[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]





                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE

                              COMMITTEE ON
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION


                             JUNE 11, 2008


                       Printed for the use of the
             Committee on Transportation and Infrastructure

42-882                    WASHINGTON : 2008
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                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia,   JOHN L. MICA, Florida
Vice Chair                           DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon             THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois          HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of   JOHN J. DUNCAN, Jr., Tennessee
Columbia                             WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York             VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida               STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California               FRANK A. LoBIONDO, New Jersey
GENE TAYLOR, Mississippi             GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland         ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California        HENRY E. BROWN, Jr., South 
LEONARD L. BOSWELL, Iowa             Carolina
TIM HOLDEN, Pennsylvania             TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington              TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington              SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts    BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York          JOHN BOOZMAN, Arkansas
BRIAN HIGGINS, New York              Virginia
RUSS CARNAHAN, Missouri              JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado            MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois            TED POE, Texas
NICK LAMPSON, Texas                  DAVID G. REICHERT, Washington
ZACHARY T. SPACE, Ohio               CONNIE MACK, Florida
MAZIE K. HIRONO, Hawaii              JOHN R. `RANDY' KUHL, Jr., New 
BRUCE L. BRALEY, Iowa                York
JASON ALTMIRE, Pennsylvania          LYNN A WESTMORELAND, Georgia
TIMOTHY J. WALZ, Minnesota           CHARLES W. BOUSTANY, Jr., 
HEATH SHULER, North Carolina         Louisiana
MICHAEL A. ACURI, New York           JEAN SCHMIDT, Ohio
HARRY E. MITCHELL, Arizona           CANDICE S. MILLER, Michigan
JOHN J. HALL, New York               MARY FALLIN, Oklahoma
STEVE KAGEN, Wisconsin               VERN BUCHANAN, Florida
STEVE COHEN, Tennessee               ROBERT E. LATTA, Ohio
JERRY McNERNEY, California




                 ELIJAH E. CUMMINGS, Maryland, Chairman

GENE TAYLOR, Mississippi             STEVEN C. LaTOURETTE, Ohio
RICK LARSEN, Washington              DON YOUNG, Alaska
CORRINE BROWN, Florida               HOWARD COBLE, North Carolina
BRIAN HIGGINS, New York              WAYNE T. GILCHREST, Maryland
BRIAN BAIRD, Washington              FRANK A. LoBIONDO, New Jersey
TIMOTHY H. BISHOP, New York, Vice    TED POE, Texas
Chair                                JOHN L. MICA, Florida
LAURA A. RICHARDSON, California        (Ex Officio)
  (Ex Officio)




Summary of Subject Matter........................................    vi


Love, John P., Vice President, Pasha Hawaii Transport Lines LLC..    26
Paxton, Matthew, President, Shipbuilders Council of America......    26
Roberts, Michael G., Partner, Venable LLP, on behalf of Crowley 
  Maritime Corporation...........................................    26
Watson, IV, Rear Admiral James, United States Coast Guard, 
  Director of Prevention Policy for Marine Safety, Security and 
  Stewardship....................................................     5
Williams, Patricia J., Director, National Documentation Center, 
  United States Coast Guard......................................     5


Cummings, Hon. Elijah E., of Maryland............................    46
Oberstar, Hon. James L., of Minnesota............................    59


Love, John P.....................................................    61
Paxton, Matthew..................................................    73
Roberts, Michael G...............................................    81
Watson, IV, Rear Admiral James...................................    91

                        ADDITIONS TO THE RECORD

Horizon Lines, Inc., Robert S. Zuckerman, Vice President, General 
  Counsel and Secretary, written statement.......................    96
Matson, Navigation Company, written statement....................   105
Seabulk Tankers, Inc., Kenneth Rogers, President, written 
  statement......................................................   109














                        Wednesday, June 11, 2008

                  House of Representatives,
    Committee on Transportation and Infrastructure,
   Subcommittee on Coast Guard and Maritime Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2167, Rayburn House Office Building, Hon. Elijah E. 
Cummings [Chairman of the Subcommittee] presiding.
    Mr. Cummings. This Subcommittee is called to order.
    Today's hearing will enable us to closely examine a 
critical subject in United States maritime transportation, and 
that is the rebuilding of Jones Act vessels in foreign 
shipyards. I take this opportunity to thank Mr. Gene Taylor of 
Mississippi for his outstanding work in protection of the Jones 
Act, and I note that he personally requested this hearing to be 
held by the Subcommittee.
    The vessels that ply the coastal trade in the United States 
providing service between domestic destinations must comply 
with the requirements of the Jones Act, meaning that they must 
be built in a United States shipyard owned by an American and 
crewed by Americans. Provisions added to the Jones Act in 1956 
and known as the Second Proviso requires that these ships also 
be rebuilt in the United States shipyards. However, that 1956 
action did not define the term "rebuild"; and, by 1960, vessels 
were using United States shipyards to install middle sections 
called midbodies that had been built in foreign shipyards into 
Jones Act vessels.
    In response, Congress revised the Second Proviso in an 
effort to close the loophole that allows the midbodies to be 
installed in domestic vessels. Not until 1996, however, did the 
Coast Guard issue regulations to clarify the specific standards 
that will be applied to determine whether a Jones Act vessel 
had been rebuilt in a foreign shipyard.
    These regulations state, regardless of its material of 
construction, a vessel is deemed rebuilt when a major component 
of the hull or superstructure not built in the United States is 
added to the vessel. For a vessel of which the hull and 
superstructure is constructed of steel or aluminum, a vessel is 
deemed rebuilt when work performed on its hull or 
superstructure constitutes more than 10 percent of the vessel's 
steelweight prior to the work. Further, a vessel may be 
considered rebuilt when work performed on its hull or 
superstructure constitutes more than 7.5 percent but not more 
than 10 percent of the vessel's steelweight prior to the work. 
A vessel is not considered rebuilt when work performed on its 
hull or superstructure constitutes 7.5 percent or less of the 
vessel's steelweight prior to the work.
    There apparently appears to exist a lack of clarity 
regarding what can be done to a vessel in a foreign shipyard 
within the parameters that have been established by these 
regulations. Specifically, there is confusion regarding what 
constitutes a major component of a hull or superstructure.
    Further, there is also concern among some in the Jones Act 
trade that the standards that have been set forth have been 
inconsistently applied, particularly in terms of calculating 
vessel steelweight.
    These issues have been the subject of several recent court 
cases, including one that examined a Jones Act vessel that was 
converted from a container ship to a roll-on/roll-off vessel. 
Part of the work on that vessel was completed in a Chinese 
shipyard and part was done in the United States. In this case, 
the Coast Guard did not count the amount of steel removed when 
making the calculation of steelweight to determine whether the 
vessel was still eligible for the coastwise trade. Rather, it 
counted only the amount of steel added.
    Another case involved the installation in a Jones Act 
vessel of an inner hull, which essentially converted the vessel 
from a single hull to a double hull to meet the standards of 
the Oil Pollution Act of 1990. In this case, the Coast Guard 
determined that a second hull was not a major component of the 
hull or superstructure since the inner hull was not separable 
from the outer hull because of the manner in which it was 
constructed. In ruling on this case, a United States court 
stated that the manner in which a component is added to a 
vessel, whether piece by piece or wholesale, is irrelevant to 
considerations of whether the component is a major one.
    In summary, one of the overarching issues we will examine 
today is the lack of transparency to this assessment process. 
Shipyards and vessel owners must continually submit Freedom of 
Information Act requests to the Coast Guard to find out what 
