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: Final rule.

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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 is

issuing this rule to prescribe cost averaging as the methodology used

for determining rates and to implement conforming procedural changes.

MARAD is also reducing information collection under these regulations.

DATES: This final rule is effective January 29, 1998.

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

Costs and Rates, Maritime Administration, Washington, DC 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.

Under the 1990 Rule, MARAD established fair and reasonable rates,

so-called guideline rates, based on each individual vessel's costs

which applied to the ocean borne portion of cargo transportation. The

guideline rate consisted 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 vessel reflected actual historical vessel operating costs

escalated to the current period by utilizing 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.

Each vessel's actual reported fuel consumption at sea and in port

forms the basis of the guideline rate's fuel cost segment. 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.

[[Page 3820]]

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 vessel 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 then divided by cargo

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

deadweight) to determine the guideline rate.

Under the 1990 rule, 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 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 revising the Rule could encourage development of

a modern and efficient merchant marine and reduce government-wide cargo

preference shipping 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. In the ANPRM, MARAD identified

three alternative methodologies, in addition to the existing rate

methodology, that it was considering. The three alternatives were:

Foreign Market, Cost Averaging, and Market Based.

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

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

industry associations. Comments were offered in support of, and in

opposition to all four alternatives, with no clear consensus.

Commenters generally supported the need for guideline rate reform and

were unanimous that any methodology must encourage investment in

efficient vessels.

Public Meetings

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

MARAD believed it would be beneficial to meet with interested parties.

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

community and other interested parties met with MARAD. 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 (AID), the major government shipper

agencies.

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

and the information received from the ANPRM and meetings with

interested parties, on February 28, 1997, MARAD published a Notice of

Proposed Rulemaking (NPRM) 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 and the comments that were

received during the comment period.

Comments

Eight groups submitted comments in response to the NPRM of February

28, 1997. The respondents were the American Institute of Certified

Public Accountants (AICPA), four U.S.-flag operators that frequently

carry preference cargoes, a U.S. liner operator, the U.S. Agency for

International Development (AID), and United States Department of

Agriculture's Foreign Agricultural Service (USDA). To facilitate

discussion of the comments, they will be discussed by subject matter.

General

General comments ran the gamut from supporting most of the

proposals in the NPRM to urging MARAD not to adopt the rule. Some

questioned the need for guideline rates or changes to the current

procedures and their legality. One operator contended that when at

least three bids are received for a preference cargo the lowest should

be assumed to be fair and reasonable. Another operator conjectured that

averaging will introduce arbitrary biases and that it is unfair for

operators to be expected to accept low rates when the market is poor

but still be held to ceiling rates if the market improves. The same

operator postulated that some operators would not be able to recover

costs at the averaging rate. In addition, several operators were

concerned that their knowledge of their competitors' cost structure was

insufficient for them to know how the averaging system would affect

their rates.

[[Page 3821]]

The averaging methodology for calculating fair and reasonable

guideline rates is supported by the legislative history of Section

901(b)(1) of the Act (Pub. L. 83-664 or the Cargo Preference Act of

1954).

The Cargo Preference Act of 1954 requires government agencies to

take such steps as may be necessary and practicable to assure that at

least 50 percent (75 percent for specified bulk agricultural products)

of the gross tonnage of certain government-sponsored cargoes, ``which

may be transported on ocean vessels shall be transported on privately-

owned United States-flag commercial vessels, to the extent such vessels

are available at fair and reasonable rates for United States-flag

commercial vessels.''

House Report No. 80, 84th Cong., 1st Sess. 3 (1955) sets out the

reasons for passage of the Cargo Preference Act of 1954, as follows:

Without some form of assurance of participation by United

States-flag vessels in the transportation of relief and aid cargoes,

it became clear that the shipping of the recipient and other

maritime nations with lower operating costs would be able to

underbid American-flag vessels and eventually transport much, if not

all, of these cargoes to the irreparable detriment of the American

merchant marine.

H.R. Rep. No. 80 also addressed administration of the Cargo

Preference Act of 1954 and, as relevant here, discussed the meaning of

``fair and reasonable rates.'' The question of how ``fair and

reasonable rates for United States-flag commercial vessels'' should be

calculated was referred to the Comptroller General of the United States

by the House Merchant Marine and Fisheries Committee. The Comptroller

General advised the Committee in a letter dated February 17, 1955, (B-

95832), that--

``fair and reasonable rates'' as used in Pub. L. 664 * * * would

appear to call for reasonable compensation to the operator,

including a fair profit. However, it seems apparent that the statute

contemplates average ``fair and reasonable rates,'' which may or may

not be profitable, or even compensatory, to a high-cost operator.

