[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25437]
[[Page Unknown]]
[Federal Register: October 14, 1994]
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FEDERAL MARITIME COMMISSION
46 CFR Part 540
[Docket Nos. 94-06; 94-21]
Financial Responsibility Requirements for Nonperformance of
Transportation; Inquiry Into Alternative Forms of Financial
Responsibility for Nonperformance of Transportation
AGENCY: Federal Maritime Commission.
ACTION: Notice of Inquiry.
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SUMMARY: The Proposed Rule in Docket No. 94-06 is held in abeyance,
pending an Inquiry into alternative methods of establishing financial
responsibility. The Inquiry's purpose is to determine whether an
acceptable alternative can be fashioned that will address the industry
objections to the Proposed Rule, yet ensure that cruise passengers are
adequately protected in the event of nonperformance of transportation.
DATES: Comments due on or before November 28, 1994.
ADDRESSES: Send comments (original and 20 copies) to: Joseph C.
Polking, Secretary, Federal Maritime Commission, 800 North Capitol St.,
NW., Washington, DC 20573-0001, (202) 523-5725.
FOR FURTHER INFORMATION CONTACT: Bryant L. VanBrakle, Director, Bureau
of Tariffs, Certification and Licensing, Federal Maritime Commission,
800 North Capitol Street NW., Washington, DC 20573-0001, (202) 523-
5796.
SUPPLEMENTARY INFORMATION: The Federal Maritime Commission
(``Commission'' or ``FMC'') administers section 3, Pub. L. 89-777, 46
U.S.C. app. 817e (``Section 3''). Section 3 requires certain passenger
vessel operators (``PVOs'') to establish financial responsibility for
nonperformance of transportation.1 The Commission's regulations
implementing section 3, contained in 46 CFR part 540, subpart A,
generally provide that a PVO may evidence its financial responsibility
by one or more of the following methods: A guaranty, escrow
arrangement, surety bond, insurance or self-insurance. The amount
required must equal 110 percent of the PVO's highest UPR over a two-
year period.2 The maximum coverage amount currently required is
$15 million, subject to a sliding scale.3
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\1\Section 3 provides, in pertinent part:
(a) No person in the United States shall arrange, offer,
advertise, or provide passage on a vessel having berth or stateroom
accommodations for fifty or more passengers and which is to embark
passengers at United States ports without there first having been
filed with the Federal Maritime Commission such information as the
Commission may deem necessary to establish the financial
responsibility of the person arranging, offering, advertising, or
providing such transportation, or, in lieu thereof, a copy of a bond
or other security, in such form as the Commission, by rule or
regulation, may require and accept, for indemnification of
passengers for nonperformance of the transportation.
\2\UPR is defined under 46 CFR 540.2(i) as:
. . . that passenger revenue received for water transportation
and all other accommodations, services, and facilities relating
thereto not yet performed.
\3\The Commission, in Docket No. 92-19, Revision of Financial
Responsibility Requirements for Non-Performance of Transportation,
amended 46 CFR Part 540, Subpart A, to (1) institute this sliding
scale formula for determining the amount of financial responsibility
coverage required for operators meeting certain requirements; (2)
exclude, under certain conditions, revenue from ``whole-ship''
arrangements from being considered UPR; and (3) publish a suggested
form escrow arrangement as a guideline for the industry (57 FR 51887
(September 14, 1992)).
