But this does not take into account the interest cost savings to the government on the $25 million CDS. The Title XI interest rate is normally less than one-half percent higher than the long term government rate, and thus the government's cost of long term money is, currently, about 102 percent. Accordingly, the interest saving to the government on the $25 million CDS would be $2,625,000 in the first year, or more than the entire per-diem subsidy.

There is the serious problem of fuel-cost differential on existing vessels which should be dealt with in any omnibus legislation. The conversion of vessels having steam turbine engines to diesel power plants could be accomplished with respect to newer vessels with the following modifications of the existing law: (a) CDS should be calculated on a full cost-parity basis even if that requires a greater than 50 percent CDS rate; (b) capital construction funds should be permitted to be used to pay capital and interest cost during the six to ten months that the vessel will be off-hire while it is in the shipyard; (c) provide that off-hire expenses, including interest and amortization of existing debts may be included in Actual Cost for Title XI purposes in financing the conversion; (d) fuel subsidy should be paid for a limited time until the conversion can be accomplished-perhaps two to three years would be appropriate; and (e) the statutory economic life of such vessels should be extended ten years for subsidy and Title XI purposes.

It is appropriate to suggest the kinds of vessels which should be encouraged under the foregoing program. The military services have indicated through their chartering histories that they prefer smaller or intermediate-sized vessels to very large ships probably because of the variety of ports served and the more flexible uses to which the vessels can be put. Indeed, the Maritime Administration has had a policy of not paying operating-differential subsidy with respect to tankers over 100,000 deadweight tons. This policy should be continued.

With the exception of a few very large carriers, utilized in the Strategic Petroleum Reserve lift and the Valdez/Balboa leg of the Alaska to the East Coast trade, the entire U.S. bulk fleet consists of vessels of 100,000 deadweight tons or less. Vessels of between 35,000 deadweight tons and 60,000 deadweight tons can serve most ports that receive dry-bulk and tanker cargoes and no American crude-receiving terminal, except Puget Sound, can handle a very large crude carrier without lightering or transshipment at a Caribbean transshipping point. Moreover terminals handling dry-bulk cargoes normally do not handle ships larger than about 60,000 deadweight tons.

Accordingly, the program should probably be directed toward developing a larger number of small to intermediate-sized tankers, dry-bulk carriers and OBOS, rather than a few very large crude carriers or vessels much over 100,000 deadweight tons. Probably the vessel with the greatest flexibility in terms of cargo capability and ports would be an intermediate-size OBO which, although slightly less efficient for transporting oil would compensate by the variety of dry-bulks which it can handle and by its ready conversion to a military auxiliary capable of loading cargoes which cannot be transported in containers, such as tanks, artillery, long-length steel, airplane sections, half-houses, half-warehouses, and similar outsized cargoes. While a tanker can transport both oil and grain, it cannot handle iron ore, coal, bauxite, scrap iron, logs, lumber, and similar industrial commodities that move in shipload quantities and could move in an OBO. A pure dry-bulk carrier cannot participate in the vast petroleum market; and there is comparatively little domestic dry-bulk cargo presently moving coastwise, whereas there is a substantial movement of oil from the U.S. Gulf to ports north of Cape Hatteras, from Valdez to U.S. Pacific Coast and from Balboa to the Gulf and East Coast; an OBO could participate efficiently in those trades.

This memorandum has described in general terms the principal modifications of the Merchant Marine Act, 1936, that would be required to carry out the suggested bulk vessel program. We have not thought it necessary at this stage to prepare proposed legislation because it is appropriate first to set forth the broad principles

of a program before engaging in the time-consuming process of developing statutory language and perhaps stimulating discussion of minor points of phraseology, before the main outlines are understood and agreed upon.

PREPARED STATEMENT OF ROBERT B. MCMILLEN, PRESIDENT, TOTEM OCEAN

TRAILER EXPRESS, INC.

