FEDERAL MARITIME COMMISSION
DOCKET NO. 89-26
THE GOVERNMENT OF THE TERRITORY OF GUAM, ET AL.
v.
SEA-LAND SERVICE, INC. AND
AMERICAN PRESIDENT LINES, LTD.
Cargo which was tendered directly to Respondent Sea-Land Service, Inc. by the shipper at a Sea-Land terminal is port-to-port cargo and is subject to the Commission's jurisdiction. The proceeding will be remanded to the Administrative Law Judge to permit Complainants to prove their damages with respect to such cargo.
Complainants' contention that tariffs filed by Sea-Land Service, Inc. at the Interstate Commerce Commission (now Surface Transportation Board) are not supported by valid joint-through arrangements between Sea-Land and the inland carriers is a matter which, in the first instance, should have been addressed to the agency where the tariffs were filed.
The Commission's jurisdiction is port-to-port. It has no jurisdiction over the transportation of cargo by Sea-Land Service, Inc. in its through service from Hawaii to interior points in Guam.
The preponderance of the evidence shows that Sea-Land Service, Inc. did not enter into joint-through arrangements with truckers on Guam until 1993. Absent a joint-through arrangement, the Commission has jurisdiction over the transportation of cargo by Sea-Land Service, Inc. in its through service to Guam to the extent the cargo was delivered within the port of Apra.
Sections 18 and 22 of the Shipping Act, 1916, gave the Government of Guam the right to file a complaint challenging the overall rate levels of Respondent carriers.
Reparations may be awarded only to named complainants under Section 22 of the Shipping Act, 1916.
The complainant in a complaint case has the ultimate burden of proof. Those parties advocating a financial methodology other than that provided for in General Order 11 have the burden of showing that the alternative methodology is necessary to achieve a fair and reasonable result.
The incremental cost study proffered by Respondent American President Lines, Ltd. is not an appropriate method to determine whether the rate levels of Respondents are just and reasonable.
Comparing the rates in the Guam trade with rates in other trades is not an appropriate method to determine whether the rate levels of Respondents are just and reasonable. Likewise, the lack of shipper complaints is of no weight in determining whether the overall rate levels of Respondents are just and reasonable.
Respondents' "capacity use days" method of allocation has not been shown to be necessary in order to achieve a fair and reasonable result.
Only leased vessels which are capitalized on the carrier's books and which meet the AICPA guidelines for capitalization may be included in rate base.
The comparable earnings test, which was prescribed by G.O. 11 during the operative period, is the appropriate methodology to determine whether Respondents' rates were just and reasonable. The fact that it was replaced by the "Before Tax Weighted Average Cost of Capital" methodology in 1995 is irrelevant.
American President Lines, Ltd. exceeded the allowable rate of return in the Guam trade in the years 1988, 1989 and 1990.
Sea-Land Service, Inc. exceeded the allowable rate of return in the Guam trade in the years 1988 and 1989.
A rate of return analysis may not be employed to challenge the reasonableness of individual commodity rates. Respondents' ten percent increase on eighteen commodity rates has not been shown to be unjust, unreasonable or otherwise unlawful.
Roger A. Berliner and William R. Koerner, for Complainant Government of Guam.
Robert T. Basseches, David B. Cook, and David Reich, for Respondent American President Lines, Ltd.
C. Jonathan Benner and Leonard L. Fleisig, for Respondent Sea-Land Service, Inc.
John M. Binetti, for Intervenor Military Traffic Management Command.
REPORT AND ORDER
BY THE COMMISSION: (Harold J. Creel, Jr., Chairman; Ming C. Hsu, Joe Scroggins, Jr., and Delmond J.H. Won, Commissioners)
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . .7
PROCEEDING . . . . . . . . . . . . . . . . . . . . . . . . . .12
A. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . .12
B. Initial Decision . . . . . . . . . . . . . . . . . . . . . 12
1. Overall Rate Level Challenges . . . . . . . . . . . . . . 13
2. The Applicability of G.O. 11 Cost Allocation
Methodology and Rate of Return Calculation to Guam . . . . . 15
a. Harbor Draft and Other Restrictions
at Guam . . . . . . . . . . . . . . . . . . . . . . . . . . .16
b. The "Deviation" . . . . . . . . . . . . . . . . . . . . . 17
c. Cargo Mix . . . . . . . . . . . . . . . . . . . . . . . . 17
3. "Objective Evidence" . . . . . . . . . . . . . . . . . . .19
4. Individual Commodity Rates . . . . . . . . . . . . . . . .22
C. Exceptions and Replies . . . . . . . . . . . . . . . . . . 23
1. Exceptions . . . . . . . . . . . . . . . . . . . . . . . .23
a. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . . 23
b. Respondents . . . . . . . . . . . . . . . . . . . . . . . 26
2. Replies to Exceptions . . . . . . . . . . . . . . . . . . 27
3. Oral Argument . . . . . . . . . . . . . . . . . . . . . . 27
4. Commission Request for Clarification of
Certain Evidence . . . . . . . . . . . . . . . . . . . . . . 28
DISCUSSION . . . . . . . . . . . . . . . . . . . . . . . . . .29
A. Confidentiality . . . . . . . . . . . . . . . . . . . . . .29
B. Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . 32
1. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . . 32
2. Sea-Land . . . . . . . . . . . . . . . . . . . . . . . . .36
3. Disposition . . . . . . . . . . . . . . . . . . . . . . . 39
a. Sea-Land's West Coast - Guam Service . . . . . . . . . . .39
b. Sea-Land's Hawaii - Guam Service . . . . . . . . . . . . .42
C. Overall Rate Level Challenges . . . . . . . . . . . . . . .47
1. Respondents . . . . . . . . . . . . . . . . . . . . . . . 47
2. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . . 48
3. Disposition . . . . . . . . . . . . . . . . . . . . . . . 48
D. Burden of Proof on Methodology to Apply . . . . . . . . . .52
1. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . . 52
2. Respondents . . . . . . . . . . . . . . . . . . . . . . . 52
3. Disposition . . . . . . . . . . . . . . . . . . . . . . . 54
a. Whether G.O. 11 may be applied to
cases brought by Complaint . . . . . . . . . . . . . . . . . 55
b. Whether G.O. 11 may be applied to
the Guam Trade . . . . . . . . . . . . . . . . . . . . . . . 57
E. Alternative Methodologies Examined . . . . . . . . . . . . 61
1. Incremental Costs . . . . . . . . . . . . . . . . . . . . 61
a. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . . 61
b. Respondents . . . . . . . . . . . . . . . . . . . . . . .65
c. Disposition . . . . . . . . . . . . . . . . . . . . . . .66
2. "Objective Evidence" of
Rate Reasonableness . . . . . . . . . . . . . . . . . . . . .68
a. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . .68
b. Respondents . . . . . . . . . . . . . . . . . . . . . . .70
c. Disposition . . . . . . . . . . . . . . . . . . . . . . .72
F. G.O. 11 Methodology: Construction of
Rate of Return for Respondents' Service . . . . . . . . . . .74
1. Rate Base . . . . . . . . . . . . . . . . . . . . . . . . 77
a. Valuation of Assets . . . . . . . . . . . . . . . . . . .77
b. Allocation of Assets Between the Guam Trade
and the Remainder of the Service . . . . . . . . . . . . . . 81
(1). FEU-Mile Relationship Generally . . . . . . . . . . . . 81
(2). Draft Restrictions in Guam . . . . . . . . . . . . . . .85
(3). Uncounted Containers . . . . . . . . . . . . . . . . . .87
(4). Net Investment in Other
Property and Equipment . . . . . . . . . . . . . . . . . . . 88
(5). GovGuam's Adjustments to
Sea-Land's Rate Base . . . . . . . . . . . . . . . . . . . .89
2. Net Income and Interest Expense . . . . . . . . . . . . . 89
a. Net Income . . . . . . . . . . . . . . . . . . . . . . . .89
(1). Total Trade Revenue . . . . . . . . . . . . . . . . . . 90
(2). Voyage Expense . . . . . . . . . . . . . . . . . . . . .90
(a). Vessel Operating Expense . . . . . . . . . . . . . . . .91
(i). Use of the FEU-Mile Relationship . . . . . . . . . . . .91
(ii). Fuel Costs: The "Deviation" . . . . . . . . . . . . . .92
(b). Cargo Handling Expense . . . . . . . . . . . . . . . . .95
(i). Sea-Land's Objection to the
Commission's Order for Clarification
of the Record . . . . . . . . . . . . . . . . . . . . . . . .96
(ii). Inclusion of Certain Costs in
Cargo Handling Expense . . . . . . . . . . . . . . . . . . . 98
(A). Mini-Land-Bridge Expense . . . . . . . . . . . . . . . .98
(B). Cargo Barge Container Expense . . . . . . . . . . . . .102
(iii). Allocation of Cargo
Handling Expense . . . . . . . . . . . . . . . . . . . . . .103
(A). APL's Use of "More Direct
Ratios" to Allocate Certain Costs . . . . . . . . . . . . . 103
(B). GovGuam's Calculations . . . . . . . . . . . . . . . . 105
((1)). Container Freight
Station Expense . . . . . . . . . . . . . . . . . . . . . . 105
((2)). Rail Transportation
of Guam-Bound Cargo from the
Pacific Northwest . . . . . . . . . . . . . . . . . . . . . 106
((3)). Costs of Repositioning
Empty Containers . . . . . . . . . . . . . . . . . . . . . .106
(3). Administrative and General Expense . . . . . . . . . . 110
(a). Inclusion of Agency Fees . . . . . . . . . . . . . . . 110
(b). Allocation of A&G . . . . . . . . . . . . . . . . . . .111
b. Interest Expense . . . . . . . . . . . . . . . . . . . . 112
c. Depreciation and Amortization . . . . . . . . . . . . . .113
d. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . .113
e. Other Accounting Issues . . . . . . . . . . . . . . . . .114
G. The Reasonableness of Respondents' Rates of Return . . . .119
1. Test of Reasonableness . . . . . . . . . . . . . . . . . 119
a. GovGuam . . . . . . . . . . . . . . . . . . . . . . . . .121
b. Respondents . . . . . . . . . . . . . . . . . . . . . . .122
c. Disposition . . . . . . . . . . . . . . . . . . . . . . .126
2. Conclusions Regarding Rates of Return . . . . . . . . . .128
H. Individual Rates . . . . . . . . . . . . . . . . . . . . .128
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . 131
INTRODUCTION
This proceeding was initiated by Complaint filed December 7, 1989, by the Government of the Territory of Guam ("GovGuam" or "Complainant") against American President Lines, Ltd. ("APL") and Sea-Land Service, Inc. ("Sea-Land"), two carriers in the Guam trade.(1) The Complaint, as amended, contains four counts.
In Count I, GovGuam alleges that, in violation of section 18(a) of the Shipping Act, 1916 ("1916 Act"), 46 U.S.C. app. § 817(a) (amended 1984), and section 2 of the Intercoastal Shipping Act, 1933 ("1933 Act"), 46 U.S.C. app. § 844 (amended 1984), Respondents charged unjust and unreasonable rates pursuant to tariffs filed with the Federal Maritime Commission ("FMC" or "Commission").(2) In addition, GovGuam avers that Sea-Land charged unjust and unreasonable port-to-port rates in violation of section 18(a) of the 1916 Act and section 3 of the 1933 Act after it canceled its FMC tariffs.(3) GovGuam also contends that Respondents charged similarly situated shippers different rates and charges in violation of section 16, First of the 1916 Act, 46 U.S.C. app. § 815, First (amended 1984). Finally, GovGuam avers that Respondents charged unjust and unreasonable demurrage charges in violation of section 17 of the 1916 Act, 46 U.S.C. app. § 816 (amended 1984), and section 4 of the 1933 Act, 46 U.S.C. app. § 845a (amended 1984), and engaged in unreasonable preference and prejudice with respect to the assessment of demurrage fees in violation of sections 14, Fourth and 16, Second of the 1916 Act, 46 U.S.C. app. §§ 812, Fourth and 815, Second (amended 1984).
In Count II, GovGuam alleges that Respondents unjustly and unreasonably increased rates on eighteen tariff items in violation of sections 16, First, 17 and 18 of the 1916 Act.
In Count III, GovGuam alleges that Sea-Land continued to operate port-to-port between the U.S. West Coast and Guam after withdrawing from the Guam Rate Agreement tariff, FMC-F No. 2, in violation of section 2 of the 1933 Act. GovGuam also alleges that Sea-Land continued to collect port-to-port terminal charges in violation of section 17 of the 1916 Act, and engaged in unreasonable preference and prejudice with respect to the assessment of untariffed charges in violation of section 16, First of the 1916 Act.
In Count IV, GovGuam alleges that Sea-Land continued to operate port-to-port between Hawaii and Guam after canceling its tariff FMC-F No. 64. The allegations contained in Count IV are similar to those in Count III.
The matter was assigned to an Administrative Law Judge ("ALJ").(4) The ALJ permitted Military Sealift Command ("MSC") to intervene in support of GovGuam.(5) He also granted GovGuam leave to amend the Complaint to add four shippers as complainants: Pacific International Company, Inc., Town House Department Stores, Inc., Micronesian Brokers Incorporated and Tucor Services, Inc.(6) However, the ALJ dismissed that portion of the Complaint seeking reparations on behalf of all similarly situated Guam shippers on the grounds that only those who paid unreasonable rates are entitled to reparations.(7)
In the discovery phase of this proceeding, Sea-Land refused to comply with any discovery requests having to do with Sea-Land's activities after June 22, 1989, the date on which it canceled its FMC tariffs. GovGuam then sought and obtained an enforcement order from the U.S. District Court for the District of Columbia. On appeal, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the Commission has the power to develop the facts necessary to determine whether it has jurisdiction over the subject matter of the case. The Government of the Territory of Guam v. Sea-Land Service, Inc., 958 F.2d 1150 (D.C. Cir. 1992)("Guam v. Sea-Land").
After lengthy discovery, the parties submitted direct, rebuttal and surrebuttal testimony and participated in two oral hearings totaling approximately ten weeks. The record compiled in this proceeding, consisting of myriad exhibits sponsored by witnesses for each of the parties, hearing transcripts, motions, proposed findings of fact, and post-hearing briefs, is approximately 22,000 pages in length.(8) Although GovGuam's direct case relied heavily on an analysis of Respondents' financial results, which generally followed the rate of return methodology prescribed by the Commission's regulations at 46 C.F.R. Part 552 (1994) ("G.O. 11"),(9) it presented several alternative analyses which did not follow G.O. 11, including rate comparisons with other trades. APL countered by arguing that a traditional financial analysis was inappropriate in the Guam trade. Accordingly, APL placed primary reliance on alternative methodologies, including an incremental cost study and rate comparisons with other trades. The financial analysis that it did prepare deviated from G.O. 11 methodology in all important respects. Sea-Land's case focused primarily on the issue of the Commission's jurisdiction.(10) After receiving briefs from all parties, the ALJ issued his Initial Decision on June 3, 1996.
PROCEEDING
A. Scope
As a threshold matter, it should be borne in mind that the Initial Decision only disposes of Counts I and II of the Amended Complaint. Subsequent to the decision in Guam v. Sea-Land, the parties conducted discovery and presented evidence on the allegations contained in Counts III and IV, and submitted briefs to the ALJ addressing the question of the Commission's jurisdiction over Sea-Land's service after June 22, 1989. Nevertheless, the ALJ made no findings regarding the violations alleged in Counts III and IV. His decision not to address these counts was apparently based on a statement contained in Sea-Land's brief that it has no objection to deferring the jurisdictional issues until after the rate issues are resolved on their merits. Sea-Land Brief at 27 - 28; I.D. at 4.
B. Initial Decision(11)
The Initial Decision consists of several parts: the 52-page opinion denominated "Initial Decision" by the ALJ, and three Appendices (cited herein as "App. A," "App. B," and "App. C"). Appendix A describes in summary fashion the witnesses presented by the parties. Appendix B sets forth in greater detail the ALJ's discussion and disposition of APL's Motion to Dismiss. See I.D. at 4. The 109-page Appendix C similarly sets forth much of the ALJ's discussion and disposition of cost accounting and reasonableness issues. See I.D. at 52.
1. Overall Rate Level Challenges
The first issue addressed in the Initial Decision was a renewed motion to dismiss filed by APL,(12) in which APL argued that neither the 1916 Act nor the 1933 Act permitted a complainant to challenge a carrier's entire rate structure. GovGuam responded that the ALJ's prior orders denying previous motions to dismiss barred him from reconsidering the issue. The ALJ rejected GovGuam's contention, pointing out that an ALJ may always reconsider a decision as long as the case is before him. I.D., App. B at 3 - 4.
GovGuam also claimed that the Commission "invited" the filing of a complaint, citing In the Matter of Agreement No. 102-008454, the Guam Rate Agreement, 25 S.R.R. 385 (1989). That case was dismissed by the presiding officer on grounds of mootness, in that the agreement at issue was being terminated. In its Order affirming the dismissal, the Commission also denied a motion to modify filed by Guam, stating:
Guam's Motion to Modify seems to contain several misconceptions. First, Guam sees this proceeding as providing the parties, particularly Hearing Counsel, with a unique opportunity to investigate the past and present rates of Respondents. We disagree. There is nothing unique about the rights afforded the parties in this proceeding. If the proceeding is dismissed, Guam could initiate a separate complaint case pursuant to Section 22(a) of the Shipping Act, 1916, 46 USC App §821, challenging the rates of Respondents. Subpart L of the Commission's Rules of Practice and Procedure, 46 CFR §§502.201-502.210, would give Guam the same opportunity for discovery that Hearing Counsel enjoys.
Guam also appears to assume that Respondents will continue to file rates that are subject to FMC jurisdiction. There is nothing to support this assumption. Carriers in other trades have canceled their port-to-port rates and filed joint-through rates with the [Interstate Commerce Commission]. Indeed, Sea-Land has already canceled one of its FMC Guam tariffs. It is unclear whether the Commission will retain jurisdiction over carriers serving Guam. Hearing Counsel appears to be correct in its observation that under the circumstances modification of the February Order might be premature. Accordingly, we deny Guam's Motion to Modify without prejudice to Guam's right to file a complaint challenging any rates filed with the Commission by Respondents.
25 S.R.R. at 386-87 (footnote omitted, emphasis added).
The ALJ in the instant proceeding concluded that the quoted language indicates no more than that Guam had a legal right to file a complaint under section 22 of the 1916 Act, challenging Respondents' rates. He also acknowledged similar language in numerous other Commission cases, including Matson Navigation Co., Inc. Proposed Overall Rate Increase of 2.5 Percent Between United States Pacific Coast Ports and Hawaii Ports, 23 S.R.R. 662, 663 (1985) ("Docket No. 85-3"). Although he believed that there was no question regarding GovGuam's right to file a complaint, he saw the real issue as whether the 1916 Act or the 1933 Act conferred a right on a private party to challenge the entire rate structure of a carrier based on the methodology contained in G.O. 11. He agreed with APL's contention that the 1933 Act only authorizes the investigation of newly filed rates, not existing rates, citing Matson Navigation Co., Inc. Proposed Overall Rate Increase of 2.5 Percent Between United States Pacific Coast Ports and Hawaii Ports, 23 S.R.R. 1216, reconsideration denied 23 S.R.R. 1515 (1986), remanded sub nom. Seaman v. Federal Maritime Comm'n, 868 F.2d 458 (D.C. Cir. 1989), report on remand, 25 S.R.R. 83 (1989), review denied, 898 F.2d 812 (D.C. Cir. 1990) ("Docket No 85-24"). After reviewing the legislative history of the Amendments to the Intercoastal Shipping Act of 1933, Public Law No. 95-475, 92 Stat. 1494 (1978)("Public Law No. 95-475"), the ALJ concluded that there was nothing to prohibit a shipper from challenging the entire rate structure of a carrier. Accordingly, he granted APL's renewed Motion to Dismiss in regard to alleged violations of the 1933 Act, but denied it in regard to alleged violations of the 1916 Act.
2. The Applicability of G.O. 11 Cost Allocation Methodology and Rate of Return Calculation to Guam
The next issue the ALJ addressed was whether the methodology of G.O. 11 should be used to determine whether Respondents' rates were just and reasonable. The ALJ quoted from 46 C.F.R. §§ 552.1(b) and (d), which state:
b) The methodology employed in each case will depend on the nature of the relevant carrier's operations and financial structure. In evaluating the reasonableness of a [vessel operating common carrier's] overall level of rates, the Commission will use rate of return on rate base as its primary standard. However, the Commission may also employ other financial methodologies in order to achieve a fair and reasonable result.
