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Washington State
Transportation Commission
WSDOTFERRIESDIVISION
&
WASHINGTONSTATETRANSPORTATION
COMMISSION
FUELCOSTMITIGATIONPLAN
AJointReportonFerryFuelCostSavingStrategies
andaFuelSurchargeBusinessPlan
Preparedfor:
TheSenate&HouseTransportationCommittees
and
OfficeofFinancialManagement
January,2010
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WSDOTFerriesDivision
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FUELCOSTMITIGATIONPLAN
AJointReportonFerryFuelCostSavingStrategies
andaFuelSurchargeBusinessPlan
Contents
ExecutiveSummary.................................................................................................................................. ES1
ApproachtoManagingFuelCostRisk................................................................................................. ES2
CostManagementRecommendations................................................................................................ ES2
RevenueEnhancement(FuelSurcharge)Recommendations............................................................. ES2
TimingImpactsonDifferentFareMedia............................................................................................. ES4
FuelMitigationStrategyReporting...................................................................................................... ES5
FuelCost
Mitigation
Plan
Next
Steps
...................................................................................................
ES
6
Background,contextandfuelcostmanagementchallenge......................................................................... 1
RecentFinancialChallenges...................................................................................................................... 1
HistoricalFuelPrices................................................................................................................................. 2
LongRangePlanStrategy......................................................................................................................... 4
WSFscostmanagementPlantoAddressFuelcostVolatility...................................................................... 4
FuelConservationMeasures..................................................................................................................... 5
CurrentWSFFuelContract....................................................................................................................... 6
MarketExposure:FuelPriceHedging....................................................................................................... 6
MarketExposure:DeterminingthePriceofFuelforWSFBudget........................................................... 7
FuelSurchargeBusinessPlan........................................................................................................................ 8
WSTCandDepartmentRoles.................................................................................................................... 9
MechanicsofApplyingtheFuelSurcharge............................................................................................. 10
SettingtheThresholdPriceofFuel......................................................................................................... 11
Revenues
and
Ridership
Effects
..............................................................................................................
12
TimingandFrequencyofSurchargeChanges......................................................................................... 13
SurchargeRulemaking............................................................................................................................ 16
AppendixA:DraftCommissionWACLanguageforferryfuelSurcharge................................................. A1
AppendixB:FuelSurchargeExamples....................................................................................................... B1
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FerryOperators...................................................................................................................................... B1
OtherPublicTransit............................................................................................................................... B2
PackageandFreightShipping................................................................................................................ B2
Airlines................................................................................................................................................... B3
Trucking&Cargo.................................................................................................................................... B3
AppendixC:OptionsEvaluated................................................................................................................. C1
Fuelchargesettorecover100%offuelcost......................................................................................... C1
Fuelsurchargesettokickinoncebasefuelistriggered....................................................................... C1
FuelSurchargebasedonatraditionalshareofcostsapproach........................................................ C3
FuelSurchargetiedtobudgetedfuelcosts........................................................................................... C4
FuelStabilizationFund........................................................................................................................... C4
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EXECUTIVESUMMARY
The Washington State Ferries (WSF) LongRange Plan, adopted in June 2009, included a number of
initiativesdesignedtomanagedemandandfinancialrisksforasystemthatisfacingsignificantfunding
shortfallsoverthenext20years.Onerecommendationwastodevelopandimplementafuelsurcharge
programto
mitigate
the
financial
risk
of
future
fuel
price
fluctuations.
The
Washington
State
TransportationCommission(WSTC)incorporatedthisrecommendationintoitsLongTermFundingStudy
finalrecommendations.BothstudieswereavailabletotheLegislatureasmembersdeliberatedoverthe
FY200911Budgetandconsideredfundingandpolicyissuesinthe16YearLegislativeFinancialPlanfor
Transportation.
ThisFuelCostMitigationPlanwasdeveloped inresponsetotwoprovisoscontained intheFY200911
adoptedbudgetforWSFandtheTransportationCommissionregardinginitiationofafuelsurcharge:
FortheDepartmentofTransportationMarine:If,afterthedepartment'sreviewoffaresand
pricingpolicies,thedepartmentproposesafuelsurcharge,thedepartmentmustevaluateother
cost savings and fuel price stabilization strategies that would be implemented before the
impositionof
afuel
surcharge.
FortheTransportationCommissionFuelsurchargemethodology:Ifthecommissionconsiders
implementinga ferry fuel surcharge, itmust first submitananalysisandbusinessplan to the
office of financial management and either the joint transportation committee or the
transportationcommitteesofthelegislature.
Thegoalofthisplan istocombinebothelementsoftheprovisos intoadocumentthatbothdescribes
WSFsfuelcostmitigationplansandpresentsarecommendedapproachandimplementationplanfora
fuelsurchargemechanism.Towardthisend,WSFhascollaboratedwithasubcommitteeoftheWSTCon
therecommendedfuelsurchargeapproach.
Based on the understanding that this plan will satisfy the Transportation Commissions proviso
requirement above, the Governors Proposed Budget, released December 9, 2009, included the
followinglanguage:
For the Transportation Commission: The commission shall impose a ferry fuel surcharge
effectiveMay1,2010,inordertoprovideamechanismforraisingadditionalrevenueinatimely
mannertohelpcoverincreasedcostsofferryfuelthatexceedanadoptedbaseleveloffunding.
Theplanrecommendsamultipartstrategytoaddresspricevolatilityandcostrisksassociatedwiththe
fuelbudget forWashingtonStateFerries.Foreachoftherecommendedelementsan implementation
schedule isdiscussedandrolesandresponsibilitiesdefined.Aseriesofappendicesareattachedwhich
provideadditionalsupportinformationincluding:
DraftrulemakinglanguagedescribingtheauthorityandmethodologyoftheproposedsurchargeprogramtobeaddedasanewsectionoftheWashingtonAdministrativeCode;
BackgroundandcontextofcurrentfundingchallengesfacedbyWSFandhowafuelsurchargefitsintotheoverallstrategyofaddressingthesechallenges;
Analysis of other industry fuel surcharge programs, including ferry systems, public transitagencies,andprivateenterprises;
DiscussionofWSFcostmanagementstrategies including those targetingconsumptionof fuel,budgeting,andhedgingstrategiestoreducevolatility;and
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needstobeanautomaticfunction,withnoadministrativediscretion.Forafuelsurchargemechanismto
operate in a timely manner, the Commission must adopt a fuel surcharge methodology in the
Washington Administrative Code (WAC), through the regular rulemaking process, and then the
methodologymustdictatewhenandhowthesurchargewouldbeapplied.
It is the intent of this recommendation that the fuel surcharge be a mechanism to allow for partial
mitigationof
costs
associated
with
unexpected
increases
in
fuel
prices
between
budget
setting
opportunities. The mechanism that is proposed is designed to work within the framework of the
legislativebudgetprocessand toneither limitnor imposeanyparticularbudget solution.Rather, the
goalistoprovidethelegislaturewithanadditionalmechanismwherebytheriskassociatedwithfuture
unexpectedincreasesinfuelpricescanbesharedbetweencustomersandstatetaxpayers.
Theproposed surchargemechanism isdesigned tobeboth transparent and simple to calculate.The
intentofthefuelsurchargeistoreducebutnotcompletelyeliminateWSF'sexposuretotheeffectsof
fuelpricevolatility.Thepurpose isprimarilytomanagebudgetriskbetween legislativebudgetsetting
opportunities.Asproposed,thesurchargewouldworkasfollows(seepage10fordetails):
1. Acalculationofcostsofdieselfuelwouldbebasedonamonthlyreviewprocessthatusestheindexes
of
Tacoma
and
Anacortes
fuel
price
data,
weighted
according
to
WSF's
purchasing
pattern,andwouldserveasareadilyavailableproxyforfuelcostsbymonth.
2. Ifactualcostsoffuelarehigherthanthebudgetedpriceoffuel,asadoptedbythelegislatureinthe ferry operating budget, then a fuel surcharge would be triggered. For example if actual
prices for thepreviousmonthaveraged$2.20per gallonand thebudgetedpriceof fuelwas
$2.00,thenfuelcostsforthatmonthwouldbe10%overbudgetedprices.(Ifhedgingactivities
have reduced the cost of fuel, these gains would be factored into the average price of fuel
calculation).
3. Sincefuelaccountsforapproximately20%oftotalcostsa10% increase infuelwouldmeananoverallcostimpactonferriesoperatingbudgetofapproximately2%.
4. Torecoverthesecosts fromoperatingrevenues,revenueswouldneedto increaseatahigherpercentagethancosts,sinceWSFonlyrecoversabout70%ofitscostsfromoperatingrevenues.
So a fuel surcharge would need to be set to about 3%, to recover the higher costs from
operating revenues (3%ofoperating revenueswouldbeequalto2%of totaloperatingcosts,
sincecostsarehigherthanoperatingrevenues).
5. The3%surchargewouldthenbeappliedtoallfarecategoriesThefollowingaresomeofthemoredetailedelementsofthehowthesurchargemethodologywouldbe
implemented:
DuetoWSFsregionalfare integrationagreements,anypricechangesmustoccuronthe1stofthe
month.
Monthlyfuelsurchargeadjustments,wherewarrantedbyfuelpricechanges,couldandshould be made automatically, as per a set formula established by the Washington State
TransportationCommissionandadoptedintheWashingtonAdministrativeCode.
ThebudgetedpriceoffuelwouldbeestablishedbythemostrecentWSFbudget,andwouldbe"reset"bysubsequentlegislativebudgetaryactions.
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Acalculationofcostsofdieselfuelwouldbebasedonamonthlyreviewprocessthatusestheindexes of Tacoma and Anacortes fuel price data, weighted according to WSF's purchasing
pattern,andwouldserveasareadilyavailableproxyforfuelcostsbymonth.
Thefuelsurchargewouldbedeterminedsolelybasedonthedegreetowhichactualfuelpricesdiverge from the threshold price of fuel established in the WSFbudget. Possible elasticity
effectsof
higher
prices
would
be
ignored
for
the
purposes
of
calculating
the
surcharge.
