Developing a new fare system for the Norwegian ferries.

In Norway today, about 150 ferries service a total of about 100 routes. The ferries are run by 20 different transport companies and half of their total costs are covered by subsidies from the central authorities. Because the ferries are regarded as important factors of the road network, the central responsibility for these services and the distribution of subsidies to the operators, lies with the Directorate of Roads. The present fare system has, broadly speaking, remained unchanged since 1988. An avowed policy has been that the fare level should be the same all over the country; i.e. it should cost the same throughout the country to travel a certain distance with a specific vehicle. In 2000 the Directorate of Roads engaged the Nordland Research Institute to develop a new fare system for the ferries under the constraints that the fares should be based on the principles of economic welfare, the operators' needs for subsidy should not increase and finally, the number of vehicle fare categories should be decreased from 9 to 4. These constraints implied significant changes in the fare system. The report from the Nordland Research Institute was submitted in December 2001. The present fare system is reviewed and a cost model for the ferries developed to infer how long-term marginal costs of carrying different type of vehicles vary with the travelling distance. The long-term marginal costs are thus split into two cost components; one which is independent of the travelling distance (boarding and alighting costs) and another which increases with the travelling distance. The cost model is estimated using costs and production data from 65 ferry connections. The paper also discusses in the light of the Ramsey rule how the fares should differ from marginal costs providing that the operators' needs for subsidy should not increase. Finally the paper compares the new fares with the present rates for different type of vehicles over certain distances. In that way the distributional effects of the new fares are inferred. Broadly speaking, implementing the suggested fare system will make it cheaper for small vehicles to travel over short crossings but significantly more expensive for lorries, especially over longer stretches. As expected, the suggestions have led to substantial protests from the truck industry. For the covering abstract see ITRD E124693.