Mr. Chairman and members of the Subcommittee, I am Robert B. McMillen, President of Totem Ocean Trailer Express, Inc. (TOTEM). I appreciate the opportunity to present this testimony to the Subcommittee in opposition to proposed amendments to § 506 and § 605(A) of the Merchant Marine Act, 1936, as amended, that would authorize subsidized vessels to engage in domestic service between the mainland United States and Alaska.

It is our firm conviction that changing current law to allow subsidized vessels to serve the Alaska trade would severely threaten existing investment in shipping services in that trade and severely threaten existing competition to the detriment of the consumers of the existing shipping services.

I would like to briefly describe our company and what we and our shippers have to lose if a government subsidized competitor is allowed into the Alaska trade through a change in existing law.

TOTEM operates two new roll on/roll off vessels in the Puget Sound to Alaska rail belt trade. The Alaska rail belt area roughly encompasses the ports of Anchorage, Whittier, Valdez, Seward and Homer and inland points including the entire North Slope oil producing area, Fairbanks and the Kenai Peninsula. TOTEM entered this trade in September of 1975 with one newly U.S. built vessel and we subsequently added a second U.S. built roll on/roll off vessel in 1977. Our total investment in new U.S. built vessels devoted to the Alaska trade is in excess of $100 million. Our vessels fly the U.S. flag, are U.S. crewed and were constructed without the benefit of construction differential subsidy and are operated without the benefit of operating subsidy. Additionally, since entry into the Alaska trade, TOTEM has invested approximately $30 million in fixed port improvements, trailers and terminal operating equipment.

Our $130 million of private investment has created 320 new jobs of which 66 are sea-going labor, 162 are employees in the State of Washington, and 92 are employees in the State of Alaska. Our major competitor in this trade is Sea-Land Services, Inc. which operates four container vessels in the trade. Prior to the current economic wind down in Alaska, Sea-Land operated five vessels in this trade. Another substantial competitor is the rail/barge service operated pursuant to the Alaska Railroad's tariff. This latter service also operates from Puget Sound to the Alaska rail belt and while the barge portion of the service is private, the rail service is provided by the U.S. government owned and operated Alaska Railroad. This service is provided under a joint rail/water tariff published by the United States government. The Alaska Railroad rail/water tariff has given us some substantial experience with government subsidized competition for the level of rates in the rail/water barge service which competes with ours is set by the United States Rail Administrator in the United States Department of Transportation. It has been our experience and also our competitors' that rate increases determined essential to the private carriers by Order of the Interstate Commerce Commission have been unable to be used by the private carriers because the United States government's competing tariff has from time to time undercut the private carrier's rates.

We are deeply concerned that § 302(6) and § 303(5)(A) of H.R. 4769 which would permit, on pay-back of subsidy, vessels built with construction differential subsidy and receiving operating differential subsidy to perform services between any domestic ports as a part of a voyage in foreign commerce could result in such service in the Alaska rail belt trade. The testimony before this Subcommittee by American President Lines, Ltd. on December 3, 1979 endorses those proposed amendments specifically for the purpose of entering the Alaska trade. We also note the additional amendments proposed by American President Lines to amend both § 506 and § 605(a) of the Merchant Marine Act, 1936, as amended, to allow service by their subsidized vessels specifically in the Alaska trade.

American President Lines has stated in their testimony that their purpose in seeking to qualify for the Alaska trade through these proposed changes in law is to serve the Dutch Harbor/Kodiak market. But the amendments they have proposed would not limit their Alaska service to that area and would in fact authorize subsidized vessels to serve all Alaska ports. While TOTEM's service from the Puget Sound to Alaska involves vessel calls only at the port of Anchorage as our Alaskan distribution point for service throughout the rail belt area of Alaska, we feel substantially threatened by any change in existing statutory language which would

authorize subsidized vessels to serve any port in the State of Alaska from any port in the mainland United States. The change in law urged by American President Lines would allow them or other subsidized lines to enter into direct competitive service with our company as well as our other existing competitors in the Puget Sound to Alaska rail belt trade.