Tointegratethesurchargewiththehedgingprogram,anygainsfromhedgingactivitiesmustbe
accounted for in the calculation of actual fuel prices. In effect, if hedging has limited WSFs
exposure to the full impactofmarketprices, thenanygains fromhedgingwouldbeused to
discounttheindexofmarketpricestoreflectWSFsactualfuelcostsforaparticularmonth.
Fuelsurchargeswouldberoundedtothenearestfivecents,wouldbeseparatelyidentifiedfromregularfares,andtherevenueswouldbesegregatedwithintheFerryOperatingAccountsoas
tobeusedsolelytodefrayfuelcosts.
Toensurethatthesurcharge isappliedonlywhenthere isareasonablysubstantial increase infuelprices,thesurchargewouldonlybe implemented ifthesurchargepercent isgreaterthan
2.5%.
To provide customers with some relative certainty about potential surcharge impacts, theproposedmethodologywouldcapthesurchargeat20%.Exhibit ES1 presents an example of the impacts of the proposed methodology on several example
fares. Intheexamplebelow it isassumedthatthethresholdpriceoffuel isequalto$2.58(proposed
budgetpriceforFY2011).Ifpricesincreasedto$3.00(netofhedginggains),thena4.3%fuelsurcharge
wouldbeautomaticallyapplied,whichwouldresultinafuelsurchargeof50cents,increasingthetotal
priceforaSeattleBainbridgecar&driverfarefrom$11.85to$12.35.
ExhibitES1
ImplicationsofProposedFuelSurchargeMethodology
Exhibit ES1 is only an illustrative example. The actual implications would depend on both the final
budgetedpriceoffuelestablishedbytheLegislatureaspartofthebudgetprocessandtheactualprice
offuel
once
asurcharge
mechanism
is
in
place.
Also,
the
example
only
highlights
the
effects
on
three
example fares. If implemented, thesurchargewouldapplytoall farecategoriesonallroutes,placing
theburdenofexcessivefuelcostsonallferrycustomers.
TimingImpactsonDifferentFareMedia
Thefuelsurchargewouldaffectvariousfaremediadifferently.Someriderswouldntpaythesurcharge
untiltheirpreviouslypurchasedticketswereusedup;conversely,someridersmayprepurchasetickets
atahigherrateandoverpayifthesurchargewerereduced.Fareswillfallintothreedifferentcategories:
ThresholdPriceofFuelequalto$2.58(ProposedBudgetforFY2011)Hedging
Adj.Actual
FuelPrice
Increase
over
Threshold
Surcharge
Amount
Fuel Surcharge TotalPrice
Fuel Surcharge TotalPrice
Fuel Surcharge TotalPrice
$2.58 0.0% 0.0% $0.00 $11.85 $0.00 $6.85 $0.00 $37.90
$2.75 6.6% 1.8% $0.00 $11.85 $0.00 $6.85 $0.00 $37.90
$3.00 16.3% 4.3% $0.50 $12.35 $0.30 $7.15 $1.65 $39.55
$3.25 26.0% 6.9% $0.80 $12.65 $0.45 $7.30 $2.60 $40.50
$3.50 35.7% 9.5% $1.15 $13.00 $0.65 $7.50 $3.60 $41.50
SeattleBainbridgeIsland MukilteoClinton AnacortesFridayHarbor
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Category1Faresthatcouldbeoutofsynchwhenimplementingorremovingafuelsurcharge. The
totalfareamountwouldgouponthefirstofthemonthofanewsurcharge. Riderswouldhavethe
ability tobuyand store inadvanceata lowerprice (good for90days)but could run the riskof
overbuying at a higher rate if total fare amounts drop below their purchase price when a
surchargeisreducedoreliminated.Thiscategoryincludesthefollowingfares:
SinglefullfarepassengerandvehicleWave2Gotickets(includingoversizedvehicles). Singlesenior/disabledpassengerandvehicleWave2Gotickets(includingoversizedvehicles).
Category2Faresthatwould likelyalwaysbeat leastpartiallyoutofsynchwithafuelsurcharge,
suchasmultiridecardsandautomaticrevaluecards.Thiscategoryincludes:
Multiridecardsforpassengersandunder20vehicle/driverfares.Riderswouldhavetheabilitytobuyandstoreinadvanceatalowerprice(goodfor90days)butcouldruntherisk
ofoverbuyingatahigherrateiffaresdroppedbelowtheirpurchaseprice.
Multiridecardsforpassengersandunder20vehicle/driverwithautomaticrevalue. Multiridecards(referencedasbundledsinglefaresintheWAC)forsenior/disabled
passengersand
under
20
vehicle/driver
with
automatic
revalue.
Category3Faresthatwouldalwaysbeinsynchwithafuelsurcharge.Thiscategoryincludes:
MonthlyPassengerPassesthisfaremediaisgoodforasinglecalendarmonthandisavailable onaWave2GocardorontheORCAcard(exceptfortheAnacortes/SanJuan
Islands/SidneyB.C.servicearea).Thepriceofthepasswouldgoup(ordownifcomingoffa
surcharge)accordinglystartingwithitsavailabilitytwoweekspriortothefirstofthemonth
whenrevisedsurchargefaresgointoeffect.
SinglefullfarepassengersusinganepurseontheORCAcard. Senior/DisabledpassengersusinganepurseontheORCAcard.
FuelMitigation
Strategy
Reporting
Since the fuel surcharge is part of a broader fuel cost mitigation plan that is designed to be
complementarytotheregularbudgetprocess,itisrecommendedthatWSFprepareanannualreportto
theLegislature,OfficeofFinancialManagement (OFM),andWSTC summarizing theperformanceand
effects of the surcharge on both revenues and ridership. This would include reporting on all three
elementsoftheferryfuelcostmanagementprogram:fuelpurchasingandthefinancial impactsofany
hedgingstrategiesemployed;fuelsavingsmeasures,bothprogressontheprogrammaticelementsand
any serviceadjustments implemented toconserve fuel;and theperformanceand impactsof the fuel
surcharge.
TheregularannualreportwouldbeincludedaspartoftheDepartmentsbudgetsubmittalsandwould
provide the necessary supporting information for the Governors Office and the Legislature to make
budgetdecisionsregardingboththefuturespendingauthorityforfuelpurchaseaswellaswhetherto
assumerevenuesfromthecontinuationormodificationoffuelsurcharges.
In addition, for the fuel surcharge, WSF would publish the supporting documentation for how the
surcharge iscalculated.Thisdocumentationwouldclearly identifythesourceof fuelprice information
andhow the surchargepercent is calculated.Thiswouldbeupdatedas the surcharge isadjusted to
actualchangesinfuelprices.
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FuelCostMitigationPlanNextSteps
Sincethisfuelcostmitigationplanintroducesanewcomponenttothefarestructureaswellaschanges
to WSF operations and budgeting, there will be multiple development and implementation steps
occurring in thenext three fiscalyears.Eachof theprimarycomponentsandproposedschedulesare
brieflydescribedbelow.
1. ImplementFuelSurcharge(AssoonasMay2010).WSFissupportiveoftheGovernorsprovisoto the Commission that it put in place a fuel surcharge by May 1, 2010. The Commission is
interestedinmakingsurethatthefuelsurchargemechanismisavailabletotheLegislatureand
OFMassoonasthisdate,pendingLegislativedirectiononthisissue.Therefore,theCommission
has taken the first step in the rulemakingprocess,providingnotice to thepublic thata fuel
surchargemaybeimplementedpendingfurtherdirectionfromtheGovernorandLegislatureon
anagreedtotimeframeforimplementation.
2. ContinuetoPursueFuelSavingStrategies(Ongoing).WSFhas implementedanumberoffuelconservationinitiativesandcontinuestoevaluateandimplementadditionalfuelsavingsactions
in the 200911 biennium. These initiatives aim to reduce fuel consumption through vessel
upgrades,running
on
fewer
engines,
alternative
docking
procedures,
more
efficient
loading
and
unloading, and slowing vessels down during nonpeak periods. WSF will continue to pursue
thesestrategiesandinvestigateotherpossiblemethodsofreducingfuelconsumption.
3. ReviseBudgetPractices forFuel (Base201113budgetonnewpractices).For thebalanceof2010, WSF will work with Office of Financial Management (OFM) and the Transportation
Revenue Forecast Council to develop an alternative approach to current fuel budgeting and
forecasting practices. An emphasis will be placed on strengthening the nearterm fuel price
forecast by identifying a consensus forecast of fuel prices that would incorporate multiple
industryperspectivesand then incorporating thisnearterm forecastwithGlobal Insights16
yearlongrangeforecast.
4. Develop and Implement Price Hedging Policy (201113). Efforts have begun to develop ahedging policy, identify the most appropriate hedging technique, and gather information
neededtomakeadecisiononwhethertoproceed.ItisexpectedthatWSFshedgingpolicyand
programwillbeincludedinthe201113budgetproposalandstartinFY2011.Oncethehedging
programis implementedanygainsfromhedgingshallbeusedtodiscountthe indexofmarket
pricestoreflectWSFsactualfuelcostsforaparticularmonth.
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FUELCOSTMITIGATIONPLAN
AJointReportonFerryFuelCostSavingStrategies
andaFuelSurchargeBusinessPlan
BACKGROUND,CONTEXTANDFUELCOSTMANAGEMENTCHALLENGE
RecentFinancialChallenges
WSFfacestwodistinct,butequallysignificant,financialchallengesasitcontinuestooperatethelargest
ferrysysteminthenation.Thefirstisafundingchallengethatreliesonincreasinglyscarcetaxdollarsto
supplementWSFsoperatingandcapitalbudgets.Thesecondchallengeinvolvesmitigatingthefinancial
risks associated with being among the states largest fuel consumer in a time period that has
experiencedwildswingsinthepriceoffuel.
