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: Further notice of proposed rulemaking.

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SUMMARY: The Federal Maritime Commission proposes to remove its current

$15 million coverage ceiling for nonperformance of transportation by

passenger vessel operators. The Commission would replace the ceiling

with sliding-scale coverage requirements keyed to passenger vessel

operators' financial rating, length of operation in United States

trades and satisfactory explanation of claims for nonperformance of

transportation. For self-insuring passenger vessel operators, the

Commission proposes to reestablish a working capital requirement and to

require third-party coverage for 25 percent of unearned passenger

revenue. In order to clarify that the escrow agreement is for the

exclusive benefit of passengers' deposits and prepaid fares, the

Commission proposes revising the form escrow agreement it publishes as

a guideline for the industry. The Commission also proposes to require

applications for Certificates (Performance) to be filed at least 90

days in advance of the arranging, offering, advertising or providing of

water transportation or tickets in connection therewith, unless good

cause is shown. Finally, the Commission again solicits suggestions for

other alternatives to consider under its Public Law 89-777 program, as

well as suggestions for scheduling the phasing-in of the proposed

rule's revised coverage requirements. These changes are deemed

necessary to enhance the travelling public's protection against

nonperformance of transportation.

DATES: Comments due on or before August 26, 1996.

ADDRESSES: Send comments (original and 15 copies) to: 1 Joseph C.

Polking,

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

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

\1\ The Commission also requests, but does not require, that

commenters submit an electronic copy of their comments in ASCII,

WordPerfect or Microsoft Word format.

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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:

I. Introduction

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'') 2 to establish financial responsibility for

nonperformance of transportation.3 The Commission's regulations

implementing section 3 (46 CFR 540, Subpart A) generally provide that a

PVO may evidence financial responsibility by one or more of the

following methods: A guaranty, escrow arrangement, surety bond,

insurance or self-insurance. The Commission requires coverage of at

least 110 percent of a PVO's highest unearned passenger revenue

(``UPR'') 4 over a two-year period. However, the maximum coverage

amount currently required is $15 million. Also, non-self-insuring PVOs

that can evidence a minimum of five years operation in U.S. trades with

a satisfactory explanation of any claims for nonperformance of

transportation are entitled to reduced coverage requirements under the

following sliding scale: 5

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\2\ For the purposes of section 3, a PVO is any person in the

United States that arranges, offers, advertises or provides passage

on a vessel having berth or stateroom accommodations for fifty or

more passengers and which is to embark passengers at United States

ports.

\3\ 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.

\4\ UPR is defined under 46 CFR 540.2(i) as:

* * * passenger revenue received for water transportation and

all other accommodations, services, and facilities relating thereto

not yet performed.

\5\ 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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Under the Commission's present rules, self-insuring PVOs are

required to demonstrate, among other things, net worth equal to at

least 110 percent of their UPR. At an earlier stage of this proceeding,

as discussed below, the Commission had proposed to phase out self-

insurance except for PVOs which are state and Federal entities.

The Commission monitors activity of PVOs who are subject to Public

Law 89-777 and by rule requires semiannual UPR reports.6

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

cruise schedules and fare structures.

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\6\ 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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II. Background

A. Docket No. 94-6

These proceedings were instituted with a March 1994 Notice of

Proposed Rulemaking (``1994 NPR'' or ``1994 Proposed Rule'').7 The

1994 NPR addressed the Commission's concerns about the adequacy of its

coverage requirements in the light of several recent developments,

including $700 million in uncovered UPR, the voluntary bankruptcy of

one PVO and the dislocation of a self-insured carrier's operations as a

result of the 1993 floods in the Mississippi River system. The 1994 NPR

therefore proposed:

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\7\ 59 FR 15149 (March 31, 1994).

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(1) removing the current $15 million UPR coverage ceiling;

(2) revising the current UPR sliding scale 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); and

(3) removing 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.

The 1994 NPR drew twelve comments. There was virtually unanimous

support for the Commission's existing coverage requirements, and

widespread questioning of the need for the 1994 Proposed Rule. Many

commenters drew attention to the Commission's earlier series of

proceedings in this area,8 and

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asserted that there have been no industry changes warranting this

proposal. Positions ranged 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 1994 Proposed Rule by

foreign-flag interests. There was no support for the 1994 Proposed Rule

outright; however, a foreign-flag PVO supported the 1994 Proposed

Rule's coverage requirements for those PVOs unable to meet that PVO's

self-insurance proposal.

