[Federal Register Volume 59, Number 62 (Thursday, March 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7647]


[[Page Unknown]]

[Federal Register: March 31, 1994]


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FEDERAL MARITIME COMMISSION

46 CFR Part 540

[Docket No. 94-06]

 

Financial Responsibility Requirements for Nonperformance of 
Transportation

AGENCY: Federal Maritime Commission.

ACTION: Proposed Rule.

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SUMMARY: The Federal Maritime Commission proposes to remove the $15 
million unearned passenger revenue (``UPR'') ceiling now applicable to 
passenger vessel financial responsibility requirements for 
nonperformance of transportation, because some vessel operators now 
have UPRs significantly exceeding $15 million. The Commission also 
proposes to revise the current UPR sliding scale accordingly--and to 
require coverage of 110 percent of UPR up to $25 million per operator, 
with coverage of 90 percent of UPR for amounts exceeding $25 million. 
Comment is also sought on an alternative proposal to require coverage 
of 110 percent of UPR up to $25 million per operator; 75 percent of UPR 
between $25 million and $50 million per operator; and 50 percent 
coverage for UPR over $50 million per operator. Additionally, the 
Commission proposes to remove self-insurance as an option for section 3 
coverage (except for state or federal entities). Existing self-insured 
commercial operators would be provided one year following the effective 
date of any final rule in this matter to obtain other evidence of 
financial responsibility. These changes are deemed necessary to ensure 
that cruise passengers are adequately protected in the event of 
nonperformance of transportation.

DATES: Comments due on or before May 2, 1994.

ADDRESSES: Send comments (original and 20 copies) to: Joseph C. 
Polking, Secretary, Federal Maritime Commission, 800 North Capitol St., 
NW., Washington, DC 20573, (202) 523-5725.

FOR FURTHER INFORMATION CONTACT: Bryant L. VanBrakle, Director, Bureau 
of Tariffs, Certification and Licensing, Federal Maritime Commission, 
800 North Capitol St., NW., Washington, DC 20573, (202) 523-5796.

SUPPLEMENTARY INFORMATION: The Federal Maritime Commission 
(``Commission'' or ``FMC'') administers section 3, Public Law 89-777, 
46 U.S.C. app. 817e (``Section 3''). Section 3 requires certain 
passenger vessel operators (``PVOs'') to establish financial 
responsibility for nonperformance of transportation.1 The 
Commission's regulations implementing Section 3, contained in 46 CFR 
part 540, subpart A, generally provide that a PVO may evidence its 
financial responsibility by one or more of the following methods: A 
guaranty, escrow arrangement, surety bond, insurance or self-insurance. 
The amount required must equal 110 percent of the PVO's highest UPR 
over a two-year period.2 The maximum coverage amount currently 
required is $15 million, subject to the following sliding scale:3
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    \1\Section 3 provides, in pertinent part:
    (a) No person in the United States shall arrange, offer, 
advertise, or provide passage on a vessel having berth or stateroom 
accommodations for fifty or more passengers and which is to embark 
passengers at United States ports without there first having been 
filed with the Federal Maritime Commission such information as the 
Commission may deem necessary to establish the financial 
responsibility of the person arranging, offering, advertising, or 
providing such transportation, or, in lieu thereof, a copy of a bond 
or other security, in such form as the Commission, by rule or 
regulation, may require and accept, for indemnification of 
passengers for nonperformance of the transportation.
    \2\UPR is defined under 46 CFR 540.2(i) as:
    * * * that passenger revenue received for water transportation 
and all other accommodations, services, and facilities relating 
thereto not yet performed.
    \3\The Commission, in Docket No. 92-19, Revision of Financial 
Responsibility Requirements for Non-Performance of Transportation, 
amended 46 CFR Part 540, Subpart A, to (1) institute this sliding 
scale formula for determining the amount of financial responsibility 
coverage required for operators meeting certain requirements; (2) 
exclude, under certain conditions, revenue from ``whole-ship'' 
arrangements from being considered UPR; and (3) publish a suggested 
form escrow arrangement as a guideline for the industry (57 FR 51887 
(September 14, 1992)).