letter opinions the service has issued, because the Coast Guard 
does not post these letters on the Internet. We can do better.
    In contrast, the Customs and Border Protection Agency posts 
its letter rulings regarding the transportation of merchandise 
under the Jones Act trade on the Internet so that the maritime 
industry can see their current interpretations. I find it 
difficult to understand how one can expect one to obey the law 
when they don't know what the law is.
    Additionally, once someone has received a Coast Guard 
letter ruling it is difficult, if not impossible, to obtain the 
background information regarding how the Coast Guard came to 
the conclusion expressed in the letter. This makes it difficult 
for the Coast Guard to obtain the views of both sides of an 
issue before it makes a decision.
    The issues before the Subcommittee today, the issues are 
very complex, but they are critical to ensuring that the 
provisions of the Jones Act are appropriately enforced and that 
all of the vessels certified for the coastwise trade are 
competing on a level playing field.
    Finally, I would like to note that the Subcommittee invited 
both Seabulk and Matson Navigation, both of which are subject 
to litigation regarding the extensive work they have had done 
on their ships in China, to testify today. Regrettably, they 
declined our invitation. Without their testimony, I believe 
that it will be very difficult for the Subcommittee to decide 
on any statutory waivers of the Jones Act requirements that 
might be proposed for these companies if they should need them 
as a result of current court cases.
    I look forward to the testimony of all of today's 
witnesses; and now I recognize Mr. Poe, who is standing in for 
our Ranking Member, Mr. LaTourette. Mr. Poe.
    Mr. Poe. Thank you, Mr. Chairman.
    The Subcommittee is meeting this morning to review several 
recent Coast Guard decisions that have allowed Jones Act 
vessels to undergo nonemergency major structural work at 
foreign shipyards. In at least two instances, and perhaps 
several more, the Coast Guard has determined that these 
modifications do not qualify as rebuilding under Federal 
statutes and regulations. I am concerned about the process that 
has been used to make these determinations and the impacts the 
Coast Guard's decisions have been on the U.S. maritime 
    Over the past century, Congress has acted many times to 
preserve and strengthen the Nation's shipbuilding capacity and 
domestic commercial fleet. These are for national security and 
economic reasons. The primary protections provided to the 
United States maritime industry include the statutes commonly 
referred to as the Jones Act. Under the Jones Act, all vessels 
engaged in United States coastwise trade are required to be 
owned by U.S. citizens, built in the United States and crewed 
by U.S. Merchant Mariners. The Act also provides that the 
rebuilding of a U.S. coastwise vessel must take place in the 
United States in a United States shipyard to maintain the 
vessel's eligibility to participate in the Jones Act trade. 
However, several vessel operators have recently entered into 
contracts with foreign shipyards to substantially modify U.S.-
flagged, Jones Act-qualified vessels with the Coast Guard's 
apparent approval.
    It is in our Nation's interests to have a robust domestic 
fleet and Merchant Marine, and I urge the Coast Guard to 
vigorously enforce U.S. law. However, we should not rely solely 
on the Jones Act to maintain a strong maritime industry.
    I hope that the witnesses will share with the Subcommittee 
their thoughts on what American shipyards can do to better 
compete with their foreign counterparts and how we can 
encourage young people to enter the maritime trade.
    I want to thank the Chairman for holding this important 
hearing and look forward to hearing from all of the witnesses, 
and I yield back.
    Mr. Cummings. Thank you very much, Mr. Poe.
    Mr. Taylor.
    Mr. Taylor. Mr. Chairman, let me thank you for the very 
aggressive and thorough job you are doing as Chairman, for the 
hearing you had on the 123-foot Bollinger class ships, for this 
hearing today.
    The Coast Guard is a very honorable service, and on a day-
to-day basis they almost always do the right thing. In the case 
of stretching those boats, somebody screwed up, and to date no 
one in that organization has stepped forward and said "I 
screwed up", which is completely contrary to what they teach 
every recruit every day. In the case of this, somebody screwed 
up. Somebody in the Coast Guard wasn't doing their job.
    So what I would hope we would have as a result of today's 
hearing, I hope the Admiral or someone will step forward and 
tell us what the rules are. Who is supposed to enforce the 
rule? Who in the Coast Guard is responsible for enforcing this 
law that was obviously broken over in China? If they have 
adequate manpower, then who screwed up? If they don't have the 
adequate manpower to enforce the law, what are you going to ask 
for? And, above all, I hope I won't hear that the Coast Guard, 
similar to the Bollinger class screw-up, won't step forward and 
say, well, we gave that responsibility to the private sector 
and somebody let us down.
    So, again, I want to thank you for having this hearing. I 
welcome the Admiral for being here. Again, I want to emphasize 
the vast majority of the time the Coast Guard does right thing. 
In this instance, they didn't. But we need to find out what 
went wrong. If there is a mistake that was made, let's correct 
it. If there is a loophole that has to be closed, let's do so. 
And I very much, again, appreciate you calling this hearing.
    Mr. Cummings. Thank you very much, Mr. Taylor.
    Mr. LoBiondo.
    Mr. LoBiondo. Thank you, Mr. Chairman.
    I join with my colleagues in thanking you for holding this 
hearing. Something that a lot of people take for granted with 
the Jones Act, but hopefully with this hearing we can emphasize 
the critical importance of what it means in terms to our 
overall economy, especially our maritime economy, and I think 
for homeland security. I think it is critical that these laws 
be enforced and not be open to such broad interpretation as we 
are dealing with and Mr. Taylor just referred to, which clearly 
something is very wrong. So I am very proud to join with most 
of my colleagues in very strong support of the Jones Act and 
thank you for bringing attention to this critical issue.
    Mr. Cummings. Thank you very much, Mr. LoBiondo.
    Mr. Bishop.
    Mr. Bishop. Thank you, Mr. Chairman.
    I want to thank you for holding this hearing and inviting 
these witnesses here to participate in this important 
discussion. I look forward to the testimony from the Coast 
Guard, from industry and advocacy groups to discuss the Jones 
Act and, most importantly, the Second Proviso of the Jones Act 
and determinations made by the U.S. Coast Guard relating to 
vessels rebuilt overseas.
    As we all know, Congress enacted the Jones Act to protect 
the U.S. shipbuilding and ship repair industry. Congress 
amended the Jones act to provide assistance to shipyards here 
in the U.S. by excluding foreign rebuilt vessels from U.S. 
domestic trade. Without any question, the most important issue 
here is the Coast Guard's determination with respect to rebuild 
cases; and I am most concerned about the transparency of the 
existing process and what we can do to ensure that U.S. 
companies which abide by the spirit of the Jones Act in the 
construction and rebuild of their vessels are not put at a 
disadvantage to companies which take their business overseas.
    I want to thank the panelists for their participation, Mr. 
Chairman; and I yield back the balance of my time.
    Mr. Cummings. Thank you very much.
    Mr. Larsen.
    Mr. Larsen. Mr. Chairman, I just want to thank you for 
holding this hearing as well.
    I think most of what I wanted to say has been said. Just 
echoing all the comments about transparency, about the 
appropriate application of the Second Proviso and am looking 
forward to the Coast Guard comments about how they are going to 
help us help them make sure there is appropriate direction 
given to the application of the Second Proviso in the future.
    Thank you.
    Mr. Cummings. Thank you.
    I want to thank all of the panel for your brief opening 
statements. I really appreciate it.
    We will now go to our witnesses.
    The first witness is Rear Admiral James Watson IV of the 
United States Coast Guard. He is the Director of Prevention 
Policy for Marine Safety, Security and Stewardship.
    Ms. Patricia J. Williams of the United States Coast Guard 
is Director of the National Vessel Documentation Center. It is 
my understanding that you will not be testifying, Ms. Williams? 
Or you will? Will you be testifying or do you have an opening 
    Ms. Williams. I do have a brief opening statement.
    Mr. Cummings. All right. Before we get started, let me just 
say this, that the Full Committee has a rail bill, Amtrak bill 
on the floor of the House this morning. So from time to time I 
will be leaving and going to talk about that bill on the floor. 
So one of my colleagues will take Chairmanship during those 
periods, and other Members may have to do the same thing.


