Final Report - Review of maximum fares for private ferry ... · would change as follows, from January 2016 (or when determined by TfNSW): Brooklyn Ferries fares increase by 30 cents

Independent Pricing and Regulatory Tribunal

Review of maximum fares for private ferry services in 2016

Transport — Final Report and RecommendationsDecember 2015

Review of maximum fares for private ferry services in 2016

Transport — Final Report and Recommendations December 2015

ii IPART Review of maximum fares for private ferry services in 2016

© Independent Pricing and Regulatory Tribunal of New South Wales 2015

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-925340-41-9

The Tribunal members for this review are:

Dr Peter J Boxall AO, Chairman

Ms Catherine Jones

Mr Ed Willett

Inquiries regarding this document should be directed to a staff member:

Patrick Lam (02) 9290 8448

Jenny Suh (02) 9113 7775

John Smith (02) 9113 7742

Independent Pricing and Regulatory Tribunal of New South Wales PO Box K35, Haymarket Post Shop NSW 1240 Level 15, 2-24 Rawson Place, Sydney NSW 2000

T (02) 9290 8400 F (02) 9290 2061

www.ipart.nsw.gov.au

Contents

iii IPART Review of maximum fares for private ferry services in 2016

Contents

1 Executive summary 1 1.1 Overview of recommended fare outcomes 1 1.2 How we made our final recommendations 2 1.3 Other decisions and approach to future reviews 5 1.4 How this report is structured 6

2 IPART’s role and process for the review 7 2.1 Factors we consider in undertaking the review 7 2.2 Our review process this year 8 2.3 Our response to matters raised in submissions 9

3 Final recommendations on maximum fares 18 3.1 Summary of our final recommendations 18 3.2 Overview of how we made our final recommendations 19 3.3 Updating the building block model 20 3.4 Framework to recommend fare changes 24 3.5 Other decisions and approach to future reviews 26

4 Other factors we considered 28 4.1 Implications for private ferry operators 28 4.2 Implications for passengers 29 4.3 Implications for the environment 29 4.4 Implications for Government funding 29 4.5 Relativities with Sydney Ferries’ services 30 4.6 Service standards 31

Appendices 33 A Terms of Reference 35 B Requirements of the IPART Act for private ferries recommendations 36 C Building block model 38 D Weighted-average cost of capital 43 E Patronage forecasts 49 F Government payments 50

1 Executive summary

Review of maximum fares for private ferry services in 2016 IPART 1

1 Executive summary

The Independent Pricing and Regulatory Tribunal of New South Wales (IPART) is currently reviewing the maximum fares for seven private ferry operators that provide regular passenger ferry services1 under contract to Transport for NSW (TfNSW) in the Sydney, Central Coast and North Coast areas of NSW.

We have made final recommendations on maximum fares for 2016.2 The Director-General of TfNSW is responsible for deciding on these fares.

This report explains our final recommendations, including the fare outcomes and the decisions that led to those outcomes.

1.1 Overview of recommended fare outcomes

Under our final recommendations, the maximum fares for private ferry services would change as follows, from January 2016 (or when determined by TfNSW):

Brooklyn Ferries fares increase by 30 cents (to $7.00)

Church Point Ferry Service fares increase by 30 cents (to $8.00)

Clarence River Ferries fares increase by 30 cents (to $8.00)

Palm Beach Ferry Service fares increase by 10 cents (to $7.80 and $11.30 for the Basin and Ettalong services, respectively), and

Matilda Cruises, Central Coast Ferries and the Cronulla and National Park Ferry Service fares do not change from 2015 levels (see Table 1.1).

With the exception of Central Coast Ferries, our final recommendations are in line with our indicative fare recommendations from our Issues Paper released in November. As Central Coast Ferries and Matilda Cruises are currently charging less than maximum fare we recommended last year, we are not recommending increasing the maximum fare this year. This is discussed further in Section 1.2. The maximum fare for the Cronulla and National Park Ferry Service does not change as this is above our estimate of the efficient fare in 2016.

1 As defined in the Passenger Transport Act 1990. 2 Pursuant to section 9 of the Independent Pricing and Regulatory Tribunal Act 1992 (IPART Act).

1 Executive summary

2 IPART Review of maximum fares for private ferry services in 2016

Table 1.1 Final recommendations on maximum fares for private ferry services from January 2016 (incl. GST)

Operator Maximum fare in 2015

($2015)

Indicative recommended maximum fare

in 2016 ($2016)

Final recommended

maximum fare in 2016

($2016)

Change in maximum

fare

($2016)

Brooklyn Ferry Service $6.70 $6.90 - $7.00 $7.00 $0.30

Central Coast Ferriesa $7.80 $8.00 - $8.10 $7.80 -

Church Point Ferry Service

$7.70 $7.90 - $8.00 $8.00 $0.30

Clarence River Ferries $7.70 $7.90 - $8.00 $8.00 $0.30

Cronulla and National Park Ferry Service

$6.40 $6.40 $6.40 -

Matilda Cruises (Circular Quay to Darling Harbour)a

$7.40 $7.40 $7.40 -

Matilda Cruises (Circular Quay to Lane Cove)a

$7.40 $7.40 $7.40 -

Palm Beach Ferry Service (Palm Beach to the Basin)

$7.70 $7.70 - $8.00 $7.80 $0.10

Palm Beach Ferry Service (Palm Beach to Ettalong)

$11.20 $11.20 - $11.50 $11.30 $0.10

a These services currently charge less than the maximum fare. The current fares are $7.00 for both Matilda routes and $7.50 for Central Coast Ferries.

Note: TfNSW may decide to change fares before January 2016.

It is important to note that we only recommend the maximum fare. Ferry operators can choose to set their fare below the maximum fare. In our view, ferry operators are in the best position to decide whether to set their fares below the maximum.

1.2 How we made our final recommendations

To make our final recommendations, we considered the current (2015) maximum fare for each ferry operator and how much, if any, this needs to change to be at a more efficient level in 2016. An efficient fare ensures passengers pay a fair price and ferry operators are able to run their business efficiently.

We used the following framework to recommend maximum fares in 2016:

For ferry operators currently charging fares less than the 2015 maximum fare, we considered whether there is a need to change the maximum fare in 2016 and whether the maximum fare should be regulated.

1 Executive summary


For ferry operators currently charging the 2015 maximum fare:

– if the 2015 maximum fare is the same as or higher than the 2016 efficient fare, we recommended freezing the 2015 maximum fare (in nominal terms)

– if the 2015 maximum fare is below the 2016 efficient fare, we recommended increasing the 2015 maximum fare to the lesser of:

– the 2016 efficient fare from the building block model, or

– the 2015 maximum fare plus 30 cents.

1.2.1 Findings and recommendations for private ferries charging fares below maximum fares

Ferry operators face varying degrees of competition from other transport options. In some cases, this competition is limiting the price that ferry operators can charge their customers. In our view, competition provides the best form of protection for customers, including protection from higher than efficient prices.

We found that currently two ferry operators (Matilda Cruises and Central Coast Ferries) are charging fares below their 2015 maximum fares:

Matilda Cruises (Circular Quay to Darling Harbour) is charging $7.00 and the 2015 maximum fare is $7.40.

Matilda Cruises (Circular Quay to Lane Cove) is charging $7.00 and the 2015 maximum fare is $7.40.

Central Coast Ferries is charging $7.50 and the 2015 maximum fare is $7.80.

Fares for Matilda Cruises and Central Coast Ferries services are being determined by the competitive market. In our view, market-determined fares are likely to be a better estimate of an efficient fare compared to our estimates. As the current fares are below the maximum fares in 2015, we are recommending no change to the maximum fares in 2016. Nevertheless, Matilda Cruises and Central Cost Ferries still have the ability to increase their fares in 2016 as their current fares are 30 to 40 cents below their maximum fares.

We are of the view that price regulation is not necessary for the Matilda Cruises and Central Coast services covered by this review. In general, price regulation is only required in a monopoly market, where lack of competition can lead to higher prices and poorer service outcomes. However, in our view competition is delivering Matilda Cruises and Central Coast passengers benefits beyond those that can be achieved through fare regulation.

Recommendation

1 That Matilda Cruises’ two ferry services and the Central Coast Ferry service should not be subject to price regulation, as these services are provided in a competitive market and the market-determined fares are below IPART’s recommended maximum fare.

1 Executive summary


1.2.2 Findings and recommendations for private ferries charging maximum fares

For private ferries currently charging maximum fares, we considered whether the current maximum fare should be changed in 2016. To do so, we have updated our building block models to estimate efficient fares in 2016, and compared them with the 2015 maximum fares. In particular, we have updated the efficient operating and capital costs estimated as part of our review last year and incorporated new patronage data in our building block models. Where private ferry operators provided updated cost information, we considered our consultant (Indec)’s advice on the efficiency of these costs. In addition, we considered external benefits provided by private ferry services and found that these do not exceed the financial viability payments that some ferry operators are receiving from the NSW Government. Therefore, we have not recommended making any changes to our approach for determining efficient fares on the basis of external benefits.

IPART finding

1 That the external benefits from private ferry services do not exceed the financial viability payments that some ferry operators are receiving from the NSW Government.

We found that Cronulla Ferry Service’s current maximum fare is higher than the 2016 efficient fare, and therefore we are recommending freezing the 2015 maximum fare (in nominal terms).

For the remaining private ferry operators, we found that their current maximum fares are below the 2016 efficient fares and hence we are recommending increasing the 2015 maximum fare to the lesser of:

the 2016 efficient fare from the building block model, or

the 2015 maximum fare plus 30 cents.

We considered an increase of 30 cents provides a reasonable balance between the impacts on ferry operators and passengers. This is similar to fare increases in previous years.

We are not able to provide details of our calculations of efficient fares as our analysis relies on confidential information provided by the ferry operators. Nevertheless, we have conducted thorough analysis of this information in making our recommendations. This is discussed further in Chapter 3.

