Appendix — Puerto Rico Maritime Shipping Authority v. Federal Maritime Commission

Supreme Court brief1982

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PuverRTO Rico MARITIME SHIPPING AUTHORITY,

Petitioner,

Vv.

FEDERAL MARITIME COMMISSION,

Respondent.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

AMY LOESERMAN KLEIN

Counsel of Record

KATHLEEN MA‘I0ON

GALLAND, KHARASCH, CALKINS

& Snort, P.C.

1054 Thirty-First Street, N.W.

Washington, D.C. 20007

Telephone: (202) 342-5200

Attorneys for Petitioner

July 16, 1982

WILSON - Eres Printine Co.. Inc. - 769-0096 - WasnincTron. D.C. 20001

TABLE OF CONTENTS

APPENDIX A—Opinion of the Court of Appeals ......

APPENDIX B—Order of the Federal Maritime Com-

mission Partially Adopting Initial Decision .............

APPENDIX C—Initial Decision of the Administrative

Law Judge, Federal Maritime Commission ...............

APPENDIX D—Orders of the Court of Appeals Deny-

ing Petition for Rehearing snd — for Re-

SNE ISR NOD SZ

APPENDIX E—Statutes and Regulations ...............

Shipping Act, 1916, § 18(a), 46 U.S.C. § 817(a)....

{ntercoastal Shipping Act, 1933, as amended (Pub-

Se ee I Clieeihentedthasttedenetchesinrenctnesumanticten

Section 2, 46 U.S.C. § 844 .....................

Section 3(a), 46 U.S.C. § 845(a) ..................

Section 3(b), 46 U.S.C. § 845(b)................

Section 3(c) (2), 46 U.S.C. § 845(c) (2) —......

46 C.F.R. § 502.67(a) (2), (3) & (4) —..................

Gs EIN ccterrencsesnesinteccivennsceeresemamessecsemsennene

ee _ E

APPENDIX F—Materials in the Record Cited by the

Court of Appeals: J.A. 704-712 ............... ERE

5la

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 81-2088

PuERTO RIcO MARITIME SHIPPING AUTHORITY,

7 Petitioner

FEDERAL MARITIME COMMISSION and

UNITED STATES OF AMERICA,

Respondents

TRAILER MARINE TRANSPORT CORPORATION,

GOVERNMENT OF THE UNITED STATES

No. 81-2128

GOVERNMENT OF THE VIRGIN ISLANDS and

PUERTO RICO MANUFACTURERS ASSOCIATION,

e Petitioners

FEDERAL M4RITIME COMMISSION and

UNITED STATES OF AMERICA,

Respondents

Sea-LAND SERVICE, INC.,

PuERTO RICO MARITIME SHIPPING AUTHORITY,

TRAILER MARINE TRANSPORT CORPORATION,

Intervenors

Petitions for Review of an Order of the

Federal Maritime Commission

Argued January 28, 1982

Decided May 14, 1982

Amy Loeserziur, Klein, with whom Kathleen Mahon

was on the brief, for Puerto Rico Maritime Shipping

Authority, petitioner in No. 81-2088 and intervenor in

No. 81-2128. ‘

John C. Cunningham, Attorney, Federal Maritime Com-

mission, with whom C. Jonathan Benner, General Coun-

sel, Federal Maritime Commission, was on the brief, for

respondents. Edward G. Gruis, Attorney, Federal Mari-

time Commission, also entered an appearance for re-

spondent, Federal Maritime Commission. Barry Gross-

man and Robert J. Wiggers, Attorneys, Department of

Justice, also entered appearances for respondent, United

States of America.

George J. Weiner, with whom Edward J. Sheppard

and Edward Aptaker were on the brief, for Government

of the Virgin Islands and Puerto Rico Manufacturers

Association, intervenors in No. 81-2088 and cross-

petitioners in No. 81-2128.

Michael Joseph for intervenor, Trailer Marine Trans-

port Corporation, in Nos. 81-2088 and 81-2128.

Daniel J. Sweeney and Steven J. Kalish were on the

brief for intervenor, Drug and Toilet Preparation Traffic

Conference, Inc.

Donald J. Brunner was on the brief for intervenor,

Sea-Land Service, Inc., in No. 81-2128.

Before: WALD, MIKVA and GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

the rate increases of three of the carriers and reduced

the proposed increase of the fourth and most dominant

carrier, the Puerto Rico Maritime Shipping Authority.

We now consider petitions for review of the agency’s

order filed by the dominant carrier and by representa-

tives of involved shippers, challenging various elements

I. BACKGROUND

Under the Intercoastal Shipping Act of 1933, 46 U.S.C.

§§ 843-848, the FMC was authorized to review the rates

of intercoastal carriers in order to ensure that they were

reasonable and just. In 1978, Congress amended the Act

to streamline consideration of rate increases, while still

protecting the interests of both carriers and shippers.’

Under section 845 of title 46, as amended, the Federal

publication in the Federal Register of the specific issues

to be resolved. 46 U.S.C. § 845(a) (Supp. III 1979).

The Commission must adhere to strict time limits within

The Commission may once extend the 180-day limit for

sixty days.

Pub. L. No. 95-474, 92 Stat. 1496 (1978); S. Rep. No.

1240, 95th Cong., 2d Sess. 1 (1978), reprinted in 1978 U.S. Cope

The 1978 Amendments also provided for special proce-

dures for the conduct of the hearing: “Notwithstanding

any other provision of law, in providing a hearing for

the purposes of this chapter, it shall be adequate to pro-

vide an opportunity for the submission of all evidence

in written form, followed by an opportunity for briefs,

written statements, or conferences of the parties.” Jd.

§ 845(b). It is clear from the legislative history of the

amendments that this provision was designed to allow

expeditious completion of these hearings without run-

ning afoul of the Administrative Procedure Act.*

The carrier has the burden of proof that its rates are

just and reasonable. Jd. § 845(b). If the Commission

finds that the new rates are unjust or unreasonable it

may determine and prescribe a maximum or minimum

rate. See id. § 845a. Any amount charged to shippers

over that which is ultimately determined to be just and

reasonable must be refunded to the shipper by the car-

rier, with interest computed on the basis of the prime

lending rate. See id. § 845(c) (2).

This case presents for review the premier use by the

Commission of these new powers and procedures to

evaluate tradewide, general rate increases. The Com-

2 The legislation . . . specifies that for the purposes of the act

and the Administrative Procedures Act it is unnecessary to

hold a full evidentiary hearing with the opportunity to present

oral testimony and cross-examine witnesses. It provides instead

that i: is sufficient to provide an opportunity to submit written

statements, file briefs, or hold conferences. Moreover, it is

expected that steps will be taken to expedite discovery. It had

been suggested that the 180-day deadline could not be met

because of the requirements imposed by the Administrative

opportunity for a short oral presentation and opportunity for

cross-examination. That, of course, could still be provided

where appropriate.

H.R. Rep. No. 474, 95th Cong., Ist Sess. 10 (1977).

February 3, 1981. PRMSA’s competitors Sea-Land Serv-

ice, Inc. (Sea-Land), Trailer Marine Transport Corpora-

tion (TMT), and Gulf Caribbean Marine Lines (GCML)

the Puerto Rico Manufacturers Association, the Govern-

FMC regulations require that voluminous data, re-

flecting past and future operations, be filed in support of

an application for a rate increase exceeding 3 percent.‘

Detailed revenue and expense forecasts for a pro forma

test year must be made prior to the filing of an increase.

The pro forma test year by regulation commences the

next month after the effective date of the rate increase.*

Because a rate increase may not become effective until

after a 60-day notice period, a carrier’s forecasts must

necessarily project revenues and costs for a period 4-16

months after a forecast is made.

Prior w the effective date of the PRMSA general rate

increases, the Commission ordered an investigation, with-

* See S. Rep. No. 1240, 95th Cong., 2d Sess. 2 (1978).

*46 C.F.R. §$§ 5602.67, 512.2.

§ Jd. § 612.2(f) (1) (ii).

out suspension, of the rate increases of Sea-Land, TMT

and GCML,° as well as PRMSA." The investigation,

Docket No. 81-10, was the first tradewide investigation

held under the 1978 Amendments to the Intercoastal

Shipping Act.

As required by the new law, the Commission pub-

lished in the Federal Register the specific issues to be

investigated :

(1) What is an appropriate rate of return for the

carriers named as Respondents? In addressing

this question consideration should be given to

the average rate of return earned by other U.S.

corporations and the inherent risks, if any, in

operating in the affected trades.

(2) Is the methodology used by Respondents in mak-

ing revenue and cargo volume projections ap-

propriate?

(3) Are Respondents’ revenue and cargo volume

projections sufficiently accurate, and if not, what

are the appropriate projections?

(4) Have Respondents properly calculated their cost

projections covering labor, fuel, vessel mainte-

nance and administrative and general expenses,

and, if not, what are the proper calculations?

(5) Do the proposed rate increases impose an eco-

nomic hardship on the affected interests repre-

* Order of Investigation, Docket No. 81-10, 46 Fed. Reg. 11037

(Feb. 5, 1981).

7 PRMSA’s rate increases as originally filed on December 5, 1980

were based upon an eight-vessel complement, reflecting the antici-

pated acquisition of a new roll-on/roll-off vessei. When this acquisi-

tion fell through, PRMSA was given special permission to refile its

application with all materials showing projected results under two

possible vessel configurations. This Special Permission also granted

PRMSA a new effective date of February 27, 1981. The investiga-

tion of the rate increases of the other carriers was expanded to in-

clude PRMSA. See 46 Fed. Reg. 15212 (March 4, 1981).

Joint Appendix (J.A.) at 178-79.*

The hearing was conducted almost entirely in written

form in three rounds of simultaneous submissions labeled

Direct, Rebuttal and Surrebuttal. The hearing was con-

istrative Law Judge (ALJ). On June 5, the Commission

granted an extension of time for

Pursuant to that extension, the ALJ issued his

on July 20, 1981, recommending approval of

creases of PRMSA, Sea-Land, and GCML.

the initial decision recommended neither approval nor

disapproval of the increase, but stated that the ALJ was

unable to find, from TMT’s submissions, that TMT had

presented sufficient evidence to carry its burden of proof

that its increase was just and reasonable. The ALJ

suggested that TMT have another opportunity to show

the Commission that its rate increase was justified

supplying more evidence or by referring to su

evidence not discussed in its brief to the ALJ.

On September 25, 1981, the FMC issued the

here under review, Docket No. 81-10, Sea-Land Service,

Ine., Trailer Marine Transport Corporation, Gulf Carib-

bean Marine Lines, Inc., and Puerto Rico Maritime Ship-

ping Authority, Proposed General Rate Increases in the

Puerto Rico and Virgin Islands Trades (September 2£,

1981). The Commission approved the increases of Sea-

§ 512.6(d)(3) should be used for PRMSA in light of its unique

financial structure.

* Initial Decision (1. at 65-70; J.A. at 123-28.

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ments Traffic Conference, Inc. v. United States, 321

Supp. 500, 505-06 ‘S.D.N.Y. 1970) (three-judge panel

Electronic Indus. Ass'n Vv. United States, 310 F. Supp.

1286 (D.D.C. 1970) (three-judge panel), afd, 401 U.S.

967 (1971) ; Florida Citrus Comm'n v. United States, 144

F. Supp. 517 (N.D. Fla. 1956), aff'd mem., 352 U.S. 1021

(1957) ; Koppers Co. v. United States, 182 F. Supp. 159

(W.D. Pa. 1955) (three-judge panel).

Sas p35 38,

a Wi

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the Supreme Court’s discussion of the case in Aberdeen &

Rockfish R.R. v. Students Challenging Regulatory Agency

Procedures (SCRAP II), 422 U.S. 289 (1975).

There

the Court considered but declined to decide whether the

obtain review of a genera] revenue hear-

See id. at 317 n.18.

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exceeded its authority. Second, the court must ex-

amine the manner in which the Commission has

employed the methods of regulation which it has

itself selected, and must decide whether each of the

order’s essential elements is supported by substantial

evidence. Third, the court must determine whether

the order may reasonably be expected to maintain

financial integrity, attract necessary capital, and

fairly compensate investors for the risks they have

“basic data and the whys and wherefores” of its con-

clusions. Government of Guam v. FMC, 329 F.2d 251,

255 (D.C.Cir. 1964). See also Colorado-Wyoming Gas Co.

v. FPC, 324 U.S. 626, 634-35 (1945) ; Commonwealth of

Puerto Rico v. FMC, 288 F.2d 419, 420 (D.C. Cir.

judgment are proper and perhaps necessary.” Trans

World Airlines, Inc. v. CAB, 385 F.2d 348, 358 (D.C.Cir.

1967), cert. denied, 390 U.S. 944 (1968).

mandated speedy resolution of hearings under section

845. Strict limits are placed on the time that may be

devoted to creation of the record and to consideration of

that record by the ALJ and the Commission.“ As we

said in a similar situation, “[{t]he direction to the agency

to provide expedition will be taken to heart by the

Courts, as an indication of legislative policy.” Houston

Lighting & Power Co. v. United States, 606 F.2d 1131,

1145 (D.C.Cir. 1978) , cert. denied, 444 U.S. 1073 (1980).

The time limits set by Congress indicate that a reviewing

court should accord the Commission “an extra dollop of

deference.” Id. This is especially true where, as here,

11 “The Commission’s exercise of its regulatory authority must be

assessed in light of its purposes and consequences, and not by

reference to isolated phrases from previous cases.” Permian Basin

Area Rate Cases, 390 U.S. at 791 n.60.

12 See 45 U.S.C. § 845(b) ; S. Rep. No. 1240, 95th Cong., 2d Sess.

9-10 (1978).

l5a

mandate to be arbitrary, capricious, irrational or sloppy.

But strict time frames within which to work may require

an agency to make its decision on a record more slender

than desired and may render acceptable an unusually terse

explanation of reasoning. Nonetheless, we examine the

conclusions of the Commission to ensure they are based

on consideration of all salient factors and are grounded

in substantial evidence on the record.

II. PRMSA’s CHALLENGES

A. PRMSA’s Fuel Forecast

PRMSA’s forecast of rising fuel prices for the pro

occurring since it had been tabulated months earlier.

C.D. at 32-35; J.A. at 32-35. PRMSA urges that this

PRMSA’s forecast of fuel cost in large part relied

for its veracity on the forecast of an independent fore-

casting organization, Data Resources, Inc. (DRI). The

forecast proceeded in three steps. First, PRMSA calcu-

lated a correlation of .9501 between its actual fuel prices

from the first quarter 1978 through the fourth quarter

4 This correlation established that the two

tended

together, e.g., a change in one could be used to explain most of

change in the other.

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tion and the reliance on a “theoretical statistical correla-

lation” between its extrapolation and the DRI forecast.

Second, the Commission found that “dramatic changes

in world oil markets have caused [the ARAD] forecasts

to change substantially since the initiation of the pro-

ceeding.” C.D. at 33; J.A. at 33.

The Commission concluded that these deficiences would

“ordinarily warrant disapproval of PRMSA’s forecast.”

however.

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7 The Commission referred to Exhibit C of the rebuttal testi-

mony of PRMSA witness Vasquez. See J.A. at 825. This data sheet

shows the relevant PRMSA fuel prices in dollars per barrel for

1980 to be 19.26, 20.60, 21.39, and 28.03, and hence shows quarterly

increases of 1.34, .79 and 6.64. From this, PRMSA forecast a

quar-

ter. The high correlation between PRMSA’s forecast and

not be equal in amount (one pound for one inch), but rather would

show, for example, similar increases in weight for each increase

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PRMSA’s last two challenges to the FMC’s rate review

deal with the calculation of an appropriate rate of re-

turn. Theoretically, the carriers should be allowed to earn

B. The Embedded Cost of Debt

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reliable testimony on the rate of return issue in the

record.

C.D. at 14-15; J.A. at 14-15 (footnotes omitted).

PRMSA asserts that the reasons underlying the Com-

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made reasonable use of its discretion based on a severely

truncated proceeding as required by Congress, there is

little to be gained by remanding for reconsideration of

insubstantial, subsidiary errors.

The Commission also acted within its discretion when

it accepted Copan’s formulation which did not include

short-term interest. We find no indication that this

omission creates an unreasonable result, even though a

theoretically more accurate figure might have otherwise

been produced. There will always be finer and finer

adjustments to be made in a practical science such as

the estimation of rates of return. Yet at some point an

agency must make “pragmatic adjustments” in light of

the limits of agency resources, time, and human com-

prehension. If the consequences are unreasonable, they

cannot stand. FPC v. Hope Natural Gas Co., 320 U.S.