* * *
(d) The Commission reserves to itself the right to employ other bases for allocation and calculation and to consider other operational factors in any instance where it is deemed necessary to achieve a fair and reasonable result.
The ALJ believed that these provisions meant that GovGuam could not rely on the cost allocation methods specified in G.O. 11 for its rate analysis, where other methodologies might be necessary to fulfill its obligation to provide a "reasoned and reasonable" analysis of APL's and Sea-Land's rates. I.D. at 15. He also found that there is no standard way to apply G.O. 11 forms of financial analysis to the Guam trade.
The ALJ looked at the Guam trade as a very small part of APL's worldwide operations. He found that APL reports expenses on the basis of "cost pools" which reflect the type of cost and the geographical locations where they were incurred. I.D., App. C at 7. He stated that these "cost pools" are not based on trade. Id.
a. Harbor Draft and Other Restrictions at Guam
The ALJ also found that the Guam trade had a number of attributes which set it apart from the other trades served by APL. First, he focused on Apra Harbor in Guam. He found that being only 35 feet deep, it was too shallow to handle fully-loaded ships of the types now used by APL in its Far East service. He accepted APL's assertion that, as a result, for every forty-foot equivalent unit ("FEU") carried westbound to Guam, 1.77 FEUs can be carried eastbound. He also found that the wharfage and other terminal charges in the port averaged approximately $435 per FEU for the years in question, for which the corresponding charges in Kaohsiung (Taiwan), Yokohama and Kobe (Japan) were $64, $181 and $272 respectively. Finally, he found that crane productivity in Apra Harbor was lower than that in other ports, in part because prior to 1993, APL and Sea-Land vessels calling at Apra Harbor were serviced by two relatively inefficient gantry cranes.
b. The "Deviation"
The ALJ then observed that Guam lies outside the great circle route from Oakland and Los Angeles on the one hand and ports in Taiwan and Japan on the other, and concluded that Guam is a "deviation." According to APL's Deployment Architecture Tool ("DART"), which the ALJ relied upon, the call at Guam requires a deviation of 620 miles and takes three additional days. Based on DART, the ALJ found that additional fuel cost for the deviation was $1.8 million for 1990.
c. Cargo Mix
The ALJ also accepted APL's evidence that the nature of Guam cargo makes it more expensive to handle than other cargo in the service. He found that approximately 15 percent of the cargo handled originates in or is destined for the Pacific Northwest. This cargo, it is said, must be carried overland at APL's expense. The ALJ also found that, unlike other Far East destinations, Guam must be provided with chassis. The Guam trade, he found, involves a disproportionate share of high service, high cost cargoes (such as reefer cargo), oversized cargo, household goods and military cargo.
On the basis of these differences in the cost of service for Guam and the other ports in the service, the ALJ rejected GovGuam's use of the FEU-mile relationship(13) to allocate voyage expenses to the trade. He believed that use of the "more direct ratios" posited by APL was appropriate.(14) He also rejected GovGuam's use of the Voyage Expense Relationship(15) to allocate Administrative and General ("A&G") and container expenses to the trade on the same basis. In particular, he found that GovGuam had improperly included rail expenses in the denominator of the voyage expense relationship and had included Agency Fees as part of Cargo Handling Expense rather than A&G.
The ALJ also found that APL's practice of regularly shifting vessels in and out of the Guam trade caused large fluctuations in APL's rate base. He was critical of GovGuam for failing to address the effect of these fluctuations on the calculation of APL's rate of return. The ALJ also rejected GovGuam's calculation of APL's allowable average revenue per container in the Guam trade for 1990 on the grounds that it was lower than APL's average revenue per container in the Japan and Taiwan trades.
3. "Objective Evidence"
In finding that APL's rates were reasonable, the ALJ relied on other evidence which he characterized as "objective". This evidence fell into three categories: market perception, rate stability, and rate analogies.
The ALJ accepted APL's assertion that no cargo had been prevented from moving due to rates being too high. On the other hand, he rejected as "entirely conclusory" the testimony of thirteen Guam shippers who testified that rates were too high. I.D. at 34. He found that the most recent general rate increase in the Guam trade became effective August 1, 1984 and that in 1985 APL reduced its rates by 10 percent. Since that time, it is said that, with the exception of increases in 1989 on eighteen low-rated commodities, the only rate changes have been decreases in individual tariff rates. He rejected as unsupported GovGuam's contention that rates should have dropped during the period rather than remain steady because APL's costs were declining.
The ALJ accepted APL's comparisons of the Guam trade with the trades between the U.S. Pacific Coast and Saipan, Okinawa, Dutch Harbor, and Hawaii as evidence that its Guam rates were reasonable. However, he rejected GovGuam's comparison of the Guam trade with the trades between the U.S. Pacific Coast and Taiwan and Japan as being so flawed as to have no probative value.
The ALJ also accepted APL's opportunity (or "incremental") cost study as evidence that its Guam rates could not be unreasonably high. APL claimed that it could replace Guam cargo and the capacity loss occasioned by the call at Guam with Far East cargo. It went on to claim that the revenues earned in the Guam trade did not cover the cost of the foregone opportunity to carry additional Far East cargo. The ALJ concluded that "incremental cost is also the absolute floor for any FDC [fully distributed cost] allocation that could possibly be described as 'fair and reasonable' from an economic or business standpoint." I.D. at 38. Based on APL's opportunity cost study, he concluded that the rates of both APL and Sea-Land had not been shown to be unjust, unreasonable or otherwise unlawful (Complaint Counts I and II). I.D. at 39 - 40.
Although Sea-Land did not conduct an opportunity cost study of its own, the ALJ applied APL's study to Sea-Land. He observed that GovGuam acknowledged that Sea-Land was a higher cost carrier than APL by approximately 8 percent. He reasoned that if GovGuam had not established that APL's rates were unjust, unreasonable or otherwise unlawful, then a fortiori it had not established that Sea-Land's rates were unjust, unreasonable or otherwise unlawful.
The ALJ acknowledged that some might perceive an apparent inconsistency between APL's claim that it did not recover its opportunity or incremental costs and its decision to continue to serve the Guam trade. However, the ALJ was satisfied that APL was attempting to reduce its costs in serving Guam.
As an alternative to its opportunity cost study, APL prepared exhibits which loosely followed the methodology of G.O. 11. Those exhibits, however, reflected several major departures from the cost allocation methodologies established in G.O. 11. In allocating vessel operating expenses, the ALJ found that APL was justified in using what APL characterized as "capacity use days" rather than the FEU-mile ratio. The ALJ found that this method took into account that: (1) the vessel capacity westbound, which is constrained by weight, is much lower than eastbound capacity; (2) slots used by Guam containers remain empty on the voyage leg between Guam and Taiwan; (3) the Guam draft uses a portion of the ship's capacity; and (4) non-fuel vessel costs accrue with time, not miles. The ALJ reached no conclusions regarding whether the alternative exhibits established that the general level of rates was just and reasonable.
4. Individual Commodity Rates
In regard to the eighteen individual commodity rates identified in the Amended Complaint, the ALJ found that a G.O. 11 rate of return analysis has no application to an inquiry regarding individual rates. He stated that carriers' costs vary with the commodity carried as do the demand-based pricing factors. The ALJ concluded that GovGuam had failed to demonstrate that the eighteen rates were unjust and unreasonable because all of its evidence had focused on the general level of rates.
The ALJ also rejected GovGuam's contention that Respondents' provision relating to household goods violated section 16, First of the 1916 Act. That provision provided that when household goods were transported with other commodities in a single container, the contents of the container were to be rated at the household goods rate. Less-than-container loads could be co-loaded to fill a container. The ALJ found that the rule was necessary to prevent shippers from evading the household goods rate and did not discriminate against small shippers because it permitted co-loading.
C. Exceptions and Replies(16)
1. Exceptions
a. GovGuam
On July 25, 1996, GovGuam filed Exceptions to the Initial Decision. The Exceptions consist of six specific allegations:
(1) GovGuam alleges that the Initial Decision fails to properly evaluate the evidence, properly apply Commission regulations and case law, make consistent findings of fact, and articulate a rational basis for dismissing the Complaint;
(2) GovGuam avers that the Initial Decision fails to find that the Commission has jurisdiction over certain movements of cargo transported by Sea-Land that occurred between 1989 and 1990 in the U.S. West Coast - Guam, and Hawaii - Guam trades, pursuant to Interstate Commerce Commission ("ICC") tariffs;
(3) GovGuam contends that the Initial Decision improperly finds that 46 C.F.R. Part 552 does not set forth the mandatory standards for adjudicating the overall reasonableness of rates charged by Respondents in the Guam trade when such rates are challenged by a private complainant under section 22 of the 1916 Act; GovGuam alleges that the Initial Decision errs in finding that:
(3A) 46 C.F.R. §§ 552.1(b),(d) provide a basis for a determination not to apply the methodology established by 46 C.F.R. Part 552;
(3B) the Fully Distributed Cost methodology is arbitrary and produces unreasonable results in the instant case;
(3C) the use of "generic" allocation formulas (FEU-mile and Vessel Expense Relationship) are inappropriate for determining Respondents' profitability in the Guam trade;
(3D) GovGuam's methodology produces unreasonable results based on Respondents' arguments of economic and accounting theory without identifying the unreasonable results so produced;
(3E) Guam is more costly to serve than any other port APL calls with its line-haul ships;
(3F) the methodology of 46 C.F.R. Part 552 is inapplicable to the Guam trade without determining an appropriate methodology to evaluate Respondents' profitability in the Guam trade;
(3G) Respondents' rates were reasonable for the period 1987 - 1990 based on generalized evidence "from the perspective of a steamship executive" submitted by Respondents;
(3H) Respondents' rates were reasonable for the period 1987 - 1990 based on "incremental costs" evidence submitted by APL;
(3I) the FMC must consider the "opportunity costs" allegedly incurred by Respondents in determining the reasonableness of Respondents' rates for the period 1987 - 1990;
(3J) the FMC is constitutionally prohibited from finding that any rates charged by Respondents below the alleged "incremental costs," and which include "opportunity costs," are unjust and unreasonable;
(3K) the Respondents' rates for the period 1987 - 1990 were below their alleged "incremental costs," which included alleged "opportunity costs";
(3L) the Respondents' rates for the period 1987 - 1990 were just and reasonable as a matter of law because the rates were Respondents' alleged "incremental costs," which included alleged "opportunity costs";
(3M) the overall reasonableness of Respondents' rates is determined by the application of an "objective evidence" test;
(3N) facts of "market perception" including effects on Guam's economy and shipper objections are used as part of the "objective evidence" test;
(3O) facts of "rate stability" including that there were few increases since 1984 are part of the "objective evidence" test; and
(3P) facts of "rate analogies" are part of the "objective evidence" test;
(4) GovGuam alleges that the Initial Decision improperly finds that Respondents' use of alternative methodologies to determine the reasonableness of its rates established that GovGuam failed to meet its burden of proof that such rates were unjust and unreasonable by a preponderance of the evidence;
(5) GovGuam avers that the Initial Decision improperly finds that evidence of the overall unreasonableness of Respondents' rates may not, as a matter of fact or law, be the basis for finding that rates charged individual shippers in those trades during that period of time are unjust and unreasonable under section 18(a) of the 1916 Act; and
(6) GovGuam contends that the Initial Decision fails to find that the FMC, under section 22 of the 1916 Act, can provide a remedy to shippers who were not formal complainants in this proceeding for being charged unjust and unreasonable rates by Respondents in the Guam trade between 1987 - 1990.(17)
b. Respondents
Respondents filed "Protective Exceptions" to the ALJ's partial denial of APL's Motion to Dismiss. In their Protective Exceptions, they acknowledge that the ALJ's ruling that section 22 of the 1916 Act permits a private party to challenge a carrier's entire rate structure is of little practical consequence given the ALJ's dismissal of the case on the merits. Nevertheless, Respondents filed the Protective Exceptions in the event the Commission overrules the ALJ's dismissal on the merits. Both APL and Sea-Land incorporated by reference into the Protective Exceptions the arguments made in their post-hearing briefs to the ALJ.
2. Replies to Exceptions
Sea-Land and APL filed Replies to GovGuam's Exceptions, and GovGuam replied to Respondents' Protective Exceptions and requested oral argument. APL's Reply to Exceptions focuses on the merits, while Sea-Land's focuses on the jurisdictional issues.
3. Oral Argument
Both APL and Sea-Land opposed GovGuam's request for oral argument. Oral argument was heard on October 22, 1997 and was limited to three questions regarding the evidentiary record. First, the Commission asked the parties to address the issue of the number of containers that moved port-to-port after Sea-Land canceled its FMC tariffs. Second, the Commission requested that the parties respond to a procedural question regarding the possibility of remanding the proceeding to the ALJ in the event the agency were to determine that the reasonableness of Sea-Land's rates should be based on a rate of return analysis rather than an opportunity cost study. Finally, the Commission asked APL to clarify its position with respect to GovGuam's evidence indicating that APL had failed to count containers moving between Far East ports. See Notice of Scheduling of Oral Argument, September 24, 1997.
4. Commission Request for Clarification of Certain Evidence
After the oral argument, it became apparent that there was one additional area that required further explanation. During the Commission's review of the testimony and exhibits submitted by GovGuam's expert Nadel and APL's expert Kolbe, it found that it could not reconstruct how these witnesses arrived at their respective figures for Cargo Handling Expense. While their narrative explanation of the methodology followed was adequate, the underlying figures used to arrive at the figures shown in their respective exhibits for Cargo Handling Expense were lacking. Without those figures, it was impossible for the Commission to see the effects of the various adjustments advocated by both witnesses. Because the Commission only needed the underlying work papers and an explanation of steps taken by the witnesses to calculate the Cargo Handling Expense figures shown in their exhibits, it was determined that reopening the record for further proceedings was not necessary. Accordingly, the Commission directed GovGuam and APL to furnish the Commission with the work papers underlying the calculation of Cargo Handling Expense by their respective witnesses. They were also directed to furnish the Commission with an explanation of the steps taken in making the calculations of Cargo Handling Expense.
DISCUSSION
A. Confidentiality
The financial information in the record of this proceeding was submitted by APL and Sea-Land pursuant to a protective order(18) requested by the parties.(19)
We regard this as extraordinary, given the fact that financial information submitted in support of a carrier's direct case in a Commission investigation brought under section 3 of the 1933 Act historically was not accorded this treatment. We recognize, however, that a Commission practice in cases involving domestic offshore rates where the financial information of concern involves competitors subject to the same regulatory requirements may not be appropriate to a case in which the financial information necessarily relates to common assets used in trades in which Respondents' competitors are not required to submit commercially sensitive financial information. Therefore, the Commission has made every effort to avoid the disclosure of specific financial information in the body of this Order. Nevertheless, because the Commission's decision of the myriad cost accounting and other technical financial issues in this case requires recomputation of many individual financial calculations in order to determine the ultimate issue of rate of return reasonableness, we found it necessary to use the figures submitted by the parties.(20) We have reflected such financial information as we found necessary to our decision in ten Appendices (cited as "App.") that follow the organization prescribed by G.O. 11. The Commission's determinations of each of the disputed issues of the appropriate cost allocation methodology or determinations of rate base to be applied in calculating the parties' rates of return are reflected in the body of this Order. The financial results as calculated by the parties and those which follow from the Commission's determination of the issues are reflected in the Appendices.
These Appendices are generally divided into several columns. The first columns reflect the positions of the parties and are taken directly from confidential exhibits which they introduced in evidence during the course of the proceeding. The last columns show the figures that the Commission finds to be appropriate in determining the reasonableness of Respondents' general level of rates. These figures were derived from those contained in the exhibits of the parties. In no case does the Commission rely on figures which were not provided by the parties during the proceeding. While each of those Appendices is part of the decision herein, we deem it appropriate in this case to withhold the first eight from public release, consistent with the protective order which remains in effect.
Although the Commission has considered all of the evidence of record, our decision does not attempt to catalogue each and every exhibit or page of testimony. While we have summarized the arguments of the parties with respect to the issues raised, we have not attempted to repeat every contention of the parties where the argument accepted is mutually exclusive of the others and the basis for its acceptance is made clear. See Puerto Rico Maritime Shipping Auth. v. Federal Maritime Comm'n, 678 F.2d 327 (D.C. Cir. 1982).
B. Jurisdiction(21)
The Commission will next address the issues involving whether it has jurisdiction over certain movements of cargo transported by Sea-Land in 1989 and 1990. Those issues may be characterized as follows:
(1). Whether the Commission must address questions regarding its jurisdiction before it reaches the merits of a case.
(2). Whether the Commission has jurisdiction over cargo tendered directly to Sea-Land by shippers at Sea-Land's West Coast terminals.
(3). Whether joint-through tariffs filed by Sea-Land at the ICC were properly within the ICC's jurisdiction.
(4). Whether the Commission has jurisdiction over transportation provided by Sea-Land between Hawaii and Guam and involving inland transportation (a) beyond the port of Apra, and (b) entirely within the port of Apra.
1. GovGuam
GovGuam contends that the ALJ erred in failing to reach the jurisdictional issues. GovGuam observes that an adjudicatory body must first find that it has jurisdiction over the parties and the subject matter of the case before it reaches the merits. Federal Power Comm'n v. Panhandle E. Pipe Line Co., 337 U.S. 498 (1948). It acknowledges two exceptions to the general rule -- where a determination on the merits is essential to the determination of jurisdiction, and where the merits are so straightforward that the better use of judicial resources warrants a disposition on the merits without a finding of jurisdiction. However, GovGuam believes that neither of these exceptions applies in the present case. GovGuam states that the facts critical to the determination of jurisdiction are almost totally distinct and separate from the facts critical to the merits of the case. Moreover, it contends that the merits are more, not less, complex than the question of jurisdiction.
Although GovGuam does not believe there is any question that the Commission had jurisdiction over APL during the period 1987-1990, it observes that the ALJ made no specific finding of jurisdiction. Accordingly, it requests that the Commission make such a finding.
In regard to the issue of the Commission's jurisdiction over Sea-Land's Guam operations, GovGuam makes four distinct arguments. First, it states that the evidence of record shows that Sea-Land continued to receive Guam-bound containers at its marine terminal gates in both Long Beach and Oakland after June 23, 1989. Second, it states that California Cartage Co., Inc. ("Cal Cartage") received Guam-bound containers in Long Beach for Sea-Land as its agent, even though Cal Cartage had no trucks and was not a participating carrier after August 1990. Third, it contends that Sea-Land's use of its wholly-owned subsidiary, Sea-Land Motor Freight, Inc. ("SLMF") to provide intermodal service is not a valid joint-through service because a single carrier cannot provide a joint-through service with itself. Fourth, GovGuam states that Sea-Land employees actually received Guam-bound cargo, providing trailer interchange receipts directly to the shippers' truckers at Sea-Land's Panorama Drive facility in Long Beach and Shippers' Imperial facility in Oakland and that the Guam-bound containers were moved from one Sea-Land employee to another without any involvement by a bona fide trucking company. With respect to Sea-Land's Hawaii - Guam trade, GovGuam states that none of Sea-Land's procedures for the movement of cargo from Hawaii to Guam changed after Sea-Land canceled its FMC tariff.
In regard to its contention that Sea-Land continued to receive cargo at its terminal, GovGuam states that Sea-Land has admitted that approximately 50 percent of the shipments to Guam were received by Sea-Land at its terminal. Based on a statistical analysis of containers moving through Sea-Land terminals, GovGuam believes that Sea-Land actually received up to 78.13 percent of Guam cargo moving through the port of Long Beach at its terminal. In Oakland, it is alleged that Sea-Land received 58.85 percent of the Guam-bound cargo at its terminal.
In regard to GovGuam's contention that Sea-Land's service in connection with Cal Cartage and SLMF was actually port-to-port, GovGuam states that Sea-Land has failed to produce a written agreement between Cal Cartage and Sea-Land covering Guam-bound shipments. Allegedly, Cal Cartage did not hold itself out to provide a joint-through service with Sea-Land nor did it negotiate a division of revenue with Sea-Land. SLMF is said to have no separate existence apart from Sea-Land. Allegedly, containers delivered to SLMF were received by Sea-Land employees.
