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ua14no94 FEDERAL TRADE COMMISSION (FTC)...
<DOC> FEDERAL MARITIME COMMISSION (FMC) Statement of Regulatory Priorities The Federal Maritime Commission's (Commission or FMC) regulatory objectives are guided by the agency's basic mission. The Commission's mission is to be able to take the actions necessary to ensure that the shipping statutes it administers operate as effectively as possible to provide an efficient, economic, and nondiscriminatory ocean transportation system and an environment free of unfair foreign maritime trade practices. Commission regulations are designed to implement each of the various statutes the agency administers in a manner consistent with this mission and in a way that minimizes regulatory costs, fosters economic efficiencies, and promotes international harmony. Since the Commission has no new legislation which requires implementation, the principal objective or priority of the agency's current regulatory plan is to assess its major existing regulations for continuing need, effectiveness, burden on the regulated industry, fairness, and clarity. The Commission has under review, inter alia, regulations regarding passenger vessel operator financial responsibility, co-loading arrangements between non-vessel-operating common carriers, possible guidelines for Commission review of substantially anticompetitive agreements between common carriers by water in foreign commerce, and regulations prescribing rate-of-return methodology for common carriers in the domestic offshore trades. Review of the above-mentioned rate-of-return regulations represents an important regulatory action and serves as an example of the Commission's objective to regulate fairly and effectively while imposing a minimum burden on the regulated entities, following the principles stated by the President in E.O. 12866. Rate-of-return regulations are issued pursuant to provisions of the Intercoastal Shipping Act of 1933 (1933 Act). This Act charges the Commission with the responsibility to determine whether rates and charges of common carriers by water in the domestic offshore trades are just and reasonable. (Domestic offshore trades include, principally, transportation by water between any of the contiguous 48 States or D.C. and Alaska or Hawaii, between any State and any territory, commonwealth, possession or district, and between Alaska and Hawaii.) The 1933 Act also requires the Commission by regulation to prescribe guidelines for the determination of what constitutes a just and reasonable rate of return or profit for such carriers, and from time to time to review such regulations and make such amendments thereto as may be appropriate. Pursuant to this mandate, and in response to concerns expressed by affected carriers and shippers, the Commission recently has conducted an exhaustive review of its current rate of return methodology. This review has resulted in issuance of a proposed new methodology which is designed to result in the payment by the carrier's customers of the lowest cost for service in the long run. _______________________________________________________________________ FMC ___________________________________________________________ FINAL RULE STAGE ___________________________________________________________ 206. <bullet> FINANCIAL REPORTING REQUIREMENTS AND RATE-OF-RETURN METHODOLOGY IN THE DOMESTIC OFFSHORE TRADES (DOCKET NO. 94-07) Legal Authority: 5 USC 553; 46 USC app 817(a); 46 USC app 841a; 46 USC app 844; 46 USC app 845 CFR Citation: 46 CFR 552.1; 46 CFR 552.2; 46 CFR 552.5; 46 CFR 552.6 Legal Deadline: None Abstract: Proposed action would amend regulations governing financial reporting requirements and rate of return methodology applicable to vessel operating common carriers in the domestic offshore trades. The ``weighted average cost of capital'' methodology would replace the ``comparable earnings test'' in determining the reasonableness of a carrier's return-on-rate base. Additionally, rules pertaining to the treatment of insurance expenses, deferred taxes, and the Capital Construction Fund would be amended. Statement of Need: The proposed changes to the Commission's financial regulation of vessel operating carriers in the domestic offshore trades are needed to address a number of shipper and carrier concerns regarding the Commission's current rate of return methodology. They also would align the Commission's ratemaking methodologies more closely with those used by numerous other regulatory agencies. The intent is to improve the FMC's methodology for evaluating the reasonableness of rates filed by carriers in the domestic offshore trades and for acquiring the data that are essential to that evaluation. Summary of the Legal Basis: This proposal is made pursuant to section 3 of the Intercoastal Shipping Act, 1933, which requires the Commission by regulation to prescribe guidelines for the determination of what constitutes a just and reasonable rate of return or profit for common carriers by water in the domestic offshore trades, and from time to time thereafter to review such regulations and make such amendments thereto as may be appropriate. Alternatives: The Commission addressed potential alternatives to the proposed rule in a previous advance notice of proposed rulemaking (ANPRM), ``Financial Reports of Common Carriers by Water in the Domestic Offshore Trades,'' Docket No. 91-51, 46 CFR 522, 56 FR 57298, November 8, 1991. In this ANPRM, the Commission posed a number of questions outlining the scope of the FMC's regulation of the domestic offshore trades. In addition to the weighted average cost of capital (WACC) approach the Commission proposes in this rulemaking, several parties suggested the Commission adopt, inter alia, a zone of reasonableness approach to rate regulation in place of the comparable earnings test the Commission currently employs. The Commission rejected this approach based upon its determination that any such zone would be contrary to explicit Congressional direction and, therefore, beyond the FMC's statutory authority. See Final