[Senate Hearing 108-1035]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 108-1035
 
                      BERING SEA/ALEUTIAN ISLAND 
                       CRAB RATIONALIZATION PLAN

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 20, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and Transportation
    
    
    
    
    
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                
                
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 20, 2003.....................................     1
Statement of Senator Cantwell....................................     5
    Prepared statement...........................................     5
Statement of Senator Stevens.....................................     1

                               Witnesses

Duffy, Kevin C., Commissioner, Alaska Department of Fish and Game     6
    Prepared statement...........................................     9
Fraser, Dave, Captain, Fishing Vessel Muir Milach................    30
    Prepared statement...........................................    33
Freed, Hon. Linda, City Manager, City of Kodiak..................    16
    Prepared statement...........................................    19
Kelty, Frank, Resource Analyst, City of Unalaska.................    56
    Prepared statement...........................................    59
Murkowski, Hon. Lisa, U.S. Senator from Alaska...................     3
    Prepared statement...........................................     4
Murray, Hon. Patty, U.S. Senator from Washington.................     2
Thomson, Arni, Executive Director, Alaska Crab Coalition.........    71
    Prepared statement...........................................    73

                                Appendix

Anderson, Coleman A., prepared statement.........................   107
Burns, Michael F., President and Co-Owner, Blue North Fisheries, 
  prepared statement.............................................   107
Chevalier, Robert L., Sitka, AK, prepared statement..............   108
Childers, Dorothy, Executive Director, Alaska Marine Conservation 
  Council, prepared statement....................................   109
Garcia, Kale, Owner-Operator F/V Aquila, prepared statement......   111
Harrington, Erin D., Kodiak, AK, prepared statement..............   111
Halvorsen, Robert, Professor of Economics, Department of 
  Economics, University of Washington, prepared statement........   112
Laukitis, Michael B., President, North Pacific Fisheries 
  Association, prepared statement................................   147
Lestenkof, Phillip, President, Central Bering Sea Fishermen's 
  Association, prepared statement................................   149
Letter dated May 19, 2003 to Hon. Ted Stevens from Larry Cotter, 
  CEO, Aleutian Pribilof Island Community Development Association   234
Letter dated May 20, 2003 from Michele Longo Eder to Hon. John 
  McCain.........................................................   235
Letter dated May 20, 2003 to Senator John McCain from Dennis 
  Petersen, Resident of Seattle, WA..............................   236
Letter dated May 20, 2003 to Senator John McCain from Victor 
  Smith, Friday Harbor, WA.......................................   237
Letter dated May 25, 2003 to Senator John McCain from Victor 
  Smith, Friday Harbor, WA.......................................   238
Letter dated May 29, 2003 to Linda Freed, Manager, Kodiak City 
  Manager from Simeon Swetzof, Jr., Mayor, City of St. Paul......   240
Letter dated May 30, 2003 to Senator John McCain from Jeffrey R. 
  Stephan, United Fishermen's Marketing Association, Inc.........   241
Letter dated June 6, 2003 to Senator John McCain from Victor 
  Smith, Friday Harbor, WA.......................................   245
Petersen, Rudy A., Fisherman, CEO, and Owner, Fishermen's Finest, 
  Inc., F/V American No. 1/F/V U.S. Intrepid, prepared statement.   151
Philemonoff, Ron, Chairman and CEO, Tanadgusix (TDX) Corporation 
  of St. Paul Island Alaska, prepared statement..................   186
Pierce, Byron L., prepared statement.............................   188
Powell, Richard, Resident of Kodiak, Alaska, prepared statement..   189
Pries, Robert E., Renton, WA, prepared statement.................   190
Soma, David, Deep Sea Fishermen's Union of the Pacific, prepared 
  statement......................................................   191
Sorvik, Alf O., Owner F/V Rainier, F/V Paragon, F/V Isafjord, 
  prepared statement.............................................   196
Stewart, Capt. Gary, F/V Polar Lady, prepared statement..........   196
Storrs, Bob, Vice President, Unalaska Native Fisherman 
  Association (UNFA), prepared statement.........................   197
Swetzof, Jr., Simeon, Mayor, City of Saint Paul, Alaska, prepared 
  statement......................................................   215
Taufen, Stephen R., Founder, Groundswell Fisheries Movement, 
  prepared statement.............................................   222
Tolva, Mimi, Homer, AK, prepared statement.......................   223
Tyack, Peter, Senior Scientist and Walter A. and Hope Noyes Smith 
  Chair, Biology Department, Woods Hole Oceanographic Institution   224
Uri, Konrad S., Seattle, WA, prepared statement..................   233
Hon. Ron Wyden, U.S. Senator from Oregon, prepared statement.....   246
Response to written questions submitted by Hon. Ron Wyden to:
    Kevin Duffy..................................................   246
    Dave Fraser..................................................   247
    Linda Freed..................................................   247
    Frank Kelty..................................................   248
    Arni Thompson................................................   248


                      BERING SEA/ALEUTIAN ISLAND 
                       CRAB RATIONALIZATION PLAN

                              ----------                              


                         TUESDAY, MAY 20, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:45 p.m. in room 
SR-253, Russell Senate Office Building, Hon. Ted Stevens, 
presiding.

            OPENING STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Congress directed the North Pacific 
Fisheries Management Council, in the Consolidated 
Appropriations Act for 2001, to examine the fisheries under its 
jurisdiction, particularly the Gulf of Alaska groundfish and 
Bering Sea crab fisheries. The Council was directed to analyze 
individual fishing quotas, processor quotas, cooperatives, and 
quotas held by communities. In doing this, the Council was 
expected to include economic analysis of the impact of all 
options on the three components of the fishing industry 
communities, processors, and fishing fees.
    In 2002, the Council voted unanimously to create a three-
pie system of quota share for the harvesting sector, the 
processing sector, and communities. 100 percent of the catch is 
allocated to the harvesters and 90 percent to the processors, 
with 10 percent open access. The rationalization concept of 
processor quota share is a novel idea that has its roots in the 
American Fisheries Act, AFA.
    I worked closely with the Senators from Washington to 
develop the AFA, a fisheries rationalization plan, for the 
Bering Sea, Aleutian Islands pollock. AFA has proved to be a 
good rationalization plan that has allowed for increased use of 
target species, better execution of the fishery, instead of a 
race for the fish, and a great success in conservation and 
management of the fishery, and this has brought about 
substantial growth in pollock stocks. The BSAI Crab 
Rationalization Plan must benefit all Alaskan communities. This 
fishery is prosecuted entirely off the coast of Alaska, and the 
various communities that have a history under the Council's 
plan must have a role in the future of this fishery.
    I am encouraged to learn that the Council has completed 
work on the trailing amendments and has provided additional 
protections for the communities' impact by rationalization of 
this fishery.
    And I thank the witnesses for coming to Washington for this 
hearing, and I look forward to your testimony. Again, my 
apology for being slightly late.
    Senator Murray, we are pleased to have your statement.

                STATEMENT OF HON. PATTY MURRAY, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Murray. Well, thank you very much, Mr. Chairman, 
for holding this hearing today. I really appreciate your 
leadership and for inviting me to testify today on the North 
Pacific Crab Rationalization Plan.
    The states of Alaska and Washington share many common 
interests, and I appreciate the opportunity to work with you as 
we address these important regional issues. The commercial 
fishing industry is one example of the many interests that are 
shared by the states we represent. On the issue of crab 
rationalization which is before us now, I am confident that we 
will be able to work together, as we have in the past, to 
tackle this important subject.
    Mr. Chairman, you and I are both here today for one simple 
reason, the status quo is not working. The status quo means 
more lives lost at sea, inefficient use of the resource, and 
harm to fisheries. We know that overcapitalization plaguing the 
industry was caused, in part, by the race for fish and short 
fishing seasons, and we know that we can more efficiently 
manage our resource.
    Mr. Chairman, the race for fish puts our fisherman at an 
unacceptably high risk. Too often, we hear of boats that risk 
too rough a sea and never return home. We know from past 
efforts that rationalization slows down the fishery and brings 
tremendous environmental and safety benefits. Participants 
avoid going to sea during bad weather, take time to treat the 
resource carefully, and minimize waste. We do know, also, that 
there is risk and uncertainty associated with employing new 
public-policy tools, and, in many cases, we cannot know the 
full impact of new approaches until we try them. I believe, 
however, that the experience of the American Fisheries Act is a 
testament to the potential benefits of crab rationalization.
    The plan recommended by the Council may not be perfect, but 
it does represent significant progress over the status quo. The 
costs of continued delay, in lives and in resources, are high.
    There are, of course, different perspectives on the crab 
plan passed by the Council last June. Many of my constituents 
are concerned about the plan because of its inclusion of 
processor quotas and impacts for the industry and communities. 
Most of the anxiety expressed by harvesters and communities is 
focused on the proposed plan's guarantee of 90 percent 
processor quotas.
    Mr. Chairman, I appreciate these concerns, and I am 
interested in exploring ways we might address them. We cannot 
let the perfect become the enemy of the good. After years of 
deliberation, the Council recommended its plan by a vote of 
eleven to zero. I believe it was the intent of the Council to 
send a strong message on this subject, and it did. Congress 
cannot ignore this significant action.
    Today, we will hear about the many benefits that can come 
from rationalizing the crab fisheries. We will be urged to 
enact legislation authorizing processor quotas so the Council 
and the National Marine Fisheries Service can begin the arduous 
work of implementing the plan.
    I look forward to hearing from the witnesses today, in 
hopes of hearing perspectives that will bring us new insights 
about how we should proceed. After today's hearing, it is 
important that Members of this Committee and Congress make crab 
rationalization a priority this Congress so we can complete the 
transition away from the status quo.
    Mr. Chairman, I look forward to today's testimony and to 
working with you on this issue in the weeks and months ahead. 
And thank you, again, for allowing me to participate in this 
important hearing.
    Senator Stevens. Senator, I would be pleased if you would 
join me here. I do expect another Senator, or more, could join 
before we are through.
    I should say to the audience--I know that most of you are 
from home, or at least from the Pacific Northwest--and this is 
one of those busy days in Washington, from the Senate. We have 
the Armed Services bill on the floor, and we have several 
competing conferences and hearings going on today. So I do not 
expect we are going to have any other Senators join us, except 
Senator Murkowski, if she gets cleared from her current 
hearing.
    We have, now, a panel which is made up of Mr. Kevin Duffy, 
Commissioner of the Alaska Department of Fish and Game; Ms. 
Linda Freed, City Manager of the City of Kodiak; Mr. Dave 
Fraser, Captain of the fishing vessel Muir Milach; Mr. Frank 
Kelty, Natural Resources Manager of the City of Unalaska; and 
Mr. Arni Thomson, Executive Director of the Alaska Crab 
Coalition, from Seattle. I failed to note that Mr. Fraser is 
from Port Townsend, Washington.
    I would appreciate it if you would come to the Council 
table, and we will go through the hearing.
    As you are coming up, many have questioned the time 
involved in this hearing. I am not the Chairman of this 
Subcommittee. The Chairman of this Subcommittee is otherwise 
involved in other things and did not have time for this 
hearing. He consented that we could have the hearing, but we 
are limited, in terms of the time, because of the circumstances 
I mentioned before, in terms of the bills that are before the 
Senate. We may have votes during the time of this hearing, in 
which we would have to stand in recess so that we could go cast 
our votes and return. Senator, do you have an opening 
statement?

               STATEMENT OF HON. LISA MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    Senator Murkowski. Mr. Chairman, thank you for the 
opportunity to participate, to be here with so many Alaskans 
this afternoon.
    If I had to characterize my views on the proposed Bering 
Sea Crab Rationalization Program at the moment, I would 
probably say it is undecided. So I look forward to hearing from 
today's witnesses, who represent a range of views, and who 
will, I hope, help Congress make informed decisions on this.
    The last decade has been marked by rapid change. Resource 
levels, market conditions, and economic performance have all 
fluctuated wildly. And it is clear that a race for fish is no 
longer the optimum strategy for management, if it ever was. It 
leads to adverse consequences for the resource, for the market, 
and for the fishermen who risk their lives to pursue it. So 
change is needed, but how much and what kind?
    Mr. Chairman, I do have a rather lengthy opening statement, 
but would like, more specifically, to hear from those who have 
come to speak on this issue. I would be happy to include the 
balance of my testimony for the record so that we can provide 
the opportunity to hear from the panel this afternoon.
    Senator Stevens. Well, thank you very much, Senator. All of 
the statements that are filed by the witnesses and by yourself 
and the statement made by Senator Murray will be printed in 
full in the record as though completely read, and we appreciate 
your courtesy of postponing the further testimony so that we 
may turn to the witnesses now.
    [The prepared statement of Senator Murkowski follows:]

  Prepared Statement of Hon. Lisa Murkowski, U.S. Senator from Alaska
    Mr. Chairman, thank you for the opportunity to participate in this 
important hearing.
    If I had to characterize my views on the proposed Bering Sea crab 
rationalization program at this moment, the appropriate word would be 
``undecided.''
    I look forward to hearing from today's witnesses, who represent a 
range of views, and who will, I hope, help Congress make informed 
decisions.
    The last decade has been marked by rapid change. Resource levels, 
market conditions and economic performance all have fluctuated widely.
    It is clear that a ``race for fish'' is no longer the optimum 
strategy for management, if it ever was. It leads to adverse 
consequences for the resource, for the market, and for the fishermen 
who risk their lives to pursue it.
    Change is needed. But how much? And what kind?
    I see very substantial support for moving to Individual Fish Quotas 
(IFQs) for crab harvesters. This alone is a radical change from the 
open fisheries of the past, but IFQs have been shown to be beneficial 
in other fisheries. They have slowed the race, improved product 
quality, allowed more profitable operations, and improved safety.
    But there have also been unintended consequences. When IFQs were 
implemented in Alaska's halibut and sablefish industries, some 
processors claimed they were harmed because their considerable capital 
investments--necessary to compete in an open-access race for fish--were 
no longer needed. I have no reason to doubt those losses. But neither 
have I seen convincing analysis to demonstrate that the same impact 
would necessarily occur in other fisheries.
    The most controversial aspect of the proposed plan is that it 
incorporates both IFQ's and Processor Quotas (PQs). Where IFQ's 
allocate the right to compete for fish, PQs allocate the fish 
themselves, after they have become private property of the fishermen. 
One effectively provides a license to compete, while the other 
effectively provides protection against competition. That is an 
important distinction, and one which Congress must take very seriously. 
Protection against competition is not a traditional role of the 
government in a free marketplace, except where dealing with a limited 
resource owned by the government, such as radio-frequency bandwidth. 
Congress must now decide if it is a necessary step--or if it will 
ultimately lead to more serious problems.
    There is very little history to draw upon for guidance, at least in 
the fishing world. Some point to the remarkably successful 
restructuring of the Alaska Pollock fishery under the American 
Fisheries Act (AFA), which also created a closed class of processors. 
However, it is important to note that the AFA, crafted by Senator 
Stevens and Senator Gorton with extensive input from involved fishermen 
and processors, functions quite differently in the way it deals with 
the processing issue. It requires that processors work with fishermens' 
co-ops, and it offers no guarantees beyond the annual co-op agreements.
    As an Alaskan representing my State in Congress, my primary concern 
is the potential impact on my constituents and their communities. There 
is strong support for the plan among many of the communities that have 
traditionally processed the bulk of the Bering Sea crab catch. That is 
understandable. Most of those communities would, like the processors 
themselves, be protected by a program that mandates that harvested crab 
be delivered to their existing processors.
    Among the fishermen, however, and among other communities, there is 
widespread opposition, and I believe we must fully evaluate those 
arguments, as well.
    The primary question is whether the proposed plan will benefit all 
the fishery's participants--processors, fishermen and the processing 
workers and support industries that form the backbone of our 
communities. At least one community that has received Bering Sea crab 
in the past will no longer be able to do so. Others, that may in the 
future be positioned to take Bering Sea crab, will be prevented from 
doing so.
    I recognize that the North Pacific Council has attempted to adjust 
the plan to provide for competition among processors for the 10 percent 
of fishing shares that would not be allocated among processors. It has 
attempted to preserve processing communities by geographic designations 
and by providing communities with an opportunity to acquire processing 
rights. And it has attempted to mitigate possible ex-vessel price 
reductions by mandating a form of binding arbitration.
    Are these steps enough?
    Will the plan lead to renewed prosperity not just for today's 
participants, but also to an expansion of activity to new companies and 
new communities? Or will it lead to fewer economic opportunities in all 
but a handful of lucky cases?
    Will its impacts improve the ability of the fishing and processing 
industry overall to adjust to changes in other fisheries? Or will it 
simply cause stagnation?
    Will it continue to allow healthy competition? Or lead to a radical 
consolidation that leaves many communities marooned, with no way to 
profit from future changes in the market or in the location, abundance, 
or species mix of the Bering Sea crab resource?
    Those are the questions that must be answered, and which leave me 
wondering.
    I hope that today's testimony will shed light on all of them, and 
look forward to hearing from the experts on all sides.

    Senator Stevens. I would call on, first--oh, wait a minute, 
here is--Senator Cantwell, do you have an opening statement?

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. I do, Mr. Chairman, but I will have to 
submit it for the record.
    Senator Stevens. Thank you very much. We will submit it. We 
have submitted the others. We are happy to have you join us.
    [The prepared statement of Senator Cantwell follows:]

Prepared Statement of Hon. Maria Cantwell, U.S. Senator from Washington
    Thank you Senator Stevens. I appreciate your continued leadership 
on these issues and I look forward to working with you and Senator 
Murray to ensure that the constituents of both of our great states 
benefit from a fair crab rationalization plan.
    As we heard today, managing America's Bering Sea and Aleutian 
Island crab resources is critical to the continuation of this 
multimillion-dollar industry.
    However, I don't think anyone here today would dispute that the 
current system is broken and that we must act.
    Today's ``race to fish'' is dangerous, it leads to unsustainable 
harvests, and it has forced an uneconomic overcapitalization of both 
the fishing fleet and processor facilities.
    The North Pacific Fishery Management Council's plan represents an 
impressive investment of time and energy.
    I would like to publicly thank the Council members for their work 
and their consideration of the interests of all relevant stakeholders.
    With its ``three-pie'' approach, the plan attempts to balance the 
interests of harvesters, processors, and communities. However, Congress 
must decide if this is the fairest and most effective way to 
rationalize the North Pacific crab harvest.
    I look forward to working with my Senate colleagues on this 
critical issue in the weeks and months ahead.

    Senator Stevens. It is probably not politically correct to 
say, but obviously this is a regional issue, because there is 
no one here from outside of our region. Mr. Duffy, let us hear 
your statement first.

          STATEMENT OF KEVIN C. DUFFY, COMMISSIONER, 
               ALASKA DEPARTMENT OF FISH AND GAME

    Mr. Duffy. Thank you, Mr. Chairman. Good afternoon.
    I am Kevin Duffy, Commissioner of the Alaska Department of 
Fish and Game and also the State of Alaska representative on 
the North Pacific Fishery Management Council. I appreciate the 
opportunity to be here today to discuss the Council's preferred 
alternative for the Bering Sea/Aleutian Island's Crab 
Rationalization Plan.
    Rationalization is the path to revitalize the economic 
health of Bering Sea/Aleutian Island crab fisheries, provided 
the policy recognize the partnership among harvesters, 
processors, and communities. The Council sought to ensure this 
rationalize program maintains the integrity of this partnership 
by providing incentives for all parties to work toward mutually 
beneficial goals.
    There are two approaches that accomplish this objective. 
The two approaches that maximize benefits to the Nation and 
equitably distribute those benefits among the three partners 
are the voluntary cooperatives and the two-pie allocation of 
quota share, which, in combination with CDQ allocations and 
other community elements, is in reality a three-pie scheme. 
This voluntary three-pie approach approved by the Council in 
June 2002 recognizes the prior economic interests among 
harvesters, processors, and communities. This approach fits the 
Bering Sea crab fishery.
    The Council has a pioneering history of designing 
rationalization programs unique to the fishery at hand. The 
Council crafted an IFQ program for halibut and sable fish that 
fit the small-vessel owner-onboard nature of that fishery. For 
pollock, under direction from Congress, the mechanism was 
processor-linked cooperatives.
    We design rationalization programs to fit the dynamic needs 
of any particular fishery, as a council. For the large-boat, 
heavily industrialized corporate nature of the Bering Sea/
Aleutian Island crab fisheries, the Council found that a 
voluntary three-pie coop structure fit best.
    I want to emphasize conservation and safety are as much a 
driving force to rationalize as the need to revitalize the 
economic health of the industry and communities. Resource 
protection is embedded within this plan. With extended slower 
seasons, it is anticipated that dead-loss will be greatly 
reduced and that already low bycatch levels will decline 
further.
    With more time to prosecute the fishery under IFQs, fewer 
pots will be lost, and ghost fishing by lost or abandoned pots 
will be reduced even beyond the current low levels.
    To ensure that the resource, its protection, is maintained 
and is a paramount factor under the Council's jurisdiction, 
there will be increased monitoring under this program, and the 
plan the Council developed includes a funding source for that 
increased monitoring. Most importantly, this Council plan saves 
lives. The current management scheme results in a derby-style 
race for fish.
    In terms of a brief background for the community, as the 
Chairman indicated, Congress directed the Council to consider a 
wide variety of approaches to a rationalized fishery. Early in 
this process, the Council established a broad-based industry 
working group to develop options to rationalize the Bering Sea 
crab fisheries. This workgroup met over a 2-year period to 
identify workable solutions and to develop a majority opinion. 
Including the work of the Committee, the Council has studied 
this issue for well over 3 years, with a detailed analysis of 
all of the issues brought forward by the Committee, which did 
include the concept of processor shares.
    The first Council action was to unanimously adopt a problem 
statement that any solution should consider the lack of 
economic stability for harvesters, processors, and coastal 
communities. After many revisions and exhaustive public review 
of the analysis, the Council unanimously adopted a final motion 
in June 2002, which responded to congressional direction. Since 
then, the Council continued to work on several trailing 
amendments and completed its work in April 2003.
    Overall, the Crab Rationalization Program strikes a balance 
among the three parties mentioned. Based on public input--
exhaustive public input, I might add--the program was 
unanimously approved by this Council.
    As a Council, we have an obligation to review program 
performance, especially with respect to the impact on all three 
partners. The Council is on record that we will make necessary 
adjustments to achieve our stated goals and minimize unintended 
consequences. Through program review, we can adjust elements of 
the initial policy design. This flexibility is uncommon to most 
market-based rationalization plans. Specifically, the Council 
can adjust the percentage of these shares, adjust attributes 
intended to protect community interests, adjust the other 
mechanisms for community protection, and adjust specific design 
features of the program to adapt to changes in stock status for 
the Bering Sea/Aleutian Island crab.
    All eligible fishermen under this program gain by having 
value attached to their fishing history. The Council chose 
years agreed to by the industry committee and recommended by 
the advisory panel. Regardless of where a fisherman sits in the 
qualifying period, the word of quota share generates immediate 
value and economic gain over the race-for-fish scenario. 
Furthermore, it is anticipated that consolidation and the 
ability to stack quota, combined with a buy-back program, could 
reduce the crab fleet significantly. This results in very 
significant economic gains to the remaining participants.
    Even though the economic gains are recognized by many crab 
fisherman, there was still a need to address equity issues and 
balancing of negotiating strength between harvesters and 
processors. The Council has provided many protective measures 
to ensure that vessel owners are not disadvantaged. They 
include a discount of each processor's history, providing for B 
shares, a system of binding arbitration to assure that no 
harvester will be forced to accept a price by a processor 
holding processor shares. Processors will be required, under 
the program, to give regulators full, complete, and detailed 
crab processing costs and crab sales revenues.
    Caps on the amount of harvesting shares that can be owned 
by or affiliated with processors are incorporated. This is 
intended to ensure that the processor will continue to need 
crab from independent harvesters. We have also prohibited 
vessels owned processors from being awarded B shares. This was 
done in order to further protect the interests of independent 
harvesters.
    While not a direct part of the Council's motion to protect 
fishermen's interests, there is another key advantage that 
accrues. Currently, harvesters cannot really withhold product 
from processors for long periods of time, because the current 
open-access model allows any catcher-processor or strikebreaker 
to fish while others remain tied to the dock. Once IFQ is 
issued to harvesters, every harvester can, either individually 
or as a member of a coop under this plan, withhold product from 
the processing sector without fear of someone else harvesting 
it. As learned from the AFA model, the ability to withhold 
product is a powerful tactic that fishermen can use to leverage 
fair prices.
    The next set of benefactors are the crab processors. Having 
observed processor fallout from the harvester-only allocation 
on IFQs for halibut and sable fish, and processor viability 
under AFA coops, the Council made a deliberate choice to 
include processors in this program. Processor shares will allow 
the processing sector to more fully experience the efficiency 
gains of rationalization; and, thus, remain viable. With the 
ability to trade and purchase processing shares up to a set 
limit, it is anticipated that the number of processors 
available to buy crab may actually increase. At the very least, 
award of processor shares should stabilize the crab-processing 
sector so that the number of currently viable processors will 
remain the same.
    Last, the Council chose to provide specific community-
protection measures to recognize the investment of communities 
in the relevant Bering Sea crab fisheries. Noting that the very 
real likelihood that for those same communities to experience 
irreparable harm without protection, National Standard 8 of the 
Magnuson-Stevens Act takes into account the need for sustained 
participation of fishing communities and minimizing adverse 
effects on those communities.
    There are a number of specific elements of the community 
protection measures in this plan. In the interest of time, I 
will pass those over, and please refer to my testimony.
    The Council has provided Congress with two comprehensive 
reports on the Bering Sea/Aleutian Island Crab Rationalization 
Program. The first report, in August 2002, provided details on 
the Council's Crab Rationalization Program that was unanimously 
approved. The second report, dated May 6 of this year, provided 
details on a set of trailing amendments that included a binding 
arbitration program, a suite of community-protection measures, 
details on captain and crew shares, sideboards, and details of 
a comprehensive data-collection program.
    In closing, let me emphasize that while imposing an 
allocation scheme automatically has varying impacts among the 
participants, the Council strove to make all sectors--
harvesters, processors, and communities--win from Bering Sea 
crab rationalization. It was a challenging balancing act, to 
say the least. However, through the work of the industry 
committee, the Council staff, the advisory committee, and 
community representatives, the Council's preferred alternative 
does benefit all sectors. And, most importantly, the plan will 
save lives and improve management.
    Senator Stevens. I am going to have to cut you off there, 
Kevin. Thank you very much.
    Mr. Duffy. Yes, Mr. Chairman.
    Senator Stevens. We have limited witnesses to 10 minutes 
each so we can have some time for questions here. I would ask 
you to finish. Yes, sir?
    Mr. Duffy. Just one quick concluding statement, if I could, 
Mr. Chairman.
    Senator Stevens. Yes, sir.
    Mr. Duffy. Thank you.
    The State of Alaska supports implementation of the Crab 
Rationalization Program as approved by the Council in 2002, 
including the details addressed through a set of trailing 
amendments completed in April 2003.
    Thank you, Mr. Chairman.
    Senator Stevens. Thank you.
    [The prepared statement of Mr. Duffy follows:]

          Prepared Statement of Kevin C. Duffy, Commissioner, 
                   Alaska Department of Fish and Game
    Good afternoon, Mr. Chairman and members of the Committee. I am 
Kevin C. Duffy, Commissioner of the Alaska Department of Fish and Game. 
I am also the State of Alaska's representative on the North Pacific 
Fishery Management Council. I appreciate the opportunity to be here 
today to discuss the North Pacific Fishery Management Council's 
preferred alternative for the Bering Sea/Aleutian Islands (BSAI) Crab 
Rationalization Plan.
    Thirty years ago, foreign harvesters and processors prosecuted 
Bering Sea crab fisheries. Then, the Magnuson-Stevens Fisheries Act 
Americanized these fisheries. The U.S. industry started from scratch, 
investing in both harvesting and processing capacity. At the same time, 
Alaska communities invested in the labor and infrastructure to support 
these fisheries.
    The crab fisheries flourished, quickly becoming the most valuable 
fisheries in the North Pacific. Investments in all sectors grew 
together and soon there was too much capacity harvesting and processing 
declining stocks of crab. None of the three partners--harvesters, 
processors and communities--I currently consider financially healthy. 
Of particular concern to the State of Alaska are the remote fishery-
dependent communities, which are now adversely impacted by the 
diminished flow of economic activity.
    Rationalization is the path to re-vitalize the economic health of 
these fisheries, provided the policy recognizes the partnership among 
harvesters, processors and communities. This partnership is like a 
three-legged stool. Cut out any leg and the stool tips over.
    The solution to keeping this stool strong and stable is to ensure 
that any rationalization program maintains the integrity of this 
partnership by providing incentives for all parties to work toward 
mutually beneficial goals. There are two approaches that accomplish 
this objective. The two approaches that maximize the benefits to the 
Nation and equitably distribute these benefits among the three partners 
are the Voluntary Cooperatives and the Two Pie allocation of quota 
share, which in combination with the CDQ allocations and other 
community elements, is in reality a Three Pie allocation scheme. This 
Voluntary Three Pie Cooperative approach, approved by the North Pacific 
Fisheries Management Council (hereafter referred to as the Council), 
recognizes the prior economic interests among harvesters, processors 
and communities. This three-pie approach fits the Bering Sea crab 
fishery.
    The Council has a pioneering history of designing rationalization 
programs unique to the fishery at hand. The Council crafted an IFQ 
program for halibut and sablefish that fit the small vessel, owner on-
board nature of that fishery. For pollock, the mechanism was processor-
linked cooperatives. We design rationalization programs to fit the 
dynamics and needs of the particular fishery. For the large boat, 
heavily industrialized, corporate nature of the BSAI crab fisheries, 
the Council found that a voluntary, three-pie cooperative structure fit 
best. Given the Council's history, I fully expect a different model 
will emerge from the Council for the Gulf of Alaska rationalization 
process that is currently underway.
    I want to emphasize that conservation and safety are as much a 
driving force to rationalize as the need to re-vitalize the economic 
health of the industry and communities. Resource protection is imbedded 
within the Council's plan. With extended, slower seasons it is 
anticipated that deadloss will be greatly reduced and that the already 
low bycatch will decline further. With more time to prosecute the 
fishery, fewer pots will be lost and ghost fishing by lost or abandoned 
pots will be reduced even beyond the low level that the current 
regulatory safeguards have resulted in. To ensure that the resource 
remains a paramount benefactor of rationalization, increased monitoring 
(with fees to support it) will occur. With voluntary cooperatives, the 
regulatory units will be smaller and hence administrators and resource 
managers will benefit as well. Furthermore, ending the ``race for the 
fish'' builds a conservation safety net that the Board of Fisheries and 
the Department of Fish and Game will build and act upon.
    And most importantly, the Council's plan saves lives. The current 
management scheme of the BSAI crab fisheries results in a derby-style 
``race for fish''. This system often puts pressure on participants to 
fish in unsafe weather conditions, work continuously for long periods 
without rest. There is also the potential to overload vessels with 
fishing gear in an attempt to improve returns under these conditions. 
Falling Guideline Harvest Levels (GHLs) and overcapacity in all crab 
fisheries has reduced fishing periods and increased the ``race'' for 
crab, thus exacerbating safety concerns for BSAI crab vessels.
    According to the 1997 and 2001 Occupational Safety and Health 
studies, the Alaskan commercial fishing industry had a fatality rate 28 
times the national occupational average. Within this high-risk 
industry, the BSAI crab fisheries were found to account for a 
disproportionately high level of injuries and death. From 1990 to 2001, 
there were a total of 25 vessels lost, resulting in 40 fatalities. 
Twenty-one more lives were lost as a result of being swept overboard, 
crushed by crab pots or entangled in lines or winches. These losses are 
simply unacceptable. It is these losses that in part compelled the 
Council to act now and end the dangerous ``race for fish.''
    Examining safety statistics in the Alaskan halibut fishery suggests 
that rationalization of that fishery has been a force in improving 
safety. In the five years preceding implementation of the halibut IFQ 
program (1990 to 1994), 17 fatalities occurred in the halibut fishery. 
In the 7 years after implementation of the program (1995 to 2001) the 
number of fatalities in the fishery declined to 4. While no one can 
predict the number of lives saved, it is anticipated that rationalizing 
BSAI crab, the most dangerous fishery in the U.S., will have a similar 
affect on reducing fatalities.
    It should also be noted that to the extent that a rationalized 
management system results in a sustainable, economically viable 
fishery, then improvements in safety should follow. In economically 
viable fisheries, harvesters are able to make a profit, and vessel 
owners are able to invest in better quality equipment, proper vessel 
maintenance, and hire, train and keep professional skippers and crews. 
All of these factors help improve safety.
Background on the Council Process
    Congress directed the Council to consider a wide variety of 
approaches to a rationalized fishery. As part of the Consolidated 
Appropriations Act of 2001 (Pub. L. No. 106-554), Congress directed the 
Council to examine fisheries under its jurisdiction to determine 
whether rationalization was needed. The specific legislative language 
is:

        The North Pacific Fishery Management Council shall examine the 
        fisheries under its jurisdiction, particularly the Gulf of 
        Alaska groundfish and Bering Sea crab fisheries, to determine 
        whether rationalization is needed. In particular, the North 
        Pacific Council shall analyze individual fishing quotas, 
        processor quotas, cooperatives, and quotas held by communities. 
        The analysis should include an economic analysis of the impact 
        of all options on communities and processors as well as the 
        fishing fleets. The North Pacific Council shall present its 
        analysis to the appropriations and authorizing committees of 
        the Senate and House of Representatives in a timely manner.

    Early in the rationalization process, the Council established a 
broad-based industry working group to develop options to rationalize 
the Bering Sea crab fisheries. This work group met over a two-year 
period to identify workable solutions and to develop a majority 
opinion. Including the work of the BSAI Crab Committee, the Council has 
studied this issue for well over three years, with a detailed analysis 
of all the issues brought forward by the Committee which included the 
concept of processor shares. Additionally, the Council held hearings in 
major ports and communities of Alaska, Washington, and Oregon.
    The first Council action was to unanimously adopt a problem 
statement that any solution should consider ``the lack of economic 
stability for harvesters, processors and coastal communities''. 
Adopting this problem statement allowed for the detailed analysis of 
numerous options. To assist in our understanding of the impacts of the 
various options on all participants, we employed several specialists to 
work with Council staff. After several revisions and an exhaustive 
public review of the analysis the Council then unanimously adopted a 
final motion in June 2002, which responded to Congressional direction. 
Since then, the Council continued to work on several trailing 
amendments and completed its work on BSAI Crab Rationalization in April 
2003.
Key Elements of the Council's Motion (includes trailing amendments)

   Harvest shares will be allocated for 100 percent of the 
        total allowable catch (TAC). The qualifying years selected for 
        these shares were the years recommended by the BSAI Crab 
        Committee and the Advisory Panel.

   Processing shares will be allocated for 90 percent of the 
        TAC. The qualifying years selected for these shares were the 
        years recommended by the BSAI Crab Committee.

   Regional share designations will apply to all processor 
        shares and to the corresponding 90 percent harvest shares. The 
        regional designation recognizes historic delivery patterns and 
        distributes landings between two specific regions.

   There is no linkage between harvest shares and processing 
        shares. Harvesters are free, within regions, to match up shares 
        with any processor that hold processing shares. Ten percent of 
        the harvester's allocation will remain available to deliver to 
        any processor (called B shares) whether or not that processor 
        was eligible to receive an initial allocation of processing 
        shares.

   Voluntary harvester cooperatives are encouraged and once 
        formed should achieve efficiencies through the coordination of 
        harvest activities and deliveries to processors. It is 
        anticipated that these cooperatives will also serve as a forum 
        for profit-sharing arrangements similar to American Fisheries 
        Act (AFA) cooperatives.

   Community Development Quota allocations will be increased 
        from 7.5 percent to 10 percent of the TAC. A community quota of 
        brown crab was also established for Adak, a similarly situated 
        community that lies outside the CDQ program.

   A cool down period that would restrict the movement of 
        processing activity from crab dependent communities for a 
        period of two years following implementation of the program.

   Allow communities to purchase harvest and processing shares 
        and grant crab dependent communities the right of first refusal 
        to purchase processing shares that may transfer outside of the 
        communities. Grant communities in the Northern Gulf of Alaska 
        the right of first refusal on the sale of processor shares from 
        communities that are not dependent on the crab fisheries.

   A captain share allocation of 3 percent of the TAC was 
        established for exclusive use by captains and crew.

   A vertical integration cap of 5 percent is used to control 
        processor accumulation of harvesting privileges.

   Use and ownership caps on harvesting and processing 
        privileges are included to limit consolidation and excessive 
        control.

   A mandatory binding arbitration program will be used to 
        settle any outstanding price disputes between harvesters and 
        processors.

   A crew loan program will assist crewmember entry into the 
        fisheries.

   Harvest restrictions, (called GOA sideboards) were included 
        to protect non-rationalized Gulf of Alaska fisheries.

   Comprehensive data collection and program review will be 
        used to assess the success of the rationalization program and 
        to make modifications where needed.

    As a Council, we have an obligation to review program performance, 
especially with respect to impacts on all three partners. And we will 
make necessary adjustments to achieve our stated goals and minimize 
unintended consequences. Through program review we can adjust elements 
of the initial policy design. This flexibility is uncommon to most 
market based rationalization plans. Specifically, we can

  1.  adjust the percentage of B shares.

  2.  adjust attributes intended to protect community interests in a 
        region.

  3.  adjust the mechanism for community protection.

  4.  adjust specific design features to adapt to changes in stock 
        status.

    Overall, the crab rationalization program strikes a balance among 
the interests of harvesters, processors, and communities. The Council, 
based on exhaustive public input over three years, unanimously approved 
the crab rationalization program. In making this unanimous vote Council 
members recognized the comprehensive, balanced approach that 
incorporated both short and long-term safeguards to protect the 
interests of all three partners.
Benefits for Harvesters, Processors and Communities
    Now, I would like to address the how and why involved in creating a 
stable three-legged stool, where harvesters, processors and communities 
each benefit from crab rationalization. First in the line of 
benefactors are the fishermen. All eligible fishermen gain by having 
value attached to their fishing history. Some will have more value than 
others. The years selected for qualifying quota share determine the 
extent that each fishermen gains. The Council chose the years agreed to 
by the industry committee and recommended by the Advisory Panel. More 
recent years were also considered, and in a few cases adopted, based on 
NOAA general counsel's advice to consider recency for qualification 
determinations. Regardless of where a fisherman sits in the qualifying 
period, the award of quota generates immediate value and economic gain 
over the race-for-fish scenario. Furthermore, it is anticipated that 
consolidation and the ability to stack quota, combined with a buy back 
program, could reduce the crab fleet significantly. This results in 
very significant economic gains to the remaining participants.
    Even though these economic gains are recognized by many crab 
fishermen, there was still a need to address ``equity issues'' and 
balance of negotiating strength between fishermen and processors. With 
respect to these issues, the Council provided many protective measures 
to ensure that vessel owners are not disadvantaged. They include:

   A discount of each processor's history, which leaves 10 
        percent of the harvest shares (B shares) open to delivery to 
        any processor. It is anticipated that these B shares will 
        provide adequate negotiating leverage for fishermen.

   A system of binding arbitration that to ensure that no 
        harvester will be forced to accept a price by a processor 
        holding processor shares. The system will be conducted using an 
        independent third party arbitrator when or if there is a price 
        dispute between harvesters and a processor. It will include an 
        opportunity for groups of harvesters to bargain collectively, 
        as they have traditionally for Bering Sea crab prices, or to 
        enter arbitration on an individual basis. The binding 
        arbitration approach adopted by the Council also provides for 
        independent market analysis and a non-binding pre-season price 
        formula.

   Processors will be required to give the regulators full, 
        complete and detailed crab processing costs and crab sales 
        revenues. This information will be useful for the Council to 
        monitor the way revenues are shared with vessel owners.

   Caps on the amount of harvesting shares that can be owned by 
        or affiliated with processors. This is intended to ensure that 
        the processor will continue to need crab from independent 
        harvesters.

   Prohibiting vessels owned by processors from being awarded 
        ``B'' harvest shares. This was done in order to further protect 
        the interests of independent harvesters.

    While not a direct part of the Council's motion to protect 
fishermen's interest, there is another key advantage that accrues to 
fishermen as a result of rationalization. Currently, harvesters cannot 
really withhold product from processors for long periods of time 
because the current open-access model allows any catcher processor or 
other strike breaker to fish while others remain tied to the dock. Once 
IFQ is issued, every harvester can--either individually or as a member 
of a cooperative--withhold product from the processing sector without 
fear of someone else harvesting it. As learned from the AFA model, the 
ability to withhold product is a powerful tactic that fishermen can use 
to leverage fair prices.
    It is also important to point out that the Council instituted caps 
on the amount of consolidation that may occur among the processors. The 
consolidation rules are far more restrictive than what would be 
required under normal antitrust laws, and they are intended to ensure 
multiple market opportunities. Furthermore, when crab stocks are low, a 
quota system that includes processors should result in less 
concentration of processing facilities and more buying entities as 
firms could choose to lease quota or have their shares custom 
processed. These measures to keep the existing processing base healthy 
while allowing for new entrants should expand, not limit, market 
opportunities for fishermen.
    The next set of benefactors are the crab processors. Having 
observed processor fallout from the harvester only allocation on IFQs 
for halibut and sablefish, and processor viability under the AFA 
cooperatives, the Council made a deliberate choice to include 
processors in the rationalization program. This decision to protect 
processor's investments also responds to the Congressional direction 
given to the Council.
    Under the sablefish IFQ program (note: sablefish is a more 
appropriate comparison than halibut because sablefish did not change 
product form from frozen to fresh) only 25 of the 67 pre-IFQ firms 
survived the harvester only allocation of quota according to thorough 
analysis done by Washington State University. Additionally, most of the 
surviving processing firms lost market share. Processor shares will 
allow the processing sector to more fully experience the efficiency 
gains of rationalization and thus remain viable. With the ability to 
trade and purchase processing shares, up to a set limit, it is 
anticipated that the number of processors available to buy crab may 
actually increase. In the very least, award of processor shares should 
stabilize the crab processing sector so that the number of currently 
viable processors will remain the same.
    Similar to fishermen, processors have concern that they will be 
``price takers''. Currently, some processors estimate that fishermen 
capture upwards of 87 percent of the wholesale price of crab. Crab 
harvesters are organized under the 1934 Act, into a monopolistic 
bargaining association and as such, negotiate price as one entity 
represented by the Alaska Marketing Association. The processors are not 
similarly organized and argue that the bargaining strength is all in 
the fishermen's hands. This perspective suggests that like beauty, 
bargaining strength is in the eyes of the beholder, or the potential 
loser in this case. Nonetheless, the Council's approach to binding 
arbitration, data collection and program review are aimed to protect 
the processing sector as well.
    Lastly, the Council chose to provide specific community protection 
measures to recognize the investment of communities in the development 
of the Bering Sea crab fisheries, noting the very real likelihood for 
those same communities to experience irreparable harm without 
protection. As you know, National Standard 8 of the Magnuson-Stevens 
Act directs Fishery Management Councils to take into account (a) the 
need for sustained participation of fishing communities and (b) 
minimizing adverse economic impacts to such communities. The Council 
chose to address communities and National Standard 8 through a ``three 
pie'' approach to rationalizing the crab fisheries in the Bering Sea. 
There are two key elements to the community third pie--(a) market-based 
allocations to community interests and (b) measures to protect 
communities from potentially adverse effects. Following are the 
specific elements of the ``community third pie''.
    Market-based Allocations to Community Interests include:

   Expanding the CDQ program (includes 65 Western Alaska 
        communities) to include all crab fisheries approved under the 
        rationalization program with the exception of Western AI brown 
        king crab.

   Increasing the CDQ allocation of crab from 7.5 percent to 10 
        percent.

   Allocating the percentage of Western AI brown king crab not 
        used during the base period to the community of Adak and 
        require that up to 50 percent of the ``A'' share brown king 
        crab be processed in Adak.

   Allowing for purchase of processing and harvesting shares by 
        crab dependent communities not included in the CDQ program. 
        Give these same communities the right of first refusal for 
        processing shares that may leave their communities after a two-
        year cool down period. Grant communities in the Northern Gulf 
        of Alaska the right of first refusal on the sale of processor 
        shares from communities that are not dependent on the crab 
        fisheries.
    Community Protection Measures include:

   Establishing two regions to protect historical, primary 
        delivery patterns of various crab species and attach regional 
        designations to crab harvested with Class A shares and to 
        processing quota shares.

   Maximizing the benefits of regionalization on the 
        communities of St. Paul and St. George by limiting B shares to 
        10 percent of the total amount of crab.

   Imposing a two-year (post implementation) cool down period 
        where processing shares must remain in the originating 
        community.

   Imposing processing use caps to assure that at least two 
        plants will always be operating in the Northern Region and four 
        plants in the Southern Region.

   Limiting the future expansion of the offshore catcher 
        processor fleet so that more crab might be processed in 
        community based plants.

   Requiring that a portion (equivalent to the increase 
        received) of CDQ crab be delivered to shore-based plants.

   Allowing for the transfer of catcher processor shares to 
        shore-based processors.

   Providing a 3 percent allocation to help captains, some of 
        who reside in coastal communities, to leverage future 
        employment opportunities in a rationalized crab fishery.

   Excluding small, underutilized crab stocks from the 
        rationalization program so that small vessel, state water 
        fisheries could be developed near communities.

    The direct allocation of harvesting and processing shares, and 
purchase of processing shares by communities, translates into direct 
benefits to Alaska's coastal communities. These actions in conjunction 
with the regionalization elements comprise the ``meat of the third 
pie''.
    Although processor shares are typically viewed as part of the 
second pie, the issuance of such shares has direct implications for the 
protection of a community's processing base. As noted above, experience 
to date with the issuance of harvester only allocation in Alaska 
reveals a dramatic reduction and shift in shore based processing 
operations. While the causes for this shift and reduction are complex 
and debatable, it is good public policy to try and minimize these 
impacts, as the more processors that survive the transition to a 
`rationalized fishery' the better the community's economic base will 
be. Such a system inherently benefits communities as well as 
processors. Furthermore, the establishment of processor shares allowed 
for the creation of additional community protection measures. In 
essence, the processor pie helps makes the community pie whole.
Catcher Processors
    There remains one more sector that benefits from the Council's 
action--catcher processors. Catcher processors have long had an 
advantage over all other sectors participating in the harvesting and 
processing of BSAI crab. This advantage comes about from being 100 
percent vertically integrated operations, which do not have to purchase 
all their crab. The Council's action solidified this sector of the 
industry through the creation of catcher processor shares. However, the 
Council chose not to allow this sector to grow at the expense of the 
onshore sector and disenfranchise Alaska's coastal communities. Hence, 
the Council's program limits catcher processors to their historical 
aggregate level. In essence, the Council made the catcher processor 
sector whole without being punitive and for some fisheries such as the 
Aleutian Islands brown king crab, the Council chose qualifying years 
that advantaged catcher processors.
Criticism of Council Action
    Despite the balanced approach of the Council motion and extensive 
efforts to be inclusive of all affected parties, the Council action 
still faces criticism. I will take some time to address the following 
concerns:

   Not including the year 2000 for processing shares

   Not creating a higher portion of B shares

   Antitrust implications of processing shares.
Year 2000
    It is reported that including 2000 would have benefited Kodiak 
based processors. While is true that the year 2000 was one of Kodiak's 
better years in terms of BSAI crab landings, the Council analysis shows 
that Bristol Bay Red King Crab comprised 1.8 percent of the total value 
of fish landed at the port of Kodiak and Bering Sea Opilio Crab 
represented 1.35 percent of the total value landed in the year 2000.
    It is important to note that the year 2000 was not included in the 
recommendations made by the industry committee which, incidentally, 
included Kodiak representatives who did not bring this concern forward. 
The committee noted that the year 2000 was not included for a number of 
reasons: (a) it was the only year that had a delayed start date of 
April 1 due to inclement weather and some vessels did not participate 
with the season change date; (b) it was the only potentially qualifying 
year affected by the AFA processor sideboards; and (c) a large storm 
greatly disadvantaged some small Alaskan vessels. As such, the year 
2000 was seen as an anomaly and not included in the recommendations or 
in the Council actions.
    Nonetheless, processors in Kodiak will still benefit from the 
rationalization program, as they will no longer just be the port of 
last load delivery. With a slower, extended fishery fishermen will have 
the time to deliver mid-season to Kodiak processors. There are 
processors in Kodiak who will receive processor shares. Other 
processors in Kodiak have the option of buying processor shares or 
receiving ``open delivery'' B-shares of crab. In fact, Kodiak, home to 
Alaska's largest crab fleet, is the port that is expected to benefit 
most from the `open delivery' arrangement. To help ensure this, the 
Council made B-shares off limits to catcher processors.
    Kodiak is not the only community to gain under the Council's 
rationalization plan. Dutch Harbor, St. Paul, St. George, Adak, Sand 
Point and all the communities under the CDQ program gain in the 
Council's three-pie approach to rationalization.
Why 10% B Shares
    In determining the appropriate amount of B shares, the Council 
first looked to the experience under AFA. In the AFA there is a similar 
10 percent discount on processing history, i.e.; vessels may deliver up 
to 10 percent of their catch to any processor. Immediately after AFA 
passage, many harvesters tried to get the Council to amend the AFA 
agreement. They did so under the Dooley-Hall proposal. There were 
claims that the processors would capture all the profits. Today, if one 
were to ask key Dooley-Hall advocates if they are disenfranchised and 
would prefer no AFA or AFA as originally passed, their answer is 
unequivocal: AFA as enacted by Congress. This suggests that a 10 
percent discount could serve as adequate negotiation leverage in a 
large-boat industrialized fishery.
    Based on the cost and wholesale data provided by crab processors, 
it does not make sense to discount processor history any more than the 
10 percent level selected by the Council. Data was provided to the 
Council in public testimony that shows that processor margins are very 
thin, and probably non-existent in the small quota, slow-paced crab 
fisheries. With these low margins, processors will be hungry for all 
deliveries of crab, especially the crab delivered last. Once the start-
up and initial operation costs have been covered, the remaining loads 
of delivered crab are where the margins increase and profits are 
realized.
    Additionally, crab fishermen (through their bargaining association) 
now allocate crab as a reward for a company setting the price, a price 
that in turn is adopted by the rest of the companies. The amount 
allocated has been less than 5 percent to achieve this advantage. This 
demonstrates the power of having 10 percent (or less) of the crab to 
allocate to processors as a reward for higher price. As such, the 
notion that the fishermen delivering last will become a price hostage 
is a notion unsupported by existing economic reality. No one will fish 
A-shares without a contract. There will be no ``last harvester leaving 
the grounds.'' Furthermore, with the adoption of voluntary cooperatives 
between fishermen and in discussions with a processor of their choice, 
it is anticipated that price and profit-sharing arrangements will: (a) 
cover all the crab the harvester intends to deliver, including the 10 
percent B shares portion; (b) address profit sharing across vessels 
participating in the cooperative; and (c) be agreed to well in advance 
of the season.
    Public testimony from the community of St. Paul also pointed out 
that a higher amount of B shares would negatively impact their economic 
base. The balancing act of community interests required the Council to 
consider these concerns as well when determining the appropriate amount 
of B shares.
Antitrust Issues
    The Department of Justice has not found any anti-competitive 
effects in the division of whiting allocations among catcher-processors 
or the division of pollock allocations among AFA cooperatives. It is 
expected that the Department will view the crab rationalization plan in 
a similar light. The Congressional Research Service has already made a 
similar review of the Council's action to create processor shares and 
concluded ``that the Federal antitrust laws are likely to be deemed 
irrelevant in the context of the subject proposal''.
    Even with this green light from the Congressional Research Service 
it is important to note that the same anti-competitive issues that are 
being raised under crab rationalization were brought up under the AFA. 
Since the processor provisions of the AFA had no anti-competitive 
effects, then the less restrictive processor elements included in the 
Council approach on BSAI Crab Rationalization should be viewed 
similarly. The less restrictive provisions of the Bering Sea/Aleutian 
Islands (BSAI) crab rationalization program include: (1) no closed 
class of processors (new processors can purchase `open delivery' B 
shares or allocated shares from a qualifying processor); and (2) no 
direct linkage between fishermen and processors.
    The 1934 Fisherman's Marketing Act contains an explicit statutory 
exemption from the antitrust laws allowing fishermen to bargain 
collectively in price negotiations with fish processors. The fishermen 
are allowed to decide, as a group, on their bargaining position, an 
activity that would violate the Federal antitrust laws without the 
exemption.
    The Whiting Cooperative (vertically integrated catcher processors) 
and the AFA inshore cooperatives have each submitted to the Department 
of Justice a request for a ``business review letter'' concerning 
planned cooperative activities. Section 210 of the AFA requires each 
cooperative to request a business review letter prior to submitting the 
cooperative contract to the Council and the Secretary. Each cooperative 
described its proposed activities of allocating pollock quotas among 
member vessels. In response, the Department of Justice has issued the 
requested business review letters stating that the Department of 
Justice finds that the described activities are not anti-competitive 
and the Department intends to take no enforcement action. However, the 
AFA does not require the cooperative to have received a business review 
letter and the AFA does not grant an exemption to the antitrust laws. 
While we anticipate a similar ruling for crab cooperatives, if Congress 
approves the Council's crab rationalization plan, this is a non-issue.
Concluding Remarks
    In closing let me emphasize that while imposing an allocation 
scheme automatically has varying impacts among the participants, the 
Council strove to make all sectors--harvesters, processors, and 
communities--win from BSAI crab rationalization. It was a challenging 
balancing act to say the least. However, through the hard work of the 
industry committee, the Council staff, the Advisory Panel and the 
community representatives, the Council's preferred alternative does 
benefit all sectors. And most importantly, BSAI Crab Rationalization 
will save lives and improve management while reducing bycatch and 
deadloss.
    The program is a Voluntary Three Pie Cooperative with unique 
protections and opportunities for communities and captains. The novelty 
of the program compelled the Council to include several safeguards into 
the program, including a binding arbitration program for the resolution 
of price disputes and extensive data collection and review programs to 
assess the success of the rationalization program. These safeguards 
demonstrate the Council's commitment to a fair and equitable 
rationalization program that will protect the interests of all sectors 
which depend on these crab fisheries.
    In unanimously adopting the crab rationalization plan, the Council 
made it very clear that the program was one crafted specifically for 
the crab fisheries of the Bering Sea/Aleutian Islands, and that in so 
doing no one should assume a similar system for other fisheries under 
its jurisdiction. We have met the charge given to us by Congress. We 
have acted responsibly and creatively to meet all the standards of the 
Magnuson-Stevens Act. It is time for Congress to move the plan to 
rationalize these crab fisheries forward.

    Senator Stevens. Ms. Freed?

         STATEMENT OF HON. LINDA FREED, CITY MANAGER, 
                         CITY OF KODIAK

    Ms. Freed. Thank you.
    Senator Stevens. Could you pull that mike up toward you?
    Ms. Freed. Is that close enough for you?
    Senator Stevens. Not quite. Thank you.
    Ms. Freed. Thank you.
    For the record, my name is Linda Freed. I have been a 
resident of Kodiak, Alaska, for 23 years, and I now have the 
privilege of serving as the City Manager of the City of Kodiak.
    I would like to note, for your information, that in the 
audience today is the Honorable Carolyn L. Floyd, Mayor of the 
City of Kodiak, and Dave Woodruff, a council member from the 
City of Kodiak. In addition, Dick Powell, a long-time Kodiak 
City resident and a Bering Sea crab fisherman, is also here.
    Kodiak is a major fishing port in the United States. It has 
been consistently in the top communities for both product 
landed, the volume of product landed, and the value of that 
product. Kodiak has the largest resident fishing fleet in the 
State of Alaska and the largest resident population of 
processing workers.
    Crab rationalization and the issue of processor quota 
shares are critical to the City of Kodiak and all its 
residents. Kodiak has already lost 70 children from our school 
system within this last year due to the closure of processing 
plants and reductions in our fishing fleet. Kodiak is a fishing 
town, and we cannot afford to see our primary source of 
natural-resource employment taken from our residents by either 
fisheries managers or Congress.
    The City of Kodiak is opposed to the North Pacific 
Fisheries Management Council's request that Congress pass 
special legislation to create individual processor quotas, or 
IPQs to establish individual monopoly markets for processing 
crab harvested from the Bering Sea. If enacted, the Council's 
proposal would grant each member of a select group of companies 
the exclusive right to process specific percentages of the 
Bering Sea crab after it has been harvested by independent 
fishermen. Under the Council plan, each fisherman would be 
forced to deliver 90 percent of their catch to one of a select 
group of processing companies that are issued an IPQ.
    The City of Kodiak is not alone in its opposition to the 
Council's unprecedented proposal. All of the regional 
Governments with communities where crab is processed--the 
Aleutians East Borough, the Lake and Peninsula Borough, the 
Kodiak Island Borough, and the Kenai Peninsula Borough--are all 
seriously concerned about this proposal. The Aleutians East 
Borough and the Kenai Peninsula Borough have gone further and 
passed formal resolutions opposing the Council plan, as have 
the cities of Sand Point, Chignik, Homer, and Seldovia, just to 
name a few. In fact, the only communities on record supporting 
the Council proposal are Dutch Harbor and Akutan. Even St. 
Paul, a community in the middle of the Bering Sea crab fishing 
grounds, is divided about whether to support or oppose IPQs. In 
fact, TDX, the village corporation for St. Paul, and the City 
of Kodiak find ourselves in similar circumstances. We both own 
processing plants that have processed crab. We are not eligible 
to have IPQs because we did not run those plants ourselves.
    The adverse impacts of IPQs on Alaskans are tremendous. 
Fishing communities that depend on independent fishermen and 
local processing plants for the mainstay of our economies will 
be devastated if Congress enacts this IPQ proposal. IPQs will 
mean the loss of innovation and competition within the 
processing industry. Companies with IPQs will not have to 
remain efficient, establish new product lines, or offer to 
process less valuable species in order to attract more 
deliveries. With a guaranteed share of the harvest, companies 
with IPQs will maximize their profits by minimizing what they 
pay for crab and reducing their investment in their facilities.
    The City of Kodiak alone stands to lose between $3 million 
and $10 million a year in revenues to our community and lost 
fish taxes if the Council's plan is implemented. I must say 
that we had to have that analysis done on our own, because the 
State of Alaska did not provide that kind of economic analysis 
for our community.
    The community protection provisions that have been proposed 
by the Council do not protect Kodiak and many other coastal 
communities. One provision is a right of first refusal on a 
proposed sale of IPQs between two companies. However, a 
community must meet all of the terms and conditions of the 
agreement between the two private parties and provide full 
payment within 120 days. This means that the two private 
parties, one of whom is a buyer, has a vested interested in 
making sure a community cannot afford to exercise its option, 
and they have every incentive to include provisions in the 
agreement that are poison pills to the community. Most 
communities would need 120 days just to start financing 
negotiations, much less make full payment of potentially 
millions of dollars. And there is no appeal process under the 
Council plan if a community does, in fact, try to exercise its 
right and is unable to do so. The Council's IPQ plan 
effectively returns Alaska fishing communities to the days 
before statehood, when our State fishery resources were under 
the control of a few large processing companies. The Council's 
own documents show the extent to which a few processors will 
control Alaska's fisheries if this plan is enacted.
    In 1998, Congress enacted the American Fisheries Act, which 
created a closed class of processors for the inshore delivery 
of Bering Sea pollock. The AFA granted six companies exclusive 
right to process the entire 50 percent of the Bering Sea 
pollock that was AFA decreed to be delivered inshore. All six 
of those AFA companies also process crab. According to the 
Council's own preliminary analysis, those six AFA processing 
companies will be granted IPQs approximately equal to 75 
percent of the Bering Sea opilio and red king crab harvest. 
Perhaps coincidentally, five of those AFA companies are also 
defendants in the ongoing Bristol Bay salmon antitrust lawsuit 
in Anchorage.
    As many Members of the Committee are aware, Kodiak and 
other Alaskan coastal communities are in the midst of a long-
term crisis in the salmon industry. IPQs will make this even 
worse. The combined effect of the closed class of pollock 
processors and IPQs will virtually ensure that there is no 
solution to the salmon problem. One of the AFA companies, Wards 
Cove, has used its guaranteed pollock revenue to enable it to 
withdraw from salmon processing marketing entirely. They no 
longer need the marginal income from their salmon operations. 
Other AFA companies have reduced their salmon buying in the 
years since the AFA passed despite the considerable increase in 
revenues and financial stability provided by the AFA. Add the 
guaranteed revenue from crab IPQs, and these companies have 
even less incentive to expend money to gain marginal revenue 
from salmon.
    We need to attract new and innovative processors to our 
salmon industry. The Council plan just locks in the same old 
companies that have created the mess we currently find 
ourselves in.
    Despite the overlap in companies that benefit under the AFA 
and the Council's proposal, it needs to be stressed that the 
benefits granted to processors under the AFA and the IPQ plan 
are not the same. The fact that Congress passed the AFA 
provides no basis for Congress to pass IPQs. IPQs confer more 
benefits and far greater market power to crab processors than 
pollock processors received under the AFA.
    And I would like to refer you to an attachment to my 
testimony, by Dr. Halvorsen, that points out the significant 
differences between the AFA and the plan proposed by the 
Council.
    The simple truth is that IPQs are nothing more than an 
economic allocation of markets. They are a ransom that 
processors are demanding before they will allow the crab 
fishery to be rationalized to improve conservation and fishing 
safety. There is no fishery management or community-protection 
justification for IPQs.
    The push for IPQs will not stop with crab. The Council is 
already considering plans to rationalize the Gulf of Alaska 
groundfish fisheries, and some Gulf of Alaska fish processors 
are demanding that IPQs be included. Further, a recent report 
on the crisis in salmon fisheries suggested that IPQs may be 
needed for salmon fisheries. Congress has already passed 
special legislation for pollock and is being asked again to 
pass special legislation for crab. If Congress authorizes crab 
IPQs, the floodgates will be opened, and Congress will be 
besieged with requests for special legislation for each fishery 
off Alaska.
    Having Congress legislate fishery by fishery is precisely 
what the Magnuson-Stevens Act was designed to prevent. Congress 
needs to send a clear message that IPQs will not be allowed. 
Once that message is delivered, it will be easy for the Council 
to quickly implement an individual fishing-quota program under 
its existing authority that will address the legitimate 
concerns of fishermen, communities, and processors.
    Thank you for the opportunity to present this testimony. 
And I would ask if the Committee could keep the record open for 
another 10 days, because we do have some additional information 
we would like to present you with.
    Thank you.
    [The prepared statement of Ms. Freed follows:]

Prepared Statement of Linda Freed, City Manager, City of Kodiak, Alaska
    My name is Linda Freed. I have been a resident of Kodiak, Alaska 
for 23 years and now have the pleasure of serving as the City Manager 
for the City of Kodiak. Kodiak is a major fishing port in the United 
States, and has consistently been among the top three fishing ports for 
both volume and value. Kodiak has the largest resident fishing fleet in 
Alaska and also the largest resident population of processing workers.
    Crab rationalization and the issue of processor quota shares are 
critical to the City of Kodiak and all of its residents. Kodiak has 
already seen 70 children leave our schools in the last year due to the 
closure of processing plants and reductions in the fishing fleet. 
Kodiak is a fishing town, and we can not afford to see our primary 
source of natural resource employment taken from our residents by 
fishery managers or the Congress.
    The City of Kodiak is opposed to the North Pacific Fishery 
Management Council's request that Congress pass special legislation to 
create Individual Processor Quotas--IPQs--to establish individual 
monopoly markets for processing crab harvested in the Bering Sea. If 
enacted, the Council's proposal would grant each member of a select 
group of companies the exclusive right to process a specific percentage 
of the Bering Sea crab after it has been harvested by independent 
fishermen. Under the Council plan each fisherman would be forced to 
deliver 90 percent of their catch to one of the select group of 
processing companies that are issued an IPQ.
    Many Alaskans are frankly stunned that Congress would seriously 
consider the Council's proposal for IPQs. An analogy to another 
independent American industry might help the Committee understand our 
dilemma. Congress established permits for ranchers to graze their 
cattle on Federal land when the west was fenced a century ago. Those 
permits are akin to individual fishing quotas. What the Council has 
proposed to address the ``harm'' to processors caused by individual 
fishing quotas is the equivalent of granting a select few companies the 
exclusive right for each of them to process a set percentage of all of 
the beef products made from cattle grazed on Federal land, and then 
requiring each rancher to deliver 90 percent of the cattle grazed on 
Federal land to one of those companies--all in the name of protecting 
the meat packing companies from the harm caused by granting grazing 
rights on Federal land to independent cattle ranchers.
    The City Okuda is not alone in its opposition to the Council's 
unprecedented proposal. All of the regional governments with 
communities where crab is processed the Aleutians East Borough, Lake 
and Peninsula Borough, Kenai Peninsula Borough, and Kodiak Island 
Borough-are seriously concerned about the Council proposal. The 
Aleutians East Borough and the Kenai Peninsula Borough have passed 
formal resolutions opposing the Council plan, as have the cities of 
Sand Point, Chignik, Homer, and Seldovia, to name a few. In fact, the 
only communities on record supporting the Council proposal are Dutch 
Harbor and Akutan. Even St. Paul, a community located in the middle of 
the crab fisheries, is divided about whether to support or oppose IPQs.
    The adverse impacts of IPQs on Alaska are tremendous. Fishing 
communities that depend on independent fishermen and local processing 
plants for the mainstay of their economies will be devastated if 
Congress enacts this IPQ proposal. IPQs will mean the loss of 
innovation and competition within the processing industry. Companies 
with IPQs will not have to remain efficient, establish new product 
lines, or offer to process less valuable species in order to attract 
more deliveries. With a guaranteed share of the harvest, companies with 
IPQs will maximize their profits by minimizing what they pay for crab 
and reducing their investment in facilities. To enable the IPQ 
companies to do just that the Council included in their plan a binding 
arbitration proposal supported by the processors, community protection 
provisions that are mere window dressing, and explicit language to 
ensure that processors could consolidate facilities by transferring and 
leasing IPQs.
    The effects are not limited simply to fishermen and processing 
plant workers. The City of Kodiak alone stands to lose between 
$3,000,000 and $10,000,000 a year in revenues to the community and lost 
fish taxes if the Council's plan is implemented. Because neither the 
Council nor the State has undertaken an economic impact analysis of the 
Council proposal, the City had to hire its own economist to provide 
these figures. A copy of that analysis by Richard Tremaine is attached 
to my testimony.
    Other communities face an even more daunting prospect--under the 
Council plan a processor could transfer its IPQ out of their community 
and leave them with a crab processing plant which no one can use 
because there are no IPQs available to allow that plant to operate. The 
community would be legally barred by Congress from getting a new 
processor to come in and operate in their community.
    Kodiak fishermen and processors are also directly harmed by this 
proposal. Alaska Fresh Seafood, a long time Kodiak processor that 
helped pioneer the Bering Sea crab fisheries, would be unable to 
process crab caught by the fishermen that are part owners of the plant 
because, under the restrictive criteria selected by the Council, Alaska 
Fresh would receive IPQs equal to far less than what they historically 
processed. In fact, the Council's own analysis of their proposal shows 
that the 12 largest processors receiving IPQ under the plan would get 
nearly 20 percent more than they have historically processed-to the 
detriment of Kodiak processors who have already been locked out of 
entering the Bering Sea pollock processing market.
    Another Kodiak example of the absurd nature of the Council's IPQ 
plan is illustrated by Dick Powell, a long time Kodiak fisherman who 
operates both a crab catcher processor and a crab fishing boat. Under 
the Council plan Dick would be unable to use his own catcher processor 
to process crab from his own fishing boat. Once again the Council's 
plan operates to thwart competition and free enterprise.
    Alaska coastal communities fare no better under the Council plan. 
The so-called ``community protection provisions'' are nothing of the 
kind. What the Council has offered to communities is a first right of 
refusal on a proposed sale of IPQs between two private companies. 
However, a community must meet ALL of the terms and conditions of the 
agreement between the two private parties, and provide full payment 
within 120 days. This means that the two private parties, one of whom 
(the buyer) has a vested interest in making sure a community can't 
afford to exercise its option, have every incentive to include 
provisions in the agreement that are poison pills to the community. 
Most communities would need 120 days just to start financing 
negotiations, much less make a full payment of millions of dollars. And 
there is no appeal process under the Council plan if a community does 
in fact try to exercise its right and is unable to do so.
    I was a member of the Community Protection committee appointed by 
the Council chairman, and have to say that the process was nothing more 
than a sham. The committee was under instruction not to consider 
anything that was outside the scope of the IPQ alternative that the 
Council had already adopted unless \3/4\ percent of the Committee 
members agreed to discuss it. As a result the Committee was unable to 
have any discussion of, let alone take any action on, substantive 
proposals that would have addressed the impacts of IPQs on Kodiak and 
other coastal communities.
    The City of Kodiak also takes exception to the May 6, 2003 letter 
the Chairman of the North Pacific Fishery Management Council sent to 
Congress. The letter once again attempts to mislead Congress about the 
support for this plan by referencing an 11 to 0 vote that occurred in 
June of 2002, before all of the details of the Council plan were known 
to the public or even to Council members. Since that time the Council 
has had 6 to 5 votes approving various elements of the ``safeguards'' 
promised to communities and fishermen at that June meeting. Now that 
the details of the entire plan are known, only one fishing group 
controlled by processors and two Alaska communities remain in support 
of the IPQ plan.
    Contrary to the claim of the Council chairman, the Council has NOT 
taken final action on the entire suite of crab rationalization options. 
The Council was scheduled at their upcoming meeting in Kodiak this June 
to vote to put out for public review a draft analysis of the entire 
package that includes the work done over the past year. But the Council 
chairman chose to pull crab rationalization from the June agenda rather 
than have to report to Congress a less than unanimous vote in support 
of the entire IPQ plan. In addition, by delaying action until the fall, 
the Council chairman has denied the public and the Congress access to 
the Council's detailed analysis of the IPQ alternative and an 
individual fishing quota only alternative that is also being considered 
as part of the National Environmental Policy Act process.
    The Council's IPQ plan effectively returns Alaska fishing 
communities to the days before Statehood, when our State fishery 
resources were under the control of a few large processing companies. 
IPQs grant an exclusive right to process a specific percentage of the 
crab harvest to a particular company, and the company may chose to 
process all of their percentage at any facility that they own within 
the region. In fact, the Council has gone out of its way to ensure that 
processors have an unrestricted right to consolidate their IPQs at any 
facility they own within the two regions--north and south--that are 
created under the Council plan. Consolidation for processors is nothing 
more than a euphemism for closing plants in remote Alaska coastal 
communities.
    The Council's own documents show the extent to which a few 
processors will control Alaska's fisheries if this plan is enacted. In 
1998 Congress enacted the American Fisheries Act (AFA), which created a 
closed class of processors for the inshore delivery of Bering Sea 
pollock. The AFA granted six companies the exclusive right to process 
the entire 50 percent of the Bering Sea pollock that the AFA decreed 
must be delivered inshore. No other processing companies are allowed to 
process that pollock, regardless of their history in Alaska's other 
fisheries. All six of those AFA companies also process crab. According 
to the Council's own preliminary analysis, those six AFA processing 
companies will be granted IPQs equal to approximately 75 percent of the 
Bering Sea opilio and red King crab harvest. Perhaps coincidentally, 
five of those AFA companies are also defendants in the ongoing Bristol 
Bay salmon anti-trust lawsuit in Anchorage.
    As many members of the Committee are aware, Kodiak and other 
Alaskan coastal communities are in the midst of a long term crisis in 
the salmon industry. IPQs will make this crisis even worse. The 
combined effect of the closed class of pollock processors and IPQs will 
virtually ensure that there is no solution to the salmon problem. One 
of the AFA companies--Wards Cove--has used its guaranteed pollock 
revenue to enable it to withdraw from the salmon processing market 
entirely--they no longer need the marginal income from their salmon 
operations. Other AFA companies have reduced their salmon buying in the 
years since the AFA passed, despite the considerable increase in 
revenues and financial stability provided by the AFA. Add the 
guaranteed revenue from crab IPQs, and these companies have even less 
incentive to expend money to gain marginal revenue from salmon.
    Even more to the point, Nippon Suisan, an AFA company that will 
receive IPQs equal to roughly 15 percent of the Bering Sea crab under 
the Council plan, is also among the largest owners of Chilean salmon 
farms. They clearly have no interest in seeing Alaska salmon compete in 
the market place with their more expensive farmed product. How does 
Congress expect to ever solve the salmon problem if they allocate 
exclusive access and specific market share rights to the very same 
companies that dominate the dying salmon industry. We need to attract 
new and innovative processors in salmon. The Council plan just locks in 
the same old companies that have created the mess we are in.
    Perhaps the greatest irony is that if IPQs had been granted 30 
years ago, two of the six AFA companies--Trident and Icicle--would 
never have come into existence. Both of these U.S. processing companies 
were formed by fishermen who were unhappy with the price being paid by 
the existing processors. In fact, many of the fishing companies 
operating in Kodiak and throughout Alaska were formed by fishermen who 
wanted to get a better price for their fish. The Council proposal would 
end that competitive market process for fish processing, because no new 
entrant can hope to compete against companies like Trident, Nippon 
Suisan, and Maruha when those companies have a closed class for pollock 
and an exclusive right to process crab.
    Despite the overlap in companies that benefit under the AFA and the 
Council's proposal, it needs to be stressed that the benefits granted 
to processors under the AFA and the IPQ plan are not the same. The fact 
that Congress passed the AFA provides no basis for Congress to pass 
IPQs. IPQs confer more benefits, and far greater market power, to crab 
processors than pollock processors received under the AFA. Under the 
AFA Congress created a closed class of inshore processing facilities 
and linked the set aside of a coop's fish to an agreement to deliver 90 
percent of a coop's harvest to a particular processing facility. But 
Congress did not guarantee the owner of each facility in the closed 
class a particular share of the inshore pollock harvest, nor did they 
force the fishermen to join the coops if they chose not to. In 
addition, each coop could deliver 10 percent of their collective 
harvest to another inshore processing facility, which means that each 
coop has the ability to let one or more boats transfer and take their 
history to another processor if they so choose.
    Under the Council's IPQ plan each processing company is guaranteed 
a particular share of the crab harvest, which means that company can 
consolidate processing facilities and has no risk of losing market 
share if they don't compete on price and terms. Further, each fisherman 
must deliver 90 percent of their catch to a company with IPQs, which 
makes delivery of the remaining 10 percent to a different processing 
company economically and practically infeasible. A more detailed 
summary of four key differences between the AFA and the Council's IPQ 
proposal prepared by Dr. Robert Halverson of the University of 
Washington is also attached to my testimony.
    What is particularly troubling about this proposal is that neither 
the Council nor the State has ever provided any justification for the 
proposal other than that certain processors demanded it. IPQs are not 
used anywhere in the world. Dr. Scott Matulich of Washington State 
University is the only academic who has supported the IPQ proposal. He 
has promoted IPQs as the only way to ensure that all parties--
processors, fishermen, and communities--benefit from rationalization of 
a fishery. The reality is that IPQs benefit only one party--the 
processors--at the expense of fishermen and communities.
    Independent reviews of Dr. Matulich's work and the Council proposal 
have failed to find merit in the IPQ concept and have demonstrated the 
harm they are likely to cause. The National Academy of Sciences 
considered IPQs as part of their comprehensive review of individual 
fishing quota plans and recommended the use of other methods--for 
example allocating individual fishing quotas to processors, which the 
Council plan does already--instead of IPQs. The Council's own 
independent analysis by Drs. Milon and Hamilton of the University of 
Central Florida found that crab IPQs were anti-competitive and would 
have adverse impacts on fishermen. Independent reviews of Dr. 
Matulich's work by the General Accounting Office and Dr. Robert 
Halvorsen of the University of Washington have concluded that the 
analysis done by Dr. Matulich for the State of Alaska used a flawed 
methodology and cannot be validated. Yet the Council persists in 
pushing IPQs as necessary for crab rationalization to occur.
    Congress does not lightly create monopoly markets. When Congress 
does, they create regulatory commissions to oversee those monopolies, 
complete with investigative authority and detailed enforcement powers, 
in order to protect the public from the adverse economic impacts of 
those monopolies. None of those safeguards are included in the Council 
proposal. The binding arbitration provision is enforced, if at all, 
through private contract. The right of first refusal offered to protect 
communities is ephemeral at best--the reality is that no community 
could ever expect to meet the conditions the Council has set. There is 
no appeal to a government agency if problems arise. The Council plan 
makes no provision for oversight and enforcement by the Secretary of 
Commerce or any other government agency. The Council has neither the 
expertise nor the legal ability to oversee the monopoly market 
structures they are asking Congress to create in the name of fishery 
management. Antitrust remedies would simply not exist, because Congress 
will have legislatively created these monopolies.
    The simple truth is that IPQs are nothing more than economic 
allocation of markets. They are a ransom that processors are demanding 
before they will allow the crab fishery to be rationalized to improve 
conservation and fishing safety. There is no fishery management or 
community protection justification for IPQs. In fact, IPQs are 
precisely what National Standard 5 of the Magnuson-Stevens Act 
expressly prohibits they are a measure that has economic allocation as 
its SOLE purpose.
    Congress needs to realize that the push for IPQs will not stop with 
crab. The Council is already considering plans to rationalize the Gulf 
of Alaska groundfish fisheries, and some Gulf of Alaska fish processors 
are demanding that IPQs be included. Further, a recent report on the 
crisis in the salmon fisheries suggested that IPQs may be needed for 
the salmon fisheries. Congress has already passed special legislation 
for pollock, and is being asked again to pass special legislation for 
crab. If Congress authorizes crab IPQs, the floodgates will be open and 
Congress will be besieged with requests for special legislation for 
each fishery off Alaska. Having Congress legislate fishery by fishery 
is precisely what the Magnuson-Stevens Act was designed to prevent.
    IPQs have dominated the Council's discussion of much needed 
individual fishing quota proposals for far too long. Congress needs to 
send a clear message that IPQs will not be allowed. Once that message 
is delivered it will be easy for the Council to quickly implement an 
individual fishing quota program under its existing authority that will 
address the legitimate concerns of fishermen, communities, and 
processors.
    Thank you for the opportunity to present this testimony. I would be 
happy to answer any questions at the hearing, and ask that the hearing 
record be kept open for ten business days so that the City of Kodiak 
may submit additional information in support of our testimony.
    Attachments: Estimation of Losses to the Kodiak Community
    Major Differences Between the AFA and the Council's IPQ Plan
                                 ______
                                 
                               Attachment
Estimation of Losses to the Kodiak Community from Bristol Bay Red King 
        Crab Rationalization
    During the past several years a number of Kodiak crab fishermen 
have delivered their Bristol Bay red king crab to Kodiak rather than a 
port closer to the grounds. This is due to a number of factors 
including investments some have made in a local processor, responses to 
higher prices offered in Kodiak and relationships with local 
processors.
    Under the NPFMC proposed crab rationalization program, crab 
processors will be granted a processing quota based on their activity 
during 1998-9. Harvesters will be granted corresponding quota of which 
90 percent (``A'' shares) must be delivered to processors holding 
processing quota and the remaining 10 percent (``B'' shares) may be 
delivered to any processor. Analysis of the rationalization program 
suggests that the ``B'' quota deliverable to any processor will 
initially equal about 12.9 percent of each independent (i.e., non-
processor controlled) harvester's allocation.
    The impact of the reduction in deliveries to Kodiak can be 
estimated based on information provided by NPFMC. The following table 
lists the landings and value to Kodiak, overall landings, and the 
estimated impacts to the Kodiak community based on first sale of 
processed products.