591, 602 (1944). In light of the constraints on the agency,

however, we find that this particular “product of expert

judgment” well deserves its “presumption of validity.”

patible with and possibly supportive of Copan’s figure. Finally,

the Commision stated it was unmoved by the arguments in PRMSA’s

brief

It is unimportant that, »s PRMSA notes, the brief included a

citation of PRMSA’s witres and not mere legal argument. The

FMC was not required to be convinced. We also note that PRMSA’s

brief cites its witness for the number estimated by Copan, not the

proposition that the figure was too low. See PRMSA Opening Brief

Before FMC 38-39; J.A. at 216-17. Further, the cited portion of the

Silberman testimony does not criticize the figure as too low, but

only as an estimate without basis. See Silberman Surrebuttal at 23;

J.A, at 986. On the following page the estimate is termed “appar-

ently an incorrect, low interest rate.” Jd. at 24; J.A. at 987. The

testimony gives no support or reasoning for the conclusion that the

estimate was “apparently” low. Thus, the fine shred of expert testi-

mony on which PRMSA would have us reverse the agency was not

even cited to the agency in the brief that was putatively more than

a brief. There is no indication that the Commission failed to con-

sider properly the testimony of PRMSA’s expert, and no indication

of abuse of discretion in the Commission’s rejection of the argu-

ments in PRMSA’s brief.

pes

Id. The consegences here are not unjust and unreason-

able, and the Commission’s actions are upheld.

C. Total Capital of the Reference Group

PRMSA’s final challenge concerns the interpretation

of the FMC’s General Order 11, which sets forth the

manner in which the reasonableness of a rate will be

evaluated. In pertinent part, the Order states: “The

reasonableness of a carrier’s return on rate base will be

based on a comparative analysis of the carrier’s pro-

jected return on rate base with the rate of return on total

capital earned by comparable U.S. corporations.” See

46 C.F.R. § 512.6(d) (2) (ii) 1980. The question before

us is whether the Commission properly interpreted “total

capital” when it rejected the carrier’s approach to calcu-

lation of the rate of return of the comparable, or refer-

ence group, corporations.

At the outset, we note that an agency’s interpretation

of its own regulations is owed substantial deference. In

Udall v. Tallman, 380 U.S. 1, 16 (1965), the Supreme

Court acknowledged the “great deference” shown to an

agency’s interpretation of the statutes it must administer.

The Court continued, “When the construction of an ad-

ministrative regulation rather than a statute is in issue,

deference is even more clearly in order.” Id. We will

accept the interpretation so long as it does not do violence

to the language of the regulation itself.

Since this involves an interpretation of an adminis-

trative regulation a court must necessarily look to

the administrative construction of the regulation if

the meaning of the words used is in doubt... .

[T]he ultimate criterion is the administrative in-

terpretation, which becomes of controlling weight

unless it is plainly erroneous or inconsistent with

the regulation.

Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413-

14 (1945). Applying these principles we have no trouble

upholding the Commission’s interpretation.

The “total capital” of the reference group is used to

Utilities and other regulated industries have long been

restricted to a rate base that is “used and useful” in

See

method as inconsistent with the Commission’s regulations,

LD. at 44 & n.21; J.A. at 102 & n.21, and the Commis-

sion adopted this result. C.D. at 18; J.A. at 18.

Silberman calculated the rate base of the reference

group by adding its fixed assets to its working capital,

thus excluding noncurrent assets. The noncurrent assets

™ See 46 C.F.R. § 512.6(d) (2) (ii).

84a

were excluded because they were felt to be typically

nonproductive or productive at a significantly lower rate

than current assets. BIE’s Copan recalculated the rate

base and related return with a rate base including the

noncurrent assets, saying that he was compelled to do so

by Commission regulations. J.A. at 971.

At base, this is a question of interpretation. The Com-

mission has interpreted its own regulations to preclude

the use of a surrogate rate base for “total capital” and

we find no reason to disturb this result. PRMSA argues

that its own witness at the hearings which led to the

adoption of the regulation advocated the approach in-

corporated by the regulations and that its witness in-

tended that the “total capital” of the reference group

be a surrogate for rate base. However accurate PRMSA’s

attempt to divine the intent of its own witness, the Com-

mission is not necessarily restricted in its interpretation

of its own regulation by the testimony of particular wit-

nesses presented prior to adoption. This is the first case

of which we are aware in which the Commission has in-

terpreted the regulation and we find that interpretation

to be plainly consistent with its wording.

Having accepted the Commission’s interpretation of the

Rock & Sand Co., swpra., 325 U.S. at 414. PRMSA argues

that its interpretation, and not the Commission’s, is most

consistent with the function performed by the comparable

return calculation. Barring an arbitrary or capricious

result, however, this is most appropriately a question

for the Commission in the exercise of its expertise, bal-

ancing the ease with which an interpretation may be

implemented and the accuracy of the results obtained.

It should be noted that the “surrogate” calculated by

Silberman used current and noncurrent assets rather than

operating and nonoperating assets. Although Silberman

testified that this would exclude some elements he felt

groups.” Given the uncertainties of the surrogate rate

base proposed by PRMSA’s expert, as well as the per-

vasive practicalities of expedited ratemaking, we find

no basic flaw in the Commission’s approach.

%* PRMSA attempts to show that Copan, the BIE’s witness, agreed

ere

}

Copan agreed to this assertion assuming any later adjustment for

risk. See J.A. at 543. The risk-spreading effect of the nonoperating

assets, typically of lower return and lower risk, will normally give

the reference group a different risk profile than if only its operatin .

assets are considered. Thus adjustments for risk will tend to take

into account the diffeernce between “total capital” and the cai rier’s

rate base.

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rea Rate Cases, 390 U.S. 747, 792 (1968) (“pro-

vestor and the consumer interests”); Permian

Gas Co., 320 U.S. 591, 603 (1944) (“a balancing

as the regulated industry. See FPC v. Hope

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for each of his risk estimations. J.A. at 756-67.

Both the ALJ and the Commission accepted his estimates.

GVI/PRMA next argue that the Commission gave in-

sufficient weight to the impact of the rate increases on

the ratepayers. The rhetoric of ratemaking has long

stated that it encompasses the interests of the ratepayer

In light of Mr. Copan’s expert status, this was well within

the discretion of the Commission.”

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initia Hep Hit it ;

iH Pl BIR Hy

geeedpeetaiead dans baadantiee atta

H.R. Rep. No. 1240, 95th Cong., Ist Sess. 7 (1977).

We conclude, therefore, that the FMC’s standard for

special consideration, “extreme economic dislocation re-

sulting directly from a carrier’s rate increases,” falls

within its discretion and effects a rational result. Any

lesser standard would shield the ratepayer from the realis-

tic costs of the services he used. Fairness to the rate-

payer is primarily subsumed in the limitation of rates to

RUE BOT

: 33f°

question of price collusion cannot now

Order of Investigation.” C.D. at

= 2

competition.

8-9 (1977). See also S. Rep. No. 1240, 95th Cong., 2d

Sess. 14-15 (1978). It was neither arbitrary nor unfai

B. TMT’s Burden of Proof

GVI/PRMA claim that TMT has failed to meet its

Commission. I.D. at 64-70; J.A. at 122-28. The Commis-

sion accepted TMT’s proof in two of the three areas,

based on explanations included in TMT’s brief on ex-

ceptions. C.D. at 40; J.A. at 40.

The first area concerns additional cargo that TMT

expected to gain from GCML/’s termination of service to

* But ef. Conway Corp. v. FPC, 510 F.2d 1264, 1274 (D.C. Cir.

1975), aff'd, 426 U.S. 271 (1976) (am agency may consider price-

squeeze effects of wholesale and retail rates in setting rates within

the “zone of reasonableness”); City of Batavia v. FERC, No. 80-

1072, slip op. at 41-42 (D.C. Cir. Feb. 9, 1982) (same).

aaks

While the Presiding Officer suggested that TMT

As noted above, TMT

cargo

tional cargo for TMT which is based upon a loss of

100,000 tons by GCML will be accepted.

C.D. at 40-41; J.A. at 40-41.

We find no error in the Commission’s conclusion. Al-

GVI/PRMA also challenge the basis of TMT’s pro-

jected escalation of operating costs. The Commission ac-

* Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1988).

See also Trailways, Inc. v. ICC, No. 80-1713, slip op. at 6 (D.C.

44a

estimates with citation to supporting ma-

in the record. C.D. at 41; J.A. at 41. On review

cepted

terial

of the relevant portions of the record, we again find that

the Commission had adequate support for its conclusion.

sions.” Both were attributed to the expenses incurred

the “management commissions.” C.D. at 41-42; J.A. at

41-52. The gravamen of GVI/PRMA’s challenge is that

this failure is indicative of an overall failure by TMT to

its burden of proof. They argue that the three

challenged areas establish a pattern of avoiding the issues

ytaaeaaiany

Heunlh

HLH

Hitt

much

pported

does

submissi

other

ee. the

udgment based

that generally met i

find no this

C. Consideration of Evidence and Findings

GVI/PRMA charge that the FMC failed to make find-

ings as to three material issues of fact: PRMSA’s revenue

projection, the carriers’ cost escalation factors, and the

ili EE

ieats|ealst ee ile

Hetil Sata! eed

dati Betleral (pi

bos eieza’ + : HE rf

He eee ele eat

208 3 :*

vst aL al al a5 i!

mes

lel

HE ji

fg #2425 : E

pidis saytaghas

hae elated

PEE £ HAE, 8

aa t sta] :

sel iiiy

Hie SHEE

rate base of these carriers

t is not a portion of the activity regulated. To

subject to the ratemaking juris-

theoretically it should be ex-

with trifles, however, Commission

3 yum ie ae Bagh yo I ger

costs of such “other cargo” unless it cumulatively exceeds

and

the

five-percent of gross revenues. See 46 C.F.R. § 512.3(j).

water and land transportation on a single

It is

FMC

*8 See Puerto Rico Maritime Shipping Auth. v. ICC, 645 F.2d

1102 (D.C. Cir. 1981); Trailer Marine Transp. Corp. v. FMC, 602

F.2d 379 (D.C. Cir. 1979).

footnote rejected the assertion that intermodal cargo

was likely to expand to the point where it would need to

The question of intermodal cargo involves a somewhat

different issue: the necessity of making findings on all

yt apcin sacapd Intermodal cargo is cargo that

The evidence indicated that PRMSA’s intermodal cargo

was 1.05 percent of its total carriage in 1980. See J.A. at

988. The ALJ accepted PRMSA’s cargo projection and in

aah

47a

be accounted for separately. See I.D. at 60-61 & n.26;

J.A. at 118-19 & n.26. The Commission did not specifi-

cally mention intermodal cargo in its decision.

GVI/PRMA seize upon this as evidence that neither

the ALJ nor the Commission considered the entire record,

noting that the ALJ did not refer to the arguments made

;

ii!

ait;

-nee

sie

D. Sea-Land’s “Brokerage Payments”

Finally, GVI/PRMA argue that part of Sea-Land’s

listed expenses should have been disallowed as unlawful.

FMC regulations require that carriers include in their

tariffs any amount paid as compensation to independent

ocean freight forwarders. See 46 C.F.R. §§ 510.24, 581.5

(b) (viii) (1980). Failure to include those payments in

a tariff would make the payments unlawful. Among its

test-year administrative and general expenses, Sea-Land

included a projected cost of $607,547 in “freight broker-

age.” GVI/PRMA claimed this to be an unlawful pay-

ment because no such freight brokerage was included in

Sea-Land’s tariffs. Sea-Land responded that it was a

sales expense paid not to a licensed freight forwarder

but to an independent company retained by Sea-Land to

perform its sales functions in Puerto Rico. Sea-Land

claimed this amount as an appropriate expense of sales

even though it may have been entered under the wrong

name. See J.A. at 844.

GVI/PRMA state that the ALJ refused to consider the

lawfulness of the payments because that had not been

listed as an issue in the notice for the hearings. Actually

the ALJ stated he probably could ignore the matter, bu

it was his opinion that the record was inconclusive as

the question. Further, he noted that even if the expense

were not allowed, Sea-Land’s return would be within its

allowable rate of return. See I.D. at 61-62 & n.27; J.A. at

119-20 & n.27. The Commission took a similar approach:

the trade. Nor has it been demonstrated that these

payments were in fact unlawful under the Shipping

C.D. at 38-89; J.A. at 38-39.

GVI/PRMA attack this statement as improperly plac-

ing the burden of proof on the shippers. Since the burden

of proving that rates are reasonable and just falls on the

carrier, the shippers assert that they must also prove

Efbe

siete

z Fa ®

{

the burden to the carriers. We are unswayed by argu-

ments based on isolate’ sertences, viewed out of context,

that when reasonably examined reveal that the Commis-

sion found one side more persuasive than the other.

Second, the only indication on the record that the pay-

ments were unlawful is the use of the account “freight

brokerage” by Sea-Land in its initial submissions. GVI/

PRMA complained that this appeared to be an unlawful

payment because it is unmentioned in any tariff. See

Protest of GVI/PRMA, et al. and Request for Investi-

AUTH

SHE 3 gist if

gtk iE

The Order of the Commission is affirmed, and the stay

of refunds that we ordered earlier is vacated.

5la

APPENDIX B

SERVED

September 25, 1981

Federal Maritime Commission

FEDERAL MARITIME COMMISSION

Docket No. 81-10

PROPOSED GENERAL RATE INCREASES IN THE

PUERTO RICO AND VIRGIN ISLANDS TRADES

ORDER PARTIALLY ADOPTING INITIAL

DECISION

This proceeding was instituted by Order of Investiga-

tion, served January 29, 1981, to determine the lawful-

ness of genera] rate increases filed by Sea-Land Service,

Ine. Land Transport Corporation

ene

AUR

all

jae TTR

it Ty erie

DISCUSSION

ee Oe 95-475,° the

18]

Hie

2 The Chamber of Commerce of Puerto Rico, although technically

@ party did not actively participate at any stage of the proceeding.

(the Act) (46 U.S.C.

inter alia: (a) a

BSSELSE

iti

iia

file

hardship on the affected interests represented by

Protestants and Intervenors, and, if so, to what

extent should this factor be considered in deter-

mining a reasonable rate of return for the carriers?

The February 27, 1981 Order Amending Order of In-

vestigation stated that because of PRMSA’s peculiar capi-

tal structure,‘ consideration should be given to the fixed

coverage ratio standard of reasonableness stated

in 46 C.F.R. 512.6(d) (3) in determining the reasonable-

ness of its proposed rate increases.

Due to the number of issues and subissues presented,

and their complexity, the findings of the Presiding Officer,

| anen

eatin!

Po pein

2% i Bes Ht

iF it

seater te es Cention Gh x entnaod oe tacts

tay)

falas “

: et

tai

hd?

projected future. In applying this methodology

Counsel arrived at an average rate of return

through 1980 of 12.5% with an upward adjustment

2% for current trends* and a reference group rate of

return of 14.5% for the projected year at issue. Hearing

Counsel then analyzed the business and financial risks

of each carrier as it compared to the reference group and

concluded that: PRMSA should be awarded a risk

should be awarded a risk premium of 1.5% for a total

reasonable rate of return of 16% ; and GCML should be

awarded a risk premium of 2.5% for a total reasonable

rate of return of 17%.

The Presiding Officer construed the conclusions reached

by Hearing Counsel as suggesting that on a trade-wide

*The 2% upward adjustment for current trends was based upon

overall rate of return trends from 1968-1979.

idnuaeee

HE Hie |e

ATH fala

Hil HRs

tH Th. é de :

cae HIE ht aE ah

SUPE elt

PTH Et Lizeii: 1:13!

lilies

Hea

Hee

Jets Ep

if eth TE:

TTR

393

pee

HIE

‘lt

Pau

bie

it ae

poche

S¥.sas

subEiiiel

iaful

status can be adequately considered.

GVI/PRMA argue that Sea-Land cannot be awarded

risk premiums to compensate for past shortfalls in earn-

that is greater than any previously allowed by the

mission and that it is attempting to reap excessive profits.

'TMT’s Reply finds the rate of return determinations

of the Initial Decision acceptable. GVI/PRMA’s refusal

to consider risk premiums is allegedly based upon a cost

of capital approach which is contrary to G.O. 11.

PRMSA’s Reply also supports the Presiding Officer’s

zone of reasonableness and his risk premiums findings.

PRMSA points out that both statistical and subjective

studies were utilized to support the Presiding Officer’s

determinations and it was proper for him to reject a cost

of capital approach as contrary to G.O. 11. PRMSA

denies that its 100% debt financing reduces its business

risk.