    Mr. Cummings. With that, we will hear from you, Ms. 
Williams. And thank you all for being with us.
    Ms. Williams. Thank you. Good morning.
    Mr. Cummings. Good morning.
    Ms. Williams. I am Patricia J. Williams, the Director of 
the National Vessel Documentation Center. The NVDC is a Coast 
Guard headquarters unit located in Falling Waters, West 
Virginia. I assumed the role of Director this past April upon 
the retirement of the former Director, Thomas L. Willis, but I 
have served as the second in command of the NVDC since its 
formation in 1995.
    The NVDC, as you know, administers the Vessel Documentation 
Program, which includes foreign rebuild determinations. I have 
in some way participated in the definitive rulemakings of 
rebuild determinations since 1992, when I assumed a role at 
Coast Guard headquarters. So I look forward to discussing this 
area of my responsibility with you today.
    Rear Admiral Watson has the Coast Guard's opening 
    Mr. Cummings. Rear Admiral Watson.
    Admiral Watson. Good morning, Mr. Chairman and 
distinguished Members of the Committee. My name is Rear Admiral 
James A. Watson. I am Director of Prevention Policy at the 
Coast Guard. It is a pleasure to appear before you today to 
discuss the rebuilding of vessels under the Jones Act.
    I would like to briefly explain our regulations and 
highlight the challenges of recent Coast Guard rebuild 
    Vessel rebuild determinations under the Jones Act are 
administered by the Coast Guard at the National Vessel 
Documentation Center. The National Vessel Documentation Center 
is the Coast Guard's only 100 percent civilian-operated 
command. Its mission requires the same day to day 
professionalism and connectivity with the maritime industry as 
other Coast Guard units. Its focus is to lawfully issue vessel 
documents and--excuse me, rather than carrying out the safety, 
security and environmental stewardship, as other Coast Guard 
units do in the mainstream.
    The current regulations at 46 CFR 67.177 provide key tenets 
for foreign rebuild determinations. As detailed in these 
regulations, a vessel is deemed rebuilt foreign when any 
considerable part of its hull or superstructure is built upon 
or substantially altered outside of the United States.
    In determining whether a vessel is rebuilt foreign, the 
following parameters apply: Regardless of its material of 
construction, a vessel is deemed rebuilt when a major component 
of the hull or superstructure not built in the United States is 
added to the vessel. For a vessel of which the hull and 
superstructure is constructed of steel or aluminum, a vessel is 
deemed rebuilt when work performed on its hull or 
superstructure constitutes more than 10 percent of its vessel 
steelweight. A vessel may be considered rebuilt when the work 
performed on its hull or superstructure constitutes more than 
7.5 percent but not more than 10 percent of the vessel's 
steelweight prior to the work. A vessel is not considered 
rebuilt when work performed on its hull or superstructure 
constitutes 7.5 percent or less of the vessel's steelweight 
prior to the work.
    The Coast Guard has attempted to steer a consistent path in 
applying these regulations despite challenges from a lack of 
express definitions in some areas. The term "major component" 
has not been expressly defined. Its addition as a parameter to 
the current regulation received no comment from industry when 
it appeared in the notice of proposed rulemaking in April of 
    Last year, the Shipbuilders Council of America filed a 
complaint in the District Court for the Eastern District of 
Virginia for a review of agency action and for declaratory and 
injunctive relief related to, in part, to the Coast Guard's 
application of these terms. This action followed the issuance 
by the Coast Guard on May 20th, 2005, of a favorable 
preliminary rebuilt foreign determination as to the Seabulk 
Trader and the Seabulk Challenge and the issuance of a 
Certificate of Documentation with a coastwise trade endorsement 
to the Seabulk Trader on May 9th, 2007, following the 
completion of the work on that vessel in China.
    On April 24th, 2008, the District Court for the Eastern 
District of Virginia issued an adverse decision on that 
challenge to the Coast Guard's determination to issue a 
coastwise endorsement to the Seabulk Trader. The court ordered 
the Coast Guard to revoke the Seabulk Trader's coastwise 
endorsement and remand the case back to the Coast Guard for 
further proceedings and consideration as to whether, one, a 
major component was added to the vessel in China; two, whether 
the foreign work exceeded the permissible steelweight 
thresholds; and, three, whether the work resulted in the 
installation of required segregated ballast tanks which must by 
law be installed in the United States if a vessel desires to 
maintain its coastwise privileges.
    On Seabulk's request, the Court granted a temporary stay 
pending appeal of 60 days on May 9th, 2008, and directed the 
parties to begin negotiations on an appropriate appeal bond. 
The deadline for filing a notice of appeal is June 23rd, 2008. 
The Coast Guard is working closely with the Department of 
Justice on its next course of action in this case. And because 
the case is still in litigation, all other questions about it 
must be referred to the Department of Justice.
    The way forward regarding any improvement to vessel rebuild 
determination will hinge on at least one of three types of 
actions. The first one, judicial action. Although the Coast 
Guard cannot discuss our specific recommendations or intended 
action with respect to an appeal of the decision in the Seabulk 
Trader, clarity could result from actions by the Court in this 
matter. However, with regard to action by the Court, generally 
speaking, it seems equally possible that clarity going forward 
from this or other judicial actions could be uncertain and 
might not necessarily resemble the intent of Congress.
    Second type of action, agency action. The Coast Guard could 
propose new regulations. The rulemaking is a time-consuming 
process and, without any additional clear guidance from 
Congress, may continue a policy which is misaligned with 
congressional purpose and be subject to more judicial actions.
    Third is legislative action. Congress could act to bring 
greater legislative clarity to the Jones Act. The Coast Guard 
would welcome such action. We have more than 50 years of 
experience with vessel determinations and are committed to 
working as extensively as necessary with Congress to garner 
more precise statutory context. The Coast Guard seeks to 
administer the Jones Act in good faith through consistent 
regulatory actions and vessel determinations. Additional 
legislative clarity would necessarily involve refinement of 
more precise definitions of statutory terms major component and 
considerable part.
    Thank you for the opportunity to testify today. I look 
forward to discussing these and other facets of our 
responsibilities during today's hearing.
    Mr. Cummings. Thank you very much to both of you.
    Admiral Watson, let me start with you.
    As evidenced by today's hearing, there are lots of 
questions about the Coast Guard's interpretation of the Second 
Proviso of the Jones Act and whether the United States ship 
owners are complying with the intent of the law. It appears 
that there is room for clarification of the Coast Guard 
regulations on this matter.
    Does the Coast Guard, first of all, have the authority to 
revise its rebuilding regulations without further congressional 
action? In light of the concerns expressed about the Coast 
Guard's regulations by shipyards and operators and now again by 
the Court, a court of law, does the Coast Guard now plan to 
revisit its regulations?
    Admiral Watson. Sir, the Coast Guard has no plans to 
revisit the regulations at this time. We I think are not 
limited in proposing regulations related to this subject 
matter. We intend to obviously watch closely the outcomes of 
these judicial actions. And depending upon their outcome and 
whether or not there is any changes to the Jones Act itself 
legislatively, we would make a decision at that time.
    Mr. Cummings. Now that leads me to my next question. In 
your statement you said that the Coast Guard believes that 
additional legislative clarity is necessary, did you not?
    Admiral Watson. Yes, sir.
    Mr. Cummings. And you said that that would hopefully, 
hopefully improve the efficacy of the Second Proviso by 
clarifying the terms, quote, major component and, quote, 
considerable part, unquote. Has the Coast Guard looked into 
whether such an amendment may be found to be in violation of 
GATT, which could potentially result in sanctions being imposed 
on United States trade until the entire United States build 
requirement under the Jones Act is repealed? Why should we, 
therefore, risk a repeal of the United States build requirement 
when the Coast Guard can clarify its standards by regulations?
    Admiral Watson. Sir, with regard to GATT, that certainly is 
out of the Coast Guard's purview of expertise. What I know is 
that that statement you made is definitely something that needs 
to be considered. We feel that simply providing clarity and not 
expanding on or making changes to Jones Act but rather just 
clarifying to communicate the intent of Congress is in the safe 
area with regard to GATT. But that would be the Coast Guard's 
view on it only, and you would be better off to get advisement 
from the trade negotiators. And I think the issue is that there 
is consequences of not doing that.
    So it is a balance of outcomes that need to be looked at, 
and we are experiencing right now the outcome of taking the 
purely regulatory route. These regulations just went into 
effect in 1996, and now we are involved in a lot of judicial 
actions. And the process, I would imagine for the business 
side, is at a standstill until all this can get resolved.
    Mr. Cummings. Certainly clarification is important. I think 
whenever anyone is in business they have to have clarity with 
regard to the law, not only because they want to comply but 
they also want to make sure that they can properly plan. Any 
business person will tell you that planning is of utmost 
importance. And all of this would certainly go into their 
    There is just two more questions, and then we will go to 
Mr. Poe.
    Does the Coast Guard base calculations of steelweight, when 
assessing whether a vessel has been rebuilt in a foreign 
shipyard, on the amount of steel that has been removed from a 
vessel and the amount of steel that has been added to the 
vessel, or does it base considerations on the greater of either 
the steel removed from the vessel or the steel added to the 
vessel, rather than the combined weight of such steel? And can 
you comment on this?
    Admiral Watson. Our policy is to use the greater, the 
second, the greater of the steelweight of the steel added 
versus removed.
    Mr. Cummings. Okay. Finally, the calculations and 
considerations related to rebuilding decisions, as we can see, 
are very complex. They involve decisions relating to the 
steelweight of the vessel, assessment of whether certain items 
constitute major components and the analysis of whether work 
being performed is applied to the hull and superstructure of 
the vessel. But, as we all know, during any construction 
process the scope of work changes to address, for example, 
unforeseen issues and to make improvements to the planned 
    So my question is, do the owners submit to the Coast Guard 
a detailed list of proposed changes or discuss in detail the 
potential impacts of these changes on the rebuilding analysis? 
And what effort does the Coast Guard make to verify that the 
representations of the owners are accurate before making a 
final rebuild determination?
    Admiral Watson. The applicant is required to do all of the 
calculations with regard to the steelweight and all of the 
requirements to make a determination for Jones Act rebuild.
    The Coast Guard is normally asked to make a preliminary 
determination, which is not a final agency decision but is 
something that was introduced in 1996, because it does give the 
business communities some information that hopefully they can 
rely on before they embark on a large project.
    So at the Vessel Document Center the information is 
evaluated and a determination is made. The evaluation that is 
done by these companies is normally accepted as an accurate 
    We have in a number of cases, when there is reason to do 
