55014 Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices

return. An income tax benefit can

potentially have numerous cash flow

effects. The Department’s practice is to

single out the cash flow effect most

directly associated with the tax benefit;

in this case, the actual savings which

arise when the taxes are due.

Verification

In accordance with section 782(i) of

the Act, we verified the information

used in making our final determination.

We followed standard verification

procedures, including meeting with

government and company officials, and

examination of relevant accounting

records and original source documents.

Our verification results are outlined in

detail in the public versions of the

verification reports, which in the Public

File for this investigation.

Suspension of Liquidation

In accordance with section

703(d)(1)(A)(i) of the Act, we have

calculated an ad valorem subsidy rate of

17.47 percent for CIL, the one company

under investigation. We are also

applying CIL’s rate to any companies

not investigated or any new companies

exporting the subject merchandise.

We have concluded a suspension

agreement with the GOTT which

eliminates the injurious effects of

imports from Trinidad and Tobago (see,

Notice of Suspension of Investigation:

Steel Wire Rod from Trinidad and

Tobago being published concurrently

with this notice). As indicated in the

notice announcing the suspension

agreement, pursuant to section 704(h)(3)

of the Act, we are directing the U.S.

Customs Service to continue suspension

of liquidation. This suspension will

terminate 20 days after publication of

the suspension agreement or, if a review

is requested pursuant to section

704(h)(1) of the Act, at the completion

of that review. Pursuant to section

704(f)(2)(B) of the Act, however, we are

not applying the final determination

rate to entries of subject merchandise

from Trinidad and Tobago; rather, we

have adjusted the rate to zero to reflect

the effect of the agreement.

ITC Notification

In accordance with section 705(d) of

the Act, we will notify the ITC of our

determination. In addition, we are

making available to the ITC all nonprivileged and nonproprietary

information relating to this

investigation. We will allow the ITC

access to all privileged and business

proprietary information in our files,

provided the ITC confirms that it will

not disclose such information, either

publicly or under an administrative

protective order, without the written

consent of the Acting Deputy Assistant

Secretary for AD/CVD Enforcement,

Import Administration.

If the ITC’s injury determination is

negative, the suspension agreement will

have no force or effect, this investigation

will be terminated, and the Department

will instruct the U.S. Customs Service to

refund or cancel all securities posted

(see, section 704(f)(3)(A) of the Act). If

the ITC’s injury determination is

affirmative, the Department will not

issue a countervailing duty order as long

as the suspension agreement remains in

force, and the Department will instruct

the U.S. Customs Service to refund or

cancel all securities posted (see, section

704(f)(3)(B) of the Act). This notice is

issued pursuant to section 704(g) of the

Act.

Return or Destruction of Proprietary

Information

This notice serves as the only

reminder to parties subject to

Administrative Protective Order (APO)

of their responsibility concerning the

return or destruction of proprietary

information disclosed under APO in

accordance with 19 CFR 355.34(d).

Failure to comply is a violation of the

APO.

This determination is published

pursuant to section 705(d) of the Act.

Dated: October 14, 1997.

Robert S. LaRussa,

Assistant Secretary for Import

Administration.

[FR Doc. 97–27984 Filed 10–21–97; 8:45 am]

BILLING CODE 3510–DS–P

DEPARTMENT OF COMMERCE

International Trade Administration

[C–307–814]

Final Affirmative Countervailing Duty

Determination: Steel Wire Rod from

Venezuela

AGENCY: Import Administration,

International Trade Administration,

Department of Commerce.

EFFECTIVE DATE: October 21, 1997.

FOR FURTHER INFORMATION CONTACT:

Christopher Cassel, Robert Copyak, or

Richard Herring, Office of CVD/AD

Enforcement VI, Import Administration,

U.S. Department of Commerce, Room

1874, 14th Street and Constitution

Avenue, N.W., Washington, D.C. 20230;

telephone (202) 482–2786.

Final Determination

The Department of Commerce (the

Department) determines that

countervailable subsidies are being

provided to CVG-Siderurgica del

Orinoco (SIDOR), the producer and

exporter of steel wire rod from

Venezuela. For information on the

estimated countervailing duty rates,

please see the Suspension of

Liquidation section of this notice.

Petitioners

The petition in this investigation was

filed by Connecticut Steel Corp., CoSteel Raritan, GS Industries, Inc.,

Keystone Steel & Wire Co., North Star

Steel Texas, Inc., and Northwestern

Steel and Wire (the petitioners), six U.S.

producers of wire rod.

Case History

Since our preliminary determination

on July 28, 1997 (62 FR 41439, August

4, 1997), the following events have

occurred:

We conducted verification of the

countervailing duty questionnaire

responses from August 27, 1997 through

September 9, 1997. Petitioners and

SIDOR (respondent) filed case briefs on

September 23, 1997, and rebuttal briefs

on September 26, 1997. A public

hearing was held on October 1, 1997.

On September 12, 1997, the GOV and

the U.S. Government initialed a

proposed suspension agreement. On

October 14, 1997, the U.S. Government

and the GOV signed a suspension

agreement (see Notice of Suspension of

Countervailing Duty Investigation: Steel

Wire Rod from Venezuela) which is

being published concurrently with this

notice in the Federal Register. On

October 14, 1997, the petitioners also

requested that the Department and the

International Trade Commission (‘‘ITC’’)

continue this investigation in

accordance with section 704(g) of the

Act. As such, this final determination is

being issued pursuant to section 704(g)

of the Act.

Scope of Investigation

The products covered by this

investigation are certain hot-rolled

carbon steel and alloy steel products, in

coils, of approximately round cross

section, between 5.00 mm (0.20 inch)

and 19.0 mm (0.75 inch), inclusive, in

solid cross-sectional diameter.

Specifically excluded are steel products

possessing the above noted physical

characteristics and meeting the

Harmonized Tariff Schedule of the

United States (HTSUS) definitions for

(a) stainless steel; (b) tool steel; (c) high

nickel steel; (d) ball bearing steel; (e)

free machining steel that contains by

weight 0.03 percent or more of lead,

0.05 percent or more of bismuth, 0.08

percent or more of sulfur, more than 0.4
Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices 55015

percent of phosphorus, more than 0.05

percent of selenium, and/or more than

0.01 percent of tellurium; or (f) concrete

reinforcing bars and rods.

The following products are also

excluded from the scope of this

investigation:

Coiled products 5.50 mm or less in

true diameter with an average partial

decarburization per coil of no more than

70 microns in depth, no inclusions

greater than 20 microns, containing by

weight the following: carbon greater

than or equal to 0.68 percent; aluminum

less than or equal to 0.005 percent;

phosphorous plus sulfur less than or

equal to 0.040 percent; maximum

combined copper, nickel and chromium

content of 0.13 percent; and nitrogen

less than or equal to 0.006 percent. This

product is commonly referred to as

‘‘Tire Cord Wire Rod.’’

Coiled products 7.9 to 18 mm in

diameter, with a partial decarburization

of 75 microns or less in depth and

seams no more than 75 microns in

depth; containing 0.48 to 0.73 percent

carbon by weight. This product is

commonly referred to as ‘‘Valve Spring

Quality Wire Rod.’’

The products under investigation are

currently classifiable under subheadings

7213.91.3000, 7213.91.4500,

7213.91.6000, 7213.99.0030,

7213.99.0090, 7227.20.0000, and

7227.90.6050 of the HTSUS. Although

the HTSUS subheadings are provided

for convenience and customs purposes,

our written description of the scope of

this investigation is dispositive.

The Applicable Statute

Unless otherwise indicated, all

citations to the statute are references to

the provisions of the Tariff Act of 1930,

as amended by the Uruguay Round

Agreements Act effective January 1,

1995 (the ‘‘Act’’).

Injury Test

Because Venezuela is a ‘‘Subsidies

Agreement Country’’ within the

meaning of section 701(b) of the Act, the

ITC is required to determine whether

imports of steel wire rod from

Venezuela materially injure, or threaten

material injury to, a U.S. industry. On

April 30, 1997, the ITC published its

preliminary determination, finding that

there is a reasonable indication that an

industry in the United States is being

materially injured or threatened with

material injury by reason of imports

from Venezuela of the subject

merchandise (62 FR 23485).

Verification

In accordance with section 782(i) of

the Act, we verified the information

used in making our final determination.

We followed standard verification

procedures, including meeting with

government and company officials, and

examination of relevant accounting

records and original source documents.

Our verification results are outlined in

detail in the public versions of the

verification reports, which are on file in

the Central Records Unit (Room B–099

of the Main Commerce Building).

Subsidies Valuation Information

Period of Investigation: The period for

which we are measuring subsidies (the

‘‘POI’’) is calendar year 1996.