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\8\ Docket No. 90-1, Security for the Protection of the Public,

Maximum Required Performance Amount; Proposed Rule, 55 FR 1850

(January 19, 1990); Final Rule, 55 FR 34564 (August 23, 1990);

Correction, 55 FR 35983 (September 4, 1990).

Fact Finding Investigation No. 19, Passenger Vessel Financial

Responsibility Requirements, Order of Investigation, 55 FR 34610

(August 23, 1990).

Docket No. 91-32, Passenger Vessel Financial Responsibility

Requirements for Indemnification of Passengers for Nonperformance of

Transportation--Advance Notice of Proposed Rulemaking and Notice of

Inquiry, 56 FR 40586 (August 15, 1991).

Docket No. 92-19, Revision of Financial Responsibility

Requirements for Nonperformance of Transportation; Proposed Rule, 57

FR 19097 (May 4, 1992); Final Rule, 57 FR 41887 (September 14,

1992).

Docket No. 92-50, Financial Responsibility Requirements for

Nonperformance of Transportation--Revision of Self-Insurance

Qualification Standards; Proposed Rule, 57 FR 47830 (October 20,

1992); Final Rule, 57 FR 62479 (December 31, 1992).

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B. Docket No. 94-21

Given the concerns expressed in the industry comments to the 1994

NPR, the Commission determined to hold it in abeyance pending a formal

Inquiry under Docket No. 94-21, Inquiry into Alternative Forms of

Financial Responsibility for Nonperformance of Transportation (``1994

Inquiry'').9 The 1994 Inquiry's purpose was to determine whether

an acceptable alternative could be fashioned to both address the

industry's concerns with the 1994 NPR and ensure appropriate protection

for passengers. The 1994 Inquiry therefore solicited comment on

covering UPR liability through:

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\9\ 59 FR 52133 (October 26, 1994).

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(1) voluntary association(s) (such association(s) would be in

addition to the current individual methods of evidencing financial

responsibility for non-performance); 10 and

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\10\ In this connection, the Commission noted its approach in

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

Common Carriers, Final Rule, 58 FR 5618 (January 22, 1993), which

permits groups or associations of non-vessel-operating common

carriers (``NVOCCs'') to collectively issue bonds to meet financial

responsibility coverage requirements imposed upon NVOCCs by the

Shipping Act of 1984. Because this approach had proven successful

with respect to NVOCCs, a purpose of the 1994 Inquiry was to

consider its applicability and adaptability to PVO requirements

under Pub. L. 89-777.

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(2) retained but strengthened self-insurance requirements.

In general terms, the association(s) envisioned by the 1994 Inquiry

would accept liability for all or a part of a PVO's section 3

liability, using 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. Because these associations

would necessarily involve concerted carrier activity, comments were

also invited on whether this approach could present issues under the

antitrust laws, to the extent such activity is not immunized under

Shipping Act agreements.\11\

\11\ The Shipping Act of 1984, 46 U.S.C. app. 1701, (``1984

Act'') governs concerted ocean common carrier activity in the U. S.

foreign waterborne trades. The Shipping Act, 1916, 46 U.S.C. app.

801, (``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. Effective September 30, 1996, the ICC Termination Act of

1995, Pub. L. No. 104-88, 109 Stat. 803, repeals among other things

the 1916 Act provisions applicable to agreements.

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The reinforced self-insurance approach envisioned by the 1994

Inquiry would have worked in a manner whereby the Commission would

restore its former standard,\12\ 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. This approach would, however, still require qualifying assets to

be located in the United States.

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\12\ The Commission previously required the maintenance of

working capital and net worth, each equal to 110 percent of the

operator's UPR. This standard provided that the Commission could,

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

working capital.

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The 1994 Inquiry was subsequently revised to clarify that the

Commission was also seeking comment on accepting liens, mortgages or

other security instruments as evidence of financial

responsibility.13

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\13\ 59 FR 54878 (November 2, 1994).

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Five comments on the 1994 Inquiry were submitted by three trade

associations (one representing surety interests,14 one

representing foreign-flag vessel operators 15 and one representing

U.S.-flag vessel operators)16, a foreign-flag vessel operator

17 and a U.S.-flag vessel operator.18

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\14\ The Surety Association of America (``Surety Association'')

is a trade association that represents 650 surety companies that

provide 95% of the surety bonds written in the United States.