so, sent all of that information, all of the detailed plans to 
our Naval Architecture Branch at Coast Guard headquarters, 
provide it to the structural engineers and Naval architects to 
do a complete duplication in terms of the calculations of what 
has been submitted and determined by the applicant. And that 
can be done at the preliminary determination and then again at 
the end of the process with the detailed information coming 
from the shipyard when the work is complete.
    Mr. Cummings. Did you have something to add, Ms. Williams?
    Ms. Williams. Yes, sir, if I might.
    When we issue a preliminary determination in a rebuild 
case, we caution the applicants that the work has to be done--
that the rebuild determination, if favorable, applies only if 
work is done in conformance with what they have outlined in the 
detailed plan and the information provided to us up front. If 
the project changes dramatically from those submissions, they 
are required to resubmit. And we can at any point ask for 
additional information and further clarity, and an applicant 
can then make resubmissions.
    The final action--the final action would result in a 
second--a final rebuild determination letter or the actual 
issuance of a Certificate of Documentation with a coastwise 
    Mr. Cummings. When you say "change dramatically", what do 
you mean? Who determines that?
    Ms. Williams. Well, if the work has begun and the owners 
and the owners' agent determine that the scope of the work is 
going to change once they have begun a project, then it is 
incumbent upon them to notify the Coast Guard, just as they did 
voluntarily in requesting the preliminary rebuild 
    Mr. Cummings. So you don't do outside verification then?
    Ms. Williams. No, sir, we do not.
    Mr. Cummings. All right. Mr. Taylor, I know you have a 
question, but I want to just go to Mr. Poe. Mr. Poe?
    Mr. Poe. Thank you, Mr. Chairman.
    Thank you both for being here.
    Section 12101 of Title 46 of the U.S. Code says a vessel is 
deemed to be rebuilt in the U.S. only if the entire rebuilding, 
including the construction of any major component of the hull 
or superstructure, was done in the United States. How does the 
Coast Guard define rebuilding? Either one of you or both.
    Ms. Williams. Well, we defined it as it is spelled out in 
our regulations, is the vessel is rebuilt if any major 
component not built in the U.S. has been added to the vessel or 
if work exceeding 10 percent of the vessel's overall steel work 
is done outside of the U.S.
    Mr. Poe. What is the difference in rebuilding and repair?
    Ms. Williams. There is no difference. It depends on the 
extent of the work. The percentages on a repair are considered 
in the calculation for a rebuild determination, as is any other 
type of work.
    Mr. Poe. So as far as the Coast Guard is concerned 
rebuilding and repair are synonymous?
    Ms. Williams. They could be, sir, yes.
    Mr. Poe. Well, either they are or they aren't. Is repair a 
different word than rebuilding?
    Ms. Williams. Well, if a repair reaches the extent of a 
rebuild in our definition of greater than 10 percent of the 
work or a major component added to the vessel not built in the 
U.S. Obviously, a repair would not necessarily fall in the 
category of a major component added. But if the extent of work 
done in a repair exceeds 10 percent, then it could result in a 
determination that the vessel has been in fact rebuilt.
    Mr. Poe. If a ship has a hull replaced, would you agree 
that that has to be done in the United States?
    Ms. Williams. If the entire hull is being replaced?
    Mr. Poe. If the hull is replaced.
    Ms. Williams. Yes, sir.
    Mr. Poe. You take the hull off, and you put another one on. 
That would be done in the United States?
    Ms. Williams. To maintain its U.S.-built determination, 
    Mr. Poe. And instead of taking that hull off you put a hull 
on the inside of the existing hull to give the ship more life, 
or whatever reason, but you put it on the inside, would that 
have to be done in the United States?
    Ms. Williams. It depends, sir. In a case of an inner hull, 
if the total--if the extent of work done exceeds the parameters 
of a rebuild, yes, it would be considered a rebuild at that 
point if it is done----
    Mr. Poe. I am trying to keep it pretty simple. You take the 
hull off, put another one on, you got to build it in the United 
States. If you leave the old bad hull on there and you put a 
hull on the inside like a lining, like we say in Texas, you 
know, you have a lining for your pickup bed--truck, you know, 
your truck that has a pickup, would you require that that new 
hull inside of the existing hull be built in the United States? 
Either it would have to be or it wouldn't have to be.
    Ms. Williams. It depends on the method used to perform that 
work. In the case you are describing, if it is not done as a 
major component issue but that we are looking at the separable 
parts that were used to do that work in applying the tests of 
the 7.5 to 10 percent, then it could not--it could be 
determined not to have been a rebuild.
    Mr. Poe. Let's go to the opposite. You leave the hull on 
the ship and you put one on the outside of it. Would that have 
to be done in the United States?
    Ms. Williams. Again, it would be dependent on the method of 
    Mr. Poe. So you don't know? Is that what you are telling 
    I am just trying to see what the Coast Guard's position is. 
All things equal, you put it on the outside, generally would 
that have to be done in the United States or you would say that 
may not be a major component of the ship?
    Ms. Williams. Well, a lot depends on the method of 
performing the work on the vessel. It is not as clear-cut as 
you described. If there were singularly a whole hull added to 
the vessel, that then would fall under a definition of major 
    Mr. Poe. All right. Thank you, Mr. Chairman.
    Mr. Cummings. Thank you.
    Mr. Taylor.
    Mr. Taylor. Thank you, Mr. Chairman.
    Admiral, I am reading your statement, and I am going to 
read selective parts of it back to you. This is from page 3. 
This is the second to last paragraph.
    "There is no requirement, however, that vessel owners seek 
a preliminary determination before having foreign work done."
    I am going to skip down a few sentences.
    "There is no requirement that a vessel owner seek a final 
determination after having foreign work done."
    What I read into that, and please correct me, is you are 
doing this on the honor system. That basically if I want to 
beat the system, if I want to take advantage of cheap foreign 
labor, still engage in the coastwise trade, I basically let you 
know that I am going to do some work, but I am not going to 
show you what it is. I am going to take it overseas, I am going 
to get my work done cheap, I am going to come back and do the 
Jones Act trade, and I don't even have to tell you what I did, 
just as long as I pay the fee for a new documentation?
    And, again, given the screw-up on the 123s, and there is no 
nice word for it, eight ruined vessels, the Nation is out of 
$90 million, no one in your organization has stepped forward to 
say, you know what, I should have caught it. Nobody on the 
contractor side has stepped forward and said we screwed you. 
Just eight ruined vessels.
    But I can tell you this. I have now become a master at 
hogging and sagging calculations. And I realize when you start 
chopping up a hull there are vulnerabilities that come out of 
that. So what you are basically telling someone is you can go 
chop up your hull overseas as long as you don't ask for 
permission up front. You can come back and say I did it, but it 
really wasn't much work. And you really can create a situation 
where your hull is now vulnerable as a result of the work you 
have done overseas, and it is going to be documented again by 
the Coast Guard, and no one is taking the time to see they have 
taken a safe vessel like the 110 and turned it into an unsafe 
vessel like the 123?
    Have we got a situation now where we are encouraging that 
through the law? And I am going by your testimony. So please 
    Admiral Watson. Yes, sir. I would like to distinguish 
between the work that we do to certificate vessels and to 
ensure that they are in compliance with our safety standards.
    In the case of these large vessels we are talking about, 
they are typically built to class society standards, and they 
are referenced through our safety regulations. And quite often 
there is an ABS surveyor or another class society surveyor that 
is attending that work in the shipyard, and there is a lot of 
correspondence between the Coast Guard and the surveyor.
    Mr. Taylor. Is it an ABS's job to enforce American law?
    Admiral Watson. Sir, no.
    Mr. Taylor. Particularly with regard to the Jones Act?
    Admiral Watson. No.
    Mr. Taylor. Whose job is that, sir?
    Admiral Watson. With regard to the Jones Act, that is the 
Coast Guard and the Vessel Documentation Center.
    Mr. Taylor. And have you at any point delegated that 
responsibility to the ABS?
    Admiral Watson. No, sir.
    Mr. Taylor. Okay.
    Admiral Watson. But the processes of validating that there 
has been safe construction practices, the requisite amount of 
structural material being put in to prevent buckling and 
hogging and sagging, as you mentioned, and all of the other 
circumstances related to stability and environmental 
protection, that is all being done under our safety side. And 
the process of issuing a vessel documentation certificate is 
done by the vessel documentation side.
    Mr. Taylor. Has your safety side talked to the 
documentation side or does the safety side take the attitude, 
okay, it is not going to create an oil spill even if they broke 
the law, so we won't tell these guys over in the documentation 
    Admiral Watson. Well, the safety people are focused on 
safety and environmental protection; and when the Vessel 
Documentation Center needs that level of expertise to calculate 
steelweight and the kinds of things that are necessary to make 
a determination for vessel documentation, they do go to those 
experts that can do those sorts of calculations.
    But I think you accurately characterized the system for 
documentation. It does involve a certain amount of an honor 
system here. What you have in place is a very extreme penalty, 
and that penalty has been considered the motivator for honesty 
and compliance with the standard. And there is a lot of 
transparency in the competition, too, with regard to these 
issues of reconstruction in a foreign shipyard. Obviously, 
there is a lot of people in this room and there is people that 
go to the extent of actually the lawsuits.
    Mr. Taylor. Mr. Chairman, if you will bide with me for a 
minute, Admiral, what I just find mind-boggling and what I 
think the average American will find mind-boggling is I have 
from time to time had constituents who have documented vessels 
call me up, and I am probably going to get the word wrong, but 
one of your regs says that a threshold coming off a deck going 
into a vessel I believe has to be six inches. And it makes 
sense. You catch a big wave, is to keep that wave from going in 
the cabin, flooding the engine room, possibly lose power and 
the boat capsizes.
    And I think I had an instance where a constituent, it was 
five and three-quarter inches, Coast Guard wouldn't document 
it. He had to go back and do some carpentry work.
    Again, rules are rules. How do you think that constituent 
would likely feel about seeing this vessel that was gutted in 
China, rebuilt in China, certified by the United States Coast 
Guard like nothing happened? Does that strike you as selective 
enforcement? Because it certainly strikes me as selective 
enforcement. Quarter of an inch here, a container ship 
converted to a railroad ship there and you guys can't catch it?
    And so it leads to the question, is it that you are getting 
a message from the administration look the other way? Is it a 
lack of manpower? Is it a lack of expertise? Or, lastly, is it 
a lack of will within the Coast Guard?
    Because I have actually had--I wasn't told this, but one of 
my staffers had a conversation with one uniformed Coast Guard 
officer who said something to the extent that the Jones Act is 
an antiquated law that ought to be off the books.
    Now, number one, if it is on the books I would expect you 
guys to enforce it; and, quite frankly, I don't think the Coast 
Guard ought to be in the position of picking and choosing which 
