OMNIBUS MARITIME BILL

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THURSDAY, NOVEMBER 8, 1979

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON MERCHANT MARINE,

COMMITTEE ON MERCHANT MARINE AND FISHERIES,

Washington, D.C.

The subcommittee met, pursuant to notice, at 2:13 p.m., in room 1334, Longworth House Office Building, Hon. John M. Murphy (chairman of the subcommittee) presiding.

Present: Representatives Murphy, Wyatt, McCloskey, and Melvin H. Evans.

Staff present: Peter Kyros and Steven Little.

The CHAIRMAN. The subcommittee will please come to order. This afternoon we continue our consideration of H.R. 4769, a bill to revitalize maritime policy, reorganize certain government agencies and reform regulation of maritime affairs in the United States.

We will continue with testimony for 4769 generally. First, we will receive the comments of our distinguished colleague from the Commonwealth of Puerto Rico on the unique maritime problems affecting Puerto Rico.

In addition, we will receive further testimony from the Office of the Special Trade Representative in order to obtain further information on issues raised at the hearings on October 25.

We are firmly committed to a reoganization of the maritime agencies to provide for policy formulation and coordination for all maritime issues in a single accountable office, and we look forward to hearing from a distinguished professor from Cornell University of Maritime Transportation who will review 4769 in a fresh and provocative manner.

And we are happy to welcome our colleagues, the very distinguished delegate from Puerto Rico, Baltasar Corrada.

STATEMENT OF HON. BALTASAR CORRADA, RESIDENT
COMMISSIONER IN CONGRESS FROM PUERTO RICO

Mr. CORRADA. Thank you, Mr. Chairman and members of the committee. Mr. Chairman, I am submitting a full statement for the record which contains 21 pages plus 3 proposed amendments as attachments to the statement.

The amendments are contained in an attachment that consists of 10 pages after the first 21 pages of the full statement, and if you will allow me, I will summarize from a shorter statement that I have prepared for the purposes of the hearing.

The CHAIRMAN. Without objection, the entire statement of the gentleman will be printed at this point in the record with the three amendments, and if you would proceed.

[The following was received for the record:]

STATEMENT OF HON. BALTASAR CORRADA, RESIDENT COMMISSIONER IN CONGRESS FROM PUERTO RICO

1. INTRODUCTORY REMARKS

On behalf of the people of Puerto Rico, I am pleased to have the opportunity to speak before this Committee today on the Omnibus Maritime Bill now under consid

eration.

The people of Puerto Rico share the belief of this Committee that a vigorous U.S. Merchant Marine is important for economic security and national defense, and thus, that it is important for the United States to have a strong competitive Merchant Marine capable of carrying domestic and a fair share of foreign commerce. The United States and its exporters and importers cannot be left to the mercy of foreign carriers for the transportation of their goods or, at times of national crisis, for access to strategic materials.

No comparable group of citizens under the American flag is as dependent on a vigorous U.S. Merchant Marine as the 34 million American citizens who live in Puerto Rico. The island is dependent upon ocean transportation for fully 99 percent of its trade with the United States. Three quarters of the food consumed in Puerto Rico comes from the mainland, all by ship. Over 90 percent of the island's exports go to the United States, again almost entirely by ship.

In the event of a petroleum supply disruption, Puerto Rico must be able to rely on U.S. flag tankers to transport needed petroleum from Strategic Petroleum Reserve stocks on the mainland to the island if only a limited reserve of 1.3 million barrels of oil, as now proposed by the Department of Energy, is provided as a regional component of the SPR; if the American fleet is inadequate to the task, the result will be disaster.

Puerto Rico's dependence on a healthy U.S. Merchant Marine arises from three factors: geography, economics, and the Jones Act. As Puerto Rico is an island, shipping turns out to be the only economically reasonable means of trading with the mainland; and since, for purposes of the Jones Act, Puerto Rico's ports are considered to be U.S. ports, all such shipping must be in U.S.-flag vessels. Thus Puerto Rico finds itself a "captive user"-the only alternative to using U.S. flag vessels in trade with the United States is to cease trading with the United States, hardly a desirable alternative from either a mainland or a Puerto Rican perspective.

Recognizing the importance of a U.S. Merchant Marine, the people of Puerto Rico seek to do our share in strengthening it; but we seek some relief from the disproportionate costs to the Puerto Rican economy. The higher cost of shipping in U.S.-flag ships means higher costs to Puerto Rican consumers for food imported from the mainland. It means Puerto Rican petrochemical products cannot compete with petrochemical products from the Virgin Islands, which, because of an exemption from the Jones Act, are shipped to the East Coast markets on foreign-flag vessels. The burden of these shipping costs rests primarily on a handful of states and other jurisdictions which are not part of the 48 contiguous states. Petrochemical producers in the Gulf Coast, though subject to the Jones Act when they ship their products to the East Coast, can escape the burden by sending their products by pipeline. Consumers on the mainland do not have to pay ocean freight costs on top of land freight costs when they purchase food. In the end, the noncontiguous states and jurisdictions wind up paying more than their proportionate share of the cost of maintaining a U.S. Merchant Marine.

