beanautomaticprocessdrivenbythemechanicsestablishedbytheTransportationCommission.WSF

wouldoverseetheimplementationofthisprocess.


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MechanicsofApplyingtheFuelSurcharge

Themechanicsoftherecommendedfuelsurchargearedesignedtobesimpleandautomatic.

Theproposedmethodologyincludesanautomatic triggerthatwouldbesetasapercentageabovethe

established threshold priceof fuel,anda fuel surcharge wouldonlybe imposed ifactual fuelprices

exceeded

this

minimum

percentage.

The

fixed

formula

will

be

clearly

defined

in

the

WAC

put

in

place

by

theTransportationCommissionandwouldworkasfollows:

Step1:Calculateaverageactualmarketpriceofdieselfuel.

WSFwouldestablishamonthlyreviewprocesstotrackaveragerackpricemovementforultralowsulfurdyeddieselbeginningonthe16thofthepreviousmonthandcontinuinguntilthe15th

of the current month as reported by the Washington State Department of General

AdministrationsOfficeofStateProcurement.SinceWSFpurchasesitsfuelfrombothAnacortes

andTacoma, theaveragemonthlypriceof fuelwouldbeaweightedaverageof themonthly

averagesforTacomaandAnacortesOPISRackprices,wheretheweightingreflectsthevolume

ingallonsfromeachrespectivelocationduringthepreviousfiscalyear.

Step2:

Adjust

for

effects

of

hedging

activities

over

the

corresponding

period.

Toaccount foranygains fromhedgingactivitiesduring themonth,gainsareconverted toaneffectivepergallon fuelsavingvalue thatcanbesubtracted from theOPISweightedaverage.

ThesavingsshallbecalculatedbydividinganygainsfromhedgingactivitiesbyWSFsbudgeted

averagemonthlyfuelconsumption.Theresultingestimateofsavingspergallonshallbeusedto

reducetheindexofpricestoarriveatahedgingadjustedweightedOPISindex.

Step3:Determineifhedgingadjustedpriceisgreaterthanthethresholdpriceoffueland

calculatesurchargeamount.

Ifthehedgingadjustedweighted indexdidexceedthethresholdpriceof fuel,WSFwouldusethe

formula

adopted

by

the

Transportation

Commission

to

calculate

a

fuel

surcharge

amount.

Thiswouldbedonebysubtracting the thresholdpriceof fuelpergallon for thecurrent fiscalyearfromthehedgingadjustedweightedaverageindexoverthelastmonthtocalculatetheper

gallonpriceincrease.

Thepercentage increase infuelpriceswouldthenbemultipliedbytheshareofbudgeted fuelcoststototaloperatingcostsforthecurrentbiennium.

The result would then be divided by the budgeted farebox recovery rate for the currentbiennium.Exhibit6belowdisplaysthemathusedtocalculatetheresultingfuelsurchargefactor

ifhedgingadjustedfuelpricesincreased10%abovethethresholdpriceoffuel.


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Exhibit6

BasicFuelSurchargeFormula

Step4: Ifsurchargeamount isgreater than2.5% thenasurchargewouldbeappliedat the

nextfarechangeopportunity.

Anautomatic surcharge trigger for implementinga surchargewouldbe setat2.5%aboveallbasefares.Establishingthisamountavoidsmakingsurchargeadjustmentswhenthereareonly

relativelysmallincreasesinbasefuelcosts.

Thefuelsurchargeistobecappedatamaximumof20%.Thepurposeofthecapistoprovideameasureofcertaintythateveninhighfuelinflationperiodsfareimpactswillbelimitedtoapre

determined

amount.

Tominimizethenumberofsurchargechangeseachyear,thesurchargecanonlybechangedifthe current calculated monthly fuel surcharge rate fluctuates up or down by at least an

increment of 2.5% from the prior months rate. This amount is set such that the surcharge

wouldadjustbasedonnickelrounding.

Theamountofanyfuelsurchargewillbeshownseparatelyoncustomerreceipts. TofacilitateunderstandingonthepartofWSFcustomersandensureatransparentprocess,an

explanationofhowthesurchargeisapplied,includingasummaryoftheactualcalculationofthe

surchargepercentage,willbedescribedontheWSFwebsiteandavailableinotherformatsupon

request.

SettingtheThresholdPriceofFuel

Thethresholdpriceoffuelisthekeyelementindeterminingwhetherornotafuelsurchargewouldbe

imposed.Indevelopingthisplanseveraloptionsforsettingthethresholdpriceoffuelwereevaluated.

Intheend,itwasdeterminedthatthepreferredapproachwouldbetosetthethresholdpriceequalto

thepricepergallonusedtoestablishthefuelbudget.

