Order 15652 - Island High Speed Ferry: Appl. to Operate Ferry Passenger Service

REPORT AND ORDER

By application filed with the Rhode Island Division of Public Utilities and Carriers ("Division"), Island Hi-Speed Ferry LLC ("Hi-Speed Ferry"), 8 Pier Marketplace, Narragansett, Rhode Island sought operating authority as a ferry passenger service from the Port of Galilee in Narragansett, Rhode Island to New Harbor located in the Town of New Shoreham (Block Island), Rhode Island.  [1 Island Hi-Speed Ferry LLC's Application was filed with the Division on February 20, 1998. See Exhibit DPU-1. The limited liability corporation has two members: Galilee Cruises, Inc. whose principal is Charles A. Donadio, Jr., and The Galilee Group, Inc., which is comprised of three individuals: Dana A. Hagopian, Jon G. Hagopian, and Mark J. Hagopian. The Application was signed by Mr. Donadio on behalf of all principals of the LLC. Mr. Donadio proffered testimony on behalf of the LLC and is referred throughout this Decision as the "Applicant."]  Interstate Navigation Company ("Interstate"), which currently provides service between Galilee and Old Harbor (also located in the Town of New Shoreham), and the Town of New Shoreham ("New Shoreham"), each filed "Protests" and Motions to Intervene in the Docket (collectively, the "Protestants"). [2 Both petitions were granted thus affording Interstate Navigation and the Town of New Shoreham full intervention status in the proceedings. A third petition to intervene was filed by the Block Island Tourism Council; however, after further consideration, the Council withdrew its request and decided to participate by way of offering comments through its Executive Director at the public hearings. See Exhibit Public Comment 1.]  Duly noticed hearings were held by the Division at 100 Orange Street, Providence, Rhode Island on April 27 through April 30, 1998, and continuing on May 13, May 14, May 20, May 21 and June 11, 1998.  [3 Before the formal evidentiary proceedings commenced, the Applicant filed a Motion for Summary Disposition of the Intervenors' protests, which the Division denied.]  The Division also held two hearings within the affected communities; one in the Town of New Shoreham on May 1, 1998 and a second in the Town of Narragansett on May 5, 1998. [4 The Division also held two prehearing conferences at the Offices of the Division, the first of which established a procedural schedule in the Docket, and the second of which resolved certain discovery disputes between the parties. Those conferences were held on March 5, 1998 and April 8, 1998, respectively.]  During the proceedings, the following appearances were entered:

For Island Hi-Speed Ferry, LLC:          Mark J. Hagopian, Esquire

Jon G. Hagopian, Esquire

For Interstate Navigation Company:      Michael R. McElroy, Esquire

For the Town of New Shoreham:          Merlyn P. O'Keefe, Esquire

For the Division of Public Utilities

and Carriers:                                         Paul J. Roberti

Special Assistant Attorney General [5]

[5 The Attorney General serves as legal counsel to the Division in accordance with R.I.G.L. Section 39-1-19.]

DISCUSSION

We begin our decision-making process by first considering applicable statutory law which drives the instant proceeding. Section 39-3-3 of the Rhode Island General Laws requires that any "common carrier of persons and/or property operating upon the open water ... shall first have made application to and obtained a certificate from the division certifying that the public convenience and necessity required the services." [6 This Section of law also specifies that a Certificate need only be obtained for intrastate water carrier operations.]  In essence, Section 39-3-3 ensures that water carrier services  [7 Only water carrier services that are provided to the "general public" require compliance with Chapter 3 of Title 39.] are included within the scope of Section 39-3-1, which defines those services which require the granting of a "certificate" from the Division.  [8 Although not specifically labeled in the statutes, the certificate is known, and commonly referred to, as a "Certificate of Public Convenience and Necessity."]

A second major consideration is whether the applicant, Charles A. Donadio, Jr., and his partners, are "fit, willing and able" to provide the proposed service. As part of its broad statutory authority to protect the public, the Division must ensure that an applicant for a certificate is fit, willing and able to properly perform the service proposed.  [9 See R.I.G.L. Section 39-12-10.]  Moreover, the Division must be confident that the Applicant will not only provide safe and reliable service, but also will adhere to Orders of the Division, as well as applicable rules and regulations promulgated by the Division. We begin our review with the latter issue.

Fitness, Willingness and Ability To Perform Proposed Services

The Protestants proffered several witnesses testifying that the Applicant was not fit, willing and able to perform the proposed services. The testimony centered around the fact that the Applicant had not obtained financing, had not purchased a vessel, had not hired personnel to operate the business and had not finalized other ingredients that go into operating a ferry service. The two main witnesses offered by Interstate Navigation on these issues were: Leonard Lardaro, Ph.D., a Professor at the University of Rhode Island, and Walter E. Edge, a Certified Public Accountant serving as a consultant to Interstate Navigation. In prefiled testimony, Dr. Lardaro's testimony that the Applicant was not fit, willing and able, was as follows:

Q. Based on your experience and training in business and economics, do you believe that the Applicant is "fit, willing, and able" to operate the summer-only passenger service that has been proposed?

A. In my professional opinion, there are several questions about whether the Applicant is "fit" or "able" to provide this service. Besides its obvious lack of experience in this field, it is my understanding that at the present time, the Applicant has failed to apply for the primary loan of approximately $2 million that will enable it to purchase its vessel. Nor does the Applicant have either a purchase or [sic] sale agreement for the vessel, nor has it made any deposits on a vessel. Furthermore, while the Applicant intends to provide "first class service," neither the food nor the liquor license has been secured. Several other details, some potentially significant, must also be dealt with before this service can be provided. The remaining two captains that will be needed for whatever vessel ends up being utilized must be hired. [10 Exhibit INC-13, at 7.]

Under cross-examination, Dr. Lardaro tempered his testimony about the importance of finalizing the operation before receiving approval and agreed that it would certainly be incongruous on the part of the Applicant to spend millions of dollars to secure a vessel, office space, office equipment, hire personnel, or finalize permits before obtaining the necessary authority to operate. The Division felt that the Applicant's position was the more reasonable one. He stated:

... I was not going to put down a non-refundable $200,000 deposit knowing that Interstate Navigation was going to fight me tooth and nail as long as they could, and I'm in a verbal written type of contract in which the vessel could sell and that's why I have been in talks, a contingency plan with Glading & Hearn to construct another vessel. [11 Tr. 4/28/98 at pp. 142, 143.]

Interstate's other witness, Mr. Edge, also concluded that the Applicant was not fit, willing and able because a vessel had not been obtained. Cross-examination, however, revealed the untenable nature of Mr. Edge's position:

Q. Having done some regulatory work yourself, don't you think it would have been imprudent for the Applicant to waste a lot of time and perhaps money applying for loans here and there before it obtained the authority to operate a high speed ferry?

A. I suppose, yes.

Q. Let's skip down to . . . your summary conclusions on the applicant's ability to operate the proposed passenger ferry service. You say the Applicant lacks a vessel?

A. "At this time."

Q. "At this time." Is it your opinion that the Applicant should purchase the vessel or be committed to the purchase of the vessel before being granted regulatory authority to operate it by the DPU?

A. I clearly don't believe the Applicant would be required to purchase the vessel before coming before the Commission. Whether or not the Applicant should have had more documentation on the purchase of the vessel, I believe they should have.

Q. All right. But this first item, "The Applicant lacks a vessel," that doesn't make the Applicant lack ability, does it really, because it . . . presently lacks a vessel before it has a certificate to operate one?

A. I think the key point here is at this time you couldn't run it because you have no vessel. That's what the testimony says. [12 Tr. 4/29/98, pp. 253-54.]

Based upon the foregoing evidence, the arguments put forth by Interstate Navigation are deemed unconvincing.

Charles Donadio, the Applicant, presently operates a tour and charter boat service. Mark Hayward, Deputy District Director of the United States Small Business Administration, testified to Mr. Donadio's business acumen as well as his most recent accomplishments:

Q. Do you have an opinion of Mr. Donadio as a business person?

A. Yes.

Q. What is that opinion?

A. Based on the information that I have read and seen, Mr. Donadio is a very good small business person who has an understanding of the successful operation of a seasonal boating service.

Q. What is the basis of that opinion?

A. Information that I have read and reviewed on Mr. Donadio's application as 1998 Rhode Island's Young Entrepreneur of the Year.

