    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

                       INDIVIDUAL FISHING QUOTAS (IFQS)
    =======================================================================

                               OVERSIGHT HEARING

                                   before the

          SUBCOMMITTEE ON FISHERIES CONSERVATION, WILDLIFE AND OCEANS

                                     of the

                             COMMITTEE ON RESOURCES
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               February 13, 2002

                                   __________

                               Serial No. 107-84

                                   __________

               Printed for the use of the Committee on Resources

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                             COMMITTEE ON RESOURCES

                        JAMES V. HANSEN, Utah, Chairman
           NICK J. RAHALL II, West Virginia, Ranking Democrat Member

    Don Young, Alaska,                   George Miller, California
      Vice Chairman                      Edward J. Markey, Massachusetts
    W.J. ``Billy'' Tauzin, Louisiana     Dale E. Kildee, Michigan
    Jim Saxton, New Jersey               Peter A. DeFazio, Oregon
    Elton Gallegly, California           Eni F.H. Faleomavaega, American
    John J. Duncan, Jr., Tennessee           Samoa
    Joel Hefley, Colorado                Neil Abercrombie, Hawaii
    Wayne T. Gilchrest, Maryland         Solomon P. Ortiz, Texas
    Ken Calvert, California              Frank Pallone, Jr., New Jersey
    Scott McInnis, Colorado              Calvin M. Dooley, California
    Richard W. Pombo, California         Robert A. Underwood, Guam
    Barbara Cubin, Wyoming               Adam Smith, Washington
    George Radanovich, California        Donna M. Christensen, Virgin
    Walter B. Jones, Jr., North              Islands
        Carolina                         Ron Kind, Wisconsin
    Mac Thornberry, Texas                Jay Inslee, Washington
    Chris Cannon, Utah                   Grace F. Napolitano, California
    John E. Peterson, Pennsylvania       Tom Udall, New Mexico
    Bob Schaffer, Colorado               Mark Udall, Colorado
    Jim Gibbons, Nevada                  Rush D. Holt, New Jersey
    Mark E. Souder, Indiana              James P. McGovern, Massachusetts
    Greg Walden, Oregon                  Anibal Acevedo-Vila, Puerto Rico
    Michael K. Simpson, Idaho            Hilda L. Solis, California
    Thomas G. Tancredo, Colorado         Brad Carson, Oklahoma
    J.D. Hayworth, Arizona               Betty McCollum, Minnesota
    C.L. ``Butch'' Otter, Idaho
    Tom Osborne, Nebraska
    Jeff Flake, Arizona
    Dennis R. Rehberg, Montana

                          Tim Stewart, Chief of Staff
               Lisa Pittman, Chief Counsel/Deputy Chief of Staff
                    Steven T. Petersen, Deputy Chief Counsel
                        Michael S. Twinchek, Chief Clerk
                     James H. Zoia, Democrat Staff Director
                   Jeffrey P. Petrich, Democrat Chief Counsel
                                     ------

           SUBCOMMITTE ON FISHERIES CONSERVATION, WILDLIFE AND OCEANS

                     WAYNE T. GILCHREST, Maryland, Chairman
               ROBERT A. UNDERWOOD, Guam, Ranking Democrat Member

    Don Young, Alaska                    Eni F.H. Faleomavaega, American
    W.J. ``Billy'' Tauzin, Louisiana         Samoa
    Jim Saxton, New Jersey,              Neil Abercrombie, Hawaii
      Vice Chairman                      Solomon P. Ortiz, Texas
    Richard W. Pombo, California         Frank Pallone, Jr., New Jersey
    Walter B. Jones, Jr., North
        Carolina

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing held on February 13, 2002................................     1

    Statement of Members:
        Gilchrest, Hon. Wayne T., a Representative in Congress from
          the State of Maryland......................................     1
            Prepared statement of....................................     1
        Saxton, Hon. Jim, a Representative in Congress from the State
          of New Jersey, Prepared statement of.......................   132
        Underwood, Hon. Robert A., a Delegate to Congress from Guam,
          Prepared statement of......................................     2

    Statement of Witnesses:
        Bromley, Dr. Daniel W., Anderson-Bascom Professor of Applied
          Economics, University of Wisconsin-Madison.................    23
            Prepared statement of....................................    25
        Christiansen, Fred, Chairman, Gulf of Alaska Coastal
          Communities Coalition......................................   104
            Prepared statement of....................................   106
        Crockett, Lee R., Executive Director, Marine Fish
          Conservation Network.......................................    48
            Prepared statement of....................................    50
        Cross, Rear Admiral Terry M., Assistant Commandant for
          Operations, U.S. Coast Guard...............................    10
            Prepared statement of....................................    11
        Emerson, Peter M., Senior Economist, Environmental Defense,
          Austin, Texas..............................................    69
            Prepared statement of....................................    70
        Gilmore, Jim, Director of Public Affairs, At-Sea Processors
          Association................................................    41
            Prepared statement of....................................    43
        Gutting, Richard E., Jr., President, National Fisheries
          Institute..................................................    39
            Prepared statement of....................................    39
        Halvorsen, Dr. Robert, Professor, Department of Economics,
          University of Washington...................................   118
            Prepared statement of....................................   120
        Heasley, Nathanael, Fisheries Program Director, Taxpayers for
          Common Sense...............................................    53
            Prepared statement of....................................    55
        Hoard, Ralph G., Executive Vice President, Icicle Seafoods,
          Inc........................................................    90
            Prepared statement of....................................    91
        Hogarth, Dr. William T., Assistant Administrator for
          Fisheries, National Marine Fisheries Service, U.S.
          Department of Commerce.....................................     3
            Prepared statement of....................................     5
        Jensen, W. Peter, Wallace & Associates, Cambridge, Maryland..    65
            Prepared statement of....................................    67
        Leal, Dr. Donald R., Senior Associate, Political Economy
          Research Center (PERC), Bozeman, Montana...................    32
            Prepared statement of....................................    34
        Matulich, Dr. Scott C., Professor, Washington State
          University.................................................   108
            Prepared statement of....................................   110
        Seaton, Paul K., Commercial Fisherman........................    95
            Prepared statement of....................................    97
        Spaeth, Robert A., Executive Director, Southern Offshore
          Fishing Association........................................    78
            Prepared statement of....................................    79
        Stinson, Jay, Captain, F/V Alaskan, and President, Alaska
          Draggers Association.......................................    99
            Prepared statement of....................................   100

    Additional materials supplied:
        Alaskan Leader Fisheries, Clipper Seafoods, and Prowler
          Fisheries, Statement submitted for therecord...............   132
        Alverson, Robert, Manager, Fishing Vessel Owners Association,
          Statement submitted for therecord..........................   135
        Blue, Gordon, Marine Services Corporation, Statement
          submitted for the record...................................   138
        Childers, Dorothy, Alaska Marine Conservation Council,
          Statement submitted for the record.........................   141
        Coastal Conservation Association, Statement submitted for the
          record.....................................................   143
        Kaplan, Dr. Ilene M., Department of Sociology, Union College,
          and Visiting Researcher, Marine Policy Center, Woods Hole
          Oceanographic Institution, Statement submitted for the
          record.....................................................   144
        Kozak, Linda, Kozak & Associates, Inc., Statement submitted
          for the record.............................................   145
        Stephan, Jeffrey, United Fishermen's Marketing Association,
          Inc., Statement submitted for therecord....................   147

             OVERSIGHT HEARING ON INDIVIDUAL FISHING QUOTAS (IFQS)

                                  ----------

                          Wednesday, February 13, 2002

                         U.S. House of Representatives

          Subcommittee on Fisheries Conservation, Wildlife and Oceans

                             Committee on Resources

                                 Washington, DC

                                  ----------

        The Subcommittee met, pursuant to call, at 1:07 p.m. in
    room 1334, Longworth House Office Building, Hon. Wayne
    Gilchrest [Chairman of the Subcommittee] presiding.

         STATEMENT OF THE HONORABLE WAYNE GILCHREST, CHAIRMAN,
      SUBCOMMITTEE ON FISHERIES CONSERVATION, WILDLIFE AND OCEANS

        Mr. Gilchrest. The Subcommittee will come to order. I
    apologize. I just wanted to call us to order, but we just were
    called for a vote. So what I will do is ask unanimous consent--
    I hope none of the staff objects--
        [Laughter.]
        Mr. Gilchrest. --to have two statements put into the
    record: my statement and Mr. Underwood's statement, and
    introduce Dr. Hogarth and Admiral Cross with strong
    appreciation for both of you gentlemen coming here today to
    talk about another dimension of our ongoing process to
    reauthorize the Magnuson-Stevens Act and to begin the process
    of trying to understand and appreciate the magnitude of the
    management of the nation's fisheries and the complexity of
    trying to understand these interesting things known as
    individual fishing quotas or individual transferable quotas.
        [The prepared statement of Mr. Gilchrest follows:]

     Statement of The Honorable Wayne Gilchrest, Chairman, Subcommittee on
                  Fisheries Conservation, Wildlife and Oceans

        As many of you know, the Subcommittee has spent all of 2001 and the
    beginning of this year hearing testimony on various aspects of the
    reauthorization of the Magnuson-Stevens Fishery Conservation and
    Management Act. This hearing is on one of the most interesting and most
    contentious issues that we will look at during this entire debate.
        Today, we will examine the issues surrounding the concept of
    Individual Fishing Quotas (IFQs). IFQs have a number of forms--those in
    which the shares are transferrable and those in which the
    transferability is restricted. IFQs have also been used in a number of
    very different fisheries with varying successes across the world. Our
    own experiences with IFQs in U.S. fisheries have raised interesting
    policy issues for us to examine. I believe we will hear about a number
    of the U.S. experiences through testimony today.
        The debate on IFQs has been so polarizing in the past that Congress
    stepped in and stopped an IFQ plan from being implemented even after a
    Council had passed the plan. Congress then enacted a moratorium that
    has already been extended once. These are unusual steps for Congress to
    have taken, but highlight the amount of interest and passion that IFQs
    create.
        As many of you remember, the House of Representatives passed H.R.
    39 in the 104th Congress which included standards and guidelines for
    the use of IFQs. Because of the intensity of the debate, Congress could
    not come to agreement on these standards so here we are again.
        I believe that it is important that Congress creates a set of
    standards and guidelines for the Councils to follow in developing and
    implementing IFQ plans.
        I do not intend for this hearing to be a rehash of any past IFQ
    fights or to reopen wounds from earlier debates; but rather, I would
    like witnesses to help us learn from the past experiences so that when
    Congress develops standards, we can minimize the mistakes and problems.
        I look forward to hearing today's testimony and look forward to
    your suggestions for us to consider when we start drafting standards.
                                     ______

        [The prepared statement of Mr. Underwood follows:]

        Statement of The Honorable Robert Underwood, Ranking Democrat,
          Subcommittee on Fisheries Conservation, Wildlife and Oceans

        Thank you Mr. Chairman for holding this hearing today. Given the
    number of witnesses, it would appear there are very divergent views on
    this controversial issue. A review of the testimony reveals just that.
        There are those that clearly believe Individual Fishing Quotas, or
    IFQs, are a superior management tool, while there are others who feel
    they are fraught with problems. Some witnesses think IFQs should be
    granted in perpetuity. Others believe their duration should be strictly
    limited to no more than 5 years. Some think IFQs should, without
    question, be considered a property right. Others believe that just the
    opposite is true'' that they are nothing more than a limited privilege
    to harvest a public resource and should never be considered property.
        To allocate these quota shares, some argue using catch history is
    the only fair way to go. Yet others believe this is inherently unfair,
    as it limits access to only recent participants, and that an auction
    would be a more just allocation system. There is also debate over
    whether quota shares should be allocated for free or provide a royalty
    to the taxpayer for the use of this public resource.
        Finally, there is dispute as to whether IFQs encourage conservation
    or potentially provide greater incentives for quota busting and high
    grading, which could seriously undermine the sustainability of the
    resource.
        These are all very important issues and concerns that must be
    addressed. In addition, and perhaps of greatest concern to me in my
    district, is the potential for negative impacts on small fishermen and
    communities that could occur with the adoption of an IFQ program. Small
    boat fishermen and fishing dependent communities are the backbone of
    the Guam industry.
        With such wide ranging views and concerns Mr. Chairman, its clear
    that the development of clear legislative standards to guide the
    implementation of future IFQ programs will be very difficult. Still, we
    in the Congress have a responsibility to develop and adopt measures
    that can address the concerns associated with IFQs before any new
    programs are implemented.
        As we have seen with the halibut IFQ program, and really with the
    adoption of any program that allocates a public resource, there will be
    great opposition to change or to retroactively applying any new
    standards to programs that have already been implemented.
        IFQs may be a viable management tool in some fisheries, but we must
    ensure that the proper measures are in place first to conserve and
    protect this valuable public resource. That should be our primary goal.
        Thank you Mr. Chairman, I look forward to hearing from the
    witnesses.
                                     ______

        Mr. Gilchrest. And what this Subcommittee is attempting to
    do is to tweak those aspects of the Magnuson-Stevens Act to
    make the management of the fisheries more beneficial and to
    improve the process to ensure that we understand the marine
    ecosystem enough to increase the stock and ensure that the
    industry remains viable and profitable. And as these two
    gentlemen know as much as anybody in the room, Admiral Cross
    and Dr. Hogarth, that will take every ounce of rigorous mental
    effort that we have. But I think everybody in the room is up
    for it.
        So at this point, we will recess for about 15 minutes.
    Thank you.
        [Recess.]
        Mr. Gilchrest. The Subcommittee will come to order.
        You know, people who are standing in the back, why don't
    you just sit around this little horseshoe up here? That will
    relieve some of the congestion back there and make you a little
    more comfortable in case you want to take some notes or things.
    I don't know if I can yield you any time.
        [Laughter.]
        Mr. Gilchrest. Thank you.
        Dr. Hogarth, you may begin, sir.

     STATEMENT OF WILLIAM T. HOGARTH, ASSISTANT ADMINISTRATOR FOR
              FISHERIES, NATIONAL MARINE FISHERIES SERVICE

        Dr. Hogarth. Congressman, I hope this does not mean that
    they will get to ask us questions, does it?
        [Laughter.]
        Mr. Gilchrest. You can ask them questions.
        [Laughter.]
        Dr. Hogarth. Mr. Chairman and members of the Subcommittee,
    thank you for inviting me here today to discuss individual
    fishing quotas or IFQs. I am Bill Hogarth, the assistant
    administrator for fisheries in the National Oceanic and
    Atmospheric Administration.
        IFQs are one management measure used to implement
    sustainable fishery policies. We use other measures like
    community development quotas, fishing co-ops and various forms
    of individual effort quotas. These measures and IFQs have
    worked well. However, a broad range of rights-based
    arrangements should be available to the fishery management
    councils and NMFS as we manage our nation's living marine
    resources.
        IFQs play an effective role in managing fishery resources
    on a sustainable basis. However, they should not be treated in
    isolation from other management tools. Current law provides
    enough flexibility to structure IFQs so they address concerns
    regarding their prospective social impacts. However, IFQs are
    not the answer to every problem; are not appropriate in all
    fisheries; and are not a substitute for the detailed management
    measures we use in Federal fisheries. Today, I will review the
    background of IFQs; their objectives and goals; the role of
    NMFS and the Secretary and the need for additional statutory
    guidance.
        First, NMFS agrees with many of the major findings and
    recommendations of the National Academy of Sciences' IFQ study
    Sharing the Fish. Most significantly, we agree that the
    moratorium on new IFQs should be allowed to lapse in October.
    Second, the existing mandates and guidance on IFQs, while not
    comprehensive, do establish useful boundaries on key points.
    IFQ objectives range from maximizing efficiency to focusing on
    social goals related to sustained participation of fishermen
    and fishing communities. For example, the surf clam ocean
    quahog and the wreckfish IFQs were developed and administered
    largely to improve economic performance. On the other hand, the
    sablefish and the halibut IFQ in Alaska gives high priority to
    social goals.
        Alternatively, the Atlantic purse seine or bluefin tuna IFQ
    was designed mostly to ensure harvesting sector stability. All
    of these examples show we can maintain a flexible application
    of the Magnuson-Stevens to design IFQs and accomplish several
    goals. We believe the Secretary should continue to have the
    flexibility to develop IFQs in Secretarial-managed fisheries.
    We also believe many critical decisions should be left
    initially to the councils, such as the initial decision to
    develop an IFQ; formulas and criteria for determining initial
    allocations; rules on transferability of IFQ shares in
    secondary markets; caps on the consolidation of IFQ shares; and
    the use of alternative rights-based approaches.
        However, these decisions and the resulting proposals must
    be reviewed and approved by the Secretary. The Magnuson-Stevens
    Act currently provides most of the guidance we need to move
    forward with new IFQs. However, several difficult and
    controversial areas are broader than the councils' prerogative
    and require a national-level solution. While Congress may
    identify other matters that it must deal with in
    reauthorization of the Magnuson-Stevens Act, NMFS has
    identified just three that Congress should consider: first, all
    implementing regulations in existing IFQs ban foreign
    ownership. Some experts believe that once the moratorium
    lapses, a national policy on foreign ownership of IFQ shares
    will be needed. Such a policy involves trade, investment and
    foreign policy considerations, all of which are beyond the
    jurisdiction of NMFS and therefore might be better addressed in
    law.
        Second, the Magnuson-Stevens Act requires the collection of
    fees to recover management and enforcement costs but does not
    authorize the capture of some share of windfall profits and/or
    economic rent. Opinions differ sharply on these issues.
    Regardless, recovery of windfall profits and/or economic rent
    would be better addressed as a national policy in Magnuson-
    Stevens Act due to the tax, budget and natural resources
    management implications.
        Third, fees paid by participants to recover IFQ management
    and enforcement are capped at 3 percent of ex-vessel values in
    affected fisheries, and as noted in the NAS study, the cap may
    be too low in some fisheries. Some even question the need for a
    national cap for IFQ cost recovery fees. This matter should
    also be addressed by Congress.
        In addition, a number of IFQ issues are probably not best
    addressed by uniform and nationally applicable norms. Instead,
    solutions should be crafted to the needs of the specific
    fisheries. In these instances, the most appropriate action may
    not be an amendment to Magnuson-Stevens Act. In dealing with
    these issues, NMFS plans to focus on the matters and the cost
    of management, enforcement and observer coverage.
        We are now in the process of setting up a workshop with the
    Heinz Center that will bring in the four sectors to look at
    rights-based management. This workshop should be held within
    the next 60 to 90 days, and in this, we will review all of the
    existing data on rights-based management and come forward with
    any recommendation or additional criteria or how the process
    should be worked after we bring in the stakeholders.
        Mr. Chairman, in the final analysis, although IFQs remain
    controversial, considerable interest in them exists in a number
    of Federal fisheries. If a council or industry believes that an
    IFQ is warranted, the option should be available. If a council
    chooses to develop an IFQ, it will need rules and technical
    support from NMFS. While Congress establishes statutory
    guidance on IFQs through reauthorization of the Magnuson-
    Stevens Act, NMFS will be poised to provide any support that
    you think is necessary.
        This concludes my testimony, and I will be happy to answer
    any questions you may have.
        [The prepared statement of Dr. Hogarth follows:]

      Statement of William T. Hogarth, Ph.D., Assistant Administrator for
       Fisheries, National Marine Fisheries Service, U.S. Department of
                                    Commerce

        Mr. Chairman and Members of the Subcommittee, thank you for
    inviting me to another hearing on reauthorization of the Magnuson-
    Stevens Fishery Conservation and Management Act (MSA). I am William T.
    Hogarth, the Assistant Administrator for Fisheries in the National
    Oceanic and Atmospheric Administration/Department of Commerce. My
    testimony today will focus on individual fishing quotas (IFQs).
    I. Introduction
        IFQs have a ten-year history in the United States, and an even
    longer history in other countries such as New Zealand. As a result, a
    great deal has been written and said about them. As we all know, IFQs
    and rights-based management systems generally have spawned sharp
    debates and mountains of technical and partisan literature.
        IFQs are but one of a wide range of management measures that can be
    used to implement sustainable fisheries policies. We have other rights-
    based systems, such as community development quotas (CDQs), fishing
    cooperatives and various forms of individual effort quotas, including
    management programs based on days-at-sea. By and large, IFQs and other
    rights-based arrangements have worked well in the United States on both
    economic and conservation grounds. In fact, the National Marine
    Fisheries Service (NMFS) believes that a broad range of rights-based
    arrangements should be made available to the Regional Fishery
    Management Councils (Councils) when they consider IFQs and to NMFS when
    we review proposals.
        IFQs can and should play a role in our collective efforts to manage
    fishery resources on a sustainable basis. However, we do not, and they
    should not be treated in isolation from other management instruments
    that limit effort and participation in Federally managed fisheries. We
    believe that sufficient flexibility exists in current law to structure
    IFQs, so they adequately address concerns regarding their prospective
    social impacts. If they are well designed and managed, IFQs will, in
    all likelihood, work well and generate considerable net benefits.
        At the same time, IFQs are not the answer to every problem and may
    not be appropriate nor feasible in all types of fisheries. Given the
    current state of knowledge about IFQs, we believe they might be
    difficult to implement in multispecies and multigear fisheries. Also,
    IFQs are not a substitute for many of the management measures we use
    such as mesh size regulations and bycatch limits. Simply put, we are
    not suggesting that the Councils and NMFS absolutely must have IFQs to
    manage fisheries. However, we believe that, in some Federally managed
    fisheries, we can manage resources with greater efficiency if the
    Councils and NMFS have IFQs available as a tool.
        We believe that Congress should allow the existing moratorium on
    new IFQs to lapse, and we will be pleased to work with the Congress as
    it considers legislation to set additional appropriate conditions under
    which new IFQ programs could be approved.
        To place IFQs in their proper perspective, my testimony will review
    the background of IFQs, their objectives and goals, the role of NMFS
    and the Secretary of Commerce, and the need for additional statutory
    guidance.
    II. Background
        I will take as a starting point the MSA, in particular two key
    elements: first, the major findings of the Congressionally mandated
    National Academy of Sciences (NAS) study of IFQs, Sharing the Fish,
    which was completed just a few years ago in 1999; and, second, the
    mandates and guidance governing IFQs in the 1996 Sustainable Fisheries
    Act (SFA) amendments to the MSA.
        First, NMFS agrees with many of the major findings and
    recommendations of the NAS report. We agree that the moratorium on new
    IFQs should be allowed to lapse in October 2002. Therefore, the heart
    of the matter becomes how best to develop and administer new IFQs.
        Second, the existing mandates and guidance on IFQs, while not
    comprehensive, do establish useful boundaries on many key points. Not
    only does the SFA establish a moratorium on IFQs, it also:
         defines them for the first time in Section 3(21);
         states in Section 303(d)(3) that IFQs are privileges, not
    rights; they can be revoked at any time; they do not confer right of
    compensation; and, they do not create any ``right, title, or interest
    in or to any fish before the fish is harvested.''
         mandates in Section 304(d)(2)(A) and (B) the collection
    of fees to recover management and enforcement costs, capping these fees
    at three percent of ex-vessel value;
         stipulates in Section 303(d)(5)(B) that new, i.e., post-
    moratorium, IFQs must provide for ``effective enforcement and
    management,'' including ``adequate observer coverage'';
         provides in Section 303(d)(5) significant and detailed
    guidance on dealing with distributional issues after the lapse of the
    moratorium, including provisions that initial allocations must be
    ``fair and equitable''; that no participant in an IFQ program may
    acquire ``an excessive share'' of quota amounts/percentages; and, that
    any new IFQ program ``considers the allocation of a portion of the
    annual harvest in the fishery for entry-level fishermen, small vessel
    owners, and crew members who do not qualify for individual fishing
    quotas''; and
         authorizes in Section 303(d)(4)(A) the use of 25 percent
    of fees collected under limited entry programs to ``issue obligations
    that aid in financing purchases of individual fishing quotas in that
    fishery by fishermen who fish from small vessels, and first-time
    purchase of individual fishing quotas in that fishery by entry-level
    fishermen.''
        It is important to emphasize that the same basic regulatory
    assessments which apply to all fishery management plans (FMPs) and plan
    amendments are also required of IFQs. Language related to this can be
    found in Section 303 (which deals with the mandatory and discretionary
    provisions of FMPs), parts of Section 304, the ten national standards
    in Section 301, all regulatory provisions in the MSA, and all the
    required assessments that we conduct under the National Environmental
    Policy Act, the Regulatory Flexibility Act, and Executive Order 12866,
    which deals broadly with the analyses of economic and social costs and
    benefits.
        Also, all ten national standards apply to proposed IFQs, just as
    they do to any other management measure. At least eight of the ten
    standards are directly relevant to IFQs and other rights-based
    measures. They are: NS1 (optimum yield and overfishing); NS2 (best
    science); NS4 (non-discrimination and fair/equitable shares); NS5
    (efficiency); NS7 (cost minimization); NS8 (fishing communities); NS9
    (bycatch); and, NS10 (safety at sea).
    III. Program Objectives of IFQs
        With this information, I think we should look at the various
    objectives of IFQs. The guiding objectives of an IFQ system can run the
    range from maximizing efficiency, i.e., matching harvesting capacity
    with available resources, to focusing on social goals related to the
    sustained participation of fishermen and fishing communities. I believe
    that the most helpful approach to understanding this subject is to
    consider actual examples. Therefore, this portion of my testimony will
    comment on three short case studies.
        Examples of the existing IFQs that were developed and administered
    largely to improve economic performance, including rationalization of
    effort and capacity, are the surf clam/ocean quahog IFQ and the
    wreckfish IFQ. On the other hand, an IFQ that was set up quite
    differently because the Council and the agency wanted to assign a high
    priority to social goals, including support for small boat fishermen
    and certain fishing communities, is the sablefish and halibut IFQ in
    Alaska. A third category, of which the Atlantic purse seine for bluefin
    tuna IFQ is a good example, is less well known and was designed in
    large part to ensure stability in the harvesting sector. Of these four
    existing IFQs, this testimony will examine three so that we can see
    more clearly how they can accommodate different priorities. These brief
    examples will focus on the social and economic goals of IFQs.
    Typically, there is a perceived tension between these two objectives
    but, in practice, IFQs can be structured and administered in ways that
    mediate between these priorities.
    (A) Surf Clam/Ocean Quahog IFQ
        This IFQ program was implemented just over a decade ago. Its
    objectives were economic in nature, with full transferability, no caps
    on consolidation, few restrictions on the right to purchase quota
    shares, and without any set-asides for the benefit of small operators.
    All in all, the surf clam/ocean quahog IFQ has generated significant
    improvements in economic efficiency and more rational levels of
    harvesting capacity. The number of vessels in these fisheries has
    declined sharply, average harvests per vessel have more than tripled,
    the wasteful derby fishery has ended, and profits per participant have
    increased considerably. Resource conditions also have improved,
    especially for surf clam, and the latest quota has been increased
    appreciably.
        At the same time, it should be noted that there has been more
    progress toward economic efficiency in the higher-value surf clam
    fishery than in the lower-value ocean quahog fishery. Improvements in
    vessel safety are hard to document. Economic rationalization and
    reductions of overcapacity have changed this fishery in some
    significant ways. Small boat operators are fewer, and owners of medium-
    sized boats play a relatively larger role. Total employment has
    declined. The top three processors have increased their share of this
    market from just over half to almost three quarters in the last decade.
        The surf clam/ocean quahog IFQ has produced visible gains in
    economic efficiency and some improvement in stock health.
    (B) Halibut/Sablefish IFQ
        The IFQ program for halibut/sablefish in the North Pacific was
    established with somewhat different priorities--to support small,
    Alaska-based fishermen and to protect their fishing communities. In
    fact, when this IFQ was first developed, initial allocations were given
    to about 6,500 owners of halibut and sablefish vessels. Although some
    experts maintain that IFQs may be more difficult to enforce in
    fisheries with a large number of participants, this program seems to
    indicate that such an IFQ can work well, even when accommodating
    several thousand fishermen.
        Limits on accumulation of halibut shares are highly restrictive--
    just 0.5 percent or 1.0 percent per participant/owner, depending on the
    area. Transferability of quota shares, which is tightly regulated, is
    allowed only among members of the same vessel category. As a result,
    changes in numbers and the overall level of participation and, hence,
    more rational levels of harvesting capacity, are not as evident in the
    halibut/sablefish IFQ as in the East Coast IFQs.
        The improvements in the halibut/sablefish fishery cannot be denied.
    Before the IFQ was implemented, this fishery was a one-week derby
    fishery accompanied by high loss of life, low prices, processing gluts,
    and poor quality products. Since this IFQ program has been in place,
    this fishery has moved in a positive direction on many fronts. For
    example, the derby fishery has ended, operations are more evenly spread
    out over the year, more fresh fish is sold, prices have generally been
    higher, safety at sea has been enhanced, and many small fishermen have
    remained in the fishery, thereby stabilizing dependent communities.
    However, efforts to control concentration of the IFQs have spawned
    intricate regulations, particularly the rules on consolidation caps and
    transferability, which carry costs. Consequently, administration of
    this IFQ is more labor intensive and costly than for the East Coast
    IFQs.
    (C) Atlantic Bluefin Tuna Purse Seine IFQ
        The Atlantic bluefin tuna IFQ has been managed under the MSA and
    pursuant to an international agreement on Atlantic bluefin tuna quotas.
    Also, the purse seine IFQ system was established through Secretarial
    regulations. Under this IFQ system, a quota of 250 tons is divided
    among five U.S.-flag purse seiners that operate alongside a far greater
    number of smaller boats who participate in the ``general'' category
    under a separate quota. A major objective of this IFQ is to promote
    predictability and stability in this small but important fishery. This
    goal is achieved through limits on transfers, which are allowed only
    among the five participants.
        The Atlantic bluefin tuna IFQ is somewhat unique in several ways:
    the fishery is managed by the Secretary; the overall bluefin quota is
    established pursuant to an international agreement; it is a small part
    of a larger fishery; and, most significantly, its major objectives are
    to promote predictability and stability.
    IV. Flexibility of Goals
        As illustrated by the above examples, we can maintain a flexible
    application of the MSA provisions to design IFQs that accomplish a
    mixture of economic, social and other goals. In addition, the Secretary
    should continue to have the same flexibility to develop MSA-consistent
    IFQs in Secretarially-managed fisheries. I would like to explain
    several ways in which the Councils and the Secretary have the
    discretion to design IFQs that meet the unique needs of Federally
    managed fisheries.
        We believe that many decisions should be left initially to the
    discretion of the Councils. These decisions and the resulting proposals
    must be reviewed and approved by the Secretary in conformity with the
    requirements of the MSA and other applicable laws and executive orders.
    Nevertheless, the Councils (or the Secretary, with respect to Atlantic
    highly migratory species) should have a lead role in at least the
    following areas: (1) the initial decision to develop an IFQ; (2)
    formulas and criteria for determining initial allocations; (3) rules on
    transferability of IFQ shares in secondary markets; (4) caps on the
    consolidation of IFQ shares; and, (5) recourse to alternative rights-
    based approaches, including CDQs and fishery cooperatives.
    (A) Initial decision to develop an IFQ
        Three of the existing four IFQs were initiated by the relevant
    Council, and the fourth, the Atlantic bluefin tuna IFQ, was developed
    by NMFS. The NAS report stressed the need for local initiative and,
    within reasonable bounds, local control.
    (B) Initial Allocations
        The MSA requires that initial allocations be ``fair and equitable''
    but gives little guidance on the meaning of those terms. The practical
    result is that Councils (or, as appropriate, the Secretary) have wide
    latitude in setting the conditions for allocating harvest opportunities
    in IFQ fisheries. Although not required by the MSA, initial allocations
    have generally been awarded on the basis of catch history. Other
    formulas for determining initial allocations could be decided by the
    Councils (or, as appropriate, the Secretary).
        In addition, there are other initial allocation issues including
    proposed allocations to the for-hire recreational sector, i.e.,
    charterboat operators, and processors.
        Initial IFQ allocations to charterboat operators are not explicitly
    addressed in the MSA, and NMFS is not convinced that an MSA amendment
    is necessary to deal with them. NMFS recommends that initial IFQ
    allocation issues should be left to the discretion of the Councils,
    with the clear understanding that all such proposals must be reviewed
    by the Secretary for consistency with the MSA.
        Similarly, NMFS notes that IFQ allocations to processors are not
    required by the MSA, and that the 1999 NAS report, Sharing the Fish,
    found no compelling reasons to support or oppose processor allocations.
    For IFQ programs currently in place, processors were not precluded from
    receiving initial allocations. However, Councils chose to issue the
    initial allocations only to harvesting interests. Obviously, vertically
    integrated firms that both harvest and process fish may have qualified
    for initial IFQ allocations by virtue of the fact they own and operate
    boats in that fishery. Our view is that Councils should continue to
    have the discretion to provide initial IFQ allocations to processors,
    in which case NMFS will review that proposal for consistency with the
    MSA and other applicable laws.
    (C) Transferability
        Transferability is a critically important issue in the design of
    IFQ programs, and the MSA assumes transferability. Currently, broad
    discretionary authority is allowed to deal with sales/leases of IFQ
    shares in secondary markets in conformity with the basic goals of the
    program. As noted above, transferability in the East Coast Council-
    generated IFQs is relatively liberal (except vis-a-vis foreign
    interests), while in the halibut/sablefish program it is sharply
    limited to transfers among members of the same vessel category.
        In principle, NMFS generally supports transferability in IFQs
    because such programs are more likely to encourage the prudent use of
    capital and labor, thereby promoting improved stock conservation.
    However, restrictions on overall concentration in a fishery may be
    appropriate if they are needed to ensure the social objectives of the
    Council and are implemented in conformity with applicable law. Councils
    may, at their discretion, propose restrictions on transferability, and
    NMFS will review those proposals on a case by case basis.
    (D) Caps on consolidation of IFQ shares
        Another distributional issue that, under current law, may be
    addressed flexibly by the Councils, is caps on individual accumulations
    of quota shares. As noted earlier, Section 303 of the MSA requires that
    new, post-moratorium IFQs avoid the accumulation of ``excessive'' quota
    shares by individual participants, but does not provide guidance on
    what constitutes an excessive share. Some have suggested that U.S.
    anti-trust law adequately deals with this matter, but many others
    believe that fishery-specific guidance is necessary.
        It should be noted that this ``equity'' issue is also addressed in
    NS4, which provides that allocations among various fishermen must be
    ``carried out in such a manner that no particular individual,
    corporation, or other entity acquires an excessive share of such
    privileges.'' In general, Secretarial review under NS4 should be
    sufficient to deal with this concern, but, in so doing, should give
    considerable latitude to Council discretion. This determination should
    depend on the attributes of the fishery, including, among other
    factors, numbers of participants, the dependency of communities, the
    existence of competing small and large boat sectors, and the market
    power of processors. In dealing with proposed caps on consolidation,
    the Councils and NMFS must be sensitive to at least two related
    concerns: first, the implications for ``equity'' of participation; and,
    second, the possibility that excessive concentration could confer too
    much market power to a small number of players. The Councils should be
    afforded flexibility on this issue, and they should explicitly address
    this issue in the FMP's statement of program objectives.
    V. The Need for Additional Statutory Guidance
        The MSA currently provides much of the guidance that NMFS and the
    Councils need to move forward with new IFQs. Nevertheless, difficult
    and controversial issues remain. Several of these issues are broader
    than the Councils' prerogative and require a solution at the national
    level. NMFS would be pleased to work with the Subcommittee on any or
    all of these issues. While Congress may obviously identify other
    matters that it must deal with in a reauthorized MSA, NMFS has
    identified just three that Congress should consider:
         Bans or restrictions on foreign ownership of IFQs
        All four existing IFQs ban foreign ownership through their
    implementing regulations. Some experts believe that, after the
    moratorium lapses, a national policy on foreign ownership of IFQ shares
    will be needed. Restrictions/bans on foreign ownership of IFQ shares
    necessarily involve trade and investment policy, and foreign policy
    considerations, which are beyond the jurisdiction of NMFS, and
    therefore might be better addressed in law.
         Public capture of some share of windfall profits and
    economic rent
        The MSA requires the collection of fees to recover management and
    enforcement costs, but does not authorize the capture of some share of
    windfall profits and/or economic rent. Both windfall gains and economic
    rent were reviewed in some detail in the 1999 NAS report. Specialists
    differ sharply in their views on these issues, and some even doubt that
    windfall profits, in the strictest sense, exist in IFQ programs.
    Regardless, recovery of windfall profits and/or economic rent clearly
    require a national policy because of the budget and natural resource
    management implications. Therefore, this issue should be addressed by
    Congress when it reauthorizes the MSA. A well crafted policy may
    increase resources going to fishery management and enforcement if the
    IFQ system is providing increased rents to IFQ holders.
         Caps, currently 3 percent, and other restrictions on fees
    paid by industry to recover management and enforcement costs
        Fees paid by participants to recover IFQ management and enforcement
    are capped at 3 percent of ex-vessel values in the affected fisheries.
    As noted in the NAS report, that cap may be too low in some fisheries.
    Some even question the need for a national cap on IFQ cost recovery
    fees. Therefore, this matter should be addressed in MSA
    reauthorization.
    VI. Regulatory Guidance: The NMFS/Secretarial Role
        As the NAS report concluded and our daily experience shows, a
    number of other IFQ issues are probably not best addressed by uniform
    and nationally applicable norms. Instead, solutions should be crafted
    to meet the needs of specific fisheries. In these instances, the most
    appropriate action may not be an amendment to the MSA. In dealing with
    these issues, NMFS plans to focus on distributional matters and the
    costs of management, enforcement and observer coverage.
        Accordingly, in its regulatory reviews, NMFS will focus on the
    following issues:
         ``fair and equitable'' initial allocations;
         ``excessive concentration of shares'' of IFQ; and
         special treatment for smaller boat and entry level
    fishermen, and crew members.
        NMFS will also, as required, develop plans to ensure adequate
    support for management, enforcement, and observer coverage needs. More
    precisely, NMFS will assess the following:
         management/enforcement costs to be recovered through
    fees; and
         personnel/budget requirements needed to provide adequate
    observer coverage.
        Finally, NMFS will begin to work on standards, guidelines or
    methodologies to review and revise IFQs and related management
    programs, as required under Section 303 (d)(5)(A) of the MSA. With
    these tools, the Secretary and the Councils can better discharge their
    MSA obligation to develop procedures and requirements for review/
    revision of IFQs.
    VII. Summary--Elements of a National Policy on IFQs
        In conclusion, a national policy on IFQs, as required in Section
    303(d)(5)(A), should include the following three elements:
        Congress: As previously stated, Congress should allow the existing
    moratorium on new IFQs to lapse, and we will be pleased to work with
    the Congress as it considers legislation to set additional appropriate
    conditions under which new IFQ programs could be approved. At the same
    time, Congress ought to allow the regional councils flexibility and
    discretion to address fishery-specific characteristics. NMFS is
    examining these and other IFQ issues such as foreign ownership, the
    collection of some share of windfall profits and/or economic rent, and
    caps on cost recovery fees and will be happy to work with the
    Subcommittee on how best to address them in a reauthorized MSA.
        Councils: In developing IFQ programs, many decision points should
    begin with the Councils, in particular the decision to develop an IFQ,
    initial allocations, processor and charterboat IFQ shares,
    transferability, caps on consolidation, and special treatment for small
    boat, entry level fishermen and crew members.
        Administration/NMFS: NMFS should work with the Councils at each
    step of the IFQ development process. When the MSA is reauthorized and
    statutory guidance on IFQs is established, NMFS will undertake the
    following broad categories of activities:
        a) work with the Councils early in the plan development phase to
    identify appropriate IFQ-related issues and provide technical
    assistance to ensure that proposed IFQs are comprehensive and meet
    legal requirements;
        b) conduct its mandatory reviews, including those provided in the
    MSA and other regulatory statutes (especially NEPA, RFA, E.O. 12866)
    with these issues and other concerns explicitly in mind; and
        c) identify costs and staffing requirements for management,
    enforcement and observer coverage.
        With this approach, I believe we can develop a national policy on
    IFQs that is sound and broadly supported, respects the important role
    of the Councils, is administratively practical, and leads to improved
    management and sustainability of our fishery resources.
        In the final analysis, while there are concerns and questions about
    IFQs, there is also considerable interest in them in a number of
    Federally managed fisheries in the Atlantic, Gulf of Mexico, and
    Pacific regions. I believe that, if a Council wants an IFQ, they should
    have that option. If they then choose to develop an IFQ, they will need
    rules and some reasonable level of technical support from NMFS. When
    Congress establishes statutory guidance on IFQs through reauthorization
    of the MSA, the major obligation of NMFS will be to provide that
    support.
        Mr. Chairman, this concludes my testimony. I am prepared to respond
    to any questions that you and other members of the Subcommittee may
    have.
                                     ______

        Mr. Gilchrest. Thank you, Dr. Hogarth.
        Admiral Cross?

    STATEMENT OF REAR ADMIRAL TERRY M. CROSS, ASSISTANT COMMANDANT
                    FOR OPERATIONS, U.S. COAST GUARD

        Admiral Cross. Mr. Chairman, members of the Subcommittee,
    good afternoon. First, let me say it is an honor for me to
    represent the Commandant, Admiral Jim Loy, and the Coast Guard
    before this distinguished Subcommittee to discuss the impacts
    of individual fishing quota programs on fisheries, law
    enforcement and fishing vessel safety. Sir, I previously
    submitted a written statement that I would like to have entered
    into the record, and with your permission, I have a short oral
    statement.
        Mr. Gilchrest. Without objection.
        Admiral Cross. And, sir, before I begin that portion of my
    statement that relates to IFQs, I think it is important for me
    to thank you personally on behalf of the entire Coast Guard for
    your support for our organization over the last several years
    and in particular for your support of our fiscal year 2002
    supplemental funding. Those dollars were absolutely critical to
    our ability to enhance our port and coastal security operations
    while continuing to continue other missions which I know you
    understand are vital to the nation's security, the public
    safety and the economic health of the nation. Thank you, sir.
        And, of course, one of those missions important to the
    nation's economy is the protection of U.S. fish stocks from
    foreign fishers and also the enforcement of international
    agreements and domestic regulations, including IFQ regulations.
    Sir, in general, I can sum up the Coast Guard's experience with
    IFQ programs as follows: any quota system that lengthens the
    fishing season will likely have two impacts: first, it will
    require more resources to enforce, because the fishing season
    will be spread out over a longer period of time. Second, it
    will likely result in a safer fishery. This is because it will
    give fishers more time, more of a choice as to when they fish,
    and the bottom line, it gives fishers an opportunity to avoid
    fishing in bad weather.
        Sir, I also want to note that the Coast Guard plays an
    active role in the regional fisheries management councils, and
    we very strongly support this process. Should the Congress
    decide to lift the moratorium on IFQs, we will assist the
    councils with our very best recommendations on enforcement and
    safety issues related to IFQ implementation.
        Finally, sir, I need to point out that the Coast Guard
    represents the nation's primary at-sea enforcement capability.
    A significant portion of our fisheries law enforcement efforts,
    especially the protection of our fish stocks within the
    Exclusive Economic Zone, occur well offshore in the deep water
    environment. Simply put, we cannot do the job without
    resources, and I know you are aware of that.
        I served as commander of the 17th Coast Guard District in
    Alaska from the summer of 1997 to the summer of 1999. I know
    you visited Alaska, I think, during the summer of 1997 and got
    a chance to see firsthand some of the old, obsolete vessels we
    still use to enforce fisheries laws in the Bering Sea and the
    Gulf of Alaska, including the 60-year-old Coast Guard Cutter
    STORIS. We augmented our force in Alaska in 1999, so you
    probably did not get a chance to see the 58-year-old Cutter
    ACUSHNET.
        I know the Commandant has emphasized the importance of the
    deep water program to the Coast Guard. We need new deep water
    ships and aircraft to sustain our ability to protect the
    nation's ports and coastal areas; to effectively conduct
    counternarcotics operations and migrant interdiction operations
    and also for offshore fisheries law enforcement.
        Sir, I would be pleased to respond to any questions you may
    have.
        [The prepared statement of Admiral Cross follows:]

     Statement of Rear Admiral Terry M. Cross, United States Coast Guard,
                       U.S. Department of Transportation

        Good morning, Mr. Chairman and members of the Subcommittee. I am
    pleased to appear before you today, on behalf of the Commandant of the
    Coast Guard, to discuss the effects of individual fishing quota (IFQ)
    programs on fisheries enforcement and fishing vessel safety. I applaud
    your efforts to develop standards for the implementation of future IFQ
    programs. I know this is a management tool that a number of the
    Regional Councils and the National Marine Fisheries Service (NMFS) are
    interested in exploring for application in certain fisheries. As the
    Coast Guard's Assistant Commandant for Operations and former Commander
    of the Coast Guard District in Alaska, I have some first hand insight
    into the effects of these programs on fisheries enforcement efforts and
    safety.
        In general, I can sum up the Coast Guard's experience with existing
    IFQ programs as follows. First, any quota system that lengthens the
    fishing season will likely (a) require increased enforcement resources
    and (b) lead to a safer fishery by giving fishermen greater choice as
    to when to go out. Secondly, the Coast Guard supports the Fishery
    Management Councils and their process. Should the Congress decide to
    lift the moratorium on IFQs, we will assist the Councils with our best
    recommendations on enforcement and safety issues related to their
    implementation of IFQs for certain fisheries.
        There are currently three individual fishing quota systems in use
    in this country: the Surf Clam/Ocean Quahog fishery in the Northeast,
    the Wreckfish fishery in the Southeast and the Halibut and Sablefish
    fishery in the North Pacific. The Halibut and Sablefish fishery is the
    newest IFQ program, established in 1995. As such, it has reaped the
    benefits of lessons learned from previous IFQ regimes. This program is
    the most widely studied of the IFQ fisheries and reflects the most
    significant enforcement efforts and challenges. When viewed together
    (as they typically are), the Halibut and Sablefish fishery is the
    largest individual quota managed fishery in the world. Through these
    experiences, we, along with our other management partners, have
    garnered numerous lessons learned to aid in developing guidelines for
    future IFQ programs.
        The Coast Guard and the Department of Transportation are firmly
    committed to effective enforcement of our nation's fisheries
    conservation and management programs. We, along with our Federal
    enforcement partner, the National Marine Fisheries Service, worked
    extensively with the North Pacific Regional Fishery Management Council
    during the early 1990s to craft the individual fishing quota program
    for the Alaska Halibut and Sablefish fisheries. This comprehensive
    process, which occurred over a four-year period, combined industry with
    management and enforcement agencies to develop a realistic management
    alternative to the derby fishery that existed. Since the implementation
    of this program, we have learned enforcement, both at-sea and dockside,
    is a challenging task; a task far more complex and resource intensive
    than the derby style fishery that previously existed. IFQ management
    requires a much more extensive permitting and catch monitoring system,
    which leads to more complex regulations and more extensive enforcement
    considerations. Because IFQs required the inspection of vessels over
    greatly extended fishing seasons, the Coast Guard increased the number
    of cutter days spent on enforcement of the Halibut and Sablefish
    fisheries by approximately 40 percent averaged over the years since the
    IFQ was implemented. Similarly, we nearly quadrupled the number of
    aircraft hours dedicated to this mission during the same period.
        In addition to our at-sea efforts, shore side enforcement
    responsibilities have also grown tremendously. Despite a significant
    increase in NMFS personnel in the Alaska region, the magnitude of the
    shore side enforcement effort requires significant Coast Guard
    participation as well. As a result, the Coast Guard and NMFS are
    working more closely to coordinate dockside monitoring and surveillance
    efforts to ensure compliance with the IFQ in this fishery, especially
    in a post-September 11 world. We have been very pleased with the
    compliance rates in these fisheries. The violation rate has been cut
    from an average of 67 violations per year to an average of 19 per year
    since implementing the IFQ. This represents a reduction of over 70%.
        In addition to improved compliance rates, fishing vessel safety has
    been enhanced. Before the transition to the individual quota system,
    the Halibut and Sablefish fisheries were textbook examples of the
    dangers associated with derby fisheries. They were open for short 1-3
    day periods, and due to the normally harsh and unpredictable weather
    conditions in Alaska, they often opened during periods of inclement
    weather. During the three years prior to IFQs, the Coast Guard
    conducted an average of 28 search and rescue missions per year and an
    average of 2 lives were lost per year in these fisheries. Since
    implementation of the IFQ program, the average number of search and
    rescue missions has dropped to 8 per year, with an average of 1 life
    lost every two years. While other commercial fishing vessel safety
    initiatives implemented during this period also contributed to these
    positive statistical trends, the change in fishing management
    techniques was likely a primary factor. This notion is supported by a
    1999 study conducted by the University of Alaska's Institute for Social
    and Economic Research, which found that more than 85% of the Halibut-
    Sablefish permit owners felt that the transition to the IFQ system had
    made their fishery safer.
        What I have shared with you today are recent examples of the
    experiences we have had in what I believe is the very successful
    management of the Alaska Halibut and Sablefish fisheries. However, this
    does not mean IFQs are appropriate in every fishery. The social,
    biological, law enforcement and safety impacts of future management
    programs, will vary depending greatly on how the program is crafted. In
    general, a fishery management regime spreading effort over a longer
    time period will require additional enforcement resources. It will also
    allow fishermen to take into consideration such factors as weather,
    market conditions, crew availability, and vessel condition in order to
    maximize profitability and minimize risk. As future programs develop,
    Coast Guard representatives on the Regional Fishery Management Councils
    will continue to advise the councils on the enforcement and safety
    impacts of any proposed management decisions.
        Only through open and honest communication about these issues, as
    happened extensively leading up to the implementation of the Alaska IFQ
    program, can our fisheries management system work for the American
    public. These same types of open communications are occurring more and
    more often today as the Department of Transportation and the Coast
    Guard strive to protect both our economic resources and our nation's
    security. Protecting America from terrorist threats requires constant
    vigilance across every mode of transportation: air, land, and sea.
    Without a robust transportation network our nation's vast fisheries off
    Alaska would be nearly worthless. The agencies within the Department of
    Transportation, including the U.S. Coast Guard, Federal Aviation
    Administration, Federal Highway Administration, and the Maritime
    Administration (MARAD), touch all three modes of transportation and are
    cooperatively linked. This is especially true of the maritime mode.
    Ensuring robust port and maritime security is a national priority and
    an intermodal challenge, with impacts in America's heartland
    communities just as directly as the U.S. seaport cities where cargo and
    passenger vessels arrive and depart daily. The United States has more
    than 1,000 harbor channels, 25,000 miles of inland, intracoastal and
    coastal waterways and 95,000 miles of coastline serving 361 ports
    containing more than 3,700 passenger and cargo terminals. This maritime
    commerce infrastructure, known as the U.S. Marine Transportation
    System, or MTS, has long been a Department of Transportation priority.
    The U.S. MTS handles more than 2 billion tons of freight, 3 billion
    tons of oil, transports more than 134 million passengers by ferry, and
    entertains more than 7 million cruise ship passengers each year. The
    vast majority of the cargo handled by this system is immediately loaded
    onto, or has just been unloaded from, railcars or truckbeds, making the
    borders of the U.S. seaport network especially abstract and vulnerable,
    with strong, numerous and varied linkages direct to our Nation's rail
    and highway systems.
        Thank you for your continued leadership in our nation's fight
    against terrorism, for your support of the fisheries management
    process, and for providing this opportunity to discuss the possible
    impacts of this new fishery management method. I will be happy to
    answer any questions that you may have.
                                     ______

        Mr. Gilchrest. Thank you, Admiral Cross.
        Admiral, can you tell us the difference or the similarities
    between what you have suggested as far as IFQs improving safety
    in the fisheries because it has lengthened the season to the
    Fishing Vessel Safety Act and how those two have improved
    safety, or does one complement the other?
        Admiral Cross. Sir, I think one does complement the other.
    Let me perhaps try to put it in perspective for you. If you
    take a look at the fatalities and number of fishing vessel
    sinkings in the 5 years prior to the Fishing Vessel Safety Act
    being passed and then the most recent 5 years, you will see
    about a 30 percent reduction in each of those numbers. However,
    I think it is instructive to take a look at also the halibut
    and sablefish IFQ in Alaska, which was actually implemented in
    1995, which was long after the Commercial Fishing Vessel Safety
    Act was passed. And we have some statistics there that I think
    are relevant.
        Prior to the implementation of the IFQ in that particular
    fishery, we experienced about 28 search-and-rescue cases a year
    specific to that fishery and roughly two fatalities per year.
    Subsequent to the implementation of the IFQ, we experienced
    about eight search and rescue cases annually and less than one
    fatality.
        Mr. Gilchrest. That is pretty significant.
        Admiral Cross. Yes, sir.
        Mr. Gilchrest. And you think a large part of that had to do
    with the implementation of IFQs?
        Admiral Cross. Well, sir, certainly, on a continuing basis,
    we do all we can to educate fishers not just in Alaska but
    throughout the country, and we like to think that that has some
    impact. But we are forced to draw the conclusion, at least
    within the halibut and sablefish fishery, that the IFQ
    materially impacted the safety of the fishery.
        Mr. Gilchrest. Now, the clam industry on the East Coast has
    had an IFQ in place for a number of years, and yet, in recent
    years, there have been a number of sinkings. Is there any
    explanation for that that the Coast Guard might offer to that
    industry or might offer to us in improving the safety of the
    fishery?
        Admiral Cross. Yes, sir, let me comment on that. In
    general, over time, with the exception of 1999, that has been a
    relatively safe fishery. I believe that there has been a loss
    of only three lives since 1983. However, in 1999, three fishing
    vessels did sink, with the loss of 10 lives. And we
    investigated each of those sinkings, and we would be happy to
    provide a summary of the reports to the Subcommittee if you
    would like. But our investigation showed that none of these
    vessels were engaged in fishing at the time they sank, and
    there is no reason for us to believe that the IFQ fishery had
    anything to do with the sinking of the vessels. And I can
    encapsulate all three of those sinkings if you would like and
    relate what the investigations found regarding why those
    vessels sank. None of them were fishing at the time, though. I
    can point that out.
        Mr. Gilchrest. We would appreciate that, Admiral, if you
    could send that report to the Subcommittee.
        Admiral Cross. Yes, sir, I would be happy to do that.
        Mr. Gilchrest. We would like to review that.
        Admiral--I was about to call Admiral Hogarth.
        [Laughter.]
        Mr. Gilchrest. I guess we could do that.
        [Laughter.]
        Mr. Gilchrest. Dr. Hogarth--and thank you, Admiral Cross,
    very much.
        Dr. Hogarth, you stated that your recommendation would be
    to let the moratorium on implementation of IFQ's lapse in
    October. Can you give us some specific recommendations that we
    should include or not include in this reauthorization, which we
    hope to complete before the end of this fiscal year, as far as
    the language in the Magnuson-Stevens Act dealing with IFQs?
    Should we be as specific as we can be as far as standards are
    concerned to an IFQ fishery?
        You mentioned that we should ban foreign ownership, and you
    mentioned some items about the recovery of the costs, of the
    fees paid, and I think we can do that. Is there anything else
    that we should be specific on, and how much latitude would you
    like NMFS to have in developing IFQs that are appropriate in
    the different fisheries, and how much would you like--when you
    say NMFS, I mean the Secretary--how much latitude, then, should
    we give to each council in developing IFQs?
        Dr. Hogarth. Well, I think that we should--we do not need a
    lot of specifics. In my opinion, one size does not fit all in
    this industry. We have a lot of different types of fisheries:
    red snapper in the Gulf; you look at the clam fishery, and you
    look at Alaska, and they are different. And I think the
    councils need to have the leeway to work with the industry in
    designing what is the best IFQ for the situation they are
    looking at.
        If Congress ties their hands with a lot of criteria, it is
    going to be very difficult, because you are going to be looking
    at, you know, one size fits all, and so, we will not have the
    latitude, I think, to develop IFQs that we need. If you look at
    the four that we have in place now, they are in entirely
    different fisheries, but they all four seem to be working well.
        I think that one issue that is not clear is the role of
    processors in IFQs. I think under Magnuson, they probably
    should be included, but so far, they have not. The councils
    have chosen not to. However, that needs to be clarified as to
    the processor's role in IFQs.
        Mr. Gilchrest. If we do mention processors, is there some
    recommendation? If we mention processors, I am assuming that
    you would like the Secretary and the councils to have some
    latitude in different fisheries to include or not to include
    processors.
        Dr. Hogarth. I think it is going to be clear whether they
    are eligible or not, and I think if you look at Magnuson now,
    they may be.
        Mr. Gilchrest. As far as--and I did not mean to interrupt
    you--but as far as the processors are concerned, getting into
    an IFQ, the language that we would put into the Act would allow
    the Secretary and the council to make that decision, and should
    we include an opening for recreational industry, the charter
    boat industry? Should we worry about how that fishing quota can
    be transferred or purchased? Should we worry about, then, which
    to some extent it appears that the IFQs in the clam industry in
    the mid-Atlantic may be owned--about 60 percent of it might be
    owned by three individuals.
        Do we have to worry about, in the reauthorization of the
    Act, that type of monopoly, or should we leave that up to the
    council and the Secretary?
        Dr. Hogarth. I think the last point is an excellent point.
    I think, you know, we think the councils should be able to
    address that, but I am not sure that you want to see one
    company or two companies monopolize the fisheries. And so, it
    might be good to have some guidance on the, you know, the total
    percentage.
        Other than that, I really--you know, one thing in Magnuson:
    it defines fisheries as the stock in fishermen, you know. It
    says the stock in fisheries is defined as fish stock and
    fishermen. It does not say, well, that includes, you know,
    processors or includes--what else it includes. I think that is
    probably where the clarification needs to be if the processors
    are included, you know, to make sure that there is no question
    from a court standpoint as to what you intended.
        Mr. Gilchrest. I see.
        Dr. Hogarth. But I really--other than that, you know, I
    think there is not much we need. I think we just need for it to
    lapse and let the councils work forward. Like I say, we are
    going to have a workshop quickly to try to get the four sectors
    together to see if we are missing some points that we probably
    need to make, and we will be happy to provide you with that
    report. And we are trying to expedite that workshop.
        Mr. Gilchrest. And when might that workshop be complete?
        Dr. Hogarth. We are hoping to have it in the next 60 days.
    That is what our goal is.
        Mr. Gilchrest. If you can make it in the next 50 days,
    maybe we can include it in the--
        Dr. Hogarth. We will try to speed up the process, then.
        Mr. Gilchrest. Thank you, Dr. Hogarth.
        Mr. Underwood?
        Mr. Underwood. Thank you, Mr. Chairman, and thank you for
    your testimony, both of you.
        Admiral Cross, I want to first of all congratulate the work
    of the Coast Guard. I know it is a very integral part of
    homeland defense, and its role in that regard is increasing
    rather than decreasing. And my question pertains a little bit
    to that in terms of understanding your multifaceted
    responsibilities. One of them, obviously, is your work in
    monitoring the EEZ and in the IFQs. And in your own explanation
    here, you have indicated that in the implementation of the
    halibut and sablefish ITQ program in Alaska required an
    increase in the number of cutter days spent enforcing the
    fishery by 40 percent; a quadrupling of the number of aircraft
    hours dedicated to this mission.
        So maybe you can explain: how are those decisions made
    within the Coast Guard where to put their resources, since you
    have--this is a vital part of your mission but has certainly,
    given the events of the past few months, you are taking on
    other, very serious responsibilities as well?
        Admiral Cross. Sir, let me just start by saying those
    judgment are made very carefully. And what we ask our
    operational commanders to do is to analyze various threats from
    the various mission areas and then allocate resources
    appropriately. Let me give you an example, perhaps. On
    September 10, 1 or 2 percent, certainly less than 5 percent of
    the Coast Guard's resources were dedicated to port and coastal
    security. By October 11, a month after the September 11 events,
    that number had increased to well over 50 percent, based on the
    perceived threat in the short-term and the time it took us for
    developing coherent plans and working with the operational
    commanders.
        The Commandant since that time has decided that at least in
    the short-term, the right number is probably going to be
    between 20 and 25 percent, so that allows us to reallocate some
    of our resources that were drawn in for port and coastal
    defense in the short-term until we built up partnership and
    developed operational plans. Now those resources, many of those
    resources, have been redeployed back to Coast Guard missions.
    So maybe at the end of the day, your question is what does this
    mean for fisheries law enforcement?
        Well, over the short-term, until we can acquire the
    resources that we think we need to conduct the port and coastal
    security mission, it probably means somewhere between about a 5
    to 7 percent reduction in the allocation of Coast Guard
    resources to fisheries.
        Mr. Underwood. But in the President's new budget and the
    reallocation of resources, has the Coast Guard not received a
    significant bump-up in terms of security issues and homeland
    security, and is that not, in a sense, taking care of that?
        Admiral Cross. Well, sir, that is certainly going to take
    care of phase one, but the reality is we have the money, but we
    still need to recruit and train those people that the money is
    going to pay for. We need to get the boats and equipment on
    line that the money was provided to buy, and we are working at
    that absolutely as hard as we can. So what I am telling you
    now, the numbers I am providing now are not the same numbers
    that we will be talking about a year from now.
        Mr. Underwood. Now, are operational commanders, then, given
    the latitude to make these judgments in terms of in their own
    respective area, whether perhaps not as much attention needs to
    be given to port security? I would imagine that not to be the
    case.
        Admiral Cross. Typically, the operational commanders
    receive broad guidance from the Commandant and from the Marine
    Safety office and operations, myself, program directors, and
    then, they certainly have latitude within their operational
    areas to move resources as the threats change. And the threats
    can change very quickly. For example, the number that I gave
    you, 5 to 6 percent, 5 to 7 percent, assumes a maritime
    security condition that the Commandant has termed the new
    normalcy. And when there are times that the security condition
    needs to be increased, perhaps with the receipt of specific
    intelligence regarding a specific threat, then you will see
    once again the Coast Guard bringing additional resources to
    bear on the homeland and port coastal security mission, and
    there is no place for those other resources to come from in the
    short-term other than from other Coast Guard missions.
        Mr. Underwood. OK; if I could ask--I did not want Dr.
    Hogarth to get off scot-free here.
        [Laughter.]
        Mr. Underwood. Well, thank you. Thank you for that
    explanation.
        Also, Admiral, if you can give some indication--this is for
    the record--as to the level of resources or assistance given by
    the Coast Guard to the Freely Associated States, meaning the
    Marshalls and Palau and FSM, in terms of assisting them in the
    enforcement of their own EEZs.
        Admiral Cross. Yes, sir, we would be pleased to do that,
    and I fully understand that just the huge distances and the
    geography involved make that a very, very difficult area to
    enforce.
        Mr. Underwood. And it would mean an increase of Coast Guard
    resources for Guam! That would be the consequence of that.
        [Laughter.]
        Mr. Underwood. Dr. Hogarth, thank you for your testimony,
    and this is just a kind of a conceptual question, so for my own
    understanding of the issue, you referred to IFQs as a rights-
    based management tool, and yet, does the Magnuson-Stevens Act
    not make clear that IFQs are not property rights in that
    definition but, instead, a revokable permit? So maybe you can
    explain the difference, or maybe you can explain what you mean
    by rights-based management tool.
        Dr. Hogarth. Well, I think from that perspective, we are
    still taking a public resource and given a right to fish to a
    limited number through a process. We are saying that you can
    harvest a certain amount. But we are taking a public trust
    resource and allowing certain individuals to harvest a certain
    amount of it, and that is what I think we mean by rights-based.
    It is a right to do; it is something that the Government
    permits.
        Mr. Underwood. OK; but the right is not inherent.
        Dr. Hogarth. No; that is correct.
        Mr. Underwood. It is a public resource.
        Dr. Hogarth. Public resource; that is correct.
        Mr. Underwood. OK; clear; thank you.
        Dr. Hogarth. Could I just say one thing for the record?
        Mr. Underwood. Sure.
        Dr. Hogarth. I just--while I got the opportunity with
    Admiral Cross here--I just, from the National Marine Fisheries
    Service standpoint, I just publicly would like to thank the
    Coast Guard. We depend on them quite a bit, and as he said, at
    sea, we depend on them totally. And it is just a great
    cooperation that we have working, and Admiral Cross and I met
    several weeks ago to talk about the issues and how to work
    closer and how we can work together. I have been in several
    regions, and I would say that the regions I have been in, on at
    least a quarterly basis, we would have the Coast Guard call up,
    and we would get our enforcement together, and they would call
    me. We would decide then what needed to be enforced. They would
    ask our input: you know, what do you feel is critical for this
    quarter so we can do our planning?
        I know the events of September 11 have changed that some,
    but that cooperation is still ongoing, and, in fact, we have
    some people working with the Coast Guard now in the Houston
    Channel and some other areas. But just publicly, I would just
    like to say that we support the Coast Guard, and they support
    us, and anything to do to help them get back up to the level of
    enforcement in fisheries, we support. It is a great working
    relationship.
        Mr. Underwood. Thank you.
        Dr. Hogarth. Just thanks.
        Mr. Gilchrest. If the gentleman would yield, I guess just
    very briefly on the rights issue, I think perhaps--and I am not
    a lawyer; I am not sure if we have any lawyers up at this end
    of the room--but a rights-based management system--I do not
    think it is referred to as that in the Magnuson-Stevens Act,
    and I think we want to be careful with the language that we put
    into the Magnuson-Stevens Act for future reference. I believe
    that IFQs are referred to as privileges. I think, Dr. Hogarth,
    that the way you used your comments, I would interpret as
    privileges.
        Dr. Hogarth. That is correct.
        Mr. Gilchrest. But I think we should continue to interpret
    it as such. So when someone is given or purchases an IFQ, that
    is the standard legal terminology. It is not that I want to
    split hairs here.
        Dr. Hogarth. Thank you.
        Mr. Gilchrest. But it is--
        Mr. Underwood. I want to split some hairs, though.
        Mr. Gilchrest. Mr. Underwood.
        Mr. Underwood. I brought it up.
        Mr. Gilchrest. I was hoping that Mr. Underwood and I can
    retire from Congress and take care of those islands he
    described.
        [Laughter.]
        Mr. Gilchrest. Anyway, I will yield now to Mr.
    Faleomavaega.
        Mr. Faleomavaega. Thank you, Mr. Chairman, and thank you
    for calling this hearing, and I certainly want to thank Dr.
    Hogarth and Admiral Cross for their testimony.
        In following up on Mr. Underwood's testimony, I would again
    like to pay my personal respects to the tremendous work that
    the Coast Guard has done for our security. There are some of us
    here on the Hill who have a very different opinion about
    reinventing the wheel and having a Homeland Security
    department-level official when there are six or seven agencies
    already engaged on the whole question of fighting terrorism and
    especially on homeland security; for example, the Coast Guard.
        It seems that from your testimony, Admiral Cross, that all
    you need really is more training and personnel and resources,
    and homeland security is basically on our wharves and docks and
    on the high seas; this could have been done very effectively by
    the Coast Guard alone. Are you in agreement with that, or am I
    off base?
        Admiral Cross. Sir, I think most of the work that the Coast
    Guard does including port and coastal security involves
    partnerships. We have, for some time, and we continue to work
    very closely with the U.S. Customs Service. Dr. Hogarth talked
    about the work with the National Marine Fisheries Service. What
    he did not tell you specifically is that we had a shortage of
    boats and people in a particular area of the Gulf Coast, and we
    went to the National Marine Fisheries Service, and said you
    have a boat, and you have some people, and could we partner and
    cover this particular area? And so, we did that.
        We also have a very strong partnership with the Navy. The
    Navy has given the Coast Guard the use of 13 170-foot patrol
    boats plus various reserve units, and we have also partnered
    very closely with state and local officials and the other DOD
    services. So I do not want anyone to have the impression that
    this is a solely a Coast Guard effort, because it is not.
        Mr. Faleomavaega. I did not mean to suggest that, Admiral.
    But what I am saying is before the September 11 tragedy, you
    were already strapped for resources and ships and everything
    where possible to fulfill your mandate from the Congress. As
    Members of this Committee, we all know that.
        But since the September 11 tragedy and even with the
    President's initiative, we have given you a little bit more
    money, but it is still not sufficient to carry out the
    responsibilities as you should. Am I wrong on this observation?
        Admiral Cross. I think Admiral Loy has noted that we are
    working with the administration to provide additional resources
    for the Coast Guard.
        Mr. Faleomavaega. Dr. Hogarth, your testimony specifically
    was on the IFQs and also in reference to the reauthorization of
    the Magnuson-Stevens Conservation Act. Do you see any problems
    with the current status of the law as it provides this
    Congressional mandate for these councils, regional councils and
    the way they operate? I know from years past that these
    councils have had spats with NMFS, if you will, in terms of who
    is going ahead or who is coming behind and who is not
    fulfilling their Congressionally mandated responsibility. Can
    you comment on that?
        Dr. Hogarth. Well, I think, you know, first of all, I
    support the council process. I think the open, transparent
    process is what we need in managing fisheries. I think, you
    know, we need to work with the councils more greatly, and that
    is what we are trying to do.
        There are some things that we are looking at and that we
    think probably need to be, you know, tweaked, so to speak. I do
    not think that there are any major changes that we see in the
    Magnuson-Stevens, but there are some questions arriving about
    the balance on certain councils, you know, how do we achieve a
    balance? It says that there should be, but the Secretary, for
    example, has to choose from what he is submitted from the
    governments of the states and has no other choice. So I think
    we have to look at balance, how do we balance these councils?
        And there are a few things that we are putting together,
    and we will make those recommendations to your Committee
    hopefully very shortly. They are going through the review
    process within the agency now, but I do not think there is
    anything that we see that is major. We think the act is
    working. A lot of what the problems are is just us getting it
    implemented. It has been a lack of, to be honest with you,
    resources since 1995 on the Sustainable Fisheries Act to get
    some of the work done.
        But we have a new process that we are implementing with the
    councils that seems to be working relatively well right now. It
    is a lot of pressure on the councils. We put a lot of pressure
    on them, but we have put a lot of pressure on our own people.
        Mr. Faleomavaega. On the question of IFQs again, do you see
    that there is a greater strain on moratoriums and putting
    quotas on the eastern shores and the Atlantic of the variety of
    the fish? I suppose that you have a lot of lively debate even
    among the scientific community. How does this compare to those
    of us from the Pacific? Do you see a lot more of these efforts
    to put quotas and limitations on IFQs than you would in the
    Pacific, or are they about the same?
        Dr. Hogarth. I think in some instances, the Western
    Pacific, the Western Pacific Council, one thing they have done
    is they have had a limited entry program for a number of years,
    you know, that has been in place, which is a little bit more
    advanced than some of the East Coast. We have--you know, I
    think quotas will be a fact of life for awhile. I think we have
    to look at the amount of fish that can be extracted, including
    by-catch, which Congress has, you know, told us we have to do,
    and I think we need to do a better job there. But I do not
    think you are going to get out of quotas.
        Mr. Faleomavaega. As I remember correctly, I think some 100
    fishing vessels from the East Coast are now embanked in Hawaii,
    because there was such a place--there was a moratorium on
    swordfish.
        Dr. Hogarth. Yes.
        Mr. Faleomavaega. And now, we have got very serious
    problems in the Pacific even putting that on base. Is NMFS in
    any way cognizant of some of the problems that we have in the
    Pacific?
        Dr. Hogarth. We are. Definitely, we are. We are working--
    particularly now in the long line industry and the fact that
    vessels are moving around based on regulations that we have had
    to put into place to save turtles, some as a result of
    lawsuits; some as a result of the fact that we need to protect
    some of these species. We are trying to work with the councils
    to look at, you know, so that they will do the regulation it
    takes to protect those areas in addition to the movement of
    vessels.
        And that can be done through the council process.
        Mr. Faleomavaega. I do not know if you are aware, but I
    happen to have the largest tuna canning facility in the world
    that is based in my district in the Central Pacific, and I
    wanted to ask if the administration is supportive of the idea
    of allowing duty-free canned tuna from the Andean countries to
    be exported to the United States without any duty.
        Are you supportive of this position?
        Dr. Hogarth. That decision is above me.
        Mr. Faleomavaega. Because now, the Asian countries are
    complaining about this policy.
        Dr. Hogarth. Well, potentially--we talk to the industry,
    and depending on which group of the industry you talk to, some
    of the industry, some of the canners support it, and some do
    not. I think that there are some things that we could do for
    our industry that they have asked us to on canning labels and
    things that we are trying to work with the Department of
    Agriculture now that would be of more benefit to them that
    would probably relieve some of the real concern over this duty
    free.
        Mr. Faleomavaega. Thank you, Mr. Chairman.
        Thank you.
        Mr. Gilchrest. Thank you, Mr. Faleomavaega. We will refer
    that to the Ways and Means Committee.
        One other quick question, Dr. Hogarth: in your testimony
    you said that the current state of knowledge of the fisheries
    and the IFQs, it would be difficult to have multispecies
    management be compatible, with IFQs. As we begin the process of
    discussion and moving toward an understanding of ecosystem
    management of the fisheries, would you say that is a difficult
    if not impossible management tool?
        Dr. Hogarth. What?
        Mr. Gilchrest. Ecosystem management with IFQs.
        Dr. Hogarth. I do not know that it is impossible. I think
    again, it is going to look at the type of fisheries that you
    are dealing with within the ecosystem. I think that some we
    would, and some we would not. What the problem is with
    multispecies is, for example, in a group when you have got 53
    species--I mean, in this type of group of fishery, for example,
    in the Southeast, you do not know what you are going to catch.
    You may catch 20-something species when you are fishing, and it
    is very difficult to set IFQs from that standpoint.
        But I think the ecosystem management, I think, has a lot of
    potential for the future to help with the management, period.
    And how it fits in with IFQs, I think, will be worked out as we
    go forward. But I do not think it is impossible totally for
    IFQs. You have still got single species in an ecosystem that
    you catch separate from these multispecies.
        Mr. Gilchrest. So as we go through the process of letting
    the moratorium lapse on IFQs and allow the councils and the
    Secretary to be flexible in their implementation of IFQs in
    various fisheries, NMFS and other agencies will continue to
    pursue an understanding of that dynamic system that we call an
    ecosystem and in some years down the road pull it all together.
        Dr. Hogarth. Yes, sir. Due to this Committee's direction
    already, we are doing quite a bit on ecosystem management.
    There have been several workshops. Even at the American
    Fisheries Society meeting this fall, there are going to be
    further. That is a primary issue for us right now that we are
    trying to sort through and work through. We feel like it is the
    management of the future, and we have just got to figure out
    how to do it and how to measure everything together. So it is
    going to take us and a lot of fishermen and academia to come
    together, but that is what is underway right now.
        Mr. Gilchrest. We are all up for it, Dr. Hogarth.
        Dr. Hogarth. Thanks.
        Mr. Gilchrest. Thank you.
        Any--Dr. Underwood?
        Mr. Underwood. Thank you very much.
        And it is along the line of what the Chairman just asked.
    If, given the acceptance of the fact that IFQs are really
    permits to have exclusive access to a public resource, should
    these programs not be required to demonstrate that they
    contribute to and enhance the conservation of the resource in
    question? And should they be subjected to some kind of regular
    review to see that they are, in fact, doing that?
        Dr. Hogarth. I think that is why we feel that the councils
    should continue this process and have some leeway is that
    definitely, they should be conservation based, and they should
    be reviewed, you know, constantly as far as the council is
    concerned, yes.
        Mr. Underwood. OK; thank you.
        Mr. Gilchrest. Mr. Faleomavaega, any follow-up questions?
        Mr. Faleomavaega. No questions.
        Mr. Gilchrest. Admiral Cross, you are not going to retire
    to Juneau when you are out of the Coast Guard? A lot of
    Coasties do, I understand.
        [Laughter.]
        Admiral Cross. Yes, sir, a lot do. It is not my plan right
    now, sir.
        Mr. Gilchrest. Thank you very much, Admiral Cross and Dr.
    Hogarth, for your testimony.
        Mr. Gilchrest. Before I introduce the next panel, if
    anybody standing by the back door wants to sit around the
    horseshoe up here, you are welcome to, or if you find another
    seat somewhere in the audience.
        Our second panel is Dr. Daniel Bromley, Professor of
    Applied Economics, University of Wisconsin; Dr. Donald Leal,
    Senior Associate, Political Economy Research Center; Mr.
    Richard Gutting, President, National Fisheries Institute; Mr.
    Jim Gilmore, Director, Public Affairs, At-Sea Processors
    Association; Mr. Lee Crockett, Executive Director, Marine Fish
    Conservation Network; Mr. Nathaniel Heasley, Fisheries Program
    Manager, Taxpayers for Common Sense.
        Gentlemen, thank you very much for coming.
        Dr. Bromley. Should I start?
        Mr. Gilchrest. I was just waiting until everyone sat down.
        Gentlemen, thank you very much for coming this afternoon.
    We look forward to your testimony and your input, and Dr.
    Bromley, you may begin.