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By Notice of Proposed Rulemaking published in the Federal Register
on March 31, 1994 (``NPR'' or ``Proposed Rule''),4 the Commission
proposed to remove the $15 million unearned passenger revenue (``UPR'')
ceiling now applicable to passenger vessel financial responsibility
requirements for nonperformance of transportation. The Commission
initiated this proposal in part because there is an estimated $700
million in UPR without section 3 coverage, raising concern that there
could be insufficient financial responsibility to indemnify the
travelling public for nonperformance. The Commission also proposed to
revise the current UPR sliding scale accordingly--and to require
coverage of 110 percent of UPR up to $25 million per operator, with
coverage of 90 percent of UPR for amounts exceeding $25 million. The
NPR also put forth an alternative proposal which would require coverage
of 110 percent of UPR up to $25 million per operator; 75 percent of UPR
between $25 million and $50 million per operator; and 50 percent
coverage for UPR over $50 million per operator. Additionally, the
Commission proposed to remove self-insurance as an option for section 3
coverage (except for state or federal entities). Existing self-insured
commercial operators would be provided one year following the effective
date of any final rule in this matter to obtain other evidence of
financial responsibility. In issuing the Proposed Rule, the Commission
stated that it considered these changes to be necessary to ensure that
cruise passengers are adequately protected in the event of
nonperformance of transportation.
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\4\59 FR 15149.
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Comments on the NPR were originally due by May 2, 1994. The comment
period was subsequently extended to June 10, 1994,5 in response to
a request for a 90-day extension of the comment period by The Delta
Queen Steamboat Co., and was again extended in response to a request by
the International Council of Cruise Lines to extend the comment period
to June 24, 1994.6
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\5\59 FR 23183 (May 5, 1994).
\6\59 FR 30567 (June 14, 1994).
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Two Congressional interests,7 four PVOs (two U.S.-Flag8
and two foreign-flag9), and six trade associations (three
representing U.S.-flag PVOs,10 one representing foreign-flag
PVOs,11 one representing surety interests,12 and one
representing travel agents13) filed comments on the Proposed Rule.
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\7\The U.S. House of Representatives Committee on Merchant
Marine and Fisheries and Subcommittee on Merchant Marine and
Fisheries (``Committees'') filed a comment; Congressman W.J. Tauzin
(D-Louisiana) filed a separate comment.
\8\Alaska Sightseeing/Cruise West (``Alaska Sightseeing'') is a
Seattle-based PVO that operates four U.S.-flag vessels ranging in
capacity from 58 to 101 passengers, and will be deploying a fifth
overnight vessel in 1995. Its 1993 UPR was just under $5 million,
and it projects that its UPR will surpass $5 million with the
deployment of its fifth vessel.
American Classic Voyages Co. (``AMCV'') was formerly known as
The Delta Queen Steamboat Co., and now is the corporate parent of
The Delta Queen Steamboat Co. (``Delta Queen'') and American Hawaii
Cruises (``AHC'').
\9\Carnival Corporation (``Carnival'') is the parent company of
Carnival Cruise Lines, Holland America Lines and Windstar Cruises,
which operate eighteen cruise vessels which embark passengers at
U.S. ports and which it states comprise the largest cruise business
in the world.
Kloster Cruise Limited (``Kloster'') does business under the
trade names Norwegian Cruise Line and Royal Viking Line. It is also
the parent company of Royal Cruise Line Limited. Kloster states that
it is the third largest cruise ship operator in the world.
\1\0The National Cruise Ship Alliance is an organization of
business, government and labor representatives that promotes the
development of a U.S.-flag cruise ship industry. It is involved with
legislation pending in Congress to attract foreign built cruise
ships to U.S. ports and encourage the construction of new U.S.-flag
cruise vessels.
The Transportation Institute represents 140 U.S.-flag shipping
companies engaged in foreign and domestic trades, including AMCV.
The Passenger Vessel Association is a 500-member trade
association of U.S.-flag passenger vessel owners, operators and
suppliers which operate some 1,200 vessels and carry about 80
million people each year. Its members include the American companies
which offer overnight cruises, all on U.S.-built, U.S.-crewed, U.S.-
flag vessels. With the exception of AMCV, these companies all are
small, generally family-owned businesses whose vessels range in size
from 49 to 138 passengers and operate throughout the Americas, from
Venezuela to Alaska.