Q. Has Mr. Donadio been selected recently to receive an award from the SBA?

A. Yes. Mr. Donadio will receive his award on May 21, 1998.

Q. What was that award?

A. The 1998 Rhode Island and New England "Young Entrepreneur of the Year."

Q. Please describe the selection criteria and process for making that award?

A. The SBA Young Entrepreneur of the Year criteria is as follows: Individuals who serve as a majority owner and operate or bear principal responsibility for operating a small business with a three year track record, and who will not have reached the age of 30 by June 1, 1998, may be nominated. Nominations will be evaluated on the following criteria:

-- Evidence of success as measured by sales and profits (the nomination package must include a profit and loss statement and balance sheet for the past three years).

-- Increased employment opportunities created by the nominee's business.

-- Development and/or utilization of innovative or creative business methods.

-- Demonstrated entrepreneurial potential necessary for long term business success and economic growth. [13 Exhibit IHS-14.]

Many others also testified to the Applicant's fitness, character and standing in the community. The Division takes into consideration the testimony from six different witnesses:

He is astute, knowledgeable and hardworking . . . he is fit and able to run such a business as he operates an excursion boat service and does so in a knowledgeable, first rate manner. [14 Prefiled testimony of Richard Yost, General Manager of Lighthouse Inn. See exhibit IHS-11.]

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Respectable business person. . . . Dealings have been honest and service good.  [15 Prefiled testimony of Peter Conway, President of Conway Tours. See exhibit IHS-15.]

* * *

I believe Mr. Donadio to be one of the most ambitious, professional businessmen in the region. . . . He is able to single-handedly take a project from concept to reality. He has built his business from the ground up, with sheer guts and determination. He has a marketing savvy and a sense for trends in the industry. . . . He is absolutely fit and able to manage a high speed ferry.  [16 Prefiled testimony of Lisa Konicki, Westerly Chamber of Commerce. See exhibit IHS-17.]

* * *

He has been most successful and astute in anticipating the needs of the public. . . . Charlie is hardworking and willing to go the extra mile to help other organizations with whom he can cooperate. [17 Prefiled testimony of Ann O'Neill, President, South County Tourism Council. See exhibit IHS-16]

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Mr. Donadio is a hardworking, energetic business person who is dedicated and focused on growing his business and improving the Port of Galilee. I commend him for taking on such a venture. . . . I would have no reason to doubt his determination and ability to provide a choice to individuals who are in need of water transportation to Block Island. [18 Prefiled testimony of Lori Tobin, Narragansett Chamber of Commerce. See exhibit IHS-32.]

* * *

He is reliable, accommodating, personable and a great business person. . . . I think he is well organized and efficient. Also he has the marketing knowledge. [19 Prefiled testimony of Jodi C. Sweezey, Vice President, G&W Transportation Co. See exhibit IHS-34.]

Based on the evidence of Mr. Donadio's character and his business accomplishments, the Division is satisfied that he is capable of procuring necessary funds, obtaining necessary permits and employing key personnel needed to operate a successful ferry business.  [20 Interstate strongly argued unfitness due to the fact that Mr. Donadio failed to admit in testimony that he had previously been arrested, as demonstrated by a criminal complaint unearthed by Interstate Navigation during the last moment of the hearings. Later, Mr. Donadio requested an opportunity to explain what appeared to be an inconsistency in testimony. At a supplemental hearing on June 11, 1998, the Division allowed Mr. Donadio that opportunity. The Division also allowed the criminal complaint into evidence as Exhibit INC-16. The Division finds that Mr. Donadio's explanation regarding the inconsistency was credible. See Transcript of 6/11/98.]  Given Mr. Donadio's proven diligence as a businessman, the Division is satisfied that, if he is granted a certificate, he will overcome any unresolved financing, licensing or other issues that would otherwise prevent him from operating. Furthermore, the Division has not expected other applicants to invest millions of dollars into a business before applying for operating authority, and does not intend to do so now. [21 In fact, one might argue that if Mr. Donadio had invested millions of dollars prior to being granted a certificate to operate, his fitness might have been called into question given that if he failed to obtain a certificate, the investment would have been seriously compromised.]  The Division concludes, therefore, that the Applicant has the fitness, willingness and ability to conduct the proposed operation.

Public Convenience and Necessity

The issue of public convenience and necessity is complex, and many factors must be taken into consideration. Of utmost importance is that it be considered in the context of the public interest. Breen et al. v. Public Utilities Commission, 194 A. 719 (R.I. 1937). The phrase "public convenience and necessity" is susceptible to a variety of interpretations as was demonstrated during the proceeding by all those who expressed an opinion on the matter. To Island Hi-speed Ferry LLC, the phrase means promoting competition and creating new opportunities for those who contemplate traveling to Block Island. Conversely, to the residents of Block Island, the phrase means maintaining the status quo in terms of the available modes of ferry service to the Island. To Interstate Navigation, it means remaining as the sole provider of ferry transportation to Block Island so as to ensure profitability and rate stability. For the occasional visitor or tourist traveling to the Island, it means the availability of convenient modes of travel for pleasure, business, emergency, and ordinary purposes, reflecting significantly increased demands during the warm weather months. Stated in another way, it means having a choice.

Despite the range of views on the subject, weighing the public convenience and necessity requires careful consideration of the facts and circumstances in each particular case. In undertaking its review, the Division is guided by its expertise and knowledge in evaluating such matters, as well as past pronouncements by the courts of Rhode Island. Vested by the Legislature with the responsibility to decide these matters, the Division must weigh whether the public convenience and necessity would be served by the Applicant's proposed service. Indeed, it is a challenging task that requires scrutiny of applicable case law and the massive evidentiary record in this proceeding.  [22 The record consists of more than 100 documentary exhibits and approximately 2,500 pages of transcripts from the evidentiary hearings.]  We begin our analysis with a review of the case law.

Abbott v. Public Utilities Commission and its Progeny

Probably one of the oldest and most recognized cases in this field of public utility regulation is the case of Abbott v. Public Utilities Commission, 136 A. 490 (R.I. 1927). The applicant in Abbott sought approval to operate a "jitney" between two locations already served by an existing railroad. After evaluating the railroad's protest, [23 The railroad was the "New York, New Haven & Hartford Railroad Company" and operated between Providence and Woonsocket.] the Public Utilities Commission denied David Abbott's application for a certificate. [24 In 1927, the Division of Public Utilities and Carriers did not exist and the Public Utilities Commission maintained exclusive jurisdiction over the granting or denial of Certificates.]

In affirming the denial, the Supreme Court spoke at length on the meaning of the phrase "public convenience and necessity:"

The expression "public convenience and necessity" has not a well-defined and precise meaning. "Convenience" is not used colloquially in the statute as the appellant appears to consider. It is not synonymous with "handy" and "easy of access," although the question of ease of access may well enter into the determination of the public's convenience. "Convenience" shall be given an interpretation in accord with its regular meaning of "suitable," "fitting," and "public convenience" has reference to something fitting, or suited to the public need.

* * *

The word "necessity" in the expression under consideration does not have reference to an indispensable necessity, but rather that the route in question appears to the commission to be reasonably requisite. In passing upon public convenience and necessity, the commission must consider whether a proposed route is suited to and tends to promote the accommodation of the public and also whether it is reasonably required to meet a need for such accommodation. [25 Abbott, 136 A. 490, 492.]

Lastly, the Court expressed its approval of the agency's effort to give consideration to the impact on existing carriers:

We approve that position of the Commission. They are justified in considering the existing means of transportation, as to its substantial character and its probable permanence, also the investments of capital made by the owners of such existing means, the nature of the service that is being rendered, and, if such service is adequate, what will be the probable effect of admitting competition into a field now adequately served, and what effect such competition will probably have upon the receipts of existing lines of transportation, and as to whether, in the face of further competition, the adequacy of the existing service will be continued. [26 Breen et al. v. Division of Public Utilities, 194 A. 719, 720 (R.I. 1937) (citations omitted).]

Ten years later, the Court reaffirmed the principles espoused in Abbott and determined further that the Division, in passing upon the question of whether public convenience and necessity exists in any given case, must give primary emphasis to the needs of the general public. In the Court's opinion, this was "most fundamental":

Public service is the test in granting a certificate of public convenience and necessity. . . . Protecting existing investments, however, from even wasteful competition must be treated as secondary to the first and most fundamental obligation of securing adequate service for the public. [27 Breen, 194 A. at 720]

In Breen, the Court upheld the Division's issuance of a taxi license after concluding that the "effect of the [new license] was merely to provide persons in Central Falls with more convenient taxicab service . . . ." [28 Id.]  Apparently, the volume of business done from the existing taxicab stand in Central Falls was "irregular and seasonal" and at certain times voluminous. [29 Id.]