     STATEMENT OF DANIEL BROMLEY, PROFESSOR OF APPLIED ECONOMICS,
                        UNIVERSITY OF WISCONSIN

        Dr. Bromley. Thank you, Mr. Chairman.
        I have a longer statement that I have submitted. If my
    timing is right, I will have 5 minutes worth of prepared
    comments here.
        Mr. Gilchrest. Yes, sir.
        Dr. Bromley. I shall comment on whether IFQs should be used
    as a management tool, but first, I suggest that we need a bit
    of clarity about IFQs. This is necessary because the literature
    on fisheries has made such a conceptual mess of IFQs that there
    seems hardly a problem in the oceans that cannot be solved with
    IFQs. Not only is much of this literature confused and flawed
    in its diagnosis of the fishery problem; this literature
    violates the very first rule of public policy. That rule is
    that one needs a single policy instrument for each policy goal.
        When we read that IFQs will solve problems of excess
    capacity; that they will lead to the conservation of fish
    stocks; that they will reduce monitoring and enforcement costs;
    and that they will solve the alleged tragedy of the commons, we
    must understand that this is a classic example of severe
    overstatement. There are three principles I believe that set
    the stage for thinking about IFQs. First, we must be clear
    about the public ownership of the oceans. I am reassured in the
    conversations that have just been completed that this is
    understood at that end of the room.
        There is a myth that the oceans are some empty frontier in
    which fish are not owned by anyone until they find themselves
    onboard a vessel. However, since 1976, the Exclusive Economic
    Zone and the fish within it are clearly the sovereign
    possession of the citizens of the United States, to be managed
    on our behalf by the Federal Government. In technical terms,
    the EEZ is a state property regime on a par with the public
    lands.
        Second, we must be clear that IFQs are not property rights,
    and this is not splitting hairs. IFQs are permits. The claims
    and the duties that are inherent in IFQs are against other
    holders of IFQs, not against the citizens of the United States
    and not against the National Marine Fisheries Service. The
    Magnuson-Stevens Act is clear that IFQs are permits that bestow
    nothing in the way of a property right in fish or the wealth of
    ocean fisheries. It must not be modified in this respect.
        Finally, we must be clear that it remains the obligation of
    the Federal Government to manage and protect the sustainable
    harvest of the fish stocks in the EEZ. It is not in doubt that
    the NMFS has the obligation to protect the biological integrity
    of all fish stocks, and that obligation, it seems to me,
    supersedes any other purpose of the agency. Protecting fish
    stocks is not something that can be passed off to the bogus
    magic of IFQs under the flawed rubric of rights-based fishing,
    nor is protection something that can be passed off to the
    regional fisheries management councils. There must be a
    national commitment to protect fish stocks and to rehabilitate
    those that have been driven to the brink of collapse.
        Let us now turn our attention to IFQs as a management tool.
    I submit that IFQs might be considered a feasible management
    tool for particular fisheries if certain conditions are met: if
    there is assurance that the harvest levels will not drive
    stocks to economic or biological extinction; if there is a
    local desire to force some labor and capital to exit a
    particular fishery; if it is clear that the subsequent purchase
    of petty quota shares, as I would put it, will accomplish the
    desired exit; if there is a realistic annual fee for those
    wishing to remain in this particular fishery; if those wishing
    to remain in a particular fishery and seeking quota shares are
    made to offer bids for royalty payments on landings, with only
    a subset of those bidding for this--
        Mr. Gilchrest. Excuse me, sir; bids for what? I did not
    hear that. Bids for royalty payments?
        Dr. Bromley. Yes; if those wishing to remain in a
    particular fishery and seeking quota shares are made to bid a
    royalty offer for landings, with only some subset of the
    highest bidders actually receiving these quota shares.
        The reason I insist on this is that if one really believes
    in a market economy, what one really wants is for private firms
    to have the opportunity to reveal to all of us their
    willingness to pay for something. The way IFQs have been handed
    out is, in a sense, the dogma of picking winners, which I
    understood at least in years past, the Government was loath to
    do, to pick winners, so auctions are precisely the antithesis
    of picking winners based on catch history.
        Let me move on. My sixth condition is if it is clearly
    understood that the legal nature of an IFQ as a permit stands
    on the same ground as all commercial contracts and agreements
    and bears no relation whatsoever to Constitutional notions of
    property rights; these are not rights-based fisheries. They are
    quota-based fisheries, and they ought to be called that.
        Seventh, if it is clearly understood that monitoring and
    enforcement costs in an IFQ fishery are not less and stand a
    very good chance of being greater than they are in a non-IFQ
    fishery; and finally, if it is clearly understood that IFQs
    will doing nothing at all--nothing at all--to turn fishers or
    fishing firms into good and beneficent stewards of our wealth
    of ocean fisheries.
        I close with a few comments on the national interest in
    local and regional fisheries: the idea behind the councils is
    that these councils will ensure us that fishery policy is
    formulated by those closest to the resource and also the
    implications of those decisions. However, as we learned in the
    Pacific Northwest about timber harvests, local interests can
    often conflict with the larger national ownership and the
    interest of precious natural assets. Local issues and
    priorities, of course, warrant some consideration. At the same
    time, we must be very clear that the ultimate health of marine
    fisheries is too important to be left to local pressures and
    local wishes.
        It may be acceptable for regional councils to have the
    option of implementing an IFQ system in one or more fisheries,
    but that implementation must be consistent with the conditions
    that I have spelled out above.
        To summarize, my position is this: IFQs might be a regional
    management tool if and only if the conditions that I have
    alluded to above are guaranteed. I will summarize them here:
    clear acknowledgement of public ownership of the wealth of
    ocean fisheries; absolute assurance of the continued Government
    protection of fish stocks and recovery of depleted stocks; and
    there must be a pricing protocol that reverses the current
    artificial inducements to fish and that brings a financial
    return to the U.S. Treasury for the opportunity to participate
    in the fishery.
        If these conditions are not met in their entirety, then
    IFQs are not a management tool at all but merely a cunning way
    to hand over enormous income and wealth streams to the
    industry.
        Thank you very much.
        [The prepared statement of Dr. Bromley follows:]

       Statement of Dr. Daniel W. Bromley, Anderson-Bascom Professor of
               Applied Economics, University of Wisconsin-Madison

        I have been asked to address a number of questions concerning
    Individual Fishing Quotas and I will do so in strict accord with the
    letter of invitation sent by Congressman Gilchrest on October 12, 2001.
    1 I provide a brief biosketch at the end of this testimony.
    ---------------------------------------------------------------------------
        \1\ Many of the ideas expressed here have been developed andd are
    much elaboratedn Macinko and Bromley [2001].
    ---------------------------------------------------------------------------
        The letter of invitation states that: ``The Subcommittee is
    interested in your views on whether and when IFQs should be used as a
    management tool, and your recommendations for the development of
    guidelines that will address issues associated with the development and
    implementation of IFQ fishery management plans.'' A number of specific
    questions are then detailed. To facilitate clarity I shall start by
    responding to this general programmatic question. I will then turn to
    the specific questions posed. My answers to the general questions are
    based upon the detailed points raised in response to the specific
    issues of interest to the Subcommittee.
    THE GENERAL QUESTION:
            Whether and when IFQs should be used as a management tool, and
            guidelines that will address issues associated with the
            development and implementation of IFQ fishery management plans.
        A useful response to this question first requires some contextual
    clarification. In that regard, I insist that coherence will come to
    American fisheries policy if and only if the following five conditions
    are met:
    RECOGNIZE PUBLIC OWNERSHIP
        There must be clear recognition that the wealth of ocean
    resources--but especially the fish stocks--are the exclusive property
    of the citizens of the United States. This reality for the Exclusive
    Economic Zone would put fisheries on the same legal basis as grazing on
    BLM lands, as grazing and timber harvests on U.S. Forest Service lands,
    and as petroleum extraction from the Outer Continental Shelf.
        Recognition of ownership by all of us carries with it the
    correlated obligation that some government agency be given a clear and
    non-negotiable mandate to protect--not just ``manage''--the wealth of
    ocean resources for the long-run benefit of all of its owners. This
    means that fisheries policy would suddenly be driven not by the wishes
    and priorities of the industry in pursuit of our fish, but in the
    interests of those of us who are the owners of the ocean ecosystems and
    all that is contained therein. After all, the fishing industry is
    merely the first step in a long and elaborate process of converting
    nature's gift into a valuable product for our consumption. Fishing
    firms stand on the same foundation as firms engaged in petroleum
    extraction, timber harvesting, livestock grazing, and mineral
    extraction. All of these firms exist with but one purpose in mind--to
    serve us as they collect nature's bounty for our benefit. As long as
    there is a demand for the product they deliver, we need not worry that
    there will be clever and hard-working entrepreneurs standing in line
    seeking the opportunity to serve our cravings. That is, after all, the
    essence of capitalism and the associated markets we claim to revere.
    B. ASSURE SUSTAINABLE HARVESTS
        With public ownership clarified, and with the long-run
    sustainability of the wealth of ocean fisheries assured by the
    aggressive management protocols of a committed government agency (said
    responsibility currently residing in the National Marine Fisheries
    Service), we may turn our attention to the essential matter of assuring
    the long-run sustainability of the valuable assets of the EEZ. Notice
    that safe harvests must remain the exclusive province of some
    government agency. Notice, as well, that the determination of this
    harvest level--often called the Total Allowable Catch (TAC)--must be
    resolutely situated beyond a robust firewall that offers absolute
    protection to government scientists and their technical advisors from
    local political pressure to push the TAC up beyond what the scientists
    insist is the safe harvest. In those fisheries without a formal TAC
    there must be a resolute commitment to follow management advice about
    closures when stocks are threatened.
        Having said that, we must recognize that part of the difficulty in
    many fisheries is that they are managed on the dubious metaphor--and
    models--of ``surplus production.'' These models presume that nature
    produces ``extra'' stuff that can freely be taken out of the ecosystem
    without serious implications for other parts of those ecosystems which
    are either predators of, or prey for, the allegedly ``surplus
    production.'' When simplistic models of surplus production are built
    for single species--and unfortunately this seems to be the norm--then
    it should not surprise us when seemingly ``safe'' harvests turn out to
    hold serious implications for a number of fish stocks. In such cases it
    is not political pressure that constitutes the primary threat to
    sustainability, but bogus science. If the Congress really is interested
    in the application of good science to fisheries policy then a major
    research initiative to advance the primitive art of fishery population
    dynamics would offer enormous payoffs.
    ALLOCATION OF HARVESTS
        With individual stocks in each fishery protected from both bad
    science and political manipulation, the question then turns on how the
    safe (sustainable) annual harvest from particular fisheries shall be
    allotted to those who seek to participate. Before answering this
    question, I must briefly offer a slight but fundamental economic
    digression. Specifically, the capture of the living resources of the
    oceans is currently free to all who wish to earn income from that
    pursuit. It constitutes intellectual dishonesty for an economist to
    fail to point out that this simple fact leads to an artificial
    inducement for too many factors of production--oats and labor--o be
    devoted to that particular pursuit. That is, too much labor and capital
    will be devoted to catching fish in comparison to other avenues of
    gainful employment. We know that in other economic pursuits the
    necessary inputs are priced through markets that ostensibly reflect the
    value that society attaches to those inputs. Of course fishing is not a
    costless activity--oats, gear, licenses, fuel, and insurance present
    formidable costs. However, only in the fishery is the valuable product
    (the fish themselves) freely given away. Not only is this zero price a
    false reflection of the true social value of the harvested fish, this
    zero price results in fishing being artificially cheap compared to
    other possible avenues of making a living. It follows that there will
    therefore be too much labor and capital devoted to fishing.
        We see that economic efficiency--nd equity with other sectors
    involved in natural resource extraction--emands that those who seek to
    make a living from fishing must offer payments to the owners of those
    fishery resources for the opportunity to profit from that activity.
    This requires that any allotment of fishing opportunities to the
    private sector must be predicated upon some scheme in which the U.S.
    government receives a payment for fish caught. These schemes could be
    structured in a variety of ways. But the receipt of payments to the
    U.S. Treasury assures that economic efficiency and equity across
    resource sectors has finally arrived in U.S. fisheries policy.
    D. IFQs AS A MANAGEMENT TOOL
        We now have public ownership firmly established, we have safe and
    sustainable harvests assured, and we have sound economic principles in
    place to make sure that the current subsidies to excessive entry and
    landings have been reduced, if not entirely eliminated. 2
    From this auspicious foundation I can now address the core question:
    whether and when (that is, under what circumstances) IFQs should be
    seen as a feasible management tool in U.S. fisheries?
    ---------------------------------------------------------------------------
        \2\ There are other subsidies, introduced to ``develop the American
    fishing fleet'' in the 1970s, that continue to plague and stifle
    economically rational fishing policy. This does not seem the place to
    discuss such practices.
    ---------------------------------------------------------------------------
        The answer to this question first requires clarity as to what is
    meant, precisely, by the concept of an ``IFQ.'' There are four
    components that are pertinent here:
         A total allowable catch (TAC) is set for a particular
    fish stock;
         That TAC is then divided into shares (called ``quotas'')
    among some subset of all vessels with a creditable ``catch history;''
         Permits to catch and land those quotas are then issued
    free of charge to all with a creditable catch history;
         Those permits to a quota share constitute ``individual
    fishing quotas'' (IFQs)
        The question therefore concerns which of these attributes alone, or
    in concert, offer a feasible and prudent ``management tool'' for
    fisheries? Notice that mere feasibility is not sufficient. Of course
    IFQs are feasible--they exist in 6 U.S. fisheries (one is a state
    fishery in Wisconsin, while the other 5 are Federal programs). So I
    will answer in terms of the sufficient condition--are IFQs a prudent
    management tool?
        IFQs can be a prudent management tool for particular fisheries if
    certain conditions are met. These conditions are:
         If there is assurance that harvest levels will not drive
    stocks to economic or biological extinction (that is, there must be a
    coherent and safe TAC);
         If there is local pressure to force some labor and
    capital to exit a particular fishery;
         If it is clear that the subsequent purchase of petty
    shares will accomplish the necessary exit of labor and capital;
         If there is a realistic annual fee structure for those
    wishing to remain in a particular fishery;
         If those remaining in a particular fishery and seeking
    quota shares are made to offer bids for royalty payments on landings
    (with only some subset of the highest bidders receiving quota shares);
         If it is clearly understood that the legal nature of the
    IFQ (as a permit) stands on the same ground as all commercial contracts
    and agreements and bears no relation whatsoever to Constitutional
    notions of ``property rights'' (that is, the legal content of IFQs is
    situated in contract law among other holders of IFQs and bears no
    relation to the citizens of the U.S. as owners of the wealth of ocean
    fisheries or the U.S. Treasury); 3
    ---------------------------------------------------------------------------
        \3\ See Becker [1977, p. 13] for the important distinction between
    ``claim rights held against other individuals--in this case other IFQ
    holders--from those held against institutions--in this case the NMFS or
    the U.S. Treasury.
    ---------------------------------------------------------------------------
         If it is clearly understood that IFQs will do nothing at
    all to turn fishers or fishing firms into good and beneficent stewards
    of our wealth of ocean fisheries;
         If it is clearly understood that monitoring and
    enforcement costs in an IFQ fishery are not less--and stand a very good
    chance of being greater--than those costs in a non-IFQ fishery.
    E. THE NATIONAL INTEREST IN LOCAL AND REGIONAL FISHERIES
        The final piece in this challenging policy puzzle concerns the
    relation between the local/regional level and the national interest in
    U.S. ocean ecosystems. The idea behind the various fishery management
    councils is that the councils will assure us that fishery policy is
    formulated by those closest to the resource and the implications of
    various policy choices. However, as the Pacific Northwest recently
    learned about timber harvesting practices, local interests can often
    conflict with the larger national ownership interest of precious
    natural assets.
        Local issues and priorities of course warrant careful consideration
    in national fishery policy. At the same time, we must be very clear
    that the ultimate health of marine fisheries is too important to be
    left to local pressures and wishes. It may be acceptable for regional
    councils to have the option of implementing an IFQ system in one or
    more particular fisheries, but that implementation must be consistent
    with the conditions spelled out immediately above. To summarize briefly
    here, as long as that implementation were consistent with: (1) clear
    recognition of the public ownership of the wealth of ocean fisheries;
    (2) absolute assurance for protection of each fish stock--and recovery
    of depleted stocks; and (3) a pricing scheme for fish that assures a
    return to the U.S. Treasury for the opportunity to participate in the
    fishery.
        We see here a necessary blending of national and regional
    interests. Regional interests have a stake in the ocean's resources,
    and there is certainly special knowledge at the regional/local level.
    But the wealth of ocean fisheries is most assuredly not the fee simple
    estate of local or regional interests. Rather, that estate is an asset
    belonging to all citizens of the U.S. The obligation here is that
    local/regional priorities and interests must always be subordinated to
    the larger national interest in the sustainability of the fishery
    resource.
    SUMMARY:
        These five principles, if assiduously adhered to, offer a plausible
    chance of rescuing U.S. fishery policy from the incoherence into which
    it has slowly settled over the past decades. And if IFQs are thought to
    be a prudent management tool then they must only be introduced under
    the more expansive list of 8 conditions elaborated under item D above.
        I now turn to the more specific issues in Congressman Gilchrest's
    letter of invitation. In doing so I will draw upon--and reinforce--some
    of the comments from above.
    SPECIFIC ISSUES:
    1. Initial allocation among fleet sectors and individuals
        One of the major flaws in IFQs as we know them is that the receipt
    of an IFQ permit represents a gifting of public wealth to private
    individuals. As a citizen I am offended--and as an economist I am
    outraged--by this unnecessary enrichment of an industry that is proud
    of its commitment to what many of its members are pleased to call the
    wonders of American free enterprise. Unfortunately, the adjective
    ``free'' has an insidious double meaning in fisheries policy. I very
    much doubt that this practice is what most people have in mind when
    they pronounce on the manifold virtues of a market economy. Indeed, one
    could make a plausible argument that much of the observed--and much
    lamented--``excessive entry'' afflicting many fisheries is less
    motivated by the desire to catch fish than it is to acquire some catch
    history by which firms might then receive one of these wondrous gifts.
    We call this, with deep irony, ``fishing for quota.'' Notice that the
    mere expectation that IFQs will be introduced in a number of fisheries
    has precipitated the ``race for catch history''--such racing then
    providing part of the alleged need and ``justification'' for IFQs. In
    an ironic twist, we may fairly observe that the ``disease'' is caused
    by the promise of ``medicine.'' And the more likely the prospects of
    medicine, the worse the disease becomes. This is bizarre in the
    extreme.
        If Congress is intent on gifting public wealth to the private
    sector then there must first be a clear set of criteria whereby that
    gifting can be justified and explained to the American people--and to
    the U.S. Supreme Court.
        It is clear that if IFQs are to be introduced then the only
    economically rational way for that to be done is on the basis of the
    willingness of fishing firms to pay for the opportunity to pursue that
    particular income stream. It would seem odd, I suggest, were oil
    companies to be given free access to the deposits in the Outer
    Continental Shelf. It would be odd, as well, were logging firms and
    sawmills to be given free access to the timber growing on public lands
    in America. And indeed we know just how much controversy exists over
    the allegedly low grazing fees paid by western ranchers for access to
    forage on the public lands. One thing that can be said for the
    ranchers--at least they are paying something for what they receive from
    the public domain. The same cannot be said for America's fishing fleet.
        I have earlier (item C above) pointed out that pursuing fish is
    artificially cheap. All fishing firms should be required to pay
    substantially more than at present to pursue our fish. That alone would
    solve much of the alleged problem of ``excessive capital'' in (or
    lurking near) many fisheries. I also insist that if an IFQ system is
    instituted, access to an IFQ permit should be contingent on submitting
    bids (royalty payments) for each fish landed. Such auctions are common
    in natural resource policy and must be part of any IFQ program [Macinko
    and Bromley, 2001].
        This is not the place to articulate the details of several feasible
    auction systems. It is, however, the place to insist that only auctions
    can uncover the market's assessment of the economic value of fishing.
    And, only through auctions will we finally bring the proper economic
    incentives to an industry that has, for too long, had free access to
    the wealth of ocean fisheries. To those who worry that auctions would
    eliminate small firms I wish to point out that auctions could be
    designed in a way that would partition the allowable catch in a way
    that would reflect local characteristics, culture and concerns. In
    addition, the auction systems would lead to fishing permits for set
    periods of time--ranging from 2-10 years--depending on the
    circumstances of each fishery. This would facilitate management
    flexibility as conditions change. Finally, there could be limits on
    maximum share of any fishery that could be controlled by a single
    firm--or by a combine of firms. Notice that the proceeds from this
    system of auctions could, in the beginning, be dedicated to programs
    that would ease the transition of firms unwilling to continue to fish.
    The proceeds could also serve to ease transition costs in particular
    communities hit hard by the transition to the new fishery regime.
    2. Should processors receive quotas?
        It is important to point out that the excessive and quite
    unnecessary controversy about whether or not processors should receive
    quota shares arises from the fact that there is an expectation that the
    quota shares--and the immoderate income streams associated with said
    permits--will be given away free. In rather blunt terms, those who fish
    seek to make sure that they are the only ones to benefit from this
    wondrous wealth transfer and the associated income stream. Members of
    this House know all too well that there is an unlimited demand for
    income streams given away free of charge by the government.
        But, under my proposal, anyone who seeks to acquire an opportunity
    to earn a living from fishing must first agree to pay higher fees for
    the opportunity to fish, and they must participate in an auction where
    they would bid for royalty payments on the fish caught and landed.
    Notice that structuring the initial allocation in this way would
    immediately truncate the very long line of supplicants who would
    otherwise appear before you at frequent intervals claiming to be much
    in need of a government handout.
    3. Impact of IFQs on conservation and management of fisheries resources
        We come now to the basis of most, if not all, of the bogus dogma
    concerning IFQs. This dogma appears in many forms but the most blatant
    form seems to be:

            Major Premise:       IFQs are private property rights
            Minor Premise:       Private property rights cause good
            stewardship
            Conclusion:          LIFQs will bring forth good stewardship of
            the public's wealth of ocean fisheries.
        Notice several things about this chain of reasoning. First, IFQs
    are assuredly NOT private property rights. Hence the major premise is
    patently false. The Congress [Magnuson-Stevens Act, Sec. 3 (21)] has
    defined an IFQ as:
            ...a Federal permit under a limited access system to harvest a
            quantity of fish, expressed by a unit or units representing a
            percentage of the total allowable catch of a fishery that may
            be received or held for exclusive use by a person. (emphasis
            added)
        In fact, Congress went on to provide further clarity regarding
    property rights and permit-based limited access systems generally
    [Magnuson-Stevens Act, Sec. 303 (d)(3)]:
        An individual fishing quota or other limited access system
    authorization:
        (A) Lshall be considered a permit for the purposes of sections 307,
    308, and 309;
        (B) Lmay be revoked or limited at any time in accordance with this
    Act;
        (C) Lshall not confer any right of compensation to the holder of
    such individual fishing quota or other such limited access system
    authorization if it is revoked or limited; and
        (D) Lshall not create, or be construed to create, any right, title,
    or interest in or to any fish before the fish is harvested.
        Unfortunately the fishery literature--including that emanating from
    the National Marine Fisheries Service--is replete with incoherent
    claims that an IFQ fishery is a ``rights-based fishery.'' Let us be
    clear about one fundamental point: the Exclusive Economic Zone (EEZ)
    represents nothing if not the reach of the sovereign authority of the
    U.S. Government over the entirety of economically important natural
    assets within the EEZ. It is therefore patently false to claim that the
    American fishery in the EEZ is a ``common property resource.'' It is
    also false to claim that no one ``owns'' the fish until they are
    captured by the fishing firm. The American people own the fish in the
    EEZ and all of the associated natural systems central to the health of
    the oceans [Bromley, 1991].
        What of the minor premise--the quite extravagant claim made for the
    wonderful stewardship properties of private owners? Economic theory is
    quite clear on this point. If the rate of time preference of a private
    owner is greater than the rate of reproduction of a living resource
    (i.e. fish) then it follows that the owner will find it preferable to
    drive the resource stock to extinction and consume the proceeds. Or, if
    interest rates are favorable, the private owner will invest the
    proceeds where they will grow faster than if the resource had been
    managed conservatively to yield an income over time. We call this the
    iron law of the discount rate [Macinko and Bromley, 2001].
        There is other evidence of the flawed story about private ownership
    and stewardship. Specifically, public policy has clearly recognized--at
    least since the days of Theodore Roosevelt--that private individuals
    suffer from a ``faulty telescopic faculty'' when it comes to the
    treatment of nature. There is only one entity whose time horizon gives
    proper account of the future. That entity is the collective authority
    of government, looking not to the present value of future earnings, but
    looking instead to the future value of present actions. One can only
    imagine what would have become of the Grand Canyon had this magnificent
    jewel not been taken firmly into the public domain. One can almost see
    the roller-coasters racing from rim to rim over the Colorado River.
    Just imagine--the world's largest water slide at Yosemite.
        The question therefore, restated from above, is: what is the
    ``impact of IFQs on conservation and management of fishery resources?''
    The simple answer is that there is nothing in IFQs that assures
    ``conservation'' of fishery resources. The evidence from several
    international fisheries with long histories of IFQs systems, when
    stripped of all the propaganda, is that conservation remains a
    fundamental problem. Indeed, several fisheries in New Zealand have
    begun to practice ``shelving''--a practice in which quotas are not
    taken back from fishers but merely ``shelved'' as the allowable harvest
    is reduced under continued overfishing. There is, in other words, an
    explicit agreement between the government and the industry not to
    pursue the entirety of the TAC. The extra TAC not taken is simply
    ``left on the shelf'' so as not to alert too many people--but
    especially the bankers who have extended credit to IFQ-dependent
    fishing firms.
        The obvious question becomes, if IFQs are a credible management
    tool then why are several New Zealand fish stocks still threatened
    after more than a decade of IFQs? In fact, we see that the government
    has encountered fierce resistance from the fishing industry to make
    necessary reduction in the TAC in several fisheries. The record in
    Iceland is also far from encouraging. So much for the magic of IFQs
    [Macinko and Bromley, 2001].
    4. Costs of implementing and enforcing IFQ programs
        You will probably hear from witnesses who will have a better answer
    to this question than I might provide. But I must point out that IFQs
    do nothing to reduce enforcement costs in the fishery. Indeed, with a
    strict limit on allowable landings it is plausible that the incentive
    for dumping and high grading is exacerbated in an IFQ fishery. A great
    bit of the received dogma has it that the IFQ fishery is a self-
    enforcing fishery. Do not believe it for a minute.
        This skepticism will be well rewarded by the realization that IFQ
    permit holders remain exposed to the same externalities that afflict
    all fisheries--these externalities have been identified in the
    fisheries literature as stock, mesh, and crowding externalities. In
    short, what possible incentive does one fisher have to relinquish a
    promising fishing ground to a competitor who also holds an IFQ permit?
    Moreover, there are absolutely no incentives in an IFQ fishery to
    discourage permit holders expending time and money to lobby for higher
    total allowable catch limits (TACs). Indeed, the economic literature on
    rent seeking behavior is very clear that the opposite is to be
    expected. Does a smaller group of fishing firms increase the
    possibility of supply manipulation? This remains an open question. But
    the smaller the group of firms, the greater are the prospect for such
    behavior--and the further the fishery moves away from the competitive
    ideal most economists find so compelling.
        Obviously, if future TAC levels are reduced because of excessive
    harvest in the current season then the value of a unit of quota goes
    down--and conversely. This is the basis of the contention that IFQ
    permits are necessary and sufficient for cautious stewardship of the
    fishery resource. But, as I insist above, the logic here is utopian for
    the simple reason that no single holder of a permit can control the
    fishing behavior of other permit holders. And unless each vessel owner
    can be assured of complete reciprocity on the part of all others in a
    fishery, there is little that one fisher can do to buttress the future
    value of quota shares. We are, in other words, back to the free riding
    problem that is allegedly solved by ``ownership'' of a quota. The
    absence of complete control by each individual over the precise
    behavior of the rest of those harvesting means that no permit holder
    can control: (1) the economic value of what is held (the quota share);
    (2) the fugitive resource (fish); and (3) the ecosystem(s) affecting
    that fugitive resource. To call this ``ownership'' is a contradiction
    in terms.
        The practical effect is that by themselves IFQs provide little in
    the way of savings on enforcement costs. Of course if a large share of
    the firms are removed from a particular fishery--via IFQs, via entry
    fees, or by license limitation schemes--then enforcement costs might
    fall by the simple logic that it is cheaper to monitor 25 vessels than
    150. But this reminds us that enforcement costs are a function of the
    incentive structure operating on the firms under scrutiny, and on the
    number of firms that must be watched. Since IFQs do not materially
    change the income incentive structure of fishing firms then the only
    impact on enforcement costs must arise because of the reduced number of
    fishing firms. However, that reduction cannot be credited to IFQs but
    rather to the fact that there are now fewer firms in a fishery. If we
    wish to design fishing schemes to reduce enforcement costs then there
    are other policy instruments at our disposal.
    5. Impacts on individuals and communities who do not receive IFQs
        The frequent call to ``rationalize'' the fishery is predicated on
    the assertion that there are ``too many boats chasing too few fish.''
    From this blanket indictment it follows that the proper policy is to
    reduce--often dramatically--the number of firms (vessels) in each
    particular fishery. Leaving aside for the moment the truth content of
    the premise about too many boats chasing too few fish, this policy
    prescription guarantees that there will be a number of firms denied
    access to the fishery, and therefore it is plausible that there will be
    a number of fishing communities that will be adversely affected by the
    loss of fish landings and jobs.
        By definition, IFQs will reduce the number of fishing firms; that
    is precisely their justification. The experience of IFQ implementation
    is that there is far too much catch history to be sustained and so the
    alleged ``need'' for rationalization is exacerbated by the speculative
    chase for catch history. When it is time to allocate an unsustainable
    total catch history it often happens that those firms most responsible
    for adding investment into the fishery have large qualifying catch
    histories. Most other firms will have qualifying catch histories that
    likely bear little relation to their recent catch levels. Then, when
    quota shares are allocated many fishing firms, even those with a catch
    history, will receive quota shares that are below the level required to
    maintain a viable going concern. Those firms unable to acquire
    additional quota shares to bring their landings back to their former
    level will have no choice but to sell their minimal share. This large
    number of forced sellers has the practical effect of suppressing the
    quota sale price, bestowing yet a second windfall on those who
    received, free of charge, larger quota shares. It is these initial
    large holders who will eventually control a larger portion of the total
    allowable catch in an IFQ fishery. The recipients of large initial
    allocations are thus advantaged twice--once from the windfall from the
    citizens of the United States, and then again when they enter the
    market for additional quota shares. We may fairly regard this as
    consolidation under duress. Of course no one is forced to sell their
    petty quota share. But if it is too small to be of any possible benefit
    then it is economically irrational to hold it. In economics we have the
    concept that the poor will always sell out first (or at a lower price).
    Why is this? Because their preference for liquidity is higher than it
    is for those with rather more ample money in their pocket (or in the
    bank).
        Quite obviously, ridding fisheries of allegedly redundant firms
    will hold serious implications for those firms forced out of the
    fishery, and to those communities inordinately dependent upon fishing
    activity. The more aggressive economics literature is inclined to
    dismiss these dislocations with the utopian palliative that we should
    not worry about such things because the labor and capital suddenly
    ``liberated'' from the fishery will then be free to move to some other
    location and find its next best employment. The story will then be
    advanced that the nation as a whole will be better off since those
    newly liberated factors of production can suddenly be deployed
    elsewhere in the economy. Such theoretical niceties cannot be expected
    to find much sympathy in the fishing firms--and fishing communities--
    suddenly ``liberated'' from the fishery. The problem here transcends
    the allegedly simple task of ``rationalizing'' the fishery. The problem
    becomes one of economic and social strategies for individuals and
    communities that have long depended on the fishery.
    6. Windfall profits to initial recipients
        I have previously commented on the windfall accruing to those who
    manage to acquire a large initial allocation of IFQ shares. The issue,
    however, goes beyond windfall ``profits.'' Indeed, the proper way to
    consider the matter is to understand that the initial allocation of IFQ
    permits represents an enormous wealth transfer from the citizens of the
    United States to the private sector. The holder of an IFQ permit
    suddenly acquires a license to reap large income and wealth from the
    public's oceans resources. There can be no justification for such
    windfalls and the auction scheme advocated here would eliminate those
    egregious gifts of wealth to the private sector.
    7. Limiting duration of IFQ permits
        All future fishing permits should be awarded only to those who are
    the successful bidders for the opportunity to catch fish--that is,
    those firms that submit winning bids to pay royalties for fish caught.
    The duration of this system of purchased opportunities to pursue and
    catch fish should be crafted to local fishery conditions, but there is
    no basis for having a time period that extends beyond a 10-year period.
    8. Other limited access systems (cooperative fishing agreements)
        The recent interest in so-called ``cooperative fishing agreements''
    warrants but brief mention here.
        At first blush, the term ``cooperatives'' conjures ideas about
    alternative business arrangements where members are also regarded as
    ``owners'' in a loose sense of that term. However a close look at what
    passes for ``cooperatives'' seems to reveal a very different picture
    indeed. Is this not the deployment of cunning language to conceal what
    is at work? If such arrangements were called by their proper name--
    cartels--we might well be less enamored of this latest fad.
        While I may be mistaken, the idea of fishing cooperatives is that
    members agree to act in a particular fashion in order to avoid some
    allegedly undesirable circumstance. Is ``derby fishing'' a problem?
    Perhaps a cartel can result in the pacing of fishing activity so that
    the worst aspects of a derby are alleviated. Isn't cooperation better
    than cutthroat competition and racing?
        My only caution here is that a small group of fishers who can
    coordinate their activities to avoid derby fishing can as easily
    coordinate their activities in the interest of influencing price. That
    is, perhaps deliveries to processors can be timed in a particular
    fashion to benefit one segment of the industry?
        It is, therefore, imperative that we be clear as to the social
    benefits produced by ``fishing cooperatives.'' At the moment I remain
    dubious.
    REFERENCES
    Becker, Lawrence C. 1977. Property Rights: Philosophic Foundations,
            London: Routledge and Kegan Paul.
    Bromley, Daniel W. 1991. Environment and Economy: Property Rights and
            Public Policy, Oxford: Blackwell.
    Macinko, Seth and Daniel W. Bromley. 2001. Through the Looking Glass:
            Marine Fisheries Policy for the Future, report to the Pew
            Charitable Trusts, September 22. (mimeo).
    NRC (National Research Council). 1999. The Community Development Quota
            Program in Alaska Washington, D.C.: National Academy Press.
                                     ______

        Mr. Gilchrest. Thank you, Dr. Bromley.
        I have a vote, and I think what I am going to do rather
    than try to get one or two more speakers in and then miss the
    final three, I am going to race over there and race back. But
    given the time constraints of everybody today, I will turn the
    chair over to Mr. Underwood, and I will be back as soon as I
    can.
        Dr. Bromley, thank you very much. That was clear and
    succinct and right on the mark. I will try to be back in time
    so that I can ask you questions about it.
        Mr. Underwood. [presiding] OK; Mr. Donald Leal?

     STATEMENT OF DONALD LEAL, SENIOR ASSOCIATE, POLITICAL ECONOMY
                            RESEARCH CENTER

        Dr. Leal. Thank you, Mr. Chairman, members of the
    Subcommittee. Thank you for the opportunity to testify on
    individual fishing quotas in relation to reauthorization of the
    Magnuson-Stevens Act. Because IFQs affect both wealth and the
    structural makeup in a fishery, the Subcommittee expressed
    interest in hearing views on a number of issues related to
    their use. Before launching into these issues, I want to make
    something really clear at the outset: IFQs arose in response to
    significant problems plaguing many U.S. fisheries, namely
    overharvesting, overcapitalization, falling fisherman income,
    poor product quality, rising fishing costs and hazardous
    fishing.
        These are problems that decades of traditional regulations
    such as restrictions on fishing vessels and gear, areas fished,
    fishing times and even a total allowable catch have failed to
    solve, and indeed, sometimes, they have actually exacerbated
    the problems associated with a race for the fish. In case after
    case, both here and abroad, fisheries that have adopted IFQs
    and have rigorously enforced them have been able to end the
    race for the fish. I have a booklet that I completed a year ago
    documenting every fishery that has used IFQs in New Zealand,
    Iceland, Australia, Greenland, Netherlands, et cetera, in the
    four fisheries that are Federally managed here. They have all
    in general done much better than they did before under
    regulations, and I think we all need to keep that in mind when
    we are discussing this.
        Therefore, you can predict what I am going to recommend,
    and I recommend that Congress lift the moratorium on the
    development of IFQ programs for U.S. fisheries. Now, in order
    to assure that IFQs work effectively, I also recommend the
    following as they relate to the issues that were outlined in
    the letter on the testimony. First, IFQs--I am going to take
    exception to Dr. Bromley's point of view, and that is I believe
    IFQs should be made a permanent property right to a percentage
    share of the total allowable catch to encourage fishermen to be
    bonded together; to act collectively to conserve the resource.
        New Zealand is a perfect case study to see what happens
    when fishermen have real property rights in the individual
    harvest and that they have invested in foreign management
    companies to improve the health of fish stocks and that they
    invest in the research of fish stocks. They have actually even
    implemented their own more rigorous regulations in that they
    are more accepting toward conservatively set total allowable
    catches, because they know that that right--they are protecting
    the value of their own property right. Let us keep that clear.
        Recognize that certain restrictions may be necessary to
    alleviate certain concerns over quota concentration, as we
    heard previously. I believe, however, that there should be as
    few as possible restrictions on the transferability. Why do I
    believe this? Transferability is critical to the proper
    functioning of IFQs. Transferability is one way that the
    industry can finance a way of eliminating the excesses in the
    fleet that have built up over years and years of regulations in
    that. Instead of a taxpayer-funded buyout, consider it an
    industry-funded buyout, when the more efficient fishers, those
    who lower fishing costs, raise product value and buy out the
    less efficient fishers, and those less-efficient fishers get
    compensated, and they do so voluntarily when they exit the
    fishery.
        In addition, transferability allows fishermen the
    flexibility to adjust the size of their operations. Those who
    want to increase the size of their operations buy more quota.
    Those who want to reduce the size of their operations sell
    their quota. So keep that in mind when we put restrictions on
    the transferability aspect of IFQs. Although they may be in
    certain cases warranted, as in the case of a small, rural town
    with few employment options and that you may want to be
    concerned about not letting quota be concentrated. So direct
    the councils to say consider these aspects and put a
    concentration limit as far as quota go.
        New Zealand, it can vary anywhere from 1 percent to 25
    percent or, I believe, 35 percent. There is no hard and fast
    rule. I would leave it up to the councils.
        Now, on the most controversial issue, and that is initial
    allocation, I believe here that the rationale for allocating
    quota on the basis of historical catch is probably the most
    feasible approach to date in allocating shares of the catch
    among current fishermen. They, after all, invested their
    capital and risked their capital in developing the fishery, and
    that, in turn, means that they should be recognized in doing
    so. Imagine, if you will, if we had said the same thing to the
    people who homesteaded the Western frontier, that, oh, by the
    way, you can work those 160 acres, and now, we are going to
    have an auction system, or we are going to have another system
    that does not recognize what you did to work that land. It is
    kind of late in the game.
        Auctions are an efficient mechanism for generating revenue
    for the Government and also allocating the quota to those who
    value it most, but in these cases where it is a mature fishery,
    I do not think they are realistic, especially in the case where
    it is a depressed fishery. In new or emerging fisheries,
    certainly consider an auction.
        As to processors, I believe there is a valid argument to
    consider processors in the form of compensation for any losses
    they incur to market changes from IFQs. Whether they should be
    allocated a quota, I do not think so. As far as quota holders,
    the value of quota and the full cost, I believe since the quota
    holders are going to become permanent property right holders if
    I had my perfect world, that they should also pay the full
    costs of managing IFQs and that they should be able to retain
    the full value of their IFQs. That is the bond, the cohesion
    that makes fishermen work together to improve the fishery both
    economically and environmentally.
        That about summarizes my main recommendations on IFQs.
    Thank you.
        [The prepared statement of Dr. Leal follows:]

       Statement of Donald R. Leal, Senior Associate, Political Economy
                       Research Center, Bozeman, Montana

        Mr. Chairman and members of the Subcommittee, thank you for the
    opportunity to testify on individual fishing quotas (IFQs) as they
    relate to reauthorization of the Magnuson-Stevens Act. Because IFQs
    affect both wealth and the structural makeup in a fishery, the
    subcommittee expressed interest in hearing views on a number of issues
    related to the use of IFQs. Before launching into these issues, I would
    like to point out something at the outset: IFQs arose in response to
    significant problems plaguing many U.S. fisheries--namely,
    overharvesting, overcapitalization, falling fisher income, poor product
    quality, and hazardous fishing.
        These are problems that decades of traditional regulations'
    restrictions on fishing vessels and gear, area fished, fishing times,
    and a total allowable catch (TAC) have failed to solve. Indeed in a
    number of cases they have exacerbated these problems. For example, in
    the Alaska halibut fishery prior to IFQs, season duration was
    progressively shortened to prevent actual harvest from exceeding the
    total allowable catch (TAC). Not only did actual harvests often exceed
    the TAC, fishermen overinvested in vessels, gear and labor in an
    attempt to win the race for fish. The compressed fishing season also
    forced fishermen to fish under hectic and sometimes dangerous
    conditions. There was enormous waste of halibut from lost or abandoned
    gear and from spoilage. Fresh fish was delivered over short periods
    which led to market gluts and frozen halibut for consumers for most of
    the year.
        IFQs have eliminated or significantly reduced these problems. By
    allowing managers to extend the fishing season from a few days to about
    8 months, fresh halibut is available for most of the year; fishing
    safety is vastly improved; the amount of fish lost to abandoned gear
    has fallen dramatically, and annual harvest goals are being met (See
    Exhibit A).
        Fleet excesses have also been reduced as intended (Exhibit B). Some
    vessel owners and crew have exited the fishery but new entrants,
    including hired skippers and crews under the old regime, are now quota
    holders in the fishery. According to Alaska's Commercial Fisheries
    Entry Commission, previous crew members acquired after four years of
    the program anywhere from 9 to 17 percent of the quota share units
    outstanding depending on the region fished.
        The Alaska halibut fishery exemplifies the kinds of improvements
    that have occurred in other fisheries under IFQs around the world.
    Overall, IFQs have reduced overcapitalization in the fishery, raised
    fisher income, reduced hazardous fishing, improved product quality, and
    importantly, when IFQs represent permanent shares, as they do in New
    Zealand, they have encouraged fishermen to cooperate and invest in
    improving the health of fish stocks.
        On the question of whether IFQs be used as a management tool, the
    evidence is clear. IFQs are a far superior approach to traditional
    regulations in correcting the problems of overfishing and overcapacity.
    As such, I recommend that Congress lift the moratorium on the
    development and implementation of IFQ programs.
        IFQs work because they give the holder the certainty that his or
    her allocation of the TAC will not be taken by someone else. This
    certainty has proven very effective at mitigating the race for the
    fish. Moreover, because they are transferable, IFQs can be very
    effective in reducing overcapitalization plaguing so many U.S.
    fisheries. Rather than engaging in a losing a proposition less
    efficient fishers sell their quota shares and move on while more
    efficient fishers work to reduce fishing costs and product more value
    in the fishery.
        The one drawback as IFQs are defined under current U.S. law is that
    the incentive for fishers to act collectively in husbanding the
    resource and in complying with regulations for conservation is hampered
    by the lack of permanency of quota shares. To enhance fishermen
    cooperation to conserve the resource an IFQ should be made a permanent
    right to a percentage share of the TAC.
        There has been much controversy on the initial allocation of IFQs.
    Typically IFQs are allocated to individual vessel owners on the basis
    of their catch history in a fishery. The rationale for selecting vessel
    owners and using their catch history is that it provides a quantitative
    way of taking into account prior investment in developing the fishery.
    As evidence by the near universal use of this approach in IFQ fisheries
    around the world, it appears to be the most acceptable approach for
    initial allocation, at least among current participants.
        This approach is not free of criticisms, however. Long delays
    between the time period used for determining a participant's catch
    history and implementation of IFQs can lead to controversy. In the
    Alaska halibut fishery, for example, a long delay in implementation
    resulted in the exclusion of some fishers who were active in the
    fishery just prior to IFQs but not active during the time period used
    to determine catch history. Understandably, these fishers felt they
    were making the investments in developing the fishery but being left
    out of initial allocation of quotas. To avoid such controversy, the
    time between the control period used in determining catch history for
    initial allocation and the implementation of IFQs should be as short as
    possible.
        There are other criticisms related to this approach. Since IFQs are
    allocated free of charge no revenue is generated from this process.
    Critics charge that giving away quota amounts to a windfall gain for
    current participants. In addition, individuals like hired skippers and
    crew with no record of catch history can feel they are being treated
    unfairly. Also, processors may experience lower returns from their
    investments because of market changes that IFQs bring about.
        One obvious way to address these concerns is through the use of
    auctions for initial allocation. Such an approach is not unprecedented
    for a public resource, e.g., spectra rights. An auction will generate
    revenue up-front and allocate quota shares efficiently, if shares are
    to go to the highest bidder. But an auction can also be modified so
    individuals who have invested in developing the fishery have at least a
    price preference in their bids over other bidders. Such an approach can
    be effective in retaining a majority of prior investors while
    generating revenue for the government. However, given the fact that
    bidders will vary in their ability to access financial capital,
    auctions will probably not eliminate the perception of an
    ``unfairness'' in initial allocation. As such, awarding initial
    allocations on the basis of catch history still appears to be the most
    attractive option at this time with some modifications.
        One modification is that councils should allocate a percentage of
    the TAC to local fishing communities likely to suffer some employment
    reductions in transitioning to IFQs. These communities, in turn, would
    have the option of either hiring displaced skippers and crews to fish
    their allocation or sell or lease to them shares of their allocation.
    While such an approach may require current participants to give up a
    fraction of their historical allocations, the willingness to do so
    should be enhanced by the potential for IFQs to change incentives from
    maximizing catches to maximizing returns.
        In the case of processors, there appears to be no compelling
    argument for mandating initial quota shares to processors across all
    fisheries adopting IFQs. Evidence indicates processor impacts will
    differ on a case by case basis. In cases where councils determine that
    processors will be adversely affected by IFQs, another modification is
    that councils offer them some form of compensation, such as buyouts of
    obsolete and unmalleable capital.
        The costs of monitoring and enforcement in a fishery increases
    under IFQs. Unfortunately, information is quite limited on the
    magnitude of these. Data from British Columbia and Alaska's halibut
    fisheries gives us some idea of enforcement costs relative to ex vessel
    price. In 1993, $0.067 per lb., or 3 percent of ex vessel price, was
    spent on enforcement in the British Columbia halibut IFQ fishery. For
    the Alaska halibut fishery under IFQs, an estimated $0.073 per lb., or
    a modest 4 percent of ex vessel price, was spent on enforcement in
    1997. In any case, quota holders stand to benefit greatly from IFQs and
    thus should pay the full costs of managing IFQs.
        Some argue for an additional annual tax on quota value. This is
    based on the belief that as trustee of a public resource the government
    should receive the associated economic surplus or economic rent, which
    is capitalized along with other profits in quota value and not easily
    measured. This argument, however, fails to consider the secondary
    impacts of taxing away quota value. For one, as Johnson (1995) argues
    in an article in Marine Resource Economics, the industry becomes less
    motivated to conserve the exploited resource preferring that the
    government set a higher overall harvest level even if it means lower
    abundance in the future. Moreover, as profit maximizers, private
    operators are in the best position to lower fishing costs and raise
    product value in the fishery. The government has neither the
    willingness nor the ability to do the same. By taxing away quota value
    the incentive for quota holders to act collectively in lowering costs
    and improving product value in the fishery is reduced. Indeed taxing
    away quota value may actually result in lower returns to the treasury
    than from a fishery whose main source of revenues are taxes from
    ordinary income. Thus, quota holders should be allowed to retain the
    full value of their IFQs.
        Monitoring and enforcement is part and parcel of management costs
    and is critical to maintaining the integrity of an IFQ system. To
    ensure system integrity, councils must require a dual-channel reporting
    system comprised of fish harvesters and their buyers as well as stiff
    penalties to discourage cheating. All fish receivers--fish wholesalers
    and processors--are required to report fish purchased from fishers. All
    fish permit holders are required to provide detailed catch reports
    along with information on effort (vessel, area fished, and the quota
    share fished after each fishing trip. Penalties must be stiff enough to
    deter cheating. This would include forfeiture of quota shares for
    repeated violations.
        In sum, experience with IFQs prove they are superior to regulations
    in ending the race for the fish. They can be controversial, but I hope
    that the above recommendations can help mitigate some of the concerns
    so we as a nation can move forward by allowing IFQs as a management
    tool to rebuild our nation's fisheries.
                                     ______

        [Exhibits A and B follow:]
        [GRAPHIC] [TIFF OMITTED] T7639.001

        [GRAPHIC] [TIFF OMITTED] T7639.002

        Mr. Underwood. Thank you, Dr. Leal. And now, we will go to
    Mr. Richard Gutting, Jr., is it?