Sea-Land’s Reply challenges the allegation that none of

the rate of return testimony was accepted by the Presid-

ing Officer, pointing out that its testimony was accepted

with the exception of the premiums for past shortfalls.

group. However, it is alleged that the interest expense

estimated by Mr. Copan is reasonable in light of the

phe

of the disparities in methodology utilized by the various

parties resulted, in each instance, in rates of return

markedly favorable to the ultimate position of the party

to predict what appears

to be unreasonable levels of returns in the test year.*

7 Although Dr. Ileo surveyed rates of return from 1976-1980, he

ultimately based his rate of return findings only on the results of

1980. (Tleo Testimony at 7). His risks differential was based solely

upon the difference in the imbedded debt cost of PRMSA and that

of the average U.S. manufacturing firm. (Ileo Testimony at 10).

specifically rejected by the Commission in its promulga-

tion of G.O. 11.*

The same infirmity applies to the testimony of Dr.

Brennan, testifying for GYI/PRMA™ Dr. Silberman,

sponsored by PRMSA, substituted the G.O. 11 formula

upon an assumed correlation with Aaa bond yields. (Nadel Testi-

mony at 26). Dr. Nadel’s 3% premium to account for past short-

falls in the carriers’ rates of return is an overadjustment above any

reasonable maximum level of return. (Nadel Testimony at 29-30).

rate regulation. Galveston Elec. Co. v. Galveston, 258 U.S. 388, 395

(1922). This rule of law is not unfair to the carrier in light of the

fact that confiscatory rates cannot be established on the basis of

the carriers’ past actual profits. Board of Public Utility Commis-

sioners v. N.Y. Telephone Company, 271 U.S. 23 (1926).

* See, Financial Reports of Common Carriers in the Domestic

Offshore Trades, FMC Docket No. 78-46, 19 S.R.R. 1283 (1980).

1° See, Germaine Testimony at 18.

1 See, Brennen Testimony at 5.

12 See, Silberman Testimony at 6, Silberman Rebuttal Testimony

at 13-14.

ficiencies, the failure to follow the requirements of G.O.

11 precludes any reliance upon them.

The Presiding Officer, however, did not accept Mr.

Copan’s estimated imbedded debt cost figure utilized to

compute the benchmark rate of return for U.S. manufac-

turing firms. Mr. Copan used a 7% estimated interest

figure which he derived from his primary data base, FTC

Quarterly Reports. While certain adjustments to Mr.

Capan’s conclusions are warranted based on certain

policy considerations discussed below, the Commission

does not share the Presiding Officer’s skepticism regard-

ing the imbedded debt cost.

The bases cited for the Presiding Officer’s belief that

the 7% interest figure was “too low” were the current

cost of money, the estimate of Dr. Ileo and the argu-

ments of PRMSA in its brief.” The figure used by Mr.

Copan was not intended to reflect the current cost of

money but the average interest costs of U.S. manufac-

turing firms from 1968-1979.* It is certainly beyond

dispute that average interest rates were lower during

that period of time than they are today. Mr. Copan ad-

justed his rate of return results for current trends in the

cost of money by 2%, thereby compensating for any po

tential distortion. Dr. Ileo’s 9.5% interest estimate was

applicable only to 1980” and this supports rather than

undermines Mr. Copan’s estimate of a significantly lower

rate for an earlier period. Finally, assertions of

PRMSA’s counsel on brief do not alone impeach the

otherwise reliable expert opinion of Mr. Copan.** There-

18 See, L.D. at 38.

14 See, Copan Testimony at 8.

15 See, Ileo Testimony at 7, Table IV.

1* Even as an “unexplained” expert opinion, it is entitled to more

weight than the argument of a party in interest on brief. See 7

Wigmore on Evidence § 1922, 1988 (Chadbourn rev. 1978); Frank-

lin Supply Co. v. Tolman, 454 F.2d 10569, 1071 (9th Cir. 1972).

ri ; F Ate

atte fies Lu lily |

THEE Hla a

itt! Auta bait)

eH ut ne HRA

F Paks zie} ae i fli

‘in alia! ABH BEIT bel ifistt

TH alee nly sagecllgeet

; nl strate layed

festa! pins Hit!

FE PALE

;

ye!

abrehta Sy

“i

pegs garmrap Care thy -Pgten sagem tage ge

auiaiie GaGe abhay Ee iments eon

avoid by adopting the rate of return on rate base test

and rejecting the rate of return on equity test of reason-

ableness.” Each of these considerations operates in an

opposing manner when used in evaluating the desirabil-

ity of establishing a trade-wide maximum rate of return.”

uy!

a “given” and allows carriers who have high risk financial struc-

tures, high comparative costs and erratic earnings histories to be

allowed a higher overall return than a carrier who has a conserva-

tive financial structure, low comparative costs and a stable earnings

bila Ut: i ea

3° 434! il Li

et il ie i i

at ti hist cid nip :

te Hid bit

i HHH ET TE Hy

for each carrier are: (a) 16.5% for GCML;* (b)

15.5% for TMT; (ce) 16% for Sea-Land; and (d) 17%

for PRMSA.”

The Commission will now consider the fixed charges

coverage ratio as an alternative standard for measuring

the reasonableness of PRMSA’s rates. Hearing Coun-

achieve higher earnings through a reduction of costs rather than

sel’s suggestion that the fixed charges coverage ratio be

used as the primary test of reasonableness of PRMSA’s

rates is contrary to the requirements of G.O. 11 which

clearly contemplates the use of this standard only when

the rate of return on rate base test produces unreason-

able results." Under any of the above rate of return

analyses PRMSA is entitled to the highest rate of return

in the trade and will obtain a significant margin of net

profit over and above all operating costs and debt main-

tenance. Accordingly, it does not appear that in this

case the results of the rate of return analysis are un-

reasonable regardless of the theoretical problems pre-

sented by its application to PRMSA. The fixed charges

ard as the primary test for all cases involving PRMSA.

REVENUES AND EXPENSES

The Initial Decision

The major issues addressed in the Initial Decision,

concerning revenues and expenses of the carriers, cen-

tered around the proper methodology to be applied in

estimating the cargo tonnage to be carried in the test

year, the adjustment for inflation in the carrier’s cost

projections (exciuding labor * and fuel), and the projected

™ 46 C.F.R. 512.6(d)(1); Docket No. 78-46, supra, 19 S.R.R. at

1310.

is not recognized as a test of reasonableness in G.O. 11.

** Although noted as an issue in the Order of Investigation

there was virtually no disagreement with the carriers’ projected

labor costs, these being determined by negotiated contracts. I.D.

71.

H HAE : pagel joi

a ee

nade ae

it th if Le ar

ln nH

TRIES

$72 &93° >

amy aaa AR,

iv tet tees :

Aili fle Hi :

Eee LTTE LEE '

HULME URE

ag3 Sptgggz esis Bosbesesgs

Hi aie HHA eh

a A: wage? ais1a! i i

segment of the trade. tonnage reduction was at-

tacked by both Hearing Counsel and GVI/PRMA on

the ground that it presumed that an increase in available

in Sea-Land’s projections. With this adjustment, Sea-

Land’s rate of return was determined to be 16.28%.

a 9.8% annualized rate. Upon the suggestion of Hear-

ing Covnsel, this was raised to 9.9%. Utilizing this

inflation factor in computing Sea-Land’s expenses, the

Officer concluded that Sea-Land’s rate of re-

turn would be 16.04%, again within the zone of rea-

TMT and GCML utilized the same basic methodology

pervision

fees to Crowley Maritime Corporation (CMC), TMT’s

parent company. Also, it was noted that GVI/PRMA’s

contentions concerning the application of inflation fac-

tor to unidentified expense items and a $7.4 million over-

estimate of rate base were not adequately explained. No

findings of TMT’s rate of return were made in light of

GVI/PRMA excepted to the refusal of the Presiding

allow revisions to the submissions of PRMSA

upon actual operating results obtained since the

233

HEE THE

Ze ate i 2s

AE Hu eu al Wii ati

aH ‘lt bel papi Hie

ial Hp iit iti

2 HOHE HE

ahah HT pi

SHH HGF Fae ar tiln

3i THE HL: Hl ue!

bgstescagaggagvasg ees

HL elie

Pals elt

3 HERR

ss tadys! sheet

Hifi uipea ay

eaten

able on this basis.

Sea-Land excepts to the rejection of its projected decline

SFE

ni!

ge9232

igs

si5s3y

;

aie

believe

T4a

self-serving. GVI/PRMA submit that TMT’s supervision

fees/management commission allocation argument does

not refute the apparent double counting of expenses.

GVI/PRMA argue that even if TMT’s rate base was

not expressly put at issue in this proceeding, the signifi-

cant discrepancy in its submissions reveals the inherent

unreliability of all of the carrier’s projections and justi-

fication of its rates. The inflation factor application ex-

planations of TMT are alleged to be insufficient and in-

consistent. Finally, GVI/PRMA maintain that TMT’s

workpapers do not contain all of the information cited

in TMT’. Exceptions and that the additional informa-

tion cannot now be considered by the Commission.

TMT argues that contrary to the assertions of the Pro-

testants, it has met its burden of proof on the basis of the

sequent to the institution of the proceeding was proper

and did not violate the due process rights of the Protes-

tants. PRMSA also insists that there was no double count

of plant closings in its cargo forecasts because its market

survey took this into account. PRMSA views Protestants’

trend line analysis, to arrive at an inflation factor, as un-

reliable and subjective. The independent service used in

the Initial Decision is supported as being both objective

and historically reliable. PRMSA opposes

‘]

[

75a

that P.L. 95-475 requires that there be some limitation on

the submission of testimony and evidence in order to ex-

peditiously dispose of rate proceedings.

Finally, PRMSA supports TMT on the burden of proof

issue. It argues that TMT has in fact adequately clarified

the record. PRMSA would also have the Commission keep

in mind the impact that a rollback of TMT’s rates would

have on PRMSA, who is said to have clearly justified its

rate increase.

Sea-Land submits that its brokerage expense was a sales

commission to its Puerto Rican subsidiary and is a lawful

and proper expense. The problem with the payment al-

legedly was not as to its accuracy or propriety, but rather

its classification.

Hearing Counsel’s Replies to Exceptions are intended

to clarify its position on the issues now before the Com-

mission. The “rule of reason” standard, for the use of

actual operational data advanced in the Initial Decision,

does not go as far as Hearing Counsel originally desired,

but is deemed acceptable for the purpose of expediting rate

proceedings. Hearing Counsel admit that in applying this

standard the Presiding Officer was correct in allowing

PRMSA to adjust its projections due to the late delivery

of the PONCE and refusing to allow the Protestants to

reduce the carriers’ fuel cost projections on the basis of

the recent OPEC oil price freeze. Hearing Counsel believe

that the Presiding Officer was correct in rejecting Sea-

Land’s projected decline in tonnage in the North Atlantic

segment of its service because this reduction is incon-

sistent with gains projected in other segments of the trade.

Conclusion

Before contentions concerning the individual revenue

and expense projections of the carriers can be addressed,

certain general matters affecting all of the carriers pro-

jections must first be discussed. These are: (a) the ac-

ceptance or rejection of actual operating results obtained

after the commencement of the proceeding; (b) the ap-

76a

propriate methodology to be applied to arrive at an infla-

tion factor for all non-labor and non-fuel expenses; and

(ec) the appropriate methodology to be applied to arrive

at a predicted average cost of fuel for the test year.

The Commission finds that actual operating results

should not be accepted unless they are based upon changes

standard approximates the Presiding Officer’s “rule of

reason.”

It is particularly important that parties not be per-

mitted to supplement their cases after the close of the rec-

ord and after an Initial Decision is issued, as both Hearing

Record, issued August 14, 1981, aside from all other ques-

tions of the legality of such a procedure, it to practioally

inappropriate under the time limitations of P.L. 95-475.

The methodology proposed by Hearing Counsel to deter-

‘|

1876, ;

—Rate Increases, 18 fag oe 1441, ‘1444 (1978). This standard

has in cases arising after the enactment of P.L.

95-475. See, Matson Navigation Company—Bunker Surcharge, 19

S.R.R. 1067 (1979). See aleo Villages of Chatham and River-

ton, Illinois v. FERC. No. 80-1826, Slip Op. at 11 (D.C. Cir.

August 11, 1981).

Tla

a a9

3d) 12]

provides a sufficiently reliable [index] as a check on the

in the record. The methodology of GVI/PRMA was suc-

lished by a recognized independent forecasting service and

propriety of the carrier’s projections.

types of costs incurred by the carriers. The index is pub-

His

Hlth

HUTT

cessfully shown to be unacceptable.* PRMSA’s method-

ology is also very tenuous.

If PRMSA had established a direct relationship be-

tween its costs and ARAD forecasts, its data might be

acceptable. However, only a theoretical statistical cor-

ee ee aon eS eee

ent

=Up 2

eal

Bet

: i 3

Dr. V.

Huy 110

é ad bt:

{i tiple:

i atjet! wil

aZaaace ote

iy i

didnt Hil:

supra, at 800. yp pg sores g hace one:

for two reasons: (1) PRMSA’s last

' i. i

: ae |

$2583

fink

known

. Andie,

gga

1 eat Hi al le I i

-i Hine ! i

se li £ BEE g

‘ it Ht i at Hit

aus F a etadi

ty it EAT piles i it

; inalvel iif dal F He

ggee Salk 5 ae a

* Vasquez Rebuttal Testimony at 18-19, Exhibits F-J.

—".

$f3

ALE

reli

PhS:

gas

Wii tieaai:

all Tht fi Tet Het

get lag i

vealye rit lit HUE

radical HF nig

| i ali anil #

ne i at Hh

itt

were made,

goals,

eope

of the

Presiding

its

tor. feel

a cae ie ia neat cee

ee RH .f hig

aan tiie ondaees-talies te camman.

;

if te

any

as to

* See, LD. at 58; Roazynski Testimony at 9-10.

weal dt

tial

533

tits

Lit

«ete Of]

1 allie

i aa he be

1 HE i

PLU HBL

niet i

inl! FL i]

i ath HHT A

at 2.

* Hearing Counsel Opening Brief, Appendix A.

#5 It should also be noted that Sea-Land cancelled the increases

would have arrived at a rate of return below the 16.04% found

here.

* GCML projected a decline of 100,000 tons of cargo in the trade.

Baci Testimony at 5.

‘

adjusted for extraordinaries, was found to be reasonable.

However, one of the extraordinaries it claimed, i.e.

33%

UNE

ih i

tal

* This data is reflected in GCML’s original

the Commission pursuant to Rule 67(a) (2) pry deen

Rules of Practice and Procedure (46 C.F.R. 502.67(a) (2)).

The initial methodology used by TMT in

to be a satisfactory explanation of the “supervision” ex-

penses, it completely fails to address “management com-

missions.”

TMT’s explanation of its claimed “management com-

missions” is that CMC incurs expenses in managing all

its operating units, including the Caribbean Division, of

which $3.013 million were allocated to TMT operations in

por-

tion of the Caribbean Division expenses. CMC’s overall

operating expenses are not itemized in the record.” TMT

has therefore failed to sustain its burden of proof on this

issue, and accordingly the $3.018 million in “manage-

ment commissions” will be disallowed as an expense.”

TMT adjusted its rate base downward due to a double

counting of vessel improvements in response to protests

to its original projections. During the proceeding, it was

alleged that an additional $7 million of rate base was

overstated.“ TMT’s response to this allegation has been

** See Farmer Testimony 4-7; TMT Exceptions at 18-19.

* See Farmer Testimony, Exhibit F, p. 1; TMT Exceptions at

10-11.

% See Farmer Testimony, Exhibit G.

*! Administrative and general expenses were specifically included

as an issue in this proceeding in the Order of Investigation and

TMT bears the burden of proof on these issues.

@1.D. at 70.

esas

Based upon the above determinations, TMT’s rate of

return will be 15.88%, below the 15.5% maximum rea-

sonable rate of return permitted. Accordingly TMT’s

rate increases are found to be just and reasonable.

ECONOMIC HARDSHIP

The Initial Decision

attained

diet rf

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ess

atl

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ates i ids.

eashl2tisaysi*s

in some cases compelling but as simply not addressing

% See Docket No. 79-48—TMT—Proposed General Increases in

Rates, 19 S.R.R. 986, 988 (1979).

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Area Rate

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upon a carrier because of economic hardship considera-

tions.” However, in determining the amount of addi-

tional revenues that will be necessary for a carrier to

attract capital and compensate its investors for the risks

they have assumed, it is appropriate that the Commis-

sion consider, in carrier interests against ship-

per and other affected interests, the economic impact

that a rate increase can be expected to have on a trade."