This approach would be to simply take the price per gallon used for the estimate of fuel cost

expendituresinthebudgetandusethisasthethresholdpriceoffuel.Inessence,thelegislaturewould

settheWSFfuelbudgetbasedonthepriceoffuelusedtodevelopthebudgetrequest.Thesurcharge

mechanismwould thenhelpmitigate theeffectsofpricevolatilitybygeneratingadditionaloperating

revenuewhenfuelpricesincreasebeyondthethresholdpriceoffuelassumedinthebudget.

IfthesurchargeweretriggeredduringtheLegislativeinterim,therevenuegeneratedfromthesurcharge

would be in available to assist in funding supplemental budget requests for fuel funding. When the

legislaturepassed itsnextbudget(withthesupplementalrequest)theprocesswouldberesetandthe

surchargewouldbebasedonthefuelpricesassumedinthenewbudget.

This approach is simple and is consistent with the intent of the proposed surcharge mechanism, by

havingthesurchargebethelastlineofdefenseforunpredictedpriceincreasesthatexceedboththe

PercentIncreaseoverThreholdPrice

(CurrentMonth)FuelShareof

OperatingCosts(Budget)

FareboxRecoveryRate

(Budget)

SurchargeAmount

EXAMPLE 10% 20% 70% 2.9%


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Exhibit7

FareboxRevenueandRidershipImpactsatDifferentSurchargeLevels

FY 2010 FY 2011 FY 2012 FY 2013

Baseline Farebox Revenues $147.8M $155.0M $162.5M $168.7M

Fuel Surcharge Revenues5% Surcharge $0.9M $5.0M $5.3M $5.5M

10% Surcharge $1.7M $9.8M $10.3M $10.7M15% Surcharge $2.6M $14.3M $15.1M $15.6M20% Surcharge $3.4M $18.6M $19.5M $20.3M

Baseline Ridership 22,918,000 23,450,000 23,919,000 24,180,000

Ridership Impacts of Fuel Surcharge

5% Surcharge -71,000 -421,000 -429,000 -433,000 10% Surcharge -143,000 -843,000 -859,000 -866,000 15% Surcharge -214,000 -1,265,000 -1,288,000 -1,300,00020% Surcharge -285,000 -1,687,000 -1,719,000 -1,735,000

Source:ParsonsBrinckerhoff,WSFRevenueProjectionsforFuelSurchargeOptions

TimingandFrequencyofSurchargeChanges

Inconsideringthefrequencywithwhichfuelsurchargesmightbeadjusted,thereisatensionbetween

wanting to respond quickly to rising fuel costs in order to mitigate the budgetary impacts and the

challenge forcustomersof frequentpriceadjustments. In reviewing theoptions for frequency, itwas

determinedthatWSFcouldsupportamonthlyfuelsurchargeupdateprocess.

WSF is required tonotifySoundTransit30daysprior toa farechangeandall farechangesare tobe

effectiveonthefirstdayofthemonth.AdministrativelyWSFalreadyhastheabilitytosupportmonthly

changes

in

the

Electronic

Fare

System

(EFS)

and

ticketing.

WSFwouldneedtocreatearegularmonthlyprocesstoreviewfuelpurchasesandimplementsurcharge

where fuelpriceswarrantand/orserviceadjustments to reduce fuelconsumption.Tobeaneffective

fuel cost mitigation tool, WSF will need to minimize the time lags between the surcharge need and

actual implementation. Based on the notification requirements, the shortest practical lag will be

approximatelysixweeks.Exhibit8 illustratestheprocessandscheduleforreviewand implementation

forthefirstmonthofsurchargeandthesurchargereviewandimplementationprocessthereafter.The

exhibit ismeant to show that the implementationprocessand reviewprocessoverlapand thedates

selectedareforillustrativepurposesonly.


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Exhibit8

ExampleofFuelSurchargeReview,NotificationandImplementationProcess

Startingonthe15thofeachmonth.ReviewtheaverageweightedOPIS indexversusbudgetedamountsforthepreviousmonth(midmonthtomidmonth)anddeterminetheneedforafuel

surcharge.Reviewinformationinternallytofinalizefuelsurchargedecision.

Firstofthefollowingmonth(Twoweeksafterthebeginningofthereviewcycle).Notifytransitpartnersofpricechanges tobe implementedat thebeginningof the followingmonth (meets

requirementsfor30daysnoticeandimplementationoffarechangesonthefirstofthemonth).

15dayspriortoimplementation.Notifycustomersoffuelsurchargeandpricechangestotakeeffectatthebeginningofthenextmonth.

Firstofthemonth(67weeksfromthebeginningofthereviewcycle).Implementnewfares.TimingImpactsondifferentfaremedia.Thefuelsurchargewouldaffectvariousfaremediadifferently.