1 Executive summary


1.3 Other decisions and approach to future reviews

In our Issues Paper released in November, we invited comment on preliminary views that:

we continue to recommend the maximum single adult fare, rather than fares for all types of tickets, including discounted multi-trip tickets, and

we no longer conduct mid-year fuel cost reviews outside the regular fare review cycle.

1.3.1 Recommending maximum fares

Stakeholders supported IPART continuing to recommend the maximum single adult fare for this review and our recommendations in this report are made on this basis. Under this approach, ferry operators are able to determine the discounts that apply to their multi-trip tickets. These arrangements are captured in our building block analysis, and will mean that (all else equal) the more passengers that travel under discounted fares, the higher the non-discounted fare will need to be to recover the total efficient costs.

1.3.2 Mid-year fuel cost review

We have decided to no longer undertake the mid-year fuel cost review for private ferry operators. Under the mid-year review, if fuel costs increased or decreased by more than 10% in the six months after our final fare recommendation, we may recommend an adjustment to maximum fares.

As we now use a building block approach to recommend fare changes, we consider there is less need to conduct a mid-year fuel cost review. The aim of the building block approach is to create an incentive for efficiency rather than to ‘pass through’ actual costs. Ferry operators who commented on this issue supported the removal of the mid-year fuel cost review, but submitted that there should be some other mechanism to adjust fares if costs substantially change (see chapter 2).

1.3.3 Approach to future reviews

We consider that, as with other industries where we regulate using a building block approach, in future reviews we could recommend a price path for maximum fares over a number of years rather than just a single year. This would provide ferry operators and passengers with more certainty over future fare changes.

The regulatory framework under such an approach may also include a mechanism to revise fares, either up or down, if there are substantial unforeseen changes. We would consult with stakeholders on the types of changes that may warrant a revision to fares, as well as on other issues relevant to the regulatory framework.

1 Executive summary


A number of submissions called for extending the Opal system to all private ferries. The decision to include private ferries under the Opal system is a matter for the NSW Government.

1.4 How this report is structured

This report provides more detail on this review and our final recommendations:

Chapter 2 explains our role in making recommendations for private ferry fares, our process for conducting this review and our responses to issues raised in submissions.

Chapter 3 sets out our final recommendations on private ferry fares, explains how we made these final decisions, and summarises how we propose to approach future reviews.

Chapter 4 discusses other factors we considered in making our final decisions, including their impact on stakeholders.

Appendices A to F contain our terms of reference and supporting information.

2 IPART’s role and process for the review



IPART makes recommendations to TfNSW on the maximum fares to be charged for regular private ferry services. Our role is limited to providing recommendations;3 the Director-General of TfNSW will decide the date on which these changes, if accepted, will take effect. Operators may charge less than the recommended maximum fare if they wish.

This review does not include fares for Sydney and Stockton Ferry services. IPART is currently reviewing fares for both these services as part of a separate public transport review.4 Also, we are not reviewing the discount applied to concession tickets or the cost or availability of the Pensioner Excursion Ticket (PET) and Opal Gold as these are matters for the NSW Government.

This chapter provides an overview of the factors we have considered in undertaking this review and explains our review process. It also provides our response to submissions on our Issues Paper released in November 2015.

2.1 Factors we consider in undertaking the review

We review private ferry fares under terms of reference from the Premier (see Appendix A), which specify the factors that we must consider when making recommendations to TfNSW. These factors include:

the cost of providing the services concerned and the need for greater efficiency in the supply of services so as to reduce costs for the benefit of customers

relativities with Sydney Ferries’ services including in terms of service, efficiency, cost and ticketing products

the protection of consumers from abuses of monopoly power in terms of prices, pricing policies and standards of service

the need to maintain ecologically sustainable development

the impact on customers of the recommendations

3 Pursuant to section 9 of the Independent Pricing and Regulatory Tribunal Act 1992 (IPART Act). 4 http://www.ipart.nsw.gov.au/Home/Industries/Transport/Reviews/Public_

Transport_Fares/Public_Transport_Fares_in_Sydney_and_Surrounds



standards of quality, reliability and safety of the services concerned (whether those standards are specified by legislation, agreement or otherwise and any suggested or actual changes to those standards), and

the effect of any pricing recommendation on the level of Government funding provided to private operators under commercial contracts.

We also had regard to the list of factors we are required to consider under section 15 of the IPART Act in making our recommendations for private ferry fares (see Appendix B).

The ferry services covered by this review are listed in Table 2.1.

Table 2.1 Ferry services covered by this review and their current maximum fares as at 7 December 2015

Operator Routes Current maximum fare

Current fare charged

Brooklyn Ferry Service Brooklyn to Dangar Island $6.70 $6.70

Central Coast Ferries Woy Woy to Empire Bay $7.80 $7.50

Church Point Ferry Service

Scotland Island and western foreshore of Pittwater

$7.70 $7.70

Clarence River Ferries Iluka to Yamba $7.70 $7.70


Cronulla to Bundeena $6.40 $6.40

Matilda Cruises Circular Quay to Darling Harbour (fast ferry)

$7.40 $7.00a

Circular Quay to Lane Cove (fast ferry)

$7.40 $7.00a

Palm Beach Ferry Service

Palm Beach to Mackerel Beach and the Basin

$7.70 $7.70

Palm Beach to Ettalong and Wagstaffe (fast ferry)

$11.20 $11.20

a Current fares for Matilda Cruises obtained from http://www.matilda.com.au/, 7 December 2015.

2.2 Our review process this year

We received the Terms of Reference for this review on 26 October 2015 and commenced the review by releasing an Issues Paper in November 2015. In the Issues Paper, we outlined:

factors we are required to consider under the Terms of Reference

how we propose to approach the review

indicative fares and specific issues we seek stakeholder comments on, and

how stakeholders can provide input to the review.



To make fare recommendations to TfNSW in time for fare changes on 1 January 2016, in the Issues Paper we have made our indicative recommendations on maximum fares for 2016 and invited stakeholder comment. In making our indicative fare recommendations, we updated our building block models incorporating efficient costs estimated as part of our review last year, and calculated an efficient fare in 2016. For ferry operators whose current maximum fares were below efficient fares, we made a judgement to determine an indicative fare increase that balances the impacts on customers and ferry operators. We also invited all private ferry operators except for Matilda Cruise to provide us with updated cost and patronage information. We received confidential information from Brooklyn Ferry Service, Church Point Ferry Service and Palm Beach Ferry Service on their actual and forecast operating costs, capital expenditures and ticket sales including multi-trip tickets.

We received four submissions on our Issues Paper. In reaching our final decisions, we considered matters raised in the submissions to the Issues Paper and the factors discussed in Section 2.1. In addition, we commissioned Indec Consulting (Indec) and considered its advice on the reasonableness of ferry operators’ updated costs.

The submissions on our Issuer Paper are available on our website.5

2.3 Our response to matters raised in submissions

Our Issues Paper raised a series of specific questions that we sought stakeholder comments on. In this section, we summarise stakeholder submissions to these questions and our response.

2.3.1 Indicative fare recommendations for 2016

Our indicative recommendations in the Issues Paper were that in 2016 maximum fares for:

Central Coast Ferries increase by between 20 and 30 cents (to $8.00-$8.10)

Clarence River Ferries increase by between 20 and 30 cents (to $7.90-$8.00)

Brooklyn Ferries increase by between 20 and 30 cents (to $6.90-$7.00)

Church Point Ferry Service increase by between 20 and 30 cents (to 7.90-$8.00)

Palm Beach Ferry Service increase by up to 30 cents (up to $11.50 for the Ettalong service and up to $8.00 for the Basin service)

Cronulla and National Park Ferry Service do not change from 2015 levels ($6.40), and

5 http://www.ipart.nsw.gov.au/Home/Industries/Transport/Reviews/Private_Ferries/

Review_of_fares_for_Private_Ferries_for_2016



Matilda Cruises do not change from 2015 levels ($7.40 for both the Circular Quay to Darling Harbour and Circular Quay to Lane Cove services).

Church Point Ferries agreed with our indicative fare recommendations, but considered accounting for external benefits would result in a better fare outcome.6 Brooklyn Ferries welcomed the indicative fare increase but considered there is still imbalance between impacts on passengers and the viability of continuing ferry service.7 The submission from Mr Miles agreed with our indicative fare recommendations except for Palm Beach services as they are generally similar to the MyFerry2 fare of $7.60 (the equivalent Opal fare is $7.18).8 Given the small number of passengers involved in private ferries, Mr Miles submitted that the Tribunal should apply the standard ferry fares that cover the majority of ferry routes in Sydney.9

Our final fare recommendations are consistent with the indicative fare recommendations from our Issues Paper. The exception is Central Coast Ferries, where our Issues Paper indicated a fare increase of 20-30 cents and our final recommendation is to freeze the current maximum fare.

We do not agree with Mr Miles that we should set the maximum ferry fares for private ferries the same as fares that apply to the majority of ferries in Sydney. Private ferry operators have different cost structures, earn revenues in different ways and have different financing arrangements with the NSW Government. Setting fares without accounting for these factors would result in under or over- recovering costs for private ferry operators.

External benefits and viability payments are discussed further below.

2.3.2 Proposed approach for final fare recommendations for 2016

Church Point Ferry Service considered accounting for external benefits would be a more equitable approach for services that provide the only means of transport for the physically and financially disadvantaged.10 Brooklyn Ferry Service did not agree with our proposed approach. It submitted that the proposed approach does not address external benefits, and operators cannot recover efficient costs only by fare increases.11

Mr Miles agreed only because it is too late to do anything else now.12

6 Church Point Ferry Service submission to the Issues Paper, November 2015, pp 1-2. 7 Brooklyn Ferries submission to the Issues Paper, November 2015, p 1. 8 A. Miles submission to the Issues Paper, November 2015, p 2. 9 Ibid., p 1 and p 3. 10 Church Point Ferry Service submission to the Issues Paper, November 2015, p 1. 11 Brooklyn Ferries submission to the Issues Paper, November 2015, p 1. 12 A. Miles submission to the Issues Paper, November 2015, p 2.



