Determination of Fair and Reasonable Guideline Rates for the Carriage of Bulk and Packaged Preference Cargoes on U.S.-Flag Commercial Vessels

DEPARTMENT OF TRANSPORTATION

Maritime Administration

46 CFR Part 382

[Docket No. R-158]

RIN 2133-AB19

Determination of Fair and Reasonable Guideline Rates for the

Carriage of Bulk and Packaged Preference Cargoes on U.S.-Flag

Commercial Vessels

AGENCY: Maritime Administration, Department of Transportation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The regulations at 46 CFR part 382 prescribe the

administrative procedures and methodology for determining fair and

reasonable rates for the carriage of dry and liquid bulk and packaged

preference cargoes on United States commercial cargo vessels. MARAD

proposes to amend those regulations to prescribe cost averaging as the

methodology used for

[[Page 9144]]

determining rates and to implement conforming procedural changes. MARAD

also intends to request approval of a reduced information collection

under these regulations.

DATES: Written comments on this rule, including information collection

requirements, are requested, and must be received on or before April

29, 1997.

ADDRESSES: Comments may be mailed or otherwise delivered to the

Secretary, Maritime Administration, Room 7210, Department of

Transportation, 400 Seventh Street S.W., Washington, D.C. 20590. All

comments will be made available for inspection during normal business

hours at the address above. Commenters wishing MARAD to acknowledge

receipt of comments should enclose a stamped, self-addressed envelope

or postcard.

FOR FURTHER INFORMATION CONTACT: Michael P. Ferris, Director, Office of

Costs and Rates, Maritime Administration, Washington, D.C. 20590, Tel.

(202) 366-2324.

SUPPLEMENTARY INFORMATION: Section 901(b)(1) of the Merchant Marine Act

of 1936 (the Act), as amended (46 App. U.S.C. 1241(b)), cited as the

Cargo Preference Act of 1954, requires that at least 50 percent of any

equipment, materials or commodities purchased by the United States or

for the account of any foreign nation without provision for

reimbursement, or acquired as the result of funds or credits from the

United States, shall be transported on privately owned U.S.-flag

commercial vessels, to the extent that such vessels are available at

fair and reasonable rates. In 1985, section 901 was amended to exclude

certain programs from the application of cargo preference and to raise

the U.S.-flag share to 75 percent on certain others. Upon request,

MARAD provides fair and reasonable rates (also referred to as guideline

rates) to U.S. shipper agencies. Section 901(b)(2) of the Act provides

the authority for MARAD (by delegation from the Secretary of

Transportation) to issue regulations governing the administration of

section 901(b)(1). In 1989, MARAD issued regulations at 46 CFR Part 382

(``Rule''), that initially became effective on January 1, 1990. The

Rule contains regulations that govern the calculation of fair and

reasonable rates.

Under the current Rule, MARAD establishes fair and reasonable

rates, so-called guideline rates, which apply to the waterborne portion

of cargo transportation and consist of four components: (1) Operating

costs; (2) capital costs; (3) port and cargo handling costs; and (4)

brokerage and overhead. The operating cost component of the guideline

rate for each participating bulk vessel reflects actual vessel

operating costs that are based on historical data modified to the

current period by utilizing escalation factors for wage and non-wage

costs. All eligible annual operating costs are added together for each

vessel and divided by the total number of operating days for that

vessel to yield a daily operating cost. The cost is escalated to the

current year and multiplied by estimated total voyage days to provide

the operating cost segment for the voyage.

There is a fuel cost segment of the operating costs that MARAD

calculates for each vessel on the basis of actual reported fuel

consumption at sea and in port. The actual fuel consumption of each

vessel is multiplied by the corresponding projected number of voyage

days at sea and in port to calculate total units of fuel consumed.

Current fuel prices are applied to fuel consumed to produce the fuel

segment of the operating cost component. MARAD then adds the totals of

the fuel and non-fuel operating cost segments to produce the operating

cost component for the voyage.

The capital cost component is presently calculated individually for

each participating bulk vessel and consists of an allowance for

depreciation and interest, plus a reasonable return on investment.

Depreciation is calculated by the straight-line method, based on a 20-

year economic life and utilizing a residual value of 2.5 percent.

However, if the owner acquired an existing vessel, the vessel is

depreciated by the straight-line method over the remaining period of

its 20-year economic life, but not fewer than 10 years. Capitalized

improvements are depreciated straight-line over the remainder of the

20-year period, but not fewer than 10 years.

For the purpose of calculating interest expense, MARAD assumes that

original vessel indebtedness is 75 percent of the owner's capitalized

vessel cost and that principal payments are made in equal annual

installments over a 20-year period. To compute the interest cost, the

owner's actual interest rate is applied to the constructed outstanding

debt on the vessel. Where the owner has a variable interest rate, MARAD

uses the owner's rate prevailing at the time of calculation, and if

there is no interest rate available, MARAD selects an appropriate

interest rate.

MARAD allows a return on capital cost (investment), with two

components, return on equity and return on working capital. The rate of

return is based upon a five-year average of the most recent rates of

return for a cross section of transportation industry companies,

including maritime companies. Equity in the vessel is assumed to be the

vessel's constructed net book value less constructed indebtedness.

Working capital is the dollar amount necessary to cover operating and

voyage expenses. The annual depreciation, interest, return on equity

and return on working capital are divided by 300 operating days to

determine a daily amount. The total of these elements is multiplied by

estimated voyage days to determine the capital cost component used in

the fair and reasonable rate calculation.

The port and cargo handling cost component of the guideline rate is

determined for each voyage on the basis of the actual cargo tender

terms for the commodity, load and discharge ports, and lot size. Costs

used to determine the port and cargo cost component are based on the

most current data from all available sources and verified from data

received on completed cargo preference voyages. The brokerage and

overhead component of the guideline rate is the aggregate of the cost

components for operating, capital and port and cargo handling,

multiplied by an 8.5 percent allowance for broker's commissions and

overhead. The total of these four components is now divided by cargo

tons (which cannot be less than 70 percent of the vessel's cargo

deadweight) to determine the guideline rate.

Under existing regulations, whenever a vessel carries preference

cargo and subsequently transports additional cargo prior to its return

to the United States, MARAD reexamines the guideline rate that it

calculated for the preference voyage. This reexamination may result in

the recalculation of the original guideline rate, incorporating the

additional voyage itinerary, costs and revenues which occurred as a

result of the carriage of the additional cargo. If a vessel is scrapped

or sold after discharging a preference cargo, MARAD now adjusts the

guideline rate to reflect the termination of the voyage after

discharge. If the rate received by the operator for the preference

cargo exceeds the adjusted guideline rate for the one-way voyage, MARAD

informs the shipper agency who may then require the operator to repay

the difference in the ocean freight.