laws they are going to enforce. And if that officer feels that 
way about the Jones Act then he ought to run for Congress and 
try to change the law. Until then, he ought to live by the law.
    So what is it of the scenarios? Are you getting told by the 
administration don't enforce the law? Are you short on 
manpower? Or do you just don't give a flip in the case of 
enforcing this law?
    Admiral Watson. Sir, we feel like we have consistently 
enforced this law.
    Mr. Taylor. That is not very consistent, Admiral. And we 
sent you these photos a long time ago. And it took the court 
case to do something about it. The Coast Guard didn't do 
anything about it until the courts did something about it. So 
why is that?
    Admiral Watson. Well, sir, what I was going to say is that 
that is a lot of work. There had been ships with a lot of work 
done for the last I guess 50 years. We have never had a program 
that is like we have for safety to do enforcement for the 
purpose of Jones Act, where we would actually go and be 
resident in a shipyard or be involved with doing the detailed 
plan review strictly for the purpose of doing Jones Act. So 
when I mentioned consistent, that is what I mean.
    Now whether that is adequate, whether there is some changes 
that should be made in this area, that would be something that 
should be discussed. But I would say that we have been 
consistent both doing safety and doing our Jones Act 
    Mr. Taylor. How do you explain this, Admiral? What 
    Admiral Watson. What happened in that case is, first of 
all, I think there is an explanation that needs to be made 
about what constitutes the considerable part and what 
specifically is how we are currently defining ``major 
component''. And I think, you know, what you are seeing there 
is a combination of considerable part that was evaluated, added 
to that a lot of parts that were not considered to be 
structural, which looks like a lot of ship. But things like 
doors and ramps and bolt-on structures that are what we 
consider nonstructural are not considered as part of that 
considerable part. And then----
    Mr. Taylor. Admiral, with all due respect----
    Admiral Watson. Yes, sir.
    Mr. Taylor. --this ship was gutted. This ship was taken 
down to the bare hull and rebuilt. Are you going to tell me no 
one in the Coast Guard could recognize that? You couldn't take 
a kid out of Cape May and he couldn't make that determination?
    Admiral Watson. Sir, I believe that was one of the ships 
that we did take a close look at in our Naval architecture 
department. But it didn't add up to the greater than 10 percent 
rule that we have for----
    Mr. Taylor. Thank you, Mr. Chairman. You have been very 
    Mr. Cummings. Mr. Taylor, I have given you a little extra 
leeway because you did ask for the hearing, and I hope the 
Members can appreciate that.
    Just one thing, Rear Admiral, is a lot of this based on 
trust? I mean, I am listening and I am thinking that there must 
be a big trust factor, because it does not seem to be the kind 
of verification that I would think would be appropriate. And 
trust is nice, but I am just wondering when you are talking 
about millions upon millions upon millions of dollars, you 
know, sometimes people may find ways to get around our regs.
    And I must tell you, in answer to Mr. Taylor's last 
question, too--this is just a second thing--it was very 
confusing. And it left for me sitting here thinking that if a 
ship is pretty much gutted, and this is where we end up, 
somebody's not doing something right. There is something 
awfully wrong with this picture. And it does concern me, and I 
think it will concern the rest of the Committee.
    And I want to go back to his question, which you may answer 
now or throughout answering other people's questions, do we 
have a lack of manpower? Do we have a lack of expertise? Do we 
have regulations that just need to be done over again because 
they are just not clear enough? Is legislative action 
necessary? If so, exactly what is that?
    Again, we have to have clear meaning for these people who 
are in this business and so that we can make sure that the laws 
that we are putting forth are adhered to. There is no need for 
us to sit up and go through these changes if the laws are not 
going to be adhered to. And they must be administered in a 
consistent manner. Very important.
    Mr. Larsen. You can answer that throughout the----
    Mr. Larsen. Thank you, Mr. Chairman.
    Admiral, getting back to the preliminary determination 
process, you noted that the Coast Guard generally accepts as 
accurate the calculations that an applicant makes, but at times 
it goes to the Naval architect's office. What would trigger the 
Coast Guard sending plans to the Naval architect's office?
    Admiral Watson. Well, one of the triggers would be when we 
hear from other people in the industry. And we hear that on a 
regular basis. But if it is a close line issue, obviously, if 
there has been concerns in the past over these kind of projects 
and whether there is any doubt with regard to their ability to 
do accurate calculations, those would be some of the 
circumstances where we would choose to do that.
    Mr. Larsen. Do you have a formal process for that then or 
is it mainly hearing from folks from the outside that would 
cause the Coast Guard to sit down and make its own 
determination about whether or not to send this material over 
to the Naval architect's office?
    Admiral Watson. I don't think we have a bright line, if 
that is what you are looking for, where we would, you know, 
automatically send these plans to the Naval architects.
    The people that we have at the Vessel Documentation Center 
are all civilians. They have been there a long time. They have 
done these cases for many years, and the system has been like 
that. And that is where I draw my statements that I think that 
there is consistency here.
    There is a lot of variations in the projects, and some look 
pretty significantly different in pictures than others. But the 
evaluation and whether or not they go to the Naval architects 
is I think consistent by virtue of the people and the 
repetitiveness of their process at the Vessel Documentation 
    Ms. Williams. Sir, I am sorry, if I might add to that.
    Mr. Larsen. Yeah.
    Ms. Williams. We might--the NVDC might request a 
determination from the Naval Architecture Branch of whether 
work is actual structural to the hull or superstructure. That 
is without getting any feedback from any competitor or from the 
applicant. But if in our view, we are conducting our review, we 
have questions as to whether the work being done is in fact 
structural and it is work being done upon the hull or 
superstructure, we seek their advice in those instances.
    Mr. Larsen. Okay. My understanding is that somebody may 
apply for preliminary rebuild determination, but there is no 
requirement that they do that. Is that correct?
    Ms. Williams. That is correct, sir. In their belief----
    Mr. Larsen. And why would they request it and why wouldn't 
they request it? And how many times--how many times do you get 
a request for final determination where you didn't have the 
preliminary determination?
    Ms. Williams. They generally seek a preliminary. Because, 
as the Admiral alluded to earlier, the penalties for violating 
the rule are so severe such that they would submit to us their 
calculations so that we could confirm their understanding that 
they have not reached the level of rebuild. I don't know of any 
instance where we have been asked for a final determination 
where there has not been a preliminary determination.
    Mr. Larsen. Okay. You mentioned the penalties being severe. 
And I think if you were to ask the Seabulk Trader folks about 
the penalty, that was pretty severe and appropriate in my view. 
But has the Coast Guard ever done what the courts have done, 
pulling a coastwise endorsement?
    Ms. Williams. Not for this purpose, sir, not that I am 
aware of.
    Mr. Larsen. So what severe penalties--when you talk about 
penalties being very severe, what penalties are you talking 
    Ms. Williams. I am talking about if the work exceeds the 
level that we determine is a rebuild greater than the 10 
percent and they perform the work, then they are subject to 
losing the coastwise strait privileges.
    Mr. Larsen. And how many times has that happened?
    Ms. Williams. There is one case, a Crowley case that I am 
aware of, where they did undertake the work without requesting 
any type of review because it was in the nature of an emergency 
repair in a foreign shipyard, and the work reached the level of 
I think greater than 25 percent. And they did in fact ask for a 
ruling, in which case we denied.
    Mr. Larsen. So then do you find that in most cases--if I 
may, Mr. Chairman, in most cases that the ship owners and 
operators are complying with the law? Is that your--would that 
be your determination?
    Ms. Williams. We would think so, sir.
    If I might, the vessel documentation process as a whole, 
everything we do at the National Vessel Documentation Center 
requires self-certification. When any applicant applies to 
document a vessel, whether it be new vessel or a vessel that is 
undergoing some changes, they certify it by virtue of their 
application that--for instance, to get a coastwise 
endorsement--that the vessel has been built in the U.S., which 
requires that all components, all major components of the hull 
and superstructure have been built in the U.S. and that the 
vessel has been entirely constructed in the U.S.
    That is a self-certification. We do not verify on any 
application any of those facts. The circumstances that the 
Admiral was discussing earlier about compliance issues, the 
safety facet, there is verification. The Coast Guard employs 
folks who look at vessels for those purposes but not for 
purposes of verifying that every component that was put on a 
vessel was in fact of U.S. origin.
    Mr. Larsen. I understand the difference between checking 
out the vessel for safety. To be sure it floats when it leaves 
is something different than making sure it complies with the 
Jones Act. I think we are all pretty clear we are talking about 
two different things there. And this is a hearing about the 
Jones Act.
    Mr. Chairman, thank you very much. I would just like to 
note on the next panel I would like to hear a little bit from 
the next panelists about the preliminary rebuild determination 
process, its transparency, and this whole issue of self-
certification. So just give them a heads up on that.
    Thank you.
    Mr. Taylor. [Presiding.] The Chair thanks the gentleman.
    The Chair recognizes Mr. Bishop.
    Mr. Bishop. Thank you, Mr. Chairman.
    I want to return to the general subject matter of the 
questioning that Mr. Poe was pursuing earlier, and it is the 
issue of when the Coast Guard and/or the NVDC have the capacity 
to exercise discretion. In the Seabulk case, it is pretty clear 
that the Coast Guard and the NVDC could have decided that the 
construction of a new inner hull was a major component of the 
ship's hull; and, in fact, ultimately, that was the thrust of 
the Court's decision.
    Leaving aside the issue of whether or not the Court's 
decision was right, my question has to do with when the Coast 
Guard has the opportunity to exercise discretion, and you have 
that opportunity often, what principles guide that exercise? 
How do you make the judgment?
    And again revisiting this decision, you made the judgment--
or the judgment was made that the construction of an inner hull 
did not constitute a major rebuild. Court found the opposite. 
How does that process go forward and what principles guide you 
as you undertake these decisions?
    Admiral Watson. Yes, sir. There are two principles involved 
here. There is the consideration of whether this work is a 
major component, in which case we would be looking to see if it 
was a single component that was still structural and added to 
the vessel. An example of that would be like a bulbous bow, a 
new transom, a complete section of the superstructure, 
structural; and if it exceeds 1.5 percent of the weight of the 
vessel, excluding all of its fuel and engines and outfitting, 
then that would be rebuilt. That would be a determination that 
you can't sell coast-wise.
    In the case of pieces and parts being put into a vessel, we 
have not considered that to be a major component. So were we to 
have done that, that would be inconsistent with our work 
historically, and that would be a change.