\1\1The members of the International Council of Cruise Lines
(``ICCL'') have approximately 90% of the cruise industry berth
capacity. ICCL's letterhead lists Carnival Cruise Lines, Celebrity
Cruise Lines, Commodore Cruise Line, Costa Cruise Lines NV, Crown
Cruise Line, Crystal Cruises, Cunard Line Ltd., Dolphin Cruise Line,
Epirotiki Lines, Fantasy Cruise Lines, Holland America Line, Majesty
Cruise Line, Norwegian Cruise Line, Premier Cruise Lines, Ltd.,
Princess Cruises, Regency Cruises, Inc., Royal Caribbean Cruises,
Ltd., Royal Cruise Line, Royal Viking Line, Seabourn Cruise Line,
Sun Line Cruises, Inc., and Windstar Cruises.
\1\2The Surety Association of America represents 650 surety
companies that provide 95% of the surety bonds written in the United
States.
\1\3Midwest Agents Selling Travel (``MAST'') is a trade
association of over 300 upper Midwestern retail travel agencies
which have an estimated $60,000,000 in cruise sales annually, and
approximately $10,000,000 in consumer deposits with PVOs at any
given time.
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There is virtually unanimous support for the Commission's existing
UPR coverage requirements, and widespread questioning of the need for
the Proposed Rule. Many commenters draw attention to the Commission's
many recent proceedings in this area, and assert that there have been
no industry changes warranting this proposal. Positions range from
strong Congressional and U.S.-flag PVO opposition to any further
changes to current coverage requirements, to conditional support of a
modified version of the Proposed Rule by foreign-flag interests. There
is no support for the Proposed Rule outright; however, Carnival
supports the Proposed Rule's coverage requirements for those PVO's
unable to meet its self-insurance proposal.
Many commenters take issue with the Proposed Rule's requirement for
essentially unlimited coverage for UPR. They contend that Pub. L. 89-
777's purpose is to insure that PVOs are financially responsible to
perform transportation, and interpret the statute and the Commission's
past interpretations as requiring evidence of financial responsibility,
not a financial guaranty.
U.S.-flag advocates state that the proposal to discontinue self-
insurance for commercial PVOs would unfairly impact U.S.-flag
operators; foreign-flag advocates criticize it for unduly restricting a
maturing industry. U.S.-flag advocates also criticize the impact of the
Proposed Rule's increased coverage requirements and associated
collateralization requirements upon smaller U.S.-flag PVOs, noting that
they face much higher operating costs than their foreign competition.
In addition, a number of commenters urge the Commission to perform a
cost/benefit analysis on the Proposed Rule's impact.
Many U.S.-flag advocates assert that the impact of the Proposed
Rule's increased coverage requirements would be severe enough to cause
the cruise industry to generally relocate its embarkations to nearby
foreign ports in the Caribbean, Mexico and Canada, thus avoiding FMC
jurisdiction and eliminating protection to the U.S. travelling public.
However, neither of the commenting foreign-flag PVOs nor ICCL in any
way intimate that this would be likely to happen.
The NPR included an alternative coverage requirement,14 and
asked for suggestions for other approaches to ensure adequate UPR
coverage. This aspect of the proposal drew considerable comment;
although the initial approach set forth in the Proposed Rule drew no
unconditional support, the foreign-flag PVO interests in particular
supported a modified version of the Proposed Rule's alternative
approach. Other alternatives were also offered.
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\1\4The alternative proposal would require coverage of 110
percent of UPR up to $25 million per operator; 75 percent of UPR
between $25 million and $50 million per operator; and 50 percent
coverage for UPR over $50 million per operator.
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ICCL and Kloster support the Commission's alternative proposal to
remove the current $15 million ceiling and to implement a sliding
scale, provided (1) that it is gradually phased-in; and (2) the
Commission amends its self-insurance requirements to make self-
insurance reasonably available to creditworthy operators, regardless of
the location of their qualifying assets. These commenters also propose
that (1) only existing UPR be covered, rather than the PVO's highest
UPR during the preceding two years; and (2) coverage requirements and
self-insurance tests should encompass the organization as a whole,
thereby enabling a corporate parent to obtain coverage for its entire
organization.
