[Federal Register Volume 59, Number 213 (Friday, November 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27373]


[[Page Unknown]]

[Federal Register: November 4, 1994]


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FEDERAL MARITIME COMMISSION

46 CFR Part 552

[Docket No. 94-07]

 

Financial Reporting Requirements and Rate of Return Methodology 
in the Domestic Offshore Trades

AGENCY: Federal Maritime Commission.

ACTION: Notice of proposed rulemaking; reply comments.

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SUMMARY: The Commission is seeking reply comments to its Notice of 
Proposed Rulemaking concerning financial reporting requirements and the 
rate of return methodology in the domestic offshore trades. The 
Commission has received seven comments on the proposed rule which have 
raised issues which require further comment. Comments are requested on, 
and are to be limited to, the calculation of the cost of capital, 
working capital, the selection of proxy groups, and the deletion of 
alternative methodologies.

DATES: Reply comments due December 5, 1994.

ADDRESSES: Comments (original and fifteen copies) to: Joseph C. 
Polking, Secretary, Federal Maritime Commission, 800 North Capitol 
Street, N.W., Washington, D.C. 20573-0001, 202-523-5725.

FOR FURTHER INFORMATION CONTACT:

Richard R. Speigel, Bureau of Trade Monitoring and Analysis, Federal 
Maritime Commission, 800 North Capitol Street, N.W., Washington, D.C. 
20573-0001, 202-523-5845
C. Douglass Miller, Office of the General Counsel, Federal Maritime 
Commission, 800 North Capitol Street, N.W., Washington, D.C. 20573-
0001, 202-523-5740.

SUPPLEMENTARY INFORMATION: On April 7, 1994, the Federal Maritime 
Commission (``FMC'' or ``Commission'') published a Notice of Proposed 
Rulemaking (``NPR'') (59 FR 16592) which proposed to amend its 
regulations governing financial reporting requirements and rate of 
return methodology applicable to vessel-operating common carriers by 
water in the domestic offshore trades. Among other things, the proposed 
rule would change the method of determining the reasonableness of a 
carrier's return on rate base from the comparable earnings test to the 
weighted average cost of capital methodology. At the request of Matson 
Navigation Company, the Commission extended the comment period for 
interested parties to file until July 20, 1994 (59 FR 27002). Seven 
parties filed comments on the NPR. Commenters include: American 
President Lines (``APL''), Crowley Maritime Corporation (``Crowley''), 
Matson Navigation Company, Inc. (``Matson''), Puerto Rico Maritime 
Shipping Authority (``PRMSA''), United States Department of 
Transportation (``DOT''), Marsoft Incorporated (``Marsoft''), and the 
State of Hawaii (``Hawaii'').
    Based on its review of the comments, the Commission has determined 
that reply comments on four issues would be beneficial. In order that 
the Commission have the most complete information available to enable 
it to make an informed judgment in these matters, interested persons 
are invited to submit comments on the issues discussed below.

Issue 1: Calculation of the Cost of Capital

    PRMSA addresses the issue of the calculation of the before-tax 
weighted average cost of capital (``BTWACC'') and its relationship to 
the projected rate of return on rate base. PRMSA states that the 
formula for the BTWACC contained in the proposed rule is correct.\1\ 
PRMSA asserts, however, that since the projected rate of return in the 
proposed rule is computed on an after-tax basis--with return on rate 
base being computed by dividing net income plus interest expense by the 
trade rate base--the proposed before-tax weighted average cost of 
capital is being compared to the after-tax projected return on rate 
base. PRMSA suggests, therefore, that either the weighted average cost 
of capital should be changed to an after-tax basis so it can be 
compared to the after-tax projected return on trade rate base currently 
specified, or the BTWACC should be retained and the projected return on 
trade rate base should be changed to a before-tax basis.
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    \1\The proposed rule states the before-tax weighted average cost 
of capital will be calculated using the following equation:

    BTWACC=(D/D+P+E)Kd+
        (P/D+P+E)Kp(1/1-T)+
        (E/D+P+E)Ke(1/1-T)
    where:

