Applicant is a vessel common carrier (VCC) authorized to transport freight between Los Angeles Harbor and points on Santa Catalina Island. It has operated the service on a continuous basis for over 42 years. The principal commodities transported are fuel, foodstuffs, other consumable goods, furniture, machinery, and bulk building supplies. It provides the service using two tugboats and two barges, and one military-style landing craft.
Applicant's last general rate increase was authorized in 2003 by Decision (D.) 03-08-053. In recent years Applicant has been recovering increased fuel costs by imposing a surcharge on its rates under a "zone of reasonableness" the
Commission authorized for VCCs.1 It currently is assessing a fuel surcharge of 20%.
The application requests authority to increase rates for regular overnight service an average of 35%. Driving Applicant's request for rate relief is a dramatic drop in revenue from operations. Revenues for the six-month period October 2008 through March 2009 fell $264,000 (20.6%) compared to the same period one year earlier. The steepest declines occurred during the first three months of 2009, when year-to-year revenues dropped 37.7%, and Applicant experienced a pretax loss of $118,000. Applicant projects that revenues will continue to be less in the remaining months of 2009 and into 2010 compared to company revenues in the same months of the prior year.
A drop in the number of cross-channel visitors to Santa Catalina Island is a major reason for the declining revenues. Applicant reports that since its last rate increase in 2003, the number of year-round residents on the Island has remained relatively steady at 3,500. However, the number of cross-channel visitors has been dropping each year from a total of 739,334 in 2000 to 527,647 in 2008, a decline of 28.6%. The visitors stay in hotels, eat at the Island restaurants, and drive demand for the construction or expansion of tourist-serving facilities. The businesses serving their needs require freight shipments of food, supplies, furnishings, and construction materials and equipment. Applicant anticipates a continued decline due to the national economic downturn and the resultant pressures on individuals and households to reduce discretionary spending.
The decline in the transportation of construction materials and equipment is reflected in the sales of building materials at the local building supply company in Avalon. Sales increased significantly from 2004 to 2005, and then more gradually until 2007. A large drop-off of 18.7% occurred in 2008. The rise and fall in the vendor's sales is demonstrated graphically in Attachment 3 to the application. The decline in 2008 is attributable not only to the fall in demand for construction, additions, and renovations in the hospitality industry and restaurants, but also to less construction activity in general due to unavailability of construction loans.
While Applicant's revenues have been dropping, it reports experiencing higher costs of operations since its 2003 rate increase. The most significant cost items are summarized as follows:
Maintenance and Upgrades of Operating Equipment
Between 2003 and 2008, annual costs in this category increased 126% from $237,105 to $536,324. Applicant states it cannot afford to reduce this line item of expense without jeopardizing the reliability and safety of the operation and exposing the company to higher emergency repair costs.
Insurance
Annual insurance costs rose from $314,404 in 2003 to $383,925 in 2008, or 22%. While actively pursuing new insurance carriers and programs in an effort to control costs, Applicant indicates it is not able to make cuts in general liability coverage or the special insurance requirements for marine vessels and operations without exposing the company to unreasonable risks.
Wages
Applicant paid 16% more in wages in 2008 than in 2003. In the last several years it has focused on efficiency gains and has successfully implemented personnel reductions to bring costs down. However, Applicant believes further personnel reductions are impractical without significantly impacting service levels.
Tug/Barge Fuel and Rental
Costs in this category increased 103% over the five-year period, going from $158,594 to $321,475. Applicant has covered most of the additional fuel costs with the Commission-authorized surcharge. Because fuel prices have moderated, Applicant is committed to lowering the surcharge once the requested rate relief is granted. Meanwhile, the costs of rentals for the vessels and ancillary equipment such as fork lifts and refrigeration units have increased steadily.
The requested rate increase of 35% would apply only to regular overnight service. Applicant does not propose to increase its base rates for same day service from the Mainland or for on call delivery service to the camps and beaches on the Island. In addition to the general rate increase, Applicant requests authority to make the following changes to its rate schedule:
Refrigerated Freight
Applicant requests to charge a 12.5% premium over regular rates to transport items requiring special handling and storage in refrigerated and frozen storage units, such as frozen food, ice cream, produce, meats, and fish. These items are highly susceptible to spoilage and have a higher than average claim ratio. Applicant estimates this type of cargo makes up approximately 5% of its shipping volume.
Large Vehicles in Excess of 15,000 Pounds
Applicant proposes to establish a special flat rate of $3,850 per round trip for large trucks and construction equipment. It indicates the rate will be more economical for the community of Avalon than the charge under the current rate structure (which is based on shipment weight). The number of such large vehicles is relatively small, so Applicant believes limiting the rate at this level should have a minor impact on overall revenues.
Adjustment to the Minimum Shipment Weight
To clean up what it calls a minor discrepancy in the base rate schedule, Applicant would like to change the minimum weight from 0-100 pounds to 0-112 pounds, and to change the next category level to start at 112 pounds.
Applicant believes its requests are fully justified. Its 2008 revenues totaled $3,452,000. Without a rate increase, and with the 20% surcharge remaining in place, Applicant projects 2009 revenues of $2,678,000 and operating costs of $2,855,000. The result is an operating ratio of 106.6%. The projection assumes that cross-channel traffic will remain stagnant or continue to fall for some time until the national and regional economies significantly improve. If the requested rate increases are implemented in 2009 and the fuel surcharge is reduced to 10%, the projection changes to revenues of $3,329,000, operating costs of $3,115,0002, and an operating ratio for the full year of 93.6%.
Applicant states the projected operating ratio of 93.6% represents a reasonable rate of return on the company's investment in the business. It has not requested a base rate increase for six years, even though costs have been steadily increasing over time, the amount of shipping has been declining, and the expected revenue from adding a special vessel to its fleet to enable service to Island camps and beaches and same day service from the Mainland has not materialized.
1 This authority was last extended by the Commission to November 6, 2009, by Resolution TL-19094, which also expanded the zone of reasonableness from 20% to 30%.
2 Projected operating costs are higher under a rate increase due to an increase in tax expense of $260,000.