U.S. Market: Foundation for the Future

In part two of a two-part series, William G. Schubert, the new U.S. Maritime Administrator (MarAd), speaks with H. Clayton Cook, Jr. about the current standing and future direction of maritime activities in the United States.

Cook: I'd like to pick up where we left off last time.

You were explaining where matters stood concerning MarAd's monitoring the time chartering of U.S.-flag vessels by foreign nationals.

Let me say a few words for the benefit of our readers.

As you and I both understand, the Shipping Act, 1916, requires that MarAd approve all transfers of U.S.-flag vessels, or interests in these vessels, to non-citizens.

Time charters are such a transfer of interest, and time charters to foreign nationals require MarAd approval.

Over the years since 1916, and until 1992, MarAd required the submission of such time charters for MarAd review prior to MarAd approval. With certain limited exceptions, this submission for review was eliminated in 1992 as a part of the Administration's deregulation efforts. And, MarAd issued a so-called "advance general approval" of all such charters. So, at the present time a foreign national can time charter a U.S.-flag vessel without MarAd's knowledge or any specific approval.

I see that MarAd has published the Federal Register Notice that you mentioned at our last meeting. The Notice reviews the history of the 1992 changes and states that any MarAd change in policy will require a further MarAd rulemaking proceeding. Would you comment?

Schubert: As I've said before, the world is a different place today from what it was in 1992. A time charterer determines what cargoes will be loaded and discharged and directs the vessel's schedules and its ports of call. A U.S.-flag vessel chartered to an unknown foreign national could present problems. The vessel is a U.S.-flag vessel, so one might assume that it doesn't pose any risks. But the foreign national could direct that the vessel be loaded in a fashion and directed to a location were there is the possibility of mischief.

And, this could occur without the vessel's U.S.

citizen master and crew being fully aware of what was going on.

You will forgive me if I don't comment further. As a first step we wish to obtain the industry's advice concerning what might be involved if MarAd returned to a case-by-case review. We will be receiving industry comments in response to our Federal Register Notice.

We will review these comments, and discuss these matters with the Coast Guard and other concerned agencies, and go from there.

OPA 90 TANKERS Cook: When we closed last time you were beginning to speak about your commitment to work with the Navy, our U.S. shipbuilding and repair yards, labor, our U.S. commercial vessel operators, and Congress to develop a unified long-term strategy to maintain our shipyard capacity. Could we pick up on that?.; | Schubert: Yes. MarAd needs to address the issues of U.S. shipyard productivity, modem shipyard infrastructure. R & D investment, and training of a sufficient number of skilled workers. I want to work with our U.S. shipyards in identifying opportunities in our domestic trade, and in then turning these opportunities into successful projects. Everyone agrees that our shipyards need to identify vessel designs that they can build in series in order to achieve adequate economies of scale. The Kvaerner Philadelphia Shipyard may be headed in that direction with its container vessel design. T believe this can be done in meeting our needs for Oil Pollution Act of 1990 (OPA 90) product tankers and with other Vessel designs.

Cook: There has been a good deal of discussion concerning a "short fall" of tankers sufficient to meet OPA 90 needs. How would you define the "short fall" problem?

What can MarAd do to assist in solving the problem?

Schubert: The General Accounting Office's Year 2000 report on OPA 90 compliance recommended that MarAd monitor the progress being made to replace single-hull vessels with double- hull vessels, and keep the relevant House and Senate Committees advised of the progress being evidenced in meeting OPA 90 requirements. 1 MarAd issued a report on this subject "U.S. Tank Vessel Markets, Impact of OPA-90 Double Hull Requirements," this past June.

The report is available to interested parties on line at www.marad.dot.gov\statistics, so I won't go into all of the detail here.2 Briefly, however, in performing the required analyses, it is necessary to break the industry down into four sections: domestic crude carriers, domestic product tankers, coastal tank barges, and foreign flag tankers serving our U.S. product import trades.

