Federal Maritime Commission, dated May 16 and June 1, 1966.... Comptroller General of the United States, dated June 23, 1966.. Post Office Department dated July 26, 1966 - Gulick, James W., Deputy Maritime Administrator, Maritime Ad- ministration, Department of Commerce, Washington, D.C.; accom- panied by Carl Davis, General Counsel; and Carl L. Weir, Office of Harllee, Rear Adm. John, U.S. Navy (retired), Chairman, Federal Safir, Marshall P., chairman, Sapphire Steamship Lines, Inc., 375 Park Walsh, Cornelius, chairman, Waterman Steamship Corp., 19 Rector St., New York, N. Y.; accompanied by Joseph T. Lykes, Jr., vice chairman, Lykes Bros. Steamship Co., Post Office Box 53068, New Orleans, La.; William B. Rand, president, United States Lines Co., 1 Broadway, New York, N. Y.; Robert G. Stone, president, States Marine Lines, 90 Broad Street, New York, N. Y.; Edwin A. Wester, vice president, Pacific Far East Lines, 141 Battery Street, San Francisco, Calif.; and Warner W. Gardner, counsel, Shea & Gardner, 734 15th Street NW., Washington, D.C.. Miscellaneous information submitted: Dewey, Ralph B., president, Pacific American Steamship Association, 635 Sacramento Street, San Francisco, Calif., letter dated May 26, Excerpt from the hearings before House Committee on Appropriations, Haddock, Hoyt S., executive secretary, AFL-CIO Maritime Com- mittee, 100 Indiana Avenue NW., Washington, D.C., letter dated Hall, Paul, president, Seafarers International Union of North America, Letter from Alan S. Boyd, formerly Chairman, Civil Aeronautics Board, Washington, D.C., addressed to Lawrence E. Hartwig, Chairman, Renegotiation Board, Washington, D.C., dated February OCEAN FREIGHT RATES ON MILITARY CARGOES MONDAY, MAY 9, 1966 U.S. SENATE, COMMITTEE ON COMMERCE, SUBCOMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met at 10:10 a.m., in room 5110, New Senate Office Building, the Honorable Daniel B. Brewster presiding. Senator BREWSTER. The subcommittee will come to order. The purpose of the hearing today is the consideration of S. 3297, a bill to authorize the carriage of military cargoes by U.S.-flag vessels at reduced rates which are fair and reasonable, introduced by the chairman of this committee, Senator Magnuson, and by me. (The bill follows:) [S. 3297, 89th Cong., 2d sess.] A BILL To authorize the carriage of military cargoes by United States-flag vessels at reduced rates which are fair and reasonable Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Shipping Act, 1916, is amended by redesignating section 45 as section 46 and by inserting before such section a new section as follows: "SEC. 45. (a) Any carrier or group of carriers subject to this Act may notwithstanding any other provision of this Act negotiate shipping contracts for the carriage of Department of Defense cargoes, in foreign or domestic commerce, at rates less than those prescribed in their commercial tariffs, under the procedures provided in this section. "(b) The Secretary of Defense may negotiate such contracts as provided in subsection (a) of this section for the ocean transport of goods in foreign or domestic commerce, in vessels of United States registry, with any common carrier or appropriate group of common carriers acting under authority of an agreement approved under section 15 of this Act. "(c) The rates and charges for the ocean transport of Department of Defense cargoes shall be fair and reasonable and the rates and charges provided in any contract made under subsection (b) hereof shall not exceed those charged in the aggregate for the transport of similar classes of cargoes for private persons. "(d) The Secretary of Defense and any carrier or group of carriers with which he contracts pursuant to this section shall endeavor to reach agreement upon the rate or rates which shall comply with the requirements of subsection (c) hereof. The Secretary shall have authority to require, for Government use only and not more frequently than annually, the submission by the contracting carrier or group of carriers of such data relating to costs and profits as he may reasonably require. "(e) If the Secretary of Defense and any carrier or group of carriers cannot reach agreement upon the rate or rates which shall comply with the requirements of subsection (c) hereof, either party may petition the Federal Maritime Commission to determine under the principles followed for domestic offshore ocean rate regulation what may be a fair and reasonable rate or rates. Such rate shall be determined with due regard to the level of commercial tariff rates in the trade. The carrier or carriers, pending such determination by the ComStaff counsel assigned to this hearing: William C. Foster. mission, shall charge the rate or rates last in effect subject to an obligation by both parties to adjust their accounts retroactive to the date of the petition to reflect the rate ultimately determined. "(f) In procuring transportation under this section, the Secretary of Defense, in support of the national policy to promote a strong United States merchant marine, shall employ to the maximum practicable extent United States-flag common carrier operators, and shall utilize an equitable system for allocation of cargo among such operators in proportion to their respective services." (The agency comments follow :) FEDERAL MARITIME COMMISSION, May 16, 1966. Hon. WARREN G. MAGNUSON, Chairman, Committee on Commerce, DEAR MR. CHAIRMAN: In reference to your request of May 4, 1966, for the views of the Federal Maritime Commisison with respect to S. 3297, a bill "To authorize the carriage of military cargoes by United States-flag vessels at reduced rates which are fair and reasonable," I am enclosing a copy of my testimony on the proposed bill given before your Committee on May 9, 1966. In addition, at the request of Senator Brewster, which he made during the course of my testimony, we will be forwarding comments and suggested language for amendment of the proposed bill. Sincerely yours, JOHN HARLLEE, Rear Admiral, U.S. Navy (Retired), Chairman. FEDERAL MARITIME COMMISSION, OFFICE OF THE CHAIRMAN, Washington, D.C., June 1, 1966. Hon. DANIEL B. BREWSTER, Chairman, Subcommittee on Merchant Marine and Fisheries, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: Pursuant to your request we are enclosing herewith with the unanimous concurrence of the Federal Maritime Commission, copies of proposed revisions or additions to S. 3297, incorporating certain answers to questions which I had raised during the course of my testimony concerning the proposed legislation. In addition, the enclosed proposed revisions cover additional matters. Although my testimony raised the question of whether or not the