[Federal Register Volume 61, Number 124 (Wednesday, June 26, 1996)]
[Proposed Rules]
[Pages 33059-33066]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16210]



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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: Further notice of proposed rulemaking.

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SUMMARY: The Federal Maritime Commission proposes to remove its current 
$15 million coverage ceiling for nonperformance of transportation by 
passenger vessel operators. The Commission would replace the ceiling 
with sliding-scale coverage requirements keyed to passenger vessel 
operators' financial rating, length of operation in United States 
trades and satisfactory explanation of claims for nonperformance of 
transportation. For self-insuring passenger vessel operators, the 
Commission proposes to reestablish a working capital requirement and to 
require third-party coverage for 25 percent of unearned passenger 
revenue. In order to clarify that the escrow agreement is for the 
exclusive benefit of passengers' deposits and prepaid fares, the 
Commission proposes revising the form escrow agreement it publishes as 
a guideline for the industry. The Commission also proposes to require 
applications for Certificates (Performance) to be filed at least 90 
days in advance of the arranging, offering, advertising or providing of 
water transportation or tickets in connection therewith, unless good 
cause is shown. Finally, the Commission again solicits suggestions for 
other alternatives to consider under its Public Law 89-777 program, as 
well as suggestions for scheduling the phasing-in of the proposed 
rule's revised coverage requirements. These changes are deemed 
necessary to enhance the travelling public's protection against 
nonperformance of transportation.

DATES: Comments due on or before August 26, 1996.

ADDRESSES: Send comments (original and 15 copies) to: 1 Joseph C. 
Polking,

[[Page 33060]]

Secretary, Federal Maritime Commission, 800 North Capitol St., NW., 
Washington, DC 20573, (202) 523-5725.

    \1\ The Commission also requests, but does not require, that 
commenters submit an electronic copy of their comments in ASCII, 
WordPerfect or Microsoft Word format.
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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:

I. Introduction

    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'') 2 to establish financial responsibility for 
nonperformance of transportation.3 The Commission's regulations 
implementing section 3 (46 CFR 540, Subpart A) generally provide that a 
PVO may evidence financial responsibility by one or more of the 
following methods: A guaranty, escrow arrangement, surety bond, 
insurance or self-insurance. The Commission requires coverage of at 
least 110 percent of a PVO's highest unearned passenger revenue 
(``UPR'') 4 over a two-year period. However, the maximum coverage 
amount currently required is $15 million. Also, non-self-insuring PVOs 
that can evidence a minimum of five years operation in U.S. trades with 
a satisfactory explanation of any claims for nonperformance of 
transportation are entitled to reduced coverage requirements under the 
following sliding scale: 5
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    \2\ For the purposes of section 3, a PVO is any person in the 
United States that arranges, offers, advertises or provides passage 
on a vessel having berth or stateroom accommodations for fifty or 
more passengers and which is to embark passengers at United States 
ports.
    \3\ 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.
    \4\ UPR is defined under 46 CFR 540.2(i) as:
    * * * passenger revenue received for water transportation and 
all other accommodations, services, and facilities relating thereto 
not yet performed.
    \5\ 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.   
------------------------------------------------------------------------

    Under the Commission's present rules, self-insuring PVOs are 
required to demonstrate, among other things, net worth equal to at 
least 110 percent of their UPR. At an earlier stage of this proceeding, 
as discussed below, the Commission had proposed to phase out self-
insurance except for PVOs which are state and Federal entities.
    The Commission monitors activity of PVOs who are subject to Public 
Law 89-777 and by rule requires semiannual UPR reports.6 
Additionally, the Commission periodically surveys PVOs' future U.S. 
cruise schedules and fare structures.
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    \6\ 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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II. Background

A. Docket No. 94-6

    These proceedings were instituted with a March 1994 Notice of 
Proposed Rulemaking (``1994 NPR'' or ``1994 Proposed Rule'').7 The 
1994 NPR addressed the Commission's concerns about the adequacy of its 
coverage requirements in the light of several recent developments, 
including $700 million in uncovered UPR, the voluntary bankruptcy of 
one PVO and the dislocation of a self-insured carrier's operations as a 
result of the 1993 floods in the Mississippi River system. The 1994 NPR 
therefore proposed:
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    \7\ 59 FR 15149 (March 31, 1994).
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    (1) removing the current $15 million UPR coverage ceiling;
    (2) revising the current UPR sliding scale 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 (the NPR also put 
forth an alternative proposal which would 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); and
    (3) removing 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.
    The 1994 NPR drew twelve comments. There was virtually unanimous 
support for the Commission's existing coverage requirements, and 
widespread questioning of the need for the 1994 Proposed Rule. Many 
commenters drew attention to the Commission's earlier series of 
proceedings in this area,8 and