The Alaska crude oil trades are the primary source of demand for the U.S. crude carriers. The oil companies involved in Alaska production have undertaken the OPA 90 responsibility here. At the close of 2001 there were eight new double hull crude carriers on order with more than enough capacity to meet OPA 90 year 2005 requirements. So we can rest easy on this aspect of OPA 90 compliance.

The OPA 90 problem, which is the subject of widespread concern, is the apparent short fall in U.S.-flag product tankers. These vessels are engaged the historic U.S. Gulf Coast to north of Hatteras, and in Florida and West Coast trades, and in movements on the West Coast itself. These trades have been declining in recent years and will continue to decline.

The shorter runs in these trades became the province of tug tank barge services some years ago. More recently, with increases tank barge productivity, and the introduction of articulated tug barge combinations with larger barges, there has been some substitution of these barges for product tankers on the longer runs as well. So this factor must be considered.

Age and OPA 90 resulted in the removal of 38 product tankers from the domestic trades from 1994 to 2000. I expect the removal of another 12 vessels by the end of 2005. We have had 11 newly built or reconstructed double-hull product tankers delivered over the period 1996 to 1999 at prices which have not exceeded $40 to $45 million per vessel. There are eight CDSbuilt product tankers that will become eligible when they become 20 years of age. However, when all is said and done, we appear to be short U.S.-flag tonnage.

But, for our U.S. vessel operators, the "problem" that arises in our current situation is the substitution of foreign products for domestic products once U.S.-flag transportation costs reach a certain level.

You see, the U.S. also obtains a portion of its petroleum product needs through product imports. Virtually all of these product imports are carried by foreignflag tankers. As of the end of 2000, 83 percent of the worldwide foreign-flag tanker fleet was eligible to for U.S. trades. Between now and the end of 2005 over 34 million DWT of existing foreign-flag capacity will become ineligible by OPA 90 standards. However, current new buildings and those, which we project, appear sufficient to more than offset this reduction.

Further, looking back at the year 2000, only about 51 percent of the foreign-flag tanker fleet eligible for U.S.

trades actually served U.S. trades. So, there is a substantial pool of existing world tonnage that can move into the U.S. trades,. Once the differential between foreign- flag rates and U.S.-flag rates reaches a certain point,..for example, the,delivered cost of imported petroleum products in the Northeast becomes less than the delivered cost of domestic petroleum products transported from our Gulf Coast refineries to the Northeast.

The U.S. operators appear to be fine shape in terms of achieving the daily rates necessary for the profitable employment of the existing U.S.-flag vessels, which cost no more than $40 million to $50 million. However.

with the U.S. shipyards now speaking in terms of vessel prices in the $80 million to $100 million range, U.S. operators will need a market, which will support $40,000 to $50,000 in daily hire, if they are to employ these vessels profitably. This market may not exist, largely because the substitution of foreign for domestic products that I have just explained.

Cook: That is a fairly large daily hire cost burden to overcome. What role can MarAd play in assisting the U.S.-flag operators as they seek to solve this problem?

Schubert: Perhaps MarAd can be a useful intermediary.

We need to see what can be done to reduce the U.S. operator's costs to a level where they generate daily rates that the market will sustain. You can look at the daily rate as composed of vessel operating cost and vessel capital cost components. There is not much that we can achieve in reductions in operating costs.

So, we must focus on the capital cost component.

This can be broken into two parts, the cost of the vessel and the cost of financing the vessel.

We need to address shipyard prices and financing costs. The starting point for the first issue might be a standard product tanker design that could be built in series by one or more U.S. shipyards. I am planning meetings on this subject, first with U.S.-flag operators to gage their sense of the market and their thoughts about a standard design, next with potentially interested shipbuilders, and finally with petroleum company users, and with the U.S. Navy which may itself be in need of this size tanker.

Next we need to focus on sources for equity and debt to facilitate lower cost financing. The Office of Management and Budget (OMB) has advised MarAd that it will have no objection to our renewing our capital construction fund (CCF) proposals this fall as we go into the 2004 budget cycle. There is almost $1.4 billion of U.S. citizen shipowner money on deposit there. The owners have already set this money aside for shipbuilding.