decisions of the Federal Martime Commission under section 45 (e) would be subject to court review the enclosure does not comment thereon. We believe, however, that decisions would be subject to court review as are other orders of the Commission. We would also point out that while in most instances involving disputes under government contracts the Armed Services Board of Contract Appeals is the forum to which the parties first address themselves for redress, under this legislation it would be the Federal Martime Commission on issues involving lawful rates or practices. Consideration was given to inclusion of a provision clarifying that the provisions of section 6 of the Intercoastal Shipping Act, 1933, not be rescinded as a result of this proposed legislation. While it is our belief that nothing in the Act would conflict with section 6 of the Intercoastal Shipping Act, 1933, the Congress may desire, in order to eliminate any doubt, to include the following language, "Nothing in this section shall prevent the carriage, storage, or handling of Department of Defense cargoes at free or reduced rates, when otherwise permitted by law." In our testimony presented on May 9, we raised the question of treatment of subsidies in determining the fair and reasonable rate under section 45(e). We have not determined the effect of subsidy payments to carriers of military cargo space and our files do not include materials which would be necessary to arrive at such a determination. Nevertheless this committee has asked for views on the subject and we, therefore, will make our recommendation in accordance with our understanding of the effect of subsidy on the expense and profit position of American flag carriers who transport military cargoes. Construction differential subsidy may amount to as much as 55 percent of the cost of constructing an American flag vessel. We think that the construction differential subsidy clearly should not be included in the carrier's rate base. The rate base normally consists of funds which are invested by the carrier itself in the operating capital equipment. We know of no reason which would support allowing a rate of return on the part of the rate base supplied by the government. Logically it would be unthinkable for the government to pay a percentage of the cost of the ship and then pay rates which allow a rate of return not only on the percentage of the vessel cost borne by the operator but also the percentage contributed by the United States. Thus, it seems clear that the rate base of the carrier should not include construction funds contributed by the government. The problem is not so easily answered concerning treatment of operating subsidy in calcuating the carrier's net profit. Three alternatives would be to (1) deduct operating differential subsidy allocable to military cargo from the expenses attributable to military cargo, (2) treat operating differential subsidy allocable to military cargo as military cargo revenue, or (3) give no effect to operating subsidy in which case the fair and reasonable military rate would be based on the total expenses of running the ship including the portion contributed by the government in the form of operating differential subsidy. We favor the first alternative for the following reasons: (1) the rate of return should be based only on expenses actually accruing to the operator. The portion of the expense covered by subsidy is paid by the government, of course, and not the operator, and hence a rate based on total expenses of the vessel would result in a windfall to a subsidized operator, and (2) rates based upon total expenses (including those covered by operating differential subsidy) would result in rates higher than a reasonable rate of return for the efficient operator or would tend to promote inefficiency on the part of subsidized operators. It should be recognized that the subsidized operator gives up certain operating flexibility in return for receipt of subsidy. He must serve the range of ports specified in the subsidy contract even though it might be more efficient to cover only the ports at which a large volume of profitable cargo is tendered. Thus, it is likely that to a certain extent the unsubsidized operator is free to operate more efficiently and have a lower cost per ton on military cargo than the subsidized operator. It might be that this should be recognized in setting a fair and reasonable rate of return, but at this time the Federal Maritime Commission has no facts on which to base a suitable formula. There are other factors in the operation of subsidized versus unsubsidized vessels which also affect this problem. For example, the subsidized operators use more modern vessels which probably would carry cargo at a lower cost if operated only between a limited number of ports; the unsubsidized operator of older ships would have a very low depreciation expense. There may be other factors relating to the operation of subsidized carriers vis-a-vis non-subsidized carriers which we cannot give effect to without the kind of detailed factual study which could not be accomplished in view of the limited data available to us and the limited time we have had to prepare these comments and the attached statutory revisions. On balance we would favor a determination of fair and reasonable rates on military cargo based on a rate base exclusive of construction differential subsidy and a calculation of net return which deducts operating differential subsidy from the carrier's expenses. As the next alternative, we would favor the substitution of a determination of net profits based on expenses attributable to military traffic less a reasonable reduction for payment of operating differential subsidy. This would leave the Commission free to subtract from total operating expenses only the portion of operating differential subsidy which the Commission deems to measure the net advantage resulting from the payment of subsidy. Our testimony of May 9 pointed out that the Federal Maritime Commission has in the domestic offshore trade based rates on varying bases such as (a) cost of a particular carrier, (b) cost of dominant carrier, (c) aggregate cost of all carriers. At this juncture it would be difficult to project which of the above three would be the most appropriate. In some instances there might be only one carrier involved. In another instance there might be no dominant carrier and conceivably in some instances the experience of all carriers in the trade would be meaningless because of changed conditions. We would use the aggregate or average cost of the carriers in the trade, except in extraordinary circumstances such as military exigency or experimental movements. |