[[Page 33061]]

asserted that there have been no industry changes warranting this 
proposal. Positions ranged from strong Congressional and U.S.-flag PVO 
opposition to any further changes to current coverage requirements, to 
conditional support of a modified version of the 1994 Proposed Rule by 
foreign-flag interests. There was no support for the 1994 Proposed Rule 
outright; however, a foreign-flag PVO supported the 1994 Proposed 
Rule's coverage requirements for those PVOs unable to meet that PVO's 
self-insurance proposal.
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    \8\ Docket No. 90-1, Security for the Protection of the Public, 
Maximum Required Performance Amount; Proposed Rule, 55 FR 1850 
(January 19, 1990); Final Rule, 55 FR 34564 (August 23, 1990); 
Correction, 55 FR 35983 (September 4, 1990).
    Fact Finding Investigation No. 19, Passenger Vessel Financial 
Responsibility Requirements, Order of Investigation, 55 FR 34610 
(August 23, 1990).
    Docket No. 91-32, Passenger Vessel Financial Responsibility 
Requirements for Indemnification of Passengers for Nonperformance of 
Transportation--Advance Notice of Proposed Rulemaking and Notice of 
Inquiry, 56 FR 40586 (August 15, 1991).
    Docket No. 92-19, Revision of Financial Responsibility 
Requirements for Nonperformance of Transportation; Proposed Rule, 57 
FR 19097 (May 4, 1992); Final Rule, 57 FR 41887 (September 14, 
1992).
    Docket No. 92-50, Financial Responsibility Requirements for 
Nonperformance of Transportation--Revision of Self-Insurance 
Qualification Standards; Proposed Rule, 57 FR 47830 (October 20, 
1992); Final Rule, 57 FR 62479 (December 31, 1992).
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B. Docket No. 94-21

    Given the concerns expressed in the industry comments to the 1994 
NPR, the Commission determined to hold it in abeyance pending a formal 
Inquiry under Docket No. 94-21, Inquiry into Alternative Forms of 
Financial Responsibility for Nonperformance of Transportation (``1994 
Inquiry'').9 The 1994 Inquiry's purpose was to determine whether 
an acceptable alternative could be fashioned to both address the 
industry's concerns with the 1994 NPR and ensure appropriate protection 
for passengers. The 1994 Inquiry therefore solicited comment on 
covering UPR liability through:
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    \9\ 59 FR 52133 (October 26, 1994).
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    (1) voluntary association(s) (such association(s) would be in 
addition to the current individual methods of evidencing financial 
responsibility for non-performance); 10 and
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    \10\ In this connection, the Commission noted its approach in 
Docket No. 92-37, Financial Responsibility for Non-Vessel-Operating 
Common Carriers, Final Rule, 58 FR 5618 (January 22, 1993), which 
permits groups or associations of non-vessel-operating common 
carriers (``NVOCCs'') to collectively issue bonds to meet financial 
responsibility coverage requirements imposed upon NVOCCs by the 
Shipping Act of 1984. Because this approach had proven successful 
with respect to NVOCCs, a purpose of the 1994 Inquiry was to 
consider its applicability and adaptability to PVO requirements 
under Pub. L. 89-777.
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    (2) retained but strengthened self-insurance requirements.
    In general terms, the association(s) envisioned by the 1994 Inquiry 
would accept liability for all or a part of a PVO's section 3 
liability, using a Commission-approved surety bond or guaranty in an 
amount equal to the combined UPR of the two members having the highest 
amount of UPR during the past two years. Because these associations 
would necessarily involve concerted carrier activity, comments were 
also invited on whether this approach could present issues under the 
antitrust laws, to the extent such activity is not immunized under 
Shipping Act agreements.\11\