Much of this money might be available for use as equity for product tanker construction.

This could be used in combination with borrowings from whatever financing sources will be available at that time. The important point to understand is that these financing costs may be almost as important as the shipyard price in the daily rate computation.

Cook: That is an ambitious program for action. 1 might like to deal a bit further with the subject of the sources for vessel debt financing, but let's move on. What is your time table?

Schubert: I expect to have completed the first of these meetings, with the U.S.-flag operators, this month.

These meetings will have been accomplished before your subscribers will read about them in this interview. We will follow on from there and establish an appropriate schedule and time lines.

Coastwise Trailer Movements Cook: In your March 14th FY 2003 authorization testimony you spoke about the traffic congestion problems that the U.S. is facing, and about Coastwise shipping as one means of dealing with the problem. Would you explain the problem as you see it?

Schubert: The most highway traffic congested section of the United States is our Northeast Corridor. These 13 states and the District of Columbia contain 27 percent of entire U.S. population.

Population density is comparable to that of the fifteen countries in the European Union. New Jersey's exceeds that of the EU's most densely populated country The Netherlands.

Your readers who have driven Inter- state 95 are aware of the problem today.

But, matters are going to get much worse. Current studies predict a doubling of freight traffic by 2010 and a tripling by 2030. Looking at 2010, these studies indicate that, after taking into account rail freight service expansions, we are going to be adding 10.000 more trucks to 1-95 per day — which is the equivalent of adding one more truck every 270 yards from Maine to Florida.

Let me add that similar problems exist in the 1-5 and I-10 corridors.

Do you know that it typically costs about $32 million to add a single mile of four lane interstate highway, and about $100 million per interchange? This does not include the cost of land acquisition.

So, it's clear that we can't build out of the problem with additional highway construction.

Cook: What can be done?

Schubert: For the 1-95 corridor the obvious answer is water transportation.

These water routes are existing "highways" that are almost entirely unused. These water highways, I believe that you have called them "W- 95s," can be placed in service with only the modest costs of roadstead and terminal construction, and of the vessels involved. These W-95 highways do not require regular maintenance and periodic resurfacing. Further. FHWA advises us that if we can reroute a substantial portion of the heavy trailers in this fashion we will reduce the costs of highway and bridge maintenance.

Cook: A moment ago you mentioned the European Union. You have recently come back from a trip to the EU where you were looking at their use of water transport. Can you say a word about that?

Schubert: Yes, in contrast to our situation, in Europe today 40 percent of the freight moved within the EU is moved by water. Further, the EU has an ambitious "motorways of the sea" initiative designed to increase the share of water borne carriage between EU members.

The Europeans have focused on the lower environmental and social costs of waterborne transportation of freight as important elements in EU strategic planning. I believe that these benefits are fairly obvious, and that the Europeans are on the right track.

Much of the attention on this subject has been focused on the transport of sea containers coming into the U.S. at a port like Port Newark and then being transferred up or down the Coast. Actually, the more important problem on 1-95 is with the purely domestic moves in the large 53 foot trailers. Taking these 53 footers off of 1-95, and off the metropolitan bypasses like 1-495, would do a great deal to alleviate congestion and the reduce the potential for accidents. Air quality would be a major benefactor.

Trailers with hazardous materials transported in this fashion would be removed from bridge and tunnel transit as well as bypassing major metropolitan centers.

Cook: How do you get this started?

Schubert: First, we need to work within DOT with the Federal Highway Administration (FHWA) and the Office of the Assistant Secretary for Transportation Policy (OST Policy), and then work with the Administration, to make Coastwise shipping a part of our national transportation system planning. For example, we are exploring opportunities for the inclusion of the water mode in Tea 21, and its inclusion in the six year surface transportation authorization bill that is now being considered by Congress.

We are working with FHWA and OST Policy, and with the Administration, on these issues.

