Financial Responsibility Requirements for Nonperformance of Transportation; Inquiry Into Alternative Forms of Financial Responsibility for Nonperformance of Transportation

FEDERAL MARITIME COMMISSION

46 CFR Part 540

[Docket Nos. 94-06; 94-21]

Financial Responsibility Requirements for Nonperformance of

Transportation; Inquiry Into Alternative Forms of Financial

Responsibility for Nonperformance of Transportation

AGENCY: Federal Maritime Commission.

ACTION: Notice of Inquiry.

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SUMMARY: The Proposed Rule in Docket No. 94-06 is held in abeyance,

pending an Inquiry into alternative methods of establishing financial

responsibility. The Inquiry's purpose is to determine whether an

acceptable alternative can be fashioned that will address the industry

objections to the Proposed Rule, yet ensure that cruise passengers are

adequately protected in the event of nonperformance of transportation.

DATES: Comments due on or before November 28, 1994.

ADDRESSES: Send comments (original and 20 copies) to: Joseph C.

Polking, Secretary, Federal Maritime Commission, 800 North Capitol St.,

NW., Washington, DC 20573-0001, (202) 523-5725.

FOR FURTHER INFORMATION CONTACT: Bryant L. VanBrakle, Director, Bureau

of Tariffs, Certification and Licensing, Federal Maritime Commission,

800 North Capitol Street NW., Washington, DC 20573-0001, (202) 523-

5796.

SUPPLEMENTARY INFORMATION: The Federal Maritime Commission

(``Commission'' or ``FMC'') administers section 3, Pub. L. 89-777, 46

U.S.C. app. 817e (``Section 3''). Section 3 requires certain passenger

vessel operators (``PVOs'') to establish financial responsibility for

nonperformance of transportation.1 The Commission's regulations

implementing section 3, contained in 46 CFR part 540, subpart A,

generally provide that a PVO may evidence its financial responsibility

by one or more of the following methods: A guaranty, escrow

arrangement, surety bond, insurance or self-insurance. The amount

required must equal 110 percent of the PVO's highest UPR over a two-

year period.2 The maximum coverage amount currently required is

$15 million, subject to a sliding scale.3

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\1\Section 3 provides, in pertinent part:

(a) No person in the United States shall arrange, offer,

advertise, or provide passage on a vessel having berth or stateroom

accommodations for fifty or more passengers and which is to embark

passengers at United States ports without there first having been

filed with the Federal Maritime Commission such information as the

Commission may deem necessary to establish the financial

responsibility of the person arranging, offering, advertising, or

providing such transportation, or, in lieu thereof, a copy of a bond

or other security, in such form as the Commission, by rule or

regulation, may require and accept, for indemnification of

passengers for nonperformance of the transportation.

\2\UPR is defined under 46 CFR 540.2(i) as:

. . . that passenger revenue received for water transportation

and all other accommodations, services, and facilities relating

thereto not yet performed.

\3\The Commission, in Docket No. 92-19, Revision of Financial

Responsibility Requirements for Non-Performance of Transportation,

amended 46 CFR Part 540, Subpart A, to (1) institute this sliding

scale formula for determining the amount of financial responsibility

coverage required for operators meeting certain requirements; (2)

exclude, under certain conditions, revenue from ``whole-ship''

arrangements from being considered UPR; and (3) publish a suggested

form escrow arrangement as a guideline for the industry (57 FR 51887

(September 14, 1992)).