Allocation Period: In the past, the

Department has relied upon information

from the U.S. Internal Revenue Service

on the industry-specific average useful

life of assets in determining the

allocation period for non-recurring

subsidies. See General Issues Appendix

(GIA), appended to Final Countervailing

Duty Determination; Certain Steel

Products from Austria, 58 FR 37217,

37226 (July 9, 1993). However, in British

Steel plc. v. United States, 879 F. Supp.

1254 (CIT 1995) (British Steel), the U.S.

Court of International Trade (the Court)

ruled against this allocation

methodology. In accordance with the

Court’s remand order, the Department

calculated a company-specific

allocation period for non-recurring

subsidies based on the average useful

life (AUL) of non-renewable physical

assets. This remand determination was

affirmed by the Court on June 4, 1996.

British Steel, 929 F. Supp. 426, 439 (CIT

1996).

In this investigation, the Department

has followed the Court’s decision in

British Steel. Therefore, for the purposes

of this final determination, the

Department has calculated a companyspecific AUL. Based on information

provided by SIDOR regarding the

company’s depreciable assets, the

Department has determined that the

appropriate allocation period for SIDOR

is 20 years.

Equityworthiness: In analyzing

whether a company is equityworthy, the

Department considers whether or not

that company could have attracted

investment capital from a reasonable,

private investor in the year of the

government equity infusion based on

information available at that time. In

this regard, the Department has

consistently stated that a key factor for

a company in attracting investment

capital is its ability to generate a

reasonable return on investment within

a reasonable period of time.

In making an equityworthiness

determination, the Department

examines the following factors, among

others:

1. Current and past indicators of a

firm’s financial condition calculated

from that firm’s financial statements and

accounts;

2. Future financial prospects of the

firm including market studies, economic

forecasts, and project or loan appraisals;

3. Rates of return on equity in the

three years prior to the government

equity infusion;

4. Equity investment in the firm by

private investors; and

5. Prospects in the marketplace for the

product under consideration.

For a more detailed discussion of the

Department’s equityworthiness criteria,

see the GIA, 58 FR at 37244.

Petitioners alleged that SIDOR was

unequityworthy from 1977 through

1992. (As explained below, while the

GOV’s conversion of SIDOR’s external

debt into equity was made effective in

October 1992, we consider 1991 to be

the relevant year to examine the

company’s equityworthiness. Therefore,

throughout this notice, we will refer to

the transaction as the ‘‘1991 debt-toequity conversion.’’) On this basis,

petitioners claim that any equity

infusions into SIDOR by the GOV from

1977 through 1990, and the 1991

decision to convert SIDOR’s external

debt into equity were inconsistent with

the usual investment practices of private

investors. In addition, we examined

whether land transferred from CVG to

SIDOR in 1993 and 1994 to cancel

unpaid capital subscriptions was

inconsistent with the usual investment

practices of private investors.

1. 1977 through 1990 Equity Infusions

On March 18, 1997, we initiated an

investigation of SIDOR’s

equityworthiness for the years 1977

through 1990. See Memorandum dated

March 18, 1997, from The Team to

Jeffrey P. Bialos, Re: Initiation of

Countervailing Duty Investigation: Steel

Wire Rod from Venezuela (Initiation

Memo), (on file in the public record of

the Central Records Unit of the

Department of Commerce, Room

B–099). In past investigations, the

Department preliminarily determined

that SIDOR was equityworthy in 1977,

and unequityworthy for the years 1978

through 1984. See Preliminary

Affirmative Countervailing Duty

Determination; Carbon Steel Wire Rod

From Venezuela, 50 FR 28234, 28237

(July 11, 1985) (1985 Wire Rod from

Venezuela), and Preliminary Affirmative

Countervailing Duty Determination;

Certain Steel Products From Venezuela,

50 FR 11227, 11230 (March 20, 1985)

(Steel Products from Venezuela). The
55016 Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices

Department also previously initiated an

investigation of SIDOR’s

equityworthiness for the period 1985

through 1990. See Initiation Memo, and

Final Affirmative Countervailing Duty

Determination: Circular Welded NonAlloy Pipe from Venezuela, 57 FR 42964

(September 17, 1992) (Non-Alloy Pipe

from Venezuela). Although we

previously found SIDOR to be

equityworthy in 1977, that decision was

a preliminary finding. See the

Memorandum, dated October 15, 1991,

to Eric I. Garfinkel, Re: Initiation of

Countervailing Duty Investigation:

Circular Welded Non-Alloy Steel Pipe

From Venezuela, appended to the

Initiation Memo. As such, we concluded

that this preliminary finding warranted

reinitiating.

In this investigation, SIDOR did not

provide any new information regarding

the company’s financial position for the

years 1977 through 1990. Because no

information has been presented in this

investigation that calls into question the

Department’s prior determinations that

the company was unequityworthy for

the years 1978 through 1990, we

continue to find that the GOV equity

investments made in those years were

inconsistent with the usual investment

practices of private investors. Moreover,

with respect to the 1977 equity infusion,

neither party has provided any

information beyond what the

Department examined in the prior

proceeding in which we preliminarily

found the company to be equityworthy

for that year (see Steel Products from

Venezuela). Therefore, because no new

information has been submitted in this

proceeding to indicate that our prior

preliminary decision in Steel Products

from Venezuela was incorrect, we find

that it is appropriate to follow that

earlier determination, and determine

SIDOR to be equityworthy in 1977.

2. 1991 GOV Debt-to-Equity Conversion

We also initiated an investigation of

SIDOR’s equityworthiness with respect

to the conversion of SIDOR’s external

debt into equity, which was approved

by the Venezuelan Congress on May 18,

1993. See Initiation Memo. The

transaction was made retroactive to

October 28, 1992, and is reflected in

SIDOR’s 1992 financial statements.

However, in the questionnaire

responses, the GOV stated that the

decision to convert 60 percent of

SIDOR’s external debt into equity was

reached in October 1991, and that the

terms of the transaction did not change

by the time the transaction was

approved by the Venezuelan Congress

in 1993. Therefore, we consider 1991 to

be the relevant year for purposes of

determining whether the conversion of

SIDOR’s external debt into equity was

consistent with the usual investment

practices of private investors.

In our preliminary determination, we

found SIDOR to be equityworthy in

1991. Therefore, we determined that the

GOV’s decision to capitalize SIDOR’s

external debt in 1991 was consistent

with the usual investment practices of

private investors. See Preliminary

Affirmative Countervailing Duty

Determination: Steel Wire Rod From

Venezuela, 62 FR 41939, 41941 (August

4, 1997) (Preliminary Determination). In

reaching our preliminary finding, we

evaluated SIDOR’s financial ratios for

the three years prior to 1991. We also

took into account respondent’s claim

that a major restructuring process,

begun in 1989 and aimed at improving

SIDOR’s profitability and international

competitiveness, had significantly

improved the company’s financial

position by 1991. See Preliminary

Determination, 62 FR at 41941.

However, we also stated that additional

issues must be examined before

reaching a final determination with

respect to the conversion of SIDOR’s

debt into equity. We have reexamined

our preliminary finding that SIDOR was

equityworthy in 1991, and, taking into

account our findings at verification, and

the financial results in light of high

inflation, we now determine that SIDOR

was not equityworthy in 1991.

In reaching our decision, we

considered the specific investment

factors relied upon by Venezuelan

commercial bankers to evaluate the

financial condition of potential

customers. The bankers stated that in a

high inflationary economy where

financial statements are not adjusted to

reflect the impact of high inflation,

potential customers are evaluated not

only on the basis of their financial

ratios. Rather, a number of additional

aspects of a company’s operations are

also taken into account, including: (1) a

company’s ability to generate real,

inflation-adjusted revenue growth and

cash flow, (2) the reputation of the

company, and (3) the company’s

competitiveness. In analyzing these

factors, the bankers stressed that a key

issue for investors is whether a

company has successfully survived the

crises of the economy, including

inflation, over the last years. See the

September 19, 1997, Memorandum to

Barbara E. Tillman Re: Meetings with

Commercial and Investment Banks in

the Countervailing Duty Investigation of

Steel Wire Rod from Venezuela (Memo

Re: Meetings with Commercial Bankers)

at 2–6 (on file in the public record of the

Central Records Unit of the Department

of Commerce, Room B–099).

Accordingly, in evaluating SIDOR’s

equityworthiness in 1991, we have

expanded our standard analysis to

consider these additional factors.

As petitioners correctly point out, the

bankers indicated that SIDOR did not

represent a sound investment during the

early 1990s. Furthermore, in one

banker’s view, no private investor

would have provided SIDOR with U.S.

$1.0 billion in 1991. Respondent

attempts to discount these statements by

arguing that the bankers also concluded

that an inside investor ‘‘may well have

made such an investment.’’ Memo Re:

Meetings with Commercial Bankers at 6.