Some riders wouldnt pay the surcharge until their previously purchased tickets were used up;

conversely,some

riders

may

pre

purchase

tickets

at

ahigher

rate

and

overpay

ifthe

surcharge

were

reduced.Fareswillfallintothreedifferentcategories:

Category1Faresthatcouldbeoutofsynchwhenimplementingorremovingafuelsurcharge. The

totalfareamountwouldgouponthefirstofthemonthofanewsurcharge. Riderswouldhavethe

ability tobuyand store inadvanceata lowerprice (good for90days)but could run the riskof

overbuying at a higher rate if total fare amounts drop below their purchase price when a

surchargeisreducedoreliminated.Thiscategoryincludesthefollowingfares:


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SinglefullfarepassengerandvehicleWave2Gotickets(includingoversizedvehicles). Singlesenior/disabledpassengerandvehicleWave2Gotickets(includingoversizedvehicles).

Category2Faresthatwould likelyalwaysbeat leastpartiallyoutofsynchwithafuelsurcharge,

suchasmultiridecardsandautomaticrevaluecards.Thiscategoryincludes:

Multiridecardsforpassengersandunder20vehicle/driverfares.Riderswouldhavetheabilitytobuyandstoreinadvanceatalowerprice(goodfor90days)butcouldruntherisk

ofoverbuyingatahigherrateiffaresdroppedbelowtheirpurchaseprice.

Multiridecardsforpassengersandunder20vehicle/driverwithautomaticrevalue. Multiridecards(referencedasbundledsinglefaresintheWAC)forsenior/disabled

passengersandunder20vehicle/driverwithautomaticrevalue.

Category3Faresthatwouldalwaysbeinsynchwithafuelsurcharge.Thiscategoryincludes:

MonthlyPassengerPassesthisfaremediaisgoodforasinglecalendarmonthandisavailable onaWave2GocardorontheORCAcard(exceptfortheAnacortes/SanJuan

Islands/Sidney

B.C.

service

area).

The

price

of

the

pass

would

go

up

(or

down

if

coming

off

a

surcharge)accordinglystartingwithitsavailabilitytwoweekspriortothefirstofthemonth

whenrevisedsurchargefaresgointoeffect.

SinglefullfarepassengersusinganepurseontheORCAcard. Senior/DisabledpassengersusinganepurseontheORCAcard.

Customer information and notification. Customers would be notified 30 days in advance of any

impositionormodificationtoafuelsurcharge.Inadditiontousingitswebsite,signageonvesselsandin

terminals,broadcastemails,andothercustomernotificationchannelswillbeused.WSFwillissuepress

releases and work with local news organization to ensure accurate information is efficiently

disseminated.

Giventhe

potential

for

confusion

and

customer

impacts,

WSF

will

also

work

with

the

Ferry

Advisory

Committeestoestablishcommunicationsprotocolsaroundfuelsurchargeissues.Inaddition,therewill

be a dedicated section on the WSF website to describe the basis of the surcharge, show how the

calculationworksandinformcustomersofanyupcomingchanges.

Implications forWSF operations. WSF will experience some operation impacts associated with the

process of implementing the surcharge proposal. The following is a list of the types of operational

impactsthathavebeenidentifiedtodate:

InitiallytheITgroupwillneedtoprogramtheticketingsystemtoallowfortheadditionofafuelsurcharge to the total price of a ticket and to show that surcharge as a separate item on a

receipt.

On a monthly basis, the budget office would need to collect the fuel price data from theWashington State Department of General Administrations Office of State Procurement,

calculatetheaveragecosts,runthesurchargecalculation,anddetermineifasurchargeneedsto

beaddedormodified.

Onceasurchargeneedstobe implementedormodified,therewillbe impactsassociatedwiththecommunicationssurroundingthechange.


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Also,there is likelytobesomecustomerconfusion,especiallyatthebeginningoftheprocess,andsoitislikelythatcallstoWSFcustomerserviceagentswouldincreasewhenasurchargeis

implementedormodified.

At the tollbooths, the fare tableswillneed tobemodified tomakeclear that theposted faredoesnotincludeanypotentialfuelsurchargeamounts.

Therewill likelybe training requirements for terminal staff tounderstandhow the surchargeworksandtoabletoexplainittocustomers.Itmaybedesirabletohaveasimplebrochurethat

ticketsellerscanhandouttocustomerswhohavemoredetailedquestions.

SurchargeRulemaking

Sinceanewcomponent isbeingaddedtothefarestructure,theTransportationCommissionwillneed

toadopttheframeworkandmechanicsofhowthesurchargewillbeassessedandimplementedwithin

thefareWAC. SincechangingtheWAC isafivetosixmonthprocess, it isnotpracticaltochangethe

surcharge through the WAC process every time there is a relatively significant change in fuel prices

(eitherupordown).Asaresult,itwillbenecessaryfortheWSTCtoadoptfarepolicyrulesthatestablish

an

automatic

process

which

incorporates

a

fuel

surcharge

formula

so

that

WSF

can

implement

a

nimble

andresponsivesurchargeprogram.