Priorto
1999,
WSF
received
almost
20%
of
its
operating
support
and
75%
of
its
dedicated
capital
funding
through theMotorVehicleExciseTax (MVET).WSF lost this revenuesource inNovember1999when
votersapprovedI695andtheLegislaturecodifiedMVETtaxreductions.Inordertoreplacethegapleft
bythelossofMVETandincreasetheoverallfareboxrecoveryrates,fareshavebeenincreasedbetween
37%and122%,varyingby route,since1999.While these fare increaseshave resulted inasignificant
increaseinoperatingrevenues,theoveralleffectoncostrecoveryrateshasbeenmodestbecausefuel
costsareathistoricallyhighlevelsoftotalcosts.
AsillustratedinExhibit1,between1991and2008fuelcostshaveincreasedfromanaverageof10%of
WSFstotaloperatingbudgetthroughoutthe1990stoconsistentlymorethan20% inthepastseveral
years.Rapidly increasing fuel costshaveoffsetmostof the farebox recoverygainsmade in theearly
2000s.The
recent
increases
in
fuel
prices
have
pushed
fuel
costs
from
approximately
$10M
per
year
duringthe1990stomorethan$50MinFY2008.Giventhatthededicatedtaxesandoperatingrevenues
are insufficienttorecoveroperatingcosts,mostoftheadditionalfuelcostshavebeenbornebystate
taxpayersasgeneralgastaxfundsareredirectedbytheLegislaturetocovertheseunexpectedcosts.
Withfuelpricesnotexpectedtoreturntothelowerlevelsexperiencedbetween1980and2000,WSFis
consideringoptionstomeetthechallengesposedbyhigherandmorevolatilefuelprices.Thechallenge
is findingabalancebetweenconsumptionbasedcostmanagementstrategies,hedgingstrategies,and
increasingfareboxrevenues,perhapsthroughtheimplementationofafuelsurcharge.
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Exhibit1
WSFFuelCostsand%ofTotalOperatingCosts(FY1991FY2009)
12%10% 11% 9% 9%
10% 9% 8% 7%
11%
14%
10%
12% 13%
18%
21%20%
23%
21%
$0M
$10M
$20M
$30M
$40M
$50M
$60M
Source:WSFRouteStatements (FY19992009)
HistoricalFuelPrices
The average price per gallon of diesel fuel, as displayed below in Exhibit 2, grew slowly in nominal
dollarsupuntilthemid1970s,whentheoilembargodrovepricesupsignificantlybeforedroppingback
downtoanewhigherlevel.Intheearlypartofthiscenturytherewasasecondmajorpriceadjustment.
While prices have declined somewhat in the last year due to the weak global economy, high fuel
inventories,and
declining
global
oil
demand,
most
forecasters
expect
oil
to
stabilize
at
ahigher
price
pointgoingforward.
Mostlongtermprojectionsoftheglobalfuelmarketdepictfuelpricesincreasingonaverageabout2%
to4%peryearoverthenext15years.Thisrateofpriceinflationwouldsuggestthatfuelpriceswillgrow
atorsomewhatabovegeneralinflation.Marketinstabilityandshorttermpricefluctuationswillbethe
norm going forward. As a result, fuel costs actually present two separate but interrelated financial
challengesforWSF:
(1) Therehasbeenastructuralshiftinfuelprices,withfuelaccountingformorethan20%ofWSFoperatingcosts,versus10%formuchofthepast30years.WSFrevenuesourceshavenotbeen
adjustedtoreflectthisstructuralshift.
(2) Fuelpricevolatilityhas resulted in frequentbudgetadjustments,puttingadditional strainonlimitedstatetransportationfunds.
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Exhibit2
HistoricalU.S.FuelPrices(19202010)
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Ferry System Owned andOperated by WSFNominal $/gal
Inflation Adjusted $/gal
Exhibit 3 presents projected fuel expenditures (excluding taxes) for the next 16 years based on the
baselineforecastoffuelpricesfromeachofthepreviousthreequarterlyrevenueforecasts.
Exhibit3
Actual&ProjectedFuelExpendituresFY1991FY2025
$0M
$10M
$20M
$30M
$40M
$50M
$60M
$70M
March 2009 June 2009 September 2009
Actual Expenditures Projected Expenditures
Source:OFMTransportationRevenueForecasts;WSFFuelConsumptionEstimatesandRouteStatements
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LongRangePlanStrategy
TheWSFLongRangePlan,adoptedinJune2009,includedoperatingandpricingstrategiesdesignedto
managedemandandreducefinancialrisks.Theoperatingstrategiesproposed,suchasvesselupgrades
andslowingboatsinoffpeakperiods,focusedonreducingfuelconsumptiontoreduceexposuretofuel
priceswings.
Theprimarypricing strategy thatwas recommendedwas todevelopand implementa fuel surcharge
programtomitigatethefinancialrisksoffuturefuelpricefluctuations.Thebasicconceptsofapotential
fuelsurchargeplanwerepresentedtotheLegislatureanddiscussedduringthe2009legislativesession.
Thefundamentalsofthefuelsurchargeplan,aspresentedtotheLegislature,included:
A fuel surcharge thatwouldautomaticallyadjust faresupanddown to reflect increasesanddecreasesinfuelpricesaboveapredeterminedbasefuelprice.
Thecustomerstotalfarewouldbesubjecttoautomaticincreasesinperiodsofrapidfuelpriceescalation, effectively passing on this direct operating expense to those benefiting from the
service.
Thebase fuelpricewassetatapricethatwasequaltothe inflationadjustedaveragecostofdiesel
from
1952
to
2008
($2.15
per
gallon),
the
time
period
over
which
the
State
has
owned
andoperatedtheferrysystem.
The structural shift tomuchhigher fuelprices relative tohistorical levelshascreatedadifficultstate
budget problem. The solution to the problem would combine additional revenue support, fuel
conservationmeasures,andpricehedgingstrategies toeffectivelymanage future fuelcosts.WSFhas
begunto implementfuelconservationmeasuresandhastheauthoritytoenter intohedgingcontracts
tostabilizefuelprices.Thequestionofhowtogenerateadditionalrevenues(i.e.whoshouldpayforthe
increasesinfuel)becomesthecentralpieceofWSFsfuelmanagementstrategy.
ThecommonlyheldviewoftheWashingtonStatehighwaysystem isthatdedicatedtaxdollarsshould
be used to support the overhead, capital expenditures, and maintenance of highways. Under this
construct,tax
dollars
received
by
the
ferry
system,
amarine
highway,
should
support
Department
overhead, WSDOT overhead, terminal maintenance, and capital expenditures. Operating revenues,
including fare revenues, would conversely generate the revenue needed to fund costs that are not
typical of the highway program,particularly vessel operating expenditures (including labor, fuel, and
maintenance) and terminal operations. Under this paradigm, a policy case could be made that the
higher level of fuel costs should be passed through to the customers that are using the system.
However, it is unrealistic to assume customers could always assume the full burden of fuel costs,
especiallyinanenvironmentwherepricesareincreasingveryrapidly.
WSFSCOSTMANAGEMENTPLANTOADDRESSFUELCOSTVOLATILITY
Inorder
to
address
fuel
price
volatility
and
reduce
its
exposure
to
increasing
fuel
costs,
WSFs
options
includereducingoperatingcostsand/orincreasingrevenues.WSFhasalreadybenefitedfromsomecost
savings through fuelconservationmeasures.Beyond thesemeasures,WSFsoptions for reducing fuel
expendituresincludefurtherconservationmeasuresoreliminatingsailings.Fuelconservationmeasures
were proposed in the WSF LongRange Plan and JTC Vessel Sizing study related to reducing fuel
consumptionthroughvesselupgrades,alternativedockingprocedures,andslowingvesselsdownduring
nonpeakperiods.Ontherevenueside,WSFcanmitigateitsexposuretofuelpriceshocksthroughafuel
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surcharge. WSF is also exploring fuel price hedging to reduce volatility. Additionally, new revenues
generatedthroughtaxescouldhelpoffsetfuelpricespikes.
FuelConservationMeasures
WSF implementedanumberof fuelconservation initiatives inthe200911biennium.These initiatives
aim
to
reduce
fuel
consumption
through
vessel
upgrades,
running
on
fewer
engines,
alternative
docking
procedures,andslowingvesselsdownduringnonpeakperiods.Anestimated2.9milliongallonsoffuel,
ormorethan9%,wouldbesavedannually ifWSFcould implementallthefuelconservationmeasures
displayedbelowinExhibit4.
Exhibit4
FuelConservationMeasures
VesselSpecificStrategies
JumboMarkII OperateontwoenginesImplemented
exceptduringlandings
540,000gal/yearfor3ferries
Implemented
JumboMark
I
Upgradecontrol
systems
to
run
vessels
on
3
enginesinsteadof4142,000
gal/year
for
2ferries
Awaitseatrials&establishmentof
operationalprocedures
SuperClass Upgradeenginesandassociatedsystemsto
enablerunningon2enginesinsteadof4
387,000gal/yearfor3ferries
InEngineeringDesignphase
IssaquahClass Runninginsplitmode Notyetdetermined
Tobeinvestigatedthrough
operationaltesting
IssaquahClass Usewasteheatrecoverytoheatvessels Upto61,000gal/yearpervessel
Investigatingwhetherinstallationcost
canbereduced
SystemWideOperationalStrategies
Developalternatetieupmethodforvessels,
allowingareductioninshaftspeedwhile
docked
145,000gal/yearpervessel
Awaitapprovalofgrantrequestedfor
pilotproject
Slowvesselsdown0.5to1.0knots(seeError!Reference source not found.)
Upto2.5%savingsfor0.5knot
reductionand5%for1.0knot
reduction
Assessingserviceimpactsatroute
level
Improveloadingandunloadingtimes Notyetdetermined
Source:WSF2009LongRangePlan
Theuncertaintyofhowmuch fuelpriceswill fluctuate in the futureandmore importantlyhow long
priceswillstayhighrelativetohistoriclevelsmakesitdifficultforWSFtomeaningfullymanagefuelcost
risk on the consumption side only. WSFs ability to respond to shortterm price spikes is relatively
limited, and longterm fuel consumption options such as eliminating sailings, routes, or operating a
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smallerfleetsizewouldbecostlyandnegativelyimpactthelevelofservicegoalsestablishedinthe2009
LongRangePlan.
