where the figures that Respondents used in their Direct Case originated."1 On pages 8-9, Mr. Roush explained the source for and calculations made in determining the revenue produced for the through-movement. II. The Method Used To Determine Reasonableness Of Rates In the Commission's OFI, the Commission found that the parties' use of rate of return on total capital to determine reasonableness of rates was “incomplete." As stated by the Commission: No rate of return was computed on the equity portion of the rate base of either carrier. Only the rates of return on total capital were used in arriving at the conclusion that the returns were not unreasonable in comparison with other U.S. businesses. The rate of return on equity was not determined because "the respondents' complex corporate structure made this impossible”. . . . [I]f such a critical analysis can be avoided by carriers which happen to have a "complex corporate structure" there exists the possibility that important aspects of their financial structure regarding the effect of debt management on profitability may go unexamined. When the financing structure of a subsidiary is unusually complex, an acceptable alternative may be the use of the debt-equity ratio and imbedded debt rate of the parent corporation in calculating the respective rates of return. OFI at 4-5. Once again, as in responding to the first remanded issue, the Respondents declined to present the Commission with the analysis it requested, arguing instead that they should not be required to make such analysis. This argument is repeated in Respondents' Direct Case (at 5-8). Respondents argue that only the G.O. #11 accounting methodology should be employed in determining the rate of return unless "the application of such rules and regulations create unreasonable results" (citing 46 C.F.R. §512.3(g)).' Respondents cite the decision in Sea-Land Service, Inc.-Gen. Increase in Rates, etc., Docket #71-53, 13 SRR 907, 921 (1973), as supporting their position. 13 However, I find nothing in that decision that in any way constricts or limits the Commission in its discretion to choose the most appropriate accounting methodology for use in a particular rate proceeding. Even though the Respondents did not present debt and equity data in their Direct Case, Hearing Counsel points out that they did provide sufficient information to the staff expert witness, Dr. Robert Ellsworth of the FMC Bureau of Industry Economics, so that he could make the analysis required by the In its Direct Case, Respondents testify that through-movement cargo cannot burden its all-water cargo because the revenue produced from the through-rate division exceeds the related fully-distributed expenses. For the most current 12-month period available to TMT (through Nov. 30, 1978), total expenses were $39,814,099. During this same period, TMT handled 37,500 forty-foot trailers. That resulted in average expense per trailer of $1,061.71. Using the August 1978 example (the month chosen by Hearing Counsel in its Request for Documents), the revenue from the 347 through-movement trailers was $405,615—an average revenue of $1,168.91 per trailer. Thus, the through-movement cargo produced a margin over expenses of $107.20 per forty-foot trailer, ergo, no expense burden on the port-to-port traffic. Resp. Dir.Case, at 4-5. "Respondents further contend that no unreasonable results occur by using G.O. #11 accounting methodology. "Respondents should not be subject to the uncertainty of submitting a financial report based on GO 11 requirements and having it judged by another accounting methodology. The mathematical exercises sought to be engaged in by the Commission serve little practical purpose as GO 11 makes provision for the inclusion in the rate base of the cost, less depreciation, of the assets used in the trade.” (Res. Dir. Case, at 6.) "That decision, though cited as a statement of the Commission in Respondent's Direct Case, was actually a decision of Administrative Law Judge Herbert K. Greer in a proceeding that was ultimately discontinued by the Commission on March 18, 1975 because two other proceedings were expected to deal with key issues from the Docket #71-53 proceeding. See 14 SRR 1569 (1975). Commission. His analysis is set forth in his testimony14 and is directed to the following areas: (a) rates of return on equity, (b) fair (maximum) rates of return on equity, (c) debt and equity ratios, and (d) tax savings arising from interest payments as a deductible expense. Again, as in the original proceeding, the ultimate conclusion as to reasonableness of the new rates is based upon a comparison with average rates of return for U.S. corporations, including a comparison with transportation industries as well as in "all industries," and also includes consideration of risk factors for TMT and GCML. Dr. Ellsworth disagrees with the Respondent's argument that the Commission should utilize the same hypothetical debt and equity ratio concept that the CAB uses, but beyond that his analysis leads him to conclude that the general rate increases of TMT and GCML are reasonable when viewed in the light of the carriers' rates of return. Dr. Ellsworth's analysis established embedded debt costs (8.32%: TMT, 8.57%: GCML) and then following the Commission's suggestion, used the debt and equity structure of the parent corporation (Crowley Maritime Corporation or CMC) as an indicator of the debt and equity structures for TMT and GCML. From this, the analysis proceeds to calculate rates of return on equity. After including the post-tax effect of the revenue TMT earned from its joint rail/water service, TMT yields a rate of return on equity of 12.34% and a 10.04% return on rate base. Dr. Ellsworth calculates that GCML should have realized a negative return on equity of -2.61% and a positive 3.75% return on rate base. (The negative return on equity results from the cost of meeting the imbedded debt being greater than the net income before interest.) Dr. Ellsworth then determined what the maximum fair rate of return would be for the Respondents. Before arriving at that conclusion, he first details several factors he considered (Ellsworth, 8-16). Dr. Ellsworth calculates that TMT and GCML would be entitled to a maximum fair rate