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type flat dollar charges per container rates. First, there would be a much simpler tariff rate structure, containing fewer rates, thereby greatly simplifying billing and payment of freight charges. Second, under flat dollar per container charges the present problems of misclassification or mismeasurement of cargoes in order to obtain unfair freight rate advantages would disappear. Thus, by eliminating rates dependent upon weight or measurement, flat container rates would reduce the need for the FMC's container inspection program. Third, flat dollar charges per container without regard to the commodity, would eliminate possibilities of rate advan. tages through misdescription of the shipment. Fourth, because the flat dollar charge would apply without regard to the volume of the commodity in the trailer, the shipper would have an incentive to fill the container both as to weight and measurement, thus leading to better utilization of container equipment, improved carrier efficiency, and lower rates. Finally, there would be an increased compatibility with inland rate structures, since rail and motor carriers are tending toward increasing the number of rates on a flat per container or per trailer basis.

In contrast to the foregoing obvious advantages, there are certain difficulties which would be created by this type of simplified rate structure, among which are the following. All commodities cannot necessarily afford to pay the same level of freight rate. Because of variations in marketing conditions, value of the goods and competitive factors, certain commodities can afford to pay relatively high freight rates, whereas others need much lower freight rates in order to sell in a competitive market. The present Commission policy of favoring lower rates on cost of living necessity type commodities. while allowing luxury (or more valuable) commodities to pay higher rates reflects the need for recognizing factors other than cost in determining freight rates. Establishment of flat dollar charge per container rates without regard to the commodity involved would seri. ously alter rate structures based upon varying per hundred weight and per cubic foot charges for different commodities. Because of the varying size of containers and trailers and the unknown factor of how full a shipper may be able to load a particular container, flat container rates make it very difficult for a competing carrier, which charges unit rates per 100 pounds or per cubic foot to know the effective unit rate which it must meet, leading to possible excessive rate cutting.

Although certain difficulties may be involved in flat dollar charge per container rates, without regard to the commodity, weight, or measurement of the item loaded into the container, ocean transportation should not adhere to traditional rate structures which may artificially restrain the application of the ultimate efficiencies inherent in containerization, simplification of tariffs, and other benefits of technologcal advances. The FMC should not insist or require that common carriers adopt specialized flat dollar charge per container rate structures. The Commission, nevertheless, should be flexible in its regulation, thereby encouraging more efficient rates and the adoption of regulations which would facilitate the continuing trend towards such rate structures.

As rate structures in the Puerto Rican trade move to. ward the flat dollar charges per container rates (i.e., first to per container rates varying by the commodity involved and then possibly toward per container rates without regard to the commodity involved) the Commission's policy of favoring relatively lower rates on certain low-value cost of living necessity-type commodities and permitting higher rates on the high-value luxury-type commodities, should be preserved.61 This would be possible through the establishment of a classification-type rate structure with lower flat dollar charges per container rates on certain of the low-value necessity-type commodities and higher rates on the more valuable luxury-type commodities. 62

Competitive influences may result in further refinements in flat dollar charges rates, making these per container rates even more appropriate in accommodating the forthcoming large scale movement of containers through a few terminals in mammoth containerships (see ch. VI section B.2.c.). It should be recognized, however, that these rates will probably never completely replace traditional rate structures for commodities flowing in breakbulk form or LTL quantities which do not lend themselves to the full containerload concept (e.g., construction materials and heavy machinery).

61 The FMC's policy of favoring low rates on basic foodstuffs and other consumer articles essential to the economy of Puerto Rico was announced in the Commission's 1965 investigation entitled, Reduction in Freight Rates on Automobiles - North Atlantic Coast Ports to Puerto Rico-8 F.M.C. 410(1965) (See ch. V, section B.2.).

62 For example, where freight is only 1 to 5 percent of the commodity's wholesale value (e.g., heavy machinery), a rate increase may be relatively unimportant. However, where freight is more than 10 percent of the wholesale value of a relatively low-priced commodity (e.g., rice and beans), a rate increase may have an important impact on Puerto Rico's economy (See ch. V). 63 See, e.g., Alcoa Steamship Co., Inc.--General Increase in Rates in the Atlantic-Gulf Puerto Rico Trade, 9 F.M.C. 238 (1966). In this case, Alcoa requested a 15 percent rate of return. However, the Commission stated: “We feel that considering all the circumstances a rate of return not in excess of 10 percent is reasonable on this record, and rates allowing for a greater return are unreasonable". The Commission has approved the following rates of return for carriers in other domestic offshore trades: (1) Pacific Coast/ Hawaii-8.32 and 10.5 percent (General Increases in Rates, 1961, 7 F.M.C. 260, 1962), (2) Pacific-Atlantic/Guam-6.42 percent (Pacific-Atlantic/Guam Increases in Rates, 7 F.M.C. 423, 1962), (3) Pacific Coast / Alaska-9.07 percent (General Increase in Alaskan Rotes and Charges, 7 F.M.C. 563, 1963).