Guided by these decisions, we recognize that the issue of public convenience and necessity is complex and multi-faceted. The standard is not necessarily one of absolute "convenience" or absolute "necessity," but rather, may likely be a blend of the two. If the totality of the evidence demonstrates that the Applicant's service would be beneficial to the public interest, even after weighing the impact on existing carriers, we are inclined to grant a Certificate. With these principles in mind, we begin our review of the evidence.

The Nature of the Proposed Service

The Applicant, Charles A. Donadio, Jr., testified that "our market will consist of people who demand first class high speed travel to and from Block Island at reasonable fares."  [30 Tr. 4/28/98, p. 8.]  His Business Plan describes in particularity the nature of the proposed ferry service:

Island Hi-Speed Ferry will fulfill the customer need by providing a different type of ferry service to Block Island, a Hi-Speed Ferry that treats the passenger as a #1 priority. It will offer the customer advanced ticketing, virtual no-wait boarding and a quick approximate 35 minute shuttle to the island, along with a schedule that not only departs earlier from Galilee but returns later from Block Island than the existing service. Island Hi-Speed Ferry will be a state of the art Hi-Speed catamaran that will give the passenger a smooth quiet ride that cuts through the ocean even in choppy seas. It's [sic] facilities and amenities will be first class, offering air conditioning, private restrooms, a large open galley & bar and comfortable cushioned seating, and will be handicap accessible. Island Hi-Speed will be many steps ahead of it's [sic] competition by fulfilling the need for faster service aboard a first class vessel that will clearly put the customer first. [31 Tr. 4/28/98, p. 8.]

Mr. Donadio testified that the proposed service would provide conveniences not currently available on the existing ferry service, and would be expected to attract customers who currently do not want to travel on the larger ferries because of the unavailability of similar services, such as guaranteed seating and advanced ticketing without having to wait. [32 Some of the other amenities offered by the service include airline-style seating, sun deck seating, private restrooms, air-conditioning, video monitors, a full galley and "top shelf" bar, handicapped accessibility, and high speed over the open water.[sup]32]  The proposed 92 foot aluminum catamaran has a service speed of 28 knots, a carrying capacity of 149 persons, and is certified by the United States Coast Guard for ocean service up to 100 nautical miles off-shore.  [33 Id. at 8. Another benefit purportedly offered by the catamaran has to do with the manner in which the catamaran is construted. The hull is manufactured separately from the superstructure and the two are separated by numerous rubber bushings which reduces the vibration caused by engine operation or vessel operation. In addition, "noise deadening materials" are employed in the engine room to reduce engine noise and vibration. Mr. Donadio explained the level of vibration in the passenger compartment of a sailing catamaran as follows: "There was none. It was like you were sitting in a quiet living room.... Very, very quiet." This was in stark contrast to his experiences on Interstate's vessels:

Q. Have you made any observation about the vibration levels of, for example, the Carol Jean in its passenger compartment?

A. Yes. They are loud. The vibration is tremendous. When they put the engines on, it is like a vibrating steel structure. They are loud, and it's a ferry ... like any other ferry that operates throughout New England.]

Mr. Donadio testified that by utilizing reservations and assigned seating, travelers will be able to board the vessel without the waiting attendant to existing operations. He claimed that such practices will cut the time in half for some travelers who otherwise have to arrive an hour early to purchase tickets, wait in line to board Interstate's vessels and travel approximately an hour before disembarking at Old Harbor on Block Island. Mr. Donadio expects that his high speed ferry service will reduce the actual total travel time in half. He also explained how he would stagger his proposed schedule from that of Interstate's in order to alleviate congestion in both Galilee and Block Island and provide additional choice to the traveling public and island residents. [34 Tr. 4/28/98, pp. 129-30.]

Mr. Donadio articulated in testimony how his service, besides decreasing the travel time to Block Island, would be an entirely new experience for passengers:

A. ... One is the experience of riding the vessel. If you've ever ridden a catamaran, it is like a ride at the park; it is an unbelievable experience, something completely different from a monohull vessel. That is also a primary reason.

Q. What do you mean ride at a park?

Yes. It is like you came to experience the ride. It is the ride. You are not getting on a boat and sailing slowly to Block Island. It is an experience. You have to ride it to understand what it's like to ride one of these vessels. The other reason is the complete turn-around time of not just taking the vessel from dock to dock, it's from parking, purchasing your ticket, getting on the boat, going to Block Island and disembarking on the boat, that whole time frame. As I understand right now with your ferries [it] is about two hours. We are going to cut that right in half. So it is not just the time riding the vessel, it is the time purchasing the ticket and waiting in line to ride that vessel. It is cutting the time completely in half. [35 Tr. 4/27/98 at pp. 284-86.]

Mr. Donadio also stated his belief that, based on his personal experience, there exists a market of people who do not use Interstate's services and who would likely respond to his proposed service. He characterized the demographics of the unserved market, as follows:

A higher income level, people who want to get to the island in a much more upscale type of service. I've -- I have plenty of friends and relatives and other people who just will not go the island. If they do, they go once a year just because it is a very long time invested to get there. I mean, you have to deal with an hour-and-a-half to two hours on either side to go back and forth. I mean, I've talked to people who said if there was a quicker service and they weren't delayed, that they would shoot over there for lunch or dinner or they would go several times throughout the year, and there are people that just plain flatly will not go to Block Island because of -- they don't want to pay $75 to go on an airplane that carries four passengers and they don't want to go on Interstate Navagation's ferry where 1,000 other people are just being [transported]  [36 Mr. Donadio's characterization was stricken from the record. Tr. 4/28/98, p. 131.] over to the island. [37 Tr. 4/28/98, pp. 130-31]

Furthermore, Mr. Donadio took exception to Interstate's suggestion that the long lines, which witnesses testified typify summer travel on Interstate's vessels, are inevitable:

Q. Well, if you take 200,000 people over to Block Island and the majority of them are in the summer, you are going to have long lines of people right?

A. It depends how you operate your service. [38 Tr. 4/27/98, at p. 298.]

On the issue of public convenience and necessity, the Applicant offered the expert testimony of two economists to establish public need. In its direct case, the Applicant offered the testimony of Dr. Timothy Tyrrell, Professor of Tourism Economics at the University of Rhode Island. [39 Exhibit IHS-26.]  Dr. Tyrrell testified that based on his research in the area of tourism growth in Rhode Island and his analysis of the Galilee Master Development Plan, he felt that the Applicant would service a "niche market" which has not been adequately served in the past. He characterized it as an "upscale tourist market" consisting of people who desire a faster ride and a service with more comforts and amenities than those presently offered by Interstate Navigation. [40 Tr. 4/30/98, p. 72.]  He further distinguished the proposed service from the airlines servicing Block Island during the following exchange:

Q. Could you tell me why it is that the upscale market you described in your testimony, why these people in that market wouldn't just fly over on one of the three airlines to Block Island to save time?

A. I think it's more convenient for some to travel out of Galilee if they're from Boston. As I understand it, the flights come from -- flights come from Westerly. It's more convenient. Also, there are other things in the Narragansett area for people to do. I think that's all part of this building capacity in the region for the tourism. I think an upscale market is what they're courting. [41 Tr. 4/30/98, p. 114.]

Dr. Tyrrell also observed that while the tourism market in Rhode Island has been marked by fairly regular growth in recent years, there has been little growth in Interstate's market. Dr. Tyrrell attributed the flat growth to the fact that current ferry services are "not attracting the market."  [42 Tr. 4/30/98, p. 80.]  When asked on cross-examination whether the Applicant's service was "required" by public necessity, he answered that in his opinion there is no difference between public convenience and necessity. Because there is a market for a new attraction which requires a new service that is not currently provided, the Applicant's service would enhance both convenience and necessity. [43 Tr. 4/30/98, pp. 82-83.]

Dr. Tyrrell concluded by describing the Applicant's proposed service as a new transportation option which would attract new visitors to Galilee, enhance tourism in the area and encourage other upscale retail and hospitality businesses. Although he recognized that there would be some overlap in the two markets served by Interstate and the Applicant, he emphasized his belief that there exists an unserved niche market that is reasonably distinct from that served by Interstate:

Markets are never truly distinct. Consumers change because of changes in their tastes as well as changes in their ability to pay. However, the plan for the new ferry suggests a service that is considerably different from the existing ferry service. This should result in a larger influence on the overall market growth than on a shift of customers between the existing and new service. ... There is a niche market that is reasonably distinct from the market served by the existing ferry service.  [44 Exhibit IHS-26.]