 
                                                  Based on     Based on
        Year              2000         2001         1999         1990
 
Kodiak BBRKC              824,780      817,916
 deliveries (lb)
Overall BBRKC           7,546,145    7,786,420   11,000,000   20,000,000
 harvest (lb)
Kodiak percentage          10.93%       10.50%       10.72%       10.72%
3.8% of total             258,078      266,296      376,200      684,000
 harvest ``A'' share
 harvest
3.8% plus 12.9            291,370      300,648      424,730      772,236
 percent of ``A''
 shares (IQ)
Difference between        533,410      517,268      754,152    1,371,185
 actual (projected)
 and IQ
Ex-vessel prices            $4.80        $4.92        $4.86        $4.86
Converted to first          $5.48        $5.60        $5.54        $5.54
 wholesale product
 value
Difference in value    $2,921,379   $2,895,047   $4,175,587   $7,591,977
 processed products
Community weighted          1.232        1.232        1.232        1.232
 average multiplier
Foregone community     $3,599,138   $3,566,698   $5,144,324   $9,353,316
 multiplied impact
Total Kodiak                 94.5         80.5        87.86        88.82
 deliveries ($
 million) all
 species
Difference % of            2.709%       3.161%       4.172%       7.503%
 total deliveries
Total fisheries        $1,287,344     $796,393   $1,041,869   $1,041,869
 taxes
Fisheries taxes on        $34,879      $25,177      $43,464      $78,167
 difference
Total Effect           $3,634,017   $3,591,876   $5,187,788   $9,431,483
 (Wholesale +
 Multiplier + Taxes)
 

    In 2000, 824,780 lbs of Bristol Bay red king crab were delivered to 
Kodiak from a total harvest of 7,546,145 lbs. This represents 10.93 
percent of the total harvest. Kodiak processors will receive only 3.8 
percent of the processor IQs (which are 90 percent of the total 
harvest) which would have translated into 258,078 lbs of deliveries in 
2000. In addition, harvesters making those deliveries would have 
received 12.9 percent of that amount in non-processor specific IFQs. If 
this amount is also assumed to be delivered to Kodiak a total of 
291,370 lbs would have been delivered in 2000--a difference of 533,410 
lbs less than actual deliveries. The fishery average ex-vessel price 
was $4.80 per pound in 2000. The round weight equivalent average 
difference between ex-vessel and wholesale product value is $0.6867 per 
lb for a wholesale price of $5.48/lb. This results in potential product 
loss of $2,921,379 to processors. The best available economic 
multiplier for Kodiak is 1.232 or a local increase of 23.2 percent for 
every new dollar into the community. Total deliveries to Kodiak in 2000 
from all fisheries were valued at $94.5 million. The proposed loss in 
BB red king crab deliveries would amount to 2.709 percent of the total. 
Kodiak collected $1,287,344 in fisheries landing and business taxes for 
2000 landings. The straight percentage of that simply allocated to the 
crab difference is a loss of $34,879. This calculated total loss to the 
community of Kodiak from regulatorily prohibited Bristol Bay red king 
crab is $3,634,017. For 2001 the same calculation estimates a loss due 
to processor restrictions of $3,591,876.
    The same calculation can be used to estimate loss to the Kodiak 
community when crab harvest levels increase from current low levels. In 
1999, 11,090,930 lbs of Bristol Bay red king crab were harvested 
overall and in 1990 20,362,342 pounds were harvested. Rounding these 
numbers to the nearest million pounds and projecting the 2000/2001 
averages for other variables (Kodiak percentage of landings, ex-vessel 
price, conversion to wholesale price, total Kodiak deliveries, and 
total taxes modified only by the increase in crab landings) allows 
derivation of losses to Kodiak. As the amount of crab harvest increases 
its relative importance to the Kodiak economy likewise increases. For 
instance, recent delivery percentages applied to 1990 crab harvest 
levels suggest that Bristol Bay red king crab would contribute over 7.5 
percent of the total value of deliveries of all species to Kodiak. 
Restrictive processor quotas applied to the 1990 harvest would cause an 
annual loss of $9.4 million to the Kodiak community.
Background
    When product is prohibited from delivery to a community the result 
is an economic loss not only to the persons buying the product for 
further processing but also to the community as a whole. Since the 
local industry is not able to manufacture processed product it is not 
able to employ workers or to purchase other local goods and services 
required in the manufacturing process. In turn, there are lower wages 
and profits throughout the community due to economic multiplier 
effects. This analysis derives these cumulative impacts based on 
readily available information. Since the restrictions on trade due to 
crab processor quotas can only be estimated, and since market trends 
have shown increased economic crab processing activity in Kodiak in 
recent years, these estimates are viewed as conservative and at the 
lower end of probable impacts.
    Estimating the economic impact to the Kodiak economy from reduced 
king crab deliveries must be based on processed product value. 
Processed product value is derivable from deliveries and comparison 
between ex-vessel and processed product prices.
    Fishery purchases by Kodiak processors have decreased dramatically, 
both in terms of volume and value, during the past few years. This is 
related to changing ocean conditions, changing world markets, and 
regulatory changes designed to protect Seller sea lions.
Recent deliveries to Kodiak
    Accurate data for 2002 deliveries are not yet available from A. 
However, the change between 1997 and 2001 is illustrative. Both overall 
landings at Kodiak and ex-vessel value of all species combined are 
similar between 1997 and 2001. However, the relative importance of 
species, such as Bristol Bay red king crab, have changed. Red king crab 
changed from 0.1 percent of overall landings and 1.5 percent of overall 
value in 1998 to 0.3 percent of overall landings and 4.8 percent of 
overall value in 2001.

           Ex-Vessel Landings of Seafood at Kodiak, 1997-2001
                          [Millions of Pounds]
------------------------------------------------------------------------
          Species              1997     1998     1999     2000     2001
------------------------------------------------------------------------
Bristol Bay King Crab            0.4      0.3      0.5      0.9      0.8
                              (0.1%)   (0.1%)   (0.2%)   (0.3%)   (0.3%)
------------------------------------------------------------------------
Total Crab                       1.1      1.2      1.4      2.7      1.4
------------------------------------------------------------------------
  Pollock                       83.3    165.8    130.5    102.2     90.8
------------------------------------------------------------------------
  Pacific Cod                   73.1     72.0     85.0     64.9     54.7
------------------------------------------------------------------------
Total Groundfish               184.2    263.4    237.6    200.4    176.3
------------------------------------------------------------------------
Salmon                          57.8    105.6     70.5     61.8     78.8
------------------------------------------------------------------------
Halibut                         11.0      9.1      9.9      9.3      8.5
------------------------------------------------------------------------
Sablefish                        3.9      3.6      3.2      3.4      2.2
------------------------------------------------------------------------
Other Species                    8.7      5.7      4.1      3.3      3.3
------------------------------------------------------------------------
Total All Species              267.0    388.6    326.7    281.0    270.5
------------------------------------------------------------------------
Source: McDowell Group. 2002. Analysis of Economic Impacts From Fishing
  Restrictions on the Kodiak Island Borough Economy. Prepared for Kodiak
  Island Borough. November 2002. Table 11.


           Ex-Vessel Landings of Seafood at Kodiak, 1997-2001
                          [Millions of Dollars]
------------------------------------------------------------------------
          Species              1997     1998     1999     2000     2001
------------------------------------------------------------------------
Bristol Bay King Crab           $1.3     $1.2     $1.7     $1.7     $3.9
                              (1.6%)   (1.5%)   (1.6%)   (1.8%)   (4.8%)
------------------------------------------------------------------------
Total Crab                       3.1      2.0      2.8      3.4      4.9
------------------------------------------------------------------------
  Pollock                        8.1     11.6     13.1      8.7     12.7
------------------------------------------------------------------------
  Pacific Cod                   15.5     13.7     25.5     24.0     15.9
------------------------------------------------------------------------
Total Groundfish                27.8     28.6     41.2     36.8     32.5
------------------------------------------------------------------------
Salmon                          18.8     29.8     31.1     21.5     18.8
------------------------------------------------------------------------
Halibut                         21.0     10.0     20.6     23.1     16.2
------------------------------------------------------------------------
Sablefish                        8.0      5.2      5.7      7.0      6.9
------------------------------------------------------------------------
Other Species                    4.2      3.7      2.7      2.7      1.2
------------------------------------------------------------------------
Total All Species              $82.9    $79.3   $103.9    $94.5    $80.5
------------------------------------------------------------------------
Source: McDowell Group. 2002. Analysis of Economic Impacts From Fishing
  Restrictions on the Kodiak Island Borough Economy. Prepared for Kodiak
  Island Borough. November 2002. Table 12.

    Total Bristol Bay red king crab harvests and Kodiak deliveries for 
2000 and 2001 are available from ADF&G.\1\ In 2000, 10.93 percent of 
the Bristol Bay red king crab were delivered to Kodiak and in 2001, 
10.5 percent were delivered there. Kodiak processors are expected to be 
allocated slightly less than 3.8 percent of the Bristol Bay red king 
crab IPQ.\2\
---------------------------------------------------------------------------
    \1\ Fishery Information Packet for the Bristol Bay Red King Crab 
Fishery, 2002. ADF&G RIR 4K02-45. Kodiak data--NMFS data as presented 
at http://www.kodiak.org/seafood.html.
    \2\ Communication from NPFMC staff Dr. Mark Fina. Includes one 
additional processor for confidentiality reasons.
---------------------------------------------------------------------------
Deliveries to Kodiak under crab rationalization
    Thirty-one red king crab harvest vessels are reported to be 
affiliated with processors.\3\ This represents 12.1 percent of the 
total 256 harvest vessels which qualify.\4\ The cumulative quota due 
these 31 vessels amounts to 12.6 percent of the red king crab IFQ. 
Using the data from the analysis, a maximum of 225 vessels will be 
eligible to receive the ``B'' shares. This number is likely to be lower 
since there continues to be consolidation in the harvesting fleet. This 
consolidation will only become greater under the proposed buyout 
program. Likewise, ``control'', when defined, will be more restrictive 
than the 10 percent ownership ``affiliation'' criteria used in the 
NPFMC analysis.
---------------------------------------------------------------------------
    \3\ North Pacific Fishery Management Council (NPFMC). 2002. Bering 
Sea Crab Rationalization Program Alternatives: Public Review Draft. 
May, 2002. Table 3.4-27.
    \4\ NPFMC, 2002. Table A3-32.
---------------------------------------------------------------------------
    Supposing for this analysis that the percentages listed above are 
correct, the independent harvesters will control86.4 percent of the 
``A'' shares (77.76 percent of all IFQs) and all 10 percent of the 
``B'' shares. Therefore, each independent harvester will receive ``B'' 
shares in an amount equal to 12.9 percent of their ``A'' shares (rather 
than 11.1 percent if all harvesters received ``B'' shares). Conversely, 
these ``B'' shares will equal 11.6 percent of their total annual 
harvest allocation (rather than 10 percent).
    In order to simplify the analysis of probable loss to Kodiak, it is 
assumed that the full3.8 percent of the overall ``A'' share harvest 
would be delivered to Kodiak along with the ``B'' share deliveries 
associated with that IQ (an additional 12.9 percent of the ``A'' 
shares). This equates to 3.86 percent of the overall harvest. The 
difference between deliveries and the percentage that would be 
allocated to Kodiak processors in 2000 and 2001 is calculated at 
533,410 lbs and 517,268 lbs, respectively.
Wholesale processed product value
    In order to calculate the economic impacts of reductions in 
processed crab to the Kodiak economy, it is first necessary to 
determine the value of crab and how that value relates to ex vessel 
value. The following table derives the difference of crab value between 
first sale of wholesale product (sections) and ex-vessel value. 
Shellfish sections represent 98 percent or more of the processed 
product type for red king crab from 1996-2000.\5\ Therefore, the first 
wholesale crab prices for shellfish sections is used as a proxy for all 
first wholesale prices. In order to convert wholesale prices into 
equivalent delivered prices it is necessary to multiply by the product 
recovery rate. In this case, a product recovery rate of 60 percent is 
used. \6\ Comparing these back cast, delivered wholesale prices to 
actual ex-vessel prices allows a difference or processor markup to be 
determined. This difference varies year to year but an average of the 
five most recent years available is $0.6768 per pound delivered weight.
---------------------------------------------------------------------------
    \5\ NPFMC, 2002. Appendix 2-3, Table 2.
    \6\ Chuck Crapo, Brian Paust, and Jerry Babbitt. 1988. Recoveries 
and Yields from Pacific Fish and Shellfish. Alaska Sea Grant, Marine 
Advisory Bulletin No. 37. King crab, raw-whole, converted to cooked 
sections.

 
                                    Wholesale  1st         Backcast
                                   Sale  (Sections)   Delivered  (Whole)   Actual  Weighted    Difference  $/lb
                                         $/lb                 $/lb          Ex-Vessel  $/lb
 
1996                                         $ 8.53               $5.12               $4.01               $1.11
1997                                         $ 6.15               $3.69               $3.26               $0.43
1998                                         $ 5.52               $3.31               $2.61               $0.70
1999                                         $11.25               $6.75               $6.26               $0.49
2000                                         $ 9.11               $5.47               $4.81               $0.66
Average                                                                                                 $0.6768
 
Sources: First wholesale crab price--NPFMC, 2002, Appendix 2-3, Table 1. Conversion ratio of 60 percent for
  whole fresh crab to sections--Crapo, 1988. Ex-vessel average price--NPFMC, 2002, Table 2.5-1.

    The reported average ex-vessel prices for BB king crab in 2000 and 
2001 are $4.80 and $4.92, respectively.\7\ Converting these to 
processed sections and back calculating a wholesale price results in 
estimates of $5.48 per delivered pound at the wholesale level for 2000 
and $5.60 per pound for 2001. Based on these estimated processed 
product values, the foregone value at the first wholesale level would 
have been $2,921,379 in 2000 and $2,895,047 in 2001.
---------------------------------------------------------------------------
    \7\ ADF&G data by year http://www.cf.adfg.state.ak.us/geninfo/
shellfsh/shelhome.htm#catch
---------------------------------------------------------------------------
Economic multiplier impacts
    Gross revenue received from the sale of processed crab at the first 
wholesale level, is termed a direct effect (output value). In addition 
to these direct effects of revenue, a community also incurs indirect 
and induced effects from the sale of crab. ``Indirect effects are 
changes that occur because producers change the amounts of goods and 
services they purchase, such as raw fish, fuel, utilities and packaging 
supplies. Induced effects are generated as income from direct and 
indirect expenditures work their way through the economy. An example of 
an induced effect would be a reduction in restaurant sales as 
processing plant workers choose to cut back on personal expenditures. . 
. . [I]t is assumed that there is an overall U.S. multiplier of 2.0 for 
all direct effects--with indirect and induced effects that accrue 
either inside the local economy or leak out to non-local economies. In 
other words, it is assumed that for every dollar of direct output 
effect, there is an additional dollar of indirect and induced effects 
that is generated somewhere in the U.S. economy.'' \8\
---------------------------------------------------------------------------
    \8\ Northern Economics. 2001. Assessment of Economic Impacts of 
Federal Actions to Protect Steller Sea Lions on Alaska Groundfish 
Fishery Participants. Prepared for Southwest Alaska Municipal 
Conference. August 2001. Section 8.4.
---------------------------------------------------------------------------
    The most recent estimate of community wide economic impacts for 
Kodiak Island are a weighted average aggregate multiplier of 1.232. 
This compares to similarly derived multipliers of 1.185 for the 
Aleutians West Census area and 1.085 for the Aleutians East Borough.\9\ 
Applying this economic multiplier to the potential value of foregone 
wholesale processed product results in a cumulative impact of 
$3,599,379 for 2000 and $3,566,698 for 2001.
---------------------------------------------------------------------------
    \9\ Estimated using IMPLAN impact analysis software by Northern 
Economics, 2001.
---------------------------------------------------------------------------
Local fisheries taxes
    Taxes are derived directly from the fishing industry both via a 
shared landing tax and a fisheries business tax. A simplified method is 
used to determine the amount related to a difference in crab landings. 
Total landing and fisheries business taxes for Kodiak are reported as 
$1,287,344 in 2000 and $796,393 in 2001.\10\ Total landings for all 
seafood products in Kodiak during the same two years were valued at 
$94.5 million and $80.5 million, respectively.\11\ The potential loss 
in ex-vessel value is calculated at 2.709 percent of the overall 
landings for 2001 or $34,879. The same calculation for 2001 results in 
a potential loss of $25,177.
---------------------------------------------------------------------------
    \10\ McDowell Group. 2002. Analysis of Economic Impacts From 
Fishing Restrictions on the Kodiak Island Borough Economy. Prepared for 
Kodiak Island Borough. November 2002. Table 17.
    \11\ McDowell Group, 2002. Table 17.
---------------------------------------------------------------------------
    There are other taxes and municipal income associated with crab 
processing and with indirect and induced economic activity that are not 
accounted for in this analysis. For instance, reduced processing and 
the concomitant reductions in purchases and spending result in lower 
overall sales tax revenues.\12\
---------------------------------------------------------------------------
    \12\ The City of Kodiak currently has a 6 percent sales tax.
---------------------------------------------------------------------------
Cumulative potential impacts to Kodiak, 2000 and 2001
    The estimated total effects of prohibiting crab deliveries to 
Kodiak processors includes, at a minimum, the loss of wholesale 
product, multiplied community impacts, and foregone taxes. The 
estimated potential minimum impacts for 2000 and 2001 are thereby 
calculated at $3,634,017 for 2000 and $3,591,876 for 2001.
Cumulative impact to Kodiak based on historic crab harvest levels
    The Bristol Bay red king crab harvests in 2000 and 2001 were at the 
low end of recent harvests. There was no fishery at all during 1983, 
1994 and 1995. The only years during the past three decades when the 
harvest was lower than 2000/2001 was in 1982, 1984, 1985, and 1988. 
During the past three decades, harvests have ranged from 4.2 million 
pounds to 130 million pounds.\13\ The harvests from 1990 through 2002 
have averaged 11.6 million pounds.
---------------------------------------------------------------------------
    \13\ Harvests of 3 million pounds in 1982, 4.2 million pounds in 
1984 and 1985, and 7.4 million pounds in 1988. Fishery Information 
Packet for the Bristol Bay Red King Crab Fishery, 2002. Table 1.
---------------------------------------------------------------------------
    In order to arrive at a more realistic expectation of economic 
losses to the Kodiak community under crab rationalization it is 
illustrative to analyze recent delivery rates compared to crab 
rationalization restrictions using examples from the last ten years of 
harvest. In order to make the analysis within current trends, the 
projection uses several simplifications. Overall Bristol Bay red king 
crab harvests are rounded off to 11 million and 20 million pounds as 
proxies for actual harvests in 1999 (11,090,930 pounds) and 1990 
(20,362,342 pounds). The average harvest delivery percentage to Kodiak 
from 2000 and 2001, 10.72 percent, is used to compare to restricted 
deliveries under crab rationalization. The average ex-vessel value from 
2000/2001 of $4.86 is used to derive a first wholesale back calculated 
price of $5.54 per delivered pound. Likewise, total deliveries to 
Kodiak are assumed to be the same as average in 2000/2001 except for 
the increase in deliveries that would be made to Kodiak due to the 
increased crab harvest. Total taxes are under-estimated at the average 
of 2000 and 2001.
    The analysis projects that an 11 million pound crab harvest with 
processor quotas would result in a loss to the community of Kodiak of 
$5,187,788 million. A harvest of 20 million pounds, based on that 
experienced in 1990, would result in a loss to Kodiak of $9,431,483 
million. The losses would represent 4.172 percent and 7.503 percent of 
overall value of landings to the community, respectively.
    These calculations are, at best, conservative estimates. They 
derive expected losses based on actual deliveries to Kodiak during 2000 
and 2001 compared to projected deliveries. However, the expected 
deliveries are likely to be even less than used in this analysis and 
therefore the impacts greater. For example, processors are free to 
transfer processing quota between processing plants. It is entirely 
possible that processors with larger plants in Unalaska/Dutch Harbor 
would direct deliveries to those plants at the expense of deliveries to 
Kodiak. Likewise, vessels that are ``controlled'' by processors, such 
as several fishermen who have investments in both crab harvesters and a 
processor at Kodiak, would not receive ``B'' harvest shares and 
therefore crab deliveries to Kodiak would decrease accordingly.
                                 ______
                                 

 Major Differences between AFA Inshore Cooperatives and the Council's 
      Proposed Rationalization Program for the BSAI Crab Fisheries

  Robert Halvorsen, Professor of Economics, Department of Economics, 
              University of Washington Seattle, Washington

I. Protection of Processors' Market Shares
    Under the proposed rationalization program for the crab fisheries, 
a processor would receive processor quota share equal to 90 percent of 
its historic processing share. This amount would be guaranteed to the 
processor because harvesters could deliver their Class A allocation 
only to processors holding processing share. Therefore the only way 
that a processor could lose more than 10 percent of its historic market 
share would be if it set the ex vessel price so low that vessels would 
prefer to forego fishing rather than deliver fish to it, because that 
would be their only alternative.
    Under the AFA, each processor has the right to process 90 percent 
of its cooperative's total harvest, but this does not guarantee that it 
will receive 90 percent of its historic processing share, because 
vessels have alternatives to remaining in the cooperative. One 
alternative for a vessel is to fish in the open access portion of the 
fishery and deliver its fish to another processor. It could then either 
remain in open access or join the cooperative of that processor. 
Another option is to qualify for another cooperative without going 
through open access by delivering its fish to the alternative processor 
as part of the 10 percent of the cooperative's total harvest that can 
be delivered to any processor. And if enough vessels defected, the 
cooperative itself might be dissolved, eliminating any processing 
rights under the AFA.
    Therefore protection of processors' market shares would be much 
greater under the proposed program for the crab fisheries than under 
the AFA, thereby giving the processors much greater bargaining power. 
In particular, under the AFA a processor will retain market share only 
if it offers an ex vessel price that is competitive with the price 
being offered by other processors, whereas under processor quota shares 
a processor could retain 90 percent of its market share even if it 
offered a price just slightly higher than the cost of catching fish.
II. Regionalization
    Under the proposed rationalization program for the crab fisheries, 
Class A harvest shares and processor shares for each crab fishery would 
be regionally designated, whereas under the AFA the entire inshore 
sector is treated as a single region. This difference has important 
implications both for the net economic benefits that can be realized 
from rationalization and for the distributional consequences of 
rationalization.
    The Council itself recognizes that regionalization reduces net 
economic benefits by restricting consolidation of activities that are 
desirable for reducing capacity and gaining efficiency in both the 
harvesting and processing sectors under rationalization (Report to 
Congress August 2002, page 18). The lack of such constraints under the 
AFA increased the total net economic benefits that were available to be 
shared by harvesters and processors.
    Regionalization also has implications for the distributional 
consequences of rationalization because it subdivides the markets for 
crab and thereby increases the already high degree of concentration 
among processors. It also creates an incentive for processors to 
consolidate their market shares on a regional basis, which would 
increase the degree of concentration still more. The greater bargaining 
power attained by processors can be expected to adversely affect the 
price received by harvesters for Class B allocations as well as for 
Class A allocations, both because it might be difficult logistically to 
deliver to different markets and because processors might be able to 
require bundling deliveries of the two classes of fish.
III. Complexity
    The ``three-pie voluntary cooperative program'' being recommended 
for the crab fisheries is much more complex than the rationalization 
program implemented under the AFA. The greater complexity can be 
expected to have serious negative consequences both with respect to the 
cost of management and with respect to the functioning of the market 
for fish and for quota shares.
    Implementation of the proposed rationalization program for the crab 
fisheries would require the determination of share allocations in each 
region of each fishery for each individual vessel and processor. 
Ongoing management measures would include annual monitoring and 
enforcement measures at the same level of detail. Eventual formation of 
voluntary cooperatives might reduce some of the management costs with 
respect to harvesting, but the extra costs of managing processing 
activities would continue.
    More importantly, the increased complexity of the system might make 
the determination of prices through a decentralized market structure 
impracticable. For each regional market in each fishery the prices that 
would have to be determined include the ex vessel price of Class A 
fish, the ex vessel price of Class B fish, the price of Class A 
harvesting quota, the price of Class B harvesting quota, and the price 
of processing quota.
    Attaining equilibrium prices in such a complex system would be 
difficult in even in large, well-functioning, markets, and the markets 
in the crab fisheries would be both thin and imperfectly competitive. 
In addition, the large fluctuations in total allowable catch would 
complicate the determination of equilibrium prices and hinder the 
ability of the system to converge to stable values. In recognition of 
the possibility of the price system breaking down, the rationalization 
plan includes a binding arbitration program. However, the necessity of 
such a procedure increases the cost of managing the fisheries under the 
proposed rationalization plan, and even a well-designed arbitration 
procedure is not an adequate substitute for a well-functioning market.
IV. Net Benefits from Rationalization
    Rationalization of the pollock fishery under the AFA created large 
net economic benefits for the inshore sector, which made it feasible 
for both the harvesting and processing sectors to benefit from the 
program. As already noted, the regionalization requirement under the 
proposed plan for the crab fisheries would decrease the potential net 
economic benefits to be obtained by rationalization. But even if this 
provision did not exist, the total net economic benefits of 
rationalization in the crab fisheries could not be expected to be as 
large as they were under the AFA, because participants in the inshore 
pollock fishery benefited both from a large increase in the sector's 
total allocation and from large rationalization benefits from the 
formation of cooperatives.
    The sector's total allocation was increased first by an increase in 
its share of the total directed pollock fishery from 35 percent to 50 
percent, and subsequently by an increase in the total allowable catch 
for the pollock fishery. The combined result was that the inshore 
sector's total allocation has increased by 80 percent from the pre-AFA 
level in 1998 to the present.
    Large efficiency benefits were realized from the formation of the 
AFA cooperatives. Rationalization under the AFA permitted improved 
targeting of pollock during the peak roe season, resulting in greatly 
increased ex vessel prices during this season. The value of output was 
also increased because slowing the race for fish permitted an increase 
in the recovery rate and a shift to higher valued products. Harvesting 
costs have been reduced by the transfer of quota shares from less 
efficient vessels to more efficient vessels, and easy transferability 
of allocation within a cooperative has facilitated the full harvesting 
of the available allocations.
    In contrast, the proposed rationalization program for the crab 
fisheries does not include an increase in the total allocations 
available to these fisheries. It does incorporate a buyback program, 
but the efficacy of the buyback program has yet to be determined, and 
in any case could not result in benefits equivalent to the 80 percent 
increase in total allocation experienced by the inshore pollock 
fishery. Similarly, increases in the value of output due to 
rationalization are not anticipated to be as large for the crab 
fisheries, and increases in harvesting efficiency are likely to be 
hindered by the restrictions imposed by the proposed program.

    Senator Stevens. Yes, we can keep the record open for 10 
days. We are going on recess on Friday, so that would be--we 
should make that so it would be a week from the coming--not the 
coming Monday. I forget the date that will be, but that is the 
date we will come back into session. That would be the date we 
will close the record.
    Ms. Freed. Thank you.
    Senator Stevens. The second of June.
    Ms. Freed. Thank you.
    Senator Stevens. Thank you very much.
    Our next witness is Dave Fraser, Captain of the fishing 
vessel Muir Milach.

              STATEMENT OF DAVE FRASER, CAPTAIN, 
                   FISHING VESSEL MUIR MILACH

    Mr. Fraser. Thank you, Mr. Chairman, Members of the 
Committee. I appreciate the opportunity to testify on behalf of 
the Crab Rationalization and Buyback Group.
    The Crab Group represents over 100 crab vessels, and the 
Crab Group strongly supports rationalization of the Bering Sea 
and Aleutian Island crab fisheries. We agree that the status 
quo system has left harvesters on the brink of bankruptcy, it 
has led to the demise of most of the non-AFA crab processors 
already, and it is also, and worst of all, been a murderous 
management system. We lose, on average, five fishermen a year. 
And that is clearly unacceptable, and we need to move forward 
into a rationalized fishery.
    That said, Mr. Chairman, the Council has recommended to you 
two distinct programs, one of which is a crab-management 
program that manages the harvest of crab. It includes skipper 
and crew provisions. It includes CDQ provisions, 
regionalization, a number of other protections for processors 
inherent in the program. But separate from that, they have 
recommended to you a different program. It is one to manage 
markets, manage the marketplace for crab and the sale of crab. 
And that is what requires congressional authorization. That is 
the program to which the Crab Group objects.
    Mr. Chairman, after the June meeting, I went home and was 
explaining to my neighbor, who is a plumber, what the Council 
had recommended, and just started out at the very basics and 
explained that they were recommending a program that divided up 
the right to buy crab from fishermen and assign each processor, 
or actually a small handful of processors, specific amounts of 
crab they could buy. He interrupted me after about 30 seconds 
and said, ``Well, you are going to get paid less for your crab 
that way, are not you?'' Now, neither Harold, my neighbor, nor 
I are economists, but I think he is right.
    In 1996, Mr. Chairman, you, in reauthorizing the Magnuson-
Stevens Act, asked for advice, and you did not ask for it from 
a plumber or me; you asked for it from the National Academy of 
Sciences. The National Academy of Sciences spent a long time 
preparing its advice, and they looked specifically, on the 
basis of your direction, at crab processing quotas, or at 
processing quotas. And they said, quote, ``We find no 
compelling reason for establishing a separate processor quota 
system.''
    Mr. Chairman, the Council, at your direction, was also, as 
you pointed out at the beginning of this session, asked to 
analyze the impacts of processor quotas in looking at crab 
rationalization. Now, the Council staff new a hot potato when 
they were handed one, and they contracted out that portion of 
the crab rationalization analysis to two independent economists 
from Florida. Those economists said, quote, under a processor 
quota system, ``processors will do better and harvesters will 
do worse as the ratio of A to B shares increases.''
    Now, that did not go over real well, and the Council took 
that out of the analysis and put it in an appendix, but that 
was the only analysis done on the impact of processor quotas; 
and the rest of the document was about four pages out of 
several hundred pages devoted to the issue of processor-quota 
impacts.
    Mr. Chairman, when the Council got to June and made its 
recommendation, it did not have any analysis of the impacts of 
processor quota before it, and it did not make any motions to 
consider any other alternatives, such as 50-50 or 70-30 or 
anything other than 90-10 split on processing quotas. The 
argument--there was no debate over this, but the argument 
essentially boils down to, ``It is our way or no way.'' 
Processor quotas must be included or processors will block 
rationalization of the crab fishery and these lives will be 
held hostage.
    What the economists that were contracted by the Council 
described as ``monopsony ex-vessel pricing,'' I described as a 
game of musical chairs. If you, as a fisherman, are unhappy in 
the situation you are in with a processor and want to move to a 
different processor, under an IPQ system you have got to move 
somebody else out of their chair, and they have to agree to go 
to someplace else. The only other open chair is the one you 
left that you found intolerable.
    Now, Commissioner Duffy has suggested that 10 percent B 
shares, open-market shares, are enough to correct the problem, 
and he has also equated that, and others have equated that, to 
the 10 percent rule in the AFA. I think it is absolutely 
critical that you realize the essential difference between the 
AFA, which is an excellent program, and the IPQ program for 
crab, which is not. And that is the under the AFA, you do have 
stability. Processors have a planning horizon. They contract 
with members of their coop on an annual basis. But it is not 
musical chairs. If a harvester chooses to move to another 
processor by going through a year of open access, he can do so 
and take his chair with him. No processor under the AFA is 
guaranteed any fixed amount of quota from year to year. And 
that is what keeps the marketplace honest. It is the element of 
competition.
    Mr. Chairman, the Council did recognize the impacts of 
processor quota and what it would do to a competitive 
marketplace. And as a result, in recognizing that, they 
initiated a couple of trailing amendments. Those were to deal 
with community protections and the binding arbitration program. 
As Ms. Freed has suggested, the community-protections element 
ended up being--ephemeral, I think that was the word she used, 
or a sham. Likewise, the binding-arbitration provisions were 
the only basis on which some harvesters were willing to swallow 
the idea of processing quota.
    The Council set up a committee. It worked for several 
months, came back with two models, one of which was supported 
by processors, the other by harvesters. And the bottom line, 
Mr. Chairman, is that the Council, on a 6-5 vote, chose the one 
that the processors favored and rejected the one that the 
harvesters favored. And after that meeting, every single group 
of crab harvesters has expressed the fact that the binding 
arbitration model chosen by the Council will not provide a 
meaningful safety net or the assurance of an outside option 
that equates to a competitive marketplace.
    Now, Mr. Chairman, Arni will testify later. They believe 
that this can be corrected, and will be corrected, but they are 
the only group that is taking that position at this point in 
time.
    So binding arbitration has not fixed the problem of 
destroying a competitive marketplace, and it becomes a tar 
baby. Arni will be asking for continual oversight by Council 
and Congress of the binding-arbitration process. Unless you 
write them a blank check, that means the Council has to come 
back to Congress for more authority if they want a different 
kind of binding arbitration than the one currently proposed.
    If Congress authorizes IPQs and gives broad authorization 
for changes in binding arbitration, it will transform the 
Council's task from managing fisheries to managing markets, and 
they will need to invest the Council with the powers and 
experiences of the National Labor Relations Board, the Federal 
Trade Commission, Department of Justice Antitrust Division, and 
Public Utility Regulatory Commissions.
    It is a tar baby, Mr. Chairman, and I think it is a path 
Congress should think very seriously about going down, because 
the changes that will occur while attempting to fix the impacts 
from a flawed system are going to be irreversible changes. You 
cannot put Humpty-Dumpty back together again.
    Mr. Chairman, I suggested at the beginning that the 
Council's program, absent processing quota shares, already does 
include elements to protect processors. We do not disagree with 
the need for protection of processors under a rationalized 
fishery, but some of the elements that are already embedded in 
the program for processors are separate classes of quota for 
catcher vessels and catcher processors so that catcher vessels 
cannot start processing their own catch; they have to use 
existing processors. There is regional restrictions on 
deliveries. Processors are allowed to acquire and own harvest 
quota; and, in fact, a processing company is allowed to hold 
five times as much harvest quota as any individual harvesting 
company is allowed to hold. That limitation for harvesters of 
only 1 percent, versus the processors' 5 percent, means that 
there will be a diverse supply on the harvest side for 
processors.
    Mr. Chairman, I think that the AFA provides a workable 
alternative to PQs, but the AFA is not equivalent to processor 
quotas. Congress should reject the Council's request for a 
radical expansion of its duties beyond fisheries management and 
into market regulation represented by the request for 
authorization to adopt the processor-quota element. If Congress 
does, in fact, authorize processor quotas, it is critical to do 
so in a manner that guarantees improved community protections 
and a better binding-arbitration system, and that those 
elements are done first.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Fraser follows:]

     Prepared Statement of David Fraser, Captain, FV Muir Milach, 
                 Crab Rationalization and Buyback Group
Executive Summary

1.0 What Happened in Dutch Harbor and Why the 11-0 Vote?

2.0 Are Processor Quotas Necessary or Prudent?
    2.1 National Academy of Science Recommendations
        2.1.1 ``Sharing the Fish'' on Processor Quota
        2.1.2 Distribution of Benefits of Quota Shares--Initial 
        Allocation
        2.1.3 Distribution of Benefits and Consolidation
        2.1.4 Foreign Ownership
    2.2 Economists' Views on Processor Quotas
        2.2.1 The GAO On Matulich
        2.2.2 Economists on Processor Quota--Milon and Hamilton
        2.2.3 Economists on Processor Quota--Halverson
        2.2.4 Economists on Processor Quota--Christy and Anderson

3.0 Do We Believe in the Value of a Competitive Marketplace?
    3.1 Price Formation Under Status Quo versus Under Processor Quota
        3.1.1 Price Formation Under Status Quo
        3.1.2 Price Formation Under Processor Quota
    3.2 The Nature of the Right or Privilege represented by the 
Processing Quota

4.0 Making a Square Wheel Round--Fixing the Impacts of PQs
    4.1 Will 10% B Shares Serve Their Intended Purpose?
        4.1.1 A Simplified Answer
        4.1.2 The Missing Analysis
    4.2 Binding Arbitration--A Substitute for Competition?
        4.2.1 Need for Arbitration
        4.2.2 Contrasting the Alternatives
                4.2.2.1 What's In a Name?--Fleetwide Arbitration
                4.2.2.2 What's In a Name?--Last Best Offer Arbitration
                4.2.2.4 Dr. Plott's Analysis
                4.2.2.5 Information available to the arbitrator(s)
                4.2.2.6 Arbitration timelines
                4.2.2.7 Arbitration administration
        4.2.3 Quality issues
        4.2.4 Data Verification
        4.2.5 The Council's Revised LBO Model
    4.3 Community Protections
    4.4 Government in the Marketplace

5.0 Alternatives to Processor Quotas to Protect Processors
    5.1 Existing Programs
        5.1.1 AFA Pollock in the Shoreside Sector
        5.1.2 Halibut & Sablefish IFQs
        5.1.3 British Columbia's IVQ Groundfish
        5.1.4 Newfoundland Crab
    5.2 Alternatives discussed in the NPFMC's Advisory Panel

6.0 Public Comment--Who Supports Processor Quotas

7.0 Where Angels Fear to Tread
                                 ______
                                 
Executive Summary
    The CRAB Group supports rationalizing the Bering Sea/Aleutians 
Islands crab fisheries. The status quo system has left harvesters on or 
over the brink of bankruptcy, and has led to the demise of most of the 
non-AFA (American Fisheries Act) crab processors. Worst of all, the 
murderous ``race for fish'' in the middle of winter kills an average of 
five fishermen a year. We are also aware that asking Congress to 
overrule a unanimous Council request puts us in a difficult position.
    However, we believe a fair rationalization program can be developed 
without resorting to Processor Quotas (PQs). Processor quotas will 
result in a segmented monopsony and require endless government 
regulatory involvement to simulate a competitive market.
    It is the position of the CRAB Group and hundreds of others that 
Congress should reject the Council's request for a radical expansion of 
its authority.
    The harvester component of the crab rationalization program is 
legal now. It can be adopted together with the CDQ provisions, the 
regionalization provisions, and the skipper and crew provisions 
designed by the Council, but without PQs.
    IFQs allocate access to a share of a public resource, which becomes 
private property only after it is captured. PQs grant a right or 
privilege to process a fixed portion of the harvest. Thus PQs direct 
the disposition of private property, rather than a public resource.
    IFQs insure that public resources are harvested in a safe and 
efficient manner. PQs eliminate or restrain competition among 
processors and create a regulated marketplace which requires creating a 
substitute mechanism for price formation.
    The crab rationalization process included nearly two years of 
committee meetings in which the various elements were crafted. Both 
harvesters and processors participated in these meetings. Throughout 
this process, the processing sector was adamant that rationalization 
was not going forward without processor quota. In the end all the 
arguments for PQ come down to this: ``Our way, or no way.''
    The Council spent three days debating nearly all the proposed 
elements. In the end it created a balanced harvester IFQ system with 
regional delivery requirements, skipper and crew provisions, and a 
balance of recent and historic participation credit.
    However during this time, not a single motion was made regarding 
the allocation of 90 percent or the procession rights. There was no 
debate regarding the impacts of creating this system in spite of 
considerable testimony opposing processor quota shares.
    It is our firm belief that an effective lobbying effort cannot 
substitute for building a low cost and effective rationalization 
program within the current framework of the Magnuson-Stevens Fisheries 
Management and Conservation Act.
National Academy of Science Recommendations
    Congress should heed the advice it requested from the National 
Academy of Science. In the NAS report, ``Sharing the Fish,'' they said 
there was no:

        ``. . . compelling reason to establish a separate, 
        complementary processor quota system (the ``two-pie'' 
        system).''

It also noted with regard to foreign ownership:

        ``If there is a consistent congressional policy, it can be 
        characterized as resistance to foreign ownership of fishing 
        vessels and foreign exploitation of fish resources with the 
        U.S.''

The heart of the controversy over PQs is the impact on price formation. 
PQs destroy the harvesters' ability to benefit from collective 
bargaining under the 1934 Fishermen's Marketing Act.
    Ninety percent of a harvester's crab must be delivered to a 
processor holding unused PQ. The result is a game of musical chairs 
which encourages harvesters to accept a sub -optimal price to avoid 
being the last one standing. In order to change processors, a harvester 
must find a new chair . Such harvesters must sell at a lower price than 
the person they are displacing in order to buy this chair. Clearly this 
creates a downward price spiral.
    Issuance of PQs divides the market and takes competition for 
product out of the equation. My neighbor owns a plumbing business and 
has no experience with fishing, but it took him less than thirty 
seconds to figure out that PQs will serve one purpose well . . . and 
that fishermen will be paid less for their crab as a result.
    Lower ex-vessel prices mean lower crew wages and reduced landing 
taxes for the State of Alaska. 
The Magical 10 percent Solution?--B Shares
    The State of Alaska's Issue Paper has states that giving harvesters 
``B'' shares to sell 10 percent of their crab on an open market will 
restore harvesters bargaining power and guarantee a fair price for all 
crab deliveries.
    The Issue Paper also claim the 10 percent B shares allow new 
processors to enter the fishery and increase the share of communities 
like Kodiak with limited qualified ``A'' share processors.
    Simply asserting that a 10 percent of the crab can do all this 
doesn't make it so. Indeed, these assertions lack supporting analysis. 
Unless B shares are like the biblical loaves and fishes, it is 
impossible to believe these shares will provide enough crab to leverage 
price by offering them to PQ endowed processors and provide a pool of 
product for disenfranchised processors and communities.
    In fact, the Council recognized 10 percent was inadequate and 
initiated a series of trailing amendments to deal with community 
protections and with price formation through binding arbitration.
Trailing Amendments--Binding Arbitration
    PQs would segment and allocate 90 percent of the Bering Sea crab 
market. Without specific legislative permission, that allocation would 
constitute a per se violation of antitrust law, equivalent to price 
fixing. It is a ``hard-core cartel agreement'' that would otherwise be 
prosecuted criminally by the Department of Justice. This inherently 
anti-competitive effect of PQs is the problem that requires Binding 
Arbitration.
    The Council Chairman appointed a committee of fishermen and 
processor representatives to address the issues of binding arbitration. 
Over several months of meetings committee developed two distinct 
approaches.
    The Council chose the version supported by processors on a 6-5 
vote. That version fails to provide a meaningful safety net. Nor does 
it provide assurance of an outside option approximating a competitive 
marketplace.
Real Time Oversight
    The Council has repeatedly stated its intent to modify the program 
to respond to unintended or unanticipated impacts. To do so will 
require far broader authority than simple legislation to implement the 
preferred alternative. It is also naive to imagine that some of the 
effects will be reversible.
    Without additional authority, the Council lacks the tools required 
to address many of the problems that will arise. It is difficult to 
imagine that Congress will relish taking on the role of real-time 
program manager. It is also difficult to believe that additional 
authority should be granted outside the context of the Magnuson-Stevens 
Fisheries Conservation Management Act.
    If Congress authorizes PQs, it will transform Councils' task from 
managing fisheries to managing markets. They will need the powers and 
experience of the National Labor Relations Board, Federal Trade 
Commission, Department of Justice Anti-trust Division, and Public 
Utility Regulatory Commissions.
Alternatives to Processor Quotas
    There are many alternative approaches that have been utilized to 
deal with the concerns of processors in a variety of rationalized 
fisheries. Even without PQs, the crab rationalization plan gives 
processors substantial protection by program elements. These include:

   Separate Catcher Vessel and Catcher Processor classes of 
        quota, so fishermen can't process their own crab.

   Regional restrictions on deliveries.

   Processors are allowed to acquire and own harvest quota.

   Limits on consolidation of harvest quota, preserving a 
        diverse supply for processors.

    The Council's Advisory Panel also offered a number of alternatives 
to PQs which didn't receive adequate consideration. If analysis did 
show there was further necessity to protect processors, there are less-
damaging alternatives.
    The American Fisheries Act provides one such workable alternative 
to PQs. The critical difference is that while the AFA coops provide a 
large measure of stability through the requirement for annual coop 
contracts with an eligible processor, no processor is guaranteed a 
fixed share of the harvest for more than one year, and ultimately it is 
competition that governs whether a vessel will remain with a processor 
or move its quota to another processor.
    Legitimate processor concerns can be addressed without authorizing 
PQs and segmented markets.
    Recommendations:

    Congress should reject the Council's request for a radical 
expansion of its duties beyond fisheries management and into market 
regulation represented by the request for authorization to adopt the 
Processor Quota element of their preferred alternative.
    If Congress does authorize PQs it is critical to do so in a manner 
that guarantees that improved community protections and a better 
binding arbitration process are accomplished first.
Introduction
    The CRAB Group supports Crab Rationalization including measures to 
protect communities and processors. The status quo system has left 
harvesters on or over the brink of bankruptcy, and has already led to 
the demise of most of the non-AFA crab processors. Worst of all, the 
murderous ``race for fish'' in the middle of winter kills an average of 
five fishermen a year.
    We believe a fair rationalization program can be developed without 
resorting to Processor Quotas (PQs) which will result in a segmented 
monopsony and require endless government regulatory involvement to 
simulate a competitive market.
    Our concerns are detailed in the following discussion.
1.0 What Happened in Dutch Harbor and Why the 11-0 Vote?
    The North Pacific Fisheries Management Council staff prepared a 436 
page analysis for the crab plan of which just four pages were devoted 
to the impacts of Processor Quotas. Recognizing the controversial 
nature of PQs, the Council contracted outside economists Milon and 
Hamilton from Florida for further analysis of the impacts. These 
economists produced a 35 page document which highlighted the negative 
impacts on harvesters. Unfortunately, the Council chose to remove it 
from the analysis.
    At the June meeting where the Council picked its preferred 
alternative, it passed 20 amendments (and considered many more) to the 
proposed plan over three days of debate on the element and options of 
the program dealing with the harvest sector. Not a single motion was 
made on the regarding the level of PQ, and so there wasn't a word of 
debate regarding the impacts of creating a PQ system governing the 
marketing of 90 percent of the crab.
    Aside from the PQ element, the Council did an excellent job of 
putting together a balanced IFQ system with regional community 
protection, skipper and crew provisions, a reasonable balance of recent 
and historic participation credit, and excessive share provisions for 
the harvest sector. All of which could be adopted without the PQs now 
the IFQ moratorium has lapsed. However, the processing lobby made it 
quite clear throughout the process that nothing was going to happen 
unless and until they got processing quota. In the end all the 
arguments for PQ come down to this: ``Our way, or no way.''
    This powerful group has made it clear to everyone seeking to 
rationalize fisheries, that regardless of the economic cost to other 
non-diversified processors, fishing communities, vessel owners, or, 
indeed, the cost in human life for those who work in the nations most 
dangerous occupation, they will block any action that doesn't give them 
control of the harvester's market choices.
    It's my opinion that the Council, tired of having blood on its 
hands, chose what they hoped would be the lesser of two evils. Since 
the Council vote last June Congress allowed the moratorium on IFQs to 
expire. It is now up to Congress to decide whether Processor Quotas are 
good policy.
2.0 Are Processor Quotas Necessary or Prudent?
2.1 National Academy of Science Recommendations
    In the 1996 Magnuson-Stevens Reauthorization Congress directed the 
National Academy of Science to provide advice and recommendations on 
IFQ programs and specifically directed the evaluation of processor 
allocations. Section 303(d)(5) of the M-S Act directs Councils to 
consider the recommendations for the NAS report (Sharing the Fish).
2.1.1 ``Sharing the Fish'' on Processor Quota
    Page 205 of ``Sharing the Fish'' contains a two part recommendation 
relative to processors and quota. The first part speaks to allocating a 
portion of the IFQs to processors; the second speaks to creating a 
``two pie'' or PQ system:

        ``On a national basis, the committee found no compelling reason 
        to recommend the inclusion or exclusion of processors from 
        eligibility to receive initial (fishing) quota shares''

        ``Nor did the committee find a compelling reason to establish a 
        separate, complementary processor quota system (the ``two-pie'' 
        system).''

Page 153-155 of ``Sharing the Fish '' provides a more extensive and 
very useful discussion of the issues surrounding processor quota 
allocations. The NAS concluded:

        ``The committee was not convinced, however, that the solution 
        to the perceived problems lies in the allocation of either 
        harvesting or processing quota to processors.''
2.1.2 Distribution of Benefits of Quota Shares--Initial Allocation
    ``Sharing the Fish''--the report to Congress by the National 
Academy of Science recommended a broad distribution of the benefits of 
Quota share programs. The benefits are broadly distributed in the 
initial allocation under the harvester IFQ portion of the Council's 
plan. However, the benefits of the Processor Quota are highly 
concentrated.

   About 250 harvester vessels would get allocations as IFQs.

   Only 21 of the 80 processors who operated in opilio in the 
        last 10 years would receive PQs.

   According to the Council's analysis ``the top 12 would 
        receive more quota allocation than they historically processed 
        (96.4 percent compared to 75.66 percent).''

   The top four opilio processors will be guaranteed 57.6 
        percent of the PQ.
2.1.3 Distribution of Benefits and Consolidation
    In contrast to the harvest sector where caps were set at levels 
that would maintain a minimum fleet size of about 100 boats, processing 
caps were set so as to allow consolidation to only 2 processing 
facilities.
    Though the processor ownership cap is set at 30 percent, the action 
would also grandfather in initial recipients of IPQ, not as of the date 
of Council action in June of 2002, but as of a date in the future when 
IPQ is actually issued--thus inviting consolidation in the interim.
    Use caps were set for only one fishery in one region, (opilio in 
the northern region) at 60 percent of the IPQ. There was no definition 
of the duration of ``use'' (i.e., leasing) as time limited. Thus even 
if the 30 percent ownership caps did provide for a minimum of 4 
processors per fishery, the lack of ``use'' caps allows the ownership 
caps to be neatly circumvented by 99 year leases.
    In addition to the lack of meaningful consolidation limits for PQs 
holders, individual processing companies are allowed to own up to five 
percent of the harvest quota, while harvesting companies are limited to 
one percent.
    The Council's lack of meaningful action on ownership and use caps 
opens the door to unconstrained consolidation of the processor sector 
before and after implementation. There is a fundamental inconsistency 
between the concerns imbedded in the MS-FCMA over excessive shares and 
promoted in the NAS report, and the creation of PQs.
2.1.4 Foreign Ownership
    On page 155 of ``Sharing the Fish'' the NAS notes:

    ``If there is a consistent congressional policy, it can be 
characterized as resistance to foreign ownership of fishing vessels and 
foreign exploitation of fish resources with the U.S. EEZ  (e.g., 16 
U.S.C. 1812[a], 1824[b][6]). The concerns giving rise to the exclusion 
of foreign interests fall within several categories:

   Fear of foreign domination of the maritime industry and 
        fisheries;

   Difficulties in regulating foreign-owned businesses;

   Threats to the social values of U.S. fishing communities; 
        and

   Loss of potential economic benefits.

    The Council's analysis (page 393) showed that between 37 percent 
and 49 percent of Processor Quota would be allocated to foreign 
processors. This does not take into account the amounts to be allocated 
to domestic `'shell'' corporations, formed to qualify vessel ownership 
under MARAD rules. [e.g., Peter Pan Seafoods, a Japanese-owned company, 
would receive an estimated 14 percent of initial PQS for opilio. A 
subsidiary which owns a processing ship, Steller Sea, would receive as 
much as 5 percent additional allocation, which has not been accounted 
as allocation to foreign processors.
    It is unlikely that foreign owned processors could be precluded 
from being issued Processor Quota, because they would rely on treaty 
protections to demand equal treatment (as occurred under the AFA). It 
is ironic that we restrict the allocation of IFQs to U.S. citizens 
only, when Processor Quota would require some of those U.S. citizens to 
sell their property/catch to foreign owned processing companies.
    Processor Quotas are inconsistent with the recommendations of the 
National Academy of Sciences found in ``Sharing the Fish.''
2.2 Economists' Views on Processor Quotas
    The entire theoretical underpinning of Processor Quotas rests on 
the work of one economist--Scott Matulich. It is his belie f that in a 
free market, fishers with IFQs will ``expropriate the quasi-rents 
rightfully belonging to processors'' because harvesters would no longer 
fear that company owned boats would pre-empt their catch if they were 
to go on strike.
    Matulich has been able to parlay this diagnosis into a prescription 
for a particular cure of his own design called the ``2-pie'' or PQ 
system. The Council bought off on this prescription at a particular 
dosage level PQs for 90 percent of each catcher boats' harvest. 
Unfortunately there is no FDA to require testing on this new medicine 
to determine a safe dosage level, before it is administered to the crab 
fleet.
    To judge whether the side effects of Matulich's cure are likely to 
be worse than the disease, it is necessary to turn to other economists. 
As noted in the preceding section the National Academy of Science 
considered and rejected Matulich's prescription. They were not alone.
2.2.1 The GAO on Matulich
    In December of 2002 the GAO provided this committee with a report 
on IFQs which contained a very critical review of a paper by Matulich 
purporting to provide an empirical basis for his theory in the context 
of the existing Halibut and Sablefish IFQ program. They questioned the 
methodology and the potential for bias in the survey design for 
gathering data.
2.2.2 Economists on Processor Quota--Milon and Hamilton
    In a paper prepared under contract for the Council by Florida 
economists J. Walter Milon and Stephan F. Hamilton (A Comparative 
Analysis of Alternative Rationalization Models for the Bering Sea/
Aleutian Islands Crab Fisheries--March 2002) the authors describe the 
impacts of a ``segmented monopsony.''
    In discussing the IPQ model Milon and Hamilton noted:

        ``The (PQ) quota allocation defines a property right of each 
        processor to serve a perfectly segmented market, and, with a 
        fixed quantity of harvest, each processor maximizes his profits 
        by paying the lowest ex-vessel price that supports harvester 
        delivery of this quantity. The outcome is regional monopsony 
        ex-vessel pricing . . . Accordingly, the delineation of 
        processor quota rights subsumes all economic rent from the ITQ 
        program in the harvest sector . . . With a two pie permit 
        distribution that allocates the full processing quota, the 
        value of harvester permits are driven to zero . . . With 
        completely defined property rights in the processing sector, 
        the allocation of property rights in a harvest sector ITQ 
        program becomes redundant.''

    The Council stopped just short of completely defining property 
rights in the processing sector, leaving 10 percent of the catcher boat 
harvest in an open market.
    Milon and Hamilton went on to observe that in a system where some 
percent of the harvest share remains ``free market'' (such as the 10 
percent recommended in the Council action) the outcome is a blend that:

        ``. . . results in a continuum of market segmentation levels. 
        Consequently, all possible two-pie permit distributions have 
        identical implications for economic efficiency, but differ in 
        the degree to which the policy rent is shared between market 
        participants. Processors are likely to fare better, and 
        harvesters fare worse, as the ratio of A to B permits increases 
        in the proposed fishery management system.''

    Cartels are precluded by existing anti-trust laws. It is ironic 
that the same outcome (monopsony pricing) would be legally achievable 
under Processor Quotas. The only functional difference is that when a 
legal Processor Quota system segments the market, it will be more 
effective than if a group of processors had conspired to set prices. In 
the latter instance there is always hope that a new processor could 
enter destabilize the cartel by offering competitive prices.
2.2.3 Economists on Processor Quota--Halvorsen
    Economist Dr. Halverson, who was contracted by the Council for an 
earlier analysis of the distribution of bargaining power under 
different ``game'' rules for American Fisheries Act coops, was also 
critical of the Matulich 2 Pie theory. Dr. Halvorsen presented a paper 
to a hearing of the U.S. House Resources Committee explaining the 
theoretical deficiencies of the Matulich theory. Additional analysis by 
Dr. Halvorsen have been submitted to this committee by Mayor Freed.
2.2.4 Economists on Processor Quota--Christy and Anderson
    Two other very prominent fisheries economists served on the NMFS 
Advisory Panel to the NAS when ``Sharing the Fish'' was prepared, Lee 
Anderson (chairman of the NMFS East Coast AP) and Francis Christy. 
Christy, who worked in fisheries for many years for the UN-FAO, is 
considered to be the economist who came up with the idea for IFQs. Lee 
Anderson, who wrote a seminal text book on IFQs and economic theory, 
was a member of the Mid-Atlantic Fisheries Management Council when the 
1st IFQ program was adopted. Both economists have been very critical of 
the Matulich theory and of the idea of PQs. While Anderson recognizes 
the potential for negative impacts on processors from IFQs to the 
extent that their capital is non-malleable, he doesn't advocate PQs as 
the appropriate fix for that potential problem.
3.0 Do We Believe in the Value of a Competitive Marketplace?
3.1 Price Formation Under Status Quo versus Under Processor Quota
    The heart of the controversy over Processor Quota goes to its 
impact on price formation.
3.1.1 Price Formation Under Status Quo
    Given the depressed state of crab stock, the last Bristol Bay Red 
King Crab fishery lasted just over three days. The last opilio season 
was a matter of weeks. These are the two major crab fisheries. Price 
has been negotiated pre-season by a marketing association. The derby 
nature of the fishery makes it difficult to ``shop around''--crabbers 
have generally been price takers in a world market for crab.
    The opilio catcher boat fleet has gone on strike the last couple 
years. However, because there are a number of catcher processors who 
fish a common quota with the catcher boats, striking means foregoing a 
portion of the harvest. One of the major processing companies owns 4 of 
the catcher processors, so their reaction to a strike is ``throw me in 
the briar patch.''
    With three day seasons in the Red King crab fishery, strikes would 
be economic suicide for catcher boats. Matulich is right about one 
thing, shortened seasons are better for processors than they are for 
harvesters.
3.1.2 Price Formation Under Processor Quota
    The program the Council passed and has requested Congress to make 
legal is very different. It allows harvesters to sell 10 percent of 
their catch to the processor of their choice. The other 90 percent must 
be delivered only to a processor holding unused IPQ. This results in a 
game of ``musical chairs'' where the ``last man standing'' has no 
choice about where to sell--and as a consequence there is an urgency to 
``sit down'' early at a sub-optimal price to avoid being the ``last man 
standing.''
    If a harvester wishes to move to a different processor because they 
are unhappy with the way they are being treated, there is only one way 
to do it. They must displace someone who is working for a different 
processor. The only way to do that is to offer to fish at a lower price 
than the person you are displacing. This fundamental alteration of the 
dynamics into a game of musical chairs destroys the ability of fishers 
to benefit from collective bargaining as provided under the 1934 
Fishermen's Marketing Act.
3.2 The Nature of the Right or Privilege represented by the Processing 
        Quota
    There is a fundamental difference in purpose between IFQs and PQs. 
The purpose of PQ is to direct the transfer of private property. The 
purpose of IFQs is to allocate access to a share of free swimming 
critters, which up to the point of capture, are a public trust 
resource.
    IFQs are generally understood to be a privilege to harvest a fixed 
portion of the common property public trust resource. The result of 
being allowed to harvest that resource is that it is converted to 
private property at the point of harvest.
    A PQ is a right or privilege to process a fixed portion of the 
harvest. Congress has been clear that they regard Harvest Quota shares 
as a privilege, but there is a spectrum between ``privilege'' and 
``right'' that has yet to be debated with regard to PQs. The wrinkle 
here is that crab, once harvested, have been converted to private 
property. Thus, it appears that the PQ directs the disposition of 
private property, rather than the disposition of a public resource.
    The introduction of PQs for the purpose of eliminating or 
restraining competition among processors creates a regulated 
marketplace and the need to provide a substitute mechanism for price 
formation.
4.0 Making a Square Wheel Round--Fixing the Impacts of PQs
    The Council failed to analyze and debate the impacts of a 90/10 PQ 
system up front and made the assumption that allowing 10 percent free 
market or ``B shares'' would serve to simultaneously allow opportunity 
for disenfranchised processors and communities as well as provide 
harvesters leverage for obtaining a fair price. The Council also set in 
motion a process of ``trailing amendments'' to address price formation 
through ``binding arbitration'' and ``community protections.''
4.1 Will 10% B Shares Serve Their Intended Purpose?
    The State of Alaska's Issue Paper has said that ``B'' shares will

   Protect harvester's bargaining power and guarantee a fair 
        price for all crab deliveries.

   Provide a pool of product for new processors to enter the 
        fishery.

   Increase the share of communities which have limited 
        qualified ``A'' share processors.

    The National Environmental Policy Act requires the evaluation of 
regulatory actions by examining contrasting alternatives, so that 
decisions rely on analysis rather than unsupported assertions.
    In order for the above assertions to be possible, it must be 
plausible that being a non-PQ endowed processor is a viable business. 
This raises the threshold question, ``How does a non-PQ endowed 
processor attract B share deliveries?''
4.1.1 A Simplified Answer
    The following is a very simple modeling exercise that shows the 
answer is ``no.'' Assume a base ex-vessel price of $1/lb in the PQ 
sector.
    Assume a Processor 1 is PQ endowed with 1,000,000 lbs and takes A 
share deliveries from 10 vessels with 100,000 lbs each.
    Assume Processor 2, not PQ endowed needs 100,000 lbs to justify 
operating a crab line.
    In order to attract deliveries from 10 vessels with 10,000 lb each 
of B share crab Processor 2 will have to pay some sort of incentive 
bonus. If Processor 2 determines it can pay $1.10 (a 10 cent 
``competitive bonus'') and still show a profit, will doing so attract 
deliveries of B shares?
    In order to retain the deliveries of the 100,000 lbs of B share 
crab from its 10 vessels Processor 1 will have to pay some sort of 
``loyalty bonus.'' If Processor 1 determines it is willing to pay $1.01 
(a 1 cent ``loyalty bonus'') pro-rated over both A and B deliveries, 
why would the vessels deliver B shares to Processor 2?
    Both Processor 1 and 2 are paying an ``extra'' $10,000 to get the B 
share deliveries. The difference is that Processor 1 is amortizing that 
$10,000 over 1,000,000 lbs and Processor 2 is amortizing over just 
100,000 lbs. This gives the PQ endowed processor a 10:1 advantage over 
the non-PQ processor. (If B shares had been set at 20 percent the PQ 
endowed processor would still have a 5:1 advantage, or about a 3:1 
advantage if B shares had been set at 30 percent)
    Entry by a non-PQ endowed processor is unlikely to occur unless PQ 
endowed processors are indifferent to retaining B share deliveries. If 
any new processors did enter, they would quickly be driven out by the 
endowed processors price leverage. When the game is this clearly 
rigged, very few will make the mistake of playing.
    If there are no non-PQ endowed B share processors, they can't 
fulfill the variety of functions asserted in the ``Issue Papers.''
4.1.2 The Missing Analysis
    One of the stated purposes of PQs is to address the transitional 
costs associated with non-malleable capital in the processing sector. 
The analysis currently lacks any quantitative analysis of the crab 
specific fixed capital (malleable or otherwise) in the processing 
sector.
    Part of the reason for the lack of analysis is that Section 
303(b)(7) of the M-S Act exempts processors from the requirement to 
submit economic data. As a result they are free to claim harm, but the 
analysts don't have the ability to verify their claims.
    If analysis shows that there is only 10 cents on the dollar of 
bargaining power at stake in the choice between PQs at levels between 0 
percent to 100 percent, that difference represents a difference of $10-
50 million per year in ex-vessel revenue. That difference in revenue in 
turn affects the raw fish tax collected by the state of Alaska as well 
as wages for crew flowing into communities. The analysis should have 
included an evaluation of the level and duration of the PQ necessary to 
compensate the transitional costs of the processing sector; but again, 
processors have hidden behind the lack of data.
4.2 Binding Arbitration--A Substitute for Competition?
    The Council recognized that PQs would have a profound impact on 
price formation and so they initiated a trailing amendment to deal with 
Binding Arbitration. The NPFMC Chairman appointed a committee of 
fishermen and processor representatives to address the issues of 
binding arbitration. This committee developed two distinct approaches.
4.2.1 Need for Arbitration
    Binding arbitration is necessary to address the inherently anti-
competitive effect of the PQ component of crab rationalization. The 
magnitude of the problem is proportionate to the A/B share split, and 
at 90/10 the Binding Arbitration process plays a crucial role in 
substituting for the removal of a competitive market for harvesters.
    PQs would effectively segment and allocate 90 percent of the market 
into which crab harvests will be delivered. That action would radically 
shift negotiating leverage between harvesters and processors relative 
to status quo. Without a specific legislative exemption, that action 
would constitute a ``per se'' violation of antitrust law equivalent to 
price fixing. It is a ``hard-core cartel agreement'' that is prosecuted 
criminally by the Department of Justice.\1\
---------------------------------------------------------------------------
    \1\ By contrast, fishermen have had an exemption from antitrust law 
that allows them to collectively harvest, process, market and/or sell 
their catch since the adoption of the Fishermen's Collective Marketing 
Act in 1934. Through a qualifying fishermen's cooperative, it is legal 
for fishermen to allocate among themselves harvest shares of a fishery, 
and to collectively negotiate the prices at which they are willing to 
sell their catch. It is also legal for Councils to adopt individual 
fishing quota programs which allocate harvest shares by regulation.
---------------------------------------------------------------------------
    Binding arbitration is intended to address failed price 
negotiations, and to reintroduce parity lost through processor market 
segmentation. Binding arbitration is not intended to be a substitute 
for consensual price negotiation, and we expect and intend that most if 
not all crab delivery contracts will be settled through negotiation. 
However, all negotiations are conducted against the parties' outside 
option if negotiations fail, which in this case is the price that would 
be set under arbitration. Therefore, the results of the model chosen 
will directly condition the results of such negotiations.
    While it is not panacea that will undo the anti-competitive impact 
of PQs, the ``Fleetwide'' conventional arbitration model more 
appropriately addresses the negotiation leverage shift associated with 
the Council's preferred rationalization alternative. T he segmented 
``Last Best Offer'' model, does not.
4.2.2 Contrasting the Alternatives
    The Council tasked the Binding Arbitration Committee with 
developing an arbitration program, and the committee came back to the 
Council with two models referred to as the ``Fleetwide Minimum Price'' 
(FW) and the ``Last Best Offer'' (LBO) models.
    The names of the two Binding Arbitration models don't capture the 
range of differences.
4.2.2.1 What's In a Name?--Fleetwide Arbitration

    We believe the FW model works better than the segmented LBO model 
in part because it is more closely models the current price formation 
process, by setting price before a harvester is required to make an 
irrevocable commitment to deliver.
    As its name implies the ``Fleetwide'' arbitration model is designed 
to create a minimum price that is available to the whole fleet as a 
``safety net.'' It allows the arbitrator to ``cut the baby'' and 
establish a minimum price that is between the positions taken by either 
processors or harvesters in the preliminary negations.
4.2.2.2 What's In a Name?--Last Best Offer Arbitration

    Under the segmented LBO model, harvesters must irrevocably commit 
to deliver their crab to a processor to trigger a price arbitration. 
This is a highly unusual departure from standard commercial practice. 
It is akin to entering a contract to buy a house before the price has 
been revealed. It will have adverse economic and psychological effects 
on harvesters entering the negotiation process.
    Given that the purpose of Binding Arbitration is to compensate for 
the creation of a segmented market, providing a reasonable outside 
option makes more sense than stripping the harvester of the right to 
strike.
    The ``Last Best Offer'' model involves separate isolated 
arbitrations for each processor and for individual harvesters or groups 
of harvesters delivering to a particular processor. While LBO 
arbitration forces parties to narrow the range of proposals submitted 
to the arbitrator(s), also disadvantages the more risk averse party, 
and invites strategic gaming by processors. Crab harvesters, who 
typically depend heavily on their crab revenues for survival, are 
likely to be much more risk averse in crab price negotiations than crab 
processors who have other sources of income (such as AFA pollock 
processors).
    Harvesters in these circumstances have proportionately more to lose 
than their processor counterpart. As a consequence, they may well have 
a strong incentive to buy their way out of arbitration at a discount, 
rather than enter a process under which an arbitrator is constrained to 
accepting one or the other of the parties' price proposals, rather than 
having the latitude to frame an equitable result.
4.2.2.4 Dr. Plott's Analysis

    The FW model was deliberately designed to produce an environment in 
which the parties are encouraged to collaborate to produce additional 
value. In Dr. Plott's experimental analysis for the Council, it appears 
to have done so On the other hand, the segmented LBO model 
fractionalizes parties, and in Dr. Plott's experiments produced a more 
contentious negotiating environment, with fewer well timed deliveries, 
and at least one instance of a harvester choosing not to ``deliver.'' 
This is an important consideration, if we are hoping to obtain 
additional value from our crab resources through rationalization.
4.2.2.5 Information available to the arbitrator(s)

    It is critical under either model that the arbitrators have access 
to data concerning historical and current crab transactions. Under the 
FW model, all arbitrations are conducted by the same arbitrator or 
arbitration panel. However, under the segmented LBO model there is no 
assurance of such information exchange.
    This is important, as there are unresolved legal and policy issues 
which may prevent the arbitrators from accessing the database being 
established in connection with the program to verify the accuracy of 
information submitted in the discrete arbitrations. Section 303(b)(7) 
and 402(b) of the M-S Act prevent the collection of necessary 
verification data from processors, and would prohibit its release to an 
arbitrator even if it were collected.
4.2.2.6 Arbitration timelines

    The FW model was designed to prevent the arbitration process from 
being time constrained. The segmented LBO system has set what we 
perceive to be an extremely tight time frame within which all 
arbitrations would take place. We are concerned that the resulting time 
constraint may shift negotiating leverage inappropriately, and prevent 
an effective exchange of data between arbitrations.
    The compressed 15 day timeline for LBO arbitration is likely to 
require separate arbitrators as well. This means that any individual 
arbitrator will have a limited information base to evaluate the market. 
A single Arbitrator with access to a broad view of the full market 
under the FW model is better situated to determine a fair minimum 
price. If each PQ owner's arbitrations are happening in a vacuum, the 
arbitrator will have a narrow frame of reference for ground-truthing 
the PQ owner's data.
4.2.2.7 Arbitration administration

    Given the significance of bin ding arbitration in the context of a 
segmented and allocated processing market, we think it is far more 
critical that the system function well than be cheap. In any case, we 
do not believe that the relative costs of the two systems would be 
substantially different. The FW model would generally use one 
arbitrator or a single panel over a longer time, while the segmented 
LBO model would use more arbitrators or arbitrator panels over a 
shorter time frame.
4.2.3 Quality issues
    Quality affects price, and in the absence of well defined quality 
standards and a quick, efficient and equitable enforcement system, 
quality issues could skew negotiating leverage notwithstanding 
arbitration system design. This remains as an issue that needs to be 
referred to the Binding Arbitration Committee for further work.
4.2.4 Data Verification
    The Analysis states on page 3.7-8 that the arbitrator will need to 
invest substantial time and effort into development of the historic 
division of revenues standard, and to determine both historic ex vessel 
prices and first wholesale prices. It notes:

        ``The magnitude of this problem is not likely to be fully 
        understood until the arbitrator begins the process of 
        calculating the division of revenues.''

    The Analysis points to a long list of complicating factors in the 
arbitrators' task. It states that determining the historic first 
wholesale prices and revenues division will also be:

        ``complicated by the lack of uniformity of processors and the 
        different products those processors sell into different 
        markets.''

        ``complicated by vertical integration of the processing 
        sector.''

        ``complicated by several other factors . . .

                ``. . . sensitive to the production levels of specific 
                products . . .''

                ``. . . sensitive to changes in total harvest . . .''

                ``. . . (and) location of landings''

        ``complicate(d) . . . (because) Commercial Operator Annual 
        Reports (COAR) . . . distinguish species, but not fishery.''

    Without the ability to access the Data Collection system, it is 
imperative that the Arbitrator will not have the ability to ``ground 
truth'' information provide by participant. There is a need for 
retroactive gathering of data to establish a baseline for measuring 
impacts of PQs and the efficacy of Binding Arbitration. Unfortunately 
this may be an impossible task.
    NOAA-GC has said that the Data Collection program will be unable to 
either provide the necessary data, or even verify the accuracy of data 
provided to the Arbitrator by participants, without changes to section 
303(b)(7) and 402(b) of the M-S Act.
4.2.5 The Council's Revised ``Last Best Offer'' Model
    The Council ultimately adopted a revised LBO model which 
incorporated a watered down version of what is called the ``Steele 
amendment.'' The Steele amendment would have utilized the highest 
arbitrated price (reflecting a minimum of 7 percent of the market) 
resulting from the LBO process to establish a fleetwide price. In one 
significant way this reflects current practice where the Alaska 
Marketing Association negotiates with a number of processors and signs 
a contract with the processor with the best offer, and then that offer 
is ultimately matched by other processors.
    The success of the Steele amendment version of LBO would have 
depended on the continued survival of a number of processors in the 7 
percent market share range. Under the consolidation rules, these 
smaller IPQ holders may disappear over time, and with them the 
potential of the revised LBO to achieve its goal of a quasi-competitive 
fleetwide price.
    However, the Council's revised LBO alternative merely uses the 
information on the highest price representing 7 percent of the market 
as information available for the arbitrator's consideration in the 
subsequent year.
    The Binding Arbitration process recommended by the Council fails to 
provide a meaningful safety net. It does not provide assurance of an 
outside option approximating a competitive marketplace.
4.4 Community Protections
    The second set of trailing amendments dealt with community 
protections. The CRAB Group concurs with the testimony of Mayor Freed 
of Kodiak.
    The supposed ``right'' of first refusal is an ephemeral and 
unworkable ``protection'' to a problem that would not exist but for the 
inclusion of PQs in the program.
    PQs facilitate consolidation and the lack of meaningful processor 
consolidation limits in the program ultimately means plant closings in 
remote Alaskan coastal communities.
4.4 Government in the Marketplace
    The Council has repeatedly stated its intent to modify the program 
to respond to unintended impacts. If it is to do so it will need far 
broader authority than legislation which simply implements the 
preferred alternative. This implies the Council is asking for a blank 
check from Congress. If Congress doesn't provide a blank check, then 
Congress must exercise real time oversight of the program as only 
Congress will have the power to amend it. It is naive to imagine that 
Congress can micro-manage the impacts of PQs in real time, or that the 
impacts will be reversible.
    When government steps it to try to simulate the function of a 
competitive market it is sticking its foot in a tar baby. If Congress 
authorizes PQs, it will transform Councils from fish management bodies 
into a hybrid of, or delegating the authority of, the National Labor 
Relations Board, Federal Trade Commission, Department of Justice Anti-
trust Division, and a Public Utility Regulatory Commission. Council 
members are not selected for their competence in these areas, which is 
why they do not currently have the authority to adopt PQs.
5.0 Alternatives to Processor Quotas to Protect Processors
    There are many alternative approaches that have been utilized 
elsewhere to deal with the concerns of processors in a variety of 
rationalized fisheries. These include elements in a number of existing 
programs, as well as proposed alternatives that didn't receive adequate 
consideration by the Council.
    In the crab rationalization plan, processors were given substantial 
protection by various program elements including the following:

   Processors are allowed to own and acquire IFQs.

   Catcher Vessel IFQ holders must deliver their crab to 
        processors rather than processing themselves as Catcher 
        Processors.

   Regional restriction on deliveries, which favor existing 
        processors.

   Limitations on consolidation of IFQ ownership at 1 percent 
        each for harvesters, which preserve a diverse supply for 
        processors.

   Processors are allowed up to 5 percent each of the harvest 
        IFQ, in contrast to 1 percent limit for harvesters.

    Without analysis of the adequacy of these provisions, nor 
discussion or debate, the NPFMC added the provision of Processor Quota. 
If analysis shows there is further necessity to protect processors, 
there are less-damaging alternatives in existing programs such as the 
AFA.
5.1 Existing Programs
5.1.1 AFA Pollock in the Shoreside Sector

   AFA shoreside processors were collectively guaranteed an 
        increased share of the pie.

   AFA shoreside processors were provided a closed class.

   AFA shoreside processors were provided with a degree of 
        stability in the design of the coop rule.