Advance Notice of Proposed Rulemaking

MARAD decided that revisions to the Rule may be necessary to

encourage development of a modern and efficient merchant marine and to

reduce government-wide cargo preference

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costs. As a result, on April 19, 1995, MARAD issued an Advance Notice

of Proposed Rulemaking (ANPRM) (60 FR 19559), soliciting comments from

the public. MARAD identified three alternative methodologies in the

ANPRM, in addition to the current guideline rate methodology described

above, that it is considering to reduce cargo preference costs. The

three alternatives were:

Foreign Market Differential--Under this methodology, MARAD would

calculate the added costs associated with owning and operating a vessel

under the U.S.-flag resulting from U.S. laws and regulations and the

U.S. standard of living. This procedure would identify a modern and

efficient target vessel or vessels available worldwide and estimate

costs under foreign ownership and under U.S. ownership, if operated in

the most efficient manner practical. The resulting cost differential

would be prorated over specific voyages, as cargoes are tendered, and

added to the foreign bids for such voyages to determine the fair and

reasonable rate for U.S.-flag operators.

Significant problems exist with this method, both in terms of

economic impact on U.S.-flag ship owners and the legislative history of

the Cargo Preference Act. First and foremost of these problems is the

difficulty of identifying and quantifying all of the additional costs

of U.S.-flag ownership. While some of these costs, including wages and

benefits, are easily identified, such costs as the additional cost of

meeting U.S. labor standards, safety and environmental requirements are

not subject to quantification that would be undisputed. Secondly, since

preference cargoes historically move between different geographic areas

than commercial cargoes, a direct comparison with the ``foreign

market'' may not be possible. Finally, the Cargo Preference Act of 1954

intended that only rates for U.S.-flag commercial vessels are to be

considered in the determination of what is fair and reasonable. See

Comp. Gen. B-95832 (Feb. 17, 1955) (unpublished), cited in H.R. Rep.

No. 80, 84th Cong., 1st. Sess., 18 (1955). Accordingly, MARAD cannot

employ a foreign market-based system.

Cost Averaging--A methodology utilizing vessel cost averaging would

be constructed in much the same manner as the current Rule methodology,

except that average vessel costs would replace individual vessel costs

in the calculation of the fair and reasonable rate. There are three

basic cost areas which would be the most likely candidates for

averaging: Vessel operating costs, vessel capital costs, and fuel. Any

one, or a combination of any of the three cost areas could be included

in a cost averaging methodology.

Market Based--Under a market based methodology, a vessel operator's

bid would be considered fair and reasonable if it were submitted in a

competitive environment. A competitive environment would be established

if there were a required number of qualified bids made by independent

and non-affiliated U.S.-flag vessel operators. A market-based

methodology would actually be a combination of methodologies because a

cost-based determination would be made in instances where an

insufficient number of independent bids were received. The cost-based

rate could be determined as prescribed in the existing Rule or by use

of some other methodology like those described above. A review of the

legislative history of the Cargo Preference Act of 1954, indicates that

adoption by MARAD of a market based methodology may require additional

enabling legislation.

Comments to ANPRM

Seven sets of comments were received in response to the ANPRM.

Commenters represented U.S. shipper agencies, operators and industry

associations. Comments were offered in support of, and in opposition to

all four alternatives, with no clear consensus. The U.S. Agency for

International Development (USAID) also offered an alternative similar

to Worldscale for use in determining guideline rates. Commenters

generally supported the need for guideline rate reform and were

unanimous that any methodology must encourage investment in efficient

vessels.

One commenter proposed an alternative method whereby rates for

U.S.-flag operators would be capped at defined comparable foreign rates

plus a fixed percentage premium. Theoretically, this would be a ceiling

rate, and anything less than the ceiling would be fair and reasonable

by definition. The foreign rates would be based on averaged foreign

rates for comparable cargoes and cargo lots for any preceding calendar

year. The basis for any premium would still be the additional costs of

U.S.-flag ownership and operation.

Public Meetings

After an initial review of the comments received on the ANPRM,

MARAD believed it would be beneficial to meet with interested parties

to explore further the need for change and potential methodologies.

MARAD held two meetings. On July 12, 1995, members of the shipping

community and other interested parties met with MARAD. The meeting

generated considerable discussion on the topics of guideline rate

alternatives and the added costs associated with owning and operating

U.S.-flag vessels. Most persons present considered that an enumeration

of the legal and regulatory costs imposed on U.S.-flag vessels would be

very valuable. However, it was generally believed that it would be too

difficult to construct a methodology accurately comparing the cost of

operating under the U.S.-flag to the cost of operating under

appropriate competitive foreign flags. With respect to a market based

system, several attendees noted that the market should be left alone to

regulate supply and demand. At the conclusion of the July 12 meeting,

there was a consensus that what was needed were changes to (1) prevent

abnormally high rate fixtures and (2) encourage efficiency. The

averaging methodology was considered the best means to accomplish these

goals.

On July 14, 1995, MARAD met on the same subject with

representatives of the United States Department of Agriculture (USDA)

and the United States Agency for International Development (USAID), the

major government shipper agencies. Many of the same issues which arose

at the July 12, 1995 meeting were discussed at this meeting. The

discussion centered on the foreign market differential and cost

averaging methodologies. There appeared to be support for both of these

methodologies, although the shipper agencies expressed some

reservations concerning specific items, e.g., are there sufficient

vessels available in each category to make averaging possible and

whether or not a new vessel should serve as the target vessel of a

market based evaluation.

A question also arose regarding the effect that the proposed

changes would have on the ability of the U.S.-flag commercial fleet to

meet the preference reservations established by the cargo preference

laws. Those laws currently require that 75 percent of specified

preference cargoes be reserved for U.S.-flag participation. There is

concern that the proposed changes would make it impossible for the

commercial fleet to provide adequate availability to meet the statutory

cargo reservation requirements. Although some high cost operators may

be adversely affected, given current and foreseeable market conditions,

sufficient U.S.-flag tonnage should be available to attain the 75

percent participation level.

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As a result of MARAD's experience in determining guideline rates

and the information received from the ANPRM and meetings with

interested parties, MARAD is proposing to amend the Rule in order to

improve the fair and reasonable rate-making process. The following is a

discussion of proposed changes to 46 CFR Part 382.

Averaging

One of the principal criticisms of the existing Rule, which is

based on individual vessel costs, is that it fails to provide

sufficient incentives for efficient vessels to operate in the cargo

preference trade. Conversely, the current methodology has not

adequately controlled the rates provided to the less efficient

operators. Averaging costs would provide the same operating and capital

cost allowances for all vessels competing for the carriage of a

specific preference cargo, creating an incentive for vessels to operate

more efficiently. The resulting lower guideline rates would prevent the

government from paying excessive rates for the use of less efficient

(more costly) vessels, especially in times of high market rates for

vessels in the trade. Accordingly, MARAD proposes that the operating

costs, including fuel consumption, capital costs and speed, used in the

construction of the guideline rate be averaged for all vessels within

specific size categories. The averages would be computed twice a year.