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By Notice of Proposed Rulemaking published in the Federal Register

on March 31, 1994 (``NPR'' or ``Proposed Rule''),4 the Commission

proposed to remove the $15 million unearned passenger revenue (``UPR'')

ceiling now applicable to passenger vessel financial responsibility

requirements for nonperformance of transportation. The Commission

initiated this proposal in part because there is an estimated $700

million in UPR without section 3 coverage, raising concern that there

could be insufficient financial responsibility to indemnify the

travelling public for nonperformance. The Commission also proposed to

revise the current UPR sliding scale accordingly--and to require

coverage of 110 percent of UPR up to $25 million per operator, with

coverage of 90 percent of UPR for amounts exceeding $25 million. The

NPR also put forth an alternative proposal which would require coverage

of 110 percent of UPR up to $25 million per operator; 75 percent of UPR

between $25 million and $50 million per operator; and 50 percent

coverage for UPR over $50 million per operator. Additionally, the

Commission proposed to remove self-insurance as an option for section 3

coverage (except for state or federal entities). Existing self-insured

commercial operators would be provided one year following the effective

date of any final rule in this matter to obtain other evidence of

financial responsibility. In issuing the Proposed Rule, the Commission

stated that it considered these changes to be necessary to ensure that

cruise passengers are adequately protected in the event of

nonperformance of transportation.

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\4\59 FR 15149.

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Comments on the NPR were originally due by May 2, 1994. The comment

period was subsequently extended to June 10, 1994,5 in response to

a request for a 90-day extension of the comment period by The Delta

Queen Steamboat Co., and was again extended in response to a request by

the International Council of Cruise Lines to extend the comment period

to June 24, 1994.6

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\5\59 FR 23183 (May 5, 1994).

\6\59 FR 30567 (June 14, 1994).

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Two Congressional interests,7 four PVOs (two U.S.-Flag8

and two foreign-flag9), and six trade associations (three

representing U.S.-flag PVOs,10 one representing foreign-flag

PVOs,11 one representing surety interests,12 and one

representing travel agents13) filed comments on the Proposed Rule.

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\7\The U.S. House of Representatives Committee on Merchant

Marine and Fisheries and Subcommittee on Merchant Marine and

Fisheries (``Committees'') filed a comment; Congressman W.J. Tauzin

(D-Louisiana) filed a separate comment.

\8\Alaska Sightseeing/Cruise West (``Alaska Sightseeing'') is a

Seattle-based PVO that operates four U.S.-flag vessels ranging in

capacity from 58 to 101 passengers, and will be deploying a fifth

overnight vessel in 1995. Its 1993 UPR was just under $5 million,

and it projects that its UPR will surpass $5 million with the

deployment of its fifth vessel.

American Classic Voyages Co. (``AMCV'') was formerly known as

The Delta Queen Steamboat Co., and now is the corporate parent of

The Delta Queen Steamboat Co. (``Delta Queen'') and American Hawaii

Cruises (``AHC'').

\9\Carnival Corporation (``Carnival'') is the parent company of

Carnival Cruise Lines, Holland America Lines and Windstar Cruises,

which operate eighteen cruise vessels which embark passengers at

U.S. ports and which it states comprise the largest cruise business

in the world.

Kloster Cruise Limited (``Kloster'') does business under the

trade names Norwegian Cruise Line and Royal Viking Line. It is also

the parent company of Royal Cruise Line Limited. Kloster states that

it is the third largest cruise ship operator in the world.

\1\0The National Cruise Ship Alliance is an organization of

business, government and labor representatives that promotes the

development of a U.S.-flag cruise ship industry. It is involved with

legislation pending in Congress to attract foreign built cruise

ships to U.S. ports and encourage the construction of new U.S.-flag

cruise vessels.

The Transportation Institute represents 140 U.S.-flag shipping

companies engaged in foreign and domestic trades, including AMCV.

The Passenger Vessel Association is a 500-member trade

association of U.S.-flag passenger vessel owners, operators and

suppliers which operate some 1,200 vessels and carry about 80

million people each year. Its members include the American companies

which offer overnight cruises, all on U.S.-built, U.S.-crewed, U.S.-

flag vessels. With the exception of AMCV, these companies all are

small, generally family-owned businesses whose vessels range in size

from 49 to 138 passengers and operate throughout the Americas, from

Venezuela to Alaska.