Whenever a business entity is in a positive rate of

return situation (in excess of imbedded debt costs) there

is some degree of ability to attract capital and compen-

sate investors for risk. The question becomes what is a

uses the average earnings of U.S. businesses as a bench-

mark by which such “fairness” can be measured.” Im-

posing a rate of return below the U.S. average would re

quire a finding that the particular entity has less risk

than average. While economic hardship could be factored

into in such considerations, if risks are shown to be above

average it is highly unlikely that even a showing of ex-

treme hardship would justify a rate of return below

average. The relevant inquiry is when business risks

above the national average are shown, to what extent

can economic hardship act as a moderating factor. In

this regard attention should be focused upon the criteria

used to award “risk premiums.” To reduce business

“risk premiums” on the basis of economic hardship would

require a showing of extreme economic dislocation re-

sulting directly from a carrier’s rate increases.”

5" See Permian Basin Area Rate Cases, supra, at 812.

“PF PC. v. Hope Natural Gas Co., supra, at 608.

This would require a finding that risks assumed by carrier

investors due to the overall volatility of the trade are outweighed

aHE

Vials

omy. This would enable the Commission to ascertain the

economic impact imposed in the rate increases.

Evidence relating to specific impacts of a general rate

increase on single commodity shippers and their ultimate

consumers could also be relevant in an economic impact

inquiry. While not as comprehensive as general compara-

tive analysis, a fair sampling of the impact upon major

commodities moving in the trade is a sufficient basis upon

which inferences may be drawn as to the overall] impact

of a general rate increase.” At what point such inferences

can be drawn is a question which must be answered on an

ad hoc basis. A trade-wide rate investigation probably

presents the best vehicle for considering both general and

specific impacts.

The question then becomes what, if any, economic hard-

- ship has been established in this case and how does it im-

by considerations such as business failures, resulting unemployment

and the inability of the average consumer to obtain the basic neces-

is i IE

The Protestants did submit substantial evidence of gen-

eral and specific economic adverse impacts : esulting from

ocean freight rates on the interests they represent. They

satisfactorily established that ocean freight rate increases

have a clear adverse impact upon the costs of basic com-

modities,“ the competitive position of business interests

™ Protestants allegedly did not comply with discovery requests

asking the witnesses in the hearings in St. Thomas and San Juan

to bring with them financial data as to their individual businesses.

At least one witness complied with this request. I.D. at 88. Also,

other discovery requests may have been complied with. See GVI/

PRMA Reply Brief at 108-110.

@ Certainly, any such failure did not significantly prejudice

PRMSA’s ability to cross-examine these witnesses. PRMSA Reply

to Exceptions at 108-105. LD. at 88, n. 84. Further, no formal

impact of the rate increases will be passed on

fore, no adjustment of the carriers’ rates of return based

solely on this consideration is warranted.

Finally, whatever its merits, the question of price col-

lusion cannot now be considered in this proceeding. It

was not included as an issue in the Order of Investigation.

The tactic here of having it considered under the economic

hardship issue on the basis of a presumption of economic

injury due to a per se violation of the antitrust laws is

tenuous. First, it would require a finding of a violation

of antitrust law, which, in the context of this proceeding

mony. Transcript of May 4, 1981 Hearing at 95, 1938. Housing

be available. Transcript of May 4, 1981 Hearing at 50-54.

*® The apparel industry will be put at a distinct competitive dis-

agricultural products, and textiles, /d. at 8-11. While these inter-

ests recognize that rate increases cannot be avoided, they are

of the opinion that the impacts of the rate increases should be

y2a

is beyond the Commission’s statutory authority. Second,

Land Service, Inc. are found to be just and reasonable;

and

IT IS FURTHER ORDERED, That the proposed rate

increases to Tariff FMC-F No. 5 of Trailer Marine

Transport Corporation are found to be just and reason-

able; and

IT IS FURTHER ORDERED, That the proposed rate

increases to Tariff FMC-F No. 2 of Gulf Caribbean Ma-

rine Lines, Inc. are found to be just and reasonable; and

IT IS FURTHER ORDERED, That the proposed rate

increases to Tariff FMC-F No. 7 of Puerto Rico Maritime

Shipping Authority are found to be unjust and unreason-

able to the extent they exceed an average of 14.5% ; and

IT IS FURTHER ORDERED, That the Puerto Rico

Maritime Shipping Authority refund to any person who

was charged on the basis of its unsuspended proposed

rate increases an amount equal to that portion thereof

* See ID. at 62, n. 27.

* See footnote 69.

i ¢

Vice Chairman Moakley, concurring :

I concur with the ultimate conclusions reached by the

majority in this proceeding but differ in the manner in

which two related issues were resolved.

First, I disagree that a logical discussion of the pros

only in general terms on risk premiums. It states in per-

“... the rate of return earned by U.S. cor-

porations is computed and, where appropriate, ad-

money and relative risk.” (Emphasis supplied).

oS ee ee ae

issue of whether financial] risk premiums should, as

eral

(2) the competitive position of business interests in

relation to the mainland U.S. ; and

(3) the basic economic welfare of the offshore economy

in relation to the U.S. mainland.

However, this evidence is not found persuasive in this

suspended increases because the rates would not

der all shipper input irrelevant.

by protestants is relevant to these particular

iyi

s28

;

97a

DOCKET 81-10

Sea-LAND SERVICE, INc.,

TRAILER MARINE TRANSPORT CORPORATION,

GULF CARIBBEAN MARINE LINEs, INC. and

PUERTO RICO MARITIME SHIPPING AUTHORITY,

PROPOSED GENERAL RATE INCREASES IN THE

PUERTO RICO AND VIRGIN ISLANDS TRADES

Commissioner Richard J. Daschbach

SEPARATE OPINION

Judge Kline’s July 20, 1981 Initial Decision is fully dis-

positive of the five issues delineated in the Commission’s

January 29, 1981 Order of Investigation and Hearing

(see hc adnotes at pp. 1-2 of Initial Decision) and I adopt

its findings that the rate increases of Sea-Land, the Puerto

Rico Maritime Shipping Authority, and Gulf Caribbean

Maritime Shipping Lines are just and reasonable. I fur-

ther find that TMT’s rate increase is just and reasonable.

In view of the Initial Decision’s thorough treatment of

the salient issues in this proceeding, the Commission’s ex-

tensive re-examination of them is, in my judgement, un-

necessary and duplicative.

98a

APPENDIX C

Federal Maritime Commission

Served July 20, 1981

Exceptions Due 8-4-81

Replies to Exceptions Due 8-14-81

FEDERAL MARITIME COMMISSION

No. 81-10

Sea-LaAnD SERVICE, INC.,

TRAILER MARINE TRANSPORT CORPORATION,

AND GULF CARIBBEAN MARINE LINBs, INC.

PROPOSED GENERAL RATE INCREASES IN THE

PUERTO RICO AND VIRGIN ISLAND TRADES

This is the first trade-wide general-revenue investigation

under Public Law 95-475, which imposes strict time

limits. It investigates general-rate increases of 16 to

18 percent filed by four carriers, PRMSA, Sea-Land,

TMT and GCML. The huge scope of the proceeding

with one possible exception (TMT) the carriers have

adequately explained their methodologies and justi-

fied their rate increases. More specifically I find:

(1) An exact rate of return cannot be fixed with as-

surance on this record because of deficiencies in all of

the expert witnesses’ testimony. However, the closest

approximation is provided by BIE witness Copan and

confirmed by others to show that 16 to 17 percent up

to about 18 percent for PRMSA, primarily, repre-

sents a zone of reasonableness. Witness Copan’s rec-

ommendations would have been followed more closely

but for a significant omission, which he and BIE

should cure on exceptions. This omission refers to an

estimate of 7 percent for interest which he made when

deriving a benchmark rate of return from a group of

industries. For PRMSA, consideration of the fixed

charges coverage ratio is necessary as a check but, as

Mr. Copan shows, the ratio justifies PRMSA’s rate

increases.

(2) All respondents except possibly for TMT have

generally provided adequate explanations showing

that their revenue and cargo volume methodologies

are reasonable. Protestants’ alternative methodolo-

gies are not found to be persuasive or more reliable

but seem to have been improvised and based on ques-

tionable techniques.

(3) The carriers’ calculations of fuel and increases

in other costs are reasonable under the circumstances.

Protestants’ alternative calculations are found to be

deficient, largely improvised, and based upon doubt-

ful methodologies and expedient adjustments.

(4) Economic hardship cannot be measured with as-

surance in a general-revenue case and the evidence

in this case is inconclusive. Essentially individual

shipper testimony is relevant in an individual com-

modity rate case, not a general-revenue proceeding.

100a

Individual shippers with particular rate problems who

testified in this proceeding should be steered to proper

negotiations or relevant proceedings to seek relief.

(5) Protestants’ criticisms of certain aspects of the

carriers’ cases are found to be valid. These refer to

certain projections of Sea-Land, add-ons to rate of re-

turn because of bad past years, the effects of budget

cuts, PRMSA’s use of a “surrogate” G.O. 11 formula,

and to some extent, its attempt to compensate for its

tax-exempt status. These criticisms, however, after

corrections, do not alter the finding that the rate in-

creases are justified. However, protestants’ criticism

of TMT’s curious change in its prediction from that

originally presented to the Commission, and certain

other matters not adequately explained, warrant a

finding that TMT has not proven its projections to be

reasonable, absent satisfactory explanation on excep-

tions to the Commission.

(6) Certain critical recommendations are made for

the sake of efficiency in future rate cases. These con-

cern the need to clarify G.O. 11 regarding the formula

and data to be used, the need for Commission Orders

to specify the scope of the issues; the need to formu-

late a rule governing admissibility of later evidence;

and the need to encourage shippers and carriers to

seek solutions to individual rate problems in other

than general-revenue proceedings.

Amy Loeserman Klein and T. Scott Gilligan, for re-

spondent PRMSA.

Donald J. Brunner, for respondent Sea-Land Service,

Ine.

Michael Joseph, for respondents TMT/GCML.

Edward J. Sheppard, George J. Weiner, and April C.

Lucas, for protestants GVI/PRMA.

10la

Daniel J. Sweeney and Steven J. Kalish, for protes-

tant DTPTC.

Walter R. Fournier, for protestant Chamber of Com-

merce for Puerto Rico.

John Robert Ewers, Alan J. Jacobson and Charles C.

Hunter, for Bureau of Investigation and Enforce-

ment.

INITIAL DECISION *‘ OF NORMAN D. KLINE,

ADMINISTRATIVE LAW JUDGE

This proceeding is the first general trade-wide investiga-

tion of general rate increases filed in the United States

Atlantic and Gulf-Puerto Rico and U.S. Virgin Islands

trades in approximately seven years, the last such investi-

gation (Docket Nos. 71-80, 71-42, 71-43) having concluded

in 1974." It began after general rate increases were filed

by the Puerto Rico Maritime Shipping Authority, Sea-

Land Service, Inc., Trailer Marine Transport

The rate increases were all filed between November 26,

1980, and December 5, 1980, and were designed to become

effective for Sea-Land on January 25, 1981, for TMT/

GCML on January 29, 1981, and for PRMSA, on Febru-

ary 3, 1981. However, for various reasons, only GCML’s

rates went into effect as scheduled, the others being de-

ferred so that ultimately PRMSA’s and Sea-Land’s rates

became effective on February 27, 1981, and TMT’s on

March 3, 1981." The rate increases subject to investiga-

tion were 18 percent for Sea-Land, 16 percent for TMT/

GCML, and a weighted composite increase of 17.2 percent

for PRMSA consisting of an 18 percent increase in the

North Atlantic ports and 16 percent in the South Atlantic

and Gulf ports. The rates were not suspended but were

made the subject of investigation under section 18(a) of

the Shipping Act, 1916, and sections 3 and 4 of the Inter-

coastal Shipping Act, 1933. These rate increases were

published in supplements to two of Sea-Land’s tariffs

(FMC-F No, 34 and No. 58) ; one of TMT’s (FMC-F No.

5), one of GCML’s (FMC-F No. 2) and PRMSA’s tariff

FMC-F No. 7. Interestingly, Sea-Land’s Tariff No. 53 is

an intermodal tariff applying between Canadian ports and

San Juan, Puerto Rico, a tariff which the Commission

has decided is a domestic rather than foreign tariff. See

Special Docket No. 556, Pan American Industries, Inc. v.

Sea-Land Service, Inc., 18 SRR 1697 (1979); but ef.

Special Docket No. 695, Application of Sea-Land for the

Benefit of the Otto Gerdau Co., 19 SRR 1424 (1.D. 1980,

FMC., April 7, 1980). In any event the rate increases in

the Canadian tariff were ultimately canceled by Sea-Land

and never went into effect.

* There appears to be some confusion about the effective date of

Sea-Land’s increases probably caused by so many postponements

and special-permission applications which affected the various dates

of the rate increases. BIE states that Sea-Land’s changes became

effective on March 3, 1981 (BIE opening brief, p. 1), together with

TMT’s. However, the Commission's tariff records indicate that Sea-

Land’s increases in its tariff FMC-F No. 34 went into effect on

February 27, 1981. (See Supplement No. 26 to cited tariff.)

Protests to the proposed rate increases were filed by

the Government of the Virgin Islands (GVI), the Puerto

Rico Manufacturers Association (PRMA), the Chamber

of Commerce of Puerto Rico, and The Drug and Toilet

Preparation Traffic Conference, Inc. (DTPTC). The com-

bined protestants contended that the rate increases would

have a serious adverse economic impact on Puerto Rico

and the Virgin Islands‘ and challenged the carriers’ sup-

porting materials filed with the rate increases as being

speculative, inaccurate, and unreliable especially as re-

gards proper allocation of rate base and expenses, rea-

sonableness of projections of cargo volume and revenue

and the reasonableness of the rate of return.

The three carriers originally named as respondents re-

plied to the protests in defense of their rate increases,

citing Commission case law and regulations in support of

their financial exhibits and asserting the need for in-

creased revenue so that the islands could enjoy the bene-

fits of reliable service by financially healthy carriers.

PRMSA also defended its supporting materials filed with

its financial case but encountered a problem with its

submissions relating to projections based upon the as

sumption that it would acquire the ATLANTIC BEAR,

an acquisition which did not oceur. After PRMSA had

it attempted to show that deployment of the two Trans-

the

which should have been presented back in December with

the original case. The Commission therefore rejected

PRM" 4’s tariff filings for failure to comply with Rule 67.

See Order, 20 SRR 838. However, the Commission later

permitted PRMSA’s rate increase to become effective on

February 27, 1981, on special permission.

* Protestant DTPTC has not contended the issue of economic im-

pact in litigating this case but has joined other protestants in

the other issues.

104a

The Reasons for the Hearing

In ordering a hearing the Commission recited a num-

ber of facta which apparently convinced them of the

need for such a proceeding. The Commission cited the

protestants’ contentions generally regarding the carriers’

speculative and unreliable financial submissions and

specified that protestants had challenged the carriers’

projected labor costs, Jo nese eee egy

v8 gar earl my and general expenses. The Commis-

sion stated that “these matters will be made an issue in

allowing a higher than average rate of return because

the Commission stated that “such considerations must be

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* By case law the Commission has emphasized that it will not only

narrow issues but will read its Orders narrowly to make sure that

unintended, extraneous issues are not litigated, however important

the issues may appear to be. See Trailer Marine Transport Corp.—

Proposed General Increase in Rates, 19 SRR 985, 987-988 (1979),

without opinion by the D.C. Circuit Court of Appeals

of the Virgin Islands v. F.M.C., January 30,

become onerous causing great expense and probable

exhaustion on all litigating parties. I now turn to the

specific means employed to deal with the problems in this

case.

Modern Procedural Techniques Employed to

Meet the Problems Posed by the Size of

This Case and the Governing Statute

At the outset it was apparent that because of the many

issues and parties in this trade-wide investigation every

modern administrative technique conducive to rapid de-

velopment of an evidentiary record would have to be em-

ployed. The basic problem, of course, is that P.L. 95-475

requires completion of the “hearing” within 60 days. Con-

gradual states. myself and the parties to

grasp the technical issues on an ongoing basis and to

understand the evidentiary record while it was being

compiled. The advantage to such a procedure is that the

presiding judge can utilize the post-hearing briefs much

more rapidly than is possible in the traditional oral,

trial-type system of hearings when all too often a baffled

F.2d 718, 722-723 (D.C. Cir. 1974); 8 Davis, Administrative Law

Treatise (2d Ed. 1980) §§ 14.1-14.5; Senate Report to P.L. 95-475,

pp. 2, 9, 14-15; United States v. Florida East Coast Railway Co.,

410 U.S. 224 (1978); Prettyman, Trial by Agency, The Va. Law

Review Assoc. (1959) pp. 30-35.

in a more adequate record being produced in a shorter

space of time. McCormick, cited above, p. 857.