Consistent with the approach outlined in the Issues Paper, we:

commissioned a consultant and considered its advice on the reasonableness of ferry operators’ updated costs

considered ferry operator and other stakeholder comments on our indicative fare recommendations and on other issues raised in the Issues Paper, and

undertook our own analysis, including updating the weighted average cost of capital in the building block model.

We have considered external benefits in our approach. This is discussed further below.

2.3.3 Estimating an appropriate weighted average cost of capital for ferry operators

In the 2014 private ferries review, we used our standard approach for estimating the weighted average cost of capital (WACC) and adopted the same industry-specific parameters as in the 2012 Sydney Ferries review. This year, we proposed adopting the same equity beta and gearing ratio as in our 2014 final decision, but updating the market-based parameters.

Mr Miles submitted that an appropriate cost of capital is last year’s rate plus a reasonable percentage. He considered that having calculated it once, it is not necessary to repeat the process of estimating the cost of capital.13 Church Point Ferry Service submitted that private ferry operators are generally small and considered of high risk.14 A 10-year bank business mortgage loan interest rate would be a more appropriate rate.15 Brooklyn Ferry Service agreed with the proposed approach, but submitted that it is difficult for it to source capital externally given the current short contract term and that it is not recovering efficient costs (ie, its current fare is below the efficient fare).16 A confidential response to our information request noted that companies usually have a gearing ratio of up to 30% and our WACC should reflect actual gearing ratios.

Our regulatory framework is one of incentive regulation to promote efficient service provision and efficient pricing. Therefore, we determine a WACC for a regulated business that reflects the efficient cost of capital for a ‘benchmark entity’, which is not influenced by the actual financing decisions of the regulated business under its existing structure and ownership. Following this approach, we have determined the WACC that reflects the efficient cost of capital for a benchmark firm operating in competitive market and facing similar risks to private ferry businesses.

13 A. Miles submission to the Issues Paper, November 2015, p 2. 14 Church Point Ferry Service submission to the Issues Paper, November 2015, p 2. 15 Ibid, p 2. 16 Brooklyn Ferries submission to the Issues Paper, November 2015, pp 1-2.



The confidential response to our information request also commented that our methodology does not take into account the latest bank practices of adding loan associated fees (eg, line of credit, establishment, valuation etc) and including these fees, an appropriate cost of debt is 5.5%. It also submitted that based on our WACC methodology, a nominal risk-free rate of 2.9% and a debt margin of 2.4% should yield a cost of debt of no less than 5.3%.

We do not agree with these comments. Our approach for estimating the cost of debt across all industries is to include allowance for debt raising costs of 12.5 basis points (bps) for a target term-to-maturity of 10 years. These costs include underwriting fees, legal fees, company credit rating fees and other costs incurred in raising debt finance. Our allowance for debt raising costs is consistent with regulatory practice. Regulators across Australia typically include an allowance of 12.5 bps for debt raising costs if the 10-year term-to-maturity is used (and 20 bps for 5-year term-to-maturity).17

In relation to the calculation of the cost of debt, as set out in the Issues Paper, the correct 40-day average and 10-year average risk-free rates are 2.7% and 4.7%, and the correct 40-day average and 10-year average debt margins are 2.8% and 2.9%. In nominal terms, the cost of debt is 5.5% based on the 40-day averages and is 7.6% based on 10-year averages. Since we use a real post-tax WACC, the nominal rates are then converted to real rates using our forecast inflation rate of 2.5%.

The confidential response to our information request also argued that an appropriate equity beta is 1.22. It submitted that based on its survey, of 144 world-wide shipping related companies, 31% had a beta around 1.22 and 16% had a beta above this level. Given increasingly difficult Australian marketing conditions, particularly for ferry service industry, it submitted that an appropriate equity beta is 1.22.

We do not agree with this comment. For this year’s review, we proposed to apply the same equity beta as that used in the 2014 private ferries review and Sydney Ferries in the 2012 review (ie, 0.8 to 1.0).18 In the 2014 review, we found that based on past IPART’s decisions and risks faced by ferry operators relative to other regulated businesses, the equity beta of 0.8 to 1.0 is appropriate for ferry services. We have updated our analysis this year and found that our equity beta range for private ferries remains appropriate. See Appendix D for more details of our analysis.

It is unclear how this stakeholder sampled comparable companies to obtain 144 firms, and how many of those are Australian listed companies providing ferry passenger service. As part of our 2014 private ferries review, we analysed equity betas of comparable firms. Since ferry service providers can also earn

17 Industry Panel, Review of the Independent Competition and Regulatory Commission’s 2013 Price

Direction – Draft Report, December 2014, p 171. 18 IPART, Review of maximum fares for Sydney Ferries services from January 2013 – Final Report,

November 2012, p 95.



revenues from operations in other industries, we limited our sample to include companies that have at least 50% of their revenue from ferry passenger services. As a result, our sample consisted of 14 companies, of which only one was from the Australian market. Our analysis this year is based on a sample of 17 international comparable firms. See Appendix D for more information.

In addition, it is unclear whether the betas presented in this submission are adjusted for leverage (ie, de-levered). Stock-return based equity betas are “levered” betas in that they are affected by companies’ financial structures (ie, the level of leverage). That is, holding other things constant, the higher the financial leverage of a firm, the higher the equity beta. Therefore, in determining an equity beta for a benchmark entity, equity betas should be de-levered using companies’ actual capital structure, and then re-levered at a chosen gearing ratio for the benchmark entity.

Consistent with our approach proposed in the Issues Paper, we have adopted the same industry specific parameters as in the 2014 review and updated the market-based parameters to 1 December 2015. Our final fare recommendations apply the midpoint WACC of 5.8% real post-tax. Appendix D explains our approach for estimating the WACC, including our final decision on the equity beta and gearing ratio for private ferry services.

2.3.4 Estimating the value of external benefits

In the Issues Paper, we proposed to estimate the total annual external benefit of travel by multiplying annual patronage in the peak period19 by our current estimate of net external benefits per passenger journey for Sydney Ferries, ranging from $0.12 to $1.42. For private ferry operators which receive subsidies from the NSW Government to assist in meeting the costs of providing the services, we proposed to consider whether external benefits associated with these services are appropriately captured by the subsidy being funded by the Government.

We estimated that the total external benefits are in a range of $5,207 to $61,601 for Palm Beach Ferry Service (Ettalong), $5,976 to $70,711 for Cronulla Ferry Service and $1,950 to $23,080 for Central Coast. The major component of external benefits of public transport use was avoided road congestion. We did not estimate external benefits for Brooklyn Ferry Service and Church Point Ferry Service. These ferries provide a service to islands and hence there are unlikely to be external benefits associated with passenger travel (ie, avoided road congestion).20

19 We proposed to estimate annual patronage in the peak period based on the proportion of daily

commuter services to total daily services multiplied by total annual patronage. 20 IPART, Review of private ferry fares from January 2016 - Issues Paper, November 2015, pp 5-7.



Dangar Island League did not agree that there are no external benefits arising from Brooklyn Ferry Service. It submitted that Brooklyn Ferry Service is the only public transport option for commuters, elderly and disabled residents, all school children and day trippers, and replaces an equivalent number of passenger trips by private boat carrying one or two passengers. Also, it commented that Brooklyn Ferry Service reduces the demand for increased infrastructure in Brooklyn for boat moorings and spreads demand for parking between the ferry wharf and the general mooring facility and provides social benefits to those less mobile or unable to utilise small boats and safety issues at times of inclement weather.21

Brooklyn Ferry Service did not agree with our proposed approach. It submitted that our proposed approach does not take into account that there are alternative transport options with high emissions for off shore residents. It commented that its service provides community/social benefits through provision of reliable and safe travel options, particularly to the elderly, school children or less mobile residents. It also commented that it is not clear how external benefits proposed for other operators would impact prices, or the level of Government funding.22

Church Point Ferry Service also did not agree with our proposed approach. Similar to Brooklyn Ferry Service, it also commented that its service provides safe and reliable form of transport for elder and less mobile residents of the area, and parents or carers with small children. It also submitted that its service provides health benefits because the ferry service encourages greater levels of physical activity, mostly with people walking to and from the wharves and their homes, mitigates air pollution and greenhouse gas emissions by reducing use of private dinghies, and is the only provider that offers a fully carbon offset ticket. In addition, Church Point Ferry Service submitted that it provides a marine hub for off-shore residents and Pittwater users, including a Commuter dinghy Wharf, noting that there are insufficient commuter dinghy mooring places in its service areas.23

Mr Miles submitted that the calculation of external benefits should not be complicated. He suggested relying on past figures and estimates.24

The approach in our Issues Paper involved identifying external benefits for ferry services where there are likely to be road congestion benefits as this is the major component of external benefits – these are Palm Beach (Ettalong), Cronulla and Central Coast. Therefore, we remain of the view that external benefits would not be material for Brooklyn and Church Point who provide a service to islands. This is because there are fewer vessels, and more capacity for those vessels, to travel on the ocean relative to cars travelling on the road.

21 Dangar Island League submission to the Issues Paper, November 2015, p 1. 22 Brooklyn Ferry Service submission to the Issues Paper, November 2015, p 2. 23 Church Point Ferry Service submission to the Issues Paper, November 2015, pp 2-4. 24 A. Miles submission to the Issues Paper, November 2015, p 2.



Some submissions identified other benefits that need to be included in our external benefit calculations. These included reduced demand for boat moorings, safety benefits, active transport benefits, lower air pollution, social inclusion benefits, and community benefits. In our review of external benefits, we have established an approach to determine the value of the net external benefits of public transport for our fare reviews this year. The external benefits estimated under our approach already account for avoided road accidents when people use public transport instead of driving (safety benefits), avoided air pollution and greenhouse gas pollution when people use public transport instead of driving, and external health benefits that arise because public transport encourages greater levels of physical activity (ie, walking or cycling to and from public transport).25

However, our approach does not account for the benefits of increased mobility and social inclusion in estimating external benefits. We considered that many of the benefits associated with social inclusion are private. For example, the ability of people to access resources such as education, employment, health and other services improves a person’s well-being.26 We agreed that there may be some external benefits associated with improved mobility and social inclusion, but considered these are difficult to measure and determine a reasonable range for these benefits.