GovGuam alleges that after Sea-Land canceled its port-to-port tariff covering the Hawaii - Guam trade in 1989, it continued to serve the Hawaii - Guam trade without filing a tariff at either the FMC or the ICC. It is said that Sea-Land purports to operate a joint-through service with truckers in Guam; however, GovGuam states that no trucking company on Guam held itself out as participating in a joint-through service. GovGuam also contends that there is no evidence that Sea-Land entered into any agreement with truckers on Guam except an Equipment Interchange Agreement which all truckers signed when Sea-Land first entered the trade.
GovGuam further states:
The persuasive and exhaustive case put on by GovGuam was met by Sea-Land's single and continuing mantra -- the ICC tariff governs and is, in and of itself, proof that the ICC has jurisdiction over what Sea-Land alleges are now intermodal transfer of goods.
GovGuam Exceptions at 33. GovGuam submits that this contention was rejected by the previous ALJ in this case in an order dated March 22, 1991, which denied a motion to dismiss filed by Sea-Land with respect to shipments that moved after June 22, 1989. It is said that the order directed Sea-Land to demonstrate that each of its shipments after that date was not within the jurisdiction of the FMC. GovGuam Exceptions at 34.
2. Sea-Land
In its Reply to Exceptions, Sea-Land contends that, given the fact that the ALJ found that rates filed by Sea-Land with the FMC had not been shown to be "unjust and unreasonable or otherwise unlawful", I.D. at 40, it was unnecessary for him to reach the jurisdictional issue. Sea-Land states:
[O]nce the ALJ determined that GovGuam had failed to sustain its rate attack, the question of the FMC's jurisdiction to award reparations for shipments moving after June 23, 1989 became moot. Clearly, this issue would only ripen upon a finding of liability.
Sea-Land Reply to Exceptions at 48. Moreover, Sea-Land contends that GovGuam fails to recognize the exception to the general rule that an agency must determine its own jurisdiction before reaching the merits of a claim. Boston Shipping Ass'n, Inc. v. Federal Maritime Comm'n, 706 F.2d 1231, 1235 - 36 (1st Cir. 1983), is cited for the proposition that it is appropriate not to reach the jurisdictional issue where it is more complex than the claims on the merits. Sea-Land claims that the instant case is similar to Boston Shipping in that the merits of this case were clearly in favor of Respondents and the jurisdictional issue was very complex.
Although Sea-Land contends that the jurisdictional issue is exceedingly complex, its contention regarding jurisdiction is really quite simple. As stated by GovGuam, Sea-Land views the filing of tariffs with the ICC as determinative of the jurisdictional issue. It maintains that the Commission had no jurisdiction over Guam shipments carried by Sea-Land after June 23, 1989, the date on which Sea-Land withdrew from the Guam Rate Agreement. In its Reply to Exceptions, Sea-Land states:
It has been and remains Sea-Land's position that any shipment to Guam by Sea-Land made after June 23, 1989 falls under the regulatory auspices of the I.C.C. or its successor agency, the Surface Transportation Board.
Sea-Land Reply to Exceptions at 47. Sea-Land further states that:
Sea-Land has contended consistently that delivery errors by shippers, ILWU gate checkers, customers or truckers cannot destroy the jurisdictional foundation of the basic, tariffed service.
Sea-Land Reply to Exceptions at 70.
Sea-Land reads GovGuam's Exceptions as contending that the ALJ's order of March 22, 1991, shifted the burden of proof with respect to the jurisdictional issue. Sea-Land contends that, at most, the order may have served to shift the burden of going forward -- not the burden of proof.
Sea-Land attacks GovGuam's statistical analysis of containers moving through Sea-Land facilities after June 23, 1989, which was offered to show how many containers moved port-to-port and thus were subject to FMC jurisdiction. Sea-Land cites the testimony of one of its witnesses who provided an example of why the "Container Yard to Container Yard" designation relied upon by GovGuam in its statistical analysis does not necessarily mean that the container moved "port-to-port." Id. at 75, fn 60. Sea-Land also states that its Guam service has been "defect free" since August of 1990, but makes no similar claim for the period from June 22, 1989 to August, 1990.
Sea-Land's Reply to Exceptions also addresses GovGuam's contention that Sea-Land operated unlawfully after June 21, 1989, by carrying cargo between Hawaii and Guam without a tariff on file with either the ICC or this Commission. GovGuam avers that the fact that all transportation between Hawaii and Guam offered by Sea-Land after June 21, 1989 included inland transportation within the island of Guam did not deprive the Commission of jurisdiction. GovGuam argues that the motor carriers used by Sea-Land on the island of Guam did not enter into valid joint-through route arrangements with Sea-Land and that the physical service remained the same as that provided previously under Sea-Land's FMC tariff. Sea-Land responds that it converted its port-to-port service to port to interior point service. Sea-Land contends that it did participate with motor carriers that held themselves out to provide a joint-through service. Therefore, Sea-Land argues that its Hawaii - Guam service was not within the Commission's jurisdiction.
3. Disposition
The general rule is that an adjudicatory body must first find that it has jurisdiction over the parties and the subject matter of the case before it reaches the merits. None of the exceptions to the general rule has any application here; the facts necessary to resolve the issue of jurisdiction are not the same as the facts bearing on whether the rates of Respondents are just and reasonable, nor is the issue of whether the rates of Respondents are just and reasonable easily resolved. Therefore, we find that the ALJ erred in not addressing the jurisdictional issues at the outset.
a. Sea-Land's West Coast - Guam Service
Turning to the merits of the jurisdictional issues with respect to Sea-Land's West Coast - Guam service, we find that cargo which was tendered directly to Sea-Land by the shipper at the Sea-Land terminal is port-to-port cargo and is subject to the FMC's jurisdiction. The fact that Sea-Land had a valid ICC tariff covering joint-through movements is of no consequence. Cargo which was tendered directly to Sea-Land by the shipper at Sea-Land's terminal was not handled as a joint-through movement.(22) The ICC tariff has no penumbra of authority which covers shipments which are not in fact joint-through shipments.
While the legal principle is straightforward, its application to the facts here is less so. The number of Guam shipments which were tendered directly by shippers to Sea-Land at Sea-Land's terminals is in dispute. Sea-Land concedes that there were some such shipments but does not indicate how many. As discussed by Sea-Land in its Reply to Exceptions at 76 - 77, GovGuam's statistical study of shipments moving through Sea-Land container yards is flawed because it includes containers which were tendered to SMLF or Cal Cartage in addition to containers which were tendered by the shipper directly to Sea-Land. As discussed below, the Commission cannot reach the issue of the validity of Sea-Land's joint-through arrangements with SMLF and Cal Cartage. Therefore, those containers were not properly included. The Commission will remand the proceeding to the ALJ to permit GovGuam to quantify the port-to-port containers handled by Sea-Land after it withdrew from the Guam Rate Agreement and to permit the named complainants to prove injury and damages as a consequence of Sea-Land's failure to file a tariff with the Commission covering the movement of port-to-port shipments in violation of section 2 of the 1933 Act, 46 U.S.C. App. § 844.(23)
The shipments tendered to Cal Cartage or SLMF present a different problem for the Commission. Sea-Land filed joint-through tariffs with the ICC naming Cal Cartage and SLMF as participants. GovGuam, however, alleges that there was no valid joint-through arrangement between the inland carriers and Sea-Land. It asks the Commission to determine whether the tariffs were properly within the ICC's jurisdiction. The Commission believes that it is not the appropriate forum to make such a determination.(24) The ICC (now the Surface Transportation Board ("STB")) should rule in the first instance on the legality of tariffs which have been filed with it. GovGuam could have challenged the legality of Sea-Land's ICC tariffs at the ICC. Having failed to do so, it cannot raise the issue here. Accordingly, the Commission will not reach the issue of whether Sea-Land had valid joint-through rate arrangements with Cal Cartage and SLMF.
b. Sea-Land's Hawaii - Guam Service
Turning from Sea-Land's West Coast - Guam service to its Hawaii - Guam service, a different jurisdictional issue arises. There appears to be little doubt that the Commission has no jurisdiction over any part of transportation conducted pursuant to a joint-through arrangement between Sea-Land and a motor carrier in Guam. This is true even in the absence of ICC jurisdiction over the transportation. Joint-through transportation involves a joint holding out to the shipping public by the ocean carrier and the inland carrier. Typically, inland carriers are shown as participants in the tariff of the water carrier. The shipper is in privity of contract with both the ocean carrier and the inland carrier. Carriers providing a joint-through service necessarily have a joint-through arrangement among themselves.
If the ocean carrier offers pickup and delivery within the port and treats the inland carrier as a subcontractor, then the FMC retains jurisdiction. The FMC's jurisdiction over rates, including pickup and delivery, was established in Matson Navigation Co. -- Container Freight Tariffs, 7 F.M.C. 480 (1963) ("Matson"). There the Commission found jurisdiction over a service in which Matson, an ocean carrier subject to the 1916 Act and the 1933 Act, charged a single factor rate for a service which included picking up goods at the shipper's premises, ocean transportation from the West Coast to Hawaii and delivery to a designated off-dock point in Honolulu. Id. at 481. The pickup service on the U.S. mainland included bringing an empty container to the shipper's place of business, loading the goods into the container and, in the case of full container loads, transporting the fully loaded container to a "container freight yard" for loading aboard the ship. Id.
The pickup service was performed by motor carriers acting as agents under the general supervision of Matson. Id. at 482. The motor carriers were not participants in Matson's tariff and Matson took sole responsibility for the entire transportation, including the pickup and delivery. Id. at 491. Although there have been numerous court cases involving joint-through rates since Matson, none has overruled it. Indeed, in Alaska Steamship Co. v. Federal Maritime Comm'n, 399 F.2d 623 (9th Cir. 1968)("Alaska Steam"), the Ninth Circuit was careful to distinguish Alaska Steamship's joint-through service from the service in Matson. See also IML Sea Transit, Ltd. v. United States, 343 F. Supp. 32 (N.D. Cal. 1972), aff'd, 409 U.S. 1002, reh'g denied, 409 U.S. 1118 (1973)("IML"). It is also important to note that the difference between the result in Matson and Alaska Steam was not based on differences in the physical operations of the carriers but on differences in the way the services were held out to the public. Matson, like Alaska Steam, involved "intermodal" transportation. The critical difference was that in Alaska Steam there was a joint-through rate arrangement, and in Matson there was not.
Both Matson and IML involved inland transportation in the San Francisco Bay area. It is unclear whether the Commission could assert jurisdiction over a Matson-type arrangement involving transportation to or from an inland point beyond the port area. While it is true, as GovGuam asserts, that the Commission asserted jurisdiction over such transportation in Certain Tariff Practices of Sea-Land Service, Inc., Puerto Rican Div., 7 F.M.C. 504 (1963), the case cannot be considered controlling given the D.C. Circuit's conclusion in Trailer Marine Transp. Corp. v. Federal Maritime Comm'n, 602 F.2d 379 (D.C. Cir. 1979) ("TMT") and Puerto Rico Maritime Shipping Auth. v. Interstate Commerce Comm'n, 645 F.2d 1102 (D.C. Cir. 1981) ("PRMSA") that the Commission's jurisdiction did not extend beyond ports to inland points. In addition, the definition of "common carrier by water in interstate commerce" contained in section 1 of the 1916 Act, 46 U.S.C. app. § 801 (supp. 1998), by its terms is limited to transportation "from port-to-port." Given our doubtful authority, the Commission declines to assert jurisdiction over transportation provided by Sea-Land between Hawaii and Guam that involved inland transportation beyond the port of Apra in Guam.
In order to determine whether any shipments handled by Sea-Land after June 21, 1989, that involved inland transportation entirely within the port were subject to the Commission's jurisdiction, it is necessary to turn to the evidence relating to Sea-Land's Hawaii - Guam service. In 1993, Sea-Land entered into written division of revenue agreements with the Guam truckers it was using. From that point forward there is little doubt that joint-through arrangements existed and the Commission was deprived of jurisdiction. Prior to that time, the arrangement between Sea-Land and the Guam truckers was not as clear. The rate schedules published by Sea-Land for the service do not show the Guam truckers as participating carriers. Although the consignee selected the particular trucker to be used, there is no evidence that the consignee was in privity of contract with the trucker. Guam truckers were paid by Sea-Land, not the shipper or consignee. Sea-Land had equipment interchange agreements with the truckers, but these did not contain a joint-through rate arrangement. In the event the cargo was damaged during inland transportation in Guam, the shipper or consignee proceeded against Sea-Land, and Sea-Land, in turn, proceeded against the trucker. In sum, Sea-Land's Hawaii - Guam service prior to 1993 seems indistinguishable from the service provided in Matson. The Guam truckers were treated as subcontractors by Sea-Land. While it is beyond question that Sea-Land could have restructured its service to deprive the Commission of jurisdiction at any time, there is no evidence that it did so prior to 1993. Accordingly, the Commission had jurisdiction over any shipments handled in Sea-Land's Hawaii-Guam service prior to the execution of the written division of revenue agreements in 1993 that involved inland transportation solely within the port of Apra in Guam. The Commission will remand the proceeding to the ALJ to permit the named Complainants to quantify the number of containers, if any, falling into this category, and to prove damages.(25)
In sum, the Commission finds that the ALJ erred in failing to reach the issues involving jurisdiction over Sea-Land before addressing the merits of the case. With respect to such jurisdiction, the Commission rules that cargo tendered by shippers directly to Sea-Land at Sea-Land terminals is port-to-port and is subject to the Commission's jurisdiction. The proceeding is remanded for a determination of the number of containers that fall within this category. The Commission further determines that it will not rule on the validity of joint-through arrangements filed at the ICC. Finally, the Commission finds that while it does not have jurisdiction over transportation between Hawaii and Guam that involved inland transportation beyond the port of Apra, it nevertheless does have jurisdiction over port-to-port cargo that did not move pursuant to a joint-through arrangement with a Guam motor carrier. The proceeding is remanded for a determination of the number of containers, if any, falling within this category.
C. Overall Rate Level Challenges(26)
The Commission will next address the issue of whether GovGuam may challenge the general level of Respondents' rates under the 1916 Act and/or under the 1933 Act.
1. Respondents
The single issue raised by Respondents in their Protective Exceptions is whether GovGuam may challenge the general level of Respondents' rates under section 22 of the 1916 Act. Respondents claim that neither the 1916 Act nor the 1933 Act provides that a private complainant can challenge a carrier's rate of return on its overall existing rates. Respondents characterize as "boilerplate" the statement contained in the Commission's order dismissing Docket No. 89-05, discussed above, that "Guam could initiate a separate complaint case pursuant to Section 22 of the Shipping Act, 1916, 46 U.S.C. app. § 821, challenging the rates of Respondents."
Although there is nothing in either the 1916 Act or the 1933 Act that specifically limits the sort of rate challenges that may be brought by a private party under section 22 of the 1916 Act, Respondents point to the legislative history of the 1978 Amendments to the 1933 Act as supporting their position. In several places Congress stated that a shipper could bring an action under section 22 of the 1916 Act to challenge a rate charged by a carrier.(27) Congress did not mention a challenge to the carrier's overall rate of return.
2. GovGuam
GovGuam appears to concede that the 1933 Act only authorizes Commission-instituted proceedings and not private challenges to a carrier's overall rate of return. However, it observes that section 22(a) of the 1916 Act states:
That any person may file with the board a sworn complaint setting forth any violation of this Act by a common carrier by water in interstate commerce . . . and asking reparation for the injury, if any, caused thereby.
GovGuam states that the Commission has recognized that section 18 of the 1916 Act requires a carrier's rates to be just and reasonable. It argues that there is nothing in either the 1916 Act or the 1933 Act that prevents a private party from filing a complaint alleging that a carrier's overall rate of return is violative of section 18, and seeking reparations.
3. Disposition
GovGuam's reading of the statutes is correct. There is no express prohibition against a private action challenging a carrier's overall rate of return pursuant to sections 18 and 22 of the 1916 Act. Certainly, if Congress intended such a limitation it would have placed it in the statute rather than making oblique references in the legislative history of the 1933 Act. Moreover, it appears that Congress, when it referred to a rate in the singular form, intended to encompass groups of rates, including a carrier's entire rate structure. For example, section 4 of the 1933 Act, 46 U.S.C. app. § 845a, which gives the Commission authority to enforce a carrier's maximum allowable rates, applies by its terms to "any rate, fare" or "charge." It does not speak of the carrier's overall rate structure. Yet the Commission customarily relies on the section as authority to require a carrier to reduce the overall level of its rates to achieve a "just and reasonable" rate of return.
When discussing the rights of shippers to obtain reparations for unjust and unreasonable rates, it is hardly surprising that the legislative history of the 1933 Act used examples involving a single rate rather than the carrier's entire rate structure. Typically, a shipper is only interested in a single rate or a small number of rates. Even if a shipper did wish to challenge the carrier's entire rate structure, as this case amply demonstrates, most shippers cannot afford the cost of litigating a general rate case. In the legislative history to the 1933 Act it was only natural for Congress to focus on the more typical situation where a shipper challenges a single rate in a carrier's tariff. Nowhere in the legislative history to the 1933 Act is there an express statement indicating that it was the will of Congress to prevent private challenges to a carrier's overall rate structure.
While it is certainly true that the instant case is one of first impression, nothing in the 1916 Act or its legislative history bars GovGuam's cause of action. In arguing otherwise, Respondents appear to be confusing statistics with the law. The fact that most cases brought under sections 18 and 22 by shippers involve only a single rate or small number of rates does not mean that such cases are so limited. Indeed, in its order dismissing Docket No. 89-05, the Commission acknowledged that GovGuam had the same right to challenge the past and present rates of the Guam carriers as the Commission had. Accordingly, the Commission will deny the Respondents' Protective Exceptions.
However, there is no cause of action under section 3 of the 1933 Act, which applied only to new rate filings. The rates at issue in this proceeding were in effect at the time the complaint was filed. This is of some significance because, unlike section 3 of the 1933 Act, section 22 of the 1916 Act, as amended by section 4 of the 1933 Act, only provided for reparations to complainants. See Mar-Mol Co. and CopyCorp. v. Sea-Land Service, Inc., 27 S.R.R. 1085, 1089 (1997). By contrast, section 3 of the 1933 Act, which applied to general increases in rates, provided that upon a finding "that any unsuspended portion of the increase is not just and reasonable, the Commission shall order the carrier involved to refund to any person who was charged on the basis of such general increase an amount equal to that portion thereof found to be not just and reasonable plus interest." (emphasis added). There is also nothing in section 22 of the 1916 Act that would permit a governmental entity such as the Government of Guam to seek reparations on behalf of shippers that were not named as complainants. Accordingly, the Commission concludes that only named complainants may obtain reparations in this proceeding.(28)
In summary, the Respondents' Protective Exceptions are denied. The Commission rules that a complaint case may challenge a carrier's overall rate of return under sections 18 and 22 of the 1916 Act. The Commission further rules that because the rates at issue in this proceeding were in effect when the complaint was filed, there is no cause of action under section 3 of the 1933 Act. Finally, the Commission determines that only named complainants may secure reparations in this proceeding.
D. Burden of Proof on Methodology to Apply(29)
The Commission will next address the issue of whether GovGuam has the burden of proof to demonstrate that G.O. 11 is the appropriate methodology in analyzing the reasonableness of Respondents' rates.
1. GovGuam
GovGuam states that, having properly found that there was a cause of action under section 18 of the 1916 Act, the ALJ erred in failing to identify and analyze the elements of that cause of action. GovGuam points out that its case under section 18 of the 1916 Act relied almost exclusively on the rate of return analysis prescribed in G.O. 11. It contends that the ALJ rejected G.O. 11 as a valid basis for determining the reasonableness of rates in the Guam trade and analyzed alternative methodologies proffered by APL but failed to identify which of the elements of the cause of action he believed GovGuam had failed to prove. GovGuam charges that "[t]he ALJ merely resorted to a perfunctory finding that Complainants had failed to sustain their burden of proof but failed to provide an analytical framework, i.e. a 'rational basis', for that determination." GovGuam Exceptions at 46.
2. Respondents
APL points out that because this is a complaint case, GovGuam has the burden of proof. APL claims that its witnesses demonstrated that the G.O. 11 analysis of GovGuam's expert witness Nadel was seriously deficient. It contends that the ALJ correctly found that G.O. 11 cannot be used in this case where "the regulatory focus is on (i) a very small and (ii) very atypical regulated piece of (ii) [sic] a very large and highly integrated system (iii) [sic] which is otherwise unregulated and (iv) [sic] which utilizes mobile assets that move in and out of regulated service as deployments change." APL Reply to Exceptions at 10.