    \11\ The Shipping Act of 1984, 46 U.S.C. app. 1701, (``1984 
Act'') governs concerted ocean common carrier activity in the U. S. 
foreign waterborne trades. The Shipping Act, 1916, 46 U.S.C. app. 
801, (``1916 Act'') governs concerted activity of common carriers by 
water in interstate commerce in the transportation by water of 
passengers on the high seas or the Great Lakes on regular routes 
from port to port between one U.S. State, Territory, District or 
possession and any other U.S. State, Territory, District or 
possession or between places in the same Territory, District or 
possession. Effective September 30, 1996, the ICC Termination Act of 
1995, Pub. L. No. 104-88, 109 Stat. 803, repeals among other things 
the 1916 Act provisions applicable to agreements.
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    The reinforced self-insurance approach envisioned by the 1994 
Inquiry would have worked in a manner whereby the Commission would 
restore its former standard,\12\ but require prospective self-insurers 
to provide alternative coverage for a percentage (e.g., 50% or 25%) of 
their uncovered UPR, through either a traditional guaranty, surety, 
escrow agreement or lien or other security instrument, or through 
participation in a coverage association along the above-described 
lines. This approach would, however, still require qualifying assets to 
be located in the United States.
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    \12\ The Commission previously required the maintenance of 
working capital and net worth, each equal to 110 percent of the 
operator's UPR. This standard provided that the Commission could, 
for good cause shown, waive the requirement as to the amount of 
working capital.
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    The 1994 Inquiry was subsequently revised to clarify that the 
Commission was also seeking comment on accepting liens, mortgages or 
other security instruments as evidence of financial 
responsibility.13
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    \13\ 59 FR 54878 (November 2, 1994).
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    Five comments on the 1994 Inquiry were submitted by three trade 
associations (one representing surety interests,14 one 
representing foreign-flag vessel operators 15 and one representing 
U.S.-flag vessel operators)16, a foreign-flag vessel operator 
17 and a U.S.-flag vessel operator.18
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    \14\ The Surety Association of America (``Surety Association'') 
is a trade association that represents 650 surety companies that 
provide 95% of the surety bonds written in the United States.
    \15\ The International Council of Cruise Lines (``ICCL'') states 
that its members have the vast majority of the cruise industry berth 
capacity. Its letterhead lists Carnival Cruise Lines; Celebrity 
Cruise Lines; Commodore Cruise Line; Costa Cruise Lines NV; Crown 
Cruise Line; Crystal Cruises; Cunard Line Ltd.; Dolphin Cruise Line; 
Epirotiki Lines; Fantasy Cruise Lines; Holland America Line; Majesty 
Cruise Line; Norwegian Cruise Line; Premier Cruise Lines, Ltd.; 
Princess Cruises; Regency Cruises, Inc. (``Regency''); Royal 
Caribbean Cruises, Ltd.; Royal Cruise Line; Royal Viking Line; 
Seabourn Cruise Line; Sun Line Cruises, Inc.; and Windstar Cruises.
    \16\ The Transportation Institute stated in its NPR comments 
that it represents 140 U.S.-flag shipping companies engaged in 
foreign and domestic trades, including American Classic Voyages Co. 
The U.S.-flag PVOs under the Commission's section 3 program 
presently consist of American Classic Voyages, Alaska Sightseeing/
Cruise West, Clipper Cruise Line, Special Expeditions, Alaska Marine 
Highway, and American Canadian Caribbean Line.
    \17\ Carnival Corporation (``Carnival''). Carnival's comments 
are filed on behalf of Carnival Cruise Lines, Holland America Lines 
and Windstar Cruises. Carnival is an ICCL member.
    \18\ American Classic Voyages Co. (``AMCV''). AMCV is the 
corporate parent of The Delta Queen Steamboat Co. (``Delta Queen'') 
and Great Hawaiian Cruise Line, Inc. (``American Hawaii''). AMCV is 
a section 3 self-insurer.
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    All of the 1994 Inquiry's commenters had also commented on the NPR, 
and indicate that their comments on the 1994 Inquiry supplement or 
incorporate by reference those earlier comments, which generally 
opposed the 1994 Proposed Rule and urged retaining current regulations. 
Many commenters express appreciation for the Commission's efforts to 
arrive at creative solutions to the financial responsibility issue. At 
the same time, they reiterate their NPR comments that current 
requirements are working well, and that no passengers have lost any 
money.
    The commenters' general opposition to the NPR carried over to the 
alternatives proffered under the 1994 Inquiry: virtually all foresee 
problems of one sort or another with the voluntary association 
approach, ranging from skepticism about the availability of the large 
bonds necessary, to a number of difficult risk management and 
competitive factors. No commenter offers outright support for the 
vessel lien concept, for a number of reasons generally based on 
opposition to a requirement that qualifying assets be located in the 
U.S. Commenters urge the Commission not to change its current self-
insurance standards, or to discontinue the requirement that qualifying 
assets be based in the U.S.
1. Voluntary Associations
    The comments opposing the 1994 Inquiry's voluntary association 
proposal suggest that, although this general approach seems to be 
viable for NVOCCs, it may not be feasible for PVOs. In particular, 
these comments address the operational and fiscal

[[Page 33062]]