WhilethestrategiesidentifiedintheLongRangePlanandsummarizedinExhibit4havebeendesigned
tobalancefuelconservationwithminimalservicedisruptions,WSFmayneedtoconsidermoresevere
consumptionreductioneffortsinperiodsofparticularlyhighorquicklyrisingfuelprices.Forexample,it
maybe
desirable
to
consider
options
such
as
eliminating
low
productivity
sailings
altogether,
which
wouldreducethefrequencyofdeparturesduringlowerdemandperiods.Clearlythisoptionwouldhave
amoreseverecustomer impact,butwouldalsosavesignificantfuel.Thekey issue,especially ifafuel
surchargeisavailable,willbetoweighthepotentialserviceimpactsonrelativelyfewcustomersversus
theimpactofhigherfaresonallcustomers.Forexample,sincethesurchargewillonlymitigatesomeof
thefuelcostexposure,WSFwillfacechoicesaboutwhethertoreducecoststhroughlowerconsumption
asawaytofurtherlimitthecostimpactsonthebudget.
CurrentWSFFuelContract
WSFcurrentlyprocuresallof itsfuelthroughastatecontract.Pricesarepaidtovendorsthreetofour
timespermonthandarebasedmostlyontheTacomaOilPriceInformationServices(OPIS) index,but
alsothe
Anacortes
OPIS.
Prices
paid
to
vendors
include
fees
and
applicable
state
and
local
taxes
(includingretailsalestaxes).TheLegislatureamendedRCW43.19.642inthe2009legislativesessionand
mandatedWSFtouseaminimumoffivepercentbiodieselfortheoperationofvesselsaslongastheper
gallonpricepremiumpaidforthebiodieselblenddidnotexceedfivepercentofregulardiesel.Allother
stateagenciesarerequiredtouseaminimumoftwentypercentbiodiesel.
MarketExposure:FuelPriceHedging
TheLegislaturepassedHouseBill (HB)2746during the2008 legislative session,nowcodifiedasRCW
47.60.830,authorizingWSFtoexploreand implementfuelpurchasingstrategiessuchaspricehedging
toreducetheoverallcostof fuelandmitigatethe impactofmarketpricefluctuations.WSFmaintains
flexibility in determining the type of hedging strategies that might be implemented, and must
periodicallyreport
back
to
the
legislative
transportation
committees
the
status
of
implemented
strategiesbeginningoneyearafterthe initialyearof implementation.Effortshavebeguntodevelopa
hedging policy, identify the most appropriate hedging technique, and gather information needed to
makeadecisiononwhethertoproceed.
Fuelpricehedging isatoolusedto improvebudgetstabilitybymitigatingexposuretoshorttermfuel
pricevolatility.Pricehedging isparticularlyusefulforbusinessesthatbuy largeamountsofafueland
want to limit theirexposuretopricevolatility, i.e.smoothout thepeaksandvalleysofhighlyvolatile
fuelpricesandmakebudgetedfuelcostsmorepredictable.
TherearemanydifferenttypesofhedgingtoolsavailabletoWSFandmostcanbeseparated intotwo
broad categories: (1) Financial and (2) Physical. Physical price hedging involves contracting for the
purchaseof
fuel
at
adetermined
fixed
future
price.
Physical
price
hedging
is
convenient
from
an
accountingstandpoint in that fuel issimplypaid forwhen it isconsumedat thepredetermined fixed
price.
Financialpricehedginginvolvestheuseoffinancialinstrumentsthatderivetheirvaluefromthepriceof
fuel.These instrumentsareused inordertopartiallyorcompletelyoffsettheriskassociatedwithfuel
pricefluctuationsbylockinginthepriceonsomeoralloftheprojectedfuelconsumptionforaspecified
periodoftime.Financialhedging instrumentsexistandoperate independentlyofWSFfuelpurchases.
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Theyare linkedonlybythefactthatwhenthecostoffuelfromthesupplierchanges,thevalueofthe
hedginginstrumentchangesinproportiontherebyoffsettingsomeorallfuelpricechanges.
Fuel price hedging is common for private businesses, particularly transportation firms, in which fuel
pricefluctuationswouldseverelyimpactbusinessperformance.ManylargetransitagenciessuchasKing
CountyMetro,TriMet (inPortland),BCFerries,andWashingtonMetropolitanAreaTransitAuthority
engagein
fuel
price
hedging.
It
is
uncommon
for
businesses
to
hedge
100%
of
their
fuel
purchases.
However, many do hedge 50% to 90% of total fuel purchases within a contract period and typically
overlap hedge contracts. A key factor in choosing what portion of fuel thatwould be hedged is the
degreeofpredictability intheorganizationsconsumption.Themorepredictabletheconsumption,the
highertheshareoffuelpurchasesthatcouldbeeffectivelyhedged.
MarketExposure:DeterminingthePriceofFuelforWSFBudget
Determiningthepriceof fuel forbudgetingpurposes isdifficult.CurrentlyWSFsbudgetrequestsrely
primarilyuponone forecast,providedbyGlobal Insight, todetermine itsexpected fuel costs for the
remainderofthecurrentfiscalyearandsubsequentbudgetperiods.Inrecentyears,theforecast,which
is updated quarterly, has changed substantially for the same expected budget period. For example,
betweenthe
time
the
Governors
Budget
was
proposed
last
year
(December
proposed
budget,
using
the
NovemberForecast)andwhenthebudgetwasadoptedbytheLegislature(April,basedontheupdated
MarchForecast), the forecastaveragepriceof fuel forbudgetyearFY2010decreasedby33% (from
$1.95to$1.30).
While inhindsightthisreduction inthepriceassumed forthepurposesofsettingthebudgetappears
difficult tojustify, it important tonote thatwhen theMarch forecastwascompleted, the recent fuel
pricehistoryshowedthepriceoffueldroppingfromitshighof$4.62pergallononJuly14,2008toalow
of $1.25 per gallon on March 16, 2009. At that time there was much uncertainty about the future
directionof theUSandworldeconomies,which isa significant factor in theworldpriceofoil.As it
turnedout,thismarketwasatthebottomofthepricedropandpricesreboundedmorequicklythan
expected.
Whatthisexampleshows isthatnotonly isfuelpriceforecastingchallenging inthebestoftimes,but
that precisely because of these forecasting challenges, by basing a budget on only one forecast,
additionalbudget risk is introduced into theprocess. In thiscase, theMarch forecast forFY2010and
FY2011turnedouttobeoutlierswhencomparedtoforecastsbeforeandsince.Thisiswhyrelyingona
singleforecastplacesmoreriskaroundbudgetstability.TheGlobalInsightforecastdoesprovidea16
yearprojectionof fuel costs,which isnecessary fordeveloping the longterm financialplan forWSF,
howeverthebudgetstrategiesproposedinthissectionfocusontheneartermpartoftheforecastand
thedesiretoreducetheamountofbudgetuncertaintywithinatwoyearbudgetwindow.Someofthe
neartermstrategiescouldinclude:
1.Averaging
most
recent
forecasts.
WSF
can
mitigate
some
of
this
budget
risk
by
using
a
weighted
or straight average price of prior fuel forecasts or a consensus of multiple published fuel
forecasts.Exhibit5below illustratestheeffectofaveragingusingthe lasteight isto forecasts
for FY2010 fuel prices as an example. In this example, the last four Global Insight forecasts
would be used, and the most recent forecast is given the most weight in determining the
average.Thisweightingschemeplacesthegreatestweightonthemostrecentinformation,with
50%ofthepricebasedonthisforecast,withthepreviousforecastaccountingfor25%,15%and
10% respectively.Theeffectofeithermethod is to reduce thequarterbyquartervolatility in
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priceforecasts,whichwouldreducetheriskoffallingonanoutlier,wherethebudgetedpriceof
fueliseitherunusuallyhighorlowinrelationtorecentforecasts.
2. Gathering additional information on nearterm fuel using futuresmarket. Fuel futures areshorttermpriceexpectationsforfuelthatcovera3to24monthtimeperiodandcanprovide
additional informationthatcould impacttheunderlyingassumptionsusedtodetermineWSFs
fuelbudget.
The
use
of
fuel
futures
market,
such
as
heating
oil,
would
be
preferred
since
heatingoilfuturesarehighlycorrelatedtothepriceFerriespaysforitsfuel.
3. IncorporatingWSFactualhedgingpositionsintobudgetdevelopmentprocess.Oncehedgingisunderway, a portion of future fuel costs will be known and should be factored into
determiningthebudget.
4. Building a consensus nearterm forecast. Use multiple respected sources such as theDepartmentofEnergys ShortTermEnergyOutlook todetermine thebudgetedpriceof fuel.
ThiswouldallowWSFto incorporateadditionalperspectivesonshortterm(1236month)fuel
pricesmovement.Thisconsensus forecastwouldbe integrated intoWSFsongoingbudgeting
practicesandwouldalsobesynchedupwithGlobalInsights16yearforecast.
Exhibit5
IllustrativeExampleofEffectofAveraging(FY2010PriceofFuel)
Note: Lines showing the rolling averages of the most recent four forecasts start in November 2008 and reflect the
averages of current forecast plus the previous three.
FUELSURCHARGEBUSINESSPLAN
It is the intent of this recommendation that the fuel surcharge be a mechanism to allow for partial
mitigation of costs associated with unexpected increases in fuel prices between budget setting
opportunities.Workingcooperatively,WSFandtheTransportationCommissionidentifiedthefollowing
organizingprinciplesthatwereusedtofullydevelopthefuelsurchargeprogram:
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Fuel Forecast Wei ghtedAverage StraightAverage
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The intentofa fuelsurcharge is toprovideanimblemechanism that is responsive tovolatilefuelpricesthatexceedLegislativeexpectationsasidentifiedintheWSFbudget. Thesurcharge
would provide additional revenue to cover fuel costs in situations of extraordinary and
unpredictedpriceincreases.
Monthly adjustments, where warranted by fuel price changes, couldand shouldbe made,based
on
the
date
of
ticket
purchase,
except
for
monthly
passes,
which
would
be
based
on
the
monthofusage.