of return of 15%. Therefore, based on the documentation submitted and his analysis thereof, he concludes that the Respondents' new rates reflecting the new general rate increases are just and reasonable. CONCLUSION I find that based upon the additional evidence submitted in this remanded proceeding (including staff analysis thereof) the Respondents' new rates incorporating their new general rate increases are just and reasonable within the meaning of § 18(a) of the Shipping Act 1916 (46 U.S.C. §817(a)). (S) THOMAS W. REILLY Administrative Law Judge WASHINGTON, D.C. 14 See also explanatory affidavit of Dr. Ellsworth dated March 14, 1979. SPECIAL DOCKET NO. 606 APPLICATION of Sea-Land Service, Inc. FOR REPORT AND ORDER ADOPTING INITIAL DECISION BY THE COMMISSION: (Richard J. Daschbach, Chairman; Thomas F. Moakley, Vice Chairman; James V. Day and Leslie Kanuk, Commissioners) Sea-Land Service, Inc. filed an application pursuant to section 18(b)(3) of the Shipping Act, 1916 (46 U.S.C. §817), requesting permission to waive $42,569.90 and refund $280.00 in freight charges to Nepera Chemical, Inc., in order to give effect to a rate negotiated between the parties but not filed in the appropriate tariff prior to shipment. Administrative Law Judge Norman D. Kline rendered an Initial Decision denying the application on the ground that Sea-Land had failed to file a corrected tariff rate which conformed to the negotiated rate. Judge Kline based his decision upon the Commission's holding in Munoz v Cabrero v. Sea-Land Service, Inc., 17 S.R.R. 1191 (1977), that secton 18(b)(3) absolutely requires the carrier, prior to applying for refund or waiver authority, to file a new tariff reflecting the intended tariff upon which a refund or waiver is to be based. Here he found that the new tariff filed by Sea-Land will result in a charge to Nepera of $18.25 per container more than the negotiated rate. Sea-Land filed Exceptions to the Initial Decision arguing that the difference between the negotiated rate and the rate filed must be regarded as de minimis and, therefore, not a jurisdictional defect. Sea-Land's Exceptions admit that there is a variance between the negotiated rate and the rate filed, but argue that it results merely from the conversion from the rate negotiated in pounds to the rate filed in tons and the load factor of the particular commodity. DISCUSSION AND CONCLUSION The rate negotiated between Sea-Land and Nepera and the rate filed by Sea-Land pursuant to its application are clearly at variance. The rate filed would result in a charge to Nepera greater than the rate negotiated. The Commission held in Munoz, supra, at 1193, that: Section 18(b)(3) requires that prior to applying for a refund or a waiver the carrier file a new tariff upon which "such refund or waiver will be based." When read in conjunction with the statements in the House and Senate reports, it is clear that "the new tariff" is expected to reflect a prior intended rate, not a rate agreed upon after the shipment. [T]he authority granted by P.L. 90-298 to depart from the rigid requirements of Section 18(b)(3) of the Act and to make a rate applicable retroactively is strictly limited and in our opinion would not extend to approve a rate which was never agreed upon or intended to be filed. No argument has been advanced that would justify a modification of that holding. Munoz reflects Congress' intention that the requirements of section 18(b)(3) special docket applications be strictly applied. A strict application does not allow even for a de minimis exception. THEREFORE, IT IS ORDERED, That the Exceptions to the Initial Decision of Sea-Land Service, Inc. are denied; and IT IS FURTHER ORDERED, That the Initial Decision served April 23, 1979 is adopted and made a part hereof; and IT IS FURTHER ORDERED, That this proceeding is discontinued. (S) FRANCIS C. HURNEY Secretary SPECIAL DOCKET NO. 606 APPLICATION Of Sea-Land SERVICE, INC. FOR Adopted August 8, 1979 Application for permission to waive and refund portions of freight charges denied. Carrier applicant failed to publish specific commodity rate on a particular commodity after cancelling and republishing its tariff although its solicitor had indicated to the shipper that the specific rate would be carried over into the new tariff. This situation may have resulted in a tariff error of a clerical or administrative nature or constitute an inadvertence in failing to file a new tariff. However, the application is fatally defective because the carrier, in filing the new conforming tariff prior to filing the application, as required by law, filed a rate different from that quoted to the shipper and from the rate which had been published in the previous tariff. Since the application was filed on the very last day permitted by law, it was too late to reject the application so that carrier could file a corrected, conforming tariff and new application. INITIAL DECISION' OF NORMAN D. KLINE, This is a special-docket application filed by Sea-Land Service, Inc. (SeaLand), seeking permission to waive a total of $42,569.90 and refund $280.00 in freight charges for the benefit of the shipper, a company known as Nepera Chemical, Inc., located in Harriman, New York. Sea-Land seeks this permission in connection with two shipments of a liquid chemical known as "beta picoline" carried in tank containers on the SEA-LAND GALLOWAY, which sailed out of Port Elizabeth, New Jersey on June 10, 1978, bound for the port of Barcelona, Spain. The first shipment consisted of two containers in which an aggregate of 73,680 lbs. of "beta picoline" were carried. The second shipment consisted of three containers in which an aggregate of 108,820 lbs. of this commodity were carried. 'This decision will become the decision of the Commission in the absence of review thereof by the Commission (Rule 227, Rules of Practice and Procedure, 46 C.F.R. § 502.227). ? This commodity is referred to as "picaline" in Sea-Land's tariffs but as "picoline" in Sea-Land's shipping documents, letters, and application. According to Webster's Third New International Dictionary at 1711, the correct spelling is "picoline" and "beta picoline" is a liquid used in making nicotinic acid. Sea-Land ought to correct the spelling in its tariff. |