MARAD would calculate the averages more frequently, if necessary. The

impact of the change to averaging would be a reduction in the guideline

rate levels calculated for less efficient vessels and an increase in

the guideline rate levels of the more efficient vessels.

Vessel Categories

In order to administer a guideline rate system based on average

costs effectively and fairly, MARAD would place vessels in categories

where a minimal amount of distortion is evident from cost variations

that are solely based on vessel size. For example, the maintenance

costs for a 15,000 DWT vessel are less than the maintenance cost of an

80,000 DWT vessel because, among other items, the 80,000 DWT vessel has

more surface area to paint. In choosing size categories, MARAD examined

the sizes and costs of vessels that have carried preference cargo, the

number of vessels of similar size, and the cargo amounts carried on

individual voyages in the preference trade. MARAD also considered the

difference between vessel types (i.e., bulk carriers, tankers, tug/

barges, and general cargo), and trading patterns in arriving at the

proposed vessel categories. As a result, MARAD proposes that vessels be

placed in four categories on the basis of CDWT. The NPRM defines CDWT

as Summer DWT less a five percent allowance for fuel, stores and other

capacity reductions. MARAD proposes to specify the following vessel

categories:

Category I--Less than 8,000 CDWT

Category II--8,000--19,999 CDWT

Category III--20,000--34,999 CDWT

Category IV--35,000 CDWT and over

Tug/barge combinations would be included with other vessels of

similar size in computing the average. Tug/barge combinations are often

slower with lower per diem costs than self-propelled vessels. Vessel

speed will also be averaged to place vessels and tug/barge units on a

comparable basis. Since tug/barge combinations sometimes vary and costs

for more tugs than barges are reported, MARAD proposes to match the

costs of a single tug with a single barge based on the barge's

operating history. To the extent tugs or barges are grouped in the data

submission, MARAD would match classes of vessels. Cost categories would

include an equal number of tugs and barges. As tug DWT is minimal and

does not factor into cargo capacities, only the barge Cargo Deadweight

Capacity (CDWT) would be used in determining the placement of tug/barge

combinations in size categories. In the unusual case where more than

one barge is towed by the same tug, the guideline would be based on the

total tonnage carried.

Since speed would be averaged across vessel types, the separate

weather delay factors in Sec. 382.3(e)(6) would no longer be necessary.

After reviewing actual vessel speeds on preference voyages, MARAD

believes that a five percent delay factor is sufficient for all vessel

types. With the weather delay factor being equalized, specific

definitions to distinguish tug/barge units from other bulk vessels,

including integrated tug/barge units, would no longer be necessary.

Based on the above discussions, MARAD proposes to amend

Sec. 382.3(a),(b) and (e)(6) to implement cost averaging as the new

guideline rate methodology.

Although other categories were suggested by commenters, MARAD

believes the categories chosen best reflect the vessel size and cargo

distributions of the existing U.S.-fleet serving the preference trade.

Further, MARAD believes that the proposed categories better accommodate

small cargo size shipments. In calculating guideline rates, MARAD will

use costs from the vessel size category best suited for the size of the

cargo.

Information Collection Requirements

MARAD is proposing to reduce reporting and auditing requirements to

the maximum extent possible while continuing to recognize the agency's

need for accurate cost and financial information. MARAD is proposing

two changes to reduce the amount of data reported or the frequency of

reporting. This NPRM proposes that annual operating cost data for

similar vessels within a category could be provided in the aggregate on

a single schedule rather than individually for each vessel. Should the

operators take advantage of this option, a substantial reduction in the

time and cost of operator preparation is expected to occur. This

proposal would also change the filing of post voyage reports from a

voyage based requirement (60 days after each voyage) to a semi-annual

requirement. Semi-annual reporting with a ninety day lag time (versus

60 days) will reduce the paperwork burden on the operators. To

implement these concepts, the agency proposes to amend Sec. 382.2(b)(8)

to authorize aggregate schedule filings, and amend Sec. 382.2(c) to

change post-voyage filing to a semi-annual requirement.

Two changes are also proposed to reduce the audit burden on

operators, the Department of Transportation, Office of the Inspector

General (OIG), and MARAD. The first proposed change would allow an

operator to have its submissions certified by an independent certified

public accountant (CPA). This would alleviate the need for audit by the

OIG. Audits of cargo preference submissions have proven to be a

significant cost both to the operators and the government. Since many

operators have other ongoing audit requirements, MARAD believes that

the certification of the cost submissions would reduce the burden on

most operators. The second change would provide a more exact

requirement for the preparation of the accounting data used for cost

submissions. Currently, submissions must be prepared in accordance with

Uniform Financial Reporting Requirements (46 CFR Part 232), using

generally accepted accounting principles (GAAP). Part 232 allows the

operator to report to MARAD using an accounting basis that is different

from the one it normally uses for financial reporting, so long as GAAP

is used. Since GAAP allows different accounting treatments for certain

types of expense, some operators are reporting costs to MARAD in the

manner most advantageous to them. The choice can have a major impact on

an individual vessel's guideline rate. For example, drydocking costs,

which occur on a

[[Page 9147]]

multi-year cycle, can be accrued over the cycle (which includes more

than one rate year) or expensed in the current reporting period. This

interpretation has caused some problems with auditing the data,

increasing costs to the operators and the government. MARAD proposes to

require the operator to use the accounting treatment it already uses

for its own records and audited financial statements. Accordingly,

MARAD proposes to amend Sec. 382.2(a) to provide the alternative of

certification by a CPA and to amend Sec. 382.2(d) to require the use of

consistent accounting practices under GAAP.

MARAD is also proposing to make three minor reporting changes:

First, the Official Coast Guard Identification Number (official number)

would be used to identify a vessel. Since vessels change names but the

official number always stays with the vessel, it is a better

identifier. Secondly, Sec. 382.2(b)(2) would be amended to clarify the

DWT requirement as summer DWT in metric tons and eliminate the

requirement for Suez and Panama Canal net register tons. The

requirements for canal net register tons (CNRT) is not necessary. The

original intent was to use CNRT to estimate canal tolls when

calculating guideline rates, but to date no practical system has been

developed for those estimations. Finally, Sec. 382.2(b)(9) would be

amended to clarify the definition of ``operating day''. Days spent

waiting, even when the vessel is seaworthy and fully manned, in

anticipation of booking a cargo or waiting for laydays to begin, have

never been considered operating days for the purpose of calculating

guideline rates.