Sea-Land also observes that as the Complainant, GovGuam had the burden of proof. It contends that it is GovGuam's responsibility to identify the elements necessary to make its case. Sea-Land contends that GovGuam failed to meet its burden relative to the affirmative defenses raised by Respondents. It is said that in some cases GovGuam failed even to respond to the affirmative defenses which were raised.
With respect to Complaint Count II, the unreasonableness of individual commodity rates, Sea-Land argues that there is no nexus between a finding that overall revenues are too high and a finding as to the reasonableness of any specific commodity rates. Accordingly, Sea-Land contends that, assuming arguendo that the general level of rates was found to be too high, GovGuam has no basis to claim that Respondents have the burden of proof with respect to the reasonableness of the individual commodity rates identified in Count II.
3. Disposition
As Respondents correctly point out, Complainants have the ultimate burden of proof or the burden of persuasion in this case. This is true with respect to both the general level of rates and the reasonableness of the individual commodity rates identified in Complaint Count II. Moreover, because Sea-Land is correct in arguing that there is no nexus between the reasonableness of overall revenues and the reasonableness of individual commodity rates, GovGuam's burden as to this element of its case is to prove that the individual commodity rates are unreasonable. Accordingly, GovGuam cannot rely on a finding that overall revenues are unreasonably high to establish the unreasonableness of individual commodity rates.
The more difficult burden of proof question is where the burden lies with respect to the methodology to be employed to determine the reasonableness of Respondents' overall level of rates. GovGuam's case relies heavily on G.O. 11 methodology. The ALJ started from the premise that "[t]here is no established 'standard methodology' for applying G.O. 11 to Guam." I.D., App. C at 1. He was critical of GovGuam for failing to demonstrate that G.O. 11 methodology was reasonable and appropriate in the Guam trade. He based this ruling on the language of the "Purpose" section of G.O. 11, which provided that the Commission might utilize other methods or standards when necessary to reach "a fair and reasonable result." Section 552.1(b) and (d). He concluded that the alternative methodologies proffered by APL were superior to the "generic" methodology prescribed by G.O. 11. APL's methodologies ought to be accepted, he ruled, because APL had "responsibly put in question" the reliability of GovGuam's G.O. 11 methodology and GovGuam had failed to prove that G.O. 11 analysis produced "fair and reasonable" results in the context of the Guam trade, thus failing to meet its burden of proof on the issue.(30) He accepted APL's argument that the G.O. 11 cost allocation methodology generally yielded unfair or unreasonable results in the Guam trade, on the basis of APL's comparisons to results in other trades ("objective evidence") and the effects of APL's varying vessel deployments on its rate of return.(31) I.D. at 26 - 28.
a. Whether G.O. 11 may be applied to cases brought by Complaint
APL takes the position that G.O. 11 methodology was not intended to apply to complaint cases and that in such cases the parties are free to use any methodology they like. It cites Public Law No. 95-475 for the proposition that Congress instructed the Commission to establish guidelines to be used in cases brought under the 1933 Act and subject to the 180-day time limit. Moreover, it is argued that Congress intended the Commission to develop only broad guidelines.
APL may be correct that Congress was focusing on guidelines for use in cases brought under the 1933 Act. It is also correct that G.O. 11 has been used primarily in such cases, i.e. Commission instituted investigations of newly-filed rates or rate increases. However, it would make little sense for the Commission to apply G.O. 11 methodology in cases involving new rates brought under the 1933 Act while applying a different methodology in cases involving existing rates brought under the 1916 Act. Under such a scenario, even if new rates were found just and reasonable under G.O. 11, once they became effective they would be subject to challenge using a different methodology. This is clearly not sound regulatory policy. Nor has this been the Commission's practice. G.O. 11 methodology was used in Docket No. 85-24, in which the Commission investigated, inter alia, Matson's existing rates under section 18 of the 1916 Act.
It also would not be sound regulatory policy to apply G.O. 11 in Commission-instituted proceedings, while allowing alternative methodologies in complaint cases. The outcome of a case may well turn on the methodology used, and the outcome should not vary because the case was brought as a Commission investigation rather than a complaint case. In addition, rates should not be subject to a multitude of challenges, each based on a different methodology. As a general rule, the Commission finds that G.O. 11 is the appropriate methodology to be used in complaint cases brought under section 18 of the 1916 Act, to determine whether a carrier's general level of rates is just and reasonable.
b. Whether G.O. 11 may be applied to the Guam trade
The question addressed by the ALJ was whether GovGuam had the burden to show that G.O. 11 methodology was appropriate in determining the reasonableness of overall rates in the Guam trade, as opposed to other domestic offshore trades. Although the ALJ appears to believe that Guam is a special case in which G.O. 11 methodology cannot be applied, the Commission has never taken such a sweeping position. The Commission has never exempted FMC-regulated carriers in the Guam trade from G.O. 11's reporting requirements. Prior to the transfer of jurisdiction over the Guam trade to the STB, those carriers routinely filed G.O. 11 reports with the Commission. Presumably, if there had been a Commission investigation of FMC-regulated rates in the Guam trade, it would have been governed by G.O. 11 methodology.
Nevertheless, the Commission has recognized that the Guam trade is, in some ways, unique. To understand the degree to which the Commission has viewed the Guam trade as a special case, it is necessary to review the Commission's decision in Financial Reports of Common Carriers by Water in the Domestic Offshore Trades, 19 S.R.R. 1283 (1980), the rulemaking proceeding which led to the promulgation of G.O. 11. One of the parties in that case was United States Lines ("USL"), which at the time was serving Guam. Its comments and the Commission's response to those comments are instructive.
With respect to cost allocation methodology, USL urged the Commission to refrain from requiring the use of the cargo cube-mile relationship (or FEU-mile relationship) to allocate costs in all cases. USL contended that to omit any alternative to the cargo cube-mile relationship "would lead to an improper inference that determinations on the reasonableness of rates can be made only through a single set of rigid accounting guidelines which could lead to distortion in results." Id. at 1297. However, the Commission adopted the cargo cube-mile relationship for the allocation of expenses. The Commission also rejected a suggestion by another party that carriers be permitted to select their own method of allocation as contrary to the regulatory duty of the Commission and the intent of Public Law 95-475 in requiring the Commission to establish methodology guidelines. However, the Commission reserved the right to employ other methods for allocation when, in its opinion, the application of the rules as generally prescribed created unreasonable results.
This suggests that the Commission intended that, in the absence of a showing that an alternative method was necessary to produce a fair and reasonable result, the cargo cube-mile relationship would be used. Thus GovGuam does not have the burden of justifying the use of the cargo cube-mile relationship to allocate expenses; G.O. 11 creates a presumption that the cargo cube-mile relationship is the appropriate methodology. The burden of going forward with evidence to rebut that presumption falls upon Respondents to show that any proposed alternative to the cargo cube-mile relationship is necessary to produce a fair and reasonable result. See 46 C.F.R. § 552.1(d).
Therefore, we find that the ALJ erred to the extent he relied upon the language of the "Purpose" section of G.O. 11 at 46 C.F.R. §§ 552.1(b) and (d) as a basis for assigning to Complainant the burden of showing that the specific cost allocation methodology established in G.O. 11 is necessary to achieve a fair and reasonable result. See I.D. at 14. By over-emphasizing the references in the "Purpose" section to the possible use of other methodologies, the ALJ treated too lightly the prescriptive nature of G.O. 11, which fulfills the purpose of Public Law No. 95-475 to achieve predictability in the standards and methods of analysis to be used by the Commission in assessing the reasonableness of a carrier's overall rates.
In regard to the standard to be applied in determining the reasonableness of rates, USL supported the use of return on rate base as the primary standard, but suggested that the Commission allow for alternative standards for measuring return in order to achieve a fair and equitable result. The Commission adopted USL's suggestion, stating:
[A]dopting a previous suggestion of USL, the Commission has amended the rule to allow the Commission to employ other financial methodologies, depending on the nature of the carrier's operations and financial structure, in order to achieve a fair and reasonable result.
19 S.R.R. 1310. See also 46 C.F.R. § 552.1(b). There is no indication that USL or the Commission believed that the use of the return on rate base standard was unworkable in the Guam trade.
The foregoing demonstrates that GovGuam did not have the initial burden of justifying its use of the return on rate base standard. To the contrary, Respondents had the burden of demonstrating that any alternative to the return on rate base methodology was necessary in order to produce a fair and reasonable result. It should also be noted that this requires more than a showing that other methodologies are superior to the return on rate base methodology.
In sum, the FMC finds that GovGuam has the ultimate burden of proof in this case. The FMC further rules that there is no nexus between overall rate revenue reasonableness and individual commodity rate reasonableness. Finally, the FMC rules that the burden to demonstrate that G.O. 11 would produce an unfair and unreasonable result, and that an alternative methodology was necessary to reach a fair and reasonable result, falls on Respondents.
E. Alternative Methodologies Examined(32)
In this section, we turn to the parties' and the ALJ's use of two alternative methodologies for judging general rate reasonableness, first, APL's "incremental cost study" and second, the "objective evidence" standard.(33)
1. Incremental Costs
a. GovGuam
GovGuam contends that the ALJ erred in rejecting the G.O. 11 methodology in favor of a methodology proffered by APL which is based on incremental costs. GovGuam charges, moreover, that the ALJ did so without clearly determining the specific methodology properly applicable to the Guam trade.
GovGuam argues that:
[T]he ordinary administrative discretion accorded to regulatory agencies in the context of adjudications does not fully apply to the FMC in light of the requirements of P.L. 95-475. Wholly new methodologies cannot be adopted in the course of rate reasonableness litigation. Alternative methodologies can be resorted to if the primary regulation methodology produces "arbitrary", "unreasonable" or "confiscatory" results, and the regulation specifies certain alternatives previously found to be acceptable alternatives by the Commission.
GovGuam Exceptions at 118. GovGuam avers that it is a fundamental premise of the Commission's domestic offshore regulatory scheme that parties should know in advance the standards that are to be applied in determining the reasonableness of rates. GovGuam alleges that the ALJ simply abandoned the G.O. 11 methodology in its entirety in favor of wholly new and unprecedented tests of reasonableness without exploring less extreme alternative methodologies provided in G.O. 11 itself.
GovGuam finds fault with the incremental cost method posited by APL and accepted by the ALJ. GovGuam points out that APL's incremental costs included opportunity costs, a concept the Commission specifically rejected in Financial Reports of Common Carriers by Water in the Domestic Offshore Trades, 19 S.R.R. 1283 (1980)("Docket No. 78-46"). GovGuam cites to that portion of the Commission's decision in Docket No. 78-46, which states:
An opportunity cost methodology which views the cost of capital in terms of the value of a resource in its next best alternative use anywhere in the world, without differentiating between the actual costs of acquiring debt and equity capital, while of some use in economic theory, is of little practical value to a regulatory agency. Ratepayers can only reasonably be expected to compensate investors for the actual cost of providing capital, not some speculative notion of opportunities foregone.
19 S.R.R. at 1309. It is said that the fundamental principle applies with equal force to the calculation of the costs of providing ocean transportation. GovGuam argues that ratepayers can only reasonably be expected to compensate carriers for the actual costs of providing transportation services, not some speculative notion of opportunities foregone.
GovGuam observes that APL has calculated that when opportunity costs are taken into account it is actually losing money by serving Guam. GovGuam believes this is counter-intuitive given the long history of profitable operations of Respondents in the Guam trade. GovGuam states:
The simple common sense conclusion that must be reached here is that if they were losing money, they would have known about it and would have discontinued serving the trade. They did not and continued serving the trade up to and for years after the close of the record of this proceeding.
GovGuam Exceptions at 122.
Another fundamental defect in the incremental cost analysis identified by GovGuam is that the ALJ relied on figures based on APL's operations for 1990 to establish the reasonableness of APL's rates for 1987, 1988 and 1989. GovGuam contends that the ALJ compounded the error by applying APL's incremental cost analysis for 1990 to Sea-Land's rates for the entire period at issue. It is said that there is no evidence of record regarding Sea-Land's opportunity costs for any period.
GovGuam argues that the ALJ focused only on that part of the incremental cost test that deals with minimum allowable rates and never discussed that part of the incremental cost test that deals with maximum allowable rates. However, the incremental cost test, GovGuam alleges, also requires the user to determine the maximum allowable rate. This requires the regulator to construct a theoretical carrier service dedicated solely to the trade in question, i.e., a "stand alone" service; calculate the operational and financial costs of establishing that service, including a reasonable rate of return; and spread that cost over the cargo moving in the trade. GovGuam claims that although this "stand alone" model is simple in theory, it is problematic in its application. It is GovGuam's contention that a "stand alone" model cannot be applied to the Guam trade. GovGuam argues that the history of the Guam trade demonstrates that a "stand alone" service cannot compete with a "pass-by" service to the Far East. Allegedly, vessel utilization in a "stand alone" service is too low. It believes that, in practice, a "stand alone" service is not feasible in the Guam trade. GovGuam argues that APL has not demonstrated that its incremental cost test, which must include the "stand alone" model, is superior to the G.O. 11 methodology. Id. at 126 - 127.
Finally, GovGuam contends that the ALJ erred by confusing rates below opportunity cost with confiscatory rates. GovGuam observes that the Initial Decision correctly cites cases for the proposition that the Commission cannot impose confiscatory rates on the Respondents. However, it is alleged that "without providing any authority or reasoning whatsoever, the ALJ in the next paragraph announces that 'incremental costs' including 'opportunity costs' is also the 'absolute floor' for rates." Id. at 129. GovGuam goes on to state that:
Incremental costs, when they include opportunity costs, deals [sic] with notions of opportunities foregone and does not assert that actual costs cannot be paid or actual debt cannot be maintained or even that capital cannot actually be attracted. . . . In essence, what the ALJ is saying is that it is illegal and unconstitutional for the Commission to set a carriers [sic] rate of return at 12% if it could obtain a 15% rate of return by utilizing its assets elsewhere. This is utter nonsense and a total misapplication of very distinct and unrelated economic concepts.
Id. at 130.
b. Respondents
APL states that it was GovGuam which originally presented evidence on APL's incremental costs, including opportunity costs. It is argued that, as a result, GovGuam is in no position to complain about APL's use of the same concept. APL contends that the connection between incremental costs and confiscatory rates is not only accepted in agency case law and standard economic texts but was accepted by GovGuam's own expert. APL also contends that GovGuam's own witness accepted that opportunity costs were a necessary part of incremental costs. APL argues that the Commission did not reject the use of opportunity costs. It states:
[T]he issue addressed by the Commission in Docket 78-46 was whether to replace the comparable earnings benchmark with an opportunity cost of capital standard for establishing a carrier's permissible rate of return. Rate of return standards, however, have nothing whatsoever to do with the allocation or measurement of cost.
APL Reply to Exceptions at 296.
APL disputes GovGuam's assertion that APL claimed that it would fill its ships in the westbound Far East trade if it eliminated the call at Guam. APL states that it claimed that it could expect to fill the capacity made available by dropping the Guam call, at the same utilization level as APL otherwise experienced westbound. Finally, APL contends that its incremental cost analysis impeached both the results of GovGuam's analysis of APL's 1990 results and GovGuam's methodology. Accordingly, APL argues that it was appropriate for the ALJ to rely on that evidence to reject the methodology used by GovGuam in evaluating APL's results for 1988 and 1989.(34)
c. Disposition
GovGuam is correct that ratepayers can reasonably be expected to compensate a carrier only for the actual costs of providing a service, including the cost of capital. The Commission has never required ratepayers to compensate a carrier for opportunities foregone. Nor have the parties cited any authority for the proposition that other regulatory agencies do so.
The Commission is constitutionally prohibited from imposing confiscatory rates on a regulated carrier. See Federal Power Comm'n v. Nat'l Gas Pipeline Co., 315 U.S. 575 (1942). In other words, the Commission cannot set rates that are so low that the carrier cannot recover its cost of providing service. However, the carrier's cost of providing service does not include opportunity costs which are, by definition, the cost of opportunities foregone. Neither Respondents nor the ALJ identified a single case in which the courts considered opportunity costs in determining whether the rates fixed by a regulatory agency were confiscatory. In sum, there is absolutely no authority for the ALJ's statement that "incremental costs" including "opportunity costs" are an "absolute floor" for rates.
Thus, the ALJ's finding that APL's rates were reasonable for the period 1987-1989 on the basis of APL's analysis of incremental costs, including opportunity costs, for 1990 is unsupported. Likewise, he erred in applying APL's analysis to Sea-Land.
For the reasons discussed above, the Commission finds that the ALJ was incorrect in basing his decision on the incremental cost test proffered by APL. Accordingly, the Commission grants the Exceptions of GovGuam to the extent they seek to overturn the ALJ's conclusion that Respondents' rates are reasonable because they did not recover their incremental costs, including opportunity costs.
2. "Objective Evidence" of Rate Reasonableness
a. GovGuam
GovGuam contends that the ALJ erred in relying on the "objective evidence" standard in finding that Respondents' rates were reasonable. It is said that the "objective evidence" standard is improper as a matter of law as an applicable test of general revenue reasonableness. Furthermore, GovGuam alleges that the factual premises of the test are unfounded and internally inconsistent. GovGuam Exceptions at 131 - 141.
GovGuam argues, as it did in connection with the incremental cost issue, that there must be some predictability in the standards to be applied in general revenue cases. It contends that parties are not free simply to cast about until they find a methodology that produces the result they want. GovGuam alleges that Respondents have resorted to methodologies that have never been examined by the Commission. GovGuam also contends that the ALJ's analysis is internally inconsistent because on the one hand he announced that general revenue determinations cannot be used to ascertain the reasonableness of individual rates, while on the other hand he applied individual rate standards to determine the reasonableness of Respondents' general level of rates.
GovGuam believes that the ALJ's discussion of market perceptions is not only clearly wrong but is insulting to the shipper witnesses it sponsored. It is said that the ALJ's finding that Guam's economy has suffered no ill effects as a result of Respondents' rates ignores his earlier finding that Guam suffers from high inflation.
GovGuam alleges that the ALJ erred in dismissing the testimony of thirteen shipper witnesses without any examination of the substance of their testimony. GovGuam believes the ALJ's finding that no material complaints on the level of rates had ever been lodged with APL is inexplicable. Guam points out that elsewhere in the Initial Decision the ALJ acknowledged that a proposed rate increase in 1988 was withdrawn due to shipper opposition.
GovGuam argues that the ALJ erred by inferring that Respondents' rates were reasonable because they had remained at the same level for a number of years. GovGuam contends that the issue of rate stability has no rational bearing on the issue of rate reasonableness. It is said that if unreasonable rates remain in effect for an extended period of time, the length of time that the situation has endured only exacerbates the unreasonableness of the rates.
GovGuam also attacks the ALJ's reliance on APL's rate comparisons between the Guam trade and various other trades and his rejection of GovGuam's rate comparison between the Guam trade and the Japan/Taiwan trade. While GovGuam concedes that APL's revenue per container was higher in its trans-Pacific service than it was in the Guam trade, it argues that the comparison is flawed. GovGuam contends that APL has included U.S. mini-land bridge revenues in its trans-Pacific service figures. In order to make a proper comparison with the Guam G.O. 11 allowable revenue, GovGuam states that it is necessary to remove the mini-land bridge rail cost and associated expenses from the trans-Pacific average. When this is done, GovGuam alleges that the non-mini-land bridge revenues for APL's trans-Pacific service are nearly $400 less per FEU than the allowable Guam revenues. Allegedly, per container revenues in the Japan/Taiwan trade are also less than those in the Guam trade when mini-land bridge expenses are removed.
b. Respondents
In its Reply to Exceptions, APL states that the "objective evidence" relied on by the ALJ is the same sort of evidence that the Commission traditionally uses in evaluating rates under section 18 of the 1916 Act. APL Reply to Exceptions at 105. APL states that the last general rate increase in the Guam trade became effective August 1, 1984. Allegedly, there was a 10 percent general rate decrease in 1985. APL argues that while the price of goods and services on Guam were subject to great inflation during the relevant period, ocean freight rates remained at or below 1983 levels.