distinctions between the NVOCC and the PVO industries and make a 
credible argument as to why in this particular case a mechanism which 
works for one industry might not for another.19
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    \19\ In this regard, the comments point out that P&I Clubs, 
which are mutual insurance associations, were developed initially to 
provide mutual insurance for casualty and other losses. Thus, they 
are structured on the assumption that a member will survive a 
casualty, and the P&I mechanism is designed to eventually recover 
casualty losses from the member suffering that loss. (P&I Clubs 
issue performance guaranties only as an accommodation to the 
membership, and then only on a fully-collateralized basis.) The 
NVOCC industry uses commercial instruments and does not have mutual 
associations similar to P&I Clubs.
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    In short, the comments contend that an association approach would 
not work at the coverage levels contemplated under the NPR (either the 
original proposal or the alternative), due to the concentrated capital 
structures, operational diversity and competitive considerations 
inherent in the contemporary cruise industry.20 Also, ICCL 
comments that the nature of the cruise business does not lend itself to 
the mutuality inherent in the association approach, which seems to be 
borne out by AMCV's explanation of the drawbacks it sees in the 
association approach.21 It therefore appears unlikely that the 
market could support the magnitude of risk exposure inherent in the 
sort of voluntary association envisioned by the 1994 Inquiry.
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    \20\ The Surety Association advises that, depending on the 
actual make-up and financial strength of the passenger vessel 
associations, some associations may find it extremely difficult to 
qualify for a group surety bond and some may not be able to qualify 
at all.
    \21\ AMCV described the undesirability of PVOs becoming exposed 
to liability for other PVOs' nonperformance; fiduciary risks to PVO 
management for assuming liability for events within the sole control 
of its competitors; the difficulties of allocating the levels of 
risk involved and the narrowness of the base upon which that risk 
would be shared; and the inherent susceptibility of weaker members 
to termination--either for competitive reasons or because of normal 
operational risks inherent in a seasonal industry that is ultimately 
dependent upon discretionary income for all of its revenues.
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    Another material difference between these two industries is 
prepayment: NVOCCs do not require their customers to fully prepay for 
their services anywhere from two to six weeks (or, in some cases, eight 
or more weeks) before they are performed, as is the practice with PVOs. 
It is this practice which accounts for the approximately $700 million 
shortfall in uncovered UPR that prompted these proceedings. The 
shortfall's size more than anything else would appear ultimately to 
render the voluntary association approach unworkable.
    With regard to possible antitrust issues under this approach, AMCV 
notes that an association attempting to limit membership to financially 
sound PVOs could be subject to antitrust claims by excluded PVOs, and 
that there is an inherent potential for detrimental disclosure of 
confidential information.22
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    \22\ Those PVOs subject to the 1984 Act could avail themselves 
of agreement immunity to protect themselves from whatever exposure 
such concerted activity would cause under antitrust laws. Thus, the 
Shipping Act's antitrust exemption could result in uneven antitrust 
exposure as between those PVOs entitled to the wide scope of 1984 
Act agreement antitrust exemption (transportation between U.S. and 
foreign locations), which would obtain either with the filing or 
regulatory exemption of the Association agreement(s); and those 
purely domestic PVOs (transportation solely within the U.S.), which 
may not be entitled to any Shipping Act antitrust exemption at all. 
(The immunity afforded by the 1916 Act is repealed September 30, 
1996, by virtue of the ICC Termination Act of 1995, Pub. L. 104-88, 
109 Stat. 803.)
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    In view of the foregoing considerations, the Commission has 
determined not to pursue a voluntary association approach for the 
purposes of its Pub. L. 89-777 program.
2. Self-Insurance
    The self-insurance requirements currently in place were established 
by the Commission's Final Rule in Docket No. 92-50, which became 
effective February 1, 1993. Previously, self-insurers needed to 
demonstrate net worth and working capital each equal to 110% of the 
PVO's UPR--the standard the 1994 Inquiry suggested that the Commission 
might restore.
    Current self-insurance standards provide that PVOs demonstrating a 
minimum of five years' operation in U.S. trades, with a satisfactory 
explanation of any claims for nonperformance of transportation, need 
only demonstrate net worth equal to 110% of their UPR to qualify for 
self-insurance. Self-insurers are not, however, entitled to the sliding 
scale UPR coverage requirements that had been adopted in the Final Rule 
in Docket No. 92-19,23 and qualifying assets still must be located 
in the U.S.
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    \23\ Please refer to footnote 5, infra.
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    The comments on the 1994 Inquiry urge the Commission not to repeal 
self-insurance for private operators. AMCV has offered a rationale why 
the Commission should neither terminate self-insurance for commercial 
PVOs, as proposed in the NPR, nor implement the 1994 Inquiry's 
suggested restoration of the Commission's former and more rigorous 
standard.
    Foreign-flag operators take a different tack, urging repeal of the 
U.S.-based asset requirement. Carnival proposes a standard that would 
not only repeal the U.S.-based asset requirement but also provide for 
self-insurance qualification for PVOs which either (1) have earned 
investment grade ratings by the bonding rating agencies; or (2) meet 
both (a) a three times tangible net worth test and (b) a liquidity test 
(cash, short term investments and undrawn lines of credit equal to at 
least 100% UPR).
    The foreign-flag operators, and Carnival in particular, seek a 
system that appears to be well suited for assessing a company's 
investment risk. However, Carnival's ``investment risk'' test may not 
be appropriate for a statute that contemplates indemnification of 
passengers in the event a carrier does not fulfill its obligations.
    In this regard, we note that Carnival's proposed test is 
conditioned upon the Commission removing the U.S.-based asset 
requirement. We believe this requirement is critical to the self 
insurance standard. Unless passengers have the ability to attach a 
defaulting carrier's assets, self insurance under any standard is 
problematic.24 As the Commission remarked in its Final Rule in 
Docket 92-50:

    \24\ Although Carnival has proposed that self-insuring PVOs 
assent to U.S. jurisdiction in disputes with passengers over UPR and 
that PVOs designate agents for service of process, we do not believe 
that these measures would be sufficient for a passenger to attach a 
carrier's foreign-based assets. Moreover, this would not add 
anything new because section 3 UPR is already protected by U.S. Law 
(Pub. L. 89-777) and all section 3 applicants are required to 
appoint agents for service of process before they are certificated. 
Also, the Commission's concern is not limited to disputes between 
viable PVOs and passengers over UPR; rather, the Commission is 
concerned with a failing PVO's ability to indemnify passengers for 
nonperformance, which goes well beyond U.S. jurisdiction over simple 
disputes.
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    Although AHC and ICCL have requested the Commission to relax the 
requirement that the assets used to qualify as a self-insurer be 
physically located in the United States, the final rule herein 
continues existing requirements for the location of those assets. 
The Commission remains concerned that passengers may not have the 
ability or resources to pursue foreign-domiciled assets, and that 
such efforts would not be cost-effective in the majority of 
instances.* Moreover, as noted in the NPR, ``self-insurance presents 
a greater risk of loss to the travelling public than do other forms 
of coverage that are backed by independent interests holding sums of 
money for the protection of the public.''
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    * Docket No. 92-19, Notice of Proposed Rulemaking, p. 9.
    Docket No. 92-50, Financial Responsibility Requirements for 
Nonperformance of Transportation--Revision of Self-Insurance 
Qualification Standards, 57 FR 47830 (October 20, 1992), Final Rule, 
57 FR 62480 (December 31, 1992).
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    On the other hand, AMCV's comments appear to provide a basis to 
ameliorate some of the concerns that originally prompted the Commission 
to propose withdrawing self-insurance as

[[Page 33063]]

an available option for commercial PVOs.25 AMCV explains that 
traditional maritime liens and preferred mortgages, which have priority 
over passenger claims, are first deducted prior to calculating net 
worth under the existing rule; therefore, the resultant net worth used 
to qualify for section 3 self-insurance has already accounted for those 
liabilities.26
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    \25\ AMCV also suggested that the widespread use of credit cards 
and the protection offered by the Truth-in-Lending Laws and private 
travel insurance programs, act to buttress any shortfalls in the 
Commission's self-insurance options. While this may or may not be 
true, the Commission nevertheless has an independent obligation to 
make certain that PVOs have established their financial 
responsibility to indemnify passengers for nonperformance of 
transportation. Accordingly, we do not believe that the statutes or 
programs referred to by AMCV obviate the need for the Commission to 
fulfill its statutory responsibilities.
    \26\ Although AMCV may have addressed some of the Commission's 
concerns with respect to self-insurance, it did not address other 
potential payables that may have priority over passengers claims, 
e.g., employee salaries, benefits, legal fees. However, the proposed 
restoration of the former working capital standard, together with 
the additional requirement suggested below, should suffice to 
establish the requisite level of financial responsibility.
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    After further consideration, the Commission has determined to 
withdraw its proposal to discontinue self-insurance for commercial 
operators. Instead, the Commission proposes to continue self-insurance, 
but with revised criteria. To this end, the proposed rule herein would 
revise Part 540 to permit PVOs other than state or Federal 
instrumentalities to qualify for a Performance Certificate using U.S.-
based net worth and working capital each equal to or greater than their 
outstanding UPR, plus an additional cushion of 25% of UPR backed by a 
traditional guaranty, surety bond, insurance or escrow account. Such an 
approach would permit commercial operators, like AMCV, to continue to 
use the self-insurance option currently set forth in the Commission's 
rules, provided they also can evidence working capital equal to their 
outstanding UPR and can acquire a guaranty, surety bond, insurance or 
escrow account for 25% of their outstanding UPR.
3. Liens, Mortgages and Other Security Instruments
    This aspect of the 1994 Inquiry drew no support in the comments. In 
fact, commenters provided sound reasons why it should not be pursued 
further. Accordingly, the Commission intends to take no further action 
with respect to this option.

III. Discussion

    Notwithstanding the industry's general position that changes are 
not necessary, the Commission's concern about the adequacy of its 
financial responsibility standards has, if anything, increased. 
Subsequent to the close of the comment period in the 1994 Inquiry, 
three additional passenger vessel operators have sought protection 
under the Bankruptcy Code:

--In late December 1994, Gold Star Cruises ceased operations and filed 
for Chapter 7 bankruptcy.
--As of October 29, 1995, Regency Cruises ceased operations. It 
subsequently filed for Chapter 11 protection on November 7, 1995.
--On October 30, 1995, Palm Beach Cruises filed for Chapter 11 
protection to reorganize.