Overall, MARAD estimates changes in information collection burden

as follows:

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

Current Proposed

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

Responses Hours Responses Hours

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250...................................... 1,000 125 500

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New Vessel Allowance

One goal of this rulemaking is to encourage newer and more

efficient vessels to enter the cargo preference market. There are

certain conditions which this regulation cannot affect, such as the

three year waiting period before foreign-built vessels are eligible to

carry preference cargo, irregular amount of cargoes available

throughout the year, and depressed market conditions, which are

primarily responsible for the lack of newer U.S.-flag vessels in the

preference market. MARAD is proposing that newly constructed vessels,

and vessels acquired prior to the fifth anniversary of their

construction, receive an additional allowance for acquisition capital

in the guideline rate that will continue for a period of five years

after acquisition by the owner. The new vessel allowance would total

ten percent of capitalized acquisition costs (reduced to a daily basis

for use in the guideline rate based on a 300 day operating year) for

the first year after acquisition. The amount would decline by one

percentage point each subsequent year. No allowance will be included in

the guideline rate after the fifth year following acquisition. MARAD

believes this would offset any disincentives for newer vessel entrants

in the proposed rule. Therefore, it is proposed that a new

Sec. 382.3(b)(4) be added to the rule which provides a new vessel

allowance.

Seventy Percent Limitation

The current Rule provides that, for the purposes of calculating

guideline rates, calculated cargo tonnage shall not be less than 70

percent of the vessel's cargo capacity. This provision was intended to

protect the Government from excessive rates in cases where a lone

bidder with a large vessel bids on a small cargo lot. Experience has

shown, however, that the actual result has been to limit competition.

The proposed system is cargo size driven in that the category of costs

used in determining the guideline rate will be based on the total

amount of cargo carried. For example, if 30,000 tons of cargo is booked

for carriage, costs from Category III will be used to calculate the

guideline rate. As such, the guideline rate for the carriage of that

cargo for a 30,000 CDWT vessel would be the same as a 50,000 CDWT

vessel. In such a system, the 70 percent rule is not necessary, and

MARAD proposes to eliminate that restriction.

Determination of Voyage Length

One concern of the bulk operators has been the method for

determining voyage length in Sec. 382.3(e)(1). One provision requires

that a voyage be calculated on a round voyage basis. Another requires

adjustment of the guideline rate to reduce allowable voyage days for

purposes of rate calculation if a backhaul cargo is obtained. It has

been MARAD's experience that, together, these requirements discourage

full participation in the bulk preference cargo trades and do not

consistently provide equitable treatment in the guideline rate

procedures. These requirements do not reflect how bulk operations are

conducted.

In the U.S. preference trades, the majority of cargoes originate in

the U.S. Gulf. As a result, vessels generally return to Gulf ports

after completion of a voyage to await the next cargo opportunity. If

that opportunity originates from a point of origin outside the Gulf,

the vessel (1) must position for the cargo, and (2) will most likely

return to the Gulf. In some instances a succeeding U.S. load

opportunity will arise before the vessel returns to its original

preference load port and it will divert directly to the load point for

the successive cargo. In either event, a point-to-point round voyage

does not occur.

Bulk operators, particularly tankers, frequently bid on a

preference cargo in consideration of obtaining a backhaul cargo. If

there is a realistic prospect of carrying a backhaul cargo, the

operator will likely bid lower than where there is no backhaul cargo.

The prospect of profitable backhauls would also encourage the

participation of more U.S.-flag vessels in the preference trades,

resulting in more competition and lower fixture rates. However, with

the backhaul disincentive in the existing rule, the Government could

lose the benefit of the operator's incentive to bid low.

Between May 1, 1990 and June 30, 1995, MARAD calculated 1,029

guideline rates. Of these, only 30 resulted in recalculations because

of backhauls. Because most backhauls are marginal in nature, they

usually contribute very little revenue above their costs. As a result,

only five of the 30 recalculated rates resulted in calculated

recapture, i.e., a reduction in payments to the operator. Compared to

the total revenue generated by the voyages for which backhauls were

calculated, the total recapture has amounted only to four-tenths of one

percent of total gross revenue. The expected benefits of recapture are

outweighed by the administrative expense, higher fixture rates, and

lost competitive opportunities. For these reasons, MARAD is proposing

elimination of the backhaul adjustment provision.

MARAD is proposing two changes to Sec. 382.3(e)(1) to conform the

existing method of determining voyage length with the realities of bulk

preference operations. First, instead of requiring that the rate be

based on a round-trip voyage, MARAD would choose the most appropriate

port range for the return leg based on the practices of the owner and

the prospects for subsequent employment at the load port. The second

change would be to eliminate the requirement for a rate adjustment when

the operator obtains a backhaul cargo.

[[Page 9148]]

Capital Cost Component

Five changes are being proposed within this cost category. The

purpose of the proposed changes is to simplify or clarify rate

calculations.

Section 382.3(b)(2)(ii) refers only to vessels with a 20-year

economic life in determining the interest amount in the capital cost

component of a guideline rate. In practice, many vessels have been

sold, reconstructed and/or improved, and periods of economic life vary

from vessel to vessel. In these instances, the various depreciation

periods used to determine the guideline rate were defined in paragraph

(b)(2)(I) of that section, but were not explicitly mentioned in

paragraph (b)(2)(ii), Interest. To clarify paragraph (b)(2)(ii), MARAD

proposes to include therein a cross reference to paragraph (b)(2)(I)

with respect to the periods of depreciation to be used in determining

interest expense in the guideline rate.

The second proposed change affects the method of determining

depreciation. The current Rule uses a residual value of 2.5 percent of

a vessel's initial book value as part of the depreciation calculation.

For purposes of simplification and to conform to existing conditions

for vessel scrapping, MARAD is proposing to eliminate use of the

residual value in the calculation of depreciation.

The third proposed change to the capital cost calculation concerns

situations where interest rates are not available for certain

capitalized items. When this occurs, the rule now specifies that a

``current long term rate, the Title XI [Vessel Financing] rate if

available,'' be used in the guideline rate for determining the capital

component. MARAD has found that the ten-year Treasury-bill (T-bill)

rate plus one percent is an appropriate and readily available

substitute. Accordingly, MARAD proposes to amend Sec. 382.3(b)(2)(ii)

to specify the ten-year T-bill rate plus one percent as the rate used

in the fair and reasonable rate calculation when no interest rate is

available or for vessels without mortgage debt.

The fourth proposed change also relates to the interest rate used

to calculate capital costs. Section 382.3(b)(2)(ii) specifies that,

when variable interest rates are part of the mortgage, the rate ``at

the time of the calculation * * * shall be used.'' To assist in the

computation of more flexible guideline rates, MARAD proposes to use the

interest rate in effect on the first business day of the year or the

first business day on or after July 1, whichever is appropriate.

Therefore, MARAD proposes to amend Sec. 382.3(b)(2)(ii) to specify

January 1 and July 1 as the dates on which the interest rates in effect

would be used in lieu of variable interest rates for the calculation of

fair and reasonable rates.

The final proposed change to capital costs is the provision

pertaining to the return on working capital. A statement would be added

to new Sec. 382.3(b)(3) noting that the return on working capital is a

voyage related capital cost element.

Port and Cargo Handling Cost Component

To conform to the proposed new averaging system, MARAD would amend

Sec. 382.3(c) to specify that port and cargo costs will be determined

by vessel category.

One-Way Rates

Section 382.3(e)(1) provides for a one-way rate when a vessel is

scrapped or immediately sold after discharge of the preference cargo.