Even within this group of noncontiguous states and territories, there are inequities. The Virgin Islands is exempt from application of the Jones Act, thereby placing Puerto Rico at a competitive disadvantage in the petroleum refinery and petrochemical field, as well as in the area of tourism. Alaska is partially exempt from the Jones Act, in that Canadian vessels are permitted to carry passengers and cargo between points in Alaska and the United States until the U.S.-flag fleet is adequate for the task. Finally, Hawaii, while not exempt from the Jones Act, at least enjoys efficient, modern ocean service not yet available to Puerto Rico. For Puerto Rico, mainland trade is beset by escalating freight rates, outdated equipment and overtonnaging.

Not surprisingly, a tiny handful of radicals, on our Island and in Cuba and elsewhere, have seized on this issue to support their argument that Puerto Rico is treated like a second-class step-child by the United States.

The Government of Puerto Rico, let me stress, is not seeking the total exemption from the Jones Act that is enjoyed by the Virgin Islands. But we do ask this Committee and Congress to recognize that present U.S. laws and practices place a

particularly unfair burden on our citizens and economy in three vital areas: Our tourist industry, our petroleum exports and our agricultural imports.

I am therefore submitting today three draft amendments to the Omnibus Maritime Bill which can benefit the peoples of both Puerto Rico and the mainland, strengthen the trade between us, and thereby strengthen the U.S. Merchant Marine.

II. PROPOSED LEGISLATION

A. Foreign flag passenger service

Summary of proposed amendment.-My first amendment would permit foreign flag passenger service between ports in the United States mainland and ports in Puerto Rico until such time as the Secretary of Commerce determines that U.S. flag-service is available to provide such transportation.

Discussion.-The effect of the cabotage laws (46 U.S.C. § 289), which provide that only vessels of U.S. registry are permitted to carry passengers, directly or indirectly, between points in the coastwise trade, is that there is no point-to-point (or liner) service at the present time between Puerto Rico and the mainland. U.S.-flag vessels have chosen not to provide such service on the grounds that it is uneconomical. Foreign-flag vessels have not been permitted to do so. Thus, the only commercial means of travel between the mainland and the island is air carrier, which many people are unable to afford or unwilling to use. These laws also affect cruise ship service. Under a policy which the U.S. Customs Service considers to be a liberalization of the cabotage laws (19 C.F.R. § 4.80a), foreign cruise ships carrying passengers who embarked at other U.S. ports may not remain in Puerto Rican ports for more than 24 hours. American cruse ships which receive an operating differential subsidy are subject to the same limitation. (46 U.S.C. § 1183(d)(3))

The present situation does not help the United States passenger service fleet, or the economy of the United States, or the economy of Puerto Rico; but it does hurt Puerto Rico.

The elimination of these restrictions until, and only until, U.S. flag vessels can fill this gap-an action already extended to Alaska by 46 U.S.C. Sec. 289b-would benefit the Puerto Rican economy, which I remind you is part of the American economy; benefit American tourists; and hurt no one. There is no U.S. liner service present or planned on this route that could be injured by foreign competition. On the contrary, if foreign vessels do enter this service and promote it and build it, my amendment would enable U.S. vessels to take over at that time to the exclusion of the foreign vessels and without the usual start-up costs.

Moreover, the passenger on a foreign or subsidized U.S. cruise ship who is permitted to terminate his voyage in Puerto Rico, or to be ashore there for more than 24 hours, will spend more money in the shops and facilities of that American jurisdiction that might otherwise be spent in the Bahamas or Cuba or Curacao.

While no hard data is available, we believe that this amendment would significantly increase Puerto Rican tourism, local revenues and employment by bringing our island to a more equal competitive footing with the Virgin Islands and other Carribean ports. The Puerto Rican Tourist Bureau estimates that visitors staying in hotels in Puerto Rico in 1978 spent an average of $450 per visit, for a total of $243,000,000. (Total expenditures by visitors in that year came to $547,000,000.) In turn, it is estimated that for every million tourist dollars spent 190 jobs are created. Thus, any increase in tourism made possible by the opening of liner service would generate thousands of new jobs in an island now hard hit by a 17 percent unemployment rate.