This argument is not persuasive. The

Department has never distinguished

between ‘‘inside’’ and ‘‘outside’’

investors. In the GIA, we stated ‘‘it

would be inappropriate, if not

impossible, to fashion a unique inside

investor standard as a variation of the

Department’s reasonable private

investor standard,’’ because ‘‘the

Department must render its

equityworthiness determinations on the

basis of objective and verifiable

evidence.’’ 58 FR at 37249, 37250.

Furthermore, SIDOR’s competitive

position was not favorable in 1991.

SIDOR’s restructuring efforts were

insufficient to justify the conversion of

almost U.S. $1.0 billion of the

company’s external debt. As one banker

noted, ‘‘[t]he government is not able to

make the difficult restructuring changes

to SIDOR. . . to make [the company a]

competitive entity.’’ Memo Re: Meetings

with Commercial Bankers at 7. Our own

evaluation of the restructuring process,

discussed below, reaches the same

conclusion. In light of the information

gathered at verification, respondent’s

assertion that the bankers thought

SIDOR’s long-term prospects justified

the debt restructuring is not convincing.

An analysis of SIDOR’s inflation

adjusted revenue growth for 1988

through 1991, also an important

investment criterion, shows that

SIDOR’s revenue growth was not

keeping pace with inflation in 1988 and

1989. While real revenue growth was

9.44 percent in 1990, in the preceding

two years it was negative 13.38 percent

and negative 5.15 percent, respectively.

See the October 14, 1997, Memorandum

for the File, Re: Calculations for the

Final Affirmative Countervailing Duty

Determination: Wire Rod From

Venezuela (POI 1996) (Final

Calculations Memo) (public version on

file in the Central Records Unit of the

Department of Commerce, Room B–

099).

In our preliminary finding, we noted

that inflation was an important issue
Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices 55017

that we would examine prior to

reaching the final decision with respect

to the 1991 transaction. Venezuelan

commercial bankers discounted the

importance of an analysis of certain

financial ratios because the impact of

inflation on historical financial

statements is not very well understood.

See Memo Re: Meetings with

Commercial Bankers at 3. However,

there are certain areas of the financials

which can be analyzed in real terms and

adjusting these for inflation results in a

less favorable picture of the company’s

earnings. For example, because sales

revenues are recorded during the fiscal

periods and reflect the effects of

inflation, the costs related to these sales

may be understated as the value of

inventory used for these sales may have

been produced and recorded prior to the

sale. Adjusting ‘‘costs of goods sold’’ to

reflect the erosion of currency values

shows that real costs would increase

resulting in a lower net profit or higher

net loss. If such an adjustment is made

to SIDOR’s cost of goods sold, the

company’s net profit margin deteriorates

significantly: the positive nominal profit

margin of 0.06 percent in 1988 and 3.31

percent in 1989 become negative 6.67

percent and negative 11.92 percent,

respectively. The nominal profit margin

for 1990 worsens from negative 5.42

percent to negative 11.77 percent. See

Final Calculation Memo at 22. With a

negative real profit margin in each of

these years, SIDOR’s return on equity

similarly turns negative from 1988

through 1990.

In their case brief, petitioners

constructed an inflation-adjusted return

on equity (ROE) for SIDOR by

comparing the company’s nominal ROE

with the rate of inflation in that year.

According to this analysis, with annual

inflation rates of over 30 percent, no

well-run private company would be

found equityworthy in Venezuela. This

is an unreasonable conclusion. As noted

above, we calculated an adjusted profit

margin for SIDOR, based on an

adjustment of the company’s cost of

goods sold. This is a reasonable

adjustment to the company’s financial

results to account for high inflation

during the 1988 through 1990 period.

Nevertheless, we recognize that the

rate of return from a company during

years of high inflation would require the

company to earn very high returns, and

investors would consider whether the

investment would ultimately yield a

real rate of return. An analysis of

SIDOR’s financial ratios clearly

indicates that the company’s rate of

return, in nominal terms, was very low,

or negative. In the context of the high

rates of inflation during these years, the

company’s rate of return was very poor,

and yields an unfavorable future

financial outlook.

Respondent has argued that SIDOR

was worth more than its nominal book

value because the historical financial

statements understated the value of the

company’s assets, and because a

company’s fixed assets maintain their

value and increase in nominal value

with inflation. See Respondent’s

September 26, 1997, rebuttal brief.

While we acknowledge that this may be

the case, this increase in the nominal

value of the company’s real assets is not

compelling for determining that SIDOR

was equityworthy during these years.

An investor is investing in an on-going

operation, and the important factor is

the efficient operation of the assets in

order to yield a return on those assets.

As we noted in the GIA, a reasonable

investor’s decision to invest in an

operating steel company such as SIDOR

would be based on many factors, not

just the level of nominal value of the

underlying assets. See 58 FR at 37247.

The value of the corporation’s

underlying assets is more important

when a company is terminating and

liquidating. This is not the primary

consideration of an equity investor. In

any case, respondent has failed to

quantify this argument in any

meaningful way. Only in 1994 did

SIDOR begin to apply inflation

adjustments to the historical figures in

its financial statements, and the

company has admitted that ‘‘there is no

accurate way to retroactively adjust

[unadjusted statements] for inflation.’’

SIDOR’s July 3, 1997, questionnaire

response at 10 (on file in the Central

Records Unit of the Department of

Commerce, Room B–099).

Another important factor during the

1988–1991 period is that little private

investment was actually taking place in

Venezuela. Rather, given the economic

instability in the country, as evidenced

by rising interest rates and steady

currency devaluations, private money

was in fact fleeing the country for

alternative foreign currencydenominated investments. See Memo

Re: Meetings with Commercial Bankers

at 1–2. There were few exchange

controls at the time, and currency was

easily invested in foreign currencydenominated assets. While it is certainly

true that some private investment was

taking place in Venezuela during the

early 1990s, SIDOR would have been an

unlikely recipient of such funds, and

certainly not in the magnitude of the

GOV’s 1991 debt conversion.

In preliminarily finding SIDOR

equityworthy, we relied upon

respondent’s claim that the company’s

restructuring process, starting in 1989,

had significantly improved SIDOR’s

competitiveness. At verification,

officials from the Ministry of Finance

(Hacienda) and SIDOR again stated that

the restructuring process greatly

improved the company’s financial

health and placed SIDOR on the path to

becoming an internationally competitive

steel company. See the September 19,

1997, Memorandum to Barbara E.

Tillman Re: Verification of Information

Provided in the SIDOR Questionnaire

Responses (SIDOR VR) at 3–9, and the

September 20, 1997, Memorandum to

Barbara E. Tillman Re: Verification of

the Government of Venezuela

Questionnaire Responses (GOV VR) at

3–6 (public versions on file in the

Central Records Unit of the Department

of Commerce, Room B–099).

Respondent also claims that the GOV’s

decision to convert U.S. $1.0 billion of

SIDOR’s external debt into equity was in

large part due to the company’s

commitment to meet specific short- and

long-term goals, and the projections of

the company’s financial position if it

met these goals. While we acknowledge

that SIDOR may have made some

progress as a result of the restructuring

process, we do not agree that these

changes provide a basis for finding that

SIDOR was equityworthy in 1991. In the

GIA, we stated that any projections of

future earnings based on restructuring

plans would have to be reconciled with

an analysis of past performance. 58 FR

at 37245. As we will show, the

projections do not provide a sufficient

basis to overcome SIDOR’s past

performance and the company’s poor

reputation. Rather, but for the debt

capitalization by the GOV, SIDOR’s cash

flow would have become so unstable

that the company would have been

unviable. See SIDOR VR at 8.

At verification, SIDOR officials

explained that the 1989 restructuring

process was aimed at making the

company more competitive

internationally and returning it to

profitability. To achieve this, SIDOR

intended to measure and improve

several key indicators of the company’s

performance, including:

(1) work force productivity, as

measured by tons of steel produced per

worker per year;

(2) debt to equity ratio;

(3) unit cost of production and sales;

(4) the timing of deliveries; and

(5) the ratio between inventories and

sales, taking into account net sales.

See SIDOR VR at 4. SIDOR also

started a cost reduction program and

determined that the company’s product

mix had to be reduced by specializing

in the more profitable flat products. To
55018 Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices

become more competitive, SIDOR also

reduced its work force. According to

SIDOR, by 1991, the company had

greatly improved all of the indicators

and had released 3000 workers. An

additional program to improve SIDOR’s

performance was initiated in 1991, as

part of the debt restructuring that was

agreed upon in principal in that year.