The term ``immediately'' has created some confusion. MARAD proposes to

amend this paragraph by striking ``immediately'' and adding ``and does

not return to the United States as a U.S.-flag vessel.'' This language

specifies the conditions under which MARAD considers a voyage to be

one-way, will assure that an operator selling or transferring a vessel

foreign is not compensated by a cargo preference program intended to

promote U.S.-flag vessels.

Total Revenue Rates

On numerous occasions more than one cargo has been booked on a

vessel subject to the guideline rate regulations. Also, there have been

occasions when there have been multiple load and/or discharge ports.

These situations often make the calculation of individual rates for

particular parcels and/or destinations, as required by Sec. 382.3(f)

and (g), impossible. Accordingly, when this occurs, MARAD proposes to

calculate a ``Total Revenue Rate''. The guideline rate would be

calculated normally, but the final rate would be expressed as gross

revenue for the total voyage, rather than as a rate per ton. So long as

the revenue from the sum of the individual parcels does not exceed the

total revenue calculated in the guideline, the individual rates would

be considered fair and reasonable. Section 382.3(f) would be modified

to remove the references to individual rates for separate parcels

carried on the same voyage. Paragraph (g) of that section would also be

modified by including language to allow the use of either a cost per

ton or other measure that MARAD determines appropriate.

Administrative Practices

MARAD is also proposing to change certain of its administrative

practices for prescribing guideline rates. While these changes do not

necessitate actual changes in the regulations, MARAD is seeking

comments with respect to its proposals. These changes will (1) allow

differentiation between cargo tender terms when determining delay

factors (for delays in port and days not worked) to more appropriately

reflect the risk of delay inherent in the terms; (2) expand the

applicability of an initial guideline rate calculation to cover most

substitute vessels.

Delay Factors

Section 382.3(e)(3) includes in the calculation of voyage days in

port a factor to account for delays and days not worked. It has been

MARAD's practice not to differentiate between cargo tender terms in

arriving at an appropriate delay factor. In reality, different cargo

terms have different levels of risk of delay associated with them. For

example, Free In and Out (FIO) terms have defined load and discharge

rates, generally with payment of demurrage and despatch by the

charterer and vessel owner, respectively, while FBT (Full Berth Terms)

carry unlimited risk of delay without compensation. MARAD proposes to

change its practices to provide delay factors which more appropriately

reflect the risk of delay inherent in the cargo tender terms. For

example, a guideline rate calculated for an FIO cargo where the tender

included demurrage and despatch premiums could use the load and

discharge guarantee rates included in the tender; for an FBT voyage,

historical experience or current conditions may require using delay

factors in the load or discharge ports.

Guideline Rate Requests

On average, MARAD calculates two guideline rates for each cargo

actually fixed. This is generally the result of substitutions, voyage

variations, add-on cargoes, audits and similar recalculations. It is

currently MARAD's practice to provide a guideline rate when requested

by a shipper agency. MARAD intends to substantially reduce the

incidence of these calculations and determine only one guideline rate

for each preference cargo which is based on the initially requested

vessel and cargo. That guideline rate would also be applicable to all

other vessels that might actually carry the cargo and for amounts plus

or minus five percent of the

[[Page 9149]]

original request, except in the case where there is a substitution of a

vessel eligible to receive the ``new vessel allowance'' for an older

vessel, or vice versa. Rates would also be recalculated, if requested,

for add-on preference cargoes which increase cargo size by more than

five percent. MARAD will not recalculate a rate for add-on commercial

cargo.

Revised Rate Methodology

The guideline or fair and reasonable rates proposed to be

established by MARAD would apply only to the waterborne portion of

cargo transportation, to consist of four components: (1) Operating

costs; (2) capital costs; (3) port and cargo handling costs; and (4)

brokerage and overhead. The operating cost component of the fair and

reasonable rate would reflect average vessel operating costs for

vessels within the specified size categories previously discussed,

based on the historical data submitted in accordance with Sec. 382.2 of

this rule. MARAD would modify the operating costs to the current

period, utilizing escalation factors for wage and non-wage costs. To

the extent vessels are time chartered or leased, operators would submit

both operating and capital costs, including all capitalized costs and

interest rates for vessels subject to capital leases.

All eligible annual operating costs for vessels within a category

would be added together and divided by the total number of operating

days for those vessels to yield a daily operating cost. The cost would

be indexed to the current year and multiplied by estimated total voyage

days to yield the operating cost segment for the voyage. The amount of

cargo fixed would be the basis for selecting which vessel category of

cost averages would be used in calculating a guideline rate.

Fuel consumption would be figured on the basis of actual reported

fuel consumption at sea and in port for vessels within the same

category. The average fuel consumptions of vessels in the category

would be multiplied by the corresponding projected number of voyage

days at sea and in port to yield total fuel consumed. MARAD would

obtain from published sources current spot market fuel prices, at

bunkering ports consistent with sound commercial practice, and apply

them to fuel consumed to produce the fuel segment of the operating cost

component. The total of the fuel and non-fuel operating cost segments

would be added together to yield the operating cost component for the

voyage.

The capital cost component would be based on participating vessels

in the applicable size category. It would consist of an allowance for

depreciation and interest and a reasonable return on investment.

Depreciation would be straight-line based on a 20-year economic life.

However, if the owner acquired an existing vessel, the vessel would be

depreciated on a straight-line basis over the remaining period of its

20-year economic life, but not fewer than 10 years. Capitalized

improvements would be depreciated straight-line over the remainder of

the 20-year period, but not fewer than 10 years, commencing with the

capitalization date for those improvements.

For the purpose of calculating interest expense, MARAD would assume

that original vessel indebtedness is 75 percent of the owner's

capitalized vessel cost and that principal payments are made in equal

annual installments over the economic life of the vessel. To compute

the interest cost, the owners' actual interest rates would be applied

to the vessel's outstanding constructed debt, using the depreciation

schedule in Sec. 382.3(b)(2)(ii). Where the owner has a variable

interest rate, the owner's rate prevailing at the time of calculation

of the average capital cost component would be used. In cases where

there is no interest rate available, and for operators without vessel

debt, MARAD would use the ten-year T-bill rate plus one percent.

As in the existing Rule, return on investment would have two

components, return on equity and return on working capital. The rate of

return would be based upon a five-year average of the most recent rates

of return for a cross section of transportation industry companies,

including maritime companies. Equity would be assumed to be a vessel's

constructed net book value less constructed principal amounts. Working

capital would be voyage based and is the dollar amount necessary to

cover operating and voyage expenses.

A new vessel allowance would be included in the capital component

of newly built vessels and vessels acquired when five years of age or

less. The new vessel allowance would be paid for the first five years

following construction or acquisition. This allowance would equal ten

percent of the vessel's capitalized costs during the first year

following construction or acquisition, and would decline by one

percentage point each of the subsequent four years. To arrive at the

voyage allowance, the annual amount would be divided by 300 operating

days and multiplied by estimated voyage days.