Customers would be notified 30 days in advance of any imposition or modification to a fuelsurcharge. Inaddition to using itswebsite, broadcast emails andother customer notification
channels, WSF will issue press releases and work with local news organization to ensure
accurate information isefficientlydisseminated.TherewillbeadedicatedsectionontheWSF
website todescribe thebasisof the surcharge, showhow the calculation worksand informs
customersofanyupcomingchanges.
Inorder toprovide thepublicwithaclearunderstandingofhow the fuel surchargeprogramwouldwork,theproposedmechanismwouldbebothtransparentandsimpletocalculate.
Thekeyelementofthismechanism isthethresholdpriceoffuel,whichdefinesthebaselineprice
above
which
asurcharge
would
apply.
The
recommended
approach
is
to
use
the
per
gallon
priceoffuelusedbytheLegislaturetodeveloptheWSFbudgetasthethresholdprice.
Fuelsurcharges,roundedtothenearestfivecents,wouldbeseparatelyidentifiedfromregularfaresand the revenueswouldbe segregatedwithin theFerryOperatingAccount soas tobe
usedsolelytodefrayfuelcosts.
A calculation of costs of diesel fuel would be based on monthly indexes of Tacoma andAnacortesdata,weightedaccordingtoWSF'spurchasingpattern,andwouldserveasareadily
availableproxyforfuelcostsbymonth.
To integrate the surchargewith thehedgingprogram,gains fromhedgingactivitieswouldbeincorporatedintotheindexoftheactualpriceoffuel.
Basedontheseprinciples,itisbesttothinkofthefuelsurchargeasawaytohelpminimizetheimpact
ofincreasing
fuel
prices
between
budget
setting
opportunities.
Such
afuel
surcharge
program
must
be
designed to work within the policy and mechanical structure to be set by the Transportation
CommissionandfitwithintheframeworkofWSFsoperatingbudget.Currently,theonlywaythatfuel
pricesaredirectly incorporated into theWSFbudget ison theexpenditure side.When theGovernor
proposesabudget,thecostoffuel isbasedonthegallonsneededtosupportaparticularserviceplan
andaforecastoftheaveragepriceoffuelforthenexttwofiscalyears.Whenthelegislaturepassesits
budget,itincludesanexplicitappropriationtocoverfuelcosts.ItisimportanttonotethatWSFcannot
spend more than this appropriation, so if prices go up after the budget is passed, then WSF must
requestadditionalbudgetauthoritythroughasupplementalbudgetrequest.
WSTCandDepartmentRoles
Implementation of this proposed fuel surcharge program is within the WSTCs existing statutory
authoritytomanageandregulateferryfares.Toproceed,WSTCwouldneedtoestablishthesurcharge
mechanismviarulemaking,asaseparate,secondcomponentofthefarestructure.Theseruleswould
becodifiedintheWashingtonAdministrativeCode(WAC)andthussubjecttotheregularcoderevision
processandpublicreview.OncetheWACrulesareinplace,theimplementationofthesurchargewould
beanautomaticprocessdrivenbythemechanicsestablishedbytheTransportationCommission.WSF
wouldoverseetheimplementationofthisprocess.
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MechanicsofApplyingtheFuelSurcharge
Themechanicsoftherecommendedfuelsurchargearedesignedtobesimpleandautomatic.
Theproposedmethodologyincludesanautomatic triggerthatwouldbesetasapercentageabovethe
established threshold priceof fuel,anda fuel surcharge wouldonlybe imposed ifactual fuelprices
exceeded
this
minimum
percentage.
The
fixed
formula
will
be
clearly
defined
in
the
WAC
put
in
place
by
theTransportationCommissionandwouldworkasfollows:
Step1:Calculateaverageactualmarketpriceofdieselfuel.
WSFwouldestablishamonthlyreviewprocesstotrackaveragerackpricemovementforultralowsulfurdyeddieselbeginningonthe16thofthepreviousmonthandcontinuinguntilthe15th
of the current month as reported by the Washington State Department of General
AdministrationsOfficeofStateProcurement.SinceWSFpurchasesitsfuelfrombothAnacortes
andTacoma, theaveragemonthlypriceof fuelwouldbeaweightedaverageof themonthly
averagesforTacomaandAnacortesOPISRackprices,wheretheweightingreflectsthevolume
ingallonsfromeachrespectivelocationduringthepreviousfiscalyear.
Step2:
Adjust
for
effects
of
hedging
activities
over
the
corresponding
period.
Toaccount foranygains fromhedgingactivitiesduring themonth,gainsareconverted toaneffectivepergallon fuelsavingvalue thatcanbesubtracted from theOPISweightedaverage.
ThesavingsshallbecalculatedbydividinganygainsfromhedgingactivitiesbyWSFsbudgeted
averagemonthlyfuelconsumption.Theresultingestimateofsavingspergallonshallbeusedto
reducetheindexofpricestoarriveatahedgingadjustedweightedOPISindex.
Step3:Determineifhedgingadjustedpriceisgreaterthanthethresholdpriceoffueland
calculatesurchargeamount.
Ifthehedgingadjustedweighted indexdidexceedthethresholdpriceof fuel,WSFwouldusethe
formula
adopted
by
the
Transportation
Commission
to
calculate
a
fuel
surcharge
amount.
Thiswouldbedonebysubtracting the thresholdpriceof fuelpergallon for thecurrent fiscalyearfromthehedgingadjustedweightedaverageindexoverthelastmonthtocalculatetheper
gallonpriceincrease.
Thepercentage increase infuelpriceswouldthenbemultipliedbytheshareofbudgeted fuelcoststototaloperatingcostsforthecurrentbiennium.
The result would then be divided by the budgeted farebox recovery rate for the currentbiennium.Exhibit6belowdisplaysthemathusedtocalculatetheresultingfuelsurchargefactor
ifhedgingadjustedfuelpricesincreased10%abovethethresholdpriceoffuel.
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Exhibit6
BasicFuelSurchargeFormula
Step4: Ifsurchargeamount isgreater than2.5% thenasurchargewouldbeappliedat the
nextfarechangeopportunity.
Anautomatic surcharge trigger for implementinga surchargewouldbe setat2.5%aboveallbasefares.Establishingthisamountavoidsmakingsurchargeadjustmentswhenthereareonly
relativelysmallincreasesinbasefuelcosts.
Thefuelsurchargeistobecappedatamaximumof20%.Thepurposeofthecapistoprovideameasureofcertaintythateveninhighfuelinflationperiodsfareimpactswillbelimitedtoapre
determined
amount.
Tominimizethenumberofsurchargechangeseachyear,thesurchargecanonlybechangedifthe current calculated monthly fuel surcharge rate fluctuates up or down by at least an
increment of 2.5% from the prior months rate. This amount is set such that the surcharge
wouldadjustbasedonnickelrounding.
Theamountofanyfuelsurchargewillbeshownseparatelyoncustomerreceipts. TofacilitateunderstandingonthepartofWSFcustomersandensureatransparentprocess,an
explanationofhowthesurchargeisapplied,includingasummaryoftheactualcalculationofthe
surchargepercentage,willbedescribedontheWSFwebsiteandavailableinotherformatsupon
request.
SettingtheThresholdPriceofFuel
Thethresholdpriceoffuelisthekeyelementindeterminingwhetherornotafuelsurchargewouldbe
imposed.Indevelopingthisplanseveraloptionsforsettingthethresholdpriceoffuelwereevaluated.
Intheend,itwasdeterminedthatthepreferredapproachwouldbetosetthethresholdpriceequalto
thepricepergallonusedtoestablishthefuelbudget.
This approach would be to simply take the price per gallon used for the estimate of fuel cost
expendituresinthebudgetandusethisasthethresholdpriceoffuel.Inessence,thelegislaturewould
settheWSFfuelbudgetbasedonthepriceoffuelusedtodevelopthebudgetrequest.Thesurcharge
mechanismwould thenhelpmitigate theeffectsofpricevolatilitybygeneratingadditionaloperating
revenuewhenfuelpricesincreasebeyondthethresholdpriceoffuelassumedinthebudget.
IfthesurchargeweretriggeredduringtheLegislativeinterim,therevenuegeneratedfromthesurcharge
would be in available to assist in funding supplemental budget requests for fuel funding. When the
legislaturepassed itsnextbudget(withthesupplementalrequest)theprocesswouldberesetandthe
surchargewouldbebasedonthefuelpricesassumedinthenewbudget.
This approach is simple and is consistent with the intent of the proposed surcharge mechanism, by
havingthesurchargebethelastlineofdefenseforunpredictedpriceincreasesthatexceedboththe
PercentIncreaseoverThreholdPrice
(CurrentMonth)FuelShareof
OperatingCosts(Budget)
FareboxRecoveryRate
(Budget)
SurchargeAmount
EXAMPLE 10% 20% 70% 2.9%
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Exhibit7
FareboxRevenueandRidershipImpactsatDifferentSurchargeLevels
FY 2010 FY 2011 FY 2012 FY 2013
Baseline Farebox Revenues $147.8M $155.0M $162.5M $168.7M
Fuel Surcharge Revenues5% Surcharge $0.9M $5.0M $5.3M $5.5M
10% Surcharge $1.7M $9.8M $10.3M $10.7M15% Surcharge $2.6M $14.3M $15.1M $15.6M20% Surcharge $3.4M $18.6M $19.5M $20.3M
Baseline Ridership 22,918,000 23,450,000 23,919,000 24,180,000
Ridership Impacts of Fuel Surcharge
5% Surcharge -71,000 -421,000 -429,000 -433,000 10% Surcharge -143,000 -843,000 -859,000 -866,000 15% Surcharge -214,000 -1,265,000 -1,288,000 -1,300,00020% Surcharge -285,000 -1,687,000 -1,719,000 -1,735,000
Source:ParsonsBrinckerhoff,WSFRevenueProjectionsforFuelSurchargeOptions
TimingandFrequencyofSurchargeChanges
Inconsideringthefrequencywithwhichfuelsurchargesmightbeadjusted,thereisatensionbetween
wanting to respond quickly to rising fuel costs in order to mitigate the budgetary impacts and the
challenge forcustomersof frequentpriceadjustments. In reviewing theoptions for frequency, itwas
determinedthatWSFcouldsupportamonthlyfuelsurchargeupdateprocess.