Citing American Hawaii Cruises' bankruptcy filing and trade press
articles concerning the securing of financing for a Kloster Cruise
ship, MAST endorses moves to ensure liquid funds are readily available
to protect consumers in the event of a default. It suggests that the
Commission give the cruise industry 90 days--under a grant of limited
antitrust immunity--to develop its own plan to ensure total and timely
consumer protection. Should the industry fail to act in a way
satisfactory to the Commission, MAST suggests consideration of higher
bonding.
Alaska Sightseeing recommends that the Commission instead require
110% coverage for UPR up to $5 million, and 50% coverage for UPR over
$5 million, with no maximum. It also suggests retaining self-insurance
for U.S. corporations operating U.S.-flag vessels.
AMCV requests that the current self-insurance option be maintained
and that the existing coverage ceiling be left in place. It stresses
that self-insurance is an important alternative for U.S. companies and
should be retained. It therefore urges that self-insurance not be
simply discarded, but that any concerns should be addressed
individually. It suggests, for example, that the percentage threshold
of net worth as a function of UPR could be increased above 110% to
provide an additional cushion of coverage.
AMCV's first proposal is that PVOs be required to fully disclose
any shortfall between coverage and UPR, and to advise their passengers
of the availability of additional insurance coverage. Its second
proposal is a new rulemaking to consider a berth-based formula, an
indexed increase in the ceiling, or other alternatives to address the
coverage ``gap''.
Carnival believes that the current gap between UPR and coverage
levels is a legitimate issue: recent fleet growth has substantially
increased the gap between coverage and actual UPR. Carnival therefore
suggests that UPR coverage requirements be designed to adjust as PVOs
increase in size, and to avoid the need to return to this issue every
few years. However, it submits that the Proposed Rule's removal of
self-insurance would penalize the most financially sound PVOs. It
instead suggests that self-insurance standards be strengthened and made
available to PVOs which have either (i) an ``investment grade rating''
of its debt by at least two accepted bond rating agencies; or (ii)
which meet certain minimum financial ratios (liquidity of at least 100%
of the PVO's UPR plus at least three times its UPR in tangible net
worth (excluding intangible assets such as good will)). Thus, Carnival
states that the Commission would be accepting the financial standards
the rating agencies and Wall Street use to adjudge a maturing industry,
arguing that a PVO meeting its proposed self-insurance tests clearly
has the resources to satisfy passenger claims for UPR. In the event
that a PVO is unable to self-insure by meeting either the investment
grade ratings test or the minimum financial ratios test, Carnival
supports a significant increase in coverage requirements. In light of
the total amount of UPR, Carnival submits that the Commission's first
alternative of bonding 110% of UPR up to $25 million, and 90% of UPR
exceeding $25 million appears reasonable.
Discussion
We continue to believe that the Proposed Rule represents a legally-
appropriate approach to address the Section 3 coverage issues that are
before the Commission. However, in view of the general opposition to
the Proposed Rule, the Commission has determined to hold it in abeyance
pending the exploration of additional alternatives. The Commission
wishes to ensure that full consideration is given to other means of
establishing financial responsibility which are more acceptable to the
industry. The Commission is therefore instituting this inquiry to
determine the feasibility of the PVO industry addressing coverage
requirements through (1) the vehicle of voluntary association(s) (such
association(s) would be in addition to the current individual methods
of evidencing financial responsibility for non-performance); and (2)
retained but strengthened self-insurance requirements, as outlined more
fully below. The Commission believes that these approaches could
provide a level of protection to the travelling public comparable to
that envisioned by the Proposed Rule, but with less of an impact upon
the industry.
