# Financial Reporting Requirements and Rate of Return Methodology in the Domestic Offshore Trades > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-27373 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** November 4, 1994 ## Text FEDERAL MARITIME COMMISSION 46 CFR Part 552 [Docket No. 94-07] Financial Reporting Requirements and Rate of Return Methodology in the Domestic Offshore Trades AGENCY: Federal Maritime Commission. ACTION: Notice of proposed rulemaking; reply comments. ----------------------------------------------------------------------- SUMMARY: The Commission is seeking reply comments to its Notice of Proposed Rulemaking concerning financial reporting requirements and the rate of return methodology in the domestic offshore trades. The Commission has received seven comments on the proposed rule which have raised issues which require further comment. Comments are requested on, and are to be limited to, the calculation of the cost of capital, working capital, the selection of proxy groups, and the deletion of alternative methodologies. DATES: Reply comments due December 5, 1994. ADDRESSES: Comments (original and fifteen copies) to: Joseph C. Polking, Secretary, Federal Maritime Commission, 800 North Capitol Street, N.W., Washington, D.C. 20573-0001, 202-523-5725. FOR FURTHER INFORMATION CONTACT: Richard R. Speigel, Bureau of Trade Monitoring and Analysis, Federal Maritime Commission, 800 North Capitol Street, N.W., Washington, D.C. 20573-0001, 202-523-5845 C. Douglass Miller, Office of the General Counsel, Federal Maritime Commission, 800 North Capitol Street, N.W., Washington, D.C. 20573- 0001, 202-523-5740. SUPPLEMENTARY INFORMATION: On April 7, 1994, the Federal Maritime Commission (``FMC'' or ``Commission'') published a Notice of Proposed Rulemaking (``NPR'') (59 FR 16592) which proposed to amend its regulations governing financial reporting requirements and rate of return methodology applicable to vessel-operating common carriers by water in the domestic offshore trades. Among other things, the proposed rule would change the method of determining the reasonableness of a carrier's return on rate base from the comparable earnings test to the weighted average cost of capital methodology. At the request of Matson Navigation Company, the Commission extended the comment period for interested parties to file until July 20, 1994 (59 FR 27002). Seven parties filed comments on the NPR. Commenters include: American President Lines (``APL''), Crowley Maritime Corporation (``Crowley''), Matson Navigation Company, Inc. (``Matson''), Puerto Rico Maritime Shipping Authority (``PRMSA''), United States Department of Transportation (``DOT''), Marsoft Incorporated (``Marsoft''), and the State of Hawaii (``Hawaii''). Based on its review of the comments, the Commission has determined that reply comments on four issues would be beneficial. In order that the Commission have the most complete information available to enable it to make an informed judgment in these matters, interested persons are invited to submit comments on the issues discussed below. Issue 1: Calculation of the Cost of Capital PRMSA addresses the issue of the calculation of the before-tax weighted average cost of capital (``BTWACC'') and its relationship to the projected rate of return on rate base. PRMSA states that the formula for the BTWACC contained in the proposed rule is correct.\1\ PRMSA asserts, however, that since the projected rate of return in the proposed rule is computed on an after-tax basis--with return on rate base being computed by dividing net income plus interest expense by the trade rate base--the proposed before-tax weighted average cost of capital is being compared to the after-tax projected return on rate base. PRMSA suggests, therefore, that either the weighted average cost of capital should be changed to an after-tax basis so it can be compared to the after-tax projected return on trade rate base currently specified, or the BTWACC should be retained and the projected return on trade rate base should be changed to a before-tax basis. --------------------------------------------------------------------------- \1\The proposed rule states the before-tax weighted average cost of capital will be calculated using the following equation: BTWACC=(D/D+P+E)Kd+ (P/D+P+E)Kp(1/1-T)+ (E/D+P+E)Ke(1/1-T) where: Kd is the regulated firm's cost of long-term debt capital; Kp is the regulated firm's cost of preferred stock capital; Ke is the regulated firm's cost of common stock equity capital; D is the value of the regulated firm's long-term debt outstanding; P is the value of the regulated firm's preferred stock outstanding; E is the value of the regulated firm's common-stock equity outstanding; T is the corporate income tax rate --------------------------------------------------------------------------- PRMSA's comments appear to have merit. Therefore, the Commission is proposing to retain