    AFA catcher vessels are only guaranteed their history as a member 
of a coop with a processor partner. 90 percent of the catch history of 
the coop had to be delivered to the processor partner in a given year. 
Though vessels are able to move between processors annually, 
disincentives were built in that discouraged movement between coops, 
where the alternative to being in a coop was an open access derby for 
one year.
    The critical difference between the AFA processor protections and 
PQs is that while the AFA coops provide a large measure of stability 
through the requirement for annual coop contracts with an eligible 
processor, no processor is guaranteed a fixed share of the harvest for 
more than one year, and ultimately it is competition that governs 
whether a vessel will remain with a processor or move its quota to 
another processor.
5.1.2 Halibut & Sablefish IFQs
    Halibut and sablefish shoreside processors were protected from 
competing with freezer boats.
5.1.3 British Columbia's IVQ Groundfish
    In the BC Canada groundfish ITQ, the allocation of 10 percent of a 
vessel's catch history is conditional on community and processor 
concerns.
5.1.4 Eastern Canada Opilio Crab
    In the ``harvester only'' IFQ program for snow crab, binding 
arbitration was instituted to set a base price. It is worth noting that 
crab processing there is still profitable enough that it has attracted 
a number of new entrants.
5.2 Alternatives discussed by the NPFMC's Advisory Panel
    The Council's Advisory Panel offered a number of alternatives to 
Processor Quotas which didn't receive adequate consideration.

   Processors could be allocated a portion of the harvest ITQ 
        commensurate with their relative proportion of fishery specific 
        non-malleable capital.

   A quasi closed class of processor, guaranteeing a percentage 
        of the harvest to be delivered to the class of eligible 
        processors based on their aggregate processing history.

   An AFA style coop with disincentives for not joining or for 
        leaving a coop.

    There are many options for addressing processor concerns without 
adopting PQs and a segmented market.
6.0 Public Comment--Who Supports Processor Quotas
    Letters submitted to the Council concerning Crab Rationalization at 
the June 2002 meeting were overwhelmingly against Processor Quota.
    The single harvesters association endorsing Processor Quota was 
Alaska Crab Coalition, who supported it at the 80 percent level, with 
the remaining 20 percent to be ``free market.'' Their written rationale 
for limiting PQs to 80 percent provided to the Advisory Panel at the 
June Council meeting makes an excellent case as to the problems with 
Processor Quota at any level. Their recent (albeit temporary) 
retraction of support for the PQ program following the April Council 
action on Binding Arbitration stated:

        ``The ACC cannot accept the arbitration approach adopted by the 
        Council, and accordingly is forced to oppose statutory 
        authorization of the BSAI rationalization plan, until and 
        unless the Council adopts a system that protects harvesters 
        against market distortions that would otherwise result from 
        processors shares. Whether that can be achieved within the 
        context of the 90/10 formula is an open question.''

    Though ACC is now ``confident that crab harvesters will be provided 
the comfort level they expect and deserve'' in the ongoing process. The 
open question of the moment is what changes ACC expects w ill be 
adopted, but it is clear that they recognize the reality that Processor 
Quotas will result in ``market distortions'' and that even they 
question whether 90/10 isn't going too far.
    The CRAB Group, representing over 100 vessels, supports 
rationalization of the crab fishery but is opposed to PQ for all the 
reasons outlined in this document.
    There are several associations representing segments of the crab 
fleet in addition to ACC and the CRAB Group.

   United Fishermen's Marketing Association, Inc. (UFMA) based 
        in Kodiak strongly opposes PQs in the crab fishery or any other 
        fishery.

   Tom Casey, representing the 30 crab vessels in the Alaska 
        Fisheries Conservation Group (AFCG), has stated that their 
        members find the 90 percent PQ program so untenable that they 
        would prefer status quo.

   Jake Jacobs representing the Alaska Marketing Association 
        testified at the April Council meeting that ``Last Best Offer 
        Arbitration is an open sore.''

    A petition signed by over 1,000 Alaskans was published this week in 
the Anchorage Daily News. Other petitions circulated in the Seattle 
area with several hundred signatures were submitted to members of this 
committee by Fishermen's Finest company.
    Changing the M-S Act to allow for Processor Quotas in the Bering 
Sea crab fishery is only the allowing the camels nose into the tent. If 
it is allowed in this fishery, the pressure to allow it in all 
federally managed fisheries is inevitable. Does Congress really want to 
open up this can of worms and transform fisheries management Councils 
in to bodies with the authority to regulate trade? If so, then expect 
the amount of public comment on how to regulate markets to escalate 
exponentially.
7.0 Where Angels Fear to Tread--Recommendations
    It is the position of the CRAB Group and others that Congress 
should reject the Council's request for a radical expansion of its 
duties beyond fisheries management and into market regulation 
represented by the request for authorization to adopt the Processor 
Quota element of their preferred alternative.
    The harvester component of the crab rationalization program is 
legal now that the moratorium on IFQs has expired. It can be adopted 
together with the CDQ provisions, the regionalization provisions, and 
the skipper and crew provisions designed by the Council, but without 
PQs.
    The need for the complex elements on binding arbitration and 
additional community protections are largely a response to the impacts 
of market segmentation resulting from PQs.
    If Congress does authorize PQs it is critical to do so in a manner 
that guarantees that improved community protections and stronger 
binding arbitration process are all done at the same time and done 
right.
    Thank you for the privilege of submitting this testimony to your 
committee.
                                 ______
                                 
                                                     August 2, 2002

   The Bering Sea Crab Rationalization Preferred Alternative Or Anti-
     Trust: Why Opposition to the Processing Quota Plan is Growing

Summary: During the North Pacific Fisheries Management Council's 
(NPFMC) June meeting, the State of Alaska presented a comprehensive 
crab rationalization motion, which with surprisingly few amendments, 
was unanimously approved. This plan contains several elements that 
require congressional approval, so a report to Congress is being 
drafted detailing the council's preferred crab rationalization plan. 
One of the elements that will require congressional action is Processor 
Quota (PQ). This element is also being debated in the Magnuson-Stevens 
Act reauthorization.
Recommendation:
    Congress Should Not Authorize Processing Quota for the Crab Plan or 
in the MSFCMA.
    Because of Processor Quota, the crab plan is opposed by more than 
half the vessels in the affected fisheries, and three of the four 
associations of vessel owners in these fisheries. Because of processor 
quota, one community publicly supports the crab plan while two 
Boroughs, two native associations, three cities and more processors 
than not--oppose it. We expect that as the salmon seasons wind down, 
more communities, native associations, and fishing groups will join the 
opposition.
Discussion:
    The State of Alaska has circulated a document containing a number 
of issue papers describing the Bering Sea Crab Rationalization Plan in 
glowing terms.
    In fact, the plan actually provides a new mechanism for complete 
control of the market by a single processor.
    Consolidation of so-called excess processing capacity is 
guaranteed. Many of the processors involved have already benefited from 
the American Fisheries Act.
    Proponents urge that Congress, should not attempt to second guess 
the NPFMC. They compare the NPFMC plan to a three-legged stool, which 
is designed to balance. However, a relatively small group of interests 
dominated the stool's construction. Those who would not concede that 
processor quota was an essential element were completely subsumed to 
those interests represented at the NPFMC table.
Background:
    The Council could not properly design the ``processor leg of the 
stool,'' because the processors represented at the Council table acted 
in concert to frustrate Council implementation of a rationalization 
plan for the BSAI crab fisheries.
    Rationalization proceeded in incremental steps beginning with the 
1992 moratorium on new vessels entering the Federal fisheries in the 
North Pacific. In 1995 the council adopted a limited entry program, 
followed by a recency requirement in 1998, and in 2001 by a not yet 
implemented buyback program.
    Individual Fishing Quotas, a controversial element of this long-
range plan, have become generally accepted by the crab fleets. In 
developing a consensus on appropriate crab rationalization measures, 
IFQ resistance has been mitigated by including provisions for elements 
imposition of strict ``caps'' on ownership and use of IFQs.
    Processor representatives made it clear that they would not allow 
rationalization of the crab fisheries without Processing Quota. At a 
NMFS workshop on IFQ programs in Galveston this summer, these interests 
declared that they would block any IFQ programs, if they were not given 
Processing Quota in the BSAI crab fisheries.
    Processing Quota became the price that fishermen had to pay in 
order to slow down the world's most dangerous of fisheries. It's not 
surprising, therefore, that a small group of fishermen became willing 
to pay this price.
Part I--The Case of Processor Quotas--Is it Reasonable?
Why Processor Shares Are Not Necessary:
    The market division and consolidation sought by proponents of 
processor quota are not allowed under the Sherman Act, and consequently 
would require special enabling legislation. What is the justification 
for this?
    Processors have offered several justifications for Processor Quota 
in the BSAI crab fisheries. These include issues of:

   stranded capital,

   lower profitability,

   potential impacts on isolated rural communities,

   compensation for those who will leave the industry because 
        of excess processing capacity,

   concerns about competition with new processors attracted to 
        the rationalized fisheries.

    None of these arguments ultimately hold up to scrutiny.
Stranded Capital
    Advocates claim that processing quota is justified on the grounds 
that a transition from open access to an IFQ program in the halibut/
sablefish fisheries caused problems for processors.
    The National Academy of Sciences report to Congress, Sharing the 
Fish stated that:

        ``Adversely affected processors assert that harvester-only IFQs 
        may result in stranded capital, lower profitability and 
        significant impacts on isolated rural communities.'' In 
        addition, ``The arguments for allocating harvesting or 
        processing quota to processors derive from a desire to 
        compensate those who will leave the industry because of excess 
        processing capacity.''

    However, rather than accept the assertion that processing quota was 
a reasonable solution to the problems expressed, the NAS panel 
recommended:

        ``If the regional councils determine that processors may be 
        unacceptably disadvantaged by an IFQ program because of changes 
        in the policy or management structure, there are means, such as 
        buyouts, for mitigating these impacts without resorting to the 
        allocation of some different type of quota . . . For example, 
        coupling an IFQ program with an inshore-offshore allocation 
        would preserve the access of shore-based processors to fishery 
        resources.''
Stranded Capital is also a Function of the Derby
    The Council analysis notes:

        ``The problem of stranded capital in the processing sector is 
        difficult to assess. . . . In recent years, some crab 
        processing facilities have been removed from service and are 
        currently idle. This suggests that crab rationalization (and 
        the current low stocks) have fishery declines and crab 
        rationalization, however, is somewhat problematic. Since 
        support facilities are often developed for use in multiple 
        fisheries, it [sic] changes in crab fisheries might not be the 
        sole cause of stranded capital. Declines in crab fisheries, 
        however, are certainly a contributor to stranded capital in the 
        processing sector.''

    Successful rebuilding of the fisheries, a key element of the 
rationalization plan, will produce a need for far more processing 
capacity than is presently utilized.
    Under an IFQ, smaller, currently closed, fisheries can be safely 
opened.
Impacts on Isolated Rural Communities
    The Council accomplished this by partitioning the allocation of IFQ 
into Northern and Southern shares. This regionalization in the crab 
plan partially addresses the problem of potentially significant impacts 
from an IFQ on isolated rural communities. Regionalization doesn't 
require IPQs to function.
Compensated Exit
    How well does the NPFMC crab plan compensate those who will leave 
the industry because of excess processing capacity?

   The plan qualifies 21 processors in the opilio fishery, even 
        though 80 different processors worked in the fishery between 
        1991 and 2000.

   The plan reallocates history from the smaller processors to 
        the largest.

   Compensation for forced exit in the processing industry 
        resulting from excess capacity is not provided by the crab 
        plan.

   Forced exit is institutionalized by the crab plan.
Fear of New Competition
    Processors claim that facilities will become surplus because there 
will be new processors attracted to the rationalized fisheries. These 
processors, it is said, will operate low cost operations, because there 
will not be a necessity to handle the volumes that were formerly 
required.
    This fear of competition by new entrants is itself an indication 
that there is potential profit for processors in a rationalized fishery 
without Processor Quotas.
Ending the Race for Fish
    Processors have claimed representative the race for fish was driven 
by processors as well as fishermen, and therefore there would not be an 
end to the race for fish, unless processors also stopped competing. He 
advocated that Processing Quota was the way to end processor 
competition.
    Experience of the halibut sablefish IFQ programs and other IFQ 
fisheries clearly shows PQs aren't necessary to end the race for fish.
    The desire of processors to end competition by segmenting the 
market has one objective--to provide the mechanism for paying a lower 
price to harvesters.
Power to Control the Process
    Justifications of Processor Quota in the BSAI crab fisheries based 
upon the reasonable arguments of stranded capital, lower profitability, 
potential impacts on isolated rural communities, and compensation to 
for exit due to excess processing capacity, do not stand up to 
scrutiny.
    Processor representatives have repeatedly told the fleets that they 
``will not allow'' rationalization of the crab fisheries without 
processing quota. Power, rather than reason, carried the day with the 
Council.
    The motion to allocate processor quota passed with out any 
discussion of alternative methods to mitigate processor concerns.
Part II--The State of Alaska Issue Papers--Facts or Fallacies?
    It is important to distinguish between the expressions of intent 
set forth in the State of Alaska's compilations of Issue Papers and the 
probable impacts that legislation of this crab plan would produce. In a 
number of instances the impacts were examined, and are at variance with 
the conclusions drawn by the State of Alaska, and consequently, with 
the expressed intent of the crab plan.
Discounted Processing History--Fallacy 1:
    The Issue Papers refer to the effect of the 10 percent open market 
or B shares as ``discounted processing history'' since PQ is allocated 
for only 90 percent of the harvest.

        ``No processor will receive 100 percent of their processing 
        history. They will receive 90 percent, leaving each processor 
        to have to compete with other processors to secure the 
        remaining 10 percent of processor shares.''

providing opportunities for new processors and increased harvester 
leverage in the price formation process,'' and ``The intent of this 
discount is to counteract any potential gain in processing power.'' 
[Emphasis in the original.]
Discounted Processing History--Fact:
    The Council's own analysis states:

        ``the top 12 [processors] (with one exception) would receive 
        more quota allocation than they historically processed'' (99.4 
        percent compared to 75.66 percent)

   A narrow qualification window for processors, excludes over 
        50 processors who have bought crab in the last 10 years. This 
        reallocates ``processing history'' to the ``top 12''.

   Nearly one quarter of the processing history is first 
        redistributed from smaller and disqualified processors to the 
        largest processor quota share holders. Only then is it 
        ``discounted'' by 10 percent.

   The allocation of processing history' is a reduction of 
        broader market opportunity, and a bonus above the historic 
        share for the largest of the processors.

   By contrast, the harvester program reallocates shares from 
        those with greater history, to those with less, leaving the 
        average harvester with about 88 percent of their own historic 
        catch.

   The Council had no discussion, and built no record, for 
        their unanimous selection of this skewed allocation of 
        processing shares, or of the 90/10 split between A and B 
        harvest shares.

Discounted Processing History--More Fallacies:
    The Issue Papers refer to the effect of the 10 percent open market 
or B shares as ``discounted processing history'' since PQ is allocated 
for only 90 percent of the harvest.

   ``the remaining 10 percent of processor shares . . . 
        [provide] opportunities for new processors and increased 
        harvester leverage in the price formation process,''

   ``The intent of this discount is to counteract any potential 
        gain in processing power''

   ``Based on the cost and wholesale data provided by crab 
        processors, it does not make sense to discount processor 
        history any more than the 10 percent level selected by the 
        Council. Data . . . shows processor margins are very thin, . . 
        . With these low margins, processors will be hungry for all 
        deliveries of crab, especially the crab delivered last.''
Discounted Processing History--More Facts:
    The writer makes several critically flawed statements:

   That a ``discount'' of Processor Quota shares actually 
        exists.--Which the Council Analysis shows is not the case.

   That any such market competition would be permanent, not 
        ephemeral.--But, if processors ``compete'' to buy the `B' quota 
        shares for themselves, rather than B share harvest from 
        fishers, competitive market behavior ceases.

   That the data received from processors was definitive.--
        However, this ``data'' presented confidentially to the NPFMC, 
        without public review.

   That processors have ``thin margins.''--By contrast, 
        harvesters had testified that recent crab fisheries had 
        resulted in losses for those with mean (average) catch, or 
        less. Thin margins' are certainly better than none

   That ``processors will be hungry for all deliveries of crab, 
        especially the crab delivered last.''--This statement ignores 
        the impact of a fixed market share. To the first crab delivered 
        is no different than the last--the processor receives exactly 
        the amount of ``A class'' harvest for which he owns PQ. This 
        for increased margins by relieving the processor of the need to 
        compete based on price.
IFQs Result in Fewer Processors--Fallacy
    The Issue Paper, Council Action on Processor Shares,'' claims that,

        ``only 25 of the 67 pre-IFQ firms survived the harvester-only 
        allocation of [sablefish] quota according to thorough analysis 
        done by Washington State University. . . . Experience to date 
        shows that harvester only allocation of shares results in fewer 
        processors.''
IFQs Result in Fewer Processors--Fact
    This is conclusion not supported by the ``WSU study'', which showed 
new processors entering following the halibut IFQ or other real world 
experience.

   The study, itself, cautions that the ITQ allocations ``may 
        not be causal.''

   Attrition of processors in ``open access'' crab fisheries 
        occurred at a similar rate during the same time frame.

   The NPFMC analysis shows 80 different processors operated in 
        the opilio fishery during the same period as that of the WSU 
        study.

   The Council crab plan qualified only 21 processors in the 
        fishery.

   Processors fared better under the halibut/sablefish IFQ 
        plan, than under either the ``open access'' fishery regime for 
        crab, or in the NPFMC crab IPQ plan.

   The allocation of processor quota invites consolidation, it 
        does not require that recipients actually process in the 
        future.
Processing Quota = Legal Monopoly of Domestic Supply:
    Processing Quota, as defined in the NPFMC crab plan, is presently 
prohibited under U.S. law. The prohibition occurs under terms of 
antitrust statute, and Congressional authorization of the crab plan 
would provide, intentionally or otherwise, exemption from current 
antitrust provisions. The specific nature of the exemption and the 
impacts that such exemption could be expected to produce has not been 
examined by the NPFMC in the rush to produce a report to Congress.
``AFA Coop Analogy''--Fallacy:
    The State of Alaska document includes a one page Issue Paper titled 
``Antitrust Issues'', which states:

        ``The same anti-competitive issues that were brought up under 
        consideration of the American Fisheries Act (AFA) are being 
        raised under crab rationalization''
``AFA Coop Analogy''--Fact:
    The AFA did not create a fixed market division between processors, 
as the crab plan does. The vessels were only allowed to enjoy the 
benefit of this catch history within the operation of a cooperative.
    Vessels are required to form a cooperative with a specific 
processor, depending upon the deliveries of the vessel in the year 
prior to coop formation. A vessel may leave the coop and move to 
another, following a year in the ``open access'' fishery, reducing the 
amount of market share of one processor, and increasing the market 
share of the new processor.
    In contrast to AFA, under the crab plan vessels are to receive a 
direct allocation of fishing history. As a consequence, processor-owned 
vessels will also receive a direct allocation, whereas under the AFA 
processor-owned vessels could only operate in a rationalized manner if 
they were allowed to participate in a coop.
``Dooley Hall'' and ``Wild Claims''--Fallacy:
    The Issue Paper on ``Processor Shares'' states,

        ``Immediately after AFA passage, many harvesters tried to get 
        the Council to amend the AFA agreement. They did so under the 
        Dooley-Hall proposal, using precisely the same rhetoric, like 
        company towns and surfs [sic] working for feudal lords. There 
        were all sorts of wild claims the processors would capture all 
        the profits.''
``Dooley Hall'' and ``Wild Claims''--Facts:
    The Issue Paper writer misses the very important balance that was 
achieved, and which constitutes the dynamic point about which the AFA 
shoreside agreements operate. The fears of the harvesters were genuine, 
and were justified.
    Without a mechanism for harvester movement between AFA coops, 
harvesters would have been critically disadvantaged. The ability of a 
coop to collectively allocate some or all of that ``10 percent'' to 
effectively accommodate the movement of a vessel, allowing the vessel 
to transition without enduring the `open access' year, had not yet been 
established. The precise role of `processor association' with 
cooperatives had not been determined, and one of the issues was whether 
a processor could act, within the coop, to block such internal 
allocations.
    The interplay of this collective 10 percent ``open market'' 
allocation and ability of vessels to move between cooperatives was a 
very important determinant in the balance that has been achieved under 
the AFA.
    The Dooley-Hall proposal, which would facilitate freedom of 
movement of harvesters, was not rejected by the Council, it was tabled. 
This action created a potential sword, which remains in place, hung 
above the table. The Issue Papers do not recognize the finesse with 
which the Council resolved this particular difficulty.
    There were also wild claims at the time by Scott Matulich, the 
processors' favorite economist and author of the WSU study. He claimed 
that AFA as passed by Congress would cause Unisea to got out of 
business, because the AFA gave harvesters too much power. However, 
Unisea, an AFA processor, supported the removal of the AFA sunset, 
which suggests they are happy with the benefits the AFA gives them.
Antitrust Relates to AFA Coops--Fallacy
    An antitrust issue that did arise under the AFA is related to coop 
formation. The Issue Paper ``Antitrust Issues,'' breezes past this:

        ``The 1934 Fisherman's Marketing Act contains an explicit 
        statutory exemption from the antitrust laws allowing fishermen 
        to bargain collectively in price negotiations with fish 
        processors. The fishermen are allowed to decide, as a group, on 
        their bargaining position, an activity that would violate 
        Federal antitrust laws without the exemption.''

        ``Since the processor provisions of the AFA had no anti-
        competitive effects, then the less restrictive processor 
        elements included in the Council motion on BSAI Crab 
        Rationalization should be viewed similarly.''
Antitrust Relates to AFA Coops--Fact
    A Congressional Research Service memorandum [CRS memo] prepared at 
the request of Sen. Murray's staff, references a court opinion which 
underscores the importance of the protections of the Fishermen's 
Collective Marketing Act to harvesters.
    In United States v. Hinote, 823 F. Supp. 1350 (S.D. Miss. 1993), 
the court, concluded that catfish processors could not take advantage 
of the antitrust exemption under the FCMA solely by purchasing or 
leasing some interest in a catfish farming operation. Id. at 1359. The 
court reasoned that if it were to come to the opposite conclusion,

        ``large integrated agribusinesses organized to market and sell 
        agricultural products could exempt themselves from the 
        antitrust laws by the simple expedient of purchasing and/or 
        leasing some interest in a farming operation, no matter how de 
        minimis the interest. Such a result, however, would undermine 
        Congress' express purpose in enacting both the Sherman and 
        Capper-Volstead Acts''

    While the ``intent language'' of Senators Stevens and Gorton, the 
makers of the AFA, indicated that processor owned vessels were intended 
to participate in the coops, the final Department of Justice letter 
ruling on the issue provided that the implicit exemption was by not a 
blanket one:

        ``footnote 6. Our conclusion that processor-owned vessels may 
        participate in FCMA cooperatives under the AFA is therefore 
        unlikely to lead to anticompetitive results. Nevertheless, to 
        minimize the possibility of negative effects on the fishing 
        industry, Congress included within the AFA several provisions 
        designed to eliminate potentially adverse economic 
        consequences. See, e.g.,  213(c)(1) (granting the North 
        Pacific Council the authority to recommend conservation and 
        management measures ``that supersede the provisions of this 
        title . . . to mitigate adverse effects in fisheries or on 
        owners of fewer than three vessels in the directed pollock 
        fishery caused by . . . fishery cooperatives in the directed 
        pollock fishery''); see also 144 Cong. Rec. S12,708 (daily ed. 
        Oct. 20, 1998) (statement of Sen. Murray) (``In the inter est 
        of ensuring that small, independent fishermen are the true 
        beneficiaries of fishery cooperatives, the bill includes a 
        number of requirements for fishery cooperatives in all three 
        sectors which are designed to provide these small, independent 
        fishermen with sufficient leverage in the negotiations to 
        protect their interests.''). Thus, should shoreside processors 
        in the BSAI fishery affiliate with catcher vessels for no 
        purpose other than to engage in anticompetitive conduct under 
        the umbrella of antitrust exemption, the AFA would appear to 
        give the Council the authority to check such abuses.''
Crab Coops vs AFA Coops--Fallacy
    An important feature of the potential legislation should not be 
hidden under the Issue Papers gloss:

        ``The Department of Justice has not found any anti-competitive 
        effects in the division of . . . pollock allocations among AFA 
        Coops. It is expected that the Department will view the crab 
        plan in a similar light.''

    The crab plan includes a provision for the formation of 
cooperatives of harvesters ``in association with a processor.'' This 
should not become a means of allowing processor owned crab vessels to 
join 1934 FCMA coops.
Crab Coops vs AFA Coops--Fact
    It is clearly evident that processor-owned vessels already enjoy 
the benefits of vertical integration. Since these vessels are also 
directly allocated their catch history under the crab plan, there is no 
necessity for the processor owned vessels to participate in the crab 
plan coops.
    There should be no exemption, direct or implied, granting processor 
owned vessels participation in crab coops.
Antitrust Issues Under Crab--Fallacy
    There are other anti-trust issues that are unique to the crab plan. 
The Issue Papers radically understate the anti-competitive effects of 
the action that the NPFMC is recommending to Congress.
Antitrust Issues Under Crab--Fact
    Among the issues ignored, is the manner in which the NPFMC crab 
plan creates a horizontal division of the entire market for the 
domestic production of harvest vessels of snow crab, and more than 97 
percent of the domestic production of harvest vessels of king crab. 
This type of horizontal division of the market would represent a per se 
violation of the Sherman Act, under existing law, if it were not 
exempted by congressional action. This was never an issue under the 
AFA.
Authority to Give Processors Antitrust Exemptions--Fallacy
    The Issue Paper on ``Antitrust Issues'' concludes:

        ``If Congress says yes to the Council's crab rationalization 
        plan, this is a non-issue.''
Authority to Give Processors Antitrust Exemptions--Fact
    Congress could enact legislation that would exempt the NPFMC from 
prohibitions on almost any otherwise illegal activity. The question is, 
not whether Congress can, but why should Congress do such a thing?
    This is certainly true that:

   It is within the power of the NPFMC, as a Federal advisory 
        body, to recommend a program that would otherwise be 
        prohibited.

   It is within the power of Congress to provide this 
        exemption.

    If it ``says yes,'' then Congress will have enacted legislation 
which provides an implied antitrust exemption allowing BSAI crab 
processors:

   to divide up the market,

   to consolidate control over that market to a single entity,

   despite provisions of the Sherman Act and other antitrust 
        statutes.

    It is that this power to reverse the present antitrust protections 
that is of concern.
    If Congress says ``yes'' without a more rigorous examination of the 
issues, the results could be a irreversible disaster for harvesters, 
communities, and the public.
    The ``Antitrust Issues'' Issue Paper states that there is no 
``closed class'' of processors [as is recognized to exist, under the 
AFA] because new processors can ``purchase `open delivery' B shares or 
allocated shares from a qualifying processor.''
No Closed Class of Processors?--Fact
    This is a semantic device word play. The crab plan does result in a 
closed class relative to A shares.

   Under the NPFMC crab plan, as in the AFA, new entrants to 
        the processing sector must purchase a ``right'' from a ``closed 
        class'' of processors in order to buy ``A share'' deliveries. 
        In the AFA, membership in the `closed class' does not guarantee 
        market share.

   In the NPFMC crab plan, closed class (``qualified'') 
        processors would be gifted with permanent market share, due to 
        participation in processing activity during a very narrowly 
        defined qualifying period.

   The crab plan is more restrictive upon new entry of 
        processors, because the market share, as well as the right to 
        process, must be acquired from `qualified' processors.

    The ``open delivery'' B shares referred to as source of product for 
``new'' processors. It is true any processor (except catcher 
processors) can legally purchase B share harvests. However, B share 
fail to represent a viable basis for a new processor to enter the 
fishery for several reasons :

   This is a 10 percent market share segmented into more than 
        250 pieces, in each of the major fisheries.

   Many of these pieces are already in control of the ``closed 
        class'' of processors that will receive Processing Quota under 
        the plan.

   Processors are allowed, under the plan, to purchase and 
        control B shares.

   B shares are intended to be used as leverage to obtain a 
        ``fair price'' from the processor for A share deliveries.

   B shares are intended to enhance deliveries to communities 
        such as Kodiak.
No Direct Linkage of Harvester to Processor?--Fallacy
    The ``Antitrust Issues'' Issue Paper argues that the crab plan is 
less restrictive than AFA for harvesters, stating:

        ``there is no direct linkage between fishermen and processors 
        (fishermen are free to deliver to any processor holding 
        processor shares).''--and that the plan,

        ``assures multiple processors in each crab fishery,''
No Direct Linkage of Harvester to Processor?--Facts

   NPFMC has provided a system that is ultimately even more 
        restrictive than the AFA.
   The AFA provides specific provisions to accommodate 
        harvester movement from one processor to another.
   The crab plan requires harvesters to match quota shares with 
        a processor for 100 percent of the harvester's ``A'' designated 
        quota shares.
   The bar to movement is that a harvester wishing to move must 
        identify a processor willing to discharge another harvester 
        already delivering to that processor, in order to ``free up'' 
        Processing Quota shares, to accept delivery.
   The crab plan allows processors to transfer PQ freely, 
        without effective caps upon the consolidation of quota shares 
        to a processing facility. Thus, a harvester may be directed by 
        the terms of a processing quota share trade, to deliver to a 
        processor, without the harvester having choice.
   The Council action, in fact, allows consolidation of control 
        over all processing to a single entity.
Consolidation Rules Ensure Multiple Markets?--Fallacy
    The Issue Paper, ``Council Action on Processor Shares,'' states:

        ``The Council instituted caps on the amount of consolidation 
        that may occur among the processors. The consolidation rules 
        are far more restrictive than what would be required under the 
        normal antitrust laws, and they are intended to ensure multiple 
        market opportunities.''
Consolidation Rules Ensure Multiple Markets?--Facts
    The disparity between this unsupported assertion, and the reality 
of the mechanism of the crab plan, was enough to cause the Alaska 
Fishermen's Journal to write an editorial titled: ``Earth to Council: 
Abort! Abort!''
    Dealing with the fallacies of this claim in the Issue Paper 
requires a full review of the Analysis and the actual options selected 
by the Council.
The NPFMC Analysis of Antitrust Issues--and the NPFMC Motion:
    The Analytical Document prepared for NPFMC consideration of the 
program developed in the Council motion contains the following brief 
reference titled: ``Antitrust Issues Related to the Issuance of 
Processing Shares and Regionalization of the Fishery.''

        ``Generally speaking, congressional action will be needed to 
        resolve any potential anti-trust issues associated with the 
        regionalization and processor share provisions. Antitrust 
        issues, however, could also arise in a harvester IFQ program, 
        if constraints are not placed on consolidation of QS. These 
        issues are discussed with more specificity in the appropriate 
        sections below.''
What are ``the appropriate sections below?''

   the section on QS ownership caps and excessive share issues 
        (3.4.1.2),

   the section on processor caps (3.4.2.6),

   the discussion of regionalization (3.6), and

   the discussion of competition in the fisheries (3.16).
Section 3.4.1.2 Ownership and Use Caps
    This section discusses the role of ownership and use caps in 
regulating the degree of consolidation of harvester shares (QS, in the 
analysis):

        ``As noted in the NRC study `Sharing the Fish,' ownership and 
        use caps are generally favored as a means to prevent excessive 
        shares. . . .'' Further on, ``The options for capping the 
        ownership of QS [in the] Bristol Bay red king crab, the BS 
        opilio, the BS bairdi [crab fisheries] . . . are 1, 5 and 8 
        percent of the QS pool. These caps would limit consolidation of 
        the fishery to 100, 20, and 13 QS owners, respectively, if all 
        QS holders own quota amounts equal to the cap.''

    The Council's discussion of harvest caps cited the necessity to 
start with ``very conservative guidelines.''

   NPFMC settled the ``ownership caps'' for these fisheries at 
        1 percent of total allocated.
   ``Use caps'' allowing additional quota to be leased, provide 
        that a total ``use'' (owned and leased) of 2 percent of QS.
   However, processors are also allowed to own up to 5 percent 
        of the fishing quota in a given fishery, despite that all other 
        owners are restricted to the 1 percent caps earlier referenced.
   This ``control on vertical integration'' establishes that 
        processors are entitled to a larger portion of fishing quota 
        than any other QS holders.
Section 3.4.2.6 Consolidation
    This section discusses the role of ownership and use caps in 
regulating the degree of consolidation of processing shares

        ``Caps on ownership and use of processing shares could be used 
        to prevent consolidation of market power in a few firms. These 
        caps might be favored as a means to ensure competition in the 
        processing labor market. In addition, share concentration could 
        influence the market power of processors with respect to 
        harvesters. Harvesters are concerned that if processing shares 
        become consolidated in the hands of a few firms, those firms 
        could have the ability to control the ex vessel price of crab. 
        In addition, caps on ownership could be used to facilitate a 
        market for processing shares, contributing to entry of 
        processors to these fisheries.''

    A footnote to the analysis states:

        ``Ownership and use caps, together with an allocation of 
        processing shares, are the only options that would guarantee a 
        minimum number of participants in the processing sector.''

    Another footnote to the analysis states:

        ``Some of the companies listed in Appendix 3-3 have common 
        owners . . . Depending on the rules chosen for determining 
        ownership for purposes of applying caps, these companies with 
        common owners might be considered a single entity.''
Application of the Rule
    The NPFMC action provides ownership and use caps that do not 
guarantee a minimum number of participants in the processing sector.
    The Council didn't choose the rule that would implement caps that 
``apply individually and collectively.'' The NPFMC chose that ``No 
ownership [is] to exceed 30 percent of the total PQS . . . at the 
company level.'' In general, this allows an individual entity to own 60 
percent of the total PQS pool, provided the ownership is held in at 
least two separate companies.

    Use Caps
    With respect to processing ``use'' caps, the NPFMC motion applies 
three rules:

   ``In the Northern Region, annual use caps will be at 60 
        percent for the opilio crab fishery.''

   ``50 percent of the WAI IPQ brown king crab QS shall be 
        processed in the WAI region.''

   ``Custom processing would continue to be allowed within this 
        rationalization proposal.''

    Taken together with the ownership cap rules, this means:

   While ``ownership'' may not exceed 30 percent of the total 
        PQS, this calculation is made at the ``company level.'' Thus, 
        provided companies are not ``merged,'' an individual may 
        acquire ownership of ALL PQS.

   With only two exceptions and there are no ``use caps'' on 
        IPQS. Thus, all PQS may be processed in one facility, whether 
        or not ``companies'' are owned in common.

   For the Northern Region opilio crab fishery, there must be 
        at least two processing companies to which harvesters may sell 
        crab.

     However, these companies, may be owned by the same 
            individual.

     Also, these companies may also be allowed to operate 
            from the same processing facility, if amounts delivered 
            above the ``60 percent use cap'' are processed according to 
            ``custom processing'' agreements.

   For the Western Aleutian Islands IPQ brown king crab 
        fishery, 50 percent of the catch must be processed in the 
        region. This IPQ could be processed by the same company.
Other Sections of the Council Analysis
    Section 3.16, particularly 3.16.2 which contains a brief survey of 
the literature of conflicting accounts of competitive impacts projected 
by economists. It includes a summary of a discussion paper prepared for 
the NPFMC by economists Milon and Hamilton. They conclude that:

   Segmentation of the market limits harvester negotiating 
        power, and

   PQs ``could allow processors to capture efficiency gains 
        realized by the harvesting sector since harvesters would be 
        required to deliver harvests to processors holding processing 
        shares.''
Are Harvesters Willing to Accept Processor Quota as the Price of 
        IFQs?--Fallacy:
    In the Issue Paper, ``Council Action on Processor Shares,'' the 
writer asserts that the Council ``asked crabbers which they would 
prefer? Answer: the Council motion is preferred to open access.''
Are Harvesters Willing to Accept Processor Quota as the Price of 
        IFQs?--Fact:
    This recollection is inconsistent with the tapes of record.

   The Council motion had not yet been made at the time public 
        comment was taken.

   Only one of four harvester associations endorsed Processing 
        Quota.

    The C.R.A.B. Group's testimony to the Council opposed processing 
quota and supported rationalizing the fisheries, that we represented 
nearly half of the crab harvesters, and that the Council decision would 
determine whether opposition to Processing Quota would grow. Opposition 
to Processing Quota is growing.
An Unrecognized Conflict of Interest by the State of Alaska
    Nowhere in the praises heaped upon the crab plan in the Issue 
Papers is there a hint of a direct financial interest in the outcome by 
the Alaska Department of Fish and Game [ADF&G]. Perhaps it is through a 
lack of self-consciousness by the author of the Issue Papers, but an 
undeclared conflict of interest is glossed over. Consider the NPFMC 
motion:

        ``Section 5, Program Elements, Option 5. A proportional share 
        of fees charged to the harvesting sectors and processing 
        sectors for management and enforcement of the IFQ/IPQ program 
        shall be forwarded to the State of Alaska for use in management 
        and observer programs for BSAI crab fisheries.''

    This is likely to be a sum considerably exceeding the amount 
presently authorized by the Alaska Legislature. It is certain that 
ADF&G needs the money. The fishing industry has supported the budget 
requests of ADF&G to the Alaska Legislature for years, only to 
experience debilitating cuts, year after year.
Part IV--Our Request to Congress
    The Council has recommended two distinct programs to Congress in a 
single package, a harvester IFQ and a Processor Quota program. However, 
the two programs are not equally well supported by the record.
The Harvester Program
    After a day-and-a-half of discussion, the NPFMC chose a suite of 
options that determined the harvester elements of the crab plan. These 
elements were based upon years of experience with the halibut/sablefish 
plan, were selected from a broad array of possibilities, and included 
provisions that would mitigate each of the impacts noted by the Select 
Panel in ``Sharing the Fish'' including options for skippers and 
communities, and the prevention of accumulation of excessive shares of 
fishing quota.
The Processor Program
    After discussions ranging from little to none, the NPFMC chose a 
suite of options that determined a Processing Quota provision. There 
were no real alternatives presented, there was no effective cap on 
consolidation, no practical experience except for tenuous analogy to 
provisions of the American Fisheries Act, theoretic guidance based on 
highly controversial and unproven assertions, and no demonstrated 
understanding of the anti-competitive aspects of the provision. The 
NPFMC crab plan has been billed as bold step into new territory. It is 
instead, a reactionary slide into a system that has not been seen in 
Alaska since the Seward Purchase--a State sanctioned monopoly of 
fisheries resources.
Is the Ultimate Question ``Processors Shares or Nothing?''
    Finally, consider the question actually asked of crabbers: ``Which 
would you prefer--Processor Quotas, or nothing?'' This is an industry 
that is in collapse, and the lives, the vessels and the homes of many 
harvesters are right there on the line. Was this not really the 
question of Solomon was asked to judge?
    The Issue Papers claim that the baby was cut in thirds. Instead, 
the NPFMC has given the whole baby to the processors, who declared they 
had the power in Congress to block any programs, no matter the cost to 
life or resource, to have their way.
Conclusion

   We ask Congress to reject the Council's recommendation to 
        legalize Processor Quotas and by implication undo the antitrust 
        provisions of existing statutes.

   After rejecting Processor Quotas, we hope Congress will use 
        its wisdom to judge the rest of the Council's program to end 
        the deadly race for crab, to improve safety and to improve 
        conservation of the resource, on its merits.

   We ask that Congress allow and encourage the Council to 
        develop a rationalization plan for crab that doesn't include 
        Processor Quotas.

    Senator Stevens. Our next witness is Frank Kelty, the 
Natural Resources Manager of the City of Unalaska.
    Mr. Kelty?

          STATEMENT OF FRANK KELTY, RESOURCE ANALYST, 
                        CITY OF UNALASKA

    Mr. Kelty. Good afternoon, Mr. Chairman, Members of the 
Committee. Thank you for inviting me to testify before the 
Committee.
    My name is Frank Kelty. I am the Resource Analyst for the 
City of Unalaska. With me from Unalaska today--we have 
traveled, I think, it must be about 7,000 miles to get here--is 
the Honorable Mayor Pam Fitch, city council members Marcort, 
Meeks, and Mr. Graves, and also our City Manager, Chris Latik.
    Previously, I worked for 30 years in the Alaska seafood 
industry as a crab plant manager for two operations in 
Unalaska. I also served as the city's Mayor for 10 years. The 
City of Unalaska strongly supports the Bering Sea crab-
management plan because it recognizes the investment of all 
participants in the Bering Sea crab fishery, including 
harvesters, processors, and communities. My oral testimony will 
focus on the following issues--community dependence, safety, 
and the lessons we have learned from AFA.
    Mr. Chairman, we have a crab resource and industry in the 
Bering Sea that is in trouble. That is why we are here today. 
The fisheries in the Bering Sea have excess harvesting and 
processing capacity, resource conservation and management 
problems, lack of economic stability for harvesters, 
processors, fishery-dependent communities, as well as major 
safety concerns. The crab plan is strongly supported by the 
Cities of Unalaska, Akutan, St. Paul, and St. George. These 
communities process in excess of 85 percent of the king and 
opilio snow crab of the Bering Sea. And I might like to point 
out that City of St. Paul passed one of the first resolutions 
over a year ago in support of this plan.
    Mr. Chairman, I would like to emphasize the following 
point. The communities that have been dependent on crab are, in 
fact, supporting the plan. The plan, Mr. Chairman, guarantees 
that the vast majority of the crab resource will stay onshore 
in Alaska. I repeat, this plan is a shore-side plan that 
guarantees the resource to Bering Sea communities. This has 
long been your stated goal for the Alaska fisheries, and it is 
implemented in this crab plan.
    The North Pacific Council was extremely careful to 
recognize historic dependence and to protect our stake in the 
fisheries. Alaskan communities are protected through a 
requirement that 90 percent of a processor's history stays in 
the community within the region that they earned it and assures 
us access to the resource during good times and bad.
    The City of Unalaska has seen firsthand the benefits of a 
rationalized fishery under the American Fisheries Act. The race 
for pollock in the Bering Sea has stopped. We have seen 
increased economic stability for pollock harvesters, 
processors, and fishery-dependent communities, as well as 
longer fishing seasons that benefit both employment in the 
industry and in the community, improved resource management, 
new product development, improved revenue streams for the 
community, and increased safety.
    As many of you know, the Bering Sea crab fishery is the 
most dangerous in the world. As a crab plant manager, I cannot 
count the number of times I have had vessels return to Unalaska 
for crab unloading in January and February, March, that were 
covered in a foot of ice or more. Sometimes the boats returned 
to port having had two or three pilothouse windows blown out by 
rogue waves that destroyed all their electronics. Fortunately, 
the skipper can navigate blind for 2 days. I have had to make 
phone calls to family members to tell them that their loved 
ones were lost at sea during the crab season.
    This crab plan will stop the race for fish by giving 
harvesters the flexibility to pursue crab through longer 
fishing seasons. Harvesters will be able to base their 
decisions on accommodation of market, fishing, and weather 
conditions, rather than face the pressure to fish in bad 
weather because of such compressed seasons, as is certainly the 
case. There is no question in my mind that this plan will help 
save lives and reduce injuries.
    As you know, there is a small, but vocal, opposition from 
industry participants and community, most notably the City of 
Kodiak. Their opposition is primarily based by the plan's 
allowance for processing quota shares and on the years used to 
determine processing and fishing history under the plan. These 
opponents, by and large, reduced their participation in the 
crab fishery some time ago rather than remain in the fishery, 
like Unalaska and others that ride through the ups and downs. 
They made their choice of their own free will and opted to 
diversity into other fisheries, fisheries that they have been 
successful at and have benefited from. Yet now they ask to be 
held harmless at the expense of those who kept their commitment 
to the crab fishery.
    The Council has ensured that 10 percent of the fishery will 
remain open access, so they will have an opportunity to 
participate in the fishery. And the harvesting of processing 
shares that they do hold from the late 1990s will have 
significant value.
    The Council, after careful deliberation, ratified the plan 
by a unanimous vote--ratified the plan by a unanimous vote--and 
followed up with the adoption of strong community-protection 
measures. We believe that the final plan treats Kodiak and a 
few other opposing communities fairly.
    In summary, Mr. Chairman, we believe that this plan was 
crafted by the Council in a deliberate, balanced, and open 
fashion that has taken almost 4 years to complete. The plan has 
measures that protect and enhance economic activity for both 
harvesters and processors that have invested hundreds of 
millions of dollars in their operations in Bering Sea 
communities. So I would encourage you to move forward with 
legislation to implement its provisions, and in a timely 
manner.
    Thank you for allowing me to testify, and I look forward to 
answering any questions you may have.
    Senator Stevens. Thank you very much.
    [The prepared statement of Mr. Kelty follows:]

 Prepared Statement of Frank Kelty, Resource Analyst, City of Unalaska
    Mr. Chairman, my name is Frank Kelty, and I am the resource analyst 
for the City of Unalaska. Unalaska strongly supports the Bering Sea 
Crab Management Plan developed by the North Pacific Council. We have 
submitted a written statement and supporting materials for the record. 
My oral testimony will focus on the following issues: (1) community 
dependence; (2) safety; and (3) the lessons we have learned from the 
American Fisheries Act.
    Mr. Chairman, we have a crab resource in the Bering Sea/Aleutian 
Islands that is in trouble, and that is why we are here today. The 
fisheries of the Bering Sea/Aleutian Islands have excess harvesting and 
processing capacity; resource conservation and management problems; 
lack of economic stability for harvesters, processors, and fishery-
dependant communities; as well as major safety concerns.
Community Dependence
    The crab plan is strongly supported by the cities of Unalaska, 
Akutan, St. Paul, and St. George. These communities process in excess 
of 85 percent of the king and opilio crab in the Bering Sea. Opilio is 
also referred to as snow crab.
    Mr. Chairman, I would like to emphasize the following point: the 
communities that have become dependent on crab are, in fact, supporting 
the plan. The plan, Mr. Chairman, guarantees that the vast majority of 
the crab resource will stay on-shore in Alaska. I repeat; this plan is 
a shoreside plan that guarantees the resource to the Bering Sea 
communities. It cannot be shifted to offshore catcher-processors, and 
it cannot be taken out of state for primary processing. This has been 
your long stated goal for the Alaskan fisheries, and it is implemented 
by this crab plan.
    The North Pacific Council was extremely careful to recognize 
historic dependence and to protect our stake in the fisheries. Unalaska 
believes that the plan itself is a community protective measure because 
it assures that 90 percent of the processors' history stays in the 
community within the region and assures us of the resource during good 
times and bad.
    Community opposition to the plan is coming from Kodiak. They feel 
that the plan will impact their revenues, local processing plants, and 
the 35 resident crab vessels. Kodiak was a major player in the crab 
fisheries of the Bering Sea, but that was over 20 years ago, before the 
development of the processing plants in the Bering Sea communities. 
Between 1997 and 1999 (the qualifying years), Kodiak's historical 
landings from the Bering Sea were very small, at less than 1 percent 
for opilio snow crab and 6 percent for Bristol Bay red king crab.
    Kodiak is 600 miles from Unalaska, and we are another 200 miles 
from the king crab fish grounds and further yet from the major opilio 
grounds. That distance means many days of running time to take crab 
back to Kodiak. Harvesters have to worry not only about weather, but 
deadloss of crab at unloading due to the length of time that the crab 
has been on board the vessel.
    Kodiak's vessels are protected under this plan. Because a good 
harvesting history assures they will have great value, and Kodiak's 
processors are granted their processing history. Kodiak's processing 
companies will be able to compete for an additional ten percent of the 
resource that has been set aside as open access. We believe that Kodiak 
has been treated fairly by the North Pacific Council.
    The City of Kodiak has requested changes to the plan to give their 
community a greater stake in the fisheries. The crab allocation is a 
zero sum game. Any increased allocation to Kodiak comes out of the fish 
to be processed by Being Sea communities that have a far greater 
dependence on the crab resources of the Bering Sea.
AFA
    Unalaska has seen first hand the benefits of a rationalized 
fishery. Under the American Fisheries Act, which rationalized the 
Bering Sea Pollock fishery and is a far more restrictive plan than the 
BSAI crab plan, the race for fish was stopped. We have seen increased 
economic stability for harvesters, processors, and fishery dependant 
communities, as well as longer fishing seasons that benefit both 
employment in the industry and the community. We have seen improved 
resource management, new product development, and increased safety. 
With a rationalized Bering Sea/Aleutian Island crab fishery, we will 
see many of the same benefits in all sectors of the Bering Sea/Aleutian 
Island crab industry.
Safety
    I have worked in the crab industry for over thirty years, and I 
know that Bering Sea crab is the most dangerous fishery in the world. I 
cannot count the number of times I have had vessels return to Unalaska 
for unloading covered in a foot of ice in January or February. 
Sometimes the boats have returned to port having had two or three 
pilothouse windows taken out by rogue waves that destroyed all of their 
electronics, forcing the skipper to navigate blind for two days and 
barely making back to port. I have had to make phone calls to family 
members to tell them their loved ones were lost at sea during the crab 
fishery. This crab plan will help put a stop to that madness by making 
the fishery safer. The rationalized Pollock fishery in the Bering Sea 
has worked wonders for safety. Now, the Pollock fleet can wait out 
major storms. The North Pacific Crab Plan affords this same safety net 
to crab fishermen
    In summary, Mr. Chairman, we support the public process that this 
issue has gone through with the North Pacific Council, and we support 
the council process. This plan has the support measures that protect 
and enhance economic activity for crab industry and the communities of 
the Bering Sea. The North Pacific Council's Crab Rationalization Plan 
is vital to the long-term stability of the communities of the Bering 
Sea that have become dependent on this resource.
    Thank you for allowing me the opportunity to testify.
                                 ______
                                 
         Prepared Statement of Frank Kelty, Resource Analyst, 
                        City of Unalaska, Alaska
    Mr. Chairman and Members of the Committee:

    For the record, my name is Frank Kelty; I am the Resource Analyst 
for the City of Unalaska. Previously, I worked in the Alaska Seafood 
industry for 30 years in Unalaska, Alaska, as a manager for two 
processing companies running crab operations. I also served the 
community of Unalaska as and elected official for 19 years, until 
December of 2000, when I resigned to work as Resource Analyst. The last 
10 years of my time on Council, I served as the Mayor of Unalaska. I'm 
here today to testify on behalf of the City of Unalaska in support of 
the North Pacific Fishery Management Council's Bering Sea/Aleutian 
Island Crab Rationalization Plan.
    Included in your packet of information is the City of Unalaska 
Resolution 2003-27 that was passed unanimously by the Unalaska City 
Council in support of North Pacific Council's Bering Sea/Aleutian 
Island (BSAI) Crab Rationalization plan. Also included are resolutions 
and letters from other Bering Sea communities that support the plan. 
Those communities include the City of Saint Paul, City of Saint George, 
and the City of Akutan. These communities, as well as Unalaska, process 
in excess of 85 percent of the King and Snow Crab harvested in the 
Bering Sea Crab fisheries. The City of Unalaska is not only the largest 
crab processing community in the State of Alaska, but the nations 
number one commercial fishing port as well.
    The BSAI rationalization plan has been developed in a very open 
process. After three years of committee meetings and discussion by 
harvesters, processors, community representatives, and members of the 
public, came two years of intense discussion, analysis, and development 
by the North Pacific Council, its staff, and the council's industry 
advisory panel, with assistance from NMFS, ADFG, and independent 
economists and fishery consultants. The plan was finally adopted by a 
unanimous vote of the North Pacific Council 11-0 in June of 2002.
    The current state of the Bering Sea crab fisheries is poor at best. 
Included with the information in the packet, I have provided a 
spreadsheet created by the Alaska Department of Fish and Game that that 
reflects the recent history of the Bering Sea Fisheries covered under 
this plan. As you can see, many of these fisheries have been closed for 
years, and three of them have been under rebuilding plans for the many 
years. The ones that have been open have had very small harvest quotas 
and a very limited amount of fishing time, with a large number of 
participants in these un-rationalized fisheries.
    This situation has led to economic instability in the crab industry 
as a whole and has caused major revenue shortfalls for many of the 
fishery-dependent communities in the Bering Sea/Aleutian Island area, 
especially smaller communities such as Saint Paul and Saint George that 
depend almost exclusively on the harvesting and processing revenues 
generated from the crab fisheries of the Bering Sea. With the continued 
race for fish in the BSAI crab fisheries, we have witnessed the 
continuous struggle that the State of Alaska fishery managers have in 
managing an un-rationalized fishery. A good example is the fact that 
the 2003 Opilio Snow Crab fishery might not have opened had a new 
regulation from the Alaska Board of Fish not been granted to enact a 
further reduction in the number of pots that harvesters could use 
during the season. Without that reduction in fishing gear, we may not 
have had a season, which would have been devastating to the harvesters, 
processors, and fishery-dependent communities.
    With the gear reduction regulation in place, we had a season that 
lasted ten days, and a fleet of almost 200 vessels harvested 26 million 
pounds of snow crab. This October, we will once again have another 
derby-type crab opening on the Bristol Bay Red King Crab fishery. It 
may last 4 or 5 days with a limited amount of harvest quota. This 
fishery will attract well over 200 vessels. As a consequence, for the 
2003 crab fishing season, the majority of the Bering Sea Crab fleet 
will have a total of 14 or 15 fishing days. This type of scenario has 
been ongoing on for years. I think this points out the crisis situation 
this industry is in right now and why the Bering Sea Aleutian Island 
Crab rationalization plan needs to move forward and be implemented as 
soon as possible.
    This plan, which the City of Unalaska supports first and foremost, 
recognizes the investment of all participants in the Bering Sea crab 
fisheries, including the harvesters, processors, and communities. My 
community has seen first hand the benefits of a rationalized fishery 
with Bering Sea Pollock fishery under the American Fisheries Act. Under 
(AFA) the race for fish was stopped. We have seen a reduction in the 
size of the fleet, as well as longer fishing and processing seasons 
that benefit both employment in the industry and the community. It has 
also provided economic stability to harvesters, processors, fishery-
dependent communities, and support sector business.
    Under AFA, we have seen improved resource management, new product 
development, and increased safety for the fleet. Included in the packet 
of information provided, you will see some revenue graphs that point 
out the increase in many of the City of Unalaska fishery-related 
revenue streams since AFA was enacted. With a rationalized BSAI crab 
fishery, we will see many of the same benefits in all sectors of the 
industry. The following is an overview of some of the main components 
of the plan that we support and that need to be pointed out.
Harvester Sector
    Harvesters would be allocated quota shares (QS) in each fishery 
rationalized by the program. Harvester shares will be allocated in two 
classes of shares: Class A shares at 90 percent, and class B shares at 
10 percent. Class A shares carry the regionalization tag and would have 
to be delivered to the designated region. Class A shares of crab would 
have to be sold to any processor in that region who has processor quota 
shares. The 10 percent, class B shares do not have any regionalization 
tag and can be sold to any processor in any region.
    Quota shares and IFQs would both be transferable under the program, 
subject to limits on the number of shares a person may own or use. 
Leasing of quota shares may be prohibited, except within a cooperative, 
after the first five years of the program. The transferability is 
necessary to reduce fleet size and remove capital from the fisheries 
under this plan. The limit on leasing of QS or sale of IFQs by persons 
not in cooperatives is intended to create an incentive for cooperative 
membership.
    The Captains share allocation of 3 percent quota shares are open 
shares for the first three years of the program and will be reviewed by 
the North Pacific Council, which will decide whether to make the shares 
either class A or a class B designation. A crewmember crew-loan program 
will be developed to assist crewmembers' entry into the crab fisheries.
    This program would permit harvesters to form voluntary cooperatives 
with one or more processors holding processing quota shares (PQS). 
Cooperatives are intended to facilitate efficiency in the harvest 
sector by aiding harvesters in coordinating harvest activities among 
members of the cooperatives and deliveries to processors. A minimum 
membership of four unique QS holders would be required for cooperative 
formation. Under AFA, Pollock cooperatives have so effectively 
coordinated the harvest that less than 1 percent of the TAC is un-
harvested. We have also seen formation of profit sharing agreements 
between harvesters and processors under AFA that have been very 
successful in maximizing revenues for both sectors. I believe we would 
see the same types of programs under a rationalized crab fishery.
    Harvesters also have a binding arbitration program in place, which 
will be used to settle price disputes between processors.
Processing Sector
    The allocation of processor shares is easily the most controversial 
part of the plan. However, their contribution and investments in the 
BSAI crab fisheries cannot be ignored, as they are the economic anchor 
for fishery-dependent communities in remote locations in the Bering Sea 
area. Their investments in Unalaska are in the hundreds of million of 
dollars. They provide employment and markets for a wide variety of 
harvesters in different fisheries, and the importance of the revenue 
they generate in the millions of dollars annually for both for local 
governments and the State of Alaska cannot be understated.
    The processing sector will be allocated PQSs in each fishery 
rationalized by the program. These annual allocations of processing 
privileges are referred to as Individual Processing Quotas (IPQs). IPQs 
would be issued annually for 90 percent of the allocated harvests 
corresponding to the 90 percent allocation of class A harvester shares. 
Leaving the remaining 10 percent of processing unallocated and, 
therefore, deliverable to any processor is intended to strike a balance 
of bargaining power between the harvesting and processing sectors. In 
addition, this 10 percent unallocated processing amount would allow for 
new entry to that sector.
    PQS allocations would be based on processing history during a 
specified qualifying period for each fishery. A processor's allocation 
in a fishery would be equal to the processor's share of all qualified 
processing in the qualifying period. All allocations will be made to 
the buyer of record on ADFG fish tickets, by the State of Alaska 
Commercial Operators Annual report, and by fish tax records. This rule 
reflects the intention to allocate shares to the entity that purchased 
the crab and funded the processing activity.
    Processor shares would be transferable, including leasing of PQS, 
subject only to use and ownership caps, and restrictions that apply 
during the two-year cooling-off period.
    Ownership of PQS will be limited to 30 percent of the outstanding 
PQS in a fishery. An exception to this would be in the Northern Region 
where PQS shares in the Opilio Tanner fishery would be capped at 60 
percent due to the limited number of processors in that region.
Community Protection
    This is a very important part of the crab rationalization plan. I 
maintain that it shows that the importance of the processors having 
quota shares is their designation by region. The most important part of 
the community protection provision is the regional designation of 
shares, which will apply to processor allocations north of 56 20, N 
Latitude. The South region will be all areas not included in the North 
region, and all the corresponding 90 percent of the harvest 
allocations, distributing landings and processing between specific 
regions. Included in the handouts, are spreadsheets and graphs that 
show landings, State of Alaska fish tax information for Opilio Snow 
crab between the North and South regions, and community designations. I 
have also included landings by community and percentages of landing 
over a four-year period for Bristol Bay Red King Crab. These are 
currently the two major Bering Sea fisheries. This information clearly 
shows the connection between the communities of the Bering Sea and the 
dependency of these communities on the crab fisheries of this area, and 
it shows the importance of the processing plants in their communities. 
It also points out the lack of dependency by some communities, such as 
Kodiak, which is located in the Gulf of Alaska, over seven hundred 
miles from the nearest Bering Sea crab fishery.
    For the first two years of the plan, a cooling-off period is 
currently in place. During this time, the processing quota earned in a 
community may not be used outside of that community.
    First Right of Refusal options apply for communities with at least 
3 percent of the initial PQS allocation in any BSAI fishery, based on 
history in a community. Exception will be made for those communities 
that receive a direct allocation of any crab species; currently, the 
only exception is Adak. This right allows qualified communities, or 
community groups, and CDQ groups a first right of refusal to purchase 
processing quota shares that are based on the original processing 
history of the community.
Safety
    This is one area under a rationalized fishery in which we will see 
major improvements. Fishing in Bering Sea Crab fisheries, as many of 
you know, has been labeled the most dangerous profession in the Nation. 
Approximately 25 fishermen lost their lives in the Bering Sea during 
the 1990s. This rationalization plan will provide a safer fishery in 
much the same way as we have seen in the Halibut and Sablefish IFQ 
fishery and the AFA rationalized Pollock fishery in the Bering Sea. In 
my previous employment in the crab industry, I saw first hand the havoc 
that the Bering Sea can wreck on people and on vessels in an un-
rationalized fishery. I cannot count the times I have had vessels 
return to Unalaska for unloading covered in a foot of ice in January or 
February. Sometimes they have returned to port having had two or three 
pilot house windows taken out by rogue waves, and had all there 
electronics and navigation gear destroyed and had to hand steer for two 
days, barely able to make it back to town. I only had to deal with the 
ultimate tragedy once, and that was enough for a lifetime. Having to 
deal with the tragedy of a vessel lost with all hands, and having to 
tell loved ones and friends that their family member or friend will not 
be coming back was one of the toughest things I have ever had to deal 
with in my life. The improvement that we will see in safety with a 
rationalized fishery is something we cannot put a dollar value on, and 
we should never forget that.
    There are those who oppose this plan. Many of them do not have any 
involvement with the crab fisheries of the Bering Sea, but are worried 
that sometime in the future elements of this plan could impact their 
fishery. We heard the same concerns during the implementation of the 
American Fisheries Act (AFA) by the same folks that weren't involved in 
the Pollock fishery, that it would cause problems for them in their 
fisheries, but it has never happened. There are crab harvesters that 
also do not support the plan. Many of their concerns might be due to 
the qualifying years that are in the plan. Some vessels do not have 
very much poundage or history during those years. These people might 
hope to keep the derby fisheries going, thinking they may be better off 
financially. We have heard the concerns that with processor shares, 
their ex-vessels prices will be impacted. However, under AFA Pollock 
cooperatives we have not seen that. What we have seen is ex-vessel 
prices increase for the harvesters with profit sharing agreements and 
other incentive programs.
    We also have strong opposition to the plan from Kodiak. They feel 
the plan will impact their revenues, their local processing plants, and 
the 35 vessels that are home ported there. At one time, Kodiak was a 
major player in the crab fisheries of the Bering Sea, but that was over 
20 years ago, before the development of the processing plants in the 
Bering Sea communities. Between 1997 and 1999, which were the 
qualifying years in the plan, Kodiak historical landings from the 
Bering Sea are very small, at less than 1 percent for Opilio Snow crab 
and 6 percent for Bristol Bay Red King crab. That does not show much 
dependency on the major crab fisheries in the Bering Sea, especially 
when compared to the communities located in that area. This is due, in 
part, to the distance they are from the crab grounds of the Bering Sea.
    Kodiak is six hundred miles from Unalaska, which is another 200 
miles from the King crab fishing grounds and further yet from the major 
Opilio snow crab fishing grounds. That distance means many days of 
running time to take crab back to Kodiak. Harvesters have to worry not 
only about weather, but deadloss of crab at unloading due to length of 
time that the crab has been on board the vessel. In addition, they have 
to deal with the fishing gear that they may have left on the fishing 
grounds, and they have increased cost of expenses just to make that 
run.
    I believe their current historical crab landings can be met under 
this plan through the processor quotas shares that the local processing 
plants will receive and through the open access 10 percent share of the 
quota for the harvesters that can be delivered to any processor in any 
community.
    Unalaska supports this rationalization plan, as do other 
communities located in the Bering Sea/Aleutian Islands, and the crab 
processors and many of the harvesters that fish these fisheries. We 
believe that the rationalization plan as proposed will address many of 
the serious concerns facing all sectors involved in the crab industry 
of the Bering Sea/Aleutian Islands. In Unalaska, we will see many of 
the same benefits in a rationalized crab fishery that we have seen in 
the rationalized AFA Pollock fishery. We support the public process 
that this issue has gone through with the North Pacific Fishery 
Management Council, and we support the council process. This plan has 
the support measures that protect and enhance economic activity for all 
sectors in the community of Unalaska. There is no doubt that everyone 
realizes that our mainstay for continued success as a City is linked to 
the fisheries from which we gain economic resources.
    In closing, I would like to read a paragraph from North Pacific 
Council Chairman Dave Benton's August 5, 2002 letter to Congress that 
was attached to the North Pacific Council report to Congress on the 
Bering Sea and Aleutian Islands Crab Rationalization Program:

        ``This program is certainly not with its controversy. The 
        adoption by the Council of processing quota shares as a 
        fundamental part of the program is probably the most 
        controversial aspect of the program. However, the Council 
        believes, as is reflected in its unanimous vote, that the crab 
        fisheries in the Bering Sea/Aleutian Islands require this 
        innovation, comprehensive management approach to adequately 
        recognize and protect the interests of all participants. It 
        recognizes all components of the fishery as a balanced, 
        inextricably linked system, rather than individual, competing 
        components. It may not be the appropriate model for other 
        fisheries. We do believe it is the appropriate management 
        approach for this fishery, and we respectfully submit that 
        Congress should allow for such regionally tailored approaches 
        in the management process. All Councils need such flexibility 
        as we consider development of rationalization programs for 
        other fisheries, for the benefit of all user groups, and to 
        sustain our precious fisheries resources for the Nation.''
            Thank You.
            
            
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            
            
            

    Senator Stevens. Our last witness is Arni Thomson, 
Executive Director of the Alaska Crab Coalition, Seattle, 
Washington.

  STATEMENT OF ARNI THOMSON, EXECUTIVE DIRECTOR, ALASKA CRAB 
                           COALITION

    Mr. Thomson. Good afternoon, Mr. Chairman and Distinguished 
Members. On behalf of the Alaska Crab Coalition, I would like 
to thank you for the opportunity to provide testimony on this 
vitally important subject of crab rationalization. I am Arni 
Thomson, Executive Director of the Alaska Crab Coalition.
    Mr. Chairman, the ACC speaks on this subject from long 
experience and deep conviction. Established in 1986, the ACC is 
the longest-standing organization of Bering Sea crab fishing 
vessel owners. I think it fair to say that among the several 
organizations of Bering Sea crab harvesters, the ACC has been 
the most consistent contributor to the efforts of Congress, the 
Commerce Department, and the North Pacific Fishery Management 
Council to provide for the improvement of our fisheries.
    The ACC applauded your inclusion in the Consolidated 
Appropriations Act of 2001 a directive that the North Pacific 
Council consider rationalization of the Bering Sea crab 
fisheries, including individual fishing quotas, processing 
quotas, and community quotas, and to report back to Congress on 
the outcome. This directive placed the Bering Sea crab 
fisheries on the Council's priority list and guided the ensuing 
analysis and debate in a direction ensured that all interested 
parties a place at the table. Most importantly, this directive 
implicitly recognized that all three major groups--harvesters, 
processors, and communities--would have to be accommodated in 
order to ensure the viability of any rationalization plan.
    Mr. Chairman, the Council's plan represents a fair balance 
of the effected interests, a compromise that promises to 
achieve, for the first time, the fundamental goal of ending the 
race for crab that has killed our fishermen, accelerated 
bycatch and discards to damaging levels, and devastated the 
economics of the fisheries for harvesters, processors, and 
communities alike.
    I would like to just stop briefly to point out that at the 
beginning of our rationalization efforts, that the industry 
took a real hard look at the AFA model in order to try to 
emulate the AFA model in the crab fisheries. However, there 
certain distinct characteristics between the fisheries, the 
fisheries being unique, it just would not work. Basically, the 
pollock fishery is a single-species fishery. There are long-
established one-on-one market relationships and contracts 
between fishermen and specific processors. However, in the crab 
fisheries, we have multi-species fisheries when the fishermen 
oftentimes have multiple markets, and the fisherman very 
expressly stated that they did not want a closed class of 
processors.
    So this gravitated toward a request from the fishermen to 
the processors to produce a proposal of matching processor 
quota shares for the fishermen's IFQs, and that is how we got 
started down the road of the processor shares. And then we 
added to that the regionalization concept which was proposed by 
the City of St. Paul in the Pribilof Islands.
    Going on, the following are six key elements of the plan. 
Quotas for fishermen, processors, and communities that will end 
the race for crab, reduce bycatch and waste, and promote 
sustainability of the resources and economic stability for the 
industry and communities, improve safety by ending the derby 
fishery, preservation of the regional distribution of economic 
activity through regional share designations of harvester and 
processor quotas that will distribute landings and processing 
between specific regions, plus additional protections.
    Mr. Fraser mentioned to arbitration programs that were 
presented to the Council, one by the harvesters and the other 
by the processors. This is not entirely correct. The proposal 
that was developed, primarily by the crab group, of whom he 
represents, was a flawed proposal that did not commit the 
fishermen to a binding arbitration program. So, in good faith, 
the Alaska Crab Coalition could not support that program, 
because we had initially proposed an arbitration program, and a 
binding one. It was the only way that the arbitration would 
work.
    Having said that, a mandatory binding-arbitration program 
to settle price disputes between harvesters and processors and 
to ensure competitive market prices with a firm Council 
commitment to change the program if it does not work. This 
commitment is contained in the May 6th letter of the North 
Pacific Council to the Congress.
    Going on, initial harvest-share allocations to captains of 
3 percent of the tack and the opportunity for skippers and crew 
to purchase shares with a low-interest loan program, an 
important precedent.
    Comprehensive data collection and program review to assess 
the success of the rationalization program and to provide 
oversight of revenue share ration between harvesters and 
processors.
    Processor quotas are, as we all know, the main point of the 
controversy. Some individuals and organizations would have the 
Council or Congress throw out processor quotas and leave it at 
that. But, Mr. Chairman, that would be repudiating the very 
directive that Congress enacted into law and that Council 
respected.
    As we all know, Congress did not establish any priority 
among the effected groups or among the various management 
measures to be considered. Why not throw out harvester 
community quotas and leave it at that? The question is 
rhetorical, and the answer is obvious. Because harvesters, 
communities, and processors all have the vital interests at 
stake and the right not only to be considered, but also to be 
accommodated in any rationalization plan.
    In closing, Mr. Chairman, I ask that you take account of 
the considered judgment of the ACC and other organizations that 
believe that the plan developed by the Council family is the 
only viable approach to restoring our Bering Sea crab fisheries 
in a fair, balanced, and effective way. I respectfully urge 
that you and your colleagues in Congress grant the authority 
that remains necessary to bring this critically needed plan to 
fruition.
    Finally, at the suggestion of the North Pacific Council, in 
its letter of May 6, 2003, we request that the Congress 
explicitly authorize and direct the Council to take immediate 
action to change the arbitration program if it does not work.
    That concludes my comments, Mr. Chairman. Thank you very 
much.
    [The prepared statement of Mr. Thomson follows:]

        Prepared Statement of Arni Thomson, Executive Director, 
                         Alaska Crab Coalition
    Senator Stevens, Senator Murray, Distinguished Committee Members:

    The Alaska Crab Coalition (``ACC''), a trade association 
representing the owners of Bering Sea crab fishing vessels, as well as 
service and supply companies in the fishing industry, is grateful to 
have been invited to testify at this important hearing on the Bering 
Sea and Aleutian Islands (``BSAI'') crab rationalization plan 
(``Plan'') adopted by the North Pacific Fishery Management Council 
(``Council'') at its June 2002 meeting. The ACC strongly supports the 
Plan.
    Since its inception in 1986, the ACC has worked closely with the 
Council, the Department of Commerce, and Congress in the development 
and implementation on an array of statutes, regulations, and policies 
aimed at the improvement of safety, conservation, efficiency, and 
fairness in the BSAI crab fisheries. The challenges have been enormous: 
the highest occupational fatality rate in the Nation, resources in 
severe difficulty, the industry on its financial knees, and communities 
at serious economic risk. What sets the Plan apart from all previous 
management responses, and what promises to deliver the long-sought 
after solutions, is its comprehensive approach to addressing the root 
cause of the problems plaguing these fisheries--the race for crab. 
Through implementation of the Plan, excess harvesting and processing 
capacity will be removed from the BSAI crab fisheries in a way that 
will be fair to harvesters and processors, alike, and will avoid 
economic dislocation of dependent communities. Through a carefully 
balanced system of harvester and processor quota shares and regional 
delivery provisions, a sustainable equilibrium of production capacity 
and resource availability will be achieved, markets will be stabilized, 
safety will be improved, and communities will be protected.
    Clouds of paper from one disgruntled special interest group or 
another must not be allowed to obscure the fact that the Plan 
represents the best collective judgment of the Council family, based on 
the wise guidance of Congress. Blaring opposition must not be permitted 
to drown out the chorus of support for this excellent Plan.
Background and Need for BSAI Crab Rationalization
    The BSAI crab fisheries have long presented daunting challenges to 
fisheries managers, our industry, and dependent communities. Safety 
concerns have necessarily attended fishing operations in the extremely 
harsh natural environment of the Bering Sea and Aleutian Islands area. 
Conservation became an issue, as soon as major fishing fleets began to 
exploit the resource. Allocation issues arose for our fishermen, when 
we first sought to ``Americanize'' the fisheries, by wresting control 
from the foreign fleets, and later, after such issues arose again, when 
that goal was achieved and our domestic harvesting exceeded the 
available resources.
    As communities became dependent upon BSAI harvesting and 
processing, the scope and complexity of economic and social issues 
greatly increased. The full spectrum of these challenges became less 
and less manageable, as BSAI crab resources suffered declines and 
failures under enormous fishing pressures.
    Following much debate and the rejection of a harvester-only 
individual quota program, a license limitation program (``LLP'') was 
adopted in 1995 and implemented in 1998, with the objective of slowing, 
if not halting, increased harvesting capacity in the fisheries. Of 
course, this was only a halfway measure, as it failed to prevent 
``capital stuffing,'' that is, additional investments increasing the 
efficiency of the limited number of vessels that were permitted to 
operate in the fisheries. Limits on the number of pots per vessel and 
various other management measures, including time and area closures, 
also failed to solve the fundamental problem of excessive harvesting 
capacity. The race for fish intensified.
    In the superheated race for crab, these measures had perverse 
safety, conservation, and economic effects. Crab pots are designed to 
``soak'' for long enough to allow all the bait to be consumed, and for 
the juveniles to leave, through escape panels, in search of other 
forage. Fishing seasons comprised of a few days, coupled with pot 
limits, led to a spiral of increased risk to the safety of fishermen 
and to the sustainability of the resources, as frantic efforts were 
made to maximize the numbers of pot lifts in short seasons. In these 
circumstances, juvenile crab feeding on bait, would still be in the 
pots at the time they were lifted, and a high percentage of juveniles 
would perish, as a result of the changes in temperature, when they 
ascended and descended the water column. The future of the crab 
fisheries was dying with its juveniles. Many independent vessel owners 
were left hanging precariously on the brink of bankruptcy. Worst of 
all, the BSAI crab fishery remained the most dangerous occupation in 
the United States.
    In 1996, while the LLP was wending its way through the bureaucracy 
toward implementation, the Sustainable Fisheries Act was enacted. It 
included two measures first proposed by the ACC, new national standards 
to limit and reduce bycatch, and to improve safety, and a third measure 
supported by the organization, authority for the Federal Government to 
conduct industry-funded fishing capacity buybacks. However, to the 
disappointment of the ACC, the Act also included a four-year moratorium 
on new individual fishing quotas.
    Bering Sea pollock took center stage in the North Pacific, and in 
October 1998, the American Fisheries Act established a unique system of 
harvester/processor coops for that fishery, including a 90/10 formula 
for mandatory deliveries to exclusive processors. Most of the Council's 
time during the ensuing 18 months was consumed with resolving those 
issues left to its jurisdiction by the new law.
    During the year 2000, the crab industry considered various forms of 
coops and a buyback. However, these potential management responses to 
the crisis in the BSAI crab fisheries achieved a critical mass of 
support.
    At the close of the year 2000, the moratorium on individual fishing 
quotas was extended for an additional two years. However, in the 
Consolidated Appropriations Act of 2001 (P.L. 106-554), Congress also 
enacted special legislation that served as a guidepost for future BSAI 
crab management:

        . . . The North Pacific Fishery Management Council shall 
        examine the fisheries under its jurisdiction, particularly the 
        Gulf of Alaska groundfish and Bering Sea crab fisheries, to 
        determine whether rationalization is needed. In particular, the 
        North Pacific Council shall analyze individual fishing quotas, 
        processor quotas, and quotas held by communities. The analysis 
        should include an economic analysis of the impact of all the 
        options on communities and processors as well as the fishing 
        fleets. The North Pacific Council shall present its analysis to 
        the appropriations and authorizing committees of the Senate and 
        House of Representative in a timely manner.

    In January of the following year, the Council formally constituted 
a 21-member Crab Rationalization Committee that represented all 
affected interests, including the crab industry organizations, 
dependent communities, and the environmental community. The work of 
that committee culminated on March 23 of that same year with 
endorsement, by a two-thirds vote, of a system that would provide 
quotas for both fishermen and processors and regionalized landing 
requirements. This served as the basis for the Council's eventual 
adoption of a ``three-pie voluntary cooperative program.''
    On June 10, 2002, the Council adopted the Plan by a unanimous vote 
of 11-to-0. The very fact that the long public debate leading up to 
this decision was spirited and even rancorous at times demonstrates 
that the Council proceedings were a model of public participation, with 
input received from every party who had a perspective to bring to the 
table. There were countless hours of deliberation in the Council and 
its committees, as well as within and among interested and affected 
individuals and organizations over a period of more than two-and-a-half 
years. Anyone who failed to offer his or her views cannot claim a lack 
of opportunity to have participated in the process.
    There was, it is true, a last-minute disagreement over a system of 
arbitration designed to resolve price disputes. No organization was 
more concerned than was the ACC, which withdrew support for the Plan, 
pending the outcome of efforts to resolve the crisis. Fortunately, the 
ACC was able to support the end-product, based on the expectation that 
the Council and Congress would critically and continually review the 
operation of the arbitration process, and that the Council would make 
changes, if that proved necessary to assure fairness. This expectation 
was proved correct, when the Council submitted its May 6, 2003, report 
to the Congress, with the following statement concerning arbitration:

        If the preferred arbitration program does not function as 
        intended, the Council is committed to using a different 
        arbitration structure to provide a fair price setting 
        environment. Because of the completed analyses of these 
        different structures, an alternative structure, such as the 
        ``Steele Amendment,'' could be expeditiously adopted as part of 
        the binding arbitration program should Council review of the 
        program suggest that the arbitration program is not working as 
        intended. If Congress approves this program, such explicit 
        authority could be provided to the Council to ensure timely 
        action to address problems that might arise . . . We hope that 
        Congressional authorization of the program will provide 
        explicit direction to the Council concerning its obligation to 
        review and amend the program should any unanticipated negative 
        impacts arise.