Quoted in H. Rep. No. 80, supra, p. 18 (Emphasis in original).

The Committee agreed with the Comptroller General's construction of

the law and added,

* * * it should be understood that at any one particular time

market rates may be considerably less than [the fair and reasonable

rate ceiling], in which event the chartering agency should feel free

to exercise sound business judgment to secure the lowest rates

possible for the Government.

H. Rep. No. 80, Supra p. 18.

MARAD has sought to develop a cost-based system which rewards

efficiency while holding rates in check during peak periods. Guideline

rate procedures have never guaranteed profitability and the Agency

believes that the Comptroller's opinion means that full cost (plus

profit) recovery in the guideline rate is not required for all vessels.

MARAD also believes that the averaging methodology is fully consistent

with the Act and that it will be rare that an operator does not recover

its costs after efficiently executing a preference voyage at the full

guideline rate.

MARAD's goal in revising the Rule is to encourage a modern and

efficient merchant marine while reducing government-wide cargo

preference costs. A United States General Accounting Office (GAO)

report entitled CARGO PREFERENCE REQUIREMENTS--Objectives Not

Significantly Advanced When Used in the U.S. Food Aid Programs,

published in September 1994, concluded that food aid programs were

paying higher shipping rates because guideline rate procedures allowed

less efficient operators to charge higher rates. The report

hypothesized that using average operating costs for similar sized ships

instead of an individual ship's operating costs ``should reduce food

aid transportation costs.'' MARAD believes that changing the Rule to

use average costs will be effective in encouraging efficient operation.

In addition, administrative and technical changes made to the rule will

help reduce time spent on the program by all parties in a period of

scarce resources.

Finally, comments were received that relate to how the averaging

system will affect each individual operator. One operator requested

that MARAD consider providing operators with hypothetical rates based

on recent cost information and also allow an additional comment period.

Another requested that MARAD undertake a thorough effort to educate

operators on the averaging process and its likely impact on guideline

rates.

MARAD does not believe that an additional comment period will

provide any significant benefit. However, before the final rule becomes

effective, MARAD will contact each operator with current costs on file

to explain the cost averaging system and discuss how it might affect

rates. MARAD will also provide additional instructions and explanations

in a brochure explaining guideline rate procedures to the general

shipping community. In addition, MARAD will also provide the average

category costs to operators and updates on an ongoing basis.

Averaging

MARAD proposed that the operating costs (including fuel

consumption, capital costs and vessel 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, or 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. Although commenters generally supported the

principle of averaging, it was unclear to one commenter whether capital

costs would be averaged. Another believed that the rule should specify

how MARAD will decide which vessels' costs will be averaged and develop

a method to prevent use of irrelevant cost data. A third opposed

averaging stating that it would be unpredictable and inefficient,

penalizing newer vessels, capital improvements and steam-turbine driven

vessels.

Under the averaging system, both vessel operating and capital costs

will be averaged as will fuel consumption rates and vessel speed. Some

wording changes have been made in the capital cost sections of the

final rule to clarify that capital costs are averaged. In regard to

steam-turbine vessels, it is true that any cost that is greater than

the average creates a disadvantage to the operator of the higher cost

vessel. MARAD shared the commenter's concern about impact on newer

vessels that might enter the fleet and has provided a separate new

vessel allowance. Because capital improvements are generally undertaken

to create efficiencies in other cost areas, effective capital

improvements should yield a long-term advantage to the operator.

Regarding the use of inappropriate data that could cause the

average to be somehow distorted, MARAD will pay close attention to data

provided to assure that it yields a meaningful average. Clearly, if a

vessel carried preference cargo in this program during the prior year,

it will be included in the average. For other vessels, an operator's

program participation will be a factor in determining inclusion in the

average. However, other factors such as the individual vessel's program

participation and cost structure will also be considered.

Vessel Categories

MARAD proposed a four-category system based on cargo deadweight

[[Page 3822]]

capacity (CDWT) with the cargo capacity determining which category of

costs were to be used. Six commenters raised issues concerning

categories. The comments concerning categories fall into three basic

areas: Mixing vessel types within a category, how and why the

categories were selected, and alternative category suggestions.

Two commenters opposed assigning vessels to categories without

regard to vessel type. One commenter stated that the cost structure of

a LASH liner operation bears no resemblance to the cost structure of

bulk operators. The other commenter argued that tug and barges are

inappropriate for transoceanic voyages and should therefor not be

included with vessels which are fully capable.