------------------------------------------------------------------------
     Unearned passenger revenue                                         
             (``UPR'')                        Required coverage         
------------------------------------------------------------------------
$0-$5,000,000......................  100% of UPR up to $5,000,000.      
$5,000,001 to $15,000,000..........  $5,000,000 plus 50% of excess UPR  
                                      over $5,000,000 subject to an     
                                      overall maximum of $5,000,000 per 
                                      vessel.                           
$15,000,001 to $35,000,000.........  $10,000,000 plus 25% of excess of  
                                      UPR over $15,000,000 subject to an
                                      overall maximum of $5,000,000 per 
                                      vessel and a $15,000,000 overall  
                                      maximum.                          
Over $35,000,000...................  $15,000,000 overall maximum.       
------------------------------------------------------------------------


    The Commission monitors activity of PVOs who are subject to Public 
Law 89-777 and by rule requires semiannual UPR reports.4 
Additionally, the Commission periodically surveys PVOs' future U.S. 
cruise schedules and fare structures.
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    \4\46 CFR 540.9(h) provides, in pertinent part:
    Every person who has been issued a Certificate (Performance) 
must submit to the Commission a semiannual statement of any changes 
that have taken place with respect to the information contained in 
the application or documents submitted in support thereof. Negative 
statements are required to indicate no change. Such statements must 
cover every 6-month period of the fiscal year immediately subsequent 
to the date of the issuance of the Certificate (Performance), and 
include a statement of the highest unearned passenger revenue 
accrued for each month in the 6-month reporting period. In addition, 
the statement will be due within 30 days after the close of every 
such 6-month period.
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    Developments since our most recent actions in Dockets Nos. 92-19 
and 92-505 have prompted us to reconsider existing UPR coverage 
requirements with regard to the sliding scale, the ceiling and self-
insurance. One development concerns the involuntary bankruptcy of 
American Hawaii Cruises (``American Hawaii''). Another is the extent to 
which some PVOs' UPR now exceeds the current $15 million ceiling.
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    \5\Financial Responsibility Requirements for Nonperformance of 
Transportation--Revision of Self-insurance Qualification Standards, 
Final Rule (57 FR 62749 (December 31, 1992)).
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    Further, with regard to self-insuring PVOs that are not state or 
federal entities, the Commission is concerned that sufficient funds may 
not be available to indemnify passengers for nonperformance of 
transportation.
    While American Hawaii's vessels operated without disruption in 
their transition to new ownership, if American Hawaii's required level 
of financial responsibility had been based on the existing sliding 
scale formula, no more than a total of $10 million in UPR coverage 
would have been required for UPR amounts up to $35 million for its two 
vessels; and no more than $15 million in coverage would have been 
required had its UPR exceeded $35 million.
    Some PVOs' UPR now greatly exceeds the current $15 million 
ceiling--in some instances by a factor of several times the current 
ceiling. In aggregate, there is about $300 million in coverage 
presently on file for what we estimate to be $1 billion in UPR subject 
to Public Law 89-777, leaving some $700 million in UPR without Section 
3 coverage.
    The foregoing raises concern with regard to the increased exposure 
to risk of the travelling public's deposits and prepaid fares in the 
event that a PVO holding UPR levels above the current ceiling defaults, 
possibly leaving passengers unprotected and subject to financial 
losses. The Commission therefore proposes to remove the $15 million 
ceiling in 46 CFR 540.9(j)--and revise the sliding scale in section 
540.5(e)--to require coverage for UPR over and above the present 
ceiling. The Commission proposes to amend section 540.5 to require 
coverage of 110 percent of UPR up to $25 million per operator, and 
coverage of 90 percent of UPR for amounts exceeding $25 million. 
Comment is requested on the alternative of requiring 110 percent 
coverage for up to $25 million in UPR per operator; coverage of 75 
percent for UPR between $25 million and $50 million per operator; and 
50 percent coverage for UPR over $50 million per operator.
    Given its clear Section 3 responsibilities and obligations, the 
Commission needs to address the amount of UPR subject to Section 3 
which is not presently covered by evidence of financial responsibility 
under the Commission's rules. The Commission's proposals detailed above 
represent two approaches to that end. However, if the PVO industry or 
another interested party has an alternative proposal to ensure adequate 
financial responsibility coverage for UPR subject to section 3, we 
invite their suggestions.
    The Commission's monitoring and review of PVO coverage issues in 
general indicates a need for the Commission to reconsider the 
acceptability of self-insurance for section 3 coverage with regard to 
PVOs that are not state or federal entities. Our examination of self-
insurance standards reveals a vulnerability which appears to provide 
inadequate protection in the case of commercial PVOs. Presently, only 
net worth at 110 percent of the highest UPR over the past two years 
must be maintained. The Commission is concerned that, in the event of a 
default, other interests with potentially superior claims on a PVO's 
assets--e.g., a vessel's crew, shipyards, provisioners, mortgage 
holders--would reduce the assets ultimately available to indemnify 
nonperformance to a level far below the PVO's actual UPR. Even if the 
Commission were to reinstate its former requirement that self-insurers 
evidence net worth and working capital, each in an amount no less than 
110 percent of the greatest amount of UPR over the preceding two years, 
sufficient assets might still not be readily available to make whole 
the travelling public in the event of a default. These concerns do not, 
however, appear to militate against accepting state or federal entities 
as self-insurers.
    While the Proposed Rule would discontinue self-insurance for 
commercial entities, it would permit commercial operators who are 
presently self-insured to remain so for one year following the 
effective date of any final rule in this proceeding. At that time, 
self-insuring commercial PVOs would be required to provide other 
evidence of financial responsibility.
    Proposed amendments to Form FMC-131, Part II, will conform the 
Commission's Application for Certificate of Financial Responsibility to 
reflect the amendments contemplated in the proposed rule.
    The Federal Maritime Commission certifies, pursuant to section 
605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), that this 
proposed rule, if adopted, will not have a significant economic impact 
on a substantial number of small entities, including small businesses, 
small organizational units, and small governmental organizations. The 
passenger vessel operators impacted by the rule are generally not small 
businesses.
    This proposed rule does not impose any additional reporting 
requirements from those previously approved by OMB under section 
3504(h) of the Paperwork Reduction Act of 1980, as amended.