E. THE RELATIONSHIP BETWEEN

RATES AND COSTS

As noted in the foregoing pages, it appears that common carrier rates from U.S. mainland sources of supply to Puerto Rico have remained relatively steady over the past eight years (app. E). Also, the comparison of specific conference commodity rates from New York to islands nearby Puerto Rico, including Jamaica, Haiti, and the Dominican Republic, shows that only one conference rate of 125 rates examined was lower than the corresponding commodity rates from New York to San Juan. In addition, it was noted that these foreign conference rates to the same nearby Puerto Rican islands have experienced significant general rate in. creases over the past decade while those to Puerto Rico have had a very favorable rate history with no general rate increases. These comparisons and rate relations would tend to indicate that ocean rates from the U.S. mainland to Puerto Rico are relatively low. However, the fact that rates are relatively low is not persuasive that ocean freight rates to Puerto Rico are legally reasonable. Cost factors must be considered.

The FMC has administered its authority over the Puerto Rican trade so that common carriers are permitted to receive no more than a fair and reasonable rate of return on

that amount which is required to meet all allowable expenses of providing service, including the cost of acquiring or retaining the capital needed to provide service.” 63

Consequently, it becomes important not only to consider rate comparisons and relationships but also to compare rates against the carrier's cost of service. Gen. eral Orders 5 (G.O. 5) and 11 (G.O. 11) 64 require the reporting of carriers' overall revenue and expense information and are instruments used in analyzing these factors on a company-wide and FMC regulated trade-wide levels. These reporting statements are de

signed for and are generally adequate only with respect to general revenue changes and needs.

However, the Commission is faced daily with various specific regulatory problems which require more detailed cost information than that obtainable from these financial reports. These problems include:

(1) Frequent selective rate increases on essential commodities which cannot be effectively ana. lyzed by the staff without specific cost information.

(2) Frequent rate adjustments in certain categories of cargo, such as LTL traffic, where the car. rier argues that the cost of handling such cargo is higher than that of other categories;

(3) Rate changes in which the carrier has converted weight or measurement rates to an all. weight basis; and,

(4) Rate changes which propose differentially lower or higher rates between South Atlantic and North Atlantic ports requiring, among other

things, proof of advantages in costs. Although there are no specific criteria for determining the reasonableness of a rate, nor has any definite test been developed by transportation experts, one of the most important elements for rendering rate analysis most meaningful is cost accounting information. Even though many other factors, including load conditions, distance, trade conditions, competition and value of service are involved in the ratemaking process, in the judgment of the Commission's staff, cost is important for analyzing and comparing rates and their effect on the economy being considered. This has been emphasized in several important transportation cases. (See: Matson Navigation Company Pallets and Containers, Pacific Coast/Hawaii Trade, 7 F.M.C. 771, 1964; Reduced Rates on Machinery and Tractors to Puerto Rico, 9 F.M.C. 482, 1966; and, Gulf Westbound Inter-Coastal Soya Bean Oil Meal Rates, 1 USS BB 554, 460, 1936). In Reduced Rates on Machinery and Tractors to Puerto Rico, 9 F.M.C. 482 (1966), for example, the Commission said:

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64 G.O. 11 statements provide an account of income and expense and rate base data applicable solely to common carriers' domestic offshore operations. In contrast, G.0. 5 statements provide an account of income and expense and rate base data on a company-wide level.

we find both the 43 and 37-cents rates of SACAL to be 'unjust and unreasonable under section 4 of the 1933 Act. There is no justification of such rates in terms of “cost or "value of service' *'* * Therefore, we find the 43 and 37-cent rates of SACAL for the carriage of heavy machinery to be violative of section 16 First and fix the minimum rate for SACAL for the carriage of heavy machinery (except road scrapers) at 48 cents, including arrimo."

Knowledge concerning the relationship between cost of service and specific rates was also of particular sig. nificance in considering the reasonableness of rates in Rates from Jacksonville, Florida to Puerto Rico, 10 F.M.C. 376' (1967) where the Commission said: “Sea-Land has not justified its proposed differentially lower rates between Jacksonville and Puerto Rico as compared with its rates between other Atlantic ports and Puerto Rico by sufficient proof of advantages in cost of operation, value of service to shippers or other transportation conditions warranting such reduction. (Italic added.)” In that investigation, the Commission further stated: "Had Sea-Land adduced evidence of the difference in cost of operation between North Atlantic ports and Puerto Rico as compared to cost of operation between Jacksonville and Puerto Rico, it might have been determined that a rate difference was justified on the basis of costs of the respective services.”