It is true that LASH liner operations have cost structures which

are not comparable to bulk operations. However, from time to time LASH

vessels have competed for and carried bulk and bagged commodities

outside of liner operations. To the extent that LASH vessels are used

outside of liner operations and subject to this rule, MARAD finds no

reason to exclude this vessel type from the cost discipline that

averaging by categories provides.

In regard to the appropriateness of transoceanic tug and barge

movements, tugs and barges have regularly competed for transoceanic

cargoes during the last several years. MARAD sees no reason why two

vessel types competing for the same cargoes should not be subject to

the same guideline rate methodology.

With respect to how size categories were selected, 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. The analysis

placed vessels in size categories where they compete primarily with

each other and have similar aggregate cost structures.

MARAD's proposal to use cargo capacity rather than vessel size to

determine which category of costs to use was not generally well

received. Two commenters argued that the approach was less efficient

and could result in inequities for cargoes just above and below the

category break. After reviewing the comments and doing further

analysis, MARAD has reconsidered this approach and now believes that

categories based on vessel size would be the most effective and fair to

all concerned because costs are more closely related to vessel

deadweight than cargo deadweight.

One set of comments from industry and one from government proposed

vessel category sizes different from MARAD's. Both proposed five

different category sizes and one proposed categories broken down by

vessel deadweight (DWT) in lieu of CDWT. MARAD's original proposal and

the two alternatives are:

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Category MARAD (CDWT) (CDWT) Alternative #1 (DWT) Alternative #2

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I................................ 35,000.................. 38,000-50,000........... 30,000-49,999.

V................................ None..................... >50,000................. =>50,000.

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In response to the proposals, MARAD constructed guideline rates

using the averaging method with all three different category size

methods. The analysis showed a more even progression of rates from one

cargo size to another using the MARAD categories and that there is

little difference resulting from using CDWT instead of DWT to establish

the MARAD categories. However, the review resulted in a modest shift in

the break point between Category I and Category II from 8,000 CDWT to

10,000 DWT. Also, costs for vessels in the greater than 35,000 DWT

category did not display major variations due to vessel size.

Consequently, the final rule will have four categories based on vessel

size.

Voyage Parameters

The parameters of the pro forma voyage used in the construction of

the fair and reasonable guideline rate were addressed by five

commenters. Three comments were received concerning MARAD's proposal

for constructing voyages based upon MARAD selecting the most

appropriate port range for the return leg of the preference voyage,

rather than a return to the load port in all instances. Although one

commenter objected to the change without stating a specific reason, two

generally supported the change, as being in keeping with commercial

practices. One suggested that the return leg always terminate in the

U.S. Gulf, as that is where most cargo originates. The other suggested

that the language in the rule be expanded to include specific reference

to the practices of the owner and the prospects for subsequent

employment.

MARAD believes that the method of voyage construction published in

the NPRM can adequately address these concerns. Regarding always

terminating in the U.S. Gulf, in certain circumstances, e.g.,

consecutive voyages from the U.S. West Coast, the U.S. Gulf would not

be the appropriate termination area. The rule already authorizes MARAD

to select ``the most appropriate'' port range, so expanding the

language is not necessary.

Since speed would be averaged across vessel types, MARAD proposed

that the separate weather delay factors in Sec. 382.3(e)(6) be

eliminated. However, one commenter pointed out that tug/barge units

will still encounter greater weather delays than self propelled ships.

As a result of comments received, MARAD reconsidered this item and the

10% delay factor for computing average speed for tugs has been retained

in the final rule.

One commenter asserted that a critical problem with the

transportation of bulk preference cargo is that the risk shifted to

carriers by the use of ``full berth terms'' and other land-based

transportation requirements in preference charter parties. In the NPRM,

MARAD noted the differences in risk between load and discharge terms

and indicated its intention to use delay factors which reflect the

inherent risks, therefore no change has been made to the final rule.

Finally, a government commenter requested that MARAD continue to

calculate one-way rates at the time of booking for vessels sold or

scrapped prior to their return to the United States. The final rule

continues to provide for a one-way rate, but with a more precise

definition of the circumstances when it applies. The one-way rate will

continue to be calculated at the same time as the full round-trip

guideline rate.