TomaketheoptionofafuelsurchargeavailabletotheLegislatureassoonaspossible,asameansto

assistinthefundingforferryfuelin2010,thefollowingWACschedulewouldneedtobefollowed:

December2009,WSTCfiledintenttopromulgaterulesforimplementingafuelsurcharge. February2010,WSTCissuestheproposedrulelanguageforthefuelsurchargeandinitiatesthe

publiccommentperiod.

FebruaryMarch2010,publiccommentgathered. MidMarch2010,WSTCholdsapublichearingon theproposaland subsequentlyadopts the

finalrule.

May

1,

2010,

earliest

possible

date

the

fuel

surcharge

could

be

implemented.

Since the fuel surcharge is part of a broader fuel cost mitigation program that is designed to be

complementarytotheregularbudgetprocess,itisrecommendedthatWSFprepareanannualreportto

theLegislature,OfficeofFinancialManagement (OFM),andWSTCsummarizing theperformanceand

effects of the surcharge on both revenues and ridership. This would include reporting on all three

elementsoftheferryfuelcostmanagementprogram:fuelpurchasingandthefinancial impactsofany

hedgingstrategiesemployed;fuelsavingsmeasures,bothprogressontheprogrammaticelementsand

any serviceadjustments implemented toconserve fuel;and theperformanceand impactsof the fuel

surcharge.

TheregularannualreportwouldbeincludedaspartoftheDepartmentsbudgetsubmittalsandwould

provide the necessary supporting information for the Governors Office and the Legislature to make

budgetdecisionsregardingboththefuturespendingauthorityforfuelpurchaseaswellaswhetherto

assumerevenuesfromthecontinuationormodificationoffuelsurcharges.


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1/13/2010

WashingtonStateTransportationCommission PageA1


APPENDIX A: DRAFT COMMISSION WAC LANGUAGE FOR FERRY FUEL

SURCHARGE

WAC468300050

FuelSurcharge

(1) Inordertomanagethefinancialriskassociatedwithfuelpricevolatility,itisherebydeclaredtobethepolicyoftheWashingtonStateTransportationCommissiontoimplementafuelsurchargeasan

addedcomponenttothetotheregularpostedfaresforpassageonvesselsoperatedbyWashington

StateFerries(WSF)whenactualfuelpricesexceedthoseincorporatedandassumedintothe

departmentsWSFfuelbudget.Thetotalferryfarechargedwillconsistofthebasefareplusthe

automatic,incremental,additionalsurchargeascalculatedaccordingtothefixedformulasetforth

inthis

rule.

The

department

is

hereby

directed

to

apply

afuel

surcharge

to

base

fares

to

reflect

the

impactonWSFfuelcostsassociatedwithincreasesinfuelpricesabovethebudgetedpriceoffuel.

Themethodforcalculatingthefuelsurchargeshallbeasfollows:Anaveragehedgingadjusted

actualfuelpriceshallbecalculatedmonthly.Becausefuelispurchasedfromtwo

sources,theaveragemonthlypriceoffuelshallbeaweightedaverageofthemonthly

averagesforbothsourcesOPISRackPrices,wheretheweightingreflectsthevolumeof

WSFfuelpurchasesingallonsfromeachrespectivelocationduringthepreviousfiscal

year.

b. TheaveragemonthlypriceshallbecalculatedforbothsourcesasasimpleaverageoftheOPISDailycontractaveragerackpricesforUltraLowsulfurDyedDieselfuelas

reportedbytheGAOfficeofStateProcurementfromthe16thofthepreviousmonthto

the15thofthecurrentmonth.

c. Thecalculatedaveragecostoffuelshallbeadjustedtoreflectthefinancialimpactsassociatedwiththedepartmentshedgingoperationsoverthecorrespondingperiod.

Thispricepergallonadjustmentshallbedeterminedbydividingnetgainsfromhedging

byaveragemonthlyfuelconsumption.

d. Ifthehedgingadjustedactualfuelpriceisgreaterthanthebudgetedpricepergallon(excludingtaxesandfees)forthecurrentfiscalyearthanthepercentageincreaseinfuel

pricesshallbecalculatedbyfirstsubtractingthebudgetedpricepergallon(excluding

taxesandfees)forthecurrentfiscalyearfromthecalculatedhedgingadjustedaverage

actualpriceandthendividingtheresultbythebudgetedfuelprice(thepriceoffuel


28/36

FuelCostMitigationPla1/13/2010

WashingtonStateTransportationCommission PageA2


usedfordeterminingtheexpenditureappropriation).

e. Afuelsurchargeamountisthencalculatedbyasfollows:i. Multiplythepercentageincreaseinhedgingadjustedfuelpricesbytheshareof

budgetedfuelcoststototaloperatingcostsforthecurrentbiennium;then

ii. Dividetheresultbythefareboxrecoveryrateforthecurrentbiennium(definedasthebudgetedfarerevenuesdividedbytotalProgramXoperatingcosts).