There is another noteworthy consideration which supports the FMC's requirements for detailed cost information. As previously noted, the Commission adopted the ratemaking principle that some commodities be required, because of the public interest, to bear more than their full share of allocated costs." 65 As the Commonwealth testified in docket No. 1145,66 it was aware that higher freight charges might be placed on certain commodities by the requirements that rates for highvalued commodities “should be such as not only to cover the cost of movement but sufficient also to support some share of the cost of the movement of basic commodities *” The FMC, quite naturally, cannot effectively discharge this responsibility without detailed cost information. It needs specific cost information: (1) to ensure that selective rates on essential commodities continue to bear a reasonable relationship to their cost of movement; (2) to ensure that selective rate decreases on high-valued commodities will not un. balance the share these rates should cover on their cost of movement; and, (3) to evaluate whether other rates on high-valued commodities, indeed, are not only covering their cost of movement but also are supporting the cost of moving the basic commodities of primary importance to the economy of Puerto Rico.

Because commodity cost information is important to the financial information system needed by the FMC in performing its regulatory functions, the FMC is con

sidering revisions to G.O. 11 designed to supplement the FMC's present financial reporting system composed of FMCG.0.5 and FMC G.O. 11. General Order 5, the first financial reporting requirement of the FMC, issued less than six months after the establishment of the Commission, was adopted to provide immediate financial data while more detailed informational requirements were developed. General Order 5, which required filing with the FMC copies of the same reports already required by the ICC and the Maritime Administration, requires financial information on an overall basis only; it gives no breakdown between revenues and expenses related to the movement of traffic in the domestic offshore trades under the terms of rates and charges required to be filed with the FMC, and the carriage of other cargo (including MSTS and foreign cargo) where the same voyages carry both FMC regulated and other traffic.

These data deficiencies of G.O. 5 led to the development of G.0. 11. General Order 11, the second phase of the FMC's financial information system, issued in 1964 to obtain this missing information, was designed to isolate the financial data attributable to FMC-regulated cargo from that applicable to other services. Although G.O. 11 produced some refinements, its require. ments were not particularly burdensome on the carriers. The Revenue-Ton-Mile formula for allocation of costs between FMC-regulated cargo and non-regulated cargo was the major new data accumulation requirement of G.O. 11.

General Order 5 and G.O. 11, however, provide the Commission with general financial information on company-wide and FMC-regulated trade-wide levels. These reporting statements, therefore, are adequate only with respect to general rate changes. A serious gap develops frequently when the FMC must consider rate changes which apply to one region, range of ports, or to specific commodities.

The Commission observed in docket 969, Alaska Steamship Company-General Increase in Rates in the Peninsula and Bering Sea Areas of Alaska, 8 F.M.C. 1 (1964), which was connected with a similar problem: “Alaska Steam has put forth no convincing rationale as to why we should measure the increases here by the results of the carrier's overall operations. To do so would, in our opinion, allow the carrier to offset losses in the competitive trades with profits from the trade in which it presently enjoys a virtual monopoly. * * * The separation of services and construction of a partial rate base, while perhaps subject to some infirmities regarding exactitude of allocations, is the fairest method of testing these increases."

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65 Reduced Rates on Machinery and Tractors from United States Atlantic Ports to Ports in Puerto Rico: Further Reduction in Rates on Machinery and Tractors from United States Ports to Ports in Puerto Rico, 9 F.M.C. 480 (1966).

65 Reduction in Freight Rates on Automobiles-North Atlantic Coast Ports to Puerto Rico, 8 F.M.C. 409 (1965).

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b. It is recommended that the Commission require carriers to furnish more detailed cost data which will enable it to deal expeditiously with rate changes.

2. Conclusion

When a rate change is made for a specific commodity or service, cost information should be available which is sufficiently specific to permit the Commission to compare prospective revenue with cost and properly evaluate whether the change is reasonable. The development of container carriage and the need to know the cost differential in stuffing and unstuffing TL and LTL containers as well as the filing of rate changes for specific commodities rather than general rate changes, has highlighted this deficiency in financial information.

The proposed new G.O. 11 order now being considered by the FMC is designed to overcome this deficiency by reducing the FMC-regulated—trade-wide cost information to a regional basis as well as to a still lower series of levels (commodity group categories) which can be reasonably associated with the specific rates on file with the Commission and those which are expected to come into existence in the foreseeable future. The new revision forms the third phase in the Commission's financial information requirements (i.e., G.O. 5 is the companywide level, G.O. 11 is the FMC-regulated—trade-wide level, and the new revision is the commodity group level).