MarAd and FHWA are working develop critical cargo data statistics in freight movements within the United States which will illustrate the viability of Coastal shipping markets. This information will be provided to the National Ports and Waterways Institute (NPW1) for use in the fourth and final phase of their study of the East, Gulf and West Coasts. This study will identify location pairs and cargo volumes where water transportation can be most easily introduced.

We expect the results of this NPWI study to be available in late 2002 or early 2003.

MarAd and FHWA are planning a conference on Coastal "short sea" shipping in New York City for this November.

We expect conference participation from across the spectrum of those concerned.

The conference will explore the dynamics of a robust U.S. Coastal shipping system, the job and entrepreneurial opportunities that such a system would offer participants, and the benefits that would accrue to everyone in the reduction of highway congestion and improvements in air quality.

We expect this conference to bring the most interested stakeholders together.

The objective will be to identify Coastwise shipping opportunities, and terminal, roadstead and vessel designs, and to discuss problems and solutions; the "how" of developing successful Coastwise systems.

We hope to achieve a consensus, which will provide the support neces- sary for a coordinated program to develop commercially viable Coastal shipping routes to serve the East, Gulf and West Coasts.

Cook: What sorts of financing are available to get these Coastal short sea systems underway? Will the conference address the financing aspects of these systems?

Schubert: Yes, conference speakers will address the financing aspects. One of the most important financing sources for terminal and roadstead construction in non-attainment areas is Congestion Mitigation Air Quality (CMAQ) money. Most East Coast locations will qualify for CMAQ help, as will some locations on the Gulf and West Coats. However, these projects will have to "get in line" behind existing highway projects, and the timing may be a problem. There are other sources as well.

Cook: What about financing for the vessels?

Schubert: We are exploring various alternatives.

As 1 mentioned earlier, OMB has advised us that it will have no objection to our renewing our CCF program requests this fall. There is almost $1.4 billion of U.S. citizen shipowner CCF money on deposit already set aside for shipbuilding. Some of this money might be available as equity. This could be used in combination with borrowings from whatever financing sources are available at that time.

Cook: I'm pleased with your advice on these CCF program requests. But I'm not necessarily encouraged by what you are saying about sources for debt. In transactions in which I have been involved, the debt portion of the financing has often been the most difficult problem.

But let's move on to our next topic.

A consulting firm advising a Connecticut port city in planning a Coastal waterborne barge service has told me that they do not believe these Coastal services can be successful so long as the Harbor Maintenance Tax (HMT) is applied to the moves. This group's study concludes that a container movement from Port Newark to the Connecticut port city could be done by sea without any deterioration in delivery time, and at a lower cost than by truck. But, it then concludes, that the estimated cost of the HMT makes the movement by barge more expensive than the movement by truck. They use as an example a 40 foot sea container containing manufactured products with a value of $176,000. They say that the tax on this single container would amount to $220.

Schubert: I can't speak to your specific example.

However, MarAd has studied the HMT issue. It is a serious issue. Of course, movements to and from Alaska, Hawaii and Puerto Rico are exempted. But movements between other states are not. The HMT issue is one that MarAd and FHWA will have to examine more closely as we develop our models for commercially viable Coastal shipping routes.

Passenger Ferry Projects Cook: Let's turn to the subject of ferries. In your March 14th FY 2003 authorization testimony you spoke about the congestion problems faced by commuters and the availability of CCF monies for the financing of ferries.

Would you outline your thinking on this subject?

Schubert: Ferries are becoming increasingly important as a means for commuter transportation.

Selected urban locations like New York and Boston have seen new ferry services introduced after a 30 or more year hiatus. In New York City prior to the events of September 11 th non- subsidized ferry operators were providing 30,000 passenger trips per day between multiple locations in northern New Jersey and Manhattan.

Today, these passenger figures have more than doubled.

The City has announced its intention to lead in the development of a regional passenger ferry transportation plan with the construction of what The New York Times has described as a "flotilla" of new ferry terminals.

In San Francisco commuter ferry services were never entirely discontinued in the Post World War II period.