\1\1The members of the International Council of Cruise Lines

(``ICCL'') have approximately 90% of the cruise industry berth

capacity. ICCL's letterhead lists Carnival Cruise Lines, Celebrity

Cruise Lines, Commodore Cruise Line, Costa Cruise Lines NV, Crown

Cruise Line, Crystal Cruises, Cunard Line Ltd., Dolphin Cruise Line,

Epirotiki Lines, Fantasy Cruise Lines, Holland America Line, Majesty

Cruise Line, Norwegian Cruise Line, Premier Cruise Lines, Ltd.,

Princess Cruises, Regency Cruises, Inc., Royal Caribbean Cruises,

Ltd., Royal Cruise Line, Royal Viking Line, Seabourn Cruise Line,

Sun Line Cruises, Inc., and Windstar Cruises.

\1\2The Surety Association of America represents 650 surety

companies that provide 95% of the surety bonds written in the United

States.

\1\3Midwest Agents Selling Travel (``MAST'') is a trade

association of over 300 upper Midwestern retail travel agencies

which have an estimated $60,000,000 in cruise sales annually, and

approximately $10,000,000 in consumer deposits with PVOs at any

given time.

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There is virtually unanimous support for the Commission's existing

UPR coverage requirements, and widespread questioning of the need for

the Proposed Rule. Many commenters draw attention to the Commission's

many recent proceedings in this area, and assert that there have been

no industry changes warranting this proposal. Positions range from

strong Congressional and U.S.-flag PVO opposition to any further

changes to current coverage requirements, to conditional support of a

modified version of the Proposed Rule by foreign-flag interests. There

is no support for the Proposed Rule outright; however, Carnival

supports the Proposed Rule's coverage requirements for those PVO's

unable to meet its self-insurance proposal.

Many commenters take issue with the Proposed Rule's requirement for

essentially unlimited coverage for UPR. They contend that Pub. L. 89-

777's purpose is to insure that PVOs are financially responsible to

perform transportation, and interpret the statute and the Commission's

past interpretations as requiring evidence of financial responsibility,

not a financial guaranty.

U.S.-flag advocates state that the proposal to discontinue self-

insurance for commercial PVOs would unfairly impact U.S.-flag

operators; foreign-flag advocates criticize it for unduly restricting a

maturing industry. U.S.-flag advocates also criticize the impact of the

Proposed Rule's increased coverage requirements and associated

collateralization requirements upon smaller U.S.-flag PVOs, noting that

they face much higher operating costs than their foreign competition.

In addition, a number of commenters urge the Commission to perform a

cost/benefit analysis on the Proposed Rule's impact.

Many U.S.-flag advocates assert that the impact of the Proposed

Rule's increased coverage requirements would be severe enough to cause

the cruise industry to generally relocate its embarkations to nearby

foreign ports in the Caribbean, Mexico and Canada, thus avoiding FMC

jurisdiction and eliminating protection to the U.S. travelling public.

However, neither of the commenting foreign-flag PVOs nor ICCL in any

way intimate that this would be likely to happen.

The NPR included an alternative coverage requirement,14 and

asked for suggestions for other approaches to ensure adequate UPR

coverage. This aspect of the proposal drew considerable comment;

although the initial approach set forth in the Proposed Rule drew no

unconditional support, the foreign-flag PVO interests in particular

supported a modified version of the Proposed Rule's alternative

approach. Other alternatives were also offered.

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\1\4The alternative proposal would require coverage of 110

percent of UPR up to $25 million per operator; 75 percent of UPR

between $25 million and $50 million per operator; and 50 percent

coverage for UPR over $50 million per operator.

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ICCL and Kloster support the Commission's alternative proposal to

remove the current $15 million ceiling and to implement a sliding

scale, provided (1) that it is gradually phased-in; and (2) the

Commission amends its self-insurance requirements to make self-

insurance reasonably available to creditworthy operators, regardless of

the location of their qualifying assets. These commenters also propose

that (1) only existing UPR be covered, rather than the PVO's highest

UPR during the preceding two years; and (2) coverage requirements and

self-insurance tests should encompass the organization as a whole,

thereby enabling a corporate parent to obtain coverage for its entire

organization.

