DBRS Comments on Review of Coastal Ferry Act: Potential Erosion in BC Ferries Autonomy

DBRS notes that on January 24, 2012, the British Columbia Ferry Commissioner released the conclusions of its review of the Coastal Ferry Act (the Act), the legislation that defines the operating environment of British Columbia Ferry Services Inc. (BC Ferries; rated “A” by DBRS). The review was triggered by concerns of the Commissioner relating to future fare increases, and was enabled by the provincial Minister of Transportation and Infrastructure through Bill 14. The review draws from extensive public consultations and an inter-jurisdictional review of other ferry systems, and is aimed at outlining possible changes to the Act that could better balance user interests with the financial sustainability of BC Ferries.

The report is very comprehensive and touches virtually all aspects of BC Ferries’ operations. Particularly noteworthy recommendations include: (1) a much clearer and broader role for the Commissioner in many areas, such as the approval of capital and operating plans, changes to service levels and performance audits; (2) establishing the interests of ferry users and taxpayers as the first guiding principle under the Act, followed by the financial sustainability of BC Ferries; and (3) increasing provincial subsidies to hold fare increases in line with inflation during the balance of Performance Term 3 (April 1, 2012 to March 31, 2016). The Commissioner also proposes replacing the use of a targeted pre-tax return on equity as the basis for determining future fare increases by equity and cash flow targets deemed sufficient to meet debt servicing requirements and maintain current credit ratings.

While the proposed changes have a long way to go before becoming part of the Act, DBRS notes that they would reduce the autonomy of BC Ferries, whose operating framework is already more constrained than other comparable industries such as public transit and airports. The proposed changes would make BC Ferries’ operations and financial position even more dependent on the regulatory system and the Commissioner’s discretion. Moreover, a potentially lower return on equity would likely translate into weaker credit metrics and reduced financial flexibility over time.

The report highlights the importance of users maintaining realistic expectations regarding service levels and calls for increased support from the provincial government to ensure the financial sustainability of BC Ferries, which suggests that the operator alone would not be expected to protect service affordability. Nevertheless, if adopted in their entirety, the proposed changes would be viewed by DBRS as an erosion of an operating framework that has so far proved very effective at fostering service efficiency and preventing political interference, introducing an element of downside risk in the credit profile of BC Ferries.

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The applicable methodology is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies.