Agenda Date: February 26, 1999 Item Number: Docket: TS-990098 Company Name: Horluck Transportation Company, Inc. BC-19 Staff: Danny P. Kermode, Revenue Requirements Specialist Recommendation: •Approve the filing in Docket TS-990098 for Horluck Transportation Company, Inc., as revised, to become effective March 1, 1999 with a June 30, 2000 expiration. •Require the company to file quarterly reports to the commission that would include 1) results from operations for the quarter ended and year to date, and 2) a balance sheet as of the end of the respective quarter within 45 days of the close of the quarter. Reporting requirement would expire April 15, 2000. Discussion: On January 26, 1999 Horluck Transportation Company, Inc., (Horluck) filed tariff revisions in which they propose increasing rates for foot ferry service. The foot ferry provides an important commuting link between Port Orchard, Annapolis, and Bremerton. The ferry is a vital component of the Kitsap county transit system. Bus passengers can transfer from a bus to the ferry, and once again, to an awaiting bus on the opposite side. Kitsap Transit currently pays approximately 85 percent of Horluck’s revenues. Horluck provides daily service and transported approximately 443,000 passengers in 1998. Horluck received its last rate adjustment in February of 1998. Horluck proposed to increase revenues by $182,908 (40 percent). The increase in revenue would be used to 1) offset increased operating costs, 2) reflect an 8 percent decrease in passenger traffic and, 3) recover costs associated with the purchase and refurbishing of a new (pre-owned) ferry, the Mary L. The new ferry is necessary to update its aged fleet that includes vessels from 1948 and 1953. After review of the company’s records, Staff has determined the rate impact of the first two items, increased operating costs and reduced passenger traffic. However, the new ferry has presented a number of analytical problems. The costs associated with the Mary L are represented by both operating costs and financing costs. Most of the expenses of the Mary L proposed by the company are projections and not pro forma adjustments. Ratemaking theory requires use of pro forma adjustments that give effect to known and measurable changes in expenses or revenues that are not mitigated by other factors, not projections. Normally, estimates of some future level of activity are not acceptable. For example, fuel costs related to the new ferry and the effect of total fuel consumption by the other vessels can not be computed without an actual history of the ferry providing service. The company has incurred debt to purchase and refurbish the Mary L. Even though the Mary L is noDocket: TS-990098 February 26, 1999 Page 2 t yet in service the debt needs to be serviced. The allowed operating ratio should provide cash flow adequate to provide monthly payments. To facilitate the conversion from old, low capacity to a newer, higher capacity ferry, staff recommends an initial rate structure effective March 1, 1999, that includes all costs except for operating costs associated with the Mary L. These rates will stay in effect until the Mary L begins service. As of the date the Mary L begins service, currently estimated at the end of March, the second rate structure would then become effective, superceding the first rate structure. The second rate structure includes estimated expenses related to the operation of the new ferry. Staff recommends that second rate structure would expire on June 30, 2000. This will allow the company time to accumulate cost information related to the total company impact of running the Mary L and still remain financially viable. Prior to the expiration of its tariff, the company will be required to file for a new tariff, Staff would then begin a review and audit to set rates based on the new historical cost data. Staff also recommends the Commission order the company to file quarterly reports to the commission that would include 1) results from operations for the quarter ended and year to date, and 2) balance sheet as of the end of the respective quarter within 45 days of the close of the quarter. Staff has determined that the requested increase is excessive. Staff’s analysis indicates the use of a two step increase. The first step is without the new vessel in service and would increase fares by 9 percent. The second step fare increase, with the MaryL in service, represents a 27 percent increase over current rates and a 14 percent over the first step rates. Horluck has filed revised tariffs which reflect Staff results. There have been no comments received from the public in this filing. A sample of current and proposed rates are presented below: Current Fare Proposed Step 1 Step 2 One Way Adult $ 1.10 $ 1.50 $ 1.20 $ 1.40 One Way Child 0.75 1.00 .75 1.00 Bikes 1.00 1.00 .75 0.75 Docket: TS-990098 February 26, 1999 Page 3 The staff’s review of the company’s results of operations are attached for the test year ended December 31, 1998. The first schedule shows Staff results without the new vessel in service. The fare increase under this scenario will result in a 92.43 percent operating ratio. The second schedule represents operating results with the new vessel in service with a resulting operating ratio of 92.13 percent. It is Staff’s opinion that the revised rates are fair, just, reasonable, and sufficient. Staff recommends that the Commission: •Approve the filing in Docket TS-990098 for Horluck Transportation Company, Inc., as revised, to become effective March 1, 1999, with a June 30, 2000 expiration. •Require the company to file quarterly reports to the commission that would include 1) results from operations for the quarter ended and year to date, and 2) a balance sheet as of the end of the respective quarter. Reports would be due within 45 days of the close of the quarter. The reporting requirement would expire April 15, 2000. Attachments