Testimony Of Tourism Industry Representatives

The Applicant presented several representatives from the tourism industry, all of whom expressed opinions that the proposed service would be deemed valuable to many travelers who otherwise would not travel to Block Island on the existing modes of transportation service. The testimony supported the concept of the niche market theory by emphasizing that time is an important factor for tourists who visit Rhode Island. Each reiterated the concept that the time savings offered by the Applicant's service would be an inducement for tourists who utilize boat trips or those tourists who visit Rhode Island for brief periods. Peter Conway, President of Conway Tours, explained the concept during testimony:

Q. Now, you stated on Page 2 that certain groups are on a tight time schedule, correct?

A. Uh-huh.

Q. And so saving time has a monetary value attached to it, correct?

A. Yeah. Also a make or break, either they can fit it in or they can't.

Q. And you have done business with Mr. Donadio in the past as you have with Interstate, correct?

A. Yes.

Q. And you expect to continue to do business with him, correct?

A. Yeah; as well as Interstate.

Q. Now, what assumption were you making about the dock-to-dock travel time of the high speed ferry versus Interstate's?

A. I thought it was in the 45 minute range, but you know, I don't know that much about it, but I know it was significantly less.

Q. You thought the difference was 45 minutes?

A. No; that it took 45 minutes.

Q. Okay. For the applicant's ferry?

A. Right.

Q. And how long did you think it took for the Interstate ferry?

A. Approximately an hour and ten minutes.

Q. Are you basically saying that in your opinion the public's convenience would be served by having this high speed ferry?

A. I think that there are certain groups and certain people that need -- need a quicker time and it can be the difference between a group doing a tour and not doing a tour. I mean, I can give examples, but I would say that serves both convenience and need. [45 Tr. 4/28/98, pp. 236-38.]

Jodi Sweezie, Vice-President of G&W Transportation Co., offers tours to over 100 destinations in New England. Although her company does more than 1000 tours annually, none are to Block Island due to time constraints and the nature of existing transportation services to Block Island. She testified that the public necessity requires the Applicant's proposed service:

I would consider it as a necessity because where my groups are from, this particular Block Island would be a one-day tour, okay? It wouldn't be something that I would use overnight and the timing is very, very important so I service groups from Boston, north of Boston, all the way up to Concord, New Hampshire, so the timing is extremely important. [46 Tr. 5/13/98, pp. 16-17.]

Public Testimony

Many members of the public took the opportunity to express their views concerning the Applicant's proposed service. Those who testified on Block Island at the public hearing generally opposed the proposal to add high speed ferry service, citing primarily their satisfaction with Interstate's current service and their fear that the Applicant's service might impact Interstate in the form of increased rates and/or curtailed services. These comments will be addressed later in this decision.

At the public hearing in Narragansett, the views, for the most part, were diametrically different than those expressed on Block Island. Those who testified predominantly favored the introduction of high speed ferry service for a variety of factors. One such factor which certainly relates to convenience and necessity concerns the needs of elderly persons, people with physical limitations and families with small children who demand a more expedient method of traveling to Block Island. Unsolicited testimony was given at a public hearing in Narragansett by David J. Crook Sr., 25 Ocean View Drive, Narragansett, as follows:

Unfortunately I have an injury to the spine that precludes me from going on the Block Island ferry. I cannot stand in those lines to buy a ticket. I cannot stand in those lines to wait to board. I have a problem if I have to park any distance and I have to walk there.

The solution that I think Mr. Donadio is presenting here could be ideal for people that have the same problem. He is making a situation there where I can walk in and buy a ticket, I can sit there and wait until the boat leaves and get on the boat and I can park in very close proximity to the boat. I think they haven't taken into consideration the people that have these problems and I would hope that you consider them. [47 Tr. 5/5/98, pp. 43-44.]

At the same public hearing in Narragansett, Karen Jones, 12 Christopher Street, Wakefield, Rhode Island, also testified in favor of the Applicant's proposal:

I would just like to make a statement, mainly to this gentleman that owns the airline. He said that he doesn't know anybody who didn't go to Block Island because of the lines. Well, he's looking at her. I moved home to Rhode Island this summer and one of my goals, my main goals was to get over to the island because I hadn't been there in so long, and unfortunately, I can only go on the weekends. And when I went there the lines were horrendous and I didn't want to take so much time to get there and so much time to get back and my feeling is that if there was high speed ferry, I would have no problem paying the fee so that me and my friends -- my friends and I could go over, have lunch, spend the afternoon and come back, and I talk with a lot of people and I'd say 90 percent of the people that I talk to feel the same way.

I've also been reading in the newspaper and I've read that Mr. McElroy, the lawyer for Interstate, stated that the high speed ferry would take the cream off the top of his business. What I feel is that Charlie's business is a totally different level. If you go on the high speed ferry, you are going to have reserved seating, you are going to get there sooner, there's going to be no lines and it's just like first class airlines. People want that; people pay for that.

This woman that spoke before me said, or the gentleman that spoke before me, said why would he do that and stop the growth, and my question is how can he do that? How can these people speak for so many other people like myself who would take this ferry and not mind the cost and enjoy the ride? I mean, there's enough for -- there's enough for everybody to make some money here and it's a totally different service and I just think that it's not fair. [48 Tr. 5/5/98, pp. 38-40.]

John Miller of Narragansett, Rhode Island had this to say about the Applicant's proposed service and the prospect of competition:

I believe that Mr. Donadio and his partners are trying to provide a different kind of service, a kind of service that is not going to detract from Interstate appreciably, but more important, it's competition and that's what this country was built on and that's what we hope it will continue to offer. I think it will be a wonderful thing for Galilee to have a competitor to Interstate and I think Interstate's operation will improve as a result of it. [49 Tr. 5/5/98, p. 6.]

Barry Couture, also a resident of Narragansett, emphasized the attributes of competition and the consistency of the Applicant's business plan with the State's Master Development Plan for the Port of Galilee:

I'm also very intimately familiar with the Governor Almond's master development plan for the Port of Galilee and I feel that a high speed ferry is a nice fit for the amenities and attractions that Part 5 of the plan calls for. Also I believe competition is a good thing in the business world today. It keeps those that are in business sharp and it also keeps them tuned to their customers' needs and also the community's needs that they serve.

I also believe that if the electric, gas and telephone utilities are encouraging competition by deregulation, it only serves best the consumer for lower rates, higher customer satisfaction and more services that they are willing to give. I think that the high speed ferry's plan is well thought out, it addresses many issues of development of the Part of Galilee including parking, traffic flow, and passengers coming forth, along with ticket sales, trying to keep people who are trying to get on the ferry off the street and out of the way for their own safety and for the community's ease of access and flow. [50 Tr. 5/5/98, at 12-13.]

Applicant's Rebuttal Case

The most convincing evidence of public need was presented later in the Applicant's rebuttal case. Lawrence Kunkel, the Applicant's other expert economist testified in his personal capacity as an economist interested in economic development in the State of Rhode Island. [51 Tr. 5/13/98, pp. 72-73.]  His qualifications and vast experience as detailed in his curriculum vitae and in testimony, coupled with his firsthand experience and frequent travels to Block Island, distinguished him from all other economists who testified during the proceeding. [52 Mr. Kunkel's statement of credentials was admitted into the record as Exhibit IHS-35. For additional discussion, see transcript dated 5/13/98, at 53-68.]  Mr. Kunkel explained how the Applicant's service would co-exist with both Interstate's service and the airline services out of Westerly, Rhode Island. By virtue of the distinguishing attributes of the Applicant's proposed service from that of Interstate's, he depicted how the two services would "compete indirectly in a smaller niche marketplace." [53 Tr. 5/13/98, p. 82.]

In comparing the potential impact between the Applicant's proposed service and New England Airlines, he concluded: "the overlap on an indirect competitive basis will be far more injurious, if you will, to the airline than to Interstate Navigation." [54 Tr. 5/13/98, p. 85.]  In his opinion, the Applicant's potential ridership consisted of a "dormant unserved niche market" that "would be activated should a provider supply the marketplace a set of attributes that meets the demand for that niche market." [55 Tr. 5/13/98, p. 91.]

As will be discussed later in this decision, Mr. Kunkel strongly rebutted the testimony presented by Interstate's economist, Dr. Leonard Lardaro, that the Applicant and Interstate will be in direct competition with each other, which will lead to a large scale diversion of customers from Interstate to the Applicant and ultimately to Interstate's demise. [56 Tr. 5/13/98, pp. 100-101.]