\15\ The International Council of Cruise Lines (``ICCL'') states

that its members have the vast majority of the cruise industry berth

capacity. Its 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. (``Regency''); Royal

Caribbean Cruises, Ltd.; Royal Cruise Line; Royal Viking Line;

Seabourn Cruise Line; Sun Line Cruises, Inc.; and Windstar Cruises.

\16\ The Transportation Institute stated in its NPR comments

that it represents 140 U.S.-flag shipping companies engaged in

foreign and domestic trades, including American Classic Voyages Co.

The U.S.-flag PVOs under the Commission's section 3 program

presently consist of American Classic Voyages, Alaska Sightseeing/

Cruise West, Clipper Cruise Line, Special Expeditions, Alaska Marine

Highway, and American Canadian Caribbean Line.

\17\ Carnival Corporation (``Carnival''). Carnival's comments

are filed on behalf of Carnival Cruise Lines, Holland America Lines

and Windstar Cruises. Carnival is an ICCL member.

\18\ American Classic Voyages Co. (``AMCV''). AMCV is the

corporate parent of The Delta Queen Steamboat Co. (``Delta Queen'')

and Great Hawaiian Cruise Line, Inc. (``American Hawaii''). AMCV is

a section 3 self-insurer.

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All of the 1994 Inquiry's commenters had also commented on the NPR,

and indicate that their comments on the 1994 Inquiry supplement or

incorporate by reference those earlier comments, which generally

opposed the 1994 Proposed Rule and urged retaining current regulations.

Many commenters express appreciation for the Commission's efforts to

arrive at creative solutions to the financial responsibility issue. At

the same time, they reiterate their NPR comments that current

requirements are working well, and that no passengers have lost any

money.

The commenters' general opposition to the NPR carried over to the

alternatives proffered under the 1994 Inquiry: virtually all foresee

problems of one sort or another with the voluntary association

approach, ranging from skepticism about the availability of the large

bonds necessary, to a number of difficult risk management and

competitive factors. No commenter offers outright support for the

vessel lien concept, for a number of reasons generally based on

opposition to a requirement that qualifying assets be located in the

U.S. Commenters urge the Commission not to change its current self-

insurance standards, or to discontinue the requirement that qualifying

assets be based in the U.S.

1. Voluntary Associations

The comments opposing the 1994 Inquiry's voluntary association

proposal suggest that, although this general approach seems to be

viable for NVOCCs, it may not be feasible for PVOs. In particular,

these comments address the operational and fiscal

[[Page 33062]]

distinctions between the NVOCC and the PVO industries and make a

credible argument as to why in this particular case a mechanism which

works for one industry might not for another.19

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\19\ In this regard, the comments point out that P&I Clubs,

which are mutual insurance associations, were developed initially to

provide mutual insurance for casualty and other losses. Thus, they

are structured on the assumption that a member will survive a

casualty, and the P&I mechanism is designed to eventually recover

casualty losses from the member suffering that loss. (P&I Clubs

issue performance guaranties only as an accommodation to the

membership, and then only on a fully-collateralized basis.) The

NVOCC industry uses commercial instruments and does not have mutual

associations similar to P&I Clubs.

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In short, the comments contend that an association approach would

not work at the coverage levels contemplated under the NPR (either the

original proposal or the alternative), due to the concentrated capital

structures, operational diversity and competitive considerations

inherent in the contemporary cruise industry.20 Also, ICCL

comments that the nature of the cruise business does not lend itself to

the mutuality inherent in the association approach, which seems to be

borne out by AMCV's explanation of the drawbacks it sees in the

association approach.21 It therefore appears unlikely that the

market could support the magnitude of risk exposure inherent in the

sort of voluntary association envisioned by the 1994 Inquiry.

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\20\ The Surety Association advises that, depending on the

actual make-up and financial strength of the passenger vessel

associations, some associations may find it extremely difficult to

qualify for a group surety bond and some may not be able to qualify

at all.

\21\ AMCV described the undesirability of PVOs becoming exposed

to liability for other PVOs' nonperformance; fiduciary risks to PVO

management for assuming liability for events within the sole control

of its competitors; the difficulties of allocating the levels of

risk involved and the narrowness of the base upon which that risk

would be shared; and the inherent susceptibility of weaker members

to termination--either for competitive reasons or because of normal

operational risks inherent in a seasonal industry that is ultimately

dependent upon discretionary income for all of its revenues.