      STATEMENT OF RICHARD GUTTING, PRESIDENT, NATIONAL FISHERIES
                               INSTITUTE

        Mr. Gutting. That is it. Thank you very much for the
    opportunity to testify today. My name is Richard Gutting, Jr.
    and I am the president of the National Fisheries Institute. The
    institute represents the U.S. fish and seafood industry. Our
    members grow, harvest, process, import, export and sell at
    retail and in restaurants all of the fish and seafood products
    that are produced here in the United States.
        Our members operate vessels and facilities in all of the
    major U.S. fisheries. We are an ocean-to-table organization, if
    you will, very diverse.
        Our organization does support the use of IFQs in fishery
    management. We believe that they are a very useful tool. We
    believe they should be available to managers to address the
    issues before fisheries. Like many of the previous speakers, we
    also believe that whether or not they should be used is a
    decision that is best made by the councils. Councils need
    flexibility to fashion particular measures for the often-unique
    and diverse needs of individual fisheries.
        We also support the current criteria for the development of
    IFQs that are in the act as well as some of the recommendations
    of the National Academy of Sciences. In addition, I was very
    pleased to hear Dr. Hogarth mention today the need to amend the
    act so that processing and processors can be incorporated into
    the IFQ process. Right now, there is a legal limitation upon
    the councils. They really cannot bring into an IFQ or a limited
    access system shore-based processors. We think that this needs
    to be changed.
        I would go slightly beyond what Dr. Hogarth said. He was
    not really asked a question, but we believe that it is very
    important that if IFQ programs are developed that there be
    fundamental fairness and equity between the processing sector
    and the harvesting sector in a particular fishery. The
    experience we have had is that when IFQs deal only with the
    fishing portion of the fishery, they can have a profound and
    devastating impact on shore-based processing. Shore-based
    processing and fishing are codependent. As fisheries develop,
    both sides develop. And when it comes time to rationalize the
    investment, rationalize labor, it is very important that both
    sides of the fishery be fairly treated on an equal basis.
        There are many ways to do this. We do not think it would be
    appropriate for the act to spell out one particular way. What
    is important is the fundamental idea of fairness and equity be
    in the act. And with that, I will close.
        Thank you.
        [The prepared statement of Mr. Gutting follows:]

      Statement of Richard E. Gutting, Jr., President, National Fisheries
                                   Institute

        Chairman Gilchrest, Congressman Underwood, and members of the
    subcommittee, on behalf of the member companies of the National
    Fisheries Institute (NFI), I want to thank you for the opportunity to
    testify on the role of Individual Fishing Quotas (IFQs) under the
    Magnuson-Stevens Fishery Conservation and Management Act (MSFCMA). I am
    Richard E. Gutting Jr., President of the NFI.
        The NFI is a trade association representing the U.S. fish and
    seafood industry. We are an ``ocean to table'' organization,
    representing harvesters, processors, importers, exporters,
    distributors, restaurants, and retail establishments. Our members
    operate vessels and facilities in all major U.S. fisheries, and our
    mission is to ensure an ample, safe, and sustainable seafood supply to
    consumers.
        The management of our nation's fisheries is showing remarkable
    improvement. Overfished resources are being rebuilt, and some
    overcapitalized fleets are being rationalized. While there is more to
    do, managers and scientists are making significant progress.
        To further facilitate the wise use of fishery resources, fishery
    managers should be authorized to establish IFQ programs and other
    rationalization schemes such as limited access and cooperatives. These
    management tools do not result in the so-called ``privatization of a
    public resource'' any more than harvesting does. In any fishery, as
    soon as a fish is captured it has been ``privatized''.
        A moratorium was imposed in 1996 on the creation of additional IFQ
    programs that is scheduled to expire this fall, having been extended in
    2000. At the same time, new requirements for IFQ programs were enacted,
    including:
         The establishment of a publicly-available central
    registry system,
         Non-compensatory revocation of IFQs by the councils and
    Secretary of Commerce,
         No right, title, or interest in or to any fish before the
    fish is harvested,
         Fees to cover the actual costs directly related to the
    enforcement and management of the IFQ program,
         A set-aside of up to 25% of such fees for use as
    financial aid for IFQ purchases by ``small vessels'' and first
    purchasers,
         Fair and equitable allocation of initial IFQs,
         Prevention of any person from acquiring an excessive
    share of IFQs, and
         Consideration of the allocation of a portion of the
    annual harvest for entry-level fishermen, small vessel owners, and
    crewmembers.
        In addition, limited access systems must take into account:
         Present participation in the fishery,
         Historical fishing practices in, and dependence on, the
    fishery,
         The economics of the fishery,
         The capability of the vessels in the fishery to engage in
    other fisheries, and
         The cultural and social framework relevant to the fishery
    and any affected fishing communities.
        A 1998 National Academy of Sciences (NAS) report, Sharing the Fish,
    recommends that Congress lift this moratorium on IFQs and:
         Encourage cost recovery and some extraction of profits
    (already addressed in the MSFCMA),
         Require accumulation limits (already addressed in the
    MSFCMA),
         Support additional study and routine data collection,
         Determine rules for foreign ownership,
         Delegate decisions about the transferability of quota
    shares to the councils, and
         Define the nature of the privilege (already addressed in
    the MSFCMA).
        The NAS made no recommendations with regard to allocating shares to
    fish processors although Congress had asked it to analyze ``mechanisms
    to ensure that U.S. fish and seafood processors are treated fairly and
    equitably in initial allocations.'' A National Marine Fisheries Service
    IFQ Advisory Panel Report, however, suggests that processor shares are
    an important consideration as excessive investments in processing
    capacity parallel investments in harvesting capacity. The NFI agrees.
        The NFI supports the existing criteria for IFQs and limited access
    programs and the recommendations of the NAS. However, we believe the
    MSFCMA must be amended to ensure that primary processors are treated
    fairly in any new IFQ programs. Scott Matulich, a professor at
    Washington State University, explains why in the Pacific Fishing
    magazine (March 1996):
            ``...the IFQ literature is founded on the fallacy that only the
            harvesting sector intervenes between the fish resource and the
            consumer. This, of course, is patently false for most
            fisheries; the processing sector typically is just as crucial
            to the utilization of fishery resources as the harvesting
            sector. Yet this one simplification is largely responsible for
            the conventional wisdom of endowing harvesters with valuable
            rights and leaving processors with the consequences.''
        When fishing fleets have been rationalized through the allocation
    of IFQs, vessel owners have been compensated. Primary processors have
    not, even though they have been left with unusable facilities and
    processing equipment.
        This is not fair. When fisheries are rationalized, primary
    processors must be treated equitably and the MSFCMA needs to be amended
    to ensure this fairness.
        How best to ensure fairness varies from fishery to fishery. One
    approach is to allocate 100% of the Total Allowable Catch (TAC) in
    harvesting shares and 100% of the TAC in processing shares under a so-
    called two-pie system. Alternatively, it may make sense to allocate 50%
    of the harvesting rights to the primary processing community, or to
    limit access to primary processing. It all depends on the nature of the
    fishery. Thus, while the law must ensure that the harvesting and
    primary processing sectors receive equitable treatment, it should not
    proscribe exactly how that should be achieved.
        Mr. Chairman, IFQs are a powerful tool for rationalizing fisheries.
    However, without clear criteria in the MSFCMA, including a requirement
    for equitable treatment for primary processors, the NFI believes the
    moratorium on IFQ programs should continue.
                                     ______

        Mr. Underwood. Thank you very much, Mr. Gutting.
        And now, we will go to Mr. Jim Gilmore, At-Sea Processors.

      STATEMENT OF JIM GILMORE, DIRECTOR, PUBLIC AFFAIRS, AT-SEA
                         PROCESSORS ASSOCIATION

        Mr. Gilmore. Thank you, Mr. Chairman, for the invitation to
    testify today on fish harvesting cooperatives. I am Jim
    Gilmore, the director of public affairs for the At-Sea
    Processors Association.
        The catcher-processor fleet participates in the nation's
    largest fishery, the Bering Sea Pollock Fishery, and in the
    West Coast Pacific Whiting Fishery, and we have established
    fish harvesting cooperatives in both fisheries. In pollock and
    in whiting, the National Marine Fisheries Service sets a total
    allowable catch level on an annual basis, and in both
    fisheries, managers have divided the TAC among three sectors in
    which the catcher-processor sector is allocated a percentage of
    the overall TAC. The cooperatives are formed within that
    management structure. The cooperatives are voluntary, and they
    are governed through a private contract in which eligible
    participants in the catcher-processor sector of those fisheries
    agree to limit their individual catches to a specific
    percentage of the catcher-processor sectors apportionment of
    the TAC.
        By agreeing to apportion the available harvest on an
    individual basis, fishing and processing is conducted at a
    deliberate and rational pace. Once the apportionment is set,
    the cooperatives allow for transfers of individual shares among
    the member companies of the cooperative. The cooperatives are
    not involved in matters related to pricing or marketing of
    fishery products. The cooperatives are feasible not only
    because the management system sets an overall TAC for the
    fisheries and because there have been discreet allocations to
    the catcher-processor sector there but also because fishery
    managers have implemented effective catch monitoring and
    enforcement measures in those fisheries, including requirements
    for comprehensive Federal fishery observer coverage, the
    weighing of all catch and real-time electronic catch reporting.
        The cooperatives formed by the catcher-processor companies
    do not raise antitrust concerns, because in the pollock and the
    whiting fisheries, the Federal Government has regulated the
    output from the fisheries through TACs and has imposed
    effective limits on entrants into the fisheries. The
    cooperatives are needed, though, because fishery managers have
    not taken steps to stop the race for fish. The fishing
    cooperatives end that race for fish by setting the individual
    harvest caps.
        There are four improvements in conservation and management
    of those two fisheries that we have co-ops in that I would like
    to cover today. The first is making more food from every pound
    of fish harvested. In 2001, the pollock catcher-processor fleet
    yielded 49 percent more products from each pound of fish
    harvested than we did in 1998, the last year in which we had a
    race for fish. Without a race for fish, we have changed our
    fishing operations in ways to be able to take more time to
    target optimal-sized fish for processing. We have made a number
    of revisions in our factories to get more yield from the fish
    rather than concentrating on processing fish as quickly as
    possible.
        The second thing is addressing overcapitalization. The
    multivessel companies have idled a number of the vessels that
    are no longer needed in order to catch the available quota. One
    thing I would point out is the cooperatives are more ephemeral,
    if you will, than individual fishing quota programs. It is
    unlikely that any of the idled vessels will be permanently
    retired from the fisheries. Because cooperatives are voluntary,
    and the Government does not assign the individual quotas, the
    circumstances warranted, coop members might elect to return to
    a race for fish, and companies with idled vessels would likely
    reactivate those vessels to be competitive in that race for
    fish.
        The third highlight of what we have done is we have
    complemented Federal sea lion protection measures. To ensure
    that pollock fishing and other groundfish fishing does not
    hinder the recovery of stellar sea lion populations competing
    for groundfish with foraging sea lions, NMFS has implemented
    far-reaching management measures that close areas to fishing
    and disperse fishing effort temporally and spatially. The
    cooperatives are in effect for all sectors of the pollock
    industry, and we have complemented those Federal rules designed
    to slow down and spread out the harvest.
        For example, in the first year of coop fishing in 1999, the
    pollock catcher-processor sector reported that vessels made 45
    percent fewer tows per day and caught 27 percent fewer fish per
    tow by eliminating the race for fish. As a consequence of that,
    we have extended our fishing season from around 90 days up to
    about 200 to take the available quota.
        On a final note is reducing by-catch. The pollock and
    whiting fisheries are midwater fisheries. About 90 percent of
    what is caught is the target species. However, there is some
    incidental catch of salmon, which trawl fishermen are not
    permitted to keep and to sell. In 2001, the nine pollock
    catcher-processor cooperatives that govern fishing for the in-
    shore sector, the mother ship sector and the catcher-processor
    sector signed an intercooperative agreement to achieve further
    reductions in salmon by-catch. The 120 pollock catcher vessels
    and catcher-processor vessels that constitute these nine
    cooperatives voluntarily agreed to share salmon by-catch
    information on a real time basis to identify hot spots to avoid
    and to deny access to fishing grounds to any cooperative whose
    vessels exceeded agreed-upon salmon by-catch limits.
        So those are our four areas that we thought were worth
    highlighting about cooperatives, and we are pleased to answer
    any questions you have.
        Thank you.
        [The prepared statement of Mr. Gilmore follows:]

    Statement of Jim Gilmore, Director of Public Affairs, At-Sea Processors
                                  Association

        Thank you, Mr. Chairman and members of the Subcommittee, for the
    invitation to testify today on fish harvesting cooperatives. I am Jim
    Gilmore, Director of Public Affairs for the At-sea Processors
    Association (APA). APA represents seven companies that operate 19 U.S.-
    flag catcher/processor vessels. The catcher/processor fleet
    participates in the Nation's largest fishery, the Bering Sea groundfish
    fishery, and in the west coast Pacific whiting fishery.
    Fish Harvesting Cooperatives
        APA members participate in two fish harvesting cooperatives'the
    Pollock Conservation Cooperative (PCC) and the Pacific Whiting
    Conservation Cooperative (PWCC). The pollock cooperative was formed in
    1999; the Pacific whiting cooperative was initiated in 1997.
    Participation in the cooperatives is voluntary. Under terms of a
    private contract, eligible participants in the catcher/processor sector
    of the Bering Sea pollock fishery and the Pacific whiting fishery
    allocate the available harvest on an individual basis and members limit
    their harvests to the agreed upon amount.
        The cooperatives work within the established Federal fishery
    management system. In the case of Bering Sea pollock and Pacific
    whiting, the regional councils recommend and the National Marine
    Fisheries Service (NMFS) implements Total Allowable Catch (TAC) level
    for the fisheries annually. For both fisheries, fishery managers
    divided the TAC among three sectors in which the catcher/processor
    sector is allocated a certain percentage of the TAC. Eligible
    participants in the catcher/processor sector operate within this
    framework in establishing cooperatives in which member companies agree
    to limit their individual catches to a specific percentage of the TAC.
    By agreeing to apportion the available harvest on an individual basis,
    fishing and processing can be conducted at a deliberate, rational pace.
    Once the apportionment is set, the cooperatives allow for transfers of
    target species among member companies. The cooperatives are not
    involved in matters relating to pricing or marketing of fishery
    products.
        While participation in the cooperatives is voluntary, all of the
    qualified participants in the catcher/processor sector in the Bering
    Sea pollock fishery and Pacific whiting fishery participate in the
    cooperative. It is unlikely that the cooperatives could succeed without
    100 percent participation of all qualified entrants in the fishery. If
    a single, qualified entrant continued to engage in a ``race for fish,''
    it would likely undermine collective efforts by the remaining fishing
    companies to rationalize fishing practices. It is instructive that both
    the Bering Sea pollock and Pacific whiting cooperatives include multi-
    vessel companies and single vessel companies. Both larger and smaller-
    sized companies realize benefits from cooperative fishing, although the
    way in which those companies benefit may differ.
    Practical Considerations in Forming Fish Harvesting Cooperatives
        The cooperatives formed by catcher/ processor companies are
    feasible because in the Bering Sea pollock and Pacific whiting
    fisheries the Federal Government 1) regulates output by setting annual
    catch limits in the fishery, 2) imposed effective limits on new
    entrants into the fisheries, and 3) created separate allocations for
    the catcher/processor sector in the pollock and Pacific whiting
    fisheries.
        Because there is no specific legislative authority authorizing the
    catcher/processor cooperatives, prospective co-op members prudently
    requested a ``business review letter'' from the Justice Department's
    Antitrust Division evaluating the cooperatives. The Antitrust Division
    confirmed that because the government regulated output through TACs and
    limited entry into the fisheries there was no bar to qualified
    participants voluntarily establishing individual harvest limits. Far
    from expressing concerns about fish harvesting cooperatives leading to
    anti-competitive practices, the business review letters support the
    industry's view that the formation of cooperatives could be expected to
    benefit consumers. The Antitrust Division's letter of May 20, 1997 on
    the proposed Pacific whiting co-op stated, ``To the extent that the
    proposed agreement allows for more efficient processing that increases
    the usable yield (output) of the processed Pacific whiting and or
    reduces the inadvertent catching of other species whose preservation is
    also a matter of regulatory concern, it could have pro-competitive
    effects.''
        Once a cooperative is established, there must be effective
    monitoring and enforcement of fishing activities to ensure compliance
    with terms and conditions of the cooperative contract, particularly
    adherence to agreed upon individual catch amounts. Pollock catcher/
    processors are required to carry two Federally trained and certified
    fishery observers onboard at all times while fishing; catcher/
    processors in the Pacific whiting fishery voluntarily carry at least
    one fishery observer. Observers record all target and non-target
    species catch, relying on flow scales that weigh the catch as it moves
    along a conveyor from the fish hold into the factory. (Catch accounting
    is relatively easy in the pollock and Pacific whiting fisheries because
    99 percent of the catch is the target species.)
        The Federal observers report catch data electronically and on a
    real-time basis to the National Marine Fisheries Service (NMFS).
    Cooperative members authorize a private company, Sea State, Inc., to
    access the NMFS observer reports to calculate each individual
    cooperative member's catch amount. NMFS maintains the responsibility
    for closing a fishery when the catcher/processor sector allocation is
    reached. The cooperative enforces individual catch limits. The
    cooperative contract provides for monetary penalties should companies
    exceed their assigned quota, including any quota leased from other co-
    op members. To date, no penalties have been assessed in either
    cooperative.
    Fishery Cooperatives Improve Fisheries Conservation and Management
        The North Pacific groundfish fisheries, including Bering Sea
    pollock, and the Pacific whiting fishery are well-managed and
    sustainable fisheries. Fish stocks are healthy and abundant. NMFS' most
    recent report to Congress on the status of U.S. fisheries states that
    none of these stocks is over-fished. In the North Pacific in
    particular, fishery managers have adopted an ecosystem-based management
    approach to conserve target species and to minimize effects of fishing
    on other fish species, marine mammals and sea birds and sensitive
    habitat. This ecosystem-based management approach, which includes
    annual TAC levels, comprehensive observer coverage, sophisticated catch
    accounting practices, electronic catch reporting, among other
    progressive management measures, makes the cooperative a viable option.
    What the management system had not done, however, was to stop the
    ``race for fish.'' Fishing cooperatives end the ``race for fish'' and,
    in doing so, further improve conservation and management of these
    important national resources.
    Producing More Food From Each Pound of Fish Harvested
        In 2001, the pollock catcher/processor fleet yielded 49% more
    products from each pound of fish harvested than in 1998, the last year
    of the ``race for fish.'' (See Attachment ``A.'') In the past three
    years, vessel operators have instituted numerous changes in fishing and
    processing practices to achieve this dramatic improvement in the amount
    of products produced from the available harvest. In terms of changes in
    fishing practices, without a ``race for fish,'' fishing captains can
    now be more discriminating and deliberate, prospecting until they
    locate optimal-sized fish for maximizing processing yields. Under the
    ``race for fish'' format, slowing down fishing operations meant
    sacrificing fishing opportunities to other vessels.
        Production yields are increasing, in part, because multi-vessel
    fishing companies are using their most efficient catcher/processor
    vessels and leaving less efficient vessels tied up. Also, when the co-
    op shifted the emphasis from maximizing one's share of the TAC to
    deriving as much value as possible from a pre-determined allocation,
    extra processing lines onboard active catcher/processors could be
    replaced with equipment, such as decanters and mincing machines, that
    extract additional protein from fish after primary processing and
    before secondary processing of inedible fish parts into fish meal.
        Not only is more product and value derived from each fish
    processed, but very little of the catch is discarded. In 2001, the
    discard rate for Bering Sea pollock catcher/processors was six-tenths
    of one percent. The average discard rate for world fisheries is about
    25 percent.
    Resolving Overcapitalization in the Fisheries
        Ten catcher/processor vessels are licensed to catch and process
    Pacific whiting, and 20 catcher/processor vessels were eligible to
    catch and process Bering Sea pollock when the pollock cooperative was
    formed in 1999. Without the ``race for fish,'' between 6 to 8 of the
    ten eligible catcher/processors participate annually in the Pacific
    whiting fishery, and 14 to 16 pollock catcher/processors participate in
    the Bering Sea pollock fishery each year. One pollock catcher/processor
    vessel has forfeited its U.S. fishing privileges, but the remaining 3
    to 5 catcher/processors eligible to fish for pollock remain moored or
    conduct some limited fishing in the non-pollock North Pacific
    groundfish fisheries.
        Anticipating the formation of the pollock catcher/processor
    cooperative, Federal law and regulations severely curtail other fishing
    opportunities for the fleet, avoiding the ``spillover'' of excess
    capacity to other fisheries. The Bering Sea pollock catcher/processor
    fleet is limited to catching somewhat less than its historical share of
    non-pollock Bering Sea groundfish species, and the fleet is not
    permitted to operate beyond U.S. waters of the Bering Sea except for
    the Pacific whiting fishery. There are similar constraints placed on
    pollock catcher vessels that deliver to Bering Sea onshore processors
    and motherships, again, to prevent unused capacity from being deployed
    in other fisheries.
        However, because of the more ephemeral nature of co-ops vis-a-vis
    Individual Fishing Quota (IFQ) programs, it is unlikely that idled
    vessels will be permanently retired from the fisheries. Cooperatives
    are voluntary. The government does not assign the individual quotas. If
    circumstances warranted, co-op members might elect to return to a
    ``race for fish.'' Companies with idled vessels would likely reactivate
    those vessels to be more competitive in the race.
        However, as long as the cooperatives continue, there is no
    incentive to employ harvesting and processing capacity beyond what is
    needed to catch and process the available harvest. Therefore, in
    addition to idling vessels, companies are no longer investing in
    equipment to increase fishing and processing capacity. Under the ``race
    for fish'' fishermen and processors engaged in ``capital stuffing,''
    enhancing vessels' harvesting capability and adding more processing
    lines, refrigeration equipment, etc. Harvesters and processors sought
    to maximize their individual share of the TAC. Because virtually all
    participants were making these investments, their share of the catch
    remained relatively unchanged. And because TAC levels remained
    relatively stable, the investments were not yielding additional value.
    This unhealthy economic situation, which led to numerous bankruptcies
    in the catcher/processor fleet in the 1990s, is alleviated under
    fishing cooperatives.
    Cooperatives Complement Steller Sea Lion Protection Measures
        In 1997, NMFS classified the western stock of Steller sea lions as
    endangered under the Endangered Species Act (ESA). Despite years of
    research, scientists are unable to determine the cause of the decline
    of Steller sea lion populations. To insure that fishing does not hinder
    the recovery of sea lion populations by competing for groundfish with
    foraging sea lions, NMFS and the North Pacific Fishery Management
    Council have implemented far-reaching management measures that close
    areas to fishing and disperse fishing effort temporally and spatially.
        Cooperatives, which are in effect for all sectors of the pollock
    industry, complement Federal rules designed to slow down and spread out
    the harvest. For example, in its first year of co-op fishing in 1999,
    the pollock catcher/processor sector reported that vessels made 45%
    fewer tows per day and caught 27% fewer fish per tow by rationalizing
    the fishery. As a consequence of these operational changes, catcher/
    processors are taking over 200 days to take their quota compared with
    about a 90-day season in 1998. Other pollock sectors have had similar
    experiences. NMFS notes in its 2001 biological opinion on Steller sea
    lion protective measures that pollock cooperatives have ``shown success
    in reducing the ``footprint'' of fisheries.'' The biological opinion
    goes on to recommend ``an expansion of these types of approaches to
    rationalize all (North Pacific) groundfish fisheries.''
    Cooperatives Help Achieve Lower Discard Rates and Reduce Incidental
            Catches of Non-Target Species
        As noted earlier in my testimony, pollock accounted for roughly 99
    percent of total catch by the pollock catcher/processor fleet in 2001,
    and the fleet discarded just six-tenths of one percent of its total
    groundfish catch. Performance in the Pacific whiting fishery is
    similar. While these two fisheries are, perhaps, the ``cleanest''
    fisheries in the world, the cooperatives further promote increased
    retention and increased utilization of non-target groundfish species.
    Under the ``race for fish,'' catcher/processors, which have multiple
    processing lines, dedicated each line to processing as much pollock or
    Pacific whiting as possible as quickly as possible. Now, factories can
    be more flexible to accommodate processing the modest amounts of non-
    target groundfish species that are incidentally caught.
        In the North Pacific, Federal regulations require trawl vessels to
    discard any herring or crab that is incidentally harvested, and halibut
    and salmon can be retained only if donated to food banks. (There are
    similar restrictions on trawl vessels in the Pacific whiting fishery.)
    Because the Bering Sea pollock and Pacific whiting fisheries are
    conducted using mid-water trawl nets, salmon is the only ``prohibited
    species'' caught in significant quantities. To complement fishery
    management measures that limit salmon bycatch, in 2001, the nine
    pollock cooperatives that govern fishing for the inshore processing
    sector, mothership processing sector and the catcher/processor sector
    signed an inter-cooperative agreement to achieve further reductions in
    salmon bycatch. The 120 pollock catcher and catcher/processor vessels
    that constitute these nine cooperatives voluntarily agreed to locate
    fishing away from areas of salmon concentrations. Sea State, Inc., the
    firm that records and monitors individual catch levels for cooperatives
    members, administers the bycatch program as well, downloading NMFS
    observer data and alerting pollock fishing vessels of bycatch
    ``hotspots.'' Each cooperative's bycatch rate is evaluated on a real-
    time basis and if its vessels' performance is sub-par, then vessels
    from that cooperative must voluntarily refrain from fishing in those
    identified areas.
    Public Policy and Fish Harvesting Cooperatives
        As is the case with IFQ programs, fish harvesting cooperatives are
    not practical for all fisheries. However, the success of the pollock
    and Pacific whiting cooperatives suggests that fisheries conservation
    and management could be enhanced by the formation of cooperatives in
    other fisheries. Cooperatives could be an attractive alternative for a
    number of reasons. Among other things, cooperatives could alleviate
    public policy concerns over the more permanent nature of government-
    issued quota shares under IFQ programs. Also, concerns among
    stakeholders that they could be disadvantaged under the initial
    allocation of quota shares under an IFQ program are alleviated because
    cooperatives give stakeholders a direct voice in the apportionment of
    the TAC.
        The American Fisheries Act (AFA), enacted in 1998, included
    specific provisions for pollock cooperatives in the non-catcher/
    processor sectors, including considerations for pollock and non-pollock
    processors and non-pollock fishermen. The North Pacific Council
    published a draft report in October 2001 that confirmed the success of
    the pollock cooperatives. The Council's report to Congress stated,
    ``Reduced bycatch, higher utilization rates, increased economic
    returns, and improved safety are among the direct benefits of the
    AFA'the cooperative management structure has shifted more of the
    monitoring and enforcement burden to the cooperatives and their
    members, which has allowed the fishery to be managed more precisely.''
    The AFA and the Council's report could provide useful guidance to
    Congress in considering legislation relating to IFQ programs and
    cooperatives. We would particularly commend to the Subcommittee's
    attention the consideration for processors in the design of the inshore
    and mothership pollock cooperatives and the management measures that
    preclude ``spillover'' of fishing capacity between the pollock and non-
    pollock groundfish sectors.
        Although our experiences and the North Pacific Council's report on
    the AFA confirm that fishing cooperatives offer a promising approach to
    enhancing fisheries management and conservation, there are impediments
    to the formation of new cooperatives. In reauthorizing the Magnuson/
    Stevens Act, including considering changes to existing IFQ policies,
    Congress should consider the following issues related to expanding
    opportunities for communities of interest to form fish harvesting
    cooperatives.
        The moratorium on new IFQ programs impedes the formation of new
    fish harvesting cooperatives, in part, because NOAA General Counsel
    interprets the existing IFQ moratorium to preclude regional fishery
    management councils from allocating a percentage of the TAC in a
    fishery to any like-minded group of fishermen interested in forming a
    cooperative. An opinion from the agency's lawyers contends that an
    allocation of a percentage of the TAC to a group violates the
    moratorium on issuance of quota shares. It is difficult for a fish
    harvesting cooperative to succeed without unanimous, or near unanimous,
    participation of eligible participants. By continuing to race for fish,
    outliers can frustrate the will of fishermen seeking to rationalize a
    fishery through formation of a cooperative, so allocating to fishery
    participants seeking to create a cooperative on the basis of an
    historical catch formula is important. If Congress extends the IFQ
    moratorium but wants to permit, or even encourage, cooperatives, some
    provision should be made for allowing allocations to groups.
        A second issue relates to the Fishermen's Collective Marketing Act
    of 1934. Although formation of the catcher/processor cooperatives for
    pollock and Pacific whiting did not rely on any specific statutory
    authority, Federal law does provide for fishermen to engage in
    collective harvesting and marketing activities under the statutory
    authority of the FCMA. This Act exempts qualified fishermen from
    antitrust laws in allowing collective production and marketing
    arrangements similar to exemptions enjoyed by agricultural producers.
    However, because the FCMA allows for collective marketing arrangements,
    there is case law that might preclude processor-owned vessels from
    participating in a fish harvesting cooperative formed under the FCMA
    statute. In reviewing the success of fish harvesting cooperatives,
    Congress might review the FCMA to determine whether changes to the 1934
    Act are warranted and would serve to facilitate cooperative formation.
        That concludes my testimony, Mr. Chairman. I am pleased to answer
    any questions that Members of the Subcommittee might have. Thank you,
    again, for the opportunity to testify.
                                     ______

        [A chart attached to Mr. Gilmore's statement follows:]
        [GRAPHIC] [TIFF OMITTED] T7639.003

        Mr. Underwood. Thank you, Mr. Gilmore.
        Now, we will go to Mr. Lee Crockett, who is executive
    director of the Marine Fish Conservation Network.

      STATEMENT OF LEE CROCKETT, EXECUTIVE DIRECTOR, MARINE FISH
                          CONSERVATION NETWORK

        Mr. Crockett. Good afternoon, Mr. Chairman and members of
    the Subcommittee. I am Lee Crockett. I am the executive
    director of the Marine Fish Conservation Network. The network
    is a nationwide coalition of environmental groups, commercial
    and recreational fishing associations and aquariums. Thank you
    for providing us with an opportunity to express our views on
    individual fishing quotas.
        As you know, whether to allow the establishment of IFQ
    programs and, if so, subject to what standards is one of the
    most contentious issues in fisheries management today. The
    Congressionally mandated moratorium on the establishment of new
    IFQ programs has been in place for nearly 6 years. The current
    moratorium is set to expire on September 30, 2002, only 7
    months from now. We are very concerned that the moratorium will
    expire before Congress acts to establish standards. We urge you
    not to let that happen. Unregulated IFQs can have devastating
    effects on fishermen and fishing communities while providing
    little benefit to the marine environment.
        National standards for IFQ programs are necessary for two
    reasons: first, IFQs are unique because they grant fishermen
    exclusive rights to a public resource before the fish are
    caught. Second, explicit legislative standards are necessary to
    ensure the protection of the marine environment as well as the
    broad interests of fishermen and fishing communities. We have
    developed a set of recommended standards to ensure that IFQ
    programs are properly designed which are included in my written
    testimony. I would like to briefly review the major points of
    the network's position:
        First, should IFQs be allowed as a management tool? The
    Network supports continuing the IFQ moratorium unless and until
    Congress adopts legislation containing standards for IFQ
    programs that ensure such programs protect fishermen and
    enhance the conservation of marine fish. We have little
    confidence that the councils and NMFS will address the problems
    commonly associated with IFQ programs without legal guidance.
    Standards must be in place before the moratorium is lifted,
    because it is very difficult if not impossible to apply them
    retroactively.
        Second, IFQs must not create compensable property rights.
    IFQ programs must acknowledge that fish resources are publicly
    owned; that IFQs are not compensable property rights and that
    IFQs are revocable. We recognize that the Magnuson-Stevens Act
    contains language stating that IFQs are not compensable
    property and are revocable. However, we fear that if Congress
    allows IFQ shares to be held for long periods of time, for
    example, for 5, 10, 15 years, they will obtain the attributes
    of property.
        To address this, quota shares must be of a set duration. We
    recommend 5 years, after which time they may be renewed,
    subject to satisfying defined criteria. These limitations will
    make it clear that quota shares are a temporary privilege.
        Third, IFQ programs and shareholders must provide
    additional conservation benefits to the fisheries. The Network
    does not believe that conservation will automatically be
    enhanced because an IFQ program is established; rather, we
    believe that IFQ programs should be required to improve
    conservation. To accomplish this, we recommend that all IFQ
    programs establish objectives to improve conservation as a
    result of allocating shares and that any decision to renew an
    IFQ share must be based on an evaluation of whether the
    shareholder is meeting their requirements to the IFQ program
    and contributing additional and substantial conservation
    benefits to the fishery.
        Fourth, protection of individual fishermen and fishing
    communities: the specter of consolidation is one of the
    greatest fears that fishermen have of IFQ programs. Based on
    experience in some existing IFQ programs, they fear that
    corporate interests will buy up quota shares, thus forcing them
    to change from small businessmen to corporate employees. To
    guard against this, we recommend that Congress direct that IFQ
    programs preclude any person or entity from acquiring an
    excessive share of quota shares issued. We also strongly
    recommend that councils be specifically precluded from basing
    the amount of initial allocation of quota shares on the size of
    recent catches or catch history, because such a practice will
    reward the largest operators at the expense of small ones.
        To ensure that IFQ-managed fisheries have broad
    participation, IFQ programs must ensure that a portion of each
    annual allocation is set aside for entry-level fishermen,
    small-vessel operators, crew members and others who do not hold
    quota shares. Finally, we urge Congress to view initial
    allocations as an opportunity to promote conservation by
    rewarding fishermen who have a demonstrated record of
    conservation-minded fishing.
        Fifth: independent review of IFQ programs and shareholders.
    The Network strongly advocates a review of IFQ programs every 5
    years. Decisions on whether to review the program and how to
    improve it should be based on the outcome of that review.
    Review criteria should include whether the program is providing
    additional and substantial conservation benefits to the
    fishery. In order for the 5-year limit on IFQ shares to be
    meaningful, the Network strongly believes that there must be a
    sustainable likelihood that quota shareholders would lose
    previously held shares if they failed to comply with the
    requirements of their IFQ program.
        If the review becomes perfunctory, and the shares are
    automatically renewed, they will take on the trappings of
    property.
        And finally, Mr. Chairman, I would like to express our
    strong opposition to processor quota shares. There is no public
    policy benefit from creating a closed market for fishermen. On
    the contrary, we see major economic hardships for fishermen if
    such systems are allowed. If processor quotas are established,
    fishermen will have a limited number of processors available to
    buy their fish, severely disadvantaging them during pricing
    negotiations while providing no benefit to either the economy
    or conservation.
        Thank you again for providing the Marine Fish Conservation
    Network with an opportunity to present its views on IFQ
    programs and the need for national standards, and I would be
    happy to answer any questions.
        [The prepared statement of Mr. Crockett follows:]

         Statement of Lee R. Crockett, Executive Director, Marine Fish
                              Conservation Network

        Good morning Mr. Chairman and Members of the Subcommittee, my name
    is Lee Crockett. I am the Executive Director of the Marine Fish
    Conservation Network (Network), a nationwide coalition of more than 130
    environmental organizations, commercial and recreational fishing
    associations, aquariums, and marine science groups dedicated to
    promoting conservation of marine fish and the long-term sustainability
    of marine fisheries. Our member organizations represent approximately 5
    million people. For your information, I've attached a list of Network
    members to my testimony. We appreciate this opportunity to present our
    views on individual fishing quota (IFQ) programs.
        As you know, whether to allow the establishment of IFQ programs,
    and if so, subject to what standards, is one of the most contentious
    issues in fisheries management today. In 1996, Congress placed a four-
    year moratorium on the establishment of new IFQ programs to allow for
    further analysis of these management tools and to establish a national
    policy with respect to IFQs. In the interim, it directed the National
    Research Council (NRC) to analyze IFQ programs. The NRC released its
    report in December 1998 and recommended that councils be allowed to use
    IFQ programs provided that appropriate measures were implemented to
    avoid adverse effects from such programs. Unfortunately, Congress was
    unable to address these concerns prior to the expiration of the
    moratorium on September 30, 2000. Congress extended the IFQ moratorium
    for two additional years. The Network feels that this extension was
    appropriate because it allows Congress adequate time to develop
    national standards for the design and conduct of IFQ programs.
        We believe that national standards for IFQ programs are necessary
    for two reasons. First, IFQ programs are unique--they grant fishermen
    the exclusive privilege to catch ocean fish, a public resource, before
    the fish are caught. Second, as we have seen with implementation of the
    Sustainable Fisheries Act (SFA), unless Congress provides very explicit
    direction, regional council implementation is likely to vary widely and
    will likely be inadequate or incomplete. The Network strongly believes
    that explicit legislative standards are necessary to protect the marine
    environment, as well as the broad interests of fishermen and fishing
    communities. To facilitate this process, the Network developed a
    comprehensive set of recommended legislative standards to insure that
    IFQ programs are properly designed and thus advance the conservation of
    marine fish and the management of marine fisheries. For your
    information, I've enclosed a redline copy of our proposed legislative
    standards and a one-page summary.
        I have organized my testimony around the major themes of our
    position.
    Marine Fish Conservation Network's National Standards for IFQ Programs
        Should IFQs be allowed as a management tool?
        The Network supports continuing the IFQ moratorium, UNLESS AND
    UNTIL, Congress adopts legislation containing standards for the design
    and conduct of IFQ programs in order to ensure that these programs
    contribute to and enhance the conservation of our nation's marine fish.
    While some argue that the regional councils can address problems
    commonly associated with IFQ programs during development of the
    program, the record of SFA implementation by the councils makes us very
    skeptical. As we have testified before this Subcommittee previously,
    council implementation of the SFA varies widely and significantly lags
    behind what we believe Congress intended. Whether fishermen are
    protected and an IFQ program enhances conservation will depend on
    council membership and NMFS leadership. In our view, allowing councils
    to address potential IFQ program problems without the clear guidance of
    national standards is a gamble that our fish and fishermen can not
    afford to take given the poor condition of many of our ocean fish
    populations.
    IFQs Must Not Create A Compensable Property Right
        IFQ programs must acknowledge that fish resources are publicly
    owned, that IFQs are not compensable property rights, and that IFQs are
    revocable. We recognize that the Magnuson-Stevens Act contains language
    stating that IFQs are not compensable property and are revocable.
    However, we fear that if Congress allows IFQ shares to be held for long
    periods of time, e.g., 5, 10, 15 years, they will obtain the attributes
    of property. We see examples of this phenomenon in current requests for
    the government to buyback fishing permits or days at sea. To address
    this, quota shares must be of a set duration, not to exceed five years,
    after which time they may be renewed subject to satisfying defined
    criteria. These limitations will make it clear that quota shares are a
    temporary privilege.
    IFQ Programs and Shareholders Must Provide Additional Conservation
            Benefits to the Fishery
        Advocates of IFQ programs often promote their potential to enhance
    conservation. The argument is that stewardship of the resource will be
    enhanced because the value of the quota shares will be linked to the
    health of the resource. Therefore, they argue, the quota shareholder
    will have a financial incentive to conserve the resource. The Network
    does not believe that conservation will automatically be enhanced
    because an IFQ program is established; rather we believe that IFQ
    programs should explicitly provide for additional conservation benefits
    to the fishery. To accomplish this, we recommend that all IFQ programs
    establish objectives for improved conservation as a result of
    allocating shares and that any decision to renew an IFQ share must be
    based on an evaluation of whether the shareholder is meeting the
    requirements of the IFQ program and contributing additional and
    substantial conservation benefits to the fishery. Additional and
    substantial conservation benefits are scientifically measurable
    improvements in avoiding bycatch, preventing highgrading, reducing
    overfishing, rebuilding overfished stocks, and protecting essential
    fish habitat.
        We believe that IFQ programs, if allowed, must be subject to strict
    conservation requirements for the simple reason that quota shareholders
    are being granted exclusive access to fish resources. Simply put, a
    guaranteed portion of a public resource requires additional measures to
    ensure that the public resource is protected. The Network recommends
    that fisheries subject to an IFQ program, at a minimum, be required to
    satisfactorily meet all of the conservation requirements of the
    Magnuson-Stevens Act. In particular, optimum yield should be set below
    the maximum sustainable yield to guard against overfishing, buffer
    against scientific uncertainty, and protect the ecosystem. Bycatch
    should be reduced over time to insignificant levels, and damage to
    essential fish habitat should be minimized. In addition, all IFQ
    programs must provide additional scientifically measurable benefits to
    the fishery by substantially avoiding bycatch, preventing highgrading,
    reducing overfishing and rebuilding overfished stocks, and protecting
    essential fish habitat.
    Protection for Individual Fishermen and Fishing Communities
        To ensure that IFQ-managed fisheries have broad participation,
    limits must be established to prevent excessive consolidation of quota
    shares and the size of initial allocations of quota shares should not
    be based on catch history, i.e., the size of past catch levels.
    Preference should be provided in initial allocations to fishermen who
    can demonstrate a record of conservation-minded fishing, are owner-
    operators, and have long-term participation in the fishery. Each IFQ
    program must ensure that a portion of each annual-allocation is set-
    aside for entry-level fishermen, small vessel operators, and crew
    members who do not hold quota shares.
        The specter of consolidation is one of the greatest fears that
    fishermen have of IFQ programs. Based on experience in some existing
    IFQ programs, they fear that corporate interests will buy up quota
    shares, thus forcing them to change from small businessman to corporate
    employees. Some fishermen members of the Network worry that IFQ
    programs will transform them into ``sharecroppers.'' Substantiating
    these concerns is the fact that the NRC identified consolidation as a
    problem in the surf clam and ocean quahog fisheries in the mid-
    Atlantic. To address these concerns, we recommend that Congress direct
    that IFQ programs preclude any person or entity from acquiring an
    ``excessive share of the individual quota shares issued.'' Moreover,
    excessive share should be defined in statute to not exceed 1% of the
    total quota shares. In recognition of the need for regional
    flexibility, councils could exceed this limit if there are a small
    number of participants and the increase would not be detrimental to
    other quota shareholders.
        We strongly recommend that councils be specifically precluded from
    basing the amount of an initial allocation of quota shares on the size
    of recent catches, i.e., catch history, because such a practice will
    reward the largest operators at the expense of small operators. To do
    otherwise will likely allow the largest operators to achieve windfall
    profits derived from a public resource. Additionally, giving the
    biggest shares to the largest operators could reward those who have
    caused environmental problems by using non-selective, and/or habitat
    damaging gear. Disallowing the use of catch history will also provide a
    disincentive for fishermen to intensify their fishing activities in
    order to establish catch history when an IFQ program is in the planning
    stages.
        Finally, we urge Congress to view initial allocations as an
    opportunity to promote conservation. Using initial allocations to
    reward fishermen who have a demonstrated record of conservation-minded
    fishing will provide an incentive for other fishermen to switch to less
    damaging and more selective fishing gear.
    Independent Review of IFQ Programs and Shareholders
        The Network strongly advocates a review of IFQ programs every five
    years. Decisions on whether to renew the program and how to improve it
    should be based on the outcome of that review. Review criteria should
    include additional and substantial conservation benefits to the
    fishery, including avoiding bycatch, preventing highgrading, reducing
    overfishing and rebuilding overfished stocks, and protecting essential
    fish habitat.
        To carry out these reviews, we recommend that the Secretary
    establish a National Individual Fishing Quota Review Panel. We feel
    that a national panel is necessary to ensure a truly independent review
    of how effective IFQ programs are at meeting their objectives,
    including conserving fish resources. The National IFQ Review Panel
    should consist of individuals knowledgeable about fisheries management,
    but with no financial interest in any fishery. A representative of each
    Council Individual Fishing Quota Panel should also be on the panel.
        In order for the five-year limit on IFQ shares to be meaningful,
    the Network strongly believes that there must be a substantial
    likelihood that quota shareholders would not be allowed the same number
    of shares held in the previous period if they fail to comply with all
    aspects of their IFQ program. If the review were to become perfunctory
    and shares are automatically renewed, they would take on the trappings
    of property despite the Magnuson-Stevens Act language to the contrary.
    To carry out these reviews, each fishery management council should
    establish and maintain an Individual Fish Quota Review Panel,
    consisting of individuals with knowledge in fisheries management, but
    with no financial interest in an IFQ program.
    Recovery of Costs
        Because IFQ shareholders are granted the exclusive privilege to
    catch fish, we believe that IFQ programs must recover all directly
    related administrative costs, including costs of enforcement, observer
    coverage, and independent reviews of the programs. Review of IFQ
    programs depends on good data and adequate funds to carry out the
    reviews. Cost recovery will ensure that the councils and the Secretary
    have the funds necessary to carry out these important mandates.
    Reserve a Portion of the Catch to Protect the Resource and Future
            Opportunities
        IFQ programs must provide the opportunity for allocation of quota
    shares to entities that do not intend to catch the fish, but instead to
    reserve the quota share for conservation-banking purposes that can help
    ensure the continuation of healthy predator-prey relationships. Given
    the scientific uncertainty that characterizes many fisheries, this
    reserve portion would also serve as a buffer against such uncertainty.
    The IFQ Act of 2001
        As you know, Senators Olympia Snowe and John McCain introduced the
    IFQ Act of 2001, S. 637, on March 28, 2001. If enacted, this
    legislation would provide a legal framework for IFQ programs. On behalf
    of the Network, I testified before Senator Snowe and the Subcommittee
    on Fisheries and Oceans in general support of S. 637. The Network
    believes that her bill is a good start because it addresses many of our
    concerns regarding the impact of IFQ programs on fishermen and fishing
    communities. However, it requires additional language to ensure that
    conservation is enhanced under IFQ programs and that they are
    independently reviewed.
        We would like to commend to you a provision from S. 637 that is not
    contained in the Network's proposal. The bill would require councils to
    conduct a referendum of eligible permit holders to determine whether an
    IFQ program should be developed and another to determine whether the
    IFQ program should go into force. A super majority is required for the
    council to proceed in each case. We feel that this is a fair and
    equitable means of insuring that an IFQ program has broad support among
    affected fishermen.
    Processor Quota Shares
        Finally Mr. Chairman, I would like to express our strong opposition
    to processor quota shares. There is no public policy benefit from
    creating a closed market for fishermen. On the contrary we can see
    major economic hardships for fishermen if such systems are allowed. If
    processor quotas were established, fishermen would have a limited
    number of processors available to buy their fish. Under one proposal,
    only those who bought fish in the past from fishermen would be allowed
    to buy from them in the future. Any such program would severely
    disadvantage fishermen during price negotiations. There would be no
    public benefit to either the economy or to conservation under any such
    program.
        The ``evidence'' frequently used in an attempt to justify processor
    quotas comes for the halibut fishery in Alaska. The Network members in
    Alaska, including the Alaska Marine Conservation Council and the Alaska
    Longline Fishermen's Association (ALFA), have a great deal of
    experience in this fishery and question the validity and value of this
    so-called ``evidence.'' As Linda Behnken, executive director of the
    ALFA and former three-term member of the North Pacific Fishery
    Management Council, said very simply and clearly in testimony before
    the Senate Subcommittee on Oceans and Fisheries, ``I have seen no
    evidence to support their claims.'' She went on to say that her
    experience with a fishermen-owned processing cooperative in Sitka, AK
    showed that the plant did well under the halibut IFQ program. We
    believe that the real evidence shows that allowing processor quotas is
    NOT the answer to any fishing economics or conservation problems.
        Thank you again for providing the Marine Fish Conservation Network
    with an opportunity to presents its views on IFQ programs and the need
    for mandatory national legislative standards to guide implementation of
    such programs. I would be happy to answer any questions you or other
    members of the Subcommittee may have.
                                     ______

        Mr. Gilchrest. [presiding] Thank you very much, Mr.
    Crockett.
        Mr. Heasley?

      STATEMENT OF NATHANIEL HEASLEY, FISHERIES PROGRAM MANAGER,
                       TAXPAYERS FOR COMMON SENSE

        Mr. Heasley. See if I can sneak in here a little bit.
        Good afternoon, Mr. Chairman and members of the
    Subcommittee. My name is Nate Heasley, and I am representing
    Taxpayers for Common Sense.
        Taxpayers for Common Sense is an independent voice for
    American taxpayers dedicated to cutting wasteful spending and
    subsidies in order to achieve a responsible and efficient
    Government that operates within its means. I am here today to
    talk specifically about what we see as a trend toward
    privatization of America's fisheries through the use of
    individual fishing quotas.
        IFQs represent a major step toward privatization of the
    fisheries. They are a permit of a different sort than have been
    used traditionally in the U.S., because they grant the holder
    an exclusive and noncompetitive privilege to harvest fish.
    Previous IFQ programs, both in the U.S. and abroad, have given
    these vouchers for fish away for free. As a public resource,
    the fisheries are the property of the American people and
    should not be simply given away, and no property right should
    be vested in the recipients of any IFQ.
        When IFQs are handed over for free, they also are usually
    handed over without any specific limit on their duration. This
    creeping privatization will only lead to a misperception that
    the recipient has a property right in the fishery.
        When an IFQ program is implemented, the initial allocation
    is often capricious, unfairly excluding some who have
    participated in the fishery while giving a windfall to others.
    Worse yet, some who actually claim to own the IFQs do not even
    bother to fish. They lease the quota out to others, making a
    profit that rightfully belongs to the American taxpayers. This
    adds a new twist to an old adage: give a man a fish; he will
    eat for a day. Teach a man to fish, he will eat for life. Give
    a man an IFQ, he will never bother to fish again.
        [Laughter.]
        Mr. Heasley. Any system that does not create a level
    playing field for current and future generations of fishermen
    cannot be supported by the American people as a proper use of
    their resource. Those who have traditionally fished must be
    allowed to continue the practice, and those who would like to
    fish must be allowed to enter the fishery but not at the
    expense of the American taxpayer and for the profit of a select
    few corporations or individuals.
        Under the current system of management, very little of the
    cost of maintaining the fisheries is borne by the fishermen who
    are benefiting. To add insult to injury, evidence indicates
    that IFQ programs are likely to increase costs, not reduce
    them. Enforcement under an IFQ system is more expensive than
    under other management techniques. And let us be clear about
    who benefits from these sorts of programs. Much like the
    agribusiness, fishing is increasingly a corporatized business.
    The romantic days of the independent fisherman on his own boat
    are waning as consolidation and foreign bank interests creep
    into America's fisheries.
        A properly implemented IFQ plan could help pay for the
    current fisheries management costs incurred by the Federal
    Government. Just like any other business in America, the
    externalized costs of fishing must be internalized by those who
    benefit, particularly if the beneficiaries are getting an
    exclusive grant to fish America's waters. To address these
    problems, Taxpayers for Common Sense encourages Congress not to
    allow IFQs to be used as a management tool unless there are
    specific provisions to protect the interests of the American
    taxpayers' resource. To this end, we recommend that like any
    other public resource made available for private use, access to
    the oceans under an IFQ or similar program be auctioned for the
    greatest benefit of the American taxpayer.
        If IFQs are implemented through an auction program, it is
    important that IFQ programs not allow consolidation of fishing
    interests and that the privileges be retained for the
    independent fisherman that feed this country every day. Time-
    limited IFQs are the solution to the problem of privatization
    and consolidation. The reason there must be time-limited
    auctions of an IFQ program is to ensure that America's
    fisheries remain the property of all Americans. Under no
    circumstances should the ocean become the property of a few.
        It is a truly public resource that is there for all
    Americans to enjoy in their own way, whether that is the
    commercial fishing that puts food on our tables or recreational
    fishing that brings millions of dollars to our local
    communities. Taxpayers for Common Sense has proposed the idea
    of a competitive auction as a middle ground to the simple
    argument of whether or not IFQs should be allowed. We believe
    that a properly structured auction could ameliorate some of the
    problems associated with IFQs while protecting American
    taxpayers' interests.
        We hope this Committee joins us in recommending a
    competitive auction that will reimburse the public for the use
    of their resource. Thank you for the opportunity to share our
    views on this subject, and we welcome any questions.
        [The prepared statement of Mr. Heasley follows:]

     Statement of Nathanael Heasley, Fisheries Program Director, Taxpayers
                                for Common Sense

    Introduction
        Good afternoon, Mr. Chairman and members of the committee. My name
    is Nate Heasley, and I'm the Fisheries Program Director for Taxpayers
    for Common Sense. Taxpayers for Common Sense (TCS) is an independent
    voice for American taxpayers, dedicated to cutting wasteful spending
    and subsidies in order to achieve a responsible and efficient
    government that operates within its means.
        I'm here today to talk about the trend toward privatization of
    America's fisheries through the use of Individual Fishing Quotas
    (IFQs). IFQs are a fishery management system that divides the current
    harvest of a particular fishery between some of the participants, and
    gives each an exclusive privilege to harvest a set amount of fish
    without competition. The privilege, expressed as a percentage of the
    total allowable catch (TAC) for that fishery, is then transferable to
    others, who purchase the privilege from the initial recipient. There
    are currently only four IFQ programs in place in the United States:
    halibut, sablefish, wreckfish and surf clam/ocean quahog.
        As this committee likely knows, the Sustainable Fisheries Act of
    1996 established a moratorium on new IFQ programs. Without action by
    Congress, that moratorium will expire with the Magnuson-Stevens
    reauthorization. If Congress does not enact legislation on the use of
    IFQs, regional councils will be able to implement unfettered IFQ
    programs, with potentially disastrous effects. IFQs is are a blunt tool
    for fishery management. Improperly implemented, they create an
    inflexible system that permanently puts a public resource in private
    hands. My comments will highlight the following issue: the give-away of
    a public resource, the problems of initial allocation of IFQs, and the
    internalization of management costs. In my conclusion, I will propose
    that only properly structured competitive auctions will address these
    problems.
    Giving Away the Public Resource
        As they have been implemented in the US prior to the moratorium,
    IFQs represent a move towards privatization of the fisheries. Taxpayers
    for Common Sense is very concerned by this trend. As we all know, the
    200-mile coastal Exclusive Economic Zone is one of America's largest
    and most valuable public resources. IFQs have the potential to
    seriously undermine the protections that the oceans have as a public
    resource.
        As a public resource the fisheries are the property of the American
    people, and should not be simply given away. If IFQ programs are
    allowed without significant protections, they will do just that; rob
    the American people of their resource and create additional costs for
    fisheries management on the taxpayers.
        The creeping privatization of IFQs will only lead to the
    misperception that the recipient has property right in the fishery.
    Similar examples can be found in grazing privileges, which have long
    been allotted for far below market value. As we have seen with grazing,
    a failure to set up the system properly from the beginning can lead to
    the misperception of a property right in a public resource, which in
    turn gives rise to spurious lawsuits and waste of the public's
    resource. IFQs have the potential to be the ``grazing privileges of the
    sea,'' with all of the same wastefulness as those privileges have on
    land.
        In the few examples we have of IFQ programs, IFQs have been handed
    out free of charge to a select group of people in that fishery. Those
    IFQs represent a grant of millions of dollars worth of a public
    resource, and since they are typically transferable, they present a
    tremendous windfall to those who are lucky enough to receive them.
    Those who do not receive them are then barred from entering the
    fishery, unless they want to pay those who were handed the privilege
    for free.
    Initial Allocation and Intergenerational Equity
        When an IFQ program is implemented, the initial allocation is often
    capricious, unfairly excluding some who have participated in the
    fishery while giving a windfall to others. Those ``winners'' who are
    lucky enough to receive an IFQ can become instant millionaires, as
    happened with dozens of fishermen in the halibut fishery in Alaska.
    Other domestic IFQ programs have had similar results--the surf clam
    ocean quahog fishery, for instance, had similar allocation inequities
    that have only been made worse by consolidation of the IFQs by large
    corporate interests. When IFQs were introduced in the Surf Clam Ocean
    Quahog fishery, more than $80 million dollars worth of annual harvest
    was given away to a mere 180 recipients. All others, the ``losers''
    were barred from the fishery, while those who were left had a grant
    that allowed them to fish at their leisure in a state-sponsored
    monopolized fishery. Since their introduction, those permits have been
    even further consolidated to even fewer owners, and excluding all
    others, including future generations who may have wanted to
    participate.
        Worse yet, some who actually ``own'' the IFQs don't even fish. They
    lease the quota out to others, making a profit that rightfully belongs
    to American taxpayers. This adds a new twist to an old adage; Give a
    man a fish, he'll eat for a day. Teach a man to fish, and he'll eat for
    life. Give a man an IFQ, and he'll never bother to fish again.
        This cannot be allowed to happen in future IFQ programs. Those who
    have traditionally fished must be allowed to continue that practice,
    and those who would like to fish must be allowed to enter the fishery,
    but not at the expense of American taxpayers and for the profit of a
    select few corporations or individuals. Any system that does not create
    a level playing field for current and future generations of fishermen
    cannot be supported by the American people as a proper use of their
    resource.
        Commercial fishing represents a multi-billion dollar industry in
    this country, and provides a living to thousands of families. The value
    of those fish properly belongs to the American people, and those who
    benefit from the resource can no longer burden the taxpayers with their
    externalities, while reaping the benefits of our resource.
    Recouping Costs of Management
        A properly implemented IFQ plan could help pay for current
    fisheries management costs incurred by the Federal Government. Under
    the current system of management, very little of the cost of
    maintaining the fisheries is borne by the fishermen who are
    benefitting. Most fisheries do not have any charges or significant fees
    associated with the extraction of the people's living marine resources,
    and even taxes that are paid by most other Americans, such as the fuel
    tax, are waived for fishermen.
        Under an IFQ system, the lack of extraction fees amounts to
    outright robbery. Those who are granted the exclusive privilege and
    guaranteed return of millions of pounds of fish, do so without
    compensating the American people for all but the smallest portion of
    the costs. For example, in the Halibut IFQ program in Alaska, perhaps
    the most positive example of an IFQ program that we have, the fees are
    limited to only 2% of the fish's sale price. A pittance when the
    program management costs are taken into account.
        Fishery management costs run in to hundreds of millions of dollars.
    The NMFS budget alone in 2003 will amount to over $600 million dollars.
    That money, spent on a variety of programs to ensure sustainability of
    America's fisheries, directly benefits fishermen. The costs of
    enforcement of current fishing laws amounts to over $500 million
    dollars per year, including Coast Guard, NMFS, and direct aid to
    states. Add to all of that the cost of boat buy-backs, subsidized
    loans, harbor improvements, and direct subsidies, and it's clear that
    fishermen are benefiting a great deal at the expense of American
    taxpayers, while returning little for the use of their resource.
        Let's be clear about who benefits from these sorts of programs.
    Much like agribusiness, fishing is increasingly a corporate business.
    The romantic days of the independent fisherman on his own boat are
    waning as consolidation and foreign bank interests creep in to
    America's fisheries. Particularly with the specter of NAFTA, which
    could allow large foreign-owned fishing fleets to benefit from the
    billion dollars that America invests in its fisheries every year.
        To add insult to injury, evidence indicates that IFQ programs are
    likely to increase costs, not reduce them. Enforcement under an IFQ
    system is much more expensive than under other management techniques.
    According to NMFS, current IFQ programs have only a 1%-2% monitoring
    rate at the docks, where the target is at least 20%. Where there is a
    lack of enforcement, there will be illegal fishing. That in turn will
    lead to a reduction in the long-term productivity of the fishery, and
    spur even greater management costs in research and other maintenance.
        This must not be allowed to happen. Just like any other business in
    America, the externalized costs of fishing must be internalized by
    those who benefit, particularly if the beneficiaries are getting an
    exclusive grant to fish America's waters.
    Conclusion
        To address these problems, Taxpayers for Common Sense encourages
    Congress not to allow IFQs to be used as a management tool unless there
    are specific provisions to protect the interests of American taxpayers'
    resource. To this end, we recommend that, like many other public
    resources made available for private use, access to the oceans under an
    IFQ or similar program be auctioned for the greatest benefit to the
    American people.
        An auction is the most rational way to maximize the revenue from
    the fisheries, provided it done in the proper way. An auction must
    protect to a certain degree those who have participated and made
    capitol investments in that fishery, without barring new entrants
    completely. Experienced fishermen who have capitol investments in the
    fishery will already be at a competitive advantage in an auction
    system, but it will still be important to provide protections to ensure
    that corporate fishing interests are not at an advantage merely because
    of their scale.
        IFQ consolidation could have significant adverse effects on both
    fishing communities and the fisheries themselves. This ultimately could
    lead to more subsidies, more boat buy-backs, and an overall reduction
    in the yields from our fisheries--none of which will be good for
    American taxpayers. The lesson we've learned from America's farmers is
    an important one, and we should be wary of repeating the mistakes that
    have led to the degradation of the American family-owned farm. It is
    important that IFQ programs not allow consolidation of fishing
    interests, and that the privileges be retained for the independent
    fishermen that feed this country every day.
        But even as we talk about auctions, we must remember that any IFQ
    program does not confer a property right, but merely a privilege to
    fish. Any IFQ program must be time limited, both to allow new entrants
    and to keep the industry competitive, but also to give those who manage
    the fisheries the flexibility to alter the programs as situations
    change, without having to go through cumbersome processes such as boat
    buy-backs and permit stacking.
        Most importantly, the reason there must be time-limited auctions of
    any IFQ program is to ensure that America's fisheries remain the
    property of all Americans. Under no circumstances should the ocean
    become the property of a few--it is a truly public resource that is
    there for all Americans to enjoy in their own way--whether that's the
    commercial fishing that puts food on our tables, or recreational
    fishing that brings millions of dollars to local economies.
        Taxpayers for Common Sense has proposed the idea of a competitive
    auction as a middle ground to the simple argument of whether or not
    IFQs should be allowed. We believe that an properly structured auction
    could ameliorate the problems associated with IFQs, while protecting
    American taxpayers' interests. We hope that this committee joins us in
    recommending a competitive auction that will reimburse the public for
    the use of their resource.
        Thank you for the opportunity to share our views with this
    committee.
                                     ______