We are seeing the expanding re-institution of various cross Bay services to provide commuting alternatives to the bridges and the Bay Area Rapid Transit (BART) system. A Blue Ribbon Committee of business and political leaders has developed a plan for "the world's best" high speed Bay Area water transit system with a fleet of 70 boats. In late August, the state chartered Water Transit Authority announced a scaled back 44 boat version of that Blue Ribbon plan calling for the expansion of capacity by existing ferry services, and the addition of seven new routes.

The reasons for these developments are the same as those, which we have already discussed, crowded highways and gridlock in tunnel and bridge crossings. We are unlikely to see a newly constructed Lincoln Tunnel or Golden Gate Bridge during our lifetimes.

MarAd's Title XI Program has had a significant impact in New York. There, through the use of Title XI, the principal operator has been able to reduce its annual debt service payments by roughly one half.

And, they have been able to maintain a competitive rate structure in a service that is privately owned and operated without any operating subsidy from New York City or New York State. MarAd is proud of this. We are currently working on new ferry projects with several other groups.

We believe that changes in the CCF regime of the sort that I presented in my March authorization testimony would probably be beneficial here. The extension of CCF along those lines could provide money for immediate ferry construction from existing CCF deposits. It would also enable ferry operators to accumulate the money needed for fleet expansion on a more rapid, before tax, basis. We are looking at this and other options, and also working with FHWA to identify alternative means to access the capital that will be needed for ferry construction.

Cook: I understand that MarAd is a participant in an Administration initiative called the Marine Transportation System. Would you tell us about that?

Schubert: The Marine Transportation System (MTS) is a U.S. Department of Transportation effort to identify and study our waterways as an integrated national system. The objective is to develop a national plan for waterborne transportation to meet 21 st century needs. The MTS project was initiated in 1998.

MarAd and the U.S. Coast Guard have played leading roles in the MTS Task Force work to improve coordination of waterborne transportation efforts at the national, regional and local levels. There are now pubic and private sector committees, and an MTS National Advisory Council, a chartered non-federal body, whose purpose is to advise the Secretary of Transportation on MTS issues.

MarAd continues as an active participant and chairs the public sector subcommittee on ferries. We are working to bring together at MarAd the expertise of the 6 or 7 federal agencies that have an impact on ferry operations. In this way the private sector parties interested in a project will be able to come to MarAd and obtain all the information necessary for ferry project development.

MarAd is also working with FHWA, the U.S. Coast Guard, the Passenger Vessel Association (PVA), the San Francisco Bay Area Water Transit Authority and several metropolitan planning authorities, to develop the agenda for a ferry conference to be held in conjunction with the PVA annual meeting in San Diego in early 2003. Representatives from all of our existing ferry vessel operators, and from most projects that are in progress, will be in attendance. It should provide a useful venue for a MarAd report of its MTS and other ferry related action to the private sector.

Schubert: I'm afraid our time is up. I appreciate your coming in. I've enjoyed our two meetings and the opportunity that they will provide to make contact with Maritime Reporter readers.

Cook: Before I leave, I see that you have a picture on your desk of what look like two Labrador retrievers.

Could you tell our readers a little bit about them?

Schubert: They are Labrador retrievers. One is a Golden and the other a Chocolate. Their names are Cody and Samson. Now that Gail and I are settled in a house in Annapolis we are able to have them with us.

About the Author H. Clayton Cook, Jr., B.S. Princeton University, LLB The University of Virginia. Mr. Cook served as General Counsel of the U. S. Maritime Administration from 1970 to 1973, where he was responsible for the implementation of the Merchant Marine Act of 1970, and the drafting of the Federal Ship Financing Act of 1972. Upon completing his government service, Mr. Cook joined Cadwalader, Wickersham & Taft as the partner responsible for the development of that firm's Washington Maritime practice. Mr.

Cook continues his law practice today as Counsel to Bastianelli, Brown & Kelley, Chartered, in that firm's Washington, D.C. offices. He is also a partner in Management & Transportation Associates, Inc., a management consulting firm based in Essex, Conn.

Mr. Cook's email address is [email protected].