The Plan
    While there have been concerns that the Plan somehow establishes 
unsuitable precedents for other fisheries, the fact is that it responds 
in a tailored way to a unique combination of circumstances:

   Horrendous weather and ice problems on the fishing grounds, 
        resulting in the highest occupational fatality rate in the 
        Nation.

   Extreme over-capitalization in both the harvesting and the 
        processing sectors.

   Heavy economic and social reliance of five communities, 
        located in two regions, on crab production.

   Unstable and declining crab resources, and excessive bycatch 
        waste.

   Foregone fishing opportunities, due to inability to manage 
        small resources.

    The Plan responds, in a sustainable, fair, and balanced manner, to 
the complex resource, environmental, economic, social, and safety 
challenges confronting stakeholders in the major BSAI crab fisheries:

   Vessel owners;

   Skippers and crews;

   Processors;

   Communities;

   The public at large.

    To achieve this goal, the Plan contains the following primary 
elements:

   Harvest shares allocated to fishermen for 100 percent of the 
        total allowable catch (TAC), with 90 percent of those shares to 
        be delivered to processors holding processing shares, and the 
        remaining 10 percent to be deliverable to any processor.

   Processing shares allocated to processors for 90 percent of 
        the TAC.

   Regional share designations for processor allocations and 
        the corresponding 90 percent of the harvest allocations, 
        distributing landings and processing between specific regions, 
        plus additional community protections.

   A mandatory binding arbitration program to settle price 
        disputes between harvesters and processors and to insure 
        competitive market prices.

   Voluntary harvester cooperatives permitted to achieve 
        efficiencies through the coordination of harvest activities and 
        deliveries to processors.

   Community Development Quota allocations of 10 percent of the 
        TAC.

   Initial harvest share allocations to captains of 3 percent 
        of the TAC, and the opportunity for skippers and crew to 
        purchase shares.

   Low-interest Federal loan program for captains and crew to 
        purchase harvest shares.

   Comprehensive data collection and program review to assess 
        the success of the rationalization program and to provide 
        oversight on revenue share ratio between harvesters and 
        processors.

    The Plan presents an impressive array of improvements over the 
prevailing situation. These included:

    Biological Benefits

   Improved stock management through use of a TAC.

   Reduced overharvests through individual allocations.

   Reduced discards resulting longer soak times and better 
        sorting of undersized crab through escape mechanisms in gear.

   Improved handling of discards by ending the race for crab.

    Economic Benefits

   Compensated reductions in capitalization through voluntary 
        share transactions.

   Economic stability for the harvesting and processing sectors 
        and communities.

    Social Benefits

   Preservation of regional distribution of economic activity.

   Facilitated entry to the fishery for crew.

   Protection of historical interests of captains.

    Safety Benefit

   Improved safety by ending the derby fishery.
Conclusion
    The ACC commends Senator Stevens for his foresight in authoring the 
statutory guidance that was essential to the Councils' work in 
developing the Plan. We likewise commend Senator Murray for her 
contributions to strengthening the statutory framework for management 
of our crab fisheries. We are deeply grateful for the impetus provided 
by Congress for us to overcome the crisis in our fisheries, and we 
respectfully request that the requisite, additional statutory authority 
be provided as soon as possible for implementation of the crab 
rationalization plan crafted by the Council family.
    Thank you.
                                 ______
                                 
 Addendum to the Statement of Arni Thomson, Executive Director, Alaska 
                             Crab Coalition
    I. The unique differences between the Bering Sea Pollock fishery 
and the crab fishery, and the alternatives for rationalization that led 
to development of the three-pie program with harvester, community, and 
processor shares:

   Rationalization solutions for processors, as well as 
        fishermen, begin with restricting entry. The pollock model 
        found in the American Fisheries Act of 1998 (AFA) was 
        specifically designed for the pollock industry, where stocks 
        were abundant, and long term single market contracts were in 
        effect, particularly within the onshore sector, when the 
        measure was enacted. The number of participants in both the 
        harvesting and processing sectors was stabilized, and the 
        startup costs for new entrants into the processing sector had 
        become almost prohibitive. Processing was, in 1998, and remains 
        today, at full capacity, so markets were not available to 
        accommodate new harvester entrants. During negotiations on the 
        AFA, processors insisted upon, and harvesters accepted, closed 
        classes for both sectors. In addition, the processors 
        requested, and the harvesters accepted, a statutory requirement 
        to contractually bind particular vessels to particular 
        processors, with very little practical flexibility for 
        harvesters to change processors. The AFA was a grand experiment 
        in fisheries management that everyone now agrees has worked 
        very well for the participants operating in the unique 
        circumstances of the pollock fishery.

   In the initial crab industry discussions during the winter 
        and spring of 2000, a proposal was considered, utilizing key 
        elements of the shorebased AFA approach. This was a sincere 
        attempt to arrive at a prompt solution in critical 
        circumstances. However, there were several reasons the AFA 
        model did not work for Bering Sea crab. Most importantly, crab 
        fishermen preferred to avoid a closed class of processors and 
        restriction of markets, and believed that the unique 
        circumstances of their fishery justified and required a 
        different approach.

   In the crab industry, there are multiple fisheries and 
        fishermen have multiple markets. With the exception of the 
        Aleutians Islands brown crab fishery, the crab stocks are low. 
        There is also gross overcapacity of fishing vessels and 
        floating processors. Using the AFA model for Bering Sea crab 
        would have eliminated small processors, as eligibility 
        criterion called for fishermen to match up with the processor 
        they had delivered the majority of their catch to in the 
        previous year. Most fishermen delivered the majority of their 
        product to the large companies, with the small companies being 
        minor markets for partial loads. The small companies, some of 
        which are price leaders, would have lost out on processing 
        privileges under the AFA model.

   A buyback of crab processors was also discussed, but this 
        also meant closing the class of processors and limiting entry 
        in the future. As noted above, fishermen were opposed to a 
        closed class of processors.

   Following failed attempts to adapt the AFA coops, crab 
        fishermen, themselves, asked processors for a processor shares 
        proposal. This was the point of departure for negotiations that 
        led to processors shares, and eventually, regional delivery 
        requirements to protect communities, as envisaged by provisions 
        of the Consolidated Appropriations Act of 2001.

   The crab program, as structured with processor shares, 
        contrary to what opponents have to say, is less restrictive 
        than the AFA. There is no closed class of processors; new 
        processors can enter the industry at any time. Unlike the 
        situation for pollock harvesters under the AFA, crab fishermen 
        under the crab rationalization plan can move from coop to coop, 
        without a penalty year spent fishing in an open access fishery, 
        and fishermen can belong to more than one coop at a time.

   During the public process of considering alternatives, the 
        industry also had discussions of a single-pie IFQ program, 
        combined with regionalization of deliveries of crab--without 
        processor shares or any AFA-style contractual relationship with 
        processors. The technology needed for the processing of crab is 
        much simpler and less costly than that required for pollock, 
        which facilitates the transition of fishermen into the 
        processing sector. This proposal continues to be very popular 
        amongst fishermen.

    Due to the low status of the stocks, there is a significant amount 
        of excess capacity in floating processors that can be purchased 
        at rock bottom prices. Under this single-pie proposal, 
        harvesters could form large fishermen's cooperatives and either 
        purchase a floating processor, or contract with one or more 
        processors or catcher processors, to custom process their 
        product. Under custom processing agreements, fishermen retain 
        ownership of the product, and they can then market it 
        themselves, enabling them to extract more rents from the 
        fishery. In this scenario, harvesters would have the power to 
        vertically integrate the industry, bypass the existing 
        processing sector and disrupt the economics of the five 
        communities that are dependent on established processing 
        facilities. The reality of the outcome of this alternative 
        proposal's effects on efforts to maintain the historic revenue 
        sharing ratio between the harvesting and processing sectors, 
        and to maintain stability in coastal communities, contributed 
        heavily to the development and adoption of the crab 
        rationalization plan's three-pie quota share program.

   The uniqueness of the crab fisheries cannot be 
        overemphasized. They have the only processor shares and have 
        the only regional delivery community protection requirement, as 
        well as the only harvester-processor arbitration process to 
        insure pricing fairness.

    II. Transcript of the testimony of the CRAB Group, Linda Kozak, 
Gordon Blue, Terry Cosgrove, Richard Powell and Jeffrey Stephan to the 
North Pacific Fishery Management Council on October 8, 2000 in Sitka, 
Alaska. At this time the CRAB Group requested (1) that the NPFMC begin 
a full BSAI crab rationalization analysis; (2) formally establish a 
BSAI crab rationalization committee; (3) direct the committee to assist 
the Council staff to identify the elements and options of an analysis 
for BSAI crab rationalization.
    In response to a question from a Council member during this 
testimony Ms Kozak stated on behalf of the CRAB Group that it was their 
belief that the Council is the only forum for developing an analysis 
for a program for crab IFQs, or crab co-ops.
    See the attached notarized transcript in electronic format, pdf 
file, from October 8, 2000.
                               Attachment
                               
                               
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Senator Stevens. Well, thank you very much.
    I think the issues are before the Congress very succinctly 
here now. It would be my intention to call upon each of my 
colleagues in the order in which they came to ask questions. 
And I hope we are in agreement we will limit ourselves to 10 
minutes on the first round.
    I will recognize you, Senator Murray, for any questions you 
might wish to ask.
    Senator Murray. Well, thank you very much, Mr. Chairman, 
and I know time is short, so I will limit myself to just a 
couple of questions, and let me start with Mr. Thomson.
    Can you explain to the Committee the differences between 
the pollock fishery and the crab fisheries which led the 
Council's crab committee to reject a plan that simply 
duplicates the AFA?
    Mr. Thomson. Senator Murray, that is a rather complex, but 
very important, question. It will take me a minute, but I will 
give it my best shot.
    The American Fisheries Act, as I mentioned earlier, we did 
take a very hard look at duplicating that model, since there 
was a firm legislative precedent. However, the pollock fishery, 
as I mentioned in my testimony, is a single-species fishery. 
There are very close alignments between individual fishermen 
and single processors, not multiple processors, very close, 
established relationships, a number of which there were even 
contracts in place. The fishermen and the processors agreed to 
a closed class for both the fishermen and the processors. That 
was point number one.
    Second, they agreed, in the legislation, and this 
particularly applies to the onshore sector, to statutorily bind 
themselves, the fishermen, to a single processor for 90 percent 
of his deliveries. So that was the basis for, particularly, the 
onshore American Fisheries Act, the model that the crab 
industry took a real hard look at.
    However, on the crabbers' side, in looking at the AFA model 
we quickly came to--start to pull away from it, because the 
fishermen, a number of them, were very much opposed to closing 
a class of processors and to that sort of market restriction.
    We also, at that time, looked at the effects on the small 
processors. In other words, most of the fishermen--or a number 
of the fishermen had multiple markets, but their major markets 
were the large crab-processing companies, and if you look at 
the criterion which determines who your market will be, it 
would be the one that you sold the majority of your product to. 
The end result would have been the small processing companies, 
of which a number of them are price leaders, being 
disenfranchised in the program. They would virtually have not 
been participants in the program. So we had to shift away from 
the AFA model.
    One of the other things we looked at that was proposed, and 
discarded, was harvester IFQs with regionalization only. What 
would have been the outcome of that? The outcome would likely 
have been the pretty quick disappearance of several small 
companies, because larger companies would have bought them up 
or possibly bid the price up on crab to the point where smaller 
companies would go away.
    The other very clear outcome of the IFQ program with 
regionalization-only would have been we would have seen the 
harvesters form into some major fishermen's coops and then 
contract with a floating processor or two floating processors 
or some crab-catcher processes and essentially--although it 
would have been a great deal for the fishermen that I 
represent, the fact of the matter is we would have been able to 
totally bypass the processing sector of the industry, and there 
would have been devastating effects particularly on the 
Pribilof Islands. So that was another option we looked at.
    Then we looked at an option of buyback of the processing 
sector, but any rationalization solution of processors or 
fishermen requires restricting entry. And so to do a buyback, 
you, first of all, would have to close the class of processors 
and do a limited entry.
    So I know I am kind of going on a bit here, but there were 
some very important differences that made the AFA unworkable.
    Senator Murray. OK, thank you.
    Mr. Fraser, if Commerce decides against authorizing the 
process of quotas, what specifically would you recommend that 
the Council and that the Congress do?
    Mr. Fraser. Mr. Chairman, I think--and Senator Murray--that 
the Council has done a yeoman's task in developing this whole 
program and 90 percent of the work they have done is pertinent 
to moving forward, with a traditional IFQ program absent a PQ 
element being contained within the program. So I think that is 
the starting point.
    As I mentioned in my testimony, I think there are some 
processor protections that are inherent even in the non-
processor-quota portion of the program. The Crab Group does not 
object to strengthening those. And I think that the AFA does 
provide a model for moving in that direction.
    Clearly, you know, no two fisheries are exactly the same. 
One of the key differences between the two is that the amount 
of capital on the processing side, in comparison to the harvest 
side, in the pollock fisheries is much greater. The pollock 
fishery is much more capital intensive in processing than crab 
is, and thus the justification or more processor protection was 
greater in the pollock fishery. And harvesters have not moved, 
as Arni pointed out, near as much in the pollock fishery as 
they do--because you do not have--and you do not have turnover 
processors. You have got a small number of processors that were 
essentially closed class even before the AFA was passed. And so 
it was easier, I think, for harvesters in that fishery to 
accept a reduced amount of competition that was inherent in 
structuring the AFA, as long as there was some competition left 
in that market arena.
    In the crab fishery, we have seen 80 processors who 
processed crab during the last 10 years during the period of 
time the Council analyzed. Only 21 of the 80 would receive any 
processing quota at this point, and most of the processing 
quota is concentrated in the hands of just a half a dozen of 
those, and most of those are the AFA processors.
    I think you have to recognize that the AFA has, in and of 
itself, provided a large measure of protection for AFA crab 
processors and that the protection for the remaining processors 
is where it needs to be focused as the Council moves forward 
with the non-processor quota plan.
    The sideboards that you, Senator Murray, and Chairman 
Stevens, included in the AFA, the sideboards on crab 
processing, gave the non-AFA processors more opportunity than 
they will receive under this plan. This plan actually awards 
the AFA processors more crab than the sideboard limit. I think 
that if you move forward with a non-processor quota plan, you 
ought to retain the sideboards that you have already included 
within the AFA to protect those remaining non-AFA processors.
    Senator Murray. Well, just a rough guess, how long would it 
take for the Council to finalize another plan if we were not to 
move forward legislatively?
    Mr. Fraser. Mr. Chairman and Senator Murray, the Council 
has an EIS that is prepared. At the request of the advisory 
panel, a repeated request to the advisory panel, we asked that 
they include in that EIS other alternatives than processing 
quotas. There was quite a bit of resistance to that, but, in 
the end, NOAA's general counsel advised the Council that they 
must look at viable alternatives, including legal alternatives, 
and the IFQ system is currently a legal alternative. So the 
Council has a completed EIS for an IFQ system, as well as an 
EIS for the processor quota system.
    So I think they could move forward with a legal IFQ program 
faster than by waiting for Congress to work through all the 
issues relating to authorizing processor quotas. And I think, 
as you have heard from Mayor Kelty and others--or it used to be 
Mayor Kelty----
    [Laughter.]
    Mr. Fraser. But everyone in this room, I think, agrees for 
the need to move forward.
    Senator Murray. Right.
    Well, Mr. Chairman, thank you. I know you have to move on, 
and I will submit the rest of my questions for the record, if 
that is OK.
    Senator Stevens. Thank you very much.
    Senator Murkowski?
    Senator Murkowski. Thank you, Mr. Chairman.
    There is obviously a lot of disagreement at the table, but 
I think it would probably be fair to say that the reason we are 
here, we are looking for, within the industry, to provide 
safety within the industry, we are looking to sustain the 
resource, and we are looking to provide the protection, the 
economic stability, for the communities themselves, the coastal 
communities. And we have heard from both Ms. Freed and Mr. 
Fraser that your concerns are that the communities are not 
protected.
    What suggestions do you have? How can we address that 
component?
    Ms. Freed. I believe you have heard from Mr. Fraser that 
the plan the Council has before it, without PQs, provides quite 
a bit of protection. There is a regionalization component to 
the plan, which provides protection for communities. And we 
think that component does a very good job protecting 
communities.
    What is important to Kodiak is to provide the ability for 
our plants to compete. Kodiak has processed Bering Sea crab for 
over 30 years. The two years selected for the PQ portion of 
this program selects 2 years in which people really could not 
logistically bring their crab back to Kodiak, even if they 
wanted to, because of fish and game regulations.
    We want the opportunity to compete, to have crab come back 
to Kodiak. And to do that, there needs to be a competitive 
market for the harvesters. We believe that the plan, absent of 
PQs, allows that to happen.
    Senator Murkowski. Thank you.
    Mr. Duffy, has there been an economic analysis or an 
economic impact study done that has assessed or reviewed the 
impact to the coastal communities on the regional Governments, 
or, for that matter, the State tax revenues? And if there has 
not been one done, will there be one conducted as part of the 
EIS?
    Mr. Duffy. Through the Chair, Senator Murkowski, there was 
extensive economic analysis conducted, community profiles 
developed, all kinds of information was generated through the 
Council crab rationalization process. I am not sure of the 
specific comment the representative from Kodiak made about the 
state not analyzing something, but through the Council process 
and leading to a Council conclusion in June, there were 
extensive community profiles developed with all sorts of 
economic analysis of the impacts of the different alternatives.
    So the analysis has been done through the Council process, 
Mr. Chairman.
    Senator Murkowski. Go ahead, Mr. Chairman. Thank you.
    Senator Stevens. Senator Cantwell, do you have any 
questions?
    Senator Cantwell. Yes, thank you, Mr. Chairman.
    Nobody has mentioned the 100-million-loan buyout program, 
and I know that it is in the rulemaking process. What effect do 
you think that that will have on this plan? Should we wait 
until we see that rulemaking? Do we think it is actually going 
to reduce the capital investment that has been made? What are 
the thoughts of the various panelists?
    Mr. Thomson. A good question, too, Senator Cantwell.
    The crab industry eagerly awaits the final implementing 
regulations for the buyback program. And we are conservatively 
estimating that we could reduce the over-capitalization 
somewhere around 20 to 25 percent, or reduce capitalization 20 
to 25 percent, going into this rationalization program. And the 
low-cost loan would actually result in a redistribution of that 
quota share in a proportional manner to all of the harvesters 
that stay in the fishery. And so a lot of folks are really 
looking forward to it.
    Senator Cantwell. Do you think it is essential to making 
this program work?
    Mr. Thomson. I would not say it is essential, no. We think 
it would definitely be a very positive benefit, though, 
stepping into the program.
    Mr. Fraser. Mr. Chairman, following up on that, the Crab 
Group, as is implicit in our name, Crab Rationalization Buyback 
Group, has long supported the buyback program and is very 
grateful for the efforts of the Chairman and Senators getting 
that program through, and there has been a lot of hard work to 
make sure that it moves through a NMFS process and ends up 
being implemented. But we are, as I understand it, on the verge 
of implementation, and once that happens there is a very 
expeditious process that is laid out in regulation that could 
result in real benefits in next season, in fact, if all falls 
into place on the time line, to the fleet.
    So I think the buyback program is good. It should move 
forward. The time line for implementation of rationalization 
program is unknown at this point, whether or not Congress 
authorizes processor quotas. So I think there are immediate 
benefits there, and we should move forward with it.
    Senator Cantwell. And, again, no effect on this decision? 
No----
    Mr. Fraser. I think they are standalone issues.
    Senator Cantwell. OK.
    Anybody else?
    Mr. Fraser, you mentioned in your testimony that you 
thought there was better protections for communities that might 
be implemented, or better binding arbitration. What, 
specifically, were you thinking of?
    Mr. Fraser. Mr. Chairman and Senator Cantwell, on the 
community-protection side, I think, as Ms. Freed alluded, the 
community protections that were part of the trailing amendments 
were intended to protect communities from the impacts of 
processor quotas. If you do not go down that path, those sorts 
of community protections are not needed. And, as she said--I 
will leave her statement stand on the community-protection 
side.
    On binding arbitration, I have submitted a much more 
lengthy comment in my written testimony, because it is largely 
a technical kind of issue and there are a lot of nuances. But 
Arni was correct, there were two basic models that came out of 
the Committee. Most of the harvest groups supported a fleetwide 
model, and that model would create a pre-season process where 
one arbitrator would look at information from all processors 
and all harvesters and establish a fair, minimum price which 
would become the outside option for harvesters to then 
negotiate their contracts with processors. And if they can 
bring more to the table by delivering at specific times that 
enhance the size of the pie, they may share those additional 
benefits differently than that minimum price.
    The last best offer arbitration process that the Council 
adopted creates a segmented series of arbitrations, where the 
arbitrators do not necessarily communicate with one another. 
They happen in isolation. The arbitrator does not have the 
ability to cross check the information from a processor whose 
arbitration he is conducting with information about an 
arbitration with a processor that is being arbitrated by 
somebody else. And as a result, you do not have good 
information. And I think that it is very critical that the 
information base for any arbitration program be as good as 
possible.
    And right now, under the Magnuson-Stevens Act, NMFS is 
prohibited from collecting economic data from processors. The 
first thing you would need to do is make sure you change the 
Act to mandate the collection of the relevant economic data and 
make that data available to the arbitrator, because the Act 
further restricts the ability of NMFS to provide economic data 
that it does collect to any outside party. So it is essential 
that the arbitrator have access to the full amount of 
information.
    But the key difference that--the model that Arni's group 
supported and ended up being supported by the Crab Group and 
others as an attempt to compromise was called the Steele 
amendment. Mr. Steele is here. But it attempts to simulate the 
situation we have now, where you have a fleetwide price-
formation process that establishes a price, and everybody has 
to meet that minimum. A processor cannot come in and say, ``I 
have got excessive costs, and you have to pay those costs for 
me.'' In the status quo, that does not happen. Once somebody 
establishes the price, all the other processors step up and 
meet it. And we support that concept as being essential to an 
arbitration process.
    Senator Cantwell. So, Mr. Fraser, you are saying you are 
not out-and-out against processor quotas if what you call a 
``fleet model'' of an arbitration process would be in place?
    Mr. Fraser. Mr. Chairman, Senator Cantwell, I think if we 
go down the path of processing quotas, it is essential that we 
have a good binding-arbitration process to help ameliorate the 
fact that you are segmenting the market----
    Senator Cantwell. I have that point, but would you support 
a plan that had that model?
    Mr. Fraser. I believe the concept of processor quotas is 
fundamentally anti-competitive and bad public policy. What I 
said in the advisory panel early on in the process is, if 
somebody comes forward with such a model that really takes the 
place of competition, and members of the Crab Group, members of 
Tom Casey's group, (the Fisheries Conservation Group), the 
Kodiak Association, (United Fishermen's Marketing Association), 
the Alaska Fishery Market Association--(the group that does 
crab marketing and bargaining)--if they support it, I would put 
aside my personal objections to a processor quota and remove 
myself from this process. But those groups are not endorsing 
the package that the Council has put forward for binding 
arbitration. Some members of those groups believe that a 
different ratio of A and B shares (perhaps 50:50 or 70:30), 
combined with a fleetwide binding arbitration model that 
provided a minimum price as an outside option, would simulate a 
competitive price. The position of the Crab Group is that 
processor quota is bad public policy and that it will not be 
possible to open Pandora's Box in just one fishery and then 
prevent its spread to other fisheries.
    Senator Cantwell. Well, if I could, Mr. Chairman, Mr. 
Thomson, what is wrong with a fair minimum price set by an 
arbitrator as a beginning point?
    Mr. Thomson. Senator Cantwell, you say what is wrong with 
the----
    Senator Cantwell. What is wrong with the concept that Mr. 
Fraser said in having one arbitrator have analysis--basically 
having an information database that has all the information and 
setting what is a fair minimum price so that there can be a 
starting point as a way to protect them. We often run into this 
as we are trying to sell our agricultural products abroad for 
countries who do not want to open up to our product. They just 
want to know what the minimum price is going to be so that they 
know that they are not going to get taken. Then everybody else 
comes in to negotiate the price.
    Mr. Thomson. We do support that. We fully support it. And 
that concept is implicit in the Steel amendment. And the 
Council, in its recent letter to your distinguished Members, 
states that if there is a problem with the process, the 
arbitration process that they have approved as of April of this 
year, that they will immediately address that, take a look at 
that process, and implement this minimum fleet-wide arbitration 
process. They will replace the existing one with the minimum, 
fleet-wide.
    Senator Cantwell. So that is a back-up and----
    Mr. Thomson. It is a back-up----
    Senator Cantwell. I do not want to--I know that I am--I do 
not want to--I want to give time to the Chairman, yield my time 
back, but I--Mr. Fraser, you are shaking your head that that is 
acceptable process, or no?
    Mr. Fraser. It is not an acceptable process. I think Arni 
and I agree that the Steele amendment is better than what the 
Council adopted but it needs to be in place on day one.
    Senator Cantwell. OK. Thank you.
    Thank you, Mr. Chairman.
    Senator Stevens. Well, thank you very much.
    I think we ought to put our eyes back on the goal that we 
sought to achieve with the original Magnuson Act, and that was 
to protect the species, to assure the reproductive capability 
of the North Pacific was to be the primary source of fisheries 
for the United States, that we wanted to assure the 
survivability of the species. We really did not envision 
protecting fishermen--you will not like that--or protecting 
communities. We were protecting the fish.
    Now, I still think we have got some ways to go to assure 
ourselves that we are still on that line. I think it can be 
achieved under the recommendations of the Council, but I am 
worried a little bit about some of our powers. It is my 
understanding the Commission will still establish seasons, 
right? They will establish annual quotas, right? And this 
formula will apply to their annual actions.
    One of the things we have to be sure, that we do not get 
ourselves in the position that some Federal court somewhere is 
going to start regulating the fisheries off the Alaska coast. I 
think that that would be--a delay of a year or two in 
litigation over this plan would be destructive to everybody, 
including the fishery, I think, because of the problems.
    Do you all agree that--not agree, but would you care to 
comment upon a follow-up to Senator Cantwell's question? Do you 
envision that we have the authority now to condition the 
approval of this change in the law upon compliance with the 
recent letter that was received by us concerning the 
arbitration procedure? Do you understand?
    Mr. Fraser. Mr. Chairman, I will rush in, I guess.
    Senator Stevens. There is a letter on file, as Mr. Thomson 
said, saying that the Council would consider this change. And, 
in effect, it is a tacit admission that perhaps the procedure 
for arbitration is not sufficient to carry out their original 
intention, and they indicated they would revisit it.
    Mr. Duffy, do you believe we----
    Mr. Duffy. Thank you, Mr. Chairman.
    Senator Stevens.--should consider making our action here 
conditioned upon the follow-up to that letter?
    Mr. Duffy. Mr. Chairman, the discussion was about binding 
arbitration. It was, indeed, very complex. Counsel, as well as 
the industry, spent 6 months trying to sort this one out. It 
was very difficult. In the end, it a 6-5 vote was made by the 
Council, that is the binding-arbitration process. It is a pre-
season non-binding price formula. You go through the season, 
and if you cannot reach agreement between the harvester and 
processor, there are provisions for binding arbitration.
    This concept of the Steele amendment is incorporated into 
the Council motion in that what the proponents were trying to 
do in the Steele amendment can be looked at by the nonbinding 
arbitration process prior to the start of the next season to 
get a feel for how that works.
    If the question is, ``Can Congress change what the Council 
has recommended on binding arbitration,'' the answer is yes.
    Senator Stevens. We never have. We have never done that 
before, because we created the Council with the idea that 
regional management was better than management from Washington. 
But, strangely, I hear some of you saying you would rather have 
some management from Washington now.
    [Laughter.]
    Mr. Duffy. Mr. Chairman, if I could respond to that. I do 
not want that to be attributed to me because I am a big 
supporter of the Council process and I think we have done a 
very good job shaping a very difficult program.
    What I was suggesting is the binding-arbitration 
discussions and the vote were very, very close, and there were 
a lot of very difficult concepts for the Council to wrestle 
with. And we would not be the first to admit--or the last to 
admit, that we were, you know, experts in binding arbitration. 
It is a subject where a lot of attorneys make a living. So it 
was a complex issue.
    Mr. Fraser. Mr. Chairman, to follow up on that, the 
Council--actually NOAA General Counsel has sent a letter to 
Department of Justice, the Antitrust Division, requesting some 
bounds, I think, on what constraints they will bump up against 
in setting up different binding-arbitration programs. I concur 
with Mr. Duffy, the M-S Act process under which you delegate 
authority to the Council for managing fish. However, we would 
be stepping into new territory here if you start delegating 
authorities to councils to manage markets. And it is unclear at 
this point how broad of authority you would have to grant to 
the Council to give them the ability to change horses from one 
system of binding arbitration to another if, in fact, the 
system that they have identified at this point does not work 
out.
    And so any Council action to deal with a flawed arbitration 
program will not be final. Prior to review they will wait a 
year until they see the results. Fishermen will be described as 
coming to the Council whining for a change, so they might want 
to see 2 years of results. And then there is an analysis 
process, and it takes a year for the Council to work through 
its process and then 6 months for NMFS to implement things, 
assuming the fix is within the scope of authority Congress 
might grant. So we are looking a number of years down the road. 
If the effects are seriously negative, they may be 
irreversible. That is the concern.
    So from our perspective, as harvesters, we would like to 
see a binding-arbitration program in which we have confidence 
clearly built in ahead of time before you go down any further 
on the path of authorizing the processor quotas.
    Senator Stevens. Well, the difficulty I have is I think 
that the Council has responded to an act of Congress that has 
already been passed. And you are requesting, Mr. Fraser, that 
we amend our own action in seeking to have the Council make 
this determination.
    I am interested in your comment concerning the antitrust 
provisions. That has been one of the worries that has been 
raised here in this Committee. And I am fearful, again, that 
should this be taken to court on the antitrust concept, we are 
liable to find a court managing the fisheries off our coasts. I 
want to make sure that does not happen. And if the antitrust 
provisions, if there is a decision that this is in violation of 
antitrust, I want to make sure it is returned to the Council to 
manage this fishery and not kept in some Federal court.
    But, beyond that, I am reminded of the time I spent with 
former Secretary of Commerce Mack Baldrige, when he was still 
with us, and he was very interested in the king crab, and he 
taught me about the way king crab travel across the ocean 
floor. He had a report that one of you issued concerning the 
pods, that they are 40 and 50 feet high, and how they travel so 
far.
    It leads me to this question. What assurance is there that 
when a harvester comes to a processor, that the processor will 
be open under this proposal? We have a processor share, and you 
must sell to a processor that has part of that share. But if 
you are the harvester, and you come in when the processor that 
you are obligated to deliver to is closed, where do you go? 
Where do you go, Mr. Thomson?
    Mr. Thomson. The way the program is designed is there is--
90 percent of the processing shares are allocated to certain 
processing companies. But you have to match up with one of the 
companies. If a company is closed or its quota share is filled 
up with other harvesters, he has to go someplace else. But 
there will be--there is somebody there to match up with.
    Senator Stevens. But it has to be someone within the 90 
percent, right?
    Mr. Thomson. It has to be someone within the 90 percent. 
But we envision that this thing will operate similar to the 
AFA, that there are so many advantages to the fishermen joining 
coops that months ahead of time you are going to pair up into a 
coop, say, with another 10, 20, 30 boats. Fishermen will have 
to make decisions who is going to fish, who is going to tie up 
their boats, so that they can save money in order to make 
money.
    I do not know whether I am answering your question 
correctly, but we do not envision this becoming a problem.
    Senator Stevens. Do you believe that the processor holding 
part of the 90 percent shares has an obligation to remain open 
to receive the harvesters' product when it is brought to the 
shore?
    Mr. Thomson. Yes, I believe he has an obligation. I mean, 
he is there to be in business and to make money. In order to do 
that, he has to contract and receive product.
    Senator Stevens. Let me tell you, I am sure you remember 
that I had an unfortunate invasion into this process when we 
commissioned the Lady Anne back in 1980, and that was one 
investment that I had--the only investment that I can recall 
that I had to buy my way out of.
    [Laughter.]
    Senator Stevens. This is not a business without great 
financial risk, and I am worried about what happens to 
processors under this proposal when there is such an enormous 
share allocated to certain processors with no chance of entry 
into that circle at all in the future.
    Now, I want to make sure I understand this, now. Annually, 
the allowable catch is determined. If it is increased next year 
by 20 percent, the same processors get 90 percent. Is that 
right?
    Mr. Thomson. That is correct, sir.
    Senator Stevens. Mr. Duffy, is there any chance for a new 
processor to enter into this without another act of Congress?
    Mr. Duffy. Yes, Mr. Chairman, there is 10 percent B shares. 
That is one option. So any harvester can process their B 
shares. In addition to that, any processor without processor 
shares can purchase processing quota from those that currently 
hold it if they strike an agreement.
    Senator Stevens. I saw that, but does that apply when there 
is an increase in the quota?
    Mr. Kelty. Mr. Chairman?
    Senator Stevens. Yes?
    Mr. Kelty. There are caps in place. If the quota goes up, 
then there are caps on the amount that the processors can 
process, and that would mean more poundage into the open-access 
B-share category.
    Senator Stevens. The 10 percent is not 10 percent in that--
do you agree, Mr. Duffy?
    Mr. Duffy. Mr. Chairman, the way it works with these caps 
is--let us say, for example, opilio crab stock goes up 
dramatically. At some point, the 90:10 is diminished to 80:20, 
depending on the total amount of the stock there. With those 
caps in place, the amount of B share that anyone can process is 
increased when you hit those caps.
    Senator Stevens. And does the Commission make that 
determination?
    Mr. Duffy. Yes, that is part of the comprehensive Council 
plan. And on an annual basis, the Department of Fish and Game 
will be the total allowable catch, by species.
    Ms. Freed. Mr. Chairman, if I could respond to that, as 
well. We have looked very carefully at those caps set on the 
community protection committee, and we are very disappointed at 
how high those caps are set. We believe that they offer no 
respite from the 90:10, not, certainly, in our lifetimes.
    We would also like to mention that the 10 percent B share, 
open share, we do not believe that provides any leverage for 
the fishermen at all, and provides no leverage for communities. 
Ten percent, frankly--even in open access right now, fishermen 
are told if they do not bring their crab to a particular plant, 
they do not have a tender contract. Or if they do not bring 
their crab to a plant, they are not going to have other 
opportunities with a particular processor.
    We have had public hearings where fishermen have testified 
before the city council saying, ``We do not believe that there 
is any chance that that 10 percent will ever be able to be 
brought back to Kodiak, because the processors that we deliver 
our 90 percent to will hold us hostage.''
    Senator Stevens. We can take care of that, Ms. Freed. I do 
believe most of the boats you are talking about are home-ported 
in Kodiak, and they certainly could bring back their last catch 
without any problem. I do not think--that is another antitrust 
problem. If you think that, for 1 minute, that a processor can 
demand that they get part of the 10 percent in exchange for an 
agreement to buy part of the 90 percent, you have got yourself 
an antitrust case right there. Now, that is not going to happen 
twice, I will tell you, because that is an antitrust violation.
    Ms. Freed. Well, Mr. Chairman, also the fact is, is that 
there is so little quota that comes to Kodiak because of the 
years that were selected that boats will not be able to bring 
their last load home as they have traditionally done. That is 
one of the things that we took to the North Pacific Council and 
asked them to consider, and they dismissed that out of hand.
    Boats will not be able to bring their last load home to 
Kodiak, even boats that are home-ported in Kodiak, because 
under the current plan, Kodiak gets roughly 3 percent of the 
quota. Traditionally, what comes home in a last load when there 
is open opportunity for the fishermen to bring their crab back, 
is 10 percent or more.
    Senator Stevens. Well, what about that 10 percent? Why 
could not you get part of the 10 percent?
    Ms. Freed. The way the last-load home works is, most of 
them would have more onboard, potentially under these low tax 
right now, that is more than just the 10 percent. But what I am 
saying is, that is not equivalent to what the processing quota 
is and their ability to bring that product home now, because 
they have to deliver 90 percent of their product to plants that 
are not in Kodiak.
    Mr. Kelty. Mr. Chairman?
    Senator Stevens. Yes, Mr. Kelty.
    Mr. Kelty. Yes, I have to take exception to some of Ms. 
Freed's comments. You know, the Kodiak history through 1997 
through 1999, it is a little bit under 4 percent on red crab. 
It is not even 1 percent on opilio. Part of my testimony that I 
turned in, I went back trying to find some history for Kodiak, 
and I went back all the way to 1990. 1990 to 2003 for opilio, 
1.9 billion pounds were processed. Kodiak got 6.6, only 6.6 
million out of 1.9 billion pounds of opilio went back to 
Kodiak. Years that--we had 300-million-pound quotas in the 
early 1990s. Less than a million pounds went back to Kodiak. On 
red king crab, in that same timeframe, from 1990 to 2002, there 
was 126 million pounds of red king crab processed; 5.5 million 
pounds went back to Kodiak, about 3.8 percent, during that 
whole 10-year period.
    It just shows you there is a lack of dependency on the 
Bering Sea resource going back to that community. This last 
opilio season, in 2003, there was 197 boats fished. Only one 
vessel--it was a one-trip season, 26 million pounds of opilio 
caught--only one vessel decided to go back to Kodiak, with less 
than 100,000 pounds. On the king-crab season the year before, I 
think seven vessels went back. And these are one-trip seasons.
    Senator Stevens. We have got to move on here.
    Senator Murray, do you have any further questions?
    Senator Murray. No, thank you, Mr. Chairman.
    Senator Stevens. Senator Murkowski, do you have any further 
questions?
    Senator Murkowski. I want to ask, really quickly, on this 
10 percent, the undesignated shares. You know, I understand the 
purpose and the intent and the leverage to the fishermen and 
hopefully to encourage new processors to come into the industry 
so we do not have the antitrust concerns. But in terms of how 
we got to the 10 percent--again, I guess, Mr. Duffy, this would 
be directed to you--what kind of an analysis went into that to 
determine it is a 90:10? How did we arrive here? Just very 
briefly, because I am sure there is more history than I want to 
know.
    Mr. Duffy. Very briefly, through the Chair, Senator 
Murkowski, the concept of a 90:10 split was within a range of 
discussions that happened in the industry committee. That 
industry committee met for over a two year period. So that was 
really where you had a range of--I think it was 70 to 90 
percent was discussed, if you went down the processor-quota 
idea.
    So in terms of the 90 percent and specifically where was it 
analyzed, I think the concept, generally, of processor-quota 
shares, their benefits to communities, the potential 
relationship impacts it might have between harvesters and 
processors, was all in the Council analysis. But I do not think 
you can take your finger and point to a specific point or place 
in the analysis where it says 90 percent or 85 or 95 or 100.
    The Council had to listen to the industry committee, the 
advisory panel, the science committee, and had to come to a 
decision about what they thought an appropriate share of the 
rents would be through a program that protects communities, 
harvesters, and processors. That is where the 90 percent 
processor quota, 10 percent B share came from.
    Mr. Fraser. Neither the Advisory Panel or Scientific and 
Statistical Committee recommended 90:10. Nor did the crab 
industry committee appointed by the Council make a specific 
recommendation on the A:B ratio. However, ACC which supported 
the Committee report to the Council came to the June 2002 
meeting recommending 80:20. The Council did not debate any 
alternative ratios, and so the record fails to identify why 
90:10 is the preferred option. If I could just add, Mr. 
Chairman, that the one place that the analysis did deal with it 
was the two economists who were contracted by the Council, 
Professors Milan and Hamilton, and that analysis was 
qualitative. And the relevant quote was that, ``as the ratio 
increases of processor quota to independent market quota, it is 
going to favor processors over harvesters.'' And I think that 
is just--it is almost intuitively obvious. But we are at a 
ratio that is clearly at the high end of favoring processors.
    Senator Murkowski. And if I recall your testimony 
previously, you had said that that summation had been taken out 
of the----
    Mr. Fraser. It had been removed from the main document 
and----
    Senator Murkowski. OK.
    Mr. Fraser.--put back in as an Appendix.
    Senator Murkowski. Thanks.
    Thank you, Mr. Chairman.
    Senator Stevens. Mr. Duffy, I have some other questions to 
ask, if I may. We are obligated to get out of this room by 
4:30.
    Is there a commitment by the Council to monitor the crab 
plan and make any needed adjustments if one of the three pies 
or partners--harvesters, processors, or communities--are 
disadvantaged by some unintended consequence?
    Mr. Duffy. Mr. Chairman, I think I would be appropriate for 
that.
    The Council, in their problem statement, talked about--and 
goal statement--talked about trying to achieve equity between 
the harvesters and processors. In developing this program, we 
put a number of measures in place we hope will do that. The 
program-review portion of it is review by the Council 3 years 
after implementation and then comprehensive review of the 
program 5 years after implementation and a commitment by the 
Council to modify the program, if needed or as appropriate, to 
ensure equity between the harvesters and processors. The 
Council is on record as taking that approach.
    Thank you, Mr. Chairman.
    Senator Stevens. Mr. Thomson, there has been, implicit in 
some of the answers, a fear that the processors are going to 
use the leverage of their 90 percent contracts to control the 
10 percent. I have in mind some sort of an amendment that would 
say that anyone that did that would forfeit forever their 
interest in the 90 percent. Would you object to that?
    Mr. Thomson. No, Mr. Chairman.
    Just a quick comment, if I might, Mr. Chairman----
    Senator Stevens. Yes, sir.
    Mr. Thomson.--to a question that you asked previously about 
the Council, this Council-approved program and whether or not 
it should be changed or altered or if we should just authorize 
the Council-approved program. The ACC has long supported the 
North Pacific Council process. We live with the decisions of 
the North Pacific Council, and so we support the program that 
the Council has approved. We agreed to that going into this 
process, and I thought other folks that were involved in this 
process similarly asked for the Council process to develop this 
program, and I thought that they had similarly agreed that what 
came out of this process at the North Pacific Council on crab 
rationalization was going to become the program that we would 
live with.
    Senator Stevens. I agree with that. It does seem, however, 
that when we pass this bill, if we do, we have established a 
new paradigm for the king crab as far as the Council's 
authority for the future. And as I understand it, they would 
not have the authority to modify substantially the whatever it 
would be, the plan we approved, without the approval of the 
Congress. We could change that, of course, and say that it 
could be modified with the approval of the Secretary. I think 
you all should look at that to see, because I do believe, in a 
dynamic situation like we have got now, that the possibility of 
unforeseen circumstances is great.
    We have just had a report over the weekend, as you know, 
from a global study, of the status of fisheries in the world. I 
was interested to see that there were not any specifics 
mentioned about the North Pacific. I think the North Pacific 
Council has the best track record of all the councils in our 
country, and I think that the United States has the only track 
record of putting forth a management plan that protects the 
fish.
    Now, we have got to emphasize that even more for the 
future, and I think that if we are to avoid the unforeseen 
consequence of having a court intervene in this management 
process because of violation of some concept that is developed 
by one of these studies, and that is not--when we look at 
endangered habitats and the whole concept now, that is not an 
unforeseen possibility, we have a definite possibility of 
intervention by litigation in the management of the North 
Pacific if we do not really tow the line as far as protection 
of the species. So I would urge you to keep that in mind.
    My last question, really, is the problem of Kodiak. And it 
is been very well expressed here, but I want to ask you all. Do 
you see any chance for Kodiak to restore any portion of its 
previous fishery under the plan that is before us now? What is 
the answer to Kodiak's objection?
    Mr. Duffy?
    Mr. Duffy. Mr. Chairman, if I could, we, as a Council, 
tried to reflect, in the amount of processing quota, historical 
dependence on that fishery. As you know, under National 
Standards and under advice from the National Marine Fishery 
Service, recency is an issue we often look at. The years 
selected for processing quota for Kodiak, 1997 through 1999, 
for opilio and Bristol Bay red king crab are within the range 
of the 1991 to 2000 season and what Kodiak has processed on 
crab.
    Additional measures Kodiak can use is, they can use sweep-
up provisions to get crab in the Gulf of Alaska that is just 
bits and pieces in smaller communities' processing quota. They 
can purchase IPQ to expand their processing base in the 
community of Kodiak. And they have some first right of refusal 
processor quota if certain processors choose to leave that 
community. So they do have some options available to them upon 
approval of this program and implementation already.
    Senator Stevens. Is there any future with regard to that 
harvester-processor portion of the industry as far as Kodiak is 
concerned?
    Mr. Duffy. Mr. Chairman, if you are talking about the 
catcher-processor----
    Senator Stevens. Catcher-processor, yes.
    Mr. Duffy. Yes, the catcher-processor sector. What the 
Council has done with the catcher-processor sector is given 
each catcher-processor CP shares that reflect what they harvest 
and what they processed on board. We have also, in addition to 
that, given them harvester quota for quota that was previously 
delivered to the shore. So they are made whole under this 
program. Now----
    Senator Stevens. But can any of that allocation to 
processors, the catcher-processor, be brought ashore in Kodiak?
    Mr. Duffy. Yes, the catcher-processor shares can be 
transferred to shore-based processing through the Council----
    Senator Stevens. Must they be allocated to those that hold 
the 90 percent?
    Mr. Duffy. The CPs, if they change to shore-based, they 
would be subject to the 90:10 rule----
    Senator Stevens. Why?
    Mr. Duffy. Well, because they would be moved to shore-based 
processors who are a part of the processor-quota program.
    Senator Stevens. I do not understand that. I should have 
asked that question sooner. That was in the back of my mind 
when I came here. Why should the catcher-processor quota, if 
they decide to go ashore, automatically go to the 90 percent?
    Mr. Duffy. Remembering Council discussions on that issue--
and I will let others chime in--but remembering Council 
discussions, our intent was to make the catcher-processor fleet 
whole, but to not let them grow at the expense of coastal 
communities. So what we set up was a one-way transfer of CP 
shares to the shore-based----
    Senator Stevens. Could a community purchase the shares of a 
catcher-processor?
    Mr. Duffy. Can a community purchase catcher-processor 
shares? Yes, I believe.
    Mr. Kelty. Yes, because they can--communities can also 
purchase the harvester shares.
    Mr. Duffy. Right.
    Mr. Kelty. So the CP is a harvester, so they could purchase 
shares that way.
    Senator Stevens. Ms. Freed, why is not there an avenue for 
Kodiak to increase its shore-side processing by purchasing some 
of the shares of the catcher-processors?
    Ms. Freed. Our contention is that other communities are 
getting their historical share under this program; Kodiak is 
being forced to purchase it. The Kodiak community can ill 
afford to purchase quota that has been historically coming to 
Kodiak.
    I have got some economic information attached to my 
testimony, but in 2000, 10.93 percent of the Bering Sea red 
king crab came to Kodiak. In 2001, it was 10.5 percent. I 
cannot tell you what it was in 2002 and 2003, because Fish and 
Game does not have the statistics, but I can tell you I looked 
out of my office window and saw 14 boats that were home-ported 
in Kodiak sitting in Kodiak waiting to unload. That is well 
more than 3.8 percent that is available.
    The sweep-up provision for the coastal communities in the 
Gulf of Alaska that would provide us with an opportunity to add 
to our quota is, again, a purchase program. It would force the 
community of Kodiak to spend money that we might need for law 
enforcement, for our ambulance service, to buy quota to make us 
whole, and that is an unacceptable situation for Kodiak. It is 
not happening for many other communities. It is happening to 
some other communities in the Gulf of Alaska.
    Senator Stevens. Well, I do thank you all. It is a very 
perplexing question for us. We are going to have to confer 
further on it. There is no question about that.
    We will accept additions to your comments. Those persons 
that want to add to this record would do so through these five 
witnesses. I was limited to the five witnesses by the agreement 
we had to hold this hearing.
    And, again, I thank you all for coming. You know, we get to 
the point sometime that we forget about the objectives of what 
we fought for back in the 200-mile limit bill and the whole 
concept of being able to protect our fishery against, primarily 
against, foreign intrusion. And I do think that we have to get 
back to that and keep foremost in our mind that we, as 
particularly the Northwestern part of the United States and 
Alaska, are the stewards of that offshore potential and the 
great species that exist. And the history of the AFA is that we 
have improved the condition of pollock. The history of this 
agreement can only be tested in terms of whether it increases 
the stability of the production of crab in the North Pacific. I 
hope we keep that in mind.
    Thank you very much.
    [Whereupon, at 4:30 p.m., the hearing was adjourned.]

                            A P P E N D I X

               Prepared Statement of Coleman A. Anderson
Senator John McCain, Chairman

    Mr. Chairman, members of this committee: I do not support Processor 
quota in any form. It seems that all common sense has been thrown out 
the window on this issue of PQS. As an operator of a crab catcher 
vessel and minority owner in a crab catcher processor I would be left 
with only four companies to sell to, or compete against for the rest of 
my life in the industry. I would like the committee to consider the 
following points:

   The ACC does not represent independent fisherman and is now 
        the smallest group of vessel owners in the industry.

   The NPFMC council's recommendations do not allow for 
        vertical integration by the remaining processors in the 
        industry nor the fact that CIP vessels would no longer be 
        allowed to purchase crab at the end of the seasons. This will 
        skewer the 90:10 split to 95:05 in reality and that would not 
        be a free market in any sense of the term.

   This entire process is about harvester reduction, the 
        processing sector has downsized it's crab operations years ago 
        with the reduced GHL's that we all live with. All of the crab 
        processing equipment in Alaska is fully depreciated or the 
        former owners are out of business. There is no reason to 
        guarantee the four remaining companies a free ride for the rest 
        of their corporate existence.

   Why has Binding Arbitration become such a hot issue? Because 
        no amount of talk, meetings, and proposed full time positions 
        for legal advisors can create the compelling need to arbitrate 
        by the processing sector if the are guaranteed the crab in the 
        end by law.

   The councils proposals will result in the harvesting and 
        labor sectors of this industry being absorbed by the four 
        remaining processing corporations with no place left to go in 
        an industry that most of us have dedicated our lives to.

    As a life long Alaskan and 30 year participant in it's fisheries I 
have watch all of Alaska's recourses sold and bartered as if Alaska 
were a third world nation: Please don't allow this to continue here.
            Thank You,
                                        Coleman A. Anderson
                                 ______
                                 
    Prepared Statement of Michael F. Burns, President and Co-Owner, 
                          Blue North Fisheries
    Thank you for the opportunity to tell you a little about our 
company, Blue North Fisheries, and the likely adverse effects on Blue 
North of the Bering Sea/Aleutian Islands Crab Rationalization plan 
recommended by the North Pacific Fishery Management Council (NPFMC). 
Generally we are supportive of this plan, but have concerns about the 
design of the processing quota element of the Council's 
recommendations. First let me explain the background of our 
participation, the problem with the Council's recommendation for 
processing quotas as we see it, and a proposed solution to correct the 
problem.
    Blue North Fisheries participated in the Bering Sea crab fisheries 
for over fifteen years as crab harvesters. As a result of the enactment 
of the American Fisheries Act (AFA) in October 1998, a limited group of 
large, so-called ``AFA processors'' was given a ``closed class'' for 
the right to process pollock, and to be fair to processors not allowed 
to process pollock, the AFA ``sideboards'' limited the amount of crab 
that these AFA processors could process. In reliance on the AFA 
sideboards, and concerned about a restricted processing marketplace, 
Blue North Fisheries invested more than $2.5 million in acquiring a 
processing vessel to process crab caught by its commonly owned catcher 
vessels. Starting in October 1999 and continuing to the present, Blue 
North processed more than one million pounds of raw, delivered crab, 
all of which was caught by Blue North catcher vessels in the Bristol 
Bay Red king crab fishery and the Bering Sea C. opilio (snow crab) 
fishery. To our knowledge, Blue North is the only processing entity 
with significant recent participation that entered the processing 
sector subsequent to the AFA.
    Additionally, Blue North also engaged in joint venture processing 
operations with Western Alaskan communities since 2001, providing 
processing markets in coastal communities traditionally deprived of the 
opportunity to participate in the crab fisheries adjacent to their 
villages. These operations culminated in the company's recent 
investment partnership with the CDQ organization Coastal Villages 
Region Fund (CVRF), now fifty-percent investment partners in Blue 
North's four crab vessels including the processor Blue Dutch.
    In June 2002, the NPFMC decided to recommend the establishment of 
processing quota shares, for the first time ever. Given the extent of 
our crab processing in 1999-2002 (continuing in 2003), we reasonably 
expected to receive processing quota shares equivalent to our present 
effort. However, the NPFMC omitted the most recent three years and 
picked 1997-1999 (years that are most advantageous for the AFA 
processors) for the Bristol Bay Red king crab and Bering Sea C. opilio 
(snow crab) fisheries. By contrast, the AFA used for historical 
participation the three years preceding the year of enactment, which we 
believe is the correct approach. The result of the NPFMC's selection of 
less-than-current history is that Blue North is extremely disadvantaged 
by receiving no processing quota for opilio and only a negligible 
amount for king crab, despite active current processing--processors 
with less recent participation will receive more processing quota 
shares. Additionally, the Western Alaska communities of CVRF that have 
been deprived of opportunities in fisheries off their doorstep will be 
similarly disadvantaged by this lack of processing opportunity.
    ``Present participation in the fishery'' is the very first 
criterion listed in the Magnuson-Stevens Act (section 303) for 
development of limited access programs. In determining crab processing 
quota shares, the NPFMC failed to adequately characterize present 
participation in its analysis, disregarding the most current three 
years of participation. The net result of this omission is to award 
processing privileges to AFA processors in excess of the processing 
sideboard caps stipulated as a condition of the benefits conferred by 
the AFA. This windfall to the large, often multi-national, AFA 
processors comes at the expense of our small, domestic processing 
operation.
    In conclusion, we request that any implementing legislation for the 
North Pacific Council's crab rationalization plan include a 
``grandfather provision'' to reflect Blue North Fisheries' present 
participation in crab processing. Without such a grandfather provision, 
the NPFMC plan has the effect of penalizing Blue North for reasonable 
reliance on the AFA sideboards. Specifically, Blue North would like to 
have sufficient processing quota shares to enable its processing vessel 
to process the catch of its commonly owned catcher vessels. This 
solution will correct the unfairness resulting from the Council's 
approach and compensate for the Council's failure to adequately address 
the requirements of the Magnuson-Stevens Act regarding present 
participation. The amount provided to Blue North under an amendment 
like this would be less than 1.5 percent of the total amount of the 
crab processing quota shares, most of which is allocated to large, 
economically advantaged shoreside processors. With this adjustment, 
Blue North Fisheries would fully support the crab rationalization 
program recommended by the North Pacific Fishery Management Council.
    Thank you for the opportunity to submit this statement for the 
hearing record.
                                 ______
                                 
          Prepared Statement of Robert L. Chevalier, Sitka, AK
U.S. Senate Committee on Commerce, Science, and Transportation
Senator John McCain, Chairman

Mr. Chairman:

    I believe that there are grave dangers to the United States 
inherent in the Crab Rationalization Plan being considered by the North 
Pacific Fishery Management Council. The domestic issues of 
socioeconomic violence and antitrust law violations are bad enough; the 
international implications are truly frightening, and the U.S. may be 
in danger of giving away control of its fisheries and oceans simply by 
adapting the processor shares provisions of the Crab Rationalization 
Plan.
    Under the Individual Fishing Quota plan, at present used to manage 
longline fisheries in the Gulf of Alaska and the Bering Sea, anyone 
wishing to purchase quota and prosecute a fishery must be an American 
citizen, and MUST, under pain of ultimately forfeiting all fishing 
rights, obey all regulations set forth by managing agencies designated 
by the Magnuson-Stevens Act. However, quota shares given to processors 
will become simply a business asset controlled by the owner of the 
processing facility, many of whom are foreign or multinational 
corporations. Under the provisions of GATT the holder of resource 
assets may have rights which supercede those of the state or Federal 
governments, and the U.S. may very well lose the ability to manage the 
fisheries in question: the provision of so-called free trade will 
supercede all matters of conservation or American utilization of marine 
resources.
    In short, the processor share provisions of the Rationalization 
Plan may destroy the Magnuson Steven Act, and all American fisheries.
            Respectfully Submitted,
                                        Robert L. Chevalier
                                 ______
                                 
      Prepared Statement of Dorothy Childers, Executive Director, 
                   Alaska Marine Conservation Council
    Chairman McCain, Senator Stevens and members of the Committee:

    Thank you for holding today's hearing on processing quota and the 
proposed Bering Sea crab rationalization plan. A decision by Congress 
regarding authorization of processing quota is clearly of major 
significance in terms of future U.S. fisheries management policy.
    The Alaska Marine Conservation Council (AMCC) is a community-based 
organization of fishermen, traditional subsistence harvesters, 
scientists, small business owners, families and others concerned about 
the health and diversity of our marine ecosystems.
    AMCC supports rationalization of the Bering Sea crab fisheries. We 
are also working at the North Pacific Fishery Management Council to 
advance conservation and community benefits of groundfish 
rationalization plans that are currently under development in Alaska. 
We do not support processing quota as an element of rationalization 
because of the controlling effect this system would have on markets, 
fishing families, communities and the public process for managing the 
public's fishery resources.
    Under the proposed Bering sea crab plan, the fishery would be 
managed under a quota system in which vessel owners and fishermen would 
be allocated individual fishing quotas (IFQs) and seafood processors 
would be awarded processing quotas to buy and process the catch. The 
proposed ``two-pie'' plan would require fishermen to sell at least 90 
percent of their catch only to processing companies holding processing 
quota.
    Processing quota is an anti-competitive system in which the 
government would allocate market share to certain corporations. 
Processing quota will limit who can do business to a select pool of 
quota holders. About 90 percent of the shares would be allocated to 12 
out of the 30 eligible companies and will allow for significant quota 
consolidation through transfers, leasing or buying out other companies 
holding quota. There are no effective limits on how much processing 
quota a single corporation could control.
    As a conservation organization, AMCC is involved in the processing 
quota debate as a matter of public policy because it speaks to 
governance of the public's fishery resources and the future face of the 
seafood industry. Our objective is to promote fishery management 
systems that ensure wise conservation management for long-term 
sustainability of fish, ocean ecosystems and our communities--healthy 
fisheries and healthy communities go hand-in-hand. The allocation of 
processing quota goes far beyond the kinds of allocation decisions 
regularly made by regional councils. We believe processing quota will 
lead to a concentration of control by processing corporations that will 
tip the scale, diminishing the role of community voices in the 
management of our resources. For fishery-dependent communities, 
processing quota does not offer a safety net but is rather a political 
accommodation that over time will create more problems than it solves. 
Certainly concerns raised by community entities regarding inadequate 
protections in the Bering Sea crab plan bear this out.
    The NPFMC has a huge and time-consuming responsibility for the 
conservation management of our fisheries. The Magnuson-Stevens Act 
authorizes regional councils to manage the harvesting sector in 
accordance with complex rules associated with the biological needs of 
the fish and ocean ecosystems along with socio-economic considerations 
related to limited access and allocation between harvesters. Fishery 
managers should not also be tasked with designing and managing market 
systems for fish after they are caught. Although many hours have been 
spent developing the Bering Sea crab plan, we remain concerned about 
the degree of scrutiny applied to the processing quota component:

   The North Pacific fishery managers' deliberations on the 
        crab plan have not included a discussion on what problems 
        processing quota is expected to resolve or what alternatives 
        might be suitable to address them. For example, do the 
        relatively small number of processing companies that will 
        receive quota require a perpetual endowment of market share? Or 
        are their problems related to being able to weather a short-
        term transition from an open access fishery to a slower-paced 
        quota system for harvesters?

   The Senate Subcommittee on Oceans and Fisheries requested a 
        report from the Government Accounting Office (GAO) reviewing 
        the ``economic effect of the IFQ program on Alaskan halibut and 
        sablefish processors.'' \1\ The report revealed clear 
        weaknesses in the one economic study that has been used as the 
        rationale for processing quota. This study concluded that IFQs 
        gave fishermen more bargaining power and caused processors to 
        lose market share, profit margin or go out of business.
---------------------------------------------------------------------------
    \1\ GAO. 2002. Individual Fishing Quotas, Better Information Could 
Improve Program Management. The full report is available at 
www.gao.gov.

        The GAO reported that they could not determine what the effects 
        of halibut/sablefish IFQs were on processors and to what degree 
---------------------------------------------------------------------------
        IFQs caused changes in the processing sector.

                ``. . . we identified a number of problems with the 
                study's methodology and scope that brings into question 
                the reliability of the study's estimates. These 
                problems include (1) the pre- and post-IFQ time periods 
                do not provide an accurate measure of processors' 
                economic welfare, (2) the study's results may not be 
                representative of the industry as a whole, and (3) the 
                document requesting economic information from 
                processors may have biased participant response. The 
                study's authors acknowledged that examining the pre- 
                and post-IFQ impacts on the processing sector does not 
                necessarily imply that the IFQ program alone caused 
                these effects.'' GAO p. 25.

                ``. . . the document requesting economic information 
                from processors may have had biased participant 
                responses. In the preamble to the survey document, 
                participants were told, among other things, that the 
                purpose of the study was to test the theory that a 
                harvester-only quota allocation transfers wealth from 
                processors to harvesters and that the survey's results 
                would be used to assist in designing future IFQ or 
                other fishery rationalization programs. Such statements 
                leave little doubt as to how responses could benefit or 
                harm processors with economic interests in other 
                fisheries. According to standard economic research 
                practice, these types of statements are to be avoided 
                when designing a survey as they can influence 
                results.'' GAO p. 27.

                ``Along with an increase in buyer-broker halibut 
                purchases, there was a decrease in the number of 
                individual shore-based plants that processed halibut 
                and sablefish. While some plants stopped processing 
                halibut and sablefish, others decided it was beneficial 
                to start. Between 1995 and 2001 . . . 68 plants stopped 
                processing halibut and 56 started, resulting in a net 
                decrease of 12 plants. Similarly, 54 plants stopped 
                processing sablefish and 40 started, resulting in a net 
                decline of 14 plants.'' GAO p. 23.

                ``The IFQ program, however, did not necessarily cause a 
                plant to stop processing halibut and sablefish, 
                According to industry and government officials, some 
                plants stopped processing halibut or sablefish because 
                the plant was sold to another processor, the plant 
                closed for personal reasons, plant management made poor 
                business decisions, or the plant burned down.'' GAO p. 
                23.

        The North Pacific Fishery Management Council recommendation to 
        Congress has not taken the GAO report into account.

    These concerns notwithstanding, we very much recognize the 
important role that the processing sector fills in our communities. The 
question of whether or not Congress should legalize processing quota 
should not be reduced to a feud between processors and fishermen with 
communities caught in the middle. Rather than asking what it will take 
to get fishermen and communities to accept processing quota, Congress 
should ask a completely different question: What is the appropriate way 
to support each sector of the seafood industry in order to better serve 
(1) fisheries conservation, (2) stability of our communities, and (3) 
preservation of healthy markets and free enterprise?
    To that end, we urge Congress to look closely at the issues facing 
the processing sector and to pursue other ways to address them in. a 
manner that preserves competition, encourages innovation and protects 
communities. A decision to authorize processing quota in Bering Sea 
crab fisheries will establish a precedent that will be hard to contain 
in other Alaskan fisheries or beyond.
    Thank you for the opportunity to share our perspective on 
processing quota with the Committee.
                                 ______
                                 
      Prepared Statement of Kale Garcia, Owner-Operator F/V Aquila
Submitted to U.S. Senate Committee on Commerce, Science, and 
            Transportation
Senator John McCain, Chairman
Senator Ted Stevens, Presiding
May 20, 2003

Senators,

    I have been participating in the Bering Sea, Bristol Bay crab 
fisheries since 1980. I just wanted to go explore Alaska and getting 
there was on a Bering Sea bound, crab catcher-processor, hired on as a 
processor. In that same season, I was able to fill in as a deck hand on 
a crab vessel. I got off and swore I'd never do that again! I began 
working my way up to Captain, as it didn't take long to figure out 
where I wanted to work on a crabber. Since then I've rarely missed a 
season.
    As an owner operator, I have now come around in full support of 
crab rationalization via the industry funded buyback and IFQ's. I 
believe this will dramatically improve the safety of the lives at sea 
and will help the crab stocks as the fishery will be approached with a 
different mind set. It will change the way I fish by allowing me to 
time the weather and tides for safer working conditions. This will also 
allow more soak time on the gear which will reduce and possibly 
eliminate the incidental by-catch of smaller juvenile crabs. This will 
definitely have a positive effect on the fishery and most everyone 
associated with the crab industry.
    I am adamantly opposed to any type of processor quota share. If it 
was decided to go along with the 90:10 two pie system, this would 
possibly take away the above mentioned positive impacts on the industry 
as I would be told when the processor would be buying crab, or when I 
could go fishing. It is currently illegal under Alaska state law for me 
to bring in live crab to one port and leave to take my ten percent 
somewhere else. It would probably not be economically feasible. If I'm 
the owner of the boat and permit to go catch the crab, then I should 
own the crab up until the time they are sold. However, if I have to 
sell 90 percent to a predetermined market then who actually owns the 
product? How am I to get a fair price? Processors have the opportunity 
to own catcher vessels and harvester shares now. In fact there is a 
significant amount of vessels that are processor owned.
    I am not interested in remaining in the industry under a two pie 
system. I have 23 years of hard work and everything financially at 
stake in the crab industry. There would be a huge devaluation in 
vessels and IFQs under the current proposed plan. When the boat tenders 
salmon in the summertime it is a full on family job for myself, my wife 
and kids. I am not sure where I would start over or what I would do. I 
do think there are many other alternatives to this absurdly proposed 
idea.
            Thank You,
                                               Kale Garcia,
                                         Owner-Operator F/V Aquila.
                                 ______
                                 
              Statement of Erin D. Harrington, Kodiak, AK
Senator John McCain,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.

Dear Senator McCain and Committee Members;

    I'm writing to you to express my concerns about the proposed Bering 
Sea/Aleutian Islands crab rationalization plan. In particular, I feel 
it is important that I express my complete opposition to processor 
quota as a tool for fishery rationalization.
    I believe that the award of processing quota to Alaskan processors 
through this plan will result in numerous side effects that will be 
deleterious to the commercial fishing industry in Alaska. In my 
opinion, the most important of these effects will be

   the restriction of future development of entrepreneurial 
        seafood marketing businesses by fishermen or next-generation 
        processors;

   the establishment of a precedent that will be carried 
        through to rationalization plans in other fisheries, where 
        processor quota is entirely inappropriate and would result in 
        the degradation of small communities and forward-thinking 
        businesses; and

   a protectionist system that locks a set number of 
        corporations (primarily foreign-owned) into the Alaskan fishing 
        industry, and renders them bullet-proof from the natural 
        fluctuations of the market-based system that would otherwise 
        compel them to innovate and improve in order to succeed.

    My family has been involved in fisheries in Alaska and 
Massachusetts for two generations. I personally have fished since I was 
a little girl. In recent years, I have broadened my involvement in the 
fishing industry as a reporter for several trade publications, as the 
project leader for a large fishermen's organization in Alaska, and now 
as a graduate student in Seafood Marketing and Economics at the 
University of Alaska. I am writing this letter on behalf of my parents 
and my brother, all of whom are directly involved in the fishing 
industry.
    Senator, I'm sure that you and your colleagues are well-versed on 
the impact of corporate consolidation in the world food systems on 
family farms. You also have likely become aware of the development of 
farmers' cooperatives, and the
    [The end of this letter was unavailable at time of printing.]
                                 ______
                                 
    Prepared Statement of Robert Halvorsen, Professor of Economics, 
           Department of Economics, University of Washington

          The Economic Analysis of Individual Processor Quotas

    On behalf of the City of Kodiak, I am submitting this written 
testimony to the record of the May 20, 2003 Hearing on Bering Sea/
Aleutian Island Crab Rationalization before the Committee on Commerce, 
Science, and Transportation of the United States Senate. My testimony 
first addresses the general issue of whether fishery rationalization 
programs should include explicit mechanisms to protect processors from 
possible adverse effects. It then discusses one specific mechanism, 
Individual Processor Quota (IPQ), which has been recommended for use in 
the Bering Sea/Aleutian Islands (BSAI) crab fisheries. I previously 
presented testimony on these topics to the February 13, 2002 Oversight 
Hearing on Individual Fishing Quotas before the House Subcommittee on 
Fisheries Conservation, Wildlife and Oceans. My testimony in the 
present statement has been revised and expanded in the light of 
information and analyses that have become available since that time.
    The City of Kodiak has also asked me to submit testimony for the 
record on the experience to date with rationalization of the BSAI 
inshore pollock fishery under the American Fisheries Act of 1998, and 
the implications that can be appropriately drawn regarding the proposed 
rationalization program for the BSAI crab fisheries. My testimony on 
this topic is being submitted separately in an additional statement for 
the record.
Executive Summary
    My analysis of the likelihood of fishery rationalization programs 
having adverse effects on processors begins by considering the 
importance of market structure in determining the outcomes of a 
rationalization program. To illustrate the importance of market 
structure and the balance of bargaining power on the outcomes of 
rationalization programs, 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 rationalization programs.
    I then review the available evidence on whether processors have in 
fact incurred losses as a result of fishery rationalization programs. 
There has been surprisingly little empirical research on this issue. 
The strongest conclusion that appears to be supported by the existing 
research is that some processors are made worse off and some are made 
better off by the implementation of an Individual Fishing Quota (IFQ) 
program. A recent unpublished study of the North Pacific Halibut and 
Sablefish IFQ program (Matulich and Clark 2002) does claim that 
processors in that fishery experienced large losses. However, a review 
of this study by the General Accounting Office concluded that problems 
with the study's methodology and scope bring into question the 
reliability of its results. My own review of this study leads to the 
even more negative conclusion that critical defects in its theoretical 
and empirical methodology invalidate its results.
    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 of the effects of rationalization 
programs on processors, 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), as in the 
proposed program for the BSAI crab fisheries.
    The inclusion of both IFQs and IPQs in a rationalization program 
was originally referred to as a ``two-pie'' system. The concepts of 
Pareto safety and two-pie programs are linked in that the two-pie 
approach 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 
shown 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.
    Neither of these claims is correct. First, as discussed in 
Halvorsen, Khalil, and Lawarree (2000), the characterization of the 
BSAI inshore pollock 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 in section 6 that the claim that a two-pie allocation is 
guaranteed to be Pareto safe in a bilateral monopoly is incorrect. 
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.
    I conclude that 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.
1. Introduction
    My testimony first addresses the general issue of whether fishery 
rationalization programs should include explicit mechanisms to protect 
processors from possible adverse effects. It then discusses one 
specific mechanism, Individual Processor Quota (IPQ), which has been 
recommended for use in the Bering Sea/Aleutian Islands (BSAI) crab 
fisheries. I will discuss in turn the conditions determining the 
probability, extent, and incidence of possible adverse effects of 
rationalization programs on processors, and the efficiency and equity 
rationales that have been advanced in favor of ensuring that processors 
are protected from any such effects.
    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, Mitte1harnmer, and Reberte 1996, Matulich and Sever 1999).
2. Theoretical Analysis of the Effects of IFQ Programs on Processors
    Unless specified otherwise, the phrase ``IFQ program'' will refer 
to a rationalization program based on the allocation of quota shares 
for harvesting only, and in which the lFQs are allocated only to 
harvesters. This is in contrast to possible rationalization programs 
that include IFQs but also make explicit provision for compensating 
processors for possible negative effects on them, either by allocating 
part of the total harvesting quota shares to them or by incorporating 
processing quotas as well, as in a ``two-pie'' system.
    Also, the phrase ``processors'' will refer to the processors that 
have been operating in the fishery prior to the time that it is 
rationalized. One common result of rationalization is the entry of new 
processors, who are obviously made better off by the opportunities 
created by rationalization. An appraisal of the overall effect of a 
rationalization program on the processing sector should clearly take 
the positive effects on new processors into account as well. However, 
my review of the theoretical analysis of the effects of IFQ programs on 
processors will concentrate on the effects on previously operating 
processors only.
    In analyzing and predicting the effects of an IFQ program on the 
well-being of incumbent 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.
Implications of alternative models of market structure
    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 ones (Halvorsen, Khalil, and Lawarree 2000).
    Perfect competition is one of the standard models used in economic 
analyses, in large 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).
Halvorsen, Khalil. and Lawarree Study
    The analysis by Halvorsen, Khalil, and Lawarree was conducted on 
behalf of the North Pacific Fishery Management Council and 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.
Applicability of standard economic models:
    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 
unity 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 6 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.
Bargaining power:
    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, but the positive net 
benefits from the reallocation aspect of the AFA, as well as the 
potential net economic benefits from rationalization of the fishery, 
decreased the likelihood that they would be adversely affected relative 
to the situation pre-AFA. 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.
    The requirement of rigorous, fishery-specific, analysis of the 
probable effects of IFQ programs is especially important because very 
little information is available on the actual effects of previous 
programs. The following section reviews several recent studies that 
have evaluated the actual effects on processors of previous IFQ 
programs.
3. Empirical Analysis of the Effects of IFQ Programs on Processors
    There has been surprisingly little empirical research on the actual 
effects of IFQ programs on the processing sector. However, there are 
three studies that have examined the effects of IFQ programs in the 
United States and British Columbia halibut fisheries. All three studies 
document the fact that there were many winners from the programs in the 
form of new processors who entered the fisheries in order to benefit 
from the opportunities created by the IFQ programs. However, one study 
differs from the others with respect to its conclusions concerning the 
effects of the IFQ programs on processors that had been operating in 
the fishery before the programs were adopted.
British Columbia Study
    The British Columbia halibut fishery was studied by Casey et al., 
(1995). The IFQ program was implemented in May 1991 and the study is 
based on the results of in-person interviews with processors in 
September 1993 and a mail survey of harvesters in May 1994. The study 
documents large net economic benefits from rationalization of this 
fishery, including the ability to switch from mostly frozen products to 
more highly valued fresh fish. Ex vessel price is estimated to have 
increased by more than half. The survey of processors indicated that 
some of the processors that had been operating prior to the IFQ program 
felt that it had made them better off while some felt it had made them 
worse off.
General Accounting Office Study
    The GAO study (United States General Accounting Office 2002) based 
its determination of the effect of IFQ programs on processors on an 
assessment of the economic effects of the North Pacific halibut and 
sablefish IFQ program. The study methodology included analysis of data 
from the National Marine Fisheries Service and the Alaskan Department 
of Fish and Game, interviews with fishery participants, and a review of 
a study commissioned by the Alaskan Department of Fish and Game 
(Matulich and Clark 2002).
    The GAO's summary of its main conclusions was (page 20): ``Some 
processors were adversely affected by the implementation of the halibut 
and sablefish IFQ program while others benefited. However, quantifying 
the economic effects of the IFQ program on processors is difficult 
because much of the data needed to measure changes in profitability are 
proprietary. Furthermore, other factors besides the IFQ program may 
lead to changes in processors' economic situation.''
    The GAO's review noted that the Matulich and Clark study of the 
halibut and sablefish IFQ program had concluded that processors were 
hurt significantly by the IFQ program. However, the GAO also noted that 
it could not validate or replicate the study's results, and that it had 
identified a number of problems with the study's methodology and scope 
that brought into question the reliability of the study's estimates. 
Among the problems identified by the GAO were: the study's assumption 
that all costs except labor and material inputs were constant over a 
seven year period was clearly unjustified, the choice of base year 
exaggerated the size of any negative effect, the results might not be 
representative of the industry as a whole, and the document requesting 
economic information from processors might have biased participant 
responses.
    In April 2002 I presented a critique of the Matulich and Clark 
study in public testimony before the North Pacific Fishery Management 
Council. The conclusions I reached concerning the reliability of the 
study's results were even more negative than those reached by the GAO. 
My analysis of the study is summarized in the following sub section.
Matulich and Clark Study
    The Matulich and Clark study assumes that the effect of the IFQ 
program on processors' economic welfare can be measured as the change 
in ``quasi rents'' retained by processors, which they define as the 
change in revenues in excess of all variable processing costs. However, 
the use of this measure to evaluate welfare changes is not consistent 
with economic theory and would not provide reliable estimates of 
changes in welfare even if it were estimated accurately. Furthermore, 
their empirical methodology is deeply flawed and would be incapable of 
providing reliable estimates of welfare change even if a theoretically 
correct measure were being used. In short, the study measures the wrong 
thing, and measures it poorly.
Theoretical assumptions:
    Quasi-rents are fundamentally a short-run concept. The short-run is 
defined as the period of time during which at least one of the firm's 
input quantities cannot be changed. It should be noted that, although 
it is customary for expository reasons to use capital inputs as 
examples of fixed inputs, and labor and materials inputs as examples of 
variable inputs, some capital inputs may in fact be variable in the 
short-run (e.g., motor vehicles, personal computers), and some labor 
and materials inputs may be fixed (e.g., because of transportation 
costs, job-specific human capital, or contractual commitments).
    The difference in the short-run between the firm's total revenue 
and total expenditures on variable inputs is defined as the quasi-rent 
to the fixed inputs. That is, the amount in excess of the amount 
required to keep the fixed inputs in their current use. Thus a decrease 
in quasi-rents would indicate a decrease in the firms' welfare in the 
short-run.
    In the long-run, by definition, all inputs are variable, and the 
amount required to keep inputs in their current use is equal to what 
they could earn elsewhere, including a normal rate of return to 
capital. Therefore the relevant concept for measuring a firm's welfare 
change in the long-run is that of economic profit. Quasi-rents would 
have no operational meaning, being simply equal to economic profit if 
correctly measured.
    There is no direct connection between the economic concepts of the 
short-and long-run and calendar time. Instead, the amount of time 
required before all inputs can be considered variable will vary across 
industries, although it is plausible that in any given industry the 
number of inputs that are fixed will decrease with the length of time 
being considered.
    Thus the first-step in attempting to use quasi-rent data to measure 
changes in a firm's welfare should be a careful evaluation of which, if 
any, inputs are fixed, given the period of time over which changes are 
being evaluated. Simply assuming that labor and material inputs are 
variable and all other inputs are fixed, as done by Matulich and Clark, 
is not adequate even for a period as short as a year, and is clearly 
unjustified for the seven-year period over which they evaluated 
changes.
    To illustrate the type of error their assumption can introduce in 
the measurement of welfare change, consider the results of applying 
Matulich and Clark's definition of quasi-rents to evaluate changes that 
are distant enough in time for all inputs to be variable. Further 
suppose for ease of exposition that in both periods the price of 
processed fish is $1.00, the cost of raw fish is $0.40, and average 
cost is $0.50. Thus economic profit per unit would be equal to $0.10 in 
both periods and the firm's welfare would be unchanged. Nevertheless, 
if the firm had become more labor intensive over time, the unit quasi-
rent as calculated by Matulich and Clark would have indicated a 
decrease in welfare. For example, if average costs were split equally 
between capital and labor costs in the first period, but labor costs 
accounted for 80 percent of average costs in the second period, the 
unit quasi-rent as calculated by Matulich and Clark would have 
decreased from $0.35 to $0.20, a decrease of 43 percent.
    While this example is hypothetical, it does illustrate that quasi-
rent as evaluated by Matulich and Clark does not provide reliable 
estimates of changes in welfare over longer periods of time. More 
specifically, increases in labor intensity, other things equal, will 
result in decreases in welfare as evaluated by their measure.
    Lastly, even if reliable estimates of welfare changes were 
obtained, their normative significance would depend in part on the 
benchmark on which they were based. Matulich and Clark choose as their 
benchmark the welfare of processors in 1992-1993, asserting that this 
period represented an open-access long-run equilibrium. One reason for 
doubting this assumption is that it is not clear that the fishery would 
have stabilized at the 1992 levels in the absence of an IFQ program. If 
not, then a more appropriate benchmark would be the counterfactual case 
of how the fishery would have developed in the absence of a program.
    More directly, the 1992-1993 experience reflected the fact that 
fishery participants expected an IFQ program to be implemented, and 
this provided incentives for different behavior than would have 
occurred in an open-access equilibrium. For example, harvesters might 
have considered it worthwhile to fish at a loss in order to try to 
capture or protect catch history.
Empirical methodology:
    Matulich and Clark obtained the data used to estimate changes in 
quasi-rents from a questionnaire distributed to a sample of processors. 
The principal types of data requested were total revenue, total raw 
fish cost, and total variable processing costs, defined as the 
aggregate of several specific cost elements, including custom 
processing fees, wage and housing costs for direct labor, and packaging 
and freight costs. Data on total revenue and total raw fish cost were 
verifiable from Alaska Department of Fish and Game data, the data for 
variable processing costs were not.
    Economists using survey research techniques have noted that the 
design of a questionnaire can result in a number of different types of 
biases. In particular, respondents may engage in strategic 
misrepresentation of the data if it is clearly in their economic 
interests to do so. Therefore, one of the most important protocols for 
survey design is to avoid providing material that establishes a clear 
link between a participant's responses and his or her economic 
interests.
    The survey design used by Matulich and Clark clearly violates this 
protocol. The material accompanying the questionnaire noted that 
Professor Matulich was the principal investigator, that he had written 
an article showing that the type of program used for halibut and 
sablefish transfers wealth from processors to harvesters, and that the 
purpose of this survey was to see if that was true empirically. It was 
further noted that the purpose of the study was to obtain information 
for use in evaluating future rationalization programs; in particular to 
help policy makers to avoid unintended distributive effects, and that 
distributional impacts would be based on measuring changes in 
processors' total revenue minus various processing costs.
    This material would have made it clear to the processors how their 
responses could benefit or harm them in the future when other fisheries 
in which they participated were rationalized, and this would have 
provided an incentive for strategic misrepresentation. At a minimum, 
processors that had benefited from the IFQ program would realize that 
reporting this might be harmful to their future interests, and 
therefore have simply not participated in the survey.
    An important difficulty in assessing the treatment of a number of 
empirical issues is that the discussion in the report is often 
qualitative where it would normally be expected to be quantitative. 
Examples include the section on data problems where it is noted that it 
was ``not uncommon'' for aggregation problems to prevent accurately 
measuring variable processing costs, and that ``some'' firms were 
unable to access historical data. No information is provided on the 
number of firms that were eliminated from the sample for these reasons. 
Similarly, they report that there were a ``few'' instances'' where 
inventory issues were ``problematic''.
    In addition, Matulich and Clark report that some firms were 
considered to be outliers, usually by exhibiting unrealistically high 
quasi-rents. These firms were contacted for an explanation, and if it 
was not satisfactory, the firm was dropped from the sample or its data 
replaced by the sample average. The number of firms considered 
outliers, how many were considered to report too high quasi-rents, how 
many justified their data, were dropped, or had their data replaced by 
sample averages, is not specified.
    Lastly, and most surprisingly, Matulich and Clark do not report the 
number of participants included in the final data. They report that the 
number of buyers/processors asked to participate in the survey was 53 
for halibut and 46 for sablefish, accounting for 88 percent to 96 
percent of all fish purchased, and that the retained survey data 
accounts for 52 percent to 61 percent of fish purchased. Given the 
degree of concentration in these fisheries, this may or may not 
represent a substantial percentage of the number of total firms.
    Matulich and Clark do note that the final sample does not include 
data for any firms that exited the fisheries, which accounted for one-
fifth of the total 1992-1993 catch in both fisheries. Although these 
firms might be expected to have been less profitable than the surviving 
firms, they are assumed to have had the same quasi-rent share in 1992-
1993 as the surviving firms. Similarly, surviving firms that lost 
market share are assumed to have had the same quasi-rent share as the 
firms increasing market share.
    Matulich and Clark conclude from their analysis that 82 percent of 
the halibut processing sector (as measured by raw fish weight rather 
than number of firms) lost quasi-rents relative to the pre-IFQ period, 
with the average loss being 56 percent. Even more dramatic results are 
reported for the sablefish processing sector. However these results 
cannot be considered to be reflective of the actual effects on the 
economic welfare of processors. The basic problem with their approach 
is that the results depend on the estimates of total variable 
processing costs, which in turn depend on arbitrary, and unrealistic, 
assumptions concerning which inputs are variable over a seven-year time 
span. In addition, estimation of total variable costs conditional on 
these assumptions depends on survey data from processors, who can be 
expected to clearly realize that there are incentives for strategic 
misrepresentation.
4. Rationales for Compensation
    As discussed in the previous two sections, there are no general 
theoretical or empirical grounds for concluding that processors as a 
whole are likely to be adversely affected by the implementation of an 
IFQ program. However, it is possible that situations could arise where 
processors would be adversely affected. Therefore it is useful to 
consider whether it would be desirable to incorporate measures to 
prevent such adverse effects from occurring, or to compensate 
processors if they do occur. Arguments have been put forward for 
preventing processors from being harmed by rationalization programs 
based on considerations of both efficiency and equity. Each type of 
rationale will be considered in turn.
Efficiency
    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 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.
Equity
    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.
5. 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 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 4, 
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. The one-pie allocation is again 
concluded to not be capable of providing policy feasible Pareto safe 
outcomes. However, they claim to show that the two-pie system is 
guaranteed to 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.
6. Two-Pie Allocations and Pareto Safety
    Matulich and Sever's attempt to demonstrate 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 ex vessel 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 P\0\ 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). The solution 
of the Nash model does not strengthen the claim that the two pie 
allocation is Pareto safe, but instead is performed under the 
assumption that the price must fall with the Pareto safe range.
    In short, Matulich and Sever's claim that ``[e]ach sector is 
guaranteed sufficient quasi-rents to make all members Pareto safe'' 
(page 214) is based simply on 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 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 also owns some catcher 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 shown that 
a two-pie allocation is guaranteed to be Pareto safe under bilateral 
monopoly is incorrect, 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.
References
    Anderson, Lee G. (1991), ``A Note on Market Power in ITQ 
Fisheries,'' Journal of Environmental Economics and Management, 21 (3): 
291-296.
    Casey, Keith E., Christopher M. Dewees, Bruce R. Turris, and James 
E. Wilen (1995), ``The Effects of Individual Vessel Quotas in the 
British Columbia Halibut Industry,'' Marine Resource Economics, 10 (5): 
211-230.
    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.
    Nash, John F. (1953), ``Two-Person Cooperative Games,'' 
Econometrica, 21 (1): 128-40. 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.
    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.
    United States General Accounting Office (2002), ``Individual 
Fishing Quotas: Better Information Could Improve Program Management,'' 
December.
    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.