Accordingly, the record in this proceeding was developed

essentially by having each party present its direct written

case on March 10, rebuttal written case on April 10, and

written surrebuttal on April 23. Interspersed were four

formal prehearing conferences and one informal con-

ference at which time discovery or other pressing mat-

ters had to be resolved. At the final conference, it was

witness (Mr. Copan, BIE’s first expert) would be

ranted. Such limited cross-examination conducted

counsel for PRMSA was held on April 29. Thereafter,

‘i

als

Virgin Islands, on May 4, and in San Juan, Puerto Rico,

phase was thence concluded.

the first two witnesses who testified in St. Thomas were the Gov-

117a

The Evidentiary Record and Post-Hearing Briefs

The evidentiary record that was developed by the

techniques described above is massive. It consists of the

direct, rebuttal, and surrebuttal written testimony of more

than 30 witnesses, mostly experts in their respective fields

and amounts to several hundreds of pages in the aggre-

gate. In addition there are three volumes of transcript

cross-examination of witness Copan and the

examination of the witnesses testifying in St. Thomas

and San Juan. Incidental exhibits and documents of one

type or another were also admitted into evidence. For

ready reference, an outline showing these various ex-

hibits and testimony has been compiled and printed as an

appendix entitled “Exhibit A” to PRMSA’s opening brief,

June 1, 1981. The outline comprises seven pages. Fol-

lowing the close of the evidentiary record, six opening

and reply briefs were filed many of which were huge. In

the aggregate these twelve briefs total many hundreds of

pages.

Fundamental Principles of Law Governing

Administrative Rate Cases

Because this case involves controversy among so many

expert witnesses which I must attempt to resolve although

I am without personal technical or legal assistance as I

have mentioned and because P.L. 95-475 imposes strict

time constraints which disable me from explaining my

findings in detail or recalculating financial exhibits con-

sistent with my findings on methodology, I must resort to

fundamental principles of law as an aid in determining

the many technical issues. These principles establish that

rate cases are technically akin to rulemaking proceedings,

ernor and a Senator rather than smal] business persons gener-

ated some degree of controversy as did the introduction of evidence

by PRMSA on the last day of hearing. Appropriate rulings dealing

with these problems have been issued. (See PRMSA’s Motion to

Strike Certain Portions of Testimony of Governor Luis and Senator

Williams Denied in Part, and other rulings, June 10, 1981.)

1188

that it is impossible to make precise findings in rate cases,

that the burden of proof is merely a preponderance of the

evidence rather than a clear and convincing showing, and

that expert witnesses, like all other witnesses, must base

their testimony upon reliable source data and reasonable,

logical thinking if their testimony is to be followed.

APA, 5 U.S.C. 551 (4); Alaska S. Co. v. FMC., 356

(2d Ed. 1979) pp. 5, 322-823. Although modern case law

iH i

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slisticies

to hurry through to decision in

adversariness under P.L. 95-475. I have, however, p

ously recommended that G.O. 11 be revised and clarified.

party

validity of that position by a preponderance of the evi-

dence. As many parties have continually shown by cita-

tion of many cases, “ratemaking is not an exact science,”

and only a reasonable approximation is required. Among

the many cases in which this basic principle has been

recognized are the following: Increased Rates on Sugar,

119a

7 F.M.C, 404, 411 (1962); Alcoa Steamship Company—

General Increase in Rates in the Atlantic Gulf Puerto

Rico Trade, 9 F.M.C. 220, 231 (1966) ; Investigation of

Increased Sugar Rates, 9 F.M.C. 326, 330 (1966); Sea-

Land Service, Inc.—Increase in Rates in the U.S. Pacific

Coast/Puerto Rico Trade, 15 F.M.C. 4, 9-10 (1971);

TMT Corp.—Rates, 19 SRR 177, 187-188 (LD. 1979;

FMC May 16, 1979); Matson Navigation Co.—Bunker

Surcharge, 19 SRR 1065 (1979). The Supreme Court

has also recognized that pinpointing is not feasible in

Statutory reasonableness is an abstract quality repre-

sented by an area rather than a pinpoint. It allows a

substantial spread between what is unreasonable

because too low and what is unreasonable because too

high. FPC v. Conway Corp., 426 U.S. 271, 278

(1976), cited in Communications Satellite Corp. v.

F.C.C., 611 F.2d 883, 892 (D.C. Cir. 1977).

In a similar vein the Supreme Court has stated:

What will constitute a fair return in a given case

is not capable of exact mathematical demonstra-

tion .. . United Railways & Elec. Co. v. West, 280

U.S. 234, 249, 251 (1980).

Moreover, the courts have been tolerant when agencies

have employed methodologies that admittedly contain in-

firmities, stating that “it is the result reached not the

method employed which is controlling” and “[i)t is not

theory but the impact of the rate order which counts”

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™ As the Commission stated in the case cited:

This type of issue would have been a perfect subject

for rulemaking, specifically, a rulemaking proceeding to

amend G.O. 11. Because G.O. 11 is itself not fully infor-

mative and because the comparable earnings standard

itself has deficiencies and uncertainties, the record con-

tains different opinions by a half dozen expert witnesses

on this question.

Effective March 28, 1980, the Commission promulgated

its revised G.O. 11. See Docket No. 78-46, General Order

11, Revised, slip opinion, January 14, 1980, 19 SRR 1283.

Among other things, the Commission adopted the so-called

“comparable earnings” test to determine reasonableness

of carriers’ rates of return. The Commission stated:

[t]he Commission intends to continue to test the

reasonableness of a carrier’s rates based on a “com-

parable earnings analysis” which will utilize as its

benchmark the rate of return on total capital earned

by comparable U.S. corporations. The Commission

will not limit the comparable earnings analysis to

firms in the same geographic region. There will be

some cases in which the C.mmission will consider a

predetermined hypothetical capital structure to de-

termine financia. risk. Slip opinion, p. 65.

After rejecting alternative tests such as “opportunity

cost,” the Commission stated:

Therefore, the Commission has determined to retain

the comparable earnings test in its final rules so as

to account for, inter alia, various sources of financ-

ing and differences in risk in judging the reason-

ableness of a carrier’s rates. Id., p. 67.

This is, of course, not the place to challenge the Com-

mission’s choice of the comparable earnings test. As some

authorities have pointed out, however, this test is consid-

ae tee gee sais at com CO waa

tion test has been preferred. See James C.

Principles of Public Utility Rates (Columbia Univertity

127a

Press, 1981), p. 257; Phillips, The Economics of Regula-

tion ( D. Irwin, Ine. 1965), p. 298.

I do not have the time to write a treatise on the two

tests, how they developed, or how the courts deal with

them. I can only define them briefly and refer the reader

to the authorities cited for a complete discussion.

Briefly, for ready reference, one authority defines the

two tests as follows:

First, the “cost of capital” standard, under which

the rate of return should enable a company to attract

capital on terms that will (a) maintain its credit

standing, (b) protect its financial soundness, and

Second, the “comparability of earnings” standard,

under which the rate of return to equity owners

“should be commensurate with returns on invest-

ments in other enterprises having corresponding

risks.” Phillips, cited above, p. 268.

Another authority defines the two tests as follows:

Two tests of a fair rate of return have been men-

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opportunities for investment, the money market

and business conditions generally.

As Bonbright notes in his discussion of the Court’s

formulation of the comparable earnings standard in

Bluefield and, later Hope Natural Gas (J. Bonbright,

Principles of Public Utility Rates, 257-58 (1961)

(emphasis added) ] :

Here, as in the Hope case, are suggested not

just one standard of a fair rate of return but

that the courts have not intended to set up two

conflicting standards of reasonable utility rates.

Instead, the credit-maintenance or capital-

attraction standard is primary, while the com-

parable-risk standard is secondary and ancillary.

That is to say, the fair rate of return is a rate,

the allowance of which will permit the company

on the competitive market, could expect to se-

cure on investments in enterprises of compar-

able reputed risk.

As I have discussed above, Congress intended that the

Commission issue, substantive guidelines for determining

rate of return questions and intended, furthermore, that

the Commission revise these guidelines from time to time.

It is extremely important, however, to understand that

these guidelines (present in G.O. 11 revised) are intended

to have substantive, i.e., precedential effect, and are not

merely suggestions. Otherwise the same issues keep get-

ting litigated in case after case. G.O. 11, of course, has

not selected the first test, ie., “cost of capital,” “capital

attraction” or sometimes called the “maintenance of

credit” test.

It is important to bear in mind that the Commission

has chosen “comparable earnings” rather than the other

test and that the choice must be followed unless or until

G.O. 11 is revised by the Commission. This is important

because, in my opinic=, a good deal of certain experts’

Having made the choice of the “comparable earnings”

test, we must now live with it in this case and deal as

best we can with its deficiencies. (I might add that the

other test, i.e., cost of capital, has also been criticized for

several reasons, e.g., use of earnings-price ratios, circu-

which have become terribly obvious in this case. The

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“appropriate” rate of return. They are all based on

assumptions and judgments with respect to risk, cap-

ital costs and other critical determinants of an ap-

propriate return.

I also agree with Dr. Nadel, another expert sponsored

by Sea-Land and TMT/GCML, who stated:

In summary, I agree with Dr. Germane, as appar-

ently does Mr. Copan, that the “question of compara-

bility can never be resolved clearly.” (Surrebuttal-

Nadel, p. 7).

zone could be determined. However, after studying the

recommendations of the six expert witnesses who all reach

different conclusions, as summarized in the table below,

it is apparent that there is neither no single number that

I can rely upon nor is there anything but a vague range

that I can presently ascertain. Unfortunately

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problem with the cost-of-capital approach. See Docket

No. 78-46, 19 SRR at 1808-1309.

Interestingly, as BIE notes in their reply brief (p. 2)

TMT/GCML seem to have acknowledged that BIE wit-

ness Copan correctly followed G.O. 11 methodology most

closely although they suggested that their approach was

a useful alternative. Of course, the Commission has al-

ready decided against such an alternative in the cited

rulemaking proceeding.

The major battle in this hectic case has been that be-

tween PRMSA, the leading carrier and its witness, Dr.

Silberman, and GVI/PRMA and its leading witness, Mr.

Joseph F. Brennan. I have serious problems with Mr.

Brennan’s approach, namely, his heavy orientation to-

ward utilities, money market, and cost-of-capital tests

rather than ocean common carriers and comparable earn-

ings, the idea that his reference group may have already

included “premiums” so that no separate risk adjustment

is necessary, and the idea espoused by GVI/PRMA that

the “comparable earnings” test is supposed to be a maxi-

mum without upward adjustment for any risk. I have

equally difficult problems with Dr. Silberman’s work.

Previous Commission decisions, Docket No. 78-46, and

the Order in this case seem clearly to contemplate that

once a benchmark rate of return is determined from a

reference group, an upward adjustment for peculiar risks

to the carriers should be made. True, G.O. 11 states that

an adjustment for risk shall be made “where appropri-

ate.” See 46 CFR 512.6(d), Docket No. 78-46, slip opin-

ion, p. 26, rules section. However, the authorities cited

above associate comparable earnings with determination

of risk factors. As Phillips states (Phillips, The Eco-

nomics of Regulation), cited above, p. 297: “The crucial

element in the ‘comparable earnings’ standard is the

measurement of risk.” See also Welch, Cases and Text

on Public Utility Regulation, cited above, pp. 488-489.

The definition of the “comparable earnings” test as seen

139a

parable to the regulated company that no adjustment for

be necessary. However, the Commission has

continually adjusted for risk as have other agencies be-

cause the reference group that is so comparable is very

difficult to find. Thus, in Docket No. 78-46, the Commis-

sion specifically stated that in retaining the “comparable

earnings” test, the Commission would account for, among

other things, “differences in risk in judging the reason-

ableness of a carrier’s rates.” Docket No. 78-46, slip

opinion, p. 67. Compare also the fact that regulatory

commissions normally utilize wide varieties of reference

groups for comparison purposes, e.g., broad groups of

industrials, utilities, railroads. See Phillips, cited above,

p. 299 n. 128." In previous Commission rate cases, com-

P.R. and V.I. Trades, 19 SRR 669 (1.D.; F.M.C. Sept.

19, 1979), comparison with industries analyzed by Stand-

ard and Poors, including airlines, common carrier truck-

ing, and total transportation, was used. See also

PRMSA—General Increase in Rates, 18 SRR 794, 800

(L.D. 1978) ; Matson Navigation Co.—Rate Increases, 18

SRR 1351, 1354 (1978); 18 SRR 1441, 1445 (1978). In

the Order instituting this case, the Commission stated:

In addressing this issue [i.e. rate of return] the

Commission generally takes into account: (a) the

17 As this reference shows, in the leading case, FFC v. Hope, broad

groups were used for comparison purposes. Also, even though the

reference group is supposed to be “truly comparable,” adjustment

for individual risk is apparently still allowed.

In short, the practice of making adjustments for risk

and in this Commission, upward adjustments after refer-

ence group bench-marks have been ascertained, seems

firmly embedded. Mr. Brennan, however, would make no

such adjustments. He would not do so because he or his

counsel apparently believes that his group of Standard

and Poors 400 industrials have already been given a

premium for risk and because, as his counsel argues on

in a new rationale not previously discussed by Mr.

Brennan, the “comparable earnings” test was originated

1923 when the utilities were a less risky group than

GVI/PRMA’s contentions,

°F

;

Brennan makes no risk adjustments at all. (Sea-Land’s

and TMT/GCCL’s witness, Dr. Nadel, also made no risk

adjustment but did so because he selected a reference

group that, in his opinion, would be truly comparable

based on several enumerated criteria.)

The reason why Mr. Brennan will make no upward

adjustment to his benchmark rate of return of 15 percent

relates apparently to his fundamental grounding in util-

ity, money market and cost-of-capital principles. Mr.

formulation of General Order 11 (Docket No. 78-46) as

far as I can determine, nor does that regulation or any

Commission rate case of which I am aware find his

theories relevant. Even if I did not agree that, as

PRMSA pointed out, Mr. Brennan has taken what ap-

pears to be an inconsistent position in certain respects in

a Pennsylvania utility rate case, I find that there are

18 GVI/PRMA’s attempts to persuade me that utilities such as

AT&T are more risky than PRMSA seem very strained and ‘the

argument is very hard to swallow. As the court stated in Communi-

cations Satellite Corp. v. F.C.C., 611 F.2d at 910: “As for the

present [1977] it is a truism that AT&T generally is not a risky

investment. .. .”

142a

good and sufficient reasons to find that Mr. Brennan’s

approach is unacceptable in this proceeding. These rea-

sons are well presented in BIE’s reply brief, pp. 28-31,

in Mr. Copan’s rebuttal testimony, pp. 72-75, in Dr.

Germane’s surrebuttal testimony, pp. 25-33, and in

PRMSA’s reply brief, pp. 18-24. I have no time to dis-

cuss the many points made by these parties and witnesses.

Very briefly, however, they show that Mr. Brennan’s

concern over how the marketplace has already given

reference group companies some type of premium to main-

tain the market value of the companies’ assets above

book values is irrelevant in Commission rate cases con-

ducted under the comparable-earnings test. Mr. Copan

cites several authorities which demonstrate that a market-

to-book value analysis is not only irrelevant to this Com-

mission’s rate regulation principles but it is dangerous

anyway for any regulatory agency to attempt to con-

sider such factors. (Sce Copan’s rebuttal testimony, p. 74,

citing Bonbright.) On brief, GVI/PRMA strive valiantly

to persuade that there is a fundamental principle in rate-

making that supports Mr. Brennan’s irrelevant market-

to-book value analysis and that is that a regulatory

agency starts from the basic proposition that a regulated

company is only entitled to earn a sufficient return to

maintain the integrity of its assets, i.e., “to maintain the

integrity of its original-cost rate base.” (GVI/PRMA

reply brief, p. 18.) This sounds appealing as do so many

skillful arguments raised by GVI/PRMA in their post-

hearing briefs (after all, shouldn’t any carrier be able to

maintain the integrity of its assets?), but again they do

not withstand the particular rebuttal evidence and argu-

ments. As PRMSA, for one, shows (PRMSA’s reply

brief, pp. 18-24) this whole market-to-book idea is a tech-

that belongs in a cost-of-equity-capital study, Mr.

B continually uses cost-of-capital theories and

methods, ultimately shows that he is really disagreeing -

with the Commission’s comparable-earnings test, and the

theory appears on brief for a new purpose, namely, to

more, as PRMSA points out on brief, the theory was

the other carriers are operating at

in reference groups. I find

t with Dr. Silberman, Mr.

. Germane that PRMSA’s and other car-

measurably higher than those of the refer-

that the Commission has indeed recog-

techniques employed in this case to measure

business risk. See cases cited in PRMSA’s

pp. 10-11, and the discussion refuting Mr.

Brennan on the risk issue in PRMSA’s reply brief, pp.

8-11. Nor do I agree with GVI/PRMA’s arguments on

brief criticizing expert witnesses other than their own

Mr. Brennan for subjectivity in evaluating risk factors.