In each of these cases, there appear to be sufficient funds set aside 
to indemnify passengers scheduled to embark at U.S. ports. At the same 
time, it should be noted that there was some concern regarding Regency 
because its unearned passenger revenue had from time to time exceeded 
the current ceiling; however, Regency ceased operations at a time when 
its unearned passenger revenue was below the ceiling.
    Accordingly, in light of the foregoing the Commission believes that 
it must now proceed to revise its coverage requirements to narrow the 
gap between coverage and UPR as a means of enhancing protection for the 
public.

A. Revised Coverage Requirements

1. Coverage Levels
    As aforementioned, the Commission remains concerned about 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). Adjustments will 
also be proposed to the sliding scale and eligibility requirements 
currently set forth in 540.5(e). The Commission also proposes to 
introduce a new sliding scale coverage table that would apply to all 
operators.
    a. Reduced Coverage Scale. The revised sliding scale in 46 CFR 
540.5(e) would continue to be available to passenger vessel operators 
that can provide evidence of at least five years' operation in United 
States trades, with a satisfactory explanation of any claims for 
nonperformance of transportation. Operators opting to use this reduced 
coverage sliding scale would, in addition, have to demonstrate that 
their debt is rated ``Aa'' or better by Moody's Investors Service. For 
those who qualify, this reduced coverage sliding scale would require 
100 percent coverage for UPR up to $15 million and, when fully phased 
in, 60 percent coverage for UPR between $15 and $50 million; 20 percent 
coverage for amounts between $50 and $100 million; and 10 percent for 
amounts over $100 million. The reduced coverage sliding scale would be 
phased in over a 3-year period to minimize the impact of the new 
coverage requirements.27
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    \27\ The proposed reduced coverage sliding scale would require 
100 percent coverage for a PVO's first $15 million in UPR and phase 
in this revised coverage requirement in three increments:
    First, effective March 1, 1997, it would require 60 percent 
coverage for UPR between $15 and $25 million; 20 percent coverage 
for amounts between $25 and $50 million and 10 percent coverage for 
amounts over $50 million.
    Second, effective March 1, 1998, it would require 60 percent 
coverage for UPR between $15 and $35 million; 20 percent coverage 
for amounts between $35 and $75 million and 10 percent coverage for 
amounts over $75 million.
    Finally, effective March 1, 1999, it would require 60 percent 
coverage for UPR between $15 and $50 million; 20 percent coverage 
for amounts between $50 and $100 million; and 10 percent coverage 
for amounts over $100 million.
---------------------------------------------------------------------------

    The Commission believes that this approach would give more weight 
to third-party, marketplace assessments of a PVO's financial strength 
in determining its section 3 risk. Moreover, this approach relies, 
albeit indirectly, upon foreign-based assets as urged by foreign-flag 
PVOs in connection with the self-insurance standards.
    b. Standard Coverage Scale. The new standard coverage sliding scale 
would be available to all PVOs, regardless of the extent of their 
operational experience, their financial standing or their explanations 
for instances of nonperformance. When fully phased in, the standard 
coverage sliding scale would ultimately require 100 percent coverage 
for UPR up to $50 million; 75 percent coverage for amounts between $50 
and $100 million; and 25 percent coverage for amounts over $100 
million. The standard coverage sliding scale would be phased in over a 
3-year period to minimize the impact of the new coverage 
requirements.28
---------------------------------------------------------------------------

    \28\ The proposed rule would phase in this revised coverage 
requirement in three increments:
    First, effective March 1, 1997, it would require 100 percent 
coverage for UPR up to $25 million; 75 percent coverage for amounts 
between $25 and $35 million; and 25 percent coverage for amounts 
over $35 million.
    Second, effective March 1, 1998, it would require 100 percent 
coverage for UPR up to $35 million; 75 percent coverage for amounts 
between $35 and $50 million; and 25 percent coverage for amounts 
over $50 million.
    Finally, effective March 1, 1999, it would require 100 percent 
coverage for UPR up to $50 million; 75 percent coverage for amounts 
between $50 and $100 million; and 25 percent coverage for amounts 
over $100 million.