WSF is required tonotifySoundTransit30daysprior toa farechangeandall farechangesare tobe
effectiveonthefirstdayofthemonth.AdministrativelyWSFalreadyhastheabilitytosupportmonthly
changes
in
the
Electronic
Fare
System
(EFS)
and
ticketing.
WSFwouldneedtocreatearegularmonthlyprocesstoreviewfuelpurchasesandimplementsurcharge
where fuelpriceswarrantand/orserviceadjustments to reduce fuelconsumption.Tobeaneffective
fuel cost mitigation tool, WSF will need to minimize the time lags between the surcharge need and
actual implementation. Based on the notification requirements, the shortest practical lag will be
approximatelysixweeks.Exhibit8 illustratestheprocessandscheduleforreviewand implementation
forthefirstmonthofsurchargeandthesurchargereviewandimplementationprocessthereafter.The
exhibit ismeant to show that the implementationprocessand reviewprocessoverlapand thedates
selectedareforillustrativepurposesonly.
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Exhibit8
ExampleofFuelSurchargeReview,NotificationandImplementationProcess
Startingonthe15thofeachmonth.ReviewtheaverageweightedOPIS indexversusbudgetedamountsforthepreviousmonth(midmonthtomidmonth)anddeterminetheneedforafuel
surcharge.Reviewinformationinternallytofinalizefuelsurchargedecision.
Firstofthefollowingmonth(Twoweeksafterthebeginningofthereviewcycle).Notifytransitpartnersofpricechanges tobe implementedat thebeginningof the followingmonth (meets
requirementsfor30daysnoticeandimplementationoffarechangesonthefirstofthemonth).
15dayspriortoimplementation.Notifycustomersoffuelsurchargeandpricechangestotakeeffectatthebeginningofthenextmonth.
Firstofthemonth(67weeksfromthebeginningofthereviewcycle).Implementnewfares.TimingImpactsondifferentfaremedia.Thefuelsurchargewouldaffectvariousfaremediadifferently.
Some riders wouldnt pay the surcharge until their previously purchased tickets were used up;
conversely,some
riders
may
pre
purchase
tickets
at
ahigher
rate
and
overpay
ifthe
surcharge
were
reduced.Fareswillfallintothreedifferentcategories:
Category1Faresthatcouldbeoutofsynchwhenimplementingorremovingafuelsurcharge. The
totalfareamountwouldgouponthefirstofthemonthofanewsurcharge. Riderswouldhavethe
ability tobuyand store inadvanceata lowerprice (good for90days)but could run the riskof
overbuying at a higher rate if total fare amounts drop below their purchase price when a
surchargeisreducedoreliminated.Thiscategoryincludesthefollowingfares:
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SinglefullfarepassengerandvehicleWave2Gotickets(includingoversizedvehicles). Singlesenior/disabledpassengerandvehicleWave2Gotickets(includingoversizedvehicles).
Category2Faresthatwould likelyalwaysbeat leastpartiallyoutofsynchwithafuelsurcharge,
suchasmultiridecardsandautomaticrevaluecards.Thiscategoryincludes:
Multiridecardsforpassengersandunder20vehicle/driverfares.Riderswouldhavetheabilitytobuyandstoreinadvanceatalowerprice(goodfor90days)butcouldruntherisk
ofoverbuyingatahigherrateiffaresdroppedbelowtheirpurchaseprice.
Multiridecardsforpassengersandunder20vehicle/driverwithautomaticrevalue. Multiridecards(referencedasbundledsinglefaresintheWAC)forsenior/disabled
passengersandunder20vehicle/driverwithautomaticrevalue.
Category3Faresthatwouldalwaysbeinsynchwithafuelsurcharge.Thiscategoryincludes:
MonthlyPassengerPassesthisfaremediaisgoodforasinglecalendarmonthandisavailable onaWave2GocardorontheORCAcard(exceptfortheAnacortes/SanJuan
Islands/Sidney
B.C.
service
area).
The
price
of
the
pass
would
go
up
(or
down
if
coming
off
a
surcharge)accordinglystartingwithitsavailabilitytwoweekspriortothefirstofthemonth
whenrevisedsurchargefaresgointoeffect.
SinglefullfarepassengersusinganepurseontheORCAcard. Senior/DisabledpassengersusinganepurseontheORCAcard.
Customer information and notification. Customers would be notified 30 days in advance of any
impositionormodificationtoafuelsurcharge.Inadditiontousingitswebsite,signageonvesselsandin
terminals,broadcastemails,andothercustomernotificationchannelswillbeused.WSFwillissuepress
releases and work with local news organization to ensure accurate information is efficiently
disseminated.
Giventhe
potential
for
confusion
and
customer
impacts,
WSF
will
also
work
with
the
Ferry
Advisory
Committeestoestablishcommunicationsprotocolsaroundfuelsurchargeissues.Inaddition,therewill
be a dedicated section on the WSF website to describe the basis of the surcharge, show how the
calculationworksandinformcustomersofanyupcomingchanges.
Implications forWSF operations. WSF will experience some operation impacts associated with the
process of implementing the surcharge proposal. The following is a list of the types of operational
impactsthathavebeenidentifiedtodate:
InitiallytheITgroupwillneedtoprogramtheticketingsystemtoallowfortheadditionofafuelsurcharge to the total price of a ticket and to show that surcharge as a separate item on a
receipt.
On a monthly basis, the budget office would need to collect the fuel price data from theWashington State Department of General Administrations Office of State Procurement,
calculatetheaveragecosts,runthesurchargecalculation,anddetermineifasurchargeneedsto
beaddedormodified.
Onceasurchargeneedstobe implementedormodified,therewillbe impactsassociatedwiththecommunicationssurroundingthechange.
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Also,there is likelytobesomecustomerconfusion,especiallyatthebeginningoftheprocess,andsoitislikelythatcallstoWSFcustomerserviceagentswouldincreasewhenasurchargeis
implementedormodified.
At the tollbooths, the fare tableswillneed tobemodified tomakeclear that theposted faredoesnotincludeanypotentialfuelsurchargeamounts.
Therewill likelybe training requirements for terminal staff tounderstandhow the surchargeworksandtoabletoexplainittocustomers.Itmaybedesirabletohaveasimplebrochurethat
ticketsellerscanhandouttocustomerswhohavemoredetailedquestions.
SurchargeRulemaking
Sinceanewcomponent isbeingaddedtothefarestructure,theTransportationCommissionwillneed
toadopttheframeworkandmechanicsofhowthesurchargewillbeassessedandimplementedwithin
thefareWAC. SincechangingtheWAC isafivetosixmonthprocess, it isnotpracticaltochangethe
surcharge through the WAC process every time there is a relatively significant change in fuel prices
(eitherupordown).Asaresult,itwillbenecessaryfortheWSTCtoadoptfarepolicyrulesthatestablish
an
automatic
process
which
incorporates
a
fuel
surcharge
formula
so
that
WSF
can
implement
a
nimble
andresponsivesurchargeprogram.
TomaketheoptionofafuelsurchargeavailabletotheLegislatureassoonaspossible,asameansto
assistinthefundingforferryfuelin2010,thefollowingWACschedulewouldneedtobefollowed:
December2009,WSTCfiledintenttopromulgaterulesforimplementingafuelsurcharge. February2010,WSTCissuestheproposedrulelanguageforthefuelsurchargeandinitiatesthe
publiccommentperiod.
FebruaryMarch2010,publiccommentgathered. MidMarch2010,WSTCholdsapublichearingon theproposaland subsequentlyadopts the
finalrule.
May
1,
2010,
earliest
possible
date
the
fuel
surcharge
could
be
implemented.
Since the fuel surcharge is part of a broader fuel cost mitigation program that is designed to be
complementarytotheregularbudgetprocess,itisrecommendedthatWSFprepareanannualreportto
theLegislature,OfficeofFinancialManagement (OFM),andWSTCsummarizing theperformanceand
effects of the surcharge on both revenues and ridership. This would include reporting on all three
elementsoftheferryfuelcostmanagementprogram:fuelpurchasingandthefinancial impactsofany
hedgingstrategiesemployed;fuelsavingsmeasures,bothprogressontheprogrammaticelementsand
any serviceadjustments implemented toconserve fuel;and theperformanceand impactsof the fuel
surcharge.
TheregularannualreportwouldbeincludedaspartoftheDepartmentsbudgetsubmittalsandwould
provide the necessary supporting information for the Governors Office and the Legislature to make
budgetdecisionsregardingboththefuturespendingauthorityforfuelpurchaseaswellaswhetherto
assumerevenuesfromthecontinuationormodificationoffuelsurcharges.
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APPENDIX A: DRAFT COMMISSION WAC LANGUAGE FOR FERRY FUEL
SURCHARGE
WAC468300050
FuelSurcharge
(1) Inordertomanagethefinancialriskassociatedwithfuelpricevolatility,itisherebydeclaredtobethepolicyoftheWashingtonStateTransportationCommissiontoimplementafuelsurchargeasan
addedcomponenttothetotheregularpostedfaresforpassageonvesselsoperatedbyWashington
StateFerries(WSF)whenactualfuelpricesexceedthoseincorporatedandassumedintothe
departmentsWSFfuelbudget.Thetotalferryfarechargedwillconsistofthebasefareplusthe
automatic,incremental,additionalsurchargeascalculatedaccordingtothefixedformulasetforth
inthis
rule.
The
department
is
hereby
directed
to
apply
afuel
surcharge
to
base
fares
to
reflect
the
impactonWSFfuelcostsassociatedwithincreasesinfuelpricesabovethebudgetedpriceoffuel.