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Another material difference between these two industries is

prepayment: NVOCCs do not require their customers to fully prepay for

their services anywhere from two to six weeks (or, in some cases, eight

or more weeks) before they are performed, as is the practice with PVOs.

It is this practice which accounts for the approximately $700 million

shortfall in uncovered UPR that prompted these proceedings. The

shortfall's size more than anything else would appear ultimately to

render the voluntary association approach unworkable.

With regard to possible antitrust issues under this approach, AMCV

notes that an association attempting to limit membership to financially

sound PVOs could be subject to antitrust claims by excluded PVOs, and

that there is an inherent potential for detrimental disclosure of

confidential information.22

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\22\ Those PVOs subject to the 1984 Act could avail themselves

of agreement immunity to protect themselves from whatever exposure

such concerted activity would cause under antitrust laws. Thus, the

Shipping Act's antitrust exemption could result in uneven antitrust

exposure as between those PVOs entitled to the wide scope of 1984

Act agreement antitrust exemption (transportation between U.S. and

foreign locations), which would obtain either with the filing or

regulatory exemption of the Association agreement(s); and those

purely domestic PVOs (transportation solely within the U.S.), which

may not be entitled to any Shipping Act antitrust exemption at all.

(The immunity afforded by the 1916 Act is repealed September 30,

1996, by virtue of the ICC Termination Act of 1995, Pub. L. 104-88,

109 Stat. 803.)

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In view of the foregoing considerations, the Commission has

determined not to pursue a voluntary association approach for the

purposes of its Pub. L. 89-777 program.

2. Self-Insurance

The self-insurance requirements currently in place were established

by the Commission's Final Rule in Docket No. 92-50, which became

effective February 1, 1993. Previously, self-insurers needed to

demonstrate net worth and working capital each equal to 110% of the

PVO's UPR--the standard the 1994 Inquiry suggested that the Commission

might restore.

Current self-insurance standards provide that PVOs demonstrating a

minimum of five years' operation in U.S. trades, with a satisfactory

explanation of any claims for nonperformance of transportation, need

only demonstrate net worth equal to 110% of their UPR to qualify for

self-insurance. Self-insurers are not, however, entitled to the sliding

scale UPR coverage requirements that had been adopted in the Final Rule

in Docket No. 92-19,23 and qualifying assets still must be located

in the U.S.

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\23\ Please refer to footnote 5, infra.

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The comments on the 1994 Inquiry urge the Commission not to repeal

self-insurance for private operators. AMCV has offered a rationale why

the Commission should neither terminate self-insurance for commercial

PVOs, as proposed in the NPR, nor implement the 1994 Inquiry's

suggested restoration of the Commission's former and more rigorous

standard.

Foreign-flag operators take a different tack, urging repeal of the

U.S.-based asset requirement. Carnival proposes a standard that would

not only repeal the U.S.-based asset requirement but also provide for

self-insurance qualification for PVOs which either (1) have earned

investment grade ratings by the bonding rating agencies; or (2) meet

both (a) a three times tangible net worth test and (b) a liquidity test

(cash, short term investments and undrawn lines of credit equal to at

least 100% UPR).

The foreign-flag operators, and Carnival in particular, seek a

system that appears to be well suited for assessing a company's

investment risk. However, Carnival's ``investment risk'' test may not

be appropriate for a statute that contemplates indemnification of

passengers in the event a carrier does not fulfill its obligations.

In this regard, we note that Carnival's proposed test is

conditioned upon the Commission removing the U.S.-based asset

requirement. We believe this requirement is critical to the self

insurance standard. Unless passengers have the ability to attach a

defaulting carrier's assets, self insurance under any standard is

problematic.24 As the Commission remarked in its Final Rule in

Docket 92-50:

\24\ Although Carnival has proposed that self-insuring PVOs

assent to U.S. jurisdiction in disputes with passengers over UPR and

that PVOs designate agents for service of process, we do not believe

that these measures would be sufficient for a passenger to attach a

carrier's foreign-based assets. Moreover, this would not add

anything new because section 3 UPR is already protected by U.S. Law

(Pub. L. 89-777) and all section 3 applicants are required to

appoint agents for service of process before they are certificated.