Unlike the 1989 restructuring program,

under this program, SIDOR made

specific commitments to the GOV, and

agreed to reach these performance

targets by 1993. The targets included (1)

an 11.0 percent reduction in per unit

production costs; (2) an increase in

labor productivity as measured by tons

of liquid steel production per man year;

(3) a reduction of inventories to 25

percent; and (4) an increase in sales

volume to 2,400,000 tons per year, and

capacity utilization of over 80 percent.

See SIDOR VR at 8. According to SIDOR

officials, if these targets were reached by

that time, SIDOR would become

competitive globally. Id.

However, we disagree with these

arguments. It may be true that SIDOR’s

inability to meet its commitments to the

GOV was, as respondent claims,

compounded by the difficulties in the

Venezuelan economy. However,

petitioners correctly note that not all of

the performance targets were linked

directly to the success of Venezuela’s

economy or to worsening inflation. See

SIDOR VR at 8. Moreover, as the

bankers noted, a key factor in

determining a company’s potential was

its ability to perform adequately in spite

of the worsening economic conditions.

In conjunction with GOV’s 1991

agreement to capitalize 60 percent of the

company’s external debt, although

SIDOR prepared a report containing

certain financial projections for the

Economic Council of the Presidential

Cabinet, there were no independent

evaluations of this potential investment.

See SIDOR VR at Exhibit 21 (Public

Document). In analyzing SIDOR’s

potential, the report details a plan of

action to improve the company’s

competitiveness. However, the report

includes scant projections of the

company’s projected financial

performance, such as profitability, and

other financial indicators—important

information that a private investor

would consider. Rather, the report’s

focus is on SIDOR’s projected cash flow,

with and without the capitalization of

60 percent of the company’s external

debt. The report acknowledges that

‘‘[d]espite implementing a cost

reduction program * * * the high debt

burden impedes SIDOR from

accomplishing its modernization plans

{and the capitalization of 60 percent of

SIDOR’s external debt} is the minimum

required to guarantee the continued

operation of the firm.’’ Id. Moreover,

respondent acknowledges that the

economic indicators used in the

projections ‘‘had proved to be too

optimistic.’’ Respondent’s September

26, 1997, Rebuttal Brief at 17.

Accordingly, the company’s own

projections and statements indicate that,

absent the debt capitalization, SIDOR’s

cash flow would be insufficient for the

company to meet its debt obligations,

and the company would become

unviable.

We analyzed similar circumstances in

Certain Steel From Mexico which

involved AHMSA, a Mexican steel

producer. In that case, it appeared that

the financial projections were done to

show that the government of Mexico’s

assumption of AHMSA’s debt could

achieve a level of cash flow to prevent

the company from defaulting on its

loans. Our conclusion in that case is the

same we have reached here: ‘‘the focus

of the analysis was not to demonstrate

to a reasonable investor that [the

company] was a good investment.’’ GIA,

58 FR at 37245. Rather, in this case, the

focus of SIDOR’s report for the

Economic Council of the Presidential

Cabinet was to show that SIDOR would

have been unable to continue operations

without the capitalization of 60 percent

of the company’s external debt. Again,

our evaluation of AHMSA’s projections

in Certain Steel From Mexico, are also

appropriate in this case. At that time,

we stated that the reasonable investor

would weigh a company’s past

performance ‘‘far more than a financial

projection done by the company itself in

an attempt to garner more financial aid

from the {government}.’’ GIA, 58 FR at

37245.

The analysis above makes clear that

SIDOR was not an equityworthy

company in 1991. Accordingly, we

determine that the 1991 conversion of

SIDOR’s external debt into equity was

not consistent with the usual

investment practices of private

investors.

3. 1993 and 1994 CVG Land Transfers

to SIDOR

In the Preliminary Determination, we

found that in 1993 and 1994, CVG

transferred land to SIDOR to cancel

unpaid capital subscriptions. We also

found that SIDOR was equityworthy in

each of these years. See Preliminary

Determination, 62 FR at 41941. For

many of the same reasons outlined

above, we have reevaluated our

preliminary determination that SIDOR

was equityworthy in these years. For

example, SIDOR’s real revenue growth

from 1991 to 1993 was negative 16.97

percent, negative 8.73 percent, and

negative 22.48 percent, respectively. We

have also calculated SIDOR’s cost of

sales, adjusted for the rate of inflation,

in each year from 1990 through 1993.

This adjustment yields negative profit

margins in each of the three years

preceding the 1993 and 1994 land

transfers, except 1991. However, even in

that year, the adjusted return was very

small, 0.18 percent. See Final

Calculation Memo at 22. In each year

that SIDOR experienced a loss after

adjusting for inflation, the company’s

return on equity would also be negative,

meaning that SIDOR was not able to

generate a real return on investment in

those years. Accordingly, we now

determine that SIDOR was

unequityworthy in 1993 and 1994.

Equity Methodology: In measuring the

benefit from a government equity

infusion to an unequityworthy

company, the Department compares the

price paid by the government for the

equity to a market benchmark, if such a

benchmark exists. A market benchmark

can be obtained, for example, where the

company’s shares are publicly traded.

See, e.g., Final Affirmative

Countervailing Duty Determinations:

Certain Steel Products from Spain, 58

FR 37374, 37376 (July 9, 1993).

Where a market benchmark does not

exist, the Department has determined in

this investigation to continue to follow

the methodology described in the GIA,

58 FR at 37239. Following this

methodology, equity infusions made on

terms inconsistent with the usual

practice of a private investor are treated

as grants. Using the grant methodology

for equity infusions into an

unequityworthy company is based on

the premise that an unequityworthiness

finding by the Department is

tantamount to saying that the company

could not have attracted investment

capital from a reasonable investor in the

infusion year based on the available

information.

Creditworthiness: When the

Department examines whether a

company is creditworthy, it is

essentially attempting to determine if

the company in question could obtain

commercial financing at commonly

available interest rates. If a company

receives comparable long-term financing

from commercial sources, that company

will normally be considered

creditworthy. In the absence of

comparable commercial borrowings, the

Department examines the following

factors, among others, to determine

whether or not a firm is creditworthy:

1. Current and past indicators of a

firm’s financial health calculated from
Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices 55019

that firm’s financial statements and

accounts.

2. The firm’s recent past and present

ability to meet its costs and fixed

financial obligations with its cash flow.

3. Future financial prospects of the

firm including market studies, economic

forecasts, and projects or loan

appraisals.

For a more detailed discussion of the

Department’s creditworthiness criteria,

see, e.g., Final Affirmative

Countervailing Duty Determinations:

Certain Steel Products from France, 58

FR 37304 (July 9, 1993); and Final

Affirmative Countervailing Duty

Determinations: Certain Steel Products

from the United Kingdom, 58 FR 37393

(July 9, 1993).

Petitioners have alleged that SIDOR

was uncreditworthy in each of the years

the company received GOV equity

infusions, i.e., 1977 through 1992 (with

the exception of 1988). In Non-Alloy

Pipe from Venezuela, the Department

initiated an examination of SIDOR’s

creditworthiness for the years 1985

through 1990. See 57 FR at 42964. For

all other years, the Department initiated

an examination of SIDOR’s

creditworthiness based upon an analysis

of SIDOR’s cash flow and financial

ratios. See Creditworthy/Equityworthy

Memo. As outlined above under the

‘‘Equityworthiness’’ section, for all the

years except 1989 through 1992, SIDOR

did not submit financial data beyond

what was examined in the initiation

stage, stating that such information was

inaccessible. Therefore, because SIDOR

has not provided any information that

undermines the Department’s initiation

analysis, we determine that SIDOR was

uncreditworthy from 1978 through 1987

and from 1989 through 1990.

We also now consider SIDOR to be

uncreditworthy in 1991, the year of the

GOV’s decision to convert 60 percent of

SIDOR’s external debt into equity. The

company’s financial picture in the three

years prior to 1991 was erratic. As

outlined under the equityworthiness

section above, in 1991, SIDOR’s real

revenue growth was negative in 1988

and 1989, and, after making an

adjustment for inflation, the company’s

profit margin was negative in each of

the three years preceding 1991.

According to Venezuelan commercial

bankers, this is a key factor in

evaluating a company’s ability to meet

its debt obligation. See Memo Re:

Meetings with Commercial Bankers at 3.

While the bankers also stated that they

would lend to Venezuelan companies

with a debt-to-equity ratio of up to 300

percent, they further indicated that a

key factor would be whether the

company had survived the crises of the

economy. This cannot be said of SIDOR.

The company’s own projections at the

time made clear that without the GOV’s

conversion of SIDOR’s external debt, the

company would not have been able to

meet its debt obligations. See SIDOR VR

at Exhibit 21 and the

‘‘Equityworthiness’’ discussion above.

We have also determined that SIDOR

was unequityworthy in 1993 and 1994.