Themethodforcalculatingthefuelsurchargeshallbeasfollows:Anaveragehedgingadjusted
actualfuelpriceshallbecalculatedmonthly.Becausefuelispurchasedfromtwo
sources,theaveragemonthlypriceoffuelshallbeaweightedaverageofthemonthly
averagesforbothsourcesOPISRackPrices,wheretheweightingreflectsthevolumeof
WSFfuelpurchasesingallonsfromeachrespectivelocationduringthepreviousfiscal
year.
b. TheaveragemonthlypriceshallbecalculatedforbothsourcesasasimpleaverageoftheOPISDailycontractaveragerackpricesforUltraLowsulfurDyedDieselfuelas
reportedbytheGAOfficeofStateProcurementfromthe16thofthepreviousmonthto
the15thofthecurrentmonth.
c. Thecalculatedaveragecostoffuelshallbeadjustedtoreflectthefinancialimpactsassociatedwiththedepartmentshedgingoperationsoverthecorrespondingperiod.
Thispricepergallonadjustmentshallbedeterminedbydividingnetgainsfromhedging
byaveragemonthlyfuelconsumption.
d. Ifthehedgingadjustedactualfuelpriceisgreaterthanthebudgetedpricepergallon(excludingtaxesandfees)forthecurrentfiscalyearthanthepercentageincreaseinfuel
pricesshallbecalculatedbyfirstsubtractingthebudgetedpricepergallon(excluding
taxesandfees)forthecurrentfiscalyearfromthecalculatedhedgingadjustedaverage
actualpriceandthendividingtheresultbythebudgetedfuelprice(thepriceoffuel
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usedfordeterminingtheexpenditureappropriation).
e. Afuelsurchargeamountisthencalculatedbyasfollows:i. Multiplythepercentageincreaseinhedgingadjustedfuelpricesbytheshareof
budgetedfuelcoststototaloperatingcostsforthecurrentbiennium;then
ii. Dividetheresultbythefareboxrecoveryrateforthecurrentbiennium(definedasthebudgetedfarerevenuesdividedbytotalProgramXoperatingcosts).
f. Iftheresultingsurchargeamountislessthan2.5%thenthereisnofuelsurcharge.Iftheamountismorethan2.5%,thenafuelsurchargeshallbeaddedtoallferryfaresinan
amountequaltothepostedfaremultipliedbythesurchargefactor,withresultingfares
roundedtothenearestnickel.
g. Tominimizethenumberofmonthlychangesonceafuelsurchargeisinplace,thesurcharge
can
only
be
changed
ifthe
fuel
surcharge
amount
changes
(up
or
down)
by
at
leastanincrementof2.5%.
(3) WSFshallestimatetheneedforafuelsurchargeonamonthlybasis,basedupontheformulaprescribedinthisrule,andifasurchargeistobeaddedormodified,thenthedepartmentshall:
a. NotifyORCApartnersofthependingsurchargechangesatleast30dayspriortoimplementationofsaidchanges.
b. Makeallsurchargechangesbeeffectiveonthefirstofthemonth(4) Thefuelsurchargeamountshallbelimitedtoamaximumof20%.(5) ThedepartmentshallprovideanannualreporttotheLegislature,OFM,andtheWashingtonState
TransportationCommissionsummarizingitsfuelcostmitigationactivities,includinghowthe
departmenthasmanageditscostsaswellastheapplication,performanceandimpactoffuel
surchargespursuanttothisauthority.
(6) Theamountofanyfuelsurchargeshallbeshownseparatelyoncustomerreceipts.(7) TofacilitateunderstandingonthepartofWSFcustomersandtoensureatransparentprocess,an
explanationofhowthesurchargeisapplied,includingasummaryoftheactualcalculationofthe
surchargepercentage,shallbedescribedontheWSFwebsiteandavailableinotherformatsupon
request.
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APPENDIXB:FUELSURCHARGEEXAMPLES
Within the lastdecade, fuel surchargeshavebecomea common toolusedbybusinesses tomanage
theirexposuretofuelpricevolatility.Typicallytheriskofhighfuelcostsareeithersharedwithorpassed
on entirely to the customer though the fuel surcharge. Fuel surcharge examples are much more
commonin
private
industries
such
as
airlines,
ground
and
air
shipping,
trucking,
and
cargo.
Fuel
surchargeexamplesarelessprevalentamongpublictransportationcompanies.
Three ferry operatorswere identified inour research as having imposed a fuel surcharge in the last
three to fiveyears.Manybusinesses,bothprivateandpublic,havedecreased themagnitudeof fuel
surchargestoreflecttherecentdownturn infuelprices.Manypublicagencies,suchastheLongIsland
Ferry,UtahTransitAuthority,andBCFerrieshaveeveneliminatedaportionorall fuel surcharges.A
summaryofselectedfuelsurchargeexamplesaredisplayedinExhibitB2attheendofthisappendix.
FerryOperators
BCFerries
BCFerries,
which
is
regulated
by
the
British
Columbia
Ferry
Commission,
has
used
afuel
surcharge
to
diminishfuelpricevolatilitysince2004.Themainfeaturesofthefuelsurchargemechanismare:
A fuel deferral account was set up for each of the seven route groups within the system tostabilizefuelcostsandhelpavoidtemporaryfuelsurcharges.
Differences between the actual delivered price and the set price, determined by theCommission,iseithercreditedordebitedtoeachroutesdeferralaccountafteradjustingforany
pricehedginggainsor losses.Anegativedeferralaccountbalancesignifiesthatfuelcostshave
beendeferredforfuelthathasalreadybeenusedbutthatstillhastobepaidforbyBCFerries
customersthroughafuelsurcharge.Apositivebalanceistheresultofpreviousfuelsurcharges
havingmorethanpaidforfuelconsumed.
BCFerriesshareswithcustomers inthe first5centsper literof the fuelpriceoverandabovebasesetfuelprices.Fuelcostsaretransferredtothedeferralaccountwhenthepriceperliteris
greaterthan5centsabovebasesetfuelprices.
A fuel surcharge is administered when a route groups monthend deferral account balanceexceeds 2% of the annual presurcharge tariff revenue for the route group and cannot be
adjustedmorethanonceperquarter.BCFerriesmustprovideat least15dayspublicnoticeof
anyfarechanges.
Thesurchargeamount,which isapercentageabovebasefares, issetsothat iteliminatestheestimateddeferralaccountbalancesovera12monthperiod.
EverythreemonthsBCFerriesmustreporttotheCommissiontheactualaverageleveloffarespaidbyitscustomers.
In2008,themostrecentfuelsurchargesimposedincludeda10.3%surchargeonmajorroutes,17.6%onminorroutes,and9.2%ontheHorseshoeBayLangdaleroute.However,decliningfuel
pricesinthelasthalfof2008allowedtheremovalofallfuelsurchargesbytheendofDecember
2008.Furthermore,fuelrebatesof8%havebeenappliedontheminorroutegroups.
Inorder to levy fuel surcharges, theCommissionhas requiredBCFerries to implementa fuelconservationplanthatincludesvesselspeedcontrol,fuelmonitors,propellerreplacement,hull
resurfacingtoreducedrag,andschedulingadjustments
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LongIslandFerry(CrossSoundFerry)
TheLong IslandFerry,operatedbyCrossSoundFerryServices, isavehicleandpassenger ferry route
linkingthenortherntipofLongIslandtoNewLondon,Connecticut.Thereisafixedfuelsurchargeof2%
that isappliedtoallbase farestocoverthecostsassociatedwithanEPAmandateduseof lowsulfur
diesel.Afloatingsurchargecomponentisappliedasapercentagesurchargeontopofallbasefaresand
isbased
on
the
present
price
of
fuel
compared
to
apre
established
base
benchmark
price.
With
the
recentdeclineinfuelprices,thefloatingsurchargeiscurrentlyat0%.
StateofRhodeIslandFastFerry(BlockIslandFerry)
Beginningin2006,theRhodeIslandUtilitiesCommissionimplementedafuelsurchargeforitsfastferry
operations.Thesurchargewasimposedasa$0.60surchargeoneachonewayfare.TheCommissionhas
thestatutoryauthorityto levyup toasetmaximumsurcharge.Themaximumsurcharge iscalculated
eachmonthandbasedonrecoveringeligiblefuelcostsabovethestatutoryfuelfloorcostsof$1.20per
gallon,usingprojectedmonthlyfuelusageandridership.
OtherPublicTransit
UtahTransit
Authority
(UTA)
TheUTAimposesafuelsurchargeonlyiftheU.S.averageOnHighwayDieselFuelprice(NADF)reported
by the DOE rises above $3.00 per gallon. A $0.25 surcharge is applied to base fares for each $1.00
incrementabovethe$3.00pergallontrigger.
PackageandFreightShipping
Fuelsurchargesarecommonpracticeamongstshippingproviders.Manyshippingcompanies including
FedEx,UPS,andDHL applya fuelsurcharge forbothgroundandairshippingservices.Our research
showedthatfuelsurchargesdonotvarywidelybetweencompaniesforgroundorairexpressshipping.
Fuelsurchargesaretypicallyindexbased,increasingordecreasingwiththemovementoftheparticular
fuel
price
index.
Surcharges
are
only
applied
if
the
index
rises
above
a
set
threshold
price
per
gallon.
Mostshippingcompanies index theirair fuel surchargeson themonthly roundedaverageof theU.S.
Gulf Coast (USGC) price for a gallon of kerosenetypejet fuel, published by the U.S. Department of
Energy(DOE).UPS indexes itsgroundsurchargeagainsttheU.S.averageOnHighwayDieselFuelprice
(NADF)reportedbytheDOE.Thereisatwomonthlagbetweenpublicationofthefuelpriceindexand
imposition of the monthly fuel surcharge. For example, Septembers fuel surcharge paid for ground
shippingwithUPS isbasedonNADFpricepergallonpublished inJune.Examplesofthetypicalground
andairfuelsurchargeindexesandfuelsurchargepercentagesaredisplayedbelowinExhibitB1.