On the issue of need, Mr. Kunkel, based on his own experience and on evidence that high speed ferries are springing up all over the country and all over the world, [57 Mr. Kunkel cited the introduction of similar high speed ferry services in Cape Cod (Martha's Vineyard), New York, Boston, the West Coast, the Caribbean, and in Europe. Tr. 5/13/98, at 92.] concluded that there is a "revealed preference" for such a service. [58 Tr. 5/13/98, p. 101. Mr. Kunkel described the preference as follows: "A revealed preference is simply consumers demonstrating that they are willing to spend money to acquire a particular product and that they have revealed a preference for this market, for this product or service over or in addition to some other product or service." Tr. 5/13/98, at 93.]  In testimony, he described his personal experiences in traveling to Block Island and articulated examples of need for a high speed ferry service:

Q. Now, Mr. Kunkel, have you ever traveled to Block Island?

A. Yes.

Q. Would you please describe the nature, the purpose, the duration of that travel?

A. Yes. Every summer my family and I travel to Block Island for two weeks. We typically rent a house on Mansion Beach and we pack the car to the gills and go to Block Island for two weeks.

Q. And during these trips to Block Island -- how long have you been doing this?

A. Approximately 12 or 13 years.

Q. And what mode of travel have you used to get the kids in the car and all your vacation stuff to Block Island?

A. I've always used Interstate Navigation.

Q. Okay. And as a user -- let me ask you this first of all. When you've gone on these two week vacations, you are a very busy person, do you have -- have you typically stayed on the island for that entire two weeks?

A. Yes, I have, simply because it's just not convenient given the length of time to go back and forth to go off island to my office or other places.

Q. If you had the opportunity to go off to, say, go to a meeting or to do something else, would you take that opportunity while you are on Block Island.

A. Yes.

Q. Do you play golf, by the way?

A. Yes, I do.

Q. Are there any golf courses on Block Island?

A. No.

Q. If you had the opportunity to make a quick trip from the Island to the mainland to play golf, would you do that?

A. Positively.

Q. As a user of Interstate Navigation's vessels -- first of all, let me ask you this. If you had the opportunity and the applicant's vessel were in service, would you use it?

A. Yes, I would. But I think -- obviously, I would also have to continue to use Interstate Navigation.

Q. And why is that?

A. Because I have to get my car over ... [59 Tr. 5/13/98, pp. 87-89. Mr. Kunkel also articulated what he considered to be common experiences with the existing ferry service to the Island in contrast to the proposed high speed ferry service:

Based on conversations that I have had with a variety of passengers with whom you have discussions with on your way over and back, my impression of their experience with the Block Island ferry is that they go to Block Island in spite of the service that they receive on the ferry. There is always discussion about the bathrooms; there is always discussion regarding having to wait in line; there is always discussion regarding having to cue your car up to get your car on; there are always discussions about not being able to always get on the boat you want to get on. So these are characteristics, if you will, of the attribute quality where I would say that it is a minimal quality service and not one that people embrace readily but more that they endure because basically they have no choice at this point. Tr. 5/13/98, pp. 140-41.]

Mr. Kunkel drew the following conclusion on the question of convenience and necessity of the Applicant's proposed service:

Q. Do you have an opinion with a reasonable degree of economic certainty as to whether that is needed [sic] for the applicant's service?

A. Yes.

Q. What is that opinion?

A. My opinion is that, again, based on my own personal experience and on evidence that the high speed ferry is springing up all over the country and all over the Caribbean and in other parts of the world, that again, this revealed preference clearly demonstrates that the need for high speed service is there. I mean, when you look at how consumers crave speed in virtually every other aspect of their life, faster computers, faster fax machines, faster modems, faster food; I mean, the list is endless. To think that they somehow have revealed a preference for speed in virtually every other aspect of their lives and for some reason would not have it here, I think is an invalid conclusion.

Q. And would you conclude that faster and better is also a revealed preference in this market?

A. Yes.

Q. Not just speed?

A. Not just speed. But the whole set of attributes taken together. [60 Tr. 5/13/98, pp. 101-102.]

The Division finds Mr. Kunkel's observations and conclusions to be most persuasive and compelling on the issue of convenience and necessity.

Protests of Interstate Navigation and Town of New Shoreham

The greatest concern of the Protestants was the potential impact that the Applicant's service might have on Interstate's business. The main thrust of Interstate's argument is that Division approval of the proposed ferry service would result in higher rates and/or curtailed service, and eventually, could force Interstate Navigation to go out of business.

Walter Edge, Interstate's consultant, presented what he conceded to be a "worst case scenario," which was based upon certain assumptions. First, Mr. Edge assumed that all of the Applicant's customers would come from Interstate's customer base. [61 Tr. 4/29/98, p. 269.]  Mr. Edge also assumed no load growth in passenger statistics. Neither did he give any credence to the existence of a niche market for high speed ferry service. Lastly, and most importantly, Mr. Edge assumed that the Public Utilities Commission would subsequently reduce the Applicant's proposed rates to a level consistent with conventional PUC rate review pursuant to R.I.G.L. Section 39-3-11.  [62 Mr. Edge assumed that the Applicant's proposed $26 round trip fare would be reduced to as little as four to seven dollars after a review by the Public Utilities Commission. Exhibit INC-8, p. 12.]  This theory was the backbone of Interstate's protest and the root of its fear that the Applicant's business would seriously undermine Interstate's revenues. Mr. Edge explained the theory while being cross-examined:

Q. Where do those adjustments come from?

A. The adjustments are based on my experience as to what the Public Utilities Commission would do if they had a rate hearing for them, for this Applicant.

Q. What if the Division (hypothetical question), what if the Division approved the application and mandated the $26 round trip rate, how would that affect your testimony?

A. I'm -- I believe that the worst case scenario would not come to fruition, not all the people on Interstate would go over to the Applicant's boat; but I don't know -- I mean as was pointed out in my cross-examination, I did no study as to how many people would go from one boat to another that was price sensitive. I did my analysis as if all of their new customers were our current ratepayers, what the worst case impact would be on Interstate.

Q. So the $26 round trip, that could attract a new market?

A. I believe the $26 ticket may not attract as many of Interstate's $13 ticket people as I think a $4 ticket for the applicant would attract $13 Interstate ratepayers ...  [63 Tr. 4/30/98, pp. 16-17.]

As a result, Interstate Navigation argued that the proposed ferry would "skim the cream" of passengers during the peak months of July and August which would have an adverse economic effect on Interstate's revenues. Dr. Lardaro characterized the situation as follows:

[M]any persons will view these competing ferry services as being either perfect or near-perfect substitutes. Persons for whom the total costs of these two services are identical, nearly so, or for whom the Applicant's service is the less expensive of the two, will switch from Interstate to the Applicant, resulting in a loss of customers for Interstate. During off-peak periods, higher income persons who, up until now, have ridden the Block Island ferry will switch from that service to that of the Applicant. In peak periods the proposed service will have a lower cost for a wide variety of customers, depending on the time difference. The proposed service will therefore draw a substantial number of customers directly from Interstate Navigation, as it will be operating from the same pier during the "peak" summer season when a large ridership exists, resulting in a loss of revenue to Interstate that it will need to redress through an increase in rates. Of course any losses that result cannot be recouped at the time they occur, so Interstate will experience an unrecoverable loss of revenue and profit. [64 Exhibit INC-13.]

Susan Linda, Vice-President and Chief Financial Officer of Interstate Navigation Company, predicted that approval of Hi-Speed Ferry's proposal would result in loss of about $1,000,000 in passenger revenues per year.  [65 Exhibit INC-15, p. 24.]  Under cross-examination, Mrs. Linda testified that the projected loss was based on the "worst case scenario" developed by Mr. Edge.

Q. But then, again, that's assuming Mr. Edge's "worst case scenario"; correct?

A. For the $1 million loss; but I believe that any amount of passengers that the Applicant takes from us is going to affect our revenues and then eventually affect our rates.

Q. Any amount? What if it was a hundred thousand dollar loss of revenue?

A. We could probably take a hundred thousand dollar loss. I don't think we could do it every year.

Q. Why don't you think you could do it every year, a hundred thousand dollar loss?

A. We'd have to make up that loss.

Q. And how would you do that?

A. By raising our rates.

Q. Isn't there any other way you could make up that hundred thousand dollar loss?

THE WITNESS: Besides cutting our costs?

MR. MARK HAGOPIAN: Yeah.

THE WITNESS: Besides cutting our costs?

MR. MARK HAGOPIAN: No. Let me ask you that question.

Q. Isn't that the way to reduce costs to do just that, reduce costs?

A. We could reduce our costs; but why should we be forced to reduce our costs because the Applicant wants to run a vessel? [66 Tr. 5/14/98, pp. 85-86.]