the before-tax weighted average cost of capital contained in the proposed rule and change the calculation of the projected rate of return on rate base to a before-tax basis. Retention of the BTWACC seems appropriate because it is employed by a large majority of regulatory commissions. The before-tax weighted average cost of capital would be calculated as it is in the proposed rule. However, the projected rate of return on rate base stated in the proposed rule would be changed to: TP04NO94.000 The Commission thus proposes to amend section 552.6(d)(2) to read: (2) Return on Rate Base. The return on rate base will be computed by dividing Trade net income plus interest expense plus provision for income taxes by Trade rate base. The Commission requests comments on this amendment to the proposed rule. Issue 2: Working Capital The proposed rule adopted Hawaii's suggestion in FMC Docket No. 91- 51, Financial Reports of Common Carriers by Water in the Domestic Offshore Trades, that insurance expense be treated in the same manner as other operating expenses in calculating working capital, i.e., include that amount applicable to the duration of an average voyage. In its comments on this proposed rule, Hawaii suggests an additional modification of the calculation of working capital, namely, the exclusion of interest expense. In support of its proposal, Hawaii states that interest expense is a source of working capital funds, and is not paid to the bond holder until after related revenue is received. Hawaii concludes, therefore, that interest expense does not create a need for working capital. Comments are requested on the validity of the proposal to exclude interest expense from the calculation of working capital. Issue 3: The Selection of Proxy Groups A number of parties commented on the selection of the proxy group. Hawaii indicates a concern with the criteria prescribed in selecting a comparable group of companies when the proxy group is used in determining the cost of common-stock equity. Hawaii believes that the companies in the Value Line Investment Survey which satisfy the Commission's criteria for the proxy group do not have business risks similar to those of Matson. Hawaii claims that these companies are generally consolidated companies; are not dominant in their trades; and do not have statutory barriers to entry. Marsoft states that according to its research only three marine transportation companies and four trucking companies meet the proposed guidelines for the proxy group. Marsoft does not believe that airlines, railroads, or full-load trucking companies should be included in the proxy group, because they do not provide comparable services. Marsoft states that in many cases large, geographically and operationally diverse companies will be compared to small, highly specialized private carriers. Marsoft believes that the comparison may not be credible in some cases. PRMSA comments that the proxy group should not be restricted to the freight transportation business. PRMSA asserts that equity capital in the regulated carrier competes against the broad spectrum of companies in the economy, not just against companies involved in freight transportation. The nature of a business is said to be only one ingredient of business risk, not the sole determinant. PRMSA notes that as of June 1994, there were a total of 39 companies listed in Value Line Investment Survey which were involved in air transport, trucking, maritime, and railroading. Allegedly, not all of these companies were involved in freight transportation as required by the proposed rule. PRMSA concludes from this that the potential list of comparable companies is highly limited. Under the proposed rule, the proxy group is selected from companies which operate and derive a major portion of their gross revenues primarily as common carriers in the business of freight transportation, and own and operate transportation vehicles or vessels. The Commission requests specific suggestions on industries other than freight transportation covered by the Value Line Investment Survey which have business and financial risks similar to those of the domestic carriers that may be added to the current proxy group criteria. Issue 4: Deletion of Alternative Methodologies The proposed rule revises paragraph (b) of section 552.1 by deleting the provision that the methodology employed in each case will depend on the nature of the relevant carrier's operations and financial structure. Also, the proposed rule adds language to that paragraph that specifies the extent of possible alternative methodologies. Paragraph (b) reads: (b) In evaluating the reasonableness of a VOCC's overall level of rates, the Commission will use return on rate base as its primary standard. A carrier's allowable rate of return on rate base will be set equal to its before-tax weighted average cost of capital. However, the Commission may also employ the other financial