    The other thing that we look for is whether there is metal 
that is added to the structural parts of the ship, built-up 
sections, replaced sections. This could include maintenance 
that we were talking about where we would replace steel, and 
that would also include the major components as well. If you 
add all of that up over the whole ship and that exceeds the 7.5 
percent of that steel light ship, then we would start to 
consider that this could be a rebuilt case; and there is some 
discretion and there are other considerations when we are 
between 7.5 and 10 percent. If it exceeds 10 percent, it is 
definitely a rebuilt.
    Mr. Bishop. I guess the difficulty I am having--and I will 
confess to being a layman with respect to naval architecture--
but it just seems that the Second Proviso of the Jones Act, the 
intent of it is clear. It is to protect American shipbuilding 
and to not give an unfair advantage to those who have not 
engaged in shipbuilding in America.
    And the construction of an inner hull, it strikes me, is a 
major retrofit of a vessel; and it just--I just don't 
understand why, if we have a law where the intent is clear and 
the activity undertaken by a shipbuilder at a minimum is 
subject to a choice, why that choice would not revert--why the 
finding would not be one that is supportive of the intent of 
the Second Proviso.
    Admiral Watson. Yes, sir. Maybe I could just talk a little 
bit about the history and how we got to this long-standing 
Coast Guard interpretation of the intent.
    It was a case that occurred in 1960 where a clarification 
occurred with regard to this issue, and what was going on, 
there was a whole mid-body section was being floated into the 
United States from a foreign shipyard and then it was going to 
be put into a ship that was being rebuilt actually in a U.S. 
shipyard with this foreign major component.
    So this first level of the determination of whether or not 
you are putting in a major component really relates back to the 
determination and the clarification that we got in 1960 that 
had to do with this actual major single component thing that 
could be floated from one shipyard to another and installed in 
this vessel as a rebuild. And there has never been any other 
determination on or clarity about major component. That has 
just been the long-standing thing. We have only been looking 
for major complete components that exceed 1.5 percent ever 
since then.
    The changes that were made in 1996 as a result of the court 
cases then had to do with the establishment of these 
percentages for steel that is added onto structures and the 
definition of a considerable part but not major component.
    Mr. Bishop. Mr. Chairman, may I be given one additional 
    Mr. Taylor. Please.
    Mr. Bishop. Again, staying with Seabulk--and you just 
indicated that certain court decisions have informed further 
judgments made by the Coast Guard--in the Seabulk case the 
Coast Guard found that the separable/inseparable distinction 
that the Coast Guard was making would lead to arbitrary 
applications of the Jones Act. Do you foresee the Coast Guard 
now rethinking that separable/inseparable distinction so that 
there would be greater clarity going forward?
    Admiral Watson. Well, I think the Coast Guard is going to 
have to deal with the court's decisions; and I think it is 
going to be a little bit difficult for me to predict how we are 
going to do that.
    One thing that comes to mind is that the Seabulk case is 
not the only case out there, and there are several cases, and 
it is possible that different judges could render different 
decisions on circumstances that are very similar. So then I 
don't know quite how we would write regs.
    Mr. Bishop. Mr. Chairman, thank you for allowing me.
    Mr. Taylor. Thank you.
    The Chair recognizes Ms. Richardson.
    Ms. Richardson. Thank you.
    I think my colleagues have done a pretty good job about 
dealing with the specifics of the issue today. What I would 
like to do is I think talk about the bigger problem, which 
hopefully can get us to some resolution.
    I am new on the Committee; and back in May we had a hearing 
of this group, a body of the Coast Guard National 
Transportation Safety Board Casualty Investigation Program, and 
at that time the Investigator General found that five out of 
six of your folks who were assigned to the marine casualty 
investigators in the sector of San Francisco were unqualified 
for these positions.
    Further, in the report it stated--and that is why it is a 
good thing that Members stay around, so we can remember from 
one week to the next of what is said. In the report it said, in 
August of 2007, the Coast Guard issued a revised standard which 
both improved and detracted from the qualifications for marine 
casualty investigators. The Coast Guard improved the standards 
by updating the task that an investigator must perform to 
qualify for this position. These tasks include preparing for an 
investigation, initiating, et cetera.
    Then we get to the key point here which is why we are here 
today: However, in August of 2007 the standard also removed the 
prequalification requirement as a whole for machinery and small 
vessel investigator, which, in essence, lowered the standard. 
Coast Guard personnel stated that knowledge in these speciality 
areas is essential to the ability of investigators to correctly 
identify the causes of marine casualties and issue appropriate 
safety alerts and recommendations. In our opinion removing this 
prequalification standard may negatively affect the 
qualifications and the capabilities of the Coast Guard marine 
casualty investigators.
    Now, I realize that one is one issue and one is the other. 
But, sir, I have got to tell you also then when I look at the 
report of the testimony of Catherine Higgins, where they 
suggest that we were last here and we were fighting over who 
should have jurisdiction and you guys have done it over the 
years and that is why you still want it to do it, I have got to 
tell you--and I am going to summarize--what I recommend that 
this Committee do is that I think when we get a new 
administration we need to send a letter to the Department; and 
a complete reevaluation needs to be made of the jobs and 
qualifications and what the Coast Guard does.
    With all due respect, sir, you are out there fighting a 
war. You are doing a whole bunch of things that many of us 
didn't anticipate you were going to have to do at this level, 
and hence we are having problems with marine accident 
investigations, we are having problems with this, and I really 
believe that you are stretched too far. And whether it is your 
inability to fight with the current administration to demand 
that you have appropriate personnel, I don't know what it is, 
but I believe it needs to be seriously looked at based upon 
your current involvement with the war efforts that we have. 
Maybe what you did previously in nonwar environments was okay, 
but I believe that we are just seeing holes in the ship all 
around us and it has got to change.
    So what I am going to ask of our Chairman is that we do a 
letter, and I think we need to seriously reevaluate all of 
these different things that you are required to do and 
determine which ones are the most critical, and the ones that 
you can't, maybe somebody else needs to do them. But this is 
not working.
    Do you have a comment on that?
    Admiral Watson. The only comment I would like to make is 
that there really isn't a difference in the subject matter we 
are talking about here. It is an issue of clarity of a 
    I think to characterize the people that we have at the 
National Vessel Documentation Center as having not the 
requisite experience and competence I think is really not the 
accurate characterization for this particular issue.
    Ms. Richardson. Well, you just had several Members here who 
went through questions and asked you, if you were completely 
redoing the hold, didn't you see it? Didn't you know? Didn't 
you understand? And there were serious concerns here of the 
ability to do the job.
    Admiral Watson. Well, in the process of issuing a 
certificate of documentation, there is no field visit to the 
ship. I mean, that was one thing that we absolutely agree with. 
This is a process that relies on honesty on the part of the 
applicant to do those calculations. And we don't have, in the 
course of every documented vessel, an inspector that goes out 
just for the purpose of doing the documentation evaluation. 
This is done at the Vessel Documentation Center with the 
information that is provided the same way it has been provided 
for years and years, and the people that we have there are very 
experienced. And it is really not an issue of training. It is 
an issue of standards and clarity of purpose on the part of the 
    Ms. Richardson. Well, what I would say as I close, because 
my time has expired, honesty only works if it is going all the 
way; and if it is not going all the way then obviously we need 
another process to deal with it. So what I am frustrated with 
is I sit on this Committee and in a couple months I have seen 
multiple instances where your operation has failed. So I am 
willing to give you the fact that I don't think necessarily the 
failure is solely that people don't want to do a good job or 
the people that are there aren't capable of doing the job. What 
I am saying is I think, with all the things you are doing, it 
seems to be a little too much.
    So we either, one, need to get enough people there to do 
the job in a quality fashion or, two, we need to reevaluate all 
of what you do. But we shouldn't be fighting over, as we were 
just here, your saying that you wanted jurisdiction of another 
area when I see areas that you have jurisdiction over where it 
is not working. So at some point these pieces need to come 
together, and that is what I am concerned about.
    Thank you.
    Mr. Taylor. The Chair recognizes Mr. Poe.
    Mr. Poe. Thank you, Mr. Chairman.
    Just to clarify, Admiral, isn't a field visit required 
before a Certificate of Inspection is issued?
    Admiral Watson. Yes, sir.
    Mr. Poe. So there is an inspection of the vessel?
    Admiral Watson. Yes, sir. It is an inspection related to 
the safety rules in 46 CFR.
    Mr. Poe. I just wanted to make sure that was clear.
    Thank you, Mr. Chairman.
    Mr. Taylor. The Chair recognizes Mr. Baird.
    Mr. Baird. Thank you, Chairman. I thank our witnesses.
    I don't know if you both have had a chance to look at the 
testimony of Michael Roberts, who I think is speaking on the 
second panel. Have you had a chance to look at that, by chance? 
I am not trying to blind side you here.
    Admiral Watson. I looked at it one time through, sir. But I 
will be happy to take questions.
    Mr. Baird. What is intriguing to me is Mr. Roberts makes a 
number of points here about possible changes in the procedures 
of the NVDC, and I am just interested--to a layman they seem 
like reasonable ideas. What are the pros and cons of these 
suggestions from your perspectives respectively?
    Admiral Watson. I am trying to remember all the 
suggestions, but I noticed there were some that related to 
    Mr. Baird. Let me just summarize really quickly. And these 
are not hostile questions. They are concerned particularly 
about, basically, the confidentiality.
    The closed nature of the NVDC determination process 
suggests that some of the procedures, changes should be public 
notice that an application has been filed, an opportunity for 
third parties to participate in the proceeding with appropriate 
restrictions to protect confidentiality of proprietary 
information, a reasonable opportunity for pursuing an 
administrative appeal within the Coast Guard, judicial review 
under the Administrative Procedures Act, and publishing and 
indexing of Coast Guard decisions on these issues.
    As I read it, I think the premise is that others might want 
to have input into this and maybe offer a different perspective 
possibly than NVDC or the Coast Guard might determine. And, 
again, to a layman I should tell you who supports the Jones Act 
in principle and in its purpose, that makes some sense to me. 
But I----
    Admiral Watson. Yes, sir. And that is what I was recalling 
was in there, was mostly the transparency of the process. And I 
think we are looking very closely at adding to the process that 
when an application--when a determination is made, a 
preliminary determination or a final determination, that that 
letter that the Coast Guard produces could be made public and 