Also, the Commission's concern is not limited to disputes between

viable PVOs and passengers over UPR; rather, the Commission is

concerned with a failing PVO's ability to indemnify passengers for

nonperformance, which goes well beyond U.S. jurisdiction over simple

disputes.

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Although AHC and ICCL have requested the Commission to relax the

requirement that the assets used to qualify as a self-insurer be

physically located in the United States, the final rule herein

continues existing requirements for the location of those assets.

The Commission remains concerned that passengers may not have the

ability or resources to pursue foreign-domiciled assets, and that

such efforts would not be cost-effective in the majority of

instances.* Moreover, as noted in the NPR, ``self-insurance presents

a greater risk of loss to the travelling public than do other forms

of coverage that are backed by independent interests holding sums of

money for the protection of the public.''

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* Docket No. 92-19, Notice of Proposed Rulemaking, p. 9.

Docket No. 92-50, Financial Responsibility Requirements for

Nonperformance of Transportation--Revision of Self-Insurance

Qualification Standards, 57 FR 47830 (October 20, 1992), Final Rule,

57 FR 62480 (December 31, 1992).

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On the other hand, AMCV's comments appear to provide a basis to

ameliorate some of the concerns that originally prompted the Commission

to propose withdrawing self-insurance as

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an available option for commercial PVOs.25 AMCV explains that

traditional maritime liens and preferred mortgages, which have priority

over passenger claims, are first deducted prior to calculating net

worth under the existing rule; therefore, the resultant net worth used

to qualify for section 3 self-insurance has already accounted for those

liabilities.26

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\25\ AMCV also suggested that the widespread use of credit cards

and the protection offered by the Truth-in-Lending Laws and private

travel insurance programs, act to buttress any shortfalls in the

Commission's self-insurance options. While this may or may not be

true, the Commission nevertheless has an independent obligation to

make certain that PVOs have established their financial

responsibility to indemnify passengers for nonperformance of

transportation. Accordingly, we do not believe that the statutes or

programs referred to by AMCV obviate the need for the Commission to

fulfill its statutory responsibilities.

\26\ Although AMCV may have addressed some of the Commission's

concerns with respect to self-insurance, it did not address other

potential payables that may have priority over passengers claims,

e.g., employee salaries, benefits, legal fees. However, the proposed

restoration of the former working capital standard, together with

the additional requirement suggested below, should suffice to

establish the requisite level of financial responsibility.

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After further consideration, the Commission has determined to

withdraw its proposal to discontinue self-insurance for commercial

operators. Instead, the Commission proposes to continue self-insurance,

but with revised criteria. To this end, the proposed rule herein would

revise Part 540 to permit PVOs other than state or Federal

instrumentalities to qualify for a Performance Certificate using U.S.-

based net worth and working capital each equal to or greater than their

outstanding UPR, plus an additional cushion of 25% of UPR backed by a

traditional guaranty, surety bond, insurance or escrow account. Such an

approach would permit commercial operators, like AMCV, to continue to

use the self-insurance option currently set forth in the Commission's

rules, provided they also can evidence working capital equal to their

outstanding UPR and can acquire a guaranty, surety bond, insurance or

escrow account for 25% of their outstanding UPR.

3. Liens, Mortgages and Other Security Instruments

This aspect of the 1994 Inquiry drew no support in the comments. In

fact, commenters provided sound reasons why it should not be pursued

further. Accordingly, the Commission intends to take no further action

with respect to this option.

III. Discussion

Notwithstanding the industry's general position that changes are

not necessary, the Commission's concern about the adequacy of its

financial responsibility standards has, if anything, increased.

Subsequent to the close of the comment period in the 1994 Inquiry,

three additional passenger vessel operators have sought protection

under the Bankruptcy Code:

--In late December 1994, Gold Star Cruises ceased operations and filed

for Chapter 7 bankruptcy.

--As of October 29, 1995, Regency Cruises ceased operations. It

subsequently filed for Chapter 11 protection on November 7, 1995.

--On October 30, 1995, Palm Beach Cruises filed for Chapter 11

protection to reorganize.

In each of these cases, there appear to be sufficient funds set aside

to indemnify passengers scheduled to embark at U.S. ports. At the same

time, it should be noted that there was some concern regarding Regency

because its unearned passenger revenue had from time to time exceeded

the current ceiling; however, Regency ceased operations at a time when

its unearned passenger revenue was below the ceiling.