                                             Appendix PMajor Differences Between AFA Inshore Cooperatives and Council's Crab Rationalization Program
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         AFA Inshore Pollock Cooperatives                          Proposed BSAI Crab Rationalization
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation of processing history:
  Initial allocation                                                                               90% of previous year's deliveries                        90% of historic share of deliveries
  Guaranteed percent                                                                                                            Zero                                                       100%
  Individual vessels' ability to reallocate                                                                 10% per year, cumulative                                                       Zero
  Percent of vessels' approval required to retain                                                                                80%                                                       Zero
 
Regionalization:
  Decreased efficiency gains                                                                                                      No                                                        Yes
  Increased processor concentration                                                                                               No                                                        Yes
 
Complexity:
  Number of markets                                                                                                   7 cooperatives                                      15 regional fisheries
  Number of prices                                                                                                     Maximum of 14                                              Maximum of 75
  Need for price arbitration                                                                                                      No                                                        Yes
  Monitoring and enforcement costs                                                                     Much less than in IFQ program                              Much more than in IFQ program
  Large fluctuations in TAC                                                                                                       No                                                        Yes
 
Total benefits from rationalization:
  Increase in total TAC                                                                                                          Yes                                                         No
  Buyback program                                                                                                                 No                                                        Yes
  Increase in value of product                                                                                                 Large                                                   Moderate
  Efficiency benefits from cooperatives                                                    Scheduling, avoidance of under harvesting                           None if cooperatives do not form
 
Information base for program evaluation
  Experience in other fisheries                                                            Whiting and offshore pollock cooperatives                      IPQs never before used in any fishery
  Experience in other markets                                                                              Agricultural cooperatives                                                       None
  Previous theoretical analysis                                                                  Extensive for IFQs and cooperatives                                                Very little
  Previous empirical analysis                                                                    Extensive for IFQs and cooperatives                                                       None
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                                 ______
                                 
 Statement of Robert Halvorsen, Professor of Economics, Department of 
                  Economics, University of Washington

 On Implications of the American Fisheries Act for Bering Sea/Aleutian 
                      Islands Crab Rationalization

    On behalf of the City of Kodiak, I am submitting this written 
testimony to the record of the May 20, 2003 Hearing on Bering Sea/
Aleutian Island Crab Rationalization before the Committee on Commerce, 
Science, and Transportation of the United States Senate. My testimony 
discusses the rationalization program for the Bering Sea/Aleutian 
Islands inshore pollock fishery that was implemented under the American 
Fisheries Act of 1998, and the implications that can be appropriately 
drawn from this experience regarding the proposed rationalization 
program for the BSAI crab fisheries.
    The City of Kodiak also asked me to submit written testimony on the 
general issue of whether fishery rationalization programs should 
include explicit mechanisms to protect processors from possible adverse 
effects, with specific consideration of Individual Processor Quotas 
(IPQs) as one such mechanism. My testimony on this topic has been 
submitted separately and will be referred to below as Halvorsen (2003).
Executive Summary
    The American Fisheries Act (AFA) included both a reallocation of 
total allowable catch from the offshore sector to the inshore sector 
and a rationalization program for the inshore sector based on 
cooperatives that were tied to individual processing facilities. In 
response to controversy over the AFA rules for cooperatives, the North 
Pacific Fishery Management Council commissioned studies of the effects 
of the proposed rules as well as of several alternatives (Halvorsen, 
Khalil and Lawarree, 1999 and 2000).
    The studies concluded that the qualification requirements for 
membership in a cooperative disadvantaged independent catcher vessels. 
However, the rule that a cooperative could deliver 10 percent of its 
harvest to an alternative eligible processing facility, and, more 
importantly, that continued existence of a cooperative required 
approval by 80 percent of its members, decreased the probability that 
independent catcher vessel owners would be adversely affected by the 
AFA provisions for cooperatives. Also, the reallocation aspect of the 
AFA, as well as the potential efficiency benefits from rationalization 
of the fishery, would result in large net economic benefits for the 
inshore fishery as a whole.
    The principal alternative to the AFA cooperatives that was 
considered in the studies was the ``Dooley-Hall proposal'' under which 
cooperatives would be allowed to deliver to any eligible processing 
facility and any eligible catcher vessel would be allowed to join any 
cooperative. The studies concluded that, for the purpose of evaluating 
the effects on the distribution of the net benefits of the fishery, the 
Dooley Hall proposal could be analyzed as if it were an IFQ program.
    Two previous theoretical analyses of the distributional effects of 
an IFQ program (Plesha and Riley, 1992 and Matulich, Mittelhammer, and 
Reberte, 1996) had concluded that an IFQ program would have highly 
adverse effects on processors, and Professor Matulich argued that this 
would be the result of implementing the Dooley-Hall proposal in the 
inshore pollock fishery. However, the theoretical analyses had little 
relevance for the inshore pollock fishery. They assumed cutthroat 
competition among processors, whereas this was highly unlikely given 
the degree of concentration and other market structure characteristics. 
Also, the models assumed that processors received no IFQs but in the 
pollock fishery processor-controlled vessels would receive at least 
half of the total harvest allocation. The models also ignored the 
existence of differentiated capital, informational rents, and 
alternative uses for capital.
    The Halvorsen, Khalil and Lawarree studies included a consideration 
of the results of the Dooley-Hall proposal under the extreme 
alternative assumption that the fishery was a bilateral monopoly, with 
processors behaving as if they were one entity (a monopsony), and a 
Dooley-Hall cooperative containing all independent catcher vessels 
acting as a monopoly. It was noted that the bilateral monopoly model 
was highly unlikely to be an appropriate characterization of the 
fishery. One reason for considering this model was that it was the 
market structure for the inshore pollock fishery that Matulich and 
Sever (1999) had assumed in their study of a ``two-pie'' allocation. 
Halvorsen, Khalil and Lawarree concluded that under a bilateral 
monopoly processors would attain at least three-fourths of the total 
net benefits of the fishery.
    The analysis of the Dooley-Hall proposal under the assumption of 
either cutthroat competition or bilateral monopoly did not provide a 
realistic prediction of actual outcomes in the inshore pollock fishery. 
Under more realistic assumptions concerning the fishery the most 
reasonable outcome was that independent catcher vessel owners would 
fare somewhat better, and processors would fare somewhat worse, under 
the Dooley-Hall proposal than under the AFA, but this did not imply 
that a rationalization program based on the Dooley-Hall proposal would 
have adverse effects on processors.
    The Council decided to retain the original AFA provisions for 
cooperatives in implementing the rationalization program for the 
inshore pollock fishery. The actual experience of the fishery 
subsequent to rationalization has been consistent with the overall 
economic analysis of Halvorsen, Khalil, and Lawarree. Total net 
economic benefits in the inshore sector were increased because of the 
increase in the sector's share of the total allowable catch (TAC), as 
well as substantial increases in the TAC itself. In addition, 
implementation of the cooperatives has resulted in increased 
efficiency, including increases in the value of output and decreases in 
harvesting costs. As a result, the net effects of the AFA on both 
harvesters and processors is generally agreed to have been positive, 
although the relative size of the benefits remains a matter of 
contention.
    In its deliberations concerning rationalization of the BSAI crab 
fisheries, the Council considered the use of a program similar to the 
AFA cooperatives in the inshore pollock fishery, as well as an entirely 
different type of rationalization program based on the use of both IFQs 
for harvesters and individual processing quotas (IPQs) for processors. 
As in the case of the inshore pollock fishery, the Council commissioned 
an independent economic analysis of the proposed alternatives. The 
study, Milon and Hamilton (2002), concluded that a two-pie system in 
which processors were allocated IPQs for the entire harvest would 
result in the processors capturing all of the net economic benefits 
from the fishery.
    The study also considered a program with both Class A harvesting 
quotas that must be delivered to processors that hold IPQs, and Class B 
harvesting quotas that may be delivered to any processor. As the ratio 
of B to A quotas increases, harvesters fare better. If all harvesting 
quotas are Class B, the outcome is the same as for an IFQ only program, 
with the likelihood that both harvesters and processors would benefit 
from rationalization.
    The Milon and Hamilton study also considers the effects of 
regionalization of the fisheries. It concludes that regionalization 
reduces cost efficiency by imposing constraints that prevent harvest 
within a region being transferable to other regions. In addition, 
regionalization increases the market power of processors, resulting in 
lower ex vessel prices.
    Milon and Hamilton's conclusion that both harvesters and processors 
are able to gain under an IFQ program that did not include IPQs is 
consistent with Halvorsen, Khalil, and Lawarree's analysis of the 
Dooley-Hall proposal under the AFA. As in other individual harvesting 
quota programs, the implementation of an IFQ program in the BSAI crab 
fisheries would allow the creation of rents and facilitate 
rationalization in both the harvesting and processing sectors. The 
realization of significant economic benefits from rationalization of 
the fisheries would make it possible for both processors and harvesters 
to benefit, and both the Halvorsen, Khalil and Lawarree study and the 
Milon and Hamilton study indicate that this is the most likely outcome. 
The research program by Professor Matulich that has attempted to 
establish the presumption that harvesters would gain and processors 
would lose under an IFQ program is simply not credible, either on 
theoretical or empirical grounds.
    The ``three-pie voluntary cooperative program'' proposed by the 
Council for the BSAI crab fisheries includes both regionalization and 
the requirement that 90 percent of total harvesting quotas be Class A 
shares that can only be delivered to processors holding IPQs. Class B 
shares, which can be delivered to processors that do not hold IPQs, 
account for I 0 percent of the harvest allocation. As opposed to the 
likely outcome under a standard IFQ program that both processors and 
harvesters would benefit, the Milon and Hamilton study concludes that a 
program in which processors receive IPQs equal to the total harvest 
would benefit only processors, with the value of harvester IFQs being 
driven to zero. They also conclude that as the ratio of IPQs to IFQs 
decreases, harvesters will fare better. However, there is no reason to 
believe that reducing the IPQ share from 100 percent to 90 percent is 
sufficient to allow independent catcher vessels to avoid adverse 
effects from the rationalization program.
    The basis for the Council's conclusion that a 90 percent-10 percent 
program would balance the interests of both processors and harvesters 
is not clear. Some proponents of the IPQ program have based their 
arguments in its favor on an analogy with the AFA inshore pollock 
cooperatives. It is now generally agreed that outcomes under the AFA 
cooperatives benefited both processors and harvesters. However, the 90 
percent-10 percent IPQ program is fundamentally different from the AFA. 
The only apparent similarity is that a cooperative can deliver 10 
percent of its harvest to an eligible processing facility other than 
the one it is qualified for under the AFA, and harvesters could deliver 
10 percent of their harvests to processors without IPQs under the 
proposed program for the BSAI crab fisheries. However this apparent 
similarity is purely superficial and does not imply, as some proponents 
have argued, that processors are guaranteed 90 percent of their 
historic processing shares under the AFA program as well as under the 
three-pie program.
    There is in fact no basis for believing that the rationalization 
program proposed for the BSAI crab fisheries will have similar outcomes 
to those obtained under the AFA cooperatives for the inshore pollock 
fishery. Instead, the crab rationalization program as currently 
structured is much more advantageous for processors both because of the 
guarantee of 90 percent of their processing history and because of the 
regionalization restrictions. The program is also far more complex, 
making it problematic that market processes can be relied on for the 
determination of appropriate prices. And there is less of a margin for 
error in case of unintended distributional effects because the net 
benefits to the fishery as a whole are expected to be substantially 
smaller. Some of the major differences between the two programs are 
summarized in the Appendix.
    The generally favorable outcomes under the AFA provide no assurance 
of favorable outcomes under the proposed rationalization program for 
the BSAI crab fisheries. The 90 percent-10 percent proposal appears to 
be a step in the direction of a compromise that less overwhelmingly 
favors processors than a 100 percent IPQ program would. However, it is 
not clear why the 100 percent program should have been the apparent 
starting point.
    A more obvious approach would be to begin by considering the 
effects of a standard IFQ program. Both the Halvorsen, Khalil and 
Lawarree study and the Milon and Hamilton study indicate that a 
straight IFQ program would benefit both harvesters and processors. 
Given the existence of concerns that an IFQ program might instead 
result in adverse outcomes for processors, consideration of 
modifications to the program to rebalance the outcomes would be 
reasonable. Regionalization is one such modification, and whatever its 
primary purpose, one effect of regionalization in the BSAI crab 
rationalization program is to increase processors' bargaining power.
    The allocation of IPQs would be another possible modification. 
Restricting deliveries of some portion of the harvest under IFQs to 
processors holding IPQs would tilt the distribution of the benefits of 
the program in favor of processors, with processors faring better the 
larger the share of IPQs in the total harvest. Given that it is not 
clear that processors would fare badly without IPQs, as well as the 
total lack of practical experience with IPQs, it would be reasonable to 
limit the original allocation of IPQs to a modest share of the total 
harvest. And if the goal is to have an effect similar to the overall 
provisions of the AFA inshore cooperatives, which allow for the 
possibility that a processor's claim on its processing share can be 
eroded over time or even be completely lost, then this share should 
most likely be less than 50 percent.
    The Council has commendably committed itself to closely monitoring 
the outcomes under the BSAI crab rationalization program and making 
modifications to the program if the outcomes are judged to be 
unsatisfactory. Therefore, if it turned out that the initial allocation 
of IPQs was seen to be causing unsatisfactory results, the Council 
could modify the allocation accordingly. Because IPQs do not contribute 
to the realization of the efficiency benefits of rationalization, such 
changes would have primarily only distributional results. Such a 
flexible approach would appear to be clearly superior to one in which 
the Council commits itself to a 90 percent-10 percent program with the 
intention of making unspecified modifications to other aspects of the 
program if the outcomes are considered unsatisfactory.
American Fisheries Act
    The AFA increased total net economic benefits in the inshore sector 
of the BSAI pollock fishery in two major ways; it increased the inshore 
sector's share of the total allowable catch from 35 percent to 50 
percent, and it made rationalization of the fishery possible through 
the formation of harvesting cooperatives. Each cooperative was to be 
allocated a share of the inshore sector's TAC based on the catch 
history of the vessels belonging to the cooperative. Therefore, the AFA 
made it possible for catcher vessels that joined a cooperative to 
obtain pollock harvest allocations despite the moratorium on new IFQ 
programs. Because inshore processors had expressed concern that this 
might put them at a bargaining disadvantage, the AFA required that each 
cooperative be tied to a specific processing facility.
AFA cooperatives
    Under the AFA cooperative provisions, qualification for membership 
in a cooperative is based on the facility to which a catcher vessel 
delivered the largest share of its total catch in the previous year. If 
a catcher vessel does not join a cooperative it can fish for the share 
of the total inshore allocation not apportioned to the cooperatives. 
The term ``open access fishery'' is used to refer to this part of the 
inshore pollock fishery, with the understanding that access of catcher 
vessels and processing facilities is limited by the AFA. A catcher 
vessel fishing in open access can chose to remain in open access and 
deliver its fish to the eligible processing facility, or facilities, 
offering the best price. Alternatively, it can chose in any year to 
join the cooperative associated with the processing facility to which 
it delivered the largest share of its fish in the previous year.
    During the Council's deliberations concerning the implementation of 
the AFA, an association of independent catcher vessel owners protested 
to the Council that the AFA rules for inshore cooperatives would be 
harmful to them because of the restrictions on where they could market 
their fish. The association proposed an alternative set of rules, which 
became known as the Dooley-Hall proposal. The most important proposed 
change was to eliminate the qualification requirements so that a 
cooperative could deliver to any eligible processing facility and any 
eligible catcher vessel could join any cooperative.
    In response, the Council commissioned a study by myself and two 
University of Washington colleagues to help determine if the 
implementation of the inshore sector cooperatives as provided for in 
the AFA would have beneficial or adverse effects on independent vessel 
owners and to evaluate the effects of alternative proposals (Halvorsen, 
Khalil and Lawarree, 1999). Subsequently, the Council commissioned a 
second study that included the evaluation of an expanded set of 
alternative proposals (Halvorsen, Khalil and Lawarree, 2000). The 
studies were extensive and included interviews with many participants 
in the pollock fishery as well as theoretical and empirical economic 
analysis.
    The interviews with participants were consistent with respect to 
two issues; that the AFA provisions for cooperatives were designed to 
avoid any possible adverse effects of rationalization on processors, 
and that processors would fare worse, and independent catcher vessels 
would fare better, under the Dooley-Hall proposal than under the AFA 
cooperatives. However, there was sharp disagreement concerning the 
magnitude of the distributional effects. We had representatives of 
processors tell us that both sides would gain under the AFA rules, 
whereas the processors would lose disastrously under the Dooley-Hall 
proposal, while representatives of independent catcher vessel owners 
said that both sides would gain under the Dooley-Hall proposal, whereas 
they would lose disastrously under the AFA rules.
    In addition, one academic economist, Professor Scott C. Matulich, 
whose research was funded by some of the processors, claimed in public 
testimony at the October 1999 Council Meeting that his research proved 
that everyone would gain under the AFA cooperative provisions whereas 
processors would lose disastrously under the Dooley-Hall proposals. 
[The research upon which Professor Matulich based these conclusions is 
critically reviewed in the written testimony that I submitted on May 
20, 2003 (Halvorsen 2003)]. He subsequently amended his position and 
testified at the June 2000 Council meeting that the AFA had introduced 
a new market failure that ``encourages vertically integrated processors 
to impose higher average raw fish costs on non-integrated or less 
integrated processors'' which could drive them out of business, even if 
the non-integrated processors were more efficient. Furthermore, the AFA 
``may be the death knell of the independent fisherman'' because all 
processors would want to become vertically integrated (Matulich 2000, 
page 15).
    Our studies reached much more moderate conclusions than were 
expressed either in the participant interviews or Professor Matulich's 
testimony. We concluded that the balance of bargaining power in the 
fishery under the AFA provisions for cooperatives favored processors, 
because the apparent necessity of spending a year in open access in 
order to change processing facilities could be very costly for a 
catcher vessel. Therefore there was a significant probability that 
independent catcher vessels would be adversely affected by the AFA's 
provisions for cooperatives. However, we also noted that the positive 
net benefits from the reallocation aspect of the AFA, as well as the 
potential net economic benefits from rationalization of the fishery, 
decreased the likelihood that catcher vessels would be adversely 
affected relative to the situation pre-AFA.
    We also concluded that two other provisions of the AFA would 
decrease the probability that independent catcher vessel owners would 
be adversely affected. One was the rule that the cooperative contract 
could provide for up to 10 percent of a cooperative's harvest to be 
processed by a different processing facility. In our study we noted 
that cooperatives were expected to be able to negotiate a higher price 
for the 10 percent of their deliveries that could be delivered to any 
eligible processing facility. However, it turned out that there was a 
more important way in which the 10 percent rule improved an independent 
catcher vessel's bargaining power, which we did not recognize at the 
time of our study.
    The principal reason for expecting that independent catcher vessels 
might be adversely affected by the AFA provisions for cooperatives was 
that the apparent necessity of spending a year in open access in order 
to change processing facilities could be very costly. What we did not 
anticipate was that, by utilizing the 10 percent of the cooperative's 
harvest that could be delivered to another eligible processing 
facility, catcher vessels have been able to qualify for a new 
cooperative without having to spend a year in open access. This has 
been possible because the 10 percent applies to the cooperative's 
collective deliveries, not to each individual vessel's deliveries. 
Therefore the 10 percent rule freed up enough fish to make it feasible 
for even a large vessel to deliver more of its harvest to a new 
processing facility than to its existing facility and therefore to be 
able to switch processors without incurring the cost of going through 
open access.
    This has improved the bargaining power of independent catcher 
vessels more than we expected, because if they are not satisfied with 
the outcome of price negotiations they can credibly threaten to switch 
processors in the following year. If switching did occur, a processing 
facility's claim on its cooperative's original total harvest could 
decrease cumulatively over time at a rate of up to 10 percent per year, 
so that by the end of the original five year life of the AFA it might 
have lost more than 40 percent of its original processing share. And 
the process of erosion could continue into subsequent years if, as 
happened, the life of the AFA was extended. From the point of view of 
the affected processing facility, the experience in the first five 
years would be the equivalent in the proposed BSAI crab rationalization 
plan to having its individual processing quota decrease from 90 percent 
of its processing history to less than 50 percent.
    The other provision that was favorable for independent catcher 
vessels was the rule that a cooperative had to be approved by 80 
percent of the catching vessels qualified for it. This rule was even 
more important for the bargaining power of independent catcher vessels 
than the 10 percent rule, because it involved the possibility of a 
processing facility losing its entire claim on its cooperative's 
original total harvest. The rule made it possible for independent 
catcher vessels to credibly threaten to dissolve their cooperative by 
voting against its continued existence. This would not only deprive the 
processor of any claim on the deliveries of the independent catcher 
vessels, it would also cause the processor to lose the catch 
allocations of any catcher vessels that it owned, because catch 
allocations could only be obtained through membership in a cooperative.
    The 80 percent rule makes the continued existence of a cooperative 
from year to year quite uncertain. As a result, the National Marine 
Fisheries service required that each in shore cooperative apply for its 
allocation on an annual basis. Each cooperative must apply for its 
allocation annually and must certify annually that the cooperative 
meets all the requirements in the AFA and its associated regulations. 
If it is not able to do so, the processing facility will lose its 
entire claim on its processing share.
Dooley-Hall cooperatives
    The Dooley-Hall proposal would have modified or eliminated several 
of the AFA rules for inshore cooperatives. The most important proposed 
change was to eliminate the qualification requirements, so that 
cooperatives would not be tied to specific processing facilities. 
Instead, under the Dooley-Hall proposal a cooperative could deliver to 
any eligible processing facility, and any eligible catcher vessel could 
join any cooperative. Elimination of the qualification requirements 
would make the 80 percent rule inoperable, and it would be replaced by 
a rule requiring that the cooperative contract be signed by the owners 
of five or more catcher vessels.
    Except for the requirement that catcher vessels would have to 
belong to a cooperative in order to obtain the advantages of pollock 
harvest allocations, the Dooley Hall proposal would be essentially 
equivalent to an IFQ program. The cooperative requirement had some 
important practical implications for the management of the fishery, for 
example, with respect to monitoring and enforcement issues. However, 
for the purpose of evaluating the principal effects of the Dooley-Hall 
alternative on the different types of participants in the fishery, it 
could be analyzed as if it were an IFQ program. This also implies that 
our analysis of the Dooley-Hall proposal is relevant for the analysis 
of implementing an IFQ program in a fishery with similar 
characteristics to the inshore pollock fishery.
    At the time of our analysis, there already existed a considerable 
amount of theoretical and empirical information on fishery management 
programs involving IFQs, including the National Research Council (1999) 
study mandated by the Sustainable Fisheries Act of 1996. A consistent 
finding in these studies was that IFQ programs score highly on 
efficiency grounds, allowing the creation of rents and facilitating 
rationalization in both the harvesting and processing sectors. However, 
some of the studies also note that implementation of these programs 
could result in adverse effects on some participants in the fishery, 
and that the distributional effects of IFQ programs have been 
controversial.
    As noted above, the principal controversy with respect to the AFA 
and Dooley Hall proposals was their effects on the relative well-being 
of processors and harvesters. Our analysis showed that the degree of 
competitive behavior among processors would be the most critical factor 
in determining outcomes under the Dooley-Hall proposal. Processors had 
a number of important bargaining advantages. Their ownership of 
catching vessels reduced their reliance on supply from independent 
catcher vessels, while also providing them an informational advantage 
given that independent catcher vessels did not own inshore processing 
plants. Independent catcher vessels did have the advantage of being 
able to legally bargain as a group through the Bering Sea Marketing 
Association (BSMA), but the BSMA did not represent all of the catcher 
vessels and the largest processor was not a party to the negotiations.
    The basic change that the AFA made in the economic circumstances of 
the fishery was that catcher vessels would have a claim on the 
available harvest allocation based on their catch history. 
Historically, the lack of such a claim had been the primary incentive 
for the race to fish, and therefore the AFA was expected to decrease 
the daily rate of harvest and thereby extend harvesting periods. This 
in turn would create a large amount of extra capacity in both the 
harvesting and processing sectors, which might affect the degree of 
competitive behavior among processors.
    However, the processing sector was very concentrated, entry was 
legally blocked by the AFA, and processors should anticipate that 
aggressive tactics that gave them short term gains would not be 
profitable in the long run because they can all engage in such tactics. 
We did not believe that even the large amount of excess capacity that 
was anticipated would make the processors blind to the benefits of 
moderate competition. Their investments in capacity were sunk costs and 
cutthroat competition would not make them profitable. Therefore, it was 
highly improbable that the situation would deteriorate, from the 
processors' point of view, into one of cutthroat competition. However, 
because this was not a logical impossibility, the outcomes that would 
be produced by Dooley-Hall proposal under cutthroat competition were 
examined.
    This case had previously been considered in the context of a race 
for fish that is ended by the introduction of IFQs, first in a 
theoretical analysis conducted by two employees of Trident Seafood 
(Plesha and Riley, 1992), and subsequently in a paper by Matulich, 
Mittelhammer, and Reberte (1996). The latter paper was the basis for 
Professor Matulich's Council testimony concerning the effects of the 
Dooley-Hall proposal. The paper concluded that if processing capital 
had no alternative uses or salvage value, then the excess capacity 
created by an IFQ program would cause the ex vessel price of fish to 
increase to the point where it was equal to the difference between 
final product price and short-run average variable processing cost. 
Processors would leave the industry until excess capacity no longer 
existed. During the transitional period, catcher vessels not only would 
gain all the rents from the fish, but also the ``quasi-rents'' from the 
processors' capital. Processors that survived would realize gains in 
efficiency and market shares, but might have to pay a higher ex vessel 
price for fish.
    However, this theoretical analysis had little relevance for the 
inshore pollock fishery. First, it was extremely unlikely that 
processors in such a highly concentrated fishery would not be able to 
do better than the perfectly competitive market outcomes. Second, the 
model assumes that processors receive no IFQs, but in the pollock 
fishery processors owned catcher vessels that were being given harvest 
allocations on the same terms as the independent catcher vessels. Data 
provided by the National Marine Fisheries Service indicated that 
processor-controlled vessels would receive at least half of the total 
harvest allocation. Therefore, for at least half the total allocation, 
any increase in price paid by processors would, except for the effect 
on crew share, be merely an internal transfer, not an economic loss. 
Third, the model assumes that there is only one basic type of 
processing capital, so that excess aggregate capacity implies that all 
capital is in excess supply. However, pollock processors produce two 
main types of primary product, surimi and fillets. Under then current 
market conditions, fillet capital would not be in excess supply even 
with a large amount of total excess capacity, and therefore would 
continue to earn quasi-rents. The model's assumptions that processors 
could not earn informational rents, and that pollock processing capital 
had no alternative uses, were also too pessimistic.
    The extreme alternative to cutthroat competition among processors 
is that they act as a monopsony. Monopsony implies that the processors 
fully account for their mutual interdependence and behave as if they 
were one entity. If independent catcher vessels also were able to 
unite, as could occur under the Dooley-Hall proposal by the formation 
of a single cooperative containing all independent catcher vessels, the 
monopsony case would become equivalent to that of a bilateral monopoly. 
This is the market structure that Matulich and Sever (1999) assumed for 
the inshore pollock fishery in their paper claiming that a two-pie 
allocation would make everyone better off. As discussed in Halvorsen 
(2003), this was a highly misleading characterization of the actual 
fishery. However, because such an outcome was not a logical 
impossibility under the Dooley Hall proposal, the outcomes that would 
be produced by the Dooley-Hall proposal under bilateral monopoly were 
also examined.
    In this scenario, the independent catcher vessels' cooperative 
would give them an exclusive right to approximately half of the total 
inshore allocation. If they could not negotiate an agreement with the 
processors, they would not fish. Similarly, the most severe threat of 
the processors would be to not process the fish. In both of these 
cases, the processors and the independent catcher vessels would receive 
nothing from the independent catcher vessels' share of the allowable 
harvest. The standard game theory outcome, known as the Nash bargaining 
solution, would be for them to split the benefits from the independent 
catcher vessels' fish equally. The processors would also obtain all of 
the rent from the half of the total allocation that they controlled. 
The end result would be that processors would obtain about three-
fourths of the total net benefits from the fishery (one-half from the 
processor-controlled vessels and one-fourth from the independent 
catcher vessels). Thus the assumption that the inshore pollock fishery 
is a bilateral monopoly is inconsistent with a conclusion that the 
Dooley-Hall proposal would have had seriously adverse results for 
processors.
    The analysis of the Dooley-Hall proposal under the assumptions of 
cutthroat competition and bilateral monopoly is instructive, but would 
provide a realistic prediction of actual outcomes only in a fishery 
that fit one of these extreme cases. For the inshore pollock fishery, 
the most probable outcome was that processors would be moderately 
competitive. Analysis of the outcomes in this case was necessarily more 
speculative, because it could not rely on the results of the standard 
simple models of cutthroat competition and bilateral monopoly. However, 
the same key trade-offs would be at work. Independent catcher vessels' 
would benefit under the Dooley-Hall proposal from the elimination of 
the costs of open access and from the ability to form cooperatives 
independent of the processing facilities, but would lose the bargaining 
leverage provided by the 80 percent rule. We concluded that the most 
reasonable outcome was that independent catcher vessels would have been 
somewhat better off, and processors somewhat worse off, under the 
Dooley-Hall proposal than under the AFA rules. This did not imply that 
processors were expected to be harmed by a rationalization program 
based on the Dooley-Hall proposal, only that they would not be as well 
off as under the AFA provisions for cooperatives.
Outcomes under the AFA
    The analysis of the potential effects on harvesters and processors 
of rationalization programs under the AFA was facilitated by the 
existence of previous economic analysis of, and practical experience 
with, its principal features. For example, there is a large body of 
relevant literature on agricultural cooperatives that was surveyed in 
an appendix to the Halvorsen, Khalil, and Lawarree studies written by 
Professor Steven T. Buccola of Oregon State University. In addition, 
the rationalization benefits attainable by fish harvesting cooperatives 
had been demonstrated by the Pacific whiting cooperative established in 
1997 and the AFA cooperatives in the offshore sector that were 
implemented in 1999. Similarly, the analysis of probable outcomes under 
the Dooley-Hall proposal could draw on the existing literature on IFQ 
programs.
    The rationalization program that was implemented in the inshore 
pollock fishery retained the original AFA provisions for cooperatives. 
The actual experience of the fishery subsequent to rationalization has 
been consistent with the overall economic analysis of Halvorsen, 
Khalil, and Lawarree. Total net economic benefits in the inshore sector 
have been increased as a result of the increase in the sector's share 
of the TAC, as well as substantial increases in the TAC itself. In 
addition, implementation of the cooperatives has resulted in increased 
efficiency. Improved targeting of pollock during the peak roe season 
has contributed to greatly increased ex vessel prices during this 
season. The value of output has also increased because slowing the race 
for fish permitted an increase in the recovery rate and a shift to 
higher valued products. Harvesting costs have been reduced by the 
transfer of quota shares from less efficient vessels to more efficient 
vessels, and easy transferability of allocation within a cooperative 
has facilitated the full harvesting of the available allocations. As a 
result, the net effects of the AFA on both harvesters and processors is 
generally agreed to have been positive, although the relative size of 
the benefits remains a matter of contention.
    On the other hand, the fishery has not demonstrated the outcomes 
suggested by Professor Matulich. There has been no apparent tendency 
for vertically-integrated processors to have gained at the expense of 
less-integrated processors, much less to have been able to drive them 
out of business. And the AFA does not appear to have had significant 
negative effects on the share of independent catcher vessels in the 
fishery, much less to have been the ``death knell of the independent 
fisherman.''
    Because the Dooley-Hall proposal was not adopted by the Council, it 
is not possible to compare actual outcomes with the conclusions 
concerning the probable outcomes that were reached by Halvorsen, 
Khalil, and Lawarree. (Three studies of the economic effects of IFQ 
programs in halibut fisheries are discussed in the written testimony I 
submitted on May 20, 2003). However, the analysis sheds light on the 
possible outcomes of IFQ programs in fisheries with similar 
characteristics to the inshore pollock fishery. In particular, it 
indicates that implementation of an IFQ program in a fishery with a 
similar market structure would be highly unlikely to have the adverse 
effects for processors that are implied by Matulich, Mittelhammer, and 
Reberte's (1996) analysis.
BSAI Crab Rationalization Plan
    In its deliberations concerning rationalization of the BSAI crab 
fisheries, the Council considered the use of a program similar to the 
AFA cooperatives in the inshore pollock fishery, as well as an entirely 
different type of rationalization program based on the use of both IFQs 
for harvesters and individual processing quotas (IPQs) for processors. 
As in the case of the inshore pollock fishery, the Council commissioned 
an independent economic analysis of the proposed alternatives.
Milon and Hamilton study
    The study, Milon and Hamilton (2002), draws conclusions for 
economic performance under the assumptions that the harvesting sector 
is perfectly competitive and the processing sector contains few enough 
firms that it might be able to exercise market power. One of the 
rationalization programs analyzed is a two-pie system in which 
processors are allocated IPQs for the entire harvest. Milon and 
Hamilton conclude that each processor would maximize profits by paying 
the lowest ex vessel price that is required to support harvester 
delivery. The result would be that processors capture all of the net 
economic benefits from the fishery. The allocation of IFQs in such a 
program would be redundant, and the value of harvester IFQs would be 
driven to zero.
    They also consider a program with both Class A harvesting quotas 
that must be delivered to processors that hold IPQs, and Class B 
harvesting quotas that may be delivered to any processor. If all 
harvesting quotas are Class B, the outcome is the same as for an IFQ 
only program, with the likelihood that both harvesters and processors 
would benefit from rationalization. As the ratio of A to B quotas 
increase, processors are expected to fare better, and harvesters to 
fare worse. And when all the quotas are Class A, processors capture all 
of the net economic benefits from the fishery.
    The study also considers the effects of regionalization of the 
fisheries. It concludes that regionalization reduces cost efficiency by 
imposing constraints that prevent harvest within a region being 
transferable to other regions. In addition, regionalization increases 
the market power of processors, resulting in lower ex vessel prices.
    Milon and Hamilton's assumption that the harvesting sector is 
perfectly competitive is not completely accurate, because catcher 
vessels have negotiated prices collectively through the Alaska 
Marketing Association, and have engaged in strikes. However, the 
effectiveness of strikes has been undermined because catcher processors 
have continued to fish during them. Also, the lengthening of fishing 
seasons under rationalization is expected to decrease the effectiveness 
of collective bargaining (North Pacific Fishery Management Council, 
2002, page 376). Therefore, the assumption that the harvesting sector 
is competitive does not invalidate their conclusions concerning the 
qualitative effects of IPQs and regionalization.
Implications of the AFA study for an IFQ program
    Milon and Hamilton's conclusion that both harvesters and processors 
are able to gain under an IFQ program that did not include IPQs is 
consistent with Halvorsen, Khalil, and Lawarree's analysis of the 
Dooley-Hall proposal under the AFA. As noted above, the Dooley-Hall 
proposal was essentially equivalent to an IFQ program, and therefore 
the principal factors that affected outcomes under it would also affect 
outcomes under an IFQ. Because some of the most important of those 
factors are also present in the BSAI crab fisheries, our analysis of 
the Dooley-Hall proposal can shed light on the economic effects of 
implementing an IFQ program in the crab fisheries.
    The market structure of the BSAI crab fisheries is similar to that 
of the inshore pollock fishery in several important respects. Most 
importantly, the processing sector is highly concentrated, especially 
on a regional basis. Processors can be expected to realize that 
aggressive tactics yielding short-term gains are unlikely to be 
profitable in the long run. Entry is not prohibited but there would be 
some barriers to entry, even if existing processors were not given any 
rights to their processing history. Processors own catching vessels, 
which reduces their reliance on supply from independent catcher vessels 
and also provides them an informational advantage. Independent catcher 
vessels do have the advantage of being legally able to bargain as a 
group, but the effectiveness of collective bargaining is expected to 
decrease under rationalization.
    Implementation of an IFQ program would give catcher vessels a claim 
on the available harvest allocation based on their catch history. This 
would eliminate the primary incentive for the race to fish, and 
therefore can be expected to result in longer harvesting periods. This 
in turn would create extra capacity in both the harvesting and 
processing sectors, which might affect the degree of competitive 
behavior among processors.
    However, because the processing sector is very concentrated and 
there are barriers to entry, the situation should be similar to that 
analyzed in the AFA study. Processors should anticipate that aggressive 
tactics that gave them short-term gains would not be profitable in the 
long run because they can all engage in such tactics. Not even a large 
amount of excess capacity would make the processors blind to the 
benefits of moderate competition. Their investments in capacity are 
sunk costs and cutthroat competition would not make them profitable. 
Therefore, it is highly improbable that the introduction of IFQs would 
result in cutthroat competition on the part of processors.
    Therefore, as in the inshore pollock fishery, the cutthroat 
competition among processors that is required for an IFQ program to 
lead to the adverse results for processors predicted by Matulich, 
Mittelhammer, and Reberte (1996) is highly unlikely. During the 
Council's deliberations on the BSAI crab rationalization, Professor 
Matulich attempted to buttress his theoretical arguments for the 
adverse effects of IFQs by citing an empirical study of the halibut and 
sablefish IFQ program (Matulich and Clark, 2002). The theoretical and 
empirical problems with this study were discussed in my previous 
written testimony to this Committee (Halvorsen 2003), which also 
summarizes the problems that the United States General Accounting 
Office (2002) noted concerning the study's methodology and scope.
    The extreme alternative to cutthroat competition among processors 
is that they act as a monopsony. A pure monopsony would capture all of 
the net benefits in the fishery. A less extreme case is one in which 
the independent catcher vessels are also able to unite effectively 
under an organization such as the Alaska Marketing Association. With 
independent catcher vessels, as well as processors, united, the 
analysis becomes one of bilateral monopoly for the entire industry. The 
situation is equivalent to there being only one processing firm, which 
also owns some catcher vessels, and one entity that owns all the 
independent catcher vessels.
    The first step in the analysis is to understand the outside options 
(threat points) of the two players. Since there would be effectively 
only one processor, the independent catcher vessel owner's only threat 
would be to refuse to fish. The threat of the processor would be to 
refuse to process the fish of the independent catcher vessel owner. If 
the independent catcher vessel did not fish, its net benefit would be 
zero, whereas if the processor refused to process fish from the 
independent catcher vessels, it would still have available to it the 
fish caught by its own catcher vessels. Therefore, the Nash bargaining 
solution would imply a distribution of net benefits in which the 
processor would obtain more than half of the total net economic benefit 
of the fishery.
    The assumptions of cutthroat competition, monopsony, or bilateral 
monopoly are not plausible characterizations of market structure in the 
BSAI crab fisheries under a standard IFQ program. The most probable 
outcome would be that processors would be moderately competitive. They 
would have a bargaining advantage in that their ownership of catching 
vessels reduces their reliance on supply from independent catcher 
vessels, while also providing them an informational advantage. 
Regionalization of the crab fisheries would increase their bargaining 
power by increasing the effective degree of concentration. Independent 
catcher vessels would have the advantage of being able to legally 
bargain as a group, but the effectiveness of collective action is 
expected to decrease because of elongation of the fishing seasons. The 
balance of bargaining power would be expected to be in favor of 
processors, but not overwhelmingly so.
    As in other individual harvesting quota programs, the 
implementation of an IFQ program in the BSAI crab fisheries would allow 
the creation of rents and facilitate rationalization in both the 
harvesting and processing sectors. The realization of significant 
economic benefits from rationalization of the fisheries would make it 
possible for both processors and harvesters to benefit, and both the 
Halvorsen, Khalil and Lawarree study and the Milon and Hamilton study 
indicate that this is the most likely outcome. The research program by 
Professor Matulich that has attempted to establish the presumption that 
harvesters would gain and processors would lose under an IFQ program is 
simply not credible, either on theoretical or empirical grounds.
The Council's ``three-pie'' proposal
    The ``three-pie voluntary cooperative program'' proposed by the 
Council for the BSAI crab fisheries includes both regionalization and 
the requirement that 90 percent of total harvesting quotas be Class A 
shares that can only be delivered to processors holding IPQs. Class B 
shares, which can be delivered to processors that do not hold IPQs, 
account for 10 percent of the harvest allocation. As opposed to the 
likely outcome under a standard IFQ program that both processors and 
harvesters would benefit, the Milon and Hamilton study concludes that a 
program in which processors receive IPQs equal to the total harvest 
would benefit only processors, with the value of harvester IFQs being 
driven to zero. They also conclude that as the ratio of IPQs to IFQs 
decreases, harvesters will fare better. However, there is no reason to 
believe that reducing the IPQ share from 100 percent to 90 percent is 
sufficient to allow independent catcher vessels to avoid adverse 
effects from the rationalization program.
    The basis for the Council's conclusion that a 90 percent-10 percent 
program would balance the interests of both processors and harvesters 
is not clear. Some proponents of the IPQ program have based their 
arguments in its favor on an analogy with the AFA inshore pollock 
cooperatives. It is now generally agreed that outcomes under the AFA 
cooperatives benefited both processors and harvesters. However, the 90 
percent-10 percent IPQ program is fundamentally different from the AFA. 
The only apparent similarity is that a cooperative can deliver 10 
percent of its harvest to an eligible processing facility other than 
the one it is qualified for under the AFA, and harvesters could deliver 
10 percent of their harvests to processors without IPQs under the 
proposed program for the BSAI crab fisheries.
    However this apparent similarity is purely superficial. Under the 
three-pie program processing companies are guaranteed 90 percent of 
their historic processing shares, whereas under the AFA program a 
processing facility is not guaranteed to retain any of its claim on its 
cooperative's original total harvest. In addition, other differences 
between the AFA and the proposed crab rationalization program 
contradict the supposed analogy. The following section summarizes some 
of the major differences between the two programs.
Differences between the AFA and Crab Rationalization Programs
Protection of processors' market shares
    Under the proposed rationalization program for the crab fisheries, 
a processor would receive processor quota share equal to 90 percent of 
its historic processing share. This amount would be guaranteed to the 
processor because harvesters could deliver their Class A allocation 
only to processors holding processing share. Therefore the only way 
that a processor could lose more than 10 percent of its historic market 
share would be if it set the ex vessel price so low that vessels would 
prefer to forego fishing rather than deliver fish to it, because that 
would be their only alternative.
    Under the AFA, each processing facility has the right to process 90 
percent of its cooperative's total harvest, but this does not guarantee 
that it will receive 90 percent of its historic processing share, 
because vessels have alternatives to remaining in the cooperative. One 
alternative for a vessel is to fish in the open access portion of the 
fishery and deliver its fish to another eligible processing facility. 
It could then either remain in open access or join the cooperative of 
the new processing facility. Another option is to qualify for another 
cooperative without going through open access by delivering its fish to 
the alternative processing facility as part of the 10 percent of the 
cooperative's total harvest that can be delivered to any eligible 
facility. And the existence of a cooperative requires the approval of 
at least 80 percent of the vessels qualified for it. As a result, a 
processing facility is faced with the possibility of losing all of its 
processing rights if more than 20 percent of the vessels in the 
cooperative decide that it should be dissolved.
    Therefore protection of processors' market shares would be much 
greater under the proposed program for the crab fisheries than under 
the AFA, thereby giving the processors much greater bargaining power. 
In particular, under the AFA a processor will retain market share only 
if it offers an ex vessel price that is competitive with the price 
being offered by other processors, whereas under the proposed crab 
rationalization program a processor could retain 90 percent of its 
market share even if it offered a price so low that the catcher vessel 
was barely able to cover the average variable costs of harvesting the 
fish.
Regionalization
    Under the proposed rationalization program for the crab fisheries, 
Class A harvest shares and processor shares for each crab fishery would 
be regionally designated, whereas under the AFA the entire inshore 
sector is treated as a single region. This difference has important 
implications both for the net economic benefits that can be realized 
from rationalization and for the distributional consequences of 
rationalization.
    The Council itself recognizes that regionalization reduces net 
economic benefits by restricting consolidation of activities that are 
desirable for reducing capacity and gaining efficiency in both the 
harvesting and processing sectors under rationalization (Report to 
Congress, August 2002, page 18). The lack of such constraints under the 
AFA increased the total net economic benefits that were available to be 
shared by harvesters and processors.
    Regionalization also has implications for the distributional 
consequences of rationalization because it subdivides the markets for 
crab and thereby increases the already high degree of concentration 
among processors. It also creates an incentive for processors to 
consolidate their market shares on a regional basis, which would 
increase the degree of concentration still more. The greater bargaining 
power attained by processors can be expected to adversely affect the 
price received by harvesters for Class B allocations as well as for 
Class A allocations, both because it might be difficult logistically to 
deliver to different markets and because processors might be able to 
require bundling deliveries of the two classes of fish.
Complexity
    The ``three-pie voluntary cooperative program'' being recommended 
for the crab fisheries is much more complex than the rationalization 
program implemented under the AFA. The greater complexity can be 
expected to have serious negative consequences both with respect to the 
cost of management and with respect to the functioning of the market 
for fish and for quota shares.
    Implementation of the proposed rationalization program for the crab 
fisheries would require the determination of share allocations in each 
region of each fishery for each individual vessel and processor. 
Ongoing management measures would include annual monitoring and 
enforcement measures at the same level of detail. Eventual formation of 
voluntary cooperatives might reduce some of the management costs with 
respect to harvesting, but the extra costs of managing processing 
activities would continue.
    More importantly, the increased complexity of the system might make 
the determination of prices through a decentralized market structure 
impracticable. For each regional market in each fishery the prices that 
would have to be determined include the ex vessel price of Class A 
fish, the ex vessel price of Class B fish, the price of Class A 
harvesting quota, the price of Class B harvesting quota, and the price 
of processing quota.
    Attaining equilibrium prices in such a complex system would be 
difficult even in large, well-functioning, markets, and the markets in 
the crab fisheries would be both thin and imperfectly competitive. In 
addition, the large fluctuations in total allowable catch would 
complicate the determination of equilibrium prices and hinder the 
ability of the system to converge to stable values. In recognition of 
the possibility of the price system breaking down, the rationalization 
plan includes a binding arbitration program. However, the necessity of 
such a procedure increases the cost of managing the fisheries under the 
proposed rationalization plan, and even if the arbitration procedure 
were well designed, it would not be an adequate substitute for a well-
functioning market.
Net benefits from rationalization
    Rationalization of the pollock fishery under the AFA created large 
net economic benefits for the inshore sector, which facilitated 
outcomes benefiting both the harvesting and processing sectors. As 
already noted, the regionalization requirement under the proposed plan 
for the crab fisheries would decrease the potential net economic 
benefits to be obtained by rationalization. But even if this provision 
did not exist, the total net economic benefits of rationalization in 
the crab fisheries could not be expected to be as large as they were 
under the AFA, because participants in the inshore pollock fishery 
benefited both from a large increase in the sector's total allocation 
and from large rationalization benefits from the formation of 
cooperatives.
    The sector's total allocation was increased first by an increase in 
its share of the total directed pollock fishery from 35 percent to 50 
percent, and subsequently by an increase in the total allowable catch 
for the pollock fishery. The combined result was that the inshore 
sector's total allocation has increased by 80 percent from the pre-AFA 
level in 1998 to the present.
    Large efficiency benefits were realized from the formation of the 
AFA cooperatives. Rationalization under the AFA permitted improved 
targeting of pollock during the peak roe season, resulting in greatly 
increased ex vessel prices during this season. The value of output was 
also increased because slowing the race for fish permitted an increase 
in the recovery rate and a shift to higher valued products. Harvesting 
costs have been reduced by the transfer of quota shares from less 
efficient vessels to more efficient vessels, and easy transferability 
of allocation within a cooperative has facilitated the full harvesting 
of the available allocations.
    In contrast, the proposed rationalization program for the crab 
fisheries does not include an increase in the total allocations 
available to these fisheries. It does incorporate a buyback program, 
but the efficacy of the buyback program has yet to be determined, and 
in any case could not result in benefits equivalent to the 80 percent 
increase in total allocation experienced by the inshore pollock 
fishery. Similarly, increases in the value of output due to 
rationalization are not anticipated to be as large for the crab 
fisheries, and increases in harvesting efficiency are likely to be 
hindered by the restrictions imposed by the proposed program.
Implications
    There is no basis for believing that the rationalization program 
proposed for the BSAI crab fisheries will have similar outcomes to 
those obtained under the AFA cooperatives for the inshore pollock 
fishery. Instead, the crab rationalization program as currently 
structured is much more advantageous for processors both because of the 
guarantee of 90 percent of each processing company's processing history 
and because of regionalization. The program is also far more complex, 
making it problematic whether market processes can be relied on for the 
determination of appropriate prices. And there is less of a margin for 
error in case of unintended distributional effects because the net 
benefits to the fishery as a whole are expected to be substantially 
smaller.
Conclusions
    The generally favorable outcomes under the AFA provide no assurance 
of favorable outcomes under the proposed rationalization program for 
the BSAI crab fisheries. To the contrary, the economic analyses 
commissioned by the Council for both the AFA and the proposed crab 
rationalization programs indicate serious problems with the crab 
program. In particular, the choice of a 90 percent-10 percent IPQ 
program is highly unlikely to provide a reasonable balance between the 
interests of processors and harvesters.
    An IPQ program in which processors are guaranteed 100 percent of 
their harvesting history would almost certainly result in most, if not 
all, of the benefits of the rationalization program accruing to 
processors. The 90 percent-10 percent proposal appears to be a step in 
the direction of a compromise that less overwhelmingly favored 
processors. However, it is not clear why the 100 percent program should 
have been the apparent starting point.
    A more obvious approach would be to begin by considering the 
effects of a standard IFQ program. Both the Halvorsen, Khalil and 
Lawarree study and the Milon and Hamilton study indicate that a 
straight IFQ program would benefit both harvesters and processors. 
Given the existence of concerns that an IFQ program might instead 
result in adverse outcomes for processors, consideration of 
modifications to the program to rebalance the outcomes would be 
reasonable. Regionalization is one such modification, and whatever its 
primary purpose, one effect of regionalization in the BSAI crab 
rationalization program is to increase processors' bargaining power.
    The allocation of IPQs would be another possible modification. 
Restricting deliveries of some portion of the harvest under IFQs to 
processors holding IPQs would tilt the distribution of the benefits of 
the program in favor of processors, with processors faring better the 
larger the share of IPQs in the total harvest. Given that it is not 
clear that processors would fare badly without IPQs, as well as the 
total lack of practical experience with IPQs, it would be reasonable to 
limit the original allocation of IPQs to a modest share of the total 
harvest. And if the goal is to have an effect similar to the overall 
provisions of the AFA inshore cooperatives, which allow for the 
possibility that a processor's claim on its processing share can be 
eroded over time or even completely lost, then this share should most 
likely be less than 50 percent.
    The Council has commendably committed itself to closely monitoring 
the outcomes under the BSAI crab rationalization program and making 
modifications to the program if the outcomes are judged to be 
unsatisfactory. Therefore if it turned out that the initial allocation 
of IPQs was seen to be causing unsatisfactory results, the Council 
could modify the allocation accordingly. Because IPQs do not contribute 
to the realization of the efficiency benefits of rationalization, such 
changes would have primarily only distributional results. Such a 
flexible approach would appear to be clearly superior to one in which 
the Council commits itself to a 90 percent-10 percent program with the 
intention of making unspecified modifications to other aspects of the 
program if the outcomes are considered unsatisfactory.
References
    Halvorsen, Robert (2003), ``Written Testimony Submitted to the 
Record of the May 20, 2003 Hearing on Bering Sea/Aleutian Island Crab 
Rationalization before the Committee on Commerce, Science, and 
Transportation of the United States Senate.''
    Halvorsen, Robert, Fahad Khalil, and Jacques Lawarree (1999), 
``Inshore Sector Catcher Vessel Cooperatives in the Bering Sea/Aleutian 
Islands Pollock Fisheries,'' discussion paper prepared for the North 
Pacific Fishery Management Council, September 13.
    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. (2000), ``Unintended Consequences of the 
American Fisheries Act,'' report to the North Pacific Fisheries 
Management Council, June.
    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 Stephen F. Hamilton (2002), ``A Comparative 
Analysis of Alternative Rationalization Models for the Bering Sea/
Aleutian Islands (BSAI) Crab Fisheries,'' discussion paper prepared for 
the North Pacific Fishery Management Council, March.
    National Research Council (1999), Sharing the Fish: Toward a 
National Policy on Individual Fishing Quotas, National Academy Press.
    North Pacific Fishery Management Council (2002), ``BSAI Crab 
Rationalization Program Alternatives,'' March.
    North Pacific Fishery Management Council (2002), ``Bering Sea and 
Aleutian Islands Crab Rationalization Program,'' Report to Congress, 
August.
    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.
    United States General Accounting Office (2002), ``Individual 
Fishing Quotas: Better Information Could Improve Program Management,'' 
December.
                                 ______
                                 
           Community Impacts Related to Crab Rationalization 
                       Utilizing Processor Quotas
    This paper condenses information concerning crab rationalization 
affects on communities as presented in the North Pacific Fishery 
Management Council's (Council) analyses. The emphasis of this 
examination is on the ``two-pie'' or processor quota aspects of the 
proposed program. Also, the paper focuses on the community of Kodiak. 
However, the general type of information presented in the Council 
analyses for Kodiak is similar for Dutch Harbor and, to a lesser 
extent, a few other communities. Most of the information in this paper 
is taken directly from Council documents and is referenced as such. 
This paper presents a more coherent picture of the community impacts 
expected under crab rationalization. All of this information was 
available to Council decision makers and, according to their official 
record, comprised a basis for their decisions.
    A thorough review of the Council's crab rationalization analysis 
documents reveals absolutely no quantitative analysis of community 
impacts.\1\ What quantitative impact analysis exists focuses on 
allocations strategies to harvesters and processors. There is no 
quantitative analysis or discussion of the impacts to communities, 
regions, states, or the Nation as a whole.
---------------------------------------------------------------------------
    \1\ Documents reviewed for this paper include: (1) North Pacific 
Fishery Management Council (NPFMC). 2002. Bering Sea Crab 
Rationalization Program Alternatives: Public Review Draft. May, 2002. 
Including appendices; (2) EDAW (SIA). 2002. Social Impact Assessment, 
BSAI Crab Rationalization: Overview and Community Profiles. Appendix 2-
6 to NPFMC 2002.; (3) NPFMC AP/CQS/S. 2002. BSAI Crab Rationalization 
Program Trailing Amendments: Additional Provisions, Captain's Quota 
Shares, and Sideboards. December 2002.; (4) NPFMC CP/BA/DC. 2003. BSAI 
Crab Rationalization Program Trailing Amendments: Community Protection, 
Binding Arbitration, and Data Collection. February 2003.; and, (5) 
NPFMC CP/BA. 2003. BSAI Crab Rationalization Program Trailing 
Amendments: Community Protection and Binding Arbitration. April 2003.
---------------------------------------------------------------------------
    The most concise, and perhaps the only qualitative summary of 
expected impacts of a ``two-pie'' allocation on the community of Kodiak 
is found in the Social Impact Assessment.

        Kodiak processors at present do not have a substantial 
        established history in the Bering Sea crab fisheries for the 
        qualifying periods being considered. While important to BSAI 
        crab processing in the more distant past, local processors have 
        minimal contemporary involvement, being in some cases 
        effectively restricted to short season's ``last load'' 
        deliveries of locally based vessels. In a rationalized Bering 
        Sea crab fishery with only harvester rights allocated, Kodiak 
        processors generally feel that they could compete for more than 
        their historical percentage of the Bering Sea crab processed in 
        Kodiak. That is, the thought is that in a system free from a 
        race for crab (allocated harvester rights) but unconstrained as 
        to where crab can be delivered (no allocated processor rights, 
        cooperatives, or regionalization), Kodiak processors could 
        compete by offering higher prices to compensate for their 
        relatively greater distance from the resource. The co-op option 
        featuring assignment of quota to processor involved co-ops 
        based upon where the majority of catch has historically been 
        delivered would effectively serve to exclude Kodiak processors 
        from the BSAI crab fisheries. Similarly, direct processor 
        allocations would serve to diminish the role of, if not 
        completely exclude, Kodiak processors from the fishery, with 
        the degree of the effect dependent upon the percentage of the 
        processors' history which if firmly allocated-the higher the 
        percentage more firmly allocated by past processing history 
        (away from Kodiak processors, from their perspective), the more 
        potentially harmful the effect. For instance, a 100 percent 
        allocation of processor history would constrain Kodiak 
        processors to one to three percent of Bering Sea crab, unless 
        they could somehow buy a greater share from a willing 
        seller.\2\ (emphasis added)
---------------------------------------------------------------------------
    \2\ SIA, page 127.

    The analysis presented above is unequivocal in its prediction of 
the negative affect on Kodiak of a two-pie system with processor 
shares. Therefore, if the Council and the State of Alaska base their 
support of a two-pie system, with 90 percent of the processing 
privileges directly assigned to specific processors, on the analysis 
documents they are explicitly attempting to legislatively depress 
Kodiak's (and other smaller communities) future benefits from 
rationalized BSAI crab fisheries.
Summary of Council Analysis Statements Concerning Community Impacts
    There are four general sections of the analysis within which 
community impacts would reasonably be described and analyzed:

  (1)  Section 2.6: Community and Social Impacts (pages 105-137) and 
        specifically Section 2.6.4: Detailed Community Level Impacts.

  (2)  Section 3.6: Regionalization (from the May 2002 document and 
        modified by trailing amendments)

  (3)  Section 3.16: Economic Effects (pages 395-408).

  (4)  Appendix 2-6: Community Profiles and Social Impact Assessment 
        (SIA)

    Section 2.6.4 is presented below in its entirety:

        As noted in the introduction to this section, community and 
        social impacts of crab rationalization approaches are discussed 
        both in this section and in an appendix to this volume, and 
        these two discussions, taken together, comprise the SIA for 
        crab rationalization. Appendix 2-6 (Social Impact Assessment: 
        BSAI Crab Rationalization Overview and Community Profiles) 
        details the localized nature and intensity of engagement with 
        and dependency on the crab fishery at the community level, and 
        presents an analysis of the direction and magnitude of the 
        social impacts likely to result from crab rationalization for 
        the series of communities profiled as well as for the CDQ 
        region.

    Section 3 of the document presents an analysis of the alternatives 
via a variety of types of impacts. Communities are not mentioned in the 
analysis including environmental impacts, endangered species, marine 
mammals, or safety.
    Scattered throughout the SIA and analysis sections are various 
suggestive or summary statements about the ability of estimating or 
forecasting community impacts.

        Some communities could also be affected by rationalization. In 
        the current derby fishery, processing activity is likely to be 
        located to facilitate success in the race for fish. In a slower 
        rationalized fishery, processing activity could relocate to 
        different communities to realize cost efficiencies. Communities 
        that increase processing under rationalization will benefit 
        from the program. Communities that lose processing activity 
        would realize less benefits in a rationalized fishery. The 
        regionalization alternatives are intended to prevent some of 
        the redistribution of processing activity to protect 
        communities that have benefited from the distribution of 
        processing in the current race to fish. The extent of the 
        impacts of rationalization on communities depends on whether 
        these regionalization alternatives are adopted and whether they 
        succeed in achieving their goals.\3\
---------------------------------------------------------------------------
    \3\ NPFMC, page 406.

        Under a two-pie IFQ program, if the entire fishery is allocated 
        through processing shares, processor entry would require the 
        purchase of processing shares. Processing shares in this 
        program would create a regulatory barrier to entry. The extent 
        of the barrier would depend on the market price of processing 
        shares, which cannot be predicted. The relatively few number of 
        processors in the crab fisheries could lead to a limited market 
        for processing shares, which would complicate entry to the 
        processing sector. Crab in a fishery with fully allocated 
        processing privileges, however, would have a lower ex vessel 
        price.\4\
---------------------------------------------------------------------------
    \4\ NPFMC, page 407.

        At least eight communities that are home to BSAI crab 
        processors could be directly impacted by the regionalization 
        provisions under consideration. The overall impact on 
        communities cannot be determined until the regionalization 
        alternatives are selected and the communities are defined.\5\
---------------------------------------------------------------------------
    \5\ NPFMC, page 428.

        The small governmental jurisdictions could also be impacted by 
        the rationalization of the crab fisheries. As noted above, 
        depending on the alternatives chosen, communities might be 
        protected by a regionalization program. The regionalization 
        options would either directly protect individual communities or 
        would simply divide the fisheries into regions. If communities 
        are directly protected, the rationalization is unlikely to have 
        negative effects on those communities. Under a more general 
        regionalization program that divides the fishery into two 
        regions, it is likely that communities would receive limited 
        protection. Under this more general protection some processing 
        activity could move between communities in a region. This is 
        likely to benefit those communities that receive additional 
        processing activity and harm communities that processing 
        activity leaves. Similarly, if no regionalization program is 
        incorporated into the rationalization program some communities 
        would benefit from rationalization, while others would suffer 
        some losses. Fish taxes would likely be redistributed with the 
        redistribution of processing activity. In addition, the 
        provision of support services and associated sales taxes will 
        likely be redistributed to the extent that deliveries to 
        processors are redistributed in a rationalized fishery.\6\
---------------------------------------------------------------------------
    \6\ NPFMC, pages 429-30.

        Increased efficiency in the fisheries arising from 
        rationalization could also reduce the provision of support 
        services and sales taxes, if the fleet is able to reduce their 
        overall costs. These savings may occur in large communities as 
        well as small. Since the redistribution of activity and the 
        increased efficiency cannot be predicted the effects of the 
        rationalization cannot be fully predicted.\7\
---------------------------------------------------------------------------
    \7\ NPFMC, page 430.

    The analysis attempted to learn about processor quotas from other 
fisheries. This was a difficult undertaking in that such a management 
measure apparently does not exist in any other fishery worldwide. 
``Several program aspects of the alternatives are unique. For example, 
no two pie IFQ programs have been implemented in any fisheries to 
date.'' \8\
---------------------------------------------------------------------------
    \8\ NPFMC, page 396.
---------------------------------------------------------------------------
    Analogies were drawn by many to pollock AFA co-ops. The crab 
rationalization analysis presented several statements concerning those 
analogies, demonstrating that pollock co-ops and processor shares are 
fundamentally different:

        There is no parallel for that [two-pie] system under the 
        current pollock co-op system.\9\
---------------------------------------------------------------------------
    \9\ SIA, page 18.

        Pollock co-ops are plant-specific for the shore processing 
        sector, which makes them effectively community specific in 
        terms of social impacts. Under the proposed BSAI crab co-ops, 
        company level rather than plant level co-ops are contemplated. 
        This means that shifts of landings and processing effort 
        between communities could occur in a way (or to a significant 
        degree) that they cannot under the pollock co-ops.\10\
---------------------------------------------------------------------------
    \10\ SIA, page 18.

    Additional information was gathered from other studies and reports. 
One of the most important of such other reports is the 1999 National 
Research Council's report ``Sharing the Fish''. The following excerpt 
---------------------------------------------------------------------------
concerning processor shares is from the Council analysis:

        The NRC report ``Sharing the Fish'' included a discussion of 
        the merits of allocating either a portion of the quota to 
        processors or alternatively creating a separate class of shares 
        for processors. Processors are thought to have had mixed 
        results under IFQ programs. When adversely affected, processors 
        are argued to suffer from stranded capital and lower 
        profitability. Processor losses could also have negative 
        impacts on isolated communities. Processors that are successful 
        in IFQ fisheries tend to obtain results through ``contractual 
        methods or vertical integration''. The study concludes that if 
        protection of processors is an ``appropriate social goal, this 
        could be accomplished by allocating separate harvester and 
        processor quota.'' The report also suggested that other 
        methods, such as buyouts or permitting processors to own 
        harvester quota might be preferred to processor quotas, if 
        processor protection is a concern.\11\
---------------------------------------------------------------------------
    \11\ NPFMC, page 256.

    The NRC report's full recommendation for shares to other entities 
such as processors is more robust. While the NRC finds no compelling 
reason to establish a two-pie system they did recommend consideration 
of community allocations of IFQs:\12\
---------------------------------------------------------------------------
    \12\ National Research Council. 1999. ``Sharing the Fish: Toward a 
National Policy on Individual Fishing Quotas.'' National Academy, 
Press. Washington, D.C. Pages 205-207.

---------------------------------------------------------------------------
        Processor Allocations

        Recommendation: On a national basis, the committee found no 
        compelling reason to recommend the inclusion or exclusion of 
        processors from eligibility to receive initial quota shares. 
        Nor did the committee find a compelling reason to establish a 
        separate, complementary processor quota system (the ``two-pie'' 
        system). If the regional councils determine that processors may 
        be unacceptably disadvantaged by an IFQ program because of 
        changes in the policy or management structure, there are means, 
        such as buyouts, for mitigating these impacts without resorting 
        to the allocation of some different type of quota, with a 
        concomitant increase in the complexity of the IFQ program. For 
        example, coupling an IFQ program with an inshore-offshore 
        allocation would preserve the access of shore-based processors 
        to fishery resources. Whatever method is chosen, it should not 
        have the effect of subsidizing excess processing capacity. 
        Depending on regional considerations, some councils may choose 
        to allow processors to acquire quota share either through 
        transfer or through ownership of harvesting vessels that are 
        entitled to an initial allocation of quota.

        Allocations to Communities

        Recommendations: The committee recommends that councils 
        consider including fishing communities in the initial 
        allocation of IFQs, where appropriate, and that the Secretary 
        of Commerce interpret the language in the Magnuson-Stevens Act 
        pertaining to fishing communities (Sec. 303 [b][6][E] and 
        National Standard 8) to support this approach to limited access 
        management. Congress should allow, though a change in the 
        Magnuson-Stevens Act if necessary, councils to allocate quota 
        to communities or other groups, as distinct from vessel owners 
        or fishermen. Where an IFQ program already exists, councils 
        should be permitted to authorize communities to purchase, hold, 
        manage, and sell IFQs. These communities could use their quota 
        shares for community development purposes, as a resource for 
        preserving access for local fishermen, or for reallocation to 
        member fishermen by a variety of means, including loans. If the 
        communities chose to allocate the rights to individuals, they 
        could be constrained by covenants or other restrictions to be 
        nontransferable. Regional fishery management councils should 
        determine the qualifying criteria for a community that is 
        permitted to hold quota. 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. The range of criteria will 
        have to be carefully considered and weighted and the 
        implications of defining these criteria would have to be 
        examined fully.

    One of the issues raised by the community of Kodiak and others is 
the inclusion of recent participation in the analysis. This is neither 
a new nor recent concern and it is one the Council is well aware of. 
``In addition to the issues raised in the NRC report, NOAA GC has 
emphasized that the failure of the halibut and sablefish IFQ program to 
give sufficient consideration to recent participation was an important 
issue in the lawsuit filed against that program.'' \13\
---------------------------------------------------------------------------
    \13\ NPFMC, page 193.
---------------------------------------------------------------------------
Information Concerning Impacts to Kodiak
    The Council analysis documents present a great deal of information 
concerning crab fisheries and how they related to Kodiak during the 
last decade of the twentieth century. This information appears 
primarily in the harvesting and processing sections of Section 2.6 and 
in the Kodiak section of the SIA (pages 102-129).
    The crab considered for rationalization, referred to as PRP, 
consist of nine species and/or fisheries.\14\ Of these, the three 
historically most important to Kodiak are Tanner crab (opilio and 
baridi) and Bristol Bay red king crab. There has not been a fishery for 
baridi since 1996 and only a very low harvest of opilio since 1999. 
Therefore, the species of most immediate interest to Kodiak is Bristol 
Bay red king crab.
---------------------------------------------------------------------------
    \14\ The species included in the crab rationalization plan: Bering 
Sea opilio, Bristol Bay red king crab, Bering Sea bairdi, Pribilof red 
king crab, Pribilof blue king crab, St. Matthew blue king crab, Eastern 
Aleutian Islands (Dutch Harbor) golden king crab, Western Aleutian 
Islands (Adak) golden king crab, and Western Aleutian Islands (Adak) 
red king crab.
---------------------------------------------------------------------------
    A specific portion of the Kodiak based fleet in particular and the 
Kodiak fishing community in general are dependant on PRP crab. ``[Table 
2.6-13] indicates, for example, that PRP crab accounts for 35.5 percent 
of the total value harvested by the combined Kodiak fleet. As shown, 
although Kodiak has a large and diversified fleet, the Kodiak community 
fleet is relatively more dependent on the BSAI crab species proposed 
for rationalization (by far) than any other local Alaskan Fleet.'' \15\
---------------------------------------------------------------------------
    \15\ NPFMC, page 111.
---------------------------------------------------------------------------
    The relative dependence of the Kodiak fleet on PRP crab, while very 
high, is still understated. This is because there was no fishery for 
Bristol Bay red king crab, the most valuable of the PRP species, during 
two of the years used in the analysis while fisheries for salmon, 
pollock, Pacific cod, and other species continued.
    The analysis presents the value and poundage of rationalized crab 
species processed for certain areas and communities. However, while 
Kodiak is one of the two communities listed, the information for 
Bristol Bay red king crab is suppressed due to confidentiality.\16\ 
Tables presented in Appendix 3 to the SIA provide much more information 
concerning Kodiak as well as other community participation in the 
fisheries. However, the PRP crab species are combined and therefore 
individual species/fisheries data are not available.
---------------------------------------------------------------------------
    \16\ NPFMC, Tables 2.6-20 through 2.6-26.
---------------------------------------------------------------------------
    Tables 2.6-27 through 2.6-29 of the NPFMC 2002 analysis attempt to 
represent processor dependency for the PRP crab species during the 
period 1991-2000. The data indicate that PRP crab account for 1.6 
percent of the total PRP crab processed in all areas during the period 
but 4.2 percent of the value of all species processed in Kodiak. The 
explanation of the data, however, leaves some doubt as to their 
usefulness. ``[I]t is important to bear in mind that these data cover 
the full spectrum of processing operations in a given locality, and not 
only those that process BSAI crab. It thus represents community 
dependence on BSAI crab at a relatively high level of abstraction and 
may not reflect any specific operation in the community, and the data 
may represent more in the way of collective entity dependency rather 
than community dependency.'' \17\
---------------------------------------------------------------------------
    \17\ NPFMC, page 133.
---------------------------------------------------------------------------
    The change is relative crab landings in Kodiak is discussed in the 
documents. These qualitative discussions relate both to why the level 
of landings have changed and what aspects of fishery management may 
affect them. The discussion also overlaps to other community impacts 
such as services and taxes.