A. Voluntary Association(s)
In Docket No. 92-37, Financial Responsibility for Non-Vessel-
Operating Common Carriers, the Commission permitted a group or
association of non-vessel-operating common carriers (``NVOCC's'') to
collectively issue bonds to meet financial responsibility coverage
requirements imposed upon NVOCC's by the Shipping Act of 1984. Because
this approach has proven successful with respect to NVOCC's, the
Commission is considering its applicability and adaptability to PVO
requirements under Public Law 89-777. At the same time, the Commission
recognizes that, because an association approach would necessarily
involve concerted carrier activity, such an approach could present
issues under the antitrust laws to the extent such activity is not
exempted under agreements effective pursuant to the Shipping Act of
1984, 46 U.S.C. app. 1701 (``1984 Act'')15 and/or approved
pursuant the Shipping Act, 1916, 46 U.S.C. app. 801 (``1916
Act'').16 The Commission invites comment on these issues.
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\1\5The 1984 Act governs concerted ocean common carrier activity
in the U.S. foreign waterborne trades.
\1\6The 1916 Act governs concerted activity of common carriers
by water in interstate commerce in the transportation by water of
passengers on the high seas or the Great Lakes on regular routes
from port to port between one U.S. State, Territory, District or
possession and any other U.S. State, Territory, District or
possession or between places in the same Territory, District or
possession.
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In general terms, the voluntary association concept would work in a
manner whereby the involved association would accept liability for all
or a part of a PVO's section 3 liability, pursuant to a Commission-
approved surety bond or guaranty in an amount equal to the combined UPR
of the two members having the highest amount of UPR during the past two
years. We have set forth below one possible methodology which the
Commission could take to implement this alternative and is proffered
for comments concerning this alternative's viability. Such an approach
could revise the Commission's rules under 46 CFR part 540, subpart A in
the following four respects.
First, it could revise the heading of 46 CFR 540.5 to read:
``Sec. 540.5 Insurance, guaranties, escrow accounts, self-
insurance, associations''.
Second, it could add a new Sec. 540.5(e) to read:
(e) Where a group or association of passenger vessel operators
accepts liability for all or part of a passenger vessel operator's
or a ticket issuer's financial responsibility under section 3 of
Pub. L. 89-777, the group or association of passenger vessel
operators must file either a Form FMC-132A Surety Bond or a Form
FMC-133A Guaranty clearly identifying each passenger vessel operator
or ticket issuer and each passenger vessel covered. In such cases
the group or association's coverage must be in the amount equal to
the combined unearned passenger revenue of the two members having
the highest amount of unearned passenger revenue on the date within
the 2 fiscal years immediately prior to the filing of the group or
association's coverage.
Third, it could redesignate current Sec. 540.5 (e) and (f) as
Sec. 540.5 (f) and (g), respectively.
Finally, it could add a new Sec. 540.9(l) as follows:
(l) Evidence of financial responsibility of the type provided
for in Secs. 540.5 and 540.6 of this part established through and
filed with the Commission by a group or association of passenger
vessel operators or ticket issuers on behalf of its members, is
subject to the following conditions and procedures:
(1) Each group or association of passenger vessel operators or
ticket issuers shall notify the Commission of its intention to
participate in such a program and furnish documentation as will
demonstrate its authenticity and authority to represent its members,
such as articles of incorporation, bylaws, etc.;
(2) Each group or association of passenger vessel operators or
ticket issuers shall provide the Commission with a list certified by
its Chief Executive Officer containing the names of those passenger
vessel operators or ticket issuers to which it will provide
coverage, in whole or in part; the manner and amount of existing
coverage each covered passenger vessel operator or ticket issuer
has; an indication that the existing coverage provided each
passenger vessel operator or ticket issuer is provided by a surety
bond issued by a surety company found acceptable to the Secretary of
the Treasury, or by insurance or guaranty issued by a firm
acceptable to the Commission; and the name, address and facsimile
number of each surety, insurer or guarantor providing coverage
pursuant to this section. Each group or association of passenger
vessel operators or ticket issuers shall notify the Commission
within thirty (30) days of any changes to its list.