[[Page 3823]]

Guideline Rate Adjustments

MARAD's proposal to eliminate backhaul adjustments elicited

comments from three operators and two government shippers. The comments

from the operators strongly favor MARAD's proposal, while the

government shippers opposed it. MARAD believes the proposal to

eliminate the backhaul adjustment provides the operator with a greater

ability to increase its commercial carriage and U.S.-flag participation

in the U.S. foreign trade. Further, MARAD believes that increased

commercial carriage could help lower overall program costs, and

therefore the proposal is unchanged in the final rule.

As a result of substitutions, voyage variations, add-on cargoes,

and similar recalculations, MARAD averages two guideline rate

calculations for each cargo actually fixed. MARAD intends to

substantially reduce these recalculations and generally determine only

one guideline rate for each preference cargo. The guideline rate based

on the initially requested vessel and cargo will also be applicable to

all other vessels in the same tonnage category that might actually

carry the cargo and for cargo amounts plus or minus five percent of the

original request. An exception would be made when a vessel eligible to

receive the ``new vessel allowance'' is substituted for an older

vessel, or vice versa.

Two government commenters and one operator also raised the issue of

whether rates would be recalculated when an outbound commercial cargo

is added on to a preference cargo. The government commenters argued

that additional revenue sources should always trigger a recalculation.

The other commenter noted that add-on commercial cargo is similar to

the backhaul adjustment and its elimination from the guideline process

would provide an incentive to bid on commercial cargo. MARAD will

recalculate rates, if requested, for any add-on cargo which increases

cargo size by more than five percent.

Cargo Size (Seventy Percent Limitation)

Three commenters provided views regarding MARAD's proposal to

eliminate the seventy percent limitation in the current rule. This

provision currently 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. All commenters agreed with

MARAD's proposal noting that the seventy percent rule has limited

competition. Therefore, Sec. 382.3(f) of the final rule will provide

that the determination of cargo tonnage in the guideline rate shall be

based on the actual cargo tonnage booked or considered for booking on

the voyage.

Capital Costs

Five changes designed to simplify or clarify rate calculations were

proposed within this cost category. Comments pertaining to these

changes and other issues related to capital cost were received from six

of the eight commenters.

The first change adds a clarifying cross reference in

Sec. 382.3(b)(2)(ii). In the final rule the paragraph explicitly

references paragraph (b)(2)(i) for the periods of depreciation to be

used in determining interest expense in the guideline rate.

Three commenters expressed views on MARAD's second proposal,

elimination of the 2.5 percent residual value in the calculation of

depreciation. Although two commenters supported elimination, the third

had a conceptional problem with the elimination of residual value in

the depreciation calculation. Because MARAD believes that eliminating

residual value simplifies the guideline rate process while conforming

to industry practice, residual value is eliminated from the

depreciation calculation in Sec. 382.3(b)(2)(i) of the final rule.

The third proposed change to the capital cost calculation concerns

situations where interest rates are not available for certain

capitalized items. MARAD proposed the ten-year Treasury-bill (T-bill)

rate plus one percent as an appropriate and readily available

substitute. One commenter supported the change while a second contended

that a change would probably result in a reduction for some operators.

This concern is unfounded; the rate will not be substituted when the

operator provides an interest rate. Accordingly, Sec. 382.3(b)(2)(ii)

is amended in the final rule 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, which was supported by the commenters

who voiced a view, related to the interest rate used to calculate

capital costs when an owner has a variable interest rate. In the final

rule Sec. 382.3(b)(2)(ii) has been amended to specify January 1 and

July 1 as the dates on which the interest rates in effect would be used

for the calculation of fair and reasonable rates.

The final proposed change to capital costs was the addition of a

statement in the new Sec. 382.3(b)(3) noting that the return on working

capital is a voyage related capital cost element and thus not part of

the averaged costs. This proposed change elicited comments from two

persons. One agreed with the change. The second commenter appeared to

misunderstand the proposal. The final rule includes the proposed change

in new Sec. 382.3(b)(3).

The rate of return used in the calculation of capital costs also

elicited extensive responses from four commenters, even though no

change was proposed. A government commenter objected to the ``policy of

guaranteeing'' a return on investment, suggesting that if the

``guarantee'' cannot be eliminated, it be based on a rate of return for

maritime companies only. The first part of this comment misinterprets

the function of the fair and reasonable guideline rates in the

preference market. Guideline rates provide a ceiling on market rates

charged for the carriage of preference cargoes on U.S.-flag vessels.

Far from ``guaranteeing'' a rate of return, a guideline rate limits the

shipowner's profitability. In addition, the Comptroller's opinion

specifically states that a reasonable profit should be included in the

rate. Regarding the suggestion to base the rate of return on maritime

companies only, MARAD believes that a maritime profitability index

would be too narrow to assure a reasonable return during all periods.