Citing American Hawaii Cruises' bankruptcy filing and trade press

articles concerning the securing of financing for a Kloster Cruise

ship, MAST endorses moves to ensure liquid funds are readily available

to protect consumers in the event of a default. It suggests that the

Commission give the cruise industry 90 days--under a grant of limited

antitrust immunity--to develop its own plan to ensure total and timely

consumer protection. Should the industry fail to act in a way

satisfactory to the Commission, MAST suggests consideration of higher

bonding.

Alaska Sightseeing recommends that the Commission instead require

110% coverage for UPR up to $5 million, and 50% coverage for UPR over

$5 million, with no maximum. It also suggests retaining self-insurance

for U.S. corporations operating U.S.-flag vessels.

AMCV requests that the current self-insurance option be maintained

and that the existing coverage ceiling be left in place. It stresses

that self-insurance is an important alternative for U.S. companies and

should be retained. It therefore urges that self-insurance not be

simply discarded, but that any concerns should be addressed

individually. It suggests, for example, that the percentage threshold

of net worth as a function of UPR could be increased above 110% to

provide an additional cushion of coverage.

AMCV's first proposal is that PVOs be required to fully disclose

any shortfall between coverage and UPR, and to advise their passengers

of the availability of additional insurance coverage. Its second

proposal is a new rulemaking to consider a berth-based formula, an

indexed increase in the ceiling, or other alternatives to address the

coverage ``gap''.

Carnival believes that the current gap between UPR and coverage

levels is a legitimate issue: recent fleet growth has substantially

increased the gap between coverage and actual UPR. Carnival therefore

suggests that UPR coverage requirements be designed to adjust as PVOs

increase in size, and to avoid the need to return to this issue every

few years. However, it submits that the Proposed Rule's removal of

self-insurance would penalize the most financially sound PVOs. It

instead suggests that self-insurance standards be strengthened and made

available to PVOs which have either (i) an ``investment grade rating''

of its debt by at least two accepted bond rating agencies; or (ii)

which meet certain minimum financial ratios (liquidity of at least 100%

of the PVO's UPR plus at least three times its UPR in tangible net

worth (excluding intangible assets such as good will)). Thus, Carnival

states that the Commission would be accepting the financial standards

the rating agencies and Wall Street use to adjudge a maturing industry,

arguing that a PVO meeting its proposed self-insurance tests clearly

has the resources to satisfy passenger claims for UPR. In the event

that a PVO is unable to self-insure by meeting either the investment

grade ratings test or the minimum financial ratios test, Carnival

supports a significant increase in coverage requirements. In light of

the total amount of UPR, Carnival submits that the Commission's first

alternative of bonding 110% of UPR up to $25 million, and 90% of UPR

exceeding $25 million appears reasonable.

Discussion

We continue to believe that the Proposed Rule represents a legally-

appropriate approach to address the Section 3 coverage issues that are

before the Commission. However, in view of the general opposition to

the Proposed Rule, the Commission has determined to hold it in abeyance

pending the exploration of additional alternatives. The Commission

wishes to ensure that full consideration is given to other means of

establishing financial responsibility which are more acceptable to the

industry. The Commission is therefore instituting this inquiry to

determine the feasibility of the PVO industry addressing coverage

requirements through (1) the vehicle of voluntary association(s) (such

association(s) would be in addition to the current individual methods

of evidencing financial responsibility for non-performance); and (2)

retained but strengthened self-insurance requirements, as outlined more

fully below. The Commission believes that these approaches could

provide a level of protection to the travelling public comparable to

that envisioned by the Proposed Rule, but with less of an impact upon

the industry.