The average annual depreciation, interest, and return on equity for

vessels in the category would be divided by 300 operating days to

determine a daily amount. The total of these elements would be

multiplied by estimated voyage days and added to the return on working

capital and the new vessel allowance to determine the capital cost

component used in the fair and reasonable rate calculation.

The port and cargo handling cost component would be determined for

each voyage on the basis of vessels in the category and the actual

cargo tender terms for the commodity, load and discharge ports, and lot

size. The costs would include applicable fees for wharfage and dockage

of the vessel, canal tolls, cargo loading and discharging, and all

other voyage costs associated with the transportation of preference

cargo. Costs used to determine the port and cargo cost component would

be based on the most current data from all available sources and

verified from data received on completed cargo preference or commercial

voyages.

To determine the brokerage and overhead component of the fair and

reasonable rate, MARAD would add the cost components for operating,

capital, and port and cargo handling and multiply that sum by an 8.5

percent allowance for broker's commissions and overhead. The total of

these four components, expressed as total revenue or as a rate per ton,

whichever is most applicable, would be the fair and reasonable rate.

If a vessel is scrapped or sold after discharging a preference

cargo, and the vessel does not return to the United States as a U.S.-

flag vessel, the guideline rate would be adjusted to reflect the

termination of the voyage after cargo discharge. If the rate received

by the operator for the preference cargo exceeds the adjusted guideline

rate for the one-way voyage, the operator would be required to repay

the difference in ocean freight to the shipper agency.

In special circumstances, certain procedures prescribed in this

rule may be waived, so long as the procedures adopted are consistent

with the Act and with the intent of these regulations.

Rulemaking Analysis and Notices

Executive Order 12866 (Regulatory Planning and Review); DOT Regulatory

Policies and Procedures; Public Law 104-121.

This rulemaking is not considered an economically significant

regulatory action under Section 3(f) of E.O. 12866. It is not

considered to be a major rule

[[Page 9150]]

for purposes of Congressional review under Public Law 104-121. It is

anticipated that savings to the Government of less than $1 million per

year will result. Accordingly, the program will not have an annual

effect on the economy of $100 million or more. While this rule does not

involve any change in important Departmental policies, it is considered

significant under DOT Regulatory Policies and Procedures and E.O. 12866

because it addresses a matter of considerable importance to the

maritime industry and may be expected to generate significant public

interest. Accordingly, the Office of Management and Budget has reviewed

this rule.

MARAD has estimated the potential economic impact of this

rulemaking. To determine what effect the proposed changes would have

had on guideline rates, 167 rates were recalculated for the years 1992

through 1995 using the revised methodology. This sample represented 25%

to 30% of the total fixtures for each of the four years. The rate

sample chosen was reflective of the operators and countries in the

complete data base. For 1992 and 1993, the recalculated rates were

below the original guideline rates 54% of the time. In 1994 and 1995,

the ratio of recalculated rates falling below original guideline

calculations rose to 60%.

The rates calculated for the sample were compared to actual cargo

fixture rates to evaluate the ability of averaging to reduce program

costs. The chart included below summarizes the results of the sample

data. Using averaging, twelve percent of the rates in the sample were

lower, while only 10 percent rose. The dollar cost reduction for the

rates compared equates to about one million dollars over the period.

Assuming the relationship holds constant over the remainder of the

rates calculated in the period, a savings of $3.3 million could have

been realized.

Guideline Rate Changes Under Averaging Method comparison of Historical Guideline Rates to Proposal

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

Preference revenue Direction of change

Year Sample -------------------------------- Net savings -------------------------

size Original Revised Down Up

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

1992........................... 53 $82,929,000 $82,434,000 $495,000 5 4

1993........................... 67 137,344,000 136,812,000 532,000 14 13

1994........................... 36 50,607,000 50,607,000 0 0 0

1995........................... 11 15,985,000 15,982,000 3,000 1 0

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

Total.................... 167 286,865,000 285,835,000 1,030,000 20 17

=========================

Total percentage of

change.................. ........ .............. .............. ........... 12 10

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

The data for 1994 and 1995 also demonstrate how a bad market

depresses the rates offered for preference cargoes. Even though rates

calculated using the averaging method fell below the original guideline

rate 60% of the time, actual fixture rates during that period were

still below recalculated guidelines. This result is neither unexpected

nor undesirable. In fact, it validates the category cost averaging

method as being able to hold rates down in a very good market while not

being responsible for pushing the rates to the level of a bad market.

Even though reducing program costs is a goal of this proposed new

method, it is important that rates still be fair to an efficient

operator.

Federalism

The Maritime Administration has analyzed this rulemaking in

accordance with the principles and criteria contained in Executive

Order 12612 and has determined that it would not have sufficient

federalism implications to warrant the preparation of a Federalism

Assessment.

Regulatory Flexibility Act

The Maritime Administration certifies that this regulation would

not have a significant economic impact on a substantial number of small

entities. There are approximately twenty-five vessel operators that

participate in this program, none of which are small entities.

Environmental Assessment

This regulation does not significantly affect the environment.

Accordingly, an Environmental Impact Statement is not required under

the National Environmental Policy Act of 1969.

Paperwork Reduction Act

This proposed rulemaking reduces the current requirement for the

collection of information. The Office of Management and Budget (OMB)

has reviewed and approved the information collection and record keeping

requirements (approval number 2133-0514) in the current rule under the

Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

In accordance with the Paperwork Reduction Act of 1995, this notice

announces the Maritime Administration's (MARAD's) intentions to request

extension of approval for three years of a currently approved

information collection. Copies of this request can be obtained from the

Office of Costs and Rates.

Title of Collection: Determination of Fair and Reasonable Rates for

the Carriage of Bulk Preference Cargoes (46 CFR Part 382).

Type of Request: Extension of currently approved information

collection.

OMB Control Number: 2133-0514.

Form Number: None.

Expiration Date of Approval: 9/30/97.

Summary of Collection of Information: Two different types of data

are required: Vessel Operating Costs and Capital Costs--Part 382

requires U.S.-flag vessel Operators to submit this data to MARAD on an

annual basis. The costs are used by MARAD in determining fair and

reasonable guideline rates for the carriage of preference cargoes on

U.S.-flag vessels. Voyage costs and voyage days--(Post Voyage Report)--

This information is required to be filed by a U.S.-flag operator after

the completion of a cargo preference voyage.

Need and Use of the Information: The information collected is used

by MARAD to calculate fair and reasonable rates for U.S.-flag vessels

engaged in the carriage of preference cargoes. If the information is

not collected, the fair and reasonable rates could be inaccurate thus

leading to a lack of adequate protection of the government's financial

interest in obtaining the lowest possible U.S.-flag cost for shipping

government cargoes.

Description of Respondents: U.S.-flag vessels are owned and

operated by U.S. citizens under the U.S.-flag. The vessels

[[Page 9151]]

consist of tug/barges, dry bulk vessels, break bulk liner vessels,

LASH, and tankers.