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ExhibitB1
ExampleofGroundandAirShippingFuelSurcharges
At Least:But Less
Than: Surcharge: At Least:But Less
Than: Surcharge:$0 $1.50 0.00% $0 $1.30 0.00%
$1.50 $1.58 0.50% $1.30 $1.34 0.50%$1.58 $1.66 0.75% $1.34 $1.38 1.00%$1.66 $1.74 1.00% $1.38 $1.42 1.50%$1.74 $1.82 1.25% $1.42 $1.46 2.00%$1.82 $1.90 1.50% $1.46 $1.50 2.50%$1.90 $1.98 1.75% $1.50 $1.54 3.00%$1.98 $2.06 2.00% $1.54 $1.58 3.50%$2.06 $2.14 2.25% $1.58 $1.62 4.00%$2.14 $2.22 2.50% $1.62 $1.66 4.50%$2.22 $2.30 2.75% $1.66 $1.70 5.00%$2.30 $2.38 3.00% $1.70 $1.74 5.50%$2.38 $2.46 3.25% $1.74 $1.78 6.00%$2.46 $2.54 3.50% $1.78 $1.82 6.50%$2.54 $2.62 3.75% $1.82 $1.86 7.00%$2.62 $2.70 4.00% $1.86 $1.90 7.50%$2.70 $2.78 4.25% $1.90 $1.94 8.00%$2.78 $2.86 4.50% $1.94 $1.98 8.50%$2.86 $2.94 4.75% $1.98 $2.02 9.00%$2.94 $3.02 5.00% $2.02 $2.06 9.50%
Ground Shipping Air Express Shipping
Source:WebsitesforUPS,FedEx,andDHL.
Airlines
Asof2008,themajorityofairlinecompanieshaveafuelsurcharge.Airlinesalsoimposeafuelsurcharge
forcommercialcargoservices.Somehavescaledbackdomesticsurcharges,butcontinuetoimposefuel
surcharges on international flights. Southwest Airlines is an exception it does not impose any fuel
surcharges.Other
airlines
may
choose
not
to
impose
fuel
surcharges
on
routes
that
are
highly
competitivewithSouthwest. Inthepast,manyairlines imposed fuelsurchargesontravelbookedwith
frequent flyer miles. However, with the recent decline in oil prices, most airline companies have
discontinuedthispracticeondomesticawardtravel.
Trucking&Cargo
Similar to package and freight shipping, cargo and trucking businesses pass along extraordinary fuel
costsassociatedwiththetransportationofgoodstocustomersthroughafuelsurcharge.Thetypicalfuel
surchargemechanismbasesthesurchargeamountonapublishedfuelprice indexandincreaseswhen
thepricepergallonofthe index increasesaboveasettriggerpricepergallon.Mostcompanies index
fuelsurchargesagainsttheNADFpublishedbyDOE.
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ExhibitB2
SummaryofFuelSurcharges
Source:BERK2008
Type of Surcharge Price Index Basis Trigger Mechanism Frequency of Adjustments
Ferry Operators
BC FerriesPercentage surcharge imposed
on top of base fare.Not index-based
When the month-end deferralaccount ba lance exceeds
2% of annual pre-surchargetariff revenue
Quarterly
Long Island Ferry(Cross Sound Ferry)
2% fixed surcharge above base
fare to cover EPA mandated use oflow-sulfur diesel; floating surcharge
based on the present price of fuel in
comparison to a pre-establishedbenchmark price.
Not index-based
When the monthly price forfuel exceeds the benchmarkprice. Shares a portion of fuelcost burden with customers.
Monthly
State of Rhode Island Fast
Ferry(Block Island Ferry)
Floating surcharge, determinedmonthly by Rhode Island Utilities
Commission. Amount is added tobase fares
Not index-based $1.20 per gallon Monthly
Other Public Transit .
Utah Transit Authority Tiered amount added to base faresNational U.S. Avg On Highway
Diesel Fuel Prices (NADF)reported by U .S. Dept.
of Energy (DOE)
$0.25 surcharge is imposedfor each $1.00 incrementabove $3.00.
Quarterly
Package/Freight Shipping
Ground (FedEx & UPS)Percentage surcharge imposed
on top of shipping rates.NADF
0.50% surcharge is imposed
for each $0.08 incrementabove $1.50.
Surcharge
can changewithout notice
Air; International
(FedEx, UPS, DHL)
Percentage surcharge imposed
on top of shipping rates.
U.S. Gulf Coast (USGC) Prices
for kerosene-type jet fuelreported by U.S. DOE
0.50% surcharge is imposedfor each $0.04 increment
above $1.30.
Surchargecan change
without notice
Airlines .
Domestic
Methods can vary; Can depend on
how competitive routes are; usuallycharged on a fixed price per
passenger basis
Not available Not available Surchargecan change
without notice
International
Methods can var y typically a fixedcharge based on route; Surcharges
can be determined illegal bygovernmental aviation authority.
Not available Not available
Surcharge
can changewithout notice
Trucking & Cargo
Trucking
Methods vary; some impose apercentage surcharge imposed to
base trucking charges;
some utilize a per-mile surcharge.
Most u tilize NADF Var ies by companySurcharge
can changewithout notice
CargoPer kilogram surcharge is applied to
cargo prices
USGC kerosene-type jet fuel;
Local price index such as Platt'sLos Angeles Mean fuel index
(used by Alaska Air)
Varies by companySurcharge
can change
without notice
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APPENDIXC:OPTIONSEVALUATED
Fuelchargesettorecover100%offuelcost
Thisoptionwoulddesignateaportionoffarespaidbyallferryriderstorecover100%offuelcosts.The
fuelcharge
component
of
fares
would
initially
be
set
at
the
beginning
of
each
budget
cycle
and
would
be
periodicallyadjustedbetweenbudgetsbasedonthemovementoffuelprices.
Advantages: Usersofthesystemwouldeachpayfortheirfairshareoffuelcosts. WSFsexposuretofuelpricevolatilityisvirtuallyeliminated.
Disadvantages: Largeinitialfareincreaseswouldbenecessaryinordertocatchupfaressothatfuelcostsare
fullyrecovered.However,aphasedinapproachwouldallowfarestobegradually increased in
ordertoworkuptothe100%fuelcostrecoverygoal.Fare increasesneededtoachieve100%
fuel
cost
recovery
may
not
be
achievable
due
to
ridership
impacts
and
would
not
be
the
preferredoptionforWSF.
Fuelcomponentoffarewouldbe increasedanddecreasedrelativetothemarketpriceswingsand consumers may get wary of large fare shifts. Further, there is no discretion allowed to
budgetmakersortheDepartmentregardinghowto fund fuelcosts,particularly inasituation
wheretheremaybeasignificantincreaseinpricesoveraveryshortperiodoftime.
Fuelsurchargesettokickinoncebasefuelistriggered
Inthisoption,WSFwouldcoverfuelcostsequivalenttoconsumptionmultipliedbyasetbasefuelprice
per gallon from base fare revenues and taxes. As fuel prices rise above this threshold price, the
additional fuel costswouldbepassed on to customersand recovered through a fuel surcharge. The
surcharge
would
remain
in
place
until
fuel
prices
fell
below
the
base
fuel
price.
Similar
to
the
shipping
industry, fuelpriceswouldbebasedonapublisheddiesel index (e.g.NADFpublishedbyDOE)anda
standardtableofsurchargeswouldestablishfuelpricethresholdsandsurchargeamounts.Toaccount
forinflation,thebasefuelpricepergalloncouldbeadjustedannuallybyanindexsuchastheConsumer
PriceIndexforallurbanconsumers(CPIu).
AnexampleofhowthissurchargewouldworkbasedonactualaveragefuelpricesbetweenFY2006and
FY2009 isdisplayedbelow inExhibitC1.Thebase fuelpriceof$2.15 isassumed tobeequal to the
historical average price per gallon of diesel fuel between 1952 and 2008, adjusted for inflation. As
illustrated inExhibitC1,a fuelsurchargewouldbe imposed formostofFY2007,allofFY2008,and
wouldceaseabouthalfwaythroughFY2009.
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ExhibitC1
ExampleofFuelSurchargeUsingFY2007 FY2009MonthlyAverageFuelPrices
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Average MonthlyFuel Prices
Threshold Fuel Price ($2.15)
Source:WSF,
2009
ExhibitC2 illustrateshowashipping industrytype fuelsurchargemechanismwouldbeappliedusing
$2.15asthebasefuelprice.AtthebeginningoftheFY200911Budget,theestimatedaveragepriceper
gallonfordieselwas$2.36.Thisrepresenteda$13.7millionincreaseinestimatedfuelcostscompared
tothetotalFY200911appropriation.Usingthestandardtableofsurchargesbelow,theaverageprice
of $2.36 would result in a 4.86% surcharge applied to base fares. The resulting surcharge would
decreaseoverallridershipbyalmost2%ormorethan400,000riders.Theupperboundofthestandard
tablebelowiscappedat$5.00pergallon,whichwouldresultin18.9%dropintotalridership.Thisupper
boundcanbeadjustedsothattheoverallridershipimpactislesssevere.Forexamplewhilefuelprices
wererising intothe$4.00pergallonrange inFY2008,WSFcouldsettheupperboundofthetableto
$2.90
per
gallon.
The
fuel
surcharge
would
never
rise
above
13.28%
and
the
resulting
ridership
loss
wouldneverbeabove4.77%.
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ExhibitC2
ExampleofStandardTableofSurcharges&RidershipImpactFY2009 FY2011
At Least:But Less
Than:Surcharge:
FY 2011Ridership
Impact
% Change fromBase Ridership
$0.00 $2.15 0.00% 23,450,000 0.00%$2.16 $2.30 2.05% 23,277,781 -0.73%
$2.31 $2.45 4.86% 23,040,970 -1.74%
$2.46 $2.60 7.66% 22,804,159 -2.75%
$2.61 $2.75 10.47% 22,567,348 -3.76%$2.76 $2.90 13.28% 22,330,537 -4.77%
$2.91 $3.05 16.08% 22,093,727 -5.78%$3.06 $3.20 18.89% 21,856,916 -6.79%
$3.21 $3.35 21.69% 21,620,105 -7.80%$3.36 $3.50 24.50% 21,383,294 -8.81%
$3.51 $3.65 27.30% 21,146,483 -9.82%
$3.66 $3.80 30.11% 20,909,673 -10.83%$3.81 $3.95 32.92% 20,672,862 -11.84%
$3.96 $4.10 35.72% 20,436,051 -12.85%
$4.11 $4.25 38.53% 20,199,240 -13.86%$4.26 $4.40 41.33% 1