Financial Responsibility Requirements for Nonperformance of Transportation

FEDERAL MARITIME COMMISSION

46 CFR Part 540

[Docket No. 94-06]

Financial Responsibility Requirements for Nonperformance of

Transportation

AGENCY: Federal Maritime Commission.

ACTION: Proposed Rule.

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SUMMARY: The Federal Maritime Commission proposes to remove the $15

million unearned passenger revenue (``UPR'') ceiling now applicable to

passenger vessel financial responsibility requirements for

nonperformance of transportation, because some vessel operators now

have UPRs significantly exceeding $15 million. The Commission also

proposes 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.

Comment is also sought on an alternative proposal to 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 proposes 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. These changes are deemed necessary to ensure

that cruise passengers are adequately protected in the event of

nonperformance of transportation.

DATES: Comments due on or before May 2, 1994.

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

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

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

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

of Tariffs, Certification and Licensing, Federal Maritime Commission,

800 North Capitol St., NW., Washington, DC 20573, (202) 523-5796.

SUPPLEMENTARY INFORMATION: The Federal Maritime Commission

(``Commission'' or ``FMC'') administers section 3, Public Law 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 the following 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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Unearned passenger revenue

(``UPR'') Required coverage

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$0-$5,000,000...................... 100% of UPR up to $5,000,000.

$5,000,001 to $15,000,000.......... $5,000,000 plus 50% of excess UPR

over $5,000,000 subject to an

overall maximum of $5,000,000 per

vessel.

$15,000,001 to $35,000,000......... $10,000,000 plus 25% of excess of

UPR over $15,000,000 subject to an

overall maximum of $5,000,000 per

vessel and a $15,000,000 overall

maximum.

Over $35,000,000................... $15,000,000 overall maximum.

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The Commission monitors activity of PVOs who are subject to Public

Law 89-777 and by rule requires semiannual UPR reports.4

Additionally, the Commission periodically surveys PVOs' future U.S.

cruise schedules and fare structures.

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\4\46 CFR 540.9(h) provides, in pertinent part:

Every person who has been issued a Certificate (Performance)

must submit to the Commission a semiannual statement of any changes

that have taken place with respect to the information contained in

the application or documents submitted in support thereof. Negative

statements are required to indicate no change. Such statements must

cover every 6-month period of the fiscal year immediately subsequent

to the date of the issuance of the Certificate (Performance), and

include a statement of the highest unearned passenger revenue

accrued for each month in the 6-month reporting period. In addition,

the statement will be due within 30 days after the close of every

such 6-month period.

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Developments since our most recent actions in Dockets Nos. 92-19

and 92-505 have prompted us to reconsider existing UPR coverage

requirements with regard to the sliding scale, the ceiling and self-

insurance. One development concerns the involuntary bankruptcy of

American Hawaii Cruises (``American Hawaii''). Another is the extent to

which some PVOs' UPR now exceeds the current $15 million ceiling.

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\5\Financial Responsibility Requirements for Nonperformance of

Transportation--Revision of Self-insurance Qualification Standards,

Final Rule (57 FR 62749 (December 31, 1992)).

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Further, with regard to self-insuring PVOs that are not state or

federal entities, the Commission is concerned that sufficient funds may

not be available to indemnify passengers for nonperformance of

transportation.

While American Hawaii's vessels operated without disruption in

their transition to new ownership, if American Hawaii's required level

of financial responsibility had been based on the existing sliding

scale formula, no more than a total of $10 million in UPR coverage

would have been required for UPR amounts up to $35 million for its two

vessels; and no more than $15 million in coverage would have been

required had its UPR exceeded $35 million.

Some PVOs' UPR now greatly exceeds the current $15 million

ceiling--in some instances by a factor of several times the current

ceiling. In aggregate, there is about $300 million in coverage

presently on file for what we estimate to be $1 billion in UPR subject

to Public Law 89-777, leaving some $700 million in UPR without Section

3 coverage.

The foregoing raises concern with regard to the increased exposure

to risk of the travelling public's deposits and prepaid fares in the

event that a PVO holding UPR levels above the current ceiling defaults,

possibly leaving passengers unprotected and subject to financial

losses. The Commission therefore proposes to remove the $15 million

ceiling in 46 CFR 540.9(j)--and revise the sliding scale in section

540.5(e)--to require coverage for UPR over and above the present

ceiling. The Commission proposes to amend section 540.5 to require

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

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

Comment is requested on the alternative of requiring 110 percent

coverage for up to $25 million in UPR per operator; coverage of 75

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

50 percent coverage for UPR over $50 million per operator.

Given its clear Section 3 responsibilities and obligations, the

Commission needs to address the amount of UPR subject to Section 3

which is not presently covered by evidence of financial responsibility

under the Commission's rules. The Commission's proposals detailed above

represent two approaches to that end. However, if the PVO industry or

another interested party has an alternative proposal to ensure adequate

financial responsibility coverage for UPR subject to section 3, we

invite their suggestions.