        Mr. Gilchrest. Thank you very much, Mr. Heasley.
        This is an interesting group--
        [Laughter.]
        Mr. Gilchrest. --from what I can understand, with certainly
    differing opinions on the issue.
        Mr. Crockett, your recommendation for quota shares, limited
    duration of ownership of an IFQ for 5 years, no processors
    should own IFQs, as I understand it, or be leased IFQs. This
    would just be delegated to, in some manner, someone who is
    actually going to fish on the high seas.
        Mr. Crockett. Well, I need to be clear. There are proposals
    out there, something that people call the two-pie system, which
    would be harvester quotas and processor quotas. And what I was
    referring to is we are opposed to processor quotas, so that the
    only place that a fisherman, someone with a harvester quota,
    could sell their fish is to someone with a processor quota. We
    do not see the public benefit in that.
        There are situations where processors are vertically
    integrated, and they own harvester shares.
        Mr. Gilchrest. Would you do anything to change that?
        Mr. Crockett. Well, I think we would be concerned about the
    consolidation limits and a processor getting too great of a
    control over the fishery through that process, so that the
    consolidation limits would be a concern.
        Mr. Gilchrest. So existing regulations or existing law
    pertaining to IFQs, you would like to see changed to adopt your
    recommendations. Are there any IFQs that you see out there
    right now that need to be changed other than limited duration
    being implemented, quota share, IFQs in the North Pacific or
    the clam and quahog industry in the Mid-Atlantic?
        Mr. Crockett. Well, I think, as Dr. Hogarth mentioned,
    there is a very wide variation in how these programs have been
    implemented. I think some of the concerns we have about
    consolidation and the impacts on fishermen are clearly evident
    in the surf clam fishery, where your testimony earlier that 60
    percent--or maybe it was you that said it--that 60 percent of
    the quotas are held by three corporations. I believe one of
    those is an accounting firm, and the other is the bank.
        Mr. Gilchrest. So under your system, you would not allow
    that to happen.
        Mr. Crockett. That is correct.
        Mr. Gilchrest. I see.
        Mr. Crockett. But we think there should be, you know,
    preference for owner-operators, and that absentee owners should
    not be allowed, and that there should be strict limits on
    consolidation. And our proposal that is attached to our
    testimony has a general guideline. We felt 1 percent was
    adequate and that it could be raised if there was a
    particularly small fishery--like the wreckfish fishery, for
    example, only has less than 20 participants, so 1 percent would
    not work in that situation. I mean, it would be impossible to
    do.
        So in that fishery, I think we would like to see these
    retroactively applied. Our recommendations--that may not be a
    realistic request on our part, but we certainly think that, you
    know, a set of standards should apply to all of the programs.
    And in response to what Dr. Hogarth was saying about they do
    not want to see one-size-fits-all, the Magnuson Act has a set
    of national standards that guide fisheries management. And
    essentially what we are proposing here is a set of national
    standards for IFQ programs.
        Mr. Gilchrest. To some extent, which I think is a good
    idea, you are trying to move away from an accounting firm or
    Tyson Foods or Wal-Mart basically buying at auction or leasing
    IFQs.
        Mr. Crockett. I think there are real questions about
    whether Tyson Foods or Wal-Mart would have the conservation
    ethic that is supposed to be engendered through an IFQ program.
        Mr. Gilchrest. I guess the followup to that is how about a
    well-known conservation group that wants to buy an IFQ? Would
    they fit that same category as an accounting firm wanting to
    buy an IFQ?
        Mr. Crockett. In our proposal, we have suggested that
    councils, as part of their IFQ programs, should set aside a
    portion of the resource that could be purchased by people who
    do not intend to fish them and that it would be sort of a
    conservation setaside, if you will.
        Mr. Gilchrest. I see.
        Let me hold off on that just for a second. When you talk
    about a quota share, you mentioned the 60 percent are owned by
    three different corporations for the clam and quahog industry.
    I seemed to understand you to say that is not a good idea.
        Mr. Crockett. Yes.
        Mr. Gilchrest. In the quota share for the IFQ for a
    fishery, you could only own a certain percentage of that quota
    share.
        Mr. Crockett. The quota share would be of a certain size,
    the percentage, and we are suggesting 1 percent ought to be
    sort of the benchmark, and there could be modifications based
    on--
        Mr. Gilchrest. You could not own more than 1 percent?
        Mr. Crockett. Yes, that is what we are suggesting.
        Mr. Gilchrest. Oh, so 60 percent owned by three or 33
    percent owned by three is sort of way out of the ball park in
    your opinion.
        Mr. Crockett. Yes.
        Mr. Gilchrest. Dr. Bromley, you talked about market share.
    In a free market with a number of provisions--you set out
    certain standards that had to be met or should be met before we
    as a Congress or the Secretary or the councils lease an IFQ.
    And your reference to a market economy, would you agree with
    Mr. Crockett on limiting ownership--if all the standards are
    met: the harvest levels, the quota share--well, maybe that is
    what you put in there, the quota share. So you would agree with
    Mr. Crockett that a quota share for an IFQ should be part of
    the standards?
        Dr. Bromley. I would prefer to say--if this is working--I
    would prefer to say that it seems to me that the way to run an
    auction and to partition this is to set partitions ahead of
    time. One could partition the auction in terms of vessel size.
    One could partition it in terms of place, certain fishing
    communities, so that preference could be given.
        So it would seem to me that one sets up this opportunity to
    have access to the wealth of ocean fisheries in some sort of a
    partition so that the final outcome would match, perhaps, what
    Mr. Crockett favored. Am I afraid of concentration in the
    abstract? Yes, but my sense is that with proper design at the
    beginning of these programs, one can deal with that.
        Let me stop there.
        Mr. Gilchrest. Sure; thank you very much.
        Dr. Bromley. If that is responsive to your question.
        Mr. Gilchrest. That is. I do not think it is a pervasive
    problem under the present regime, because we just simply do not
    have a lot of IFQs. But if we move forward and allow, let us
    say, a minimal amount of tinkering with our standards for IFQs
    and leave it up to the councils and the Secretary, you are
    saying, I think, there may be some issue of concentration out
    there--
        Dr. Bromley. Yes.
        Mr. Gilchrest. --that we do not foresee.
        Dr. Bromley. Yes; may I elaborate on my answer?
        Mr. Gilchrest. Yes.
        Dr. Bromley. Briefly, I think what we are doing is having a
    conversation about the purpose of the oceans, you see. And in a
    sense, if one thinks about the purpose of the oceans in a
    historic sense, what we now understand is that a lot of
    interest groups care about the oceans; they care about
    ecosystems; they care about fishing communities, and if one
    recalibrates how they talk about the oceans, it is no longer a
    place from which fish will simply be extracted. It is a place
    that provides recreation; it is a place that provides a means
    of living for some people; and so on, and so, the partition of
    the auctions, the partition of access, in a sense, it seems to
    me, is reflective of a new idea about the purpose of the ocean;
    rural communities; job creation; stability of the industry, if
    we might use those words.
        So it seems to me that if one is intent on creating IFQs,
    it seems to me they must be predicated upon this broader
    concept of the purpose of the ocean. That is why I find, if I
    may, the Homestead metaphor really quite inapt. The Homestead
    Act was, in a sense, not driven by desire to produce wheat. It
    was driven by a desire, with all apologies to Native Americans,
    to fill up a continent that we presumed to be empty and to get
    people out there and what have you.
        So the idea that this is just the Homestead Act, a wet
    version of the Homestead Act, it seems to me, is really quite
    inappropriate.
        Mr. Gilchrest. I just have one other quick followup if Mr.
    Underwood will give me the latitude. I am not sure who up there
    gave the Homestead Act analogy, OK?
        [Laughter.]
        Dr. Leal. I am sure.
        [Laughter.]
        Mr. Gilchrest. Well, then, my question will be to Dr. Leal,
    then--
        Dr. Leal. Good.
        Mr. Gilchrest. --as a followup to what Dr. Bromley just
    said. And that is, Dr. Leal, what is your understanding? How
    would you like us to view the Magnuson Act? Is it an act that
    the Federal Government issues to manage the oceans for, let us
    say, the principal purpose of providing not only protein, an
    inexpensive protein source to the American people, or is it a
    Federal program to manage, in a very broad sense, pretty much
    based on what Dr. Bromley just said, to manage the fisheries
    for the public benefit, which would include extracting protein
    for people; which would include recreation; which, I think, we
    are beginning to understand would also include, as a public
    resource which provides us with, for lack of a better
    terminology, a significant source, given the ecosystem, for
    protecting the biosphere of this country?
        So with that pretty much vague question, if you could just
    respond, and I would also like to comment, if you will, that
    the Magnuson Act does not say anything about rights. It refers
    to privileges. Would you like that to go from privileges to
    rights?
        Dr. Leal. In a short answer, yes. I think that, you know,
    my inclination is to look at it from the standpoint of this is
    just--the last 40 years have been an extension of the
    privatization of the oceans. It started, you know, with the
    200-mile Exclusive Economic Zone in the sense that now, nations
    have the power to create these exclusive territories. Telling
    other nations to get out is a form of--you know, a national
    form of privatization. Now, we are at the next stage. We are at
    the stage where we have to understand that these resources are
    limited; that they cannot--you know, it is one thing to say we
    would like to have access to all fishermen, access for all
    recreationists, access for this and that.
        But the problem is these resources are scarce. They can
    only produce so much, and that we started the process, the
    extension of the process of enclosing the oceans out to 200
    miles with the limited entry system, the limited licensing that
    is going on off the Pacific Coast and starting to begin on the
    East Coast. That is just another form of privatization taking
    place. Are we there yet? No; we probably will never be
    completely there, because on the recreation side, there is
    still a portion of the fish that they say, OK, well, this
    portion is going to be allocated for recreation.
        But that does not mean we cannot have at least, on the
    recreation side, an overall quota that can be used to bargain
    with. Recreationists can buy quota from commercial fishermen if
    they feel like they want more, et cetera. Conservationists can
    buy quota from the commercial fishermen if they feel--
        Mr. Gilchrest. So you view an IFQ as something that is--
        Dr. Leal. It is a--
        Mr. Gilchrest. It is leased to somebody, and during that
    lease, they own that particular right, as someone leases an
    apartment, or they lease a building or something of this
    nature; they have certain, specific rights and privileges to
    that particular property?
        Dr. Leal. I view it as more than just a lease. I view it
    as, you know, a straight property right in--
        Mr. Gilchrest. So you would disagree with Mr. Crockett to
    hold it for only 5 years.
        Dr. Leal. Right; I think that defeats one of the purposes
    of creating rights in resources, and that is to procure
    stewardship. You know, how many people damage their own car and
    stuff? I mean, people take care of things they own. It boils
    down to that. You know, how well taken care of are our national
    forests, our national parks? We are constantly struggling with
    that whole venue, because those are the resources that seem to
    always struggle in the sense of being taken care of. I want the
    fisheries to have that same stewardship ethic in that sense.
        So I would say that this process--I would like to law
    changed, to boil down. I would like to see an IFQ a property
    right.
        Mr. Gilchrest. I see.
        Dr. Leal. Revocable only on violation, you know, if the
    rightholder violates--cheats on quota or something like that,
    repeated cheater, then, he loses it.
        Mr. Gilchrest. I understand. Thank you. I am well past my
    time.
        Dr. Leal. OK.
        Mr. Gilchrest. I yield now to Mr. Underwood. Thank you very
    much, Dr. Leal.
        Mr. Underwood. I would like to thank the panel for a very
    illuminating discussion about all of the various dimensions
    regarding the IFQs, and it seems that we are at the horns of a
    philosophical dilemma at some level, and that is the attitude
    toward what is essentially a public resource. I am finding it
    curious, Dr. Leal, your characterization that there is some
    kind of privatization ethic in that process from going from an
    EEZ to privatization, and I understand the assumption; I
    understand the assumption that you are only going to behave
    responsibly with something that you directly own and manage.
    That is an assumption about these what are essentially public
    resources.
        I guess the problem that I am having is that they are, in
    fact, public resources, and I guess the bottom line is that
    they are public resources. I just have a hard time thinking
    that they can be owned. Certainly, people are given permits to
    use public resources, and we try to manage that in a way that
    responds to the public interest. Your point is, in large
    measure, philosophical to the same extent that Dr. Bromley's
    point is philosophical, perhaps, in the opposite direction, and
    I guess it calls for some assessment on the part of the
    Committee not so much as to declare which philosophy is the
    winner but I guess which approach would work best given the
    assumption that they are public resources, and I think that is
    why it is important to, I think, keep that definition intact.
        There are some issues that were brought up about
    transferability and auction, the idea of auctioning these off,
    and I would like to pose the question to Mr. Crockett and Mr.
    Gilmore and Mr. Gutting what their attitudes are and what their
    sense is about auctioning off IFQs and transferability. Why
    don't we start with you, Mr. Crockett?
        Mr. Crockett. OK; our organization does not have a position
    on either of those, and we--
        Mr. Underwood. Pardon me, on--
        Mr. Crockett. On auctioning or transferability. I intend to
    bring it up to my board at our next meeting in March, so
    hopefully, I will have a position by then, but to date, I do
    not.
        Mr. Underwood. Mr. Gilmore?
        Mr. Gilmore. Yes; our association has not taken a position
    on auctioning. I would just offer as maybe my last day on the
    job a personal observation.
        [Laughter.]
        Mr. Gilmore. But, I mean, I think in terms of moving to
    quota systems, by and large, a big part of doing that is trying
    to provide some economic and social stability in fisheries that
    are overcapitalized, that have a race for fish going on. And
    so, I think a big part of management councils' responsibility
    in moving into these types of programs, be it a general limited
    entry program or an IFQ program, is to consider the effect on
    the current participants in the fishery, and by and large, if
    you are moving to these types of programs, probably these
    fisheries, if they are biologically or environmentally healthy,
    probably are not economically or socially healthy.
        I know that the pollock fishery, we have had a very healthy
    fishery since the U.S. took over management of it, but our
    vessels, half of our vessels went through bankruptcy in the
    1990's as a result of the race for fish, although the quotas
    remained over a million metric tons. So I think in moving into
    auctions, you just get into what are your social goals in
    moving into these programs and that it might not be appropriate
    to move toward an auction at that point but to recognize people
    that already have investments.
        And I could follow up with my letter of resignation and the
    honest views of our association.
        [Laughter.]
        Mr. Gilmore. On transferability, it has worked for us in
    the cooperative. I am not quite sure what--we have sort of done
    it on two levels, and one is that when the cooperative was
    formed, we had eight-member companies, and now, there are
    seven-member companies; one vessel elected to forfeit its U.S.
    fishing privileges and leave U.S. fisheries and will not be
    able to come back, and they sold their share of the quota. I am
    not exactly sure what it is that they sold if the Government
    changes the sectoral allocations, the way pollock is allocated.
        But all the people who purchased the Endurance's quota
    share under the coop recognized that risk and I presume took
    that into account in the offer that they made. So it did help
    us take some additional capital out of the fishery while
    compensating the people that left.
        We also do leases. I do not believe any of the remaining
    coop members have sold any of their quota, but we do engage in
    leasing throughout the year, and it has worked well for us in
    that companies with less efficient vessels have tended to lease
    some of their surplus quota to more efficient operators. But
    where we really use it is toward the end of the year. Rather
    than having three or four or five vessels still out on the
    grounds, somebody will say, well, I am just going to go do
    shipyard work and lease out the remainder of their quota. We
    end up in a situation where we might have one or two vessels
    out on the grounds at the end of the season rather than 19
    vessels racing to catch that last fish. So it has worked to
    rationalize our fishery.
        Mr. Underwood. Very good. Thank you.
        Mr. Gutting. Our organization has not considered the
    precise two questions you asked, whether or not we would
    support an auction system and with respect to transferability.
    I would offer these comments: as Jim Gilmore just mentioned,
    one of the very useful aspects of IFQs is that it can be part
    of an effort on the part of the council to rationalize a
    fishery. Oftentimes, they are considered in the context of an
    overcapitalized fishery, where you are trying to encourage more
    efficient use of capital, and you are dealing with fishermen
    who would like to exit the fishery; would appreciate very much
    an opportunity to cash out, as it were.
        IFQs have been a very useful mechanism to accomplish
    naturalization. I think that is a legitimate purpose of IFQs,
    and if you were to institute an auction system and ask people
    who do not have money to bid, you might run at cross purposes
    to what you are trying to accomplish for a fishery.
        With regard to transferability, many of the benefits of
    IFQs can only be achieved through some kind of transfer,
    whether permanent or temporary. And these are the kinds of
    issues that really are best left to the councils.
        The Chairman was asking some profound questions: why are we
    managing these fisheries? Well, if you go to the act, the
    answer is to achieve an overall benefit. And it is not a
    particular benefit. It can be local employment; it can be
    protecting communities; it could be recreation; it could be
    food.
        All of these goals are perfectly appropriate within the
    context, of course, of always of conserving the stocks. I think
    it would be a mistake for us here in Washington, D.C., through
    legislation to try to, through rigid numbers, answer all of
    these questions. The fisheries are diverse. The people who are
    dependent upon these resources have different needs. I think
    there was a profound wisdom when this act was enacted to leave
    it up to the councils to look at the particular factual
    circumstances and apply them against the general standards in
    the act. If we get too specific and start deciding how to
    manage fisheries, we are going to get ourselves in trouble.
        Mr. Underwood. Thank you, yes, and the Chairman is a
    profound guy.
        [Laughter.]
        Mr. Gilchrest. Yes; I am profound to my teenage daughter.
    She is confused all the time with my comments.
        [Laughter.]
        Mr. Gilchrest. I would agree with you, Mr. Gutting, on just
    about everything you have said. But I do think, as Dr. Hogarth
    has stated, the council system has worked fairly well and that
    the Magnuson Act has pursued a very difficult, complex mission
    with multiple players, multiple interests. But I do think it is
    incumbent upon us as Members of Congress, the Government or
    whoever, to ensure again with the collective wisdom that is out
    there to assume that we are trying to acquire that and then use
    our judgment as to the next direction that we want to pursue or
    go in. Because certainly, 25, 26, 27 years ago, however long
    the Magnuson Act has been put in place, the science is better
    now. The specific purpose for a Magnuson Act has been
    accomplished, which is to preserve the fisheries for American
    interests.
        And now, what are the American interests based on what we
    now know and based on the health of the fishery and the oceans
    and the marine ecosystem? So that is what we are wrestling with
    with all of these issues.
        And I do not want to be here until midnight, because I know
    a lot of people want to spend some time visiting museums or
    walking around Washington, but Mr. Gutting, I think you may
    agree with Mr. Gilmore, and the both of you, I suppose, might
    disagree with Mr. Crockett to some extent as far as processors
    leasing or owning quota shares or IFQs. Am I correct in that?
        Mr. Gutting. Yes; I am not sure I fully understand Mr.
    Crockett's position, but I suspect if I did, I would disagree
    with it.
        [Laughter.]
        Mr. Gutting. I would like to elaborate somewhat on our
    position. Dr. Hogarth mentioned during his testimony that there
    needs to be a change in the act to allow for the councils to
    consider processors when they address limited access systems
    including IFQ systems. And we agree with Dr. Hogarth's
    observation that the law as presently worded does not allow for
    processing and shore-based processors to be considered when
    these systems are taken up. And so, we would agree with Dr.
    Hogarth on that. There is a need for change.
        I do want to add one additional measure, and that is when
    processors are considered, and I believe they should be, in
    council deliberations, it is very important, Mr. Chairman, very
    important that if an IFQ program is adopted that the shore-
    based community, the processors, are treated fairly; that there
    is equity with the harvesting sector.
        You are going to have some witnesses later today who can
    tell you what happens when that does not take place. There can
    be tremendous economic loss and dislocation, and we think it is
    important that we learn from these lessons and not make the
    same mistakes in the future. So what we are asking is that
    please include processors in the consideration of these
    programs and be sure that they are treated fairly and equally.
    There are many, many ways to do that. We are not saying you
    should sit here and write out exactly how that is to be done,
    but there has to be a general principle here of fairness if we
    are to avoid the mistakes we have made in the past.
        Mr. Gilchrest. Big job ahead.
        Mr. Gilmore, were you going to make a comment?
        Mr. Gilmore. I would just say that we are on record as
    supporting processor quota shares. It is a little bit of a
    freebie for us since we catch our own fish and process our own
    fish. We will be considered under IFQ programs either for our
    harvesting or processing or both, but we do believe that--
        Mr. Gilchrest. But you would not turn down that freebie.
        Mr. Gilmore. Well, I think we would not get double credit.
        [Laughter.]
        Mr. Gilmore. I will take a wild guess on that; but I would
    say that we recognize that--and we have made investments in
    harvesting and processing. We just happen to put it all on one
    vessel. Processors in the North Pacific, you know, they have
    made their own investments.
        Mr. Gilchrest. Would you agree with Mr. Gutting--I
    understand your position on IFQs, but would you agree with Mr.
    Gutting as far as shore-based processors are concerned and
    entry into IFQs?
        Mr. Gilmore. Yes, we would.
        Mr. Gilchrest. You would?
        Gentlemen, thank you very much. We have a big job ahead.
    Thanks for your testimony.
        Mr. Gilchrest. Our next panel is panel three: Mr. Pete
    Jensen, Wallace and Associates; Mr. Peter Emerson, senior
    economist, Environmental Defense; Mr. Robert Spaeth, Southern
    Offshore Fishing Association.
        I want to thank the panel for coming today and offering
    your testimony. We appreciate the information that we are
    receiving from all of you, and Mr. Pete Jensen, a gentleman
    from Maryland with a wide range of experiences with the ocean
    side and the Chesapeake Bay; Mr. Jensen, you may begin.

            STATEMENT OF PETE JENSEN, WALLACE AND ASSOCIATES

        Mr. Jensen. Thank you, Mr. Chairman; greetings from back
    home.
        Mr. Gilchrest. Thank you.
        Mr. Jensen. Thank you for inviting Wallace and Associates
    to this hearing. I am Pete Jensen, an associate with Wallace
    and Associates.
        The issue of whether to allow individual fishing quotas or
    individual transferable quotas in the management of our
    nation's fisheries does not exist in isolation. A large number
    and variations of individual fishing quotas have been utilized
    in virtually every fishery in the United States. They are all
    intended to limit the total catch and allocate the catch among
    participants. But they have not been effective in dealing with
    the overcapacity and excess fishing power that exists in many
    of our fisheries. The result is an ever-changing, often
    complicated, frequently controversial mixture of control and
    allocation of fishing privileges which is expensive and complex
    to administer.
        To date, the available management measures being utilized
    are not achieving the full intent of the Magnuson Act. The idea
    for individual transferable quotas emanates from the well-known
    and documented management problems of insufficient fish stocks
    to support the capacity of recreational and commercial
    fisheries to catch fish. So the question is what objective can
    be achieved through the use of individual transferable quotas,
    and are there current and future fishery management objectives
    which are and will be frustrated by the problems of
    overcapacity and too many fishermen that cannot be effectively
    and efficiently achieved without some form of individual
    transferable quotas?
        We believe so. Individual transferable quotas are necessary
    in some fisheries to deal with overcapacity and
    overcapitalization. Participants in individual transferable
    quota regimes are able to determine the level and investment
    and capitalization appropriate to the available catch quotas.
    However, it is clear that each one must be tailored to the
    circumstances of the fishery. There is no one size fits all.
    The major debate seems to be centered around concerns over
    unknown or anticipated undesirable effects such as the
    consolidation and control of individual transferable quotas,
    foreign and absentee ownership, fair and equitable allocation
    and access, especially by individual fishermen and small
    businesses and processors.
        Community impacts and who will benefit? At a minimum, we
    believe Congress should remove the moratorium on individual
    transferable quotas along with whatever criteria are necessary
    to deal with the extant concerns but not deny the management
    councils and the National Marine Fisheries Service the ability
    to employ individual transferable quotas in appropriate
    situations. We would counsel against attempting to define the
    utilization of individual transferable quotas in extensive
    detail other than to protect against identified, unwanted
    results. To attempt narrow definitions and guidelines would, in
    our view, stifle the innovation and ideas that we believe will
    emerge from the councils, the fishing industry and the public.
        Certainly, everyone who has had full opportunity during the
    moratorium to consider the pros and cons of individual
    transferable quotas and should now be prepared to engage in a
    public discourse on the specific applications. In some
    fisheries, they will not be workable, but we believe these will
    become obvious. Because Wallace and Associates has been closely
    and substantively involved in the successful development and
    implementation of individual transferable quotas for surf clams
    and ocean quahog, we believe that they will work in other
    fisheries as well as they have worked in the clam fishery.
        When the clam fishery was on a limited access time
    allocation system because the clam stocks had been reduced due
    to fishing and environmental events, fishermen raced to fish.
    When clams were in short supply, each vessel was allocated to
    fish 96 hours per week, 52 weeks a year to catch a fixed quota.
    By the time the stocks recovered, each vessel was fishing 6
    hours every other week. None of the participants were making
    any money; the vessels were not being properly maintained;
    crews were having to work on as many as four vessels just to
    earn a living, and vessels were being lost to such an extent
    the clam fishery was considered the most dangerous fishery in
    the U.S.
        The surplus fishing capacity left the fishery; the best
    fishers remained; the crews are fully employed. This industry
    can now plan on a reliable basis and is considered one of the
    best-managed. It is a fishery that is largely self-regulated
    with minimum regulatory costs. In particular, we would point
    out that even there were some consolidations when the
    management plan was first implemented that might have been
    undesirable, the open market for allocations has resulted in a
    wide variety of quota holders, most of which are small
    businesses, individuals and families that have been in the
    fishery since before there were regulations.
        Unfortunately, it is the fishermen who have raised the
    price for the resulting complex and expensive form of
    management that results when you do not have individual quotas.
    We believe individual transferable quotas can assist the
    Congress and the management agencies in achieving better
    management and better outcomes for our fisheries. We have no
    specific guidelines to suggest today; however, we would be
    pleased to submit suggestions at the invitation of the
    Subcommittee.
        Thank you.
        [The prepared statement of Mr. Jensen follows:]

        Statement of W. Peter Jensen, Wallace & Associates, Cambridge,
           Maryland, on behalf of the North Atlantic Clam Association

        Mr. Chairman and Members of the Subcommittee, thank you for
    inviting Wallace and Associates to this hearing on Individual Fishing
    Quotas (IFQ's). I am W.P. Jensen, an associate of Wallace and
    Associates.
        The issue of whether to allow Individual Fishing Quotas or
    Individual Transferable Quotas in the management of our nation's
    fisheries does not exist in isolation. A large number and variations of
    Individual Fishing Quotas have been utilized in virtually every fishery
    in the United States and in some international management regimes. Some
    examples are daily catch limits, size limits, trip limits, limited
    entry permits, time limits, and gear specifications. They are all
    intended to limit the total catch and allocate the catch among
    participants while achieving the objectives of sustainable fisheries
    but they have not been effective in dealing with over capacity and
    excess fishing power that exists in many fisheries. The result is an
    ever changing, often complicated, and frequently controversial mixture
    of allocation of and control of fishing privileges, which is expensive
    and complex to administer. To date, the available management measures
    being utilized are not achieving the full intent of the Magnuson-
    Stevens Conservation and Management Act.
        The idea for Individual Transferable Quotas emanates from the well-
    known and documented management problems of insufficient fish stocks to
    support the capacity of recreational and commercial fisheries to catch
    fish and the difficulty in achieving biological stability of the fish
    stocks and economic stability of the fisheries. So the questions are;
    ``What is the objective to be achieved through the implementation of
    another form of Individual Fishing Quotas or Individual Transferable
    Quotas that cannot be achieved with the traditional forms of allocation
    and control of fishing privileges? Are there current and future fishery
    management objectives which are and will be frustrated by the problems
    of over-capacity and too many fishermen that cannot be effectively and
    efficiently achieved without some new form of Individual Transferable
    Quotas?
        We believe so. Individual Transferable Quotas are necessary in some
    fisheries to deal with over capacity and over capitalization.
    Participants in an Individual Transferable Quota regime are able to
    determine the level of investment and capitalization appropriate to the
    available catch quotas. However, it is clear that each application of
    Individual Transferable Quotas must be specifically tailored to the
    circumstances of the fishery being managed and the specific objectives
    to be achieved for that fishery (including the fish stocks involved).
    There is no ``one size fits all'' Individual Transferable Quota recipe.
        Unless we have misunderstood the debate and concerns that surround
    Individual Transferable Quotas there is limited debate that there have
    been desirable benefits achieved from the implementation of Individual
    Transferable Quotas for surf clams/ocean quahogs, halibut, and
    wreckfish. The major debate seems to be centered around concerns over
    unknown or anticipated undesirable effects such as consolidation/
    control of Individual Transferable Quotas, foreign and absentee
    ownership, fair and equitable allocation and access (especially by
    individual fishermen who would be considered small businesses, and
    processors), community impacts, and who will benefit by recovery of
    over fished stocks.
        At a minimum Congress should remove the moratorium on Individual
    Transferable Quotas along with whatever criteria is felt necessary to
    deal with the extant concerns but not deny the Management Councils and
    the National Marine Fisheries Service the ability to employ Individual
    Transferable Quotas in appropriate situations. We would counsel against
    attempting to define the utilization of Individual Transferable Quotas
    in extensive detail other than to protect against identified unwanted
    results, some of which have been identified. To attempt narrow
    definitions and guidelines would, in our view, stifle the innovation
    and ideas that we believe will emerge from the Councils, the fishing
    industry and the public. Certainly, everyone has had full opportunity
    during the moratorium to consider the pros and cons of Individual
    Transferable Quotas and should now be prepared to engage in a public
    discourse on the specific applications. In some fisheries Individual
    Transferable Quotas may not be workable, but we believe that those will
    be obvious as the Councils, industry, and the public debate options and
    proposals.
        Because Wallace and Associates has been closely and substantively
    involved in the successful development and implementation of the
    Individual Transferable Quota system for surf clams and ocean quahogs
    we believe that Individual Transferable Quotas can work in other
    fisheries as well as they have worked in the clam fishery.
        When the clam fishery was on a limited access time allocation
    system, because the clam stocks had been reduced due to fishing and
    environmental events, fishermen raced to fish. When clams were in short
    supply each vessel was allowed to fish 96 hours per week, 52 weeks per
    year to catch a fixed quota. By the time clam stocks recovered each
    vessel was fishing six hours every other week. None of the participants
    were making any money when the regulations required them to fish on a
    given day and time regardless of the weather. The vessels were not
    being properly maintained, crews were having to work on as many as four
    vessels just to earn a living and vessels were being lost to such an
    extent the clam fishery was considered the most dangerous fishery in
    the U.S. Compared to the safety record before the Individual
    Transferable Quota system went into effect, the clam fishery is much
    safer today. The surplus fishing capacity left the fishery, the best
    vessels remained, and the crews are fully employed. Enforcement is not
    a big issue because few rules are necessary and most rules can be
    enforced at the dock or in the processing plants. This industry can now
    plan on a reliable basis and is considered one of the best-managed
    fisheries in the U.S. It is a fishery that is largely self-regulated
    with minimal regulatory process and enforcement costs, and clearly
    sustainable.
        In particular, we would point out that even though there were some
    consolidations of allocations when the management plan was first
    implemented that might have been considered an unwanted effect, the
    open market for allocations has resulted in a wide variety of quota
    holders, most of which are small businesses, individuals, and families
    who have been in the fishery since before there were regulations.
        The choices on how to regulate and control fishing pressure on fish
    stocks that are limited are difficult. But, the choices that are being
    made in the absence of the availability of a full array of management
    tools are no less difficult and in some cases unsuccessful or
    ineffective. Unfortunately, it is the fishermen who pay the price for
    the resulting complex and expensive form of management that results.
    Individual Transferable Quotas can assist the Congress and management
    agencies in achieving better management and better outcomes for our
    fisheries.
        We believe that the Councils should have Individual Transferable
    Quotas in their arsenal of management tools to help solve some of the
    problems in fishery management if they deem them appropriate for a
    given fishery.
        We have no specific wording for guidelines to suggest today,
    however, we would be pleased to submit suggestions at the invitation of
    the Subcommittee.
        Thank you for the opportunity to testify and offer our views on
    Individual Fishing Quotas.
                                     ______

        Mr. Gilchrest. Thank you, Mr. Jensen.
        Mr. Emerson?

      STATEMENT OF PETER EMERSON, SENIOR ECONOMIST, ENVIRONMENTAL
                                DEFENSE

        Mr. Emerson. Chairman Gilchrest, members of the
    Subcommittee, my name is Pete Emerson. I work for Environmental
    Defense in Austin, Texas. I appreciate this opportunity to
    offer my perspective on individual fishing quotas and the Gulf
    of Mexico Red Snapper Fishery. Much of what I know about this
    fishery, I learned from Captain Felix Cox, a veteran fisherman
    who works the 52-foot Mattie Grace out of Aransas Pass, Texas.
    Captain Cox, a winner of the National Fisherman's Highliner
    Award, is not happy with the way things are. He is locked in an
    all-out race for fish that is driving him to financial ruin
    and, in his own words, causing me to waste more fish than I can
    count.
        This sad story is shared by many snapper fishermen.
    Government regulations set up to help fish stocks instead
    caused discards of fish to skyrocket; market supply gluts to
    push prices down; harvesting costs to rise; and fishermen to go
    to sea under dangerous conditions. These are certainly not the
    outcomes that Congress promised in adopting the fishery
    conservation and management goal found in the Magnuson-Stevens
    Act.
        To make matters worse, when our regional managers and Gulf
    fishermen tried to solve their problems, Congress cut them off
    with a moratorium on new IFQ programs. It is time to remove
    this roadblock. I encourage you to strengthen the act by
    lifting the moratorium. We need regulations that will support
    sensible year-round fishing; help reduce excess capacity and
    rebuild overfished stocks and certainly promote safety at sea.
        Resource economists recently found that replacing the
    existing limited entry program in this red snapper fishery with
    a transferable IFQ program would increase annual red snapper
    dockside revenue by 46 percent simply by eliminating market
    supply gluts and reduce annual fleet harvesting costs by 56
    percent by eliminating per-trip catch limits and excess fishing
    capacity.
        Mark Frudenberg, owner of Captain Mark's Seafood, a
    processing and wholesaling business in Freeport, Texas, thinks
    the results on the revenue side could be even better. With
    year-round fishing, he is looking to creating new marketing
    opportunities for fresh, high quality red snapper. For certain,
    potential economic returns of this magnitude justify
    consideration of IFQs in this fishery. But there are more good
    reasons for fishermen and conservationists to take note: it
    turns out that ending the race for fish; avoiding long, closed
    seasons; reducing excess capacity; getting rid of minimum size
    limits really would save fish.
        While the evidence is incomplete, available data suggest
    that at least 1.8 million red snapper a year currently thrown
    overboard because they are too small or caught out of season
    could be saved. That is a nice gain for a long-overfished
    fishery. Conservation would get another boost under a
    comprehensive IFQ program if it reduced effort-switching to
    related fisheries like amberjack and vermillion snapper that
    are already in trouble.
        Of course, we all know that IFQs generate concerns. Gulf of
    Mexico fisheries are no exception. Congress should respond by
    developing a sound national policy on IFQs. Such a policy would
    provide maximum flexibility to the regional councils but foster
    a deliberate strategy capable of introducing IFQ programs and,
    at the same time, addressing objectives for conservation,
    fishing businesses and communities. It would encourage broad
    stakeholder participation in setting goals and in reaching
    agreement on measurable performance targets.
        A national policy on IFQs would start with provisions
    already in the Magnuson-Stevens Act and then add to them. The
    act states that an IFQ is a Federal permit; that it can be
    revoked or revised based on future conservation and management
    goals. To strengthen the stewardship incentive, Congress should
    allow IFQ owners to bring civil actions against private
    entities that unlawfully harm the value of quota shares.
    Fishermen need to have assurances that their quota shares are
    secure and defensible from damage. Otherwise, a positive
    incentive to conserve stocks is reduced.
        To help IFQ programs achieve their objectives, Congress
    should remove the 3 percent cap on fees collected from
    fishermen to cover the costs of monitoring and enforcement.
    Because successful management benefits fishermen, it makes
    sense that fishermen should help pay these costs. Such a cost
    recovery requirement is a bitter pill for red snapper fishermen
    harmed by derby fishing, but it might be phased in as IFQs give
    them a chance to escape low prices and depressed earnings.
        Whatever you do, I respectfully urge that you do not make
    it too complicated. The Gulf's red snapper fishery; the
    controversy here is going to be in getting to the details of a
    program; the program design and in putting together a deal to
    make the transition from one management strategy to the next.
    It will require a substantial amount of work at the regional
    level. Congress has written national standards, conservation
    and management goals that enjoy broad public support. With IFQs
    back in the fishery management tool box, it should hold the
    Gulf Council and Federal managers responsible for identifying
    and improving regulations that are working and eliminating
    harmful ones and for getting a fair return on the taxpayers'
    dollar.
        Mr. Chairman, that concludes my testimony. Thank you for
    the opportunity to testify.
        [The prepared statement of Mr. Emerson follows:]

     Statement of Peter M. Emerson, Senior Economist, Environmental Defense

        Thank you for the opportunity to testify today on reauthorization
    of the Magnuson-Stevens Act, and individual fishing quotas (IFQs)
    1 in particular. I work for Environmental Defense in Austin,
    Texas. We are a public interest group dedicated to protecting the
    rights of all people to clean air and water, healthy food and
    flourishing ecosystems. We have more than 300,000 members worldwide,
    including 38,000 members living in states bordering the Gulf of Mexico.
        I will use this opportunity to urge you to strengthen the Act by
    lifting the moratorium on implementation of new IFQ programs. Putting
    IFQs back in the Federal fishery management tool box, so that they can
    be fairly considered and adopted where appropriate, is an important
    step in achieving the nation's fishery conservation and management
    goals.
        I will support my recommendation by using experiences from the Gulf
    of Mexico reef fish fishery to demonstrate the need for IFQs and
    suggest ways of addressing legitimate concerns.
        Introducing a system of secure and tradable IFQs in the reef fish
    fishery could deliver substantial economic returns. Conservative
    estimates point to higher dockside prices producing additional revenues
    of 46 percent for red snapper, and fleet harvest cost savings of 55
    percent. By altering fishing practices and reducing bycatch waste, IFQs
    could also ``save'' 1.8 million fish each year to speed rebuilding of
    an overfished stock. These potential outcomes demonstrate that good
    fishery management really does benefit the economy and the environment.
    End the legislative paradox
        The Magnuson-Stevens Act holds the Federal Government, and eight
    regional councils, responsible for the conservation and management of
    publicly-owned fish stocks found in the Exclusive Economic Zone.
        Major objectives of the Act--such as preventing overfishing,
    encouraging efficient use of resources, minimizing bycatch mortality,
    promoting safety at sea, and increasing benefits to the nation--have
    been set forth by the Congress in ten National Standards. The National
    Standards commit Federal managers and regional councils to use the best
    scientific information available to achieve these and other broadly-
    accepted fishery conservation and management goals on behalf of all
    U.S. citizens.
        Unfortunately, Federal managers' efforts to satisfy the National
    Standards are impeded by a four-year moratorium that Congress placed on
    the adoption of new IFQ programs starting in 1996, 2 and
    subsequently extended to October 1, 2002. 3 Without this
    important management tool, fishermen are forced to make decisions--
    often prompted by fishery regulations themselves--that exacerbate
    overfishing and bycatch waste and inevitably lead to inefficiency and
    financial hardship, increase risks at sea, and create inequities among
    fishermen and coastal communities in direct violation of the National
    Standards.
        It is past time to end this legislative paradox. By lifting the
    moratorium, Congress will allow Federal managers and regional councils
    to once again have the option of using IFQs in comprehensive fishery
    management plans designed to achieve the National Standards.
    Introducing new IFQ programs where they are needed, but are now
    prohibited, will contribute to the conservation and sustainable use of
    ocean fisheries. It will also provide fishermen and managers in these
    fisheries opportunities equal to those in three Federal fisheries
    successfully using IFQ programs.
        Finally, it is significant that the eight regional fishery
    management councils have each recommended to Congress that the IFQ
    moratorium be lifted; 4 that the National Research Council,
    in its report on IFQs mandated by Congress, concluded that IFQs should
    be allowed as a fishery management option; 5 and that
    President Bush while serving as Governor of Texas, asked Senator
    Hutchison and Congressman Ortiz to ensure that the moratorium expires.
    (Governor Bush's letter on this matter is attached to my testimony.)
    Recently, the President's fiscal year 2003 budget proposes that
    reauthorization of the Magnuson-Stevens Act include authority to
    establish transferable fishing quota systems.
    Provide help where it is needed
        The Gulf of Mexico reef fish fishery is a prime candidate for an
    IFQ program.
        There is general consensus that a limited-entry program (based on
    vessel permits and licenses, annual quotas, long season closures, per-
    trip catch limits, and minimum size limits) has failed to achieve the
    goal of rebuilding depleted reef fish stocks and has created conflicts
    among fishermen, unfair conditions and economic hardship, and
    intractable problems for Federal managers.
        The Gulf of Mexico reef fish fishery is a complex of bottom-
    dwelling species consisting of snappers, groupers, triggerfish,
    amberjacks, and a host of others. Red snapper, the highest-value reef
    fish in the Gulf, were designated as overfished in 1988. Since then,
    Federal authorities have listed six other reef fish species as
    overfished and/or undergoing overfishing. 6
        In recent years, commercial fishermen have landed about 4.7 million
    pounds of red snapper annually producing $10.2 million in dockside
    revenue in 2000. About 430 commercial vessels participate in the red
    snapper fishery, but it is estimated that only one-fourth of the
    vessels accounts for 90% of the catch. Red snapper are also very
    popular with sport fishermen, who take more than 20 million trips each
    year and take home about 4.5 million pounds.
        The Gulf of Mexico Reef Fish Management Plan, adopted in 1984,
    relies heavily on an annual total allowable catch (allocated 51% to the
    commercial sector and 49% to the recreational sector) and season
    closures. Season closures create a destructive race-for-fish and market
    supply gluts that have cost commercial red snapper fishermen millions
    of dollars due to depressed prices. As profits fall, fishermen have few
    alternatives but to intensify the race which causes even the most
    experienced captain to inadvertently waste fish. Others are forced to
    lobby the Gulf Council and Federal managers to boost the annual catch,
    even though they recognize that stocks are overfished.
        The threat of shorter seasons and worsening market gluts caused
    fishery managers to implement ever-more complex rules--such as per-trip
    catch limits and 10-day mini-seasons during spring and fall months--to
    slow the race. But, instead, these rules have encouraged excess effort,
    which has driven up fleet harvesting costs and damaged fish stocks. In
    the recreational sector, rising minimum size limits used to extend the
    fishing season cause sportsmen to waste fish, while season closures
    during the lucrative winter months hurt coastal businesses that serve
    fishermen and families. Gulf fishery managers, succumbing to mounting
    pressure among dissatisfied commercial and recreational fishermen, have
    maintained a total allowable catch significantly higher than a
    biologically safe level recommended by scientists.
        Captain Felix Cox, a 20-year veteran of the red snapper fishery,
    summarizes his experience in the derby--``This all-out race is driving
    me to financial ruin, and causing me to waste more fish than I can
    count.'' In a few words, Captain Cox has described ``a race to the
    bottom'' driven by flawed regulations.
        Loss of vessels and at-sea rescues of fishermen in hazardous
    weather are also linked to derby fishing and season closures. On April
    2, 2001, the fishing vessel Wayne's Pain sank in bad weather, 85 miles
    off Marsh Island, Louisiana. Captain Wayne Werner and his crew spent
    nine hours adrift in a life raft in ten-foot seas before being rescued.
    According to Captain Werner, ``I wouldn't have been out there, except
    the derby was on.''
        Fishermen, Federal managers, and others recognize that the current
    limited-entry program has had dire economic and environmental
    consequences. The Gulf Council tried to respond. It proposed, and
    Federal regulators approved, a transferable IFQ program for the
    commercial red snapper fishery to begin on April 1, 1996. 7
    However, this action was blocked when Congress imposed the moratorium
    on new IFQ programs. Since adoption of the moratorium, management
    problems caused by the race-for-fish and excess capacity have worsened
    for red snapper and similar problems have developed in other reef fish
    fisheries.
        Economic benefits. Research by Drs. Quinn Weninger and James
    Waters, using 1993 data, finds that replacing the existing limited-
    entry program in the red snapper fishery with a transferable IFQ
    program would have increased annual red snapper revenue by $3.1 million
    (i.e., by eliminating market gluts caused by periodic season closures)
    and reduced annual fleet harvesting cost by $3.2 million (i.e., by
    eliminating per trip catch limits and periodic season closures).
    8 These estimates imply a 46 percent gain in red snapper
    dockside revenue and a 56 percent reduction in fleet harvesting cost in
    1993. The researchers conclude that revenue gains and cost savings of
    this magnitude were likely available throughout the duration of the
    limited entry program if fishermen had been granted IFQs.
        Since derby management began in 1992, commercial fishermen have
    landed 36.1 million pounds of red snapper worth $70.3 million. If an
    IFQ program had been used to allow fishermen to land their catch more
    evenly throughout the year, it is likely they could have earned
    additional revenues of at least $38 million over the 10-year period.
        Considering changes that have occurred in Pacific Northwest halibut
    and other IFQ fisheries managed with transferable fishing permits,
    these economic estimates are judged to be conservative because they do
    not account for new marketing and harvesting practices that will emerge
    under slower-paced fishing. Yet, they clearly support the claim that
    IFQ management deserves serious consideration in the Gulf of Mexico
    reef fish fishery.
        Conservation benefits. Although generally thought of as an economic
    policy tool, transferable IFQs can also deliver important conservation
    benefits. Such benefits are tied to setting a sustainable total
    allowable catch, ending the race-for-fish, reducing excess fishing
    capacity, eliminating minimum size limits, and creating a positive
    stewardship incentive.
        Ending the race-for-fish, extending fishing seasons, and
    eliminating minimum size limits can reduce the bycatch waste that
    occurs when red snapper are caught out-of-season or below the legal
    size limit. Current derby restrictions force fishermen to throw
    overboard huge numbers of fish even though a high proportion die as a
    result of being brought to the surface from great depths. National
    Marine Fisheries Service data conclude that about 50% of the
    recreational and 30% of the commercial red snapper caught (by number)
    have been released annually in recent years because they are below the
    minimum size limit. This means that the number of red snapper thrown
    overboard each year because they are too small could drop by 1.5
    million fish or more under IFQ management. In addition, another 0.3
    million red snapper that Federal scientists estimate are thrown
    overboard annually during long closed seasons by recreational fishermen
    could be saved if seasons were extended. 9
        Closed seasons and excess fishing capacity places additional
    fishing pressure on other reef fish species. For example, greater
    amberjack have been driven to an overfished condition and vermillion
    snapper are headed in the same direction. Under IFQ management, ending
    long season closures will eliminate the incentive to apply intense
    pressure on other reef fish stocks when target species are off limits.
    Furthermore, with IFQs back in the toolbox, fishery managers can find
    ways to manage closely related reef fish species under a comprehensive
    quota-based program and avoid being forced to adopt regulations for
    individual stocks that will result in yet another race-for-fish.
        Finally, a total allowable catch based on sound science is a strong
    conservation tool. A transferable IFQ program may strengthen the
    stewardship ethic of fishermen if they believe the value of their quota
    shares will rise as fish stocks recover. Thus, fishermen may support
    conservation measures including lowering the total allowable catch in
    the short-run if they anticipate long-run gains in the form of larger
    stocks and greater profits from fishing.
        IFQ advisory panel. In an appropriations bill rider passed in
    December 2000, Congress gave the Gulf of Mexico Fishery Management
    Council the opportunity to ``develop a biological, economic and social
    profile of any fishery under its jurisdiction that may be considered
    for management under a quota management system, including the benefits
    and consequences of the quota management system considered.''
    Responding to this opportunity, the Gulf Council appointed a special ad
    hoc IFQ advisory panel for the reef fish fishery, and a first meeting
    of the panel is scheduled for March 18th. Motivated by a continuous
    decline in their fishery, several fishermen have already prepared a
    working paper on IFQ issues and options 10 and requested
    that an expert IFQ consultant be hired by the Gulf Council to assist
    the panel. 11
        Certainly, the panel will benefit from taking advantage of the work
    expended in developing the 1996 IFQ program for the commercial red
    snapper fishery. A lot of effort went into structuring a program--
    decisions were made on eligibility requirements, initial allocation of
    quota, transferability, duration of the program, and record-keeping--
    based on information obtained before the commercial fishery was
    distorted by extreme derby conditions. Capitalizing on this experience
    will help jump-start a new IFQ proposal, but this time it will need to
    be extended to other reef fish to avoid redirecting fishing effort and
    creating new derbies and perhaps to party and charter boats in the
    recreational fishery.
    Respond to legitimate concerns
        The legislative paradox discussed at the beginning of my testimony
    reflects the fact that IFQs--and other types of limited entry
    programs--evoke considerable concern due to the privileges they create,
    the possibility of providing windfall benefits to recipients, and the
    potential for decreasing employment and changing prevailing economic
    relationships with buyers and processors, input suppliers, and fishing
    communities.
        In response to these concerns, Congress needs to develop a sound
    national policy on IFQs. Such a policy would provide maximum
    flexibility for the regional councils, but foster a deliberate strategy
    capable of introducing IFQ programs (to regulate fishing effort) and
    simultaneously addressing objectives for conservation, fishing
    businesses and communities, and a region's culture.
        Fortunately, work on a national policy for IFQs is already well
    underway. The 1996 amendments to the Magnuson-Stevens Act provide a
    statutory definition stating that an IFQ is a Federal permit and if it
    is revoked, or revised, such action will not give rise to a valid
    taking claim under the U.S. Constitution. This means that Federal
    managers can consider and adopt a full range of conservation and
    management options without triggering a financial burden. It also
    preserves important characteristics of ``property'' that enables IFQs
    to be transferred and used as collateral. The Act also requires
    programs to ensure a fair initial allocation of quota, to prevent
    excessive consolidation of quota shares, and encourages regional
    councils to ensure that entry-level fishermen, small vessel owners and
    crew members have an opportunity to purchase quota shares.
        Congress should take the next step and complete the work on setting
    a national policy that will assure that new IFQ programs achieve the
    fishery conservation and management objectives in the National
    Standards. Amending the Magnuson-Stevens Act in three ways could do
    this.
        First, to strengthen the stewardship incentive, Congress should
    allow IFQ holders to bring civil action against private individuals
    whose unlawful actions harm the value of quota shares. Fishermen need
    to have assurances that their quota shares are secure and defensible
    from damage by individuals. Otherwise, a positive incentive to conserve
    stocks and manage the asset value of the fishery is undermined.
        Second, to help IFQ programs achieve their objectives, Congress
    should remove the three percent cap on fees collected from fishermen to
    help cover the costs of monitoring and enforcement. Under an effective
    IFQ program, fishermen can realize greater returns from fishing, but
    good enforcement and data collection are necessary for successful
    management. For example, the Gulf Council estimated that net economic
    benefits of its 1996 IFQ program for red snapper would be 22 percent
    higher under a ``high enforcement'' versus a ``minimum enforcement''
    scenario. In addition, high quality biological, economic, and social
    data help managers make better decisions and ensure that stocks achieve
    their optimum yield. Because enforcement and data collection are key
    components of successful management, it makes sense that fishermen
    should help cover these costs. Such a cost recovery requirement might
    be phased-in as IFQs give fishermen a chance to escape the low prices
    and depressed earnings of derby fishing.
        Third, to make sure that IFQ programs (and all other management
    programs) are achieving their objectives, Congress should require
    regional councils to regularly review and evaluate the benefits and
    costs of their programs. This will provide information needed to
    identify and improve regulations that are working and eliminate harmful
    ones. In addition, Congress should also require a periodic review and
    rigorous evaluation of council programs by an independent body.
        After watching the derby develop in the red snapper fishery, the
    Gulf Council devoted three years to sponsoring workshops, developing
    options papers, and holding public hearings before ultimately
    submitting an IFQ program to the Secretary of Commerce for approval and
    implementation. The experience gained debating and drafting the program
    leads many people to believe that most concerns related to IFQs (and
    other fishery management tools) are best addressed at the fishery and
    regional level and with broad regional stakeholder participation. Here
    in the Gulf of Mexico, there is a hope that Congress will continue to
    support decentralized planning and decision-making, giving the regional
    councils and Federal managers the authority and flexibility needed to
    do the job.
                                     ______

        [Attachments to Mr. Emerson's statement follow:]
        [GRAPHIC] [TIFF OMITTED] T7639.004

        [GRAPHIC] [TIFF OMITTED] T7639.005

        [GRAPHIC] [TIFF OMITTED] T7639.006

        Mr. Gilchrest. Thank you, Mr. Emerson.
        Mr. Spaeth?

         STATEMENT OF ROBERT SPAETH, SOUTHERN OFFSHORE FISHING
                              ASSOCIATION.

        Mr. Spaeth. Good morning, Mr. Chairman. Thank you for
    inviting me to testify today. My name is Robert Spaeth. I am
    the executive director of the Southern Offshore Fishing
    Association. I represent almost 100 offshore vessels.
        If it OK, Mr. Chairman, I am going to use the term ITQ, for
    unless the individual fishing quotas are transferable, there
    will be no support for this concept from our industry. I am
    also making the assumption that ITQs will only be available to
    commercial fishermen who can prove historical participation in
    the fisheries and that ITQs could never be purchased or owned
    by somebody who would not use them.
        ITQs could be workable in fisheries with adequate
    scientific, economical and social information available. On its
    face, it sounds reasonable to assign a quota to a fisherman or
    a fishing vessel and then let the person decide when the best
    time to go fishing. The fisherman would not have to go out in
    bad weather, and he could set his dates where the markets were
    the highest and become more financially secure.
        But there are some major problems. It is not necessarily
    the first step to stopping the overcapitalization. The ITQs
    need to be predisposed by a license limitation system and then
    give the people a time to create a history that are going to be
    in the fishery. ITQs have been proposed for the red snapper
    fishery. I was a member of the Gulf of Mexico Fishery
    Management Council's refish advisory panel at that time. We
    went through a long and arduous process to evaluate the
    proposed program. Most fishermen were against ITQs at the time,
    and many of them still are.
        The main problems were that fishermen and dealers did not
    know what an ITQ really was, how they worked or what effect it
    would have on their small businesses. There was still mistrust
    of NMFS and the fishery management councils because the
    membership of the council is oriented toward recreational
    fishermen. The commercial fishermen knew that they could not
    get a fair shake from the council or NMFS during that period.
    The Gulf Council membership category is still imbalanced and as
    bad as it has ever been since the council was created in 1976.
        In a 2001 NMFS study, there were seven recreational and
    four commercial. It is worse in 2002, with the breakdown being
    eight recreational and three commercial. The fishing industry
    would be foolhardy to trust its future to a council that is
    unbalanced.
        The first step that we would suggest in developing ITQs
    would be to ask the industry or the particular participants
    affected whether they want it; let them participate in the
    development of it, and when it is completed, to ratify it and
    then put it into action. The red snapper industry appears to be
    ready for an ITQ system. They have had limited entry for
    awhile, and they have had time to develop their histories.
        The cost: the cost of paying for an ITQ system from the
    industry could be a problem. No. 1, almost two-thirds of the
    vessels cannot afford insurance. The complex regulations and
    low wages added a loss to many qualified skippers and crew
    members. The Government cost of implementing and enforcing an
    ITQ program given time should not be any greater than the
    current system and may actually be less. Existing technology is
    sufficient for timely accounting of harvest as the number of
    entries involved in the fishery decreases due to consolidation
    of shares among the professional fishermen. Compliance will
    increase, thus reducing the need for greater enforcement costs.
        The duration of an ITQ program should continue for
    perpetuity and only cease by the Federal Government through the
    purchase of existing shares. If the research suggests such a
    risk of collapse that the quotas would be reduced to zero, then
    the direct harvest would cease. If the cessation of fishing
    existed long enough, say, after 5 years, the Government felt
    that no fishing should be allowed in the foreseeable future,
    the existing shares should be purchased at a reasonable price.
        Many of the fishermen do not really want to go to ITQs, but
    due to the overbearing regulations, derby-style fishing and low
    prices caused by these regulations, they see an ITQ as a way to
    survive. The people who do not qualify for the ITQ permits
    would not support the program.
        Individual impacts on communities: and I think in the
    short-term, there will be some consolidation of jobs and
    participation, but in the long run, I think that the benefits
    will be great.
        In conclusion, Mr. Chairman, this is a legitimate
    discussion that should take place on setting up an ITQ program
    for red snapper but not until a balance of the membership,
    which should include an environment spot, can be obtained.
        I will be glad to answer any questions.
        [The prepared statement of Mr. Spaeth follows:]

     Statement of Robert A. Spaeth, Executive Director, Southern Offshore
                              Fishing Association

        Good Morning, Mr. Chairman:
        Thank you for inviting me to testify today.
        My name is Robert Spaeth. I am executive director of the Southern
    Offshore Fishing Association (SOFA), a 501 (c) (6) non-profit
    organization representing almost 100 offshore fishing vessels. Neither
    I nor the organization I represent have ever received a government
    grant in the 25 years of SOFA's existence.
        If it's okay Mr. Chairman I am going to use the term ITQ's for
    unless the individual fishing quotas are transferable there will no
    support for the concept. I am also making the assumption that ITQ's
    will only be available to commercial fishermen who can prove historical
    participation in a fishery and that ITQ's could never be purchased or
    owned in any form by a recreational fisherman.
        ITQ's could be workable in fisheries with adequate scientific,
    economic and social information available. On its face it sounds
    reasonable to assign a quota to a fisherman or fishing vessel and then
    let that person decide when is the best time to go fishing. The
    fisherman would not have to go out in bad weather because the opening
    of the season is set on a specific date. The fisherman could also wait
    for markets to firm before bringing his allotted fish to shore. The
    fisherman might be more financially secure than in open access as long
    as the resource was sustainable. But there are major problems.
        Given the recent history of single species management that has
    resulted in a virtual dismantling of once thriving multi-species
    industries, ITQs should not be used, necessarily, as the first step in
    addressing overcapacity. If may be more prudent to first put a
    moratorium on new entrants into a particular fishery, followed by a
    license limitation program and establish a harvest threshold that could
    into an ITQ program after a period of stabilization within the fishery.
        ITQ's have been proposed for the red snapper fishery. I was a
    member of the Gulf of Mexico Fishery Management Council's Reef Fish
    Advisory Panel at the time. We went through a long, arduous process to
    evaluate the proposed program. Most fishermen were against ITQ's at
    that time and many of them still are.
        The main problems were the fishermen and dealers didn't know what
    an ITQ really was; how they worked or what affect they would have on
    their small businesses. There was and still is mistrust of NMFS and the
    Fishery Management Council because the membership of the Gulf Council
    is oriented toward recreational fishing. The commercial fishermen knew
    they could not get a fair shake from the Council or NMFS during that
    time period. The Gulf Council membership category is still unbalanced
    and is as bad as it has ever been since the Council was created in
    1976.
        In a 2001 NMFS study there were 7 recreational and 4 commercial. It
    is worse in 2002, with the breakdown being 8 recreational to 3
    commercial. We thought Congress had mandated a balance but it just
    isn't working in our region. Therefore, our major concern is who is
    going to be the lead agency in an ITQ program? The Gulf of Mexico
    Fishery Management Council would be the logical choice but the industry
    couldn't recommend that until the imbalance of membership issue is
    resolved. The fishing industry would be foolhardy to trust its future
    to Council members who are trying to ban as much commercial fishing as
    possible during each Council meeting.
        Red snapper and grouper fisheries are too volatile to even bring
    the users together at this time. I know the Committee doesn't wish to
    listen to regional horror stories but the way the management process is
    being manipulated to ban one segment of the commercial red grouper
    fishery is nothing short of vindictive and vicious. If the red grouper
    longline fishermen are banned from fishing litigation is sure to
    follow.
        At present the red snapper total allowable catch is almost equally
    divided among the recreational and commercial sectors. All red snapper
    are caught with hook and line so there are not any gear conflicts
    within the commercial sector. However, in the recreational sector, the
    for hire charter boats now take over 65% of the allowable recreational
    red snapper quota which keeps squeezing the season to fewer and fewer
    months. This restriction will last as long as the bag limit remains at
    5 red snapper per person for recreational fishermen.
        The first step in developing ITQ's would be to meet with and ask
    the industry if they think it is the right management tool for their
    fishery? Then a working group could develop a program and present it to
    the industry for approval. If it was approved then action should be
    taken. I have no problem with that.
        The reason I make this statement is red snapper appears ready to
    try ITQ's. The number of permits was reduced years ago so the red
    snapper fishermen have had time to build individual historical records
    on their catches. This historical record must be the basis for
    transferable individual quotas. Other Gulf fisheries have been
    regulated dramatically pushing fishermen back and forth on different
    species. This puts those fishermen at a disadvantage and they would not
    be in the same position as the red snapper fishermen at this time so
    those fisheries would probably want to wait.
        Example: Many fishermen who were fishing for grouper were urged by
    NMFS to fish for sharks. NMFS helped develop a shark fishery and then
    had a policy shift. Now NMFS has already cut the shark quota by 50% and
    some of the more active folks in NMFS want to cut even more. Those
    fishermen who started shark fishing and had to return to grouper lost
    some of the historical landings they would have had.
        An ITQ program for grouper might work if you limit the permits and
    give a reasonable amount of time to those left to develop a history.
    There are 1200 reef fish permits issued by NMFS in the Gulf of Mexico.
    Over 500 of these permits have no landings at all. If a 5,000-pound
    annual catch threshold was required for a permit there would only be
    approximately 300 vessels left in the fishery. This one action would
    decrease latent harvest potential to near zero.
        Initial Allocations: Historical landings remain the most objective
    and fairest means for allocating initial quotas. An upper limit on the
    percent of the total shares a single entity can own might be helpful to
    prevent over-consolidation and to protect the social structure of the
    fishery. A minimum quota share could be given to historical fishermen
    without recent landing or to those that have recently entered the
    fishery and have no history of landings. The devil is certainly in the
    details.
        Windfall profits: This may occur in some fisheries where the volume
    and profits are high but in a fishery that lands $ 2.20 a pound fish
    and the average profit is 20 to 30 thousand dollars a year if you don't
    carry boat insurance, would there really be a windfall profit if the
    quota was close to what had been produced in the past? I think that the
    value of the ITQ will be determined by what you can earn under a
    fishing system that is not classified as a ``derby'' fishery. The
    existing fishermen have invested heavily into developing the fishery
    resources that have provided a significant contribution to the nation's
    economy. These investments have been done at great risks and with
    little rewards, largely because the government has waited to such a
    late date to begin direct effort management. Economic theory clearly
    teaches us that the existing fisheries are operating at a net zero
    profit margin. Such a ``windfall'' profit to existing fishermen is
    nothing more than a barely adequate and belated return on their initial
    investment efforts. ``Windfall'' profits would be of concern if the
    initial allocations were made to non-traditional fishermen. We feel
    that this is a non-issue in most Gulf of Mexico fisheries. What is
    wrong with people seeing a profit from hard work and investment in the
    fishery? Concern over the ``windfall'' profits that may accrue to
    initial recipients is misplaced
        Impacts on conservation: This is the same as quota management and
    the results will be the same. It will cap the harvest level and if a
    further reduction or increase is required it should be done as a
    percentage across the board. It would be expected that eventually, the
    majority of the shares would be held by the more professional,
    conservation minded individuals in the fishery. ITQs are not a panacea
    for preventing overfishing but they broaden the scope of tools
    available to managers and may be helpful in directly resolving
    overcapacity concerns.
        Costs: This is a touchy subject with the fishermen. In some
    fisheries the people and business are on the edge financially. An
    assessment of the industries ability to pay must be considered. I would
    like to make a point here, The fishing industry in the gulf of Mexico
    is in big trouble as over 2/3 of the vessels cannot afford insurance.
    The complex regulations and low wages have added to the loss of many
    qualified skippers and crewmembers. To hire a captain for my boats, I
    have to find someone who can identify 50 species of fish, know what
    size is allowed, where they can fish, when and how many fish you are
    allowed per species. If you make a mistake the fines are unbearable. To
    make a long story short if you add up the Coast Guard and fisheries
    regulations coupled with seamanship and knowing how to fish this person
    is going to make more money staying home. We suggest that someone help
    determine the state of our seafood harvesters and help us in training
    new fishermen.
        The governmental costs of implementing and enforcing an IFQ
    program, given time, should not be any greater than the current system
    and may actually be less. Existing technology is sufficient for timely
    accounting of harvests. As the number of entities involved in the
    fishery decreases due to consolidation of shares among the more
    professional fishermen, compliance will increase, thus reducing the
    need for greater enforcement resources.
        If the industry is to be taxed at some future date when the ITQ
    program is viable to cover some of the management costs, then a better
    co-management system needs to be developed between industry and the
    government. First of all, the monies should be held in trust funds
    targeted toward management and research of the ITQ fishery. Secondly,
    an improved co-management structure is needed to empower the industry
    to set appropriate management objectives and to have the government
    more accountable to the industry with regard to expenditure of industry
    funds and the setting of management and research agendas. The present
    system of advisory panels to the Councils is inadequate for the needed
    purposes.
        The duration of an ITQ program should continue for perpetuity and
    only be ceased by the Federal Government through the purchase of
    existing shares. If a resource were at such risk of collapse that the
    quota was to be reduced to zero then direct harvest would cease. If the
    cessation of fishing existed long enough, say after five years, and the
    government felt that no fishing should be allowed in the foreseeable
    future then the existing shares should be purchased from the fishermen
    at a reasonable market price.
        Many of the fishermen don't really want to go to ITQ's but due to
    the overbearing regulations, derby style fishing seasons and low prices
    caused by these regulations, they see ITQ's as a way to survive. The
    people that cannot qualify for and ITQ permit would not support the
    program.
        Should processors receive quota shares? We do not have processor
    type vessels in the Gulf of Mexico fisheries and so processors should
    be not given initial quota shares. The bigger question is whether
    processors, or other non-fishermen, should be allowed to own and fish
    quota shares. Shares could be limited to vessel owners, captains, and
    crew to assure that traditional fishermen are provided priority in
    participating in the fishery. We would not want to encourage the
    ownership of quota shares by entities that are neither fishermen nor
    fishing vessel owners.
        Impacts on individuals and communities who do not receive ITQs. The
    impacts on individuals who do not receive initial ITQs depend on how
    the initial allocation is conducted. If the initial allocation were
    based on historical landings with a certain level of guaranteed
    allocation for all participants the initial impact would be minimal.
    Any allocation method that does not use historical landings or
    participation in a fishery would have immediate negative impacts on
    both individuals and communities. The overall impact of ITQs on
    communities could be negative in the short-term if dockside businesses
    were forced to consolidate due to reductions in the number of fishing
    vessels but in the long-term the community impact should be positive as
    fishing firms become more profitable and increase their local business
    transactions. Greater unemployment could occur in some coastal
    communities as employment in the fishery is reduced, depending on the
    magnitude of share transactions. However, it is hard to imagine that
    ITQs would have substantial negative impacts on most of the Gulf's
    coastal communities because these same communities have already had
    their traditional commercial fishing social structure severely
    disrupted by the various state regulations restricting the traditional
    inshore net fishing businesses.
        In conclusion Mr. Chairman, there is legitimate discussions that
    should take place on setting up and ITQ program for red snapper but not
    until the balance of membership, which should include an environmental
    spot, can be attained.
        I will be glad to answer any questions.
                                     ______