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There appears to be an increasing need for more efficient rate structures to accommodate the large con. tainerships which are radically altering traffic patterns in the Puerto Rican trade. Adherence to traditional rate structures may restrain the ultimate efficiencies inherent in containerization, the evolution of through rates, as well as inhibit the ultimate simplification of rate structures urgently needed in this trade. It is recognized that flat dollar charges per container rates potentially offer greater efficiencies and are more compatible with through movements, however, as rate structures in the Puerto Rican trade move toward flat dollar charges per container rates, the FMC's policy of favoring relatively low rates on certain commodities of extreme importance to the economy of Puerto Rico while permitting higher rates on nonessential goods will require a modified flat dollar charges per container rate structure which facilitates this rate differential.

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1. Conclusion

A serious deficiency is frequently experienced by the FMC when it must consider rate changes which affect one region or commodity. When a rate change is made for a specific service or category of cargo, cost information sufficiently detailed to permit the Commission to evaluate the change adequately is not presently available. Unless some reasonably accurate method of determining detailed cost on a commodity group basis is adopted by common carriers and the FMC, it appears that the FMC will be unable to function with optimum expedition in guarding the public interest.

Although the FMC should not insist or require that common carriers establish more efficient rate structures such as various per container rates, it is recommended that the FMC maintain a flexible regulatory approach to ratemaking practices, particularly those which permit greater efficiencies in traffic flow and are more compatible with through movements. However, the Commission's policy of favoring relatively low rates on certain cost of living commodities (perhaps through the establishment of a classification-type rate structure with lower flat dollar charges per container rates on basic foodstuffs) should be preserved. The staff of the FMC should stand ready to render whatever assistance it can in developing such a rate structure.

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Recommendations

3. Conclusion

a. It is recommended that common carriers be required to develop and utilize more detailed cost accounting, under each major mode of operation used, to determine the ocean transportation cost of carrying certain commodity groups in the U.S. mainland-Puerto Rican trade by commodity group.

Although Sea-Land's New York to San Juan commodity rate structure shows that it now has many TL rates compared to the few available in 1960, TL rates still comprise only 25 percent of Sea-Land's overall rate structure in this trade. These rates could encour. age TL movements and efficiencies.

67 FMC Docket 67-57: Significant Operating Common Carriers in the Domestic Offshore Trade; For Reports of Rate Base and Income Account.

Recommendation

Where cargoes move in TL lots, it is recommended that Sea-Land adopt TL rates, particularly on principal moving commodities. The savings and benefits incident to TL shipment should be made increasingly available to shippers.

are available from West Coast ports to Puerto Rico. The bulk of its West Coast tariff consists of AQ rates inherited when Waterman, the last breakbulk conference carrier serving this trade, departed this service in 1963.68

6. Conclusion

4. Conclusion

It appears that some carriers may be assessing higher rates on various low-rated commodities which effec. tively preclude them from having to carry such lowrated cargoes from U.S. Atlantic ports to San Juan.

Sea-Land offers many attractive maximum charges per container rates from New York to San Juan. These rates, however, are not available to cargoes moving through the port of Jacksonville and other South Atlantic ports, and in the absence of evidence of difference in cost of operation, value of service to shippers, or other transportation conditions (Rates From Jacksonville, Fla., to Puerto Rico, 10 F.M.C. 376, 1967), should be made available. Indeed, cost advantages may exist in the South Atlantic-Puerto Rican service which would justify the establishment of the maximum charges per container rates now applying from New York.

Recommendation

It is recommended that the FMC intensify its current investigation of rate differentials between low and highrated commodities from U.S. Atlantic ports to San Juan, P.R.

5. Conclusion

Recommendation

It appears that the West Coast-Puerto Rican trade is undertonnaged and in need of more diverse and lower rate structures. This is particularly important in view of various individual shipper complaints alleging that rates from the West Coast are high and service is inadequate. Although Sea-Land's West Coast-Puerto Rican rate levels have had a favorable history, all categories of West Coast ocean rates are considerably higher than those applicable to its North Atlantic-Puerto Rican tariff (charts 11 and 12). And, only 29 TL weight rates

Where advantages in cost of operation, value of serv. ice, and other transportation conditions are evident, it is recommended that Sea-Land establish maximum charges per container rates from South Atlantic ports to Puerto Rico. The Commission should continue its surveillance over this matter.

68 Even taking the larger distances between the West Coast and Puerto Rico into consideration, the West Coast rates appear to be out of line compared to those of the East Coast.

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