Overall, we do not consider there is a need to change our approach or our estimates of external benefits. Section 3.3 discusses our final decision on the external benefits of private ferry services, how it impacts prices and what it means for the Government’s funding.

2.3.5 Recommending maximum fares for private ferries

The Issues Paper sought stakeholder comment on whether IPART should continue to recommend the maximum fares for each private ferry operator. Brooklyn Ferry Service and Church Point Ferry Service agreed.27 Mr Miles submitted that recommending maximum fares for private ferries is necessary for 2016, but not for 2017 and beyond. Instead, he recommended harmonising the private ferry fares with the public ferries.28

We are continuing to recommend the maximum fare for each operator. We do not agree with Mr Miles that fares should be harmonised between private and public ferries. As discussed previously, private ferry operators have different cost/revenue structures, and have different funding arrangements with the Government. Applying a single fare for all private and public ferries may result in operators not recovering efficient costs of providing ferry services. 25 IPART, Review of external benefits of public transport - Draft Report, December 2014, p 27. 26 IPART, Review of external benefits of public transport - Draft Report, December 2014, pp 80-82. 27 Brooklyn Ferry Service submission to the Issues Paper, November 2015, p 2; Church Point Ferry

Service submission to the Issues Paper, November 2015, p 3. 28 A. Miles submission to the Issues Paper, November 2015, p 2.



2.3.6 Discontinuing a mid-year review of fuel prices

In the Issues Paper, we invited stakeholder comment on whether it is necessary to continue to conduct a mid-year review of fuel prices given that we now recommend fares based on an annual review of efficient costs. Our preliminary view was that we should no longer undertake a review of fuel prices outside the annual fare review process.

Submissions supported our preliminary view. Brooklyn Ferry Service submitted that a mid-year fuel cost review is not necessary as long as there remains an avenue whereby operators may individually or jointly approach TfNSW for a fare review if there are substantial changes in costs.29 Church Point Ferry Service also agreed, but commented that if the fuel prices return to its 2008-09 volatility levels, the mid-year review may need to be re-introduced. It further added that if there are substantial increases in other costs, there should be a mechanism to adjust fares.30 Mr Miles agreed and commented that an annual review is sufficient. He suggested that if fuel cost reviews are conducted for buses and other ferries, apply the same results to private ferries (instead of conducting a separate one for private ferries).31

Our final decision is that we will not conduct the mid-year fuel costs review. As discussed in the Issues Paper, we consider there is less need for this mid-year review given we have adopted a building block approach. If there was a substantial or uncontrollable change in costs, then TfNSW could ask IPART to review its fare recommendations.

2.3.7 Scope for increasing patronage on the ferry services

The Issues Paper noted some ferry operators’ concerns in relation to the financial viability of their private ferry operations, and invited stakeholder comment on how patronage could be increased on the ferry services under review.

Dangar Island League submitted that limiting a fare increase by including the value of external benefits in the building block model and extending the Opal System to Brooklyn Ferry Service would increase patronage.32

Brooklyn Ferry Service submitted that while transient patronage (eg, tourists) may be increased through advertising or promotion, there needs to be an increase in base patronage (ie, regular commuters). In its view, an increase in base patronage can only be achieved via reset in cost to customers, a full implementation of a building block model, which addresses all external benefits provided by the service and establishes funding sources. It submitted that

29 Church Point Ferry Service submission to the Issues Paper, November 2015, p 2. 30 Church Point Ferry Service submission to the Issues Paper, November 2015, p 4. 31 A. Miles submission to the Issues Paper, November 2015, p 2. 32 Dangar Island League submission to the Issues Paper, November 2015, p 2.



IPART’s current external benefit model for ferry services is a bus model, accounting for congestion and emissions, and does not account for factors specific to ferry services.33

Church Point Ferry Service submitted that better interaction between different modes of public transport through better integration of timetables and ticketing options may increase patronage. It considered more price competition with other modes of transport would increase patronage, but its ability to do this is limited given the small size of the local market and limited public transport options to the area. It called on the NSW Government to provide assistance.34

Mr Miles submitted that the Opal system should be fully extended to all private ferries, and this would increase patronage.35 He submitted that passengers on private ferries in Sydney which do not have the Opal system are missing out the convenience and the Opal discounts. As a result, private ferry operators are losing revenues because passengers with an Opal card are making alternative Opal-friendly travel arrangements.36

As discussed previously, we have considered the external benefits of private ferries in making our fare recommendations. We found that for Central Coast, Cronulla and Palm Beach Ferry Service - Ettalong, the current financial viability payment that the NSW Government is providing annually to these operators was greater than the estimated value of external benefit associated with these ferry services. Therefore, we concluded that there is no need to account for additional external benefits in our building block models.

The decision to include private ferries under Opal is a matter for the NSW Government.

33 Brooklyn Ferry Service submission to the Issues Paper, November 2015, p 3. 34 Church Point Ferry Service submission to the Issues Paper, November 2015, pp 4-5. 35 A. Miles submission to the Issues Paper, November 2015, p 2. 36 A. Miles submission to the Issues Paper, November 2015, p 1.

3 Final recommendations on maximum fares



In our review last year we recommended maximum fares based on our estimate of ferry operators’ efficient fares. This was a change from our previous approach of recommending maximum fares based on the amount by which the operator’s costs have changed - measured using industry-specific cost indices.

We decided to estimate efficient fares to ensure passengers were paying fair prices to use ferry services, and these prices enable ferry operators to sustain their business over the long term. For our review this year we have updated our analysis of efficient fares in 2016.

In this chapter we outline our final recommendations on maximum fares in 2016. We explain our approach to estimating efficient fares and how these inform our fare recommendations. We also outline why we consider that the competitive market is determining efficient fares for the Matilda Cruises and Central Coast services and that on this basis we recommend there is no need to regulate maximum fares for these services. In our view, competition provides the best form of protection for customers, including protection from higher than efficient prices.

3.1 Summary of our final recommendations

Under our final recommendations, the maximum fares for private ferry services would change as follows, from January 2016 (or when determined by TfNSW):

Brooklyn Ferries fares increase by 30 cents (to $7.00)

Church Point Ferry Service fares increase by 30 cents (to $8.00)

Clarence River Ferries fares increase by 30 cents (to $8.00)

Palm Beach Ferry Service fares increase by 10 cents (to $7.80 and $11.30 for the Basin and Ettalong services respectively), and

Matilda Cruises, Central Coast Ferries and the Cronulla and National Park Ferry Service fares do not change from 2015 levels (see Table 3.1).



With the exception of Central Coast Ferries, our final recommendations are in line with our indicative fare recommendations from our Issues Paper released in November. As Central Coast Ferries and Matilda Cruises are currently charging less than maximum fare we recommended last year, we are not recommending increasing the maximum fares this year. This is discussed further below. The maximum fare for the Cronulla and National Park Ferry Service does not change as this is above our estimate of an efficient fare in 2016.

Table 3.1 Final recommendations on maximum fares for private ferry services from January 2016 (incl. GST), $ nominal

Operator Maximum fare in

2015

($2015)

Indicative recommended maximum fare

in 2016 ($2016)

Final recommended

maximum fare in 2016

($2016)

Change inmaximum

fare

($2015, %)

Brooklyn Ferry Service $6.70 $6.90 - $7.00 $7.00 $0.30 (4.5%)

Central Coast Ferriesa $7.80 $8.00 - $8.10 $7.80 -

Church Point Ferry Service $7.70 $7.90 - $8.00 $8.00 $0.30 (3.9%)

Clarence River Ferries $7.70 $7.90 - $8.00 $8.00 $0.30 (3.9%)


$6.40 $6.40 $6.40 -

Matilda Cruises (Circular Quay to Darling Harbour)a

$7.40 $7.40 $7.40 -

Matilda Cruises (Circular Quay to Lane Cove)a

$7.40 $7.40 $7.40 -

Palm Beach Ferry Service (Palm Beach to the Basin)

$7.70 $7.70 - $8.00 $7.80 $0.10 (1.3%)

Palm Beach Ferry Service (Palm Beach to Ettalong)

$11.20 $11.20 - $11.50 $11.30 $0.10 (0.9%)

a These services currently charge less than the maximum fare. The current fares are $7.00 for both Matilda routes and $7.50 for Central Coast Ferries.

Note: TfNSW may decide to change fares before January 2016.

It is important to note that we only recommend maximum fares. Ferry operators can choose to set their fare below the maximum fare. In our view, ferry operators are in the best position to decide whether to set their fares below the maximum.

3.2 Overview of how we made our final recommendations

To make our final recommendations on maximum fares we took the following steps:

Invited all ferry operators (except Matilda Cruises) to provide updated cost and patronage information. Brooklyn, Church Point and Palm Beach provided updated information (discussed in Chapter 2).

Considered stakeholder submissions to our indicative fare recommendations and other issues raised in our Issues Paper (discussed in Chapter 2).



Updated our building block models to estimate an efficient fare in 2016 by:

– considering advice from Indec Consulting on the efficiency of ferry operators’ updated cost information (Indec provided similar advice for our review last year37)

– considering whether to incorporate any external benefits into the building block model for each ferry operator

– updating the weighted average cost of capital, patronage and other inputs in the building block model (see Section 3.3).

Applied our decision making framework to make final recommendations on fare changes in 2016 (see Section 3.4).

Confirmed that our recommendations address all the issues we are required to consider for this review (see Chapter 4).

These steps are discussed in more detail below.