I think it is clear that every witness is guilty of some

degree of subjectivity, including Mr. Brennan. See

PRMSA’s reply brief, pp. 25-26. Accordingly, I find Mr.

Brennan’s recommendation of a 15 percent rate of return

to be unacceptable.

Having found that the more extreme witnesses on the

edge of the table have not been persuasive, I now turn to

the more moderate witnesses nearer to the center of the

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Mr. Copan apparently estimated that interest

would amount to 7 percent of long-term liabilities, the

latter figure published in the FTC-QFR reports. (See

surrebuttal testimony of Dr. Silberman, p. 23, and

Coepan’s rebuttal testimony. Schedule 3.) Moreover, Mr.

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Mr. Copan’s period of 1974-1979. He found a benchmark

cial risk, nor did Mr. Copan who also awarded PRMSA

reply brief, pp. 2-39, although I do not agrec with all of

for tax-exempt companies with huge interest costs such as

intended to allow something like Dr. Silberman’s “surrogate” rate

base formula as applied to reference groups when it issued General

brief cited is not convincing, however. True, the Commission

the carrier) with “return on total capital” (for the reference group

of “comparable U.S. corporations”). Mr. Copan and BIE have cited

authorities including even Dr. Silberman who recognize that return

on invested capital is a proper formula. Dr. Silberman’s

ments in Docket No. 78-46 do indeed seem to

group, which PRMSA does in this proceeding. Therefore there

was no reason for the Commission in Docket No. 78-46 to worry

about application of a “total-capital” formula to reference groups.

All that the Commission really did was abandon the return-on-

equity formula which was complicated by debt/equity ratio prob-

lems. But the Commission did not say that the “total capital”

formula as applied to the reference group of “comparable U.S.

corporations” could be a “surrogate” collection of assets and work-

158a

have correctly demonstrated, this formula simply does not

follow the requirements of General Order 11. Rather than

(limited to manufacturing companies) and time period

(fiseal years 1975-1980 rather than 1978-1980). The

results are shown in Mr. Copan’s Schedule 6, attached to

his rebuttal testimony, as discussed in that testimony on

the carrier than that earned by the reference group. (See

PRMSA’s opening brief, pp. 41-43, and hearing exhibit

7.) PRMSA argues that because of this failure of Gen-

eral Order 11, “there can be no true comparability be-

tween a carrier and the reference group in a comparable

earnings study unless the reference group’s data is [sic]

adjusted to reflect a return comparable to the return on

rate base. If it is not, either the carrier or the public is

penalized by the exclusion from G.O. 11, of nonoperating

assets and nonoperating income.” PRMSA’s opening

brief, p. 46, Mr. Copan and BIE have answered this criti-

cism of General Order 11 on the grounds that companies

are competing for capital on a total capital basis and

}

(See BIE’s opening brief,

.) Whatever the merits of PRMSA’s argument,

however, the fact remains that this is not the proceeding

amend General Order 11. Moreover, as far as I can

ne, the record does not show what kind of distor-

tion was produced by application of the General Order 11

formula to the reference group. Therefore, I must find

that General Order 11 simply does not authorize a formula

for application to a reference group in which the de-

nominator consists not of total capital but of “net fixed

assets and working capital.”™ Both BIE and GVI/

= 1 have only a brief moment to comment further on this dispute

between BIE and PRMSA as to the meaning of “total capital.”

BIE argues (reply brief, pp. 21-23) that “total capital” is a very

simple term and simply means “total.” Therefore, Dr. Silberman’s

formula is incorrect. Although I agree with BIE that Dr. Silber-

man’s formula does not comply with G.O. 11, BIE’s argument in

this particular regard is too quick. The G.O. 11 formula uses “total

capital” as the denominator without further definition but, as Mr.

Copan’s testimony and BIE elsewhere demonstrates, this really

means “total invested capital,” or long-term liabilities plus equity.

But such a definition omits current liabilities from the balance

coverage ratio. This topic which deserves a treatise by

itself and a separate rulemaking proceeding for full con-

templation does not lend itself to a solution in this hectic,

time-constricted, multi-issue proceeding. The battle here

is waged primarily between GVI/PRMA and PRMSA

with BIE, although apparently agreeing somewhat with

GVI/PRMA, suggesting a solution, namely, to junk the

rate-of-return approach as far as PRMSA is concerned

and turn to the fixed charges coverage ratio. For a dis-

cussion of the battle by the parties, see GVI/PRMA’s

reply brief, pp. 25-30; GVI/PRMA’s opening brief, pp.

249-252; PRMSA’s reply brief, pp. 31-838; PRMSA’s open-

ing brief, pp. 19-20; BIE’s reply brief, pp. 26-27.

The battle stems from Dr. Silberman’s attempts to ad-

just the General Order 11 methodology (as he viewed it

using his “surrogate” rate-base formula) for the fact

that PRMSA is a tax-exempt company with a huge in-

terest expense, i.e., unlike any company in the FTC-QFR

reference group. Dr. Silberman made such an adjustment,

156a

arriving at a benchmark figure of 16.68 percent as an

equivalent rate of return for a reference group company

before interest and, of course, before taxes. All other

benchmark figures. Thus, at the outset, Dr. Silberman’s

benchmark rate of return is higher, as GVI/PRMA note.

(As I discussed above, Mr. Copan reworked Dr. Silber-

man’s table to conform it to the General Order 11 formula

and made other corrections, reducing the before-tax bench-

mark from 16.68 percent to 14.70 percent. This exercise

did not eliminate the tax-exemption and high interest

problems affecting PRMSA, however.)

PRMSA and Dr. Silberman believe that the before-tax,

before-interest benchmark of 16.68 percent is proper and

shows what a tax-exempt company like PRMSA would

have to earn on its rate base to earn the same amount

that would be earned by a taxable company achieving a

before-tax return of 20.67 percent, which is the weighted

average return which Dr. Silberman found to have been

experienced by his reference group (under his methodol-

ogy) (PRMSA’s opening brief, p. 19). PRMSA further-

more believes that by allowing PRMSA a benchmark (i.e

before markups for risk factors) return of 16.68 percem,

before interest, before taxes, PRMSA passes on to the

public the entire tax savings generated by its tax-exempt

status. Both BIE’s witness Copan and GVI/PRMA see

another side to this claim, however, because they see a

distortion produced by PRMSA’s huge interest costs

(projected as $24 million in the pro forma year, or ap-

proximately 12 percent of PRMSA’s total capitalization).

Mr. Copan explains that this huge interest expense borne

by PRMSA makes Dr. Silberman’s adjustments for tax-

“hazardous.” (Copan-rebuttal testimony, pp.

6-7.) As Mr. Copan explains, Dr. Silberman’s adjust-

ments aré subject to overstatement of the rate of return

and are heavily dependent on the amount of interest. For

157a

example, reducing PRMSA’s interest expense from $24

million to $20 million would reduce PRMSA’s benchmark

rate of return, derived from the

16.68 percent to 15.77 percent.

million

$24 interest. expense

for a hypothetical tax paying firm, one

stating taxable income for the tax paying enti

translates into a lower amount of taxes that

paid by PRMSA, and thus a higher equivalent

return for PRMSA.” (Copan-rebuttal testimony, p. 7.

Mr. Copan states the dilemma that if one calculates a

comparable before-tax rate of return for PRMSA, this

~~"

tax rate of return, one must compare PRMSA with firms

surrebuttal testimony, p. 6.) Mr. Copan suggests a re-

finement of Dr. Silberman’s calculations adjusted to con-

sider PRMSA’s capital structure as well as its massive

interest payments. (Jd.) PRMSA, however, disagrees

with Mr. Copan because by adjusting PRMSA’s rate of

return by reducing its interest obligations, PRMSA would

be forced to pass along to rate payers more in tax savings

than PRMSA actually experienced. (PRMSA’s opening

brief, p. 47 n. 22.) Mr. Copan recommends that we escape

this tax dilemma by considering the fixed charges cover-

age ratio.

This, unfortunately for the reader, is only the begin-

ning of the controversy. GVI/PRMA are much more

vehement in their opposition to Dr. Silberman’s claim

that he has passed on to the consumer the entire tax

savings generated by PRMSA’s tax-exempt status. GVI/

PRMA see this calculation of Dr. Silberman to be an

illusion. According to them, Dr. Silberman is imputing

to the reference group PRMSA’s massive interest costs,

thereby overstating the rate of return, and Dr. Silberman

is not deriving an actual rate of return from the refer-

ence group of companies but rather hypothetical returns

158a

based on the assumption that the reference group had

the same massive interest costs as PRMSA. (GVI/

PRMA’s reply brief, p. 26.) GVI/PRMA show in a table

(reply brief, p. 27) that if one compares PRMSA to a

true reference group company, i.e., one with a much lower

interest (estimated through Mr. Copan’s work to be about

2 percent of the reference group companies’ total capital

as opposed to PRMSA’s nearly 12 percent), the before-

interest, before-tax benchmark rate of return derived

from the reference group would drop to 12.16 percent

from Dr. Silberman’s 16.68 percent. But once again, as

they did to Mr. Copan, PRMSA argues that one cannot

simply “wish away” PRMSA’s high interest costs. GVI/

PRMA reply to that argument by stating that General

Order 11 methodology simply mandates that the reference

group be a true reference group, not one to which is im-

puted PRMSA’s peculiar high interest costs. As GVI/

PRMA state: “This, however, is not the ‘wish’ of GVI/

PRMA but the mandate of G.O. 11 in recognition of the

proper regulatory treament of interest expense.” (GVI/

PRMA reply brief, p. 28.)

In its reply brief, PRMSA does a fantastic job of try-

ing to justify acceptance of what it calls “a package

deal,” i.e., that PRMSA’s highly leveraged (total debt

capitalization) structure “has certain consequences to the

ratepayers and its tax exempt status has other conse-

quences to the ratepayers.” (PRMSA’s reply brief, p. 34.)

PRMSA produces a set of hypothetical tables with various

companies having certain debt/equity structures com-

pared to a non-taxable company with a 100-percent debt

structure like PRMSA. These tables do show that PRMSA

wants me to conclude, namely, that the GVI/PRMA and

Brennan approach require PRMSA to pass on to the rate-

payers tax savings never experienced by the non-taxable

company, in effect “penalizing” PRMSA for its tax-

exempt status. (Furthermore, using the tables and an-

other adjustment, PRMSA shows that a non-taxable com-

pany like PRMSA needs to earn a return of 18.08 per-

cent to be equivalent to a 22.8 percent before-tax return

of the reference group, derived from PRMSA’s hypo-

thetical tables. (PRMSA’s reply brief, p. 37.)

All of this justification is fascinating and I commend

it to lovers of dilemmas. It does show what PRMSA ar-

gues. However, as GVI/PRMA have pointed out by way

of a warning in their reply brief, no matter how many

tables PRMSA may present in its final brief, PRMSA

cannot escape certain facts. First, PRMSA is obviously

struggling because of the General Order 11 dilemma

which does not account for totally debt-financed, tax-

exempt companies like PRMSA and does not expressly

allow such a company to adjust actual reference com-

panies’ data to attribute to those companies PRMSA’s

peculiar financial structure. This means, as PRMSA has

shown, that PRMSA will have to pass along tax savings

which it does not realize if PRMSA is forced to start

from a benchmark rate of return figure drawn from the

reference group which is after interest, after taxes. The

alternative, as Mr. Copan pointed out, however, is to

allow PRMSA a higher rate of return than is necessary

based upon a benchmark figure that is before taxes, be-

fore interest only because of PRMSA’s peculiarly high in-

terest costs. Second, the tables do prove what PRMSA

wishes me to conclude about the apparent inadequacies

of General Order 11 to deal with its peculiar problems

even though the tables themselves are hypotheticals, i.e.,

they assume several sets of facts, for example, a taxable

company with a 30-60 percent debt-equity ratio and an-

other taxable company with 60-40 percent debt-equity

ratio. Furthermore, the interest for these hypothetical

companies nowhere approaches the proportion of interest

to operating income of PRMSA (PRMSA’s interest at

$24 million being more than three times its projected

income).

PRMSA’s exercises are ingenious and appear to justify

its adjustments to the application of General Order 11 to

because PRMSA is a

cenanen Witih'ta tas temmaeeiie ts the Caenatia tote

reference group. Furthermore, even if PRMSA were held

wae tian eae ase ee ee ad

flail

tala!

ithe:

dP aenn that us GUE Ul ndes On chow

a benchmark return (12.16 percent) that would be de-

rived if the tables were turned and the reference group’s

actual low interest expenses were attributed to PRMSA.

Therefore, the rate payers are arguably picking up some

of the costs of the tax savings which PRMSA never

$2 iii Hu Hi

Hil :4* Pee

ti AHHUTE

HH AH

AHHE

at tut

merely because of i

23 While one can understand PRMSA’s reluctance to pass

cousumers tax savings it never

eng men ag ie Money oy sega

16Ia

I conclude that PRMSA has pointed out a serious inade-

quacy in General Order 11 and one caused possibly by the

reasonable results.” (Docket No. 78-46, slip opinion, p.

68.) Much as I appreciate PRMSA’s dilemma, the allow-

stead of being buried in the midst of so many other issues

so that sufficient time can be devoted to it.

Use of the Fixed Charge Coverage Ratio

In its Order of February 27, 1981, the Commission

sonableness stated in 46 C.F.R. 512.6(d) (3) will also be

considered in determining the reasonableness of PRMSA’s

DTPTC; 1.8-2.0 by BIE; and 2.02-2.08, at least, by

PRMSA). Only BIE urges that this ratio be used as the

primary standard instead of rate of return on rate base.

coverage ratio may not be fully reliable a study

of comparable TIER ratios. The I.C.C. has specifically re-

jected the ratio for determining revenues for

tin Hie

SHE

Halal

163a

After considering these comments we now believe that

using these financial ratios as conditions to a finding

SPH se

BLUE

i HEHE E

ATH EEE rH Le

HTL itd

cdediul itl é

Ha i

ES eT rie : :

aia

turn

agree, however, with PRMSA that PRMSA would not ex-

ceed any reasonable estimate of the ratio under any pro-

jection that I have seen and that Mr. Copan’s estimate of

1.98-2.00 might be too low, if anything.

Issues (2) and (3): Carriers’ Revenue

and Cargo Volume Projections

The Commission’s Order frames two issues concerning

respondents’ revenue and cargo volume projections. These

are, as noted earlier :

(2) Is the methodology used by Respondents in making

revenue and cargo volume projections appropriate?

(3) Are Respondents’ revenue and cargo volume projec-

tions sufficiently accurate, and, if not, what are the

appropriate projections?

Although the first of the above two issues questions

whether the “methodology” employed by the carriers in

forecasting was appropriate, the main contentions of pro-

testants concern not the fact that the carriers used various

forecasting techniques such as market surveys, contacts

with shippers, projections of categories of traffic, etc., but

rather specific errors which protestants claim have ren-

dered the projections unreliable.

166a

It is generally recognized that in the field of forecast-

ing there is no way to make a precise prediction. As pro-

testant DTPTC recognized in its opening brief:

First, it is clearly impossible for any carrier regu-

lated by the Commission, or any other business for

that matter, to predict its future revenues and vol-

umes precisely. There are simply too many unknowns

and none of us has a crystal ball. DTPTC opening

brief, p. 2.

I believe this statement is a truism in the business world

so that a variety of different forecasting techniques may

be employed. As one book states in regard to financial pro-

jections by businesses :

This means that there will be a great deal of differ-

ence in the approaches taken by various companies,

even within the same industry, and differences will

have to be recognized even within the same industry,

also within a given company. A growing body of lit-

erature on the concept of responsibility accounting

has recognized these aspects. Helfert, Erich A., Tech-

niques of Financial Analysis (Richard D. Irwin, Ine.

fourth ed. 1977) p. 91.

DTPTC suggests that the Commission abandon the sys-

tem of relying upon “ad hoc guestimates” which lead to

continual “wrangling” and do not lead to accuracy.

(DTPTC opening brief, p. 2.) Instead DTPTC would have

the carriers simply assume that their traffic volume would

remain constant in the forecasted year so that revenue

would change merely because of the rate increases. DTPTC

also suggests an easier approach for determination of var-

ious expenses other than labor costs (which are easily de-

termined from the labor contracts), namely, by adopting

a formula upon which everyone can agree, as has the

LC.C. which utilizes a formula for non-labor expenses

for motor carriers.