    Kd is the regulated firm's cost of long-term debt capital;
    Kp is the regulated firm's cost of preferred stock capital;
    Ke is the regulated firm's cost of common stock equity 
capital;
    D is the value of the regulated firm's long-term debt 
outstanding;
    P is the value of the regulated firm's preferred stock 
outstanding;
    E is the value of the regulated firm's common-stock equity 
outstanding;
    T is the corporate income tax rate
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    PRMSA's comments appear to have merit. Therefore, the Commission is 
proposing to retain the before-tax weighted average cost of capital 
contained in the proposed rule and change the calculation of the 
projected rate of return on rate base to a before-tax basis. Retention 
of the BTWACC seems appropriate because it is employed by a large 
majority of regulatory commissions. The before-tax weighted average 
cost of capital would be calculated as it is in the proposed rule. 
However, the projected rate of return on rate base stated in the 
proposed rule would be changed to:

TP04NO94.000

    The Commission thus proposes to amend section 552.6(d)(2) to read:
    (2) Return on Rate Base. The return on rate base will be computed 
by dividing Trade net income plus interest expense plus provision for 
income taxes by Trade rate base.
    The Commission requests comments on this amendment to the proposed 
rule.

Issue 2: Working Capital

    The proposed rule adopted Hawaii's suggestion in FMC Docket No. 91-
51, Financial Reports of Common Carriers by Water in the Domestic 
Offshore Trades, that insurance expense be treated in the same manner 
as other operating expenses in calculating working capital, i.e., 
include that amount applicable to the duration of an average voyage. In 
its comments on this proposed rule, Hawaii suggests an additional 
modification of the calculation of working capital, namely, the 
exclusion of interest expense.
    In support of its proposal, Hawaii states that interest expense is 
a source of working capital funds, and is not paid to the bond holder 
until after related revenue is received. Hawaii concludes, therefore, 
that interest expense does not create a need for working capital. 
Comments are requested on the validity of the proposal to exclude 
interest expense from the calculation of working capital.

Issue 3: The Selection of Proxy Groups

    A number of parties commented on the selection of the proxy group. 
Hawaii indicates a concern with the criteria prescribed in selecting a 
comparable group of companies when the proxy group is used in 
determining the cost of common-stock equity. Hawaii believes that the 
companies in the Value Line Investment Survey which satisfy the 
Commission's criteria for the proxy group do not have business risks 
similar to those of Matson. Hawaii claims that these companies are 
generally consolidated companies; are not dominant in their trades; and 
do not have statutory barriers to entry.
    Marsoft states that according to its research only three marine 
transportation companies and four trucking companies meet the proposed 
guidelines for the proxy group. Marsoft does not believe that airlines, 
railroads, or full-load trucking companies should be included in the 
proxy group, because they do not provide comparable services. Marsoft 
states that in many cases large, geographically and operationally 
diverse companies will be compared to small, highly specialized private 
carriers. Marsoft believes that the comparison may not be credible in 
some cases.
    PRMSA comments that the proxy group should not be restricted to the 
freight transportation business. PRMSA asserts that equity capital in 
the regulated carrier competes against the broad spectrum of companies 
in the economy, not just against companies involved in freight 
transportation. The nature of a business is said to be only one 
ingredient of business risk, not the sole determinant. PRMSA notes that 
as of June 1994, there were a total of 39 companies listed in Value 
Line Investment Survey which were involved in air transport, trucking, 
maritime, and railroading. Allegedly, not all of these companies were 
involved in freight transportation as required by the proposed rule. 
PRMSA concludes from this that the potential list of comparable 
companies is highly limited.
    Under the proposed rule, the proxy group is selected from companies 
which operate and derive a major portion of their gross revenues 
primarily as common carriers in the business of freight transportation, 
and own and operate transportation vehicles or vessels. The Commission 
requests specific suggestions on industries other than freight 
transportation covered by the Value Line Investment Survey which have 
business and financial risks similar to those of the domestic carriers 
that may be added to the current proxy group criteria.

Issue 4: Deletion of Alternative Methodologies

    The proposed rule revises paragraph (b) of section 552.1 by 
deleting the provision that the methodology employed in each case will 
depend on the nature of the relevant carrier's operations and financial 
structure. Also, the proposed rule adds language to that paragraph that 
specifies the extent of possible alternative methodologies. Paragraph 
(b) reads:

    (b) In evaluating the reasonableness of a VOCC's overall level 
of rates, the Commission will use return on rate base as its primary 
standard. A carrier's allowable rate of return on rate base will be 
set equal to its before-tax weighted average cost of capital. 
However, the Commission may also employ the other financial 
methodologies set forth in Sec. 552.6(f) in order to achieve a fair 
and reasonable result.