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[[Page 33064]]

2. Self-Insurance
    The Commission has determined to propose the restoration of self-
insurance for private PVOs that can demonstrate both U.S.-based net 
worth and working capital each equal to their outstanding UPR,29 
with an additional cushion of 25% of UPR backed by a traditional 
guaranty, surety bond, insurance or escrow account.
---------------------------------------------------------------------------

    \29\ The Commission also proposes restoring the procedure to 
waive, for good cause shown, the requirement as to the amount of 
working capital appearing in the former Sec. 540.5(d).
---------------------------------------------------------------------------

3. Effective Date
    While the Commission wishes to revise section 3, Public Law 89-777, 
requirements at the earliest practicable date, it does not wish to do 
so in a manner that unnecessarily disrupts the passenger vessel 
industry. In this connection, the Commission acknowledges the 
widespread practice of P&I Clubs to require members to fully 
countersecure their section 3, Public Law 89-777, guaranties as well as 
the P&I Club practice of renewing coverages during February of each 
year. Therefore, the proposed rule herein would phase in the revised 
coverage requirements over a 3-year period beginning March 1, 1997, and 
ending March 1, 1999.

B. Revision of Part 540's Escrow Agreement Guideline

    In a recent bankruptcy involving a PVO that had used an escrow 
agreement to meet its section 3, Public Law 89-777 financial 
responsibility requirements, the question arose as to whether the 
escrow's assets should be considered debtor's property. The escrow 
agreement at issue contained language that the Commission has changed 
in other escrow agreements it has since approved so as to address this 
issue. Therefore, we are proposing a change to paragraph 12 to require 
language that makes clear that escrow funds are not debtor's property 
and should be made available to passengers.

C. Filing Deadline

    Section 540.4(b) requires that an application for a Certificate 
(Performance) shall be filed at least 60 days in advance of the 
arranging, offering, advertising, or providing of any water 
transportation or tickets in connection therewith. Late filing of the 
application is permitted only for good cause shown. With the growth of 
the passenger vessel industry over the years since this requirement was 
first promulgated, together with the industry's increasing reliance on 
complex financial responsibility proposals requiring case-by-case 
assessment by the Commission, a 60-day period can be insufficient. 
Accordingly, this is being changed to a 90-day period, absent good 
cause shown.
    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.
    The collection of information requirements contained in this rule 
have been submitted to the Office of Management and Budget for review 
under section 3507 of the Paperwork Reduction Act of 1995. The annual 
public reporting and recordkeeping burden for this collection of 
information is estimated to average 14.91 hours per response. Burden 
means the total time, effort, or financial resources expended by 
persons to generate, maintain, retain, or disclose or provide 
information to or for a Federal agency. This includes the time needed 
to review instructions; develop, acquire, install, and utilize 
technology and systems for the purposes of collecting, validating, and 
verifying information, processing and maintaining information, and 
disclosing and providing information; adjust the existing ways to 
comply with any previously applicable instructions and requirements; 
train personnel to be able to respond to a collection of information; 
search data sources; complete and review the collection of information; 
and transmit or otherwise disclose the information.
    Written comments are invited on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information shall 
have practical utility; (b) the accuracy of the agency's estimates of 
the burden (including hours and cost) of the proposed collection of 
information; (c) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (d) ways to minimize the burden of 
the collection of information on respondents, including through the use 
of automated collection techniques or other forms of information 
technology. Send comments concerning the information collection 
requirements of this rule within 60 days of this notice to Bruce A. 
Dombrowski, Deputy Managing Director, Federal Maritime Commission, 
Washington, D.C. 20573 and to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: Desk Officer for 
the Federal Maritime Commission, Washington, D.C. 20503.
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, Pub. L. 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:

    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).
Sec. 540.4   [Amended]
    2. In section 540.4(b), the reference to ``60 days'' in the first 
sentence is amended to read ``90 days.''
    3. Section 540.5 is amended by revising the introductory text, the 
introductory text of paragraph (d), paragraph (d)(6), and (e) to read 
as follows:
Sec. 540.5   Insurance, guaranties, escrow accounts, and self-
insurance.
    Except with regard to escrow accounts and self-insurers, 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 100 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, 
subject to the following schedule:

[[Page 33065]]



------------------------------------------------------------------------
 Unearned passenger revenue  (``UPR'')          Required coverage       
------------------------------------------------------------------------
Effective March 1, 1997:                                                
    $0-$25,000,000.....................  100% of UPR.                   
    $25,000,001-$35,000,000............  $25,000,000 plus 75% of excess 
                                          UPR over $25,000,000.         
    Over $35,000,000...................  $32,500,000 plus 25% of excess 
                                          UPR over $35,000,000.         
Effective March 1, 1998:                                                
    $0-$35,000,000.....................  100% of UPR.                   
    $35,000,001-$50,000,000............  $35,000,000 plus 75% of excess 
                                          UPR over $35,000,000.         
    Over $50,000,000...................  $46,250,000 plus 25% of excess 
                                          UPR over $50,000,000.         
Effective March 1, 1999:                                                
    $0-$50,000,000.....................  100% of UPR.                   
    $50,000,001-$100,000,000...........  $50,000,000 plus 75% of excess 
                                          UPR over $50,000,000.         
    Over $100,000,000..................  $87,500,000 plus 25% of excess 
                                          UPR over $100,000,000.        
------------------------------------------------------------------------