In general, the three operator commenters expressed the opposite

point of view from the above. They generally expressed the belief that

a higher rate of return is necessary to compensate for a high risk

investment in ocean shipping. One commenter suggested that the rate of

return for working capital should be based on short term business loan

rates such as prime plus a spread.

Although these comments have an element of truth, they also

illustrate the dilemma of choosing an appropriate rate of return. MARAD

believes that the suggestion to use a short term loan rate for the

return on working capital is a reasonable suggestion. However, short-

term loan rates are volatile and the suggestion ignores the question of

a specific spread to use. In the end, the Agency believes the current

procedures have worked well in the past and should continue to do so in

the future. The final rule stipulates a rate of return on working

capital and equity based on the five-year average of return on

stockholders' equity for a cross section of transportation companies.

[[Page 3824]]

New Vessel Allowance

One goal of revising Part 382 has been to encourage newer and more

efficient vessels to enter the cargo preference market. To this end,

MARAD proposed including an allowance for acquisition capital in the

guideline rates for both newly constructed vessels and vessels acquired

prior to the fifth anniversary of their construction. The proposal

provided that the allowance be included for a period of five years

after acquisition by the owner. Comments were received from four

persons on this provision. Commenters believed that the provision was

insufficient and that a strong market would be necessary for the

operator to benefit from the allowance. One commenter asserted that the

allowance would only be received if MARAD paid it directly, while

another supported the concept but only for newly constructed vessels.

As a result of the comments, MARAD modified the new vessel allowance to

provide a longer allowance period for newer vessel owners. In the final

rule, the annual new vessel allowance will equal ten percent of the

vessel's capitalized costs during the first year following construction

or acquisition, and will decline by one percentage point each of the

subsequent years until the vessel is ten years old. No allowance will

be included for vessels more than ten years of age.

Information Collection Requirements

MARAD proposed reducing reporting and auditing requirements while

continuing to recognize the agency's need for accurate cost and

financial information. Two favorable comments were received on MARAD's

proposals to reduce the amount and frequency of data reporting. To

implement these two concepts, the final rule amends Sec. 382.2(b)(8) to

authorize aggregate schedule filings, and Sec. 382.2(c) to change post-

voyage filing to a semiannual requirement.

Two changes in reporting requirements were proposed to reduce the

audit burden on operators, the Department of Transportation's Office of

the Inspector General (OIG), and MARAD. The first change, intended to

alleviate the need for auditing by the OIG, allowed an operator to have

its submissions certified by an independent certified public accountant

(CPA). One operator and the AICPA pointed out a problem with the

specific phrase used by MARAD. The AICPA recommended replacement

language specifying a report based on the independent CPA's performing

an engagement consistent with professional standards, i.e., an

attestation engagement. In addition, there was strong sentiment from

three commenters for MARAD retaining the right to audit. It was never

MARAD's intent to relinquish the right to request audits, but to

alleviate some of the need for audit. However, it is MARAD's intention

in deciding which operator's data to audit in any given year to factor

the level of CPA review into its considerations. In consideration of

the comments, the wording in Sec. 382.2 of the final rule has been

changed to include the language suggested by the AICPA.

The second proposed change in reporting requirements was to require

the operator to use the accounting treatment it already uses for its

own records and audited financial statements for its cost submissions

to MARAD. One commenter believed that drydocking accruals should still

be allowed even if a company expenses its drydocking costs. Another

remarked that reporting consistency is critical when using averaging

and MARAD should review the reported data and provide guidance to

ensure consistent cost data. While it would be advantageous if all

operators reported in the same manner and all operators accrued for

drydocking costs, the Agency believes that the averaging process itself

will even out the drydocking costs in much the same way as the accrual

process.

MARAD also proposed three minor reporting changes. First, reporting

the Official Coast Guard Identification Number (official number) would

be required; second, the DWT requirement would be amended to require

only summer DWT in metric tons and eliminate the requirement for Suez

and Panama Canal net register tons; and, finally, the definition of

``operating day'' would be clarified. Only positive comments were

received on these proposed changes and the proposals are included in

the final rule.

Brokerage and Overhead

Part 382.3(b)(5)(d) specifies that ``allowance for broker's

commission and overhead 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.'' Two comments were received on this

component of the rate. The first questioned whether 8.5% is an

appropriate allowance. The second was whether brokerage and overhead

could be allowed on pass through items. MARAD believes that the 6%

allowance for overhead costs that is added to the 2.5% brokerage

included in guideline rates is still appropriate. Regarding brokerage

and overhead on pass through items, fair and reasonable guideline rates

are for ocean transportation only and an allowance in the guideline

rate for inland transportation items is outside the scope of this

rulemaking.