        After 1996, all pots had to be removed from the fishing grounds 
        within 7 days of the end of the season. Many Kodiak Bering Sea 
        crab boats report that they are not large enough to carry both 
        a load of crab and all their pots, so that this change in 
        regulation severely limited their ability to deliver crab to 
        Kodiak, especially during high GHL years. Such boats were 
        limited even on the last (or only) delivery trip of the season. 
        For their last trip, such boats were essentially forced to 
        deliver to a Bering Sea processor, return to the grounds and 
        pick up their pots, and then go to Kodiak. Some harvesters also 
        reported that processors required them to deliver all crab to 
        them, by linking such deliveries to markets for other fish. 
        Still, by 1999 the Kodiak processors and fleet had evidently 
        adapted to the extent that Kodiak deliveries and processing 
        were at the same levels as the early 1990s. The sharp increase 
        in 2000 may be due to a number of factors. One would be the 
        great decline in the GHL and harvest, so that many vessels had 
        only one delivery trip, often of a partial load, that allowed 
        them to carry their empty pots as well. Kodiak processors may 
        also have offered price incentives, for various reasons.\18\
---------------------------------------------------------------------------
    \18\ SIA, page 119.

        Kodiak processors believe that they could compete and increase 
        their market share for BSAI crab, especially in a rationalized 
        fishery, which would reduce the incentives for quick (Bering 
        Sea port) delivery. They cite the 2000 crab season as support 
        for this contention, as they greatly increased their market 
        share over that of the recent past. Thus, any alternative which 
        limits the ability of Kodiak processors to compete for BSAI 
        crab could have potential adverse effects on both Kodiak 
        processors and crab vessels. It would be in addition to the 
        competitive advantage that Bering Sea processors reportedly 
        achieve over Gulf of Alaska processors from rationalized [AFA 
        pollock] fisheries in the Bering Sea in relation to the open 
        access fisheries in the Gulf of Alaska.\19\
---------------------------------------------------------------------------
    \19\ SIA, pages 123-4.

    For Kodiak, local BSAI crab processing is not taking place because 
of inefficiencies in the fishery that, in turn, make the lower costs of 
local processing not worthwhile in an unrationalized system.\20\
---------------------------------------------------------------------------
    \20\ SIA, page 128.
---------------------------------------------------------------------------
Implications to Communities From Combined Affects of Crab
  Rationalization
    The analysis does not quantitatively, nor for that matter in one 
location qualitatively, address the expected combined effects of the 
various management measures. Certainly such analysis is not conducted 
for communities. However, by drawing some of the points from the 
Council analysis together it is possible to make a reasonable projected 
of expected impacts.
Potential for Oligopsony
    The analysis states ``[A]n oligopsony exists when a limited number 
of buyers of a product exists. These buyers can influence ex vessel 
prices by refraining from purchases.'' \21\
---------------------------------------------------------------------------
    \21\ NPFMC, page 403.
---------------------------------------------------------------------------
    The crab processing industry is dominated by several large crab 
processors. The following information is for the Bristol Bay red king 
crab fishery. Similar concentration occurs in the Bering Sea opilio 
fishery.

        Average of top four processors\22\      15.09%
---------------------------------------------------------------------------
    \22\ NPFMC, Table 3.4-13.
---------------------------------------------------------------------------
        Combined concentration of top 4 processors\23\      60%
---------------------------------------------------------------------------
    \23\ NPFMC, Table 3.4-13.
---------------------------------------------------------------------------
        Total processing owners\24\      26
---------------------------------------------------------------------------
    \24\ NPFMC, Table 3.4-13.
---------------------------------------------------------------------------
        Median processor allocation\25\      1.0%
---------------------------------------------------------------------------
    \25\ NPFMC, Table 3.4-5.
---------------------------------------------------------------------------
        Average processor allocation\26\      3.8%
---------------------------------------------------------------------------
    \26\ NPFMC, Table 3.4-5.
---------------------------------------------------------------------------
        Number of processors allocated  20% \27\      <3
---------------------------------------------------------------------------
    \27\ NPFMC, page 283.
---------------------------------------------------------------------------
        Number of processors allocated  30% \28\      0
---------------------------------------------------------------------------
    \28\ NPFMC, page 283.
---------------------------------------------------------------------------
        Number of catcher/processors \29\      11
---------------------------------------------------------------------------
    \29\ NPFMC, Table 3.4-2.
---------------------------------------------------------------------------
        Total C/P allocation\30\      8.1%
---------------------------------------------------------------------------
    \30\ NPFMC, Table 3.4-2.

    These data probably underestimate the level of concentration. 
Processor concentrations are grandfathered at any level with verified 
contracts entered into by June 10, 2002. Any such contracts are unknown 
at this time and are not required to be made public until the time of 
allocations.
    As is the nature of manufacturing in an unrestricted industry, 
participants enter and leave on a fairly regular basis. This has been 
the case in crab processing. The difference between the number of 
processors and how change has occurred during the 1990s is illustrated 
in information from Tables 2.3-1 and 2.3-2 of the Council analysis. 
Data are not presented in the analysis for the number of processors 
prior to 1991. The number of processors has decreased during the period 
due to a dramatic decrease in catcher processors and floaters.\31\ The 
number of shorebased processors has remained relatively constant at 15 
in the Bristol Bay red king crab fishery since it resumed in 1996.
---------------------------------------------------------------------------
    \31\ From 9 floaters and 25 C/Ps in 1991 to 2 and 6, respectively, 
in 2000.

------------------------------------------------------------------------
       Year             Delivery  Percentage       Number of  Processors
------------------------------------------------------------------------
    1991                                    71%   29 qualified
                                            29%   27 non-qualified
    2000\32\                                96%   20 qualified
                                             4%   3 non-qualified
------------------------------------------------------------------------

    Foreign ownership of processors is widespread in the crab fishery. 
Several of the major crab processors including Peter Pan Seafoods, 
UniSea, and Westward Seafoods are fully owned by foreign companies 
while Alyeska Seafoods and Stellar Seafoods \33\ are partially (25 
percent or more) foreign owned.\34\ Under the recommended 
rationalization program, 47 percent of the Bristol Bay red king crab 
and 36 percent of the Bering Sea opilio processing quota will be 
allocated to the afore named five foreign owned processors? \35\ The 
qualified crab processing facilities owned by these firms which will 
receive allocations are presented in Appendix 3-3.
---------------------------------------------------------------------------
    \32\ The percentage is estimated based on analysis text since the 
percentage for non-qualified processors is confidential.
    \33\ Figure 8.7 of the January 2000 AFA report to Congress 
considers Steller Seafoods to be 100 percent owned or controlled by 
Peter Pan Seafoods.
    \34\ NPFMC, Table 3.14-1.
    \35\ NPFMC, Table 3.14-2.

------------------------------------------------------------------------
  Company Catcher/processor         Shorebased              Floater
------------------------------------------------------------------------
    Peter Pan Seafoods        King Cove               Blue Wave
                              Port Moller
    UniSea                    Dutch Harbor
                              St. Paul
    Westward Seafoods         Dutch Harbor
    Alyeska Seafoods          Dutch Harbor
    Stellar Seafoods                                  Stellar Sea
------------------------------------------------------------------------

    In addition, Trident Seafoods is known to be a major processor of 
Bristol Bay red king crab as is Icicle Seafoods. Their qualified crab 
processing facilities listed in Appendix 3-3 include:

------------------------------------------------------------------------
   Company  Catcher/
       processor                Shorebased                Floater
------------------------------------------------------------------------
    Trident              South Naknek             Akutan Bountiful
                         Akutan                   Alaska Packer
                                                  Glacier Enterprise
                         St. Paul Island          Independence
                                                  Northern Enterprise
                                                  Sea Alaska
                                                  Royal Enterprise
                                                  Tempest
                                                  Western Enterprise
    Icicle                                        Arctic Star
                                                  Bering Star
                                                  Coastal Star
                                                  Evening Star
                                                  Northern Victor
------------------------------------------------------------------------

    Of these seven companies, only Stellar Seafoods is not an AFA 
qualified pollock processor owner. Harvesters have expressed concerns 
about potential loss of bargaining power if there is a ``two-pie'' 
rationalization system. ``Harvesters claim that under the AFA crab 
sideboards imposed on processors, harvesters have faced limited markets 
and been forced to be price-takers and thus received less value for 
their crab than they would otherwise have expected. The belief is that 
processors may acquire even more leverage in the price-bargaining 
relationship under any rationalization plan other than the ``one-pie'' 
(harvester only IFQ) alternatives. In short, many harvesters believe 
that they have already been adversely affected in this way by the crab 
sideboards imposed on AFA-qualified processors by the AFA. Once the 
capped processors reach their limits, there are very few alternative 
markets to which a harvester can sell.'' \36\
---------------------------------------------------------------------------
    \36\ SIA, page 118.
---------------------------------------------------------------------------
    This brings to mind a statement from almost a century ago.

        We can let Alaska become the private preserve of a few great 
        special interests to be developed and controlled at their 
        pleasure and as their profit may dictate. . . . Or we can treat 
        Alaska as the future home of hundreds of thousands of free 
        American citizens, and its resources as a trust to be developed 
        and conserved for their benefit and for the benefit of all the 
        people-who are its owners. Gifford Pinchot, Saturday Evening 
        Post, December 16, 1911, pp12 ff.

Market Implications of Processor Quotas
    The Council commissioned a study to specifically examine the 
impacts on the crab fisheries from alternate rationalization 
programs.\37\ It contained a number of statements related processor 
quota markets and the effects on ex-vessel values from a two-pie 
system. Overall, they found that more restrictions placed on where a 
harvester may deliver, the more policy benefit shifts towards 
processors.
---------------------------------------------------------------------------
    \37\ Walter Milon and Steve Hamilton. ``A Comparative Analysis of 
Alternative Rationalization Models for the Bering Sea/Aleutian Islands 
(BSAI) Crab Fisheries,'' March 2002, Discussion Paper for the North 
Pacific Fishery Management Council. 66 pp.

        Typically markets [for processor permits] work best when there 
        are a large number of buyers and sellers in the market. In 
        ``thin'' markets for permits, a small number of firms may have 
        little incentive to trade if there are small differences in the 
        firms' productions costs and/or the firms perceived the permits 
        can be used for strategic advantage.\38\
---------------------------------------------------------------------------
    \38\ Milton and Hamilton, Page 9. Referenced to (1) ``Small 
Pollution Markets: Tradeable Permits versus Revelation Mechanisms,'' F. 
Andersson, 1997. Journal of Environmental Economics and Management 
32:38-50. (2) ``Raising Rival's Costs Strategies via Emission Permits 
Markets. E. Sartzetakis. 1997. Review of Industrial Organization 
12:751-765.

        If there is a market share guarantee for processors, then there 
        is not a threat of losing deliveries if the ex-vessel price is 
        lowered. Therefore, a processor who wants to maximize profits 
        would lower his ex-vessel price and harvesters would still have 
        to deliver to him.\39\
---------------------------------------------------------------------------
    \39\ Milton and Hamilton, Page 41.

        In general, the less the market is segmented, the larger the 
        prevailing ex-vessel prices under processor price competition. 
        . . . [t]he more restrictions that are put in place to govern 
        the location to which individual harvesters must deliver, the 
        less the degree of ex-vessel price competition to acquire 
        market share.\40\
---------------------------------------------------------------------------
    \40\ Milton and Hamilton, Pages 41-2.

    Other studies reviewed in the Council analysis seem to agree on the 
effects of thin markets. ``The authors [Matulich and Sever] caution 
that transaction costs can inhibit efficiency. Specifically, they point 
out that thin harvesting or processing share markets (or markets with 
few participants or shareholders) could reduce efficiency gains in both 
sectors. Limited numbers of participants would limit the ability of 
participants to purchase the number of shares necessary to operate 
efficiently. Vertical integration is argued to have the potential to 
contribute to these efficiency losses.'' \41\
---------------------------------------------------------------------------
    \41\ NPFMC, page 402, referencing Matulich and Sever, 
``Reconsidering the Initial Allocation of ITQs,'' Land Economics 
(1999).
---------------------------------------------------------------------------
    Vertical integration does exist in the crab fisheries. Under the 
proposed Bristol Bay red king crab rationalization plan, there are 31 
vessels with documented affiliation with a total of 6 processors. This 
will result in 4 processors being allocated an amount over the one 
percent harvest ownership cap and at least one processor receiving over 
5 Percent\42\
---------------------------------------------------------------------------
    \42\ NPFMC, Table 3.4-14.
---------------------------------------------------------------------------
    These 31 vessels will be allocated 12.6 percent of the total 
harvest allocations.\43\ As stated previously, there may well be 
greater vertical integration due to contracts entered into on or before 
June 10, 2002 and not yet made public.
---------------------------------------------------------------------------
    \43\ NPFMC, Table 3.4-27.
---------------------------------------------------------------------------
Processor Bargaining Tactics in a Two-Pie System
    The Council analysis addressed some of the potential implications 
of bargaining between harvesters and processors in a two-pie system.

        Harvesters and processors in the crab fisheries are related on 
        several levels ranging from common ownership to simply repeated 
        transactions in the buying and selling of crab. Since the 
        relationships are often manifold, their dynamics are also quite 
        complicated. Understanding these relationships, however, is 
        critical to understanding the applicability of a 
        rationalization program in a fishery.\44\
---------------------------------------------------------------------------
    \44\ NPFMC, page 99.

        Harvesters and processors also have support relationships that 
        are important to both sectors. Some processors sell bait, fuel 
        and food to vessels (often on credit) and store gear for 
        vessels during the offseason. At times, vessel owners with 
        large debts to processors will give the lending processor a 
        lien on their vessels. Whether a lien is taken is dependent on 
        the relationship between the vessel owner and the processor. 
        Because of confidentiality, the number of these liens and 
        whether and the extent to which they are used to exert pressure 
        on vessel operators is not know. Vessel owners also enter 
        contracts to tender salmon and herring for processors outside 
        of the crab season. Both vessel owners and processors contend 
        that tendering relationships are important to their businesses. 
        The extent to which either side exploits the other based on 
        these tendering contracts is also not known.\45\
---------------------------------------------------------------------------
    \45\ NPFMC, page 100.

        Some harvesters also reported that processors required them to 
        deliver all crab to them, by linking such deliveries to markets 
        for other fish.\46\
---------------------------------------------------------------------------
    \46\ SIA, page 119.

        Pricing [also] varies regionally among processors in the crab 
        fisheries. Regional price differences have several sources. In 
        fisheries where vessels make several deliveries, the 
        availability of goods and services in a location can be 
        important to fishers. Food, bait, fuel, and a good port 
        facilities can make a processor more attractive to vessels 
        wishing to offload harvests. Processors in locations that offer 
        less goods and services may pay price premiums to induce 
        fishers to sell their harvests. Processors that are distant 
        from grounds may also need to pay a premium price to compensate 
        fishers for time away from the grounds while making deliveries. 
        Proximity to consumer markets can also influence ex-vessel 
        prices. Processors with less access to consumer markets may pay 
        slightly less for crab inputs than processors closer to end 
        markets since they must bear the cost of delivering the crab to 
---------------------------------------------------------------------------
        market.

        Generalizations concerning the spatial distribution of ex-
        vessel prices may be difficult to make. Dutch Harbor, where the 
        most processors are located can be used as the basis for 
        determining prices. The prices in Kodiak are higher 
        (approximately $0.20 in the recent Bristol Bay red king crab 
        fishery) because of the longer distance to the fishing grounds 
        and the proximity to consumer markets. . . . These minor price 
        differences between ports are thought to have little effect on 
        the competitiveness of vessels that deliver to the facilities a 
        the different ports, when the other costs are considered.\47\
---------------------------------------------------------------------------
    \47\ NPFMC, pages 101-2.

        To an unknown extent, price negotiations and delivery patterns 
        are influenced by relationships between harvesters and 
        processors. Some harvesters tender salmon and herring for 
        processors. Maintaining this contract might require the 
        harvester to continue to deliver crab to the processor. 
        Similarly, some harvesters receive financial support from 
        processors. Whether formalized or not, some of these harvesters 
        have a perceived obligation to deliver crab harvests to the 
        processor with whom they have the financial relationship. The 
        extent of the impact of these relationships and obligations on 
        prices and delivery patterns is not known.\48\
---------------------------------------------------------------------------
    \48\ NPFMC, page 102.
---------------------------------------------------------------------------
Conclusions of Community Impacts Under a Two-Pie System
    The impact to communities of allocations to processors within those 
communities is not at all certain. This is due to the transferability 
of processor quotas between plants owned by the same company. ``Because 
allocations are to processing companies, however, and not to specific 
facilities or communities, economic decisions at the corporate level to 
shift production from one facility to another may have community 
effects that are essentially unknowable beforehand. . . . Given the 
tendency of the marketplace to reveal costs and incentives that had not 
previously been well know, however, this assessment is not one with a 
great deal of certainty.'' \49\
---------------------------------------------------------------------------
    \49\ NPFMC, page 136.
---------------------------------------------------------------------------
    The issue of processor consolidation is germane to the issue of 
community impacts. If operations do consolidate they will occur in 
fewer plants and, without a doubt, some communities will suffer losses. 
The analysis states that ``[w]ith processor quota shares, we can not 
predict if the processing sector will consolidate''.\50\
---------------------------------------------------------------------------
    \50\ NPFMC, page 162.
---------------------------------------------------------------------------
    There are three shorebased pollock co-ops in Dutch Harbor owned by 
the companies listed above (Alyeska, Unisea, and Westward) and one in 
Akutan (Trident). ``Under pollock co-ops, shoreplants have remained 
more-or-less self-contained, self-sufficient enterprises in the 
community. This varies from plant to plant, but operations tend to be 
of an industrial enclave nature, with a relatively low volume of 
purchases of goods and services from the local support sector. Crab co-
ops are not seen as likely to change this pattern.'' \51\
---------------------------------------------------------------------------
    \51\ SIA, page 67.
---------------------------------------------------------------------------
    Processing enclaves do not exist in Kodiak. Only two percent of the 
population lived in group housing in Kodiak in 2000 \52\ compared to 51 
percent in Unalaska the same year.\53\ The processing plants in Kodiak 
purchase utilities, supplies and services from local venders as do the 
workers who live in the community.
---------------------------------------------------------------------------
    \52\ SIA, Table 2.6-4.
    \53\ SIA, Table 2.2-5.
---------------------------------------------------------------------------
    Therefore, to the extent that processing is reduced in Kodiak, and 
shifted to processors which operate from enclaves, there will an 
overall net reduction in local economic activity in Alaskan communities 
related to crab fisheries. For all the reasons discussed above, this is 
a likely outcome under a two-pie crab rationalization program.
                                 ______
                                 
         Prepared Statement of Michael B. Laukitis, President, 
                  North Pacific Fisheries Association
U.S. Senate Committee on Commerce, Science, and Transportation
Senator John McCain, Chairman

Dear Senator McCain:

    The North Pacific Fisheries Association (NPFA) thanks you for the 
opportunity to comment on the Bering Sea Crab Rationalization Plan. 
NPFA was founded the year Alaska became a state and is one of the 
oldest fisheries organizations in the State of Alaska. Our members 
include Bering Sea crabbers, halibut and sablefish IFQ longliners, Gulf 
of Alaska fixed-gear groundfish harvesters, fishermen who custom 
process their own catch for export markets, and salmon fishermen. Much 
like family farmers we are independent fishermen and fishing families 
who go out on our own boats and work to receive the highest value for 
our catch.
    NPFA supports the conservation and safety aspects of the Bering Sea 
Crab Rationalization Plan which are much needed for the benefit of 
future sustainable crab stocks and for the benefit of fishermen who 
risk their lives to harvest American seafood. We also support 
individual fishing quotas (IFQ's) for harvesters. Many of our members 
are involved in the halibut and sablefish IFQ fisheries, and we have 
seen that this carefully designed program is benefiting everyone 
involved in the industry. The halibut industry went from chaos prior to 
1995 to a stable and safe fishery where the industry is putting very 
high quality seafood products on American's kitchen tables. We believe 
the majority of the crab plan could go forward as written.
    There is one very important aspect of the Crab Rationalization Plan 
that NPFA does not support, and that is Processor Quotas, or PQ's. NPFA 
and many people in Alaskan coastal communities see corporate 
consolidation in our fisheries and the drive by multi-national food 
companies to control Alaska's rich fishery resources, our management 
agencies, our coastal communities, and eventually our fishermen as the 
number one threat facing us today. Our fishermen and communities want 
the full protection of Federal anti-trust laws, and we want to be able 
to develop new markets in our communities and to be able to sell our 
catch in open markets. We believe healthy competition brings 
innovation, and although we are in an old profession many of us pride 
ourselves as small business entrepreneurs.
    Processor quotas by definition are anti-competitive. They give a 
market share guarantee that eliminates any incentive to maintain ex-
vessel prices above the monopoly level. We do not believe the binding 
arbitration program contemplated by the North Pacific Fisheries 
Management Council is adequate to protect fishermen's interests. The 
Council's expertise is in fishery management and conservation. 
Obviously its expertise is not in planned economies and anti-trust law. 
This program shifts benefits to the processing sector. Also, after the 
American Fisheries Act we have seen that the processing sector uses the 
market power derived from processor shares in the Pollock fishery to 
further shift benefits away from harvesters in other non-Pollock 
fisheries. We fear that this trend towards processor quotas only begins 
here and will eventually affect all of Alaska's fisheries to the 
detriment of independent fishermen.
    Awarding cartel status to the snapshot of companies who happen to 
process crab in Alaska at this time would also harm other Alaskan 
processors who might not be active in that region of the state 
currently. (The short history of the American Fisheries Act is a case 
in point. Several prominent Alaskan processing companies who argued for 
free markets for Pollock leading up to the Act but were ``left out'', 
were then obviously disadvantaged versus their competitors who had a 
guarantee share and equity in the Pollock fishery, so they are now 
leading the charge for processing quotas in the crab fishery.) 
Furthermore this crab cartel would harm competing processors in other 
coastal regions of the United States who would then have to compete 
with already powerful vertically integrated multi-national food 
companies who would be granted a guaranteed share of the resource as 
well as pricing power from the boat all the way to the consumer. 
Although it may seem to be good for Alaska to have the companies who 
operate here given such dominance in the marketplace, it is telling 
that the overwhelming majority of communities and fishermen in Alaska 
do not support processor shares. It needs to be asked whether granting 
processor shares to companies who happen to process in Alaska's Pollock 
and crab fisheries eventually triggers uncompetitive consequences for 
all seafood companies in the United States.
    In conclusion NPFA sees the benefits of rationalizing the Bering 
Sea Crab fishery for conservation and safety reasons. We do not feel 
rationalization should take place at any cost. The economic analysis 
used by the North Pacific Fisheries Council to justify processor shares 
called the Matulich study is seriously flawed as was reported by the 
GAO earlier this year. Alaskan processors and communities gain 
protection from other aspects of the Crab Plan (i.e., regionalization 
requirements for delivery of crab and that catcher boats must deliver 
their catch in Alaska).. The processor share aspects of the program are 
unacceptable. They upset the balance between processor and independent 
fishermen and potentially trigger consequences for all fisheries 
throughout the United States.
    Again, thank you for the opportunity to provide written testimony 
to this hearing.
            Sincerely,
                                       Michael B. Laukitis,
                                                         President,
                                   North Pacific Fisheries Association.
                                 ______
                                 
          Prepared Statement of Phillip Lestenkof, President, 
               Central Bering Sea Fishermen's Association
    My name is Phillip Lestenkof. I am the President of the Central 
Bering Sea Fishermen's Association (CBSFA), the management organization 
for St. Paul Island under the Western Alaska Community Development 
Quota (CDQ) Program. By way of background, the CDQ program was 
established by the U.S. Congress in 1992 as a mechanism for ensuring 
that remote and impoverished Western Alaska communities would benefit 
from rich Bering Sea fisheries. Initially, 7.5 percent of the fisheries 
were set aside for the 6 CDQ groups that were created, including CBSFA.
    I want to thank the Committee Chair and members for the opportunity 
to provide testimony on the proposed Bering Sea Aleutian Island (BSAI) 
Crab Rationalization Program (the program) developed by the North 
Pacific Fishery Management Council (NPMFC) which CBSFA has steadfastly 
supported over the last four years together with the City of St. Paul, 
AK.
I. Impacts of Crab Rationalization Program on St. Paul
    I will refer to the testimony of Simeon Swetzof, the Mayor of the 
City of St. Paul for a description of the impacts that the collapse of 
the opilio and other Bering Sea crab stocks has had on St. Paul 
Island's economy.
    Suffice it to say that, as the local fishermen's association, CBSFA 
has been stressed by the direct and indirect impacts that the collapsed 
crab stocks have had on economic activity on St. Paul. Crab processing, 
for example, enables local processors to cover overhead costs and 
allows them to process other species valuable to our community and 
local fishermen, in particular IFQ and CDQ halibut. The low volumes of 
opilio crab being processed, therefore, have threatened other economic 
activities including those upon which our local fishermen make their 
livelihoods for most of the year.
    The NPFMC's crab rationalization program will stabilize the 
situation by ensuring, through regionalized shares, that crab 
processing will continue to be a viable business activity on St. Paul 
even under a scenario of reduced crab stocks. More importantly, with a 
rationalized and regionalized crab fishery, CBSFA's private sector 
partners will be able to plan and predict outcomes to business 
decisions more easily. Numerous projects that intend to take advantage 
of St. Paul's unique location amidst the Bering Sea fisheries to 
diversifY into multispecies processing, are on hold pending enactment 
of legislation by the U.S. Congress that will implement the program.
    In addition, CBSFA is working on a largely CDQ-owned, vertically 
integrated crab processing and harvesting venture that depends on 
implementation of the program. This new venture has been approved by 
the State of Alaska and NMFS as the core project in CBSFA's 2003-2005 
Community Development Plan. As part of the plan, CBSFA is negotiating 
for equity ownership in various crab industry assets. These include:

  1.  Five percent of the total Opilio crab harvesting quota.

  2.  Five percent of the total Bristol Bay Red King Crab harvesting 
        quota.

  3.  More than five percent of the Adak Brown harvesting quota.

  4.  Five percent of the Pribilof Reds, Pribilof Blues, and St. 
        Matthews harvesting quotas.

  5.  CBSFA is also negotiating with processing companies to acquire 
        equity stakes in approximately I 0 percent of the entire 
        Processor Quota Share pool created by the program.

    If successful, CBSFA's plan will represent a significant step in 
increasing the interests of native-owned Alaskan companies crab 
industry assets, many of which are currently owned by Japanese 
interests.
II. The Need for Regionalization
    Like the City of St. Paul, CBSFA views the regionalization scheme 
in the program as the most effective tool for fulfilling the guidelines 
of Standard 8 of the Magnuson-Stevens Act and accommodating the diverse 
interests within the BSAI crab fishery. Standard 8 directs the fishery 
councils to take into account the need for sustained participation of 
fishing communities in the fisheries. The need for regionalization into 
northern and southern shares depending on historic activity arose in 
order to protect St. Paul's (and other BSAI communities') livelihood 
and the considerable infrastructure investments made to develop a port 
which has served the BSAI crab industry very effectively and 
profitably.
    During the 1990s, our community benefited from a derby-style, race-
for-fish scenario where vessels delivered crab to the nearest available 
harbor, in order to immediately depart for further loads of nearby 
abundant crab stocks. In a rationalized fishery however, the race-for-
fish, would be eliminated and furthermore, with the Guideline Harvest 
Levels (GHL) dramatically reduced as a result of the biomass collapse, 
harvesters would be limited to single trips and would therefore be more 
likely to deliver their crab to other ports such as Dutch Harbor/
Unalaska or to their homeports including Kodiak, where a number of 
harvesters are based.
    Just as harvester and processor investments have been recognized 
and protected in prior rationalization schemes, both CBSFA and the City 
of St. Paul took the novel approach of insisting that community 
considerations needed to be legitimately factored into this process. 
The stakes were considerable. St. Paul Island, unlike economically 
diversified communities in the Gulf of Alaska, is almost entirely 
dependent on crab processing. While St. Paul's strategic location and 
its existing infrastructure make it a competitive port, most of the 
processing operations in the Pribilof Islands are·''satellite 
plants'' for diversified, parent seafood companies. Therefore, with the 
incentive for decapitalization and consolidation in a rationalized 
fishery, St. Paul was at risk of seeing local processing operations 
retreating south to larger facilities in Dutch Harbor, Akutan, and 
Kodiak.
    Regionalization will stabilize the fishery and ensure that existing 
processing operations will remain in the northern region in a 
rationalized scenario. One of the added benefits of regionalization is 
that the longer runs involved between the fishing grounds and ports 
such as Dutch Harbor or Kodiak in a non-regionalized scenario would 
have implied additional fuel costs to harvesters and greater deadloss, 
to the detriment of the resource.
III. Benefits to the Resource and the Fleet
    Environmental benefits will accrue as well from the mechanisms to 
reduce excess harvesting and processing capacities. With slower seasons 
in which to prosecute the fishery, fewer crab pots will be lost at sea 
and deadloss and bycatch will be reduced. A healthier, better managed 
resource is critical to St. Paul as well, since my community's long-
term livelihood depends on the sustainable use of the surrounding 
Bering Sea fisheries Finally, experience demonstrates that to the 
extent that a rationalized management system results in a sustainable, 
economically viable fishery, then improvements in safety should follow. 
In a scenario where the ``race-for-fish'' is eliminated, fatalities 
resulting from having to fish in poor weather conditions should be 
reduced.
IV. The ``Third Pie'': Community Protections and Benefits
    Under the proposed program, allocations of harvest shares would be 
made to harvesters, the CDQ program, and captains. Moreover, processors 
would be allocated processing shares and harvesters would be permitted 
to consolidate their efficiencies by forming cooperatives. From a 
community perspective, establishment of processor shares protects the 
considerable investments made by processing companies in remote coastal 
Alaskan communities such as St. Paul. These investments typically 
include the processing facility itself, labor housing, docks, cold 
storage, tender vessels, and other infrastructure.
    Communities for their part have spent significant resources on 
harbor improvements, docks, water/sewer systems, roads, emergency 
support services, and community administration to attract and 
accommodate processors.
    In effect, processor shares are necessary for regionalization to 
work for communities. As a largely processing town, St. Paul's future 
is linked to the processors that have invested or will invest there. 
St. Paul (as is St. George) is heavily dependent on crab processing 
business in its harbor and on the floating processors within the state 
boundaries around the island. The community receives benefits from 
taxes, fuel sales, village corporation land leases, store sales, 
transportation and employment opportunities provided by the processors 
operating in the community.
    Under the program, processor allocations and the corresponding 90 
percent of the harvester allocations will be designated into the 
earlier mentioned northern and southern regions, based on historic 
participation. Provisions allowing for the non-regionally designated 10 
percent of harvester allocations to be delivered to any processor at 
any port ensure that a substantial portion of the crab resource will be 
subject to competition among ports and processors seeking to attract 
deliveries.
    However, as specified in the NPFMC's trailing amendments, a two-
year ``cooling off period'' has been established during which 
processing shares must remain in communities where processing was 
historically conducted, so as to avoid a ``rush'' to consolidation in a 
few ports immediately after implementation of the program. In addition, 
communities and CDQ groups such as CBSFA have been granted a right of 
first refusal on the sale of processing shares to protect crab-
processing dependent communities.
    To accommodate periods of abundance in the crab stocks and provide 
opportunities for new processors and communities to compete, caps of 
175 million pounds for opilio and 20 million pounds for Bristol Bay red 
king crab have been established on the amount of IPQs granted for the 
two largest crab fisheries. However, if stocks continue to remain low 
(and below those caps) the IPQs will provide stability to the 
processing sector and crab dependent communities.
    Other important community friendly provisions from CBSFA's 
perspective include an increase in CDQ crab allocations from 7.5 
percent to 10 percent of the Total Allowable Catch (TAC). CDQ groups 
will be required to deliver at least 25 percent of the allocation to 
shore based processors. Moreover, CBSFA and other CDQ groups have the 
potential to benefit from provisions extending community purchase 
rights of harvesting and processing shares to community and CDQ groups. 
These purchases would be conditioned on the use of these shares for the 
benefit of community residents. Finally, CBSFA and other CDQ groups 
have been granted higher ownership caps than individuals purchasing 
shares in order to give such groups the wherewithal to consolidate 
their economic interest in the crab fisheries to the benefit of Western 
Alaska residents.
VI. Conclusion
    The NPFMC's BSAI crab rationalization program is a carefully 
balanced plan that requires the unique structure that has been 
developed over a four year period to protect all of the participants in 
this fishery. It is clear that the program increases the economic 
stakes of communities and CDQ groups in the proper management of 
fisheries on which they depend for survival. Unlike harvesters and 
processors, communities cannot ``sail away'' in pursuit of better 
fishing grounds once a fishery has collapsed.
    We urge Congress to support the NPFMC's plan by enacting 
legislation as expeditiously as possible. After four years of economic 
crisis, remote communities in the Aleutian Chain and particularly in 
the Pribilof Islands are highly dependent on this program for their 
economic well-being and survival.
    Mr. Chairman, and distinguished members of the Subcommittee, thank 
you for this opportunity to provide written testimony on behalf of the 
CBSFA. We look forward to discussing these issues with you and your 
staffs.
                                 ______
                                 
  Prepared Statement of Rudy A. Petersen, Fisherman, CEO, and Owner, 
     Fishermen's Finest, Inc., F/V American No. 1/F/V U.S. Intrepid
Bering Sea Crab Rationalization
    With reference to my letters of August 26, 2002, September 6, 2002, 
December 13, 2002, and March 6, 2003 (copies enclosed) opposing the 
North Pacific Fishery Management Council's (NPFMC) proposed ``two pie'' 
Bering Sea Crab Rationalization Plan, a plan which endorses ``processor 
shares'' for the Bering Sea crab fishery, I hereby submit my written 
testimony to the U.S. Senate Committee on Commerce, Science, and 
Transportation; The Honorable John McCain, Chairman.
    There should be no doubt on the part of the Committee Members of my 
opposition to this plan as well as the opposition of the Independent 
crab fishermen, concerned citizens and Alaskan communities. My letters 
and petition with over 700 signatures of Americans opposing this plan 
have been faxed and mailed as set forth above to the following:

   House Resources Committee Members

   Senate Resources Committee Members

   House Appropriations Committee Members

   Senate Appropriations Committee Members

   All members of Washington State Delegation (Governor, 
        Senators, Congressmen, NPFMC members, etc.)

   All members of Alaska State Delegation (Governor, Senators, 
        Congressmen, etc.)

    I am submitting this written testimony as I will be unable to 
attend the hearing in Washington, D.C. In person. I urge you to review 
my materials once again and to oppose any Bering Sea crab 
rationalization plan that includes ``processor shares'' or a ``two 
pie'' formula.
    Processor quota shares are much bigger than a mere ``fish grab.'' 
It strikes to the very heart of our fishing industry and if allowed to 
invade our free market driven industry, the processor quota two pie 
allowances will negatively Impact our fishing Industry forevermore.
    The Idea of a few fishing companies having control over our crab 
and other fisheries is not in the best interest of the fishermen nor in 
the best interest of the public. The resources are after all a public 
resource; protection of this and all other public resources should be 
maintained by allowing our competitive free market forces to work, not 
by granting the processing sector a virtual monopoly as proposed by the 
North Pacific Fishery Management Council.
                                 ______
                                 
                                   Fishermen's Finest, Inc.
                                       Seattle, WA, August 26, 2002
Hon. John McCain,
Washington, DC.

Re: Bering Sea Crab Rationalization

    I am writing to you as CEO of Fishermen's Finest, Inc., an 
Independent, wholly U.S. owned fishing company located in Seattle, 
Washington. I operate four small catcher/processor fishing vessels 
which harvest and process groundfish in North Pacific waters and 
support some three hundred fishing families from across the country. I 
am also writing on behalf of the many who share my concerns and oppose 
the North Pacific Fishery Management Council's proposed Bering Sea Crab 
Rationalization Plan that endorses processor shares.
    Recently, the North Pacific Fishery Management Council voted in 
support of the Bering Sea Crab Rationalization Plan that would award 
the processing sector with an anti-trust exemption by allowing 
processing shares (referred to as a ``two pie'' system). We oppose the 
proposed plan which will create a virtual monopoly for a few 
processors. The Honorable Leon Panetta, head of the Pew Ocean 
Commission, said in a recent Interview for the Alaska Fisheries Report, 
``I'm just very concerned any time that competition is restricted. What 
happens when you concentrate power in any one segment of our economy, 
is that the little guy is bound to be hurt . . . I was very surprised 
that they (the House Resources Committee) provided an exception for 
Alaska (and nowhere else in the country). If it's not good for the rest 
of the country, it's not good for Alaska . . .''
    It is wrong to push through this ``two pie'' system, which has been 
rejected in all other fisheries, when one sector of the industry--the 
processors--has the upper hand financially and politically and the 
small independent financially depressed harvesters have no organized 
defense.
    It is implicitly unfair to the harvesters that originally built the 
crab fishery and who are currently experiencing great economic hardship 
due to depressed resources and market conditions. Support of the ``two 
pie'' system will give even more control of this fishery to the 
processors and ultimately will hurt the harvesters even more. It will 
be the end of the independent fishermen. The small independent business 
people of this country need your support and therefore I am looking for 
your help to stop this proposed ``two pie'' system that would unfairly 
grant the processing companies, most of which are foreign owned, the 
upper hand at the expense of the independent fishermen.
    Monopolies are bad for America, especially when they involve our 
natural resources. It is wrong to grant exclusive access to a select 
few at the expense of the small independent fishermen/businesses of 
this country. Please do not allow Congress to include wording in the 
Magnuson-Stevens Act Reauthorization, or in any other Bill, 
appropriations or otherwise, that allocates crab rights to processors. 
Concerned U.S. citizens have signed a petition opposing processor 
shares and we are continuing to gather more signatures. I would welcome 
the opportunity to talk with you and discuss this important issue in 
more detail should you need any additional information. Thank you for 
your consideration.
            Sincerely,
                                           Rudy A. Petersen

Enclosures: Various Media Articles opposing processor shares (via 1st 
Class Mail)
Organizational Charts Illustrating processor foreign ownership (via 1st 
Class Mail)
Signed Petitions against processor shares (Via 1st Class Mail)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                ______
                                 
                                   Fishermen's Finest, Inc.
                                     Seattle, WA, September 6, 2002

Via 1st Class Mail

Re; Bering Sea Crab Rationalization

    With reference to my previous letter faxed and mailed to you late 
last month, I am writing to follow up with additional signed petitions 
opposing the proposed ``two pie'' crab rationalization plan proposed by 
the North Pacific Fishery Management Council that would grant 
``processor shares'' in the Bering Sea crab fishery.
    If by chance you have not seen this previous letter, I will provide 
a brief overview of my opposition to this proposed plan. I am writing 
to you as CEO of Fishermen's Finest, Inc., an independent, wholly U.S. 
owned fishing company located in Seattle, Washington. I am also writing 
on behalf of the many who share my concerns and oppose the North 
Pacific Fishery Management Council's proposed Bering Sea Crab 
Rationalization Plan; a plan that endorses ``processor shares.''
    We have gathered in excess of 500 signatures of U.S. Citizens who 
share our concern for fairness and justice and oppose the proposed 
``two pie'' Bering Sea Crab Rationalization Plan. We will continue to 
bring this issue to light with the public, as awarding the processing 
sector with an antitrust exemption through ``processor shares'' is 
wrong. Monopolies are bad for America, especially when they involve our 
natural resources. This plan, if enacted as proposed would grant 
exclusive access to a select few processors at the expense of the small 
independent fishermen/businesses of this country; this is wrong.
    I offer the following reasons to oppose the ``two pie'' Bering Sea 
Crab Rationalization Plan:

   This type of rationalization of our public natural resources 
        has been rejected by all other Fishery Management Councils 
        across the country.

   The processing sector already has the upper hand financially 
        and politically and the small independent financially depressed 
        harvesters have no organized defense.

   Support of the ``two pie'' system wilt give even more 
        control of this fishery to the processors and ultimately will 
        hurt the harvesters even more.

   Processor shares equate to a virtual monopoly for the 
        processing sector.

   A majority of the crab processing companies are foreign 
        owned/controlled while the Independent harvesters must meet 
        Maritime Administration required 75 percent U.S. ownership.

    Please do not allow Congress to include wording in the Magnuson-
Stevens Act Reauthorization, or in any other Bill, appropriations or 
otherwise, that allocates crab rights to processors. Concerned U.S. 
citizens have signed the enclosed petitions opposing ``processor 
shares'' and we are continuing to gather more signatures. I would 
welcome the opportunity to talk with you and discuss this important 
issue in more detail should you need any additional information. Thank 
you for your consideration.
            Sincerely,
                                           Rudy A. Petersen

Enclosures: Over 500 Signed Petitions against ``processor shares/two 
pie''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                ______
                                 

  The Seattle Times--Editorials & Opinion: Saturday, November 02, 2002

                   Crab industry bakes a monopoly pie

    The Alaska crab industry is asking Congress for a law that would 
grant Individual fishing and processing quotas. The fishing quotas, if 
paid for, may be wise. Processing quotas are monopoly privileges, and 
should be rejected.
    Individual quotas began with halibut. It is a valuable fish, and in 
the open-access fishery, owners kept piling in boats until the season 
shrank to a few days. Fishermen stayed awake with pills, they put hooks 
through their palms, and if there was a storm, sometimes their boats 
roiled over. Halibut. available in theory for most of the year, entered 
the market in a flood and were sold tothe consumer frozen.
    The system was crazy. And so came the idea of setting a quota per 
boat. That way, a skipper would no longer be In a rush, and would treat 
nature, his catchand his personal safety with respect. The new system 
was tried, and ail these public benefits were achieved. But there was 
also a private benefit: the quota shares, provided free to every owner 
of a halibut boat, were a new asset that could be bought and sold. That 
meant that owners of unneeded boats could sell their shares and be paid 
to leave.
    Nowhere else In American Industry was capital paid to leave. The 
companies that bought the halibut also had excess investment, and they 
had to write it offas a loss.
    Not any more. The proposed crab plan has quotas for processors,
    What Is being done here is the creation and division of a pie: The 
pie does not consist of the crab, which was always there, but the 
exclusive rights to the crab. It is something like a stock offering, 
except that the original owner of the shares--the public--is paid 
nothing. The transaction Is political and the public is not 
represented. The dickering is between the boat owners, the processors, 
the Alaskan coastal communities and the skippers. All get a share.
    The buying and sailing of a right to catch fish makes a certain 
amount of sense. Buying and selling a right to buy fish is selling a 
monopoly privilege. It will be remarkable if it is even legal.

                                   Anchorage Daily News--Monday, May 19, 2003
                                    Fish Processing Shares Are Bad For Alaska
      To Governor Frank Murkowski, Senator Ted Stevens, Senator Lisa Murkowski, and Congressman Don Young:
 
   We are Alaskans urging you to reject processing quota because of the controlling effect on markets, fishing
                             families, coastal communities, and the public process.
 
WE OPPOSE A RETURN TO PRE-STATEHOOD DAYS WHERE A FEW FISH PROCESSORS CONTROL ALASKA'S FISHERY RESOURCES.
 GOVERNMENT SHOULD NOT ALLOCATE MARKET SHARES TO PROCESSOR OR FORCE ALASKA FISHERMEN TO SELL THEIR CATCH TO A
 SELECT GROUP OF PROCESSORS.
 
Danny Powell   Sergius        Robert        Kara Lagasse  Danielle      Nathan        Dean Clark    Mack P.
                Krukoff        Linville                    Santillana    Jankowiak                   Kinney
Vanessa        Norman Mullan  Heather       Malina        Kenneth       Bill Webber   Alexander     Charles
 Layamana                      Johnson       Nicklas       Simpson                     Ivanov        Polak
Peter Togiak   Alfonso        Brett         Robert        Earnest D.    Richard       Stephanie     Nikolai
                Suralta        Zirlott       Beedle        Linton        Thummel       Pitzman       Basargin
James Russell  Ryan Johnson   James Curran  Katrina       Carl          Ernest Wahl   Anton         Tom Wood
                                             Higbee        Nostrand                    Sanarov
Tim Quirk      Susan Jeffrey  John Nevin    Greg Moyer    Kenneth       Lon A. White  Robert        Le Roy
                                                           Mears                       Williams      Martin
David Cline    Timothy Stage  Howard        Brian         John          Margaret      Richard       Linda Kozak
                               Henning       Dierich       Whittier      Bolger        Sheard
Ray Bellamy    Jeremy Shiok   Dan           Bodey Lee     Don Dumm      Mary Taylor   Madeleine     Lucio
                               Veerhusen     Winningham                                Grant         Gonzalez
Michael Van    Hans           Christopher   Jimmy Weaver  John Spute    Jennie        Julie         Lisa Ruoff
 Note           Tschersich     Lopez                                     Jacobsen      Millier
Tracy Lohman   Atiana Konev   Frederico     Rex Willhite  Marie Lowe    Laurie        Rilee Higbee  Ken Woodman
                               Sabado                                    Bermudez
Shelley        Philip Wiley   J. Porter     Bruce         Colleen       Betsy Wilson  Nancy         Vera
 Rainwater                     O'Hara        Schactler     Rankin                      Behnken       Basargin
Dorothy Holm   Avram Kalugin  Jack Cushing  Brian         Elizabeth     Daniel        Richard       Peter
                                             Blankenship   Sencac        Harbour       Tyler         Galaktionof
                                                                                                     f
Marie Murray   Pepper Nelson  Chuck         Kyle Crow     Berry Spivey  Gregory       Dave Kaplan   Leon J.
                               Thompson                                  Spalinger                   LeClaire
                                                                                                     III
Pete Janstory  Nathan Benton  Robert        Harry         Robert        James         Kenneth       Geoffrey
                               Johnson       Elliott       Livingston    Brennan       Hoisington    Hershberger
Michael        Margaret       Palmer        Ron Knop      Paul Seaton   Burt          Faustina      Jules
 Oleksa         Short          Thomassen                                 Lekanoff      Tejada        Tileston
Lisa Frederic  Tracy Craig    Kathleen      Stephen Hall  Edmund E.     Sandra        Vicente       Phillip
                               Ballenger                   Pasana        Willhite      Naanos        Favadil
Kathryn        Dave Magone    Lavro Ivanov  Mimi Hogan    Ron Huffnage  Frances       Jon Glazner   Ivan Reutov
 Swiderski                                                               Ashford
Feodor         Matt Strametz  Richard       William       Foma Efimov   Kenneth N.    Casey Eads    James
 Martushev                     Davis         Tener                       Holland                     Mahaffey
Tim Shen       Delonio        Dale Banks    Mari Reeves   Brad          Shocky        Kenneth       Bill Schauff
                Agonoy                                     Faulkner      Greenberg     Quinn
Rick DeGroot   Eric J.        Mark Hibbard  Ronald Eads   Duncan        Francine      Mark R.       David Reutov
                Weathers                                   Fields        Bennis        Lyman
Frank Lloyd    Kent Helligso  Monica        Eladio        Malcolm       Twyla Hunter  Duane B.      Kathryn
                               Zacharof      Francisco     Milne                       Perk          Hansen
Vivian         Candace Ozols  Johanna       David         Susan         Vasily        Wendy Beck    Rion Vanek
 Menaker                       Tellman       Woodruff      Luzadden      Reotov
Jeff LaPlant   Vladimir       Ruth          Laura         Mark Edens    Carl Byers    Geoffry       Louis Barr
                Polushkin      Longhenry     Sheldon                                   Peterson
Sergei Reutov  Nikit Reutov   Bob           Zenaida       Susan Payne   Benjamin      Jeremy C.     Charles
                               Marquardt     Latonia                     Golodoff      Hansen        Kramer
Karen DiBari   Walter Sonen   Ben           John Hamik    John          Robert Mead   Roberta       Rick Ladd
                               Ballenger                   Luzadden                    Highland
Lavender       Locke Finley   Leonard       Katya Kirsch  Sandra        Leo           Linda         Richard
 Beattie                       Kelley                      Hudson        Robichaud     Sargent       Powell
Suzi Golodoff  Tuan Tran      Trifilyi      Konstantin    William       Phillip       Sandra        Beth
                               Reutov        Basargin      Barnes        Wyman         Stepanoff     Pattinson
James Sandin   Sherri         Mike Hough    Bruce         Paul Dan      Clare         Larry Dooley  Hal Long
                Pristash                     Hendrickson                 lattimore
Sanford Crane  Kevin Lowell   Cecil Ranney  Abi           Eleanor       Kathie        Gregory       Jeff Yates
                                             Woodbridge    Werbe         Veltre        Hoffman
John Bahe      Peter Kojin    Amanda        Bill Choate   Ralph Ash     Mark A.       Hida Kudrin   Klaus
                               Appell                                    Lanchuk                     Czerweny
Gary Jackson   Barbara        Alexus        Grant Miller  Nikolai       Thomas Ely    Thor          Scot R.
                Thompson       Kwachka                     Kuzmin                      Skulstad      Cummings
Mark Galdu     Eric Brese     Jeff Cline    David Hulien  Pete          KJ Herman     Marga Raskin  Nikita
                                                           Hendrickson                               Kuzmin
Henry Cooper   Shawnee        Daren M.      Nina Faust    Bob Johnson   Alex          Jeanne See    Kurt
                Kinney         Traxinger                                 Martushoff                  Marquardt
U.R. Johnson   Pete           David         S. Dolph      Robin Engel   Charles       Mary Lentfer  James Wild
                Cummiskey      Goldstein                                 Rehder
Janis Harsila  Mike           Annette       Daniel        Betsy Goll    Robert Allen  Greg LoForte  Peter Jack
                Martushoff     Stepetin      Gleason                     Wagner
Sam Powell     Kim Menster    Mike Clark    Ian Pitzman   Henry M.      Noel Johnson  Michelle D.   Floyd
                                                           Wieve                       Frank         Tomkins
Scott          Nora M.        Dorothy       Brenda        Nicholas      Dan Oliver    Ray Tremblay  Jimmy
 McCracken      DeSylva        Childers      Greenbank     Dirks                                     Charliaga
Ashley Eads    Bruce Short    James         Sung Kim      Johnny Lind   Douglas       Reutov Mike   Consolasion
                               Skonberg                                  Deplazes                    Ramirez
Gary           Phil Gordon    Albert        Sergey        Lisa          Janelle       Ruperto D.    Patrick
 Marincovich                   Fredericks    Serebrekoff   Martushoff    Everett       Gonzales      Dineen
Brian Scully   Henry Timm     Janel         Jason         Tony M.       Joseph Kelso  Rosanne       Craig Brault
                               Keplinger     Suralta       Stouers                     Curran
Stephen        Rebecca        Edward R.     Joseph        Dora Suetzed  Constance     Kevin         Paul
 Howell         Bartee         Hansen        Emerson                     Jensen        Stalker       Castellani
Laura Lucas    Dan Kondak     Zahary        Paul          Jim Stewart   Ivan          Chuck Vendt   Vasily
                               Martushev     Saunders                    Usoltsoff                   Reutov
Vikki          George Reutov  Marvin Yagie  Robert        Chris R.      Brad Sapp     Artemon       Nancy Jones
 Garroutte-                                  Schell        Branch                      Basargin
 Simpson
Bruce          David Coleman  Bert          Barry         Nicole        George        Rika Mouw     Ivan
 Flanigan                      Stammerjoha   Fredericks    Caputo        Krukoff                     Martushev
                               n
Ray Blanco     George         Eric          David Mazen   Danny         Donald        Penny Ripple  Robert King
                Owletuck       Bergloud                    Clarion       Hanson
Richard J.     Tom Dooley     Oliver Owen   Bill Rotecki  Theresa       Kevin Kiel    Freddie       Foma Reutov
 Sharpe                                                    Peterson                    Cnossen
Dave Beebe     Robert         Jack Lentfer  Ellen Mahle   Rena          Stuart Mach   Hazel Jones   Bobbie Jo
                Pletnikoff                                 Peterson                                  Skibo
Nicholas A.    Michelle       Dennis Young  William       Patricia      Joni          Ken Zafren    William H.
 Troxell        Church                       ``Webber,     Olsen         Whitmore                    Barker
                                             Sr.''
Akaky          Yaroslav       Anita R.      Danny         Arseny        Pelalgia      Bill Prout    Kenneth
 Martushev      Eglevsky       Carpenter     Carpenter     Kuzmin        Reutov                      Duckett
Marina         Alice Schell   Theresa M.    C. Cleary     John LeClair  Feoktista     Isa Wirz      Andrea
 Cabangbang                    Gurske                                    Kuzmin                      Hernandez
Peter          Stanley        Nestor        Anissa Berry- Ellen Flint   Eileen        Kent          Joseph
 Lekanoff       Jhemas         Ivanov        Frick                       Mullen        Herschleb     O'Gorman
David          Donald         Lazar Reutov  Jim Smith     Mary Kay      Maureen       Cora Holmes   Kandi Powell
 Sperbeck       Lawhead                                    Cichoski      Knutsen
Kevin Thomet   Michael        Felicia       Alan Kelly    Peter Konev   Deborah       Scott Kerr    Edward
                Grunert        McAuley                                   Williams                    Shaishnikof
                                                                                                     f
Kondra Kuzmin  Dean Harker    Linnea        Penni M.      Douglas       Annmarie      Jessie        Leo Soucy
                               Osborne       Hees          Anderson      Squires       Wilson
Robert         Tim Marsh      Grant Trask   June Sargent  Chris Burns   Steve Webb    Sandy         Gary Squires
 Russell                                                                               Barclay
Teri Poulos    Philip         Jun Blanco    Susan         Mary Monroe   Al Weathers   Teresa C.     Karen
                Freitag                      Byersclorte                               Bishop        Williams
                                             r
Mark           Stu Pechek     Julia Forte   Natividad S.  Greg Johnson  Jason Geck    John DiBari   Charlie
 Tarabochia                                  Canete                                                  Parsons
John Anthony   Denny Kay      Richard       Winslow       Dan Farrer    Martin        Teresita      Nikolai
                Weathers       Schultz       Hoffman                     Robards       Layamana      Reutov
Bill Sullivan  James Canitz   Thomas Finn   David Otte    Eric          Stacy         Girard        William A.
                                                           Weathers      Arbelovsky    Lucore        Bunter
Bobby Storrs   John Chapple   Lynn Collier  Bob Wood      Tim Longrich  Sarah Blue    Angela        Stefan
                                                                                       McBride       Horwath
Sandra Nelson  Eva Holm       Rob Dierich   Annie         Justin Fager  Charles       Stuart        Kiril
                                             Poirier                     Edwards       Schaaf        Basargin
Mary           Mark Kozak     Gordon Blue   Mako          Jeff Coleman  Pete Hannah   Brad Stevens  Emil
 Rosenthal                                   Haggerty                                                Berikoff
                                                                                                     Sr.
James Johnson  Matt W. Clark  Sue Libenson  Wendy Close   Eldor Lee     Logan Hull    Sherry Hoyt   Alexey
                                             Eskew                                                   Besargin
Thomas         Elino Culler   Lee Martin    Raymond       Joshua H.     Steve         Marty Remund  Jerry Bongen
 Solenberger                                 Hinkl         Conn          Schoonmaker
Kathy          DJ Vinberg     Thea Thomas   Doug Hogen    Ginna         Willy Dunne   Dan Gritman   Rebecca
 Kurtenbach                                                Purrington                                Poulson
Michael        Robert T.      Peg Tileston  Claire        Spence        Lewis W.      Bob Bacolas   Rodolfo Baru
 Bentley        Gustafson                    Laukitis      Ellsworth     Myers
Jennifer       Chris Myrick   Margaret      Eric          Eppie         Kenneth       Steve Haney   Garland
 Castellani                    Runser        Almocera      Seczesny      Simpson                     Blanchard
Jacob Slaven   Iosif          Mike McCune   William       Steven Horn   David Harris  Shila Hough   Tom Lohman
                Martishev                    Paulo
Sandra Marker  William        Eros Kuzmin   Ralph         Charles       Song Perk     Michael       Morgan
                Dushkin                      Guthrie       McCallum                    Yourkowski    McBride
Oliver Felton  Christine      Charles       Borghy R.     Sam Eads      Jody Spivey   Erica C.      Greg Forte
                Hoen           Harvey        Holm                                      Thompson
Layne Wilde    Ben Enticknap  Linda         James         Ralph Lohse   Lori Lee      Vern Culp     Robert
                               McCullough    McCullough                                              Dentler
Bert Wheeler   Kenneth Dewey  John Munns    Peter         Steven        Ilia Kuzmin   Caroll Hamik  Sarah
                                             Thompson      Campbell                                  Gregson
Valerie Ellis  Fran Latham    Lacey Berns   Karoly        Geneva        Gene          Bill Rome     R. Martens
                                             Gaspar        Macinko       Anderson
Lisa Reutov    Nancy Berland  David         Brad Sapp     Richard       Paul Bowen    Tracey        Michael
                               Whitmire                    Berns                       Wooden        McConnell
Sonny Nguyen   Suzanne        Ian Russell   Marietta      Martin        Kari Johnson  Joe Macinko   Walter
                Abraham                      Coons         Budnick                                   Tellman
David Little   Geredine Taan  Alex Ladutko  Chris Lynch   Meri Holden   Michael       Clinton       Tonya M.
                                                                         Poole         Mullins       Weth
Wade Buscher   Terry Johnson  James Barton  Wendy         Stanley       Nicholas      Jennifer A.   Leonard Efta
                                             Johnson       Houghton      Dowie         Creelman
Joe Newhous    Wesley J.      Steve Fish    Jeff Jensen   Glen Carroll  Shirley       Bob Nehus     Harvey
                Humbyed                                                  Snyder                      Goodell
Jolene Holl    Jim Tolson     Sharon Brown  Paul          Clay Frick    Carl Burton   Lenon J.      David
                                             Robancho                    II            Norman        Stanton
John Faris     Edgar Callen   Ron Hepler    Royce Curry   Leigh Thomet  Nick Mazin    Gerald        Sharon
                                                                                       Brookman      Shears
Bill Gurske    Greg Brown     John Lee III  Iris Kessler  Annie Wilson  Paul Shadura  Toras Fisk    Karl Ohls
                                                                         II
Susan          John Ludvick   Christopher   Amy Lewis     Andrew        Jeffrey       Don Lane      Gordon
 Houlihan                      Richards                    Jacobsen      Yeoman                      Wilson
                                                           Jr.
Laura Schmidt  Joni Lenz      Jody Adams    James Brown   John          Robin Faulk   Annette       Oliver Holm
                                                           Reisdorf                    Blankenship
Severean       Jennifer       Shirley Liss  Ernesto       Joshua        Shawn         Terry         Stacy
 Reutov         Butler                       Casano        Williams      Knudeson      Cummings      Studebaker
John A'Piak    Nick Dull      Barbara       Diana         William       Greg Wilson   Betsy         Trina
                               Marsh         DeFazio       Terry                       Pitzman       Smallwood
Beaver Nelson  James Sprague  Brenda        Christina     Milton        Frank         Kavik         Dan Falvey
                               Tellman       Henslee       Holmes        Gwartney      Anderson
Ken Jones      Mike Brooks    Luckida       Ken G.        Linda         Bill Murray   Summer Mack   Philip
                               Boatwright    Graham        Behnken                                   Lindley
Fadey Kuzmin   Carl Holman    Chris Awythe  Steve         Lawrence      William       Chris Stiehm  Cliff Ward
                                             Kalugin       Trani         Fiorentino
Roy Smith      Alexander      Andrew        Harry Curran  David Reutov  Eric Meyer    Jim Webber    Nathan S.
                Basargin       Edgerly                                                               Dall
Dana MacAuley  Cid Blase      Roberta       Per Nolan     Ray Kranich   Donald        C.O.          Edgar Smith
                               Copeland                                  Roberts       GigDecker
Dave           Florence       Paulino       Wayne         Clare         Sergei        Marjorie      Kris
 Schuckman      Collins                      Jackson       Stockert      Litvin        Hermans       Anderson
Sister Diane   Richard        Ken Roosa     Wendy Beck    Leonard       Don           Thomas        Jacob
 Bardol         Musgrove                                   Jones         Hernandez     Wischer       Stepetin
Derek Rusan    Salvador S.    Patricia      Nick Budnick  Herta         Philip Oman   Dean Cramer   Lilia Howard
                Taboy          Phillips                    Tschersich
Sherry         Ibarra L.      Rodrigo       Lee Neel      Walter        Mim           John Ketelle  Lori Sword
 Hermeling      Francisco      Cadillo                     Sargent       McConnell
Harold Martin  Tarri Thurman  Jeff Carr     Vincent       Ernest        Norman Blank  Rachel        Simian
                                             Shavender     Shaishnikof                 Alinsunurin   Basargin
                                                           f
William        Erik Fellows   Robert        John Lyle     Richard       James         Constance     Chris
 Ourada                        Arnold                      Nelson        Niemela       Griffith      Whittington-
                                                                                                     Evans
Mike Litzow    Doug Sackett   Debra         Stanley       Ivan Konev    David         Graciano      Kathy Kuletz
                               Corbett       Wolrich                     Hermeling     Suralta
Boris          Howard         Nikola        William       Jason Ginter  Susan McLane  James         Mary Timm
 Galaktionoff   Peterson       Basargin      Auger                                     Wheeler
Alan Parks     Astafey        Kurt          Michelle      Cesario       Evtropii      Charlie       Linda
                Afonin         Goetzinger    Powell        Suralta       Matveev       Schollenes    Ellsworth
Julia Walker   Shellie        Clay Durham   Phyllis       James Clauss  Taylor Jones  Richard       Elizabeth
                Mathews                      Perry                                     Kaminsky      Johnson
Mimi Tolva     Stacey Clark   George        Michelle      Keegan        Eric Myers    Coral         Gerald
                               Overpeck      Ridgway       Keplinger                   Chernolt      Sanger
Nancy Lord     Blair Martens  Larry         Steve Brown   John Mouw     Thia Falcone  Matthew       Jenny Norris
                               Shaishnikof                                             Wiley
                               f
Pasha Isadore  Russell        Bienvenido    Alan Ryden    Scott Seaton  Marie Finn    David Pray    Leroy
                Betterton      Ricafrente                                                            Cossette
David Le       Cathy Gleason  Joyce Levine  Joseph        Bob Hooyman   Marc Meindl   Tom Walters   Susana
                                             Reutov                                                  Macadaan
Kent Barkhau   David K.       Art Schultz   Bill Lindow   Thomas Crane  Colleen       George        Alfred
                Edens                                                    Newman        Smallwood     Peeler
Allan Hayes    Lena Lawhead   Edesy         Victoria      David P.      Ivan Reutov   Elizabeth     Kate Finn
                               Fefelov       Ellis         Aers                        West
Frederick      Nikita         Shelley       Darlene Port  Kristin       Neil Sargent  Kathy Nugent  Lauralee
 Deveau         Basargin       Suydam                      Smith                                     Matlock
Andy Endresen  Vasily Kuzmin  Lawrence      Scott Seaton  Roberto       Paula Terrel  Randy Baker   Claire
                               Prokopeufh                  Mendoza                                   LeClair
Jason          Remedios A.    Becky Horton  Ruben         Coral         Christine     Wendy Willis  Marie
 Gsertsien      Small                        Topacio       Ricketts-     Holland                     Minkoff
                                                           Fotter
Juliana        Michael        Charles       Chris Skelly  Laura Viac    Ben Marsh     Stephen Rosa  Valarie
 Martin         Bender         Wilber                                                                Donaldson
James Nestic   Colleen        Jason Mack    James M.      Angie Perry   Deborah       Troy          Alvin
                Helligso                     Bailie                      Goodell       Zimmerman     Bereskin
Mike O'Meara   Greg           J. Bateman    Michael       John Renner   Tom Miller    Peggy J.      Michelle
                Streveler                    Boskofsky                                 Smith         Squires
Dave Beam      Yakov Reutov   K.E. Jr.      Kip Thomet    Jeremy        Bob Childers  Robin         Kevin
                               Berggren                    Millen                      Stevens       McDougall
James          Gregg Jones    Robert Mee    Joshua Lowes  Ronald        John Gregory  Cyn Muhs      Terese Jones
 Forsberg                                                  Tennison
Todd Hoppe     Jill           Lynn Johnson  Mike Mahoney  Frederick     Bob           Charles       Frank Coma
                Wittenbrader                               Reynolds      Shavelson     Mclinn
 

                                 ______
                                 
                                   Fishermen's Finest, Inc.
                                     Seattle, WA, December 13, 2002
Hon. John McCain
Washington, DC.

Re: Bering Sea Crab Rationalization

Dear Senator McCain:

    With reference to my previous letters faxed and mailed to you 
earlier this year (copies enclosed for your reference), I am writing to 
follow up with additional signed petitions opposing the ``two pie'' 
crab rationalization plan proposed by the North Pacific Fishery 
Management Council (NPFM Council) that would grant ``processor shares'' 
in the Bering Sea crab fishery.
    To date, we have collected in excess of 700 signatures opposing 
this plan. Many prominent fishermen as well other concerned Americans 
have signed my petition, for example:


      John Boggs of Lynnwood, WA     Richard Hastings of Langley, WA
      Stanley Hovik of Edmonds, WA   Karl Hansen of Seattle, WA
      David Little of Sammamish, WA  Einar Longesater of Shoreline, WA
      Frank O'Hara, Sr. of           Thomas Parks of Edmonds, WA
       Rockland, ME
      Alf Sorvik of Edmonds, WA      Konrad Uri of Seattle, WA
 

    I understand from response to my previous letters that many feel I 
oppose rationalization of the crab fishery altogether. This is not the 
case. The fishery can be adequately and fairly rationalized at the 
independent fishermen's level; it is not necessary to offer processor 
shares as doing this will equate to a virtual monopoly for the 
processing sector. In fact, the very antitrust laws of our Country that 
were put in place to protect our free economy would need to be re-
written to allow this type of rationalization of the Bering Sea crab 
fishery.
    In addition to my opposition and that of many other concerned 
Americans, fishermen and otherwise, I understand the following Alaskan 
Communities oppose this plan as well: Akutan, Anchor Point, Chignik, 
Chignik Lagoon, Clam Gulch, Cold Bay, Cooper Landing, False Pass, 
Homer, Hope, Kachemak Bay, Kasilof, Kenai, King Cove, Kodiak, Moose 
Pass, Nanwalek, Nelson Lagoon, Nikiski, Ninilchik, Port Graham, 
Portage, Seldovia, Seward, Soldotna, Sterling, Tyonek, and Whittier.
    Please do not allow the NPFM Council to set a precedent for other 
fisheries in our Country by allowing their ``two pie'' crab 
rationalization plan, which would grant ``processor shares'' in the 
Bering Sea crab fishery, to move forward either as an amendment to an 
Appropriations Bill or as part of the Magnuson-Stevens Act 
Reauthorization. This type of rationalization of our public natural 
resources has been rejected by all other Fishery Management Councils 
across the country. If it Is wrong for the rest of America, it is wrong 
for Alaska as well--we, the Independent fishermen, concerned citizens, 
and Alaskan Communities need your help to stop this plan.
    I would welcome the opportunity to talk with you and discuss this 
important issue in more detail should you need any additional 
information. Thank you for your consideration.
            Sincerely,
                                           Rudy A. Petersen

Enclosures: My previous letters dated 8/26/2002 and 9/6/2002
Signed Petitions against ``Processor Shares/Two pie''
Seattle Times Editorial ``Crab Industry Bakes a Monopoly Pie''
                                 ______
                                 
                                   Fishermen's Finest, Inc.
                                         Seattle, WA, March 6, 2002

Hon. John McCain, Chairman,
U.S. Senate Committee on Commerce, Science, Transportation,
Washington, DC.

Re: Bering Sea Crab Rationalization

Dear Senator McCain:

    With reference to my previous letters faxed and mailed to you last 
year (copies enclosed via First Class Mail, for your reference), I am 
writing to urge you to oppose the North Pacific Fishery Management 
Council's (``NPFMC'') proposed ``two pie'' crab rationalization plan 
that would grant ``processor shares'' in the Bering Sea crab fishery.
    Please do not allow Congress to allow wording in the Magnuson-
Stevens Act Reauthorization, or in any other Bill, appropriations or 
otherwise, that allocates crab rights to processors. The fishery should 
be rationalized at the harvester level, as all other fisheries have 
been rationalized in our Country.
    As this is a very important issue that will set a dangerous 
precedent for the entire Country, should the NPFMC plan be adopted, I 
will continue to oppose the ``two pie'' crab rationalization plan for 
the following reasons:

   Violates Anti-trust.

   Grants the Processing Sector an unfair advantage.

   Contrary to all other Fishery Management Councils' actions.

   Places U.S. natural resources in foreign owned companies 
        control.

   Many Alaskan Communities oppose plan.

   Over 700 concerned citizens have signed my petition opposing 
        plan.

   Sets a dangerous precedent that may be applied in other 
        fisheries.

    The Bering Sea crab fishery should be rationalized at the harvester 
level only because:

   Consistent with all other Fishery Management Councils' 
        actions.

   Provides some protection for the economically depressed crab 
        fishermen.

   Fishing vessels must meet U.S. ownership requirements under 
        MARAD.