3.3 Updating the building block model

As noted above, we use building block models to estimate an efficient fare for ferry operators in 2016. An ‘efficient fare’ is one that will allow the ferry operator to: recover the operating costs of running its business efficiently earn a fair return on the capital it has invested in that business (and regulatory

depreciation on this capital), and undertake prudent capital expenditure (for example, to replace an old ferry).

We also use the building block approach in reviewing Sydney Ferries and other public transport fares. Detailed information on the building block approach is provided in Appendix C and in our 2014 Final Report.38

For this review, we have updated key inputs in the model and considered updated cost information provided by three ferry operators (Brooklyn, Church Point and Palm Beach). We are not able to provide details of our calculations of efficient fares as our analysis relies on confidential information provided by the ferry operators. Nevertheless, we have conducted thorough analysis of this information in making our recommendations.


Review_of_Fares_for_Private_Ferries_and_the_Stockton_Ferry_for_2015 38 IPART, Review of maximum fares for private ferry services and the Stockton ferry service for 2015 -

Final Report – December 2014, Chapter 4 and Appendix D.



Private ferry operators are commercial businesses with an incentive to be efficient and profitable. They earn revenue from ticket sales and this is at risk from competition by other forms of transport. For the most part, we found that they are operating their businesses efficiently.

3.3.1 Efficient operating and capital costs

We commissioned Indec Consulting to review updated cost information and provide advice on whether it is reasonable and efficient. We also asked Indec to provide advice on whether any other costs have materially changed in the past 12 months – in particular, whether there has been a material change in fuel costs from last years’ review. The ferry operators who provided updated information were invited to comment on a draft version of Indec’s report. A public version of Indec’s report is available on our website.39

In summary, Indec recommended that IPART continue with capital expenditure it recommended to IPART in last year’s fare review. The one exception is that Indec recommended that a ferry replacement for the Palm Beach (Basin) service be brought forward from 2017 to 2016 and reflect a more appropriate sized vessel.

In regards to operating expenditure, Indec recommended that IPART accept the ferry operators’ updated fuel, insurance and berthing costs as these costs have been assessed by Indec as reasonable and efficient. Indec advised that it would be reasonable to increase the number of ferry hours for Palm Beach as during the summer months they run two ferries on both the fast and slow routes to cover the increased summer and holiday patronage. This increased the overall operating expenditure for Palm Beach. While some operators reported higher labour costs in 2016 and 2017, Indec recommends that IPART retain the labour and repairs and maintenance estimates from last year’s review.

Overall, Indec’s recommendations did not substantially change the efficient fare calculations for Church Point and Brooklyn Ferry services. For Palm Beach Ferry services, bringing forward capital expenditure and increasing total operating expenditure due to an increase in ferry operating hours have increased efficient fares in 2016.


Review_of_fares_for_Private_Ferries_for_2016



3.3.2 External benefits

One of the key decisions we make in determining public transport fares is how much of the total cost should be paid by the passengers through fares and by the NSW community as a whole through the Government subsidy. The main reason governments subsidise public transport services is that having these services benefits the whole community, not only the people who use them (ie, public transport services can provide external benefits).40

We have used the approach to estimate external benefits that was outlined in our Issues Paper. This approach firstly involves identifying ferry services where there are likely to be external benefits, the main external benefit being avoided road congestion. Our estimate also includes avoided air pollution and greenhouse gas pollution, avoided road accidents and the health benefits associated with walking or cycling to or from public transport and the external cost – the costs of raising funds to subsidise public transport.41

In our Issues Paper, we noted that these services include Palm Beach (Ettalong), Cronulla and Central Coast Ferry services. The Brooklyn and Church Point ferries provide a service to islands, and therefore, we do not consider there would be material external benefits (avoided road congestion) in their service areas.42 In addition, the Clarence River Ferry service is located on the north coast of NSW where there is unlikely to be substantial road congestion.

We then estimated the value of annual external benefits by estimating the amount of patronage in the peak period and multiplying this by our estimate of the net external benefit per passenger journey for Sydney Ferries, ranging from $0.12 to $1.42.43 The results are summarised in the table below.

Table 3.2 External benefits associated with private ferry services ($2014-15)

Palm Beach to Ettalong

Cronulla to Bundeena

Central Coast, Woy Woy to Empire bay

Net external benefit per passenger journey

$0.12 to $1.42 $0.12 to $1.42 $0.12 to $1.42

Estimated total external benefit

$5,207 to $61,610 $5,976 to $70,711 $1,950 to $23,080

Note: We have not published patronage numbers in this table for the purpose of confidentiality.

Source: IPART calculations.

40 IPART, Estimating the external benefits of public transport used in setting maximum fares for rail, bus

and ferry services – Issues Paper, August 2014, p 1. 41 For further information on our estimate of external benefits see IPART, Review of external benefits

of public transport – Draft Report, December 2014. 42 We have no evidence that there is major congestion on the water and that the ferries are

displacing a large number of private boats. 43 IPART, Transport externality model, February 2015, available at

http://www.ipart.nsw.gov.au/Home/Industries/Transport/Reviews/External_Benefits_ of_Public_Transport/External_Benefits_for_Public_Transport. The range is based on our short- and medium term estimates of price elasticity.



Recently we updated our estimate of the net external benefit per passenger journey for Sydney Ferries as part of our broader public transport fare review.44 The range of net external benefits per passenger journey in Table 3.2 falls within the range of our updated estimates and we consider the midpoint of the above range to be a reasonable assumption for private ferry services. The major component of the external benefit we estimated for Sydney Ferries is avoided road congestion around the Sydney CBD and these congestion benefits are reflected in the estimates in Table 3.2. In our view the benefits from avoided road congestion are likely to be smaller in the local areas for the services in Table 3.2 than they are for Sydney Ferries services as these do not include the CBD. Therefore, we consider the midpoint of the above range to be reasonable.

Palm Beach, Central Coast and Cronulla Ferry services are currently receiving a viability payment from the NSW Government, and we found that the total amount exceeds our midpoint estimate of external benefits. Therefore, we do not consider there are any external benefits that need to be accounted for, in addition to the current viability payment which is already accounted for in our building block model.

IPART finding

1 That the external benefits from private ferry services do not exceed the financial viability payments that some ferry operators are receiving from the NSW Government.

3.3.3 Updating other inputs in the building block model

We also updated some common inputs to the building block models for all ferry operators, including:

the weighted average cost of capital (WACC)

patronage forecasts for 2016 and 2017 based on the last three years of historical data, and

government payments, including viability payments to ferry operators, and concession and school travel subsidies based on contract arrangements.

More details are provided in Appendix D to F.

44 For more information on this review, see our review page at,

http://www.ipart.nsw.gov.au/Home/Industries/Transport/Reviews/Public_Transport_ Fares/Public_Transport_Fares_in_Sydney_and_Surrounds.



3.4 Framework to recommend fare changes

We have used a similar framework to recommend fare changes to that we applied in our review last year:

For ferry operators currently charging fares less than the 2015 maximum fare, we considered whether there is a need to change the maximum fare in 2016 and whether the maximum fare should be regulated.

For ferry operators currently charging the 2015 maximum fare:

– if the 2015 maximum fare is the same as or higher than the 2016 efficient fare, we recommended freezing the 2015 maximum fare (in nominal terms), or

– if the 2015 maximum fare is lower than the 2016 efficient fare we recommended increasing the 2015 maximum fare to the lesser of:

– the 2016 efficient fare from the building block model, or

– the 2015 maximum fare plus 30 cents.

3.4.1 If current fares are below maximum fares

Ferry operators face varying degrees of competition from other transport options. In some cases, competition is forcing ferry operators to charge less than the maximum fare. In these instances, we need to consider whether there is any need to change the maximum fare and whether there is any need for price regulation for these services.

Fares for the Matilda Cruises services were 40 cents below the maximum fare when we conducted our review last year. At this time we noted that Matilda Cruises was facing substantial competition for passengers from other ferry services and other modes of transport. For this reason, we did not use the building block approach for Matilda Cruises. Instead, we recommended that the maximum fares remain unchanged in 2015 and that these services not be subject to price regulation.45

Currently two ferry operators (Matilda Cruises and Central Coast Ferries) are charging fares below their maximum fares:

Matilda Cruises (Circular Quay to Darling Harbour) is charging $7.00 and the 2015 maximum fare is $7.40

Matilda Cruises (Circular Quay to Lane Cove) is charging $7.00 and the 2015 maximum fare is $7.40

Central Coast Ferries is charging $7.50 and the 2015 maximum fare is $7.80.

45 IPART, Review of maximum fares for private ferry services and the Stockton ferry service for 2015 –

Final Report, December 2014, p 5.



Central Coast Ferries competes with a bus service which also runs from Woy Woy to Empire Bay. The Opal bus fare for this route is $3.50 (less than half the current ferry fare) and travel time across the two modes is similar (36 minutes by ferry, 26 to 32 minutes by bus).

Fares for Matilda Cruises and Central Coast Ferries services are being determined by the competitive market. In our view, market-determined fares are likely to be a better estimate of an efficient fare compared to our estimates. As the current fares are below the maximum fares in 2015, we are recommending no change to the maximum fares in 2016. Nevertheless, Matilda Cruises and Central Cost Ferries still have the ability to increase their fares in 2016 as their current fares are 30 to 40 cents below their maximum fares.

We are of the view that price regulation is not necessary for the Matilda Cruises and Central Coast services covered by this review. In general, price regulation is only required in a monopoly market, where lack of competition can lead to higher prices and poorer service outcomes. However, in our view competition is delivering Matilda Cruises and Central Coast passengers benefits beyond those that can be achieved through fare regulation.

Recommendation

1 That Matilda Cruises’ two ferry services and the Central Coast Ferry service should not be subject to price regulation, as these services are provided in a competitive market and the market-determined fares are below IPART’s recommended maximum fare.

3.4.2 If current fares are the same as the maximum fare

Where the ferry operator is currently charging the 2015 maximum fare, we considered whether the maximum fare should be increased in 2016. To do this we compared the 2015 maximum fare with our estimate of the 2016 efficient fare from our building block models.