Annual Responses: 125 (total)--50 filings of vessel operating costs

and capital costs from U.S. operators; 75 filings of Post Voyage

Reports.

Annual Burden: 500 hours--This rule would not impose any unfunded

mandates.

List of Subjects in 46 CFR Part 382

Agricultural commodities, Confidential business information,

Government procurement, Loan programs--foreign relations, Maritime

carriers, Reporting and recordkeeping requirements.

Accordingly, 46 CFR Chapter II is hereby proposed to be amended by

revising Part 382, to read as follows:

PART 382--DETERMINATION OF FAIR AND REASONABLE RATES FOR THE

CARRIAGE OF BULK AND PACKAGED PREFERENCE CARGOES ON U.S.-FLAG

COMMERCIAL VESSELS

Sec.

382.1 Scope.

382.2 Data submission.

382.3 Determination of fair and reasonable rates.

382.4 Waiver.

Authority: 46 App. U.S.C. 1114, 1241(b); 49 CFR 1.66.

Sec. 382.1 Scope.

The regulations in this part prescribe the type of information that

shall be submitted to the Maritime Administration (MARAD) by operators

interested in carrying bulk and packaged preference cargoes, and the

method for calculating fair and reasonable rates for the carriage of

dry (including packaged) and liquid bulk preference cargoes on U.S.-

flag commercial vessels, except vessels engaged in liner trades, as

defined in 46 CFR 383.1, pursuant to section 901(b) of the Merchant

Marine Act, 1936, as amended, 46 App. U.S.C. 1214(b).

Sec. 382.2 Data submission.

(a) General. The operators shall submit information, described in

paragraphs (b) and (c) of this section, to the Director, Office of

Costs and Rates, Maritime Administration, Washington, D.C. 20590. To

the extent a vessel is time chartered, the operator shall also submit

operating expenses for that vessel. All submissions shall be certified

by the operators. A further review and certification by an independent

Certified Public Accountant (CPA) is recommended. Submissions not

certified by an independent CPA are subject to verification, at MARAD's

discretion, by the Office of the Inspector General, Department of

Transportation. MARAD's calculations of the fair and reasonable rates

for U.S.-flag vessels shall be performed on the basis of cost data

provided by the U.S.-flag vessel operator as specified herein. If a

vessel operator fails to submit the required cost data, MARAD will not

construct the guideline rate for the affected vessel, which may result

in such vessel not being approved by the sponsoring Federal agency.

(b) Required vessel information. The following information shall be

submitted not later than April 30, 1998, for calendar year 1997 and

shall be updated not later than April 30 for each subsequent calendar

year. In instances where a vessel has not previously participated in

the carriage of cargoes described in Sec. 382.1, the information shall

be submitted not later than the same date as the offer for carriage of

such cargoes is submitted to the sponsoring Federal agency, and/or its

program participant, and/or its agent and/or program's agent, or

freight forwarder.

(1) Vessel name and official number.

(2) Vessel DWT (summer) in metric tons.

(3) Date built, rebuilt and/or purchased.

(4) Normal operating speed.

(5) Daily fuel consumption at normal operating speed, in metric

tons (U.S. gallons for tugs) and by type of fuel.

(6) Daily fuel consumption in port while pumping and standing, in

metric tons (U.S. gallons for tugs), by type of fuel.

(7) Total capitalized vessel costs (list and date capitalized

improvements separately), and applicable interest rates for

indebtedness (where capital leases are involved, the operator shall

report the imputed capitalized cost and imputed interest rate).

(8) Operating cost information, to be submitted in the format

stipulated in 46 CFR 232.1, on Form MA-172, Schedule 301. Operators are

encouraged to provide operating cost information for similar vessels

that the operator considers substitutable within a category, as defined

in Sec. 382.3(a)(1), in the aggregate on a single schedule. Information

shall be applicable to the most recently completed calendar year.

(9) Number of vessel operating days pertaining to data reported in

paragraph (b)(8) of this section for the year ending December 31. For

purposes of this part, an operating day is defined as any day on which

a vessel or tug/barge unit is in a seaworthy condition, fully manned,

and either in operation or standing ready to begin pending operations.

(c) Required port and cargo handling information. The port and

cargo handling costs listed in this paragraph (c) shall be provided

semi-annually for each cargo preference voyage terminated during the

period. The report shall identify the vessel, cargo and tonnage, and

round-trip voyage itinerary including dates of arrival and departure at

port or ports of loading and discharge. The semi-annual periods are as

follows:

Period/Due date

April 1-September 30--January 1

October 1-March 31--July 1

(1) Port expenses. Total expenses or fees, by port, for pilots,

tugs, line handlers, wharfage, port charges, fresh water, lighthouse

dues, quarantine service, customs charges, shifting expenses, and any

other appropriate port expense.

(2) Cargo expense. Separately list expenses or fees for stevedores,

elevators, equipment, and any other appropriate expenses.

(3) Extra cargo expenses. Separately list expenses or fees for

vacuvators and/or cranes, lightering (indicate tons moved and cost per

ton), grain-to-grain cleaning of holds or tanks, and any other

appropriate expenses.

(4) Canal expenses. Total expenses or fees for agents, tolls (light

or loaded), tugs, pilots, lock tenders and boats, and any other

appropriate expenses. Indicate waiting time and time of passage.

(d) Other requirements. Unless otherwise provided, operators shall

use generally accepted accounting principles and 46 CFR Part 232,

Uniform Financial Reporting Requirements, for guidance in submitting

cost data. Notwithstanding the general provisions in 46 CFR 232.2(c)

for MARAD program participants, each operator shall submit cost data in

the format that conforms with the accounting practices reflected in the

operator's trial balance and, if audited statements are prepared, the

audited financial statements. Data requirements stipulated in paragraph

(b) of this section that are not included under those reporting

instructions shall be submitted in a similar format. If the operator

has already submitted to MARAD, for other purposes, any data required

under paragraph (b) of this section, its submission need not be

duplicated to satisfy the requirements of this part.

(e) Presumption of confidentiality. MARAD will initially presume

that the material submitted in accordance with the requirements of this

part is privileged or confidential within the meaning of the Freedom of

Information Act (FOIA), 5 U.S.C. 552(b)(4). In the

[[Page 9152]]

event of a subsequent request for any portion of that data under the

FOIA, MARAD will inform the submitter of such request and allow the

submitter the opportunity to comment. The submitter shall claim or

reiterate its claim of confidentiality at that time by memorandum or

letter, stating the basis for such assertion of exemption from

disclosure, including, but not limited to, statutory and decisional

authorities. The Freedom of Information Act Officer, or the Chief

Counsel of MARAD, will inform the submitter of the intention to

disclose any information claimed to be confidential, after the initial

FOIA request, or after any appeal of MARAD's initial decision,

respectively.

(Approved by the Office of Management and Budget under control number

2133-0514)

Sec. 382.3 Determination of fair and reasonable rate.