APL states that there has been a marked growth in the trade between the United States and Guam during the relevant period which shows that rates were not so high as to preclude the movement of cargo. It also contends that the service provided Guam is a premium service which commands premium rates.
APL states that the rates in the Guam trade are less than those charged by (1) Kyowa Shipping Co. for service between the Far East and Guam, (2) Pacific Micronesia & Orient Navigation Company for service between the U.S. Pacific Coast and Saipan, and (3) Zim Israel Navigation Co. for service between Australia and Guam. APL also defends the ALJ's reliance on two other rate comparisons proffered by APL involving service to Dutch Harbor, Alaska, and Okinawa. It contends that these comparisons demonstrate that rates for linehaul service must reflect factors such as small market size, imbalanced trade, and specialized cargo requirements, even when the port served does not require a substantial deviation from the route to other ports in the service. APL contends that Dutch Harbor involves literally no deviation from APL's Pacific Northwest route between Seattle, Washington, and Asia, yet APL's revenue per container from Dutch Harbor is higher than the corresponding figure for Guam. It is said that the same is true of revenues in the Okinawa trade which is also served as part of APL's Pacific Northwest service.
APL believes there are six flaws in GovGuam's comparison of selected rates in the Guam trade with corresponding rates in the Japan/Taiwan service. Allegedly, these include: (1) use of Japan/Taiwan base ports rather than smaller Asian ports, (2) selection of low-rated, non-representative commodities, (3) application of an incorrect conversion factor that inflated some Guam per-container rates, (4) inclusion of "paper rates" in the Japan/Taiwan service, (5) failure to account for commercial differences between the Guam trade and the Japan/Taiwan service, and (6) failure to acknowledge that Japan/Taiwan rates were depressed during the period of the study.
c. Disposition
In cases involving the foreign commerce of the United States which were brought under former section 18(b)(5) of the 1916 Act, the Commission examined the effect which rates had on the movement of cargo in the commerce of the United States.(35) The Commission has also examined the effect which individual rates have on the movement of a given commodity. However, the Commission has not relied on such evidence to determine the reasonableness of the general level of rates maintained by a carrier in the domestic offshore trades. To do so would amount to adopting a reasonableness standard based on "what the traffic will bear."
Likewise, the Commission has not relied on comparisons involving rates in different trades in determining the reasonableness of the general level of rates maintained by a carrier in the domestic offshore trades. It is generally difficult, if not impossible, to identify and quantify all of the variables that affect the level of rates in a given trade. Unless the trades being compared share the same variables, a comparison of rates is of little or no value. The difficulty is compounded when one attempts to compare a domestic trade with a foreign trade. Given its dubious reliability, it is hardly surprising this methodology has not been adopted by the Commission for use in the domestic offshore trades.
The so-called "objective evidence" relied on by the ALJ in finding Respondents' general level of rates to be reasonable has not formed the basis of past Commission decisions involving the reasonableness of the general level of rates in the domestic offshore trades. Moreover, the parties have not demonstrated that "objective evidence" of shipper complaints or rate comparisons with other trades is necessary to achieve a fair and reasonable result. See 46 C.F.R. § 552.1(d)(1994). Accordingly, the Commission will not rely on this evidence in determining whether Respondents' overall rates are reasonable.
In sum, as to the use of alternative methodologies, the Commission concludes that the ALJ erred in ruling that "incremental costs", including "opportunity costs", are an absolute floor for rates, and in using that ruling as a basis for concluding that Respondents' rates were reasonable. The Commission further rules that the Respondents have not demonstrated that use of the "objective evidence" is necessary to achieve a fair and reasonable result, and that the ALJ erred in accepting the "objective evidence" as a substitute for the G.O. 11 methodology and standard.
F. G.O. 11 Methodology: Construction of Rate of Return for Respondents' Service(36)
In this section, we turn to discussion of the parties' contentions and the ALJ's disposition of the issues concerning the elements of the financial analyses required by G.O. 11.
The ALJ concluded that the cost allocation methodology prescribed by G.O. 11 cannot be applied to the Guam trade. I.D. at 12 - 28, App. C at 15 - 24. As discussed above, we do not find the ALJ's departure from the required application of G.O. 11 cost allocation methodology to be consonant with the appropriate burden of proof or supported by the record. In addition, we do not read his conclusions concerning specific issues of cost allocation, including those involving APL's "direct assignments" of various costs to the Guam trade, as findings that GovGuam's specific application of G.O. 11 methodology yielded unfair or unreasonable results. Even if these conclusions can be so read, we do not agree that the record supports them. Because we disagree with the ALJ's overall acceptance of APL's argument that G.O. 11 cost allocation methodology should not be applied to the Guam trade, and his acceptance of APL's alternative methodologies, we have chosen to address the significant cost allocation issues in terms of the arguments made by the parties below, i.e., in relation to specific departures from or adjustments to the G.O. 11 cost allocation formulae advocated by the parties or their individual witnesses.
GovGuam's direct case was generally prepared in accordance with the methodology set forth in G.O. 11. Not surprisingly, GovGuam's Exceptions focus on the ALJ's rejection of that methodology. However, the parties' differences over methodology were not limited to the theoretical contentions over the applicability of G.O. 11 to the Guam trade or the putatively permissive use of other methodologies under G.O. 11 discussed above. Much of the record in this case was devoted to the parties' contentions concerning specific elements of the financial analysis required by G.O. 11. Therefore, this section of our Order generally follows the structure of the analyses required by G.O. 11.
G.O. 11 provides that in evaluating the reasonableness of a carrier's overall level of rates, the Commission will use return on rate base as its primary standard. Return on rate base is computed by dividing the net income in the trade plus interest expense by the rate base (or capital investment) for the trade. The formula is as follows:
Net Income + Interest Expense
= Return on Rate Base
Rate Base
The reasonableness of a carrier's rate of return on rate base is grounded on a comparative analysis of the carrier's return on rate base with the rate of return on total capital earned by comparable U.S. corporations. The test is based on an analysis of U.S. corporations over an extended period of time. The resulting average rate of return for U.S. corporations may be adjusted for current trends in rates of return, the cost of money and the relative risk of the carrier versus the average U.S. corporation.
The discussion below will begin with the issues relating to the calculation of the rate base, the denominator in the rate of return formula. Based on the structure of G.O. 11, this section of the Order focuses on several broad issues involving the cost allocation methodology specified in G.O. 11 and the bases relied upon by APL and the ALJ in rejecting or modifying that methodology, in particular the FEU-mile relationship. We will then turn to the issues relating to the calculation of the numerator -- net income and interest expense. Finally, we will discuss the parties' contentions regarding whether the carrier's return on rate base should be compared to the rate of return on total capital of the average U.S. corporation, or whether the carrier's allowable rate of return on rate base should be set equal to its before-tax weighted average cost of capital.
1. Rate Base
a. Valuation of Assets
In calculating APL's rate base, GovGuam followed G.O. 11 procedure and used the average book value of assets employed in the Guam trade. In its Exceptions, GovGuam attacks APL's assertion that the use in G.O. 11 of the acquisition cost of vessels (book value) in calculating a carrier's rate base understates the true economic value of the assets in the carrier's rate base. GovGuam points out that the Commission in Docket No. 78-46 considered at length the question of replacement cost versus book value. It cites the following passage from Docket No. 78-46 in which the Commission rejected the use of replacement cost valuation of assets in rate base:
The Commission believes that the use of replacement cost data would result in a windfall to carriers at the expense of ratepayers. The entire burden of replacement costs would fall on the shipper who would be charged higher rates resulting from an inflated rate base and corresponding higher allowable rate of return. This burden would be particularly unjust in view of the fact that there is no guarantee that the benefits of paying for replacement assets would flow back to the ratepayer. Carriers are not obligated to put these funds back into the same trade or even into the same line of business.
GovGuam Exceptions at 71, citing 19 S.R.R. at 1299.
In calculating APL's rate base, GovGuam also excluded leased assets from rate base that did not fall within 46 C.F.R. § 552.6(b)(9), which provides that:
Leased assets which are capitalized on the carrier's books and which meet the AICPA guidelines for capitalization may also be included in rate base.
On Exceptions, GovGuam disputes APL's claim that "it is economically arbitrary to base substantial differences in rates on a difference in vessel financing practice [e.g., uncapitalized leases versus capitalized leases] that has no impact on the nature of the services provided." APL Summary Proposed Findings of Fact at 115.d. GovGuam contends that APL's economic expert Kolbe's criticism of GovGuam's exclusion of leased assets from rate base was made in a vacuum. Allegedly, he had not reviewed the AICPA guidelines with respect to the capitalization of leases and had no idea how to classify lease transactions as an accounting or regulatory matter. GovGuam Exceptions at 70, fn. 75.
GovGuam also disputes APL's assertion that calculating its rate base using the book value of assets and excluding leased vessels not capitalized on APL's books or meeting AICPA guidelines results in large fluctuations in rate base and rate of return from year to year as vessels are redeployed. GovGuam states that the need to adjust revenues in response to changes in the rate of return due to yearly changes in rate base would not have been necessary if APL's rates had been set at a just and reasonable level in the first place. It is said that the changes are generally modest. GovGuam contends that APL would have been justified in taking revenue increases in 1988, 1989 and 1990, if APL's rates had started from a reasonable level. Allegedly APL's average revenue per container also went up 10.4 percent during the period due to a more favorable mix of commodities carried. GovGuam contends that this would have enabled APL to achieve its allowable revenue with smaller revenue actions than calculated by APL.
Turning to Respondents' arguments, APL states that it has not proposed that the Commission use a replacement value rate base in this case. It contends that:
[D]emonstrably irrational results occur under [GovGuam witness] Nadel's G.O.-11s when a book value rate base is used in the context of APL's linehaul/feeder system, which is almost entirely unregulated and which consists of interchangeable assets that move in and out of the Guam-calling string as deployments change for reasons that are unrelated to Guam. The Commission in Docket 78-46 simply did not address such a situation.
APL Reply to Exceptions at 212.
Although GovGuam and APL calculated APL's rate base differently, they agree that it increased every year during the period 1987 - 1990. While it is true that APL's rate base declined between 1986 and 1987, APL admits that this was caused by the introduction of four L-9 vessels which were on three-year leases and could not be capitalized. G.O. 11 permits the inclusion of leased vessels in the calculation of APL's rate base only if they are capitalized on APL's books and meet AICPA guidelines for capitalization. The four L-9s did not satisfy these conditions. As a result, G.O. 11 requires that they be excluded from the calculation of APL's rate base, although their lease expense may be included in the calculation of interest expense and debt payments.
The question is whether G.O. 11 methodology for the calculation of rate base can be applied to APL in the Guam trade due to the peculiarities of its operation. In Docket No. 78-46, the Commission found that use of replacement cost rather than acquisition cost (or book value) for the calculation of rate base would result in a windfall to carriers. There is no reason to believe that the Commission was incorrect in its conclusion. Nor does it appear that the valuation of assets in rate base using acquisition cost (or book value) caused the "wide fluctuations" in rate base APL complains of. It was the exclusion of leased vessels, not the use of acquisition cost, that caused the decline in rate base from 1986 to 1987. There is no reason to abandon the G.O. 11 treatment of capitalized leases, which is fully in accord with general accounting practice.
GovGuam is correct in its exclusion of leased vessels and its use of average book value for purposes of calculating APL's rate base. This is the basis on which the Commission has calculated APL's rate base, as reflected in Appendix 1, Rate Base for APL.
b. Allocation of Assets Between the Guam Trade and the Remainder of the Service
Once one decides which basis to use for determining the value of assets, one must turn to the method for allocating that investment between the Guam trade and the remaining service in which the assets are used. One of the major differences between the parties' calculation of APL's rate base (See App. 1, Rate Base for APL) is the determination of its net investment in vessels (See App. 2, Net Investment in Vessels (Schedule A-I & A-II for APL(37))). The vessels serving the Guam trade are part of APL's Far East service. Thus, it is necessary to allocate APL's investment in vessels between the Far East service and the Guam trade.
(1). FEU-mile relationship generally
GovGuam's witness Nadel uses the FEU-mile relationship specified in G.O. 11 to allocate investment to the Guam trade but arrived at a lower allocation to the Guam trade for 1987 through 1990 than that reflected by APL in its G.O. 11 reports.(38) His lower allocation can be attributed to his calculation of the total cargo carried in the Far East trade. Nadel states that APL failed to count: (1) cargo carried on vessels operating in other services which is transferred onto vessels in this service for carriage to its ultimate destination, and (2) cargo carried on vessels operating in other services which is transferred onto vessels in this service for carriage to a transshipment port where it is loaded aboard a third vessel for carriage to its ultimate destination. Using a computer file provided by APL, Nadel calculated the number of FEUs which he claimed should have been included as service cargo. Because Nadel's calculation of the number of FEUs in the service is larger than APL's, Guam's share of the total as calculated by Nadel is less than that shown in APL's annual G.O. 11 reports. This difference in the calculation of the FEU-mile relationship accounts for the difference in Guam's share of total investment as calculated by Nadel and as shown in APL's G.O. 11 reports.
Although the G.O. 11 reports prepared by APL in the normal course of its compliance with regulatory requirements followed the G.O. 11 format and used the FEU-mile relationship to allocate costs, APL did not rely on these reports in its defense to the Complaint below. Respondents' witness Kolbe departs from the FEU-mile methodology. He claims that the FEU-mile relationship will systematically under-allocate costs to westbound traffic in general and Guam cargo in particular. Kolbe asserts that this is because (1) a greater number of containers can be loaded on a vessel in the eastbound direction than in the westbound direction; (2) draft and crane restrictions in Guam restrict the number of containers that can be loaded on certain westbound vessels; and (3) the Guam trade is severely imbalanced, with most cargo moving inbound.
Kolbe believes that the FEU-mile relationship is inappropriate because most vessel expenses accumulate on the basis of time rather than on the miles traveled. He also claims that Guam consumes a disproportionate share of port time when compared to the other ports in the service.
Instead of using the FEU-mile relationship, Kolbe used his own ratio which he claims more accurately reflects the share of vessel capacity utilized in the Guam trade and is based on time rather than miles. He states that his methodology "weights" raw FEUs so that they will accurately reflect actual capacity use. Kolbe first determined the fraction of time spent on the eastbound and westbound legs, which is approximately 50 percent in each direction. Then he determined the fraction of the eastbound and westbound vessel capacity committed to the Guam trade. Eastbound containers were divided by utilized eastbound capacity. The actual number of westbound Guam containers was adjusted upward to account for the one-way nature of the trade and the alleged container and draft limitation in Guam. As noted above, the resulting allocation of APL's investment in vessels to the Guam trade is set forth in Appendix 2.
The Commission's scrutiny of Kolbe's reasons for departing from the FEU-mile relationship as a basis for allocating APL's investment in vessels to the Guam trade begins with G.O. 11, which provides that:
The total of the adjusted cost of all vessels employed in the Service during the period . . . shall be allocated to the Trade in the cargo-cube mile relationship.
46 C.F.R. § 552.6(b)(ii) (1994). Kolbe's method of allocating APL's investment in vessels to the Guam trade on the basis of time is not in accordance with this section.
The question then becomes whether his departure from the allocation methodology specified in G.O. 11 was justified under 46 C.F.R. § 552.1(d) (1994). Section 552.1(d) provided that the Commission may "employ other bases for allocation . . . in any instance where it is deemed necessary to achieve a just and reasonable result." The ALJ relied upon this provision, in particular, in rejecting the FEU-mile allocation formula specified in G.O. 11 (which he characterized as "generic," I.D. at 14, 18), as applicable to the Guam trade (which he generally characterized as "unique").
The Commission has never invoked this provision in any other domestic offshore trade. In other words, the Commission has found that allocations based on the cargo-cube (FEU) mile relationship have produced a just and reasonable result in all other domestic offshore trades.
Turning to the Guam trade, there are no peculiar conditions that require a different method of allocation. While it may be true that vessels spend more time unloading in Guam than they do in other Far East ports, that fact standing alone does not justify departure from the cargo-cube (FEU) mile relationship. The efficiency of loading and unloading facilities often varies from port to port. APL's Guam service is by no means unique in this regard. In sum, APL has not demonstrated that use of the cargo-cube (FEU) mile relation will produce an unjust or unreasonable result. Therefore, to the extent that the Initial Decision relied on the "exception" proviso of § 552.1(d) as the basis for departing from G.O. 11's FEU-mile relationship formula for rate base asset or other cost allocations, it is reversed.
(2). Draft Restrictions in Guam
Next, we discuss other issues purportedly requiring abandonment of or adjustments to the FEU-mile relationship method of cost allocation. The first of these is the allegation that additional costs should be allocated to Guam because APL's west-bound cargo capacity is lowered by the restricted draft at the port of Apra. Respondents' witness Kolbe adjusted the proportion of costs allocated to Guam upward, based on the premise that Guam ratepayers should compensate APL for the space on certain vessels which it could have otherwise filled but for the draft restrictions in Guam. This allocation methodology and associated reasoning were accepted by the ALJ. I.D. at 18, App. C at 73 - 74.
It may be true that the draft restrictions in Guam reduce the amount of cargo which could be carried on its J9 and C9 vessels. However, it is apparent that APL's decision to deploy vessels having a draft that limited their ability to carry westbound cargo was not based on the needs of Guam shippers. Guam derives no benefit from their increased draft. It is reasonable to assume that the vessels were deemed necessary to serve the Far East. There is no reason to require the Guam ratepayers to compensate APL for lost cargo as a result of the deployment of vessels which were added to serve customers in its eastbound service from the Far East. The conclusion reached above with respect to the FEU-mile relationship generally is equally applicable to Kolbe's adjustment to account for reduction in the amount of cargo APL can carry westbound due to draft restrictions in Guam.
(3). Uncounted Containers
Another adjustment to the allocation was made by GovGuam's witness Nadel, who adjusted the figures for total cargo carried in the Far East service to reflect containers not counted by APL in its G.O. 11 reports. Nadel correctly reads G.O. 11. The service was defined by G.O. 11 as those voyages in which cargo subject to the Commission's domestic tariff filing regulations was carried. 46 C.F.R. § 552.5(b) (1994). Cargo carried in the service includes all cargo, regardless of origin or destination, that is carried on the voyage and that is not trade cargo. The Commission is satisfied that APL did, in fact, fail to count some of the non-trade containers carried on voyages in the service, and, based on our previous determination that the FEU-mile relationship is the appropriate method of allocation, we adopt Nadel's adjustment.
Our finding regarding the appropriate allocation to be employed has far reaching consequences in the calculation of Respondents' rates of return. It reduces the amount of investment in vessels allocated to the trade as calculated by Kolbe. Thus, the denominator in the rate of return fraction is reduced. Because the same allocation is applied to Voyage Expense, it decreases the amount of Voyage Expense allocated to the trade. This, in turn, affects the Voyage Expense Relationship,(39) which is used to allocate A&G. 46 C.F.R. § 552.6(c)(4) (1994).
(4). Net investment in Other Property and Equipment
Another major difference between the parties' determinations of the rate base is in the calculation of "Net Investment in Other Property and Equipment".(40) The difference in the parties' calculation of "Net Investment in Other Property and Equipment" is attributable to differences in the calculation of the VER, which is used to allocate assets that are employed in a general capacity to the trade. This ratio is calculated in the Income Statement; a full discussion of how the parties calculated the VER is contained therein. For purposes of the rate base, it is sufficient to note that the amounts reflected in APL's G.O. 11 reports and Kolbe's net investment in Other Property and Equipment are much higher than Nadel's because their calculation of the VER is twice as high as Nadel's. For the reasons discussed in connection with the Income Statement, the Commission believes that the VER falls between the figures calculated by APL and GovGuam respectively. The Commission's calculation of APL's Other Property and Equipment is contained in Appendix 3, Investment in Other Property and Equipment (Schedule A-IV) for APL.
(5). GovGuam's Adjustments to Sea-Land's Rate Base
Although GovGuam believed that Sea-Land's annual reports followed G.O. 11 more closely than did APL's, GovGuam challenged the inclusion of several items in Sea-Land's calculation of rate base (Appendix 1, Rate Base for Sea-Land). GovGuam's witness Hahne contends that Sea-Land improperly included (1) "stack cars" used in intermodal operations, (2) "repo, start-up" expenses, which, in the 1989 annual G.O. 11 report were characterized as "deferred expenses," and (3) "C6/C8 repair." Hahne's analysis was that those items cannot be considered capital assets or improvements, and should not be included in rate base. Accordingly, Hahne removed them from his calculation of rate base. Sea-Land did not produce evidence to rebut this argument. The Commission finds that Hahne's adjustments to Sea-Land's rate base were appropriate.