        Mr. Gilchrest. Gentlemen, they just called for another
    vote, so I could get started with the questions and then have
    to leave and then come back. I think what I will do is I will
    run over; I will run back; we will take a 10-minute break. I
    will try to get here in 10 or 11 minutes. You can time me.
        [Laughter.]
        Mr. Gilchrest. So we will take a short recess. I will be
    right back.
        [Recess.]
        Mr. Gilchrest. The Subcommittee will come to order. At
    least later on in the afternoon, there are more seats.
        Let us see. Mr. Jensen, I think we will start with the
    council's role in IFQs. Dr. Hogarth seemed to imply, and Mr.
    Emerson and Mr. Spaeth, feel free to comment on this question
    as well. Dr. Hogarth seemed to imply that the IFQs work well in
    certain areas and may not work in other areas and that the
    councils probably are in the best position to develop the IFQ
    system for that fishery. And Pete, I would just like to know
    how you feel on that; how much tinkering should be done; should
    we set standards with a broad parameter so that if--and when
    October comes around, and the moratorium lapses, and let us say
    the Senate does not act on a Magnuson Act, and we have not
    reauthorized it; would you like the moratorium to continue or
    for the moratorium to lapse?
        Mr. Jensen. Well, I do believe that Congress has to set
    forward the broad policy and the broad standards, because there
    are going to be a lot of variations in the different regions of
    the country, simply because the fisheries have developed in
    many, many different ways. You are also going to have a pretty
    complex situation, where if there is a large recreational
    fishery; if there is a multispecies fishery; if there is by-
    catch involved, all of those things are going to add to the
    complexity and the individuality of the kind of regimes that
    are going to have to be set up. And I think the councils are
    certainly the best forum for that.
        Thinking in the alternative as to what other forum is out
    there, and I do not think there is another one, because they do
    involve the fishermen. And having been a council member, I know
    that council members try very hard and work very hard to work
    out solutions to some sometimes impossible tasks, but they do
    get the job done and in many cases in association with the
    commissions, because there very often are fisheries that exist
    both inside and outside the three miles.
        And so, I believe councils, commissions are the appropriate
    forum to work out IFQs.
        Mr. Gilchrest. Mr. Emerson, Mr. Spaeth?
        Mr. Emerson. Thanks.
        Mr. Chairman, I certainly agree that this job has to be
    done at the council level. I think that you are in a position
    to design, and you have already started building in the
    Magnuson-Stevens Act, you have already started building a
    national policy to guide the use of individual fishing quotas.
    You can do a few straightforward things and get this job done.
    And definitely, I think they should be available after October
    1. Just thinking back to this example that I gave you from the
    red snapper fishery, withholding and not allowing us to go
    forward there, look at the penalty that you are imposing upon
    fishermen in terms of the lost income. Look at the
    environmental damage that is coming down the road as a result
    of not getting started with this tool.
        So definitely, we need to make progress.
        Mr. Gilchrest. Mr. Emerson, some of us have the impression
    that the moratorium on IFQs is as a result of the red snapper
    fishery. Is that true, and if it is true, could you tell us
    what happened?
        Mr. Emerson. I would actually like to defer that question
    to Bob Spaeth if he takes it, the reason being that Bob was on
    the Gulf Council at that time.
        Is that fair, Bob?
        Mr. Spaeth. I can--
        Mr. Gilchrest. Yes, sir?
        Mr. Spaeth. --give you my opinion. I do not have any facts
    but--
        [Laughter.]
        Mr. Spaeth. But it was only hearsay in the back room.
        Mr. Gilchrest. Then you are acting like a Member of
    Congress.
        [Laughter.]
        Mr. Spaeth. The question you wanted to know was if the red
    snapper was a result of the moratorium on the ITQ. I believe it
    was.
        Mr. Gilchrest. Yes.
        Mr. Spaeth. I think it was the only thing going. I think
    that a number of people from different Gulf Coast states got
    involved with the Congress, and what resulted was the
    moratorium. And that was to stop the ITQ system on red snapper.
        Mr. Gilchrest. At the time, were you in favor of the
    moratorium?
        Mr. Spaeth. Yes.
        Mr. Gilchrest. Would you be in favor of a further
    moratorium if we do not reauthorize the Magnuson Act, or would
    you like to see it lapse?
        Mr. Spaeth. I think that what I would like to see is the
    Congress, when you reauthorize, put some general rules for an
    ITQ and then drop the moratorium. I just think dropping it
    without first putting some guidelines in there might not be too
    good.
        Mr. Gilchrest. I see.
        Mr. Spaeth. And on the other issue that you asked about was
    whether the regional councils should be the one to do the ITQs.
    I absolutely think that they should, because, No. 1, they have
    had a lot of experience dealing with those particular fishes in
    those fisheries, and they understand a lot of the regional
    differences, but as in my testimony, I said what my big fear is
    is that the balance of the councils have to be there before we
    can undertake this, or we are not going to get the results.
        Mr. Gilchrest. And you do not feel the council is balanced
    in the Gulf?
        Mr. Spaeth. No, and there is a NMFS report by NMFS itself
    that states those numbers I gave you: three out of seven; seven
    recreational, three commercial is the imbalance right now.
        Mr. Gilchrest. So you are saying in the reauthorization,
    there should be some specific language dealing with the makeup
    of the council?
        Mr. Spaeth. There is some language in there now, I believe,
    that says that the councils are supposed to be balanced, and
    nobody is doing that. It is just going--the example is the Gulf
    Council, and it has been going on for years.
        Mr. Gilchrest. Getting back to the IFQs, Mr. Spaeth, would
    you recommend that when we reauthorize the Magnuson Act, and we
    end the moratorium on IFQs, and we set the parameters and
    standards for IFQs to be flexible enough to meet the needs of
    the different fisheries, would you recommend that the
    participants in that particular fishery be allowed, through a
    referendum, to vote before the council proceeded with an IFQ,
    and then, once they had an IFQ, would you suggest that those
    participants vote to accept or reject the IFQ that the council
    made up?
        Mr. Spaeth. Yes, yes, I do. I put that into my testimony. I
    think that is a real important item, that the people who have
    to live under it decide, because if their fishery is right for
    it, they would have more of an idea. And to participate in the
    makeup of it, and then, when they get done, I would feel that
    when it came out right, that you would not have any problem
    ratifying it. And I think snapper will be a good one to work
    with.
        Mr. Gilchrest. Mr. Emerson, would you like to comment on
    that? The idea of a referendum?
        Mr. Emerson. Mr. Chairman, you know, in 1996 or in the case
    of red snapper, there is a provision in the statute now that
    requires the two referenda and defines something like a base
    period that would determine your weighted vote. Your catch
    during that base period would determine your weighted vote. So
    the Congress has been, as you were suggesting earlier, pretty
    heavily involved in guiding the red snapper fishery with these
    kinds of things.
        I completely agree with Bob's point that fishermen should
    be indicating their will on this. I wonder if it would not be
    possible to have too many votes. I like the idea of getting a
    good program designed and then having people vote on something
    that they can really see. I am not sure we are disagreeing.
        Mr. Gilchrest. Pete, would you like to see the idea of a
    referendum in other fisheries other than red snapper, a
    referendum for an IFQ or an ITQ? Mr. Jensen?
        Mr. Jensen. I am sorry. I thought you were continuing with
    the questions with--
        Mr. Gilchrest. Oh, two Petes. We have two Petes here. I am
    sorry.
        [Laughter.]
        Mr. Jensen. I am sorry. I am going to assume that when you
    say a referendum, you mean among the licensed fishermen--
        Mr. Gilchrest. Yes.
        Mr. Jensen. --in that fishery. In some cases, that may not
    even include council members, and of course, I guess they would
    vote on their own. I do not know if I like the idea of a formal
    referendum, simply because I am not sure at this point whether
    you are going to be able to include all of the people that are
    going to be impacted by it: processors, communities,
    associations. So in general, I agree that you probably ought to
    try to get a consensus out of the industry that this is the
    right process for them, but I am not sure a referendum with
    votes is the appropriate way to do it and feel assured that you
    have everybody's input.
        Mr. Gilchrest. The last panel, Mr. Crockett made a
    recommendation for a 5-year limit on an IFQ before it is
    reauctioned again and re-evaluated. Do you have any comment on
    a 5-year limit?
        Mr. Jensen. I guess I would start out by telling you that
    at the time the ocean quahog quotas were implemented, I had my
    own concerns about that, but as I have seen how it has played
    out and recognizing what I think an ITQ, in particular,
    transferable quota must be, once they are given, they have
    value. And they become collateral for business deals, for the
    banks, for making a business sustainable. And I think that is
    what the Magnuson Act is all about, and that is sustainable
    commercial fisheries or commercial businesses.
        So I think that probably would impede or diminish the value
    of ITQs if, after 5 years, they essentially lost their value,
    and they may or may not be renewed. And so, I do not think that
    a specific time limit is the way to go. I believe there does
    have to be a mechanism for people to trade them in, to allow
    other people to get into the fishery other than through a
    simple private deal.
        I do not know what that mechanism is, and we would be glad
    to think about it and respond if you would like.
        Mr. Gilchrest. Thank you.
        Mr. Emerson, any comment on a 5-year limit or a limit at
    all? A 10-year limit, any kind of a limit?
        Mr. Emerson. I think a 5-year sunset limit is not a good
    conservation idea.
        Mr. Gilchrest. Mr. Spaeth?
        Mr. Spaeth. I do not think it is either.
        Mr. Gilchrest. Mr. Spaeth, do you have any comment on at-
    sea processors or shore side processors having ITQs?
        Mr. Spaeth. In our region--it is different in other
    regions--I have not--I happen to own part of a processing
    facility also, and I do not see any need for us as processors
    to participate in that. I think the fishermen--because the way
    it works with us, and I think somebody else mentioned it--that
    we put out a price for the fish. We have a service. We sell
    them ice, bait and fuel, and if we do a good job, they will
    sell the fish to us. So I do not see where the advantage for
    having a processor ITQ would work as long as there is enough
    out in the industry.
        Mr. Gilchrest. Should that be left up to the councils to
    make that decision for shore-side processors or at-sea
    processors to participate in an ITQ, or should we say from a
    regulatory standpoint or from a reauthorization standpoint of
    the Magnuson Act, we would say no to processors. Or should we
    leave it up to the councils?
        Mr. Spaeth. I think that you should leave it up to council
    because of the different regions.
        Mr. Gilchrest. OK.
        Mr. Emerson, any comment on shore processors?
        Mr. Emerson. Mr. Chairman, if you just remember from my
    rapid oral testimony, I talked about Mark Frudenberg, who is a
    processor, buyer, wholesaler of fish. The only thing he is
    asking for is year-round fishing. He feels that if we could
    have, in the case of our red snapper fishery, if he could have
    a year-round supply of fresh, high-quality fish, he could make
    more money. So he is not asking for that. I think, you know, we
    came here talking about IFQs because of the race for fish and
    the excess capacity problem, and that is where it should be.
        Mr. Gilchrest. Thank you. Well, those are two areas that we
    continue to keep in mind: the safety aspect and conservation
    aspect of it.
        Just a couple more questions: Pete, and then, I am going to
    ask Mr. Spaeth to comment. The commercial versus the
    recreational fishing industry, IFQs. Should we allow the
    councils to determine in that particular fishery whether or not
    the recreational fishery can participate in IFQs or what
    percentage can participate in IFQs? And also if you are a
    commercial fisherman; and you have an ITQ, can you transfer
    that to a recreational charter boat?
        Mr. Emerson. The first thing that is going to have to
    happen, of course, if you have a total allowable catch is the
    council is going to have to make an allocation decision between
    the two fisheries, recreational and commercial. And in some
    cases, they will probably make allocations between different
    elements of the fishery. For example, if there is a trawl
    component and a hook and line component, then I would guess
    that the councils probably are going to have to make different
    decisions based on the type of fishing that is going on. And in
    some cases, I think there may even be a good argument for an
    allocation to the charter or for-hire sector if it is a large
    component of the fishery.
        My view is that once they have been given this privilege,
    whoever they are, they have the right to enter into a private
    contract with anyone of legal standing. And so, if that, you
    know, if a conservation fund has the legal standing and has the
    willingness and the money to buy up an allocation, then, I do
    not see how you can prevent that.
        Mr. Gilchrest. Thank you.
        Mr. Spaeth?
        Mr. Spaeth. Mr. Chairman, I think that we need to have some
    guidelines on that in the Magnuson Act, because one of our
    fears is that some kind of organization, let us say PETA came
    up and decided they did not want to have any grouper harvested;
    they would buy up all the ITQs and let them sit in the box.
    That would not be right for the consumers, losing his access to
    that fish. Also, if the recreational sector is allowed to buy
    those ITQs, I think we come up with the health problem. We just
    have a new fishery health law. And I think you might run into
    some health aspects by letting them go just wherever.
        Mr. Jensen. Mr. Chairman, one added thought on that, and
    this is based on my experience in Maryland. And I think someone
    mentioned in their testimony, and that is one way you protect
    against that is to require that those who own them fish them or
    contract with--or join with someone else who fishes them. In
    other words, if you have an allocation, you use it. You are not
    an absentee owner, which is what the situation you just
    described I think would be an absentee owner that chose not to
    fish. And so, that is one way that we protected against that in
    Maryland.
        Mr. Gilchrest. Would that be acceptable, Mr. Spaeth? Let us
    say PETA bought up an ITQ, but then, that allocation would have
    to be fished.
        Mr. Spaeth. Yes, as long as--I think the main thing is to
    keep fishermen fishermen, and those fish that we are supposed
    to harvest under the Magnuson Act get into the marketplace. And
    Pete, sounds like a, you know, use it or lose it may be some
    kind of provision to put in there.
        Mr. Gilchrest. Mr. Emerson, who would you say should pay
    for the cost of the administration of the ITQs?
        Mr. Emerson. I think, as I said in my testimony, that once
    the program is delivering results in terms of higher prices and
    higher earnings to the fishermen that the fishermen who are
    beneficiaries of the program should definitely pay a portion of
    the costs. I think, as I tried to say in my oral testimony,
    right now, in the red snapper fishery, for example, where I
    have my best knowledge, people have been hit hard financially
    living with this derby situation since 1992.
        Mr. Gilchrest. So we should not remove the 3 percent cap?
        Mr. Emerson. No, I think you should remove the cap, and I
    think that there should be some guidance presented to the
    councils on how they go forward and administer this policy.
        Mr. Gilchrest. I see.
        One of today's witnesses suggested an auction should be
    used to allocate share to harvesters and the proceeds be used
    to compensate those who may have been economically harmed by
    the initial allocation: crewmen, communities, processors, et
    cetera. Do any one of you want to comment on that?
        Mr. Spaeth. Mr. Chairman, I would--the problem we have in
    some of the fisheries in the Gulf is that they are small. They
    do not have the economic basis to pay for the ITQ program. Red
    grouper harvests 5 million pounds; $2 a pound; $10 million.
    Back, as I remember, when we looked at the snapper ITQ, we
    talked about a $2.5 million cost of administering. Whether that
    is right or not today, I do not know.
        But if you take and put that burden on the fishery, they
    could not handle it. And then, an auction situation, I do not
    know where we would find the money to participate in the
    auction, because this industry is in very dire shape
    financially.
        Mr. Gilchrest. Now, Mr. Spaeth, I would assume that you do
    not want the auction. How would you administer an IFQ, ITQ in
    the Gulf for red snapper. Would shares then to be given to the
    fishermen, to the boat, based on the history?
        Mr. Spaeth. The allocation of the initial quota shares were
    based on historical catch.
        Mr. Gilchrest. Historical catch.
        Mr. Spaeth. Calculated from a base period, yes.
        Mr. Gilchrest. And then, they would have been given--a
    fisherman would have been given that--was it an IFQ, an ITQ?
        Mr. Emerson. It was an ITQ.
        Mr. Gilchrest. ITQ. There was no cost to the fisherman for
    that ITQ?
        Mr. Emerson. No; it was an allocation. It was a historical
    allocation.
        Mr. Gilchrest. How long was the allocation to last?
        Mr. Emerson. The program was to be reviewed after 5 years;
    is that right, Bob?
        Mr. Spaeth. I believe that. It has been a long time.
        Mr. Emerson. But it was not a hard sunset kind of idea.
        Mr. Spaeth. No, it did not sunset.
        Mr. Emerson. We have a refish management plan within which
    that program would be like any other management tool, and it
    should be evaluated like any other management tool. The whole
    plan is aimed at meeting national standards that you already
    have in place. And so, that is how it would be--
        Mr. Gilchrest. And so, would this ITQ system that almost
    went into play and is likely to go into place once we
    reauthorize the act, there was no problem down there of one or
    two or three or four entities, corporations or individuals
    owning the majority of the allocation? It was not a fear of
    consolidation?
        Mr. Spaeth. No, there was not. I think there was a
    provision in there that no one group could own over 10 percent
    of the quotas.
        Mr. Gilchrest. So under the system for red snapper, the ITQ
    would have been allocated to an individual fisherman for an
    indeterminate period of time, but because they could sell,
    transfer those quotas, no one entity could own more than the
    entire--than 10 percent of the entire quota.
        Mr. Spaeth. That is correct.
        Mr. Gilchrest. Interesting.
        Just one last question and a brief comment, I guess, unless
    you do not want to comment. The allocation, the quota, the
    ITQs, the IFQs--let us be specific about ITQs. You are
    allocated an ITQ. Is that a property right or a privilege? Or
    is there a difference?
        Mr. Jensen. Well, I think there is a difference, but I am
    not sure I can define it. And the way I would say it is that if
    you were given a privilege to have a certain percentage of an
    annual quota, what goes with it is the right to transfer that.
    And so, whether there is a cap or not, individual members can
    sign private contracts or individual holders of allocations or
    agreements, which is exactly what has happened in the surf clam
    industry. There are over 160 individual allocations, and
    several statements have been made that might be perhaps not
    entirely clear that three people own 60 percent.
        That is not entirely true. What they might do is control
    it, but it is a voluntary thing, because processors and
    harvesters and harvesters and harvesters have entered into
    voluntary agreements, long-term contracts, for example, just to
    make sure that, one, they have a place to sell their clams at
    some given price and can plan their harvesting business, and
    the processors can have a guaranteed supply of clams in order
    to go make their contracts with the people who get the
    intermediate product that they produce in order to go into
    soups and chowders and all the other things that go into the
    marketplace.
        So those kind of things, I think, are going to happen in
    any industry where you have ITQs. People are going to join
    together to further their own individual interests and make the
    best business out of it that they can.
        Mr. Gilchrest. I would possibly think--and Mr. Spaeth can
    correct me if I am wrong--that he may not want that type of
    consolidation in the snapper industry, where three entities may
    not own but they control about 60 percent of that fishery.
        Mr. Spaeth. That is correct; I would not want any one
    entity I do not think would be right to control 60 percent of
    it.
        Mr. Gilchrest. Or 30 percent.
        Mr. Spaeth. Or 30 or whatever, whatever percentage, you
    know. I think there is a reasonable percentage a company can
    own, and I do not think any company here at the present time
    owns over 10 percent in the Gulf.
        And the other thing about property rights: I feel that the
    people that invested to go out; took the risk, the chance;
    invested their money in these vessels to go harvest these fish
    have shown their ability and their want to go out there, and
    since they have the investment, I believe that they should
    have--maybe not own it, but they should have strong property
    rights.
        Mr. Gilchrest. Thank you.
        Mr. Emerson, leave it there?
        Mr. Emerson. Yes; we are fine. I mean, the act is very
    clear that the IFQ would be a Federal permit, a Federal permit
    that can be revoked or revised and so on and so on.
        Mr. Gilchrest. All right; gentlemen, thank you very much.
    You are all appreciated.
        Mr. Emerson. Thank you, Mr. Chairman.
        Mr. Gilchrest. Our fourth panel will be Mr. Ralph Hoard,
    executive vice-president, Icicle Seafoods; Mr. Paul Seaton,
    commercial fisherman; Mr. Jay Stinson, commercial fisherman;
    Mr. Fred Christiansen, Chairman of the board, Gulf of Alaska
    Coastal Communities Coalition; Dr. Scott Matulich, professor,
    Washington State University; Dr. Robert Halvorsen, professor,
    Department of Economics, University of Washington.
        Gentlemen, thank you very much for coming this afternoon,
    and we appreciate your patience through the duration of the day
    and the interruptions.
        Mr. Hoard, you may begin, sir.

      STATEMENT OF RALPH HOARD, EXECUTIVE VICE-PRESIDENT, ICICLE
                                SEAFOODS

        Mr. Hoard. Mr. Chairman, my name is Ralph Hoard, and I am
    executive vice-president of Icicle Seafoods Corporation,
    headquartered in Seattle, Washington.
        Thank you for the opportunity to testify regarding
    individual fishing quota moratorium and Magnuson Act
    reauthorization. Icicle Seafoods is an Alaska corporation
    founded in 1965. We started with a single salmon cannery in
    Petersburg, Alaska, and have expanded over the years with
    multiple locations, including Petersburg, Seward, Beaver Inlet,
    Bristol Bay, Dutch Harbor, Adak and St. Paul that process
    salmon, crab, herring, halibut, sablefish, cod and pollock.
        In addition to Alaska, we have two processing plants in the
    State of Washington and jointly own the canned salmon labeling
    warehouse in Astoria, Oregon. Although we do own a small number
    of catcher vessels, of the 230 million pounds plus of fish that
    we purchased and processed in 2001, over 85 percent of the ex-
    vessel value was purchased from independent fishermen
    throughout Alaska.
        In order to give you a clear picture of the current
    halibut-sablefish IFQ program, it is appropriate to give a
    brief history of the fishery and how we got where we are today.
    From 1975 to 1978, I was the plant manager of our Seward
    facility, where it was not uncommon for the fleet to deliver
    their catch simultaneously within a three- to 4-day period.
    Many days, we would wake up in the morning to find 3 million to
    4 million pounds of halibut waiting to be delivered.
        To accommodate this volume, we added freezers, cold storage
    capacity, processing lines, dock hoists, icemaking, mess halls,
    bunkhouses, et cetera. And as a result, the Seward plant was
    very efficient and continued to attract boats, because they not
    only knew that their catches would get unloaded quickly, but
    all the other amenities that they needed, like bait, ice,
    supplies, fuel, mechanical help, spare parts, coordination, et
    cetera, crucial to their ability to catch fish were not only
    available but in a quality way.
        This capability to quickly unload one's catch close to the
    fishing grounds, which Seward was, and get back fishing as soon
    as possible helped our fleet's catch records, which became the
    basis to establish their quota share in the current IFQ
    program. With the rapid expansion of independent salmon fleets
    throughout Alaska, many new small local vessels began to fish
    halibut. In order to accommodate this growing number of
    fishermen, we continued to expand our capacity, including
    purchasing a small plant in Homer, Alaska, and building a
    larger freezing cold storage facility there and by providing
    large pickup vessels for remote fishing grounds of Alaska that
    our fleets otherwise would not be able to access.
        The sablefish fishery had a totally different history but
    ended up in the same situation. Back in the mid 1970's, Icicle
    was purchasing 70 to 80 percent of the USA-caught Alaska
    sablefish. Although this was a very high percent, the vast
    majority of the sablefish harvested in Alaska during this
    period was still being caught and processed by foreign fishing
    fleets. This was a very trying and difficult time for both our
    fishermen and ourselves, as it was difficult to get a
    reasonable price for our product, since it was primarily a
    Japanese market, and they were securing most of their product
    needs from their directed fishing efforts in Alaska.
        In 1984, the North Pacific Fishery Management Council told
    fishermen and processors that they would give them until
    September of that year to catch and process the quota, or it
    would revert to foreign fleets, as it had for decades. That
    year, 100 percent of the fish was caught by USA fishermen;
    purchased, processed and sold by USA processors. Market prices
    increased dramatically, providing a new, profitable and viable
    fishery for both fishermen and Alaska processors.
        Once Americanized like halibut, many new participants in
    both the fishing and processing side entered the fishery.
    Seasons that once lasted three or 4 months began to last only
    two or 3 weeks. In addition to our strategically located shore
    plants in the Gulf of Alaska, we invested in processing
    equipment and icemaking capacity on our floating processors,
    which we located in remote areas of Alaska, providing
    additional markets for our fishermen and securing fish that
    both of us otherwise would not have had access to.
        We also modified our operations to make fishermen more
    efficient by accepting ondress fish and refrigerated seawater,
    again allowing our fishermen to build more catching history
    that eventually became their IFQ basis.
        Rationalization of the processing sector through processor
    quotas would give processors the same broad set of economic
    options that halibut-sablefish harvesters employ. Some examples
    are a marginal processor could decide to retire from the
    fishery; sell his quota to another processor or to another
    fisherman that wanted to process and obtain some return on his
    capital investment. A processor could consolidate facilities to
    make more efficient use of his equipment while cutting costs. A
    processor can continue to operate but with greater efficiency
    because of longer seasons and a predictable supply of fish. And
    last, a fisherman could slow down production--a processor could
    slow down production and process more value-added products,
    possibly resulting in greater margins.
        Many fisheries in Alaska are overcapitalized, resulting in
    efficiency losses to the industry. In those fisheries, too many
    boats are chasing the fish; excess processing facilities are
    being operated, and communities have invested in more
    infrastructure than is needed. The result is a fishing industry
    that can catch, process, distribute finished products in a
    short period of time, leaving all of the capital facilities
    idle for many months.
        In conclusion, I encourage you to continue to work on
    legislation that will provide the additional economic benefits
    from rationalization of overcapitalized fisheries, while
    ensuring that the opportunity to share in that additional
    economic value is available to processors as well as
    harvesters. Unless future rationalization programs provide
    equal benefits to all sectors, we would prefer the status quo.
        [The prepared statement of Mr. Hoard follows:]

    Statement of Ralph G. Hoard, Executive Vice President, Icicle Seafoods,
                                      Inc.

        My name is Ralph Hoard and I am the Executive Vice President of
    Icicle Seafoods, Inc., an Alaska corporation, headquartered in Seattle,
    Washington. Thank you for the opportunity to testify regarding the
    Individual Fishing Quota moratorium and Magnuson Act Re-authorization.
        Icicle Seafoods is an Alaska corporation founded in 1965. We
    started with a single salmon cannery in Petersburg, Alaska and have
    expanded over the years with multiple locations throughout Alaska that
    process salmon, crab, herring, halibut, sablefish, cod and pollock. We
    have processing operations throughout Alaska, including Petersburg,
    Seward, Beaver Inlet, Bristol Bay, Dutch Harbor, St. Paul and Adak. In
    addition to Alaska, we have two processing plants in the State of
    Washington and jointly own a canned salmon labeling warehouse in
    Astoria, Oregon. Although we do own a small number of catcher vessels,
    of the 230,000,000 pounds plus of fish we purchased and processed in
    2001, over 87% of the ex-vessel value was purchased from independent
    fishermen throughout Alaska.
        I would like to preface my comments by stating that we are not
    opposed to rationalization. There are certainly many compelling reasons
    why various fisheries could be rationalized. Quota based fisheries can
    provide many benefits to any particular fishery, however those benefits
    should be enjoyed by all participants in the fishery including
    fishermen, processors and those communities dependent on the particular
    fishery. The most common justification to rationalize any fishery is a
    result of overcapitalization. It is impossible to have an
    overcapitalized fishing fleet unless the processing sector
    overcapitalized with the fishing fleet in that particular fishery. It
    is very unlikely, especially in remote parts of Alaska, that the
    processing sector was able to overcapitalize without community
    investment in ports, docks, harbors and infrastructure. In other words,
    everyone got to the same place totally dependent on each other. If the
    fishery is to be rationalized whether it is with IFQs, cooperatives or
    any other method, the benefits of the rationalization should be enjoyed
    by everyone that has a vested stake in the fishery.
        In Alaska, we do have an IFQ program for halibut and sablefish in
    place that has completed its 7th year. While my comments today are on
    why that program is not working for the processing sector and why any
    new programs should not be similar to the existing halibut/sablefish
    IFQ program, I am not suggesting that it should be revisited. In fact,
    too much quota and money has already changed hands to reasonably try to
    change that program now. However, I hope my comments will help avoid
    making the same mistakes when future programs are contemplated. In
    order to give you a clear picture of the current halibut/sablefish IFQ
    program, it is appropriate to give a brief history of the fishery and
    how we got to where we are today. Although the program was instituted
    for both halibut and sablefish, the development of each fishery was
    different.
    THE HALIBUT FISHERY
        The halibut fishery, as recently as the mid 1970's, was a long,
    drawn out fishery that was mostly fished, in Alaska, by both American
    and Canadian fishermen. Those fishermen basically fished throughout the
    spring, summer, and early fall. They had an informal system where for
    every day they fished they would lay-up for half a day to help spread
    the season out. In other words, if they made a 14-day trip, they would
    tie up for 7 days. In those days our company was the major buyer of
    halibut in Alaska, some years purchasing almost 50% of the catch. The
    first expansion of our company from Petersburg was purchasing the
    Seward plant in order to provide a market in the Gulf of Alaska for our
    fishermen to the south that were having trouble selling fish. In a few
    short years after a major expansion of freezers, ice making capacity,
    docks and cold storage, our Seward plant became the largest single
    facility halibut buyer in the world.
        [A side note here: From 1975 to 1978, I was the plant manager of
    this facility where it was not uncommon for the fleet to deliver their
    catch simultaneously within a 3 to 4 day period. Many times we would
    wake up in the morning to find 3 to 4 million pounds of halibut waiting
    to be delivered by both USA and Canadian vessels. To accommodate this
    volume we added: freezers, cold storage capacity, processing lines,
    dock hoists, ice making, mess halls, bunkhouses, van service for
    fishermen to Anchorage, etc. As a result, the Seward plant was very
    efficient and continued to attract boats because they not only knew
    their catches would get unloaded quickly, but that all the other
    amenities like: bait, ice, supplies, fuel, mechanical help, spare parts
    coordination, etc., crucial to their ability to catch fish were not
    only available, but in a quality way. This capability to quickly unload
    one's catch, close to the fishing grounds which Seward was, and get
    back fishing as soon as possible helped our fleet's catch records,
    which became the basis to establish their quota share in the current
    IFQ program.]
        With the rapid expansion of the small boat salmon fleets throughout
    Alaska many new smaller local Alaskan fishermen began to fish halibut.
    Also, in 1980 the Canadian fleet was eliminated from USA waters and the
    halibut seasons became increasingly shorter. In order to accommodate
    this growing number of fishermen, we continued to expand our capacity
    including purchasing a plant in Homer, Alaska, and building a larger
    freezer and cold storage facility there. Eventually the seasons were
    measured in a few short 24- or 48-hour openings. We were still the
    largest buyer of halibut during this period as millions of pounds of
    fish had to be handled in a few short days. Since we grew with the
    fleet, we maintained our market share. During the last few years of the
    pre-IFQ fishery, we were even supplying our fishing fleets with large
    pick up vessels so they could fish in some of the remote areas of
    Alaska. This allowed small vessels to harvest fish in the best areas
    that otherwise would not have been available to them.
    THE SABLEFISH FISHERY
        The sablefish fishery had a totally different history, but ended up
    in the same situation. Back in the mid 1970's, Icicle was purchasing
    70%-80% of the U.S. caught Alaskan sablefish. Although this was a very
    high percentage, the vast majority of the sablefish harvested in Alaska
    during this period was still being caught and processed by foreign
    fishing fleets. This was a very trying and difficult time for both our
    fishermen and our company as it was difficult to get a reasonable price
    for our product since it was primarily a Japanese market and they were
    securing most of their product needs from their directed fishing
    efforts in Alaska. (I might also add that during this period there was
    virtually no market in Japan for halibut, as their directed fleets also
    filled this void with by-catch from the sablefish fishery.) In the
    early 1980's, Icicle Seafoods and other companies, along with
    fishermen, petitioned the North Pacific Fishery Management Council
    (NPFMC) to eliminate the directed foreign fishing in order to allow
    U.S. fishermen and processors to access 100% of this fishery. Although
    most fishermen were supportive of this effort, there were some that
    proposed to let the U.S. fishermen harvest the fish, but sell directly
    to foreign factory ships. Their concern was that the Alaskan processing
    sector did not have the intent to buy, the capacity to process, and the
    access to the market that the foreign companies had. During years of
    debate, the NPFMC prodded the U.S processing side to develop the
    capacity to process, and the necessary infrastructure needed for 100%
    U.S. utilization. In 1984, the NPFMC told fishermen and processors that
    they would give them until September of that year to catch and process
    the quota or it would revert to the foreign fleets as it had been for
    decades. That year, 100% of the fish was caught by USA fishermen,
    purchased, processed and sold by USA processors who spent substantial
    sums of money to gear up their plants to meet the imposed deadline.
    Market prices increased dramatically, providing a new, profitable and
    viable fishery for both fishermen and Alaskan processors.
        Once Americanized like halibut, many new participants in both the
    fishing and processing side entered the fishery. Seasons that once
    lasted 3 or 4 months began to last only 2 or 3 weeks. Again, the
    capacity and philosophy to serve fishermen we initiated to prosecute
    these fisheries worked well. In addition to our strategically located
    shore plants in the Gulf of Alaska, we invested in processing equipment
    and ice-making capacity on our floating processors which we located in
    remote parts of Alaska, providing markets for our fishermen and
    accessing fish that both of us otherwise would not have had access to.
    As new Alaskan fishermen entered the fishery and as seasons became
    shorter, we continued to work to make both ourselves and those
    fishermen working with us more efficient. We modified our operation and
    began to allow fishermen to deliver whole fish, in refrigerated
    seawater. This allowed fishermen, who once had to dress all the
    sablefish on the vessel, to become more efficient in their fishing
    operation as we took over the duties of dressing their product. A lot
    of the traditional vessels continued to dress fish, but delivering
    round, refrigerated fish became more common. Again, this allowed our
    fishermen to build more catching history that eventually became their
    IFQ basis.
    CURRENT HALIBUT/SABLEFISH PROGRAM
        Although not quite on similar courses, both the halibut and
    sablefish fisheries got into the same overcapitalized situation, which
    resulted in the current IFQ program we have today. Once the IFQ program
    was put in place, 100% of the efficiencies, economies of scale, and
    added value of the fishery was given to the harvesting sector. All of
    our investment, that not only allowed us to maintain but even grow our
    business, became irrelevant and was immediately devalued. Fishermen,
    once awarded IFQs on the other hand, were immediately able to
    consolidate and spread their fishing over eight months. Those that
    wanted out, sold. Those that wanted more, bought. It was and is still
    today a happy story for those fishermen that were awarded IFQs, whether
    they still fish or left the fishery. Today the quality of fish being
    delivered is far superior to the pre-IFQ fishery. The added value of
    the catch in the market is a lot higher. Unfortunately, 100% of that
    value has gone to the harvesting sector. The processing sector, by
    being left out of the rationalization process, was left with assets
    that are no longer needed. The choice for the processing sector was
    very clear, either continue to try to survive with assets that are not
    conducive to a controlled IFQ fishery, or exit. That is exactly what
    has happened. Although we have been able to survive only because we
    were diversified in other fisheries and other areas, our business in
    the locations that were dependent on the halibut and sablefish has
    deteriorated. This is not only a problem for us, but it's a problem for
    the fishermen that fish other fisheries in those areas. Their fisheries
    now have to carry 100% of the burden on assets that were once getting
    reasonable contribution from halibut and sablefish. Our gross profit
    margin on halibut and sablefish during the first 6 years of the IFQ
    program is $20,000,000 less than it was the 6 years previous to the IFQ
    program. Not only are we feeling the pain, but every non-IFQ fisherman
    that delivers other product to these facilities now has to carry a
    bigger burden of the costs and overhead of these facilities.
        As tough as it has been, we are one of the fortunate processors as
    we have been able to survive. Many took the second option, which was to
    just quit with no compensation for their investments. Some will say
    that's just too bad, but when they left they also left many non-IFQ
    fishermen without markets and many communities without a viable
    processing sector. Many in Alaska feel that one of our biggest
    challenges is dealing with our salmon business with the worldwide
    competition of farmed fish. That very well could be the case, but as
    one of the largest salmon processors in Alaska, I can assure you our
    biggest challenge has been adapting to the realities of the halibut/
    sablefish IFQs and the economic affect that has had on our salmon
    business. Not only is our salmon industry (fishermen, processors and
    dependent communities) fighting the challenges of the world farmed fish
    explosion, but we are having to jointly foot the bill for the lost
    opportunities in the halibut and sablefish business.
        Although there are some communities that have benefitted from the
    IFQ program because of their close proximity to good air freight
    service to access the fresh halibut market, there are just as many
    communities that also lost out and no longer have a viable seafood
    industry resulting in economic hardships to not only the community but
    the other non-IFQ fishermen that try to operate out of those
    communities.
        It is too late and not practical to change the existing halibut/
    sablefish program; however, we need to learn from it and make sure that
    any future programs allow all the stakeholders (fishermen, processors
    and dependent communities) to enjoy the benefits of a rationalized
    fishery. The benefits should be enjoyed by all and not come at the
    expense of some. [The State of Alaska has just released a study that
    examines, ``The North Pacific Halibut and Sablefish IFQ Policy Impacts
    on Processors'', that this Committee may find relevant to these
    deliberations.]
    RATIONALIZATION BENEFITS TO THE QUOTA HOLDERS
        Rationalization of overcapitalized fisheries provides benefits to
    the participants who receive IFQs and to the nation. Many fisheries in
    Alaska are overcapitalized, resulting in efficiency losses to the
    industry. In those fisheries, too many boats are chasing the fish,
    excess processing facilities are being operated, and communities have
    invested in more infrastructure than is needed. Most fisheries in
    Alaska are open access fisheries, with a race for fish being the
    primary factor in determining the structure of and investment in the
    industry. In an open access fishery, more and more boats are added to
    the fleet in a hunt for profits, resulting in shorter seasons. When the
    influx of new boats stops, the fleet will upgrade engines for more
    power, use larger nets or set more pots and longlines, and increase
    their hold capacity as they catch and land fish more quickly.
        In the processing sector, more facilities are needed to process the
    fish as the catch is landed more quickly and in a shorter period of
    time. Processors upgrade their facilities with more processing lines,
    increased freezing capacity, and larger cold storages.
        Finally, communities and support industries upgrade the
    infrastructure which supports the fishing industry, building more dock
    space, providing more housing, and increasing the capacity of utilities
    such as water, electricity, and sewage disposal.
        The result is a fishing industry that can catch, process, and
    distribute the fish and fish products in a shorter period of time,
    leaving all of the capital facilities idle for many months. For the
    fishermen in the halibut and sablefish fisheries in Alaska,
    rationalization through the IFQ system provided each quota holder with
    a broad range of economic options: (1) a marginal fisherman, or one
    that wanted to retire, could decide to sell his quota to obtain a
    return on his investment and exit the fishery; (2) a fisherman who
    owned multiple boats could consolidate his quota onto a smaller number
    of boats and increase his efficiency, resulting in increased economic
    return; (3) a fisherman could use his quota to operate while avoiding
    bad weather, to catch fish in response to market demand, and to operate
    his boat at the highest level of efficiency (crew size, fishing grounds
    choices, fuel utilization, etc.); or, (4) a fisherman could expand his
    catch total by purchasing more quota shares and leveraging the cost
    with what he received initially for nothing.
        Rationalization of an overcapitalized fishery provides increased
    economic value to the quota holders above the economic return from the
    open access fishery. The nation benefits from the productivity gains of
    the fishing side and from products with higher quality and greater
    variety.
    BENEFITS OF PROCESSOR RATIONALIZATION
        An ITQ system with all the value going to the fishermen provides no
    benefits to the processors that supported those harvesters in the open
    access fishery. The processors receive none of the additional economic
    value resulting from rationalization of the harvesting sector, and will
    lose their capital investment in the excess facilities that were needed
    to support the open access fishery. Processors will have only negative
    options available: (1) retire from the fishery and write off the
    capital investment; or (2) continue to operate at a lower level of
    facility utilization and smaller margins.
        Rationalization of the processing sector through processor quotas,
    processor-harvester cooperatives, or some other system will give to the
    processors the same broad set of economic options available to the
    rationalized harvesters: (1) a marginal processor could decide to
    retire from the fishery, sell his quota to another processor or
    fishermen that want to process, and obtain some return on his capital
    investment; (2) a processor could consolidate facilities to make more
    efficient use of his equipment while cutting costs; (3) a processor can
    continue to operate, but with greater efficiency through decreased
    costs resulting from longer seasons and more predictable supply of
    fish; and, (4) a processor could slow down production and process more
    value added products once the delivery time and quantity of fish was a
    known entity to coordinate with the proper markets. Rationalization of
    the processing sector does not change the economic options for the
    fishermen. They can still exit the fishery, consolidate on fewer boats,
    or operate with better efficiency and safety. The only difference
    resulting from rationalizing both the harvesting and processing sectors
    is that the additional economic value from the fishery will be shared
    by the two sectors. The processing sector in Alaska has made
    significant investments in each fishery, as has the harvesting sector.
    Both sectors should receive benefits from those investments when a
    fishery is rationalized.
        In conclusion, I encourage you to continue to work on legislation
    that will provide the additional economic benefits from rationalization
    of overcapitalized fisheries while ensuring that the opportunity to
    share in that additional economic value is available to processors as
    well as harvesters. Unless future rationalization programs provide
    equal benefits to all sectors, we would prefer the status quo.
                                     ______

        Mr. Gilchrest. Thank you, Mr. Hoard.
        Mr. Seaton?

             STATEMENT OF PAUL SEATON, COMMERCIAL FISHERMAN

        Mr. Seaton. I thank the Committee and the Chairman for the
    opportunity to testify. I am Paul Seaton, a fisherman from
    Homer, Alaska. I participate in numerous fisheries in the Gulf
    of Alaska, including halibut, Pacific cod and tanner crab.
    Individual fishing quotas stimulate heated debate because there
    is so much money at stake. Halibut and sablefish IFQs alone
    represented over $800 million given to selected people.
        Two areas I wish to cover: first, why specific, mandatory
    Congressional standards are absolutely necessary; and two,
    three standards that would take much of the controversy out of
    the implementation of IFQs. Firstly, individual fishing quotas
    are different from other fishery management plans. The regional
    councils were originally created to contain fishery expertise
    by exempting public members from all Federal conflict of
    interest laws. The councils were advisory, and the Secretary
    performed the oversight function and could modify plans before
    approval.
        Later, Congress created the category of limited access
    plans, which the Secretary is excluded from creating or from
    modifying. The Secretary can only accept or reject a submitted
    plan in its entirety. IFQs form a special challenge for the
    management council, because these shares or percentages of the
    future harvest are based exclusively on past catch history.
    Therefore, the concern of a council member who does not have a
    catch history of that species is negated.
        An IFQ plan can only be challenged by suing the Secretary.
    Judicial deference is given to the Secretary, specifically
    based on the assumption that he is a disinterested party. The
    council would never qualify as a disinterested party but under
    the law cannot be challenged, and the Secretary does not have
    the authority to create or modify the plan. I explain this not
    to ask that the Secretary design the plans but to underscore
    the necessity for mandatory standards to ensure that plans from
    the council meet your national goals, because there is no other
    remedy.
        Second, in the time remaining, I wish to share with you
    three standards that will take the main controversy out of IFQ
    plans. First, expected conservation gains shall be incorporated
    into any new IFQ plan in a way that ensures their attainment.
    Second, any new IFQ plan shall recognize the existing crew and
    vessel percentages as the basis for initial quota share
    allocation. And third, the councils can allocate only
    harvesting quota.
        First, the conservation expectation is in my written
    testimony. National standard No. 4 requires that fishery
    management plans be fair and equitable to all fishermen. In the
    halibut and sablefish IFQ plan lawsuit, the Ninth Circuit Court
    of Appeals specifically found that the plan violated national
    standard No. 4. However, a plan is just required to be
    consistent with the national standards, and the court found
    that the council had weighed and favored economic efficiency
    standards. Therefore, the consistency with national standards
    provision of the Magnuson-Stevens Act provides no security for
    the requirements of IFQ plans.
        The main objection to the halibut and sablefish IFQ plan
    was the granting of all of the quota shares to vessel owners.
    Neither captain nor crew received any shares as fishermen. This
    inherent unfairness to the men and women who invested their
    talent and lives to generate the catch history basis of initial
    issuance will plague all IFQ programs. Recognizing the specific
    crew share provisions that Congress and the IRS has allowed as
    the basis of fisherman compensation can easily remedy this.
    Crew share arrangements are required to be in a written
    contract. Those contracts establish the equitable compensation
    for investment or for labor that each vessel owner and his crew
    have found fair.
        An IFQ standard could be as simple as any new IFQ plan
    shall recognize existing crew and vessel percentages as the
    basis for initial quota share allocation.
        Third, processing quota share. The National Research
    Council found no compelling reason to establish a separate
    processor quota system, the so-called two-pie system. They
    suggested alternative ways of compensating processors if such a
    circumstance would exist without the ``concomitant increase in
    the complexity of the IFQ program.'' The two-pie option is ripe
    for anticompetitive activities and antitrust violations. It
    would be a drag on innovation and new market development, and
    it would be a severe constraint on fishermen delivering product
    over an expanded season. An IFQ standard here could be councils
    can allocate only harvesting quota.
        In summary, to secure the benefits to the Nation enumerated
    in the Magnuson-Stevens Fishery Conservation and Management
    Act, Congress will need mandatory requirements for inclusion of
    specific standards for any new IFQ plan.
        Thank you.
        [The prepared statement of Mr. Seaton follows:]

                 Statement of Paul K. Seaton, Alaskan Fisherman

        I am Paul Seaton, a fisherman from Homer, Alaska. I participate in
    numerous fisheries in the Gulf of Alaska including Halibut, Pacific
    cod, Tanner crab, and tender salmon and herring.
        I was a member of the Alliance Against IFQs for Halibut and
    Sablefish, was a West Coast Advisory Panel member for the National
    Resources Council congressionally requested IFQ Study, was a board
    member of the Alaska Marine Conservation Council, and am a resident of
    a coastal fishing town. Although I am testifying as an individual
    fisherman, I combine some of the concerns of all these forums about the
    specifics of IFQ and their impacts.
        Whenever Individual Fishing Quotas are considered, you will be
    bombarded with lots of competing economics and self-enrichment
    lobbying. This is because there is a lot of money on the table--halibut
    and sablefish IFQs alone represent over 800 million dollars given to
    selected people. I am going to ask you to apply your own common sense
    to this radical departure from the way all public resources are
    generally treated.
        If you gave your child a car, a logger an exclusive use of a
    forest, or a fisherman a perpetual exclusive harvest share and later
    told them you wanted to put restrictions on the use of the gift, you
    would meet considerable resistance. If, however, you said to any of
    them, I will give you this property or privilege with certain
    restrictions, they would say THANK YOU.
        This is the common sense I hope you will see in mandating that any
    new IFQ plan incorporate factors that advance the national goals for
    our fisheries and oceans.
        Two areas I wish to cover:
        1) Why specific mandatory Congressional standards are absolutely
    necessary, and
        2) Three standards that will take much of the controversy out of
    implementation of IFQs.
        1) Individual Fishing Quotas are a different animal from other
    Fishery Management Plans the Regional Councils handle. The Councils
    were originally created to contain fishery expertise by exempting
    public members from all Federal conflict of interest laws. The Councils
    were advisory to the Secretary of Commerce and the intent was to
    provide a balanced, knowledgeable forum where each industry segment
    would battle for access to their share of the fish. The Secretary
    performed the full oversight function. However, a later Congress
    created the category of Limited Access Plans, which the Secretary is
    excluding from creating. In fact, the Secretary cannot even modify a
    Limited Access Plan but can only accept or reject a submitted Plan in
    its entirety. Within this limited access plan category, IFQs form a
    special challenge for the Management Council. Those shares, pounds, or
    percentages of the future harvests are based exclusively on past catch
    history. Therefore the ``concern'' of the Council members who did not
    have a catch history of that species is negated. In fact, this leads to
    the vote trading exemplified by one NPFMC member's public statement
    that he disagreed with the halibut IFQ design but would support it as
    long as the longliners on the Council let him design the IFQ program
    for his trawl fleet.
        A further problem for the public is that an IFQ plan or element can
    only be challenged by suing the Secretary. Judicial deference is given
    to the Secretary and Agency specifically based on the assumption that
    the expert agency was a ``disinterested party'', while in reality the
    Secretary did not even have the authority to create or modify the plan.
    The Council would never qualify as a ``disinterested party'' but cannot
    be challenged for the Plan.
        I explain this not to ask that the Secretary design the plans, but
    to underscore the necessity for mandatory standards to ensure plans
    from the Councils meet your national goals, because there is no other
    remedy.
        2) Standards that will take the controversy out of IFQ Plans:
        (A) Conservation expectations must be incorporated into the Plan.
        IFQs allow a longer period of harvest and give the fishermen to
    conduct their endeavors in a noncompetitive fashion. One of the chief
    benefits touted for IFQs is this allowance for more targeted fishing to
    reduce waste, bycatch and impact on the habitat. However, if these
    expected gains are not incorporated into the plan (such as reduction in
    allowed bycatch or use of only off-bottom trawls), fishermen may well
    opt to optimize other personal advantages. For example, crucifiers--
    mechanisms which allow bycatch or small fish to be striped off the line
    at the rail by breaking the unwanted fishes jaw while ripping out the
    hook--had been outlawed for years in the halibut fishery, but were made
    legal upon implementation of IFQs. This made the job easier for a boat
    to operate with fewer crew even though the expanded season gave plenty
    of time for careful fishing.
        An IFQ standard could be: EXPECTED CONSERVATION GAINS SHALL BE
    INCORPORATED INTO ANY NEW IFQ PLAN IN A WAY THAT ENSURES THEIR
    ATTAINMENT.
        (B) Fair and Equitable to all fishermen:
        The Act has National Standard number 4 requiring fishery management
    plans to be fair and equitable to all fishermen. In the Halibut and
    Sablefish IFQ plan lawsuit, the Ninth Circuit Court of Appeals
    specifically found that the Plan did NOT meet that Standard. However, a
    plan is just required to be ``consistent'' with the National Standards
    and the Court found that the Council had weighed and favored the
    Economic Efficiency Standard. Thus, the Consistency with the National
    Standards provision provides no security for inclusion of requirements
    in IFQ plans.
        The main objection to the Halibut/Sablefish IFQ plan was the fact
    the Council gave all the Quota Shares to vessel owners based on the
    theory that their investment was all that mattered. Neither captain,
    nor crew received any Shares as a fisherman. This inherent unfairness
    to the men and women who have invested their talent and lives to
    generate the catch history basis for the initial issuance will plague
    all IFQ programs. Congress should mandate that ``fair and equitable''
    provision be incorporated in any new plan. Recognizing the specific
    ``crew share'' provisions that Congress and the IRS has allowed as the
    basis for fishermen compensation can easily do this. Congress has also
    mandated for years that those crew share arrangements be in a written
    contract before the vessel leaves port. Those contracts have
    established the equitable business arrangements that each vessel owner
    and crew have found fair. If a vessel owner has always agreed that 35,
    or 50, or 60 percent of the gross catch was adequate compensation for
    his investment in vessel and gear in an ongoing fishery business, why
    should the vessel owner get 100 percent of the fish shares with IFQs?
    The real answer is that Fishery Management Councils are controlled by
    the vessel owners who have the time to participate and the money to
    hire lobbyists some of who are the Council Members themselves. Initial
    issuance based on agreed shares would mean that each participating
    entity would have something to bring back to the operation, and it
    would be equal to their historically agreed value.
        The IFQ Standard could be as simple as ANY NEW IFQ PLAN WILL
    RECOGNIZE EXISTING CREW AND VESSEL PERCENTAGES AS THE BASIS FOR INITIAL
    QUOTA SHARE ALLOCATION.
        (C) Processor Quota Share
        The National Research Council found ``no compelling reason'' for
    inclusion or exclusion of processors from receipt of initial harvesting
    quota shares. However, it found NO compelling reason to establish a
    separate processor quota system--the so-called two-pie system. They
    suggested alternate ways of compensating processors if such a
    circumstance would exist without the ``concomitant increase in
    complexity of the IFQ program.''
        The ``two-pie'' option is ripe for anti-competitive activities and
    antitrust violations. It would be a drag on innovation and new market
    development as the existing processors would be assured an unending
    future of fish for their current product. It would be a severe
    constraint on fishermen delivering product over the expanded season if
    the processor was busy with other species.
        If upstream quotas are such a good idea, why have the processors
    not incorporated a quota for wholesalers--requiring the processors to
    sell the same fixed percentages of their processed fish to their
    historic wholesalers? Of course we all can see that such an anti-
    competitive program would be detrimental to the industry, just like
    two-pie processor quota would be detrimental. Ask yourself what the
    effect would be if you required all farmers to sell their future
    production only to the processor they sold to last year.
        An IFQ standard could be; THE COUNCILS CAN ALLOCATE ONLY HARVESTING
    QUOTA.
        In summary, to secure the benefits to the Nation enumerated in the
    Magnuson/Stevens Fishery Conservation and Management Act, Congress will
    need mandatory requirements for inclusion of those benefits in any new
    IFQ Plan. The Regional Fishery Management Councils receive huge
    pressures to emphasize other benefits and no check and balance system
    is in place other than congressional mandated IFQ standards.
        Important standards would include:
        EXPECTED CONSERVATION GAINS SHALL BE INCORPORATED INTO ANY NEW IFQ
    PLAN IN A WAY THAT ENSURES THEIR ATTAINMENT.
        ANY NEW IFQ PLAN WILL RECOGNIZE EXISTING CREW AND VESSEL
    PERCENTAGES AS THE BASIS FOR INITIAL QUOTA SHARE ALLOCATION.
        THE COUNCILS CAN ALLOCATE ONLY HARVESTING QUOTA.
                                     ______

        Mr. Gilchrest. Thank you very much, Mr. Seaton.
        Mr. Young, do you want to make a comment before we
    continue?
        Mr. Young. No.
        Mr. Gilchrest. OK; the next witness, Mr. Stinson.

             STATEMENT OF JAY STINSON, COMMERCIAL FISHERMAN

        Mr. Stinson. Mr. Chairman and the member of the Committee
    present, I guess, I am Jay Stinson, the owner-operator of the
    fishing vessel Alaskan, a 73-foot commercial fishing trawler
    that was built in 1968. I also own halibut IFQs. I also serve
    as president of the Alaska Draggers' Association, board member
    of Alaska Seafood Marketing Institute and a member of the
    University of Alaska School of Fisheries and Ocean Science
    Advisory Committee.
        Fisheries resource management has undergone a substantial
    evolution during the past several decades. Despite this
    positive transformation, traditional management tools do not
    address issues of overcapitalization or community stability.
    The general objective of fisheries management is to conserve
    marine resources and to maximize sustainable benefits to the
    nation. But oftentimes, this process leads to a race for fish.
    The situation inherent in many of our fisheries does not allow
    fishermen or managers to effectively deal with minimizing by-
    catch and discards; understanding the true impacts of fishing
    practices on habitat and the identification of possible
    mitigation strategies; disproportional impacts of protected
    species management; safety at sea; or economic and cultural
    stability of coastal communities.
        IFQs would allow a broader suite of tools to reconcile
    these issues. For fisheries to remain viable and sustainable,
    they need to be attractive to long-term investment. Currently,
    many of our fisheries are not, but not for the reasons you may
    think. The state-managed wild Alaska salmon industry is on the
    ropes, not for a lack of fish but because it is less efficient
    than foreign and domestic farmed operations. The Bering Sea co-
    ops and the halibut-sablefish IFQ program are very successful
    in meeting their intended fisheries management objectives, but
    they are economically marginalizing the Gulf of Alaska
    groundfish fisheries.
        Litigation is driving the National Marine Fisheries Service
    to fast-track severe management restrictions on Alaska
    fishermen. The environmental industry's legal challenges under
    ESA, NEPA and Essential Fish Habitat, not to mention the
    potential impacts of the marine protected areas are creating an
    extremely unstable regulatory environment for fishermen in
    Alaska's fishing-dependent coastal communities. IFQs should be
    a fisheries management tool suited to the particular needs of a
    specific fishery in a given region. Admittedly, Alaska may be
    somewhat unique in that we already have implemented several
    fisheries rationalization programs dealing with different
    management objectives.
        Successful examples include the halibut-sablefish IFQ
    program and the American Fisheries Act cooperative structure
    that recognizes both harvesters and processors. The difficulty
    in developing national standards for rights-based fisheries
    lies in the fact that one size does not fit all. Alaska is
    different geographically, culturally and ecologically from New
    England, the mid-Atlantic or the Western Pacific. We need
    regional programs that best fit local needs, and the regional
    councils are ideally suited to develop and tailor those
    programs.
        My immediate and overwhelming concern is for the continued
    health and sustainability of our fisheries resources and the
    sustained vitality of Alaska's fishery-dependent communities.
    In light of the effects of farmed salmon on Alaska's wild
    salmon industry, increasing litigation and the impacts of AFA
    on the Gulf of Alaska's groundfish industry, it is necessary to
    look at management options such as IFQs that could include
    consideration of processor shares.
        Mr. Chairman, I will end by summarizing three important
    points: Federal fisheries in the Gulf of Alaska are being
    economically marginalized by entities with more efficient
    market structure combined with the cumulative effects of severe
    environmental regulation that constrains our ability to
    operate. Rights-based management programs must be designed and
    implemented with full industry participation tailored to meet
    local needs and implemented at the regional council.
        IFQs, co-ops or other forms of rights-based management will
    encourage harvesters, processors and fishing-dependent coastal
    communities to invest in the long-term vision of sustainable
    fisheries in Alaska to the overall benefit of the nation.
        Mr. Chairman, thank you and the members for your time.
    Please accept my written testimony for the record.
        [The prepared statement of Mr. Stinson follows:]

     Statement of Jay Stinson, Captain, F/V Alaskan, and President, Alaska
                              Draggers Association

        IFQs are not the silver bullet for all of the fishing industry's
    current challenges; however they have been demonstrated to be an
    effective tool to deal with many of the challenges faced by certain
    segments of the fishing industry.
        Fisheries resource management has seen substantial evolution over
    the last several decades. Traditional management tools and input
    controls such as License Limitation Programs, gear and vessel
    restrictions, time and area closures all act to restrict fishing
    effort. They do not address issues of overcapitalization, community
    stability, improving the overall economic value of the resource or the
    biological sustainability of the resource. The general objective of
    fisheries management is to conserve marine resources and maximize
    sustainable benefits to the nation. Management Plans that encourage or
    result in the ``Race for Fish'' detract from this objective.
        For fisheries to remain viable and sustainable, they need to be
    attractive to investment. Currently many of our fisheries are not. The
    Alaska salmon industry is on the ropes; not for a lack of fish, but
    because it is being out competed by more efficient foreign and domestic
    farmed fish operations. The Bering Sea coops and the Halibut/Sablefish
    IFQ program are marginalizing the Gulf of Alaska (GOA) groundfish
    fisheries. The RPAs developed as mitigating measures for Steller Sea
    Lions pursuant to Greenpeace and American Oceans Campaign lawsuit
    against NMFS have created large closures of productive historic fishing
    areas in Alaska. The Gulf of Alaska groundfish fishermen need rights
    based management tools such as IFQs or coop structures that will allow
    us to meet conservation and regulatory mandates and still compete on a
    global scale.
        The GOA suffers from a loss of access to the resource due to
    environmental concerns that are causing economic harm to the
    communities of coastal Alaska. The fishing industry requires enough
    economic margin to invest in product development, gear designs and
    technologies that reduce by-catch, can adjust to changing harvest
    levels and mitigate impacts on benthic habitat while supporting
    sustainable fisheries.
         Whether and When IFQs should be used as a management
    tool.
        IFQs should be used as a fisheries management tool in regions and
    fisheries that are suited to their particular needs. They have been
    successfully implemented in several programs in the North Pacific for
    differing management objectives.
        These rights based programs include:
            * LIndividual Vessel Quota (IVQ) program For Halibut in British
            Columbia
            * LIndividual Transferable Quota (ITQ) Fisheries for Groundfish
            Trawl and Sablefish in British Columbia.
            * LIndividual Fishing Quota (IFQ) program for Halibut and
            Sablefish program in Alaska first implemented in 1995.
            * LAFA created fishing cooperatives in the Bering Sea for the
            majority of the participants of the largest single specie
            fishery in the United States.
            * LThe developing Commercial Charter IFQ program now before the
            North Pacific Council.
         Criteria for Considering IFQ Management
        For a fishery to be a good candidate for IFQ management, it should
    be evaluated for such threshold criteria as:
            * LIs the acute race for fish and overcapitalization driving
            one fishery toward unsafe, uneconomic and non-sustainable
            fishing?
            * LIs it being impacted and marginalized by other regional
            rationalization programs?
            * LAre the current or foreseen problems in the fishery serious
            enough to justify the accounting and enforcement costs
            associated with IFQ management?
            * LIs the fishery managed to a TAC?
            * LAre observers utilized to validate accounting at the vessel
            level?
            * LAre alternative methods available such as Vessel Monitoring
            Systems to assure accurate accounting of vessel location and
            total mortality (not just retained catch)?
        The question of ``when'' to initiate an IFQ program is dependant on
    the intended consequence of the management program and what legal,
    biological, economic, community, or management concerns need to be
    addressed.
        To a very large degree, litigation is currently driving the NMFS to
    implement more stringent fishery management restrictions on Alaskan
    fishermen. The Environmental Industry's legal challenges of ESA, NEPA,
    and EFH--not to mention the potential impact of MPAs are rapidly
    creating an extremely unstable regulatory and management environment
    that is unworkable for fisherman and the fishing dependent coastal
    communities of Alaska. NMFS reaction to this litigation is fast
    tracking new regulations with projected implementation schedules
    ranging from 2 to 4 years for some of these programs in Alaska.
        The current race for fish inherent in many of our fisheries does
    not allow fishermen and managers to effectively deal with:
            * LMandates of bycatch reduction (MSFCMA).
            * LImproved retention and utilization of fisheries resources
            (NPFMC).
            * LMinimizing discards.
            * LUnderstanding of potential impacts on benthic habitat and
            possible mitigation (EFH).
            * LDisproportional impacts of Steller Sea Lion RPAs (ESA).
            * LDeveloping and Implementing Ecosystem Based Management
            Structures.
            * LMaking more efficient and effective use of fisheries
            resources.
            * LConcerns for Safety at Sea.
            * LCoastal community stability.
        IFQs would allow fishermen a broader suite of tools to meet these
    objectives.
        Alaska halibut fishermen were economically marginalized after
    Canada's implementation of IVQs in their halibut fishery in 1990. The
    Canadian product was first to arrive in the market place, the quality
    was better, the consumer acceptance was higher, and Alaska fishermen
    were at an economic disadvantage until we were able to implement our
    IFQ program in 1995. Much the same circumstance exists now that AFA is
    implemented in the Bering Sea. The Gulf of Alaska trawl harvesters and
    their supportive processors are operating at a significant economic
    efficiency disadvantage. Certain sectors of the Pollock Co-Ops have
    improved their product recovery by as much as 48% since 1998.
        In general, AFA Co-ops are enjoying a greater economic efficiency
    than non-AFA trawl fleets. For some fisheries, including the Gulf of
    Alaska shore based harvesters and Head and Gut fleet, implementation of
    a rights based management program should occur as quickly as possible.
    Other areas of the country may not feel the requirement for the
    development of this type of management structure.
         Initial allocation of quota shares among different
    sectors of the fleet and individual participants:
        The primary purpose of an IFQ program is to allocate the TAC to
    those currently harvesting a particular fishery quota. The simplest
    allocation would be to deviate as little as possible from the current
    status quo distribution at the time of qualification. It would suggest
    a snapshot of a relatively recent catch history period as a basis for
    distributing the quota shares amongst harvesters, including vessel
    owners, captains, and crews.
        Having said that, there may be reasons for deviating from it, such
    as,
            * LManagers may want to consider reducing relative differential
            economic impacts of one sector of the fleet by another that has
            already been rationalized.
            * LFisheries managers may want to consider local and regional
            community concerns.
            * LManagers may want to award certain participants that may not
            have historical participation, or others with long standing
            historic participation and dependence.
            * LManagers may want to consider fisheries' cultural and
            economic continuity.
            * LCertain sectors of the fishery may not want to participate
            in an IFQ program, or an IFQ structure might be problematic to
            their participation, i.e. observer requirements on small boats.
            * LConcern for allowing for new entrants into the fishery.
            * LAllowing a range of flexibility to recognize ecological
            regime shifts and other biological dynamics.
        There is no one single model that meets these criteria at the
    national level. Alaska is different geographically, culturally, and
    ecologically from New England, the Gulf Coast, or the Western Pacific.
    Councils, States, local fleets and associated support industries need
    regionally based programs that best fit local needs. Regional councils
    are best suited to develop programs tailored to specific local needs.
         The question of whether processors should receive quota
    shares:
        My immediate and overwhelming concern is for the continued health
    and sustainability of our fisheries resources, and the sustained
    viability of Alaska's fisheries dependent communities. In light of the
    effects of farmed fish on Alaska's salmon industry and the differential
    impacts of AFA on the Gulf of Alaska's groundfish industry, it is
    necessary to look at management options that will allow for the long-
    term economic health of our industry. This would include consideration
    of processor shares. As a fisherman, I am apprehensive about processors
    consolidating excessive market shares. As a coastal resident being
    negatively impacted by larger, vertically integrated, and more
    economically efficient industry sectors, I feel that we should not rule
    out limited processor shares for certain fisheries. In developing
    rights based management programs, Councils should tailor a regional
    program to consider such things as regional processor restrictions or
    implementing processor share caps in the development of rights based
    fisheries management programs.
         The impacts of IFQs on conservation and management of
    fisheries resources:
        Rights-based management, whether they be IFQs, Co-operative fishing
    agreements or some other alternative structure are being demonstrated
    as paramount in slowing the ``race for fish''. By enfranchising
    individual fishermen with the responsibility of ownership, harvesters
    are more inclined to be stewards of their portion of the resource.
    Waste and by-catch are reduced. Inefficiencies, such as excessively
    large engines or overly large vessels and gear become excess investment
    costs not financially conducive to the long-term economic viability of
    an individual business. The industry as a whole becomes more
    sustainable and able to be more competitive in the increasingly
    globalized market.
        By eliminating the race for fish, fishermen become disinclined to
    overcapitalize their investments. Instead of trying to out compete each
    other on derby style fisheries, they take a more long-term perspective
    of business management. This includes concern and responsibility for
    the long-term health and sustainability of our nations marine
    resources.
        One of the most demonstrable changes to occur under the Halibut IFQ
    program is the increase in length of the season. Prior to the
    implementation of the Alaska Halibut IFQ system in 1995, fishermen were
    operating in a derby fishery that was limited to two, twenty-four hour
    openings a year. Processing plants were swamped with product, quality
    was compromised, and concern for safety was disregarded. Since then,
    all halibut fisheries are open from March 15 to November 15. Product
    availability, quality and price have all increased substantially.
    Fishery discards and over harvesting have been greatly reduced. Halibut
    IFQs have created a more economically sound fishery, which is good for
    the resource, the fishermen and market.
         The costs of implementing and enforcing these programs:
        One of the criteria for considering an IFQ program should be
    whether the long-term economic benefits out weigh the costs of
    implementation, management and enforcement of that program. That
    decision of whether to initiate such a program needs to be made by the
    participants of that particular fishery.
        The Halibut and Sablefish fisheries are taxed or assessed a users
    fee that offsets management costs of the program. The AFA co-ops of the
    Bering Sea manage their own programs and are accountable to the NPFMC.
    Small groundfish vessels operate at higher relative observer cost than
    larger vessels or plants. I would like to see an industry supported,
    agency administered observer program developed that would be more
    equitable to the economic considerations of small vessels and smaller
    processing sectors as part of future rights based management programs.
         The impacts on individuals and communities who do not
    receive quota:
        Most of the coastal communities of Alaska are dependent on landing
    taxes to help support schools, essential services, and community
    infrastructure. IFQs have been shown to increase the value of the
    resource, promote the management and health of the resource and
    increase the overall sustainability of the fishery.
         The windfall profits that accrue to initial recipients:
        As a consequence of their design, IFQs create winners and losers.
    IFQs are intended to reduce overcapitalization, limit access, and
    create a more economically efficient fisheries management model.
    Concern for windfall profits needs to be put in perspective of the
    overall benefit to the nation and the objectives of fisheries
    management. The duration of rights determines ``windfall rent
    capture''. Management consequences need to be analyzed and administered
    at the regional level.
        In regions where limited entry or license limitation programs
    result in ``the race for fish'', a closed universe of catcher vessels
    usually already exists. There is a cost of entry that is reflected in
    the market value of the License Limitation endorsement.
         The question of limiting the duration of permits:
        Existing IFQ programs should be grand fathered as currently
    provided under the MSFCMA. Existing banking and business investments
    should be disrupted to the least extent possible in consideration of
    any new rights-based program.
        Future programs should consider environmental and dynamic economic
    concerns, program sunsets or periodic program reviews. The intent of an
    IFQ program is to create long-term economic and biological stability.
    Caution should be given to the degree of ``social engineering'' that
    might be written into any future fisheries management plan.
         Other limited access systems (such as cooperative fishing
    agreements)
        Future rights based fishery management plans should include:
    fishery co-operatives, two-pie rationalization plans (i.e. including
    both harvesters and processors) and other management structures protect
    the histories of both harvester and processors. By considering both
    harvesters and processors impacts to communities would be minimized and
    long-term stability ensured.
         Similar issues which might be associated with the
    implementation of these other limited access systems:
        Transitional Phase: Design a certain amount of economic
    inefficiencies into new programs. This allows stakeholders such as
    crewmembers, new entrants, and small boat owners and support industry
    an opportunity to adjust to any new program. IFQ programs designed to
    fit large commercial scales with a finite universe of historic
    participants can be structured with a more defined process and shorter
    implementation period than one involving more participants with shorter
    histories.
    Summary:
        The sustainability of Federal fisheries in the Gulf of Alaska is
    currently being undermined by the economic marginalization of our
    industry by those entities that enjoy a more efficient market structure
    and the cumulative effects of overly stringent environmental regulation
    that would constrain our sector of the industry to operate. It may be
    the case that we in Alaska will have the healthiest Groundfish
    fisheries resources in the world and Alaska fishermen will not be able
    to harvest them. IFQs, co-ops or some other form of rights based
    management structure would encourage harvesters, processors, and
    fishing dependant coast communities to invest into the long term vision
    of sustainable fisheries in Alaska to the overall benefit of the
    nation.
                                    APPENDIX
                             acronyms and glossary
        AFA: LAmerican Fisheries Act, enabling co-op management structures
    in the Bering Sea Pollock fishery including both processors and
    harvesters
        EFH: LEssential Fish Habitat, as used in Magnuson-Stevens Fishery
    Conservation and Management Act language
        ESA: LEndangered Species Act
        GOA: LGulf of Alaska
        IFQ: LIndividual Fishing Quota, is ``a Federal permit under a
    limited access system to harvest a quantity of fish, expressed by a
    unit or units representing a percentage of the total allowable catch of
    a fishery that may be received or held for exclusive use by a person''
    (MSFCMA, Sec. 3 (21))
        ITQ: LIndividual Transferable Quota
        IVQ: LIndividual Vessel Quota
        MPA: LMarine Protected Areas
        MSFCMA: LMagnuson-Stevens Fishery Conservation and Management Act
        NEPA: LNational Environmental Policies Act
        NMFS: LNational Marine Fisheries Service
        RPAs: LReasonable and Prudent Alternatives
        TAC: LTotal Allowable Catch
                                     ______

        Mr. Gilchrest. Thank you, Mr. Seaton; without objection.
        Mr. Stinson. Stinson, sir.
        Mr. Gilchrest. Mr. Stinson. My glasses are not working. Who
    just spoke? Mr. Stinson just spoke?
        Mr. Stinson. Yes.
        Mr. Gilchrest. Now, we have Mr. Seaton? Mr. Christiansen.
    So the next gentleman is Mr. Christiansen. Thank you.