Accordingly, in light of the foregoing the Commission believes that

it must now proceed to revise its coverage requirements to narrow the

gap between coverage and UPR as a means of enhancing protection for the

public.

A. Revised Coverage Requirements

1. Coverage Levels

As aforementioned, the Commission remains concerned about 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). Adjustments will

also be proposed to the sliding scale and eligibility requirements

currently set forth in 540.5(e). The Commission also proposes to

introduce a new sliding scale coverage table that would apply to all

operators.

a. Reduced Coverage Scale. The revised sliding scale in 46 CFR

540.5(e) would continue to be available to passenger vessel operators

that can provide evidence of at least five years' operation in United

States trades, with a satisfactory explanation of any claims for

nonperformance of transportation. Operators opting to use this reduced

coverage sliding scale would, in addition, have to demonstrate that

their debt is rated ``Aa'' or better by Moody's Investors Service. For

those who qualify, this reduced coverage sliding scale would require

100 percent coverage for UPR up to $15 million and, when fully phased

in, 60 percent coverage for UPR between $15 and $50 million; 20 percent

coverage for amounts between $50 and $100 million; and 10 percent for

amounts over $100 million. The reduced coverage sliding scale would be

phased in over a 3-year period to minimize the impact of the new

coverage requirements.27

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\27\ The proposed reduced coverage sliding scale would require

100 percent coverage for a PVO's first $15 million in UPR and phase

in this revised coverage requirement in three increments:

First, effective March 1, 1997, it would require 60 percent

coverage for UPR between $15 and $25 million; 20 percent coverage

for amounts between $25 and $50 million and 10 percent coverage for

amounts over $50 million.

Second, effective March 1, 1998, it would require 60 percent

coverage for UPR between $15 and $35 million; 20 percent coverage

for amounts between $35 and $75 million and 10 percent coverage for

amounts over $75 million.

Finally, effective March 1, 1999, it would require 60 percent

coverage for UPR between $15 and $50 million; 20 percent coverage

for amounts between $50 and $100 million; and 10 percent coverage

for amounts over $100 million.

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The Commission believes that this approach would give more weight

to third-party, marketplace assessments of a PVO's financial strength

in determining its section 3 risk. Moreover, this approach relies,

albeit indirectly, upon foreign-based assets as urged by foreign-flag

PVOs in connection with the self-insurance standards.

b. Standard Coverage Scale. The new standard coverage sliding scale

would be available to all PVOs, regardless of the extent of their

operational experience, their financial standing or their explanations

for instances of nonperformance. When fully phased in, the standard

coverage sliding scale would ultimately require 100 percent coverage

for UPR up to $50 million; 75 percent coverage for amounts between $50

and $100 million; and 25 percent coverage for amounts over $100

million. The standard coverage sliding scale would be phased in over a

3-year period to minimize the impact of the new coverage

requirements.28

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\28\ The proposed rule would phase in this revised coverage

requirement in three increments:

First, effective March 1, 1997, it would require 100 percent

coverage for UPR up to $25 million; 75 percent coverage for amounts

between $25 and $35 million; and 25 percent coverage for amounts

over $35 million.

Second, effective March 1, 1998, it would require 100 percent

coverage for UPR up to $35 million; 75 percent coverage for amounts

between $35 and $50 million; and 25 percent coverage for amounts

over $50 million.

Finally, effective March 1, 1999, it would require 100 percent

coverage for UPR up to $50 million; 75 percent coverage for amounts

between $50 and $100 million; and 25 percent coverage for amounts

over $100 million.

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[[Page 33064]]

2. Self-Insurance

The Commission has determined to propose the restoration of self-

insurance for private PVOs that can demonstrate both U.S.-based net

worth and working capital each equal to their outstanding UPR,29

with an additional cushion of 25% of UPR backed by a traditional

guaranty, surety bond, insurance or escrow account.

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\29\ The Commission also proposes restoring the procedure to

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

working capital appearing in the former Sec. 540.5(d).

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3. Effective Date

While the Commission wishes to revise section 3, Public Law 89-777,

requirements at the earliest practicable date, it does not wish to do

so in a manner that unnecessarily disrupts the passenger vessel

industry. In this connection, the Commission acknowledges the

widespread practice of P&I Clubs to require members to fully

countersecure their section 3, Public Law 89-777, guaranties as well as

the P&I Club practice of renewing coverages during February of each

year. Therefore, the proposed rule herein would phase in the revised

coverage requirements over a 3-year period beginning March 1, 1997, and

ending March 1, 1999.

