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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

Pages: 1

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