Mrs. Linda further testified that she does not believe there is a niche market for high speed ferry service:

Q. So by making this assumption, you're assuming that there is absolutely no niche market out there for the applicant's service; correct?

A. Yes, I don't believe it's out there.

Q. You don't believe it's there, okay, fine. You don't believe that there is a niche market out there for a high speed ferry from Galilee to Block Island?

A. No, I don't. [67 Tr. 5/14/98, p. 81.]

During the Applicant's rebuttal case, Lawrence Kunkel expressed serious disagreement with the conclusions drawn by both Dr. Lardaro and Mrs. Linda. Regarding Dr. Lardaro's suggestion that the two services were "near perfect substitutes" that would significantly erode the revenues of Interstate, Kunkel had the following response:

Q. Now, have you had an opportunity to review Dr. Lardaro's prefiled direct testimony?

A. Yes.

Q. And did you in fact sit in this room and listen to his testimony on that witness stand?

A. Yes, I did.

Q. And do you take issue with any of Dr. Lardaro's testimony?

A. Yes, I do. I take issue with his line of reasoning, some of his statements, and more importantly, some of his conclusions.

Q. Let's try to be a little more specific. Do you agree with Dr. Lardaro that the Applicant and Interstate will be in direct competition with one another?

A. Absolutely not.

Q. Would you explain your answer?

A. Certainly. In economics, and specifically in industrial organizations, there is a very well-defined, a widely-embraced and irrefutable logic that determines whether or not products or services are direct competitors, and just as a point of clarification, when I say product or service those two words are used interchangeably in economics because a service is nothing more than an intangible product. So rather than having to constantly say product or service, if I say one, they are used interchangeably.

But, the chain of that logic in determining whether or not products or services are direct competitors is this. A product is made up of a set of attributes. The makeup of those attributes determines whether -- or the degree to which those products or services are differentiated. The level of that differentiation defines the degree of substitutability between those services. And the degree of substitutability defines whether or not a product or a service is [in] direct competition.

In this case specifically, because the product attributes of the Applicant's service which includes: location, schedule, quality of service, speed of service, price conceivably; those attributes are so markedly different from the attributes of Interstate's service that I would suggest that there is a high degree of product differentiation between the two services. If there is a high degree of product differentiation, those two services are not perfect or even near perfect substitutes for the other. Given the fact that there is high product differentiation, there is low product substitutability, hence, the two products are not direct competitors. [68 Tr. 5/13/98, pp. 75-76.]

Mr. Kunkel also disagreed with Mrs. Linda's belief that there is no niche market for high speed ferry service to Block Island. He summarized his opinions and observations as follows:

I believe that the market exists and I believe that the market will become an active one if, as I mentioned, there is a provider supplying a product with the appropriate attributes that meets the demand that exists I believe not in this -- not just in this market, but has revealed itself in a variety of other markets as well.

* * *

[W]e have seen the start up of high speed ferry services in, for example, the Hy-Line Cruises that runs from Hyannis to the outer islands; we've seen high speed ferry service spring up in New York, in Boston, on the West Coast, in the Caribbean, in Europe. There clearly is a revealed preference by virtue of the fact that these high speed ferry services didn't exist and they now operate and they operate successfully to demonstrate that this market exists because it exists in so many other places. * * * And I don't believe that there is a valid economic reason or valid economic argument that could be made that could say that it could exist in so many other markets and not yet exist here.  [69 Tr. 5/13/98, pp. 92-93. Mr. Kunkel emphasized the definition of "revealed preference" as follows:

A revealed preference is simply consumers demonstrating that they are willing to spend money to acquire a particular product and that they have revealed a preference for this market, for this product or service over or in addition to some other product or service. Id.]

The Division agrees with Mr. Kunkel's observations and conclusions. After hearing all of the evidence in this proceeding and weighing the credibility of witnesses, the Division finds that the testimony of those witnesses who have experienced a need for the services that cannot be fulfilled by Interstate Navigation, is far more convincing. [70 On this same issue, Dr. Lardaro also testified that, because the Applicant failed to conduct formal "studies" and "surveys" to demonstrate need, he concluded that there was no basis to believe that a public demand for the proposed service existed. Exhibit INC-13, at 8. Mr. Kunkel voiced strong disagreement with this and other conclusions drawn by Dr. Lardaro. Based upon the totality of the testimony on these issues, the Division is not persuaded by Dr. Lardaro's conclusions.]

Round-trip Cost Differential Between Interstate and Hi-Speed

($13.00 vs. $26.00)

As for the potential impact on Interstate Navigation if the Applicant's service is allowed, the Division finds that the concerns are overstated. First and foremost, the Division finds that Interstate's suggestion that the Public Utilities Commission will reduce the Applicant's rates is unpersuasive under law and fact.

As part of its review to determine whether the public convenience and necessity warrants the granting or denial of a certificate, the Division must weigh the impact on existing carriers, a concept that was embraced by the Supreme Court in Abbott v. Public Utilities Commission.  [71 136 A. 490, 491 (R.I. 1927).]  The Division is of the opinion that a necessary element in determining the potential impact that a new carrier poses to the permanence of an existing carrier is not only the nature of the new service (i.e. route, schedule, etc.), but also the price of the new service.

In this proceeding, the testimony indicates that the price differential between the two competing services may play the greatest role in evaluating the potential impact on Interstate and its ratepayers. For this reason, the Division considered the Applicant's filed passenger rate of $26 per round trip. However, the Division recognizes that the Public Utilities Commission maintains jurisdiction over the rates of water carriers. [72 O'Neil v. Interstate Navigation Company, 565 A.2d 530 (R.I. 1989).]  Therefore, our granting of a certificate to Island Hi-Speed Ferry is conditioned upon the Commission's approval of a tariff. If approved, the Division remains confident that the Applicant can offer this new service to the public and not pose any major threat to the financial viability of Interstate Navigation Company. As Interstate witness Walter Edge conceded, "I believe the $26 ticket may not attract as many of Interstate's $13 ticket [ratepayers] ..." [73 Tr. 4/30/98, p. 17.]  By recommending that the Commission approve the filed rate, the Division can ensure against predatory pricing that might jeopardize the scope and quality of Interstate's current operations. Clearly, the public interest is best served by our decision to factor price into our determination of "public convenience and necessity." [74 The Division also notes that with any rate filing before the PUC, the utility must file "cost of service schedules and rate base schedules for a test year period. The test year constitutes a historic year of actual data." See Rule 2.6 of the PUC's "Additional Requirements for Filings of General Rate Schedule Changes" (Addendum to Rules of Practice and Procedure). In addition, the utility must present workpapers detailing historic revenues as well. A new utility will obviously have great difficulty in complying with these requirements. Moreover, it would be nearly impossible, as demonstrated in this proceeding, to accurately forecast expenses, revenues, or a fair rate of return for a utility that has never before operated or provided services. With a new utility, the unknowns are great and the risk to capital is difficult, if not impossible, to calculate.]

Passengers-Only Service

A second important distinction which gives the Division confidence that the impact of the proposed services will not pose a threat to Interstate Navigation is that the Applicant will transport passengers only. Mr. Kunkel articulated the distinction:

Interstate by virtue of the fact they carry more than just passengers, they also carry freight, they also carry vehicles, to a certain extent they have a captured market that is present to them and will not under any circumstances be present in the applicant's service. So there is a base that is unavoidable. [75 Tr. 5/13/98, pp. 153-54.]

The Division also recognizes the magnitude of the difference in the scope of passenger operations between Hi-Speed Ferry and Interstate Navigation. The evidence demonstrated that Interstate's passenger operations will be approximately eight times that of Hi-Speed's projected passenger capacity. For this reason, the Division finds that Applicant's operations are not likely to have a significant impact on Interstate Navigation. [76 Tr. 5/14/98, pp. 48-49.]

Old Harbor vs. New Harbor

A third characteristic that differentiates the two services and minimizes potential revenue erosion to Interstate is the fact that the Applicant's service transports passengers to a different side of the island. As Mr. Kunkel explained, "everything that they would need is in Old Harbor and it's a very short walk for them from Old Harbor to the State Beach." [77 Tr. 5/13/98, p. 185.]  Although New Harbor and Old Harbor are separated by less than 1 1/2 miles, the evidence suggests that to the average visitor with no car and no bicycle, the two harbors are worlds apart:

Q. Well, the location between New Harbor and Old Harbor is only about a mile and a quarter away, correct?

A. To people that travel to Block Island, that is probably the equivalent of 20 miles.

Q. Okay. When you go to Block Island with your family do you really care whether you go into New Harbor or Old Harbor? You want to go to your rented home, correct, that's your destination, is that correct?