avoid the current practice of requiring a FOIA and then the 
time it takes to process that and--as long as there is nothing 
that we inadvertently--we would have to look at our letters 
more carefully to make sure we haven't violated someone's 
privacy or all the other stipulations in the FOIA.
    One of the unintended consequences of changing to that sort 
of a process is that the overall process could be slowed down 
by adding this amount of information out so that there is a lot 
of dialogue that goes on. We could do that. It seems to be 
happening anyway. So if it could eliminate something else 
    Mr. Baird. Litigation, for example.
    Admiral Watson. Yes, sir. That might be a net gain.
    One thing that we cannot do, and this applies in all of our 
areas in working with the maritime industry--I spent 4 years in 
my career earlier doing plan review--is that you cannot release 
proprietary plans of one company to another company, and that 
is described very clearly in the FOIA. So one of the 
limitations that we may not be able to overcome that is 
suggested there is that they could have all of the information 
needed to evaluate this as a third party. The only way they 
could get that would be to go directly to the company that made 
the application and provided it all to us, because we are not 
at liberty to release any of that information.
    Mr. Baird. Ms. Williams, do you care to comment?
    Ms. Williams. Just to add to what the Admiral said is that 
we have already seen complaints about giving only our 
determination letter doesn't provide enough information that a 
third party would necessarily require to make any type of 
comment on our decision. So--and most of that information would 
be withheld under FOIA.
    Mr. Baird. I think the challenge here is, to the extent you 
are empowered to make some of these consequential decisions, if 
there is not confidence in the intent of enforcing the law, 
then there is a need for a third-party review possibly.
    And I want to close, I guess, by following up on the 
questions that Mr. Taylor raised.
    The comments suggesting that laws that are in place are 
archaic or anachronistic leads one to wonder is that the role 
of the people in that division to make those assertions? And 
what are the consequences? If somebody is empowered, it would 
be a little bit like a police officer saying I just never 
really bought into the 70-mile-an-hour speed limit myself. You 
wonder if that is the role of the police officer or if their 
role is to enforce the 70-mile-an-hour speed limit, and what 
are the consequences of that happening?
    In two senses, what are the consequences for the 
individuals who express such opinions? And, more importantly, 
what are the consequences to the public who are depending on 
such individuals to enforce the laws as they are written?
    Do you care to comment on that.
    Admiral Watson. Sir, I have never heard anybody in the 
Coast Guard make that kind of comment. It is certainly not the 
position of the United States Coast Guard, and we do regret 
when our employees make comments like that. But it is 
impossible to control everybody's comments, and it is hard to 
say where that was heard. If someone is in an official capacity 
and they are going to make a speech, we do try to review our 
public comments by official people in the Coast Guard. We just 
would simply say, no, that is not the position of the Coast 
Guard; you can't say that.
    If they were to have said it and it comes back to us, we 
would certainly look into the circumstances and whether we need 
to do something about that individual.
    But, obviously, we don't condone that. Our purpose is to 
enforce the laws of the United States, and the Jones Act is a 
very important law.
    Mr. Baird. I appreciate that.
    I would just close by saying it is so important that the 
vast majority of the Members of the Congress of the United 
States support it and we support it because we believe in a 
strong domestic shipbuilding industry; and I think we would 
look unfavorably upon anybody who sought to undermine that, 
either overtly or covertly.
    I thank the Chairman for his time.
    Mr. Taylor. Thank you.
    Ms. Williams, just a couple of questions; and I would 
invite either you or the Admiral to answer this. But a mistake 
was made. A major rebuild occurred. The Coast Guard signed off 
on it. You shouldn't have, and it took the courts to tell you, 
you made a mistake. So let us leave it at that.
    What I am curious about is on this major rebuild. I really 
do think any kid coming out of Cape May would have said major 
rebuild. Who in your organization looked at that, and who 
signed off on it, and what is the procedure? Was it a civilian 
who made this call and a uniformed officer signs off on it? 
What is the procedure?
    The second thing is--and I am trying to cut you some slack 
here. I do not have a law degree, and I realize that guys who 
don't have law degrees are making these calls every day. So I 
am going to read things to you. This is coming out of 46 CFR:
    "A, regardless of material of construction, a vessel is 
deemed rebuilt when a major component of the hull or 
superstructure not built in the United States is added to the 
    And you drop down a little bit: "A vessel is deemed rebuilt 
when work performed on its hull or superstructure constitutes 
more than 10 percent of the vessel's steelweight prior to the 
work, also known as discounted lightship weight."
    Now, I am trying to cut you some slack. The guy who has 
worked on boats says a lot of this work could be curved welds, 
very slow, manually intensive, very expensive. Or if you just 
go by weight, a lot of that could have been straight. It could 
have been done by machine, pretty cheap to do.
    Do the people in your organization look at the complexity 
of the work, have the technical expertise to go, "that is going 
to be slow, painful, and expensive" or "that is quick and 
dirty"? Is that language confusing to you, or did it just 
automatically fall to the 10 percent rule?
    And, again, I am trying to ask this because I want to solve 
this problem, and I am trying to figure out where the problem 
is. Is it lack of expertise within your office? Is it lack of 
guidance in the law? Is it lack of national will?
    And, lastly and I sure hope the last one is way off, are 
you being leaned on by this administration or any 
administration not to enforce the law?
    Ms. Williams. Sir, the process of making a rebuild 
determination is that an applicant submits in writing to us a 
very detailed explanation of the plant work. With that, they 
submit the calculations of the amount of steel work involved in 
the proposed modifications as compared to the total steel 
weight of the vessel. That information is processed at a very 
high level within our organization.
    The NVDC is composed of about 101 persons, primarily 
paralegals, specialists, and some clerical staff. But the 
determinations and most recently--well, at least since the 
formation of the NVDC--Mr. Willis, who was the former director, 
and I made those determinations until we got a staff attorney; 
and the staff attorney, Mr. Willis and I consulted on all 
rebuild determinations made since his arrival.
    Mr. Taylor. Just for clarification, so you personally were 
involved in the Mokihana?
    Ms. Williams. Yes, sir. As a reviewer, yes, sir.
    Mr. Taylor. And you did not consider that to be a major 
    Ms. Williams. No, sir. One of the----
    Mr. Taylor. Even after the photos were submitted to you?
    And, again, I can see the difference between what they said 
they were going to do and the photos. So you made your 
determination based on their written testimony?
    Ms. Williams. On their----
    Mr. Taylor. On their written request?
    Ms. Williams. On their written request.
    Mr. Taylor. So what happened when the photos--because I 
know my office submitted to the Coast Guard these photos. What 
happened then? And the Coast Guard stuck to their story. This 
isn't a rebuild. What happened then?
    Ms. Williams. As we applied the test, as we were trying to 
explain earlier as far as a major component or major components 
added to the vessel, we applied it in conformance with what we 
believe led to the addition of that terminology to the statute 
itself, is that separate and distinct portions of a vessel that 
exceeded 1-1/2 percent of the vessels overall steelweight were 
then added to the vessel. The work that was done on the 
Mokihana did not rise to that level in our estimation of how 
the work was performed on the vessel.
    Mr. Taylor. Do you find the law that I just quoted 
confusing in any way?
    Ms. Williams. No, sir, I don't.
    Mr. Taylor. So you go by the 10 percent rule is what you 
are telling me.
    Ms. Williams. Yes, sir.
    Mr. Taylor. You are not looking at it as a major component. 
You are looking strictly at the 10 percent rule--
    Ms. Williams. No, sir. We look at both portions of it.
    Like I said, a vessel--if a major component--in the first 
provision under the rule, if a major component of the vessel, 
added to the vessel, was not built in the U.S. and was later 
added to the vessel, it could rise to the level of being a 
    There are two portions of this rebuild determination that 
we do in fact----
    Mr. Taylor. But I am sensing that in no instance do you 
look at the complexity of the work, the value added of the 
work, that your fallback is the 10 percent rule, 10 percent of 
the steelweight?
    Ms. Williams. Yes, sir.
    Mr. Taylor. That is your quick and dirty----
    Ms. Williams. Well, as far as how complex the work is and 
whether it is going to be quick and dirty, no, sir. We go with 
the overall calculations in either event.
    Mr. Taylor. The second thing I have got to ask, I have been 
to shipyards in Korea and had total access; shipyards in 
Germany, total access; shipyards across the States, total 
access; shipyards in Denmark, total access. I visited one 
shipyard in the People's Republic, and I was assigned a goon 
who was in my face all day. I am just curious. When your folks 
are in a Chinese shipyard, are they given total access to that 
    Ms. Williams. None of the folks that work for the NVDC 
would ever be in a shipyard, sir.
    Mr. Taylor. No one from the Coast Guard ever----
    Ms. Williams. Not from the Coast Guard. From the National 
Vessel Documentation Center.
    Mr. Taylor. I'm sorry, ma'am?
    Ms. Williams. No one from the National Documentation Center 
would be in a shipyard.
    Mr. Taylor. Ever?
    Ms. Williams. That is correct.
    Mr. Taylor. So you are strictly--again, then you are 
counting on the honesty of the applicant. No one is looking 
over the shoulder, never a spot check?
    Ms. Williams. That is correct. And that is for all our 
applications, not just rebuild. Any application to document any 
vessel with us is based on a self-certification of the 
    Mr. Taylor. Okay. And the reason for that decision, is that 
dollars, limited budget? Is it manpower? Is it the way it has 
always--I am just curious.
    Ms. Williams. It is the way it has always been. We 
document--we have a total of 350,000 documented vessels. About 
35 percent of those would be commercial vessels, and I don't 
know what the actual----
    Mr. Taylor. Again, Ms. Williams, deal with the practical. 
Today, out in the Gulf of Mexico, some Coasties are going to 
board a boat and say, "Do you guys have any undersize snapper 
on board?" And the folks instinctively are going to say, "No." 
And they say, "Do you mind if we look in your ice chest?" So 
for something as simple as the size of a snapper, the Coast 
Guard is going to stop and see if someone is breaking the 
rules. You are telling me that no one is bothering to check on 
a huge project like this whether people are living by the 
    Ms. Williams. Not for the purpose of issuing certificate of 
    Mr. Taylor. All right. I just wanted to get that on the 
record. Thank you for being forthright for us.
    I don't have any additional questions. Does anyone else?
    Again, thank you for being here. We have obviously got 
something that needs to be addressed. We very much appreciate 
your appearing before the Committee. You are excused, and we 
are going to call the second panel up.
    The Committee is now going to hear testimony from our 
second panel including Mr. John Love, the Vice President of 
Pasha Hawaii Transport Lines; Mr. Matthew Paxton, the President 
of the Shipbuilders Council of America; and Mr. Michael 
Roberts, a partner on behalf of Crowley Maritime Corporation.