The existing trade between the lower 48 and the Alaska rail belt market now enjoys more than sufficient vessel capacity and intense competition with low rates highly favorable to the consumers of the shipping services. Ĉlearly, the Alaska rail belt market currently enjoys some of the most up to date shipping tonnage in the world, all of which has been constructed without benefit of construction differential sudsidy and which is operated without operating differential subsidy. As we have mentioned, TOTEM operates two of the largest roll on/roll off vessels in the world in this trade and our primary competitor operates container vessels utilizing state of the art containers. TOTEM and Sea-Land combined provide four vessels sailings a week from the lower 48 to Alaska. The rail/barge service operated pursuant to the Alaska Railroad joint rail/water tariff utilizes extremely modern tug/rail equipment in its once a week minimum sailing schedule. Currently in the rail belt trade the shipper enjoys three strong shipping services with a wide variety of excellent equipment available to meet the specific demands and nature of the cargo and also service by various flat deck barge operators.

This existing capacity is more than sufficient for the size of the Alaska rail belt market. With the wind down in economic activity within the State of Alaska following completion of the oil pipeline, the ocean carriers are currently operating with load factors averaging only in the mid-1970's. When this is viewed in conjunction with the intense competition among the various carriers, the shipping public has available significantly more capacity than is currently required and highly favorable rates.

The extremely competitive nature of the Puget Sound/Alaska rail belt market has produced a rate structure which closely parallels that enjoyed in the lower 48 when one compares overland U.S. costs for the movement of cargo of approximately the same distance as Puget Sound to Anchorage. This is well illustrated by the fact that the total cost of highway movement between the Puget Sound area and Anchorage, Alaska is three to four times the cost of that same transportation service via water carrier even though the speed of highway transit is no faster than the water service provided by TOTEM.

The tremendous shipping capacity now available in the Alaska trade well illustrates that private capital and private operators will commit to the necessary increased number of vessels, barges and other equipment necessary to match the level of economic activity within the Alaska rail belt market. TOTEM is one of those private carriers that injected state of the art vessels into the Alaska trade when demand for shipping services began to exceed available capacity. Based on the current availability of U.S. vessels qualified under existing law for the domestic trade, we can see no inability to increase capacity in this market place by private investment should the demand for shipping services increase in the future.

Our company and our stockholders have devoted $130 million of investment and five years of effort in developing our service in the Alaska trade. We have not yet earned any return on our investment. We are committed to this trade and we believe in the long run our company has a profitable future and our employees' jobs will continue to be secure in providing this service. What we do not need and which clearly is not warranted by the economic facts so clear in the Alaska trade is a government subsidized competitor that will inject additional unneeded tonnage into the trade. Such an additional competitor with the benefit of government subsidy can have no effect other than to skim the cream of the cargo to the detriment of the existing private carriers and to the detriment of the service now provided to shippers in this trade.

We strongly recommend that this Subcommittee reject any amendments to § 606 and § 505(A) that would authorize service by subsidized carriers in the Alaska trade. We note that the National Maritime Council in its thoughtful and extensive review of this proposed legislation has not recommended that § 302(6) and § 303(5)(A) of H.R. 4769 be enacted and also has not recommended adoption of the amendments proposed by American President Lines.

If this Subcommittee sees any merit in the proposal to allow a change in law so that service may exist by subsidized operators to the Dutch Harbor/Kodiak area, it is imperative that any amendment to allow such service be severely limited so that the subsidized carriers cannot utilize their tonnage in the trade to the Alaska rail belt market.

Thank you for this opportunity to present our views.

65-171 0 80 46

PREPARED STATEMENT OF CROWLEY MARITIME CORP.

Crowley Maritime Corporation (Crowley), through various subsidiary operating companies, is a common carrier of property in the domestic offshore trades and as such has a vital interest in H.R. 4769, particularly Sections 506 and 605.

Crowley is a member of the National Maritime Council and supports the statement sponsored by the Council in its testimony on November 28, 1979. That statement was silent on the question of whether the 1936 Act should be amended to authorize service between Alaska and the mainland United States by subsidized liner vessels. That issue is of importance to Crowley which vigorously opposes any such amendment. Crowley files this statement in opposition to the testimony of American President lines favoring such an amendment, on December 3, 1979.