    Please contact me should you need any additional information 
regarding this very important issue. Thank you for your consideration.
            Sincerely,
                                           Rudy A. Petersen
                                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______
                                 
       Prepared Statement of Ron Philemonoff, Chairman and CEO, 
         Tanadgusix (TDX) Corporation of St. Paul Island Alaska
    My name is Ron P. Philemonoff. I am Chairman and Chief Executive 
Officer of Tanadgusix Corporation, the ANSCA Village Corporation for 
the Aleut Community of St. Paul Island. St. Paul Island is home to the 
largest Aleut community in the world, and a focal area for both crab 
catching and crab processing. We speak in opposition to the plan before 
your Senate Committee, as it is written and presented.
    Our corporation owns 90 percent of the land on St. Paul Island as a 
result of ANCSA (Alaska Native Claims Settlement Act) entitlements. As 
the former hunters and processors of the Northern Fur Seal, the Aleut 
people have inhabited the Pribilof Islands since being forcibly placed 
on these remote islands prior to the purchase of Alaska by the United 
States from the Russian Emperor. The Aleuts of the Pribilof Islands 
harvested and processed fur seals thru the Russian occupation, and 
under United States oversight until 1984. Our people were wards (some 
say slaves) of the United States government until fur seal harvesting 
and the Fur Seal Treaty of 1911 was abolished in 1984 due to national 
and international environmental politics.
    At the time of the cessation of the harvest, St. Paul Aleuts were 
specifically promised that we would enjoy the fruits of freedom and 
free enterprise, through the enjoyment of an economy based on the 
fisheries resources of the Bering Sea. By the providence of nature, 
more than 75 percent of the fisheries resources of the Bering Sea are 
located within 200 miles of the Pribilof Islands. With such abundance 
within close proximity, we were optimistic that an equitable share of 
those resources would be made available to us to meet the economic 
needs of the Aleut people of the Pribilof Islands.
    In the mid-1980s, TDX began writing to NPFMC and to the government, 
notifying them that the realization of Aleut dreams and the government 
promise of economic development would be severely compromised by the 
heavy capitalization of the fisheries in the Bering Sea, which was 
proceeding rapidly, supported by government loans and NPFMC policies. 
We duly registered our serious concerns that our people would be left 
out of participation, by not having the historical participation so 
commonly used under fishery management regimes, to qualify corporations 
and large vessel owners for entitlement to resource rights. Our 
concerns were largely ignored. By 1989, overcapitalization had created 
a crisis for government loan portfolios, Seattle corporations and 
foreign corporations, such that threats to the entire resource were 
perceived. The inshore/offshore resource split was invoked in 1992, as 
a means to ``rationalize'' the groundfish fisheries, because the larger 
companies were fighting over respective share and threatening the 
entire resource. In less than a decade, the ``rationalization'', called 
inshore/offshore, was converted to a full scale property entitlement to 
the pollock fishery resource, now enjoyed by the same beneficiaries who 
were first ``rationalized''.
    Crab Processing North of 56 Degrees. In 1987, while all the furor 
over groundfish was starting to occur, there were no crab facilities or 
processing on the Pribilof Islands, nothing North of 56 degrees with 
exception of floating processors that followed the crab fleet. Harbors 
promised to us by the government in 1984 had become bogged down in 
engineering and the politics of contracting and government. Our 
corporation perceived back then that Aleuts would not get a chance in 
any fishery if we did not accelerate our participation as a community. 
TDX thereupon embarked on a program to convert port proximate 
properties on St. Paul Island to participate in the crab fisheries. The 
heyday of Bering Sea King crab fishing had occurred in the 1970s and 
early 1980s, and our people had watched helplessly from the shore as 
hundreds of vessels, foreign and domestic, lighted our islands from 
offshore, using our island as a lee in the Bering Sea wind, working and 
exploiting the crab resource off our shores. We were determined by the 
late 1980s to mount participation in the crab fisheries, for the 
economic good of the Aleuts.
    With our own entitlement and settlement funds, and with the help of 
a willing Japanese entrepreneur, TDX cleared and refitted an abandoned 
fur seal processing facility, converting it to crab processing 
facilities. While the government sponsored breakwater and harbor 
facilities on St. Paul Island were barely functional, TDX Corporation 
spent millions of dollars to build a 300 foot ocean dock and to dredge 
immediate proximate tidelands areas so that we could invite into St. 
Paul, the Bering Sea crab fleet and process their product. By 1992, 
about the time the inshore/offshore debate had reached its height, we 
had succeeded in cornering about 25 percent of the Bering Sea crab 
resource, purchased and processed right on St. Paul Island. We planned 
and developed a new shoreside processing facility that is now the 
largest crab processing facility in the world. Use of that facility was 
ultimately purchased from our partner in 1993 by Trident Seafoods, a 
member of the pollock and salmon clubs, and the major processor of crab 
in the Bering Sea.
    While TDX and Aleuts may have been inexperienced in fisheries and 
the politics of NPFMC in the 1980s, we suffer from no current illusions 
regarding what ``rationalization'' is all about, and what it means: 
resource entitlement and property rights. Our opposition to this plan 
is based on the fact that our corporation and our shareholders, as 
pioneer investors and venture capitalists of processing North of 56 
degrees, to the tune of over $15.0 million, have been left out of this 
rationalization plan, which has, as a key component and foundation of 
its rationale for processor quota, a rewarding of investments made to 
support the crab industry, with quota property rights. If investments 
in the industry are going to be considered as a rationale for 
distributing crab processing rights into private ownership, all in the 
name of ``rationalization'', then we respectfully request that our 
investment also be rationally considered as a basis for Processor 
property right PQS for TDX. We own the dock, the plant, the land and 
the tidelands leases upon which the processing infrastructure for both 
Trident and Icicle sits. We view such a settlement that does not 
include TDX, as both unfair and inequitable, and a severe injustice to 
the Aleut people.
    We assert that any assessment of NPFMC and the State of Alaska that 
Aleut needs are served by Community Development Quota participation in 
this plan, is a flawed and technically deficient analysis, that 
disenfranchises both TDX Corporation and its shareholders, as major 
equity investors in crab processing North of 56 degrees, from rightful 
participation in full and equitable sharing of this proposed resource 
distribution. We cannot support, and must vigorously object to this 
plan as a matter of simple fairness and justice.
    We should clarify these statements. TDX Corporation does not blame 
participant processors for seeking a share of Bering Sea resources. We 
do not claim that we are solely deserving of resource entitlement, any 
more or less than any deserving vessel owner who annually risked life 
and limb to participate in these dangerous crab fisheries. Trident 
Corporation and Icicle Seafoods, both current St. Paul Island tenants 
of TDX Corporation, are responsible and reliable tenants, as well as 
owners of catcher vessels. But their rights in this plan to crab 
processor quota rights, north of 56 degrees, derives from use of TDX 
property, TDX dredged tidelands, and TDX facilities on St. Paul Island, 
which were developed with corporate resources of Tanadgusix Aleut 
shareholders, unacknowledged, unrewarded and inequitably excluded from 
participation in this plan of distribution.
    There are so-called ``community protection clauses'' in this plan 
which will be lauded as preserving and meeting Aleut interests on St. 
Paul Island. In fact, they are last minute adaptations to the growing 
awareness that community and regional protections in the plan, are 
filled with loopholes: loopholes that exempt bairdi crab from the 
program, that allow PQS to be leased to floaters, that allow PQS to be 
used within the same company outside of so-called regions, sold to 
other companies, and sold for custom processing. These are ambiguous 
and smoky illusions which will assure that community protections will 
be fish planned out of existence, in the name of ``fisheries 
efficiency''. We repeat our contention that, if allocations are going 
to be made based on investments in our St. Paul Island community, those 
allocations should go to those who made the investments, not in the 
form of a nebulous first right of refusal to a CDQ group that has not 
invested the first dime in crab processing on St. Paul Island, and that 
is consumed with political posturing and bureaucratic dithering. Aleut 
survival is much too important to base our community participation on 
such a wobbly foundation.
    Our request for equity PQS recognizing the TDX investment has been 
made at the last two NPFMC meetings, and has been totally ignored. 
Specifically, TDX requested before the NPFMC that its original 
investment in the Anderson Plant be recognized by an 8 percent 
allocation of the Bering Sea crab PQS, all species, recognizing the 
investments and levels of processing achieved by TDX St. Paul prior to 
there ever being either Trident or Icicle or Unisea in the community, 
or processing in St. George for that matter. TDX went on to say that if 
there is to be no allocation for its investment, then the PQS assigned 
to and derived from processing at our plants and facilities on our 
lands and leased tidelands, needs to be tied permanently and 
inseparably to those facilities.
    Honestly speaking, the crab ``rationalization'' plan is a self-
serving resource entitlement plan concocted under a democratic veil at 
NPFMC, by an already well vested group of influential large fishery 
resource owning companies, whose own interests already include a 
substantial portion of the crab catching industry, and the Bering Sea 
pollock resource. These companies held the independent crab fishermen 
and crab vessel owners hostage to the threat, that any rationalization 
or IFQ program in crab was dead on arrival, due to their substantial 
political influence, unless processor quota share was included. The 
losers here are small businessmen, small processors, individual vessel 
owners, smaller vessel participants, Alaskans, and Bering Sea Aleuts. 
This program should not be confused with or compared to the Halibut/
Sablefish IFQ program, as a rational panacea to ``too many vessels 
chasing too few fish''. We repeat again our request that NPFMC 
reexamine the history of crab processing development and participation 
north of 56 degrees, and implement more equitable distributions if such 
distributions are to be invoked in the name of rationality.
    We speak in frustration. This plan is an unfair vesting of 
resources to which Aleuts residents of the Bering Sea, if anyone, 
should be given priority access. Unless and until direct and 
unambiguous protections are provided for communities north of 56, free 
of loopholes, and unless and until, the investments of Alaskans into 
the industry are considered on an equal par with the investments of 
large non-resident corporations, we must strongly request that your 
withdraw any support of the crab rationalization in its current form. 
We cannot support processor quotas being distributed when the chance 
exists, multiple avenues, that those quotas will leave the island, for 
the sake of processor convenience or fishing efficiency.
    TDX has earned the rights to participation with our investments. We 
request that Congress look into these questions, and request the 
National Marine Fisheries Service or the NPFMC to document and support 
our historical participation and investment in crab fisheries north of 
56 degrees. If our equity cannot be recognized, then we ask you to send 
the NPFMC back to the drawing board for development of a crab 
distribution plan that doesn't disenfranchise legitimate ground 
investments, and market freedom for long time fishermen, by 
distributing property rights to the few processors still standing in 
the game. Rationalizing the fishery has never been explained as taking 
all risk out of the fishing business, in the name of supporting a few 
remaining processors.
    Tanadgusix Corporation urges the respected Senators of the Commerce 
Committee to dump this badly flawed plan that disenfranchises and gives 
no credence to, the true and verifiable investment and equity of the 
Aleut people of St. Paul Island in the crab industry. Or to make sure 
that it does so, before authorizing another distribution of public 
resource to large industry, without considering the needs of those who 
live in the middle of the resource.
            Respectfully Submitted,
                                        Ron P. Philemonoff,
                                                  Chairman and CEO,
                                                Tanadgusix Corporation.
                                 ______
                                 
                 Prepared Statement of Byron L. Pierce
Dear Senators,

    My name is Byron L. Pierce. I am a 53 year old Ex-Marine and 
Vietnam Vet. Both my older brothers were Marines. My middle brother 
lost his life in Vietnam. After my tour of duty I returned to my home 
in Oregon and attended college for a few years. I felt my life wasn't 
quite right and felt I needed more so I headed north and ended up on 
the most beautiful Island, Kodiak Island in Alaska.
    It was shortly after arriving here I had a chance to go King Crab 
fishing in Kodiak. I immediately fell in love with crab fishing and 
decided then and there that this is what I wanted to do with my life. 
Every aspect of the crab fishing business intrigued me. It is man 
against the sea and his ability to overcome tremendous odds while 
working exceptionally hard and hoping to come home with a good payday, 
and then doing it again and again. That was 30 years ago.
    In my career, I have owned three crab boats. I started with a small 
boat and over the years have upgraded to larger boats. I have lost many 
close friends over the years and in 1993 my family and I lost 3 crewmen 
when our crab boat Massacre Bay sank. We currently own 1 boat now, the 
Nuka Island, and are a family owned business. I have literally given my 
heart and soul to the crab industry in Alaska for 30 years.
    I have watched the crab industry change drastically over the years 
and now we are down to Rationalization, which I believe is needed!
    Senators, the big issue is the whole concept of Processor Quotas 
and the changing of the Anti-Trust laws to allow them. The concept of 
Processor Quotas tells me I have to deliver to just certain processors, 
and just take what price they choose to pay me for my crab. To me this 
is crazy!! It's like telling a chicken farmer he can only sell to 
certain markets. This is totally Un American to me!!
    The only people Processor Quotas are good for are Processors. To 
change the Anti-Trust laws on order to get this accomplished is just 
plain wrong!
    Senator, please don't tell me that this is what I went to war for 
or that this is what my brother lost his life for!
    In the early 90s, an Individual Quota Program (IFQs) was put in 
place for Alaskan halibut and sable fish fisheries that has proven to 
work well. I feel strongly that this same program would work perfectly 
for our crab fishery to the men that earned them. The fishermen, Not 
the processors.
    Again, please vote this down and vote Not to change the Anti-Trust 
Laws.
            Sincerely,
                                           Byron L. Pierce,
                                                    Crab Fisherman,
                                                        Kodiak, Alaska.
                                 ______
                                 
                  Prepared Statement of Richard Powell
    Mr. Chairman, my name is Richard Powell and I have been a resident 
of Kodiak, Alaska for 39 years and have been involved in the Alaskan 
king crab fisheries for that entire time.
    I would like to thank you for the opportunity to submit written 
comments before the Senate Commerce Committee regarding the issue of 
rationalization of the Bering Sea/Aleutian Islands crab fisheries. My 
specific comments will be in relation to the proposed element of 
individual processing quota (processing shares).
    I would like to provide a bit of history on how I perceive this 
issue has evolved over the last several years. The crab industry has 
been through a difficult time in the last several years, with the 
severe downturn of the red king crab and opilio crab stocks of the 
Bering Sea. The fishing industry has been working for years to attempt 
to develop an industry-funded buyback program. This, coupled with a 
license limitation program designed to only allow recent participants 
to remain in the fishery, can provide some short-term relief to the 
fleet.
    However, it is apparent that this fishery needs a quota based 
program, to allow individual harvesters the ability to determine when 
their fishery will occur. As you are aware, the job of fishing crab in 
the Bering Sea is the most dangerous occupation in the United States. 
In recognizing this, crab harvesters have worked for over four years in 
attempting to create a quota based program, which will lead to a much 
safer fishery, as shown by the results of the halibut IFQ program in 
Alaska.
    The processing sector in Alaska is a combination of U.S. and 
foreign owned companies. These companies have a strong lobby and work 
closely together to achieve their goals. When the issue of crab 
rationalization began to be discussed amongst the harvesters, the 
processors formed a coalition and began working as a unit to achieve 
their goal. My view of this goal is that the processors want to make 
sure to control the fleet as much as possible, in regard to time and 
location for delivery, as well as the pricing structure. This benefits 
companies who are diversified in their processing products, and want to 
create efficiencies for themselves.
    In order to achieve this goal, they determined that the only 
solution to their concerns would be processing shares. They needed to 
begin with a limited entry system of their own to create a pool of 
eligible processors. But this wouldn't be enough. They determined that 
they didn't even want to compete between themselves for the product. 
The answer was, of course, guaranteed deliveries based on their 
previous processing history. The processors discussed this with each 
other and determined that they would only agree to a minimum of 90 
percent guaranteed deliveries. They further agreed that this was the 
only solution and that no other would be acceptable. This created a 
very uncomfortable situation for the negotiators of the crab 
rationalizaton committee, which worked for over a year to try and 
determine elements and options for the Council's analysis.
    Other options were presented and repeatedly rejected. In fact, the 
processing sector representatives went so far as to say that if they 
didn't get their way, they would block the buyback program (which is 
still in OMB limbo), as well as stop any rationalization program from 
being implemented in the crab fishery. The processing lobby is powerful 
and well-funded. The results are that we are in this dilemma.
    The North Pacific Council, just one year ago, voted 11-0 to send 
their required report to Congress, along with the preferred 
alternative. The preferred alternative included the 90 percent 
guaranteed delivery requirement to eligible processors, as they 
intended. While the Council debated and voted many times over a period 
of days on the harvester elements of the program, there was no single 
vote on the policy of granting processor shares. It was simply included 
as part of a many-page motion. It was not amended or discussed, but 
simply approved in the final package. The Council made it clear that 
the cornerstones to this program were the binding arbitration and 
community protection portions of the plan. These elements were to be 
followed as ``trailing amendments'', with their own committees and 
analytical documents. This past month, the Council saw the final 
documents and reports on the ``cornerstones'' of the crab plan. They 
were barely able to get a majority to approve them. It is clear that 
with closer scrutiny, the Council's preferred alternative in June 2002, 
has serious problems.
    The entire issue of processing shares was discussed briefly by the 
National Academy of Sciences and the concept was rejected as 
unnecessary. The Committee was not convinced that processors should be 
granted processing shares, or even if they should be granted harvesting 
shares for eligible vessels they might own.
    I am frankly surprised that this issue has continued to receive 
serious consideration. It proves to me that the processor lobby is as 
strong as it was before Alaska became a state and they controlled the 
seafood industry through the salmon traps. Their successful lobby 
resulted in Alaska remaining a territory for years after it should have 
become a state. The fishermen cannot hope to compete with the power and 
funding of this group. We can only hope that our elected 
representatives will continue to use good judgment and reject this 
proposal. This is not fishery management, it is fishermen management.
    As a crab vessel owner who has a catcher vessel and a catcher/
processing vessel, I have in years past delivered some of my crab from 
the catcher vessel to processors and some of my crab, I have processed 
myself with my catcher/processor. Under the processing share proposal, 
I will not have the option in the future to process my own crab from my 
catcher vessel. Now, the last time I checked, this was still America 
and I had some freedoms to buy or sell as I choose. I shouldn't be 
forced to sell my crab to a specific, eligible processor, just like 
they shouldn't be forced to sell the processed product to a specific 
store or wholesaler. But, this is what is being proposed. It just 
doesn't make sense.
    I have every confidence that Congress will carefully evaluate this 
issue on the merits, not the political push and pull that a well-funded 
lobby can accomplish. There is a reason that we have anti-trust laws, 
let's not overturn them on a whim.
    It is vital that the Bering Sea/Aleutian Islands crab fisheries be 
rationalized and a quota based program be implemented. It is not right 
that a few powerful companies can stop this from happening unless they 
get their own guaranteed lock on the product.
    Thank you for considering my comments.
                                 ______
                                 
                 Prepared Statement of Robert E. Pries
    ``Crab Rationalization'' is nothing less than a legalized cartel. 
The fishermen have no choice but to sell to the cartel regardless of 
how low the price or they do not sell at all. Even if a portion of the 
catch is reserved for free market the results will be the same: the 
free buyer could not compete with the cartel if the cost of his fish 
was more than the cartel. If 20 percent of the catch was reserved for 
the free market then only 80 percent of the fishery will be dominated 
by small group of monopolies. What a deal.
    I am not a crab boat owner in this particular fishery but I do 
participate in crab and numerous other fisheries. We are shaking in our 
boots because we see this plague engulfing the entire fishing business. 
Processors everywhere are salivating at the prospect.
    The fishermen are not getting a fair shake as it is and this would 
only make it permanent and legally condemn us to the lowest rung of the 
economic ladder. That is not fair for men who work some pretty mean 
hours, live in some pretty Spartan conditions in the most dangerous 
occupation in the country.
    Ever since Exxon Valdez Oil Spill it has been bad news for nearly 
all of the fishermen in Alaska, even those who were not directly 
affected by the spill. That was a 9.0 disaster on the Richter Scale for 
a lot of fishermen who still have not been compensated not to mention 
those who never will which may include nearly all of us if it grinds 
along for another 15 years.
    We have more Pink Salmon than our processors seem to want but do 
you think Alaska will allow foreign processor vessels into our 
fisheries? Think again. It is all about protecting the soft money 
contributors.
    Senator McCain, I was a dedicated supporter of your bid for the 
Presidency mostly because of your fight for campaign reform. I believe 
that that this legalized bribery system of ours is the root of 
corruption in this country. It sets a bad example for the leaders of 
the country who have not already been corrupted and may be the best 
example of the trickle down theory yet.
    I cringe when I hear our President talk about spreading democracy. 
Make no mistake we are governed by a Plutocracy. The ratio of CEO to 
worker compensation increasing from 400-1 to 4,000-1 during the past 20 
years should convince anyone that this country is more and more being 
run by the wealthy for the benefit of the wealthy. Those CEO's make 
those fantastic salaries even when their Companies are failing.
    I served my country just like you Senator McCain. I was a Navy 
fighter pilot too and I am not blind nor am I deaf. I hear Perot's 
sucking sound. I see that the law is for the highest bidder. I see 
antitrust as a bad joke. I see outright white collar criminals all 
over. The politicians revolving door . . . and greed heads everywhere. 
I think that we may be in bad trouble. I don't think it was always like 
this. We are in dire need of truth, honesty, integrity all over this 
country.
    The only hope for the boat owners and crews is for a free market. 
WE only ask for a fair price for our catch something we will never see 
under this scheme which was contrived by a processor and his favorite 
politician. Best I can tell this processor has become very wealthy 
while his boat owners barely got by if they did and the crews were 
asked to live on a pitiful wage.
    Please look past the attempt to cloak this greed under a 
respectable name like ``Rationalization''. The Processors want a shoe 
in deal and my 25 years experience with them tells me that they will be 
just as greedy as Enron. Each one of these processors want their own 
monopoly and nothing less. Free market used to be the mantra of our 
economy playing field this ``Rationalization'' couldn't be further from 
a level playing field in a free market.
    The proper name is CRAB ABOMINATION.
                                 ______
                                 
                   Prepared Statement of David Soma, 
               Deep Sea Fishermen's Union of the Pacific
    The Deep Sea Fishermen's Union of the Pacific (DSFU), a labor 
organization that has represented working fishermen for 90 years, is 
grateful for the opportunity to provide a statement for the record of 
this hearing on the Bering Sea and Aleutian Islands (BSAI) Crab 
Rationalization Plan (Plan). The long history of DSFU has been marked 
by a clear vision for the longline halibut and sablefish fishery, a 
progressive outlook for the industry, an emphasis on safety and the 
immense professionalism of its members. DSFU is justifiably proud of 
its unbroken service to working fishermen. The Union has amassed an 
unparalleled string of successes in safety, fishing management, 
conservation and equitable treatment for our members throughout our 
history.
    The almost 300 current members of the Union represent a growing 
number of the longline schooner fleet crewmen and an even faster 
growing number of crab fishermen from Washington and Alaska.
    The Union was formed, when the crews were confronted by extremely 
low prices for halibut, poor resource conditions, and fishing in very 
bad weather and unsafe conditions that led to several vessels sinking 
and the loss of several crewmen. The time was right to take some 
action. They created the Union with goals that were straight-forward 
and practical; fair wages, better living conditions, improved benefits, 
and a closed shop.
    As working partners in fishing operations, the members of the DSFU 
took responsibility for the management and well being of their 
livelihoods. The Union's principles continue to be: The proper long-
term management of resources for conservation and efficiency; the fair 
and straightforward treatment of vessel, skipper and crew; professional 
work standards; and the integrity of fishermen to stand together.
    After a turbulent beginning with the Fishing Vessel Owner's 
Association (FVOA), initial differences were settled and the two 
organizations established a simple, elegant and precise contract, now 
known as the Set Line Agreement. It became the basis for payment and 
working conditions for all longline fishermen, Union or otherwise, 
working from the mouth of the Columbia to the Bering Sea.
    Relations between these two organizations have been candid and 
collegial ever since. There were many good reasons for the Union and 
FVOA to cooperate and collaborate. Many captains, boat owners and 
crewmen realized that their goals were inextricably linked. It was 
rapidly apparent that there were a sizeable number of key issues that 
would need the full cooperation and lobbying power of both the Union 
and management.
    In 1962, the North Pacific Fisheries Commission ruled that the 
Bering Sea halibut stocks were underutilized. They then became fair 
game for the Japanese. American fishermen strongly objected, but to no 
avail, and the decision negatively impacted every American fishermen 
working in the North Pacific. From 1966-1974, the halibut quota dropped 
precipitously. Longlining reached its lowest point in 1974 with just 
over 21 million pounds caught for the entire year. Trips took 20-25 
days--fish were old when delivered and ``hole'' trips (ones that made 
no money) were common.
    In the Senate, Senator Warren Magnuson from Washington State and 
Senator Ted Stevens stepped up to the plate. Under their leadership, 
the foundation was laid for the Americanization of the fisheries within 
200 miles of our coasts.
    However, a race ensued among American fishermen, as the domestic 
fleets grew in size and efficiency. For halibut, openings grew shorter. 
In 1980, area three was open for eight days and by 1983 it was five. 
Crew fitness and endurance became increasingly important. The Union 
grew with young men who were drawn by the reputation of the schooners 
and the Union's professionalism. An old sideline, black cod, 
increasingly became a mainstay of the longline fleet.
    FVOA and DSFU worked together to stop the inequities involved in 
fishing for black cod. All hook and line fishermen in the North Pacific 
again benefited from the effort.
    By 1991, fishing time for both black cod and halibut had shrunk to 
a scant number of days. The Union entered into a dialogue with FVOA 
about a plan centered on Individual Fishing Quotas (IFQs). After 
lengthy discussion and lots of effort over a period of seven years, 
IFQs were adopted for the halibut and sablefish (blackcod) fisheries. 
The decision was not an easy one. The prime-mover for this process was 
the North Pacific Fishery Management Council, which began considering 
options in the late 1970s. Dangerous ``derby'' fisheries that caused 
safety, care of gear and quality of product issues were resolved by 
IFQ's.
    The Set-Line Agreement was renegotiated between the Union and FVOA 
in 2002, again demonstrating its utility and the ability to stand the 
test of time.
    DSFU continues to set the standard for longlining in the North 
Pacific. The Union has unhesitatingly stepped up as a key part of the 
most powerful lobbying body for hook and line operations in the North 
Pacific. The recent addition of a growing number of crab crewmen and 
skippers to its ranks is a testimonial to the worth, stability and 
advocacy for working fishermen DSFU has always demonstrated. From 
dories to schooners, from lay-up to IFQ--the Union has really been 
about people--its incredible membership.
Background and Need
    Owners of the crab boats operating in Alaska, most of which are 
based in Seattle, have been struggling for a decade to stay solvent 
despite plunging populations of most crab species. In September 2002 
the National Marine Fisheries Service (NMFS) and the Alaska Department 
of Fish and Game made the situation even more critical when they 
announced that the allowable catch for snow crab, the most populous 
species, was lowered for the 2003 season. This was a 15 percent 
decrease from the 2002 catch. Without enabling legislation from 
Congress, the fishery will continue to operate under the Olympic quota 
system. The Olympic system forces boats to race for the fish, usually 
resulting in uneconomical marathon fishing sessions that are damaging 
to the crab stocks and dangerous to crews. This system is the main 
reason crabbing is considered the most dangerous fishery in the United 
States.
    The proposed alternative, a quota allocation system, would give 
catchers, processors, communities and skippers specific quotas of the 
available catch. Under the system, quota owners will be able to catch 
crab according to market and weather conditions and their own best 
operating efficiencies as opposed to the dangerous and innefficient 
``derby'' system.
    Versions of the quota allocation system have been implemented by 
the halibut, pollack and whiting fisheries, all with positive results. 
The Pacific halibut fishery, once poorly controlled and managed, is now 
considered well-managed, environmentally responsible and sustainable 
for the forseeable future. The fishery currently fishes 20 percent of 
the available biomass while providing good wages for the crewmen and a 
profitable business for the owners. In addition, the fishery has seen a 
marked decrease in accidents and deaths since rationalization. In a 
recent Seattle Times article, both Pacific halibut and sablefish were 
noted as well-managed and received Monterey Bay Aquarium's green, or 
``Best-choice,'' rating. The DSFU believes these remarkable results are 
directly related to the implementation of a quota allocation system.
    It is interesting that, with the decline of the crab fishery and 
the onset of a rationalization program initiative, crab skippers and 
crewmen strongly petitioned DSFU for representation in 2002. DSFU has 
stepped up, in adherence to its by-laws, to represent working 
fishermen.
Position Statement
    The Union, and its members feel strongly that crab rationalization 
is the correct mechanism to revitalize the industry and encourage a 
safe, healthy and economically strong crab fishery. However, the 
members also have some very serious reservations about the plan as 
currently designed. The inclusion of processor shares and more 
particularly the 90:10 split is worrisome to our members. The fact that 
the Council passed an amendment that significantly weakens the 
arbitration safeguards for the harvesters is also of concern to our 
members. In our opinion, the processor share portion of the plan comes 
close to running afoul of the anti-trust laws and particularly the 
restraint of trade provisions. The membership is also concerned about 
the precedent it sets for the next fishery that rationalizes. Once 
processor shares are legitimized, we see them becoming a part of all 
rationalizing plans. When this is coupled with an almost negligible 3 
percent share for skippers, it becomes even more difficult for the 
Union to not be concerned about the long-term consequences of the plan.
    Finally, the absence of crew shares has to be of extreme concern to 
a Union representing working fishermen. A plan that, once again, gives 
no recognition to those who perform the overwhelming majority of the 
work resulting in the successful prosecution of any fishery can only be 
considered short-sighted and inequitable by the Union representing 
these working fishermen. We do recognize and appreciate the inclusion 
of a loan program intended to give crewmwmbers the opportunity to 
purchase quota. However, as can be seen in other fisheries, this is not 
as easy as envisioned and we feel initial crew shares would be a more 
equitable approach.
    For these reasons, the DSFU believes it is in our members' best 
interests to not support or oppose the current plan at this time. The 
Union is heartened by the Council's letter of 6 May stating its 
intentions to closely monitor the arbitration and community protection 
sections of the plan and its intention to ask congress for assistance 
if the plan does not work as anticipated. However, the DSFU believes we 
should reserve our judgement until legislation is enacted and the plan 
is allowed to work for a period of time. We believe that the 
anticipated positive effects or feared negative results will emerge 
over time and if the results are negative, we would respectfully like 
to reserve our right to petition the Council and ultimately the 
Legislature for relief and modifications as necessary.
                                 ______
                                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                 
                                                              
                                 ______
                                 
       Prepared Statement of Alf O. Sorvik, Owner, F/V Rainier, 
                       F/V Paragon, F/V Isafjord
    As a former member of the Alaska Crab Coalition (``ACC''), I am 
submitting this written testimony to refute the position of the ACC, as 
presented today by it's executive director, Arne Thompson. I, along 
with many other independent crab fishermen, left the ACC when it became 
apparent the group no longer represented the interests of the 
independent fishermen and was simply a voice for the processor 
controlled and/or CDQ controlled crab fishing vessels.
    I am a fisherman and I have been active in the crab fishery in the 
Bering Sea and Aleutian Islands since the 1960s. My vessels have 
harvested Red, Brown, and Blue King Crab; Opilio and Bairdi Tanner Crab 
for over 30 years. While I have fished for many of the processors that 
stand to gain an unfair advantage by the North Pacific Fishery 
Management Council's (``NPFMC's'') proposed rationalization plan which 
endorses ``processor shares,'' I cannot support this plan.
    If the Commerce Committee allows this plan to move forward, you 
will be awarding the processing sector a monopoly. Further, this 
proposed plan goes against the wishes of almost all the Alaskan 
communities, violates our antitrust laws, sets a dangerous precedent 
for other fisheries, and illustrates just how precarious our Council's 
position in the management of our fisheries has become.
    I ask you to send a clear message to all the Councils in our 
Country that the Commerce Committee will not stand for proposed 
rationalization plans that violate the law. The NPFMC needs to do what 
the crab sector asked and agreed upon; provide a rationalization plan 
in conjunction with a buyback program and let the crab sector solve 
it's current economic problems without further diminishing the sector's 
position by granting the processing sector an unfair advantage through 
a ``two pie/processor share'' scheme.
    In closing, this is bigger than just a crab rationalization 
program, it sets the course for further rationalization plans across 
the Country. Set the process on course and do not allow the NPFMC's 
proposed Bering Sea Rationalization plan to move forward with 
``processor shares.''
                                 ______
                                 
        Prepared Statement of Capt. Gary Stewart, F/V Polar Lady
    My name is Gary Stewart. I have fished crab in the Bering Sea since 
1969. I have been a boat owner since 1978. I am president of the Alaska 
Marketing Association, the collective bargaining association of Bering 
Sea crab fishermen and the largest single group representing 
harvesters. The AMA negotiates crab prices for the entire Bering Sea 
crab fleet with the exception of the catcher-processor vessels.
    The crab rationalization program seems to be slowly working its way 
through the bureaucratic process. It is looking more to me like the 
deck is being stacked against the crab fishermen of the Bering Sea. I 
have watched and participated in this process. I think this once 
promising program will reduce our fishing fleet to the status of serfs 
and sharecroppers. I believe that getting our IFQs may not be worth the 
price we will be paying. Do any of you think we will be better off with 
processor quota shares? I know that processors will be. I know that CDQ 
groups will be. Some fishing dependent communities may be while others, 
like Kodiak, will be harmed. I have strong doubts the fishing fleet 
will benefit.
    The North Pacific Fisheries Management Council has sided with the 
processors on every phase of the rationalization process. The two-pie 
that the Alaska Crab Coalition sold me on was a program that gave 
processors a quota share for 80 percent of the crab. I didn't like it 
but thought it might be workable if a mechanism were in place to allow 
us to negotiate a fair price. Without public discussion, the NPFMC 
voted unanimously to give the processors 90 percent, with a binding 
arbitration process written by a processor attorney. A committee was 
formed to discuss arbitration models, and they had many meetings and 
spent a lot of time trying to hammer out a program we could live with--
an ultimately is was all in vain as the NPFMC rubber-stamped the 
processors plan, ignoring the AMA and all other harvester groups.
    For the first time that I can remember all the crab fishing groups 
agreed on something-the council's preferred binding arbitration model 
did not adequately protect harvesters. Jake Jacobsen, the AMA manager, 
went to the April council meetings and testified in favor of changes to 
the plan in order to better protect harvesters. The council voted 
against us 6-5.
    I had hoped the processor quota share might get tossed out when the 
Alaska Crab Coalition (a harvester political group of 10-15 boat 
owners) pulled its support. That didn't last long.
    I believe we are stuck with a binding arbitration program that will 
not be fair for harvesters. It was written by processors for 
processors.
    The Unalaska City Council recently voted to endorse processor quota 
shares. Privately, some. council members have said that they endorsed 
the plan only because they did not want to upset the all-powerful 
processors.
    Questions I would like to have answers to:

  1.  Why did the NPFMC disregard public testimony on two-pie.

  2.  Why did the NPFMC go against the findings of their own analyst in 
        regard to binding arbitration?

  3.  If processors need the protection of two-pie then why are they 
            going to be able to buy 5 percent of the quota, each? 
            Fishermen only get to own 1 percent of the fishing quota 
            each!

  4.  Why was the AMA not invited to testify at the Senate committee 
        hearing?

    By my own unofficial survey eight out of ten boat owners are 
against processor quota shares, but many are afraid of retaliation from 
processors so they think they must keep quiet. They understand where 
the power will be in the future.
    Processors have been telling us all along that if we want 
rationalization we better get in line and not object to anything they 
want. They must be telling the NPFMC the same thing.
    If rationalization were to go away tomorrow who would Jose the 
most? Would it be us fishermen? We would be back where we started. As a 
father who raised my family in the crab fishery and whose son is now 
fishing in the Bering Sea crab fisheries, I pray for a rationalized 
fishery. Processor quota shares are a bad idea. Sure, they make a big 
deal about the 10 percent harvesters will be able to deliver on the 
open market, but in truth the 10 percent is really much less 
(processors own many fishing boats)-and with processors holding boat 
loans and tendering contracts over the heads of harvesters, there is 
very little that will not be delivered to them.
    Processors just about have the golden goose wrapped up. But would 
they really ``pull the plug'' on rationalization if fishermen ask for a 
system that is not so one-sided? With all that processors stand to 
lose, I think not.
                                              Gary Stewart,
                                                        F/V Polar Lady.
                                 ______
                                 
           Prepared Statement of Bob Storrs, Vice President, 
              Unalaska Native Fisherman Association (UNFA)
    Chairman McCain, Senator Stevens, and members of the Committee:

    First, we would like to thank you for holding this hearing and 
receiving testimony regarding the Bering Sea crab rationalization plan 
put forward by the North Pacific Fishery Management Council (NPFMC), 
and in particular--the portion of that plan that deals with the gifting 
of exclusive processor quota shares to specific, largely foreign owned 
corporations.
    There are some who would tell you that processor quota is an item 
that can rightfully be handled by the NPFMC. Nothing could be further 
from the truth. This is a question of national policy that reaches far 
beyond the domain of the Council.
    The decision that you, as our elected representatives, make will 
reach far beyond price negotiations for seafood--far beyond economics 
and anti-trust issues, it is a matter of who will control not only our 
resources, but also the very social and political structure of our 
communities forever.
    With that in mind, we only wish that you could have talked with 
some of the many people who have privately apologized to us for not 
taking a public stand on this issue because they fear for their markets 
or their jobs. This is a sad fact of life in the company town scenario. 
Hopefully it is not the road that you would send us down.
    The Unalaska Native Fisherman Association, along with other 
fishermen's groups, city and village councils, independent processors, 
and ordinary citizens from across Alaska stands absolutely opposed to 
processor quota shares, and we feel that it is unfortunate that some 
with the State of Alaska and the NPFMC have accepted the arguments of 
several large companies as justified through the theories of one 
economist.
    Dr. Matulich's views are based on data selectively released by the 
processors, and neither these findings nor his methodology find broad 
approval among other economists or by the independent review of the 
General Accounting Office.
    Some people have asked us how processor quota would directly affect 
the members of UNFA. We offer a case in point:

    Seven years ago, fishermen from Unalaska and some of the outlying 
villages met to discuss the formation of a co-op. The University of 
Alaska sent down two economists who helped us draw up by-laws and 
formulate a business plan. A lease arrangement and was made for the 
last small family-owned processing plant in the Aleutians, and 
enthusiasm for the project ran high.
    One week before we were to take possession of the facility, it 
burned to the ground in our town's most spectacular blaze since the 
Japanese attack of World War II.
    Recently, people in our town have again begun to express an 
interest in re-activating the co-op, perhaps by using a small floating 
processor. One problem though--if processor quotas become a reality, 
that will be impossible.
    We have repeatedly been told that the 10 percent of the quota left 
open to the free market would accommodate any future plans as well as 
lend some capitalist flavor to this attempt at a planned economy. That 
is ridiculous. As an economist who specializes in co-ops pointed out to 
us--you cannot have a viable co-op when your members are required by 
Federal law to deliver 90 percent of their product to the competition. 
That is not the American way of doing business.
    The fact of the matter is, if you allow processor quota to become a 
reality, you will have made it functionally illegal for us to have a 
viable co-operative. You will have completed the job that the fire 
began.
    After 100 years of American anti-trust legislation, is that really 
where you want us to be?
    It is important to remember that all of the goals of fleet 
reduction, increased safety, community stability, as well as 
conservation concerns could be achieved without granting cartel status 
to a handful of companies. Conservation and safety issues are dealt 
with on deck and in the wheelhouse--not in a far away corporate 
boardroom.
    In fact, all that has prevented the communities and the fishermen 
from achieving a safer, more rational fishery has been the fact that 
these corporations have held the public process hostage to their 
demands for control of the resource. They called it their ``poison 
pill'' and from the beginning, they made it clear that it had to be 
their way or no way. They realize that they have tremendous political 
power and that they are about to acquire much more.
    This is particularly galling because huge questions continue to go 
unanswered: How great is this so-called corporate distress? Who owns 
how much of whom? Where are the profits--or the losses--being realized? 
How great are the losses to the U.S. Treasury due to abusive transfer 
pricing? What lessons, if any, are to be gleaned from the Bristol Bay 
price fixing case?
    The Unalaska Native Fisherman Association has, from the beginning, 
insisted that for there to be any meaningful discussion of relief to 
these companies, the books--from Seattle to Tokyo--must be opened.
    Citing proprietary concerns, the companies have failed to do this. 
They have released only select data through their own select economist. 
We can see where that got us with Emon and Worldcom.
    We find it ironic that any Alaskan fishermen who applies for a loan 
must completely bare his or her books--including all IRS records for 
years past, yet we stand on the verge of granting virtual ownership of 
a once publicly-owned American resource to a handful of trans-national 
companies--all purely on faith.
    Even as we look beyond the forest of ledger sheets and corporate 
relationships, it is very difficult for many of us who make our living 
at sea to equate the financial distress of a crab fishing family to the 
pains of Nippon Suissan Kaisha--who just over year ago purchased 
Gorton's Seafoods and a similar Canadian company for 175 million 
dollars, and in so doing virtually completed the vertical integration 
of their operations in North America.
    Make no mistake about it--we want these companies to prosper. 
Perhaps there are things we can do to assist them through what they 
claim are tough times; maybe with open books and open minds we can work 
together to find some new ideas that will benefit all of us. Let one 
thing be clear--granting the companies such unprecedented control over 
our resources and our lives should not even be an option.
    The very idea of facilitating the passage of the processor quota 
abomination by initially applying it solely to our area is--for those 
of us UNFA members who have served our country in combat--particularly 
offensive.
    Please remember, Alaskans deserve the same economic freedoms and 
protections enjoyed by all other Americans. We are citizens, not 
pariahs. That is why we urge you to reject the idea of processor quotas 
and allow us all to move foreword in a public process unhindered by 
further threats of corporate veto.
    Again, we thank you for your attention to this matter.
    
    
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                                   ______
                                 
           Prepared Statement of Simeon Swetzof, Jr., Mayor, 
                       City of Saint Paul, Alaska
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to provide testimony on the proposed Bering Sea Aleutian 
Island (BSAI) Crab Rationalization Program. When implemented, this will 
be an effective tool for the proper management of the BSAI crab 
resources and their sustainable commercial use by harvesters, 
processors, and communities.
    My name is Simeon Swetzof. I was born on St. George Island, but was 
raised and have spent most of my life on St. Paul Island. My wife, 
Phyllis, and I have raised our four children on St. Paul.
    I have served my community as a member of the City Council since 
1994 and I have been Mayor of the City of St. Paul since 1999. In 
addition to my duties as Mayor, I am a commercial fisherman and 
subsistence hunter. Finally, I have represented St. Paul at the North 
Pacific Fishery Management Council (NPFMC) since 1998 and have been 
intimately involved in the development of the crab rationalization 
program being considered today and the effort to protect community 
interests in this process.
I. Introduction
    Following the federally-mandated transition from fur sealing in 
1983 and the completion of the St. Paul Harbor in 1990, St. Paul 
successfully developed a fisheries-based economy. From 1993 to 1999 St. 
Paul was the primary crab processing location in the Bering Sea and the 
second fishing port in Alaska, after Dutch Harbor/Unalaska, in terms of 
state tax revenues. In 1998 and 1999, crab deliveries to St. Paul 
exceeded 40 percent of the total harvest and the Harbor generated $6 
million per year in national economic benefits from opilio Tanner crab 
(also known as ``snow'' crab) alone, by providing an alternative to at-
sea processing or delivery to more distant locations. The strategic 
value of the harbor, located in the middle of various Bering Sea 
fisheries, speaks for itself.
    The considerable investments made by the community, the State of 
Alaska, and the Federal government to build a harbor and the 
accompanying infrastructure necessary to service the Bering Sea fishing 
fleet contributed to the generation of considerable wealth for the 
community as well as for harvesters and shore-based processors. 
Unfortunately, as a late entrant into the fishing industry, St. Paul 
was in the process of diversifying its crab dependent economy when the 
opilio stocks collapsed in 1999, taking with them 85 percent of St. 
Paul's economy and affecting related service industries such as air 
freight, refueling, supplies, and crab pot storage. The economic crisis 
has been compounded by a severe decline starting in 2002 of the halibut 
CDQ fishery, the second most significant activity on the island.
II. Collapse of the Bering Sea Crab Stocks and Impacts on St. Paul
a. Status of the Fishery:
    The Bering Sea snow crab fishery, which was the subject of the year 
2002, 2001 and 2000 commercial fishery failure determinations by the 
Secretary of Commerce, has continued in a state of severe decline. The 
National Marine Fisheries Service (``NMFS'') trawl surveys for several 
years have determined that the stocks had not recovered to any 
significant extent. The 2003 harvest amounted to about 26 million 
pounds. Last year (2002), the State of Alaska, which manages the crab 
fishery, set the Guideline Harvest Level (``GHL'') at 31 million 
pounds. Barely 23 million pounds were harvested in 2001, an 88 percent 
decrease from the 1999 harvest level of 192 million pounds.\1\
---------------------------------------------------------------------------
    \1\ The year 2001 commercial fishery suffered further from 
extremely harsh weather conditions in which storms with hurricane force 
winds, together with some of the largest tides of the year, produced 
extremely dangerous sea conditions. The Alaska Department of Fish and 
Game reported to the NPFMC in April 2001 that ``a number of vessels had 
wheelhouse windows blown out and other structural damage caused by 
large waves.'' As a result, many vessels were forced to head for safe 
port a full 12 hours before closure of the season, and the fishery was 
unable to harvest the full GHL.
    In addition to the 86 percent reduction in the GHL from 1999 to 
2001, and less than full harvest recovery due to severe weather 
conditions, the year 2001 commercial snow crab fishery faced a 
reduction in prices. At an ex vessel price of $1.55 per pound, 30 cents 
per pound less than the previous year, the estimated 2001 snow crab 
fishery value was $35.9 million. This compares to an overall fishery 
value in excess of $55 million in 2000, and $162 million in 1999. 
(ADF&G Report, April 2001).
---------------------------------------------------------------------------
    The cause of the collapse of the Bering Sea crab stocks remains 
undetermined. NMFS' best available scientific information continues to 
suggest that the decline in the stocks is due to natural and 
environmental factors and not to fisheries management policies.\2\
---------------------------------------------------------------------------
    \2\ See 66 Fed. Reg. 742, 742-46 (Jan. 4, 2001) (discussing NMFS' 
approval of the Snow Crab Rebuilding Plan, Amendment 14 to the 
Fisheries Management Plan for Bering Sea/Aleutian Islands King and 
Tanner Crab).
---------------------------------------------------------------------------
b. St. Paul--the ``most affected'' community:
    The NPFMC's Snow (opilio) Crab Rebuilding Plan recognizes St. Paul 
as the coastal community ``most affected by the low stock sizes of snow 
crab.'' \3\ Crab landings and processing accounted for 85 percent of 
the cash entering the community in 1999. The City receives a 3 percent 
sales tax on crab delivered to and processed by floating processors 
within three nautical miles of the Island and a 3 percent sales tax on 
crab delivered inside the Harbor for processing. St. Paul also receives 
half of the fisheries revenues that the State receives as a 3 percent-5 
percent tax on vessels fishing outside and inside of the harbor. In 
addition, the City receives sales tax on fuel and supplies that are 
sold in the Harbor, and derives revenue and jobs from the crab fishery 
in-harbor processors and service support to the crab vessels calling 
St. Paul.\4\
---------------------------------------------------------------------------
    \3\ The finding is made as part of the NPFMC's examination of the 
importance of the fishery resource to fishing communities, mandated 
under National Standard 8 of the Magnuson-Stevens Act.
    \4\ The development of St. Paul's crab dependent economy and a 
forecast for the future of the economy, in light of the collapse of the 
crab stocks, is discussed in the NRC Report, Attachment 4 hereto.
---------------------------------------------------------------------------
    The community has suffered a loss of 82 percent to 90 percent in 
revenues from offshore and onshore processors, and harbor services in 
2000 and 2001 as compared to 1999 due to the crab collapse. The total 
loss in revenues based on the fisheries collapse in those two years, as 
compared to 1999, was 85 percent and 83 percent, respectively. Those 
losses can be summarized as follows (in thousands, rounded to the 
nearest one-tenth of thousand dollars):\5\
---------------------------------------------------------------------------
    \5\ These figures do not include other revenue sources which are 
not dependent on state of the Opilio crab harvests.

                    City of St. Paul Revenue Impacts--Opilio Crab Fishery Collapse 1999-2002
                                               [in thousands of $]
----------------------------------------------------------------------------------------------------------------
                                                                      revenue         revenue         revenue
        Revenue Source            1999     2000    2001    2002    decline  1999   decline  1999   decline  1999
                                                                      v. 2000         v. 2001         v. 2002
----------------------------------------------------------------------------------------------------------------
Onshore processors               1,706.1   254.2   320.1   214.4            -86%            -82%            -88%
----------------------------------------------------------------------------------------------------------------
Offshore processors                1,011   156.8    84.1   331.1            -85%            -92%            -68%
----------------------------------------------------------------------------------------------------------------
Fuel distributors                     85    11.4    30.8    32.7            -87%            -64%            -62%
----------------------------------------------------------------------------------------------------------------
Harbor services                    759.5    77.5   137.3   199.9            -90%            -82%            -74%
----------------------------------------------------------------------------------------------------------------
Local businesses                    75.4    28.4    63.1      63            -63%            -17%            -17%
----------------------------------------------------------------------------------------------------------------
Grand totals                     3,637.1   528.3   635.4   841.1            -85%            -83%            -77%
----------------------------------------------------------------------------------------------------------------

    The revenue losses were directly felt by the Island's 650 native 
Aleut inhabitants by loss of jobs, loss of community health and safety 
services, loss of the community day care facilities, and curtailment in 
air passenger, cargo and bypass services to the mainland. As reported 
in the Wall Street Journal,\6\
---------------------------------------------------------------------------
    \6\ On This Alaska Island, Survival Is More Than Just a TV Game--A 
Cutback in Crabbing Quotas Leaves St. Paul Scrambling To Save its Way 
of Life, THE WALL STREET JOURNAL, Jan. 15, 2001. The irony that St. 
Paul would be looking to subsistence hunting of the fur seal as a 
source of sustenance underscores the severe impact of the collapse of 
the crab stocks on St. Paul's crab dependent economy.

        St. Paul has been thrown into crisis. Layoffs are mounting, a 
        food bank has opened and an exodus from the island has begun 
        that could cripple one of the last intact native communities in 
        the U.S. . . . Particularly hard hit has been the mainstay of 
        the community, the town government of St. Paul, which has axed 
        about half of its 90 workers. A day-care center for city 
        workers was closed, killing five jobs, as was a town-run dental 
        clinic, wiping out two more jobs and islanders' only access to 
        dental care. [With protein supplies on the island dwindling, 
        the native Aleuts of St. Paul are turning to subsistence 
        hunting of seal,] ``the island's last source of sustenance if 
        all else fails.''
III. Actions Taken by St. Paul in Response:
a. Securing a Commercial Fishery Failure Determination:
    St. Paul's first step was to seek a determination by the Secretary 
of Commerce that a commercial fisheries disaster had taken place under 
Section 312(a) of the Magnuson-Stevens Act and that St. Paul be 
recognized as an affected fishing community.\7\ The Secretary made 
affirmative determinations for 2000, 2001, and 2002. As a result, 
disaster relief funding was set aside, providing affected communities 
in the Pribilofs and the Aleutian Chain with some degree of relief.
---------------------------------------------------------------------------
    \7\ Under Section 312(a) of the Magnuson-Stevens Act the Secretary 
is authorized to exercise discretion in determining whether there is a 
commercial fishery failure due to a fishery resource disaster resulting 
from: (a) natural causes; (b) man-made causes beyond the control of 
fishery managers to mitigate through conservation and management 
measures; or (c) undetermined causes. Such a determination authorizes 
the Secretary to provide funds appropriated for the purpose of 
``assessing the economic and social effects of the commercial fishery 
failure, or any activity that the Secretary determines is appropriate 
to restore the fishery or prevent a similar failure in the future and 
to assist a fishing community affected by such failure.''
---------------------------------------------------------------------------
    The City of St. Paul used its initial share of these funds to 
increase water storage capacity for fish processing and fire 
protection, both necessary steps to develop the infrastructure required 
for diversification into other fisheries in order to reduce the 
island's overwhelming dependence on crab. Together with the Corps of 
Engineers, the City has also pursued the Harbor Improvements Project in 
part in order to attract a multispecies processing, shore-based, 
facility to the island. Negotiations with processing companies are 
ongoing and their success rests in part on the implementation of the 
crab rationalization program and the economic stability that will 
accompany it.
b. Vessel Buy-Back Program and BSAI Crab Rationalization:
    As part of its multi-pronged response to the crab collapse, St. 
Paul also played an active role in promoting initiatives supported by 
most of the crab industry to reduce the capitalization of the fishery 
by: (1) promoting a fishing capacity reduction program whose goal is to 
implement a license and vessel buyback program, and (2) rationalizing 
the BSAI crab fisheries. Efforts with regards to the latter resulted in 
Congress directing the NPFMC, as part of the Consolidated 
Appropriations Act of 2001 (P.C. 106-554), to:

        ``. . . examine fisheries under its jurisdiction, particularly 
        the Gulf of Alaska groundfish and Bering Sea crab fisheries to 
        determine whether rationalization is needed. In particular the 
        NPFMC shall analyze individual fishing quotas, processor 
        quotas, cooperatives, and quotas held by communities (emphasis 
        added). The analysis should include an economic analysis of the 
        impact of all options on communities (emphasis added) and 
        processors as well as the fishing fleets. The NPFMC shall 
        present its analysis to the appropriations and authorizing 
        committees of the Senate and House of Representatives in a 
        timely manner.''

    After undertaking the congressionally mandated analysis and an 
exhaustive four year process of public input, and meetings by industry 
sectors and NPFMC members, the Council concluded that rationalization 
of the crab fishery would improve economic conditions substantially, 
for all sectors of the crab industry. At its June 2002 meeting in 
Unalaska, the NPFMC by a unanimous 11 to 0 vote, identified a specific 
rationalization program as its preferred alternative for 
rationalization of the BSAI crab fisheries. The vote on its preferred 
alternative known as a ``Three-Pie Voluntary Cooperative Program'' 
reflects the fact that this is a comprehensive program that balances 
the interests of communities, harvesters, processors, captains, and the 
resource, and incorporates short and long-term safeguards for all of 
them.
IV. St. Paul: A Leading Proponent of Regionalization
    From the outset, St. Paul has been a leading advocate for the 
inclusion of crab-dependent community concerns in any BSAI crab 
rationalization scheme. One of the ground-breaking concepts that the 
community I represent has helped to promote is the concept of 
regionalization of BSAI crab landings consistent with recent industry 
behavior.
    St. Paul views regionalization as the most effective tool for 
fulfilling the guidelines of Standard 8 of the Magnuson-Stevens Act and 
accommodating the diverse interests within the BSAI crab fishery. 
Standard 8 directs the fishery councils to take into account the need 
for sustained participation of fishing communities in the fisheries. 
The need for regionalization arose in order to protect St. Paul's (and 
other BSAI communities') livelihood and the considerable infrastructure 
investments made to develop a port which has served the BSAI crab 
industry very effectively and profitably. During the 1990s, St. Paul 
benefited from a derby-style, race-for-fish scenario where vessels 
delivered crab to the nearest available harbor, in order to immediately 
depart for further loads of nearby abundant crab stocks. In a 
rationalized fishery however, the race-for-fish, would be eliminated 
and furthermore, with the Guideline Harvest Levels (GHL) dramatically 
reduced as a result of the biomass collapse, harvesters would be 
limited to single trips and would therefore be more likely to deliver 
their crab to other ports such as Dutch Harbor/Unalaska or to their 
homeports including Kodiak, where a number of harvesters are based.
    Just as harvester and processor investments have been recognized 
and protected in prior rationalization schemes, St. Paul took the novel 
approach of insisting that community considerations needed to be 
legitimately factored into this process. The stakes were considerable 
for St. Paul, which, unlike economically diversified communities in the 
Gulf of Alaska, is almost entirely dependent on crab processing. While 
St. Paul's strategic location and its existing infrastructure make it a 
competitive port, most of the processing operations in the Pribilof 
Islands are ``satellite plants'' for diversified, parent seafood 
companies. Therefore, with the incentive for decapitalization and 
consolidation in a rationalized fishery, St. Paul was at risk of seeing 
local processing operations retreating south to larger facilities in 
Dutch Harbor, Akutan, and Kodiak.
    Regionalization will prevent this migration from taking place, 
allowing St. Paul and other northern communities to survive. In 
addition, the longer runs involved between the fishing grounds and 
ports such as Dutch Harbor or Kodiak in a non-regionalized scenario 
would have implied additional fuel costs to harvesters and greater 
deadloss, to the detriment of the resource.
    More importantly, as is highlighted by the crab disaster, St. 
Paul's long-term survival is dependent on its diversification into 
other commercially valuable fish species. Even moderate volumes of BSAI 
crab valued at $1.50/pound or better go a long way to supporting a 
processor's overhead costs, allowing it to engage in lesser-value cod, 
salmon, and groundfish processing. Therefore, consolidation of crab 
processing away from the Pribilofs would severely impair St. Paul's 
capacity to diversify since this activity provides a foundation for 
cod, IFQ halibut, and CDQ halibut processing.
V. Benefits to the Resource and the Fleet
    Prior experiences in other rationalized fisheries indicate that the 
crab resource will benefit from reductions in bycatch and associated 
mortality rates. Environmental benefits will accrue as well from the 
mechanisms to reduce excess harvesting and processing capacities. With 
slower seasons in which to prosecute the fishery, fewer crab pots will 
be lost at sea and deadloss and bycatch will be reduced. A healthier, 
better managed resource is critical to St. Paul as well, since my 
community's long-term livelihood depends on the sustainable use of the 
Bering Sea fisheries that surround us.
    Moreover, within the high-risk Alaska commercial fishing industry, 
the BSAI crab fisheries had a disproportionately high level of injuries 
and deaths. From 1990-2001 a total of 25 vessels were lost resulting in 
forty deaths. Twenty-one more lives were lost as a result of being 
swept overboard, crushed by crab pots or entangled in lines. Experience 
demonstrates that to the extent that a rationalized management system 
results in a sustainable, economically viable fishery, then 
improvements in safety should follow. In a scenario where the ``race-
for-fish'' is eliminated, fatalities resulting from having to fish in 
poor weather conditions should be reduced.
VI. The Rationalization Program from the Community Perspective
    Under the proposed program, allocations of harvest shares would be 
made to harvesters, communities, and captains. Moreover, processors 
would be allocated processing shares and harvesters would be permitted 
to consolidate their efficiencies by forming cooperatives. From a 
community perspective, establishment of processor shares protects the 
considerable investments made by processing companies in remote coastal 
Alaskan communities such as St. Paul. These investments typically 
include the processing facility itself, labor housing, docks, cold 
storage, tender vessels, and other infrastructure.
    Communities for their part have spent significant resources on 
harbor improvements, docks, water/sewer systems, roads, emergency 
support services, and community administration to attract and 
accommodate processors. As a result of these types of investments, St. 
Paul is today the most indebted community in Alaska on a per capita 
basis. Furthermore, the processing of crab on-shore leaves behind 
numerous benefits to the host community and to the State through taxes, 
job, and infrastructure development. In effect, processor shares are 
necessary for regionalization to work for communities. As a largely 
processing town, St. Paul's future is linked to the processors that 
have invested or will invest there.
    Processor allocations and the corresponding 90 percent of the 
harvester allocations will be designated under the program into 
northern and southern regions, based on historic participation. 
Provisions allowing for the non-regionally designated 10 percent of 
harvester allocations to be delivered to any processor at any port 
ensure that a substantial portion of the crab resource will be subject 
to competition among ports and processors seeking to attract 
deliveries. The BSAI crab rationalization plan provides the harvesting 
sector with more flexibility, for example, than is allowed under the 
highly successful American Fisheries Act. Movement is also allowed 
within the regions to provide for some flexibility and competition for 
private enterprise.
    However, as specified in the trailing amendments, a two-year 
``cooling off period'' has been established during which processing 
shares must remain in communities where processing was historically 
conducted, so as to avoid a ``rush'' to consolidation in a few ports 
immediately after implementation of the program. In addition, 
communities and CDQ groups have been granted a right of first refusal 
on the sale of processing shares to protect crab-processing dependent 
communities.
    To accommodate periods of abundance in the crab stocks and provide 
opportunities for new processors and communities to compete, caps of 
175 million pounds for opilio and 20 million pounds for Bristol Bay red 
king crab have been established on the amount of IPQs granted for the 
two largest crab fisheries. However, if stocks continue to remain low 
(and below those caps) the IPQs will provide stability to the 
processing sector and crab dependent communities.
    Other important community friendly provisions from St. Paul's 
perspective include an increase in CDQ crab allocations from 7.5 
percent to 10 percent of the Total Allowable Catch (TAC). CDQ groups 
are required to deliver at least 25 percent of the allocation to shore 
based processors. On St. Paul, this will encourage further economic 
development by our local CDQ organization, the Central Bering Sea 
Fishermen's Association (CBSFA). As there are few significant economic 
activities that can be engaged-in in geographically isolated 
communities in the Bering Sea, these increases in allocation have the 
potential to be significant if and when the various crab stocks 
rebound.
    Moreover, either St. Paul or CBSFA will benefit from provisions 
extending community purchase rights of harvesting and processing shares 
to community and CDQ groups. These purchases would be conditioned on 
the use of these shares for the benefit of community residents. 
Finally, CDQ groups have been granted higher ownership caps than 
individuals purchasing shares in order to give such groups the 
wherewithal to consolidate their economic interest in the crab 
fisheries to the benefit of Western Alaska residents.
VII. Conclusion
    As stated earlier, the crab rationalization program is a carefully 
balanced plan that requires the unique structure approved by the NPFMC 
to protect all of the participants in this fishery. In this regard, we 
applaud the work patiently undertaken by the Council members and 
staffpersons for over four years.
    Concerning BSAI crab dependent communities, reducing or eliminating 
IPQs would prevent this framework from working and would leave 
communities unable to safeguard the processing activities that are 
critical to the economic health of remote Bering Sea communities. For 
this reason, we urge Congress to support the NPFMC's plan by enacting 
legislation as expeditiously as possible. After four years of economic 
crisis, this rationalization program is needed in order to revitalize 
severely depressed Bering Sea communities. Unlike other parts of 
Alaska, remote communities in the Aleutian Chain and particularly in 
the Pribilof Islands are highly dependent on this program for their 
economic well-being and survival.
    Mr. Chairman, and distinguished members of the Subcommittee, thank 
you for this opportunity to provide written testimony on behalf of the 
City, and the community, of St. Paul. We look forward to discussing 
these issues with you and your staffs.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                ______
                                 
           Prepared Statement of Stephen R. Taufen, Founder, 
                     Groundswell Fisheries Movement
Dear Commerce Committee Senators & Chairman McCain:

    The Groundswell Fisheries Movement is primarily concerned about 
networks of foreign owned seafood companies and their global 
affiliates, and ``abusive transfer pricing'' practices that shift 
profits offshore to avoid U.S. taxes. Crab ``rationalization'' is just 
one more scheme that will harm the U.S. Balance of Payments and allow 
more hidden tax evasion that deprives the U.S. of the ``maximum net 
national benefit'' from its fisheries resources.
    We believe that the Senate should not allow illicit drains on the 
U.S. Treasury, derived by unfettered tax evasion (hidden behind 
taxpayer nondisclosure protections that wrongly protect foreign evaders 
doing business in the USA) and by granting exemptions from antitrust 
scrutiny.
    Instrumental rationalization depends upon fair economics and a 
balance of market powers. Just as for the NASDAQ, mathematicians and 
economists know that for investment markets to fairly benefit everyone, 
resource commoditization economics must remain a ``win win'' game for 
all investors.
    Furthermore, Congress should not institute 'binding arbitration' 
processes that protect the commercial secrecy of tax evading foreign 
multinationals in ways that guarantee a losing negotiation game for 
highly invested U.S. harvesters, whose costs are fully known to these 
buying adversaries.
    Groundswell is highly concerned about further ``regulation-
negotiation style'' political intrusions promoting concentration on the 
buying side of Alaska's seafood markets while the economic problems are 
generally on the selling side. Properly addressing problems on the 
selling side (harvester grounds prices), the Department of Commerce is 
currently reviewing undertaking a $100 million vessel buyback program 
to lessen pressure on crab fisheries.
    It is a matter of too many boats currently chasing too few crabs. 
It is not rational to resolve this by forcefully collectivizing fleets 
and forever misbalancing market powers.
    The Department of Justice is currently looking into Crab 
Rationalization and has been communicating with the North Pacific 
Fisheries Management Council on this matter. The Senate should consider 
waiting until that DOJ report is available, and remember that the DOJ 
wrongly dismissed a 1997-era set of criminal indictments recommended by 
its San Francisco branch against Japanese fisheries multinationals 
operating in the U.S. on the idea that ``one species does not an 
industry make.''
    Conveniently, since that time, these foreign firms and others have 
been marching one-species-at-a-time to take over our North Pacific 
resource rights through their U.S. affiliates and subsidiaries. Those 
firms feel that they were granted immunity from prosecution under 
pollock schemes, which goes a long way to explain why they believe the 
Congress should grant further antitrust exemptions in Crab 
Rationalization schemes, too.
    Accordingly, Congress should also consider asking the GAO to 
further examine the overall structural economic problems of Alaska's 
fisheries--especially the current role of foreign financing and effects 
of practices of Abusive Transfer Pricing.
    Likewise, there is much to be learned about the economic players 
involved from a major ``restraint of trade'' trial, L. Alakayak et al 
v. BC Packers et al (Alaska superior court case #3AN-95-04676 Civil), 
which began February 3 and lands this week in the jury's hands. It 
involves dozens of U.S. seafood processors, Japanese importers and 
their American subsidiaries as defendants. Congress must wait for its 
verdict.
    Many defendants are the same firms who ask for exclusivitv in 
controlling crab-buying markets in Alaska. Before giving away national 
crab rights to them, Congress should know if they are law-abiding, and 
about their entire global resource strategy.
    There are also serious conflicts-of-interest that have plagued the 
North Pacific Fishery Management Council, which has been for many of 
the defendants' a control point for Crab Rationalization and other 
policy-making. Groundswell has repeatedly testified on the public 
record regarding the matters of abusive pricing practices, to no avail. 
This Council is not listening and incapacitated in it policy making 
(unable to protect the United States' interests) because of its 
conflicts-of-interest.
    The salmon antitrust case evidence has already revealed that the 
free market (an interplay of ``supply and demand'' and arm's length 
transactions) for much of our seafood is a conspiratorial fraud, and 
that in the case of salmon, the oligopsony of buying companies runs 
parallel offshore markets in farmed fish to lower Alaska wild fish 
prices.
    The abundant evidence of ``price verification'' phone calls among 
buyers removes all doubt about the interrelated workings of the 
oligopsony that salmon harvesters have faced. Economists have estimated 
the market losses to be over $380 million-before applying treble 
damages in this $1.4 billion case. We must not forger that an earlier 
crab antitrust case showed the price-fixing behavior exists across 
species in Alaska fisheries.
    Many of these firms were under a Federal ``consent decree'' yet 
continued to communicate on crab issues, and on pollock and salmon, 
acting unfettered in forwarding their restraints of trade.
    One need look no further for ``the grounds price problem'' than the 
pollock fisheries, where similar, exclusive rights were granted under 
the American (sic) Fisheries Act. On the Japan side of the North 
Pacific, catcher fleets receive nearly three times the price for 
deliveries as do Alaskan fleets in U.S. ports, for similar product. 
That caused an estimated shortfall of $1.9 billion over the past seven 
vears to the U.S. pollock fleet compared to what they logically should 
have received.
    Granting similar oligopsony power for crab will worsen the negative 
economic shock on U.S. fleets and our economy, only benefiting the 
Japanese financiers and processors. They repatriate about a billion 
dollars annually through abusive transfer pricing (ATP) techniques to 
foreign shores, harming the U.S. economy directly and through 
multiplier effects of the lost dollars.
    This is an alternative essence of management from that promised by 
the original Magnuson Fisheries Act. where harvesters and processors 
would together ``Americanize'' our Alaskan fisheries and pay taxes. 
Otherwise, one would assume that a national fish price would be the 
logical means to protect U.S. interests in our fisheries.
    Congress should not grant exclusive rights to a few corporations on 
the crab buying side because it also affects their price-making powers 
over other species. too. They are already promoting a non-competitive 
``salmon rationalization'' scheme that promises to take more rights 
away from small businesses and forever eliminate large competitors from 
new entry into the market. And they are talking of similar powers over 
other species. There is no end to their greed.
    It is not rational to stifle competition and innovation. especially 
as our naturally healthy seafood supplies become increasingly valuable. 
To ensure that these few buyers are granted exclusive national resource 
buying rights, in perpetuity, from captive fleets-especially in light 
of their alleged conduct in other seafood markets--is unimaginable.
    Thank you for your considerations regarding today's Commerce 
committee meeting.
                                         Stephen R. Taufen,
                                                           Founder,
                                        Groundswell Fisheries Movement.
Cc: Senator Maria Cantwell
Senator Olympia Snowe
                                 ______
                                 
                    Prepared Statement of Mimi Tolva
    Dear Senate Commerce Committee,

    The Crab Rationalization program was originally started to allow 
Bering Sea crab fishermen to harvest the resource in a safer, 
economically sound manner while drastically reducing mortality 
ofbycatch and harvested product. By allocating a certain allowable 
catch to each harvester, (an Individual Fishing Quota, or IFQ), the 
derby-style fishery each winter would be eliminated. Fishermen could 
choose to fish in better weather, reducing the accidents and injuries 
that have plagued the fishery, currently ranked as the most dangerous 
occupation in the United States. With more time and better weather, the 
quality of the product would be enhanced, mortality would be reduced, 
and bycatch levels would drop dramatically.
    The North Pacific Fishery Management Council (NPFMC) was appointed 
to develop a plan to implement these ideas for the long-term health of 
the fishery. Much time and effort and many years have gone by, and a 
pretty good plan has emerged.
    However, one very controversial issue threatens to undermine the 
entire plan. A Processor Quota Shares (PQS) proposal has been added to 
offer protection to existing processors already in the crab market. 
Under the PQS proposal, harvester shares would be designated ``A-
shares'' and ``B-shares''. Harvesters would be forced to sell all of 
their ``A-shares'' to a specified processor. The remaining ``B-shares'' 
are intended to give harvesters negotiating power, provide a market 
price indicator at the beginning of each season, and allow harvesters 
to sell that portion to any buyer they wished.
    In June of 2002, the NPFMC voted to accept this proposal at a ratio 
of 90 percent A shares and 10 percent B-shares. (You read that right)
    With a 90 percent A-share ratio, processors will not need to 
competitively bid on product. Fishermen will not be able to negotiate a 
fair price. Almost total control by a few canneries will squelch any 
new developing crab markets and negatively affect price negotiations 
for the entire crab industry. This system would be anti-competitive and 
would severely curtail or eliminate opportunities for small processing 
businesses and independent fishermen. It goes completely against the 
free market system and would require a change in the current anti-trust 
laws to even be legal.
    Crab Rationalization is not complete. The Processor Quota Share 
component is not necessary to implement the rest of the plan. The 
processor quota component could be pulled from the overall plan if 
enough people weigh in on the issue. It could also be modified to a 
more fair and equitable split of 50 percent each of ``A'' and ``B'' 
shares.
    Please do not allow this very biased proposal to go through as it 
stands now, with the 90:10 ratio.
                                                 Mimi Tolva
                                 ______
                                 
 Prepared Statement of Peter Tyack, Senior Scientist and Walter A. and 
 Hope Noyes Smith Chair, Biology Department, Woods Hole Oceanographic 
                              Institution
    Madame Chair and distinguished members of the Committee, my name is 
Peter L. Tyack. I am a Senior Scientist and Walter A. and Hope Noyes 
Smith Chair in the Biology Department of the Woods Hole Oceanographic 
Institution in Woods Hole Massachusetts. Thank you for the opportunity 
to provide my views on the Marine Mammal Protection Act (MMPA) 
reauthorization as it relates to scientific research.
    I have been fascinated since I was a child in the social behavior 
of marine mammals and how they use sound to communicate and explore 
their environment. I have spent much of the last 25 years following 
these animals at sea, listening to their sounds and watching their 
behavior. As I started my career in basic research it never occurred to 
me that chasing my personal interests would ever become central to such 
an important policy issue. In my testimony I address issues concerning 
regulation of harassment takes under the MMPA, especially those for 
scientific research and incidental takes resulting from exposure to 
manmade noise.
Introduction
    Three committees of the National Research Council (NRC) of the 
National Academy of Sciences have reviewed issues concerning low 
frequency sound and marine mammals. Each of these NRC committees has 
published a report:

        National Research Council (NRC). 1994. Low-Frequency Sound and 
        Marine Mammals: Current Knowledge and Research Needs.National 
        Academy Press, Washington, D.C.

        National Research Council (NRC). 2000. Marine Mammals and Low-
        Frequency Sound: Progress Since 1994. National Academy Press, 
        Washington, D.C.

        National Research Council (NRC). 2003. Ocean Noise and Marine 
        Mammals. National Academy Press, Washington, D.C.

    I was a member of the first two committees and reviewed for the NRC 
the report produced by the third committee. I would like to take this 
opportunity not only to give my personal views, but to reiterate some 
of the repeated suggestions of the NRC committees for changes to the 
MMPA.
Regulations to protect marine mammals need to be drawn to focus scarce 
        regulatory resources on situations where ``takes'' are most 
        likely to risk adverse impacts to marine mammals.
    One of the most important suggestions of the NRC reports on marine 
mammals and ocean noise is to regulate harassment in the same way for 
all activities, allocating regulatory effort where harassment takes are 
most likely to risk adverse impacts to marine mammals. Currently we are 
far from this goal. For commercial fisheries, the MMPA allows 
incidental taking of endangered marine mammals as long as there is 
negligible impact from incidental mortality and serious injury. NMFS 
interprets this as an exemption for commercial fisheries from the 
prohibition of harassment. Harassment takes are ignored for effects of 
propulsion noise from vessels, and a NMFS enforcement officer reported 
to the Marine Mammal Commission last year that his region will not 
prosecute cases of level B harassment for companies that take tourists 
to swim with wild dolphins. This growing industry based upon 
intentional harassment thus can count on freedom from prosecution of 
its violations of the MMPA. On the other hand, marine mammal biologists 
are required to wait half a year or more for permits covering the 
slightest possibility that their research may disrupt the behavior of 
marine mammals. Once they receive a permit, the permitting process 
itself may trigger litigation that can block urgently needed 
conservation research. Many other users of sound in the sea, from the 
Navy to geophysical contractors to academic oceanographers, find 
themselves in a no man's land, where the appropriate regulatory process 
for harassment takes is obscure. So far the solutions of the regulatory 
agencies have fared poorly in court.
    Congress speaks through the MMPA to give commercial fisheries a 
special exemption with much more scope to harm marine mammals than 
other activities such as conservation research, naval exercises, or oil 
exploration. This is in effect a statement of national priorities, 
ranking activities for which the United States is most willing to risk 
the well being of marine mammals. I would ask all members of this 
Committee to stop and think whether commercial fishing should 
automatically rank as a higher national priority than scientific 
research, the search for domestic sources of petroleum, or the ability 
to protect ourselves from enemy submarines.
Problems with permitting scientific research on marine mammals.
    As a biologist personally concerned with protecting marine life, I 
believe that the double standards in the MMPA have led to a 
counterproductive situation for permitting scientific research designed 
to protect marine mammals. The permitting process was created to allow 
an exemption for scientific research from the MMPA prohibition on 
taking marine mammals. It is ironic that, far from exempting research 
from an effective prohibition, the permitting process restricts for 
researchers, activities that are unregulated for other users. As early 
as 1985, NMFS stated in its Annual Report on the MMPA that ``one of the 
most extensive administrative programs in NMFS is the permit system 
that authorizes the taking of marine mammals for scientific research 
and public display.'' From my perspective, this is backwards. Scarce 
regulatory resources should only be devoted to minor harassment takes 
for research after the much more significant takes of activities that 
do not benefit marine mammals are controlled by regulations that are 
effectively enforced. As I pointed out in a 1989 article, a scientist 
playing back the sounds of a tanker to monitor responses of whales 
requires a permit to cover any ``takes'' for animals whose behavior has 
changed, while the thousands of tankers entering U.S. ports are 
unregulated. This is particularly ironic since the first warning about 
effects of noise on marine mammals concerned the risk that increased 
shipping noise might significantly reduce the range over which whales 
could communicate, a warning issued in 1972, the year the MMPA was 
enacted. Not only can they ignore the likely disruption of behavior 
caused by noise, but even the lethal ``impacts'' caused when a vessel 
collides with a whale are completely unregulated. Nothing we have 
learned in the following decades has reduced scientific concern, yet in 
spite of three decades of warnings, NMFS has not taken the first step 
to protect whales from the risks posed by vessel traffic.
    It has been recognized for over a decade that the regulatory focus 
on research activities is interfering with research needed to obtain 
critical information to evaluate risk factors for noise exposure in the 
sea. As the 1994 National Academy report on Low-frequency Sound and 
Marine Mammals put it:

        Scientists who propose to conduct research directed toward 
        marine mammals are aware of the permitting requirements of the 
        MMPA and of the Endangered Species Act (ESA) and the associated 
        regulations. Most of their research can be conducted under the 
        scientific permitting process. They routinely apply for and 
        obtain such scientific research permits. However. the lengthy 
        and unpredictable duration of this process can create serious 
        difficulties for research. . . . In addition to permit delays, 
        certain types of research that are considered ``invasive'' or 
        ``controversial'' either are not allowed under the current 
        permitting process or may require an Environmental Assessment 
        or even an Environmental Impact Statement under the National 
        Environmental Protection Act (NEPA). Such a regulatory burden 
        actively discourages researchers from pursuing those lines of 
        study. (p 29)

        The committee strongly agrees with the objective of marine 
        mammal conservation, but it believes that the present emphasis 
        on regulation of research is unnecessarily restrictive. Not 
        only is research hampered, but the process of training and 
        employing scientists with suitable skills is impeded when 
        research projects cannot go forward. Experienced researchers 
        are the ultimate source for expanding our knowledge of marine 
        mammals. A policy that interferes with the development of this 
        resource appears to be self-defeating. (p 30)

    Things were bad in 1994, but they have recently become much worse. 
The delays for permitting have become much longer, over 21 months in 
some cases. In addition, the judge in a recent court case regarding the 
permitting process ruled that all acoustic research on marine mammals 
is controversial. This led him to rule that a permit for acoustic 
research requires an accompanying Environmental Assessment or 
Environmental Impact Statement. This decision means that all of the 
research that can help resolve the marine mammal issues raised by the 
National Academy reports is subject to much more regulatory burden than 
before. Unless Congress changes the regulatory process or provides new 
funds to the NMFS Office of Protected Resources to conduct the analyses 
required under NEPA, the permitting process will not only discourage 
research, but may make it almost impossible to conduct some research 
that is urgently needed for conservation biology and that has 
negligible effects.
    Let me illustrate with an example from the research of Scott Kraus, 
a biologist at the New England Aquarium who has studied North Atlantic 
right whales for decades under a series of research permits from NMFS. 
In August of 2001, he applied for a new permit, as his old one was set 
to expire 31 December 2001. In November 2001, after the end of the 
public comment period, the Permit Division received a letter from a 
self styled ``environmental warrior'' claiming, incorrectly in my 
belief, that the research would harm right whales. In early December 
2001, operating under his old permit, Kraus started aerial surveys to 
keep ships from hitting whales, and he was told the biological opinion 
for the new permit was almost done. Kraus never received his permit by 
the time his old one expired, and on 24 January 2002, NMFS informed him 
that they would defer decisions on a permit until an Environmental 
Assessment was conducted following NEPA rules. This was a complete 
surprise for Kraus, who had to cancel a research program designed to 
develop whale-safe lines for fishing gear. During 2002, eight right 
whales were known to get entangled in fishing gear, and six were 
thought to have died. It is now May 2003. Kraus had to cancel another 
attempt to repeat the whale safe fishing line project in 2003, and he 
still has no prediction from the NMFS Permit Division as to when his 
permit will be issued. There may be a new determination of a need under 
NEPA for an Environmental Impact Statement for his permit, not just an 
Environmental Assessment.
    Let me recap. The survival of right whales in the North Atlantic is 
threatened because so many are killed from entanglement in fishing gear 
and from vessel collision. Unlike any airline, as a scientist, Kraus 
needs a permit to fly over right whales, in case the whales might hear 
the plane and somehow be disturbed. Delays in permitting endanger his 
ability to fly surveys designed to warn ships of the presence of 
whales. The ships that regularly kill whales are subject to no 
regulation, and travel wherever they please at any speed through 
critical habitats of the most endangered whale in U.S. waters. In spite 
of some fisheries regulations, whales are dying in fishing gear at 
alarming rates. Fishermen can continue to place lethal fishing gear 
where it can kill whales, but Kraus cannot test new ideas for whale 
safe fishing gear, because the environmental paperwork for his research 
is not sufficient, even after 21 months of delay. Is there something 
wrong with this picture?
    I have also personally had experience with the mad world in which 
Federal actions block the research needed to protect marine mammals 
from poorly regulated impacts of human activities. We cannot protect 
marine life from intense underwater noises until we get better at 
detecting when a marine mammal or sea turtle is in the danger zone. 
Recently, there have been promising developments for whalefinding 
sonars. These are high frequency sonars that work like fish finders to 
detect echoes from animals close enough to be harmed by unintentional 
exposure to intense sounds. When these whalefinding sonars reached the 
point in their design process where they were ready to be tested at 
sea, I submitted an application to amend my research permit to test how 
well a whalefinding sonar could detect migrating gray whales. We know 
how migrating gray whales respond to noise, and we expected little if 
any behavioral response to the whalefinding sonar. The study was 
designed with very sensitive methods to detect whether whales avoided 
the sound source by a hundred meters or so, and we requested permission 
to ``take'' the whales by harassment.
    The Permit Division of NMFS issued the amendment to my permit in a 
timely fashion, but only after deciding that the environmental 
assessment it had conducted for my original permit sufficed, i.e., that 
the amendment did not require a new environmental assessment. The 
wording allowing ``takes'' of gray whales alarmed an animal rights 
advocate in Australia, who gathered a few small fringe groups to 
request an injunction against the research the day before the study was 
to begin. The study was delayed by a temporary restraining order and 
the entire field team and one of the research vessels in our national 
oceanographic fleet were tied up for most of the month planned for the 
research. In the end, the judge ruled that the amendment to my permit 
was invalid because the NMFS Permit Division had not prepared a new 
Environmental Assessment under NEPA not just for my original permit, 
but for each amendment to the permit. In the end, hundreds of thousands 
of taxpayer dollars were wasted and we are a year behind in developing 
more effective methods for monitoring marine mammals.
    The NMFS Permit Division of the Office of Protected Resources has 
just nine personnel and is increasingly inundated. In 2001 they advised 
scientists applying for a permit to expect processing times of at least 
90 days for most marine mammal permits with an additional 135 days for 
permits affecting endangered species. However, some permits have been 
subject to greater delays. NMFS currently advises scientists to allow 
at least 6 months for processing, longer for research involving 
endangered species. In the cases of my and Kraus' permits, it appears 
that last minute complaints by a fringe extremist could trigger a 
``public controversy'' condition requiring exhaustive environmental 
assessments. Given these precedents, I consider that only permits 
backed by environmental analyses acceptable under NEPA are solid enough 
to protect research from nuisance lawsuits. My understanding is that it 
typically takes several months and $50,000-$100,000 to produce an 
Environmental Assessment, and $500,000-$1,000,000 and 1-2 years to 
produce an Environmental Impact Statement. Due to the increasing number 
of scientific research permits, and the renewed emphasis on NEPA 
analysis, some permit applications may be delayed much beyond 6 months, 
with dramatic increases in the burden on the Permit Division and on the 
applicants.
    Congress has in the past few years taken strong steps to fund 
research to help resolve urgent conservation problems such as declining 
populations of Steller sea lions, or the threat of extinction for the 
North Atlantic right whale, and I applaud these actions. Yet both of 
these research efforts were delayed by more than a year because of 
delays in the permitting process for scientific research. Recent 
litigation has highlighted the importance of adequate NEPA analysis in 
order to issue legally defensible permits. If Congress wants to support 
critically needed conservation research, it is not enough to fund the 
science. Congress will also have to mandate significant increases in 
funding to the Permit Division.
    The time required to obtain a research permit has swelled from 3 
months to 6 months to 21 months and counting. A very important change 
suggested by the NRC would be for Congress to specify a fixed maximum 
time for NMFS to process permits and authorizations. The 1994 NRC 
report suggested 10 days for initial processing, 30 days for the public 
comment period, and 10 days to issue or deny the permit. The Permit 
Division used to use a more liberal 30 days for initial review, 30 days 
for the public comment period and a concurrent 45 days for review by 
the Marine Mammal Commission, and 30 days to issue or deny the permit. 
This totals to 115 days. Additional limits would need to be set for 
preparation of environmental analyses under NEPA and conducting a 
public hearing. Yet delays of more than 3-4 months pose a serious 
burden to research. The only way for the permitting process to proceed 
in a timely fashion will be for the Permit Division to conduct 
programmatic environmental analyses for most typical research 
activities well before applicants request a permit. This additional 
burden must be achieved while the ongoing flow of permit applications 
is expedited. If NMFS is to issue timely and legally defensible 
permits, the permit division and other supporting divisions in the 
Office of Protected Resources will need additional program staff, with 
specialists in many areas such as environmental law, NEPA, marine 
mammal population biology, acoustics, animal health and welfare. 
Congress will also have to mandate significant increases in funding for 
the Office of Protected Resources to hire contract personnel or to 
outsource the analyses required under NEPA and the ESA.
    Ironically, it appears that the more serious the conservation 
problem addressed by a research project, the more likely the project is 
to be attacked by extremists and delayed or cancelled. One side effect 
of the permit process is that it personalizes a project in the name of 
a scientist. When a ship hits and kills a whale, when dolphins die in 
fishing nets, when a sea turtle is killed in an underwater explosion, 
the impact is no-fault and impersonal. But when a scientist applies 
personally for a permit to help solve these problems, he or she is 
front and center in a very public process. This makes the scientist an 
all too easy target for uninformed emotional attacks against the bigger 
problem. The ``Tyack permit'' is the subject of misinformation in 
websites from Australia to the UK.
    Some animal rights groups have specialized in attacking research; 
it has become all too easy for less scrupulous groups to move from 
attacking suffering and pain induced by experiments in captive animals, 
to raise funds by misrepresenting research directed at helping to 
protect wild animals from serious threats. Activists have actually 
tried to sabotage some conservation biology projects. It may reduce the 
attractiveness of these cynical ad hominem attacks if research 
institutions or consortia were to apply for general authorizations for 
different kinds of research, much as other activities that may ``take'' 
marine mammals are authorized.\1\
---------------------------------------------------------------------------
    \1\ A problem with the language of the MMPA involves the use of the 
word ``take'' to cover the potential for an activity to cause slight 
and temporary changes in behavior. In this age of the internet, it is 
quite easy for people all over the world to hear of a permit allowing 
thousands of ``takes'' of marine mammals. It is difficult for people 
from many countries to find it credible that the U.S. would regulate 
the potential for any change in behavior, so it can easily appear that 
this permit allows ``taking'' in the normal English sense, which sounds 
quite drastic. I urge the language of the permitting process be changed 
to use ``take'' for lethal take, ``injury'' for level A harassment, and 
``disrupt'' or ``disruption'' for level B harassment.
---------------------------------------------------------------------------
    The failure of NMFS to prevail in recent challenges to their 
attempts to exempt the permitting process from further environmental 
review under NEPA suggests the need for Environmental Assessments or 
Environmental Impact Statements for each activity that may be permitted 
or authorized. I cannot imagine that even a newly invigorated Permit 
Office could perform these analyses for every project, although there 
is considerable overlap between the permitting process under MMPA and 
the environmental analyses under NEPA. Given how similar the two 
processes are, perhaps Congress could specify the categorical exclusion 
of these permits under the MMPA. Otherwise, the MMPA or regulations 
might specify programmatic environmental analyses of specific research 
procedures, such as aerial or vessel survey, tagging, biopsy sampling, 
sound playback, etc. I must emphasize that many of the most serious 
problems with marine mammal research permits have not been MMPA 
problems as much as NEPA problems. As I mentioned above, the Office of 
Protected Resources will require a considerable injection of funds and 
highly skilled personnel to be able to oversee the production of the 
required NEPA documentation.
Suggested unified procedure for authorizing any takes under the MMPA
    As my testimony has gotten deeper into the problems with the 
current regulatory situation, the discussion has gotten further and 
further from the basic goal of equal treatment of all seagoing 
activities under the MMPA. I believe that it would be much better if 
Congress could correct the deficiencies in the MMPA so that one or two 
simple regulatory processes for authorizing takes could be applied 
evenly to all seafaring activities. This should be designed to target 
situations of potential adverse impacts while minimizing the regulatory 
burden for activities with negligible effect. If a streamlined and more 
inclusive authorization process were accompanied by better monitoring 
and reporting requirements, then we would be in a much better position 
to identify and devote scarce regulatory resources to situations where 
marine mammals are most at risk from human activities.
    Please allow me to sketch an outline of such an approach based upon 
suggestions from the 1994 and 2000 NRC reports on Marine Mammals and 
Low-frequency Sound. The 2000 report reviews a suggestion made in 1994 
regarding amendments to the MMPA that were adopted in 1994:

        The NRC (1994) suggested that the regulations governing the 
        taking of marine mammals by fishing activities should be 
        broadened to include other user groups that might take marine 
        mammals. This concept was incorporated into the 1994 MMPA 
        amendments. The MMPA now requires calculation for each species 
        of a conservative number of animals that might be taken by 
        humans from marine mammal stocks, while ``allowing that stock 
        to reach or maintain optimum sustainable population,'' called 
        the potential biological removal (PBR) level (MMPA, sec 
        1362[t]; see Appendix C). NMFS is required to tally all human-
        induced mortality for its stock assessments (MMPA Sec. 1386[a]) 
        and uses this number to estimate PBR. (p. 66)

    Here is the concept for regulating takes advocated by the 1994 
National Academy Report on Low-frequency sound and marine mammals:

        The proposed regime is designed to redirect regulation to focus 
        on human activities with the largest impact on marine mammal 
        populations, scaling the extent of regulation to the risk the 
        activity poses to populations. The proposed regime was 
        initially developed primarily for commercial fishing, but it 
        was designed to allow the inclusion of other ``user groups'' 
        for PBR. If such a mechanism is adopted in the revised 
        legislation, this committee recommends that Congress and NMFS 
        consider it for regulating most ``takes'' of marine mammals by 
        research as well. Since the objective of the law is to protect 
        marine mammals, it is difficult to understand applying 
        different, and less stringent, rules to activities that kill 
        marine mammals than to activities that are known to benefit 
        them or to have negligible effects on them. For any population 
        in which harassment is considered to be a serious risk to 
        populations, taking by harassment may be included in these 
        regulations. Where taking by fishing is considered to have 
        negligible impact compared to other activities, regulatory 
        attention should focus on these more significant risks. (p. 35)

    Now we have almost a decade of experience with this PBR regime. The 
incidental take provisions of the MMPA for commercial fisheries require 
determination of whether the incidental mortality and serious injury 
from commercial fisheries will or will not have a negligible impact on 
marine mammal stocks. Fisheries are categorized as to whether they have 
frequent, occasional, or remote likelihood of causing mortality or 
serious injury, and each fishery receives an authorization for 
incidental takes subject to conditions. As long as a fisher registers 
with this authorization process, complies with the conditions, and 
reports any takes, s/he is exempt from the prohibition against taking.
    This regime for regulating fisheries takes that may kill animals 
has been quite successful in highlighting situations where populations 
are threatened by fishing. Fishers in low impact fisheries have a 
simple and streamlined regulatory process, and regulation ramps up 
corresponding to the threat, up to closing down fisheries that threaten 
the survival of marine mammal populations. However, this regime ignores 
effects of harassment, and is not systematically organized to include 
takes such as vessel collision, explosions, etc.
    The MMPA has a complex tangle of different authorizations for 
taking marine mammals. Each kind of take authorization has had 
successes and failures. The basic goals of the Act clearly have not 
been well served by such different standards for regulating takes for 
different activities. As the NRC said in 1994, ``it is difficult to 
understand applying different, and less stringent, rules to activities 
that kill marine mammals than to activities that are known to benefit 
them or to have negligible effects on them.'' The only case that I 
think justifies a lower level of regulation involves takes for 
scientific research that enhances the survival or recovery of species 
or stocks. After three decades of experience, I believe that the Act 
would be much more likely to meet its goals if it condensed all 
incidental take authorizations to one process that incorporates the 
best features of PBR and the best features of the other mechanisms.
    I suggest that different user groups that may take marine mammals 
could either voluntarily form together or be designated by NMFS. The 
list of user groups must include all activities that may take marine 
mammals. Such a list would have to include all vessels large enough to 
be registered in the U.S. that operate in waters inhabited by marine 
mammals. Either the user groups or NMFS should be required to prepare a 
Programmatic Environmental Impact Statement, an Environmental 
Assessment, or some simpler form of analysis depending upon NEPA 
criteria, including whether takes, including harassment takes, were 
anticipated to be frequent, occasional, or occur with a remote 
likelihood. After this stage, some activities might be judged so low 
risk that they would just need to specify when the user registers the 
vessel, an obligation to report all takes. For activities judged at 
higher risk for takes, each vessel or member of the user group could 
apply for incidental take authorization similar to that used now by 
commercial fisheries, but including takes by harassment. Before 
embarking to sea, each user in a high impact activity could be required 
to notify NMFS where they are going and what they plan to do. All users 
should be required to report any takes, including level A or B 
harassment takes, with strict requirements for prompt and complete 
reporting. For activities that might cause harassment takes beyond the 
range of detection of the vessel, a monitoring program could be 
established to study animals at different ranges from the activity in 
order to better estimate the number of harassment takes.
    My understanding of the PBR process is that it only counts lethal 
takes or injury so serious that it poses a risk of death. For the 
purposes of incorporating harassment takes into this regime, NMFS could 
start by just requiring complete and accurate reporting of all 
potential takes, including any disruption of behavior. The inclusion of 
any disruption of behavior should not be interpreted to signify that 
all of these constitute ``takes'' under the MMPA. Rather, accurate 
reporting of behavioral disruption could be used to help identify what 
exposures pose a risk of adverse impact. Ultimately, the significance 
to the population of any take is the effect on the demography of the 
population, the ability of the population to grow or remain a healthy 
size. I strongly encourage Congress to adopt wording requesting that 
NMFS attempt to account for harassment takes conservatively in terms of 
just the same demographic effects as lethal takes. This is currently a 
challenging scientific problem, but the correct wording would stimulate 
the appropriate science, while focusing attention on the critical issue 
of keeping marine mammal populations healthy. As I discuss more fully 
in the last section of my testimony, the best way to do this is to 
define harassment in terms of biological significance of the take.
    Ultimately a demographic accounting of harassment takes would 
require population modeling that relates the dosage of exposure to 
harassment to population parameters. There has been great progress in 
this kind of population modeling in the past decade, and the PBR 
process has forced NMFS to sharpen its stock assessments for marine 
mammals, including summarizing all known lethal takes. However, right 
now the critical analyses could not be performed for harassment takes 
because we know so little about exposures of marine mammals to 
harassment. A critical aspect of the PBR regime is that it exempts 
registered fishers from the prohibition on taking as long as they 
accurately and fully report any takes. A similar clause for all vessels 
that may be involved in harassment would ultimately give scientists the 
data needed to regulate harassment in terms of biological significance 
of impacts to populations. As in the terms of permits for scientific 
research, the user should report any observed disruption of behavior, 
but the regulations should be clear that not all of these will 
ultimately be considered ``takes'' by harassment.
    A timely reporting requirement may also make it easier to prosecute 
cases of intentional harassment, as failure to report would violate the 
terms of the exemption.
    This kind of program would allow NMFS to identify situations where

   A stock was at risk from a particularly high number of 
        takes.