    Paragraph (d) of the same section has been deleted. That paragraph 
provided that the Commission may use some other basis for allocation 
and calculation and may consider other operational factors in any 
instance where it is deemed necessary to achieve a fair and reasonable 
result.
    APL informs that these provisions are at the heart of a major 
dispute in FMC Docket No. 89-26, The Government of the Territory of 
Guam, et al. v. Sea-Land Service, Inc. and American President Lines, 
Ltd. It points out that the NPR does not give any reasons for the 
proposed changes to section 552.1 and contends that the changes cannot 
be legally adopted unless and until the FMC identifies its reasons for 
such a change and allows opportunity for comment.
    In the abbreviated comments it did provide, APL contends that the 
proposed changes can have no substantive effect on a pending complaint 
docket focused on a prior time period. APL further urges the Commission 
to ``make clear, as a general matter, that its decision in the 
prospective rulemaking proceeding is not intended to pre-judge issues 
in the retrospective complaint proceeding.'' APL contends that sections 
552.1(b) and 552.1(d) merely make explicit an agency's authority that 
is implicit in any regulatory scheme. Further, APL questions why the 
FMC would want to amend a regulation in a way that might imply that it 
was denying itself the ability to do something necessary to achieve a 
fair and reasonable result.
    The Guam trade is unique in that the trade is a very small portion 
of the carriers' overall service. However, whether the current method 
of allocation is appropriate in such a case need not be decided here, 
because the two carriers serving Guam, APL and Sea-Land Service, Inc., 
currently file most, if not all, of their rates with the Interstate 
Commerce Commission. Neither carrier files full financial reports under 
46 CFR Part 552. In the event an FMC-regulated carrier initiates such a 
service in the future, the Commission will address the need for any 
change in 46 CFR Part 552 in a separate rulemaking proceeding. 
Paragraph (d) was eliminated because the Commission did not want such 
determinations to be made on an ad hoc basis during a rate 
investigation. It is essential that significant issues relating to the 
underlying methodology to be employed in determining the reasonableness 
of rates be settled prior to any rate investigation. The 180-day limit 
specified by section 3 of the Shipping Act, 1933, 46 U.S.C. app. 845, 
cannot be met if parties are permitted to change methodologies during 
the course of a rate case. Moreover, it is unfair; parties to a rate 
proceeding are entitled to rely on the Commission's rules. They should 
not have to respond to ever-changing methodologies proposed by other 
parties.
    It is understandable that APL is concerned that the Commission's 
decision here may affect the outcome in Docket No. 89-26. However, any 
changes that may be made to Part 552 as a result of this proceeding 
will only be applied prospectively. They will have no application in 
pending cases such as Docket No. 89-26.

Conclusion

    The Commission will permit reply comments to be filed by any 
interested person, not only those that commented on the proposed rule. 
Those parties who filed comments are on the attached list. All previous 
commenters are directed to provide copies of their comments to anyone 
upon request, so as to facilitate timely comments. Copies of comments 
are also available for inspection and copying at the Commission's 
Office of the Secretary. Pursuant to Commission Rule 53, 46 CFR 502.53, 
parties shall serve reply comments on initial round participants.

    By the Commission.
Joseph C. Polking,
Secretary.
Robert T. Basseches, David B. Cook, Eric C. Jeffrey, Cynthia Gurnee 
Pugh, Shea & Gardner, 1800 Massachusetts Avenue, NW., Washington, DC 
20036, (Counsel for American President Lines, Ltd.)
Michael G. Roberts, Vice President, Government Relations, Crowley 
Maritime Corporation, 1500 K Street, NW., Suite 425, Washington, DC 
20005
Stephen Todd Rudman, Assistant General Counsel, Matson Navigation 
Company, Inc., P.O. Box 7452, San Francisco, CA 94120
Amy Loeserman Klein, Klein, Bagileo, Silverberg & Goldman, 1101 30th 
St., NW.--Suite 120, Washington, DC 20007, (Counsel for Puerto Rico 
Maritime Shipping Authority)
Rosalind A. Knapp, Deputy General Counsel, U.S. Department of 
Transportation, 400 Seventh Street, SW., Washington, DC 20590
Arlie G. Sterling, President, Marsoft, Inc., One Financial Center, 
25th Floor, Boston, MA 02111
Charles W. Totto, Executive Director, Division of Consumer Advocacy, 
Department of Commerce and Consumer Affairs, State of Hawaii, P.O. 
Box 541, Honolulu, HI 96809

[FR Doc. 94-27373 Filed 11-3-94; 8:45 am]
BILLING CODE 6730-01-M