A. Well, I have no choice because I take a car, so I have to go to Old Harbor.

Q. But the point I'm trying to make is when people go to Block Island they go for the Block Island experience, they don't go for the Old Harbor experience or the New Harbor experience, they go for the Block Island experience, correct, generally speaking?

A. Well, generally speaking they know that they are going to be deposited in a fundamentally different location from the applicant's service than the one provided by Interstate.

Q. You think a harbor that is a mile and a quarter away is a fundamentally different location on Block Island?

A. Well, you are telling me that the majority of riders are day trippers.

Q. That's correct.

A. So if they don't have a bike, they are walking. So if they are walking or even if they have a bike, in their minds that is a significant difference. [78 Tr. 5/13/98, pp. 155-56.]

Tourism Growth in Rhode Island

Although recent statistics indicate that the growth in passenger volumes has been relatively flat between 1994 and 1997, the Division recognizes that the overall trend for the last ten years has been one of significant growth for passengers, vehicles and freight, as reflected in Interstate's Fleet Study.  [79 Exhibit IHS-1, Attachment 1, pp. 11-12.]  In fact, between 1989 and 1993, the overall increase in passengers, trucks, and freight ranged between 23 percent and 79 percent.  [80 Id., at 11. Actually, the findings in the Fleet Study support the concept that enhanced service amenities increase ridership: "The increase in traffic ... may be accounted for greater satisfaction on the seakindedness of the larger vessels.'" Id.]  A broader view of these statistical trends, coupled with the present statewide trend of increased tourism, leads the Division to conclude that the probability of continued growth in the Block Island market appears promising.  [81 See prefiled testimony of Dr. Tyrrell, Exhibit IHS-26, p.6.]  Furthermore, the evidence supporting the existence of an unserved niche market only increases the prospect of continued growth in tourism. These considerations further diminish the potential impact on Interstate.

Review of Protests

Moreover, the Division has strong reservations about the rationale of the protests in this proceeding. First, we revisit testimony previously cited in our decision, relating to the potential loss of revenue that the Applicant's service might cause Interstate Navigation. Interstate's reaction was as follows:

Q. Isn't that the way to reduce costs to do just that, reduce costs?

A. We could reduce our costs; but why should we be forced to reduce our costs because the Applicant wants to run a vessel? [82 Tr. 5/14/98, p. 86.]

The testimony evinces a monopolistic mindset on the part of Interstate's management, which ignores the evidence demonstrating that the Applicant's service is suited to the public's convenience and necessity. That the general public should be denied the opportunity to avail itself of the Applicant's service in order to insulate Interstate Navigation from all risk of revenue erosion is a concept that the Division cannot embrace, especially given the current trends toward competition and the increasing availability of consumer choice in numerous industries subject to regulation by both the Division and Commission. On this issue, the Division subscribes to the philosophy of Lawrence Kunkel:

Q. And if Interstate were to lose some portion of passengers, not putting any specific number on it, but any number of passengers, with fixed costs it would require it to raise its rates to some degree; fewer passengers lost, a smaller rate increase, larger passengers lost, a larger rate increase, correct?

A. I'm sorry. I absolutely disagree with that. I categorically disagree with that.

Q. Okay.

A. There is no relationship at all beyond a certain scale where the loss of ridership necessarily translates into the need for a fare increase. I mean, what you are assuming when you make that statement is that Interstate operates under 100 percent fixed costs, has no management capability or maneuverability at all, undertakes no marketing strategy at all to undertake a ridership replacement program, and those are all leaps of faith that I find profoundly incorrect. [83 Tr.5/13/98 at pp. 147-48.]

Based on the testimony, the Division concludes that Interstate on its own initiative did not make sufficient attempts to accommodate the public's needs that surfaced during this proceeding. Mrs. Linda testified that although costs could be cut, she strongly disfavored the prospect of having to do so.  [84 Tr. 5/14/98, at p. 86.]  In a previous docket, although the PUC mandated that Interstate implement a pilot program allowing passengers to make advance reservations for the ferry, Mrs. Linda testified that the program was not successful. [85 Tr. 5/14/98, at pp. 98-99.]  She also testified that Interstate made no effort to make the public aware that reservations could be made to travel to Block Island. [86 Tr. 5/14/98, pp. 99-100.]  It is apparent by the testimony of Mrs. Linda that Interstate, because of the Hi-Speed Ferry application, plans to implement a reservation system in 1999. [87 Tr. 5/14/98, p. 100.]  The Division concludes, therefore, that even indirect competition between the two ferry companies will be in the public interest.  [88 The Division also notes that as a direct result of the Applicant's filing, Interstate has decided not to sell the Manissee, which as of April, 1998 was on the market for $575,000. Tr. 5/14/98, pp. 39-41. Mrs. Linda testified that Interstate pulled it off the market "in case we have to use it this summer." Id.]

Underlying the protests in this docket are other motives that raise credibility issues with the protests themselves. All of the protestants were cognizant of Interstate's request to replace the Manitou and Manissee ferries with the new $8,000,000 Block Island that began providing service in June of 1997. In documents filed with the Public Utilities Commission in its last rate case,  [89 Exhibit AN-1 (Docket No. 2484).]  Interstate sought approval to increase its revenues by $1,907,026 or about 36.9 percent. The major reason for the increase was to purchase a "new winter/freight boat" now known as the vessel Block Island.  [90 Exhibit AN-1 (Docket No. 2484, prefiled testimony of Susan Linda).]

As support for its rate increase request, Interstate relied upon the results of a "Fleet Study," whose stated goals were as follows:

This study was requested to address the traffic problems that have developed primarily during the high traffic summer season, particularly the large increasing freight needs of the Island. This study's goal is to address the need for improved ferry service between Point Judith and Block Island on a year-round basis and to evaluate the current and future needs of the users of the ferry service and the ability of the current fleet of vessels to meet their requirements.  [91 Exhibit IHS-1, Attachment 1 (Emphasis supplied.).]

The results of that study were approved by the PUC and are now embedded in rates in the form of the $8 million Block Island. The primary objective of this new vessel was to provide additional freight carrying capacity to the Island, most notably vehicles and large trucks. The vessel Block Island was also added to offer enhanced winter ferry service for the year-round visitors and residents of Block Island. [92 Id. See also Docket No. 2484 (prefiled testimony of Susan Linda).]

However, Interstate's new vessel offers less to the summer traveler than it does for freight, vehicles and year-round visitors. Unlike advance car and truck reservations, the options for passengers to make advance ticket reservations are far more limited. If a passenger deemed the time and expense worthwhile, a ticket could only be reserved for an Interstate vessel traveling from Point Judith to Block Island by driving to Point Judith and pre-purchasing the ticket on the particular day of travel. [93 Tr. 5/14/98, p. 95.]  Pre-purchasing is not even an option for the Block Island to Point Judith leg of the trip.

In contrast to passenger ticketing, freight, trucks and vehicles can make advanced reservations on Interstate's boats. In this respect, the service that exists for passengers, especially those in summer, contrasts markedly with the service provided for freight. [94 Tr. 5/14/98, p. 25.]  Even assuming that the ferry made the trip within one hour, passengers are required to defer to the off-loading of vehicles and trucks before they, themselves, disembark. According to the record, the off-loading of freight and vehicles can add five to fifteen minutes to the one-way trip.  [95 Tr. 5/14/98, p. 25.]  On the Carol Jean, given that she is powered with smaller engines than the Block Island, the entire trip obviously takes longer. [96 Tr. 5/14/98, pp. 26-27.]

Moreover, passengers are not informed that vehicle and truck reservations take precedent over passengers. [97 Tr. 5/14/98, pp. 14-15, 29.]  Due to weight constraints imposed by Coast Guard regulations, every vehicle or truck displaces numerous passengers who, during peak periods, may be left standing in line for the next ferry, an experience that is not all that dissimilar to that of the airline passenger stranded in the terminal due to mechanical or weather related problems.  [98 Tr. 5/14/98, pp. 15, 47.]  Perhaps what is most ironic is that the same summer passengers who are not a priority in the loading scheme provide Interstate Navigation with more than 50 percent of all revenues on an annual basis. [99 See Docket No. 2484, Exhibit AN-1 (prefiled testimony of Walter E. Edge).]

The Applicant's proposed service, by placing primary emphasis on serving the needs of passengers, is further differentiated from current products and, therefore, demonstrates that the public convenience and necessity would be served by the proposed service.