The Commission's monitoring and review of PVO coverage issues in

general indicates a need for the Commission to reconsider the

acceptability of self-insurance for section 3 coverage with regard to

PVOs that are not state or federal entities. Our examination of self-

insurance standards reveals a vulnerability which appears to provide

inadequate protection in the case of commercial PVOs. Presently, only

net worth at 110 percent of the highest UPR over the past two years

must be maintained. The Commission is concerned that, in the event of a

default, other interests with potentially superior claims on a PVO's

assets--e.g., a vessel's crew, shipyards, provisioners, mortgage

holders--would reduce the assets ultimately available to indemnify

nonperformance to a level far below the PVO's actual UPR. Even if the

Commission were to reinstate its former requirement that self-insurers

evidence net worth and working capital, each in an amount no less than

110 percent of the greatest amount of UPR over the preceding two years,

sufficient assets might still not be readily available to make whole

the travelling public in the event of a default. These concerns do not,

however, appear to militate against accepting state or federal entities

as self-insurers.

While the Proposed Rule would discontinue self-insurance for

commercial entities, it would permit commercial operators who are

presently self-insured to remain so for one year following the

effective date of any final rule in this proceeding. At that time,

self-insuring commercial PVOs would be required to provide other

evidence of financial responsibility.

Proposed amendments to Form FMC-131, Part II, will conform the

Commission's Application for Certificate of Financial Responsibility to

reflect the amendments contemplated in the proposed rule.

The Federal Maritime Commission certifies, pursuant to section

605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), that this

proposed rule, if adopted, will not have a significant economic impact

on a substantial number of small entities, including small businesses,

small organizational units, and small governmental organizations. The

passenger vessel operators impacted by the rule are generally not small

businesses.

This proposed rule does not impose any additional reporting

requirements from those previously approved by OMB under section

3504(h) of the Paperwork Reduction Act of 1980, as amended.

List of Subjects in 46 CFR Part 540

Insurance, Maritime carriers, Penalties, Reporting and

recordkeeping requirements, Surety bonds, Transportation.

Therefore, pursuant to 5 U.S.C. 553; section 3, Public Law 89-777,

80 Stat. 1356-1358 (46 U.S.C. app. 817e); section 43 of the Shipping

Act, 1916 (46 U.S.C. app. 841a); and section 17 of the Shipping Act of

1984 (46 U.S.C. app. 1716), the Federal Maritime Commission proposes to

amend part 540 of title 46 of the Code of Federal Regulations as

follows:

PART 540--[AMENDED]

1. The authority citation to part 540 continues to read as follows:

Authority: 5 U.S.C. 552, 553; secs. 2 and 3, Pub. L. 89-777, 80

Stat. 1356-1358 (46 U.S.C. app. 817e, 817d); sec. 43 of the Shipping

Act, 1916 (46 U.S.C. app. 841a); sec 17 of the Shipping Act of 1984

(46 U.S.C. app. 1716).

2. The first sentence of Sec. 540.5 introductory text and

Sec. 540.5(d) introductory text are revised to read as follows:

Sec. 540.5 Insurance, guaranties, escrow accounts, and self-insurance.

The amount of coverage required under this section and

Sec. 540.6(b) shall be in an amount determined by the Commission to be

no less than 110 percent of the unearned passenger revenue of the

applicant on the date within the 2 fiscal years immediately prior to

the filing of the application which reflects the greatest amount of

unearned passenger revenue according to the following schedule:

If Unearned passenger revenue Required coverage is:

(``UPR'') is:

0-$25,000,000.................... 10% of UPR.

Over $25,000,000................. 110% of UPR up to $25,000,000; 90%

of UPR over $25,000,000.

* * *

* * * * *

(d) For state or federal entity vessel operators, filing with the

Commission for qualification as a self-insurer such evidence acceptable

to the Commission as will demonstrate continued and stable passenger

operations over an extended period of time in the foreign or domestic

trade of the United States. Commercial (i.e., non state or federal)

vessel operators will no longer qualify as self-insurers. However, for

a period expiring [date one year after the effective date of the Final

Rule], the Commission will continue to permit self-insurance for

commercial vessel operators which were accepted by the Commission on

January 1, 1994, and which continue to submit the following:

* * * * *

Sec. 540.5 [Amended]

3. In section 540.5, paragraph (e) is removed, and paragraph (f) is

redesignated as paragraph (e).

Sec. 540.9 [Amended]

4. In section 540.9, paragraph (j) is removed, and paragraph (k) is

redesignated as paragraph (j).

Subpart A--[Amended]

5. In subpart A, Form FMC-131, Part II--Performance, is amended by

removing the second sentence of the introductory paragraph and removing

and reserving paragraph No. 8.

By the Commission.

Joseph C. Polking,

Secretary.

[FR Doc. 94-7647 Filed 3-30-94; 8:45 am]

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