2. Net Income and Interest Expense
a. Net Income
We turn now to the calculation of Net Income, the first figure in the numerator of the rate of return fraction. Net Income is derived by subtracting from Total Trade Revenue the following expenses: Voyage Expense, Administrative and General Expense, Interest Expense, Depreciation and Amortization, and Taxes. As may be seen from Appendix 4, Income Account for APL, Income Account for Sea-Land, the parties differed greatly on the determination of Net Income.
(1). Total Trade Revenue
There was general agreement by APL and GovGuam on total trade revenue. APL's revenue increased substantially between 1987 and 1988 with the departure of U.S. Lines from the Guam trade.
In regard to Sea-Land's 1989 annual G.O. 11 report, GovGuam's witness Hahne is critical of Sea-Land for filing a report covering only six months rather than a full year. GovGuam charges that Sea-Land's 1989 G.O. 11 filing presents a rate of return which is calculated upon a ratio where the denominator is the carrier's annual rate base and the numerator is the carrier's revenue and expenses for six months. In an effort to correct this alleged error, Hahne annualized Sea-Land's reported revenue and expenses (Appendix 4, Income Account for Sea-Land).
The Commission believes that Hahne's approach is unsound. That approach requires extrapolating figures for the second half of 1989, a period after Sea-Land withdrew from the Guam Rate Agreement tariff and canceled Tariff FMC-F No. 64. We find adjustment to the benchmark rate of return to be a preferable approach.
(2). Voyage Expense
Voyage Expense is typically the largest deduction from Trade Revenue in the Income Account. See App. 4, Income Account for APL, Income Account for Sea-Land. Moreover, Voyage Expense is used to determine the VER. See App. 5, Voyage Expense (Schedule B-II) for APL. The VER is used to allocate A&G expense and investment in other property and equipment, and as such, is of crucial importance. The two major categories of expense subsumed in Voyage Expense are Vessel Operating Expense ("VOE") and Cargo Handling Expense.
(a). Vessel Operating Expense
(i). Use of the FEU-Mile Relationship
VOE, as the name implies, is made up of those expenses attributable to the operation of vessels in the trade. These expenses include crew wages, fuel, and insurance. Under G.O. 11, VOE that cannot be assigned directly to the trade is allocated to the trade on the basis of the FEU-mile relationship. While the parties generally agreed on the total vessel operating expenses, they disagreed over how the expenses should be allocated to the trade. As discussed previously in connection with the allocation of investment in vessels in relation to the calculation of Rate Base, Respondents' witness Kolbe rejected the use of the FEU-mile relationship as a basis for allocating investment or expenses to the trade. Both APL's G.O. 11 Reports and GovGuam's witness Nadel utilized the FEU-mile relationship. However, in calculating the FEU-mile relationship Nadel adjusted the service cargo shown in APL's G.O. 11 reports upward by the number of containers which he claimed APL failed to count. We have previously found that the adjustments made by Nadel were appropriate.
Our decision, reflected above, that the FEU-mile relationship is the appropriate basis for allocating investment and expenses to the trade has a significant effect on the determination of the appropriate total VOE. These computations appear in Appendix 5, Voyage Expense for APL (Schedule B-II).
(ii). Fuel Costs: The "Deviation"
The other major issue with respect to calculation of VOE is the appropriate fuel expense to be allocated to the Guam trade. APL allocated an additional amount for fuel expense as a part of vessel operating expense to cover the cost of deviating from its Far East route to serve Guam (Appendix 5, Voyage Expense for APL (Schedule B-II)). APL viewed California, Taiwan, and Japan as the cornerstones of its service. Since vessels must deviate from the great circle route from California to Taiwan, Guam was seen by APL as a diversion. APL contended that the fuel cost of that diversion should be borne by Guam ratepayers. APL determined the additional fuel cost by using a computer model which shows that sailing to Guam adds over 600 miles per voyage as opposed to sailing directly from Oakland, California, to Kaohsiung, Taiwan.
Nadel disputed the concept of treating Guam as a diversion. He stated that G.O. 11 does not single out a port call as a diversion but treats all port calls equally. Accordingly, Nadel allocated all service fuel expense to Guam on the basis of his calculation of the FEU-mile relationship.
Kolbe corrected several errors pointed out by Nadel in his critique of APL's fuel expense calculation in its G.O. 11 reports, so that the amounts of fuel expense allocated to the trade by Kolbe are lower than the figures reflected in APL's G.O. 11 reports. However, in calculating the fuel cost attributable to Guam, Kolbe included the cost of deviating from APL's Far East route. Kolbe allocated the remaining fuel costs on the basis of his "capacity use days" approach rather than on the basis of the FEU-mile relationship. The ALJ accepted Kolbe's view that Guam constituted a "deviation" from APL's Far East service route, for which additional costs should be directly assigned to the Guam trade. I.D. at 22; App. C at 75 - 82.
Section 552.6(c)(2)(i) of G.O. 11, 46 C.F.R. § 552.6(c)(2)(i) (1994), stated:
For all voyages in the Service, vessel expense shall be allocated to the Trade in the cargo-cube mile or cargo cube relationship, as appropriate. Should any of the elements of vessel expense be directly allocable to specific cargo, such direct allocations shall be made and explained.
The question therefore is whether it is appropriate to directly allocate to Guam the cost of deviating from the great circle route to the Far East. Neither the 1916 Act, the 1933 Act nor G.O. 11 directly addresses the question. "Deviation" in transportation law generally means a departure from the planned or commonly prescribed itinerary between the points being served; to treat an entire planned service between ports as a "deviation" from the shortest route between two other ports on the service is a misuse of the term and the concept.(41)
APL's contention that such an allocation is appropriate requires one to differentiate between base ports and secondary ports within a service. This sort of parsing of the service is very subjective. Obviously, the decision of Respondents to call at Guam as part of their Far East service was not based on altruism. It is more realistic to believe that the Guam call, like any port call in the service, was selected because it was believed that it would make a positive contribution to the overall Far East Service. No doubt its location was factored into that decision. Accordingly, the Commission believes that Guam should not now be singled out for special accounting treatment due to its location. Because no departure from the FEU-mile relationship is appropriate in this case, the Commission concludes that the fuel expense attributable to the deviation from the great circle route to the Far East should not be directly assigned to the Guam trade.
The Commission has previously rejected Kolbe's substitution of "capacity use days" for the FEU-mile relationship as a method of cost allocation in connection with APL's investment in vessels, on grounds that APL has not demonstrated that it is required to produce a fair and reasonable result. 46 C.F.R. § 552.1(d) (1994). The Commission also rejects Kolbe's allocation of common fuel expenses based on "capacity use days", on the same grounds.
(b). Cargo Handling Expense
The parties also differ in their calculation of another major component of Voyage Expense, Cargo Handling Expense. Since total Cargo Handling Expense is part of the calculation of the VER, which in turn is used throughout G.O. 11 to allocate various categories of expense and investment, the issue reverberates throughout the calculation of the rate of return on rate base. The parties disagree both as to the inclusion of specific items of cost in the category of Cargo Handling Expense, and the proper allocation between trades of this category of costs. The total system Cargo Handling Expense as calculated by the parties is shown in Appendix 5, Voyage Expense for APL (Schedule B-II). We discuss first the procedural matter that arose on the Commission's consideration of this cost category. Then we discuss the parties' contentions concerning the inclusion of certain elements of Cargo Handling Expense. Finally, we turn to the disputes over the allocation of costs between Guam and Far East trades.
(i). Sea-Land's Objection to the Commission's Order for Clarification of the Record
As discussed previously, after the case was submitted we found that we were unable to follow how the parties calculated the various components of Cargo Handling Expense. Accordingly, we directed APL and GovGuam to provide the Commission with the work papers used to prepare the exhibits relating to Cargo Handling Expense and a step-by-step explanation of the calculations. See Order, January 21, 1998.
Although the order was not directed to it, Sea-Land objected to the procedure. Sea-Land contends that the procedure denies it the right of cross-examination and is violative of Rule 229 of the Commission's Rules of Practice and Procedure, which governs the reopening of proceedings. It believes that the order should be rescinded. APL did not join in Sea-Land's request to rescind the order. GovGuam filed a reply in opposition to Sea-Land.
The Commission finds that Sea-Land's objections are without merit. The work papers requested by the Commission were not new evidence; they were prepared by the witnesses as they developed the testimony that was presented during the hearing. Indeed, they should have been part of the record before the ALJ, because G.O. 11 required the carrier to file all work papers, properly indexed, which were prepared in support of its G.O. 11 exhibits and schedules. 46 C.F.R. § 552.4(a) (1994). These work papers existed at the time of the hearing, and are presumed to have been the basis for the testimony of witnesses who were or could have been cross-examined at that time. Parties had ample opportunity to obtain an explanation of the steps taken by an opposing witness in calculating Cargo Handling Expense during cross-examination. Thus, the explanations of the underlying accounting steps taken by each witness in calculating the figures in Cargo Handling Expense filed in response to the January 21, 1998 Order, pertain solely to the components of figures which were introduced and accepted into evidence, and on which cross-examination was or could have been undertaken during the hearing in this proceeding. Having been afforded the opportunity for cross-examination on the calculation of Cargo Handling Expense once, Sea-Land is not entitled to a second chance.
Sea-Land's contention that the Commission violated Rule 229 of the Commission's Rules of Practice and Procedure betrays a lack of understanding of the Commission's responsibilities. "The agency must always act upon the record made, and if that is not sufficient , it should see the record is supplemented before it acts." Isbrandtsen Co. v. United States, 96 F. Supp. 883, 892 (S.D.N.Y. (1951), aff'd sub nom. A/S J. Ludwig Mowinckels Rederi v. Isbrandtsen Co., 342 U.S. 950 (1952). In other words, even if the parties agree among themselves that the record is adequate, an agency may determine that it cannot reach a decision on the existing record. In such an event, an agency may decide to reopen or reconsider a decision on its own motion. Charlesworth v. U.S. Immigration and Naturalization Service, 966 F.2d 1323, 1326 (9th Cir. 1992). Rule 229 of the Commission's Rules of Practice and Procedure pertains to petitions to reopen by parties; it does not prevent the Commission from seeking additional evidence to assure that the evidentiary record in a proceeding is adequate. Ultimately, the need for additional evidence is a decision for the agency, not the parties.(42)
We now turn to the contentions of the parties with respect to several components of Cargo Handling Expense.
(ii). Inclusion of Certain Costs in Cargo Handling Expense
(A). Mini-Land Bridge Expenses
GovGuam claims that APL and Kolbe erred by failing to include mini-land bridge expense in the calculation of total Cargo Handling Expense. GovGuam claims that this omission is contrary to G.O. 11. In support of this contention, GovGuam cites the Maritime Administration's ("MarAd") Uniform Financial Reporting Requirements, 46 C.F.R. § 232.5(E)(3), which states that Cargo Handling Expense "shall include . . . cost of transporting cargo from the point of delivery into the possession of the contractor to the loading port and from the discharge port to the point of delivery stipulated by the freight agreement if different from the point of discharge."
APL contends that MarAd regulations are not determinative of the issue. APL Reply to Exceptions at 63, 277. APL states that MarAd regulations, which define expense categories for purposes of financial reports to MarAd, are guidelines rather than rigid requirements. APL argues that account classifications established by MarAd for another purpose should not be used to determine an issue of major significance in a G.O. 11 analysis. This is the view adopted by the ALJ. I.D., App. C at 82 - 88.
APL states that the FMC-regulated Guam trade is, by definition, a port-to-port trade. It is said that trade Voyage Expense consists, by definition, of the categories of vessel expense that are incurred in performing a port-to-port movement. APL contends that it greatly dilutes the Guam trade's allocation of system expense by including a sum, which is functionally the rail carrier's division of joint-through revenues, in total handling expense. APL Reply to Exceptions at 279. Since the revenue is port-to-port revenue, APL claims that expenses should also be limited to port-to-port expenses and should not include mini-land bridge expense, which is an intermodal expense.
APL also claims that Matson does not include mini-land bridge expenses as part of its G.O. 11 Reports to the Commission. It is alleged that Matson carries a large number of non-FMC regulated containers under joint-through tariffs with both motor and rail carriers. APL contends that Matson does not report sums paid to these inland carriers in its G.O. 11 Reports.
GovGuam responds by claiming that APL makes payments to American President Domestic for inland transportation costs associated with mini-land bridge movements. GovGuam alleges that APL is directly involved in the mini-land bridge operation of American President Domestic and incurs significant expenses in support of it. GovGuam claims that, by excluding the mini-land bridge expense from total cargo handling costs, which are used to allocate system-wide expenses, APL implicitly assumes that there are no system-wide expenses related to the rail movement of mini-land bridge cargo. GovGuam states that APL's position here is inconsistent with the one it took in MarAd Docket S-801, where it allegedly contended that the VER for company-wide activities should include mini-land bridge and handling costs system-wide. GovGuam also contends that APL's position is a departure from the methodology it used in preparing its 1987 G.O. 11 report and from the methodology employed by Sea-Land and U.S. Lines in filing their G.O. 11 Reports.
APL alleges that it collects the through rate from the shipper and pays the rail portion of the revenue over to the rail carrier(s) via American President Domestic, which arranged for the rail transportation. As an internal accounting convention, APL states that it treated the entire through rate as "revenue" and the portion received by the rail carrier as an "expense." However, APL maintains that, in functional terms, the "expense" is the equivalent of an inland carrier's division of a through rate, i.e., it is revenue earned by a separate carrier under a joint contract of carriage for a discrete movement performed by a different transportation mode.
APL is correct. When an inland carrier and an ocean carrier jointly hold themselves out to perform intermodal transportation, the joint-through rate is divided between them. Although the ocean carrier may receive the joint-through rate from the ratepayer and pay the inland carrier its division, this division of revenues is not really an expense to the ocean carrier. The inland carrier holds itself out to the public pursuant to the joint tariff with the ocean carrier, and the ratepayer is required to pay it for inland transportation services. Whether it is paid directly, or through the ocean carrier is of no real consequence; the contract for carriage is between the ratepayer and the inland carrier. It is unlike the situation that exists when an ocean carrier undertakes to provide a service that includes inland transportation and subcontracts with an inland carrier to provide that service. In that case, the ratepayer only has a contract for carriage with the ocean carrier; he may not even know the identity of the inland carrier. The contract for carriage is between the ocean carrier and the inland carrier and any payment from the ocean carrier to the inland carrier could properly be viewed as an expense to the ocean carrier.
Given the fact that APL's mini-land bridge service was conducted pursuant to a joint-through arrangement with inland carriers, it would not be appropriate to treat the inland carrier's division of revenues as an expense to APL. Accordingly, the Commission rejects GovGuam's Exception with respect to the inclusion of mini-land bridge expenses in the calculation of Cargo Handling Expense. This calculation is reflected in Appendix 5, Voyage Expense for APL (Schedule B-II).
(B). Cargo Barge Container Expense
GovGuam's witness Nadel removed Cargo Barge Container Expense from Cargo Handling Expense (See App. 5), and showed it as a deduction under the category of Other Expenses in the Income Account. See App. 4, Income Account for APL. He based this on MarAd accounting regulations. See Nadel W.D. Ch. II, pp. 113 - 115, TR 951 - 952, 955, 957 - 959. Nadel considers Cargo Barge Container Expense a system expense not to be included as a Cargo Handling Expense. The disparity between Nadel and both Kolbe and APL's G.O. 11 Reports over total Cargo Handling Expense would have been even greater if Nadel had included Cargo Barge Container Expense as a Cargo Handling Expense. In addition, by moving the Cargo Barge Container Expense to other expenses, Nadel removed Cargo Barge Container Expense from his calculation of VER.
APL contends that it would be impossible to have a voyage in the container shipping business without containers. APL Proposed Findings at 651. This being the case, APL argues that Cargo Barge Container Expense must be included as part of Voyage Expense. It is also contended that it must be included in the calculation of working capital, which is a component of rate base.
APL is correct in its contention. Nadel's reliance on MarAd regulations is misplaced. It is beyond dispute that container expense is a necessary part of the expenses of a containership voyage. Accordingly, we reject Nadel's treatment of Cargo Barge Container Expense.
(iii). Allocation of Cargo Handling Expense
(A). APL's Use of "More Direct Ratios" to Allocate Certain Costs
In an effort to show that use of the VER specified in G.O. 11 as the prescribed method of allocation yields unreasonable results, APL engaged in what it called a "more direct ratio" exercise. Assuming arguendo that Nadel was correct regarding the various accounting issues he raised, APL witnesses presented rebuttal evidence which allocated expenses using what they referred to as "more direct ratios." The "more direct ratio" exercise did not deal with major items of expense other than Cargo Handling Expense. Vessel Expense was excluded, as was A&G and investment and depreciation of Oakland headquarters equipment. APL witnesses focused on Cargo Barge Container Expense and investment and depreciation of containers and chassis. The exercise covered only a single year - 1990. The "more direct ratios" used by APL witnesses were not a direct assignment of expenses; they were ratios based on the witnesses' assessment of particular conditions in the Guam trade. Not surprisingly, APL's witnesses concluded that the Guam trade should bear a higher proportion of expenses than it otherwise would if the VER was used to allocate expenses. This, in turn, reduced APL's rate of return.
APL's "more direct ratio" exercise is of limited value. Although G.O. 11 provides for the direct assignment of expenses, APL's "more direct ratios" do not identify specific costs associated with Guam cargo, but are ratios which yield a different approximation of costs. They do not result in a direct assignment of expense. While the "more direct ratio" exercise establishes that there are alternative methods of allocating a limited number of expenses that may be more accurate than the VER, it does not establish that the use of "more direct ratios" is necessary to produce a fair and reasonable result. See 46 C.F.R. § 552.1(d) (1994).
(B). GovGuam's Calculations
GovGuam's allocation of Cargo Handling Expenses to the Guam trade by witness Nadel was divided into two parts: (1) vessel-related or marine expenses such as port call expense and stevedoring, and (2) non-marine expenses. For marine costs, Nadel counted all expenses for Guam voyages and allocated a portion of those expenses to the Guam trade based on the ratio of the cargo-cube of the Guam trade cargo handled at each port to the cargo-cube of all other cargo in the service handled at each port. Nadel allocated non-marine expenses, which include cargo handling, container yard and container transportation expenses, on the basis of the ratio of Guam containers to total containers, port-to-port and mini-land bridge.
((1)). Container Freight Station Expenses
Nadel alleged that APL allocated container freight station ("CFS") expenses to the Guam trade on the basis of the ratio of Guam port-to-port containers to total port-to-port containers at each terminal. He claimed that APL excluded mini-land bridge containers handled at each terminal. APL argued, and the ALJ found, otherwise. I.D., App. C at 85 - 94. Nadel also argued that APL's ratio was too high because APL's tariff restricted the use of CFS facilities to full container loads for Guam cargo -- a restriction which is not applicable to foreign cargo. In addition, Nadel noted that Guam has no CFS facility. Thus, Nadel concluded that the Guam trade had relatively little CFS cargo when compared with the rest of the service.
Kolbe's criticisms of Nadel's allocation of CFS expense are well founded. The Commission is satisfied that APL's allocation of CFS expenses, which is based on the ratio of Guam port-to-port cargo to total port-to-port cargo at each terminal, is appropriate. Therefore, the Commission's calculations incorporate APL's method of allocating CFS expenses.
((2)). Rail Transportation of Guam-Bound Cargo from the Pacific Northwest
Nadel also stated that APL assigned to the Guam trade expenses incurred in transporting cargo by rail from the Pacific Northwest to Oakland. Nadel reduced this figure in his calculation of Cargo Handling Expenses by half a million dollars for 1990. APL challenges Nadel's calculation of the cost of transporting full containers from the Pacific Northwest to Oakland. APL contends that Nadel based his figures on the average charge for a rail movement within the APL system. APL Proposed Findings at 614. Rather than using an average, APL used the actual charges assessed by rail and motor carriers for this transportation. We find that APL's methodology regarding rail transportation of Guam cargo from the Pacific Northwest produces a more accurate result.