methodologies set forth in Sec. 552.6(f) in order to achieve a fair and reasonable result. Paragraph (d) of the same section has been deleted. That paragraph provided that the Commission may use some other basis for allocation and calculation and may consider other operational factors in any instance where it is deemed necessary to achieve a fair and reasonable result. APL informs that these provisions are at the heart of a major dispute in FMC Docket No. 89-26, The Government of the Territory of Guam, et al. v. Sea-Land Service, Inc. and American President Lines, Ltd. It points out that the NPR does not give any reasons for the proposed changes to section 552.1 and contends that the changes cannot be legally adopted unless and until the FMC identifies its reasons for such a change and allows opportunity for comment. In the abbreviated comments it did provide, APL contends that the proposed changes can have no substantive effect on a pending complaint docket focused on a prior time period. APL further urges the Commission to ``make clear, as a general matter, that its decision in the prospective rulemaking proceeding is not intended to pre-judge issues in the retrospective complaint proceeding.'' APL contends that sections 552.1(b) and 552.1(d) merely make explicit an agency's authority that is implicit in any regulatory scheme. Further, APL questions why the FMC would want to amend a regulation in a way that might imply that it was denying itself the ability to do something necessary to achieve a fair and reasonable result. The Guam trade is unique in that the trade is a very small portion of the carriers' overall service. However, whether the current method of allocation is appropriate in such a case need not be decided here, because the two carriers serving Guam, APL and Sea-Land Service, Inc., currently file most, if not all, of their rates with the Interstate Commerce Commission. Neither carrier files full financial reports under 46 CFR Part 552. In the event an FMC-regulated carrier initiates such a service in the future, the Commission will address the need for any change in 46 CFR Part 552 in a separate rulemaking proceeding. Paragraph (d) was eliminated because the Commission did not want such determinations to be made on an ad hoc basis during a rate investigation. It is essential that significant issues relating to the underlying methodology to be employed in determining the reasonableness of rates be settled prior to any rate investigation. The 180-day limit specified by section 3 of the Shipping Act, 1933, 46 U.S.C. app. 845, cannot be met if parties are permitted to change methodologies during the course of a rate case. Moreover, it is unfair; parties to a rate proceeding are entitled to rely on the Commission's rules. They should not have to respond to ever-changing methodologies proposed by other parties. It is understandable that APL is concerned that the Commission's decision here may affect the outcome in Docket No. 89-26. However, any changes that may be made to Part 552 as a result of this proceeding will only be applied prospectively. They will have no application in pending cases such as Docket No. 89-26. Conclusion The Commission will permit reply comments to be filed by any interested person, not only those that commented on the proposed rule. Those parties who filed comments are on the attached list. All previous commenters are directed to provide copies of their comments to anyone upon request, so as to facilitate timely comments. Copies of comments are also available for inspection and copying at the Commission's Office of the Secretary. Pursuant to Commission Rule 53, 46 CFR 502.53, parties shall serve reply comments on initial round participants. By the Commission. Joseph C. Polking, Secretary. Robert T. Basseches, David B. Cook, Eric C. Jeffrey, Cynthia Gurnee Pugh, Shea & Gardner, 1800 Massachusetts Avenue, NW., Washington, DC 20036, (Counsel for American President Lines, Ltd.) Michael G. Roberts, Vice President, Government Relations, Crowley Maritime Corporation, 1500 K Street, NW., Suite 425, Washington, DC 20005 Stephen Todd Rudman, Assistant General Counsel, Matson Navigation Company, Inc., P.O. Box 7452, San Francisco, CA 94120 Amy Loeserman Klein, Klein, Bagileo, Silverberg & Goldman, 1101 30th St., NW.--Suite 120, Washington, DC 20007, (Counsel for Puerto Rico Maritime Shipping Authority) Rosalind A. Knapp, Deputy General Counsel, U.S. Department of Transportation, 400 Seventh Street, SW., Washington, DC 20590 Arlie G. Sterling, President, Marsoft, Inc., One Financial Center, 25th Floor, Boston, MA 02111 Charles W. Totto, Executive Director, Division of Consumer Advocacy, Department of Commerce and Consumer Affairs, State of Hawaii, P.O. Box 541, Honolulu, HI 96809 [FR Doc. 94-27373 Filed 11-3-94; 8:45 am] BILLING CODE 6730-01-M --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-27373. Public record. Not legal advice.