_ — eee. =F

cult it may be. Because we must abide by the present sys-

tem, furthermore, it is necessary to recognize the basic

principle of the system, which is that it is based upon fore-

later events to justify their earlier predictions sounds like

post hoc rationalization. In xther words, current Commis-

sion rate cases impose a respcnsibility on carriers to make

reasonable projections and try to avoid either ex post facto

decisionmaking or post hoc excuses by the carrier. Fur-

thermore, under this principle of responsible forecasting

compounded with the need for expedition, it is not appro-

a hamayaon age egal rgalr gies “Paci

traordinary reasons, for example, when something has

happened to make the carrier’s projections not reasonably

possible even as an approximation. The point is to encour-

age forecast accounting and not to penalize

carriers who have employed the best and most reasonable

techniques available unless an event occurs which obvi-

ously makes the forecast a pretense. I have no time to de

velop this discussion further and will return to it briefly

later in connection with the issue over fuel projections.

Suffice it to say that Commission rate cases are based upon

forecasting, not after-the-fact accounting.

Having said that, I must briefly discuss the various at-

tacks which protestants have made upon the four carriers’

forecasts. PRMSA, as the leading carrier by far, under-

goes the most intensive attacks. PRMSA explained its

methodology in some detail in its opening brief (pp. 65-

PRMSA’s forecasting has been very good and has not been

pessimistic. BIE acknowledges this fact.

The argument on PRMSA’s projections centers on

which figure to use. PRMSA’s projection, submitted on

March 10, 1981, was for 166,763 trailer-loads (Trans-

class case) * as adjusted to account for purported effects

lure the BEAR out of its cave.

169a

that protestants’ and BIE’s arguments on brief are con-

vincing that the effects of President Reagan’s budget cuts

on decreases in the Puerto Rican trade are extremely

speculative and that PRMSA’s witness Lopez-~Mangual, in

effect, realized this when he tried to estimate how many

units would be lost (265,000 tons he estimated) as a re-

sult of budget cuts. I refer the reader to the very effec-

tive arguments in BIE’s and GVI/PRMA’s briefs. As to

the effects of late redelivery of the PONCE, I find that

they can be considered in adjusting PRMSA’s forecasts

Moreover, PRMSA submitted its adjustments for the

PONCE in time for other parties to challenge them be-

grounds on brief apparently because of inability to verify

the accuracy. PRMSA, however, has explained and

answered protestants in detail. See PRMSA reply brief,

pp. 56-57.

The really significant attack on PRMSA’s projections,

aside from BIE’s contentions that almost no revisions

GVI/PRMA’s explanations for its alternative projec-

tions and reasons for their rejection of PRMSA’s fore-

cast are beautifully explained in their opening brief, pp.

had projected 174,401 units based upon PRMSA’s his-

17la

Certain key points should be kept in mind in evaluating

Dr. Andic’s later methodology. As PRMSA shows, she

worked from a particular year rather than from PRMSA’s

market survey. Thus, if PRMSA’s forecast is to be re-

jected in favor of Dr. Andic’s, it would be rejected not

because PRMSA’s market-survey technique is necessarily

wrong but because we should take more recent actual

results and use them as the basis for projection. But, as

I have noted, the basic principle of Commission rate

cases is to require reliable forecasting techniques and not

to employ after-the-fact actual data. If the latter prin-

ciple were to prevail, then any carrier could constantly

171,075 actual units carried in the year ending on Febru-

ation of such growth. However, as PRMSA notes, not

only does Dr. Andic’s new methodology result in the exact

same number as the old but Dr. Andic now makes an

adjustment whereas in the old methodology she

downward adjustment from the base year then

PRMSA reply brief, pp. 69-70.) Moreover, in so

sTTiEL

aft

bal

5 =

172a

I must leave the fascinating discussion of the Andic

predictions with the acknowledgement that under different

circumstances I would have provided a more detailed ex-

planation of her work and why I find it to be less relia-

methodologies end up with exactly the same figure, 174,-

101 units, the manner in which she decided to make

changes, and the generally unsupportable claims made by

2 8

first by considering the general effects and then by specific

ing plant by plant. PRMSA’s witness Huresky rebutted that

333

;

highest return to PRMSA would be 17.41 percent. This

latter figure results if BIE’s position of freezing PRMSA

to its original pre-docketed unrevised figures is adopted.

turn (but not for GVI/PRMA’s alternative method), the

TH Ee

illieeeeileb tps

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‘

Bes,

17 percent, but, as noted, it is probably too low and needs

and I could probably ignore it. However, I believe that

the record is inconclusive on the matter anyway.) ”

7" Sea-Land’s explanation for this expense item amounting to

$607,547 for “freight brokerage” is contained at pp. 12-15 of its

reply brief. GVI/PRMA argue vigorously that this item is

pro

1T5a

THE

brief, pp. 99-100, quoting Sea-Land’s witness O’Donnell

and BIE’s opening brief, p. 60, citing O’Donnell and BIE

witness Coleman.) Notwithstanding GVI/PRMA’s swipe

at this technique, it appears to be another means for a

carrier to estimate its future and to make its forecasts,

Sea-Land’s pessimistic

jects a

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19-22, and also by BIE (BIE’s opening brief, pp. 64-65).

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(GVI/PRMA’s

BIE, which has taken a strict position that a carrier’s

case should be frozen to its pre-docketed submission,

should now have no problem with this very substantial

change in TMT’s case, which apparently emerged only

after the case was docketed. Why does not BIE now in-

sist that TMT should be held to its pre-docketed case of

100,000 tons? I would welcome BIE’s explanations in

to 80,000 tons between the original verified statement of

Mr. Baci submitted to the Commiesion and the direct

testimony of Mr. Baci submitted after the case was dock-

eted by the Commission, I consulted the direct testimony

of BIE’s witness New, a staff accountant with the Com-

mission’s Office of Financial Analysis. Rather than clar-

ify the matter, however, the testimony makes it even

more confusing. Mr. New, who, like all other staff wit-

nesses, is well qualified and furnished helpful evidence,

first stated that he reviewed TMT’s workpapers and ex-

hibits submitted before the case was docketed as well as

the protests and “ound that “the aforementioned items in-

cluded in TMT’s financial projection appear to have been

appropriately calculated.” (New—direct testimony, p.

2). He also listed five errors found in the TMT papers

which had to be corrected. However, he also stated that

TMT’s data which he reviewed were “unverified.” (Jd.)

2) Saat

183a

Of greater significance, however, for this particular prob-

lem, is the explanation or lack of it for the 20,000-ton

discrepancy. Mr. New testified on this point as follows:

TMT anticipates gaining approximately 80,000 tons

of cargo formerly handled by GCML, which is re-

ducing the size of its operations and will discontinue

calling at Lake Charles, Louisiana, a port served by

TMT. (It should be noted that the statement of

Peter Baci (page 2, 3) indicates that TMT expects

to gain approximately 100,000 tons of cargo from

GCML. However, TMT’s financial projection as-

sumes a gain of 80,000 tons from GCML. TMT has

acknowledged that the 80,000 figure is correct.

Therefore, since this error appedred only in Mr.

Therefore, the only explanation for the discrepancy is

that “TMT has acknowledged that the 80,000 figure is

correct” and no adjustment to TMT’s projections was

deemed necessary “since this error appeared only in Mr.

Baci’s statement. . . .” Perhaps such an explanation

might have sufficed if the Commission had not specifically

ordered me to determine whether TMT’s projections are

“sufficiently accurate” and whether TMT used “appro-

priate methodology.” (Issues Nos. two and three.) I

184a

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tilt

employed are summarized in PRMSA’s reply brief, p. 76

and by GVI/PRMA in their opening brief, pp. 45-50.

the range of the carriers’ annualized rate of inflation.

(See PRMSA’s reply brief, p. 76.) As annualized, GVI/

PRMA would hold the carriers to an inflation factor of

7.2 and

Fovscamel'ey bot ed hidied Pretaety Sor Rahn Fetes Semees aassviha. serine

yh he aia viii

Party PRMSA BE Sea. land TT Vv. 1 /Mfire. Vv. 1 Jive.

oo 1. 0. 7 87, 1.2% o 1% «a

D = Vasques, p. 5.

S = Fretter, p. 14.

eteeee cee

S181

Seer tagt omar Decmemse thoald bere vase 00h. oD -'Pm rE. STE ene Tenner nate’ that Sea-Land bad erred te making ite fore-

T.M.T. did not make ae 18 oF 20 month forecast.

D = Andc, p. 21.

R - Andic, p. 26.

See- Land s original erroneous projection worked out tes 9. 3% anowal rate.

T.M.T. used a 10% escalation ‘2 flim Me. Frater that it Tm T,

| A, oes pow v4 yy ° as forecasted by Citibank, notes wee proper for T.M.T. to

ST a a

eat

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rn HF tlh insti

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nrennberyfe

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from other

since the

ve it

to understate PRMSA’s cost increases. Therefore, BIE

accepts PRMSA’s escalation factor of 10.4 percent (stated

as 10 percent in BIE’s opening brief, p. 74).

ai i

Hil iE - i:

BIE accepts TMT/GCML’s use of an inflation factor

See ected ts wal cae ae Ge goa nt

ee eet by TMT was the

ay? sete dg

of reasons (

a See

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fat fit

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ors employed by the carriers with modifications discussed

above and that, as in the case of the cargo volume and

revenue projections, GVI/PRMA’s unique and alterna-

and unique results, I find Dr. Andic’s work to be quick

and resourceful but increasingly suspect. BIE has been

even more severe with GVI/PRMA’s expert witnesses.”

tive methodology utilized by Dr. Andie does not withstand

analysis. Furthermore, because of her continual revisions

WT bls

Wilt

TRUE :

The Fuel Cost Increase Issue

tut

iti a

upon the shorecomings of GVI/PRMA's

of inflation factors, BIE states:

: HH HITE

cae ia

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st ai HE Ad r HH i He

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194a

discussed above in connection with the inflation factor is-

sue. PRMSA then compared A.R.A.D. forecasts with its

own experience with oil prices using recognized statistical

measuring techniques. BIE witness Straube examined

PRMSA’s forecasting technique and found it to be rea-

sonable. GVI/PRMA’s witness, Dr. Andic, however, at-

manner in which PRMSA, in my opinion, has undermined

BIE agrees to be reasonable while GVI/PRMA and its

witness, Dr. Andic, once again substitute different data

and make their own sui generis calculations, make unsup-

ported allegations about PRMSA’s evidence, change

grounds, and end up looking worse for the effort. The

statement made by PRMSA that Dr. Andic simply is not

qualified to make predictions as to fuel costs because of

her lack of experience in the field seems to be support-

able. Moreover, the statement that she cannot compete

with a service such as DRI coupled with the fact that

the trend-line analysis method which she did employ has

been shown in fact and in theory to be faulty, lead me to

conclude that GVI/PRMA’s attacks on PRMSA’s fore-

nothing wrong with these other carriers’ projections. In-

deed, BIE states in its opening brief that both Sea-Land’s

and TMT/GCML/’s projected average costs for the pro

forma year of $29.69 and $29.45 per barrel which were

below PRMSA’s predictions, were probably too low. (See

BIE’s opening brief, pp. 71, 76.)

The Issue of Economic Hardship

The final issue framed by the Commission’s Order is as

follows:

(5) Do the proposed rate increases impose an eco-

nomic hardship on the affected interests represented

by Protestants and Intervenors, and, if so, to what

extent should this factor be considered in determining

a reasonable rate of return for the carriers?

that the rate increases affected them adversely. The legal

issue concerns the question whether the Commission can

change a carrier’s return which is otherwise shown to be

reasonable for reasons relating to economic hardship and,

more particularly, to hardship affecting individual ship-

pers in a general-revenue case.

There is considerable dispute as to whether the subject

rate increases will cause economic harm on individual

shippers and consumers, PRMSA and other carriers ar-

guing that the shippers’ problems are caused by many

other factors and that many shippers are doing better fi-

nancially than the carriers are. Moreover, PRMSA

Sea-Land ask me to apply sanctions against shippers

testified on behalf of GVI/PRMA because they did

furnish answers to questions which both PRMSA and

Land had, by previous arrangement approved by

asked counsel for GVI/PRMA to have brought to

this area of the record is that the rate increases are an

gravation to the shippers, as are any price increases,

that I cannot find that these rate increases are the main

gELP ade

that I cannot find that this proceeding be the vehicle

through which they can enjoy some relief from the inex-

orable march of inflation. My problem is that their testi-

mony, while entitled to careful consideration and sympa-

198a

relevant issues in the wrong type of case. The Commis-

sion has recognized the difference between a general-reve-

nue case and an individual commodity case. In Docket No.

77-12, G.O. 16, Amdt. 20, 17 SRR 1221 (1977), the Com-

mission amended its Rule 41, 46 CFR 502.41, to clarify

the fact that a “complainant” in an individual-commodity

rate case was not the same thing as a protestant in a

general-revenue case. The Commission tried to advise

shippers that they should concentrate their efforts in fight-

ing individual rates based upon transportation factors

peculiar to the carrying of those commodities and other

relevant factors involved in single-commodity cases rather

than waste their time in general-revenue cases which, like

the present one, are heavily involved in rate-of-return and

general revenue and cargo-volume predictions. The Com-

mission stated:

However, the question of reasonableness of a particu-

lar rate is still an essentially different issue which

should be litigated in consideration of transportation

factors such as cost of service, value of service, etc.,

which focus upon the particular commodity in ques-

tion. (Footnote citations omitted.) All too frequent-

ly, however, shippers interested in obtaining a deter-

mination that a particular commodity rate or rates

are unjust or unreasonable engage in the futile en-

deavor of contesting evidence pertaining to the car-

rier’s need for increased overall revenue armed with

little more than evidence concerning anticipated ef-

fects on movements of their particular commodities.

As the Commission remarked in our previous notice,

these efforts usually consume time needlessly and are

essentially irrelevant in a general-revenue case. The

answer to this problem is to avoid the wasteful prac-

tice of litigating issues in wrong proceedings. The

proposed rule would require protestants to file their

own complaints or, under the proper circumstances,

petition the Commission to institute

concerning a particular rate or rates. In either event,

199a

the resulting proceeding would proceed to develop

truly relevant evidence pertaining to revenue, trans-

portation, and ratemaking factors relating to the spe-

cifie rate in question. Docket No. 77-12, 17 SRR at

pp. 1225-1226.

In the footnote citation omitted from the above quota-

tion the Commission cited numerous authorities which

held that general-revenue cases are essentially different

from those involving specific commodities. Among the

many cases are: Chicago Board of Trade v. United States,

223 F.2d 348, 351 (D.C. Cir. 1955) ; Alcoa Steamship Co.

Inc.—General Increase in Rates in the Atlantic/Gulf

Puerto Rico Trade, 9 F.M.C. 220, 222 (1966); Matson

Navigation Company—Rate Structure, 3 U.S.M.C. 82,

87-88 (1966); Wool Rates From Boston to Philadelphia,

1 U.S.8.B. 20, 21 (1921); Locklin, Economics of Trans-

portation (Irwin, Inc. 7th ed. 1972), pp. 421-422.

Even if this case were an individual-commodity inves-

tigation rather than general-revenue, the law is not clear

that the Commission could depart from recognized prin-

ciples of ratemaking and order rate reductions because

particular businesses or industries claimed hardship.

PRMSA cites a number of these cases holding against such

orders in its opening brief (p. 156)." This entire area of

law concerning how far a transportation regulatory agen-

cy can determine reasonableness of rates (usually individ-

ual rates) is not free from confusion, however. See dis-

cussion in Locklin, Economics of Transportation, cited

above, pp. 445-447. That author, after observing that the

L.C.C. had, in some specific commodity cases, ordered re-

ductions to relieve the problems of a particular business

or industry, also observed that many other cases were op-

posed and concluded :

*! These are: Eastbound Intercoastal Lumber, 1 U.S.S.B. 608,

623 (19386); Puerto Rican Rates, 2 U.S.M.C. 117, 119 (1939);

Increased Rates on Sugar, 7 F.M.B. 404, 418 (1962); Pacific

Coast/Puerto Rico Rate Increase, 7 F.M.C. 525, 684 (1968); Matson

Navigation Co.—Rates on Pallets, 7 F.M.C. 771, 772, 775 (1964).

The general conclusion to be drawn from these cases

is that although the Commission sometimes

the economic and social effects of certain rates, it is

on insecure ground if it modifies rates otherwise rea-

sonable out of deference to these consequences. To

welfare.” Locklin, p. 447 (footnote citation omitted.)

BIE takes strong issue with respondent TMT/GCML

in the Puerto Rican/V.I. trades since over half of their

a UMaine RE

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confirms what I have said above, i.e., that even if high

ocean freight rates were the main problem affecting them

(and this was by no means clearly shown), their testi-

mony would be much more relevant in an individual-

commodity rate investigation, not a general-revenue case.