f. Iftheresultingsurchargeamountislessthan2.5%thenthereisnofuelsurcharge.Iftheamountismorethan2.5%,thenafuelsurchargeshallbeaddedtoallferryfaresinan

amountequaltothepostedfaremultipliedbythesurchargefactor,withresultingfares

roundedtothenearestnickel.

g. Tominimizethenumberofmonthlychangesonceafuelsurchargeisinplace,thesurcharge

can

only

be

changed

ifthe

fuel

surcharge

amount

changes

(up

or

down)

by

at

leastanincrementof2.5%.

(3) WSFshallestimatetheneedforafuelsurchargeonamonthlybasis,basedupontheformulaprescribedinthisrule,andifasurchargeistobeaddedormodified,thenthedepartmentshall:

a. NotifyORCApartnersofthependingsurchargechangesatleast30dayspriortoimplementationofsaidchanges.

b. Makeallsurchargechangesbeeffectiveonthefirstofthemonth(4) Thefuelsurchargeamountshallbelimitedtoamaximumof20%.(5) ThedepartmentshallprovideanannualreporttotheLegislature,OFM,andtheWashingtonState

TransportationCommissionsummarizingitsfuelcostmitigationactivities,includinghowthe

departmenthasmanageditscostsaswellastheapplication,performanceandimpactoffuel

surchargespursuanttothisauthority.

(6) Theamountofanyfuelsurchargeshallbeshownseparatelyoncustomerreceipts.(7) TofacilitateunderstandingonthepartofWSFcustomersandtoensureatransparentprocess,an

explanationofhowthesurchargeisapplied,includingasummaryoftheactualcalculationofthe

surchargepercentage,shallbedescribedontheWSFwebsiteandavailableinotherformatsupon

request.


29/36


WashingtonStateTransportationCommission PageB1


APPENDIXB:FUELSURCHARGEEXAMPLES

Within the lastdecade, fuel surchargeshavebecomea common toolusedbybusinesses tomanage

theirexposuretofuelpricevolatility.Typicallytheriskofhighfuelcostsareeithersharedwithorpassed

on entirely to the customer though the fuel surcharge. Fuel surcharge examples are much more

commonin

private

industries

such

as

airlines,

ground

and

air

shipping,

trucking,

and

cargo.

Fuel

surchargeexamplesarelessprevalentamongpublictransportationcompanies.

Three ferry operatorswere identified inour research as having imposed a fuel surcharge in the last

three to fiveyears.Manybusinesses,bothprivateandpublic,havedecreased themagnitudeof fuel

surchargestoreflecttherecentdownturn infuelprices.Manypublicagencies,suchastheLongIsland

Ferry,UtahTransitAuthority,andBCFerrieshaveeveneliminatedaportionorall fuel surcharges.A

summaryofselectedfuelsurchargeexamplesaredisplayedinExhibitB2attheendofthisappendix.

FerryOperators

BCFerries

BCFerries,

which

is

regulated

by

the

British

Columbia

Ferry

Commission,

has

used

afuel

surcharge

to

diminishfuelpricevolatilitysince2004.Themainfeaturesofthefuelsurchargemechanismare:

A fuel deferral account was set up for each of the seven route groups within the system tostabilizefuelcostsandhelpavoidtemporaryfuelsurcharges.

Differences between the actual delivered price and the set price, determined by theCommission,iseithercreditedordebitedtoeachroutesdeferralaccountafteradjustingforany

pricehedginggainsor losses.Anegativedeferralaccountbalancesignifiesthatfuelcostshave

beendeferredforfuelthathasalreadybeenusedbutthatstillhastobepaidforbyBCFerries

customersthroughafuelsurcharge.Apositivebalanceistheresultofpreviousfuelsurcharges

havingmorethanpaidforfuelconsumed.

BCFerriesshareswithcustomers inthe first5centsper literof the fuelpriceoverandabovebasesetfuelprices.Fuelcostsaretransferredtothedeferralaccountwhenthepriceperliteris

greaterthan5centsabovebasesetfuelprices.

A fuel surcharge is administered when a route groups monthend deferral account balanceexceeds 2% of the annual presurcharge tariff revenue for the route group and cannot be

adjustedmorethanonceperquarter.BCFerriesmustprovideat least15dayspublicnoticeof

anyfarechanges.

Thesurchargeamount,which isapercentageabovebasefares, issetsothat iteliminatestheestimateddeferralaccountbalancesovera12monthperiod.

EverythreemonthsBCFerriesmustreporttotheCommissiontheactualaverageleveloffarespaidbyitscustomers.