Despite the fact that "land-based tourists" have a greater impact on the economy than "cruise ship-based tourists," the benefits of the cruise ship trade cannot be denied. In fact, the Puerto Rican Tourist Bureau estimates that the 584,000 cruise tourists in 1978 spent a total of $17,500,000; were cruises permitted to remain in port more than 24 hours, we expect the increases in spending would be substantial. Several legislative precedents exist for exemptions from the cabotage laws when U.S.-flag vessels are not available to provide service between ports in the United States. Under 46 U.S.C. § 289a, the Commissioner of Customs is authorized to grant annual exemptions to Canadian vessels transporting passengers between Rochester, New York and Alexandria Bay, New York, and under 46 U.S.C. § 289b, the Secretary of Commerce is authorized to permit Canadian vessels to transport passengers and cargo between points in Alaska and between Alaska and points in the United States outside of Alaska. In the second case, no time limit has been placed on the exemption. The proposed bill is consistent with these precedents.

B. Financial assistance for transportation of Petrochemical and Petroleum Products Summary of the proposed amendment.-This amendment to the Merchant Marine Act, 1936 would provide financial assistance for the transportation of petrochemical and petroleum products from Puerto Rico to the United States mainland for a period of three years from the date of its enactment. The assistance would be equivalent to the difference between the rates charged by U.S.-flag vessels and those charged by foreign-flag vessels providing similar service, and would be paid to the vessel operator. A condition of the assistance is that the vessel operator charge shippers of petrochemical and petroleum products the foreign-flag rate (as determined by the Secretary of Commerce).

Justification.-Puerto Rico's petroleum and petrochemical industry is vital to both the island and the U.S. mainland, particularly the East Coast. But it competes with refiners in the Virgin Islands who ship their products to the East Coast by foreign-flag tankers and refiners on the Gulf Coast who ship their products by pipeline. If the Puerto Rican petroleum and petrochemical industry cannot ship its products to the mainland at competitive rates, it cannot expand and may in fact decline. Refinery output on the island fell by more than 10 percent in 1979 as a result of economic difficulties. This is unthinkable at a time when no new refineries are being built in the U.S., particularly on the East Coast, and critical shortages of gasoline and home heating oil recur from time to time, Refiners in Puerto Rico cannot be allowed to decline. We need the jobs. Both the U.S. mainland and Puerto Rico need the fuel oil and gasoline and petrochemical products.

In the first 7 months of 1978, 54 percent of all U.S. mainland imports and 76 percent of all East Coast imports of petrochemical feedstocks came from Puerto Rico; 8 of the 35 petrochemical products shipped to the mainland are especially important because they are raw materials for the production of a multitude of end products. Puerto Rican production accounted for 15-30 percent of the total U.S. production of these aromatics, as they are called, providing more than: 15 percent of benzene, used in the production of many organic chemicals and in synthetic rubber, nylon, detergents, alcohols, insecticides and drugs; 20 percent para-xylene and orthoxylene, used in chemical raw materials and as high quality octane-blending agents in motor fuels; 25 percent of cyclohexane, used in the production of nylon, and is a silvent by the plastic industry.

The industry is also important in terms of Puerto Rico's own economic development. Organic chemicals alone comprise 41.3 percent by value and 40.6 percent by weight of all exports from Puerto Rico in 1976. Refined petroleum and petrochemicals comprised nearly 89 percent of bulk liquid cargo from Puerto Rico to the mainland in 1975. Besides being a key source of income and employment for the Commonwealth, the petroleum and petrochemical industry in Puerto Rico provides the refined fuels on which the island depends to operate its industries and generate electricity to satisfy residential and commercial needs.

But, in 1978 two plants were closed and CORCO, the largest refinery and petrochemical producer, filed a petition in bankruptcy. The plant closings are estimated to have estimated 2,600 direct and indirect jobs and cost the economy, on an annual basis, $100,000,000 in revenues. The CORČO bankruptcy has interfered with the chain of production throughout the industry.

In view of the near stagnation in the refining industry, it is imperative to maintain in operation all existing capacity. The economic troubles of the Puerto Rico petroleum and petrochemical industry have had the opposite effect-refining production in the island is reduced from 283,800 b/d in 1978 to 253,356 b/d in 1979. If the Puerto Rican industry is to fulfill its role in supplying the United States with basic petrochemicals and satisfying the oil needs of its own population, then it needs relief from certain structural disadvantages, particularly those arising from the shipping burden.

Unlike companies on the Gulf Coast, Puerto Rican producers cannot make use of pipelines to transport refined products to their major mutual market, the East Coast. The cost penalty for this disadvantage is estimated to be $30.7 million on an annualized basis (testimony of the Pace Company Consultants and Engineers, Inc. (the "Pace Company") before the U.S. Department of Energy, March 1979). Moreover, this calculation does not take into account the fact that, over time, as the volume of sales increases, the cost of transportation per unit by pipeline declines, whereas the cost of transportation per unit by vessel remains more nearly constant or increases in response to tariff adjustments.