Rule, ``Financial Reports of Common Carriers by Water in the Domestic Offshore Trades,'' Docket No. 91-51, 46 CFR 522, 56 FR 13414, March 11, 1993. The other issues and alternatives raised by respondents to the ANPRM are being addressed by this proposed rule. Anticipated Costs and Benefits: The aggregate annual cost of the WACC methodology to both the industry and the Government is expected to be about $33,000. This cost is based on the FMC's anticipation of two filings per year and recordkeeping by seven regulated carriers. Similar costs for the comparable earnings method are not available, yet the Commission estimates that WACC costs are not greater than, and may be less than, the costs under the comparable earnings method. Detailed figures for the benefits of each method are not available. However, a brief description of the benefits the Commission expects the WACC to provide relative to the comparable earnings test indicates the clear desirability of the proposed rule. The WACC methodology is more accurate than the comparable earnings method because it uses actual long-term debt figures for the regulated party, while the comparable earnings test uses an estimated interest expense as a proxy for debt expenses. Because it uses market data and actual data, while combining historical trend, current condition, and future projections, the WACC methodology is able to develop a more accurate measure of the cost of capital, a figure which then becomes the maximum rate of return a carrier is permitted to earn. The WACC also is more objective than the comparable earnings approach because it avoids the need for subjectively adjusting and comparing rates of return. With the WACC, in the unusual case where a proxy must be used, a detailed set of statistics about the proxy firms may be gathered and used. This narrows the grounds for disagreement by experts and increases the certainty and predictability of the result. WACC also balances the demand by shippers for lower rates with the need for the carrier to be adequately capitalized. If the allowable rate of return is set too high, the carrier's stockholders enjoy earnings that are above those they would earn on alternative investments of comparable risks since these excessive earnings come from shippers paying rates that are too high. On the other hand, if the rate of return is set too low (below the cost of capital), the carrier's stockholders would be unwilling to invest funds needed to keep the business running. Shippers are disadvantaged as the carrier is forced to allow vessels to deteriorate without replacement and the carrier's service level declines. The WACC balances these competing demands, thereby benefitting both shippers and carriers. Two U.S. Supreme Court cases, Bluefield Water Works & Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679 (1923) and Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 391 (1944), affirm the use of the WACC approach. Other regulatory agencies, including the Federal Energy Regulatory Commission, the Interstate Commerce Commission, the Federal Communications Commission, and virtually every State regulatory commission use WACC. The proposed rule, therefore, benefits shippers, carriers, and the Government by bringing the FMC's rate of return methodology into conformance with accepted Federal and State rate-of-return practices. The WACC also provides the Commission greater regulatory flexibility. The WACC method works equally well regardless of a regulated carrier's capitalization method; the comparable earnings test does not. This provides the greatest benefit when a carrier is entirely debt capitalized, since the WACC looks directly at whether the carrier's rate of return will meet its cost of debt needs. The comparable earnings test, on the other hand, forces the regulated carrier to compare its rate of return with firms that are capitalized differently, thereby increasing the uncertainty the carrier faces whether its rate of return will adequately cover its cost of capital. The more accurate WACC method, since it is flexible enough to apply regardless of the regulated carrier's method of capitalization, offers clear benefits to both carriers and shippers. Finally, because of technical adjustments in the allowable method for computing a carrier's rate base, each carrier's rate base will fall somewhat. A smaller rate base, in turn, makes the rate of return more sensitive to small changes in income (rate of return is earned income plus interest income divided by rate base). Shippers benefit from this increased sensitivity since small variations from projected income growth resulting from a general rate increase are more readily apparent. Carriers benefit from having a rate base that more accurately reflects their actual capitalization. Analysis of the proposed rule indicates that these benefits are achieved without additional costs imposed on either carriers or shippers. Estimates of the costs of filing responsibilities, applications for general rate increases, and recordkeeping requirements indicate that the costs will vary only slightly, if at all, as a result of using the WACC rather than the comparable earnings methodology. Nor are FMC monitoring and evaluation costs increased. Risks: This rule does not involve risk reduction efforts involving health, public safety, or environmental concerns. Where financial risk is reduced, such risk is addressed in the description of anticipated costs and benefits, supra. Timetable: _______________________________________________________________________ Action DFR Cite _______________________________________________________________________ NPRM 59 FR 16592 04/07/94 NPRM Comment Per59 FR 16592 06/06/94 Final Action 11/00/94 Final Action Effective 01/00/95 Small Entities Affected: None Government Levels Affected: None Agency Contact: Richard J. Kwiatkowski Industry Economist Bureau of Trade Monitoring and Analysis Federal Maritime Commission 800 North Capitol Street NW. Washington, DC 20573 202 523-5790 RIN: 3072-AB78 BILLING CODE 6730-01-F
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