Total Revenue Rates

When more than one cargo has been booked on a vessel subject to the

guideline rate regulations or when there are multiple load and/or

discharge ports, calculating individual rates for particular parcels

and/or destinations, as currently required by Sec. 382.3(f) and (g), is

impossible. Accordingly, MARAD proposed calculating a ``Total Revenue

Rate'' when this occurs. 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. If 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.

A shipper agency expressed concern that total revenue rates could

result in inequities to recipients or shipper agencies if a high

fixture and a low fixture combine to result in an acceptable total

revenue. One operator expressed the belief that using a total revenue

rate for combined parcels penalizes the operator for initiative in

combining parcels and another asked that the calculation method be

specified and shown by example. Responses to these concerns are drawn

from experience with the total revenue concept, which has been used

under waiver authority.

Experience to date has not shown operators frequently blending a

high fixture rate with a low one. Typically, combining cargoes allows

an operator to spread fixed costs more widely and bid a highly

competitive rate for each cargo. Using the total revenue approach

allows MARAD to combine the fixed costs for the whole voyage with the

variable costs for the individual parcels. But because the voyage's

fixed costs and the parcels' variable costs are not derived from the

same tonnage, a rate per ton is not meaningful.

MARAD does not believe that total revenue rates penalize operators

for combining cargoes. Total revenue rates actually reflect the

practices of the operators when they combine cargoes. Using a total

revenue approach simply requires comparing all the costs for all

parcels to be carried on the voyage to the total revenue proposed in

the operator's bids, thereby obviating the need to artificially

allocate fixed costs to one cargo or the other.

As requested, an example of a total revenue rate follows:

[[Page 3825]]

Cargo

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

Amount

Cargo metric tons Type Terms Load port Discharge port

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

Rice............... 10,000 Bagged............. FBT............... Galveston, TX..... Durban, South

Africa.

Wheat.............. 10,000 Bulk............... VLFO (4000/1000) New Orleans, LA... Beira,

SHEX. Mozambique.

Corn............... 10,000 Bulk............... FBT............... New Orleans, LA... Mombassa, Kenya.

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

Voyage

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

Port Activity Port time Distance Sea time Port costs Cargo costs

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

New Orleans, LA.............. Load wheat and 8.38 ........... ........... $35,000 $25,000

corn.

Bunker.......... 1.00 ........... ........... ........... ...........

Galveston, TX................ Load rice....... 8.49 390 1.25 35,000 180,000

Durban, South Africa......... Discharge rice.. 10.18 8234 28.32 25,000 100,000

Beira, Mozambique............ Discharge wheat. 12.73 702 2.24 25,000 0

Mombassa, Kenya.............. Discharge corn.. 8.49 1149 3.67 25,000 60,000

Bunker.......... 1.00 ........... 0.00 ........... ...........

U.S. Gulf.................... Return.......... 0.00 9986 31.92 0 0

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

Total Days............. ................ 48.25 ........... 85.40 145,000 385,000

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

Fair and Reasonable Rate Calculation

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

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

Fuel Costs........................................... $415,000

Vessel Operating Costs............................... $1,500,000

Port Costs........................................... $145,000

Cargo Costs.......................................... $365,000

Other Cargo Costs.................................... $20,000

Capital Costs........................................ $740,000

Brokerage & Overhead................................. $270,725

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

Total.......................................... $3,455,725,000

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

Total Revenue Rate............................. $3,455,725

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

Average Rate per ton........................... $115.19

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

Fixture and Fair and Reasonable Rate Comparison

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

Fair and

Cargo Rate bid Amount Revenue reasonable

rate

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

Rice............................................ $125.00 10,000 $1,250,000

Wheat........................................... 90.00 10,000 900,000

Corn............................................ 95.00 10,000 950,000

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

Total..................................... .............. 30,000 3,100,000 \1\ $3,455,725

Average................................... 103.33

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

\1\ Since voyage revenue is less than total revenue from the fair and reasonable rate, the individual bids are

considered fair and reasonable.

The preceding example details the areas where costs vary and

overlap. In order to provide individual rates, both direct and overall

voyage costs must be allocated to each cargo. This is very difficult to

accomplish fairly. Also, as this example illustrates, individual

fixture rates can be higher or lower than the average rate, and yet the

operator's total effort yields revenue that is fair and reasonable. The

only unique aspect of the total revenue rate is the elimination of the

step which divides the total allowable costs by the cargo tons to

derive a rate per ton.