Where we found a difference between the 2015 maximum fare and the 2016 efficient fare, we took a conservative approach so that fares transition towards the efficient level over an appropriate time. We consider this conservative approach is appropriate, to minimise price shocks for passengers as well as revenue shocks for operators. Unlike the operators of rail, metropolitan and outer metropolitan bus services, Sydney Ferry and the Stockton Ferry, who receive contract payments to provide public transport services, private ferry operators are dependent on fare box revenues.



The 2015 maximum fare is the same or higher than the 2016 efficient fare

We recommended freezing the 2015 maximum fare (in nominal terms) if this is the same or higher than the 2016 efficient fare. This was the case for the Cronulla ferry service. We recommended freezing the maximum fare, rather than reducing it, due to the impact that reducing fares would have on private ferry operators’ revenue. As discussed above, private ferry operators retain fare box revenue.

The 2015 maximum fare is the below the 2016 efficient fare

If the 2015 maximum fare is below the 2016 efficient fare we recommended increasing the 2015 maximum fare to the lesser of:

the 2016 efficient fare from the building block model, or

the 2015 maximum fare plus 30 cents.

We consider that this approach is appropriate, as it ensures that passengers face an increase of no greater than 30 cents. This is similar to fare increases in previous years.

3.5 Other decisions and approach to future reviews

In our Issues Paper released in November, we invited comment on preliminary views that:

we continue to recommend the maximum single adult fare, rather than fares for all types of tickets, including discounted multi-trip tickets, and

we no longer conduct mid-year fuel cost reviews outside the regular fare review cycle.

3.5.1 Recommending maximum fares

Stakeholders generally supported IPART continuing to recommend the maximum single adult fare and our recommendations in this report are made on this basis (see section 2.3.5). Under this approach, ferry operators are able to determine the discounts that apply to their multi-trip tickets. These arrangements are captured in our building block analysis, and will mean that (all else equal) the more passengers that travel under discounted fares, the higher the non-discounted fare will need to be to recover the total efficient costs.



3.5.2 Mid-year fuel cost review

We have decided to no longer undertake the mid-year fuel cost review for private ferry operators. Under the mid-year review, if fuel costs increased or decreased by more than 10% in the six months after our final fare recommendation, we may recommend an adjustment to maximum fares.

As we now use a building block approach to recommend fare changes, we consider there is less need to conduct a mid-year fuel cost review. The aim of the building block approach is to create an incentive for efficiency rather than to ‘pass through’ actual costs. Ferry operators who commented on this issue supported the removal of the mid-year fuel cost review, but submitted that there should be some other mechanism to adjust fares if costs substantially change (see section 2.3.6). This issue is discussed further below.

3.5.3 Approach to future reviews

We consider that, as with other industries where we regulate using a building block approach, in future reviews we could recommend a price path for maximum fares over a number of years rather than just a single year. This would provide ferry operators and passengers with more certainty over future fare changes.

The regulatory framework under such an approach may also include a mechanism to revise fares, either up or down, if there are substantial unforeseen changes to underlying costs. We would consult with stakeholders on the types of changes that may warrant a revision to fares, as well as on other issues relevant to the regulatory framework.

4 Other factors we considered



We are required by our terms of reference and by section 15 of the IPART Act to consider a range of matters related to the effect of our pricing recommendations and decisions on stakeholders. Our views on the likely implications of our decisions for four key stakeholder groups – private ferry operators, passengers, the environment and Government – are outlined in this section.

We are also required to consider the relativities between private ferry fares and those of government-provided ferry services, and standards of service and patronage. Our analysis of these issues is also provided in this chapter.

4.1 Implications for private ferry operators

To make our final decisions on the change in maximum fares for 2016, we considered the implications for fare levels and ferry operators’ revenues, and stakeholder submissions.

Where we found a difference between the current and efficient maximum fare, we took a conservative approach, so fares will transition towards the efficient level over an appropriate time. We used the following framework to guide our final decisions:

if the current maximum fare is the same as or higher than the 2016 efficient fare, we made a final decision to freeze the current maximum fare (in nominal terms)

if the current maximum fare is lower than the 2016 efficient fare, then we made a final decision to increase the current maximum fare to the lesser of:

– the 2016 efficient fare from our building block model, or

– the current maximum fare, plus an amount of 30 cents which we consider balances the impacts on ferry operators and passengers.

We took this approach to prevent price shocks for passengers as well as revenue shocks for operators. Unlike the operators of rail, metropolitan and outer metropolitan bus services, Sydney Ferry and Stockton Ferry, who receive contract payments to provide public transport services, private ferry operators are dependent on fare box revenues.



It is important to note that we only recommend the maximum fare. Operators can choose to set their fare below the maximum fare. Ferry operators are in the best position to decide whether to set their fares below the maximum.

4.2 Implications for passengers

Passengers of Clarence River, Brooklyn and Church Point and Palm Beach ferries will experience a moderate increase in fares in 2016 under our final decision. The final recommended increase in maximum fares for these private ferries is between 10 cents and 30 cents per trip, which represents a percentage increase between 1% and 4.5%. This compares with the range of 1.3% to 5.5% increase we recommended last year. We have considered the impact on passengers by gradually transitioning the current maximum fares towards the efficient fares.

For Cronulla Ferry Service, Central Coast Ferries and Matilda Cruises, we consider passengers will have a small positive impact, while receiving the same quality of service. This is because our final decision is to freeze the current maximum fares (in nominal terms) in 2016. For Cronulla Ferry Service and Matilda Cruises, there has been a fare freeze since January 2014, which implies a fare reduction of 3.5% in real terms.

4.3 Implications for the environment

The impact of the final recommended and determined fares on the environment in terms of pollution and congestion is likely to be negligible, given that ferry travel accounts for a small proportion of passenger trips.

4.4 Implications for Government funding

Where our final recommendation results in an increase to the maximum fare in 2016, this will affect the government through increased payments for fully subsidised student travel under the SSTS, and half-fare and PET concessions.

Generally, the Government provides operators with:

A payment based on the maximum child fare for an eligible school student presumed by TfNSW to have travelled under the SSTS. Operators do not record patronage figures for SSTS passengers.

A top-up to the full adult fare charged by the operator for concession passengers reported to have travelled by the ferry operator.



In some cases, a top-up to the full adult fare charged by the operator for pensioners travelling on a Pensioner Excursion Ticket, reported to have travelled by the ferry operator.46

As these payments are related to the level of fares charged by ferry operators and/or the maximum fare that they can charge, our recommendations will increase the amount of funding required per student or concession passenger trip for four operators only. There should be no impact on funding for the other operators.

4.5 Relativities with Sydney Ferries’ services

Matilda Cruises is the only private ferry operator that provides comparable services to those provided by Sydney Ferries on the Circular Quay to Darling Harbour route. There are slight differences in the service route and travel time between the two services, namely:

The Sydney Ferries trip uses slow ferries and takes a slightly longer route; from Circular Quay to Darling Harbour is via Milsons Point, McMahons Point and Balmain East and is scheduled to take 23 minutes.

The Matilda service uses fast ferries and travels from Circular Quay to Darling Harbour via Luna Park and the estimated travel time is 20 minutes.

Currently, the Sydney Ferries single Opal adult fare is $5.74 (fare less than 9 km).47

Our final recommendation is to freeze fares for Matilda Cruises in 2015, so the final recommended maximum fare for Matilda Cruises remains unchanged from last year at $7.40. As discussed, Matilda Cruises is charging less than the maximum fare; the current single adult fare is $7.00.48 We consider this relativity with Sydney Ferries’ fares is appropriate due to the differences between the services.

46 Only some private ferry services have been deemed eligible by TfNSW to provide Pensioner

Excursion Tickets to eligible pensioners for $2.50. Information provided by TfNSW. 47 TfNSW, Ferry tickets, available at https://www.opal.com.au/en/opal-fares/fare_

information_ferry/ accessed 8 December 2015. 48 Matilda Cruises, City Loop Ferry Service Prices, available at

http://www.matilda.com.au/dir076/matilda.nsf/Pages/Ferry+Services~City+Loop+-+Luna+Park accessed 8 December 2015.



4.6 Service standards

We collect and publish summary data on patronage and service standards. For this review, we have received data for the 12 months to June 2015 from TfNSW.

Patronage data is manually collected by operators. Figure 4.1 below shows the breakdown of patronage on private ferries according to passenger type. It illustrates the relativities between numbers of adult full fare-paying passenger trips, and subsidised trips (ie, passengers paying concession/half-fares or using PETs and patronage counted under the SSTS).

In total, there were just over 1 million private ferry trips reported across 2014-15. The proportion of patronage by passenger type is broadly similar to what we reported last year for 2013-14. Adult full fare ferry trips increased slightly to 34%, while concession increased by one percentage point to 30%. The share of Child and PET passengers remained unchanged. SSTS passengers were down by 2 percentage points to 27%.

Figure 4.1 Patronage on private ferries – 2014-15 (%)

Note: The SSTS patronage is based on the number of issued passes and assumed school trips.

Data source: TfNSW, October 2015.

Ferry operators also provide TfNSW with information on late and cancelled services and the number of safety incidents experienced. For the 12 months to June 2015, the private ferry industry reported 13 incidences of late services and 5 cancelled services, for example due to bad weather. We note that these incidences represent a very low proportion of total services provided (less than 1%). No safety incidents were recorded. This information is summarised in Table 4.1, along with information collected from our previous reviews.