Section 506 currently restricts CDS vessels to operate in foreign commerce but permits the vessel to stop at the State of Hawaii, or an island possession or island territory... (underlining added).

Section 605 currently restricts ODS payments to vessels in the foreign trade on which the vessel may stop at the State of Hawaii, or an island possession or island territory... (underlining added.)

H.R. 4769 as introduced would expand the permissive stops at the State of Hawaii or an island possession or island territory to include Alaska and would continue to authorize the Secretary to consent, in writing, to the transfer of a CDS or ODS vessel to the domestic trade, if the Secretary determines that such transfer is necessary and appropriate to carry out the purposes of the Act.

The amendment eliminates the existing six month per year limit on participation of CDS vessels in the domestic trade and further eliminates any requirement for a hearing before the Secretary may approve use of such vessels in the domestic trade. H.R. 4769 does not address present section 805(a) of the Shipping Act, 1936, which requires that before a subsidized carrier could operate in the domestic trade a formal hearing must be held and findings made that permission for a subsidized operator to operate in the domestic trade (1) would not result in unfair competition to anyone operating exclusively in such domestic trade, and (2) would not be prejudicial to the objects and policy of the 1936 Act. We assume therefore that Section 805(a) will remain as an integral part of the laws governing subsidized carriers.

Crowley opposes this portion of H.R. 4769 and is opposed to any expansion of the use of CDS or ODS vessels in the domestic trades.

American President Lines, Ltd., in its presentation before the Subcommittee on December 3, greatly exaggerates the conditions in Alaska, alleging there is an urgent need to permit CDS/ODS vessels to serve this domestic trade. The fact is that there presently are more han enough domestic carriers supplying service to the Dutch Harbor/Kodiak areas of Alaska. These carriers are: Foss Alaska Line, Alaska Marine Shipping, Sea-Land Service, Inc., Puget Sound Tug and Barge Company, and Western Pioneer, Inc.

American President Lines directed its comments exclusively to a need for additional carriers in the Dutch Harbor/Kodiak area of Alaska, yet proposed an amendment that would permit CDS/ODS vessels to serve all of Alaska. The adequacy of service by domestic carriers is even more dramatic in other areas of Alaska; and any legislation that permits subsidized carriers to participate in the domestic Alaska trade will certainly be harmful to those existing carriers, and in direct contravention of the long-established national policy protecting unsubsidized domestic carriers from the manifestly unfair competition of subsidized foreign service carriers.

Crowley has a long history of service to the Alaska area including a number of contracts over the years for the resupply of our country's DEWLINE bases. In 1959, Crowley began scheduled year-round service to "railbelt" Alaska, and in 1970 began serving the Dutch Harbor/Kodiak area. That service, which continues today, provides barges direct to cannery sites to discharge cannery supplies, and load seafood products for the return voyage. In 1970, the line haul connecting carrier was States Marine International, Inc. which discharged or received the cargo from Crowley barges. In 1971 Crowley itself transported the cargo between Alaska and the United States. Then in 1972 Sea-Land Service, Inc. became the connecting mainland carrier, with Crowley barges moving the cargo to and from the canneries, an arrangement which continues today. Also, since 1974, Crowley has furnished seasonal service to Bristol Bay and the Bering Sea. Crowley's substantial investment in equipment and facilities, and its long history of service since the 1950's, should not be jeopardized by allowing subsidized carriers to come and go skimming off the cream from this market at their whim.

In past years there has been no shortage of domestic carrier capacity to transport all the available cargo between continental U.S. ports and the State of Alaska. We

cannot foresee a situation where present unsubsidized domestic carriers will be unable to accommodate the cargo. To force these established unsubsidized carriers which have invested private funds in creating these services, to compete with subsidized carriers who only want to route as an increment to a foreign service, would be an inequity of the highest kind. Thus, Crowley is opposed to the amendments proposed by Section 302(6) and 303(5)(A) of H.R. 4769, as originally introduced.

[Whereupon, at 1:48 p.m. the subcommittee adjourned.]