    STATEMENT OF FRED CHRISTIANSEN, CHAIRMAN OF THE BOARD, GULF OF
                  ALASKA COASTAL COMMUNITIES COALITION

        Mr. Christiansen. Mr. Chairman and members of the
    Subcommittee, thank you for the opportunity to present my
    statement to your Subcommittee this afternoon regarding the
    reauthorization of the Magnuson-Stevens Act relative to the
    individual fishing quota program.
        My name is Fred Christiansen. I am a commercial fisherman
    and business owner from Malt Harbor, Alaska and Kodiak Island.
    I also am the Chairman of the Gulf of Alaska Coastal
    Communities Coalition, and I am representing that coalition
    here today.
        The GOAC-3 is a coalition of coastal communities in the
    Gulf of Alaska dedicated to protecting the ability of small
    Gulf of Alaska fishery-dependent communities to retain or
    regain access to sustainable marine resources for commercial
    subsistence and recreational use. Our Gulf of Alaska coastal
    communities are entirely fishery-dependent. Our membership is
    concerned that our small coastal communities will not have
    long-term viability unless some creative strategies are
    employed to rebuild sustainable economics based on healthy,
    sustainable fisheries.
        We are alarmed at the accelerating rate at which we are
    losing marine access, jobs, infrastructure and population. The
    coalition developed a response to adverse impacts from halibut
    and sablefish IFQ programs. We have proposed that qualifying
    communities would be a new class of buyers for halibut and
    sablefish quota shares in the Gulf of Alaska. By allowing a
    community nonprofit to purchase quota shares that could then be
    leased to community residents, our community would be able to
    keep a certain level of halibut and sablefish quota shares
    within the community in perpetuity.
        This should make a significant contribution to stabilizing
    coastal community economies. Our proposal is currently before
    the North Pacific Fishery Management Council. The council's
    analysis will be soon released for public comment. They have a
    set time for final action. For small, rural fishery dependent
    coastal communities in Alaska, access and opportunities related
    to fisheries are absolutely vital to the ability of our
    communities to remain viable into the future. If they do not
    remain viable, it would forever change the very character of
    what is now rural Alaska to say nothing of their current roles
    in the economies of larger cities in Alaska who supply
    provisions to rural Alaska.
        Because of our experiences, the Gulf of Alaska Coastal
    Community Coalition urges the Subcommittee to consider the
    following recommendations: No. 1, strengthen the current
    National Standard 8 under Magnuson-Stevens Act by incorporating
    as a policy statement--
        Mr. Gilchrest. Mr. Christiansen, I apologize for
    interrupting you, but I have a little less than 5 minutes to
    make it to the Capitol. So we will pick it up when I come back
    at that point.
        Mr. Christiansen. OK.
        Mr. Gilchrest. Thank you.
        Mr. Christiansen. Thank you.
        [Recess.]
        Mr. Gilchrest. The sound of the microphone. I think maybe
    people with infants should install that in their house. Just
    that sound has that effect on human beings.
        Well, thank you again for your patience, and Mr.
    Christiansen, I apologize to you for breaking up your
    testimony, and I guess if you just backed up one paragraph, we
    could pick up where you left off. You were about to give us
    some of your pieces of insight on IFQs.
        Mr. Christiansen. OK; thank you--
        Mr. Gilchrest. Recommendations.
        Mr. Christiansen. --Mr. Chairman.
        Because of our experiences, the Gulf of Alaska Coastal
    Communities Coalition urges the Subcommittee to consider the
    following recommendations: No. 1, strengthen the current
    National Standard 8 under Magnuson-Stevens Act by incorporating
    a policy statement. The National Research Council's
    recommendation to allocate initial quota shares to communities,
    taking into account the importance of fishery resources to
    fishing communities to provide for sustained participation of
    such communities and a mechanism for communities to buy shares;
    No. 2, if new IFQ programs involve issuance of processing quota
    shares, Magnuson-Stevens Act should specify that fishery-
    dependent coastal communities' economic interests be protected.
    Under such a regime, a certain percentage of the community
    processing quota shares should be kept with the group of
    coastal communities in perpetuity.
        No. 3, steps should be taken to ensure that oceans and
    their interdependent biological resources are healthy so that
    they sustain viable fisheries and the communities that are
    dependent on them.
        No. 4, Magnuson-Stevens Act should require meaningful
    socioeconomic considerations, including field research of
    potential impacts from any rationalization of fisheries. We
    need to seriously analyze the implications of known models.
        Thank you again for this opportunity to present the views
    of the Gulf of Alaska Coastal Community Coalition to the
    Subcommittee today. Our more detailed statement has been
    submitted for the record. We deeply appreciate your
    consideration of these views in subsequent actions your
    Subcommittee may take on these matters.
        Thank you.
        [The prepared statement of Mr. Christiansen follows:]

       Statement of Fred Christiansen, Chairman, Gulf of Alaska Coastal
                             Communities Coalition

        Mr. Chairman and Members of the Subcommittee:
        Thank you for the opportunity to present my statement to your
    Subcommittee this afternoon regarding the re-authorization of the
    Magnuson-Stevens Act relative to the Individual Fishing Quota Program.
    My name is Fred Christiansen. I am a commercial fisherman and business
    owner from Old Harbor on Kodiak Island, Alaska. I am also the Chairman
    of the Gulf of Alaska Coastal Communities Coalition (GOAC3) and I am
    representing that group here today.
        The GOAC3 is a coalition of coastal communities in the Gulf of
    Alaska dedicated to protecting the ability of small Gulf of Alaska
    (GOA) fisheries-dependent communities to retain or regain specific
    access to sustainable marine resources for commercial, subsistence and
    recreational users.
        Our communities are entirely fisheries-dependent. Our membership is
    concerned that our communities will not have long-term, viability
    unless some creative strategies are employed to rebuild a sustainable
    economic base. We are alarmed at the accelerating rate we are losing
    marine access, jobs, infrastructure and population. We are working
    toward reversing and /or mitigating regulatory and other changes, which
    have had negative impacts on the ability of our communities to make
    their living from the sea while recognizing that healthy ecosystems are
    essential to sustainable fisheries.
        For small rural fisheries-dependent coastal communities in Alaska,
    access and opportunities related to fisheries are absolutely vital to
    the ability of our communities to remain viable into the future.
    Without such access and opportunity, a key part of the economy--a
    mainstay of the livelihoods--of our regions within the Gulf of Alaska
    will not survive. If such communities cannot remain viable, they will
    wither and lose population, and in many cases cease to exist. If this
    happens, it will forever change the very character of what is now rural
    coastal Gulf of Alaska, which will, in turn have very negative
    consequences for the larger cities of Alaska who supply provisions to
    these communities.
        The very successful Community Development Quota (CDQ) program
    instituted in Western Alaska as authorized by Congress and provided by
    the 1991 re-authorization of the Magnuson Act greatly increased fishing
    access and opportunity for those member communities. At the same time,
    however, the fishing opportunities and incomes in our small Gulf of
    Alaska communities were declining. This continuing loss is the result
    of a variety of reasons, including the unintended consequences of
    regulatory actions.
        One of the most significant regulatory actions was the 1995
    implementation of the IFQ (Individual Fishing Quota) program for
    halibut and sablefish. As noted in the North Pacific Fishery Management
    Council, January 14, 2002, Environmental Assessment / Regulatory Impact
    Review (EA/RIR) for Amendment 66 to the existing halibut and sablefish
    IFQ program, communities under 2000 in population have shown a
    consistent out-migration of quota share since 1995 with subsequent loss
    of revenue and employment opportunities. While some people predicted
    the concentration of quota share outside small coastal communities, no
    one could have foreseen how soon or how dramatic that change would be.
        The GOAC3 developed a response to the adverse impacts from the
    halibut and sablefish IFQ program. We have proposed that qualifying
    communities would be a new class of buyer for halibut and sablefish
    quota shares in the Gulf of Alaska. By allowing a community non-profit
    to purchase quota shares that could then be leased to community
    residents, our communities would be able to keep a certain level of
    halibut and sablefish quota shares within the community in perpetuity.
    This should make a significant contribution to stabilizing coastal
    community economics. Our proposal is currently before the North Pacific
    Fishery Management Council. The Council's analysis will soon be
    released for public comment and they have set a timetable for final
    action.
        It would have been much easier, of course, to have instituted this
    type of mechanism during the initial implementation of the program
    rather than with a separate proposal now seven years after the
    program's implementation. Nevertheless, we are attempting to address
    the problem with the amendment and want to be sure that future programs
    consider community needs to insure their continued participation in
    rationalized fisheries.
        This, then, has been a substantial part of our experience with the
    existing halibut and sablefish IFQ program. It has made us realize that
    IFQ programs need built-in safeguards for rural fisheries-dependent
    coastal communities.
        In January of 1999 the National Research Council (NRC) released
    their paper ``Sharing the Fish.'' This report supported the concept of
    community ownership of a certain amount of quota share under any IFQ
    program. 1 The NRC's concern about coastal communities is a
    principal recommendation in their report and provides an objective
    basis for our recommendations that small rural fisheries-dependent
    coastal communities be considered in the initial issuance of IFQs.
    ---------------------------------------------------------------------------
        \1\ Page 10 and throughout the document
    ---------------------------------------------------------------------------
        We would note rural fisheries-dependent communities have been
    disadvantaged by initial distribution of quota shares based on
    ``historical participation.'' Throughout the past century,
    diversification and participation in several fisheries has been the
    basis for our fishermen's survival. Fishermen often emphasize the
    fisheries that have the best economic returns for their efforts. When
    halibut and sablefish IFQs were issued, this imperative worked against
    many community members who had not recently focused on halibut and
    sablefish. Many of our fishermen only qualified for a few shares of
    IFQs. Consequently, as herring and salmon values declined over the past
    seven years, these fishermen have been unable to return to fishing
    halibut and sablefish. This has further resulted in loss of skipper and
    crew jobs and infrastructure for small coastal communities.
        And, finally, some coastal communities of Alaska are already
    experiencing severe economic loss from regulatory actions relative to
    Steller sea lion and seabird avoidance restrictive measures. We are
    concerned about the potential future impacts of essential fish habitat
    (EFH), habitat areas of particular concern (HAPC), and marine protected
    area (MPA) regulatory implementation if there is not enough
    consideration of subsequent intended or unintended socio-economic
    consequences.
        Because of these experiences, the Gulf of Alaska Coastal
    Communities Coalition urges the Subcommittee to consider the following
    recommendations:
         1. LStrengthen the current National Standard 8 2 under
    MSA by incorporating, as a policy statement, the National Research
    Council's recommendation to allocate initial quota share to
    communities, taking into account the importance of fishery resources to
    fishing communities to provide for sustained participation of such
    communities.
    ---------------------------------------------------------------------------
        \2\ ``Conservation and management measures shall, consistent with
    the conservation requirements of this Act (including the prevention of
    over-fishing and rebuilding of overfished stocks), take into account
    the importance of fishery resources to fishing communities in order to
    (A) provide for the sustained participation of such communities, and
    (B) to the extent practicable, minimize adverse economic impacts in
    such communities.'' (Added in 1996.)
    ---------------------------------------------------------------------------
         2. LIncorporate into MSA a mechanism for the allocation of initial
    quota shares under any new IFQ program to fisheries-dependant rural
    coastal communities.
         3. LMSA should have clarifying language that rural fisheries-
    dependant coastal communities be qualified as buyers of quota shares
    for any new IFQ programs.
         4. LShould new IFQ programs consider issuance of ``processing
    quota shares.'' MSA should specify that fisheries-dependant coastal
    communities' economic interests be protected. First, a certain
    percentage of community processing quota shares should be kept within a
    group of coastal communities in perpetuity. Second, undeveloped or
    underdeveloped communities should have the opportunity to develop
    processing capabilities.
         5. LMSA should focus attention and actions on ways to ensure that
    the ocean and its interdependent biological resources are healthy so
    that they can help sustain viable fisheries and the communities that
    are dependent on them.
         6. LMSA should have language to address better strategies for
    dealing with species protections that balances protective regulations
    with the fisheries dependency of rural coastal communities and their
    small boat fleets.
         7. LMSA should give regional councils, such as the North Pacific
    Fisheries Management Council, flexibility in considering unique
    programs that can protect access to harvesting and processing of marine
    resources in proximity to rural fisheries-dependant coastal
    communities.
         8. LMSA should require meaningful socio-economic considerations,
    including field research, of potential impacts from any
    ``rationalization'' of fisheries. We need detailed socio-economic
    analysis of known models--such as Individual Fishing Quotas (IFQ),
    Individual Transferable Quotas (ITQ), Individual Processing Quotas
    (IPQ) and co-operative models (American Fisheries Act)--- before
    approval of a rationalization program.
         9. LMSA should provide for mechanisms that will encourage co-
    management of marine resources between state and Federal agencies and
    rural fisheries dependant coastal communities adjacent to these
    resources.
        10. LMSA should encourage the use of Local Area Management Plans
    (LAMPs) as a process by which unique local problems can be addressed
    and localized solutions crafted.
        The Magnuson-Stevens Fishery Conservation and Management Act has
    allowed the North Pacific and the rest of the country to manage fishery
    resources through the regional fishery management councils. This has
    been an educational and evolutionary process for all but it is a system
    that, in our experience, has worked for the benefit of the resource and
    the public. Fisheries-dependent rural coastal communities, however,
    have not fared as well in the council process. Like the fishery
    management plans (FMPs) the Act requires, the Council process needs
    periodic revisiting with changes and refinements. Despite these needs,
    it is our belief that the Magnuson-Stevens Act remains the best
    instrument for maintaining marine resources and for addressing regional
    differences and community needs in overall fisheries management.
        Thank you again for this opportunity to present the views of the
    Gulf of Alaska Coastal Communities Coalition to the Subcommittee today.
    We will deeply appreciate your consideration of these views in
    subsequent action by the Subcommittee.
                                  REFERENCES:
        1. LEnvironmental Assessment / Regulatory Impact Review / Initial
    Regulatory Flexibility Analysis for proposed Amendment 66 to the
    Fishery Management Plan for Gulf of Alaska Groundfish to all allow
    eligible Gulf of Alaska communities to hold commercial halibut and
    sablefish quota share for lease to community residents, North Pacific
    Fishery Management Council, Anchorage, Alaska, January 14, 2002.
        2. L``Sharing the Fish: Toward A National Policy on Individual
    Fishing Quotas'' Committee to Review Individual Fishing Quota, Oceans
    Studies Board, Commission on Geoscience, Environment and Resources,
    National Research Council, National Academy Press, Washington DC, 1999.
        3. LFinal Rule, Magnuson-Stevens Act Provisions: Essential Fish
    Habitat (EFH) Federal Register, Vol. 67, No. 12, Thursday, January 17,
    2002, Rules and Regulations.
                                     ______

        Mr. Gilchrest. Thank you, Mr. Christiansen.
        Doctor--is it Matulich?
        Dr. Matulich. Close; Matulich.
        Mr. Gilchrest. Matulich.

       STATEMENT OF SCOTT MATULICH, PROFESSOR, WASHINGTON STATE
                               UNIVERSITY

        Dr. Matulich. Thank you, Mr. Chairman.
        For the record, my name is Scott Matulich. I am a professor
    at Washington State University in the Department of
    Agricultural Economics. I am here today to give you a very
    brief overview of a research project that was just completed,
    funded by the State of Alaska and the Alaska Department of Fish
    and Game. I asked Mr. Whaley earlier to present to you a report
    to all of the Committee members and also to present to you a
    single graph, which is a color graphic that I believe you have.
    But I would like to talk to you to give you the bottom line
    from the study.
        It is a complicated study. The entire report was given to
    you, I believe, so we are going only to the very bottom line,
    and we can explore anything you would like about the
    conclusions as you ask questions. Do you have the graphic?
        [Pause.]
        Dr. Matulich. It is two graphics. They are gold cylinders.
    That is correct. Thank you, sir.
        I would like to direct your attention to the top graphic
    first. It represents what happened pre- and post-IFQ in the
    halibut fishery in the North Pacific. First of all, it is
    important to note that 82 percent--this is based on a survey
    that covered probably 56 to 60 percent of all of the fish
    processed in the North Pacific, a survey of the processors, of
    course. Eighty-two percent of the halibut processors in terms
    of raw fish weight were left absolutely worse off, i.e., were
    damaged by the initial allocation design of the IFQ program. In
    1992-93, the value of the fishery was approximately $79.3
    million. That is the ex-wholesale value, first point of
    wholesale.
        Processors retained, at that point in time, processors
    retained 19.6 percent or $15.5 million. That was revenues in
    excess of their variable costs. It is their gross operating
    margin. The IFQ fishery liberated the marketplace. It allowed
    fish that was trapped into about 83 percent frozen product form
    and was diverted into a fresh market, a much higher-valued
    fresh market after the IFQ. It doubled the value of the
    fishery, from $79 million to $155.5 million. Processors were
    left with a 56 percent loss in the value they had earned prior
    to that. I.e., prior to the IFQs, processors retained $15.5
    million. After IFQs, the processing sector retained $6.8
    million on a doubling of the value of the fishery.
        The sablefish fishery was a slightly different story.
    Actually, it is the same story. It is a different type of
    product form. It stayed in a frozen product form.
        Mr. Gilchrest. Just so I understand--I guess we can go
    through the questions later, but I do not want to get lost.
        Dr. Matulich. Fine.
        Mr. Gilchrest. The processors lost out after IFQs were
    implemented.
        Dr. Matulich. That is correct. They lost 56 percent of
    their prior wealth.
        Sablefish, 97 percent of the processors lost prior wealth,
    97 percent. The value of the fishery was $83 million in 1992-
    93. Now, the graphic that you have shows that the value of the
    fishery was the same. That is not quite correct. It was not the
    same. It turns out that in the sablefish fishery, there was a
    stock collapse that went from 29 million pounds down to 16 to
    17 million pounds. The price rose from $2.84 a pound up to
    $4.15 a pound. None of this had anything to do with the IFQ
    program, so in terms of welfare theoretics--I am an economist
    at a university--I had to remove that supply effect.
        But the bottom line is the processors lost 75 percent of
    their prior wealth. They retained--in 1992-93, they retained
    approximately $20.2 million. In 1999-2000, they retained just
    $5.1 million.
        Mr. Chairman, as you can see from this, this was not win-
    win policy. This was win-lose policy, and it is a consequence
    of the initial allocation design of the harvester-only
    individual fishing quota system, and it is the design--it is
    the outcome that you will find in all IFQ programs where there
    is nonmalleable capital involved, nonmalleable meaning you
    cannot just go do something else with your capital.
        And that is all I have to say. Thank you, Mr. Chairman.
        [The prepared statement of Dr. Matulich follows:]

     Statement of Scott C. Matulich, Professor, Department of Agricultural
                     Economics, Washington State University

        Mr. Chairman, committee members, my name is Scott Matulich. I am a
    Professor of Agricultural Economics at Washington State University. I
    am here today to provide a brief overview of a recently completed
    research project funded by the Alaska Department of Fish and Game. I
    asked Mr. Whaley to provide each of you copies of that report, entitled
    Efficiency and Equity Choices in Fishery Rationalization Policy Design:
    An Examination of the North Pacific Halibut and Sablefish IFQ Policy
    Impacts on Processors. The report, No. 5J02-02, should also be
    available on the Alaska Department of Fish and Game web site by the
    date of this testimony.
        While this report analyses how the largest IFQ policy in the United
    States impacted halibut and sablefish processors, its primary purpose
    is to provide insight into policy choices concerning future
    rationalization designs of other fisheries, including transferable
    quota systems or fishery cooperatives. The report accomplishes this
    objective by examining empirically the efficiency and distributional
    components of the IFQ policy design. As such, the results of this
    empirical study have important implications for IFQ deliberations by
    this committee and for Magnuson-Stevens Act reauthorization.
        The policy design choice centers on policy ``intent,'' i.e.,
    whether policy makers intend to benefit harvesters to the detriment of
    processors, or whether they intend to recognize the prior economic
    interests of both sectors by allowing both to benefit from the
    rationalization policy. In the case of the halibut and sablefish IFQ
    policy, the North Pacific Fisheries Management Council expressed no
    intent for the IFQ policies to advantage one sector to the detriment of
    the other, in either an absolute or relative sense. Nevertheless, more
    than 82% of the halibut processing sector and 97% of the sablefish
    processing sector (raw fish weight) were left absolutely worse off.
    Halibut processors, on average, lost more than half of their pre-IFQ
    gross operating margin. This policy-induced loss is even more
    remarkable because the gross value of the halibut fishery nearly
    doubled due to the IFQ policy. Sablefish processors also were left
    worse off, losing 75% of their pre-IFQ gross operating margin. See
    Figure 1. Harvesters were the beneficiaries of the IFQ policy design.
        The IFQ policy design was not win-win. It did not allow the
    processing sector to participate in the policy benefits. In fact, most
    processors were left worse off in both nominal and real dollars
    relative to historic levels. These detrimental outcomes were unintended
    and avoidable.
    BACKGROUND
        The switch from open access to individual transferable quota
    management is generally regarded a resounding success because
    efficiency losses emanating from open access externalities are
    recaptured. But past analyses of transferable quota polices stop there.
    There has been little theoretical work and no empirical analysis of who
    wins, who loses and how much. Yet, these combined efficiency and
    distributional elements of welfare economics are essential to
    understanding policy design choices and to advancing desperately needed
    fishery rationalization policies, whether based on individual
    transferable quotas or fishery cooperatives. The conceptual framework
    for analyzing policy design choice is presented in the Appendix to this
    testimony.
        Recent theoretical developments in the individual transferable
    quota literature argue that a harvester-only allocation of resource
    rights is beneficial to harvesters, though at the expense of the co-
    dependent processing sector. Six years after switching to IFQs in the
    two largest IFQ fisheries of the United States, there has been little
    evaluation of the economic impacts that the policy had upon the
    industry. In particular, no analysis inquired into the impacts on
    processors. The IFQ policy assured harvesters were left better off due
    to efficiency gains from fleet decapitalization and consolidation
    through fully compensated quota trading. Unlike the harvesters,
    however, the IFQ policy did not allow the pre-IFQ processing sector to
    be compensated for industry-wide decapitalization or to participate in
    the rationalization benefits, despite the fact that an overcapitalized
    fleet begets an overcapitalized processing sector. Simply put, the IFQ
    policy failed acknowledge the two sectors are inseparable elements of
    the open access externality that the IFQ policy intended to eliminate
    (Matulich, Mittelhammer and Reberte 1996 and Matulich and Sever 1999).
        Both the empirical and the theoretical literature show that a quota
    allocation only to harvesters damages co-dependent processors. Lindner,
    Campbell and Bevin (1992) first raised this issue concerning
    unintentional redistribution during the transition to an IFQ system as
    an empirical observation related the New Zealand individual
    transferable quota (ITQ) fisheries. Matulich, Mittelhammer and Reberte
    (1996) developed the theoretical framework explaining why a harvester-
    only IFQ unintentionally transfers wealth from processors to
    harvesters. Fleet consolidation reduces the harvest rate, which in turn
    creates excess daily processing capacity and therefore, excess demand
    for raw fish. Processors will bid up exvessel price to utilize the
    policy-induced excess capacity, transferring wealth to harvesters.
    Gardner Brown (2000), citing both studies in his survey of modern
    renewable resource economics literature, distilled the central policy
    issue concerning ITQ management. ``The rule for allocating ITQs is the
    crux issue and may be a stumbling block to adoption (p. 895).''
        Other than the paper by Matulich and Sever (1999), there has been
    neither thorough nor rigorous analysis of traditional IFQ allocations
    or of alternative initial allocation designs. This observation is
    surprising, since ``Advancement of rights based fishing is stymied by
    industry and congressional concern over distributional issues arising
    out of traditional ITQ design (Matulich and Sever 1999, p. 203).'' In
    fact, distributional issues arising out of fisheries rationalization
    policy seem to be the cornerstone of the recently enacted American
    Fisheries Act (AFA). For example, Senators Stevens and Gorton clarified
    the legislative intent of AFA in a letter to the Honorable Janet Reno,
    U.S. Attorney General.
            The purpose of the legislation was to rationalize, Americanize
            and decapitalize the Bering Sea pollock fishery. The
            cooperatives established in the AFA were designed to ensure
            that both [emphasis added] harvesters and processors benefited
            from the rationalization (Stevens and Gorton 1999).
        It would seem that fishery rationalization is evolving beyond the
    simplistic economic story that assigning transferable rights to
    harvesters assures gains from trade. Indeed, quota trading among
    vessels results in fleet consolidation that promotes efficiency.
    Moreover, no harvester can be made worse off because all trades are
    fully compensated. This is good. But what about the co-dependent
    processing sector that was capitalized to process the glut of fish that
    hit the docks following the derby-style open access fisheries?
        In the case of the halibut fishery, over 5,000 vessels landed 50
    million pounds in ``three or four, one- to two-day openings just prior
    to introducing IFQs (North Pacific Fisheries Management Council
    1997).'' Processors were capitalized to stabilize this enormous
    quantity of fish before it spoiled. Introduction of IFQs liberated the
    market by encouraging fleet consolidation and allowing the season to
    elongate eight months. Instead of having to divert 83% of the halibut
    to a lower-value, frozen market, IFQs stimulated product conversion so
    that 59% of the fish is now sold in the higher-value, fresh market.
    Gains were made from both the market side and harvesting cost
    reductions arising from efficient fleet consolidation. No such product
    form change occurred with sablefish; it remains a frozen product
    destined for Asian markets. This juxtaposition of fundamentally
    different market outcomes provides a near-perfect opportunity to
    evaluate whether the ability of industry to take advantage of new
    market opportunities underpins differential impacts on processors.
    PROJECT SUMMARY AND RESULTS
        Introduction of IFQs in 1995 changed the structure and operating
    behavior of the halibut and sablefish processing sectors. The resulting
    changes in absolute and relative economic welfare were measured as
    changes in gross operating margins or revenues net of variable costs
    (more formally, changes in quasi rents) that occurred before and after
    IFQs. This welfare measure captures the extent to which processors
    participated in the benefits of rationalization. Specifically, the
    analysis evaluated whether the policy left processors no worse off and
    possibly better off, or whether processors were left worse off. A
    second aspect of economic welfare considered whether processors and
    harvesters were relatively better or worse off, i.e., whether they
    shared the joint fishery benefits in the same relative proportions
    before and after IFQs. Both welfare measures can be decomposed into
    changes in market share and changes in gross operating margin as a
    share of wholesale price. The two-years, 1992-1993 represented the pre-
    IFQ period and the two-years, 1999-2000 represented the post-IFQ
    period.
        Measuring market share changes was easy because state and Federal
    regulations require statewide buying data to be reported to the Alaska
    Department of Fish and Game, Division of Commercial Fisheries. The
    Commercial Operators Annual Reports were used to measure changes in
    market share. Measuring changes in gross operating margin, however,
    required knowledge of variable processing costs through the first point
    of wholesale. There is no requirement to report such cost data. Nor are
    there any cost studies or economic models to estimate variable
    processing costs. Accordingly, a cost of production survey was
    conducted. Changes in net benefits per pound of fish (i.e., changes in
    the fraction of wholesale price retained by processors, net of variable
    processing costs and raw fish costs) and ultimately, changes in sector-
    wide welfare, were measured as a composite of these two elements. A
    firm that gained or lost market share may have gained or lost absolute
    or relative economic well-being, depending upon the degree to which it
    gained or lost its retained share of the wholesale price.
        All firms purchasing at least 100,000 pounds of fish in any of the
    four years were surveyed, while only a sample of small firms (<100,000
    pounds) were surveyed. Survey coverage totaled 88% to 96% of all
    halibut and sablefish purchased during the four years, 1992-1993 and
    1999-2000. Considerable care was given to authentication and
    verification of survey data. Data not collected in person from original
    invoices or historic source documents (i.e., sales and production
    summaries and general ledgers) were authenticated and verified as
    accurate by an ex post audit of historic internal financial documents
    and reports, including audited financial reports. An outlier test was
    conducted for the few participating firms that could not be verified in
    person. Retained survey data verified as authentic account for 52% and
    61% of landed halibut (54% and 59% of landed sablefish) in the pre- and
    post-IFQ periods, respectively. Audit verification coverage totaled 78-
    93% of the survey data (measured in pounds of raw fish), depending on
    year.
        The empirical evidence provided in this study supports the
    theoretical literature that a harvester-only allocation of quota
    redistributes wealth from processors to harvesters. The harvester-only
    allocation redistributed the pre-IFQ share of joint economic benefits
    to such an extent that the policy was not win-win.
        Both halibut and sablefish processors were impacted in strikingly
    similar ways, despite the fact that IFQs liberated higher-value fresh
    market opportunities for halibut, but not for sablefish. The similar
    outcomes derive from the fact that fleet consolidation under a
    harvester-only quota allocation creates excess processing capacity and
    therefore, excess demand for raw fish. The exvessel price concessions
    required to eliminate excess processing capacity redistribute wealth
    from processors to harvesters, regardless of product form.
        Referring to Figure 1, the pre-IFQ processing sector is estimated
    to have lost, on average, 56% of its 1992-1993 revenues in excess of
    variable costs. This loss occurred while wholesale revenues increased.
    The relative proportion of joint benefits retained by processors
    dropped 78% between the pre- and post-IFQ periods. Similarly, most of
    the sablefish processing sector lost revenues in excess of variable
    costs, though a precise estimate is somewhat more tenuous because the
    46% increase in wholesale price did not fully mitigate the 12.1 million
    pound (41%) decrease in landings. Adjusting for this supply-side effect
    by holding the wholesale price and purchases at 1992-1993 levels,
    approximately 97% of the entire sablefish industry (raw fish weight)
    were financial losers. The sablefish processing sector lost, on
    average, 75% of their pre-IFQ revenues in excess of variable costs.
        Closer examination of the halibut industry impacts portrayed in
    Figure 1 amplify the extent of policy-induced wealth redistribution.
    IFQs were responsible for nearly doubling total revenues at the first
    point of wholesale, up from $79.3 million to $155.5 million. The gross
    operating margin retained by the pre-IFQ processing sector shrank from
    $15.5 million to $6.8 million. The harvesting sector, on the other
    hand, more than doubled exvessel revenues on falling variable fishing
    expenses. 1 Revenues doubled between the pre-and post IFQ
    periods because the average wholesale price of halibut increased 66%,
    from $1.82/lb to $3.01/lb, while total catch increased 19% from 43.6
    million pounds to 51.7 million pounds. Harvesters, unlike most
    processors, were left better off in both fisheries. They captured the
    entire increase in total revenues; they captured efficiency benefits of
    reduced harvesting costs; and they captured most of the losses incurred
    by the processing sector. Those harvesters that exited did so fully
    compensated, such that none were worse off. Those harvesters that
    remained increased their gross operating margin. The redistribution,
    both absolute and relative, was solely a consequence of the IFQ policy
    design.
    ---------------------------------------------------------------------------
        \1\ Although changes in harvesting costs and derivative gross
    operating margins were not measured, efficiency gains from quota
    trading and season elongation imply variable harvesting costs per pound
    dropped. The added cost of longer running distances to fresh market
    ports may partially offset these gains.
    ---------------------------------------------------------------------------
        Market share impacts were dramatic in both fisheries. Less than
    one-third (30%) of the halibut processing firms and slightly more than
    one-third (37%) of the sablefish processing firms survived IFQs. Half
    of these surviving halibut processors doubled their aggregate market
    share from 18% to 37%, while the surviving market-share losers lost
    more than half of their pre-IFQ market share (down from 68% to 28% of
    the market). Overall, surviving halibut processors lost 14% of their
    pre-IFQ market share; exiting firms, of course, lost 100% of their
    market share. Surviving sablefish processors, in contrast, gained an
    additional 10% share of the market. Surviving market-share winners
    nearly doubled their aggregate sablefish market share (up from 33% to
    64%). Surviving losers lost almost half their sablefish market share
    (down from 45% to 24%).
        The share of wholesale price retained by processors dropped
    dramatically for processors in both fisheries. Halibut processors lost,
    on average, nearly two-thirds of their pre-IFQ share of the wholesale
    price net of variable costs. A few surviving firms gained sufficient
    market share to become financially better off (at least no worse off),
    but participated in joint fishery benefits at a rate less than their
    pre-IFQ share. Prior to IFQs, halibut processors retained a 19.6% share
    of wholesale revenues. Following IFQs, the gross operating margin for
    both traditional processed halibut and fish custom processed for others
    dropped, on average, to 6.7%. Sablefish processors lost nearly three-
    quarters of their pre-IFQ share of the wholesale price, after adjusting
    for supply-side effects. Surviving sablefish processors lost, on
    average, slightly more than two-thirds of their pre-IFQ retained share
    of the wholesale price. Very few surviving firms gained sufficient
    market share to remain no worse off or to become better off. Surviving
    sablefish processors retained, on average, just 6.9% of the wholesale
    price after IFQs were introduced, down from 24.2% prior to IFQs.
        IFQs encouraged significant entry of both primary processors and
    broker/reprocessors. These new entrants tend to be innovative, low cost
    (efficient) firms that have an operational advantage in not having to
    invest much permanent capital, or to service the associated debt. The
    product form change in halibut enabled new entrants, including broker/
    reprocessors, with relatively little capital to purchase, process and
    market fish. These new entrants were not responsible for the product
    form change. All firms faced the same profit incentive to switch toward
    the higher valued fresh product. Recall that the average wholesale
    price for halibut rose roughly 66% as the dominant product form shifted
    from frozen to fresh; processing costs remained roughly the same
    between the two policy periods and between the two product forms. Pre-
    IFQ firms located near the limited Alaska road system or where
    alternative shipping modes support the fresh market faced similar, if
    not identical incentives. Remote firms were less able to take advantage
    of the fresh market. This fact was accentuated by season elongation,
    which allowed vessels to travel to fresh buyers, redistributing
    landings toward ports that can support the fresh market.
        Fifty-one new firms became primary processors/buyers of halibut,
    capturing one-third of the halibut market. Four of these new entrants
    were large (greater than or equal to 1 million pounds) that captured
    nearly one quarter of the post-IFQ market. Entry also occurred through
    brokers/reprocessors, though these firms are not reflected in the COAR
    data. Entry was less important in the sablefish fishery, presumably
    because capital cost requirements remained high. Still, twenty-five new
    entrants, all small firms, collectively captured 12% of the market.
    Broker/reprocessors remain relatively unimportant in the sablefish
    fishery.
        Overall, this study helps clarify the policy choice among future
    rationalization designs by providing empirical evidence that the
    initial quota allocation has dramatic welfare ramifications. A
    harvester-only IFQ allocation (in any manifestation) does not recognize
    the prior economic interests of both harvesting and processing sectors.
    It does not allow both sectors to benefit from rationalization.
    Instead, a harvester-only IFQ policy benefits harvesters to the
    detriment of processors, precisely as an allocation of quota only to
    processors would damage harvesters, or an allocation of all quota only
    to me would damage both sectors. If rationalization policy is intended
    to benefit both harvesters and processors, a different initial
    allocation--one that acknowledges prior economic interests of both
    sectors--is required. Preserving the opportunity for new entry in both
    the harvesting and processing sectors will enhance the efficiency gains
    from future fishery rationalization.
    Limitations/Caveats
        There are three important limitations/caveats to this study. First,
    examination of pre- and post-IFQ impacts on the processing sector does
    not necessarily imply causality. This analysis assumed the two-year
    period 1992-1993 represents an open access long-run equilibrium,
    consistent with the fisheries economic literature. As such, it is
    regarded as a reasonable proxy for both a ``before'' and ``without''
    scenario in a before and after, with and without policy analysis.
    Nevertheless, the way in which industry restructured may be partially
    dependent on things other than the switch from license-limited open
    access to IFQ management.
        Second, empirical economic analysis of fisheries policies,
    particularly retrospective analysis, often is problematic in U. S.
    fisheries because costs of production data are not collected. This
    study is no exception. While the changes in market share reflected all
    halibut and sablefish landed in Alaska, the economic component was
    based on an industry cost of production survey that required
    participants to access 10-year-old data. Inferences drawn in this study
    assume the survey data are representative of the entire processing
    sector.
        Third, policy inferences from this study are intended to guide the
    design of future rationalization programs in other fisheries. No aspect
    of this study is intended for the purpose of revisiting/changing the
    policy designs of these two Alaska IFQ programs. Rather, this study is
    premised on the principle that once the rules of an IFQ program are
    established and individuals make investments based on those rules,
    changing the rules in fundamental ways can strand assets and create
    losers in much the same way as an initial allocation of quota only to
    harvesters damaged processors.
                                     ______

        [Attachments to Dr. Matulich's statement follow:]
        [GRAPHIC] [TIFF OMITTED] T7639.007

        [GRAPHIC] [TIFF OMITTED] T7639.008

        [GRAPHIC] [TIFF OMITTED] T7639.009

        Mr. Gilchrest. Thank you.
        Dr. Halvorsen?
        Dr. Halvorsen. Yes.
        Mr. Gilchrest. Welcome.

        STATEMENT OF ROBERT HALVORSEN, PROFESSOR, DEPARTMENT OF
                  ECONOMICS, UNIVERSITY OF WASHINGTON

        Dr. Halvorsen. Thank you for inviting me.
        Mr. Gilchrest. Is there any competition between Washington
    State University and the University of Washington?
        Dr. Matulich. May I answer that?
        [Laughter.]
        Dr. Halvorsen. There was not before today, but it is about
    to start.
        [Laughter.]
        Dr. Halvorsen. Thank you for inviting me to present
    testimony here today. I have submitted some written testimony,
    and my comments draw upon that, and most of the details that I
    will be talking about, some of which are analytical, are in
    that written testimony. But I will summarize my conclusions.
        And specifically, what I want to discuss is the case that
    has been made for Individual Processor Quotas (IPQs) in a
    fishery. The case has been essentially constructed by Professor
    Matulich over the past few years in a series of articles and
    testimony, concluding most recently 2 minutes ago. And what I
    want to do is briefly outline the basic elements that make up
    this case and then come back to discuss each one in turn. My
    conclusion is that the elements themselves are often flawed,
    and the case as a whole simply does not stand. And I was truly
    surprised to find out that the IPQs might be considered as
    something to be nationally mandated for all IFQ programs,
    because the case for them, in fact, is, I feel, extremely weak.
        I should say I am going to be criticizing the case for
    IPQs. I am not going to be criticizing Professor Matulich. I
    may say his name repeatedly because he is, I think, the sole
    proponent for this case. Therefore, I can say Professor
    Matulich says this or that, and I disagree, I am disagreeing
    with the literature produced by Professor Matulich, so I am
    disagreeing with him.
        The elements of his argument are as follows: IFQs create
    efficiency. They may cause losses to processors, so processors
    may try to block IFQs. Then, you would not attain the
    efficiency. Processors would not block IFQs if the program was
    Pareto-safe, meaning nobody would lose, and using a two-pie
    allocation would ensure that they were Pareto-safe. That is a
    brief summary of Professor Matulich's position.
        And I will have to say this pretty quickly: I certainly
    agree that IFQs create efficiency, so we agree on that part.
    But whether or not they cause losses to processors has not been
    established, even despite the latest evidence you were given
    today. In a theoretical article, one can show under certain
    circumstances--very competitive fisheries; processors who take
    what they get, so to speak--the processors may lose out. But
    that does not necessarily describe a real-world fishery.
        The pollock fishery which I studied in depth for the North
    Pacific Fishery Management Council does not fit that model, for
    example. Quite a bit of my written testimony summarizes the
    reasons why processors have significant bargaining power in
    that fishery and why, had there been more or less a pure IFQ, a
    cooperative version of an IFQ program, they would not have
    necessarily lost. And other studies--there have not been enough
    of them--but other analytical studies of real world fisheries
    do not support this case for processor losses.
        Professor Matulich presented an empirical case just now,
    but unfortunately, I believe he is mischaracterizing his
    results. As I understood from reading the paper, it addresses
    something called unit quasi-rents and whether they went up or
    down, but that is not the same thing as wealth. It is not the
    same thing as profits. Whatever the results one obtains for
    that funny-sounding concept, using quasi-rents does not
    indicate anything about profits. It is quite possible for
    processors' quasi-rents to go down at the same time as their
    profits are going up.
        In regard to the problem that processors might impede
    implementation of IFQs, I think the councils already have ways
    of enhancing processors' positions if they think that is
    necessary in order to obtain a desirable negotiated solution,
    and they have some experience using them. The idea of Pareto-
    safety is that nobody will lose. This is an idea that has been
    around in economics for 150 years but has been rejected as any
    practical criterion for public policy. It is simply not used in
    mainstream economic analysis, mainly because it is
    unattainable, and even if it was attained, I think it is naive
    to think that just being told that they could not lose would
    mean that processors would no longer care about trying to
    enhance their position in an IFQ program.
        Last, the two-pie system does not guarantee Pareto-safety.
    Professor Matulich's analysis for the perfectly competitive
    case, which is the one in which he initially showed the
    processors might lose, concludes itself that two-pie would not
    be Pareto-safe. He then does an analysis of a bilateral
    monopoly where you have one buyer and one seller and claims to
    prove it would be true in that case, but the proof is just
    technically invalid, as discussed in my written testimony.
        Therefore, I do not think there has been any case made for
    IPQs; certainly not a case that justifies using them on a
    national basis or imposing them. And as I have heard many
    people say today, I strongly support the idea of leaving
    regional councils with flexibility, given the great differences
    across fisheries. How necessary it might or might not be to
    compensate processors and how effective various methods might
    be in different fisheries is going to vary, and I do not think
    national standards and national mandates should be applied on
    that issue.
        Thank you.
        [The prepared statement of Dr. Halvorsen follows:]

     Statement of Robert Halvorsen, Professor of Economics, Department of
          Economics, University of Washington, on Behalf of the Crab
                       Rationalization and Buyback Group

    Executive Summary
        My testimony addresses the issue of whether the guidelines for
    Individual Fishing Quota (IFQ) programs should require explicit
    mechanisms to ensure that processors are compensated for losses they
    might incur as a consequence of the introduction of IFQs. I begin by
    discussing the importance of market structure in determining the
    effects on processors and harvesters of rationalizing a fishery, with
    the primary emphasis placed on the effects of an IFQ program in which
    quota shares are allocated only to harvesters.
        To illustrate the importance of market structure and the balance of
    bargaining power on the outcomes of a rationalization program, I review
    a recent analysis of the BSAI inshore pollock fishery that was prepared
    for the North Pacific Fishery Management Council (Halvorsen, Khalil,
    and Lawarree 2000). The analysis demonstrates that market structure is
    critical in determining the distributive outcomes of IFQ programs.
    Because the characteristics of market structure differ greatly across
    fisheries, the distributive effects of rationalization policies require
    fishery specific analysis. It is concluded therefore that decisions
    concerning the desirability of mechanisms to compensate processors for
    potential losses, and the type of mechanism that is most appropriate,
    should also be fishery specific, rather than attempting a ``one-size-
    fits-all'' approach.
        Next I discuss the rationales that have been advanced for
    compensating processors for any losses that they may incur as the
    result of a rationalization program. My primary emphasis is on the
    argument that if processors are not compensated they may block the
    implementation of a rationalization program, with the result that the
    potential efficiency gains from the program cannot be realized. I note
    that there are several problems with this argument. First, attempts to
    block a program unless distributive outcomes are altered may simply
    reflect an attempt to increase the size of already positive net
    benefits, rather than to avoid losses. Second, if harvesters become
    concerned that the attempt to keep processors safe from harm will
    result in losses for harvesters, they may also try to block
    implementation. Lastly, when efforts to hinder implementation are
    rewarded, an incentive is created for increased obstructive behavior in
    the future.
        Following this general discussion, I consider two recently proposed
    concepts that have received a considerable amount of discussion in the
    context of rationalization programs in North Pacific fisheries. One is
    that rationalization programs should satisfy the criterion of being
    ``Pareto safe,'' which requires that no fishery entities be made worse
    as a result of rationalization. The other is that an IFQ program should
    also involve the allocation of Individual Processor Quotas (IPQs) in
    what has come to be known as the ``two-pie'' approach.
        The two concepts are linked in that the two-pie system has been
    advocated by Matulich and Sever (1999) as a feasible way of achieving
    Pareto-safe rationalization in at least some policy-relevant
    situations. In particular, Matulich and Sever claimed to have proven
    that a two-pie allocation would be Pareto safe in a bilateral monopoly,
    that is, a fishery with only one harvester and one processor, and
    asserted that their analysis of this case would be applicable to the
    BSAI inshore pollock fishery because it ``emulated'' a bilateral
    monopoly. However, neither of these claims is correct. First, as
    discussed in Halvorsen, Khalil, and Lawarree (2000), the
    characterization of the BSAI inshore fishery as a bilateral monopoly
    was highly misleading because it ignored critical elements of the
    inshore fishery's market structure. Second, and more importantly, my
    testimony shows that the claimed proof that a two-pie allocation would
    be Pareto safe in a bilateral monopoly is invalid. Therefore, even if a
    real-world fishery could be found that was a bilateral monopoly, there
    is no reason to believe that a two-pie allocation would be Pareto safe.
        Since there are no other market structures for which the Pareto
    safety of a policy feasible two-pie system has even been asserted, no
    credence should be given to claims that a two-pie system is a ``policy-
    superior initial allocation of rights'' (Matulich, Mittelhammer, and
    Reberte 1996, page 112). Instead, the inclusion of IPQs in a fishery
    rationalization program should be viewed as simply one possible
    mechanism for enhancing outcomes for processors, bearing in mind that
    the possible outcomes under IPQs have received very little credible
    economic analysis and are untested by experience in any real-world
    fishery.
        Evaluations of the appropriateness of allocating IPQs as part of a
    specific rationalization program should include (i) an assessment of
    whether compensation for processors is desirable, given the
    characteristics of the specific fishery, in particular the balance of
    bargaining power, and (ii) the relative merits of IPQs versus other
    possible compensation programs, given the characteristics of the
    specific fishery.
        Accordingly, it is desirable that regional councils have
    flexibility in deciding whether, and how, processors should be
    compensated for possible losses arising from a fishery rationalization
    program. Therefore, I recommend that the national standards for fishery
    conservation and management not require that IPQs or other specific
    compensation mechanisms be included in future fishery management plans
    and regulations.
    1. Introduction
        My testimony addresses the issue of whether the guidelines for
    Individual Fishing Quota (IFQ) programs should require explicit
    mechanisms to ensure that processors are compensated for losses they
    might incur as a consequence of the introduction of IFQs. I will
    discuss in turn the conditions determining the probability, extent, and
    incidence of such losses, and the efficiency and equity rationales that
    have been advanced in favor of compensation.
        I will pay particular attention to two recently developed concepts
    that have received a considerable amount of discussion in the context
    of rationalization programs in North Pacific fisheries. One is that
    rationalization programs should satisfy the criterion of being ``Pareto
    safe,'' which requires that no fishery entities be made worse as a
    result of rationalization. The other is that an IFQ program should also
    involve the allocation of Individual Processor Quotas (IPQs) in what
    has come to be known as the ``two-pie'' approach. The two concepts are
    linked in that the two-pie system has been put forward as a feasible
    way of achieving Pareto-safe rationalization in at least some policy-
    relevant situations by Professor Scott Matulich and his co-authors
    (Matulich, Mittelhammer, and Reberte 1996, Matulich and Sever 1999).
    2. The Effects of IFQ Programs on Processors
        Unless specified otherwise, the phrase ``IFQ program'' will refer
    to a program in which IFQs are allocated only to harvesters. In
    analyzing and predicting the effects of such an IFQ program on the
    well-being of processors, it is critical to take into account the
    specific conditions of the fishery being considered.
        One important set of conditions concerns the market structure of
    the fishery. The first analyses to emphasize the possibility of
    processors incurring losses as a result of the introduction of an IFQ
    program (Plesha and Riley 1992, Matulich, Mittelhammer and Reberte
    1996) assumed that the fishery was perfectly competitive, the end of
    the race for fish created excess processing capacity with no
    alternative uses, and the firms in the industry were not vertically
    integrated (that is, processors did not own harvesters or vice versa).
    Given these assumptions, they conclude that processors would be made
    worse off by an IFQ program because they would fail to obtain any of
    the rents from fish and would also lose part of the value of their
    capital.
        However, if all other circumstances were the same, but processors
    and harvesters were vertically integrated (as for example in a fishery
    comprising only factory trawlers), then processors could not be made
    worse off because they would receive the full benefits of the
    rationalization program (Matulich and Sever 1999). In a mixed case,
    with some processors vertically integrated and others not, the
    incidence of gains and losses might differ by type of entity, with non-
    integrated processors being more susceptible to suffering losses than
    integrated (Halvorsen, Khalil, and Lawarree 2000).
        Perfect competition is one of the standard models used in economic
    analyses, in part because of its analytical simplicity. Examples of
    other standard models familiar from economic theory include monopoly (a
    single harvester facing perfectly competitive processors), a monopsony
    (a single processor facing perfectly competitive harvesters), and a
    bilateral monopoly (a single harvester facing a single processor). In
    the first case, the monopolist would obtain all the net benefits of the
    fishery, in the second case the monopsonist would, and in the third
    case the division of net benefits would depend, among other things, on
    the alternative opportunities available to the participants.
        These three standard models also have the advantage of analytical
    simplicity, but are not in general directly applicable to the analysis
    of the effects of IFQ programs for two reasons. First, the
    characteristics of the market structures of real-world fisheries are
    more complex than such simple theoretical models imply. And second, if
    a fishery did conform to one of these model specifications, then it
    would be expected to be capable of maximizing aggregate net benefits on
    its own, which would preclude the development of a race for fish. For
    instance, a monopolist harvester would optimally allocate its fleet
    over time rather than engaging in a race to fish between its own
    vessels. Accordingly, rationalization programs such as an IFQ program
    would be redundant.
        However, consideration of these standard models does illustrate the
    wide range of results possible with respect to the division of the net
    benefits of a fishery, and therefore the need to take market structure
    into account when assessing the effects of an IFQ program on the
    participants in the fishery. Also, to the extent that a fishery being
    considered for an IFQ program has characteristics similar to a standard
    model, some inferences may be drawn about the probability that
    processors could be adversely affected by the implementation of the
    program. For example, other things equal, implementing an IFQ program
    in a fishery with very few processors and many harvesters is less
    likely to result in processor losses than in a fishery with many
    processors and harvesters.
        More generally, these examples suggest the importance of bargaining
    power in determining the distributive effects of an IFQ program, and
    therefore the need to use the tools of game theory to assess the
    possible outcomes of a particular IFQ program. These tools include
    cooperative bargaining theory (e.g., Nash 1953) and non-cooperative
    bargaining theory (e.g., Osborne and Rubinstein 1990). A recent example
    of an analysis of a fishery using cooperative and non-cooperative
    bargaining theory is Halvorsen, Khalil, and Lawarree (2000). This
    analysis, which was prepared on behalf of the North Pacific Fishery
    Management Council, considered the prospective distribution of net
    benefits from rationalization of the inshore sector of the Bering Sea/
    Aleutian Islands (BSAI) fishery under the American Fisheries Act (AFA).
        Although most of the specific results of the analysis are directly
    applicable only to that particular fishery, a brief review of the main
    elements of the analysis is useful to illustrate the issues involved.
    The review also will be useful as background for the evaluation of the
    two-pie allocation, which was initially discussed in the context of the
    inshore pollock fishery.
        Halvorsen, Khalil, and Lawarree evaluated, and rejected, the
    suitability of several standard economic models that had been proposed
    for application in the inshore pollock fishery. For example, Wilen
    (1998) had argued that the inshore fishery was best characterized as a
    single monopsony, in part because of the dominant position of two firms
    in the main market for surimi products. Halvorsen, Khalil, and Lawarree
    concluded that Wilen's analysis substantiated the hypothesis that
    processors had significant market power, but that the fishery was not a
    monopsony.
        One reason given for rejecting the conclusion of monopsony was that
    for the processors to behave as a monopsony they would have to overcome
    serious economic and legal difficulties associated with being a
    successful cartel. Also, there was evidence that the processors had not
    always acted in a united way, as they would have if they were a
    monopsony. For example, when the Bering Sea Marketing Association
    (BSMA) went on strike against several processors in 1999, the largest
    processor in the fishery, which was not a party to the negotiations,
    had its fleet continue to fish, making prolongation of the strike too
    costly to both the members of the BSMA and their processors. The
    existence of the BSMA also argued against the conclusion that the
    inshore sector was a monopsony, because its collective bargaining is
    not consistent with harvesters acting as passive price takers. Lastly,
    as noted above, an effective monopsony would have been capable of
    substantially rationalizing the fishery without the intervention of the
    AFA.
        The existence of the BSMA was considered especially important by
    Matulich and Sever (1999), who argued that it implied that the inshore
    sector was a single bilateral monopoly. They claimed that the
    dissemination of price information to each processor by the marketing
    association during the course of negotiations allowed the processors to
    unify even though they were not sharing information among themselves.
    In other words, Matulich and Sever were claiming that the BSMA, acting
    as the representative of independent catcher vessels, unwittingly made
    it possible for the processors to unite against its own clients.
        One serious factual problem with Matulich and Sever's analysis is
    that the BSMA did not represent all of the independent catcher vessels,
    and the largest processor was not a party to the negotiations. Also,
    the theoretical analysis left two critical questions unanswered. First,
    why would the marketing association not take advantage of the
    processors' lack of communication and play one against the other by
    misrepresenting received price offers? Second, even if it did not do
    so, why would information on prices be sufficient to allow the
    processors to overcome the other economic and legal difficulties
    hindering their behavior as a single agent?
        Another critical factual problem with Matulich and Sever's analysis
    is that it ignored the existence of substantial vertical integration in
    the fishery. Based on National Marine Fishery Service data, processor
    controlled vessels harvested approximately half the total allocation of
    catch to the inshore sector. This makes the existence of a united
    harvesting sector implausible, because processor controlled vessels
    would be subject to conflict of interest issues and could not be
    expected to consider only the effects on harvesters of the results of
    negotiations with processors.
        Furthermore, the degree of vertical integration was not uniform
    across processors. For example, two of the largest processors, which
    together accounted for about two-fifths of the total inshore catch,
    were estimated to obtain more than eighty percent of their fish from
    their own processor controlled vessels, whereas another large
    processor, with about one-fourth of the total inshore allocation,
    obtained virtually all of its fish from independent catcher vessels.
    The differences in the degree of vertical integration implied
    differences in the effects of a given negotiated outcome, complicating
    any effort of the processors or harvesters to act in unison.
        Based on their assumption that the inshore sector was a bilateral
    monopoly, Matulich and Sever (1999) recommended that a two-pie
    rationalization approach be implemented, and claimed that it would
    result in a Pareto-safe distribution of net benefits.
        However, as discussed in section 5 below, Matulich and Sever's
    theoretical analysis of the two-pie system under bilateral monopoly is
    fundamentally flawed, and their conclusion that it would guarantee a
    Pareto safe outcome is simply incorrect. Furthermore, even if their
    analysis of a two-pie program under bilateral monopoly had been correct
    in theory, advocacy of this particular policy approach for this
    specific fishery was based on a highly misleading characterization of
    the fishery's market structure.
        Halvorsen, Khalil, and Lawarree (2000) used concepts from game
    theory to evaluate the nature of competition in the industry, and the
    resulting balance of bargaining power. They concluded that the
    processors had a number of important bargaining advantages. The large
    portion of the harvest caught by processor controlled vessels reduced
    the reliance of the vertically integrated processors on supply from
    independent catcher vessels, while also providing processors an
    informational advantage because the independent catcher vessels they
    bargained with did not own inshore processing plants. Also, because the
    processing sector was highly concentrated and new entry was prohibited
    under the AFA, processors would be expected to realize that aggressive
    tactics yielding short-term gains were unlikely to be profitable in the
    long-run. Independent catcher vessels did have one bargaining advantage
    in that they were able to legally bargain as a group. However, it was
    concluded that on balance the processors had substantially more
    bargaining power than independent catcher vessels.
        The Halvorsen, Khalil, and Lawarree analysis noted that
    rationalization of the inshore pollock fishery was expected to result
    in a large increase in the effective amount of processing capacity,
    which would provide more opportunities for processors to engage in
    aggressive competition, but the long-term incentives for refraining
    from doing so would remain. Therefore they concluded that the
    rationalized fishery would be characterized by ``moderate but not
    cutthroat competition'' among processors.
        These conclusions concerning bargaining power were then applied to
    analyze two alternative rationalization programs being considered by
    the Council: processor-specific cooperatives (an implicit processor
    compensation mechanism) and the Dooley-Hall proposal for non-processor-
    specific cooperatives (an approximation to IFQs). Halvorsen, Khalil,
    and Lawarree concluded that there was a significant probability that
    some independent catcher vessels would be adversely affected by the
    requirement of processor-specific cooperatives. They also concluded
    that the Dooley-Hall proposal would be more favorable to independent
    catcher vessels, and less favorable to processors, than the processor-
    specific cooperatives.
        Their conclusions concerning the relative bargaining power of
    harvesters and processors in the inshore BSAI pollock fishery would
    also have been relevant to the analysis of the effects on processors of
    alternative rationalization programs including IFQs. However, it is
    important to note that the conclusions were based on the conditions in
    this specific fishery. Because market structure is critical in
    determining the distributive outcomes of IFQ programs, and the
    characteristics of market structure differ greatly across fisheries,
    the distributive effects of rationalization policies require fishery
    specific analysis. Accordingly, decisions concerning the desirability
    of mechanisms to compensate processors for potential losses, and the
    type of mechanism that is most appropriate, should also be fishery
    specific, rather than attempting a ``one-size-fits-all'' approach.
        On the other hand, the basic principles underlying the
    recommendation that processors should be compensated for losses arising
    from fishery rationalization programs can be addressed at a general
    level. The following section discusses the principal arguments that
    have been made in support of compensation based on considerations of
    efficiency and equity.
    3. Rationales for Compensation
        One rationale advanced for compensating processors for possible
    losses is that not doing so could have adverse consequences for
    economic efficiency by creating impediments to the implementation of
    efficiency-enhancing rationalization programs. This possible source of
    inefficiency is emphasized by Matulich, Mittelhammer, and Reberte
    (1996). Having concluded that processors could suffer losses as the
    result of the introduction of IFQs in a perfectly competitive fishery,
    they note (page 112), ``These losses could promote political gridlock
    and jeopardize adoption of an ITQ policy unless they are fully
    compensated or redistribution is avoided by a policy-superior initial
    allocation of rights to both harvesters and processors.''
        This argument assumes that processors do not have enough economic
    bargaining power in rationalized fisheries to avoid losses, but do have
    enough political bargaining power to block efficiency-enhancing
    rationalization programs. However, as the Halvorsen, Khalil, and
    Lawarree analysis of the BSAI pollock fishery indicated, processors may
    in fact have more bargaining power than harvesters in some real-world
    fisheries.
        Therefore, a situation in which processors seek rent-enhancing
    mechanisms as the price of agreeing to rationalization programs may
    simply reflect the desire of processors to obtain a larger share of the
    net benefits the program would create, rather than that they are
    seeking to protect themselves from suffering losses. Under these
    circumstances, utilizing mechanisms to enhance the processors' share of
    the net benefits could actually create new impediments to the
    implementation of rationalization programs by causing harvesters to
    fear that they would lose out from the implementation of the program.
        The history of the American Fisheries Act is instructive in this
    regard. Rationalization of the BSAI pollock fishery was based on the
    creation of harvesting cooperatives. Processors in the inshore sector
    expressed concern that cooperatives might put them at a bargaining
    disadvantage. In response, the AFA rules for cooperatives required that
    they be processor-specific, and that membership in the cooperative for
    each processor was limited to vessels that were qualified for that
    processor, as determined by where a catcher vessel had previously
    delivered the largest share of its total catch.
        In response, an association of independent catcher vessel owners
    expressed concern that the AFA rules for inshore cooperatives would
    harm them because of the restrictions placed on where they could market
    their fish, and proposed an alternative set of rules known as the
    Dooley-Hall proposal. Resolution of this conflict required extensive
    hearings before the North Pacific Fisheries Management Council. In
    addition, concerns were raised about the effects of processor-specific
    cooperatives on small entities as defined in the Regulatory Flexibility
    Act.
        Another possible disadvantage of responding to processors'
    resistance to the adoption of a rationalization program by
    incorporating mechanisms to enhance their position is that doing so
    might have adverse efficiency consequences in the longer run. If it
    appears that policy makers are willing to appease opponents of
    rationalization by enhancing their rewards, this will provide
    incentives for increased obstructive behavior in the future, and
    thereby imperil the implementation of rationalization programs in other
    fisheries.
        The other principle rationale for compensating processors against
    possible losses is that it would be inequitable not to do so. For
    example, Plesha and Riley (1992) and Matulich, Mittelhammer, and
    Reberte (1996) argue that there is a Fifth Amendment ``taking'' issue
    if the rationalization of a fishery results in losses for processors.
        Without attempting to address the implied legal issues, some
    observations can be made on whether investment losses from
    rationalization are inequitable from an economic point of few. It seems
    unlikely that the investments assumed to be at risk from
    rationalization were made with the anticipation that the race for fish
    was certain to be the long-run equilibrium outcome for the fishery in
    question. Faced with an uncertain future, processors' investment
    decisions can be assumed to have taken into account the possibility of
    various alternative scenarios, including regulatory policies to end the
    race for fish. Accordingly, investment decisions would be optimized to
    reflect trade-offs between the various possible future outcomes. For
    example, there might be a trade-off between further increasing
    investment in capacity in order to secure competitive advantages by,
    for example, deterring the entry of new processing firms into the
    fishery, versus the advantage of having the smaller amount of capacity
    that would be optimal if the race for fish were ended. It is not clear
    why losses that had been anticipated to occur under a particular
    scenario should instead be compensated on equity grounds when that
    scenario turns out to be the actual outcome.
        Another equity issue concerns the distribution of net benefits
    within the processing sector. For example, as noted above, in a
    processing sector comprising some firms that are vertically-integrated
    and some that are not, the non-integrated processors would be more
    susceptible to suffering losses from rationalization than would the
    integrated processors. But the choice to not be vertically-integrated
    presumably reflects a judgement by these firms that they obtained
    enough economic advantages by refraining from acquiring harvesting
    capacity to compensate for the increased risk of losses if the fishery
    were rationalized. Adopting a policy to compensate all processing firms
    for possible losses would change the anticipated benefits and costs of
    these business decisions after the fact and thereby effectively
    discriminate in favor of the non-integrated firms, partly at the cost
    of harvesters.
        Matulich and Sever (1999) use the term ``Pareto safe'' to refer to
    the concept of a rationalization program that is ``equitable in the
    sense of not redistributing status quo ante wealth of historical
    participants'' (page 204). They then argue that if a rationalization
    program is not Pareto safe, ``politically powerful interest groups may
    form to block a switch to ITQ management, jeopardizing the efficiency
    benefits of rights-based fishing (page 215). The desirability, and
    feasibility, of relying on the concept of Pareto safety in designing
    and evaluating fishery rationalization polices is discussed in the
    following section.
    4. Pareto Safe Rationalization
        Although the term ``Pareto safe'' appears to have originated in the
    writings of Matulich and his co-authors, essentially the same concept
    has been long known in the economic policy analysis literature as the
    Pareto criterion. ``The logical criterion for proving that a policy
    change, or any other change, is beneficial was first stated by a
    nineteenth century Italian social scientist, Vilfredo Pareto. Pareto's
    rule is very simple: Program X improves the welfare of the society if
    it makes at least one person better off and no one worse off.''
    (Gramlich 1990).
        The recommendation by Matulich and his co-authors that fishery
    rationalization policies should be required to be Pareto safe is
    equivalent to saying that they should satisfy the Pareto criterion.
    However, the Pareto criterion only provides information on a policy's
    effect on economic welfare when the policy would result in no
    individual being made worse off. A policy that involved small losses to
    one individual, and large gains to many others, would fail the Pareto
    criterion, even though it might have a large positive effect on
    economic welfare. And virtually all feasible public policies result in
    at least one individual being made worse off.
        This has led to the general rejection of the Pareto criterion as a
    practical basis for evaluating public policies. As Ng (1984, page 1033)
    summarizes, ``The Pareto criterion is widely accepted as a sufficient
    condition for an improvement in social welfare.--However, most, if not
    all, changes in the real world involve making some better off and some
    (no matter how small the number) worse off. Thus the Pareto criterion
    in itself is of little practical use.''
        The practical difficulties of trying to implement Pareto safe
    fishery rationalization policies can be illustrated by considering the
    effects on individual harvesters of implementing an IFQ program.
    Matulich, Mittelhammer and Reberte (1996, page 112) indicate that an
    IFQ policy would be Pareto safe within the harvesting sector, because
    ``endowing individual harvesters with fully transferable, permanent,
    and exclusive fishing rights is tantamount to assigning property rights
    over the fish stock...[an important benefit]...arises out of gains from
    free trade in which more efficient users of the resource are able to
    purchase rights from less efficient users. Such trade fully compensates
    the sellers.'' While this is a reasonable summary of the efficiency
    arguments in favor of IFQs, it does not provide a basis for concluding
    that no individual harvesters are made worse off.
        There are at least two ways in which individual harvesters can be
    made worse off under an IFQ program. First, it is not feasible to
    ensure that the original distribution of quota among harvesters matches
    their actual participation in the fishery. For example, a standard
    procedure is to base quota share allocations on catch history over some
    historic period. If a participant's harvest was unusually low during
    all or part of that period he may not receive sufficient quota to leave
    him as well off as before. Similarly, if the catch history period is
    not fairly recent, a large proportion of the quota shares may go to
    individuals no longer active in the fishery rather than to those
    currently active (see, for example, North Pacific Fishery Management
    Council 2002, Appendix 2-7, page 8). Second, the assumption that the
    price of quota will fully compensate the sellers depends on the
    implicit assumption that the market for quotas is perfectly
    competitive, which need not be the case (Anderson 1991).
        It should be noted that similar issues could arise in a program
    involving the allocation of individual processor quotas. The allocation
    of the quotas might not reflect an individual processor's actual
    participation in the fishery, for example if a facility was
    incapacitated during part of the historic period used to determine
    shares. And fisheries with a small number of processing firms, or a few
    large and many small firms, are particularly susceptible to market
    imperfections that might prevent the price of a quota from fully
    compensating the seller.
        Thus the Pareto safe concept is not of much practical help in
    evaluating the effects of fishery rationalization programs at the
    individual participant level. Matulich and his co-authors in fact
    rarely refer to applying the Pareto safe concept at this level, but
    instead focus on Pareto safety at the level of the aggregate harvesting
    and processing sectors. In particular, as noted above in section 3,
    they suggest that a rationalization policy is unlikely to be adopted if
    it would create uncompensated losses for the processing sector.
        Matulich, Mittelhammer and Reberte (1996, page 126) speculate that
    a Pareto safe allocation might be obtained under a ``symmetrical rights
    distribution'' and suggest, ``Candidates worthy of consideration
    include (i) a split of harvest quota shares between fishers and
    processors; (ii) a ``two-pie'' allocation, in which catching rights are
    awarded to fishers and processing rights are awarded to processors; and
    (iii) full-utilization quota shares.''
        Matulich and Sever (1999) investigate the properties of the first
    two of these proposals, referring to the first one as a ``one-pie split
    allocation.'' They first consider the application of the one- and two-
    pie allocations to a fishery that is perfectly competitive and conclude
    that neither type of allocation is capable of providing policy feasible
    Pareto safe outcomes. They then consider the application of these
    allocations to a bilateral monopoly, after asserting that the BSAI
    inshore pollock fishery ``appears to emulate bilateral monopoly'' (page
    212). The one-pie allocation is again concluded to not be capable of
    providing policy feasible Pareto safe outcomes. However, they claim to
    prove that the two-pie system would be Pareto safe not only at the
    aggregate level but also at the level of individual participants. The
    validity of this remarkable claim is discussed in the following
    section.
    5. Two-Pie Allocations and Pareto Safety
        Matulich and Sever's alleged proof that a two-pie allocation would
    be Pareto safe in a bilateral monopoly is based on a series of dubious
    assumptions. The first is their assumption that the bilateral monopoly
    would be able to negotiate an ex vessel price that maximized joint
    profits under conditions of a race for fish, but would be unable to
    negotiate rationalization measures that would end the race for fish and
    thereby increase the potential joint profits. No explanation is given
    for this assumed constraint on the bilateral monopoly's ability to
    maximize joint profits. Instead it is simply implicitly assumed that
    the race for fish can be ended only by an externally imposed
    rationalization program.
        In their analysis of the two-pie allocation, efficiency is assumed
    to be attained through quota trading, and to be independent of the
    bargained ex vessel price. In particular, they note that the ex vessel
    price might be outside of the Pareto safe range. However, they argue
    that the actual price will fall within the Pareto safe range because
    (page 214):
            ``While the efficient price does not guarantee Pareto safety,
            intrinsic bargaining behavior should, provided the bargaining
            association is responsive to the well being of its entire
            membership. Bargaining agents have internal incentives to
            negotiate a price that not only maximizes joint profits
            (efficiency) but also leaves no member worse off. ``at least
            one Pareto-safe price exists--the open access exvessel price,
            P\0\...As long as the parties desire to reach a Pareto-safe
            agreement, they can do so by settling on a rent share that
            implies P0 as the ex vessel price. Thus, there are no
            functional impediments to achieving an efficient price that is
            also Pareto safe.''
        Matulich and Sever then use the Nash (1953) bargaining solution
    concept to indicate how the rent shares might be determined, given that
    ``the bargaining agents are assumed to act so as to leave no member
    worse off under ITQs relative to open access'' (page 214). Thus
    solution of the Nash model does not form part of the proof, but instead
    is performed under the assumption that the price must fall with the
    Pareto safe range.
        In short, their ``proof'' really just consists of the assumption
    that bargaining agents will want and be able to set prices that are
    Pareto safe for all their members. This assumption is merely asserted,
    rather than derived from economic theory, and is unlikely to be
    satisfied in a real-world fishery, in which each side would contain
    possibly large numbers of heterogeneous participants. It is not
    obvious, and Matulich and Sever do not suggest, how such a difficult
    principal-agent problem in each sector could be structured so that the
    agent is constrained to leave no member worse off.
        Even if it is assumed for the sake of argument that both sides of
    the bilateral monopoly desire agreements that are Pareto safe as among
    their own members, a Pareto safe price need not be the outcome of the
    bilateral monopoly negotiation. This can be demonstrated using a Nash
    bargaining model with the outside options for both sides correctly
    specified.
        To determine the outside option for the harvester sector of the
    bilateral monopoly, consider what its alternative would be if it did
    not reach an agreement with the processor sector. Because it would have
    IFQs it could harvest the fish, but the processor sector could simply
    refuse to process the harvest. Therefore the outside option for the
    harvester sector is zero rent. Similarly, the harvester sector could
    threaten to not fish, so that the outside option for the processor
    sector is also zero rent, assuming that it has no processor controlled
    vessels. With these outside options, there is no reason to assume that
    the bargaining outcome would be Pareto safe. And if the processor
    sector does have processor controlled vessels, the outcome could be
    very unfavorable for harvesters, as shown in Halvorsen, Khalil, and
    Lawarree (2000).
        To summarize, Matulich and Sever's claim that they have provided a
    proof that a two-pie allocation would be Pareto safe under bilateral
    monopoly is invalid, and there is no other market structure for which
    this claim has even been made. Therefore, no credence should be given
    to claims that a two-pie system is a ``policy-superior initial
    allocation of rights'' (Matulich, Mittelhammer and Reberte 1996, page
    112). Instead, the inclusion of IPQs in a fishery rationalization
    program should be viewed as simply one possible mechanism for enhancing
    outcomes for processors, bearing in mind that the possible outcomes
    under IPQs have received very little credible economic analysis and are
    untested by experience in any real-world fishery.
        Evaluations of the appropriateness of allocating IPQs as part of a
    specific rationalization program should include (i) an assessment of
    whether compensation for processors is desirable, given the
    characteristics of the specific fishery, in particular the balance of
    bargaining power, and (ii) the relative merits of IPQs versus other
    possible compensation programs, given the characteristics of the
    specific fishery.
        Accordingly, it is desirable that regional councils have
    flexibility in deciding whether, and how, processors should be
    compensated for possible losses arising from a fishery rationalization
    program. Therefore, I recommend that the national standards for fishery
    conservation and management not require that IPQs or other specific
    compensation mechanisms be included in future fishery management plans
    and regulations.
                                   References
    Anderson, Lee G. (1991), ``A Note on Market Power in ITQ Fisheries,''
            Journal of Environmental Economics and Management, 21 (3): 291-
            296.
    Gramlich, Edward M. (1990), A Guide to Benefit-Cost Analysis, Second
            Edition, Prentice Hall.
    Halvorsen, Robert, Fahad Khalil, and Jacques Lawarree (2000), ``Inshore
            Sector Catcher Vessel Cooperatives in the Bering Sea/Aleutian
            Islands Pollock Fisheries,'' discussion paper prepared for the
            North Pacific Fishery Management Council, February 7.
    Matulich, Scott C. and Michael Clark (2002), ``Efficiency and Equity
            Choices in Fishery Rationalization Policy Design: An
            Examination of the North Pacific Halibut and Sablefish IFQ
            Policy Impacts on Processors,'' Regional Information Report No.
            5J02-02, Alaska Department of Fish and Game, January 24.
    Matulich, Scott C., Ron C. Mittelhammer, and Carlos Reberte (1996),
            ``Toward a More Complete Model of Individual Transferable
            Fishing Quotas: Implications of Incorporating the Processing
            Sector,'' Journal of Environmental Economics and Management, 31
            (1): 112-28.
    Matulich, Scott C. and Murat Sever (1999), ``Reconsidering the Initial
            Allocation of ITQs: The Search for a Pareto-Safe Allocation
            Between Fishing and Processing Sectors,'' Land Economics, 75
            (2): 203-19.
    Milon, J. Walter and Hamilton, Stephen F. (2002), ``A Comparative
            Analysis of Alternative Rationalization Models for the Bering
            Sea/Aleutian Islands (BSAI) Crab Fisheries,'' prepared for the
            North Pacific Fishery Management Council
    Nash, John F. (1953), ``Two-Person Cooperative Games,'' Econometrica,
            21 (1): 128-40.
    National Research Council (1999), Sharing the Fish: Toward a National
            Policy on Individual Fishing Quotas, National Academy Press.
    Ng, Yew-Kwang (1984), ``Quasi-Pareto Social Improvements,'' American
            Economic Review, 74 (5): 1033-1050.
    North Pacific Fishery Management Council (2002), ``BSAI Crab
            Rationalization Program Alternatives,'' Initial Council Review
            Draft, January 22.
    North Pacific Fishery Management Council (2001), ``Impacts of the
            American Fisheries Act,'' Report to the U.S. Congress and the
            Secretary of Commerce, September 10.
    Osborne, Martin and Ariel Rubinstein, Bargaining and Markets, Academic
            Press, 1990.
    Plesha, Joseph T. and Christopher C. Riley (1992), ``The Allocation of
            Individual Transferable Quotas to Investors in the Seafood
            Industry of the North Pacific,'' photocopied.
    Wilen, James E. (1998), ``Testimony to be Presented to the North
            Pacific Fishery Management Council Regarding Inshore/Offshore
            III, Bering Sea--Aleutian Islands Pollock Allocation,''
            photocopied.
                                     ______