Therefore, we have also examined the

company’s financial statements over the

period 1990 through 1993, to analyze

SIDOR’s ability to obtain commercial

financing at commonly available

interest rates. For the three years after

1991, SIDOR’s liquidity improved

significantly, with current assets

exceeding current liabilities by over two

to one. In addition, SIDOR’s ability to

service its long-term debt also

improved, and the cash flow to debt

ratio increased to over 14 percent in

1992 and 1993. While SIDOR’s financial

picture remained weak during the

period 1990 through 1993, the lessened

debt burden and improved liquidity

indicate that SIDOR would have been

able to obtain commercial financing at

commonly available interest rates in

1993 and 1994. Therefore, we determine

SIDOR to be creditworthy in each of

these years.

Discount Rates: For uncreditworthy

companies, our practice is to use as the

discount rate the highest long-term fixed

interest rate commonly available to

firms in the country plus an amount

equal to 12 percent of the prime rate.

Because we were unable to locate a

prime rate in Venezuela, we added 12

percent to the discount rate. See e.g.,

Final Affirmative Countervailing Duty

Determination: Certain Steel Products

From Brazil, 58 FR 37295, 37298 (July

9, 1993) (Brazil Steel), Final Affirmative

Countervailing Duty Determination:

Grain-Oriented Electrical Steel From

Italy, 59 FR 18357, 18358 (April 18,

1994). (GOES).

In the Preliminary Determination, we

calculated the benefit from nonrecurring countervailable subsidies

received by SIDOR through 1987 by

using as the discount rate the long-term

corporate bond rates in Venezuela,

published by Morgan Guaranty Trust

Company in World Financial Markets.

See 62 FR at 41942. For the period after

1987, we used as the discount rate the

average short-term interest rate, because

the long-term corporate bond rates were

not available after 1987, and because the

primary mechanism for obtaining longterm domestic currency financing in

Venezuela has been through short-term,

roll-over, loans.

Based on our findings at verification,

we now determine that it is not

appropriate to use long-term corporate

bond rates as the discount rate. Central

Bank of Venezuela officials stated at

verification that ‘‘[c]ommercial banks in

Venezuela have never given long-term

loans. The general practice is to give

one-year loans at a short-term rate and

roll it over each year with a new shortterm rate.’’ GOV VR at 3.

In the Preliminary Determination, we

also stated that it was appropriate to

adjust the discount rate to take into

account inflation because Venezuela has

experienced intermittent periods of high

inflation over the past twenty years, and

because SIDOR has adjusted its

financial statements to take into account

the effects of inflation since 1994. See

Preliminary Determination, 62 FR at

41942. We have modified our approach

for this final determination and no

longer consider it appropriate to make

such an adjustment to the short-term

discount rate. In addition, we now

determine that, in calculating the

benefit from non-recurring subsidies, it

is appropriate to account for inflation

only for the period 1987 through 1996.

Therefore, for the years 1978 through

1986, we are using, as the discount rate,

the short-term bolivar interest rates

described above. As noted above, these

rates represent the primary mechanism

for obtaining long-term domestic

currency financing in Venezuela.

We have determined that the most

reasonable way to account for inflation

for the is to convert the equity infusions

into U.S. dollars, and to then apply, as

the discount rate, a long-term dollar

lending rate. Therefore, for our discount

rate, we used data for U.S. dollar

lending in Venezuela for long-term nonguaranteed loans from private lenders,

as published in the World Bank Debt

Tables: External Finance for Developing

Countries. This conforms with our

practice in Brazil Steel. See 58 FR at

37298. The changes to our calculation

methodology are discussed more fully

below under the GOV Equity Infusions

into SIDOR and Interested Party

Comment sections of the notice.

Because we determine SIDOR to be

uncreditworthy for the years 1978

through 1991 (except 1988), we added

to the discount rates a risk premium

equal to 12 percent of the discount rate

in each of those years.

Based upon our analysis of the

petition and the responses to our

questionnaires, we determine the

following:
55020 Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices

I. Programs Determined To Be

Countervailable

A. GOV Equity Infusions into SIDOR

SIDOR received GOV equity infusions

in every year from 1977 through 1991,

except 1988. SIDOR is a 100-percent

government-owned company. Its parent

company is Corporacion Venezolana de

Guayana (CVG), a holding company

owned by the GOV charged with

promoting industrial development in

the Guayana Region. The majority of the

equity infusions were made by the

Fondo de Inversiones de Venezuela

(FIV), a GOV investment fund. The

remaining funds were provided by the

Hacienda, primarily as interest

payments on loans. According to the

response of the GOV, the government

equity infusions into SIDOR were

provided pursuant to special laws

adopted with respect to governmentapproved expansion projects of SIDOR.

Thus, these equity infusions were

specific under section 771(5A)(D) of the

Act.

The first law, published in the Gaceta

Oficial No. 30,587 on January 2, 1975,

authorized SIDOR’s 1974–79 ‘‘Plan IV’’

expansion. This expansion was aimed at

increasing SIDOR’s steel production by

3.6 million tons as well as increasing

the company’s rolling capacity for flat

and non-flat products. The government

equity infusions under Plan IV were not

disbursed in the amounts or at the time

originally projected in this plan.

However, the amounts received by

SIDOR were recorded in the company’s

annual financial statements in the year

they were received. Equity funds also

were provided to SIDOR in accordance

with a 1987 law passed by the

Venezuelan Congress. This law was

published in the Gaceta Oficial No.

33,771 on December 21, 1987. The FIV

received both preferred and common

shares for these equity investments into

SIDOR.

As noted above, funds were also

provided to SIDOR by the Hacienda.

Funds provided by the Hacienda

between 1977 and 1981 were authorized

under Article 11 of a 1976 Special Law

for Public Credit and were also made

pursuant to a June 26, 1977, agreement

between the Hacienda, FIV, CVG and

SIDOR. Under this agreement, the

Hacienda agreed to pay SIDOR’s interest

on loans from the FIV in return for

shares in the company. Equity payments

made between 1984 and 1986 were

provided pursuant to government

Decree 390 of December 1984,

authorizing the Hacienda to help SIDOR

service its foreign debt. Finally, a 1987

loan from the Hacienda to SIDOR was

converted into equity, but recorded as

an advance for future capital increase.

SIDOR records all Hacienda equity

funds in the years the funds were

received. However, the capital

investments appeared in SIDOR’s

annual financial statements as

‘‘Advances for Future Capital Increase.’’

In 1989, all advances were converted

into shares issued to Hacienda, the

delay stemming from a disagreement

between the Hacienda and CVG as to

who should take ownership of the

shares. The issue was resolved in 1989,

and on the same day the shares were

issued to Hacienda, they were

transferred to CVG, SIDOR’s parent

company. We have treated these

Hacienda funds as capital investments

in each year in which they were

received by SIDOR.

According to the agreement under

which the Hacienda funds were

provided, the funds are to be treated as

capital infusions.

In 1991, following several years of

restructuring by SIDOR, the GOV agreed

to convert 60 percent of SIDOR’s debt

and the interest accrued on the debt into

equity which was converted into shares

provided to Hacienda. This debt related

to SIDOR’s pre-1986 foreign currency

loans that had been restructured in

accordance with government Decree

1261 of November 15, 1990. As a result

of this conversion, the Hacienda now

holds 39.68 percent of SIDOR’s shares.

As of December 31, 1996, the remaining

60.32 percent were held by SIDOR’s

parent company, CVG.

In 1993 and 1994, also in connection

with SIDOR’s Plan IV expansion project,

CVG transferred some of the land on

which the company constructed the

Plan IV expansion. The land was used

as payment for unpaid capital

subscriptions from CVG. At the time,

CVG purchased only about half of the

1,860,000 shares in SIDOR it had

subscribed to. We consider the land

transfers to be capital investments in

each year in which they were received

by SIDOR.

We determine that the equity

infusions into SIDOR in the years 1978

through 1987, 1989 through 1991, 1993

and 1994 confer a benefit under section

771(5)(E)(i) of the Act because the GOV

investments were not consistent with

the usual investment practice of private

investors. See the discussion on

‘‘Equityworthiness’’ above. Also, these

equity infusions are specific within the

meaning of section 771(5A)(D) because

they were limited to one company.

As explained in the ‘‘Subsidies

Valuation Information’’ section, we have

treated equity infusions in

unequityworthy companies as grants

given in the year the capital was

received. We have further determined

these infusions to be non-recurring

subsidies. Therefore, we have allocated

the benefits over 20 years.

Venezuela experienced periods of

high inflation during the period 1978

through 1996 (the rates ranged from 7

percent to 103 percent). In the

Preliminary Determination, we found

that it was appropriate to take into

account the effects of inflation to

accurately value the benefit from GOV

equity infusions. See 62 FR at 41943.

We did this by adjusting the principal

component of the benefit by the

inflation index, using the year of receipt

as the reference year to measure

inflation. We also adjusted the interest

component by adding the rate of

inflation in each year to the discount

rate.