Concession30%

Child5%

PET4%SSTS

27%

Adult34%

4 O

the

r facto

rs we

con

side

red

32

IPA

RT R

evie

w o

f ma

ximu

m fa

res fo

r priva

te ferry se

rvices in

201

6

Table 4.1 Summary of KPI data for year ending 30 June 2012-15

Route Late Cancelled Safety

Year ending 30 June 2015 2014 2013 2012 2015 2014 2013 2012 2015 2014 2013 2012

Central Coast - Woy Woy – Empire Bay 3 0 0 0 0 0 0 0 0 0 0 0

Church Point 2 4 7 1 0 0 2 0 0 0 0 1

Clarence River- Iluka – Yamba 0 0 0 0 0 0 0 0 0 0 0 0

Cronulla – Bundeena 0 1 1 0 0 2 7 1 0 0 0 0

Brooklyn – Dangar Island 0 1 0 3 0 3 0 3 0 0 0 1

Circular Quay – Darling Harbour (ff) 0 10 13 109

0 5 1 00

0 0 4 31Circular Quay – Lane Cove (ff) 3 0 4 4 4 0 0 0 0

Palm Beach – Mackerel and the Basin 1 0 0 0 0 0 0 0 0 0 0 0

Palm Beach – Ettalong Wagstaff (ff) 4 5 5 0 1 3 6 0 0 0 0 0

a All vessels fitted with wet exhaust systems.

Note: ff denotes fast ferry.

Source: TfNSW.



Appendices



A Terms of Reference


A Terms of Reference

B Requirements of the IPART Act for private ferries recommendations



Section 15 of the IPART Act 1992 details the matters to be considered by the Tribunal when making a recommendation under the Act. The section is reproduced in full below.

(15) Matters to be considered by Tribunal under this Act

(1) In making determinations and recommendations under this Act, the Tribunal is to have regard to the following matters (in addition to any other matters the Tribunal considers relevant):

(a) the cost of providing the services concerned,

(b) the protection of consumers from abuses of monopoly power in terms of prices, pricing policies and standard of services,

(c) the appropriate rate of return on public sector assets, including appropriate payment of dividends to the Government for the benefit of the people of New South Wales,

(d) the effect on general price inflation over the medium term,

(e) the need for greater efficiency in the supply of services so as to reduce costs for the benefit of consumers and taxpayers,

(f) the need to maintain ecologically sustainable development (within the meaning of section 6 of the Protection of the Environment Administration Act 1991) by appropriate pricing policies that take account of all the feasible options available to protect the environment,

(g) the impact on pricing policies of borrowing, capital and dividend requirements of the government agency concerned and, in particular, the impact of any need to renew or increase relevant assets,

(h) the impact on pricing policies of any arrangements that the government agency concerned has entered into for the exercise of its functions by some other person or body,

(i) the need to promote competition in the supply of the services concerned,

(j) considerations of demand management (including levels of demand) and least cost planning,



(k) the social impact of the determinations and recommendations,

(l) standards of quality, reliability and safety of the services concerned (whether those standards are specified by legislation, agreement or otherwise).

C Building block model



In this appendix we explain how we estimated efficient fares using the building block model. Section C.1 provides an overview of the model, and Section C.2 summarises the key inputs we used in the model.

C.1 The building block model

In many industries that IPART regulates, we use the building block approach which ‘builds up’ the revenue required by the ferry operator to cover its total efficient costs of providing contracted services.

The total efficient costs include the following components:

efficient operating and maintenance costs, and

an allowance for prudent and efficient capital costs, in the form of return of capital (regulatory depreciation) and return on capital.

The total efficient costs also include allowances for regulatory taxation and working capital, but these represent a small proportion of the total efficient costs for private ferries services.

The ferry operator needs to earn revenue to recover its total efficient costs. This ‘revenue requirement’ is shared between the government (through payments made to operators) and passengers (through fares).

In this review we have estimated an ‘efficient fare’ so that passengers pay for the total efficient costs, less total payments from the government. This means that all else equal, larger government payments lead to lower fares, as less of the total efficient costs need to be recovered from passengers through fares. This is summarised in Figure C.1.



Figure C.1 Revenue requirement under the building block approach

Note: Our building block model also includes allowances for regulatory taxation and working capital. These are not shown in Figure C.1 because they represent a small proportion of the total revenue requirement for private ferries services. The figure is not to scale.

We have estimated the efficient costs for each of the operators for the next two years (2016 and 2017). Under each operator’s contract, they receive government payments for providing school travel and concessions tickets. Some operators receive viability payments as well. Therefore, we subtracted the estimated amount of these Government payments from the total revenue requirement. We calculated the fares that would be required to cover the remaining revenue requirement (also called the passengers’ share of total efficient costs) based on our forecast estimate of annual patronage. We took account of patronage under different types of tickets (eg, adult, child, concession and multi-trip tickets) based on information reported by operators to TfNSW. A summary of multi-trip ticket information is provided in Table C.1.

Incorporating discounted multi-trip tickets in our building block model results in (all else equal) upward pressure on the ferry operators’ efficient fare. This is because a greater share of passengers’ trips are taken under discounted tickets, and therefore the efficient fare needs to be higher to ensure the operator earns enough revenue to cover the passengers’ share of total efficient costs.

Allowance for a return of capital (regulatory

depreciation)

+

Allowance for a return on capital

Total efficient costs Total revenue requirement

Operating and maintenance costs

+

Revenue from the Government

+

Revenue from fares

=



Table C.1 Summary of multi-trip ticket information

Multi-trip ticket type (trips per ticket)

Discount rate implied by current ticket price

Brooklyn Ferry Ten (10) 13%

Ferry Twenty (20) 18%

Central Coast Ferry ten (10) 47%

Church Point Total Adult 12 (12)a 41%

Clarence River Info not available Info not available

Cronulla Weekly (10)b 36%

10 Ride (10) 16%

Family (6)c 6%

Palm Beach Ferry Ten (10) 11% for Ettalong 10% for Mackerel

a Church Point sells other multi-trip tickets such as Adult Return, Concession 13, Concession Return and Child Return. b Weekly ticket allows unlimited trips per week, but we assumed 10 trips per week for the purpose of calculating the implied discount rate. c Family ticket allows two adults and up to four children.

Source: Central Coast Ferries, http://www.centralcoastferries.com.au/; Church Point Ferry Service, http://churchpointferryservice.com/; Clarence River Ferries, http://www.clarenceriverferries.com/; Cronulla and National Park Ferry Service, http://www.cronullaferries.com.au/; Palm Beach Ferry Service, http://www.palmbeachferries.com.au/ accessed 4 September 2015.

When incorporating multi-trip tickets in our building block model we have assumed that the percentage discount implied by the current ticket price will remain in future years.

C.2 Key inputs to the building block model

C.2.1 Efficient operating expenditure

Efficient operating expenditures include labour costs, fuel, insurance, repairs and maintenance, berthing and mooring fees and ‘other costs’ including cash collection costs, office rent, communication costs, financial services, external consultants, advertising, etc.

As part of our 2014 review Indec provided advice on efficient operating costs for each ferry operator. In doing this, they collected data from the operators, and reviewed operators’ actual operating costs reported in The CIE’s survey undertaken in 2013.49 As part of this 2015 review Indec has reviewed updated information provided by some ferry operators.

49 The CIE, Final Report – Private Ferry Cost Consultancy, October 2013.



C.2.2 Efficient capital expenditure

Last year Indec provided advice on forecast efficient capital expenditures over the next three years for each private ferry operator (except for Matilda Cruises). Vessels represent the largest proportion of capital expenditure incurred by private ferry operators. We have also included allowances for ferry refurbishment and engine replacement.

Replacement of old ferries is driven by structural integrity. Last year Indec noted that some operators are not planning any ferry replacement, refurbishment or engine replacement over the next three years. However, for some private ferry services, ferries are being utilised far beyond the conventional useful economic lives. Indec considered that additional capital expenditure, particularly to replace very old vessels, would be prudent.50 This means that the efficient prices that we have estimated provide for operators to replace old ferries. Indec’s 2014 and 2015 reports provide more details on efficient capital expenditure.51

Indec’s forecast efficient capital expenditures are for the purpose of estimating total efficient costs under the building block model. This does not mean that an operator must incur this amount of capital expenditure in any given year. The assessment of required capital expenditure and the mix of operating and capital expenditures are best based on the knowledge and experience of the operators. However, we include efficient capital expenditures in the regulatory asset base (RAB), which is the basis for the allowance for a return on, and of capital. Including a return on and of capital should ensure that operators will be able to prudently replace assets over time. This is discussed in the section below.

C.2.3 Allowances for regulatory depreciation and a return on assets

The revenue requirement calculated under the building block model includes an allowance for a return of capital, commonly known as depreciation, and a return on capital:

Return of capital (regulatory depreciation): including a return of capital in the revenue requirement recognises that through the provision of services to customers, a business’ capital infrastructure will wear out, and that the cost of maintaining the capital base is a legitimate business expense.

Return on capital: a return on capital includes the cost of capital invested in a business through equity and debt investments. Including a return on capital ensures that efficient investment in capital continues into the future for the maintenance and growth of the business.

50 Indec Consulting, Efficient costs of providing private and Newcastle-Stockton ferry services – Final

Report, November 2014, pp i-ii. 51 Indec Consulting, Efficient costs of providing private and Newcastle-Stockton ferry services – Final

Report, November 2014; Indec Consulting, Efficient costs of providing Brooklyn, Church Point and Palm Beach ferry services – Final Report, December 2015.



Both a return of and on capital are set with reference to the RAB. The RAB represents the value of the business’ shareholder-funded assets, used to provide the regulated services.

We calculated the allowance for a return on capital by multiplying the weighted average cost of capital (WACC) by the value of the RAB. We used our standard approach to estimate the WACC and our final decision is to apply the midpoint WACC of 5.8% to estimate the allowance for a return on assets (see Table C.2). Note that we updated our market based parameters of the WACC since the Issues Paper.

Table C.2 Real post-tax WACC range and midpoint

Low Mid High

Real post-tax WACC 5.5% 5.8% 6.1%

Note: Market data sampled to 1 December 2015.

Source: IPART calculation.

Details on our WACC calculation and parameters that underpin our WACC calculation are contained in Appendix D.