A. Voluntary Association(s)

In Docket No. 92-37, Financial Responsibility for Non-Vessel-

Operating Common Carriers, the Commission permitted a group or

association of non-vessel-operating common carriers (``NVOCC's'') to

collectively issue bonds to meet financial responsibility coverage

requirements imposed upon NVOCC's by the Shipping Act of 1984. Because

this approach has proven successful with respect to NVOCC's, the

Commission is considering its applicability and adaptability to PVO

requirements under Public Law 89-777. At the same time, the Commission

recognizes that, because an association approach would necessarily

involve concerted carrier activity, such an approach could present

issues under the antitrust laws to the extent such activity is not

exempted under agreements effective pursuant to the Shipping Act of

1984, 46 U.S.C. app. 1701 (``1984 Act'')15 and/or approved

pursuant the Shipping Act, 1916, 46 U.S.C. app. 801 (``1916

Act'').16 The Commission invites comment on these issues.

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\1\5The 1984 Act governs concerted ocean common carrier activity

in the U.S. foreign waterborne trades.

\1\6The 1916 Act governs concerted activity of common carriers

by water in interstate commerce in the transportation by water of

passengers on the high seas or the Great Lakes on regular routes

from port to port between one U.S. State, Territory, District or

possession and any other U.S. State, Territory, District or

possession or between places in the same Territory, District or

possession.

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In general terms, the voluntary association concept would work in a

manner whereby the involved association would accept liability for all

or a part of a PVO's section 3 liability, pursuant to a Commission-

approved surety bond or guaranty in an amount equal to the combined UPR

of the two members having the highest amount of UPR during the past two

years. We have set forth below one possible methodology which the

Commission could take to implement this alternative and is proffered

for comments concerning this alternative's viability. Such an approach

could revise the Commission's rules under 46 CFR part 540, subpart A in

the following four respects.

First, it could revise the heading of 46 CFR 540.5 to read:

``Sec. 540.5 Insurance, guaranties, escrow accounts, self-

insurance, associations''.

Second, it could add a new Sec. 540.5(e) to read:

(e) Where a group or association of passenger vessel operators

accepts liability for all or part of a passenger vessel operator's

or a ticket issuer's financial responsibility under section 3 of

Pub. L. 89-777, the group or association of passenger vessel

operators must file either a Form FMC-132A Surety Bond or a Form

FMC-133A Guaranty clearly identifying each passenger vessel operator

or ticket issuer and each passenger vessel covered. In such cases

the group or association's coverage must be in the amount equal to

the combined unearned passenger revenue of the two members having

the highest amount of unearned passenger revenue on the date within

the 2 fiscal years immediately prior to the filing of the group or

association's coverage.

Third, it could redesignate current Sec. 540.5 (e) and (f) as

Sec. 540.5 (f) and (g), respectively.

Finally, it could add a new Sec. 540.9(l) as follows:

(l) Evidence of financial responsibility of the type provided

for in Secs. 540.5 and 540.6 of this part established through and

filed with the Commission by a group or association of passenger

vessel operators or ticket issuers on behalf of its members, is

subject to the following conditions and procedures:

(1) Each group or association of passenger vessel operators or

ticket issuers shall notify the Commission of its intention to

participate in such a program and furnish documentation as will

demonstrate its authenticity and authority to represent its members,

such as articles of incorporation, bylaws, etc.;

(2) Each group or association of passenger vessel operators or

ticket issuers shall provide the Commission with a list certified by

its Chief Executive Officer containing the names of those passenger

vessel operators or ticket issuers to which it will provide

coverage, in whole or in part; the manner and amount of existing

coverage each covered passenger vessel operator or ticket issuer

has; an indication that the existing coverage provided each

passenger vessel operator or ticket issuer is provided by a surety

bond issued by a surety company found acceptable to the Secretary of

the Treasury, or by insurance or guaranty issued by a firm

acceptable to the Commission; and the name, address and facsimile

number of each surety, insurer or guarantor providing coverage

pursuant to this section. Each group or association of passenger

vessel operators or ticket issuers shall notify the Commission

within thirty (30) days of any changes to its list.