Based on our verification and

comments from interested parties, we

find that the methodology used in the

preliminary determination to account

for inflation should be changed. First,

prior to 1987, inflation was relatively

low and, as such, we do not consider it

appropriate to adjust for inflation prior

to 1987. In 1987, inflation increased to

40 percent and thereafter remained

consistently high, reaching 103 percent

in 1996. The period after 1986,

therefore, can clearly be distinguished

from the prior years as marked by

consistently high inflation. Accordingly,

when calculating the benefit to SIDOR

during the POI from the GOV equity

infusions, we adjusted the nominal

values of the equity infusions to account

for inflation from 1987 through 1996.

See the Interested Party Comment

section of this notice for a more detailed

discussion of this adjustment.

As we noted under the ‘‘Discount

Rate’’ section above, in calculating the

benefit from equity infusions received

prior to 1987, we have used the shortterm bolivar interest rates. For the

period 1987 through 1996, we have

accounted for inflation in our benefit

calculation by converting the equity

infusions into U.S. dollars after 1986.

This conforms with our past practice

and with business practices in

Venezuela. See Brazil Steel, 58 FR at

37298. For example, a principle source

of funding for capital investment in

Venezuela was ‘‘overseas foreign

currency-denominated financing.’’ See

Memo Re: Meetings with Commercial

Bankers at 2. Also, SIDOR’s long-term

loans were denominated in foreign

currency. Accordingly, for equity

infusions received prior to 1987, we

converted the remaining face value of

the grant in 1987 into U.S. dollars using

the bolivar/dollar exchange rate
Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices 55021

prevailing in that year. For the

remaining allocation period, we then

applied the long-term U.S. dollar

interest rate described in the ‘‘Discount

Rate’’ section of this notice. For equity

infusions received after 1986, we

converted the infusion into U.S. dollars

at the exchange rate in effect on the day

the infusion was received by SIDOR.

The discount rate used was the same

described above.

To calculate the total benefit from the

infusions to SIDOR, we summed the

benefit allocated to the POI from each

equity infusion. After converting the

benefit from U.S. dollars into bolivars,

we then divided that total benefit by

SIDOR’s total sales of all products

during the POI. On this basis, we

determine the net subsidy for this

program to be 23.61 percent ad valorem

for SIDOR.

B. Dividend Advances From the

Hacienda

Between 1977 and 1981, pursuant to

a June 26, 1977, agreement among the

Hacienda, FIV, CVG and SIDOR, the

Hacienda paid dividends on behalf of

SIDOR on the preferred shares held by

FIV. These were recorded in SIDOR’s

accounting records as ‘‘Dividend

Advances.’’ These dividend advances

are still reported in SIDOR’s 1996

financial statement. According to the

1996 financial statement, the final

treatment of these dividend advances

has not been decided. Because the

payment by the Hacienda of dividends

on behalf of SIDOR is based on an

agreement signed by the Hacienda, FIV,

CVG and SIDOR, the payment of

dividends by the Hacienda, a

government agency, is limited to one

company, SIDOR, and is, thus, specific

under section 771(5A)(D) of the Act. To

determine whether a benefit has been

provided, the Department must

determine whether SIDOR was obligated

to pay dividends to FIV on the preferred

shares. If the Hacienda relieved SIDOR

of a payment obligation, then the

payment of dividends by the Hacienda

on behalf of SIDOR constitutes a

countervailable subsidy.

According to its supplemental

questionnaire response, SIDOR had

fiscal losses in the years the dividend

payments were made. Therefore, SIDOR

stated that it was not obligated to pay

any dividends. To determine whether

SIDOR was obligated to pay the

dividends to FIV on the preferred

shares, we examined the 1977

agreement among the Hacienda, FIV,

CVG and SIDOR. We verified that under

this agreement, the preferred shares

yielded a fixed yearly dividend

equivalent to seven percent of their

nominal value. Therefore, SIDOR was

obligated to pay fixed yearly dividends

to FIV. Because the payment of

dividends by the Hacienda to FIV

relieved SIDOR of a financial obligation,

we determine that the outstanding

balance of the ‘‘Dividend Advances’’

constitutes a benefit under section

771(5)(E) of the Act.

In order to calculate the benefit from

this program, we treated the dividend

advances as interest-free short-term

loans because the advances appear to be

liabilities of SIDOR. The 1977

agreement under which these dividends

were paid does not state that these are

capital infusions into SIDOR by the

Hacienda. In addition, neither the GOV

or SIDOR has treated these dividend

advances as capital infusions. Thus, it

appears, that SIDOR is still liable for

repayment of the dividend advances.

To calculate the benefit in the POI, we

took the amount of the dividend

advances reported in SIDOR’s 1996

financial statement and calculated the

amount of interest the company would

have paid in 1996 if it had received an

interest-free loan equal to the amount of

the dividend advances. We used as our

benchmark interest rate the annual

average short-term interest rate reported

by the GOV in its supplemental

response. We used this as the

benchmark because we verified that

SIDOR did not have short-term bolivar

lending during the period of

investigation. The calculated interest

savings was then divided by SIDOR’s

total sales in the POI. On this basis, we

determine the net subsidy for this

program to be 0.08 percent ad valorem

for SIDOR.

II. Programs Determined To Be Not

Countervailable

A. GOV Loan to SIDOR in 1990

We initiated an investigation of this

program based upon petitioners’

allegation that the GOV replaced a

$1,507 million commercial loan to

SIDOR with a 15-year loan from the

government. We verified that this 1990

GOV loan to SIDOR was part of a debt

restructuring program which was

examined and found not countervailable

in the Final Affirmative Countervailing

Duty Determination: Ferrosilicon From

Venezuela; and Countervailing Duty

Order for Ferrosilicon From Venezuela,

58 FR 27539 (May 10, 1993). Because

petitioners have provided no new

information or evidence of changed

circumstances to warrant a

reconsideration of that determination,

we continue to find this GOV debt

restructuring program, under which this

1990 loan was received, not

countervailable.

B. Government Provision of Electricity

Electricity is provided to SIDOR by

EDELCA, a government-owned utility

company. Both SIDOR and EDELCA are

part of the CVG Group. EDELCA is the

largest utility company in Venezuela

and generates 70 percent of the

electricity consumed in Venezuela.

Electricity rates between EDELCA and

its industrial customers are not

regulated. Tariff rates are set by

EDELCA for a one-year period

corresponding to the calendar year.

Almost all of EDELCA’s clients are

industrial customers or other utility

companies in Venezuela. The rates

between EDELCA and the other utility

companies are regulated by the

Regulatory Commission of Electric

Energy (RCEE), while the rates charged

by EDELCA to its industrial clients are

not regulated. In 1990, EDELCA began

using dollar per-unit rates rather than

bolivar per-unit rates for its industrial

rates in order to protect its tariff

structure against the effects of inflation.

In that year, EDELCA also changed its

rate structure to one based upon its

costs plus a return on its capital. To

calculate its costs, EDELCA divided

capital costs by capacity and factored in

general operating costs, transmission

costs, administrative costs, and a ten

percent return on capital. To calculate

its base industrial tariff rate, it then

determined how much higher a price

the company would need to charge in

order to generate enough income to

service its debt and maintain a profit.

This base rate then served as the basis

for the industrial rates set in subsequent

years. Because this base rate was

calculated in dollars, it has generally

been increased in each subsequent year

by the U.S. Consumer Price Index.

EDELCA makes small adjustments to

this base rate to take into account

different transmission and

transformation costs for its customers.

We verified that certain industrial

clients with higher transmission costs

due to the distance from the generation

site paid slightly more than the basic

rate in order to account for EDELCA’s

increased cost of transmission. In

addition, some other industrial clients,

such as SIDOR, maintained their own

substations and transformers. These

customers received a slightly lower rate.

According to section 771(5)(E) of the

Act, the adequacy of remuneration with

respect to a government’s provision of a

good or service ‘‘* * * shall be

determined in relation to prevailing

market conditions for the good or

service being provided or the goods
55022 Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices

being purchased in the country which is

subject to the investigation or review.

Prevailing market conditions include

price, quality, availability,

marketability, transportation, and other

conditions of purchase or sale.’’

Particular problems can arise in

applying this standard when the

government is the sole supplier of the

good or service in the country or within

the area where the respondent is

located. In this situation, there may be

no alternative market prices available in

the country (e.g., private prices,

competitively-bid prices, import prices,

or other types of market reference

prices). Hence, it becomes necessary to

examine other options for determining

whether the good has been provided for

less than adequate remuneration. This

consideration of other options in no way

indicates a departure from our

preference for relying on market

conditions in the relevant country,

specifically market prices, when

determining whether a good or service

is being provided at a price which

reflects adequate remuneration.