The Commission, for good cause shown, may consider a time period other 
than the previous 2-fiscal-year period requirement in this section or 
other methods acceptable to the Commission to determine the amount of 
coverage required. Evidence of adequate financial responsibility for 
the purposes of this subpart may be established by one or a combination 
(including Sec. 540.6 Surety Bonds) of the following methods:
* * * * *
    (d) 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. In 
addition, applicants other than state or Federal entities must 
demonstrate financial responsibility by maintenance of working capital 
and net worth, each in an amount no less than 100 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. The 
Commission will take into consideration all current contractual 
requirements with respect to the maintenance of such working capital 
and/or net worth to which the applicant is bound. Evidence must be 
submitted that the working capital and net worth required above are 
physically located in the United States. This evidence of financial 
responsibility shall be supplemented by evidence demonstrating that 
twenty-five percent of applicant's unearned passenger revenue is 
covered by one or a combination of the following: evidence of insurance 
pursuant to Sec. 540.5(a); evidence of an escrow account pursuant to 
Sec. 540.5(b); a guaranty pursuant to Sec. 540.5(c); or a surety bond 
pursuant to Sec. 540.6. This evidence of financial responsibility shall 
be supported by and be subject to the following which are to be 
submitted on a continuing basis for each year or portion thereof while 
the Certificate (Performance) is in effect;
* * * * *
    (6) A list filed semiannually of all contractual requirements or 
other encumbrances (and to whom the applicant is bound in this regard) 
relating to the maintenance of working capital and net worth;
* * * * *
    (e) (1) The following schedule may be applied to determine the 
minimum coverage required for indemnification of passengers in the 
event of nonperformance of water transportation for those operators who 
have not elected to qualify by an escrow account or self-insurance; and 
can provide evidence (in the form of an affidavit by the operator's 
Chief Executive Officer or other responsible corporate officer) that 
applicant's debt is rated by Moody's Investors Service at Aa or higher; 
and of a minimum of five years of operation in United States trades 
with a satisfactory explanation of any claims for nonperformance of 
transportation.

------------------------------------------------------------------------
 Unearned passenger revenue  (``UPR'')          Required coverage       
------------------------------------------------------------------------
$0-$15,000,000.........................  100% of UPR.                   
Effective March 1, 1997:                                                
    $15,000,001-$25,000,000............  $15,000,000 plus 60% of excess 
                                          UPR over $15,000,000.         
    $25,000,001-$50,000,000............  $21,000,000 plus 20% of excess 
                                          UPR over $25,000,000.         
    Over $50,000,000...................  $26,000,000 plus 10% of excess 
                                          UPR over $50,000,000.         
Effective March 1, 1998:                                                
    $15,000,001-$35,000,000............  $15,000,000 plus 60% of excess 
                                          UPR over $15,000,000.         
    $35,000,001-$75,000,000............  $27,000,000 plus 20% of excess 
                                          UPR over $35,000,000.         
    Over $75,000,000...................  $35,000,000 plus 10% of excess 
                                          UPR over $75,000,000.         
Effective March 1, 1999:                                                
    $15,000,001-$50,000,000............  $15,000,000 plus 60% of excess 
                                          UPR over $15,000,000.         
    $50,000,001-$100,000,000...........  $36,000,000 plus 20% of excess 
                                          UPR over $50,000,000.         
    Over $100,000,000..................  $46,000,000 plus 10% of excess 
                                          UPR over $100,000,000.        
------------------------------------------------------------------------

    (2) The qualifications of applicants seeking consideration under 
the coverage requirements of this paragraph shall be supported by and 
subject to the following which are to be submitted on a continuing 
basis for each year or portion thereof while the Certificate 
(Performance) is in effect:
    (i) A report filed semiannually evidencing that Moody's Investors 
Service rates applicant's debt at Aa or higher; and
    (ii) Such additional evidence of financial responsibility as the 
Commission may deem necessary in appropriate cases.

[[Page 33066]]

Sec. 540.9   [Amended]

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

Appendix A to Subpart A--[Amended]

    6. The following sentence is added at the end of Paragraph 12 of 
Appendix A to subpart A--Example of Escrow Agreement for Use Under 46 
CFR 540.5(b):

The Operator and/or Ticket Issuer are not entitled to, nor have any 
interest in, any funds payable from this account to the extent such 
funds represent unearned passenger revenue, as that term is defined 
in subpart A of part 540 of title 46, Code of Federal Regulations.
* * * * *
    By the Commission.
Joseph C. Polking,
Secretary.
[FR Doc. 96-16210 Filed 6-25-96; 8:45 am]
BILLING CODE 6730-01-P