Moreover, Puerto Ricans do not understand why their refiners should suffer from a competitive disadvantage compared with refiners similarly situated which benefit from exemptions from the restrictions of the Jones Act, e.g., the Virgin Islands. According to a report prepared by the Pace Company for the Federal Energy Administration in 1976, "the U.S. flagship requirements of the Jones Act place

Puerto Rico at a disadvantage of $0.46/Bbl with respect to the Virgin Islands," a gap which is likely to have widened in the intervening years because of increased demand for U.S. tankers. The excess of U.S.-flagship rates over foreign rates is estimated by Harbridge House to have cost the Puerto Rican petrochemical industry $21.5 million in fiscal year 1978.

During these next critical 3 years, while the Puerto Rican petroleum and petrochemical industry is recovering and the U.S. supply is uncertain, my amendment would provide the differential necessary to enable U.S.-flag vessels to carry these products to the mainland at the lower rates enjoyed by Virgin Islands and other Caribbean refineries. It would eliminate a major competitive disadvantage for the U.S.-flag ship operator, and serve the interests of the U.S. consumers.

Discussion. The amendment I am submitting for the consideration of this Committee would provide financial assistance for the shipment of petrochemicals and petroleum products from Puerto Rico to the mainland United States. The amount of such financial assistance would be equal to the difference between the rates charged by foreign-flag vessels, such as are used in the trade between the Virgin Islands and the mainland (the "foreign base rate") and the rates charged by U.S.-flag vessels for the same service (the "actual base rate"). The Secretary of Commerce would be responsible for establishing the foreign base rate and the actual base rate (which, in the first instance, would be based on existing rates charged by U.S. carriers, but which could be adjusted to reflect increased operating costs and the like). Financial assistance would be available to owners or operators of U.S.-flag vessels which meet the standards set forth in the Omnibus Maritime Bill amendments to the operating differential subsidy program, subject to the condition that the applicant agree to charge shippers the foreign base rate rather than the actual base rate. Payment of financial assistance would be on a quarterly basis following each quarter in which the vessel had completed a voyage in which petrochemical and petroleum products were transported from Puerto Rico to other points in the United States.

The amendment makes financial assistance available to U.S.-flag vessels not now eligible for Construction Differential Subsidies ("CDS") or Operating Differential Subsidies ("ODS") because they are engaged in domestic trade. In addition, the amendment permits vessels owners and operators who receive ODS or CDS under the existing ODS and CDS programs to transport petrochemical and petroleum products from Puerto Rico to the mainland United States without losing their right to receive ODS and CDS (as would be the case under existing laws, sections 506 and 650(2) of the Merchant Marine Act, 1936). Sections 303(4)(A) and 302(6) of the Omnibus Maritime Bill, as currently drafted, provide that in the event a vessel receiving ODS or CDS engages in domestic trade, the amount of such subsidies is to be reduced in the same proportion as revenues from domestic trade bear to total revenues of the vessel. This amendment, in turn, amends the Omnibus Maritime Bill, by providing that CDS and ODS would be reduced only to the extent that domestic revenues came from other than the shipping of petrochemicals and petroleum products.

The amendment provides that financial assistance will be available for no more than 3 years from the date of enactment. This limitation has been included because financial assistance is intended to aid in the recovery of the petrochemical industry and not to subsidize it.

C. Financial assistance for transportation of agricultural commodities

Summary of the proposed amendment.-This amendment to Title IX of the Merchant Marine Act, 1936 would authorize the Secretary of Commerce to pay the differential between the cost of shipping designated agricultural commodities in U.S.-flag ships and the cost of shipping these agricultural commodities in foreignflag ships to and from possessions and territories of the United States. Payment would be made to eligible importers and exporters, i.e., importers and exporters participating in a price control program in the territory or possession in which they do business, or a governmental agency of the territory or possession acting as an importer or exporter. Contracts for payment of ocean freight differentials could be available for natural and chemical agricultural inputs such as fertilizer, seed, feed grains and herbicides and all agricultural commodities as may be designated by the Secretary of Commerce after consultation with the Secretary of Agriculture and affected Governors of the territories and possessions and consideration of information presented by the Governments of the territories and possessions acting through their respective Governors. The purpose of this program will be to provide relief to consumers in these off-shore areas who have to pay very high prices for agricultural commodities because of the high maritime transportation rates.

Flexibility would be provided to allow the Secretary of Commerce, at the request of the respective Governors of the territories and possessions, to recommend the agricultural commodities to be designated under the program based on: (i) The high