With respect to electricity, some of

the options may be to examine whether

the government has followed a

consistent rate-making policy, whether

it has covered its costs, whether it has

earned a reasonable rate of return in

setting its rates, and/or whether it

applied market principles in

determining its rates. Such an approach

is warranted where it is only the

government that provides electricity

within a country or where electricity

cannot be sold across service

jurisdictions within a country and there

are divergent consumption and

generation patterns within the service

jurisdictions.

In the instant case, we verified that

during the period of investigation

EDELCA set its industrial rates,

including the rate charged to SIDOR,

based upon market principles, including

adjusting its standard industrial rate for

differences in transmission and

transformation costs and for level of

consumption. In addition, we note that

EDELCA’s rate making policy

incorporates a return on its costs and

that the return earned by EDELCA on it

sales to SIDOR was higher than the

average return of its industrial clients.

We verified that EDELCA’s pricing

policies with respect to SIDOR and its

industrial customers are consistent with

the pricing policies of private utility

companies in Venezuela. Therefore, we

find that the rates charged by EDELCA

to SIDOR are not countervailable under

section 771(5)(E) of the Act.

Adequacy of remuneration is a new

statutory provision which replaced

‘‘preferentiality’’ as the standard for

determining whether the government’s

provision of a good or service

constitutes a countervailable subsidy.

The Department has had no experience

administering section 771(5)(E) and

Congress has provided no guidance as to

how the Department should interpret

this provision. This case and the other

concurrent wire rod cases mark the first

instances in which we are applying the

new standard. We anticipate that our

policy in this area will continue to be

refined as we address similar issues in

the future.

III. Programs Determined To Be Not

Used

A. Government Guarantees of SIDOR’s

Private Debt in 1987 and 1988

In 1987 and 1988, the GOV

guaranteed loans provided to SIDOR by

Credito Italiano and Kreditanstalt Fuer

Wiederaufbau (KfW), respectively. Both

of these loans were Deutschmarkdenominated loans linked to the

London Interbank Offering Rate

(LIBOR).

We verified that the 1987 and 1988

loans were specifically applied for and

authorized as part of a program to

finance the expansion of SIDOR’s pipe

mill. The approval documents specify

that the loans were for the expansion of

SIDOR’s pipe mill, in particular for

purchasing equipment. These were

authorized under the December 10,

1987, ‘‘Law for the Contracting and

Financing of the First Stage of the

Project to Expand and Modernize

SIDOR’s Pipe Mill.’’ Because we verified

that the KfW and Credito Italiano loans

were tied to financing the expansion of

SIDOR’s pipe mill, we determine that

the loans and the government

guarantees of the loans are tied to nonsubject merchandise and, thus, do not

provide a benefit to wire rod. Therefore,

we determine that the GOV loan

guarantees did not confer

countervailable benefits on the

production and/or exportation of subject

merchandise, and that this program was

not used during the POI.

B. Government Provision of Iron Ore

Iron ore is a bulky, low-priced

commodity that is traded on the

international market and is used in the

production of steel. Petitioners alleged

that Ferrominera, a government-owned

company, provided iron ore to SIDOR

for less than adequate remuneration.

SIDOR and Ferrominera are two of the

37 companies which comprise the CVG

Group, a holding company owned by

the GOV. SIDOR purchases all of its iron

ore from Ferrominera. Ferrominera is

the only producer of iron ore in

Venezuela, and 99 percent of its

domestic sales are to the steel industry.

As explained in our preliminary

determination, SIDOR and Ferrominera

maintain two separate contracts—one

for the supply of iron ore and one for

its transportation. SIDOR and

Ferrominera have a multi-year supply

contract under which Ferrominera sets

SIDOR’s iron ore prices on an annual

basis. The unit price (i.e., the price per

‘‘metric ton natural iron unit’’) is set in

U.S. dollars, and the terms of sale are

FOB, place of loading. When

Ferrominera announced a new price for

1996, SIDOR objected and tried to

renegotiate the price. Because of this

objection, Ferrominera did not apply the

new price. After negotiations failed,

SIDOR and Ferrominera entered into

arbitration conducted by the CVG

Group.

For the preliminary determination, we

calculated a program rate by comparing

the price of iron ore that Ferrominera

charged SIDOR during 1996 with a

benchmark price constructed from

published price information on the

record. However, at verification we

learned that the CVG arbitration

decision was not made until March

1997; thus the price that SIDOR had to

pay for the iron ore was not finally set

until after our period of investigation.

Because the 1996 price of iron ore was

not finalized until after the period of

investigation and final payment was not

made by SIDOR until July 1997, we

consider it inappropriate to assess the

countervailability of Ferrominera’s

provision of iron ore to SIDOR for

purposes of this final determination.

We have taken this approach in light

of our practice to countervail subsidies

based on the timing of the receipt of the

subsidy. See, e.g., Final Affirmative

Countervailing Duty Determination:

Certain Pasta From Italy, 61 FR 30288

(June 14, 1996), and Certain Welded

Carbon Steel Pipes and Tubes and

Welded Carbon Steel Line Pipe From

Turkey: Final Results of Countervailing

Duty Administrative Reviews, 62 FR

43984 (August 18, 1997). Because the

final price for the iron ore was not set

and paid until 1997, the receipt of any

potential benefit under this program is

1997, which is outside the period of

investigation. Moreover, because the

standard for adequate remuneration

specifies that transportation is one of

the factors to consider in determining

whether the provision of a good is for

less than adequate remuneration, we do

not consider it appropriate in this case

to analyze the transportation services for

the delivery of iron ore separately from

the pricing contract of such ore.
Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices 55023

Therefore, the issue of whether iron ore

is provided to SIDOR for less than

adequate remuneration will be

examined in an administrative review

conducted under section 751 of the Act,

if a countervailing duty order is issued.

We note that the interested parties

submitted comments on whether iron

ore was provided to SIDOR for less than

adequate remuneration. These

comments dealt with the methodology

which should be employed in analyzing

whether iron ore was provided for less

than adequate remuneration. Because

we are not making a determination with

respect to the countervailability of this

program, and because none of the

comments were related to the issue of

the timing of the potential benefit, it is

not necessary to address the comments

submitted by the interested parties for

purposes of this final determination.

C. Preferential Tax Incentives Under

Decree 1477

Petitioners alleged that Decree 1477

provides partial or total income tax

exemptions and other tax credits to

companies in disadvantaged regions,

including Bolivar, where SIDOR is

located. According to petitioners,

companies that relocated or commenced

an expansion after March 23, 1976,

qualify for tax incentives. We verified

that SIDOR never applied for or

received benefits under this program.

Therefore, we determine that this

program was not used by SIDOR during

the POI.

IV. Program Determined To Be

Terminated

Special Permissive Regulations for

Exporters (REFE)

The REFE program was enacted

September 9, 1994, to enable companies

and individuals to access foreign

currency more easily. Prior to 1994,

companies and individuals were not

allowed to maintain foreign currency

accounts. Rather, they had to make

specific requests for access to foreign

currency from the Office of Technical

Exchange Administration (OTAC,

Officina Technica de Administration de

Combina). In 1994, Venezuela endured

a banking crisis. In response to this

crisis, the GOV halted all exchange of

bolivars for foreign currency, leaving

companies and individuals with

virtually no access to foreign currency.

During July and August, 1994,

companies in Venezuela were unable to

service foreign currency-denominated

debt. In response to this situation, the

GOV initiated the REFE program. The

REFE program allowed companies and

individuals to use directly their foreign

currency receipts. Under the program, a

company could maintain a foreign

account with which it could directly

service its foreign currency debts or

directly pay for imported inputs.

We verified that on April 17, 1996,

the GOV terminated the REFE program

with the enactment of Decree 1,292,

which established the free convertibility

of currency in Venezuela and removed

the exchange control regulations then in

place. With the establishment of the free

convertibility of currency, we also

determine that there are no residual

benefits from the REFE program. Thus,

we determine that the REFE program is

terminated.

Interested Party Comment

Comments not already addressed in

the ‘‘Subsidies Valuation’’ and program

sections above, are addressed separately

below:

Comment: Issues regarding the equity

methodology. Both petitioners and

respondent argue that the methodology

the Department used in the preliminary

determination to calculate the benefit

arising from equity infusions into

SIDOR incorrectly accounts for

inflation. Petitioners’ position is that the

Department should not have used

variable short-term interest rates as

discount rates. Rather, they argue that

the Department should account for

inflation by dollarizing (i.e., converting

the grant amount into dollars and using

a discount rate denominated in dollars)

for both the amounts of the subsidies

and the interest rates used to allocate

them across time. They contend that, at

a minimum, the Department should

dollarize the period 1987 to 1996.