        Mr. Gilchrest. Thank you, Dr. Halvorsen.
        Dr. Matulich--
        Dr. Matulich. Very good.
        Mr. Gilchrest. --are you, then, based on your study,
    categorically opposed to IFQs?
        Dr. Matulich. Mr. Chairman, absolutely not. All of my
    writings have been about trying to design better public policy,
    and the use of the term Pareto-safe by my colleague here on the
    left--
        Mr. Gilchrest. The use of the what? What was that word?
        Dr. Matulich. He used the word Pareto-safe. It means win-
    win. Everything I have written is about how do you create
    better public policy by allowing both sectors to win from the
    policy design? So I certainly am not against individual fishing
    quotas.
        Mr. Gilchrest. So would you say the development of an IFQ
    should then include a quota to the processors?
        Dr. Matulich. Mr. Chairman, you are asking me to be
    normative here. I am here as a professor from a university.
        Mr. Gilchrest. I am asking you to be what?
        [Laughter.]
        Dr. Matulich. You are asking me to make public policy
    calls. That is not my purview. My purview is to be an analyst.
    Unless you wish for me to give my personal opinion on this--
        Mr. Gilchrest. Your personal opinion will do fine.
        [Laughter.]
        Mr. Gilchrest. This whole exchange today has been for
    information that we just put in this big slush fund, and then,
    over the next couple of weeks--
        [Laughter.]
        Mr. Gilchrest. --pull it out not at random but with some
    sense of priority, fairness, equitable, so that we can give to
    the councils some basis upon which they can proceed with the
    Magnuson Act for the next 5 years, and we are just going to let
    people who give testimony to have at it. And anything you want
    to tell us, we are ready to listen.
        Dr. Matulich. OK; first of all, I would like to address one
    of your intermediate comments about a slush fund. Does that
    mean grants are available?
        [Laughter.]
        Mr. Gilchrest. Susan--what is Susan's married name now?--
    McConkey. I will give you the number later.
        [Laughter.]
        Mr. Gilchrest. She is the one in our office who deals with
    grants.
        Dr. Matulich. In the circumstances where you have
    bargaining associations representing fishermen, where they are
    acting as a bargaining cartel, as in the case of the North
    Pacific Pollock Fishery, as in the case of North Pacific crab
    fisheries, I most certainly would suggest, as one of several
    options available to the council, giving processing quotas to
    processors and fishing quotas to fishers.
        In the context of fisheries where there is not
    countervailing power or where there is a huge transaction cost
    to creating the countervailing power, meaning it is very--let
    us take the case of the halibut and sablefish--there were 5,000
    vessels fishing for halibut in the North Pacific. It is
    inconceivable to me that you would have sufficient
    countervailing power in that particular fishery to award
    processors processing quota and expect them not to act
    mischievously with it. Because they did not have countervailing
    power, and I do not think they would have it after
    rationalization.
        That does not mean that there is not a better policy
    design, one that does not allow the value and the wealth of
    these firms to be redistributed, policy-induced redistribution,
    from the processors to the fishermen. There are other designs
    that could have been conceived.
        Mr. Gilchrest. Dr. Halvorsen, you said the pollock fishery,
    which is a coop, has worked well under that system.
        Dr. Halvorsen. No; if I said it, I was misspeaking. What I
    said is that in deciding how well processors may come out under
    an IFQ system, it is important to consider the characteristics
    of a particular fishery and that in a particular fishery,
    processors might well have the upper hand with respect to
    bargaining power and come out just fine in a straight IFQ
    program. There is no reason to think that IFQ programs imply
    losses for processors.
        As an example of that, I use the fishery with which I am
    most familiar, the pollock fishery, in which two colleagues and
    I were asked by the North Pacific Fishery Management Council to
    examine the issues being raised there, where precisely what was
    happening is that processors were trying to enhance their
    positions by certain cooperative provisions, namely, making
    them processor-specific, and the harvesters, in turn, were
    saying that they were scared they would lose, and so, they were
    coming back with counterproposals.
        And we were asked to say who might lose under the various
    proposals being offered. And one of them, the Dooley-Hall
    proposal for cooperatives that were not tied to processors, was
    an approximation to an IFQ program. And so, that was one of the
    programs we compared to the processor-specific case, and we
    found they differed, but there was no reason to think that
    under Dooley-Hall and a reasonable analysis, a game theory
    analysis of how people would behave, that processors would, in
    fact, lose.
        Mr. Gilchrest. You say a game theory analysis as to how
    people would behave?
        Dr. Halvorsen. Yes, sir.
        Mr. Gilchrest. That is interesting.
        Dr. Halvorsen. Well, I almost paused before I used the
    expression, but then, I used it. Game theory is actually what
    much of modern microeconomic theory is about. We have gone
    beyond using very simple static models of perfect competition
    or monopoly or bilateral monopoly or monopsony to consider
    real-world situations where people are considering using
    strategy against each other.
        Mr. Gilchrest. Now, who invented that game theory? That is
    going back 60 years.
        Dr. Halvorsen. Yes; game theory has been--I do not know
    where one would start with it, I guess. Von Neuman and
    Morganstern would be the most recognized people from the
    1940's, and more recently, it had a spell in economics, and
    then, people did not know what to do with it. Lately, there
    have been many more advances in it, and it really is the core
    of most economic theory courses now. And all that it is about
    essentially is saying let us take into account that sometimes,
    there are cases of strategic behavior, many times, that what I
    have to do is before I decide what I should do, I have to take
    into account how you may react and vice versa, and that
    complicates finding a solution.
        And those are the problems that game theory addresses, and
    actually, it was for that reason--when we were called up, we
    were told we think because of the situation with the relatively
    small number of processors, and we also have a bargaining
    association for harvesters, we think that there is strategic
    behavior likely in this industry, and therefore, we need some
    game theory analysis. And we do not know how to do it; would
    you do it for us?
        Mr. Gilchrest. Mr. Hoard, can you comment on Dr. Matulich's
    impression of the IFQs and what they have done to the
    processors in the halibut and sablefish fishery?
        Mr. Hoard. Yes, sir. First of all, I would like to say that
    we are not proposing revisiting black cod and halibut IFQs.
    There has been too much investment made; too much water under
    the bridge.
        Mr. Gilchrest. You are saying that they should be left the
    way that they are?
        Mr. Hoard. Yes, but we are thinking very strongly that as
    we go forward into other rationalization programs that we
    should take some of the things that we have learned here, i.e.,
    losses to processors, and that the processor-side investment
    should also be part of the rationalization, so it is not all
    just turned over to the fishermen's side.
        Mr. Gilchrest. Do you feel that there has been a
    significant loss to the processors when halibut and sablefish
    went to IFQs?
        Mr. Hoard. Yes, sir. In the 6 years prior to the IFQ
    program compared to the 6 years after the IFQ program, we
    showed a downturn of $20 million in gross profits in black cod
    and halibut alone.
        Mr. Gilchrest. And how did you recover, sustain through
    that? Have you recovered from that? Did you go to other fish?
        Mr. Hoard. We have always been diversified geographically
    and species-wise and recently got into pollock. But I can
    assure you that it has been a struggle, and I think some of our
    fishermen in other species have had to help fit the bills. When
    we used to have 7 or 8 million pounds of halibut running
    through our plant, and now, we have a third of that--
        Mr. Gilchrest. Is there something in, let us say, the
    standards that we create in this area dealing with IFQs that
    should send notice to the councils to try to deal with that,
    understand that issue, tinker with the IFQ and the processors?
        Mr. Hoard. Yes, sir, I think Congress needs to maybe set
    the bigger picture, and then, certainly, the North Pacific
    council in the case of other programs up there ought to put the
    bells and whistles and get everybody's input and go from there.
        Mr. Gilchrest. Mr. Stinson, how do you feel about this
    issue, the IFQs, the processors losing out? Should we get in
    there and open that up and try to make some sense of it?
        Mr. Stinson. Well, Mr. Chairman, I represent a group of
    vessels, about 35 trawl vessels that are involved in the
    pollock fishery in the Gulf of Alaska. We harvest less than 10
    percent of all of the pollock that is caught in Alaska. The
    vast majority is caught in the Bering Sea. Their quota this
    year in the Bering Sea is about 1.485 million tons of pollock.
    And that fishery has been rationalized. It has been fairly well
    vertically integrated, both on the catcher-processor side and
    on the shore-based side that has developed co-ops.
        Mr. Gilchrest. Do you like vertical integration?
        Mr. Stinson. I have major concerns about excess shares
    being controlled by any one sector. However, 80 percent is
    already--80 percent of the pollock fishery has chosen or is
    moving down that path.
        Mr. Gilchrest. Should the pollock fishery have an IFQ?
        Mr. Stinson. Pardon?
        Mr. Gilchrest. Should the pollock fishery have an IFQ?
        Mr. Stinson. I would like to see some sort of rights-based
    fishery management put in place in the Gulf of Alaska that
    would allow us to compete on a level playing field with the
    Bering Sea. Right now, we are at a somewhat economic
    disadvantage because they are vertically integrated and able to
    operate under a coop system while we in the Gulf do not have
    that luxury.
        Mr. Gilchrest. Is that a council issue, or should that be
    some tinkering that we do?
        Mr. Stinson. I think it is necessary for Congress to allow
    the councils tools to move in that direction. I think this is a
    question best answered at the regional level, but I think the
    councils need to be given tools to create level playing fields.
    Right now, we do not have that in Alaska in that certain
    segments of the fisheries have been rationalized, and others
    have not.
        Mr. Gilchrest. Well, I would like to continue this, but we
    have another vote. And I would like to continue to communicate
    with all of you as we go through--we are going to try to come
    up with something this year. We will see what the Senate is
    going to do. And we would like to have as much information,
    pertinent information as possible, to begin to make some
    intelligent choices in this process. And we may even touch upon
    the game theory once or twice.
        [Laughter.]
        Mr. Gilchrest. But I am going to adjourn the Subcommittee
    hearing rather than to keep you here another period of time to
    go back and forth. I would like to communicate with you, and
    any questions we have as a followup to this, we would like you
    to submit for the record and also ask you to give us your
    professional judgment and personal opinion. Often, personal
    opinions are very valuable.
        But thank you all very much for your testimony and good
    luck here in Washington and have a safe trip home. I ask
    unanimous consent to allow Members to submit statements for the
    record for the next so many days.
        Gentlemen, thank you all very much. I hope to see you again
    sometime in Washington or Alaska.
        The hearing is adjourned.
        [Whereupon, at 5:42 p.m., the Subcommittee adjourned.]

        [Additional material submitted for the record follows:]

        [The prepared statement of The Honorable Jim Saxton
    follows:]

     Statement of The Honorable Jim Saxton, Vice Chairman, Subcommittee on
                  Fisheries Conservation, Wildlife and Oceans

        Good afternoon Mr. Chairman and Members of the Subcommittee, and
    thank you to the witnesses for joining us today. I appreciate you
    taking the time out of your schedules to be here.
        I am pleased to be here today to discuss the important issues of
    both the Individual Fishing Quotas and the reauthorization of the
    Magnuson-Stevens Fishery Conservation and Management Act. As you know,
    The Magnuson-Stevens Fishery Conservation and Management Act, passed in
    1976 is the primary law dealing with fisheries resources and fishing
    activities in Federal waters (those waters extending from the edge of
    State waters to the 200-mile limit).
        The primary goals of the Magnuson-Stevens Act were the conservation
    and management of the U.S. fishery resources, the development of U.S.
    domestic fisheries and the phasing out of foreign activities within the
    200-mile fisheries conservation zone adjacent to the U.S. coastline.
    This area became known as the Exclusive Economic Zone (EEZ) following a
    1983 proclamation by President Reagan.
        I am pleased the Magnuson-Stevens Act has achieved the goals of
    eliminating foreign fishing in the EEZ and developing domestic
    fisheries. The percentage of fish harvested by foreign nations has
    declined from 71 percent of the total catch in 1977 to near zero
    percent since 1992.
        As you may know, the Sustainable Fisheries Act (SFA) amended the
    Magnuson-Stevens Fishery Conservation and Management Act.
        The SFA added a number of new definitions to the Magnuson-Stevens
    Act including ``individual fishing quota.'' ``The term `individual
    fishing quota' means a Federal permit under a limited access system to
    harvest a quantity of fish, expressed by a unit or units representing a
    percentage of the total allowable catch of a fishery that may be
    received or held for exclusive use by a person.''
        I have spent a great deal of time over the years working to do
    everything possible to conserve and rebuild overfished species. We have
    reached a critical crossroads for many species and if we do not work
    together to save them they may disappear forever. It is crucial we
    understand the need to accurately assess the stock levels and take
    appropriate action to rebuild those that are depleted.
        Our oceans are a precious resource and we need to fight to preserve
    them at any cost. For many, many years little if any thought was given
    to the need to conserve this resource. Unfortunately, these magnificent
    bodies of water have been depleted of many species and it is our
    responsibility to restore them.
        I look forward to the ongoing challenge of rebuilding these stocks
    and ensuring the oceans are healthy for future generations to enjoy
    fresh seafood, or be able to see a dolphin or whale or a sea turtle for
    that matter, in the wild. And for those who make their living from the
    sea, to be able to do so in the future is directly related to
    rebuilding those species that are currently at very low levels.
        Thank you and I look forward to hearing your testimony.
                                     ______

        [A statement submitted for the record by Alaskan Leader
    Fisheries, Clipper Seafoods, and Prowler Fisheries follows:]

     Statement of Alaskan Leader Fisheries, Clipper Seafoods, and Prowler
                                   Fisheries

        Alaskan Leader Fisheries, Clipper Seafoods, Ltd., and Prowler
    Fisheries are pleased to present the following comments for
    consideration by the House Resources Subcommittee on Fisheries
    Conservation, Wildlife & Oceans as it evaluates the potential use of
    individual fishing quotas (``IFQs'') as a fisheries management tool.
    These companies collectively own and operate nine freezer longliners
    that fish for Pacific cod in the Bering Sea and Aleutian Islands area
    (``BSAI'') .
    Background on the Freezer Longline Sector of the Pacific Cod Fishery
        The freezer longline sector of the Pacific cod fishery is currently
    fully capitalized and operating in an efficient manner. A majority of
    fleet members fish for seven months a year, and in some cases nine
    months when participating in the Pacific cod CDQ fishery.
        The freezer longline fleet includes vessels ranging from 59 1/2 to
    180 feet, and includes onboard processing and freezing capacity.
    Benthic longlining requires significant time and area for successful
    fishing activities, and produces a slow and deliberate fishery. There
    are no viable options to significantly increase vessel harvest
    capacity. This is a sharp contrast to the trawl sector, which can
    increase horsepower and net sizes to dramatically boost their harvest
    capabilities.
        In recent years the North Pacific Fisheries Management Council
    (``NPFMC'' or ``Council'') and supported by the National Marine
    Fisheries Service (``NMFS'') have worked diligently to respond to
    concerns relating to the effect of commercial fishing activities in the
    North Pacific on endangered species such as the Steller sea lion. As
    noted earlier, the freezer longline fleet uses fishing techniques that
    are slower and more spread out. NMFS has acknowledged the
    environmentally sensitive nature of their activities in the context of
    Steller sea lion protection measures.
            In terms of effects on ESA-listed species, the slower and more
            dispersed nature of the hook and line pot fisheries make
            localized depletions less likely than would be possible with
            trawl gear. BiOp at 215 (November 30, 2000).
            The hook and line fishery does fish in a manner that is
            consistent with the intent to minimize disturbance to the prey
            field. NOAA Fisheries recognizes that and for this reason is
            allowing hook and line fishing during periods that other
            fishing is restricted. Questions & Answers concerning: ESA Sec.
            7 Consultation-BiOp at Question 11 (December 1, 2000).
        The freezer longline sector of the Pacific cod fishery is
    undergoing a rationalization process led by the Council and NMFS. The
    first step was the adoption of Amendment 64 by the Council, which split
    the Pacific cod total allowable catch (``TAC'') among fixed gear
    participants (longliners, pot, and jig). This segregation made it
    possible for the Council to initiate a limited entry system for the
    entire fixed gear sector and led to the adoption of Amendment 67. The
    Secretary of Commerce has approved Amendment 67, and NMFS is now
    finalizing regulations to implement its provisions. This limited entry
    program will prevent over capitalization and the corresponding adverse
    pressure on the resource and is a critical element in ensuring the long
    term health and viability of the freezer longline sector.
        The fleet is evaluating potential future steps for further
    rationalization. These may involve the adoption of a voluntary
    cooperative, or could take the form of an IFQ program. The focus will
    continue to be on maintaining the stability of the fishery and the
    healthy status of the Pacific cod stocks.
    Specific Comments on Potential IFQ Program Elements
        The above companies recognize that IFQ programs can produce
    considerable benefits for specific fisheries. However, they also
    understand that a poorly designed IFQ program will do far more harm
    than good. The following comments address specific elements that should
    be considered by Congress in the development of a national policy on
    IFQs.

        1. LThe Regional Fishery Management Councils should be given
    sufficient flexibility to design IFQ programs that make sense for a
    particular fishery

        Each fishery is a distinct product of historical trends related to
    the development of a fishery, fish stock biological dynamics, and
    seasonal fluctuations. No two fisheries are the same, even within the
    same region, and sometimes even within the same sector. Therefore, it
    is important that Congress provide sufficient flexibility to the
    Regional Councils to accommodate the wide variations found in the
    nation's fisheries. Restrictive provisions that seem to ``simplify'' a
    national IFQ policy run the risk of stifling the innovative ability of
    individual fisheries to work with the Councils to develop an IFQ
    program that makes sense for that fishery.

        2. LInitial IFQ allocations should be based on historical
    participation in a fishery

        Commercial fishing is a capital intensive endeavor that involves
    unique business risks (including development of new markets) and
    unparalleled operational dangers. Companies entering a fishery make
    considerable investments and dedicate the time and resources necessary
    to develop a successful fishery. If an IFQ program is adopted for a
    specific fishery, the initial quota share (``QS'') allocation should be
    based on historical participation and specifically on retained catch.
    This approach acknowledges the efforts of the pioneer companies who
    made the fishery possible, and ensures that participants committed to
    the sustainability of the resource are present to provide continuity.
    The institutional knowledge possessed by historical participation is an
    important facet of ongoing improvement of the management of a fishery.
        Careful consideration also should be given to the structure of
    initial allocations. There has been considerable discussion on the
    merits of an auction system, with unsubstantiated claims that
    historical participants should not be handed a windfall. IFQs do not
    create a windfall, they only give historical participants of the
    fishery a means to harvest fish in an orderly efficient manor--the same
    fish that they were previously or historically harvesting. This line of
    thought fails to incorporate the significant, long-term investment made
    by historical participation in the fishery, as well as legitimate
    investment back expectations.
        Arbitrary and severe caps on QS ownership will disrupt current
    fisheries, resulting in more difficult management decisions and large-
    scale economic dislocation. Reasonable limitations on QS ownership
    percentages may be appropriate to prevent extreme concentrations, but
    Congress should be wary of seemingly ``innocuous'' proposals that will
    have far-reaching impacts.
        Finally, Congress should not re-allocate access to specific
    fisheries by creating a set-aside program for non-owner participants in
    a fishery, including shippers, crews, or communities. There are
    sufficient market mechanisms to allow these entities to join a fishery,
    and no need to create a subsidized class of fishery participants.

        3. LCongress should reject processor quota shares

        In the context of the freezer longline sector of the Pacific cod
    fishery, processor quota shares make no sense. Freezer longliners
    harvest and process Pacific cod with absolutely no involvement by
    processors in the North Pacific. Mandating processor quota shares
    absent Any historical or practical nexus would produce an absurd
    result.
        Beyond this specific fishery, the above companies have strong
    reservations regarding the establishment of a national policy
    authorizing processor quota shares. History demonstrates that
    processors have exercised considerable influence over the harvesting
    sector. Establishing a regime that forces harvesters to deal with
    specific processors will only exacerbate an already unbalanced
    relationship. Congress should not include in any legislation
    authorization for processor quota shares.

        4. LNational IFQ policy should focus on creating effective IFQ
    programs, not serve as a surrogate to impose additional environmental
    restrictions

        The Magnuson-Stevens Act establishes an elaborate framework for the
    management of federal fisheries. Within this framework, commercial
    utilization of fishery resources are balanced with conservation and
    sustainability goals. There are sufficient existing conservation
    provisions in the Act, and it is not necessary to add new environmental
    restrictions as part of an IFQ policy. Congress can provide adequate
    guidance to ensure that IFQ programs are structured consistent with the
    Act's National Standards, and should avoid any suggestions to turn IFQ
    policy into a Trojan Horse for unreasonable environmental agendas.

        5. LNational IFQ policy should support rational development of
    specific programs

        To succeed, IFQ programs must have time to mature and make the
    transition from a theoretical to a real world management regime. Each
    fishery may require a period of adjustment to overcome unanticipated
    events and obstacles. Some have argued for statutory sunset periods
    that would ``restart'' each IFQ program after only five years,
    including a fresh redistribution of all QS. This approach would
    significantly undermine the potential success of an IFQ program, and
    could jeopardize the achievement of the basic goal of rationalizing the
    resource. Because commercial fisheries require years to adapt and
    evolve to changing conditions, participants in an IFQ program will need
    time to make an effective transition to a new regime. If a statutory
    sunset is imposed, it will remove much of the incentive for
    participants to invest the time, effort and resources necessary to
    improve fishing practices, including reduction of bycatch, increased
    product retention, and conservation of the resource in general.
    Congress may consider authorizing the Councils and NMFS to conduct
    ongoing evaluations of IFQ programs, and where appropriate, implement
    mid-course corrections.
    Conclusion
        The Magnuson-Stevens Act established the Regional Councils to
    manage the nation's the fisheries, knowing that all fisheries are
    different and require different management approaches. Congress should
    not limit the Councils in their ability to manage and should only give
    broad guidelines (most of which are covered in National Standards).
    Congress should continue to support the Councils' ability to develop
    specific policies for individual fisheries.
                                     ______

        [A statement submitted for the record by Robert Alverson,
    Manager, Fishing Vessel Owners Association, follows:]

         Statement of Robert Alverson, Manager, Fishing Vessel Owners
                                  Association

        Chairman Gilchrest:
        On behalf of the Fishing Vessel Owners Association (``FVOA''), I
    would like to thank you for the opportunity to provide this statement.
    The FVOA is a trade association representing the owners of 84 hook-and-
    line fishing vessels that operate in fisheries from California to
    Alaska, and in the mid-Pacific Ocean. Our fisheries include halibut,
    sablefish, and Pacific cod in the Bering Sea and Gulf of Alaska, and
    sablefish off the coasts of Washington, Oregon, and California, as well
    as albacore within and beyond the United States Exclusive Economic Zone
    in the Pacific Ocean. Although I am, at present, a member of the
    Pacific Fishery Management Council, and I am a former member of the
    North Pacific Fishery Management Council, I provide this statement
    solely in my capacity as Manager of the FVOA. I note that the Deep Sea
    Fishermen's Union, which represents the crewmen on vessels owned by
    FVOA members, has endorsed this statement.
        The record clearly demonstrates that halibut and sablefish
    individual fishing quota (``IFQ'') program under the jurisdiction of
    the North Pacific Management Council ended the deadly and damaging open
    access halibut and sablefish fishing derbies. The program has resulted
    in improved conservation, safety, efficiency, employment opportunities,
    and community stability. The statements of Administration witnesses in
    today's hearing highlight the resource, social, and economic benefits
    of that IFQ program. When considering the question of whether or what
    sort of new standards should be enacted for IFQs, Congress should take
    these facts into account, and in so doing, should be very careful not
    to affect adversely the existing halibut/sablefish IFQ program.
        As observed by Dr. Hogarth in his statement to the Subcommittee,
    the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C.
    1801, et seq.) already contains standards that apply to IFQ programs.
    There are, of course, the ten National Standards, and there are
    additional requirements, including those applicable to all limited
    entry programs under section 303(b)(6) of that Act.
        The Sustainable Fisheries Act of 1996 followed establishment of the
    halibut/sablefish IFQ program, and was crafted to ensure that nothing
    in that legislation would threaten the gains already achieved in those
    fisheries. The Sustainable Fisheries Act also provided, in several
    respects, a basis for improved management of our Nation's fisheries,
    particularly where non-IFQ fisheries, and affected local communities,
    were in serious difficulty.
        The legislation's new National Standards on safety (National
    Standard 10, 16 U.S.C. 1851(a)(10)) and bycatch (National Standard 9,
    16 U.S.C. 1851(a)(9)) are particularly notable for the focus that they
    have provided on critically important aspects of fisheries management.
    The FVOA and DSFU were joined by the Alaska Crab Coalition (``ACC'') in
    first proposing the enactment of these new National Standards, and in
    securing wide support among Washington State and Alaskan fishing
    industry organizations. (The FVOA, DSFU, and ACC also contributed to
    the development of conservation-related amendments to the then Magnuson
    Act in 1990.)
        However, one provision of the Sustainable Fisheries Act--the
    moratorium on IFQs (16 U.S.C. 1853(d)(1)) until October 1, 2000--cannot
    be viewed as having contributed in a positive way to fisheries
    management. On the contrary, this congressionally-imposed constraint on
    fisheries managers has served as a roadblock to effective management,
    especially, but not exclusively, in fisheries plagued by excess fishing
    capacity and/or low resource abundance. The FVOA and DSFU strongly
    believe that the moratorium was a grave mistake in the first place, and
    that extension of the measure by subsequent legislation (P.L. 106-554)
    to October 1, 2002, only served to compound the error. One need only
    compare the highly favorable situations in the IFQ fisheries against
    the crises confronting many of the non-IFQ fisheries.
        Where the worst has been avoided, it has been by fishery-specific
    legislation, most notably, the American Fisheries Act (``AFA'')
    (Division C, Title II, P.L. 105-277) applying to the directed pollock
    fishery of the Bering Sea/Aleutian Islands Area, and legislation to
    allow rationalization of the fixed gear sablefish fishery under the
    jurisdiction of the Pacific Fishery Management Council (P.L. 106-554).
    These were desperation measures, and in the case of the American
    Fisheries Act, led to a major regulatory exercise on the part of the
    North Pacific Council and the Commerce Department, and to a series of
    remedial amendments intended to solve an array of technical and
    substantive problems. Had the industry, the North Pacific Council and
    the Commerce Department not been constrained by the IFQ moratorium,
    Congress would not have felt compelled to pass special legislation and
    a succession of amendments. At least as importantly, the resulting
    regime would not have left out some vessels that clearly should have
    been included, by virtue of their owners' investments and the vessels'
    participation in the directed pollock fishery during the relevant
    qualification period with which that Act was concerned.
        The legislation for fixed gear sablefish arose, because fisheries
    managers from the Pacific Fishery Management Council, and the FVOA and
    DSFU, were seriously alarmed by the conditions prevailing in West Coast
    groundfish fisheries. Fixed gear sablefish was a case crying out for
    some form of IFQs. Excess harvesting capacity and extremely depressed
    resource conditions combined to defeat conventional management. Indeed,
    it was conventional management necessitated by the IFQ moratorium, and
    a flawed system of scientific data acquisition and analysis, that
    caused those conditions. An attempt at creative management by the
    Pacific Council only resulted in a legal determination that the
    proposed measures violated the IFQ moratorium. There was no alternative
    to special legislation.
        If Congress again extends the moratorium, or equally as
    unfortunate, imposes conditions and restrictions that make IFQs
    impracticable or unattractive to the affected industry and fisheries
    managers, there is no doubt that additional, special legislation for
    particular fisheries will be necessary and will inevitably be enacted.
    Congress should be sensitive to the fact that a one size fits all
    approach, except for the most general sorts or standards, such as those
    at present in the law, will fly in the face of the wise statutory
    scheme of the Magnuson-Stevens Act recognizing the regional nature of
    our nation's fisheries.
        Therefore, based on the very favorable experience in the halibut
    and sablefish fisheries, the FVOA and DSFU believe that individual
    transferable quotas should be available for application to any fishery
    in the United States Exclusive Economic Zone. The FVOA and DSFU urge
    Congress to allow the statutory moratorium on individual quotas to
    expire in accordance with its terms, and not to impose unduly
    burdensome new requirements.
        The availability of IFQs to fishery managers is supported by all
    the Regional Fishery Management Council Chairmen and their respective
    Councils. Equally notable is the fact that the report to Congress by
    the National Research Council of the National Academy of Sciences, as
    directed by the Congress in the 1996 amendments (section 108(f), P.L.
    104-297) definitively describes the benefits of individual fishing
    quotas.
    Conservation
        As discussed in detail, below, replacement of the open access race
    for fish by the halibut/sablefish IFQ program has resulted in improved
    conservation and management. The incidental catch of halibut in the
    directed sablefish fishery has declined 38%.1 The incidental
    catch of groundfish in the sablefish fishery has dropped by 39%.
    Halibut mortality due to lost fishing gear has decreased by 59.65%
    (translating to an average [$3.5] million dollar saving, annually).
    ---------------------------------------------------------------------------
        \1\ The data upon which this testimony relies is the most current
    in possession of the FVOA and DSFU.
    ---------------------------------------------------------------------------
        Incidentally caught sablefish is no longer discarded in the
    directed halibut fishery. Sablefish in the western and central Gulf of
    Alaska is now fully harvested, not only avoiding waste, but also
    generating an economic gain for the industry (an average [$3.93]
    million gain, annually).
        These improvements are in accord with the principal purpose of the
    Magnuson-Stevens Act, which is conservation, and with a major, related
    objective of that statute, minimizing bycatch and related mortality. 16
    U.S.C. 1851(a)(1), (9).
        In the absence of IFQs, the West Coast groundfish fisheries have
    continued to be plagued by excessive waste. This has contributed to the
    further decline of once-abundant resources. The recently authorized
    program for the fixed gear sablefish fishery should end the race for
    fish by reducing the numbers of vessels on the grounds and lengthening
    the seasons, thus alleviating pressure on the resource.
    Safety
        As noted above, the Magnuson-Stevens Act requires that fisheries
    management promote the safety of human life at sea. 16 U.S.C.
    1851(a)(10). Replacement of the open access race for fish by the IFQ
    Program has greatly improved the safety of fishermen in the halibut and
    sablefish fisheries off the Alaskan coast. The former halibut fishing
    derby was the second most dangerous occupation in the United States
    (preceded only by the Bering Sea crab fisheries).
    Communities
        The Magnuson-Stevens Act requires that fisheries management take
    into account the interests of fishing communities. 16 U.S.C.
    1851(a)(8). Community development quotas (``CDQs''), which are integral
    to the halibut/sablefish IFQ program, have assured isolated, low-
    income, Alaskan native coastal communities a major source of employment
    and revenue. At the same time, economic and social disruption of other
    communities has been avoided; the top five halibut ports and the top
    four sablefish ports remain the same as under the open access system.
    Small vessels serving minor ports have been guaranteed their place in
    the fisheries, and an industry fee-based loan program has been
    established for the owners of those vessels and for new entrants to the
    fisheries. In short, this IFQ program has increased the overall value
    of the fisheries, making it possible to dedicate a portion to the
    poorest communities, without adversely affecting the others.
        The FVOA and DSFU would by no means suggest that CDQs or an
    industry-funded loan program be established in the Pacific region.
    Conditions there are quite different from those in Alaska, where
    communities are both small and isolated and have fewer sources of
    income.
    Overcapitalization
        The Magnuson-Stevens Act provides for consideration of economic
    efficiency, and for reduction of excess fishing capacity. 16 U.S.C.
    1851(a)(5), 1861a (a)-(e). Excess capacity in fisheries has been
    identified as one of the fundamental causes of resource declines,
    unsafe conditions, lost economic efficiency, and lower quality product.
    The halibut/sablefish IFQ program has resulted in a reduction of the
    halibut fleet from 3,450 (1994) to 1,613 (1999). Restricted Access
    Management (``RAM'') Report, NMFS, 2000, page 23. Conservation risk
    associated with fishing pressure on the resources has declined
    radically. Unsafe conditions due to 24-hour halibut derbies and 2-week
    sablefish seasons have disappeared, as fishermen have gained the
    opportunity to conduct their operations in periods of good weather
    during eight months of the year. Longer seasons have led to full-time
    employment on vessels and in processing plants, and higher fish values
    have resulted in better lives for vessel owners and crews. Slower paced
    fisheries have allowed much improved handling of the catches, and thus,
    better quality product for the consumer. It is reliably estimated that
    a government-funded buyback achieving what was accomplished by the
    halibut/sablefish IFQ program would have cost the taxpayers
    approximately $318.8 million.
    Greatest Overall Benefit to the Nation--Conservation, Safety,
            Efficiency, Quality, Value
        The Magnuson-Stevens Act requires that fisheries management achieve
    the greatest overall benefit to the Nation. 16 U.S.C. 1851(a)(1); see
    16 U.S.C. 1802 (28)(A). In addition to achieving improved conservation,
    safety, and efficiency, the halibut/sablefish IFQ program has resulted
    in improved product quality and higher product value. As noted above,
    the slower paced fisheries have translated to greater availability of
    higher quality product, in particular, fresh halibut for eight months,
    instead of a few days of the year, and greater bargaining power for
    U.S. producers in the sablefish export market. RAM Report, NMFS, 2000,
    page 9.
    CONCLUSION
        By any rational measure, the halibut/sablefish IFQ program has been
    a great success. With this example firmly established, individual
    transferable quotas should be available to fisheries managers
    nationwide. Any new standards for IFQs should not deter the employment
    of this valuable management tool. Whatever else Congress does, it
    should not adversely affect the existing IFQ programs.
                                     ______

        [A statement submitted for the record by Gordon Blue,
    Marine Services Corporation, follows:]

             Statement of Gordon Blue, Marine Services Corporation

        The Bering Sea and Aleutian Island [BSAI] crab fisheries are in a
    state of collapse. Professor Dorothy Leonard Barton of Harvard Business
    School taught that an organization's core competencies in one
    generation of technology can become ``core rigidities'' leading to
    failure, in the next. [Well Springs of Knowledge, 1995]. The core
    competency of the BSAI crab industry prior to 1999, which was the
    ability to harvest and process the available resource rapidly and
    efficiently, has now become the ``core rigidity'' of this new
    generation, in which scarcity of product is the rule. The mainstay of
    the industry, opilio crab production, topped 300 million pounds
    annually and 30 million pounds per week in the beginning of the
    nineties. The fishery has hovered around 30 million pounds annually in
    this decade. 1 This season, 190 harvesters took four weeks
    to harvest the quota, which generated approximately $38 million in ex-
    vessel revenues, and consumed more than $40 million in variable costs,
    alone.
    ---------------------------------------------------------------------------
        \1\ See testimony of the CRAB Group to this subcommittee in May,
    2001, for more detail. See also: http://www.fakr.noaa.gov/npfmc/
    Committees/Crab/Crab%20Draft%20January22.pdf This site contains a
    wealth of detail, in draft analytical form, concerning BSAI crab
    rationalization
    ---------------------------------------------------------------------------
        BSAI crab harvesters recognized the problems that were looming, and
    in 1996 were working to establish an Individual Transferrable Quota
    [ITQ] system when the national moratorium on new Individual Fishing
    Quota systems was adopted. Testimony of Mr. Spaeth and Mr. Emerson
    before the committee, indicates that a chief reason for this moratorium
    was the resistance of Gulf of Mexico fishermen to an ITQ in the red
    snapper fishery. There was plenty of resistance from BSAI crab
    fishermen in those days, as well. According to Mr. Spaeth this
    resistance has abated as fishermen in his region have become aware of
    the advantages of an ITQ in their fishery. He asks that the moratorium
    be dropped. The same transformation of opinion has occurred amongst
    Bering Sea crab fishermen. There are now no harvesters to be found that
    oppose ITQs for these fisheries. The collapse of the fisheries has been
    a harsh teacher. Conservation and rebuilding of the resource are
    primary motivations of harvesters in the desire to change our operating
    rules.
        Unanimous support for ITQs by crab harvesters has existed since at
    least August 1999, when the results of the summer stock assessment
    survey confirmed the collapse of the opilio fishery. What has impeded
    agreement and action beyond this, is processor opposition to an ITQ
    system. This is not because processors will not benefit from the
    improved resources and efficiencies that are expected results of an ITQ
    program. Neither is there a question whether processors will be awarded
    ITQ shares in the initial allocation. Through ownership interest in
    vessels, processors are expected to gain one-quarter of the initial
    allocation under an ITQ program. Harvesters have studied the findings
    of the National Academy of Sciences [NAS] study of ITQs, Sharing the
    Fish. Consequently, harvesters have been willing to consider a system
    of compensation for processors that would redeem stranded capital
    processors could show resulted from imposition of an ITQ. Processors
    have offered no specific information to this end. Harvesters have also
    been working to address the other issues raised by the NAS report, and
    have created programs that will protect communities and provide for new
    entrants to the fisheries in the future.
        The controversy is simply that processors are determined there can
    be no benefits unless the processors are guaranteed the largest share
    of the future benefits. In the BSAI crab fisheries, processors demand
    one-quarter of the initial allocation of fishing quota, and all of a
    new quota type, the processing quota. The controversy is whether the
    processing quota, or ``two-pie'' system, proposed by Professor
    Matulich, represents a fair and equitable division of ``benefits'' that
    are anticipated to occur, under the ITQ.
        The most powerful of processors have insisted that nothing less
    than the ``two-pie'' system will remove their opposition. The ``two-
    pie'' system would award fishery quota shares to harvesters, and
    transferrable, leasable, processing quota shares to processors. A pound
    of harvester quota (or 8/10 or 9/10 of a pound, in some options),
    together with a pound of harvested crab, must be matched with a pound
    of processing quota, in order to be marketed. Both types of quota would
    be awarded upon the basis of ``history,'' though processor quota years
    would be selected differently than harvester quota years. Not only
    would processors be awarded most of the benefits in this system, but
    the initial benefits would be concentrated to a few companies. For the
    opilio fishery, the years under consideration would award three-
    quarters of all processing quota to the top eight processing companies.
    Depending upon the final selection of option, the top150 to160
    harvesters would aggregate an equivalent share of harvest quota.
        Professor Matulich declares in testimony before the committee, that
    the halibut/sablefish ITQ, established in 1995, created a new division
    of ``benefits'' from the fisheries, which accrued only to harvesters.
    He chose the years 1992/93 to represent the pre-ITQ regime, and 1999/
    2000 to represent the post-ITQ regime, and asserts that comparing the
    ``quasi-rents'' 2 of these two periods, shows the ITQ
    program left processors ``absolutely worse off.''
    ---------------------------------------------------------------------------
        \2\ ``Quasi rents'' = Net revenue, after fixed and variable costs
    of operations are deducted.
    ---------------------------------------------------------------------------
        Dr. Halvorson, in his testimony, indicates five major errors in the
    chain of supposition which constitutes Matulich's argument for the
    ``two-pie'' proposal. For instance, he says, the use of ``quasi-rents''
    as a surrogate for ``wealth'' ignores the impact of capital investment,
    and is only useful as a comparative index in the very short term -
    months, rather than years. Consider the case in which a significant
    share of processor ``quasi-rents'' is required to be reinvested in
    capital equipment, simply in order to continue to capture a share of
    those open access ``quasi-rents.''
        This is entirely in accord with the testimony of Mr. Hoard: ``In
    those days our company was the major buyer of halibut in Alaska, some
    years purchasing almost 50% of the catch . . . we continued to expand
    our capacity . . . we maintained our market share . . .'' A more
    complete statement by Professor Matulich would include this, perhaps as
    follows: ``Prior to the implementation of the ITQ, a processor
    maintained `quasi-rents' share through market domination which was
    achieved at the cost of high levels of capital expenditure. Both
    ``quasi-rents'' and the necessity to dissipate rents through capital
    expenditure, decreased after program implementation.''
        Not enough information is given by the ``two-pie'' advocates to
    determine whether ``processors'' were actually worse off, or better
    off, as a result of the program. Which processors benefit and which do
    not? How much money was saved from decreased capital expenditures after
    the ITQ program was in place? Any such savings deserve consideration as
    of benefit to processors.
        We might also consider the implications of the testimony with
    respect to market share. It has been asserted that the program damaged
    Icicle because the ITQ created an unfair distribution of benefits
    between harvesters and processors. The data presented does not show
    this. According to Dr. Halvorson, this is instead, an assumption of the
    ``two-pie'' theory. A compelling case could be made, that any actual
    losses Icicle experienced were the result of a loss of market share to
    other processors. This occurred when it was no longer possible to
    continue buying market share through additional capital expenditures
    for processing equipment. This must inevitably have occurred, with or
    without ITQs. Is ``two-pie'' designed to provide a ``fair'' sharing of
    rents between harvesters and processors, or is it designed to insure
    market share to dominant processors?
        After review of the numerous errors in the presentation of the
    ``two-pie'' case, Professor Halvorson concludes that ``there is no
    merit in the arguments for ``two-pie''.'' I absolutely agree. The
    theoretic basis for the ``two-pie'' thesis is bankrupt.
        The problem, at this point, is that harvesters are left with no
    viable solution to the dilemma of processor obduracy. Processors are
    locked in a position which, though theoretically bankrupt, has been
    prepared over the course of years, and has been packaged and sold as
    morally superior, and presented as ``win-win'' and ``fair.'' This
    position has developed into the strategic equivalent of a castle keep,
    built above a bridge. Large processors, walled up within the keep, well
    provisioned with the income of other fisheries, focus upon preventing
    the passage of ITQs, and demand an extortionate toll, Processing Quota.
        Most harvesters are practical business men and women. For a time, a
    relatively numerous segment of harvesters summed up the situation thus:
    ``So what if the processors' position is nonsense. As a practical
    matter, we need to take care of our fishery and as things are, we are
    going broke. Let's give them what they want, get what we need, and get
    on with life.'' This segment has become less numerous, over time, and
    has recently begun to lose proponents at an increasing rate.
        Some of the loss of appeal can be attributed to a draft report on
    the probable price effects of the ``two-pie'' proposal, presented to
    the North Pacific Fishery Management Council by Drs. Milon and Hamilton
    3, earlier this month. This study found that in a ``fully
    segmented'' two-pie allocation, the value of harvester quota would be
    zero, and all of the available rents would accrue to the processor
    quota holder. Although this study has been attacked as theoretical and
    wrong by ``two-pie'' advocates, the greatest negative impact on
    harvester opinion concerning the validity of the ``two-pie'' thesis,
    probably has resulted from the work of Dr. Matulich, himself. Some
    harvesters were prepared to believe, on the basis of processor
    assertions, that the ``two-pie'' proposal would guarantee a fair future
    distribution of ``benefits.'' Many harvesters are now becoming aware of
    the ideas presented in the study titled ``Efficiency and Equity Choices
    in Fishery Rationalization Policy Design: An Examination of the North
    Pacific Halibut and Sablefish IFQ Policy Impacts on Processors.'' [PIP]
    4 Over time, the game-theoretic bargaining strategy
    implications of the proposal have become stark, and the reasoning for
    rejecting it is, once again, completely practical.
    ---------------------------------------------------------------------------
        \3\ This paper is found at appendix 3-7 of the draft analysis,
    cited at (1)
        \4\ This paper is found at http://www.cf.adfg.state.ak.us/geninfo/
    pubs/RIR/5j02-02.pdf
    ---------------------------------------------------------------------------
        Practical experience. Beginning in 2002, the typical Bering Sea
    crab harvest vessel ``quasi-rents'' share in the crab fisheries was
    negative $202,000. 5 This is an operating revenue loss, that
    in subsequent years has surpassed a quarter of a million dollars per
    vessel per year, for the typical vessel in this fairly homogenous
    fleet. This means that over the last three years, harvesters have lost
    half of the value of the chief harvester asset, the vessel, by fishing
    for crab.
    ---------------------------------------------------------------------------
        \5\ Spreadsheet modeling reported to NPFMC, Anchorage, Alaska, 2/
    10/2002
    ---------------------------------------------------------------------------
        A survey of independent vessel owners was undertaken by the
    McDowell Group of Juneau, Alaska, on behalf of the CRAB Group. The
    survey results were delivered to the North Pacific Fishery Management
    Council at its Anchorage meeting, December 5, 2001 6. The
    independent crab fleet was found to be owned by closely held small
    business entities which typically have a small number of owners.
    Although there are a variety of legal forms these entities take, they
    are, functionally, partnerships of a small number of individuals. Half
    of this fleet have commercial financing in the form of a preferred
    marine mortgage. Most mortgages are guaranteed by the individuals
    participating in the vessel ownership. Many vessels number both retired
    and active captains as owners.
    ---------------------------------------------------------------------------
        \6\ Contact: Chris McDowell, Seafood Industry Analyst, McDowell
    Group, 907 586 6127
    ---------------------------------------------------------------------------
        The impact of the losses generated during the past three years has
    been: income from vessel operations has disappeared; cash and liquid
    assets of the owners has dissipated; all available types of credit have
    been sought and debt maximized; trade debt has mounted and many vessels
    have lost trade credit and/or acquired liens; mortgage payments have
    gone into arrears; personal guarantees of vessel owners have been
    invoked, forcing liquidation of assets, in some instances placing homes
    in jeopardy; and some vessels and other assets have been seized and
    sold for debt. A number of families are directly and severely impacted,
    for each vessel that is struggling.
        In each successive year, the ex-vessel price of opilio has
    dropped--``number one'' grade product fetched $1.85/lb. in 2000, $1.55/
    lb. in 2001 and $1.42 in 2002. ``Grading'' of product by processors has
    become a standard practice. Nearly all product was purchased at top
    grade in 2000. Early reports indicate that 25% of production was graded
    ``number two'' in 2002, at steep discounts in price. This has resulted
    in diminishing effort, from 235 vessels participating in 2000, to 190
    in 2002. Fewer harvesters can afford the cost of gearing up.
    Nonetheless, vessel owners that can manage the costs, continue. Vessels
    have nowhere else to go. An old adage, ``the boat makes no money tied
    to the dock,'' is still true. Fixed costs are comparable to the average
    operating loss, and fixed costs do not disappear when the boat is tied
    up. Crews represent years of investment by owners in recruiting and
    training, and this human capital will disappear if the vessel ties up.
    So long as they are able, vessel owners rationally elect to pose the
    uncertain hope of an outstanding fishing season, against the certain
    high costs that must be paid, no matter what.
        Ever mindful of these burdens, crab harvesters are also aware that
    processor margins remain at least as thick as ever. This occurs because
    the processing sector has been able to idle large segments of its
    production, and reduce costs through the consolidation of processing
    operations. Harvesters remember that in the halibut/sablefish fishery,
    during 1992/93, the ``race for fish'' drove the typical harvester
    ``quasi-rents'' share in the fishery to zero. The PIP study has
    produced data showing that under these conditions, processor ``quasi-
    rents'' was at a maximum. This is not difficult to grasp: the
    intensified race for fish destroys bargaining leverage of harvesters,
    and consequently, generates a supply of relatively cheap product for
    processors.
        It is clear to harvesters that the allocation of benefits between
    processors and harvesters in the halibut/sablefish fisheries in 1992/93
    was not sustainable, because fishermen can't fish at a loss for long.
    Rather than prove that ITQs made processors ``absolutely worse off,''
    PIP merely shows that halibut processors in 1999/2000 possibly made
    less money, possibly retained more money, and in any event, profited
    7 from the fishery. The claim that ``two-pie'' would have
    provided for a ``win-win'' in the halibut/sablefish fisheries is simply
    not true - there can be no win for harvesters in a system that
    institutes losses to fishermen.
    ---------------------------------------------------------------------------
        \7\ In fact, Matulich presents data that shows the number of large
    halibut processors has actually increased since the ITQ was instituted,
    and the processing sector is healthy. This is a rare occurrence in the
    present experience of Alaska fish processors, who claim losses in many
    fisheries.
    ---------------------------------------------------------------------------
        In conclusion, a quote from Professor Matulich: ``When a theory
    says one thing, and reality says another, then the theory is wrong!''
    ``Two-pie'' proponents seek through theory to demonstrate that
    processors were harmed by the implementation of halibut/sablefish ITQs.
    When the filter of theory is removed, the data presented in PIP
    actually demonstrates that harvesters and processors both benefitted
    from a sustainable fishery regime brought about by the ITQ.
        The Professor's ``two-pie'' theory is wrong.
        In the context of Bering Sea crab, as the fisheries drop to the
    floor, we have been shown a smoking gun, clasped in the hand of the
    processing sector. Harvesters, processors and communities would all
    benefit from an ITQ. Processors seeking a permanent guarantee of an
    unsustainably high share of the available income of the crab fisheries,
    have acted to block the implementation of an ITQ in the fisheries.
        The consequences of this are: perpetuation of unnecessarily high
    losses of life and injuries to harvesters; continued high levels of
    discard and waste in the fisheries; failure of the fisheries to
    rebuild; and financial failure of the harvesters and the communities
    that depend upon them.
                                     ______

        [A statement submitted for the record by Dorothy Childers,
    Alaska Marine Conservation Council, follows:]