List of Subjects in 46 CFR Part 540

    Insurance, Maritime carriers, Penalties, Reporting and 
recordkeeping requirements, Surety bonds, Transportation.

    Therefore, pursuant to 5 U.S.C. 553; section 3, Public Law 89-777, 
80 Stat. 1356-1358 (46 U.S.C. app. 817e); section 43 of the Shipping 
Act, 1916 (46 U.S.C. app. 841a); and section 17 of the Shipping Act of 
1984 (46 U.S.C. app. 1716), the Federal Maritime Commission proposes to 
amend part 540 of title 46 of the Code of Federal Regulations as 
follows:

PART 540--[AMENDED]

    1. The authority citation to part 540 continues to read as follows:

    Authority: 5 U.S.C. 552, 553; secs. 2 and 3, Pub. L. 89-777, 80 
Stat. 1356-1358 (46 U.S.C. app. 817e, 817d); sec. 43 of the Shipping 
Act, 1916 (46 U.S.C. app. 841a); sec 17 of the Shipping Act of 1984 
(46 U.S.C. app. 1716).

    2. The first sentence of Sec. 540.5 introductory text and 
Sec. 540.5(d) introductory text are revised to read as follows:


Sec. 540.5  Insurance, guaranties, escrow accounts, and self-insurance.

    The amount of coverage required under this section and 
Sec. 540.6(b) shall be in an amount determined by the Commission to be 
no less than 110 percent of the unearned passenger revenue of the 
applicant on the date within the 2 fiscal years immediately prior to 
the filing of the application which reflects the greatest amount of 
unearned passenger revenue according to the following schedule:


If Unearned passenger revenue        Required coverage is:              
 (``UPR'') is:                                                          
  0-$25,000,000....................  10% of UPR.                        
  Over $25,000,000.................  110% of UPR up to $25,000,000; 90% 
                                      of UPR over $25,000,000.          
                                                                        


     * * *
* * * * *
    (d) For state or federal entity vessel operators, filing with the 
Commission for qualification as a self-insurer such evidence acceptable 
to the Commission as will demonstrate continued and stable passenger 
operations over an extended period of time in the foreign or domestic 
trade of the United States. Commercial (i.e., non state or federal) 
vessel operators will no longer qualify as self-insurers. However, for 
a period expiring [date one year after the effective date of the Final 
Rule], the Commission will continue to permit self-insurance for 
commercial vessel operators which were accepted by the Commission on 
January 1, 1994, and which continue to submit the following:
* * * * *


Sec. 540.5  [Amended]

    3. In section 540.5, paragraph (e) is removed, and paragraph (f) is 
redesignated as paragraph (e).


Sec. 540.9  [Amended]

    4. In section 540.9, paragraph (j) is removed, and paragraph (k) is 
redesignated as paragraph (j).

Subpart A--[Amended]

    5. In subpart A, Form FMC-131, Part II--Performance, is amended by 
removing the second sentence of the introductory paragraph and removing 
and reserving paragraph No. 8.

    By the Commission.
Joseph C. Polking,
Secretary.
[FR Doc. 94-7647 Filed 3-30-94; 8:45 am]
BILLING CODE 6730-01-P