Respondent argues that, contrary to

prior practice, the Department adjusted

the benefit derived from the allocated

principal for periods which were not

consistently hyperinflationary. They

argue that hyperinflation is defined as

50 percent inflation or higher, and that

therefore the Department’s methodology

should include inflation adjustments

only for the period 1994–1996. Second,

they argue that, in adjusting the interest

benefit derived from the outstanding

balance of the equity infusion, the

Department double-counted the effects

of inflation by combining the

benchmark rate from the year of receipt

of the equity infusion and the inflation

rate for 1996. Finally, they contend that,

in calculating the risk premium for an

uncreditworthy company, the

Department used an incorrect basis in

certain years which overstated the risk

premium. They propose that national

average short-term interest rates should

be used to calculate the risk premium

for all years in which countervailable

equity infusions were received.

Department’s position: As outlined

above, for this final determination, we

have altered our methodology for

calculating the benefit to SIDOR from

GOV equity infusions. Some of the

modifications to the calculation

methodology reflect our agreement with

arguments made by both respondent

and petitioners. For example, we agree

with respondent that it is not

appropriate to account for inflation over

the entire allocation period. Also, we

accept petitioners argument that, to

capture the impact of inflation on the

nominal benefit to SIDOR in the years

1987 through 1996, it is appropriate to

convert the subsidy amounts into U.S.

dollars. Additional changes, in

particular the use of short-term discount

rates through 1986 and U.S. dollar

discount rates from 1987 through 1996,

reflect our findings at verification and

the practices in Venezuelan financial

markets.

During the period 1978 through 1986,

the annual inflation rates in Venezuela

ranged from 7 to 21 percent. In 1987,

however, the annual inflation rate

increased to 41 percent. Since then, it

has not fallen below 30 percent and has

reached levels as high as 100 percent by

1996. The period after 1986, therefore,

can clearly be distinguished from the

prior years, because the latter period

was marked by consistently high and

rising inflation.

According to respondent, inflation in

Venezuela only reached

‘‘hyperinflationary’’ levels from 1994 to

1996, when the rates ranged between 57

and 103 percent. Therefore, respondent

argues that in calculating the benefit

from GOV equity infusions, inflation

should be taken into account only

during the period 1994 through 1996. In

support of this, respondent cites certain

steel products from Mexico, where the

Department found that Mexico was

hyperinflationary from 1983 through

1988, when inflation ranged between 57

and 131 percent. See Final Affirmative

Countervailing Duty Determination:

Certain Steel Products From Mexico, 58

FR 37352, 37355 (July 9, 1993). We did

not account for inflation in that case

when the rate was between 19 and 29

percent. Accordingly, respondent

implies that the methodology used in

Steel From Mexico stands for the

proposition that the Department only

takes into account inflation during

periods in which annual inflation is 50

percent or higher.

We disagree with respondent’s

interpretation of the approach used in

that case. In Steel From Mexico, we did

not specify that an economy must reach
55024 Federal Register / Vol. 62, No. 204 / Wednesday, October 22, 1997 / Notices

a certain level of annual inflation before

we will account for inflation in the

benefit calculation. Adopting a

threshold would miss the point of

adjusting for inflation. Rather, in Steel

From Mexico, our concern was how to

treat a period of high inflation that was

in the middle of the allocation stream

and clearly anomalous with respect to

the periods before and after. As

respondent noted, the inflation rate in

Mexico dropped from 114 percent in

1988 to 20 percent in 1989, bringing to

an end the period of anomalous rates. In

contrast, inflation in Venezuela has

been consistently high from 1987

onwards, reaching 81 percent in 1989,

and topping 100 percent in 1996, the

POI. At no time after 1987 did inflation

return to the lower levels experienced

during the period prior to 1986.

Petitioners correctly note that, during

periods of consistently high inflation, as

experienced by Venezuela after 1986,

the nominal value of a company’s nonmonetary assets increases with inflation.

Therefore, untied subsidies that are

allocated over time and which benefit a

company’s productive activities also

increase in real terms because of

inflation. Adjusting for inflation during

anomalous periods of high inflation

merely recognizes this fact, and the

adjustment takes into account the value,

in real terms, of the subsidy. With

respect to this, the methodology used in

the Preliminary Determination to

calculate the interest component of the

benefit, was incorrect. In particular, we

incorrectly added the rate of inflation to

the discount rate. This approach treats

inflation as a benefit in each year.

However, as explained above, inflation

increases the real value of non-monetary

assets, such as machinery, over time,

and is not a benefit in each year. In any

case, we have modified our approach by

converting the equity infusions into

dollars after 1986, so that an adjustment

to the interest component is no longer

necessary.

As explained in the ‘‘GOV Equity

Infusions into SIDOR’’ section above,

we determine that, for periods of high

inflation in Venezuela (i.e., 1987

through the POI) it is appropriate to

convert non-recurring subsidies into

dollars. This approach is consistent

with the Department’s past practice, in

particular when no appropriate longterm domestic discount rate exists for

use in our grant calculation. Further, as

petitioners correctly note, this approach

conforms with SIDOR’s actual business

practices and commercial practices in

Venezuela. See Memo Re: Meetings with

Commercial Bankers at 2.

Respondent argues that inflation was

not a constant phenomenon in

Venezuela. For this reason, respondent

claims that other cases in which the

Department adopted a dollarization

methodology, such as Brazil Steel, are

not relevant because, in that case,

inflation was consistently above 350

percent. We disagree with respondent

because, once again, the issue is not

whether annual inflation reaches a

certain threshold level in a country.

Rather, as noted above, adjusting the

benefit for inflation merely accounts for

the fact that, when inflation is

consistently high, the value of nonmonetary assets increases, and the value

of the subsidy that benefits the nonmonetary assets also increases. By

converting the subsidy into dollars at

the beginning of a high inflation period

and later converting the benefit

allocable to the POI back into domestic

currency at the exchange rate prevailing

in the POI, we are taking into account

that increase in the real value of the

subsidy.

Respondent claims that the risk

premium used by the Department for

the 1978 through 1986 period is

overstated, and that the Department

should use the short-term interest rates,

with a risk premium, to calculate the

benefit. Because we are now using the

rate advocated by respondent for the

1978 through 1986 period, the issue is

now moot.

Suspension of Liquidation

In accordance with section

705(c)(1)(B) of the Act, we have

calculated a subsidy rate for SIDOR, the

one company under investigation. This

subsidy rate is 23.69 percent ad

valorem. This rate would also be

applicable to any companies not

investigated or any new companies

exporting the subject merchandise.

We have concluded a suspension

agreement with the Government of

Venezuela which eliminates the

injurious effects of imports from

Venezuela (see, Notice of Suspension of

Investigation: Steel Wire Rod from

Venezuela being published concurrently

with this notice). As indicated in the

notice announcing the suspension

agreement, pursuant to section 704(h)(3)

of the Act, we are directing the U.S.

Customs Service to continue suspension

of liquidation. This suspension will

terminate 20 days after publication of

the suspension agreement or, if a review

is requested pursuant to section

704(h)(1) of the Act, at the completion

of that review. Pursuant to section

704(f)(2)(B) of the Act, however, we are

not applying the final determination

rate to entries of subject merchandise

from Venezuela; rather, we have

adjusted the rate to zero to reflect the

effect of the agreement.

We will notify the International Trade

Commission (ITC) of our determination.

In addition, we are making available to

the ITC all non-privileged and nonproprietary information relating to this

investigation. We will allow the ITC

access to all privileged and business

proprietary information in our files,

provided the ITC confirms that it will

not disclose such information, either

publicly or under an administrative

protective order, without the written

consent of the Deputy Assistant

Secretary for Import Administration.

If the ITC’s injury determination is

negative, the suspension agreement will

have no force or effect, this investigation

will be terminated, and the Department

will instruct the U.S. Customs Service to

refund or cancel all securities posted

(see, section 704(f)(3)(A) of the Act). If

the ITC’s injury determination is

affirmative, the Department will not

issue a countervailing duty order as long

as the suspension agreement remains in

force, and the Department will instruct

the U.S. Customs Service to refund or

cancel all securities posted (see, section

704(f)(3)(B) of the Act).

This notice is issued pursuant to

section 704(g) of the Act.

Return or Destruction of Proprietary

Information

This notice serves as the only

reminder to parties subject to

Administrative Protective Order (APO)

of their responsibility concerning the

return or destruction of proprietary

information disclosed under APO in

accordance with 19 CFR 355.34(d).

Failure to comply is a violation of the

APO.

This determination is published

pursuant to section 705(d) of the Act.

Dated: October 14, 1997.

Robert S. LaRussa,

Assistant Secretary for Import

Administration.

[FR Doc. 97–27983 Filed 10–21–97; 8:45 am]

BILLING CODE 3510–DS–P