MARAD believes that the total revenue approach represents the best

method for protecting the interests of all parties when cargoes are

combined. Furthermore, combining cargoes has become increasingly common

in the past two years. Consequently, in the final rule, Sec. 382.3 (f)

and (g) will allow the use of either a cost per ton or other measure

that MARAD determines appropriate.

Revised Rate Methodology

The guideline or fair and reasonable rate established by MARAD,

which applies only to the ocean borne portion of cargo transportation,

consists 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 will reflect

average vessel operating costs for vessels within the specified size

categories based on the historical data submitted in accordance with

Sec. 382.2 of this rule. MARAD will update the operating costs to the

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

costs. The averages for each category of vessels will be calculated at

least twice per year. To the extent vessels are time chartered or

leased,

[[Page 3826]]

operators will submit both operating and capital costs, including all

capitalized costs and interest rates for vessels subject to capital

leases.

Vessel costs will be placed in categories based on the vessel's

summer deadweight tons (DWT). The categories will be as follows:

Category I--Less than 10,000 DWT

Category II--10,000--19,999 DWT

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

Category IV--Greater than 35,000 DWT

All eligible annual operating costs for vessels within a category

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

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

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

days to yield the operating cost segment for the voyage.

Fuel consumption will be determined 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 will

be multiplied by the projected number of voyage days at sea and in port

to yield total fuel consumed. MARAD will obtain current spot market

fuel prices from published sources 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 will be added together to yield

the operating cost component for the voyage.

The capital cost component will be an average based on vessels in

the applicable size category. It will consist of an allowance for

depreciation and interest and a reasonable return on investment.

Depreciation for vessels in a category will be straight-line based on a

20-year economic life. However, if the owner acquired an existing

vessel, the vessel will 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 will 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 will assume

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

capitalized vessel costs and that principal payments are made in equal

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

the interest cost, the owner's actual interest rates will 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 when the average capital

cost component is calculated will be used. In cases where there is no

interest rate available, and for operators without vessel debt, MARAD

will use the ten-year T-bill rate plus one percent.

Return on investment will have two components, return on equity and

return on working capital. The rate of return will 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 used will be the vessels' constructed net book values

less constructed principal amounts. Working capital will be voyage

based and be the dollar amount necessary to cover operating and voyage

expenses.

A new vessel allowance will be included in the capital component of

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

less. This allowance, which will be paid until the vessel is ten years

old, will equal ten percent of the vessel's capitalized costs during

the first year following construction or acquisition, and will decline

by one percentage point each of the subsequent years. The voyage

allowance will be the annual amount 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 will be divided by 300 operating days to

determine a daily amount. The total of these elements will 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 will 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 will 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 will

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 will 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, will 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 will 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 may 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, provided 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; Pub. L. 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 for purposes of Congressional review

under Pub. L. 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.

When the NPRM was published, MARAD estimated the potential savings

to the Government from this rulemaking by recalculating 167 rates for

the years 1992 through 1995 using the revised methodology. This sample

reflected the operators and countries in the complete data base.

Extrapolating from the sample showed that averaging could have saved

three million dollars in ocean freight for preference cargoes during

the period. The comments received on the NPRM expressed concern that

this analysis was flawed because it contained vessels which have since

been either scrapped or withdrawn from the preference trade.

[[Page 3827]]

In response, MARAD recomputed the average costs for 1993 and 1994 using

only vessels that are currently available for the preference trade.

Table I shows the costs derived for each category from the reduced

sample which were then used to calculate guideline rates using the

averaging method. Table II summarizes the results of these calculations

and shows the percentage savings that would have been realized using

averaging.

Table I.--Daily Costs Used in Guideline Rate Averages for CY 1993 and 1994

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

Operating Capital Fuel (at Fuel Speed

Categories Year costs costs sea)* (import)* (knots) Sample size

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

Category I................................ 1993.......................... $4,087 $1,224 $1,600 $222 6.25 8

(35,000 vdwt)............................ 1994.......................... 12,757 6,138 4,492 680 13.36 14

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

Extrapolating the estimated 1.05% savings based on actual fixtures

during 1993 and 1994 to the period 1993 to August 1997, yields a

savings of nearly one million dollars as a result of averaging. This

savings estimate is approximately one-third the savings estimated with

the ship mix used in the initial analysis. The reason for this is that

declining levels of cargoes since 1994 have forced operators to bid

very low rates to obtain cargoes, thus forcing many inefficient vessels

out of the trade. Nevertheless, a million dollar savings is

significant.