B. Revision of Part 540's Escrow Agreement Guideline

In a recent bankruptcy involving a PVO that had used an escrow

agreement to meet its section 3, Public Law 89-777 financial

responsibility requirements, the question arose as to whether the

escrow's assets should be considered debtor's property. The escrow

agreement at issue contained language that the Commission has changed

in other escrow agreements it has since approved so as to address this

issue. Therefore, we are proposing a change to paragraph 12 to require

language that makes clear that escrow funds are not debtor's property

and should be made available to passengers.

C. Filing Deadline

Section 540.4(b) requires that an application for a Certificate

(Performance) shall be filed at least 60 days in advance of the

arranging, offering, advertising, or providing of any water

transportation or tickets in connection therewith. Late filing of the

application is permitted only for good cause shown. With the growth of

the passenger vessel industry over the years since this requirement was

first promulgated, together with the industry's increasing reliance on

complex financial responsibility proposals requiring case-by-case

assessment by the Commission, a 60-day period can be insufficient.

Accordingly, this is being changed to a 90-day period, absent good

cause shown.

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.

The collection of information requirements contained in this rule

have been submitted to the Office of Management and Budget for review

under section 3507 of the Paperwork Reduction Act of 1995. The annual

public reporting and recordkeeping burden for this collection of

information is estimated to average 14.91 hours per response. Burden

means the total time, effort, or financial resources expended by

persons to generate, maintain, retain, or disclose or provide

information to or for a Federal agency. This includes the time needed

to review instructions; develop, acquire, install, and utilize

technology and systems for the purposes of collecting, validating, and

verifying information, processing and maintaining information, and

disclosing and providing information; adjust the existing ways to

comply with any previously applicable instructions and requirements;

train personnel to be able to respond to a collection of information;

search data sources; complete and review the collection of information;

and transmit or otherwise disclose the information.

Written comments are invited on: (a) Whether the proposed

collection of information is necessary for the proper performance of

the functions of the agency, including whether the information shall

have practical utility; (b) the accuracy of the agency's estimates of

the burden (including hours and cost) of the proposed collection of

information; (c) ways to enhance the quality, utility, and clarity of

the information to be collected; and (d) ways to minimize the burden of

the collection of information on respondents, including through the use

of automated collection techniques or other forms of information

technology. Send comments concerning the information collection

requirements of this rule within 60 days of this notice to Bruce A.

Dombrowski, Deputy Managing Director, Federal Maritime Commission,

Washington, D.C. 20573 and to the Office of Information and Regulatory

Affairs, Office of Management and Budget, Attention: Desk Officer for

the Federal Maritime Commission, Washington, D.C. 20503.

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, Pub. L. 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:

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).

Sec. 540.4 [Amended]

2. In section 540.4(b), the reference to ``60 days'' in the first

sentence is amended to read ``90 days.''

3. Section 540.5 is amended by revising the introductory text, the

introductory text of paragraph (d), paragraph (d)(6), and (e) to read

as follows:

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

insurance.

Except with regard to escrow accounts and self-insurers, 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 100 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,

subject to the following schedule:

[[Page 33065]]

------------------------------------------------------------------------

Unearned passenger revenue (``UPR'') Required coverage

------------------------------------------------------------------------

Effective March 1, 1997:

$0-$25,000,000..................... 100% of UPR.

$25,000,001-$35,000,000............ $25,000,000 plus 75% of excess

UPR over $25,000,000.

Over $35,000,000................... $32,500,000 plus 25% of excess

UPR over $35,000,000.

Effective March 1, 1998:

$0-$35,000,000..................... 100% of UPR.

$35,000,001-$50,000,000............ $35,000,000 plus 75% of excess

UPR over $35,000,000.

Over $50,000,000................... $46,250,000 plus 25% of excess

UPR over $50,000,000.

Effective March 1, 1999:

$0-$50,000,000..................... 100% of UPR.

$50,000,001-$100,000,000........... $50,000,000 plus 75% of excess

UPR over $50,000,000.

Over $100,000,000.................. $87,500,000 plus 25% of excess

UPR over $100,000,000.