   An area or activity caused a high number of takes for a 
        variety of species.

   There were particular hot spots of takes.

   The cumulative takes pose a risk to the population

    Where the sum of takes, lethal, injury, or harassment, pose a risk 
to a population, this regime should require a take reduction team to 
reduce the problem. This kind of regulatory regime would reduce the 
burden on activities that pose little risk, while focusing attention on 
species, areas, or activities that pose the greatest risk to the most 
endangered populations.
    Some may be concerned that the regulatory process I sketch out 
would lead to reduced protection. It would certainly streamline the 
regulatory process and make it more predictable for most activities, 
but I agree with the National Academy (2000) report on Marine Mammals 
and Low-frequency Noise that such a change would, if done correctly, 
increase protection from the status quo:

        The Committee also suggests that activities that are currently 
        unregulated, but which are major sources of sound in the ocean 
        (e.g., commercial shipping) be brought into the regulatory 
        framework of the MMPA. Such a change should increase protection 
        of marine mammals by providing a comprehensive regulatory 
        regime for acoustic impacts on marine mammals, eliminating what 
        amounts to an exemption on regulation of commercial sound 
        producers and the current and historic focus on marine mammal 
        science, oceanography and Navy activities. (p. 72)

    This change would be all the more effective if it was not limited 
to acoustic impacts, but included all sources of takes including 
harassment into an integrated workable regulatory structure. The 
current MMPA has unbalanced criteria for authorization, allowing some 
fisheries to kill animals with no requirement beyond reporting, while 
having no procedure available to other activities to authorize more 
than a small number of insignificant harassment takes. This does not 
meet the conservation goals of the Act.
    During the past several years, there have been efforts to address 
the very real problems with the MMPA by developing new exemptions for 
specific activities such as military readiness. I do not think that 
complicating the Act by creating yet another special exemption is the 
best answer. I strongly urge Congress to respond to the problems 
highlighted by DOD by trying to fix the underlying flaws in the 
regulatory procedures of the MMPA before granting a special exemption 
that does nothing for marine mammal conservation and leaves many other 
producers of sound in the sea with no way to meet the regulatory 
requirements. If done correctly, the regulations might be able to 
include all activities in a streamlined regulatory approach that 
focuses attention on those situations that pose the most risk to marine 
mammal populations. Ideally this should include a common mechanism for 
dealing with harassment takes in fisheries as well as other activities.
Suggested rewording of incidental take authorization for effects of 
        noise.
    While I believe there is an opportunity to improve the MMPA by 
reducing the maze of take authorizations, this may be politically too 
difficult to achieve this year. If Congress cannot achieve a common 
mechanism for authorizing takes, I would advocate simple changes to the 
existing incidental take authorizations in sections 101.a.5.A and 
101.a.5.D that I believe would make them appropriate for regulating 
acoustic impacts. When the MMPA was first written, it emphasized takes 
in commercial fisheries. Certainly no one at that time was thinking 
about whether the regulatory process would work for issues such as 
incidental harassment takes resulting from unintentional exposure to 
noise. Nor was there much experience with issues under NEPA of whether 
the impacts of entire activities needed to be evaluated together, or 
whether it was better to authorize each time a ``take'' was possible.
    Since the MMPA was passed, many studies have demonstrated that 
marine mammals respond to ships, dredging, icebreaking and 
construction, and sound sources such as pingers, air guns, and sonars. 
Most of these sound sources are currently unregulated simply because 
NMFS chooses not to enforce the prohibition against taking marine 
mammals by harassment. I doubt that many of these activities could find 
a regulatory procedure under the current wording of the Marine Mammal 
Protection Act that would allow activities with negligible impact while 
controlling those that might have an adverse impact. As has been 
pointed out by each of the three National Academy reports on this 
topic, the dominant source of manmade noise in the ocean is the 
propulsion sounds from ships. Yet this has not been regulated by NMFS. 
As the National Academy 2000 report Marine Mammals and Low-frequency 
Sound put it:

        If the current interpretation of the law for level B harassment 
        (detectable changes in behavior) were applied to shipping as 
        strenuously as it is applied to scientific and naval 
        activities. the result would be crippling regulation of nearly 
        every motorized vessel operating in U.S. waters. (p. 69)

    One response to this conundrum is for each activity to seek special 
exemptions if their activities become targets of regulation. However, 
the National Academy 1994 report Low-Frequency Sound and Marine Mammals 
discouraged that approach:

        ``However, it seems unreasonable that an exemption from the 
        ``take'' prohibitions of the MMPA should be available for some 
        human activities, including some that kill marine mammals, 
        without being available for other human activities whose goal 
        may include the acquisition of information of potential value 
        for the conservation of marine mammals.'' (p 38)

    The first two reports of the National Academy of Sciences on marine 
mammals and low frequency sound specifically suggest a broader solution 
to this problem: removing the requirements for small numbers of takes, 
while retaining a criterion of negligible impact:

        Reword the incidental take authorization to delete references 
        to ``small'' numbers of marine mammals, provided the effects 
        are negligible. (p. 39)

        Low frequency Sound and Marine Mammals (1994)

        In addition to making the suggested change m the level B 
        harassment definition, it would be desirable to remove the 
        phrase ``of small number'' from MMPA section 137l(a)(5)(D)(i). 
        If such a change is not made, it is conceivable under the 
        current MMPA language there would be two tests for determining 
        takes by harassment, small numbers first, and if that test were 
        met, negligible impact from that take of small numbers. The 
        suggested change would prevent the denial of research permits 
        that might insignificantly harass large numbers of animals and 
        would leave the ``negligible impact'' test intact. (p. 71)

        Marine Mammals and Low-frequency Sound (2000)

    My understanding of the judge's ruling in the legal challenge to 
operation of the SURTASS LFA sonar, NRDC vs Evans, is that the judge 
ruled against the interpretation followed by NMFS that ``small'' can be 
interpreted in terms of population size, and exactly following the 
fears of the National Academy panel, ruled that the current MMPA 
language does require both negligible impact and small numbers, where 
the meaning of the word small could not be interpreted in terms of size 
and status of populations.
    The restriction in the MMPA authorizations for incidental takes to 
``a specified geographical region'' may also rule out this 
authorization process for most impacts of noise. If ``specified 
geographical region'' is taken to mean areas small enough to involve 
the same assemblage of species and oceanographic conditions, the 
requirements of the incidental take authorizations would be 
incompatible with the NEPA requirement to consider all possible uses of 
a system. Many sound sources are on a large number of vessels, each of 
which may cross the ocean in weeks. Many marine mammals also migrate 
thousands of miles through very different habitats. This makes it 
difficult to specify a geographical region for a whale that may be in 
the Caribbean one day, and off New England a few weeks later. I do not 
think that the wording specifying a geographical region is easily 
reconciled with the potential numbers and movements of both the animals 
and the noise sources.
    The propulsion sounds of ships elevate the ambient noise over the 
world's oceans, and this global impact is likely to reduce the ability 
of whales to detect calls at a distance. I see no process by which such 
takes could be authorized under the current wording of the MMPA. Depth 
sounders and fish finders have sounds that do not carry as far, but 
they are used by tens of thousands of vessels. These sounds have the 
potential to disturb marine mammals, and therefore may take animals by 
harassment, but did Congress intend to require authorization for each 
user? How far could a vessel go before its takes move out of the 
``specified geographical region?'' Oceanographic research, much of 
which uses motorized vessels and uses sound as a tool to explore the 
ocean, also has a global scope, and may be difficult if not impossible 
to authorize under the current regulatory procedures.
    The House of Representatives has proposed changes in wording of the 
sections of the MMPA for taking and importing marine mammals in HR 
1835. My understanding is that the primary effect of these changes is 
to remove the conditions of small numbers and specified geographical 
region for the incidental take provisions. I believe that as long as a 
sharp focus is maintained on the issue of negligible impact, these 
changes would make the process work for effects of noise on marine 
mammals, while still protecting marine mammal populations from adverse 
impacts. Since millions of sources such as depth sounders and the 
propulsion noises of every motorized vessel could cause harassment 
takes under the current definition, I believe that it will be essential 
for the process to authorize general activities, rather than individual 
vessels or sound sources. This is incompatible with restricting the 
authorization to ``small numbers,'' if this is taken literally to mean 
just a few individuals, or ``specified geographical region,'' if this 
is taken to mean small areas.
Definition of harassment
    Until the last paragraph, I have kept my testimony quite general, 
but I have some specific comments on the definition of harassment in 
the current MMPA and the changes suggested by the Administration and 
House of Representatives in HR 1835.
    The current definition of level B harassment in the MMPA is:

        ``has the potential to disturb a marine mammal or marine mammal 
        stock in the wild by causing disruption of behavioral patterns, 
        including, but not limited to, migration, breathing, nursing, 
        breeding, feeding, or sheltering.''

    The 1994 NRC report on Low Frequency Sound and Marine Mammals 
succinctly reviewed the problem of how harassment has been interpreted 
under the MMPA:

        Logically, the term harassment would refer to a human action 
        that causes an adverse effect on the well being of an 
        individual animal or (potentially) a population of animals. 
        However, ``the term `harass' has been interpreted through 
        practice to include any action that results in an observable 
        change in the behavior of a marine mammal. . . .'' (Swartz and 
        Hofman, 1991). (p. 27)

    The 1994 NRC report goes on to note that many minor and short-term 
behavioral responses of marine mammals to manmade stimuli are simply 
part of their normal behavioral repertoire. There is clearly a need for 
some standard of negligible effect, below which a change in behavior is 
not considered harassment.
    The change in the definition of level B harassment proposed in HR 
1835 is:

        ``disturbs or is likely to disturb a marine mammal or marine 
        mammal stock in the wild by causing disruption of natural 
        behavior patterns, including, but not limited to, migration, 
        surfacing, nursing, breeding, feeding, or sheltering, to a 
        point where such behavioral patterns are abandoned or 
        significantly altered.''

    As a biologist who has studied the behavior of marine mammals for 
more than 25 years, I find this wording confusing, and I do not see how 
it addresses the problem identified by the NRC. The last phrase added 
to the definition does add a criterion of significant alteration. 
However the point of the NRC reports was biological significance, a 
disruption that could have an adverse impact. My dictionary defines 
significant as ``likely to have influence or effect.'' The addition of 
the word ``significant'' in the new definition therefore does not give 
the same standard as suggested by the NRC. As our techniques to study 
marine mammals have grown in sophistication and sensitivity, it is now 
possible to demonstrate statistically significant alerting or orienting 
responses that in my opinion fall well below the negligible impact 
standard.
    I find the addition of the word ``abandoned'' particularly 
confusing in the new definition. It certainly makes sense to add a 
criterion for abandonment of critical habitat, but what does this 
wording mean for behavior patterns? A sperm whale or elephant seal can 
dive for an hour or more, but any marine mammal that abandons surfacing 
behavior cannot breathe. If it abandons surfacing for more than a few 
hours, it is certainly dead. If a sperm whale group is sheltering a 
young calf from a killer whale attack, even a momentary abandonment of 
the behavior could be lethal. Calves may be able to survive for days or 
weeks if their mother abandons nursing, and many whales could survive 
for years without feeding, but what is the time period implied by 
``abandon.'' My understanding of ``abandon'' is that it means a 
permanent change. By this definition, the ``abandonment'' wording turns 
level B harassment into a lethal take. Far from distinguishing 
negligible from potentially significant effects, it muddies the waters 
further.
    Another problem with the use of the term ``abandon'' is that I take 
it to mean ``giving up''--a 100 percent cessation of an activity. Yet 
since the definition of harassment also applies to stocks, this 
definition is not conservative enough for actions that may affect a 
large portion of a stock. For example, suppose an activity caused a 50 
percent reduction in foraging rates in a majority of the population, or 
caused animals to be 50 percent as effective in finding a mate for 
breeding. Such reductions would not ``alter'' the form of the behavior, 
nor would they meet an abandonment criterion, but few populations could 
sustain such changes on a long term basis.
    I would like to take this opportunity to reiterate the suggestion 
of the National Academy of Sciences second report (2000) on Marine 
Mammals and Low Frequency Sound on the definition of level B 
harassment:

        ``NMFS should promulgate uniform regulations based on their 
        potential for a biologically significant impact on marine 
        mammals. Thus, level B harassment should be redefined as 
        follows:

                Level B--has the potential to disturb a marine mammal 
                or marine mammal stock in the wild by causing 
                meaningful disruption of biologically significant 
                activities, including. but not limited to, migration, 
                breeding, care of young, predator avoidance or defense, 
                and feeding.

        The Committee suggests limiting the definition to functional 
        categories of acttv1ty likely to influence survival or 
        reproduction. Thus, the term ``sheltering'' that is included in 
        the existing definition is both too vague and unmeasurable to 
        be considered with these other functional categories.'' (p 69)

    This definition was written by scientists and may require some 
rewording to fit legal and legislative requirements. But if the 
definition of harassment is to be changed, it should be done so in a 
way that makes biological sense and that corrects the need for a 
negligible impact standard. I do not think that the changes proposed in 
HR 1835 for the definition of harassment succeed in this task. I urge 
the Senate to consider using the definition of harassment suggested by 
the National Research Council in any amendments to the MMPA.
Conclusion
    Madam Chair, I sincerely appreciate your attention to this 
difficult and complex issue. There are real problems with current 
implementation of the MMPA in our changing environment. However, I am 
convinced that Congress and the responsible Federal agencies can make 
real progress to create permitting and authorization processes that are 
more predictable and efficient, while improving the protection for 
marine mammals from adverse impacts of human activities.
    Thank you, and I look forward to your questions.
                                 ______
                                 
                  Prepared Statement of Konrad S. Uri
    I am providing this written testimony to follow up on my letter 
this past December to each member of the Commerce Committee as well as 
each member of the Appropriations Committee opposing the ``Two Pie'' 
rationalization plan as proposed by the North Pacific Fishery 
Management Council (NPFMC).
    I am a lifelong fisherman who has participated in the bottomfish 
(trawl, longline & pots) fisheries off the coast of Washington and 
Alaska for over 50 years. I also have been a crab fishermen for over 35 
years, harvesting and processing Red, Golden, & Blue King Crab as well 
as Opilio and Bairdi tanner crab; currently, I fish pacific codfish by 
longline in the Bering Sea/Aleutian Islands area about 6 months out of 
the year.
    I have seen the development of the Bering Sea/Aleutian Island 
fisheries from the 1960s, dominated by foreign vessels, to present with 
the U.S. public resource harvested by American vessels. I was active in 
supporting and implementing the original Magnuson Act, as well as many 
other fishery management, allocation, political issues over the years.
    With the advent of the American Fisheries Act, and now the proposed 
Bering Sea Aleutian Island Crab Rationalization plan, I am discouraged 
with the direction of the government to rationalize the various 
fisheries of the North Pacific. If you allow the NPFMC's proposed crab 
rationalization plan to move forward, you will award the processing 
sector with a monopoly.
    Providing the processing sector with ``Processor Shares'' violates 
the antitrust laws of our land, grants the processing sector an unfair 
advantage over the independent fishermen, is adverse to the position of 
all the other Fishery Management Councils across the Country, provides 
quasi ownership interest in the public's resources under the control of 
foreign owned companies, goes against all but one Alaskan communities' 
resolutions, and sets a very dangerous precedent which I fear will be 
applied in other fisheries in the future.
    I therefore ask the Commerce Committee to reject the proposed plan 
and send it back to the NPFMC for revamping. Beyond a buyback program, 
the fishery should be rationalized at the harvester level, with no 
``two pie'' and/or ``processor share'' provision.
                                 ______
                                 
 Aleutian Pribilof Island Community Development Association
                                           Juneau, AK, May 19, 2003
Hon. Ted Stevens
United States Senator
Washington, DC.

Re: Crab Rationalization

Dear Senator Stevens:

    There is little dispute that Alaska's Bering Sea crab fisheries are 
in crises. The combination of low guideline harvest levels, generally 
weak ex-vessel and wholesale prices, and overcapitalization in both the 
harvesting and processing sectors have brought the crab industry and 
many of the communities that depend upon it to their knees. Many of the 
participants face bankruptcy if nothing is done and, for some, it may 
be too late already.
    Crab rationalization is the only remedy available. Status quo is 
not an option. The design and implementation of any fisheries 
rationalization scheme is very controversial. That is because there are 
winners and losers. There is no way around that. In this case, most of 
the controversy swirls around the creation of crab processor quota 
shares.
    Like Kodiak, we do not particularly like processor quota shares. 
From our perspective, however, they are a necessary ingredient to make 
crab rationalization work. Without processor quota shares, the 
political will within the industry as a whole that is necessary to 
bring about crab rationalization does not exist. Therefore, without 
processor quota shares, there is no crab rationalization and the 
industry may be doomed. The impact upon coastal communities in that 
scenario is unacceptable.
    The logic behind the Council's crab rationalization program is 
reasonable. Effort in both the harvesting and processing escorts need 
to be reduced so that the inefficient and wasteful race for crab is 
eliminated. This presumably, will bring about some semblance of 
stability to the industry. The industry consists of three parties: 
harvesters, processors and communities--the program most to be designed 
so that each component experiences stability, otherwise chaos results.
    Crab harvesters argue they need quota shares to protect their 
capital investment by allowing them to fish crab wisely and 
efficiently. In that manner they are able to survive financially.
    Crab processors argue that if harvesters receive quota shares, 
processors must as well. Otherwise, the processors' ability to compete 
and survive in an industry they have participated and invested in for 
decades disappears. They believe they need quota shares to protect 
their capital investment.
    Coastal communities dependent upon crab offer the same rationale. 
Without adequate community protection in a rationalization program, the 
capital they have invested in infrastructure is wasted and the economic 
foundation of their community is destroyed.
    All three legs of the stool have the same legitimate need for 
stability. And like any three legged stool, this one will tilt at best, 
and collapse at worst, if one of the three legs is not treated equally.
    APICDA's focus during the North Pacific Fishery Management 
Council's crab rationalization process has been to protect the 
interests of our member communities. Initially, we proposed that all of 
our communities, including those that had never processed a crab, be 
allowed to construct crab shore plants and purchase crab without 
requiring crab processor quota shares. The non-APICDA communities 
argued against that approach, reasoning that every pound of crab that 
would go into our non-historic crab processing communities would be 
stolen from a community dependent upon crab processing. We found that 
was a reasonable argument, particularly during times when crab quotas 
are low, and agreed to drop our proposal. Forthwith, our focus was to 
ensure that the crab processing history earned in our communities (St. 
George in particular) would stay in that community. '
    Further, we argued that there should be a limit on the amount of 
processor quota shares, with the limit tied to the size of the crab 
quota; crab harvested above those amounts could be delivered to any 
community and any processor regardless of whether or not they have 
processor quota shares. Our reasoning was simple: when crab quotas are 
above a certain level, there is plenty of crab to address both the 
historic crab processing communities' needs and to allow for other 
communities and processors to participate. That approach has been 
adopted by the Council.
    We, as well as other communities argued for a variety of other 
community protection provisions. These provisions included: that 
communities in which processor quota shares are allocated have the 
right of first refusal to purchase processor quota shares from a 
processor who is selling; a prohibition on the transfer of processor 
quota shares away from a community during the first two years of the 
program; and, a host of other community protection mechanisms. All have 
been adopted by the PM.
    We understand the concerns voiced by the City of Kodiak. One of our 
member communities is St. George. St. George is a crab dependent 
community. Unlike Kodiak, there is no other commercial fishing in St. 
George except a small amount of halibut. There has been no crab 
processing in St. George since 2000 due to the collapse of the opilio 
stocks. The City of St. George has lost 98 percent of its revenues 
since 2000, and is near default on its bond obligations.
    It is disturbing to us to contemplate the future of St. George in 
the absence of the NPFMC's crab rationalization program. St. George 
will flounder. Unlike many other communities, St. George does not have 
a shore based seafood processor, nor does it have access to salmon or 
groundfish. St. George is essentially 100 percent dependent upon crab. 
Without processor quota shares and without crab rationalization, there 
is no fishery-related future of consequence for the community. There is 
nothing else of economic significance to fall back upon.
    We understand very well how controversial and difficult crab 
rationalization is. We understand the risks and the pitfalls. But we 
are standing on the abyss with status quo, and cannot survive the fall 
if rationalization does not happen soon.
    Sincerely,
                                              Larry Cotter,
                                                               CEO.
Cc: APICDA Board of Directors
                                 ______
                                 
       Prepared Statement of Michele Longo Eder, F/V Michele Ann
Hon. John McCain, Chairman
Committee on Commerce, Science, and Transportation

Dear Mr. Chairman, Senators Wyden and Smith, and Members of the 
            Committee:

    I am a fisherman's wife from Newport, Oregon, a town of about 
10,000 people on the central Oregon Coast. My husband is a commercial 
fisherman, and has been fishing for 30 years. He owns his own boat, and 
has a crew of 3 or 4 men. Usually, he fishes for Dungeness crab and 
sablefish. We also have permits to fish for pink shrimp, halibut, 
salmon, and albacore tuna.
    Let me state from the outset: We are opposed to fish processors 
being allocated quota or shares, or in any way be guaranteed a certain 
amount of, or access to fish that fishermen like my husband and his men 
go to sea to catch.
    Now let me tell you why. The only way our crewmen can earn a 
living, and the only way our business can make a profit and continue to 
survive in this industry, is to get the very best price for our fish 
that we can possibly fmd.
    I can't quote statistics per se, but I can tell you that in the 
last 15 years, on the West Coast of the United States, there has been 
an absolute collapse in the number of independent fish processors that 
a fisherman can sell their fish to. In towns where there had once been 
booming bayfronts, now there is but one or two processing plants, at 
most. For example, in Newport, OR, as recently as 15 years ago, there 
were 5 different processors that competed for product from fishermen. 
Each plant had to provide good service, in terms of efficient unloading 
and quick turnarounds, fresh bait, quality ice, and most of all 
COMPETITIVE PRICES or they wouldn't get the fish.
    Today, for a variety of reasons, there is one fish processor that 
processes the majority of West Coast bottomfish and crab, and that is 
the Pacific Seafood Group.
    Although I can congratulate them on their success for being an 
efficient business, buying up money-losing plants and shutting them 
down and generally cornering the market, what it has done to the family 
fishing business has been devastating. Other buyers are at risk of 
losing their shirt if they offer fishermen a better price for their 
product, for the largest processor can, and does, immediately sell at a 
lower price in order to recapture any market share they may have lost. 
This happens season after season, fishery after fishery, and year after 
year.
    Fishermen have it hard enough as it is, trying to find new and 
better markets for their fish on a boat by boat basis, without 
GOVERNMENT giving to FISH PROCESSORS another tool that would allow them 
to further control and depress prices-and the tool that I am referring 
to is ``processor quotas'' or ``processor shares.''
    In my opinion, processor quotas have absolutely nothing to do with 
either fisheries management, safety, or conservation-the purposes for 
which we think government resources and laws should be directed. 
Instead, quota shares for processors are an anti-competitive measure 
that will make the cost prohibitive for new entrants into the 
processing business, and further, will force fishermen to sell only to 
those that receive an initial allocation or have the capital resources 
to buy processor quota.
    The work that my husband and our men do is brutal. I can't begin to 
tell you what our life is like. I don't pretend to know what the rest 
of the Nation needs, but the last thing our West Coast fisheries need 
is the Federal government entwined with fish processors to give them an 
even stronger control over the prices paid for our fish. Please--don't 
make our proud fishing communities nothing but ``company towns.''
    Thank you for the opportunity to offer this testimony.
            Sincerely,
                                        Michele Longo Eder.
                                 ______
                                 
                 Prepared Statement of Dennis Petersen
Senator John McCain, Chairman
U.S. Senate Committee on Commerce, Science, and Transportation

Dear Senators:

    I've been a participant in the Bering Sea King & Tanner crab 
fisheries from 1963 until l982. In those years I served in all 
capacities aboard my own & other vessels. I also was a board member of 
the Alaska Marketing Association representing vessel owners & crab 
fishermen in price negotiations with all processors who bought crab 
from all Bering Sea boats. During those years, there were few conflicts 
of interests between being a fisherman & being a processor. Today that 
line has become inexplicably blurred.
    Processors own a very high percentage of the crab catcher boats & 
in any price negotiating process will ultimately dominate that process 
with independent vessel owners finding their voices being stifled by 
those processors who will ultimately buy all the crab. The vessel owner 
who wouldn't go along with his processor would stand an excellent 
chance of being cast adrift with no market: truly an economic disaster 
for the small independent fisherman who risks all.
    Further, in the only group representing Seattle vessel owners & 
fishermen, ACC, there is a makeup, I understand, within that 
association whereby a small group who have ownership in multiple 
vessels, including a very large crab processor, which dominates that 
association on whatever position might come up for a vote. 
Consequently, that group is highly suspect as to its loyalties within 
the Seattle crab fleet & will probably suffer a real loss of membership 
for their support of the two (2) tier crab rationalization plan. Yet, 
politically, they are given credence for being the ultimate voice of 
the Seattle fleet (which represents roughly 70 percent of the Bering 
Sea crab fleet). Not so . . . their testimony should be taken for what 
it is . . . completely tainted & not representative of a majority of 
the Seattle fleet.
    Obviously, I completely oppose the two tier crab rationalization 
plan even though I am completely retired from the industry. It is a 
product of big money influencing decisions where the men who work in 
the world's most hazardous profession will loose. Do not be swayed by 
the big moneyed processor advocates who have dominated the North 
Pacific Fisheries Council's decision making process as regards this 
super important issue. Please reject this abomination!
            Respectfully submitted,
                                           Dennis Petersen.
Cc Senator Maria Cantwell
                                 ______
                                 
                       Testimony of Victor Smith
May 20, 2003

To:
U.S. Senate Committee on Commerce, Science and Transportation
Senator John McCain, Chairman

Re: Crab Rationalization Hearings

Dear Senator McCain:

    Congress should not grant exclusive rights to a few corporations on 
the crab buying side because it also affects their price-making powers 
over other species, too. As a salmon fisher, I am concerned about 
negotiating against networks of offshore companies and global 
affiliates. Their abusive ``transfer pricing'' practices that shift 
profits offshore to lower fish prices and avoid U.S. taxes should be 
more closely examined, for all species.
    There was talk in Petersburg, AK., after Senator Stevens met with 
Icicle Seafoods fishermen there last June, that Processor Quota Shares 
were assured for Pacific Cod too. And I am most concerned because some 
are already promoting a non-competitive ``salmon rationalization'' 
scheme, as well.
    Fishers are also worried about systemic conflicts-of-interest 
plaguing the State of Alaska, the North Pacific Fishery Management 
Council, and the fishers own associations. These comprise the power 
base for Crab Rationalization and other policy-making. I have 
information on these conflicts of interest that I believe would 
convince you that at best there is only the appearance of a power base, 
and that that appearance was illegally acquired and has been used to 
defraud the public.
    This thinly veiled appearance of fishermen's support for 
legislation that will be harmful to fishermen is the result of a long 
campaign of intense opinion shaping and silencing led by conflicted 
leaders of the Alaskan fishing community.
    Opposition has been silenced by leaders outright misrepresentations 
of memberships opinion, as well as leaders preempting association votes 
by publicly announcing association positions without polling their 
members. They have also been involved in passage of legislation and 
policy making detrimental to fishermen without fishermen's approval. As 
a result, millions of dollars have been taken out of the harvesting 
side of Alaska's fisheries.
    Members of these associations (United Fishermen of Alaska, South 
East Alaska Seiners Association, Puget Sound Vessel Owners Association, 
and possibly others) appear to have been engaged with Icicle Seafoods, 
Trident Seafoods, Norquest Seafoods, and possibly other processors, as 
well as some Joint Legislative Salmon Industry Task Force members, and 
others, in a pattern of mutual favoritism.
    Conflicted members of these associations appear to have:

   (1)  Assisted processors in attempts to acquire permanent Processor 
        Quota Shares and market exclusivity.

   (2)  Assisted processors in transferring more production costs to 
        fishermen, lowering prices, and reducing public benefits 
        derived from fisheries resources.

   (3)  Helped processors elect and support politicians seemingly 
        willing too exchange support for favors.

   (4)  Proposed and led a legislative agenda favoring processors that 
        ignores real solutions for fishermen and fishing communities.

   (5)  Refused to protect Alaska's fishermen and wild salmon from 
        pressure from fish farmers and other interests and in some 
        cases even supported others interests.

   (6)  Engaged in actions to undermine fishermen and public support in 
        a fishermen's class action court case looking into charges of 
        price fixing in Bristol Bay.

   (7)  Violated association bylaws, misrepresented associations' 
        positions, and created the appearance of fishermen's consensus 
        where none existed.

   (8)  Discriminated against non-resident Alaskan fishermen.

   (9)  Used libel, character assassination, and intimidation to 
        silence opposition.

  (10)  Engaged in lobbying efforts that undermine public support for 
        fishermen.

  (11)  Used public money to fund some of their efforts.

    I believe these abuses and more have been going on for at least the 
last several years. I urge you to pay extra close attention to the 
voices of opposition coming from the few fishermen that still have the 
will to speak out. If I may, I would like to forward you this 
information. We (fishers) have been left behind on our small business 
rights.
    It is a matter of too many boats currently chasing too few crabs, 
and fishermen not receiving a fair percentage of the retail price of 
their product. The $100 million vessel buyback program should lessen 
pressure on crab fisheries, without also forcefully collectivizing 
fleets and forever misbalancing market powers.
    To institute the crab ``rationalization'' plan will merely stifle 
competition and innovation, as well as lead to even lower prices for 
harvesters. Concentrated major grocers do not yet control assigned 
collectives of American farmers, who are then forced to supply products 
only to those particular stores. So, should crab harvesters not also 
share the same antitrust protections as other fishing fleets and 
businesses?
    We hope that you do not grant processor Quota shares and even think 
about asking the GAO to study Alaska's economic structure more 
thoroughly, so that we all understand more about the overwhelming power 
foreigners and unchecked corporate greed now have in the U.S. seafood 
industry.
    I urge you to ground-truth the testimony you hear by listening 
carefully to all sides. Thank you for considering protecting my 
independent, small business and our community concerns.
            Sincerely,
                                              Victor Smith.
                                 ______
                                 
                       Testimony of Victor Smith
May 25, 2003

To:
U.S. Senate Committee on Commerce, Science and Transportation
Senator John McCain, Chairman

Re: Crab Rationalization Hearings

Dear Senator McCain:

    I have read some of the presentations made to your Committee at the 
Hearing on the 20th. I was not surprised to see that Senator Murrary 
was involved. I had predicted her involvement last year when I first 
learned of her and Senator Stevens working together on the Boeing 
tanker deal. There was an article on the tankers in the Saturday 
Seattle Times. (Right along side an article on the tax cuts.) It was 
also interesting to hear Rush Limbaugh belittling you on Friday on his 
program. I think I know what's involved there and I believe you're 
being charitable referring to the Boeing Deal as a handout.
    I don't think the timing of these events is a coincidence and I 
believe there's linkage with the Crab hearings. I believe Patty Murray 
is Senator Steven's new consensus building WA. Democrat. I doubt she 
knows much more about crab than she's been told. Not so with Kevin 
Duffy.
    Mr. Duffy was the fishermen's associations' choice for Commissioner 
of Alaska Department of Fish and Game. Despite the fact that he'd 
previously voted for Processor Quota Shares on the Council. Note in the 
following e-mail how David Bedford, who was then General Manager of 
South East Alaska Seiners Association and is now Deputy Director of 
ADF&G, denies endorsing PQs and denies that SEAS support of Mr. Duffy 
was support of PQs.
    Now look at where Mr. Duffy is. He is no longer just one of eleven 
unanimous voters on the Council; he is now the expert presenter of the 
plan. And Gov. Knowles is no longer pulling his strings, so who is 
manipulating him this time?
    It was wrong how Mr. Duffy acquired fishermen's support to become 
the processors embedded Commissioner, and his actions now prove this. 
These people and the action they are proposing is a fraud. Mr. Bedfords 
record of misdeeds goes back at least a year, and I have similar 
material on several other key proponents of this plan.
    Have you received any testimony from Oliver Holm, of Kodiak? If you 
have not, I would like to forward you letters from him that outline how 
United Fishermen of Alaska misrepresented fishermen's support to 
Senator Stevens two years ago. I have also sent his material to the 
Dept. of Justice. Have they forwarded any of it to you?
    This is an incredibly flawed process, and an incredibly involved 
one. The Bay Case was no test of this collusion; in fact, the high 
level tampering in the press highlighted it. Do you have any advise 
that might help me decide what to do with this information? I've 
received a number of threats that have me wondering now about what I 
should be doing.
                                               Victor Smith

Original Message
From: The Smiths
To: Gordon Blue
Sent: Friday, May 23, 2003 5:21 AM
Subject: Re: CR Hearings (2)

Gordon-

    Remember that Sen. Stevens voiced almost the exact same concerns 
last year when he announced the Senate wouldn't be taking it up and 
he's still at it. We predicted Sen. Murray would be involved in this 
last fall and here she is. I don't think they are any less sure about 
what they want. Stevens bas got a huge investment in Murray. I agree 
about the importance of the Bay Case but am pessimistic about the 
outcome. Fingers are crossed though. In the euphoria of a win the 
processors might be given just about anything. Kevin Duffy? Read the 
following e-mail:

        This e-mail (following) was received March 7, '03, from David 
        Bedford, then SEAS General Manager.

        Dave-

        If, as you say, SEAS has never supported processor quotas, why 
        are we supporting for commissioner Kevin Duffy, who voted for 
        them?

    You confuse support for the individual with support tor one 
specific action. SEAS believes that Kevin will be responsive to the 
concerns of commercial fishermen, particularly seiners, as he has been 
as Alaska's Commissioner to the Pacific Salmon Commission and Deputy 
Commissioner for Fish and Game. Therefore SEAS supports him. Note also 
that Kevin supported processor shares in the crab fishery, a fishery 
with little direct relevance to the mission of SEAS, because the 
Governor, his boss, instructed him to do so. Further you should 
recognize that the Governor arrived at this stance because his door was 
closed to commercial fishermen. The crucial issue now is whether we are 
in a position to work with and influence the current administration. We 
are.

        Why are we marching in lock step with the UFA, who's president 
        last spring, mischaracterized the UFA boards position as being 
        consistent with processor quotas, just as he relayed this same 
        message to Senator Stevens?

    I don't know what Bob told anyone but I do know that UFA's position 
on the AFA with its processors quotas is that the organization backs 
the North Pacific Council and opposes having resource management or 
allocation done by the Congress. As I recall, the NPFMC voted 
unanimously for processor quotas, including the commercial fish 
representatives, one of whom is an AMCC member from Kodiak.

        Weren't you one of the UFA exec committee who voted to take no 
        action on the UFA boards vote to oppose processor quotas?

    Victor, the truth of the matter is that some crab fishermen 
supported processor quota and some opposed them. A UFA board member 
sneaked a proposal on processor shares in without giving any background 
materials to the board and without alerting the affected crab 
fishermen. My position was neither in favor nor opposed but rather that 
there should be a full and fair and informed discussion before UFA took 
a position against one group of fishermen or another. I wanted to talk 
to the fishermen before I voted either for or against a resolution that 
affected them.

        Wasn't SEAS board advised not to interfere in the crab 
        rationalization plan?

    Not only no but Hell No.

        The Gilchrest Amendment, which we weren't opposing, was about 
        considerably more that the crab fishery as everyone involved 
        knows.

    You are wrong that everyone knows what the Gilcrest amendment is 
about. I don't. I take it from the context that it is the legislation 
that would permit processor quotas in the Bering Sea crab fishery. Is 
it an amendment to Magnuson-Stevens? There are a thousand things a day 
that I don't have time to oppose, or even find out about. If every 
seiner paid his dues SEAS could afford another one of me and there 
might be time to get to North Pacific Council and Federal 
waterfisheries issues that have no immediate relevance to the seine 
fishery.

        Why did we support a Governor who wouldn't take e position 
        against PQ's?

    There are no PQ proposals for the seine fishery or any other salmon 
fishery. If it happens, SEAS will be in the thick of it. The governor 
does support the economic prosperity of the fishery and the coastal 
communities. Bread and butter issues seem to resonate with the fleet 
right now.

        Why wasn't SEAS calling its members to action last spring when 
        this issue was before congress?

    What issue? The crab fishery? Gilcrest? Processor quotas? How much 
free time do you think I have? Do you have any idea how much unpaid 
time I put in tor SEAS and for you as a fisherman in the seine fishery? 
How much more do you want? If you want my limited time spent on the 
Bering Sea crab fishery instead of the Board of Fish or the permit 
reduction program or the MMPA law suit or state fishery legislation or 
the Federal subsistence program or any of the dozen other things I keep 
tabs on, get the board to tell me to shift my focus from the seine 
fishery to the North Pacific Council.

        Actions speak louder than words. Please explain why one should 
        interpret our record on PQs as one of non-support.

    Because we never supported them.
    Insteed of asking me to prove a negative why don't you prove the 
assertion you make. Show me one printed word, other than spurious e-
mails from Kodiak, where SEAS supported processor quotas. Never 
happened. All there is innuendo from one disaffected UFA board member 
who tried to sneak a resolution past the UFA board without full 
discussion--a resolution that was opposed by some fishermen in the 
relevant fishery, the proposal was advanced by the representative of an 
aquaculture association--a group with no connection whatsoever with the 
crab fisheries. It sure looked like a personal agenda to me so I felt 
the need to discuss the matter with some crab fishermen.
    How would you like it if UFA took a position on the Southeast seine 
fishery without letting any seiner know? Is that the kind of conduct 
SEAS should support in UFA, policy making by ambush?

        How do you claim SEAS opposes fish farms when we have sided 
        with the UFA and their approval or a Senator who has sponsored 
        a fish farming bill. SEAS did nothing to alert our members to 
        the code of conduct NMFS was developing for EEZ fish farming in 
        WA. and AK, whose comment period ended in Oct. last year.

    Let's double the dues and get more members, then we can hire more 
help and deal with more things. Apparently you have different 
priorities that the SEAS Board. Instead of stating dissatisfaction over 
SEAS lack of action on a specific issue, send me the information to 
persuade the board to work on mariculture instead of the current 
priorities.

        Why are we sitting by as BC fish farmers assault Alaska with a 
        lobby effort for their farm program? Why haven't we raised the 
        issue of farmed salmon traffickers being on the ASMI board?

    Ditto the last comment.

        And what of our habitat move position, you didn't even mention 
        that? All for now.
        Victor Smith
                                 ______
                                 
                                         City of Saint Paul
                                Saint Paul Island, AK, May 29, 2003

Linda Freed,
Kodiak City Manager,
Kodiak, AK.

Dear Ms. Freed:

    I am writing to you concerning representations that you made 
regarding the community of St. Paul during the May 20, 2003 hearings 
before the U.S. Senate Commerce Committee regarding the BSAI Crab 
Rationalization Program developed by the North Pacific Fishery 
Management Council (NPFMC).
    Although you have recently become involved in this process at the 
NPFMC level, you may be aware that St. Paul has for over four years 
played a leading role in developing a program that rationalizes the 
Bering Sea crab fisheries and seeks to find balance among the competing 
interests held in these fisheries by harvesters, processors, and 
communities.
    My community's considerable investment of time and effort in this 
process is understandable given that 85 percent of our economy is 
dependent on the crab fisheries (primarily opilio processing) and that 
since the 1990s St. Paul has been the harbor for more than 40 percent 
of the average annual landings of opilio crab (as opposed to under 1 
percent for Kodiak). The point is that whereas for Kodiak's diversified 
economy, Bering Sea crab processing is a minor economic activity, for 
St. Paul and other Bering Sea communities it is a matter of survival.
    It is unfortunate that, contrary to the facts, during your 
presentation before the U.S. Senate Commerce Committee you chose to 
mention that St. Paul's backing of the BSAI crab rationalization 
program was in question. To support your unfounded assertion you 
highlighted the opposition of a local private corporation. While TDX, 
as a local private enterprise seeking private gains out of this 
process, is entitled to its opinion, it does not reflect the voice of 
the community of St. Paul. My community's numerous local interests are 
represented at the City Council. Two years ago the St. Paul City 
Council passed a resolution supporting the NPFMC's work on the crab 
rationalization program. This support remains solid.
    As the Mayor/representative of a fellow Alaska city government I 
would have been pleased to meet or discuss with you my community's 
position prior to the hearings. We have enjoyed an excellent 
relationship with members of your community for years and have enabled 
many of them to make their livelihoods as harvesters in the crab 
fishery to your community's benefit. In my view, your action last week 
would be akin to me pointing to the numerous voices on Kodiak in 
support of the BSAI crab rationalization program to draw conclusions 
about Kodiak's ''true'' position. This is all the more surprising, 
since as a member of the NPFMC's Community Protection Committee you 
negotiated and participated in the unanimous vote to adopt the NPFMC's 
community protection provisions. Then last week, you appeared to 
reverse yourself when you indicated during testimony that the program 
did not have community protections.
    I am attaching for your information, a copy of my testimony as well 
as the St. Paul City Council resolution which affirms St. Paul's 
position in support of the aforementioned program. Should you have any 
questions or concerns please do not hesitate to contact me.
            Sincerely,
                                       Simeon Swetzof, Jr.,
                                                             Mayor,
                                                      City of St. Paul.
Cc: Matt Paxton--Office of Senator Ted Stevens
Bill Woolf--Office of Senator Murkowski
Anna Knudson--Office of Senator Murray
Dan Sakura--Office of Senator Cantwell
Dave Whaley--Committee on Resources, U.S. House of Representatives
David Benton--Chairman North Pacific Fishery Management Council
Kevin Duffy--Commissioner Alaska Department of Fish and Game
                                 ______
                                 
Prepared Statement of Jeffrey R. Stephan, United Fishermen's Marketing 
                           Association, Inc.
Senator John McCain, Chairman,
U.S. Senate Committee on Commerce, Science, and Transportation,
United States Senate,
Washington, DC.

Re: May 20, 2003, hearing on the Bering Sea/Aleutian Islands Crab 
            Rationalization Plan: U.S. Senate Committee on Commerce, 
            Science, and Transportation

    Dear Chairman McCain,

    On behalf of the United Fishermen's Marketing Association, Inc. 
(UFMA), I respectfully submit this testimony to the Record of the May 
20, 2003, hearing on the Bering Sea/Aleutian Islands (BSAI) Crab 
Rationalization Plan in the U.S. Senate Committee on Commerce, Science, 
and Transportation.
    UFMA does not support the provision of permits or other 
authorization that allocates exclusive rights to U.S. fishery resources 
to, or other exclusive use of such resources by, the U.S. Processing 
Sector. UFMA does not support the authorization of exclusive processing 
rights or exclusive processing access for the U.S. Processing Sector 
with respect to BSAI crab. including Processing Shares, Individual 
Processing Quotas (IPQs), ``Two Pie'', etc.
    Moreover, UFMA does not support the provision of authority to the 
Fishery Management Councils, or to the U.S. Secretary of Commerce 
(Secretary), to extinguish market access and market freedom for the 
U.S. Harvesting Sector by requiring U.S. fishing vessels to sell and 
deliver their legally harvested and legally owned fisheries products to 
a specific port, thereby, prohibiting such vessels from selling and 
delivering their products to buyers or ports of their choice 
(``Regionalization'', or mandatory ports of landing).
    We respectfully request that Congress should not judge the perilous 
and unsound notions of Processor Shares and Regionalization only as 
regional contrivances for Alaska or for BSAI Crab Rationalization, nor 
without first having comprehensively examined these concepts as 
important issues of National Policy. Free and open markets, vigorous 
competition and the enduring principles that underlie our antitrust 
laws should be as relevant today, and in Alaska, as when the Sherman 
Antitrust Act was passed.
    We respectfully request that Senators and Representatives from 
coastal states with commercial fishing economies should not wreak 
Processor Shares or Regionalization on Alaska if they are not willing 
to do so on their own states, and should understand that these schemes 
will ultimately contaminate their own fishing industries.
    Processor Shares and Regionalization are not fisheries management 
devices. They represent market allocation, market regulation and 
economic protectionism. The North Pacific Fishery Management Council 
earns great respect for their dedication and noteworthy 
accomplishments. The FTC, FCC, SEC and other entities, not the 
Councils, address ``market regulation'', ``market allocation'' or 
``preservation of competition''; these terms do not appear in the 
Findings, Purposes or Policy of the Magnuson-Stevens Act (MSA), and 
distinguished Council members nationwide are not chosen because of 
their knowledge, experience and understanding of these concepts.
    UFMA is the longest established association of BSAI crab 
harvesters. The membership of UFMA includes vessel owners and operators 
who harvest crab, sablefish, halibut, salmon, herring, p. cod and other 
groundfish in Federal and state waters of the Gulf of Alaska (GOA) and 
the BSAI. Moreover, UFMA is actively involved and impacted by 
rationalization initiatives that are currently underway with respect to 
several Fishery Management Plans (FMPs) that govern U.S. fishery 
resources within the jurisdiction of the North Pacific Fishery 
Management Council (NPFMC), including the FMPs for BSAI King and Tanner 
Crabs, BSAI Groundfish, and GOA Groundfish.
I. National Study of Processor Shares and Regjona!ization
    We respectfully request, prior to any further Congressional 
consideration of authorizing Processing Shares and Regionalization for 
application in the U.S. Fishing Industry, including the BSAI crab 
fishery, that Congress direct a full and comprehensive examination and 
report of Processor Shares and Regionalization. Such an examination and 
report should address foreign ownership, divestiture, anticompetitive 
concentrations and combinations, why already dominant processing 
entities need additional help and protection, etc.
    In the Sustainable Fisheries Act of 1996, Congress directed the 
National Academy of Sciences (i.e., National Research Council, or 
``NRC'') to examine and report on the issue of Harvesting Sector 
``Individual Fishing Quotas'' (IFQs). It makes sense for Congress to 
direct a similar examination and report of Processor Shares and 
Regionalization, since Congress did not direct in 1996, nor did the NRC 
provide in 1999, a comprehensive focus on or evaluation of the impacts, 
effects and mechanisms of Processor Shares or Regionalization, 
especially with respect to the significant anticompetitive and economic 
power issues that are undeniably present when Processor Shares are 
contemplated for use in fisheries management.
    Such an examination and report on Processor Shares and 
Regionalization should be considered in the context of antitrust and 
trade statutes and policy, instead of in the context of MSA. We 
respectfully submit that oversight of any further consideration of 
Processor Shares and Regionalization, and of the above-suggested 
Congressionally mandated examination and report, should have Judiciary 
Committee oversight, in consultation with the Commerce Committee, 
Federal Trade Commission and the Secretary of Commerce.
    If after the completion and Congressional consideration of a 
comprehensive examination and report of Processor Shares and 
Regionalization, Congress decides that these concepts are reasonable 
devices for use in the management of U.S. fishery resources, then we 
respectfully request that Congress should hold hearings to guide the 
development of National Standards that would apply to the use and 
application of Processor Shares and Regionalization in the management 
of U.S. fishery resources.
    As previously referenced. in 1999 the NRC published ``Sharing the 
Fish; Toward a National Policy on IFQs'' (``Sharing the Fish''). While 
Sharing the Fish focused primarily on the impacts, effects and 
mechanisms of Harvesting Sector IFQs, in those instances where the NRC 
did address Processor Shares, it was clear that they found no valid 
rationale for Processor Shares: ``. . . Nor did the committee find a 
compelling reason to establish a separate, complementary processor 
quota system (the 'two pie' system).'' (Sharing the Fish, page 205); 
``Processors also complained . . . The committee was not convinced, 
however, that the solution to the perceived problem lies in the 
allocation of either harvesting or processing quota to processors.'' 
(Sharing the Fish, page 155).
    We would be pleased to provide a suggested outline for a 
Congressional mandate of a comprehensive study and report of Processor 
Shares and Regionalization.
II. Lack of Adequate, Quality and Relevant Data, and Associated 
        Analysis and Consideration
    We ask Congress to closely examine the lack, quality, 
comprehensiveness, inclusion and availability of data and other 
information that is important and essential to understanding and 
analyzing the distributional and cumulative impacts of Processor 
Shares, and to making informed decisions that are associated with the 
potential application of Processor Shares. This is especially relevant 
when consideration is given to the combination of Processor Shares and 
Regionalization, and in the context of the BSAI Crab Rationalization 
Plan.
    There is an incomplete understanding and analysis of the actual 
factual ownership of, and other vehicles that provide for the exercise 
of economic power and control over, BSAI Crab Harvesting Sector IFQs by 
the BSAI Crab Processing Sector. There is no clear enumeration of the 
distribution of Processor Shares by individual processing entity, 
entity location, or port. There is an incomplete understanding of the 
ownership structure of Harvester Sector vessels, and of the cumulative 
impacts that will result from the distribution of Harvester Sector IFQs 
to Processing Sector ``affiliated vessels'' (i.e., vessels that are 
associated with Processing Sector entities through a variety of 
ownership interests, notes, loans, etc.), combined with the 
distribution of Processor Shares to those BSAI crab processors who are 
so affiliated with such vessels.
    There is a significant lack of understanding and analysis of the 
substantial opportunities that exist in the BSAI Crab Rationalization 
Plan for the exercise of economic power and control that can and will 
be used by the Processing Sector over the Harvesting Sector generally, 
over the use of Harvesting Sector IFQs, and over competitive and fair 
price formation. It is not now possible to reasonably or accurately 
understand the substantial economic power and control that will be 
vested in the BSAI Crab Processing Sector as a result of Processor 
Shares. This is especially worrisome when Regionalization is combined 
with Processor Shares.
    We respectfully request that Congress direct the Councils and the 
Secretary to request essential and relevant data that resides with the 
U.S. Maritime Administration (MARAD); such data that will generally 
permit the Councils and the Secretary to comprehensively evaluate and 
analyze the cumulative impacts of Processor Shares, Regionalization and 
Harvester Sector IFQs, and specifically with respect to the BSAI crab 
fishery. Possession of this information by the Councils and Secretary 
would significantly assist the Secretary and the Councils in their 
understanding of the social, policy and economic implications and 
impacts of their regulatory action with respect to Processor Shares.
    Further, we request that Congress direct MARAD to release and make 
available the important and relevant information that they collect and 
compile with respect to the underlying ownership structure of U.S. 
Harvesting Sector vessels. Vessel ownership information that is 
collected and held by MARAD could be of significant benefit and use to 
the Secretary and to the Councils in support of making informed 
decisions with respect to the underlying ownership structure of 
entities that may receive IFQs or Processor Shares, including 
information that is necessary for evaluating participation in U.S. 
fisheries, the important distributive impacts and effects of IFQ or 
Processor Share ownership, the anticompetitive impacts of vertical 
integration, and the extent of foreign ownership of U.S. fishing 
resources.
III. Fair and Competitive Price Formation and Arbitration
    Processing Shares and Regionalization invest the BSAI Crab 
Processing Sector with a significant increase of political and economic 
power, control and influence that will greatly obstruct the free flow 
of inputs to an otherwise but already variably competitive marketplace, 
including inputs upon which competitive prices for the Harvesting 
Sector depends (price formation). This is especially true for 
processors who benefit from the largesse of the American Fisheries Act 
Binding Arbitration as associated with price formation is characterized 
as a mitigation device. The BSAI Crab Processing Sector fashioned the 
pretension that Arbitration was meant to address ``failed price 
negotiations'', thereby masking the true and underlying reasons why 
Arbitration was investigated. That is, successful price formation 
relies on the complex conditions and facts that exist in a competitive 
marketplace; however, price formation and Arbitration, as a result of 
Processor Shares and Regionalization, must rely on information from an 
artificial and significantly misaligned marketplace. Arbitration, 
albeit a politically expedient concept, provides a false sense of 
security and mitigation.
    The Council was offered several meaningful and realistic 
opportunities to attempt to mitigate the obvious and expected negative 
impacts of Processor Shares and Regionalization on fair prices, and on 
competitive and open markets, including, for example, provisions that 
allowed: (1) all BSAI crab vessels to freely sell all their legally 
harvested and legally owned crab to Kodiak (the ``Kodiak Open Port'' 
concept''; (2) all BSAI crab vessels to freely sell their last load of 
legally harvested and legally owned crab to Kodiak; (3) Kodiak-based 
BSAI crab vessels to freely sell all their legally harvested and 
legally owned crab to Kodiak; (4) Kodiak-based BSAI crab vessels to 
freely sell their last load of legally harvested and legally owned crab 
to Kodiak. The Council discarded all these suggestions.
    An ``Open Port'' designation for Kodiak would provide some 
realistic mitigation, and at least one competitive market and port, to 
counter the anticompetitive impacts on prices and markets that are 
created by the implementation of Processor Shares and Regionalization.
IV. Foreign Ownership
    We respectfully request Congress to evaluate the impacts and 
implications of Processor Shares with respect to competition of, and 
methods to prevent, limit and control, foreign ownership interest in, 
and economic control of (1) harvesting vessels; (2) 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); (3) 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); (4) 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); etc.
V. Divestiture of IFQs and BSAI Crab Vessels in the BSAI Crab 
        Processing Sector
    We respectfully suggest that Congress evaluate the use of 
divestiture as a means to mitigate the anticompetitive impacts that 
result from the application of Processor Shares in U.S. fisheries. 
Processing Sector entities that receive Processor should be required to 
divest themselves of harvesting vessels and Harvesting Sector IFQs as a 
reasonable precondition for receiving Processing Shares.
VI. Conclusion
    Processor Shares will negatively impact the success and economic 
underpinnings of other fisheries. For example, we believe, as do others 
in the industry, that Processor Shares in the BSAI crab fishery, 
coupled with the benefits of the American Fisheries Act that accrued to 
several large dominant Alaskan processing entities, will negatively 
impact the ability of the Alaskan Salmon industry to recover from 
current market and structural related challenges.
    The impacts that result from the application of Regionalization and 
Processor Shares either separately, or in combination, 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 applying Regionalization 
or Processor Shares in fisheries management, including in the BSAI crab 
fishery.
    UFMA has consistently supported rationalization of the BSAI Crab 
fishery. We believe that it is time to deliver the safety, conservation 
and management benefits of BSAI Crab Rationalization, and we hope that 
the BSAI Crab Processing Sector will loosen their grip on these 
benefits. We hope that Congress will let the concepts of Processor 
Shares and Regionalization fade away.
    Thank you for your consideration of our comments.
            Sincerely,
                                         Jeffrey R. Stephan
                                 ______
                                 
                       Testimony of Victor Smith
June 6, 2003

To:
U.S. Senate Committee on Commerce, Science, and Transportation
Senator John McCain, Chairman

Re: Crab Rationalization Hearings

Dear Senator McCain and Committee Members:

        Regarding the testimony of Kevin Duffy, it is preposterous that 
        Mr. Duffy was the fishermen's associations' choice for 
        Commissioner of Alaska Department of Fish and Game despite the 
        fact that he'd previously voted for Processor Quota Shares on 
        the Council. The support he received from fishermen's 
        association executives to become Commissioner was unethical and 
        possibly illegally granted.

        Note in the following email how David Bedford, who was then 
        General Manager of South East Alaska Seiners Association and 
        has now moved up to become Deputy Director of ADF&G appointed 
        by Mr. Duffy, denies endorsing PQs and denies that SEAS support 
        of Mr. Duffy was support of PQs.

        This email (following) was received March 7, '03, from David 
        Bedford, then SEAS General Manager. It is Mr. Bedford's 
        response to questions about SEAS endorsement of Mr. Duffy for 
        Commissioner.

        Dave-

        If, as you say, SEAS has never supported processor quotas, why 
        are we supporting for commissioner Kevin Duffy, who voted for 
        them? (V.S.)

    You confuse support for the individual with support for one 
specific action. SEAS believes that Kevin will be responsive to the 
concerns of commercial fisherman, particularly seiners, as he has been 
as Alaska's Commissioner to the Pacific Salmon Commission and Deputy 
Commissioner for Fish and Game. Therefore SEAS supports him. Nota also 
that Kevin supported processor shares in the crab fishery, a fishery 
with little direct relevance to the mission of SEAS, because the 
Governor, his boss, instructed him to do so. Further you should 
recognize that the Governor arrived at this stance because his door was 
closed to commercial fishermen. The crucial issue now is whether we are 
in a position to work with and influence the currant administration. We 
are. (D.B.)
    Now look at where Mr. Duffy is. He is no longer just one of eleven 
unanimous voters on the Council; he is now the expert presenter of the 
processors PQ plans. And Gov. Knowles is no longer pulling his strings 
as Mr. Bedford claimed, so who is manipulating him this time? The 
Council process is flawed, and its' goals don't match those of the rest 
of the country.
    It was wrong how Mr. Duffy acquired fishermen's support to become 
the processors embedded Commissioner, and his actions now prove this. 
Executives of the seiners associations and the United Fishermen of 
Alaska have played a big role in hiding from fishermen that there have 
been plans afoot in the industry to expand PQ's to all Federal 
fisheries and even State salmon fisheries. These actions now 
demonstrate that there has been a concerted effort by numerous people 
to advance this plan.
    Fishermen's association Executives violations of association's by-
laws and running their associations to achieve their own agendas by 
silencing fishermen and misrepresenting fishermen's interests are 
theft. For policy makers and processors to have knowingly relied upon 
this illegally crafted appearance of fishermen's support as a 
foundation for advancement of acquisition of resources from the 
American people is unethical at best. It should also highlight what has 
been going on in the fishing industry on numerous other issues. It is 
not possible that what we're seeing is the result of independent 
actions.
            Sincerely,
                                              Victor Smith.
                                 ______
                                 
    Foremost, we oppose any type of rationalization plan that rewards 
over capitalization.
    We strongly oppose processor shares. They are not warranted, This 
is so because of the infrastructure already in place by the processors 
in question. Most of these capital investments (infrastructure) have 
long been paid for. This provides them with an advantage against any 
future competition.
    We believe all coastal communities dependant on commercial fishing 
will suffer negative economic impact. This is so because it, (BSAI Crab 
Rationalization), would be president setting legislation mapping out 
future rationalization plans. This plan guarantees control of our 
fisheries resources to a select group of processors both FOREIGN and 
domestic. This plan, even if limited only to BSAI Crab, will give these 
select processors a huge competitive and economic advantage. The 
majority of these processors own plants in multiple coastal 
communities: thus, giving them advantages over competing plants in 
communities outside of the BSAI Crab region.
    We believe any legislation that contradicts our current Anti-Trust 
Laws should be reviewed in depth with representatives of all groups 
whom are affected both directly and indirectly.
    In closing, we would like to submit that economics itself would be 
enough to rationalize the BSAI Crab fishery. The pace and safety of 
this fishery is a concern. These concerns can be addressed through trip 
limits and gear restrictions (i.e. Pot Limits). Any further over 
capitalization (i.e. Capital Construction Funds) should not be 
encouraged by government. We cannot support any further legislation 
that forever gives control of a public resource to a select few.
    We are a commercial fishing family residing in Kodiak, Alaska. Our 
above comments are brief. Familarity with the BSAI Crab Rationalization 
proposal would be needed to understand our letter. We are not directly 
involved in this fishery, but understand the effect the BSAI Crab 
Rationalization will have on future rationalization of the Gulf of 
Alaska and Bering Sea Ground Fisheries which we are economically 
dependant on.
            Sincerely,
                                    Ron and Julie Kavanaugh
                                            Ron Jr--age 22,
                                           Miranda--age 14,
                                            Sylvia--age 11,
                                             Garrett--age 4
                                 ______
                                 
     Prepared Statement of Hon. Ron Wyden, U.S. Senator from Oregon
    Thank you, Mr. Chairman, for holding this hearing today.
    There is a long history of fishing vessels from Oregon traveling up 
to Alaskan waters to share in the crab fishery that has flourished 
there. These boats are crewed by both Oregonians and Alaskans and 
deliver their catch to the coastal communities of Alaska to be 
processed. If done fairly, the assigning of quotas within a fishery can 
lead to both a safer fishing season and a more sustainable fishery. 
However, I share the concerns of Oregon fishers about the assigning of 
processor quota shares particularly if they are done in a manner that 
will benefit a few processors at the expense of many fishers and other 
processors. Assigning quota share in this manner raises issues of anti-
trust and could lead to the consolidation of processing capacity.
    I also am wondering why the North Pacific Fishery Management 
Council has devised a plan that they do not have the statutory 
authority to implement without the approval of Congress.
    I thought the purpose of the management councils was to make 
decisions at the regional level under the guidelines provided by 
Congress. I am not sure Congress wants or should get into the habit of 
debating individual management plans and making what should be regional 
decisions at the national level. Nor should management councils get in 
the habit of choosing to ignore Congressional instruction.
    I would like to submit the following questions for the record:
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                              Kevin Duffy
    Question 1. As a representative of the Alaska Department of Fish 
and Game and the interests of all Alaskans, was your testimony reviewed 
by Mr. Alan Austerman, the governor's fish policy advisor? And if not, 
would you please explain why?
    Answer. Witness did not respond.

    Question 2. As a member of the Council, do you have any insight as 
to why there were numerous motions on elements of harvesting shares but 
no motions made on elements of the processing share aspects of the 
program such as the ratio of A/B shares or the qualifying years used to 
award processing history?
    Answer. Witness did not respond.

    Question 3. The analysis of Dr. Charles R. Plott, the respected 
economic modeler from the California Institute of Technology, 
demonstrated that the ``last best offer'' arbitration process supported 
by the processors would be less apt to result in a competitive price 
for ``A'' shares, yet you voted for this ``last best offer'' approach 
over the alternative ``fleet-wide'' approach. Could you explain why?
    Answer. Witness did not respond.

    Question 4. A National Academy of Sciences panel recommended that 
``if the regional councils determine that processors may be 
unacceptably disadvantaged by an IFQ program because of changes in the 
policy or management structure, there are means, such as buyouts, for 
mitigating these impacts without resorting to the allocation of some 
different type of quota. For example, coupling an IFQ program with an 
inshore-offshore allocation would preserve the access of shore-based 
processors to fishery resources.'' What was your rationale for voting 
against the recommendations of the National Academy of Sciences?
    Answer. Witness did not respond.

    Question 5. You and other proponents of processor shares have 
frequently cited the 11-0 Council vote as an argument for why this plan 
should be accepted. However, the 11-0 Council vote preceded the 
decision on the binding arbitration trailing amendment which was a 
contentious 6-5 decision favoring the plan supported by the processors. 
It seems to me that once all of the parts of the proposed plan were 
revealed that the plan was endorsed in the Council by the thinnest of 
margins. Am I wrong?
    Answer. Witness did not respond.

    Question 6. According to the proposed processor share allocation 
formula, which looks at a narrow two-year window, the top 12 processors 
with one exception would receive more quota allocation than they 
historically processed, 99.4 percent to 75.66 percent respectively. Why 
did the Council decide on such a narrow window for determining 
historical levels of processing?
    Answer. Witness did not respond.

    Question 7. The General Accounting Office (GAO) has been unable to 
find any credible evidence that processors in any fishery have been 
disadvantaged by the allocation of harvester shares. Why should 
Congress endorse a plan that not only is contentious, but appears to be 
unnecessary?
    Answer. Witness did not respond.

    Question 8. We know what fishing quotas achieve for resource 
conservation and safety; what do processor quotas achieve for resource 
conservation and safety?
    Answer. Witness did not respond.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                              Linda Freed
    Question 1. Chairman Stevens has reminded us that the original 
intent of the Magnuson Fishery Conservation and Management Act was to 
protect the fisheries of the United States from foreign interests. Are 
there crab processors who are owned directly or indirectly by foreign 
interests? Will any processors that are directly or indirectly owned by 
foreign interests benefit from this proposed plan at the expense of 
American owned processing companies?
    Answer. Witness did not respond.

    Question 2. We know what fishing quotas achieve for resource 
conservation and safety; what do processor quotas achieve for resource 
conservation and safety?
    Answer. Witness did not respond.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                              Dave Fraser
    Question 1. Chairman Stevens has reminded us that the fishery 
management councils were set up to manage fish populations. Is there 
any reason processor shares would be necessary to manage fish 
populations?
    Answer. Witness did not respond.

    Question 2. Has a management plan that allocates processor shares 
in a manner similar to this proposed plan ever been tested in a crab 
fishery? If so, what is the current state of that fishery?
    Answer. Witness did not respond.

    Question 3. The National Academy of Sciences recognized that 
processors may be disadvantaged by fishing quotas. What steps other 
than processor quotas could be used to protect processors?
    Answer. Witness did not respond.

    Question 4. We know what fishing quotas achieve for resource 
conservation and safety; what do processor quotas achieve for resource 
conservation and safety?
    Answer. Witness did not respond.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                              Frank Kelty
    Question 1. The proposed plan would take a public resource, Alaskan 
crab, and allocate this resource among harvesters. The proposed plan 
then allocates the harvested crab to processors even though the 
harvested crab has become private property in the hands of harvesters. 
As a supporter of this proposed plan, are you telling me that the 
United States government and not market forces should decide what 
fishers may do with their private property? If the issue is fairness 
and protecting processors from the perceived advantage that harvesters 
will obtain with the allocation of harvester shares, what about 
consumers? Should the United States Government also be setting prices 
for the products the processors are selling to protect consumers from 
the advantage that processors obtain with the allocation of processor 
shares? If consumers don't need protection from processor shares, why 
do processors need protection from harvester shares?
    Answer. Witness did not respond.

    Question 2. The General Accounting Office (GAO) has been unable to 
find any credible evidence that processors in any fishery have been 
disadvantaged by the allocation of harvester shares. Why should 
Congress endorse a plan that not only is contentious, but appears to be 
unnecessary?
    Answer. Witness did not respond.

    Question 3. We know what fishing quotas achieve for resource 
conservation and safety; what do processor quotas achieve for resource 
conservation and safety?
    Answer. Witness did not respond.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                             Arni Thompson
    Question 1. Chairman Stevens has reminded us that the fishery 
management councils were set up to ensure that fisheries decisions 
would be made at the regional level and not at the national level or in 
the Federal courts. Of the witnesses that support this proposed plan, 
you seem to qualify your support for the plan more than Mr. Kelty and 
Mr. Duffy who seem to support the proposed plan unconditionally. In 
your opinion which specific parts of the plan are the most untested?
    Answer. Witness did not respond.

    Question 2. Once the proposed plan is accepted, you noted in your 
testimony that you expect continual oversight by the Council and 
Congress to correct or modify the processor quota portion of the plan. 
Based on your experience with the North Pacific Fishery Management 
Council and the United States Congress, do you expect that any 
necessary changes can be implemented in a span of less than two or 
three years?
    Answer. Witness did not respond.

    Question 3. Why should Congress support a plan that is supported by 
only one of the four major associations of vessel owners, which in 
turn, represents fewer than 15 percent of issued crab licenses?
    Answer. Witness did not respond.

    Question 4. Of the vessels that you list as members of the Alaska 
Crab Coalition, how many are current members, and of these, how many 
qualify as ``non-processor affiliated''?
    Answer. Witness did not respond.

    Question 5. The General Accounting Office (GAO) has been unable to 
find any credible evidence that processors in any fishery have been 
disadvantaged by the allocation of harvester shares. Why should 
Congress endorse a plan that not only is contentious, but appears to be 
unnecessary?
    Answer. Witness did not respond.

    Question 6. We know what fishing quotas achieve for resource 
conservation and safety; what do processor quotas achieve for resource 
conservation and safety?
    Answer. Witness did not respond.