Protests of the Town of New Shoreham and Island Residents

The motives underlying the protests of the Town of New Shoreham and many Island residents, which appeared to be in conflict with previous positions, made subtle appearances in the record of this proceeding. Consider the following exchange during cross-examination of First Warden Kimberly Gaffet:

Q. ... You've testified here that there are several reasons why you oppose or the town opposes the application of Island Hi-Speed Ferry, one of them being the service provided by Interstate Navigation is more than adequate. Do you see that?

A. Uh-huh.

Q. This is contrary to the position you took in the general rate filing docket a little over a year ago before the Public Utilities Commission, is it not?

A. I really don't recall that.

Q. You don't recall giving testimony?

A. Maybe you could refresh my memory. I'm sorry.

Q. You don't ever recall taking any position before the Public Utilities Commission that Interstate Navigation's service to Block Island was less than adequate?

A. That is when they were pursuing their new boat and we needed the better freight boat and better wintertime boat which we got, and since then my opinion is that service is adequate. [100 Tr. 4/27/98, pp. 211-12 (emphasis supplied). The Division also notes that in the last rate case, the PUC not only continued the discount passenger rate for Island residents, but also approved a newly created discount for Island vehicles. In addition to these discounts, the Island received a better winter boat, substantially greater freight capacity, a reduced hazardous materials rate (propane, heating oil and gasoline), and additional scheduled runs during the wintertime. See Docket No. 2484.]

During that same day of hearings, Mrs. Barbara Sprague explained as follows:

It is my opinion that we do not need another ferry service to transport passengers to and from Block Island. Interstate Navigation Company provides this service as well as providing us with good year-round service for passengers, cars, trucks and freight. To allow a competing service to come in and take from the revenues of the summer passengers would eventually force higher rates for year-round residences and businesses.  [101 Tr. 4/27/98, p. 188 (emphasis supplied). Later in her testimony, Mrs. Sprague explained that she owned two such businesses which, on average, made her dependent on two truck deliveries per week from Interstate Navigation's vessels. Tr. 4/27/98, at pp. 189-90.]

At the public hearing on Block Island and throughout the entire proceeding, this was the theme common among those who protested the Applicant's proposed service.  [102 The position of the Town and its residents is somewhat ironic. Arguably the Applicant's service better reflects the needs of Block Island as a community. Both the Town and the Tourism Council discussed the desire to reduce congestion in the summertime, specifically with respect to vehicle traffic and continued development on the Island. One could argue that a freight-free passenger-only vessel better suits the community's needs. The protests by the Town, the Tourism Council, as well as individual residents of the Town seem to contradict the focus of these concerns.]  For instance, 175 residents of Block Island signed a petition stating as follows:

We, the undersigned, oppose the application before the Division ... Interstate Navigation has been providing us with the best service Block Island has ever had. With the bigger faster boat built last year additional trips have been added making winter trips very comfortable and convenient. Interstate Navigation fulfills our needs and we feel additional service is not needed.  [103 Exhibit Public Comment 4; see also Tr. 5/1/98, pp. 37 (emphasis supplied.).]

While the Town of New Shoreham and its residents receive satisfactory service from Interstate, the evidence in the case leads to an entirely different conclusion for Interstate's largest class of customers -- the summer visitors, who are equally entitled to services that enhance transportation options to a unique and remote part of Rhode Island.

Protest of Interstate Navigation Company

The Division also has concerns about Interstate's protest as well. Consider the following exchange between the Applicant's counsel and Interstate's Vice-president, Mrs. Linda:

Q. As I understand it, your only financial motives for this protest are to protect the interests of the ratepayers and to protect the investment of Interstate's shareholders; correct?

A. Yes.

Q. Those are the only financial motives?

A. Yes.

Q. And you're not just trying to keep the Applicant out of business?

A. No. [104 Tr. 5/14/98, p. 182.]

However, the testimony revealed that Interstate has been considering the purchase of a high speed ferry service from Pt. Judith to Block Island. Joshua Linda, Assistant Operations Manager for Interstate and a member of the family that owns the business, testified that Interstate had recently looked into acquiring a high speed ferry. The following comments were made at a "High Speed Ferry Conference," which was sponsored by the Rhode Island Department of Transportation on January 29, 1998, only weeks prior to Mr. Donadio's filing of his Application with the Division. At the conference, Mr. Linda described Interstate's efforts as follows:

Up until recently, it had been on the back burner and with the new interest in high speed boats we're currently thinking about purchasing or leasing a high speed boat.  [105 Tr. 5/21/98, p. 182.]

Mr. Linda also testified that he and his father  [106 Joshua Linda's father, Raymond Linda, shares the management responsibilities of Interstate Navigation Company with his wife, Susan Linda. Tr. 5/14/98, p. 88.] took a ride on the "Gray Lady I," a high speed ferry that operates from Hyannis, Massachusetts to Nantucket. [107 Tr. 5/21/98, p. 180.]  He specifically testified that Interstate was interested in purchasing a high speed ferry in "case a license was awarded to somebody else, then we might have to compete with them possibly with a high speed boat."  [108 Tr. 5/21/98, pp. 180-185.]

The evidence shows that, despite Interstate's protest, Interstate has contemplated the purchase of a high speed ferry. [109 The evidence also demonstrates that Mr. Linda contacted the owner of the Friendship IV, which is the vessel the Applicant was negotiating to purchase. After being informed by the owner, Mr. Arthur Savage, that the vessel was "under contract," Mr. Linda attempted to make contact with Mr. Savage at least two more times (once in April) purportedly to obtain "specs" of the Friendship IV, despite the fact that every specification of the vessel was available in the Applicant's Business Plan, which had been furnished by the Applicant to Interstate on March 27, 1998 as part of the Applicant's prefiled direct testimony. Tr. 5/21/98, pp. 196-212.]  Thus, while Interstate was clearly knowledgeable about the dynamics of high speed ferry service, it appears from the company's actions and the evidence in this proceeding, that high speed ferry service would likely never be introduced but for the attempts of an unaffiliated entity to secure the same. For this reason, the Division finds that Interstate's protest is not sufficiently valid to deny the introduction of the Applicant's proposed service to the public. The concept that Interstate Navigation alone should be granted the right to provide high speed ferry service to the Island, assuming that the Division were inclined to grant a license to the Applicant, must be soundly rejected. [110 Both Mrs. Linda and her son, Joshua Linda, repeatedly echoed this request. Mrs. Linda stated: "We believe that there's no demand for an additional ... boat in the water; but if the Division feels that there is, then we are willing to add that." Tr. 5/14/98, p. 73. Joshua Linda similarly stated: "we feel that we should, you know, be granted a license if it is shown that there is a need for that." Tr. 5/21/98, p. 216.]  To the extent that Interstate essentially ignored the benefits that would flow to the public by virtue of the Applicant's proposed service, or simply misinterpreted the need for the new service, Interstate cannot now claim a right to the business concepts and innovation developed by the Applicant. [111 The Division notes that Interstate has never been constrained from offering high speed ferry service and, as matter of law, has never been precluded from doing so under its operating certificate. The Division further notes that Interstate's existing certificate never conferred an exclusive franchise.]

FINDINGS

Through a review of the record, the Division has determined that the Applicant is fit, willing and able to conduct the proposed ferry service. The Division has also determined, after a review of the entire record in the proceeding, that the Applicant has satisfied the burden of proof to show that there is a public convenience and necessity for the proposed service as described in the record of the proceeding.

Accordingly, it is

(15652) ORDERED:

That the Application of Island Hi-Speed Ferry, LLC is hereby approved subject to the following conditions:

1. That, prior to offering service to the public, the Applicant must provide the Division with sufficient documentation proving that he has complied with all necessary government regulations (i.e. U.S. Coast Guard, State and local permits to fulfill the requirements reflected in the record);

2. That the vessel utilized by the Applicant to provide the service contain all of the amenities stated in the Applicant's testimony and business plan, and that the services provided conform with the evidence in the record;

3. That the Applicant file with the Public Utilities Commission and have approved, tariffs reflecting the rates and charges outlined in the business plan;

4. That the Applicant submit proof of insurance and also hand deliver to this office a copy of approved tariffs reflecting the rates, charges, and schedule of runs; and

5. That prior to offering service to the public, the Applicant shall notify the Division and allow it to inspect the vessel to ensure compliance with this Order.

DATED AND EFFECTIVE AT PROVIDENCE, RHODE ISLAND THIS 25th DAY OF AUGUST, 1998.

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