In2008,themostrecentfuelsurchargesimposedincludeda10.3%surchargeonmajorroutes,17.6%onminorroutes,and9.2%ontheHorseshoeBayLangdaleroute.However,decliningfuel

pricesinthelasthalfof2008allowedtheremovalofallfuelsurchargesbytheendofDecember

2008.Furthermore,fuelrebatesof8%havebeenappliedontheminorroutegroups.

Inorder to levy fuel surcharges, theCommissionhas requiredBCFerries to implementa fuelconservationplanthatincludesvesselspeedcontrol,fuelmonitors,propellerreplacement,hull

resurfacingtoreducedrag,andschedulingadjustments


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LongIslandFerry(CrossSoundFerry)

TheLong IslandFerry,operatedbyCrossSoundFerryServices, isavehicleandpassenger ferry route

linkingthenortherntipofLongIslandtoNewLondon,Connecticut.Thereisafixedfuelsurchargeof2%

that isappliedtoallbase farestocoverthecostsassociatedwithanEPAmandateduseof lowsulfur

diesel.Afloatingsurchargecomponentisappliedasapercentagesurchargeontopofallbasefaresand

isbased

on

the

present

price

of

fuel

compared

to

apre

established

base

benchmark

price.

With

the

recentdeclineinfuelprices,thefloatingsurchargeiscurrentlyat0%.

StateofRhodeIslandFastFerry(BlockIslandFerry)

Beginningin2006,theRhodeIslandUtilitiesCommissionimplementedafuelsurchargeforitsfastferry

operations.Thesurchargewasimposedasa$0.60surchargeoneachonewayfare.TheCommissionhas

thestatutoryauthorityto levyup toasetmaximumsurcharge.Themaximumsurcharge iscalculated

eachmonthandbasedonrecoveringeligiblefuelcostsabovethestatutoryfuelfloorcostsof$1.20per

gallon,usingprojectedmonthlyfuelusageandridership.

OtherPublicTransit

UtahTransit

Authority

(UTA)

TheUTAimposesafuelsurchargeonlyiftheU.S.averageOnHighwayDieselFuelprice(NADF)reported

by the DOE rises above $3.00 per gallon. A $0.25 surcharge is applied to base fares for each $1.00

incrementabovethe$3.00pergallontrigger.

PackageandFreightShipping

Fuelsurchargesarecommonpracticeamongstshippingproviders.Manyshippingcompanies including

FedEx,UPS,andDHL applya fuelsurcharge forbothgroundandairshippingservices.Our research

showedthatfuelsurchargesdonotvarywidelybetweencompaniesforgroundorairexpressshipping.

Fuelsurchargesaretypicallyindexbased,increasingordecreasingwiththemovementoftheparticular

fuel

price

index.

Surcharges

are

only

applied

if

the

index

rises

above

a

set

threshold

price

per

gallon.

Mostshippingcompanies index theirair fuel surchargeson themonthly roundedaverageof theU.S.

Gulf Coast (USGC) price for a gallon of kerosenetypejet fuel, published by the U.S. Department of

Energy(DOE).UPS indexes itsgroundsurchargeagainsttheU.S.averageOnHighwayDieselFuelprice

(NADF)reportedbytheDOE.Thereisatwomonthlagbetweenpublicationofthefuelpriceindexand

imposition of the monthly fuel surcharge. For example, Septembers fuel surcharge paid for ground

shippingwithUPS isbasedonNADFpricepergallonpublished inJune.Examplesofthetypicalground

andairfuelsurchargeindexesandfuelsurchargepercentagesaredisplayedbelowinExhibitB1.


31/36




ExhibitB1

ExampleofGroundandAirShippingFuelSurcharges

At Least:But Less

Than: Surcharge: At Least:But Less

Than: Surcharge:$0 $1.50 0.00% $0 $1.30 0.00%

$1.50 $1.58 0.50% $1.30 $1.34 0.50%$1.58 $1.66 0.75% $1.34 $1.38 1.00%$1.66 $1.74 1.00% $1.38 $1.42 1.50%$1.74 $1.82 1.25% $1.42 $1.46 2.00%$1.82 $1.90 1.50% $1.46 $1.50 2.50%$1.90 $1.98 1.75% $1.50 $1.54 3.00%$1.98 $2.06 2.00% $1.54 $1.58 3.50%$2.06 $2.14 2.25% $1.58 $1.62 4.00%$2.14 $2.22 2.50% $1.62 $1.66 4.50%$2.22 $2.30 2.75% $1.66 $1.70 5.00%$2.30 $2.38 3.00% $1.70 $1.74 5.50%$2.38 $2.46 3.25% $1.74 $1.78 6.00%$2.46 $2.54 3.50% $1.78 $1.82 6.50%$2.54 $2.62 3.75% $1.82 $1.86 7.00%$2.62 $2.70 4.00% $1.86 $1.90 7.50%$2.70 $2.78 4.25% $1.90 $1.94 8.00%$2.78 $2.86 4.50% $1.94 $1.98 8.50%$2.86 $2.94 4.75% $1.98 $2.02 9.00%$2.94 $3.02 5.00% $2.02 $2.06 9.50%

Ground Shipping Air Express Shipping

Source:WebsitesforUPS,FedEx,andDHL.