Our 2014 Final Report provides more information about inputs in the building block model, including the initial RAB, remaining asset lives, patronage, freight revenue and government payments.52

52 IPART, Review of maximum fares for private ferry services and the Stockton ferry service for 2015 -

Final Report, December 2014, Chapter 4 and Appendix D.

D Weighted-average cost of capital



One of the elements in the building block model is an efficient return on assets. The rate of return is a key input to our calculation for the allowance for a return on assets. We calculate the allowance for a return on assets by multiplying the weighted average cost of capital (WACC) by the RAB.

Our approach is to use a post-tax WACC to determine a rate of return.53 We first estimate a WACC range based on current and long term market data. Then we selected a point within the range (established by the mid-points of the two WACC ranges) using our uncertainty index. As our assessment of uncertainty is currently within one standard deviation from the long term average of zero (ie, economic uncertainty is neutral), we have used the midpoint of the range of WACC values.54

We have also considered the level of the industry-specific parameters (ie, the equity beta and the gearing level) by investigating:

the risks of providing ferry services, and

the value of equity beta and gearing levels of companies that face similar risks to the ferry businesses we are regulating.

Table D.1 sets out the parameters that underpin our WACC calculation. The rest of this section provides our consideration of these industry-specific parameters.

53 IPART, Review of WACC Methodology - Final Report, December 2013. 54 See IPART, Review of WACC Methodology - Final Report, December 2013, p 23 for further details

on our decision rule for selecting a point within the range of WACC values.



Table D.1 WACC parameters and values

WACC - current data WACC - long-term averages

WACC range

Low Mid High Low Mid High Low Mid High

Nominal risk free rate 2.8% 2.8% 2.8% 4.6% 4.6% 4.6%

Inflation 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Debt margin 2.9% 2.9% 2.9% 2.9% 2.9% 2.9%

Gearing 60% 50% 40% 60% 50% 40%

Market risk premium 7.4% 8.7% 10.1% 5.5% 6.0% 6.5%

Equity beta 0.8 0.9 1.0 0.8 0.9 1.0

Cost of debt (nominal pre-tax) 5.7% 5.7% 5.7% 7.5% 7.5% 7.5%

Nominal vanilla WACC 6.9% 8.2% 10.0% 8.1% 8.8% 9.7% 8.2%

8.5% 8.8%

Real post-tax WACC 4.3% 5.5% 7.3% 5.5% 6.1% 7.0% 5.5% 5.8% 6.1%

Note: Market data sampled to 1 December 2015.

Source: IPART calculations.

D.1 Industry-specific parameters

To determine the appropriate level for the equity beta and the gearing, we have evaluated the risks faced by private ferry operators. We have compared these risks to other businesses/industries we regulate. We have also investigated market evidence available from companies that are listed on stock exchanges that provide ferry services.

In determining the equity beta and gearing level, our current practice is to adopt benchmark values (rather than the values of the regulated entity). This ensures that customers will not bear the costs associated with inefficient funding and capital structures. This is consistent with regulatory practice in Australia.

Equity beta and gearing level

The equity beta measures the extent to which the return of a particular security varies with the overall return of the market. It represents the systematic or market-wide risk of a security that cannot be eliminated by holding it as part of a diversified portfolio. It is important to note that the equity beta does not measure business-specific or diversifiable risks.

The gearing ratio is the ratio of the value of debt to the total value of assets in the business’ capital structure. Gearing is used to weigh the costs of debt and equity in estimating the WACC. Since, all else being equal, debt funding is cheaper than equity funding, the lower the level of gearing the higher the WACC and vice versa.



Our final decision is to use:

an equity beta of 0.8 to 1.0, and

a gearing ratio ranging from 60% to 40%.

This decision implies that the level of risk faced by a ferry operator is higher than the risk faced by other public transport modes (Figure D.1). We came to this judgment after considering the relative risks involved in providing private ferry passenger services compared to other modes of transport. We also placed limited weight on beta and gearing values for a range of proxies for the private ferries.

Figure D.1 Implied relative risks of utilities regulated by IPART

Source: IPART analysis.

Sydney Water, SDP

Electricity generation and retail

Incr

easi

ng

ass

et

bet

a/ri

sk

Sydney Ferries & Private ferries

Sydney and NSW Trains

Buses

Rail access

(freight rail)

Light Rail



Risks relative to other industries

In principle, ferry and bus operators are likely to respond faster in the short to medium term to changes in patronage than rail operators due to the more capital intensive nature of rail business. However, the high level of profit variability of the ferry operators affects the levels of risk they face. By contractual arrangements private ferry operators are required to provide a set number of services, regardless of the number of passengers and more importantly, they earn fare box revenue from ticket sales which is variable.

This is likely to expose private ferry operators to revenue volatility as revenue is directly related to the number of passengers, although some private ferry operators may receive a viability payment. The scheduling requirements also limit the ability of ferry operators to respond to changes in patronage. Further, ferry operators are likely to have a higher proportion of tourist passengers than rail and bus operators. Ferry operators are therefore more exposed to fluctuations in the tourism cycle than bus and rail operators.

Market evidence

Table D.2 contains companies that derive revenue from providing ferry passenger services that are listed on stock exchanges.

Table D.2 Gearing and equity beta of private ferry comparators

Company Gearing (%) Equity beta Asset beta (implied)

REEDEREI H EKKENGA 2% 0.23 0.23

VIKING LINE 36% 0.48 0.31

TOKYO KISEN No debt 0.46 0.46

HAINAN STRAIT SHIPPING 'A' No debt 0.82 0.82

MARITIME CO.OF LESVOS 64% 0.57 0.21

ATTICA HOLDINGS 71% 0.24 0.07

ANEK LINES CR 96% 0.45 0.02

TOKAI KISEN 43% 0.25 0.14

SADO STEAM SHIP 69% 0.14 0.04

HONG KONG FERRY HDG. No debt 0.74 0.74

IRISH CONT.GP.UNT. 3% 0.94 0.91

TIDE 45% 0.41 0.23

MOLS-LINIEN 51% 0.60 0.29

TALLINK GROUP 51% 1.22 0.60

2GO GROUP 19% 0.75 0.61

BOHAI FERRY 'A' 7% 1.03 0.96

CHU KONG SHIPMENTS No debt 1.03 1.03

Average 43% 0.6 0.45

Note: The equity beta is the two-year unadjusted beta.

Source: DataStream- Thomson Reuters and IPART analysis.



The data in Table D.2 suggests that, for private ferry operators the level of gearing ranges from 0% to over 96% and the average is 43%. Also, the equity beta ranges from 0.2 to 1.2 and the average is 0.6.

We have placed limited weight on the evidence from the market due to a number of concerns we have with the data. For example:

Table D.2 shows that gearing and beta values range widely. However, we note the average gearing level from this sample is at the lower end of the selected range of our analysis shown in Table D.1.

The beta estimation method (regression of stock returns on market returns) may be subject to estimation errors.

Also, most of the comparators provide more than just ferry transport services. These include property management, tourism and hospitality sectors and investment manager.

Our WACC decision rule

We use the uncertainty index to help us choosing a WACC point estimate from within the WACC range:

If the uncertainty index is within or at one standard deviation from the long term average of zero (ie, economic uncertainty is neutral), we will select the midpoint WACC.

If the uncertainty index is more than one standard deviation from the long term average of zero, we will consider moving away from the midpoint WACC. We will have regard to the value of the uncertainty index and additional financial market information.55

Figure D.2 shows that the uncertainty index is currently within one standard deviation from the long term average of zero. Based on IPART’s decision rule, we recommend the midpoint of the real post-tax WACC range, 5.8%, as the point estimate WACC.

55 IPART, Review of WACC Methodology - Final Report, December 2013, p 23.



Figure D.2 Uncertainty index

Note: IPART analysis to November 2015. Data source: Thomson Reuters.

-4

-3

-2

-1

0

1

2

3

4Higher

Lower

E Patronage forecasts


E Patronage forecasts

Figure E.1 shows annual reported patronage levels for all private ferry operators since 2008. We have not identified individual operators due to confidentiality. Note that our analysis excludes the patronage level reported under the School Student Travel Scheme (SSTS). This is because the SSTS patronage is a notional number intended for calculating SSTS payments, and does not reflect the actual number of students travelled under the scheme.

Figure E.1 Annual patronage levels (excluding SSTS)

Data source: TfNSW.

Overall, patronage levels for private ferries have increased slightly over the past six years. The annual patronage for a majority of operators has remained relatively stable. For one operator, the level of patronage has increased in recent years.

In our view, the average patronage over the most recent three years (where available) remains a reasonable guide to future patronage. Therefore, we used forecast patronage given by an average of the last three years’ patronage levels, and assumed the level of patronage to remain constant over the next two years.

-

50

100

150

200

250

2008 2009 2010 2011 2012 2013 2014

Nu

mb

er

of

pas

sen

ger

tri

ps

('0

00)

F Government payments


F Government payments

Ferry operators may receive a number of different government payments, including:

School Student Travel Scheme (SSTS): this relates to government payments for services that carry school children. The total SSTS payment is notional and is calculated based on the following formula:

Semester payment = number of eligible children x single child fare price x 2 x number of school days in semester x average number of days travelled (77% for school children or 75% for TAFE)56

Pensioner Excursion Ticket (PET): these tickets are $2.50 for all day travel. The total government payment57 relating to PET tickets is calculated based on the following formula:

Payment = number of PET tickets sold x (2 x full adult ticket - $2.50)

Concession payments: The total government payment relating to Concession tickets is calculated as follows:

Payment = number of Concession tickets sold x half the adult ticket price.

Viability payments: The viability payments are made to certain operators based on consultant advice in 2010. The total amounts are indexed by the change in CPI each year.

56 We have assumed 75% for all as we do not have information on the split between TAFE and

school students. This is a conservative assumption. 57 This may include compensation for the cost of purchasing ticket stocks.

Documents

Final Report - Review of maximum fares for private ferry ... · would change as follows, from January 2016 (or when determined by TfNSW): Brooklyn Ferries fares increase by 30 cents