------------------------------------------------------------------------

The Commission, for good cause shown, may consider a time period other

than the previous 2-fiscal-year period requirement in this section or

other methods acceptable to the Commission to determine the amount of

coverage required. Evidence of adequate financial responsibility for

the purposes of this subpart may be established by one or a combination

(including Sec. 540.6 Surety Bonds) of the following methods:

* * * * *

(d) 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. In

addition, applicants other than state or Federal entities must

demonstrate financial responsibility by maintenance of working capital

and net worth, each in an amount no less than 100 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. The

Commission will take into consideration all current contractual

requirements with respect to the maintenance of such working capital

and/or net worth to which the applicant is bound. Evidence must be

submitted that the working capital and net worth required above are

physically located in the United States. This evidence of financial

responsibility shall be supplemented by evidence demonstrating that

twenty-five percent of applicant's unearned passenger revenue is

covered by one or a combination of the following: evidence of insurance

pursuant to Sec. 540.5(a); evidence of an escrow account pursuant to

Sec. 540.5(b); a guaranty pursuant to Sec. 540.5(c); or a surety bond

pursuant to Sec. 540.6. This evidence of financial responsibility shall

be supported by and be subject to the following which are to be

submitted on a continuing basis for each year or portion thereof while

the Certificate (Performance) is in effect;

* * * * *

(6) A list filed semiannually of all contractual requirements or

other encumbrances (and to whom the applicant is bound in this regard)

relating to the maintenance of working capital and net worth;

* * * * *

(e) (1) The following schedule may be applied to determine the

minimum coverage required for indemnification of passengers in the

event of nonperformance of water transportation for those operators who

have not elected to qualify by an escrow account or self-insurance; and

can provide evidence (in the form of an affidavit by the operator's

Chief Executive Officer or other responsible corporate officer) that

applicant's debt is rated by Moody's Investors Service at Aa or higher;

and of a minimum of five years of operation in United States trades

with a satisfactory explanation of any claims for nonperformance of

transportation.

------------------------------------------------------------------------

Unearned passenger revenue (``UPR'') Required coverage

------------------------------------------------------------------------

$0-$15,000,000......................... 100% of UPR.

Effective March 1, 1997:

$15,000,001-$25,000,000............ $15,000,000 plus 60% of excess

UPR over $15,000,000.

$25,000,001-$50,000,000............ $21,000,000 plus 20% of excess

UPR over $25,000,000.

Over $50,000,000................... $26,000,000 plus 10% of excess

UPR over $50,000,000.

Effective March 1, 1998:

$15,000,001-$35,000,000............ $15,000,000 plus 60% of excess

UPR over $15,000,000.

$35,000,001-$75,000,000............ $27,000,000 plus 20% of excess

UPR over $35,000,000.

Over $75,000,000................... $35,000,000 plus 10% of excess

UPR over $75,000,000.

Effective March 1, 1999:

$15,000,001-$50,000,000............ $15,000,000 plus 60% of excess

UPR over $15,000,000.

$50,000,001-$100,000,000........... $36,000,000 plus 20% of excess

UPR over $50,000,000.

Over $100,000,000.................. $46,000,000 plus 10% of excess

UPR over $100,000,000.

------------------------------------------------------------------------

(2) The qualifications of applicants seeking consideration under

the coverage requirements of this paragraph shall be supported by and

subject to the following which are to be submitted on a continuing

basis for each year or portion thereof while the Certificate

(Performance) is in effect:

(i) A report filed semiannually evidencing that Moody's Investors

Service rates applicant's debt at Aa or higher; and

(ii) Such additional evidence of financial responsibility as the

Commission may deem necessary in appropriate cases.

[[Page 33066]]

Sec. 540.9 [Amended]

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

redesignated as paragraph (j).

Appendix A to Subpart A--[Amended]

6. The following sentence is added at the end of Paragraph 12 of

Appendix A to subpart A--Example of Escrow Agreement for Use Under 46

CFR 540.5(b):

The Operator and/or Ticket Issuer are not entitled to, nor have any

interest in, any funds payable from this account to the extent such

funds represent unearned passenger revenue, as that term is defined

in subpart A of part 540 of title 46, Code of Federal Regulations.

* * * * *

By the Commission.

Joseph C. Polking,

Secretary.

[FR Doc. 96-16210 Filed 6-25-96; 8:45 am]

BILLING CODE 6730-01-P