       Statement of Dorothy Childers, Alaska Marine Conservation Council

        Chairman Gilchrest and Members of the Subcommittee on Fisheries
    Conservation, Wildlife and Oceans:
        Thank you for holding today's hearing on Individual Fisheries
    Quotas programs.
        The Alaska Marine Conservation Council is a community-based
    organization of fishermen, subsistence hunters, conservationists, small
    business owners, and families throughout coastal Alaska whose
    livelihoods and ways of life depend on a healthy ocean ecosystem. On
    behalf of over 900 members, we urge you and your committee to develop
    strong and enduring standards for future IFQ programs to ensure that
    conservation is achieved and communities are protected.
        Attached is our recommended set of standards that should be
    features of any future IFQ program. Specifically, we believe
    conservation should be a key feature of IFQ programs, consolidation of
    access to fisheries should be controlled, opportunity for entry-level
    fishermen should be provided and competitive markets should be
    maintained. We do not support processor ownership of quota or other
    government limitations on who can buy fish from independent fishermen.
        We appreciate your leadership on fisheries conservation management
    and look forward to work on the Magnuson-Stevens Act reauthorization.
    IFQs play a key role in the future of our fisheries.
    National Standards are Needed for IFQs & Other Limited Access Systems
        Individual Fishing Quotas (IFQs) are often discussed as a fisheries
    management model that is expected to have conservation and economic
    benefits as a natural consequence of slowing down the ``race for fish''
    and making fisheries more economically ``efficient.'' However, IFQ case
    studies from around the world show that the natural trend in IFQ
    systems is toward increasing consolidation of participants in a fishery
    and not necessarily better conservation of the resource. The lesson is
    that particular outcomes for conservation or the preservation of
    fishing communities are not achieved unless they are an explicit part
    of the program design. The National Research Council emphasized the
    importance of program design in its report to Congress:
        Confusion, conflict, and ambiguity about the relative importance
    and value of the objectives of an IFQ program can result in
    contradictions and inconsistencies in its design and implementation,
    making the program more vulnerable to unintended consequences and less
    likely to succeed. (Sharing the Fish, p. 197)
        Only with proper direction from Congress can IFQs be a model that
    links conservation benefits with long-term needs of our coastal
    communities and opportunity for fishing families.
        Fishery management programs that limit access to the public's
    resource must:
         Reward clean fishing (promote low bycatch and minimize
    impact on ocean habitat) 1
    ---------------------------------------------------------------------------
        \1\ A broad range of criteria is important for the distribution of
    quota including individual catch history, long-term participation,
    dependence and good stewardship.
    ---------------------------------------------------------------------------
         Create opportunity for future generations of independent
    fishermen 2
    ---------------------------------------------------------------------------
        \2\ ``The Magnuson-Stevens Act currently requires that the regional
    councils and the Secretary of Commerce...address the issue of new
    entry. Specifically, they are required to have considered allocating a
    portion of the annual harvest to entry-level fishermen, small-vessel
    owners, and crew members who do not hold or qualify for IFQs (Sec.
    3039D095).'' (p. 158)
    ---------------------------------------------------------------------------
         Prevent excessive consolidation and vertical integration
    of the seafood industry 3
    ---------------------------------------------------------------------------
        \3\ ``The capacity of IFQs for transferability, consolidation, and
    leasing has led to a general concern that independent owner-operators
    of fishing vessels or crew members will be led into economic dependence
    on absentee owners as quota shares increase in value and small
    investors are excluded from the field.'' (p. 3)
    ---------------------------------------------------------------------------
         Preserve healthy competition among seafood processors and
    prohibit processor monopolies (this includes a prohibition on
    processing quota because of the controlling effects on markets, coastal
    communities, independent fishermen and the public process) 4
    ---------------------------------------------------------------------------
        \4\ Allowing processors to have processing quota would require a
    change in federal law. It is not currently legal to limit who can buy
    fish from independent fishermen. The National Research Council did not
    find ``...a compelling reason to establish a separate, complimentary
    processor quota system (the `two-pie' system).'' (p. 205)
    ---------------------------------------------------------------------------
         Promote healthy community fishing economies and maintain
    diverse independent fishing fleets 5
    ---------------------------------------------------------------------------
        \5\ The National Research Council noted several ways in which
    community history and dependence can be recognized. ``...[T]he notion
    of dependence may include geographic isolation; lack of employment
    alternatives; social, economic and cultural systems that have developed
    in these locations; and their dependence on fishing as a source of
    nutrition, livelihood and life style.'' (p. 19)
    ---------------------------------------------------------------------------
         Recognize historic regional fishing and processing
    patterns 6
    ---------------------------------------------------------------------------
        \6\ The National Research Council recommends that Congress
    ``...allow...councils to allocate quota to communities or other groups,
    as distinct from vessel owners or fishermen''. A range of factors such
    as proximity to the resource, dependence on the resource, contribution
    of fishing to the community's economic and social well-being, and
    historic participation in the fishery, may be among the factors that a
    council considers when setting criteria for establishing which
    communities may hold quota.'' (p. 206-207)
    ---------------------------------------------------------------------------
         Require good stewardship of the public's marine resources
    as a condition for continuing participation in IFQ fisheries
    7
    ---------------------------------------------------------------------------
        \7\ The National Research Council recommends a review process to
    ensure IFQ programs are achieving desired results and to allow for
    adjustments to be made as needed.
    ---------------------------------------------------------------------------
        The following quotes are from National Research Council. 1999.
    Sharing the Fish, Toward a National Policy on Individual Fishing
    Quotas. National Academy Press. Congress requested this report to guide
    policy on future IFQ programs.
        ``Examples of factors that may be taken into account beyond catch
    history include (1) the extent of dependence and commitment to fishing
    as a way of life, as in the Alaska Limited Entry program; (2) evidence
    for or against good stewardship and acceptance of conservation goals
    (e.g. bycatch rates, violation histories, types of fishing gear used);
    (3) whether rule following is the norm in the fishery; and (4) other
    criteria that councils deem important. These factors reflect the
    conservation and equity goals of the Magnuson-Stevens Act''.'' (p. 204)
        IFQ programs allowed to be driven only by free-market forces, such
    as the quahog/surf clam fishery, resulted in ``'loss of jobs, and
    decreased opportunities for young people and hired captains to become
    vessel owners and for independent harvesters to find markets for their
    clams.'' (p. 3)
        ``...[F]ish processors are an integral part of the fishing
    industry. Without processors, much of the fish being brought ashore
    would never make it to market...but does this entitle processors to be
    considered for receiving or holding harvesting or processing quotas?''
    (p. 153) ``Processing quotas would, presumably, be a permanent or a
    long-term arrangement, whereas processors' losses occur only once [in
    the form of stranded capital that could become redundant in a slower
    paced fishery]. It must be carefully considered whether it is desirable
    to put in a place a permanent mechanism...to fix a one-time problem,
    rather than compensating exiting processors through other means.'' (p.
    154)
        ``The Secretary of Commerce should ensure that each fishery
    management plan that incorporates IFQs includes enforcement provisions
    for regular review and evaluation of the performance of IFQ programs,
    including a clear timetable, criteria to be used in evaluation, and
    steps to be taken if the programs do not meet these criteria.
    Provisions should be made for the collection and evaluation of data
    required for such assessments.'' (p. 9)
                                     ______

        [A statement submitted for the record by The Coastal
    Conservation Association follows:]

               Statement of The Coastal Conservation Association

        The Coastal Conservation Association (CCA) is a national
    organization of recreational fishermen concerned about the conservation
    of marine resources. CCA has state organizations in 15 states and now
    has some 80,000 active members. It has been involved in the management
    of marine resources since its founding in 1977. The views submitted in
    this testimony reflect the positions of the organization as approved by
    its Board of Directors.
        Individual transferable quotas (ITQs) are not a new concept to
    fishery management. The concept of ITQs has been discussed since the
    inception of the Magnuson Act (the Act). The use of ITQs, coupled with
    a limited entry system, have in every instance been controversial. As
    implemented to date, ITQs have not made a material difference in
    fisheries. However, correctly implemented, ITQs could have positive
    economic and conservation effects on the resource.
        There are several principles that should be adopted before any
    statutory changes to the Act are made.
        1. LTo begin with, the Councils are the best place to develop an
    ITQ system. The existing statute (absent the present moratorium)
    contemplates this scenario. A fishery management council is the
    decision making body that is the closest to the participants in the
    fishery. It also has the greatest expertise in both economics and the
    conservation implications of such a measure. The variables in a limited
    entry system with ITQs are vast. How to match the basic conservation
    measures for the fishery and the long-term viability of the fishery is
    best left with the resource managers. For Magnuson Act fisheries, that
    decision should be made by the Regional Councils. For HMS fisheries, it
    should be the advisory panels.1 They are the bodies in the
    best position to consider and decide on the complexities of these
    systems.
    ---------------------------------------------------------------------------
        \1\ Reference to the Councils throughout this document is intended
    to cover Atlantic HMS fisheries as well.
    ---------------------------------------------------------------------------
        2. LThe Councils should have broad discretion to implement systems
    that are appropriate to a fishery. To the extent that reasonable ideas
    about allocating the use of the resource are now precluded by the
    statute, the statutory obstacles should be removed. Guidelines should
    broaden the measures that can be implemented, not constrict them. Ideas
    being bandied about today about auctions, processor preferences,
    redistribution of quotas, rationalizing fleets, cataloging of rights,
    etc. may be appropriate in some fisheries but not in others. So long as
    there is no negative conservation impact and the resource will be
    used2, the Councils should be able to consider ITQs.
    ---------------------------------------------------------------------------
        \2\ The concept of full use of the resource within conservation
    limits is of course the basis for both Law of the Sea's treatment of
    fisheries and the Magnuson-Stevens Act. Permanent conservation reserves
    in the hands of private parties would violate this underlying
    principle.
    ---------------------------------------------------------------------------
        3. LThe participants in the fishery should have a significant say
    in the formulation of any ITQ system impacting them. This includes all
    of the participants in the fishery, not just the commercial sector. ITQ
    systems are highly controversial because, even in the most benign of
    them, the system changes the economic relationships in the fishery. The
    Council and the participants are the best parties to sort out a
    rational and workable ITQ system for a given fishery.
        4. LLimited entry of commercial vessels should be considered before
    the approval of an ITQ system. ITQs are a good way to rationalize a
    fleet and their harvest. ITQs usually go hand-in-hand with a limited
    entry system. Councils should be required to consider the use of
    limited entry for commercial fisheries before turning to an ITQ system
    alone.
        5. LThere should never be a limited entry program for recreational
    vessels. A limited entry program has now been approved for the Gulf of
    Mexico for the for-hire fleet in the reef fishery. This is a terrible
    mistake. Recreational fishermen can and do accept seasons, bag limits,
    gear restrictions and all sorts of other measures to reduce their
    impact on the resource. They do not accept limitations on access to the
    fishery. The economic value of a recreational fishery is directly
    related to access. If access is limited to make the for-hire fleet more
    efficient, the overall value of the recreational fishery goes down.
        6. LAs long as the resource gets used within the proper biological
    constraints, there should be no limitations on who can buy an ITQ. In
    many fisheries today, the fastest growing sector is the recreational
    public. Yet, in most managed fisheries the commercial and recreational
    allocations are made on the basis of historic landings, which may have
    little or no relationship to today's fishery. Transferring the quota
    from one sector to another through the use of ITQs could be a rational
    way to reduce the number of commercial vessels in a fishery and provide
    for increased participation in the recreational sector, without
    impacting the resource.
        7. LFinally, there should be no extension of the present
    moratorium. Limited Entry and ITQs are not the answer for every
    fishery. In many the use of them may make no sense at all, but that
    decision should be made by the participants and the Councils, not by
    the Congress.
                                     ______

        [A statement submitted for the record by Dr. Ilene M.
    Kaplan, Department of Sociology, Union College, and Visiting
    Researcher, Marine Policy Center, Woods Hole Oceanographic
    Institution, follows:]

    Statement of Dr. Ilene M. Kaplan, Chair, Department of Sociology, Union
      College, and Visiting Researcher, Marine Policy Center, Woods Hole
                           Oceanographic Institution

        Individual Fishing Quotas (IFQ) have become one of the most
    controversial management proposals for United States fisheries. They
    represent a complex form of management and need to be considered very
    carefully, not only with regard to resource conservation needs, but
    with socio-economic concerns and U.S. geographic or regional needs in
    mind, as well. Furthermore, implementation of IFQs would be
    particularly problematic if quotas were to be transferable.
    Transferability could easily lead to increased pressures and negative
    socio-economic impacts on small scale fishing communities and
    businesses, particularly fishermen who own only one or two boats and
    fishermen who are not vertically integrated, which means they sell
    their catch to independent processors and dealers. Put simply, bigger
    operations could intimidate smaller operations and the many community
    businesses and families that are already facing economic problems could
    be placed under additional economic and social stress. Such small scale
    businesses should be given protection under the Regulatory Flexibility
    Act (RFA) and, in addition, the concomitant fisheries-dependent
    communities, of which these small businesses are a part, should be
    assured of fair treatment through the socio-economic impact assessments
    that need to be conducted according to the National Environmental
    Protection Act (NEPA).
        Much of the New England commercial fishing businesses are made up
    of small-scale fishing operations. The Massachusetts and Maine
    coastlines are abundant with such fishing operations. And the scallop
    industry of New Bedford, one of the mainstay commercial operations of
    the city, and contributing to New Bedford's high ranking commercial
    seafood rating in the country, consists largely of such small-scale
    fishermen. In the event that larger fishing businesses overtook small
    scale operations, many fishing families, and in some cases, entire
    fishing communities i.e., communities dependent on commercial fishing
    operations, would be faced with high levels of unemployment, economic
    stress and increased social problems.
        Socio-economic needs must be considered along with resource
    conservation strategies. The RFA assures this. IFQs have often been
    referred to as efficient operations but, efficiency should be looked
    at, not only from a resource economic perspective, but a socio-economic
    perspective as well. Increasing the number of families who face
    unemployment and a loss of family income is not efficient from all
    points of view. Alternative proposals, with fewer negative socio-
    economic impacts should be considered, particularly in regions like New
    England where small-scale fishing activities are in operation and have
    been the mainstay of economic stability for fishing families and
    communities.
        There is another important consideration to be made regarding the
    use of quotas as a conservation/regulatory method. The actual
    allocation of different individual quotas is a practice that has the
    potential to become, or be perceived as being, unfair and/or abusive.
    In a community and government network where there is already a high
    degree of suspicion among stakeholders and government officials, the
    determination and allocation of individual quotas would promote rather
    than alleviate the adversarial relationship that has emerged between
    many fishing groups and the government. Imagined unfairness, even if
    not accurate, would be a serious problem in the implementation and
    success of the program.
        In sum, the following points must be considered when examining the
    feasibility of fishing quotas: 1) transferability places undue
    pressures on small scale fishing businesses 2) socio-economic
    protections under the RFA and NEPA need to be assessed 3) geographic
    regions like New England have a history of small-scale fishing
    operations, and would be particularly at risk for socio-economic
    difficulties and 4) the process of allocating individual, transferable
    quotas can promote perceptions of unfairness that would be
    counterproductive to the success of any regulatory process.
                                     ______

        [A statement submitted for the record by Linda Kozak, Kozak
    & Associates, Inc. follows:]

               Statement of Linda Kozak, Kozak & Associates, Inc.

        I would like to submit comments for consideration on the use of
    individual fishing quotas (IFQs) in the development of fishery
    management programs in the Federally managed fisheries of the United
    States. In referencing quota programs as IFQs, it is my expectation
    that these quotas will and should be transferable.
    Background
        I am a lifelong Alaska resident and have fished salmon in Bristol
    Bay all of my life. Since 1987 I have worked as a consultant to vessel
    owners who participate in the fixed gear fisheries of sablefish,
    halibut, Pacific cod, and crab in Alaska. My IFQ background and
    experience includes attending nearly every North Pacific Fishery
    Management Council meeting for the last 15 years and representing my
    clients on IFQ issues. I was a charter member on the Council's IFQ
    Implementation Team and served on the West Coast Advisory Panel for the
    National Research Council study, which resulted in the document,
    ``Sharing the Fish''. I am now working with crab vessel owners in
    Alaska who have been attempting to have their fishery rationalized for
    several years. These vessel owners support an IFQ program for their
    fishery.
    Need for IFQs in Developing Limited Access Programs
        During the development of the sablefish and halibut IFQ program in
    Alaska, my clients and I opposed the adoption of such a program. I
    testified to the North Pacific Fishery Management Council a total of 22
    times in opposition to that program as it was developed.
        After the IFQ program was implemented and I began to see the
    advantages for resource conservation and economic efficiency, I became
    a strong believer in the potential benefits of quota programs. I now
    believe it is imperative for regional fishery management councils to
    have the flexibility to implement an IFQ program on a fishery by
    fishery basis.
        In my view, the moratorium on new IFQ programs has been harmful to
    the resource and the fishery participants. In spite of limited entry
    for the groundfish and crab fisheries in Alaska, many of the fisheries
    in Alaska are still over-capitalized and need further rationalization.
    The North Pacific Council must have the ability to implement IFQ
    programs as needed in the various fisheries.
    Comments on Developing a National Policy on IFQs
        The National Standards to assist the regional councils in their
    development of IFQ programs should be broad enough to provide guidance,
    without requiring certain, specific action. There are different and
    varied needs and concerns for each region and fishery that should be
    addressed on an individual basis. In light of the desire to have
    guidelines that don't limit the flexibility of managers, there are
    several recommendations to consider.
        1. Initial Allocation: The initial allocation for IFQs should be
    done on the basis of historical participation. The vessel owners that
    have invested years in a specific fishery, and in many cases developed
    niche markets for their product, should be recognized as those who
    initially benefit from a rationalization program. In regard to the
    concept of auctions or lottery system, I believe that this would be
    harmful to the resource and provide a lack of stability for the
    fishermen. In addition, those who would most benefit from an auction as
    the vehicle for allocation are the large companies that could afford to
    bid on the harvesting rights. This does not seem equitable to longtime,
    independent fishermen who may not have the resources to bid. It is most
    equitable to look at participation, with the councils having the
    ability to weigh dependence, as well as recent participation, when they
    consider the initial allocation. The needs of skippers and crewmembers
    can and should be addressed in developing a program. One way is to
    implement a low-cost loan program for new entry, which would provide a
    mechanism for skippers and crew to invest in the fishery. This has been
    done in the sablefish and halibut IFQ program in Alaska. Another way is
    to set aside a percentage of the IFQ at the first sale that would be in
    reserve for qualified crewmembers and skippers to purchase. There are
    many ways to design this, but the specifics should be left to the
    councils. The needs of skippers and crewmembers will vary from region
    to region and fishery to fishery.
        The coastal communities in Alaska and in many parts of the country
    depend on commercial fishing. The needs of the coastal communities need
    to be considered in developing an IFQ program, but in most cases a
    direct allocation is not appropriate or necessary.
        2. Sunset or Mandatory Review Provisions: I believe that any IFQ
    program will go through a series of modifications in the first several
    years, as was the case of the sablefish and halibut program in Alaska.
    The North Pacific Council at present is reviewing yet another change to
    that program which will allow the small coastal villages in the Gulf of
    Alaska to purchase IFQ and lease it to their fishermen. There should
    NOT be a sunset provision, as this would cause instability and
    uncertainty for the participants. A mandatory review in five to seven
    years, which would look at the program in light of specific objectives,
    is very appropriate and probably desirable. A shorter time period would
    be problematic, as it takes about five years to see the effects of a
    major change in the management of a resource.
        3. Policy Regarding Processor Shares: When addressing the question
    of how processors should be considered in an IFQ program, there are two
    basic issues.
        The first is whether processors should receive harvesting quota
    shares based on their harvesting history in a manner similar to
    independent vessels that are not vertically integrated. In the
    sablefish and halibut program in Alaska, it was never questioned that
    the processing companies should be awarded harvesting shares based on
    the history of their vessels. I believe it is time to review this
    policy in light of the concern that most processing companies in Alaska
    are highly diversified and process product from a variety of species
    and regions. This gives them a great deal of flexibility that an
    independent vessel owner who participates in only one or two fisheries
    does not have. Their very ownership of harvesting vessels gives them an
    advantage in price negotiations, while their diversification in other
    fisheries is also a distinct advantage. While a total ban on processing
    companies owning harvesting vessels is probably not appropriate, some
    level of control in the ownership of harvesting vessels may be
    necessary, regardless of whether an IFQ program is in effect or not.
        The second issue is much more troubling and potentially devastating
    to the independent harvester. That is whether processors should receive
    individual processing quota (IPQ) based on their processing history in
    a given fishery. This would require that a harvester must match all or
    some of his harvesting IFQ to a processor's IPQ in order to deliver
    product. The consideration of creating a national or regional policy to
    provide for the ability of the councils to allocate processing
    privileges as quotas, or even limited entry, goes against one of the
    objectives of a rationalization program. That is, the flexibility
    harvesters must have in a rationalization program to fish safely and in
    a manner which provides for conservation of the resource. This
    flexibility will not exist if processor quotas are allowed. Another
    important objective of an IFQ program should be to provide for open and
    free markets, with the ability for harvesters to receive a competitive
    and fair price for their product. This will provide a greater benefit
    to the skippers, crewmembers and communities. It is believed by many
    that if processor shares are allowed, the independent harvesters will
    not receive a fair and competitive price for their product, as the
    guarantee for processing a certain amount of fish will completely
    eliminate any incentive a processor might have to offer a competitive
    price. This will likely result in independent harvesters going out of
    business and being bought out by the larger, diversified vessel
    owners--the processing companies. The concern about what processor
    shares could do to the value of harvesting shares has been articulated
    in a recent report prepared for the North Pacific Fishery Management
    Council by Drs. Milon and Hamilton. Other economists, including Dr.
    Robert Halvorsen, have presented testimony to this subcommittee
    expressing concern about the potential impacts of processor shares and
    opposing the implementation of such a program.
    Conclusion
        The moratorium on new IFQ programs has been in effect for too long.
    It is a management tool that the regional councils urgently need in
    order to complete the rationalization of many fisheries. IFQ programs
    are needed to benefit the resource and provide some stability and
    certainty to the harvesters of specific fisheries. In creating National
    Standards for IFQ programs, it is important to create standards that
    will give general direction to the councils, without mandating a
    specific action or result. In the case of processor shares, Congress
    should NOT authorize or mandate the allocation of processor quota
    shares on a national or regional basis. Additionally, there may need to
    be some consideration for limiting the ownership of harvesting vessels
    and IFQ by processors.
                                     ______

        [A statement submitted for the record by Jeffrey Stephan,
    United Fishermen's Marketing Association, Inc., follows:]

         Statement of Jeffrey R. Stephan, United Fishermen's Marketing
                               Association, Inc.

        On behalf of the United Fishermen's Marketing Association, Inc.
    (UFMA), I respectfully submit this testimony to the record of the
    February 13, 2002, Oversight Hearing on Individual Fishing Quotas
    (IFQs) before the House Subcommittee on Fisheries Conservation,
    Wildlife & Oceans.
        We would appreciate any future opportunity to personally testify to
    your Committee with respect to issues that address the Magnuson-Stevens
    Fishery Conservation and Management Act, and especially with respect to
    issues that address rationalization of U.S. fishery resources,
    including the allocation to the Harvesting or Processing Sectors of the
    U.S. Fishing Industry of permits for the exclusive use of a U.S.
    fishery resource.
        The membership of the United Fishermen's Marketing Association,
    Inc. (UFMA) includes vessel owners and operators who harvest crab,
    sablefish, halibut, salmon, herring, p. cod and other groundfish in
    state and federal waters of the Gulf of Alaska (GOA) and the Bering
    Sea/Aleutian Islands (BSAI). A substantial component of our membership
    harvests sablefish and halibut under the Individual Fishing Quota (IFQ)
    Program for Halibut and Sablefish in the waters off Alaska that are
    within the jurisdiction of the North Pacific Fishery Management Council
    (NPFMC). UFMA was closely involved in the development of the
    rationalization of the halibut and sablefish fisheries (Halibut/
    Sablefish IFQ program), and is presently involved in ongoing activities
    that address implementation of and amendment to such IFQ program.
    Moreover, UFMA is actively involved and impacted by rationalization
    initiatives that are currently underway with respect to several Fishery
    Management Plans (FMP) that govern U.S. fishery resources within the
    jurisdiction of the NPFMC, including the FMPs for Bering Sea/Aleutian
    Islands (BSAI) King and Tanner Crabs, BSAI Groundfish, and Gulf of
    Alaska (GOA) Groundfish. UFMA believes that the Halibut/Sablefish IFQ
    program has been generally successful in achieving rationalization of
    the halibut and sablefish fisheries, attaining realistic resource,
    conservation and management goals, and addressing reasonable social and
    economic considerations.
        While we are especially interested in Congressional initiatives
    that may impact the allocation of permits that grant exclusive use of
    those U.S. fishery resources that are governed by the FMPs over which
    the NPFMC has authority, we agree that Congress must address several
    relevant issues and concerns of national significance and impact that
    are associated with the provision of authority to the Fishery
    Management Councils (Councils) and to the U.S. Secretary of Commerce
    (Secretary) to allocate permits that grant exclusive use of all U.S.
    fishery resources.
    I. General Recommendations and Observations
        We support the lifting of the Moratorium (IFQ Moratorium) that was
    placed on the implementation of new Individual Fishing Quota programs
    for the Harvesting Sector of the U.S. Fishing Industry (Harvester
    Individual Fishing Quotas, or IFQs).
        We support existing provisions of U.S. law that prohibit the
    allocation of permits to the Processing Sector of the U.S. Fishing
    Industry (``Individual Processing Quotas'', or ``IPQs'') to process a
    quantity of fish, expressed by a unit or units representing a
    percentage of the total allowable catch of a fishery that may be
    received or held for exclusive use by a processing entity.
        We do not support a change to federal legislation, including U.S.
    antitrust laws and the Magnuson-Stevens Act (MSA), that would permit
    the allocation of IPQs to the Processing Sector of the U.S. Fishing
    Industry.
        Economic protectionism is the objective and expected outcome of
    IPQs, and will provide the U.S. Processing Sector with an economic
    windfall. The problems that IPQs attempt to seek are not clear. IPQs do
    not seek to solve resource conservation and management problems.
        IPQs are a serious impediment to the economic freedom of the
    Harvesting and Processing Sectors to conduct their businesses in a
    competitive and market-driven manner, and will significantly constrain
    historical fishing practices, the achievement of optimum yield and the
    greatest overall benefit to the Nation, and thwart the growth of a
    sound and economic U.S. fishing industry.
        We do not support Congressional authorization for Councils to
    impose ``Regionalization'' restrictions and requirements on either the
    U.S. Harvesting or Processing Sectors. Such Regionalization
    requirements force the Harvesting Sector to deliver their harvest of a
    U.S. fishery resource to a specific port, force the Processing Sector
    to process a U.S. fishery resource in a particular port, and otherwise
    impose regional restrictions on deliveries of U.S. fishery resources to
    processors, and to certain geographical regions. Regionalization is a
    serious impediment to the economic freedom of the Harvesting and
    Processing Sectors to conduct their businesses in a competitive and
    market-driven manner.
        We understand that the IFQ Moratorium on the implementation of new
    Individual Fishing Quota programs addresses only the allocation of IFQs
    to the U.S. Harvesting Sector. The IFQ Moratorium has no linkage to the
    allocation of IPQs to the U.S. Processing Sector. We ask Congress to
    remain silent on IPQs in the MSA.
        We request the Congress to commission the Federal Trade Commission
    and the Department of Justice Antitrust Division, in consultation with
    the Secretary of Commerce, to prepare a comprehensive report that
    examines the use of IPQs in fisheries management, and that such a
    report should be completed and considered by the Congress prior to
    Congressional consideration of any National Standards that would
    authorize the use of IPQs in fisheries management.
        Several U.S. fishery resources are commodities that contribute to
    U.S. domestic and export trade, and are important to interstate and
    foreign commerce. We ask Congress to examine whether Regionalization
    violates the Port Preference Clause of the U.S. Constitution, and
    whether IPQs or Regionalization have impact on domestic and foreign
    trade, including the impacts of IPQs on international treaties, trade
    agreements and foreign laws that contain provisions, obligations and
    conditions that govern domestic and international commerce of U.S.
    products that may be associated with subsidies, anticompetitive
    combinations, etc. (e.g., NAFTA, European Commission of the European
    Union, etc.).
        We support specific, relevant and comprehensive National Standards
    for IPQs and Regionalization to which all Councils are equally required
    to adhere. If Congress wishes to consider rewriting current federal
    legislation, including U.S. antitrust laws and the MSA, to provide for
    Council and Secretarial consideration of IPQs, then we respectfully
    request Congress to legislate specific, relevant and comprehensive
    National Standards that address the consideration of IPQs and
    Regionalization by all Councils, and that such National Standards must
    equally apply to all Councils, and should be national in scope.
        We do not support a Congressional authorization that permits a
    specific Council, absent specific and comprehensive National Standards
    that are National in scope, to recommend to the Secretary FMP
    Amendments and associated regulations that intend to implement
    Individual Processing Quotas (IPQs) or Regionalization restrictions
    with respect to a U.S. fishery. We do not support a specific
    authorization to a specific Council to develop and adopt a
    rationalization plan that includes IPQs or Regionalization absent
    National Standards that apply equally to all Councils. That is, we ask
    Congress to not leave it to the Councils to determine whether or not,
    and to what extent, to recommend IPQs or Regionalization to the
    Secretary; we believe that all Councils should adhere equally to
    National Standards that address IPQs and Regionalization.
        We do not support independent and unilateral Congressional action
    that mandates IPQs or Regionalization for a specific U.S. fishery,
    especially when such action is not the subject of the thoughtful and
    deliberative review that is otherwise attempted and available with
    respect to the public process that customarily governs legislative
    action (e.g., bicameral review; review by Subcommittees and Committees
    with primary jurisdiction; Congressional hearings; debate; public
    submission of comment and testimony; markup; reports; etc.). We are
    concerned that the major policy and economic implications and the
    complex operational details of rationalization are not available for
    public assessment and analysis when Congress legislates the precise
    operational details of rationalization. We are given significant
    trepidation and disquiet by the specter of Washington D.C. lobbyists
    fixing the specific details and solutions for their special interest
    clients with respect to complex regional management challenges,
    including the rationalization of specific U.S. fisheries. We
    respectfully request that Congress eschew the pressure to legislate
    even the minor details of such complex rationalization programs that
    carry such significant consequences.
        We do not support a Congressional mandate or directive that the
    Secretary impose a Secretarial rationalization plan for a specific U.S.
    fishery, especially one that incorporates the precedents of Processor
    IPQs and Regionalization.
        We respectfully caution Congress that many of the resource,
    conservation, management and reasonable economic and social benefits
    that may derive from a straightforward Harvester IFQ program are
    quickly extinguished, or significantly distorted, when provisions,
    requirements and regulatory and other costs are attached to Harvester
    IFQ programs that seek to attain economic and social objectives, and
    the allocation of economic and social subsidies, protections and
    advantages, that go far beyond reasonable objectives of
    rationalization, and of fisheries management generally. Many of these
    costs should otherwise more properly be addressed through focused
    appropriations from the general tax structure, or through other
    legislative or regulatory remedies that are available to Congress and
    the individual States.
        Although the U.S. Maritime Administration collects and compiles
    important vessel ownership information that is of benefit and use to
    the Secretary and the Councils in support of making informed decisions
    with respect to ownership issues that are associated with IPQs,
    including information that is necessary for evaluating participation in
    U.S. fisheries, they do not make such information available to the
    Councils or the Secretary. If there is valuable and useful data that is
    available from the Maritime Administration that would help the
    Secretary and the Council understand the implications and impacts of
    their regulatory actions, we respectfully request that Congress
    authorize the U.S. Maritime Administration to make this data available.
        We respectfully request Congress to evaluate the impacts and
    implications of IPQs with respect to competition of, and methods to
    prevent, limit and control, foreign ownership interest in, and economic
    control of the U.S. fishing industry.
        We respectfully suggest that Congress should evaluate the use of
    divestiture as a means to mitigate the anticompetitive impacts that
    will result from the application of IPQs in rationalization programs
    for U.S. fisheries. There are several benefits to requiring the
    Processing Sector to divest Harvesting Sector IFQs and harvesting
    vessels as a reasonable precondition for considering the allocation of
    IPQs.
    II. Removal of the Congressional Moratorium on Individual Fishing Quota
            Programs
        We support the lifting of the Moratorium (IFQ Moratorium) that was
    placed on the implementation of new Individual Fishing Quota programs
    for the Harvesting Sector of the U.S. Fishing Industry (Harvester
    Individual Fishing Quotas, or IFQs). That is, we support the allocation
    of permits to the Harvesting Sector of the U.S. Fishing Industry to
    harvest a quantity of fish, expressed by a unit or units representing a
    percentage of the total allowable catch of a fishery that may be
    received or held for exclusive use by a person. Harvester IFQs is a
    reasonable management tool, is currently in use in the geographical
    jurisdiction of several different Councils, has been successfully
    implemented, can be addressed from a national perspective in a
    reasonably straightforward manner, and is legal when the IFQ Moratorium
    is lifted.
        The utility of using Harvester IFQs as a rationalization tool for
    the Harvesting Sector is clear, and has been identified and supported
    by the past action of several Councils, NMFS and Congress.
        There appears to be a need for fleet rationalization in certain
    U.S. fisheries, and those many factors that are customarily considered
    as a rationale for the implementation of Harvesting Sector
    rationalization, and specifically with respect to IFQs, are present in
    many of these U.S. fisheries.
        IFQs as a method of Harvesting Sector rationalization are an
    accepted concept, and a practical and reasonable management instrument
    that have proven to achieve significant resource, conservation,
    management, safety and economic and social benefits and outcomes.
        IFQs can result in the achievement of many benefits, including the
    minimization of vessel overcapitalization; benefits to the conservation
    and productivity of U.S. fishery resources; improvement in management
    efficiencies, costs and operation; improved vessel and human safety
    (for commercial vessels, harvesters, rescue vessels, rescuers); more
    efficient and competitive market mechanisms; economic stability for the
    Harvesting Sector that is generally made up of small independent
    businesses; improved product quality and marketability; consumer
    benefits; more efficient and competitive product distribution; etc.
        The Alaskan Halibut/Sablefish IFQ program has generally been a
    management instrument that has resulted in beneficial impacts to the
    resource, industry, safety, quality, marketability, competitive
    markets, consumers, product value, product and market distribution,
    etc.
        The linking, tying, and concurrent consideration, development and
    analysis of IFQs and IPQs are largely a political issue, and are not
    central to the resource, conservation and management issues that are
    relevant to rationalization of U.S. fisheries. IFQs and IPQs are
    separate concepts that are significantly different with respect to
    their costs, benefits, impacts and effects. IFQs and IPQs are
    distinctively different and unconnected in their respective application
    and effects.
    III. Allocation of Permits for Exclusive Use of U.S. Fisheries
            Resources to the Processing Sector of the U.S. Fishing Industry
            (IPQs)
        We support existing provisions of U.S. law that prohibit the
    allocation of permits to the Processing Sector of the U.S. Fishing
    Industry (``Individual Processing Quotas'', or ``IPQs'') to process a
    quantity of fish, expressed by a unit or units representing a
    percentage of the total allowable catch of a fishery that may be
    received or held for exclusive use by a processing entity. The
    prohibitions against the allocation of IPQs are good public policy, in
    the best interest of the U.S. Harvesting and Processing Sectors, of the
    U.S. Fishing Industry generally, and of the consumer. The continued
    prohibition of IPQs helps to ensure that vigorous competition and free
    market mechanisms will continue to operate in the U.S. fishing
    industry.
        We do not support a change to federal legislation, including U.S.
    antitrust laws and the Magnuson-Stevens Act (MSA), that would permit
    the allocation of IPQs to the Processing Sector of the U.S. Fishing
    Industry. IPQs pose significant antitrust and anticompetitive issues,
    and issues with respect to anticompetitive combinations,
    concentrations, mergers and vertical integration that seriously risk
    the competitiveness and future economic vitality and growth of the U.S.
    fishing industry.
        The enduring principles that underlie the Sherman Antitrust Act,
    the Clayton Antitrust Act, the Robinson-Patman Act, and other antitrust
    laws of the United States should be every bit as relevant today as when
    this important antitrust legislation was passed.
        We understand that the IFQ Moratorium on the implementation of new
    Individual Fishing Quota programs addresses only the allocation of IFQs
    to the U.S. Harvesting Sector, and has no linkage to the allocation of
    IPQs to the U.S. Processing Sector. We ask Congress that the MSA remain
    silent on IPQs.
        Economic protectionism is the objective and expected outcome of
    IPQs, and will provide the U.S. Processing Sector with an economic
    windfall. The problems that IPQs attempt to seek are not clear. IPQs do
    not seek to solve resource conservation and management problems. While
    some advocates of IPQs promote them as a means to rationalize the
    Processing Sector, IPQs are clearly not a means of rationalization, nor
    do they have any meaningful impact with respect to resource,
    conservation, management or safety objectives, effects or benefits.
        IPQs are an unproven and hypothetical theoretical concept that is
    not validated in observation, practical application or experience. This
    is also true for the unproven theory that is referred to as the ``two-
    pie'' system that is commonly associated with Dr. Scott Matulich. While
    Dr. Matulich has used the concept of the ``two-pie'' system in support
    of, and as a means of, his advocacy of allocating IPQs and other
    property rights to the Processing Sector, his ``two-pie'' theory does
    not seem to be supported in the economic literature.
    IV. Processing Sector IPQs Foreshadow Significant Antitrust and
            Anticompetitive Impacts
        IPQs are a serious impediment to the economic freedom of the
    Harvesting and Processing Sectors to conduct their businesses in a
    competitive and market-driven manner, and will significantly constrain
    historical fishing practices, the achievement of optimum yield and the
    greatest overall benefit to the Nation, and thwart the growth of a
    sound and economic U.S. fishing industry.
        Significant examples of market dominance exist in U.S. Processing
    Sector; IPQs will exacerbate this condition.
        IPQs significantly constrain the entry of new, small, innovative
    and non-dominant Processing Sector entities. While the actual
    quantities U.S. fishery resources that have been historically purchased
    and processed by new, small, innovative and non-dominant processors may
    not be proportionally high when compared to the totals that have been
    purchased and processed by established and dominant processors, it is
    an undeniable assertion that the very presence of new, innovative,
    small and non-dominant processors in the marketplace, and the
    commensurate freedom, opportunity and ability that they posses to
    compete for the purchase of U.S. fishery resources, provides
    significant competitive benefits and positive effects that sustain free
    and open markets, competition generally, competitive ex-vessel pricing,
    product diversity, product distribution , and many other benefits that
    result from free and open markets and competition.
        New, small, innovative and non-dominant Processing Sector entities
    have special economic needs and competitive positions that are
    different from established and dominant processors, and IPQs will prima
    facie limit the market freedom, opportunity and ability of these
    processors, and the U.S. Processing Sector generally, to freely compete
    for the purchase of U.S. fishery resources from the U.S. Harvesting
    Sector.
        IPQs significantly limit market freedom, competition and harvester
    choice for the Harvesting Sector, and limit the ability of Harvesting
    Sector vessels to choose the processing entity to whom they sell their
    crab.
        The distribution of IPQs to the U.S. Processing Sector presents
    significant impacts to interstate commerce and foreign trade.
        Mechanisms to control, regulate and mitigate the many adverse
    impacts that will result from the allocation of IPQs to the U.S.
    Processing Sector are very difficult, if not impossible, to achieve and
    enforce.
        The principles of free and open markets and vigorous competition
    should be encouraged and maintained in the U.S. Processing Sector. The
    U.S. Processing Sector, partially because of the limited number of
    participants, relative distribution of economic power and influence,
    and culture and history, per se possesses significant potential to
    effect and restrain free and open markets and vigorous competition in
    the U.S. fishing industry. IPQs significantly increase the potential
    and likelihood that anticompetitive behavior will impact the U.S.
    fishing industry.
        The distribution of IPQs to the U.S. Processing Sector presents
    significant issues with respect to foreign ownership restrictions;
    ownership caps; use caps; company caps; entity-specific caps;
    individual caps; excessive ownership issues; maintenance of Processing
    Sector characteristics; antitrust and anticompetitive considerations;
    vertical integration; combination and concentration considerations;
    merger and acquisition considerations; excessive economic and market
    control, power and concentration considerations; monopoly, monopsony
    and oligopoly considerations; divestiture issues; etc.
        The unintended consequences and effects of IPQs to the U.S. fishing
    industry will be significantly greater and more complex than those
    consequences that are initially intended, identified and considered;
    they include impacts to consumers, markets, communities that depend on
    the resource, competition, ex-vessel prices, wholesale prices, product
    distribution, and the less dominant participants in the Processing
    Sector. The impacts of IPQs do not only effect the U.S. Harvesting
    sector, but they also impact the consumer, markets, communities that
    depend on U.S. fisheries resources, competition, and the less dominant
    participants in the U.S. Processing Sector.
    V. Regionalization Considerations
        We do not support Congressional authorization for Councils to
    impose ``Regionalization'' restrictions and requirements on either the
    U.S. Harvesting or Processing Sectors. Such Regionalization
    requirements force the Harvesting Sector to deliver their harvest of a
    U.S. fishery resource to a specific port, force the Processing Sector
    to process a U.S. fishery resource in a particular port, and otherwise
    impose regional restrictions on deliveries of U.S. fishery resources to
    processors, and to certain geographical regions. Regionalization is a
    serious impediment to the economic freedom of the Harvesting and
    Processing Sectors to conduct their businesses in a competitive and
    market-driven manner, and will significantly constrain historical
    fishing practices, the achievement of optimum yield and the greatest
    overall benefit to the Nation, and thwart the growth of a sound and
    economic U.S. fishing industry.
        There are significant anti-competitive impacts and effects that
    must be understood and analyzed with respect to the combination of the
    theoretical concept of IPQs with the concept of ``Regionalization''.
    There is a significant and undeniable anticompetitive economic
    environment that is created if the Harvesting Sector is forced to
    deliver a required percentage of the Total Allowable Catch (TAC) for
    any fisheries resource species to a particular community or port. The
    anticompetitive environment is greatly enhanced if only one processing
    entity, or only a few processing entities, are permitted to purchase or
    process a specific fisheries species in a specific port. These
    anticompetitive effects are further exacerbated if such entity (or few
    entities):
         are dominant;
         operate processing operations in other regions and
    communities;
         operate processing operations for other U.S. fishery
    resources;
         are beneficiaries to the largesse of the American
    Fisheries Act (AFA);
         have other economic or political arrangements or
    associations with the community or region, or with other economic or
    political entities in the community or region (such entities that may
    own the land upon which the processing entity is situated, or that may
    have some ownership interest with the processing entity, etc.);
         are permitted to lease IPQs from other Processors in the
    Region;
         are vertically integrated with ownership in several
    harvesting vessels;
         etc.
        The combined anticompetitive impacts and barriers that result from
    the coupling of IPQs with Regionalization present anticompetitive and
    other economic barriers to the entry of other processing entities into
    whatever community or region is governed by the restrictions of
    Regionalization, and are significantly more intense than the separate
    and respective impacts of IPQs and Regionalization.
        The effects of Regionalization and IPQs respectively, and
    separately, and also of the coupling of Regionalization and IPQs, are
    difficult to analyze and understand. However, it is imperative that a
    thorough examination and understanding of these anticompetitive and
    other social and economic impacts are thoroughly investigated, explored
    and understood prior to a serious consideration of using
    Regionalization or IPQs in fisheries management.
    VI. National Study of Individual Processor Quotas (IPQs)
        We understand that the IFQ Moratorium on the implementation of new
    Individual Fishing Quota programs addresses only the allocation of IFQs
    to the U.S. Harvesting Sector. The IFQ Moratorium has no linkage to the
    allocation of IPQs to the U.S. Processing Sector. We ask Congress to
    remain silent on IPQs in the MSA. We further request that Congress
    commission the Federal Trade Commission and the Department of Justice
    Antitrust Division, in consultation with the Secretary of Commerce, to
    prepare a comprehensive report that examines the use of IPQs in
    fisheries management, and that such a report should be completed and
    considered by the Congress prior to Congressional consideration of any
    National Standards that would authorize the use of IPQs in fisheries
    management. The 1999 Report from the National Research Council of the
    National Academy of Sciences (``Sharing the Fish: Toward a National
    Policy on IFQs'', or ``Sharing the Fish'') was a very complete, well-
    written and thoroughly researched report. However, it focused primarily
    on the impacts, effects and mechanisms of Harvesting Sector IFQs, and
    did not provide a comprehensive focus on or evaluation of the impacts,
    effects and mechanisms of IPQs, especially with respect to the
    significant anticompetitive and economic power issues that are
    undeniably present when IPQs are contemplated for use in fisheries
    management.
        Following, we respectfully submit a suggested outline for an
    ``Individual Processor Quota Report'' that contains a range of topics
    that we envision should be included in such a report:
    Individual Processing Quota Report:
        (1) Not later than October 1, 2007, the Federal Trade Commission
    and the Antitrust Division of the U.S. Department of Justice shall
    jointly submit to the Congress a comprehensive report on Individual
    Processing Quotas (IPQs). The report shall address all aspects of such
    IPQs, including an analysis of----
        (A) Impacts and implications to competition of, methods to evaluate
    and measure, and mechanisms to prevent, limit and control, Processing
    Sector ownership interest in, and economic control of:
        (i) harvesting vessels,
        (ii) permits or licenses that permit the Harvesting Sector to
    operate a vessel in a fishery where there exists a limitation on the
    number of vessels that are permitted to harvest a U.S. fishery resource
    (e.g., license limitation programs),
        (iii) permits or licenses that permit the Harvesting Sector to have
    exclusive rights to harvest a quantity of fish, expressed by a unit or
    units representing a percentage of the total allowable catch of a
    fishery that may be received or held for exclusive use by a person
    (e.g., IFQs),
        (iv) fishing history of the Harvesting Sector (i.e., landings,
    participation and other criteria that will determine the qualification
    of Harvesting Sector entities to receive IFQs, licenses, permits, etc.)
        (v) U.S. fisheries resources.
        (B) Impacts and implications to competition of, methods to evaluate
    and measure, and mechanisms to prevent, limit and control, foreign
    ownership interest in, and economic control of:
        (i) harvesting vessels,
        (ii) permits or licenses that permit the Harvesting Sector to
    operate a vessel in a fishery where there exists a limitation on the
    number of vessels that are permitted to harvest a U.S. fishery resource
    (e.g., license limitation programs),
        (iii) permits or licenses that permit the Harvesting Sector to have
    exclusive rights to harvest a quantity of fish, expressed by a unit or
    units representing a percentage of the total allowable catch of a
    fishery that may be received or held for exclusive use by a person
    (e.g., IFQs),
        (iv) fishing history of the Harvesting Sector (i.e., landings,
    participation and other criteria that will determine the qualification
    of Harvesting Sector entities to receive IFQs, licenses, permits etc),
        (v) U.S. fisheries resources.
        (C) Impacts and implications to competition of, methods to evaluate
    and measure, and mechanisms to prevent, limit and control particular
    individuals, corporations, or other entities from acquiring an
    excessive share of IPQs.
        (D) Methods and means by which the Processor Sector and foreign
    entities exert or hold economic control or power in the U.S. fishing
    industry, including an examination of partnerships, corporations, loan
    guarantees, promissory notes, other loans, cash advances, debt
    instruments, credits, market control, etc.
        (E) Impacts and implications to competition of, and mechanisms to
    prevent, limit and control, the leasing of IPQs.
        (F) Impacts and implications to competition of, and mechanisms to
    prevent, limit and control, the ownership or leasing of IFQs by the
    Processing Sector.
        (G) Methods and means to require, under an IPQ program, that the
    Processing Sector divest itself of all ownership interest in, and
    economic control of:
        (i) harvesting vessels,
        (ii) permits or licenses that permit the Harvesting Sector to
    operate a vessel in a fishery where there exists a limitation on the
    number of vessels that are permitted to harvest a U.S. fishery resource
    (e.g. license limitation programs),
        (iii) permits or licenses that permit the Harvesting Sector to have
    exclusive rights to harvest a quantity of fish, expressed by a unit or
    units representing a percentage of the total allowable catch of a
    fishery that may be received or held for exclusive use by a person
    (e.g., IFQs),
        (iv) fishing history of the Harvesting Sector (i.e., landings,
    participation and other criteria that will determine the qualification
    of Harvesting Sector entities to receive IFQs, licenses, permits etc).
        (H) The anti-competitive impacts and economic barriers that may
    result from the cumulative and combined impacts of Individual
    Processing Quotas (IPQs) coupled with Regionalization. For example, are
    the combined impacts and barriers of IPQs and Regionalization different
    than the individual and respective impacts of IPQs or Regionalization
    and, if so, to what extent?
        (I) The general economic and social impacts on free and open
    markets, vigorous competition, price mechanisms, costs, distribution of
    rents and other competitive mechanisms in the U.S. fishing industry
    that may result from the use of IPQs in fisheries management, including
    impacts that are associated with:
        (i) IPQs generally,
        (ii) mergers, acquisitions, combinations, concentrations and
    vertical integration in the Processing Sector,
        (iii) foreign ownership interest in and economic control of the
    Processing Sector, Harvesting Sector or U.S. fishery resources.
        (J) Spillover effects of IPQs on other fisheries.
        (K) The impact of limiting the duration of an IPQ program.
        (L) Mechanisms to provide for effective monitoring and enforcement
    of IPQ programs.
        (M) Mechanisms to ensure that new Processing Sector entrants are
    treated fairly and equitably, and that new entry are facilitated, under
    an IPQ program.
        (N) potential social and economic costs and benefits to the nation
    under an IPQ program.
        (O) Impacts of IPQs on domestic and foreign trade, the linkage of
    IPQs with U.S. antitrust laws, and the impacts of IPQs on international
    treaties, trade agreements and foreign laws that contain provisions,
    obligations and conditions that govern domestic and international
    commerce of U.S. products that may be associated with subsidies,
    anticompetitive combinations, etc. (e.g., NAFTA, European Commission of
    the European Union, etc.).
        (2) The report shall include a detailed analysis of Individual
    Processing Quota (IPQ) programs already implemented in the United
    States or in other countries, including the impacts:
        (A) of any limits on transferability,
        (B) on past and present participants,
        (C) on fishing communities,
        (D) on the rate and total amount of bycatch (including economic and
    regulatory discards) in the fishery,
        (E) on the safety of life and vessels in the fishery,
        (F) on any excess processing capacity in the fishery,
        (G) on any gear conflicts in the fishery,
        (H) on product quality from the fishery,
        (I) on the effectiveness of enforcement of IPQs,
        (J) on the size and composition of the Processing entities,
        (K) on the economic value created by Individual Processing Quotas
    for initial recipients and non-recipients,
        (L) on conservation of the fishery resource,
        (M) on processors who rely on participation in several fisheries,
        (N) on the success in meeting any fishery management plan goals,
    and the fairness and effectiveness of the methods used for allocating
    IPQs and controlling transferability.
        (3) The report shall identify and analyze alternative systems such
    as federally guaranteed buyout loans to region-specific or fishery-
    specific sectors of the Processing Sector that would finance the
    removal of excess capital from the U.S. Processing Sector.
        (4) The Federal Trade Commission, and the U.S. Department of
    Justice Antitrust Division, in consultation with The Secretary of
    Commerce, shall conduct public hearings in each Council region to
    obtain comments on Individual Processing Quotas for use by the Federal
    Trade Commission and the U.S. Department of Justice Antitrust Division
    in preparing this joint report required by this subsection. The Federal
    Trade Commission, and the U.S. Department of Justice Antitrust Division
    shall submit a draft report to the Secretary of Commerce by January 1,
    2007. The Secretary of Commerce shall publish in the Federal Register a
    notice and opportunity for public comment on the draft of the report,
    or any revision thereof. A detailed summary of comments received and
    views presented at the hearings, including any dissenting views, shall
    be included by the Federal Trade Commission and the U.S. Department of
    Justice Antitrust Division in their final joint report.
    VII. Trade Considerations With Respect to IPQs and Regionalization in a
            Rationalization Plan for a U.S. Fishery Resource
        Several U.S. fishery resources are commodities that contribute to
    U.S. domestic and export trade, and are important to interstate and
    foreign commerce. We ask Congress to examine whether Regionalization
    violates the Port Preference Clause of the U.S. Constitution, and
    whether IPQs or Regionalization have impact on domestic and foreign
    trade, including the impacts of IPQs on international treaties, trade
    agreements and foreign laws that contain provisions, obligations and
    conditions that govern domestic and international commerce of U.S.
    products that may be associated with subsidies, anticompetitive
    combinations, etc. (e.g., NAFTA, European Commission of the European
    Union, etc.).
    VIII. National Standards for IPQs and Other Related Legislative Issues
        We support specific, relevant and comprehensive National Standards
    for IPQs and Regionalization to which all Councils are equally required
    to adhere. If Congress wishes to consider rewriting current federal
    legislation, including U.S. antitrust laws and the MSA, to provide for
    Council and Secretarial consideration of IPQs, then we respectfully
    request Congress to legislate specific, relevant and comprehensive
    National Standards that address the consideration of IPQs and
    Regionalization by all Councils, and that such National Standards must
    equally apply to all Councils, and should be national in scope.
        We do not support a Congressional authorization that permits a
    specific Council, absent specific and comprehensive National Standards
    that are National in scope, to recommend to the Secretary FMP
    Amendments and associated regulations that intend to implement
    Individual Processing Quotas (IPQs) or Regionalization restrictions
    with respect to a U.S. fishery. We do not support a specific
    authorization to a specific Council to develop and adopt a
    rationalization plan that includes IPQs or Regionalization absent
    National Standards that apply equally to all Councils. That is, we ask
    Congress to not leave it to the Councils to determine whether or not,
    and to what extent, to recommend IPQs or Regionalization to the
    Secretary; we believe that all Councils should adhere equally to
    National Standards that address IPQs and Regionalization.
        We do not support independent and unilateral Congressional action
    that mandates IPQs or Regionalization for a specific U.S. fishery,
    especially when such action is not the subject of the thoughtful and
    deliberative review that is otherwise attempted and available with
    respect to the public process that customarily governs legislative
    action (e.g., bicameral review; review by Subcommittees and Committees
    with primary jurisdiction; Congressional hearings; debate; public
    submission of comment and testimony; markup; reports; etc.). We are
    concerned that the major policy and economic implications and the
    complex operational details of rationalization are not available for
    public assessment and analysis when Congress legislates the precise
    operational details of rationalization. We are given significant
    trepidation and disquiet by the specter of Washington D.C. lobbyists
    fixing the specific details and solutions for their special interest
    clients with respect to complex regional management challenges,
    including the rationalization of specific U.S. fisheries. We
    respectfully request that Congress eschew the pressure to legislate
    even the minor details of such complex rationalization programs that
    carry such significant consequences.
        We do not support a Congressional mandate or directive that the
    Secretary impose a Secretarial rationalization plan for a specific U.S.
    fishery, especially one that incorporates the precedent of Processor
    IPQs and Regionalization.
    IX. Extension of IFQs to Address Economic and Social Issues, and to
            Impose De Facto and Indirect Taxes, That Should More Properly
            Be Addressed Through Other Legislative or Regulatory Remedies
            that are Available to Congress and the Individual States.
        We respectfully caution Congress that many of the resource,
    conservation, management and reasonable economic and social benefits
    that may derive from a straightforward Harvester IFQ program are
    quickly extinguished, or significantly distorted, when provisions,
    requirements and regulatory and other costs are attached to Harvester
    IFQ programs that seek to attain economic and social objectives, and
    the allocation of economic and social subsidies, protections and
    advantages, that go far beyond reasonable objectives of
    rationalization, and of fisheries management generally. Many of these
    costs should otherwise more properly be addressed through focused
    appropriations from the general tax structure, or through other
    legislative or regulatory remedies that are available to Congress and
    the individual States. These and other artificial constraints and
    restraints to the efficient application of IFQs as a resource,
    conservation and management tool significantly impair historical
    fishing practices, the achievement of optimum yield and the greatest
    overall benefit to the Nation, thwart the natural market driven growth
    of a sound and viable economic U.S. fishing industry, and generally
    choke efficient economic and market mechanisms.
        We believe that it is not in the interest of the Nation, nor in the
    best interest of resource conservation and management, to seek to
    attain through fisheries management legislation or regulation, or to
    grossly extend and distort the use of a legitimate tool for resource
    conservation and management (i.e., IFQs), the provision and allocation
    of economic and social benefits, subsidies, protections and advantages
    that are meant to gratify economic and social needs that result from:
         inefficient and imprudent investments by private
    businesses or public officials,
         inefficient and imprudent decision-making by private
    businesses or public officials,
         influences and factors that are external to fisheries
    resource conservation and management,
         influences and factors that are external to, and not
    reasonably associated with, the economic mechanisms of the U.S. fishing
    industry,
         the general economic environment of a region,
         other economic and social circumstances that are external
    to the U.S. Harvesting Sector specifically, and to the U.S. fishing
    industry generally.
        Many of the economic subsidies and social challenges that some
    propose for remedy through fisheries management legislation and
    regulation should otherwise more properly be addressed through focused
    appropriations from the general tax structure, or through other
    legislative or regulatory remedies that are available to Congress and
    the individual States. Solutions to many of the challenging economic
    and social circumstances that exist should be pursued in fulfillment of
    responsibilities that are more properly within the purview of the
    Congress, federal government and the individual States. It is not in
    the interests of the Nation, nor is it reasonable to expect, that the
    U.S. Harvesting Sector bear the costs of meeting federal and state
    economic and social responsibilities, and of addressing economic and
    social needs that derive from influences and factors that are external
    to, and that have little association or relationship with, the U.S.
    fishing industry. De facto taxation or other transfer payment
    mechanisms represent costs to pay for mitigation of these economic and
    social circumstances, and restrict and penalize the exercise of
    efficient market mechanisms in the Harvesting Sector that may otherwise
    provide promise for addressing many of these economic and social needs.
    X. Legislation is Needed to Provide Access to U.S. Maritime
            Administration Records and Data
        Although the U.S. Maritime Administration collects and compiles
    important vessel ownership information that is of benefit and use to
    the Secretary and the Councils in support of making informed decisions
    with respect to ownership issues that are associated with IPQs,
    including information that is necessary for evaluating participation in
    U.S. fisheries, they do not make such information available to the
    Councils or the Secretary. If there is valuable and useful data that is
    available from the Maritime Administration that would help the
    Secretary and the Council understand the implications and impacts of
    their regulatory actions, we respectfully request that Congress
    authorize the U.S. Maritime Administration to make this data available.
        It is important that the Councils and the Secretary possess
    detailed knowledge of the ownership structure of interests in the
    fisheries so that they are able to examine and analyze the general and
    anticompetitive impacts that flow from the concentration of interests
    that may result from rationalization programs that propose to allocate
    permits that grant exclusive use of U.S. fishery resources, especially
    IPQs.
        A thorough understanding of vessel and fishing history ownership is
    necessary and essential if the Councils and the Secretary are to be
    expected to adequately evaluate and analyze the threat of a particular
    individual, corporation, or other entity acquiring an excessive share
    of those fishing privileges that result from the allocation of permits
    that grant exclusive use of U.S. fishery resources. Significant
    potential for excessive concentrations of economic power are likely to
    result from proposed rationalization programs that contemplate the
    allocation of IPQs to the Processing Sector. The potential for
    anticompetitive combinations in the Processing Sector is further
    exacerbated when IPQs are allocated in a fishery in which only a small
    field of processors participate, that contains only a few dominant
    processors, or includes processors that own or otherwise control
    harvesting vessels (i.e., vertical integration). Anticompetitive
    impacts may result within the Processing sector itself as a result of
    the eligibility of some processors to receive a significant allocation
    of Harvesting Sector IFQs, while others possess little or no such
    eligibility.
        The 1999 report from the National Research Council, ``Sharing the
    Fish: Toward a National Policy on IFQs'' (``Sharing the Fish''), listed
    several suggestions for conditions that should exist for an IFQ program
    to be successful (p. 192). Three of these suggestions seem to have
    applicability to the need for the Councils and the Secretary to have
    ready and easy access to data that is collected and compiled by the
    U.S. Maritime Administration:
        1. L``The goals of improving economic efficiency and reducing the
    numbers of firms, vessels and people in the fishery have a high
    priority.''
        2. L``Adequate Data Exist. Because of long term impacts and
    potential irreversibility of IFQ programs, it is important that
    sufficient data are available to address and allow the mitigation of,
    insofar as possible, the potential social and economic impacts of IFQs
    on individuals and communities.''
        3. L``The likelihood for spillover of fishing activities into other
    fisheries is recognized and provision is made to minimize its negative
    effects.''
        While ``Sharing the Fish'' did not primarily focus on Processing
    Sector IPQs, it is reasonable to look at IPQs from the viewpoint of at
    least the three suggestions that are noted above, and to draw some
    conclusions:
         that a reduction of the number of Processing Sector
    entities in most U.S. fisheries would be detrimental to the maintenance
    of a vigorous competitive environment in most U.S. fisheries;
         that IPQs encourage and promote reductions in the
    Processing Sector that result in anticompetitive consolidations,
    combinations and vertical integration;
         that any National policy that addressed IPQs, or any
    Council that considered IPQs, should thoroughly understand the impacts
    of IPQs with respect to a reduction in the ``... number of firms,
    vessels and people in the fishery...''.
         that because of significant long term impacts and
    potential irreversibility of an IPQ program, and when compared to the
    effects of an IPQ program on an IFQ program where Processing Sector
    entities are also permitted to own Harvesting Sector IFQs and
    harvesting vessels, it is important that existing and sufficient data
    that is collected and compiled by the U.S. Maritime Administration are
    made ``... available to address and allow the mitigation of, insofar as
    possible, the potential social and economic impacts of IFQs on
    individuals and communities.''
         that because there is a great likelihood for IPQs to
    cause significant ``... spillover of fishing activities into other
    fisheries ...'', it is essential that existing and relevant data that
    are collected and compiled by the U.S. Maritime Administration be made
    available so that the spillover impacts that flow from IPQs are
    ``...recognized and provision is made to minimize...'' the negative
    effects.
        A brief reference that addresses this problem is found in a recent
    draft document from the North Pacific Fishery Management Council
    (``Initial Council Review Draft, BSAI Crab Rationalization Program
    Alternatives''; Prepared by NPFMC Staff, January 22, 2002) within the
    section entitled ``1.3.4 Vessel Ownership and Concentration of
    Interests'' (p. 34):

            ``Use and ownership caps on harvesting and processing shares in
            the fisheries and limits on vertical integration in particular
            require detailed knowledge of the ownership structure of
            interests in the fisheries. Limited data is available
            concerning this ownership. Many vessels and LLP licenses are
            corporate owned with individual ownership concealed by the
            corporate structure. Vessel ownership information is collected
            by the US Maritime Administration is not release by that
            agency. The agency collects complete ownership information to
            verify US ownership necessary for participation in US
            fisheries. LLP license ownership and vessel ownership records
            are maintained by the NMFS/RAM office. These records, however,
            include only the named legal owner or owners. Regardless of the
            purpose for this choice of ownership, corporate ownership has
            the effect of concealing the concentration of interests in the
            fishery.''
    XI. Foreign Ownership Considerations
        We respectfully request Congress to evaluate the impacts and
    implications of IPQs with respect to competition of, and methods to
    prevent, limit and control, foreign ownership interest in, and economic
    control of:
         harvesting vessels,
         permits or licenses that permit the Harvesting Sector to
    operate a vessel in a fishery where there exists a limitation on the
    number of vessels that are permitted to harvest a U.S. fishery resource
    (e.g., license limitation programs),
         permits or licenses that permit the Harvesting Sector to
    have exclusive rights to harvest a quantity of fish, expressed by a
    unit or units representing a percentage of the total allowable catch of
    a fishery that may be received or held for exclusive use by a person
    (e.g., IFQs),
         fishing history of the Harvesting Sector (i.e., landings,
    participation and other criteria that will determine the qualification
    of Harvesting Sector entities to receive IFQs, licenses, permits etc),
         U.S. fisheries resources generally.
    XII. Divestiture of IFQs and BSAI Crab Vessels in the BSAI Crab
            Processing Sector
        We respectfully suggest that Congress should evaluate the use of
    divestiture as a means to mitigate the anticompetitive impacts that
    will result from the application of IPQs in rationalization programs
    for U.S. fisheries. There are several benefits to requiring the
    Processing Sector to divest Harvesting Sector IFQs and harvesting
    vessels as a reasonable precondition for considering the allocation of
    IPQs. One element of the Congressional evaluation of divestiture should
    address the potential impacts to competition, economic control and fair
    market pricing that are presented by the circumstance that some
    participants in the Processing Sector own and operate harvesting
    vessels, and some do not.
        Thank you for your consideration of our comments.