[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:] 
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    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
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    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.)
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     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.
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    \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.
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    [Attachments to Dr. Matulich's statement follow:]
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    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.
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    \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
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    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.
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    \5\ Spreadsheet modeling reported to NPFMC, Anchorage, Alaska, 2/
10/2002
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    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.
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    \6\ Contact: Chris McDowell, Seafood Industry Analyst, McDowell 
Group, 907 586 6127
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    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
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    \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
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    \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
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    \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.
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    \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.