Fair and reasonable rates for the carriage of preference cargoes on

U.S.-flag commercial vessels shall be determined as follows:

(a) Operating cost component--(1) General. An operating cost

component for each category, based on average operating costs of

participating vessels within a cargo size category, shall be

determined, at least twice yearly, on the basis of operating cost data

for the calendar year immediately preceding the current year that has

been submitted in accordance with Sec. 382.2. The operating cost

component shall include all operating cost categories, as defined in 46

CFR 232.5, Form MA-172, Schedule 301, Operating Expenses. For purposes

of these regulations, charter hire expenses are not considered

operating costs. MARAD shall index such data yearly to the current

period, utilizing the escalation factors for wage and nonwage costs

used in escalating operating subsidy costs for the same period.

(2) Fuel. Fuel costs within each category shall be determined based

on the average actual fuel consumptions, at sea and in port, and

current fuel prices in effect at the time of the preference cargo

voyage(s).

(3) Vessel categories. (i) Vessels shall be placed in categories by

cargo deadweight capacities (CDWT), as follows:

Group I--under 8,000 CDWT

Group II--8,000--19,999 CDWT

Group III--20,000--34,999 CDWT

Group IV--35,000 CDWT and over

(ii) For purposes of paragraph (a)(3)(i) of this section, CDWT is

defined as Summer DWT less five percent.

(b) Capital component--(1) General. An average capital cost

component shall be constructed, at least twice yearly, consisting of

vessel depreciation, interest, and return on equity.

(2) Items included. The capital cost component shall include:

(i) Depreciation. The owner's capitalized vessel costs, including

capitalized improvements, shall be depreciated on a straight-line basis

over a 20-year economic life, unless an owner purchased or

reconstructed the vessel when its age was greater than 10 years old. To

the extent a vessel is chartered or leased, the operator shall submit

the capitalized cost and imputed interest rate. In the event these

items are not furnished, MARAD will construct these amounts. When

vessels more than 10 years old are acquired, a depreciation period of

10 years shall be used. Capitalized improvements made to vessels more

than 10 years old shall be depreciated over a 10-year period. When

vessels more than 10 years old are reconstructed, MARAD will determine

the depreciation period.

(ii) Interest. The cost of debt shall be determined by applying the

vessel owner's actual interest rate to the outstanding vessel

indebtedness. MARAD shall assume that original vessel indebtedness is

75 percent of the owner's capitalized vessel cost, including

capitalized improvements, and that annual principal payments are made

in equal installments over the economic life of the vessel as

determined in accordance with paragraph (b)(2)(i) of this section.

Where an operator uses a variable interest rate, the operator's actual

interest rate at the time of calculation of the average capital cost

component shall be used. The ten-year Treasury bill (T-bill) rate plus

one percent on the first business day of the year or the first business

day on or after July 1 shall be used for operators without vessel debt

and when the actual rate is unavailable.

(iii) Return on equity. The rate of return on equity shall be

computed in the same manner as described in paragraph b)(3) of this

section. For the purpose of determining equity, it shall be assumed

that the vessel's constructed net book value, less outstanding

constructed principal, is equity. The constructed net book value shall

equal the owner's capitalized cost minus accumulated straight-line

depreciation.

(3) Return on working capital. For each voyage a return on working

capital shall be included as part of the capital cost element. Working

capital shall equal the dollar amount necessary to cover 100 percent of

the averaged operating costs and estimated voyage costs for the voyage.

The rate of return shall be based on an average of the most recent

return of stockholders' equity for a cross section of transportation

companies, including maritime companies.

(4) New vessel allowance. Newly constructed vessels and vessels

acquired during or before their fifth year of age will receive an

additional allowance for acquisition capital as part of the capital

cost element. For the first year following construction or acquisition

by the operator, a daily amount equal to ten percent of capitalized

acquisition costs, divided by 300 operating days, shall be included.

This amount shall be reduced by one percent of capitalized acquisition

costs each subsequent year. No allowance shall be included after the

fifth year following construction or acquisition.

(5) Voyage component. The annual depreciation, interest, and return

on equity shall be divided by 300 vessel operating days to yield the

daily cost factors. Total voyage days shall be applied to the daily

cost factors and totaled with the return on working capital and new

vessel allowance for the voyage to determine the daily capital cost

component.

(c) Port and cargo handling cost component. MARAD shall calculate

an estimate of all port and cargo handling costs on the basis of the

reported cargo tender terms. The port and cargo handling cost component

shall be based on vessels in the category and the most current

information available verified by information submitted in accordance

with Sec. 382.2(c), or as otherwise determined by MARAD, such as by

analysis of independent data obtained from chartering agencies.

(d) Brokerage and overhead component. An allowance for broker's

commission and overhead expenses of 8.5 percent shall be added to the

sum of the operating cost component, the capital cost component, and

the port and cargo handling cost component.

(e) Determination of voyage days. The following assumptions shall

be made in determining the number of preference cargo voyage days:

(1) The voyage shall be round-trip with the return in ballast to a

port or port range selected by MARAD as the most appropriate, unless

the vessel is scrapped or sold after discharge of the preference cargo

and does not return to the United States as a U.S.-flag vessel. In this

event, only voyage days from the load port to the discharge port,

including time allowed to discharge, shall be included.

(2) Cargo is loaded and discharged as per cargo tender terms

interpreted in accordance with the ``International Rules For the

Interpretation of Trade

[[Page 9153]]

Terms'' (INCOTERMS) published by the International Chamber of Commerce.

(3) Total loading and discharge time includes the addition of a

factor to account for delays and days not worked.

(4) One extra port day is included at each anticipated bunkering

port.

(5) An allowance shall be included for canal transits, when

appropriate.

(6) Transit time shall be based on the average speed of vessels in

the category plus an additional five percent to account for weather

conditions.

(f) Determination of cargo carried. The amount of cargo tonnage and

the category of costs used to calculate the rate shall be based on the

tender offer or charter party terms. In instances when separate parcels

of preference cargo are booked or considered for booking on the same

vessel, whether under a single program or different programs, a

guideline rate shall be provided based on the combined voyage.

(g) Total rate. The guideline rate shall be the total of the

operating cost component, the capital cost component, the port and

cargo handling cost component, and the broker's commission and overhead

component. The fair and reasonable rate can be expressed as total

voyage revenue or be divided by the amount of cargo to be carried, as

prescribed in paragraph (f) of this section, and expressed as cost per

ton, whichever MARAD deems most appropriate.

Sec. 382.4 Waiver.

In special circumstances and for good cause shown, the procedures

prescribed in this part may be waived in keeping with the circumstances

of the present, so long as the procedures adopted are consistent with

the Act and with the intent of this part.

By Order of the Maritime Administrator.

Dated: February 24, 1997.

Joel C. Richard,

Secretary.

[FR Doc. 97-5017 Filed 2-27-97; 8:45 am]

BILLING CODE 4910-81-P