Airlines

Asof2008,themajorityofairlinecompanieshaveafuelsurcharge.Airlinesalsoimposeafuelsurcharge

forcommercialcargoservices.Somehavescaledbackdomesticsurcharges,butcontinuetoimposefuel

surcharges on international flights. Southwest Airlines is an exception it does not impose any fuel

surcharges.Other

airlines

may

choose

not

to

impose

fuel

surcharges

on

routes

that

are

highly

competitivewithSouthwest. Inthepast,manyairlines imposed fuelsurchargesontravelbookedwith

frequent flyer miles. However, with the recent decline in oil prices, most airline companies have

discontinuedthispracticeondomesticawardtravel.

Trucking&Cargo

Similar to package and freight shipping, cargo and trucking businesses pass along extraordinary fuel

costsassociatedwiththetransportationofgoodstocustomersthroughafuelsurcharge.Thetypicalfuel

surchargemechanismbasesthesurchargeamountonapublishedfuelprice indexandincreaseswhen

thepricepergallonofthe index increasesaboveasettriggerpricepergallon.Mostcompanies index

fuelsurchargesagainsttheNADFpublishedbyDOE.


32/36




ExhibitB2

SummaryofFuelSurcharges

Source:BERK2008

Type of Surcharge Price Index Basis Trigger Mechanism Frequency of Adjustments

Ferry Operators

BC FerriesPercentage surcharge imposed

on top of base fare.Not index-based

When the month-end deferralaccount ba lance exceeds

2% of annual pre-surchargetariff revenue

Quarterly

Long Island Ferry(Cross Sound Ferry)

2% fixed surcharge above base

fare to cover EPA mandated use oflow-sulfur diesel; floating surcharge

based on the present price of fuel in

comparison to a pre-establishedbenchmark price.

Not index-based

When the monthly price forfuel exceeds the benchmarkprice. Shares a portion of fuelcost burden with customers.

Monthly

State of Rhode Island Fast

Ferry(Block Island Ferry)

Floating surcharge, determinedmonthly by Rhode Island Utilities

Commission. Amount is added tobase fares

Not index-based $1.20 per gallon Monthly

Other Public Transit .

Utah Transit Authority Tiered amount added to base faresNational U.S. Avg On Highway

Diesel Fuel Prices (NADF)reported by U .S. Dept.

of Energy (DOE)

$0.25 surcharge is imposedfor each $1.00 incrementabove $3.00.

Quarterly

Package/Freight Shipping

Ground (FedEx & UPS)Percentage surcharge imposed

on top of shipping rates.NADF

0.50% surcharge is imposed

for each $0.08 incrementabove $1.50.

Surcharge

can changewithout notice

Air; International

(FedEx, UPS, DHL)

Percentage surcharge imposed

on top of shipping rates.

U.S. Gulf Coast (USGC) Prices

for kerosene-type jet fuelreported by U.S. DOE

0.50% surcharge is imposedfor each $0.04 increment

above $1.30.

Surchargecan change

without notice

Airlines .

Domestic

Methods can vary; Can depend on

how competitive routes are; usuallycharged on a fixed price per

passenger basis

Not available Not available Surchargecan change

without notice

International

Methods can var y typically a fixedcharge based on route; Surcharges

can be determined illegal bygovernmental aviation authority.

Not available Not available

Surcharge


Trucking & Cargo

Trucking

Methods vary; some impose apercentage surcharge imposed to

base trucking charges;

some utilize a per-mile surcharge.

Most u tilize NADF Var ies by companySurcharge


CargoPer kilogram surcharge is applied to

cargo prices

USGC kerosene-type jet fuel;

Local price index such as Platt'sLos Angeles Mean fuel index

(used by Alaska Air)

Varies by companySurcharge

can change

without notice


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WashingtonStateTransportationCommission PageC1


APPENDIXC:OPTIONSEVALUATED

Fuelchargesettorecover100%offuelcost

Thisoptionwoulddesignateaportionoffarespaidbyallferryriderstorecover100%offuelcosts.The

fuelcharge

component

of

fares

would

initially

be

set

at

the

beginning

of

each

budget

cycle

and

would

be

periodicallyadjustedbetweenbudgetsbasedonthemovementoffuelprices.

Advantages: Usersofthesystemwouldeachpayfortheirfairshareoffuelcosts. WSFsexposuretofuelpricevolatilityisvirtuallyeliminated.

