United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 15,846

COMMONWEALTH OF PUERTO RICO, PETITIONER

v.

UNITED STATES OF AMERICA AND FEDERAL MARITIME BOARD,

RESPONDENTS

No. 15,847

UNITED STATES ATLANTIC & GULF-PUERTO RICO CONFERENCE, BULL-INSULAR LINE, INC., ALCOA STEAMSHIP COMPANY, INC., LYKES BROS. STEAMSHIP CO., INC., and RICHARD KINSELLA, PETITIONERS V.

UNITED STATES OF AMERICA AND FEDERAL MARITIME BOARD,

RESPONDENTS

BRIEF OF RESPONDENT FEDERAL MARITIME BOARD AND STATEMENT OF RESPONDENT UNITED STATES OF AMERICA

JURISDICTIONAL STATEMENT

The jurisdiction of this Court is based on the Judicial Review Act of December 29, 1950 (64 Stat. 1129, as amended, 5 U.S.C., Section 1031, et seq.).

(1)

STATEMENT OF THE CASE

A. Statutory Background

The proceeding arises out of petitions by the Commonwealth of Puerto Rico (Commonwealth) and by the United States Atlantic & Gulf-Puerto Conference, et al. (Conference), for review of an order of the Federal Maritime Board entered after an investigation held by the Board pursuant to Section 18 of the Shipping Act, 1916 (39 Stat. 735, as amended, 46 U.S.C. Section 817), and Section 3 of the Intercoastal Shipping Act, 1933 (47 Stat. 1426, as amended, 46 U.S.C. Section 845), wherein the Board found certain rate increases of the Conference to be just and reasonable. The increases applied to rates governing the common carriage of ocean-borne cargo between United States Atlantic and Gulf ports and ports in Puerto Rico.

On December 4, 1956, the Conference filed with the Board tariffs increasing the existing rates by 15 percent. Exercising the powers vested in it by the 1916 and 1933 Acts, the Board entered an order, January 4, 1957, instituting an investigation into the lawfulness and reasonableness of these increases. The Commonwealth moved for leave, and was permitted, to intervene in the proceeding.

Hearings were held before a hearing examiner of the Board in April, 1957. However, prior to issuance of an initial decision by the Examiner, the Conference, on August 14, 1957, filed a further general rate increase of 12 percent to become effective on September 14, 1957. The Board suspended the 12 percent rate increase for four months, as authorized by Section 3, Intercoastal Shipping Act, 1933 (46 U.S.C. § 845), thus postponing the effective date of the increase to January 15, 1958. The Board's investigation was expanded to cover this second increase, and further hearings were held in October, 1957. An initial decision was issued by the hearing examiner, and ex

1 Joined with the Conference as petitioners are its individual steamship line members and its secretary.

ceptions thereto were filed with the Board. One of the principal issues raised in the exceptions was whether the examiner had erred in not requiring the carriers to produce books and records to substantiate certain financial statements which they had offered in evidence. On Jul. 13, 1958, the Board remanded the proceedings to the examiner for further hearings, with a direction to the carriers to produce substantiating records for all financial exhibits submitted at the previous hearing. Following such further hearings, in which the carriers produced and/or made their underlying records available to all parties for inspection and copying, the examiner issued an initial decision on September 10, 1959 (J.A. 54). In the initial decision, the examiner found both the 15 and the 12 percent rate increases to be just and reasonable.

Exceptions were filed to the initial decision, and oral argument was heard by the Board. Thereafter, the Board issued the Report and Order of April 28, 1960, which are the subject of these review proceedings.

B. The Board's Findings

In its Report and Order of April 28, 1960 (J.A. 12), the Board announced its findings and conclusions, with reasons therefor, holding the rate increases to be just and reasonable (J.A. 53).

In arriving at its conclusions, the Board followed the traditional "fair return on rate base" approach, calculating the carrier's rate base by placing a valuation on the property devoted to the trade by the carriers (the rate base), and allowing the carriers a fair and reasonable return thereon.

The Board treated the Bull Steamship Company, one of the Conference members, as the "ratemaking line" (J.A. 49).

This approach was based principally on the facts that Bull was by far the largest carrier in the trade, and that in its capital investment, revenues, and expenses, Bull was fairly representative of all the lines in the trade (J.A. 49).

The Board's findings and conclusions, and its reasoning in support thereof, may be summarized as follows:

1. Valuation and Rate Base

In determining the rate base, the Board followed the principle that the carriers are entitled to a fair return on the reasonable value of the property at the time it is being used for the public (J.A. 34). In valuing the carriers' vessels, the Board rejected such approaches as original book cost depreciated (suggested by the Commonwealth) and reproduction values (urged by the carriers), and instead, used as a basis the domestic market values of the vessels for the period under consideration. These market values were averaged out so as to eliminate fairly wide fluctuations occasioned early in the period by the Suez crisis and later in the period by a depression in the shipping industry (J.A. 37-38).

In determining the value of terminals, the Board distinguished between those owned by the carriers and those used-but-not-owned by the carriers. For the used-but-notowned terminals, the Board did not include their value in the rate base for the reason that the carriers are not devoting their own capital to the public service. However, the Board did allow the carriers to charge against revenues, as operating expense, the rental and other expenses incurred by the carriers by reason of their use of such facilities (J.A. 42). For the carrier-owned terminals, the Board, like the examiner, allowed the carriers to include the net book value of those properties in the rate base (J.A. 42), but it rejected the carriers' contention that such terminals should be valued at what a willing seller and willing buyer would settle on as a fair price for the property (J.A. 131).

The Board found that a fair and reasonable allowance for working capital as an element of the rate base would be an amount equal to the total of vessel operating expenses for one round voyage for each vessel in the carrier's fleet. This formula is the same as that set up in its General Order 31, Limitation 4, by which "capital neces

sarily employed" is calculated for carriers operating under subsidy contract in the foreign trades (46 C.F.R. 286.3(a)) (J.A. 40).

2. Expenses

The only expense item in dispute in this proceeding is depreciation expense. As to this expense item, the Board found that in December, 1956, American Coal Shipping, Inc., through a subsidiary (Olympia Corporation) purchased substantially all of the stock of A. H. Bull Steamship Co. of New Jersey. In January, 1956, in substantially complete liquidation of A. H. Bull, New Jersey, its assets were transferred to the books of Olympia Corporation, since renamed A. H. Bull Company of Delaware, and the vessels were entered on the latter's books at an acquisition cost of $12.9 millions, the latter figure representing about 70 percent of the appraised value of the vessels (J.A. 19). The same vessels had, at the time of the transfer, a book value of $5.2 million on the books of the predecessor corporation. The purchase of Bull by Olympia was found on undisputed evidence to be an arms-length transaction between unrelated interests. The Board concluded that in the light of the bona fides of the transaction and the reasonableness of the purchase price, as compared with the substantially higher market values for vessels, the acquisition cost of the vessels as entered on Bull of Delaware's books constituted a proper depreciation base (J.A. 33). The carriers depreciate their vessels, on the basis of a 20-year service life, from acquisition cost down to a residual scrap value amounting to 2.5 percent of acquisition cost (J.A. 30). In the case of Bull's vessels, the residual value was thus set at about $55,000 per vessel. The Board found that such depreciation practice is recognized for tax purposes, and is in conformity with the Board's regulations; and it approved this method of depreciating the vessel assets. The Board rejected the Commonwealth's contention that residual value must be based on predicted market values at the end of the vessel's service life, on the ground that such a method would substitute speculation for certainty (J.A. 31-32).