No matter how impressed I was by Ms. Creque, for ex-

ample, I do not see how I can convert GVI/PRMA’s

b Pg Ts edcagesinecsgegesaay Je

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The Matter of Use of Current or Revised Data in

Lieu of Carriers’ Pre-Docketed Data

I have alluded to a problem which has occurred in

previous rate cases both under P.L. 95-475 and before,

BIE’s contention that it is essential in rate cases, which

niust be expedited under P.L. 95-475 time schedules, that

carriers and all parties confine themselves to the carriers’

pre-dockected cases submitted to the Commission and that

other parties essentially do likewise. In other words,

BIE objects to the admission of any evidence such as

current data which is dated after the original submis-

gious except perhaps for corrections of obvious arithmetic

errors. BIE believes that this problem is so critical for

all Commision rate cases that “it is essential that a

definitive statement resolving this question be issued in

this proceeding.” BIE reply brief, p. 56.

I do not doubt that this problem has been a recurrent

thorn in the sides of litigants in Commission rate cases

and that a “definitive” statement would be very helpful.

However, I am not sure that a statement engraved in

cement can be fashioned in this case or in any case. Un-

fortunately, time and other reasons do not permit me to

give the matter the attention it deserves but, as I have

said, the Commission, which enjoys a 43-day period (from

August 14 to September 26, 1981) between the last

pleading and final decision may be able to improve upon

my suggestions.

in redelivery of the PONCE and the effect of Reagan

budget cuts. (I have already decided earlier that I would

consider the effects of the late delivery of the PONCE

but that the evidence of the effects of the Reagan budget

cuts was too speculative. Therefore, I cannot find that

my comments in this troublesome matter should be con-

sidered as pure dicta.)

* But even BIE does not wish to litigate issues concerning

PRMSA’s projections under its ATLANTIC BEAR case since the

BEAR apparently will not be acquired by PRMSA, as I have noted

earlier. But this fact was not known until after PRMSA made its

original filing on December 5, 1980. Even BIE does not expect

everyone to litigate complicated issues about the poor BEAR while

she was still in her cave and would probably never come out.

If BIE’s rigid position were to be adopted, then I would

have rejected considerable evidence as a matter of law

upon current data or data which

case was docketed. For example,

some of BIE’s own witnesses’ evidence, for example, per-

haps even BIE witness’s Fratter’s recalculation of Sea-

Land’s cost inflation factor because she utilized data

running through December 1980 or later, after Sea-

submitted its case. Indeed so extreme is BIE’s

so principled is BIE) that it urges

its own witnesses.

, , and Coleman relating to updated fuei

prices. ) :

I find that BIE’s position, no matter how tempting

and easy, is simply too extreme. At the least, as has hap-

pened in previous rate cases (see, e.g., Docket No. 79-55,

Matson Navigation Co.—Bunker Surcharge, 19 SRR

‘i

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cial

sidering what became P.L. 95-475 that the carrier’

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tee

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original cases but still allowed some flexibility. In

Docket No. 75-57, Matson Navigation Co.—Proposed Rate

Increases, etc., 18 SRR 1441 at 1444, cited by BIE (BIE

“were the basis for the carrier’s decision to increase its

rates” and allowance of revisions “contravenes the Com-

mission’s policy of expediting general revenue inquiries

and hinders effective participation by persons opposed to

rate increases.” (Id.) I conclude that although the legis-

¢ gat

issues under investigation, subject to the rights

posing parties to test the new evidence in whatever man-

ner would be appropriate. (GVI/PRMA reply brief, pp.

93-94.) PRMSA, elaborating upon the test which the

Commission adopted in Docket No. 79-55 (from my Ini-

tial Decision in that case), would establish a “flexible

rule of reason” by which the presiding judge could “bal-

ance the equities and decide the admissibility of the

proffered data.” (PRMSA reply brief, p. 49.) Essen-

tially PRMSA’s rule would permit admission of largely

uncontested data which was not subject to constant

change if it were introduced early enough in the proceed-

ing to allow all parties to test is reliability.

better be promulgated in a rulemaking proceeding which

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217a

(1) Protestants’ cases have been tested and found

wanting in most respects as compared to the more per-

suasive cases and rebuttal arguments and evidence pre-

sented by respondent carriers and by BIE.

(2) The Commission must amend and clarify General

Order 11 in numerous critica] respects in order to elimi-

nate repetitive and unnecessarily expensive rate pro-

ceedings. .

(3) The Commission should, in its Orders of Investiga-

(A) Protestants (mainly GVI/PRMA) have been given

a fair opportunity to present a reliable, effective case.

However, in almost every major respect their evidence

and arguments were shown to be significantly defective

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be relied upon more than DRI, Inc., are current data

always a better base for forecasting than earlier data in

declined as of March 1981 because of a current oil glut

be allowed to cloud sound and dispassionate forecasting.

GVI/PRMA’s envigorating emotional arguments in their

** The serious flaws in Dr. Andic’s revised forecast are cogently

exposed in PRMSA’s reply brief, pp. 68-70; 73-75.

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consideration of Sea-Land’s Dr. Nadel’s total of five per-

cent premiums added onto his 18.5 percent recommended

rate of return, yet other evidence supports Sea-Land’s

contention that its increases are within a zone of reason-

ableness, I have rejected Dr. Silberman’s “surrogate” G.O.

11 formula, as GVI/PRMA urge, and have found little

support for his method of elevating benchmark rate of

return to compensate for PRMSA’s tax-exempt status, yet

other evidence supports a rate of return for PRMSA of

17 to 18 percent or so. However, as to the remainder of

their case concerning their alternative calculations for

rate of return, cargo volume and revenue projections,

fuel cost projections, and general inflationary factors, as

I have indicated, the overall conclusion to which I am

inescapably drawn is that GVI/PRMA are struggling to

eradicate the effects of a well-prepared and well-presented

methodology or argument that will ultimately appear to

be persuasive. I find their efforts to have been diligent,

massive, and resourceful but increasingly expedient in ap-

pearance and ultimately unsuccessful. In short, GVI/

PRMA were unable to show that PRMSA had utilized de-

fective methodology and had prepared a defective, irre-

sponsible case when it decided to file its general rate in-

creases. I think that GVI/PRMA and DTPTC have had

a fair opportunity to demonstrate the superiority of their

cases or at least the failure of PRMSA and the other

respondents to mount a persuasive case but they have not

succeeded notwithstanding the amazing zeal and ingenuity

poured into 380 pages of post-hearing briefs by GVI/

PRMA’s counsel nor even the fact that GVI/PRMA have

had the benefit of several months of actual data and

hindsight (the use of which, however, is subject to serious

attack, especially by BIE, as a matter of law) .*°

* In all fairness, I should mention that PRMSA has itself some-

times struggled to elevate shaky evidence from the speculative to

the probative. This occurred when PRMSA’s witness, Mr. Lopez-

ad,

(B) It is imperative that the Commission, once and

source (such as FTC-QFR, Value Line, Standard and

Poor’s, etc.) and a standard time period for comparison

Mangual, tried strenuously to quantify the effects of the Reagan

budget cute on PRMSA’s cargo volume forecasts. Among other

things, Mr. Lopez-Mangual tried to use Census data which he

parently did not realize contained inexplicable inaccuracies

total-capital

will most likely be present in a comparable-earnings study

performed without such a separation but does not show

the degree of the distortion as far as I can tell.

P.L. 95-475 when the Commission frames its Orders of

protests,

merable lines

btedly very expensive as well as exhausting in view

P.L. 95-475. Clearly it has not ended. It is, moreover,

particularly important to determine whether an adver-

sary-type, ad hoc proceeding like the present massive

investigation is a better procedure to resolve compli-

cated General Order 11 or Rule 67 issues rather than a

data or post-docketed evidence and, if so, under what

circumstances? BIE argues that it is critical for parties

to obtain a “definitive” rule of procedure from the Com-

mission. In this proceeding, BIE apparently chose to dis-

of such evidence was unnecessary. However, if the Com-

mission does not agree with BIE, then the staff in future

cases will be obliged to reckon with later factual changes

and give testimony where appropriate.

(E) It is imperative that the Commission, once and

;

the future, they have shown justification for their 16-18

percent general rate increases. Moreover, the various cal-

culations performed by the carriers, as adjusted to satisfy

BIE’s objections or to factor in indisputable facts such as

the cancellation of the increases in Sea-Land’s Canadian

tariff or the delayed redelivery of the PONCE to PRMSA,

have corroborated the basic finding that these increases

will not exceed a reasonable rate of return level. There-

fore, as a consideration to the shippers, businesspersons,

and consumers who testified in this proceeding, I recom-

mend that the Commission announce that it will encour-

age individualized attention to particular rate problems

and will lend its good offices to any reasonable attempts

to adjust any particular individual rate that appears to

be causing problems. In any event, however, the Com-

mission owes it to individual persons who are concerned

over particular rates to save their time and money by

steering them to negotiations or to proceedings in which

their individualized rate evidence is relevant, i.e., indi-

rate problems and rate relationships in the tariffs is not

meant to disparage the economic impact testimony prof-

fered by GVI/PRMA. It is rather designed to direct at-

tention to areas where relief t be available and

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Washington, D.C.

July 17, 1981

“7 ar Oe 7

231a

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1981

No. 81-2088

PUERTO RICO MARITIME SHIPPING AUTHORITY,

Vv Petitioner

FEDERAL MARITIME COMMISSION

And consolidated case No. 81-2128

(Filed June 25, 1982)

Before: Wald, Mikva and Ginsburg, Circuit Judges.

ORDER

On consideration of petitioner’s petition for rehearing,

filed June 11, 1982, it is

ORDERED by the Court that the aforesaid petition is

denied.

Per Curiam

For THE CouRT:

Gerorce A. FISHER

Clerk

By: /s/ Robert A. Bonner

Rosert A. BONNER

Chief Deputy Clerk

: 232a

| UNITED STATES COURT OF APPEALS

| FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1981

No. 81-2088

PuERTO RICO MARITIME SHIPPING AUTHORITY,

. Petitioner

FEDERAL MARITIME COMMISSION

and

UNITED STATES OF AMERICA,

Respondents

TRAILER MARINE TRANSPORT CORPORATION, et al.,

Intervenors

And consolidated case No. 81-2128

(Filed June 25, 1982)

Before: Robinson, Chief Judge, Wright, Tamm, Mac-

Kinnon, Wilkey, Wald, Mikva, Edwards, Gins-

burg and Bork, Circuit Judges.

ORDER

Petitioner’s suggestion for rehearing en banc has been

circulated to the full Court and no member of the Court

has requested the taking of a vote thereon. On considera-

tion of the foregoing, it is

ORDERED by the Court en banc that the aforesaid

suggestion is denied.

Per Curiam

bas

Shipping Act, 1916, i 46 U.S.C. § 817(a):

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Intercoastal Shipping Act, 1983, as amended, § 2, 46

U.S.C. § 844 (Public Law 95-475)

become effective immediately upon notice to the

Commission.

Intercoastal Shipping Act, 1933, as amended, § 3(a),

46 U.S.C. § 845(a) (Public Law 95-475) :

(a) Whenever there shall be filed with the Fed-

eral Maritime Commission any schedule stating a

new individual or joint rate, fare, or charge, or any

new individual or joint classification, or any new

individual or joint regulation or practice affecting

any rate, fare, or charge, the Commission shall have,

and it is given, authority, either upon protest or

upon its own initiative without protest, and if it so

, the

tration of this chapter, the Commission shall, within

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the granting of such extension together with—

ute

a full explanation of the reasons for the

Ps 2

(B) the issues involved in the matter before

the Commission,

mission working on such matter, and

(D) a record of how each Commissioner

voted on the extension.

If a final decision is not issued by the Commission

within the one hundred and eighty day period, or by

the end of any extension period, such rate, fare,

charge, classification, regulation, or practice shall,

for purposes of this section, thereafter be deemed to

be just and reasonable. However, if the Commission

finds that it is unable to issue a final decision within

yey A san weeloe> Dp ean ange

hich are directly attributable to the proponent of

;

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‘.

Intercoastal Shipping Act, 1933, as amended, § 3(c)

(2), 46 U.S.C. §845(c)(2) (Public Law 95-475), in

relevant part:

increase an amount equal to that portion thereof

found to be not just and reasonable plus interest on

such amount computed on the basis of the average of

the prime rate charged by major banks, as published

by the Board of Governors of the Federal Reserve

System, during the period to which the refund ap-

plies.

FEDERAL MARITIME COMMISSION REGULATIONS

46 C.F.R. § 502.67 (a) (2), (3) & (4):

(2) No general rate increase or decrease shall

take effect before the close of the sixtieth day after

the day it is posted and filed with the Commission.

A vessel operating common carrier (VOCC) shall

file, under oath, concurrently with any general rate

increase or decrease testimony and exhibits of such

composition, scope and format that they will serve

oe eee ee ee eee

matter is set for formal investigation, together wi

oF cuiptes ouencis Gall ts he toneaies

of the testimony and exhibits. The VOCC shall also

certify that copies of testimony, exhibits and under-

lying workpapers have been filed simultaneously with

the Attorney General of every non-contiguous State,

Commonwealth, possession or Territory having ports

specifically authorized by an order

sion or a presiding officer. A copy

and exhibits shall be made available at every port

in the trade at the offices of the VOCC or its agent

during usual business hours for inspection and copy-

ing by any person.

(8) Workpapers underlying financial and operat-

ing data filed in connection with proposed rate

rates in the domestic offshore trades filed by vessel

to the

(d) The Commission reserves to itself the right

to employ other bases for allocation and calculation

and to consider other operational factors in any

instance where it is deemed necessary to achieve a

fair and reasonable result.

46 C.F.R. § 512.2(f) :

a particular Trade, or which would result in an in-

than

shall simultaneously file in duplicate:

(1) Financial and operating data in support of

proposed rate changes as follows:

(i) An actual midyear rate base exhibit (Exhibit

A-a) and supporting schedules computed for a 12-

month period commencing not more than fourteen

(14) months prior to the date of filing the proposed

rates;

(ii) A projected midyear rate base exhibit (Ex-

changes are proposed to become effective;

5 Tks P

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“

2428

(iii) An actual income account exhibit (Exhibit

(f) (1) (i) of this section;

(iv) A projected income account exhibit (Exhibit

B-p) and supporting schedules for the 12-month

period commencing on the first day of the month

following the date on which the changed rates are

(Exhibits C-a and C-p) coinciding with the time

periods covered by the income statements furnished

in response to paragraphs (f) (1) (iii) and (iv) of

this section ; and

(2) The work papers described in § 512.4.

MATERIALS IN THE RECORD CITED

BY THE COURT OF APPEALS: J.A. 704-712

J.A. 704: New York Times, February 26, 1981

OPEC MEETING SOON NOW SEEMS UNLIKELY

By DouGLAS MARTIN

Last week’s meeting of representatives from six mem-

bers of the Organization of Petroleum Exporting Coun-

tries will not lead to a special meeting of the organiza-

tion before the regular meeting scheduled May 25, the

Indonesian oil minister, Subroto, said yesterday at a

news conference in Jakarta.

Hamid Zaheri, the OPEC spokesman, confirmed in a

oil surpluses caused by the resumption of almost two

million barrels of daily production from Iran and Iraq

and by slack demand in consuming countries.

Concern has been growing among OPEC members that

some producing countries will have to cut output soon to

prevent a price-depressing glut of crude oil on world

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A full OPEC meeting would not be necessary before

Saudi Arabia or any other member decided to reduce

not

price

traders

$34

but

practice of reviewing production levels monthly, a cut in

output could come as early as March 1.

J.A. 705-07: Petroleum Economist, October 1980

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peaked, for how for all

time. The less oped countries will follow

suit, having run through their temporary borrowing res-

With stagnant consumption and non-OPEC capacity

growing, OPEC exports have been falling since 1973,

and will keep falling. But prices will rise, despite excess

supply, as in the past. It pays the dominant Persian

Gulf countries to let potential capacity lie fallow, and

Their long-term price strategy cited earlier is no empty

boast, because they have not yet exerted their full price

raising power.

In one respect the Eighties are different. For the first

time, it is worth asking how much more the traffic will

bear. Synthetic fuels are of no importance before 1990,

if then, but consumer reaction may well set a lower ceil-

ing. Because the consumption response to higher prices

is so slow, the producing nations are almost certain to

overshoot, and raise the price higher than they would

desire to set it if they had prompt information. The

better they understand the demand for oil, the better for

them, and in this instance their interest is the same as

their customers.’

As in the Seventies, but now much more clumsily be-

cawse of direct production control, the OPEC nations will

adapt production to demand, on their terms. The official

truth is that these nations will, for conservation’s sake,

produce freely up to some limit. If we keep our consump-

tion within that limit, happiness; if not, disaster. This

idea runs counter to logic and experience. If the demand

barrels

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request of Senator Bill Bradley (Democrat, New Jersey)

by the international energy analysis division. The

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.