Disadvantages: Largeinitialfareincreaseswouldbenecessaryinordertocatchupfaressothatfuelcostsare

fullyrecovered.However,aphasedinapproachwouldallowfarestobegradually increased in

ordertoworkuptothe100%fuelcostrecoverygoal.Fare increasesneededtoachieve100%

fuel

cost

recovery

may

not

be

achievable

due

to

ridership

impacts

and

would

not

be

the

preferredoptionforWSF.

Fuelcomponentoffarewouldbe increasedanddecreasedrelativetothemarketpriceswingsand consumers may get wary of large fare shifts. Further, there is no discretion allowed to

budgetmakersortheDepartmentregardinghowto fund fuelcosts,particularly inasituation

wheretheremaybeasignificantincreaseinpricesoveraveryshortperiodoftime.

Fuelsurchargesettokickinoncebasefuelistriggered

Inthisoption,WSFwouldcoverfuelcostsequivalenttoconsumptionmultipliedbyasetbasefuelprice

per gallon from base fare revenues and taxes. As fuel prices rise above this threshold price, the

additional fuel costswouldbepassed on to customersand recovered through a fuel surcharge. The

surcharge

would

remain

in

place

until

fuel

prices

fell

below

the

base

fuel

price.

Similar

to

the

shipping

industry, fuelpriceswouldbebasedonapublisheddiesel index (e.g.NADFpublishedbyDOE)anda

standardtableofsurchargeswouldestablishfuelpricethresholdsandsurchargeamounts.Toaccount

forinflation,thebasefuelpricepergalloncouldbeadjustedannuallybyanindexsuchastheConsumer

PriceIndexforallurbanconsumers(CPIu).

AnexampleofhowthissurchargewouldworkbasedonactualaveragefuelpricesbetweenFY2006and

FY2009 isdisplayedbelow inExhibitC1.Thebase fuelpriceof$2.15 isassumed tobeequal to the

historical average price per gallon of diesel fuel between 1952 and 2008, adjusted for inflation. As

illustrated inExhibitC1,a fuelsurchargewouldbe imposed formostofFY2007,allofFY2008,and

wouldceaseabouthalfwaythroughFY2009.


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ExhibitC1

ExampleofFuelSurchargeUsingFY2007 FY2009MonthlyAverageFuelPrices

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Average MonthlyFuel Prices

Threshold Fuel Price ($2.15)

Source:WSF,

2009

ExhibitC2 illustrateshowashipping industrytype fuelsurchargemechanismwouldbeappliedusing

$2.15asthebasefuelprice.AtthebeginningoftheFY200911Budget,theestimatedaveragepriceper

gallonfordieselwas$2.36.Thisrepresenteda$13.7millionincreaseinestimatedfuelcostscompared

tothetotalFY200911appropriation.Usingthestandardtableofsurchargesbelow,theaverageprice

of $2.36 would result in a 4.86% surcharge applied to base fares. The resulting surcharge would

decreaseoverallridershipbyalmost2%ormorethan400,000riders.Theupperboundofthestandard

tablebelowiscappedat$5.00pergallon,whichwouldresultin18.9%dropintotalridership.Thisupper

boundcanbeadjustedsothattheoverallridershipimpactislesssevere.Forexamplewhilefuelprices

wererising intothe$4.00pergallonrange inFY2008,WSFcouldsettheupperboundofthetableto

$2.90

per

gallon.

The

fuel

surcharge

would

never

rise

above

13.28%

and

the

resulting

ridership

loss

wouldneverbeabove4.77%.


35/36




ExhibitC2

ExampleofStandardTableofSurcharges&RidershipImpactFY2009 FY2011

At Least:But Less

Than:Surcharge:

FY 2011Ridership

Impact

% Change fromBase Ridership

$0.00 $2.15 0.00% 23,450,000 0.00%$2.16 $2.30 2.05% 23,277,781 -0.73%

$2.31 $2.45 4.86% 23,040,970 -1.74%

$2.46 $2.60 7.66% 22,804,159 -2.75%

$2.61 $2.75 10.47% 22,567,348 -3.76%$2.76 $2.90 13.28% 22,330,537 -4.77%

$2.91 $3.05 16.08% 22,093,727 -5.78%$3.06 $3.20 18.89% 21,856,916 -6.79%

$3.21 $3.35 21.69% 21,620,105 -7.80%$3.36 $3.50 24.50% 21,383,294 -8.81%

$3.51 $3.65 27.30% 21,146,483 -9.82%

$3.66 $3.80 30.11% 20,909,673 -10.83%$3.81 $3.95 32.92% 20,672,862 -11.84%

$3.96 $4.10 35.72% 20,436,051 -12.85%

$4.11 $4.25 38.53% 20,199,240 -13.86%$4.26 $4.40 41.33% 1

Documents

Ferry Fuel Surcharge and Fuel Cost Mitigation Report