(3) The group or association shall provide the Commission with a

sample copy of each type of existing financial responsibility

coverage used by member passenger vessel operators or ticket

issuers.

(4) Each group or association of passenger vessel operators or

ticket issuers shall be responsible for ensuring that each member's

financial responsibility coverage will discharge that member's legal

liability to indemnify the passengers of the member's vessels for

nonperformance of transportation within the meaning of section 3 of

Public Law 89-777. Each group or association of passenger vessel

operators or ticket issuers shall be responsible for requiring each

member to provide it with valid proof of financial responsibility

annually.

(5) Where the group or association of passenger vessel operators

or ticket issuers determines to secure on behalf of its members

other forms of financial responsibility, as specified by this

subpart to indemnify passengers for nonperformance of transportation

within the meaning of section 3, Public Law 89-777, not covered by a

member's individual financial responsibility coverage, such

additional coverage must:

(i) Allow claims to be made in the United States directly

against the group or association's Surety, Insurer or Guarantor

against each covered member for nonperformance of transportation

within the meaning of section 3 of Public Law 89-777; and

(ii) Be for an amount up to the UPR for each covered member up

to a maximum of the UPR in the amount equal to the combined unearned

passenger revenue of the two members having the highest amount of

unearned passenger revenue on the date within the 2 fiscal years

immediately prior to the filing of the group or association's

coverage.

(6) The coverage provided by the group or association of

passenger vessel operators or ticket issuers on behalf of its

members, in whole or in part, shall be provided by:

(i) In the case of a surety bond, a surety company found

acceptable to the Secretary of the Treasury and issued by such a

surety company on Form FMC-132A; and

(ii) In the case of insurance and guaranty, a firm recognized

and approved by the Commission.

B. Reinforced Self-Insurance

Strongly-argued support remains for continuing at least a modified

version of self-insurance. The Commission is concerned that its present

self-insurance standards may be inadequate, but it will consider an

approach whereby it would restore its former ((net worth = 100% UPR) +

(working capital = 100% UPR)) standard,17 but require prospective

self-insurers to provide alternative coverage for a percentage (e.g.,

50% or 25%) of their uncovered UPR, through either a traditional

guaranty, surety, escrow agreement or lien or other security

instrument, or through participation in a coverage association along

the above-described lines. The Commission would, however, still require

qualifying assets to be located in the United States.

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\1\7The former standard provided that the Commission could, for

good cause shown, waive the requirement as to the amount of working

capital.

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C. Coverage Requirements

PVO's electing to secure coverage through an association of the

nature described above would be required to effect coverage either

equal to that PVO's individual exposure under the coverage requirements

ultimately adopted in this matter, or the association could be required

to cover the combined UPR attributable to its two largest members. The

Commission invites comment on other variants that might also provide

adequate coverage.

We also solicit comments on any other form of security or proposal

that would provide adequate coverage for the travelling public.

Conclusion

The Commission's initiation of this proceeding is not in any way

intended to suggest that the PVO industry is unstable or has at any

time failed to meet its responsibilities under Public Law 89-777. At

the same time, we remain concerned that our present requirements may

not provide sufficient coverage in the event of future nonperformance.

The Commission affirms its willingness to consider innovative methods

of ensuring an adequate degree of Public Law 89-777 coverage without

unduly burdening the PVO industry and appreciates the input it has

received to date on the development of its rules in this area.

Now therefore, it is ordered that this Notice of Inquiry be

published in the Federal Register; and

Is further ordered, that the Proposed Rule in Docket No. 94-06 is

hereby held in abeyance pending further notice.

By the Commission,

Joseph C. Polking,

Secretary.

[FR Doc. 94-25437 Filed 10-13-94; 8:45 am]

BILLING CODE 6730-01-P