(3) The group or association shall provide the Commission with a
sample copy of each type of existing financial responsibility
coverage used by member passenger vessel operators or ticket
issuers.
(4) Each group or association of passenger vessel operators or
ticket issuers shall be responsible for ensuring that each member's
financial responsibility coverage will discharge that member's legal
liability to indemnify the passengers of the member's vessels for
nonperformance of transportation within the meaning of section 3 of
Public Law 89-777. Each group or association of passenger vessel
operators or ticket issuers shall be responsible for requiring each
member to provide it with valid proof of financial responsibility
annually.
(5) Where the group or association of passenger vessel operators
or ticket issuers determines to secure on behalf of its members
other forms of financial responsibility, as specified by this
subpart to indemnify passengers for nonperformance of transportation
within the meaning of section 3, Public Law 89-777, not covered by a
member's individual financial responsibility coverage, such
additional coverage must:
(i) Allow claims to be made in the United States directly
against the group or association's Surety, Insurer or Guarantor
against each covered member for nonperformance of transportation
within the meaning of section 3 of Public Law 89-777; and
(ii) Be for an amount up to the UPR for each covered member up
to a maximum of the UPR in the amount equal to the combined unearned
passenger revenue of the two members having the highest amount of
unearned passenger revenue on the date within the 2 fiscal years
immediately prior to the filing of the group or association's
coverage.
(6) The coverage provided by the group or association of
passenger vessel operators or ticket issuers on behalf of its
members, in whole or in part, shall be provided by:
(i) In the case of a surety bond, a surety company found
acceptable to the Secretary of the Treasury and issued by such a
surety company on Form FMC-132A; and
(ii) In the case of insurance and guaranty, a firm recognized
and approved by the Commission.
B. Reinforced Self-Insurance
Strongly-argued support remains for continuing at least a modified
version of self-insurance. The Commission is concerned that its present
self-insurance standards may be inadequate, but it will consider an
approach whereby it would restore its former ((net worth = 100% UPR) +
(working capital = 100% UPR)) standard,17 but require prospective
self-insurers to provide alternative coverage for a percentage (e.g.,
50% or 25%) of their uncovered UPR, through either a traditional
guaranty, surety, escrow agreement or lien or other security
instrument, or through participation in a coverage association along
the above-described lines. The Commission would, however, still require
qualifying assets to be located in the United States.
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\1\7The former standard provided that the Commission could, for
good cause shown, waive the requirement as to the amount of working
capital.
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C. Coverage Requirements
PVO's electing to secure coverage through an association of the
nature described above would be required to effect coverage either
equal to that PVO's individual exposure under the coverage requirements
ultimately adopted in this matter, or the association could be required
to cover the combined UPR attributable to its two largest members. The
Commission invites comment on other variants that might also provide
adequate coverage.
We also solicit comments on any other form of security or proposal
that would provide adequate coverage for the travelling public.
Conclusion
The Commission's initiation of this proceeding is not in any way
intended to suggest that the PVO industry is unstable or has at any
time failed to meet its responsibilities under Public Law 89-777. At
the same time, we remain concerned that our present requirements may
not provide sufficient coverage in the event of future nonperformance.
The Commission affirms its willingness to consider innovative methods
of ensuring an adequate degree of Public Law 89-777 coverage without
unduly burdening the PVO industry and appreciates the input it has
received to date on the development of its rules in this area.
Now therefore, it is ordered that this Notice of Inquiry be
published in the Federal Register; and
Is further ordered, that the Proposed Rule in Docket No. 94-06 is
hereby held in abeyance pending further notice.
By the Commission,
Joseph C. Polking,
Secretary.
[FR Doc. 94-25437 Filed 10-13-94; 8:45 am]
BILLING CODE 6730-01-P