Table II.--Savings in Sample Rates From Using Averaging System for Rate Calculation

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

Fixture Averaging Averaging vs

Sample size revenue savings guideline Metric tons

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

Category I......................... 18 6,098,662 ($96,481) ($692,251) 91,956

Category II........................ 22 20,953,285 0 ($1,017,582) 296,068

Category III....................... 10 20,155,736 ($611,594) ($835,651) 224,247

Category IV........................ 26 59,655,091 ($416,255) ($429,445) 1,003,997

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

Sample total................. 76 106,862,774 ($1,124,330) ($2,974,929) 1,616,268

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

........... .............. -1.05% -2.32% ..............

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

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 final rule has no environmental impact and an environmental

impact statement is not required under the National Environmental

Policy Act of 1969.

Paperwork Reduction Act

This 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.). Public comments were

requested in the NPRM at 62 FR 9150, published February 28, 1997.

Closing date for comments was April 29, 1997. No comments were received

regarding this information collection. A subsequent 30-day notice was

published July 21, 1997 by the Office of the Secretary of

Transportation at 62 FR 39046. Comments were due on or before August

20, 1997. No comments were received as a result of this notice.

In accordance with the Paperwork Reduction Act of 1995, MARAD

received an extension from OMB of approval for three years for this

information collection.

Unfunded Mandates

Under the Unfunded Mandate Reform Act (Pub.L. 104-4) the Maritime

Administration must consider whether this rule will result in an annual

expenditure by State, local and tribal governments, in the aggregate,

or by the private sector, of $100 million or more (adjusted annually

for inflation). The Act also requires that the Maritime Administration

identify and consider a reasonable number of regulatory alternatives

and, from those alternatives, select the least costly, most cost-

effective, or least burdensome alternative that will achieve the

objectives of the rule. As stated above, by this rule the Maritime

Administration is reducing regulatory burden, i.e., collection of

information, on the public. This final rule does not result in an

annual expenditure by State, local and tribal governments, in the

aggregate, or by the private sector, of $100 million or more and is the

least burdensome alternative that will achieve the objective of the

rule.

List of Subjects in 46 CFR Part 382

Agricultural commodities, Government procurement, Loan programs--

foreign relations, Maritime carriers, Reporting and record keeping

requirements.

[[Page 3828]]

Accordingly, 46 CFR Chapter II is hereby 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 Waivers.

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, which

is defined as service provided on an advertised schedule, giving

relatively frequent sailings between specific U.S. ports or ranges and

designated foreign ports or ranges.

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 based on the independent CPA

performing an engagement consistent with professional standards, i.e.,

an attestation engagement, is recommended. Submissions 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) and 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 310. 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 means 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 shall be provided

semiannually 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 semiannual periods and the

information to be submitted 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 MARAD's regulations at

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 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 assertions of exemption from disclosure. The Freedom

of Information

[[Page 3829]]

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 vessel 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 specified in

46 CFR 232.5, Form MA-172, Schedule 310, 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 non-wage 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. Vessels shall be placed in categories by

deadweight capacities (DWT), as follows:

Group I--under 10,000 DWT

Group II--10,000--19,999 DWT

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

Group IV--35,000 DWT and over.

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

component for each category 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 owners' capitalized vessel costs, including

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

over a 20-year economic life, except vessels purchased or reconstructed

when their age was greater than 10 years old. To the extent vessels are

chartered or leased, the operator shall submit the capitalized cost of

the vessel owner and imputed interest rate. If 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

each vessel owner's actual interest rates to the outstanding vessel

indebtedness. MARAD shall assume that original vessel indebtedness is

75 percent of the owners' capitalized vessel costs, including

capitalized improvements, and that annual principal payments are made

in equal installments over the economic life of the vessels 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 values shall

equal the owners' capitalized cost minus accumulated straight-line

depreciation.

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

capital shall be included as a voyage related capital cost element, and

thus not part of the averaged costs. 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

tenth year following construction.

(5) Voyage component. The annual average depreciation, interest,

and return on equity for vessels in each category 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 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. When calculating the vessels' average speed, individual

vessel speeds will be

[[Page 3830]]

reduced by five percent for self-propelled vessels and ten percent for

tugs/barges to account for weather conditions.

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

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 Waivers.

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: January 21, 1998.

Joel C. Richard,

Secretary.

[FR Doc. 98-1786 Filed 1-26-98; 8:45 am]

BILLING CODE 4910-81-P