((3)). Costs of Repositioning Empty Containers
Nadel also disputed APL's allocation of expenses incurred in connection with the repositioning of empty containers. First, Nadel claimed that APL assigned to Guam the expense of repositioning empty containers to the Pacific Northwest from California. Second, Nadel stated that APL also assigned to Guam the expense of handling empty containers in Kaohsiung which were loaded onboard in Guam. Finally, Nadel stated that APL charged Guam for empty local containers that pass through APL's terminal gates en route to a local pickup or returning from a local delivery. He stated that none of these allocations of expense associated with the repositioning of empty containers is provided for by G.O. 11. Nadel stated that G.O. 11 provides that all costs be allocated to loaded containers referred to in the regulations as "revenue producing units of cargo." He cited 46 C.F.R. § 552.5(h) (1994) as authority for his position. It is said that G.O. 11 does not ignore the costs of repositioning empty containers; it simply requires that they be allocated to loaded, revenue-producing containers.
APL disputes Nadel's allocation of CFS expenses to the Guam trade. APL claims that Nadel misinterpreted APL data to construct his allocation of expenses to the Guam trade, and that APL's allocation of expenses, which is based on the ratio of Guam port-to-port cargo to total port-to-port cargo at each terminal, is a superior allocation method.
Regarding the expense of repositioning empty containers, which Nadel excluded, APL states that these costs should be borne by the Guam trade because of the special operational circumstances associated with that trade. Since the Guam trade is unbalanced, it is alleged that the great majority of containers unloaded in Guam had to be repositioned empty from Guam to Asia. Kolbe adjusted the cost allocations by assigning the cost for lifting those empty containers off the vessel at Kaohsiung to Guam.
APL also alleged that empty containers had to be repositioned overland to the Pacific Northwest in order to replace containers loaded in the Pacific Northwest with Guam cargo that were loaded on board a vessel in Oakland. APL further contended that APL vessels in the Guam service cannot always reposition empty containers to Asia as necessary, due to the Guam crane restrictions. APL maintains that it must transport these empty containers to the Pacific Northwest so that they can be loaded on board APL vessels in another service that calls in the Pacific Northwest for repositioning to Asia. APL believes that these costs are directly attributable to the Guam trade and should be assigned to it. In regard to Nadel's contention that G.O. 11 precludes the use of empty containers in allocated expenses, APL replies that the costs were not calculated using the cargo cube ratio; they were calculated by multiplying the cost of a given function by the number of times the Guam trade caused that function to be performed.
G.O. 11 stated in pertinent part:
Should any of the elements of vessel expense be directly allocable to specific cargo, such direct allocations shall be made and explained.
46 C.F.R. § 552.6(c)(2)(i) (1994).
APL has provided an explanation of how it calculated the cost of repositioning empty containers. In that regard, it has complied with G.O. 11. However, the question remains whether the cost of repositioning empty containers as described by APL is directly allocable to the Guam trade. In other words, should the ratepayers of Guam be required to bear the cost of repositioning empty containers? In assigning the cost of repositioning empty containers to Guam, APL singles out Guam for special treatment. APL contends that this is justified due to the peculiar nature of the trade. APL Reply to Exceptions at 49-50, 161-62, 270-271. However, APL's determination that the Guam trade should bear the cost of repositioning containers which are used in other trades in addition to Guam is necessarily subjective. The Commission believes that the repositioning of empty containers is necessitated by the imbalance between east-bound and west-bound Far East cargo, and therefore benefits Far East cargo. Under the circumstances, the Commission believes that it is more appropriate to allocate the cost of repositioning empty containers to the Guam trade using the FEU-mile relationship rather than directly assigning the entire cost to the Guam trade. Each of these determinations is reflected in the Commission's calculation of Cargo Handling Expense and VER in Appendix 5.
(3). Administrative and General Expense
We turn now from the components making up Voyage Expense, to the next major category of expense - A&G. The parties differ with respect to one of the elements included in A&G, and on the appropriate basis for allocation of these expenses between trades. The Initial Decision adopted APL's position below with respect to both of these issues. I.D., App. C at 97 - 98.
(a). Inclusion of Agency Fees
Nadel disputed APL's treatment of agency fees as part of A&G. He believed that they should be shown as part of terminal expense. This contention was based on his reading of MarAd regulations.
On Exceptions, APL states that if agency fees were considered as terminal fees, no agency fees would be allocated to the Guam trade because APL's books for the terminals that handle Guam containers do not show costs for agency fees. They are included in APL's financial accounts as part of corporate overhead.
Clearly, it is appropriate to include employee salaries under A&G. Moreover, it is beyond dispute that agents generally perform duties that would otherwise be performed by APL employees. Given the fact that an agent is the functional equivalent of an APL employee, there is no justification for treating agency fees differently than employee salaries. Therefore, we find that APL's inclusion of agency fees under A&G expense is correct.
(b). Allocation of A&G
Nadel stated for GovGuam that G.O. 11 requires that A&G be directly assigned where possible, and where no direct assignment is possible, that it be allocated to the trade based on the VER. He claimed that APL eliminated only Guam's direct expense from the system expenses before allocating the remaining system expenses on the basis of the VER. Since APL allegedly did not provide direct A&G expenses for its other services and trades, Nadel claimed that he could not eliminate them from the system costs, which he believed would have been a consistent approach. Although Nadel would have preferred to make certain direct assignments, he allocated the entire A&G expense on the basis of the VER, because he lacked the necessary breakout of expenses. Thus, Nadel applied the VER(43) to APL's total A&G and made no direct assignments of expense to the Guam trade (Appendix 6, Administrative and General Expense for APL (Schedule B-III)). Although APL made a direct assignment of certain A&G expenses to the Guam trade in its G.O. 11 reports, Kolbe stated below that the concept of a system-wide allocation using a system-wide ratio is that some types of cost, such as A&G, are incurred to support the system as a whole and cannot be broken down meaningfully by particular functions or trades. He argued that the only practical method of allocating A&G expense to the Guam trade is by use of the VER. APL states on Exceptions that the only practical means of making the allocation is by use of the VER.
G.O. 11 contemplates the use of the VER to allocate A&G expense. We conclude that A&G expense is in the nature of overhead which cannot be associated with a particular trade, and that direct assignments are generally infeasible. Therefore, we have followed the practice of Nadel and Kolbe in this respect, as reflected in Appendix 6.
b. Interest Expense
In order to arrive at the Net Income subject to income tax, Interest Expense is included as one of the expenses subtracted from Trade Revenue. However, once the net income figure after provision for income taxes is derived, interest income is added to that figure.
Nadel does not dispute the method APL used to calculate interest expense. However, the changes Nadel made to APL's investment in vessels and other property and equipment are reflected in his calculation of interest expense (Appendix 7, Interest Expense for APL (Schedule B-IV)). In addition, Nadel alleges that, in its G.O. 11 reports, the figure APL added back to net interest and income was less than the full amount of interest which should have been added because APL used interest net of tax. Kolbe did not follow APL's G.O. 11 method of adding back interest net of taxes but followed Nadel's method of adding back the full amount (pre-tax) of interest expense to net income. We believe that this is the correct approach.
c. Depreciation and Amortization
Although the parties do not disagree as to the elements included in this category of expenses, their differences on other issues led to different results in their calculations of the amount of depreciation and amortization to be allocated to the Guam trade. Depreciation is allocated to the Guam trade based on two ratios: the FEU-mile and the VER. The changes made by Nadel to these ratios and the change he made to APL's investment in vessels and other property are reflected in his calculation of depreciation and amortization expense (App. 4, Income Account for APL). Our calculation of APL's Depreciation and Amortization Expense follows the methodology employed by the parties but reflects our own re-calculation of the FEU-mile relationship, the VER, and APL's investment in vessels, based on our determination of those issues above. The resulting amounts are reflected in Appendix 8, Depreciation for APL (Schedule B-IV).
d. Taxes
Nadel claimed that in 1990, APL calculated its taxes for G.O. 11 purposes using a tax rate of 43.34 percent. He maintained that the proper figure was 40 percent. Nadel also claimed that APL calculated total return on capital as income after taxes plus interest expense after tax. As discussed above, Nadel believes that G.O. 11 requires inclusion of total interest in the calculation of total return without a deduction for income tax on interest.
Although Kolbe started with different numbers, he, like Nadel, used the 40 percent tax rate in calculating APL's total return rather than the 43.34 percent figure used by APL in its 1990 G.O. 11 (App. 4, Income Account for APL), and added back the total amount of interest expense. While our calculations yield different numbers, we have followed the practice of Nadel and Kolbe with respect to the use of the 40 percent tax rate in our rate of return calculations.
e. Other Accounting Issues
APL contends that Nadel made various technical errors in his financial presentation which he failed to correct or explain. It is alleged that Nadel used the correct number of regulated FEUs in assigning revenues to the trade, but used a smaller figure in the ratios he used to allocate various categories of expense to the trade, such as vessel operating expense and certain terminal expenses. APL Proposed Findings at 652. APL maintains that this under-allocates these expenses to the trade. Nadel neither corrected the alleged error nor explained why he used two different figures.
APL also contends that Nadel erred in allocating CFS expenses on the basis of the ratio of Guam FEUs handled to the total FEUs handled at the CFS. APL Proposed Findings at 617. APL states that the Guam CFS data and the total CFS data were from two different sources and the Guam data failed to include all of the categories of CFS cargo that were included in the totals. APL alleges that this results in an under-allocation of expenses to the Guam trade. GovGuam did not respond to the criticism.
APL also alleges that Nadel erred in calculating the depreciation and investment for equipment with a clear connection to the Guam trade. APL Proposed Findings at 610. APL charges that he failed to include an allocation of the headquarters building for the year 1987, and that he failed to allocate the following assets: APL's offices in the United States that performed sales, booking, documentation, and similar activities in support of the Guam trade; APL's Manila and Hong Kong offices, which had oversight responsibilities for the Guam trade; container repair facilities that repair containers damaged in Guam; and the computer and navigational equipment that is physically located on the service vessels, but which was carried on APL's books separately.
These criticisms of Nadel's presentation appear to be well-grounded and were unrefuted in the record below. Accordingly, the Commission adopts the corrections proffered below by APL in Kolbe's testimony.
To summarize this section, the Commission rules that the record does not support the notion that application of G.O. 11 to this case would produce unfair or unreasonable results. The Commission has therefore determined to apply G.O. 11 allocation methodology to this case. As to that application, we have made the following determinations:
In the calculation of APL's rate base, we excluded leased assets, and used the average book value of assets employed in the Guam trade. In allocating investment between trades, we used the FEU-mile relationship. Alleged draft restrictions in Guam were not used to allocate additional costs to Guam. We adopted GovGuam witness Nadel's adjustment to APL's total cargo carried to account for containers not counted by APL. We determined to adjust the parties' calculation of net investment in other property and equipment to reflect the Commission's determinations as to the VER calculation. Finally, we found GovGuam witness Hahne's adjustments to Sea-Land's rate base to be appropriate.
As to Net Income and Interest Expense, our determinations follow:
Addressing Total Trade Revenue, we found GovGuam witness Hahne's adjustment to Sea-Land's 1989 G.O. 11 filing, in which he annualized Sea-Land's reported revenue and expenses, to be inappropriate, and instead we used adjustment to the benchmark rate of return.
Addressing Voyage Expense, we made the following determinations:
To allocate vessel operating expense, we used the FEU-mile relationship to allocate investment or expenses in the trade. We further ruled that Guam will not be singled out for special accounting treatment based on its location and its purported status as a "deviation" from the carriers' regular routes. Therefore, fuel costs attributable to the so-called "deviation" were not directly assigned to the Guam trade. Finally, the "capacity use days" allocation methodology was not employed to allocate common fuel expenses. To determine Cargo Handling Expense, we found that because APL's mini-land bridge service was conducted pursuant to a joint-through arrangement with inland carriers, the inland carrier's division of revenues would not be treated as an expense to APL. Furthermore, cargo barge container expense was included as a part of the voyage expense; GovGuam witness Nadel's reliance on MarAd regulations to argue otherwise is misplaced. As to the allocation of cargo handling expense, we ruled that the "more direct ratios" advocated by APL have not been shown to be necessary to achieve a fair and reasonable result. Therefore, G.O. 11 methodology (VER) was used to allocate cargo handling expenses. The FMC approved APL's allocation of Container Freight Station Expenses, GovGuam's criticisms notwithstanding. Further, we accepted APL's assignment of expenses incurred in the rail transportation of cargo from the Pacific Northwest to Oakland. However, we found that it is appropriate to allocate the repositioning of empty containers to the Guam trade under the FEU-mile relationship rather than assigning the entire cost to the Guam trade.
Addressing Administrative and General Expense, we ruled that APL's inclusion of agency fees in A&G is correct. As to the allocation of A&G, we found that direct assignment of A&G expenses is generally infeasible, and determined therefore to use the VER to allocate such expenses.
Addressing Interest Expense, we found that adding back the full amount (pre-tax) of interest expense to net income is the correct approach.
Addressing depreciation and amortization, we followed the parties' proffered methodology, but we adjusted the calculation to reflect our re-calculation of the FEU-mile relationship, the VER, and APL's investment in vessels.
Similarly, we followed the parties' methodologies as to the treatment of taxes; our calculations, however, produced different numbers.
Finally, we determined to adopt APL's corrections as to several other accounting issues, as set forth in the discussion.
This concludes our analysis of the various elements making up the rate of return fraction. Our calculation of Respondents' rates of return based on our disposition of the issues is contained in Appendix 9, Rate of Return for APL, Rate of Return for Sea-Land. We now turn to the standard to be applied to judge the reasonableness of Respondents' rates of return thus arrived at, and the application of that standard.
G. The Reasonableness of Respondents' Rates
1. Test of Reasonableness
The return on rate base established in G.O. 11 as the "primary standard" for evaluating rate reasonableness utilizes the "comparable earnings test". 6 C.F.R. § 552.1(b) (1994). This is a comparative analysis of the carrier's rate of return on rate base with the rate of return on total capital earned by comparable U.S. corporations, based on an analysis of the earnings of U.S. corporations over "an extended period of time". 46 C.F.R. § 552.6(d)(2)(ii) (1994). The comparable earnings test is designed to allow a carrier in a regulated trade to earn an amount comparable to that of the typical firm. This is the test of overall rate reasonableness applied by the Commission in domestic offshore rate proceedings up to 1995, i.e., prior to the Commission's rulemaking in Docket No. 94-07, Financial Reporting Requirements and Rate of Return Methodology in the Domestic Offshore Trades, 27 S.R.R. 292 (1995). For example, in Docket No. 90-09, a case instituted during the period in question in this proceeding, the Commission used this test to determine the reasonableness of rates filed by Matson.
The ALJ determined that the "return on rate base" standard and associated "comparable earnings test" should not be applied to Guam because it was inferior to alternative tests suggested by Respondents. I.D. at 24 - 40. The ALJ did not specifically conclude that the return on rate base test would yield unfair or unreasonable results in this proceeding. Instead, he stated that "there is no established 'standard methodology' for applying G.O. 11 to Guam," I.D., App. C at 1, relying on the opening statement in section 552.1(b) that the "methodology employed in each case will depend on the nature of the relevant carrier's operations and financial structure," combined with the section's proviso that the Commission might "also employ other financial methodologies in order to achieve a fair and reasonable result." The ALJ did not refer to the intervening language of § 552.1(b) that the "return on rate base" would be the Commission's "primary standard" for evaluating reasonableness. He thereafter found that the alternative tests for reasonableness proffered by Respondents ("incremental costs," including opportunity costs and "objective evidence") were superior tests, under which GovGuam had failed to meet its burden of proving Respondents' rates unreasonable.
We find that, as with his ruling on cost allocation methodology, the ALJ's reading of G.O. 11 unfairly burdened Complainants with justification of the G.O. 11 primary standard. We further examine the issue of the standard to be applied in this case and the ultimate issue of the reasonableness of Respondents' rates in terms of the arguments and evidence presented by the parties below.
a. GovGuam
GovGuam's case below included its application of the comparable earnings test to the rates of return for Respondents which it reached in its analysis, based on G.O. 11. Again, GovGuam's case turned largely on the testimony of Nadel. The source data used by Nadel on behalf of GovGuam to calculate the benchmark rate of return were the U.S. Department of Commerce, Bureau of Census, Quarterly Financial Report and Moody's Industrial Manual. The Census publication provides the total for all manufacturing corporations' net income after tax, long term debt, and stockholders equity. The "extended period of time" selected by Nadel was seven years, the period used in other Commission rate cases. Moody's provides the average yield on Baa rated bonds. Combining this information yields the return on total capital employed, using the following formula: Return on Total Capital = (Net Income (after tax) + Interest on Long Term Debt)/Stockholders Equity + Long Term Debt.
The rate of return was calculated for each of the seven years. Then, a seven year moving average was calculated to determine the allowable rate of return, or "benchmark", for 1988, 1989 and 1990. G.O. 11 provided that the benchmark return on total capital could be adjusted for relative risk of the trade at issue, trends in the cost of money (interest rates), and trends in the average rate of return. 46 C.F.R. § 552.6(d)(2)(ii) (1994). In this case, the period in question is in the past, so Nadel did not make adjustments for trends in the cost of money and rates of return.
Nadel did make a downward adjustment for relative risk, of 1.25 percent. Nadel cited as his reason for this adjustment that the Commission made a similar adjustment in a Hawaiian rate case in 1990. Nadel states that the Hawaiian and Guam trades are sufficiently similar that following the Commission's decision in the Hawaiian case is reasonable. From the above, Nadel concludes that APL's adjusted allowable rate of return is 9.81 percent in 1988, 10.35 percent in 1989, and 10.48 percent in 1990. Based on this analysis, Nadel determined that Respondents earned excess revenue in 1988, 1989, and 1990.
b. Respondents
APL urged the ALJ not to apply the comparable earnings test in this proceeding. Although APL recognized that the Commission had used the comparable earnings test up to 1995, including the period during which the rates at issue in this proceeding were collected, it argued that the comparable earnings test should not be applied here because it is inferior to the weighted average cost of capital test adopted by the Commission in 1995. APL Proposed Findings at 673-78.
In APL's case below, Kolbe did not use the comparable earnings approach in his analysis of the allowable rate of return. Kolbe states that the benchmark rate of return should equal a carrier's cost of capital. He states that the cost of capital is an economic concept that corresponds to the U.S. Supreme Court's description of the standard that ought to apply to the returns allowed to firms whose prices are subject to government regulation. Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944). Kolbe claimed that the standard comparable earnings method is an unreliable way of estimating the cost of capital, and therefore is unreliable in determining the allowable rate of return. Kolbe claimed that, because the comparable earnings approach calculates the cost of capital as the average earned book rate of return on a sample of comparable-risk companies, it is not a good measure of the appropriate allowable rate of return. The most fundamental problem with the comparable earnings approach, according to Kolbe, is that the cost of capital is a market-based concept and the comparable earnings approach is based on book values. Kolbe claims that economics literature on this topic shows that average accounting (book value) rates of return are not good estimates of the actual rate of return. Thus, Kolbe concludes that the comparable earnings approach is an unreliable way to estimate the cost of capital.
Kolbe uses the risk positioning approach to estimate the carrier's cost of capital. The risk positioning method estimates the cost of capital as the sum of a current interest rate and a risk premium. Kolbe calculated three risk positioning analyses. All three analyses involve two basic steps which determine the market risk premium investors expect for the period 1988-1990. The third step, which varies among the three analyses, is to include a measure of the relative risk of sample companies which operate in the maritime industry.
In his first step, Kolbe determined the risk premium of stocks over the risk-free rate to be 8.5 percent. Kolbe's second step was to determine the interest rate forecast, which measures the risk free rate, at 7.3 percent in 1988, 8.1 percent in 1989, and 7.5 percent in 1990. The last step, determining the risk specific to the maritime industry, has three variations. For the first two variations, Kolbe chose the following companies to determine industry risk: Alexander Baldwin, American President Companies, OMI Corporation, Overseas Shipholding, CSX Corporation, and Sea Containers, Ltd. He calculated a weighted average cost of capital on all the companies and then averaged the results. In the first variation, Kolbe measured the pre-tax cost of capital. In the second variation he calculated the after-tax cost of capital. In the third variation, Kolbe first calculated a small stock premium and then measured the sensitivity of the marine transportation companies to the small stock effect. All three variations are sorted into results for pre-tax and after-tax groups and averaged.
Kolbe finds the carriers' weighted average cost of capital, which he uses as his allowable rate of return, to be 13.6 percent in 1988, 14.4 percent in 1989, and 12.5 percent in 1990.
APL also contended below that Nadel's conclusion that the Guam and Hawaii trades are sufficiently similar so as to require the same downward adjustment of the benchmark rate of return is not supported by evidence of record. APL Proposed Findings at 679 - 82. It points out that Guam enjoys a partial exemption from the Jones Act which allows foreign-built U.S.-flagged vessels to serve the trade. This, it is said, greatly increases the number of vessels that are eligible to serve the trade. In addition, APL alleges that Guam, unlike Hawaii, is not subject to section 805(a) of the Merchant Marine Act of 1936. 46 U.S.C. app. § 1223(a). This allows subsidized carriers such as APL to serve the Guam trade. APL also contends that competition from foreign carriers operating from the Far East is greater in the Guam trade than in the Hawaii trade. Finally, APL believes that the Guam trade is more unstable than the Hawaii trade.
c. Disposition
APL points to a number of weaknesses in the comparable earnings test. These weaknesses were recognized by the Commission in its Notice of Proposed Rulemaking in Docket No. 94-07, 59 Fed. Reg. 16592 (proposed Apr. 7, 1994). Nevertheless, the comparable earnings test withstood challenge as recently as 1992 and its constitutionality cannot be seriously questioned. Matson Navigation Company, Inc. v. Federal Maritime Comm'n, 959 F. 2d 1039 (D.C. Cir. 1992). The court therein affirmed the Commission's determination that the comparable earnings test
fulfills the basic requirements of [Bluefield Waterworks and Improv. Co. v. Public Serv. Comm'n, 262 U.S. 679 (1923)] and [Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944)] in that Matson will be allowed to earn a return on rate base equal to that generally being made on investments in other enterprises having corresponding risks and which also generates enough revenue to allow it to maintain its credit and attract capital.
Docket No. 90-09, aff'd, 959 F. 2d at 1052. Moreover, we believe it appropriate and fair to apply the standard which was in effect as part of G.O. 11 when the rates at issue were assessed and collected and the complaint in this proceeding was filed.
While APL may have demonstrated that its methodology, which is generally consistent with that adopted by the Commission in Docket No. 94-07, is superior to the comparable earnings test using the carrier's return on rate base, it has not shown that use of its methodology is necessary to achieve a fair and reasonable result. 46 C.F.R. § 552.1(d) (1994). Accordingly, the Commission will use the comparable earnings test for purposes of this case. The results of the Commission's calculation of the comparison of the carriers' rates of return with the benchmark rate are reflected in Appendix 10, APL's Excess Return Earned in the Guam Trade, and Sea-Land's Excess Return Earned in the Guam Trade.
Nadel's calculation of the unadjusted benchmark rate of return generally follows the G.O. 11 methodology used in rate cases involving Matson, which we find appropriate. However, his adjustment for risk requires scrutiny. Nadel simply adopted the 1.25 percent downward adjustment for risk which the Commission used in Docket No. 90-09, involving Matson's service in the Hawaii trade. He defended the adjustment on the grounds that competitive conditions were the same in the Hawaii and Guam trades. This conclusion has little or no support in the record. He seems to have adopted the 1.25 percent adjustment used in Docket No. 90-09 to avoid having to make a detailed assessment of the competitive conditions in the Guam trade. As a result, GovGuam has not carried the burden of proof on the risk adjustment issue. Accordingly, no adjustment to the benchmark rate of return will be made on account of risk.
Because no adjustments were made to the benchmark rates of return that are peculiar to APL, the same figures can be used to determine the reasonableness of Sea-Land's rates of return. In the case of Sea-Land, the benchmark for 1989 must be reduced by half to account for the fact that Sea-Land only operated in the FMC-regulated trade during the first six months. App. 10.
2. Conclusions Regarding Rates of Return
The Commission finds that the rates of return earned by APL in the FMC-regulated Guam trade during the years 1988, 1989, and 1990 as shown in Appendix 9, Rate of Return for APL, exceeded the allowable (benchmark) rates of return by the amounts shown in Appendix 10, APL's Excess Return Earned in the Guam Trade. The Commission also finds that the rates of return earned by Sea-Land in the FMC-regulated Guam trade during 1988 and the first six months of 1989 as shown in Appendix 9, Rate of Return for Sea-Land, exceeded the allowable rates of return shown in Appendix 10, Sea-Land's Excess Return Earned in the Guam Trade. Based on these findings, the proceeding is remanded to the ALJ for further proceedings to determine the amount of reparations which may be awarded to Complainants herein, consistent with our findings above as to the form of remedy available under section 22 of the 1916 Act.
F. Individual Rates(44)
In 1989, the Guam Rate Agreement, on behalf of its members APL and Sea-Land, filed a 10 percent increase applicable to eighteen specific commodity rates. GovGuam contends that this increase was unreasonable.(45) The crux of its argument is as follows:
Under the facts established in this case, the Guam trade is characterized by revenue abundance, not revenue inadequacy. This negates the need for any rate increase on any commodity, even those commodities at the lower end of the tariff structure. [Footnote omitted.]
Complainant's Post-Trial Memorandum on Rate of Return Issues, at 239. GovGuam argues that APL's average ocean freight rates for these commodities equaled or exceeded the average allowable cost for each year at issue.
The ALJ declined to find that any of the eighteen commodity rates were unreasonable because GovGuam's case was based solely on its G.O. 11 analysis of APL's overall rates. He found that the economic concepts and cost accounting methods necessary to a rate of return analysis of overall rate structure were not appropriate to an analysis of individual commodity rate reasonableness. I.D. at 48 - 50, App. C at 105 - 107.
APL contends that GovGuam is attempting to apply a rate of return standard to individual commodity rates. APL Reply to Exceptions at 306 - 309. It states that the criteria for evaluating the reasonableness of a carrier's overall rate of return are quite different from the criteria used for assessing the reasonableness of an individual commodity rate. APL argues that carriers take a number of factors into consideration in establishing individual rates. APL identifies the following: general economic conditions in the trade; market and competitive forces in the trade; physical and economic characteristics of the product involved, including its value; the volume moved; commodity-specific expenses; the relationship of the commodity rate to other rates in the tariff; and the sensitivity of the volume shipped to the rates. APL Reply to Exceptions at 308.
The ALJ and APL are correct. The increase of eighteen commodity rates (1) changed the relationship of rates in the tariff of the Guam Rate Agreement, and (2) increased the revenue to the member lines. The rate of return analysis in this case addresses APL's overall rate of return but it does not address the relationship of individual rates in the Guam Rate Agreement tariff. If APL's revenues are found to produce an excessive rate of return, each commodity rate in the tariff would be excessive by the same percentage. In other words, the eighteen commodity rates would be excessive by the same percentage as every other commodity rate in the tariff. Likewise, any reparations would be borne equally by each commodity rate including the eighteen commodity rates in question. The relationship of the eighteen commodity rates to the other rates in the tariff would remain unchanged. In sum, under a rate of return analysis, the eighteen commodity rates are no less reasonable than any other rate in the Guam Rate Agreement tariff. Because we reject GovGuam's legal theory that a rate of return analysis can be used to determine the reasonableness of individual commodity rates, it is unnecessary for us to reach the various contentions advanced by the parties regarding the appropriate accounting methodology to determine the costs attributable to the carriage of the eighteen commodities.(46)
CONCLUSION For the reasons set forth above, the Commission holds that Respondents' rates have been shown to be unreasonable for the years indicated. The Commission has further decided to remand the proceeding to the ALJ for a determination of the reparations due Complainants, and to quantify the number of Sea-Land containers subject to the Commission's jurisdiction, as explained above.
Any Exceptions not specifically addressed herein were fully considered by the Commission and are denied.
THEREFORE, IT IS ORDERED, That the Complainants' Exceptions to the Initial Decision are granted consistent with the above discussion of specific issues, and denied in all other respects;
IT IS FURTHER ORDERED, That the Respondents' Protective Exceptions to the Initial Decision are denied;
IT IS FURTHER ORDERED, That the proceeding is remanded to the Administrative Law Judge for a determination of the reparations due Complainants;
IT IS FURTHER ORDERED, That the proceeding is also remanded to the Administrative Law Judge to quantify the number of Sea-Land containers subject to the Commission's jurisdiction and as to which reparations may be awarded to Complainants;
IT IS FURTHER ORDERED, That the Petition requesting substitution of MTMC for MSC as an intervenor in this proceeding is granted;
IT IS FURTHER ORDERED, That Sea-Land's Motion objecting to the Commission's determination to request the work papers related to the parties' calculation of Cargo Handling Expense is denied;
FINALLY, IT IS ORDERED, That in accordance with Rule 61 of the Commission's Rules of Practice and Procedure, the Initial Decision on remand of the Administrative Law Judge shall be issued by December 4, 1998 and the final decision of the Commission shall be issued by April 5, 1999.
By the Commission.
Joseph C. Polking
Secretary
ENDNOTES
1. APL and Sea-Land will be collectively referred to as "Respondents" except where there is reason to differentiate.
2. All the relevant statutory provisions from the 1916 and 1933 Acts were repealed, effective September 30, 1996, by the Interstate Commerce Commission Termination Act, Pub. L. No. 104-88, 109 Stat. 803 (1995).
3. APL and Sea-Land were parties to the Guam Rate Agreement tariff, FMC-F No. 2. Sea-Land also had a tariff covering the Hawaii - Guam trade, FMC-F No. 64. Sea-Land withdrew from the Guam Rate Agreement tariff and canceled its Hawaii - Guam tariff on June 22, 1989. After that date it had no FMC tariffs covering the Guam trade. Shortly afterwards, APL also terminated its participation in the Guam Rate Agreement tariff but substituted an individual tariff, FMC-F No. 19.
4. The proceeding was originally assigned to ALJ Joseph Ingolia. Subsequently it was reassigned to ALJ Frederick M. Dolan.
5. By Petition served February 18, 1998, MSC and Military Traffic Management Command ("MTMC") jointly requested that the Commission substitute MTMC for MSC as an intervenor on the grounds that the responsibility for the Department of Defense's participation in this litigation had been transferred from MSC to MTMC. No party objected. Accordingly, MTMC is hereby substituted for MSC as an intervenor in this proceeding.
6. For the sake of convenience, the Complainants will be referred to collectively as "GovGuam" except where there is need to differentiate. Furthermore, we note that Tucor Services, Inc. later withdrew as a complainant, and its claims were dismissed with prejudice. See ALJ Order, March 24, 1992.
7. Two years after the ALJ's ruling, GovGuam filed an action in the U.S. District Court for the District of Columbia on behalf of the unnamed Guam shippers for the purpose of tolling the two-year statute of limitations contained in section 22(a) of the 1916 Act, 46 U.S.C. app. § 821(a) (amended 1984). The court dismissed the action on the grounds that there is no implied right of action under the 1916 Act or the 1933 Act for a shipper to challenge a carrier's rates in a district court. The Government of Guam v. American President Lines, Ltd., 809 F. Supp. 150 (D.D.C. 1993), aff'd, 28 F.3d 142 (D.C. Cir. 1994).
8. See Appendix A to the Initial Decision ("I.D.") for a thumbnail sketch of the witnesses presented by the parties.
9. The Commission's regulations governing financial reports of vessel operating common carriers by water in the domestic offshore trades (e.g., U.S. - Guam) were originally designated as Commission General Order 11. Although this designation is no longer official, Part 552 of 46 C.F.R. was generally referred to as "G.O. 11" by the industry and the Commission.
10. Most of the parties' and the ALJ's discussion of rates focused on APL's rates, although Sea-Land concurred in APL's arguments concerning cost allocation methodology. The Respondents' expert witness was sponsored by Sea-Land as well as APL.
11. The Initial Decision appears at 27 S.R.R. 553 (1996).
12. Respondents filed several earlier motions to dismiss, which were denied in most respects. See I.D. at 3 - 4, App. B at 1 - 4.
13. The FEU-mile relationship means the ratio of the FEU miles in the trade to the total FEU miles in the service. FEU miles are calculated by multiplying the number of forty-foot equivalent units (a standard 8'x 8'x 40' container) by the mileage between ports. 46 C.F.R. § 552.5(m).
14. These "more direct ratios" involve adjustment of the calculation of voyage expense to include increased costs which APL maintains are disproportionately caused by the Guam trade.
15. The Voyage Expense Relationship ("VER") means the ratio of total Trade Voyage Expense to total Company Voyage Expense.
16. The specific legal arguments made in the various Exceptions and Replies appear throughout the Discussion portion of this Order.
17. Intervenor MSC also filed Exceptions to the Initial Decision. These Exceptions alleged: (1) that the ALJ erred in failing to find that the FMC had jurisdiction over Sea-Land's services in the West Coast - Guam, and Hawaii - Guam trades; (2) that the ALJ erred in failing to find that Respondents had established unjust and unreasonable rates in the Guam trade; and (3) that the ALJ erred in failing to provide an adequate remedy to the shippers charged unjust and unreasonable rates. MSC indicated that it was in "general agreement with the substance of GovGuam's position on virtually every issue," and determined not to file detailed arguments repeating those made in GovGuam's Exceptions. See MSC Exceptions at 2. The Commission will therefore refer only to GovGuam's Exceptions in this Order, bearing in mind that those Exceptions are supported by MSC.
18. Protective Order, April 20, 1990. See also Stipulations Regarding the Declassification of the Evidentiary Record in FMC Docket No. 89-26, March 31, 1994; Approval of Stipulations Pertaining to the Declassification of the Evidentiary Record, July 20, 1994; Denial of GovGuam's Declassification Motion, August 31, 1994; Denial of GovGuam's Renewed Declassification Motion, April 10, 1996.
19. The Commission's Rules of Practice and Procedure provide, at Rule 201(i)(1)(vii), 46 C.F.R. § 502.201(i)(1)(vii), that
Upon motion by a party or by the person from whom discovery is sought, and for good cause shown, the presiding officer may make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense including . . . * * * That a trade secret or other confidential research, development or commercial information not be disclosed or be disclosed only in a designated way.
20. Rule 119, 46 C.F.R. 502.119(c) provides, inter alia, that:
all filings which contain information previously designated as confidential pursuant to §§ 502.167, 502.201(i)(1)(vii), or any other rules of this part . . . are subject to the following requirements: * * *(c) confidential treatment afforded by this section is subject to the proviso that any information designated as confidential may be used by the administrative law judge or the Commission if deemed necessary to a correct decision in the proceeding.
21. The issues in this section of the Order relate to GovGuam Exception #2 and Respondents' Replies thereto.
22. Joint-through transportation involves a joint holding out to the shipping public by the ocean carrier and the inland carrier.
23. In determining the measure of damages for failure to file a tariff, parties should be guided by prior Commission cases involving unfiled rates, including First Int'l Dev. Corp. v. Ship's Overseas Services, Inc., 23 F.M.C. 47 (1980), rev'd on other grounds sub nom. Ship's Overseas Services, Inc. v. Federal Maritime Comm'n, 670 F.2d 304 (D.C. Cir. 1981). During the oral argument, the attorney for GovGuam suggested that the Commission should remand the proceeding to permit GovGuam to make a rate of return analysis of the port-to-port containers moved by Sea-Land after it withdrew from the Guam Rate Agreement. Given the relatively limited number of port-to-port containers moved by Sea-Land after it withdrew from the Guam Rate Agreement, we believe that a rate of return analysis would be inappropriate.
24. Compare Military Sealift Command v. Sea-Land Service, Inc., 27 S.R.R. 874, 889 (1996), aff'd sub nom. Sea-Land Service, Inc. v. Federal Maritime Comm'n, 137 F.3d 640 (D.C. Cir. 1998).
25. As discussed previously, in determining the measure of damages, parties should be guided by prior Commission cases involving unfiled rates.
26. This section addresses Respondents' Protective Exceptions and GovGuam's Reply, as well as GovGuam Exception #6 and Respondents' Replies thereto.
27. S. Rep. 1240, 95th Cong., 2d Sess. 14, 18 (1978); H.R. Rep. No. 474, 95th Cong., 1st Sess. 8-9 (1977).
28. The remedy in Bebchick v. Public Utilities Comm'n, 318 F. 2d 187 (D.C. Cir.), cert. denied, 373 U.S. 913 (1963) cited by GovGuam, has been applied in cases where the shipper was left with no remedy at law. That is not the case here: shippers could have filed individual complaints or joined GovGuam's complaint within the period provided by the 1916 Act. See The Government of Guam v. American President Lines, Ltd., 809 F. Supp. 150, 155 (D.D.C. 1993), aff'd 28 F.3d 142 (D.C. Cir. 1994)("potential class members do have an effective remedy").
29. This section addresses GovGuam Exception #4 and Respondents' Replies thereto.
30. "GovGuam did not justify or explain on any principled basis the reasonableness of G.O. 11's generic allocation methodologies for analyzing APL's Guam service which is a principal issue in this proceeding." I.D. at 19.
31. "APL . . . included an explanation of the inherent arbitrariness of [fully distributed cost] in general, and a demonstration of its potential to produce distorting results when utilized in a context with the characteristics of the Guam trade." I.D. at 14 - 15.
32. This section addresses GovGuam Exception #3 and the Respondents' Replies thereto.
33. We note that the order in which we have dealt with these "alternative methodologies" may appear to be somewhat random, as they relate to the issue of the ultimate standard of reasonableness to be applied to Respondents' rates, discussed later in this Order. However, these issues, characterized as issues of "methodology," are dealt with by the parties and the ALJ in connection with their discussion of G.O. 11's applicability to Guam generally and permeate their rate analyses. We have followed the order of treatment in the Initial Decision and the parties' filings on Exceptions. See, however, our further discussion of the rate of return standard at 119 - 120.
34. 34Sea-Land's Reply to Exceptions does not address this issue.
35. Former section 18(b)(5), 46 U.S.C. 817(b)(5)(1982), provided that:
The Commission shall disapprove any rate or charge filed by a common carrier by water in the foreign commerce of the United States or conference of carriers which, after hearing, it finds to be so unreasonably high or low as to be detrimental to the commerce of the United States.
36. This section addresses GovGuam Exception #3 and Respondents' Replies thereto.
37. References to "schedules" are to the various forms required by G.O. 11. See 46 C.F.R. § 552.6, "Forms".
38. 38 The G.O. 11 reports filed by APL for the years in question used the FEU-mile ratio to make this allocation. The FEU-mile ratio is defined as the ratio of "cargo-cube (FEU) miles for all cargo carried in the trade to total cargo-cube (FEU) miles for all cargo carried in the service." 46 C.F.R. § 552.5(n). "Cargo cube miles means the product of the cargo cube carried between each origin and destination multiplied by the number of nautical miles representing the shortest navigable distance between the two ports." 46 C.F.R. § 552.5(m).
39. The Voyage Expense Relationship is the ratio of total Trade Voyage Expense to total Company Voyage Expense. 46 C.F.R. § 552.5(p) (1994).
40. Appendices 1, Rate Base for APL and 3, Investment in Other Property and Equipment (Schedule A-IV) for APL.
41. Black's Law Dictionary defines "deviation" generally as "[a] voluntary departure by railroad carrier, without necessity or reasonable cause, from the regular or usual route or from a stipulated or customary mode of carriage" and as "[a] voluntary, unnecessary or unexcused departure without reasonable cause from the course of the voyage insured, . . . or the commencement of an entirely different voyage." Black's Law Dictionary (5th ed. 1979) at 406.
42. Furthermore, under the terms of its own argument, Sea-Land failed to timely file its Motion asking the Commission to rescind the January 21, 1998 Order. As stated in Sea-Land's Motion, a reply resisting a "Motion to Reopen" is required to be filed within ten days, pursuant to 46 C.F.R. § 502.230(b). See Sea-Land's Motion at 6. Sea-Land's Motion was filed on February 10, 1998.
43. However, as discussed previously, Nadel's calculation of the VER is lower than APL's, resulting in a lower allocation of A&G expenses to the Guam trade by Nadel.
44. This section addresses GovGuam Exception #5 and Respondents' Replies thereto.
45. GovGuam did not except to the ALJ's finding that Respondents' tariff provision regarding household goods did not violate section 16, First of the 1916 Act. I.D. at 50 - 52. The Initial Decision is adopted with respect to this issue.
46. In rejecting a rate of return analysis as an appropriate standard to evaluate the reasonableness of the eighteen rates, the Commission does not wish to imply that GovGuam could not have challenged these rates. However, any challenge of individual commodity rates must focus on the rate making factors traditionally considered in fixing such rates.