    Mr. Taylor. Mr. Love, we will take your testimony first, 
    Mr. Love. Mr. Chairman and Members of the Committee, my 
name is John love. I am a Vice President of Pasha Hawaii 
Transport Lines, and I appreciate the opportunity to testify 
before the Subcommittee on Coast Guard and Maritime 
    PHTL is a U.S. Flag carrier that operates the JEAN ANNE, a 
U.S.-built vessel carrying roll-on/roll-off cargoes in the west 
coast and Hawaiian Islands trades. The JEAN ANNE is a state-of-
the-art pure car and truck carrier delivered by VT Halter 
Marine in Mississippi in 2005. She meets all the requirements 
of the Jones Act.
    As you know, the Jones Act requires that U.S. Flag vessels 
be built and rebuilt in the United States in order to retain 
domestic trading privileges. If a major component is added to a 
vessel in a foreign shipyard, it is rebuilt foreign per se. We 
knew this when we decided to build the JEAN ANNE at VT Halter 
and have no doubt that our competitors knew this as well. We 
also assumed that the Jones Act would be vigorously enforced. 
Yet the JEAN ANNE is now competing with at least two vessels 
rebuilt in Chinese shipyards.
    The root of the problem begins with the fact that the 
decision-making process employed by the Coast Guard is a secret 
proceeding closed to the public. A typical application for a 
rebuild determination, contrary to the testimony that you heard 
here this morning, consists of a lawyer's letter with a vague 
general description of the project, even though the Coast 
Guard's regulations mandate submission of detailed information 
along with accurate sketches and blueprints.
    In the Mokihana case, none of this happened. What was 
described here this morning by Admiral Watson and by Ms. 
William is a process as it should have been but not what 
actually happened.
    To make things more difficult, the only way to obtain a 
copy of the Coast Guard ruling is to file a request under the 
Freedom of Information Act. Even when the ruling is finally 
obtained, it is difficult to ascertain just exactly what it is 
the Coast Guard has approved. There is no meaningful appeal 
process to headquarters, and disadvantaged shipowners have 
found that the only relief available is to file a complaint in 
Federal court.
    I am going to digress a moment from my written comments 
here to address some comments by Admiral Watson and Ms. 
    On October 26 of 2006, we wrote a detailed letter to the 
Coast Guard describing the process and the project that Matson 
was undertaking at Nantong, China, on the Mokihana. Unbeknownst 
to us, the day before we submitted our letter the general 
counsel and senior vice president of Matson had submitted a 
letter to the Coast Guard telling the Coast Guard that the 
project was over 7-1/2 percent, not as originally presented to 
the Coast Guard, and confirming to the Coast Guard that now 
that they had detailed plans and had entered into their 
shipyard contracts, the steel percentage was now accurately 
    What happened next is really incredible, and I am just 
going to turn to the administrative record from the Coast 
    Because as soon as Matson Navigation and the National 
Vessel Documentation Center became aware of our protest, Matson 
withdrew the letter admitting that the project was over 7-1/2 
percent; and we received a one-sentence letter from Thomas L. 
Willis, Director of the National Vessel Documentation Center, 
saying, "I refer to your letter of October 27, 2006, requesting 
reconsideration of the preliminary rebuild determination dated 
June 23, 2004, concerning Matson Navigation C-9 class vessels. 
In accordance with the provisions of 46 CFR, subpart 1.03, that 
action is no longer subject to review or consideration."
    So we were told to take a walk. That is the transparent 
    Not only is the procedural process flawed, but the 
decision-making process is flawed as well. While the rebuild 
determinations are inconsistent, there is one discernable 
trend. The Coast Guard's enforcement of the Jones Act has 
gotten increasingly lenient or nonexistent.
    The Coast Guard's regulations purportedly use two tests to 
determine if a vessel is rebuilt, a major component test and a 
steel weight test. In recent rulings, the Coast Guard has 
written the requirement that major components be constructed in 
the United States completely out of the Jones Act. Rather than 
look at what is being added to the vessel overall, the Coast 
Guard has argued that it should look only at the weight of the 
largest piece of the major component. This approach has been 
soundly rejected by the Federal court in a recent case.
    In another ruling, the Coast Guard held that a 265.5 ton 
deck added in China is not a major component because the 
heaviest piece lifted by the Chinese shipyard's crane was only 
26.9 tons. This is obviously not what Congress intended.
    The Coast Guard's implementation of the percentage steel 
weight test also shows an increased willingness to sanction 
foreign rebuilding. As further described in my written 
testimony, for example, the Coast Guard typically does not 
count outfitting when counting steel work, as outfitting has 
been historically defined as inventory, equipment, furnishing, 
and stores. Yet recently the Coast Guard has expanded this 
definition to include vehicle decks as outfitting on the ground 
that they are nonstructural steel work, although this 
distinction, the distinction between structural and 
nonstructural, was rejected by another United States District 
Court judge almost 20 years ago.
    According to the Coast Guard and confirmed by the courts, 
preliminary rebuild determinations convey no legal rights. 
Applicants seeking a rebuild ruling have been aware for years 
of the increasingly lax enforcement of the Coast Guard. They 
have asked for rebuild rulings that they know would never be 
approved by an agency that is dedicated to enforcing the Jones 
    Applicants who have obtained these rulings and who pushed 
the envelope took a calculated risk that it would be business 
as usual. Now that the courts are responding, these companies 
should not be bailed out by Congress. This would not be fair to 
those of us who followed the rules and invested tens of 
millions of dollars and trust in U.S. Shipyards.
    The problems at the Coast Guard are having ripple effects. 
Although we disagree with this approach, the Maritime 
Administration is following the Coast Guard in determining what 
constitutes a foreign rebuilding for purposes of the capital 
construction fund. This has resulted in sizable tax benefits 
for vessels rebuilt oversees in Chinese shipyards when the 
benefits were designed to encourage work in U.S. shipyards.
    In addition, while some of these projects are clearly major 
conversions requiring environmental and safety upgrades, the 
Marine Safety Center, part of the Coast Guard, also appears to 
be following the rest of the Coast Guard and by doing so may be 
creating issues concerning U.S. compliance with international 
treaties. So the Mokihana, which was gutted in China, was found 
by the Marine Safety Center not to be a major conversion for 
safety purposes.
    All of this adds up to putting us at a significant 
competitive disadvantage because we chose to play by the rules. 
The Jones Act was intended to create a level playing field. We 
ask that Congress take steps to encourage the Coast Guard to 
enforce the Jones Act by, amongst other things, making the 
rebuild application process completely transparent with input 
from all concerned, requiring the applicant to submit 
sufficiently detailed information in support of its application 
and conducting meaningful investigations.
    In the case of the Mokihana, you have a 3-page letter from 
the general counsel and senior vice president of Matson with 
three paragraphs that comprise half a page that describes the 
project. You have a couple of crude renderings of the profile 
of the ship and 1 page of calculations that a U.S. Federal 
judge has characterized as the work of a 5th grader. That was 
the application to the Coast Guard that was approved.
    Mr. Taylor. Mr. Love, we have been pretty generous. We gave 
you 10 minutes on your 5.
    Mr. Love. Thank you, sir.
    Mr. Taylor. Thank you very much.
    The Chair recognizes Mr. Paxton.
    Mr. Paxton. Thank you, Chairman Taylor and Members of the 
Subcommittee for the opportunity for the Shipbuilders Council 
of America to testify at this important hearing. I am Matthew 
Paxton, President of the Shipbuilders Council of America, the 
largest trade association representing U.S. shipyards.
    The SCA represents 31 companies that own and operate over 
100 shipyards. They are located along the eastern seaboard, the 
gulf coast, the Great Lakes, the west coast, and Hawaii. SCA's 
members build, repair and maintain America's fleet of 
commercial vessels.
    A core value of the SCA is to promote and protect the Jones 
Act, which requires vessels that operate the domestic trade to 
be built in U.S. shipyards and owned and crewed by U.S. 
    From the shipyard perspective, the Jones Act ensures that 
the U.S. maintains critical shipyard infrastructure and a 
skilled workforce that can build and repair the domestic Jones 
Act fleet that consists of over 38,000 vessels. These vessels 
were built in U.S. shipyards and represent an aggregate $48 
billion investment.
    However, over the last decade, the U.S. Ship repair 
industry has experienced a substantial decline in the amount of 
maintenance and rebuilding work on the Jones Act fleet. 
Increasingly, more Jones Act vessels are going overseas to 
perform major rebuild work. This work previously sustained the 
U.S. ship repair industry. The result has been significant 
downsizing of major ship repair facilities, loss of critical 
ship repair assets, closure of shipyards, and the outsourcing 
of skilled labor needed to maintain the domestic fleet.
    This is not the first time the U.S. Shipyards have been 
faced with the loss of work on Jones Act vessels. In 1956, the 
Congress introduced a bill to add the Second Proviso to the 
Jones Act.
    At that time, this Committee provided in its House report 
accompanying the passage of the Second Proviso bill the quote: 
"With major developments in technology in recent years there 
have been instances of American-owned, American-built vessels 
which have been substantially rebuilt in foreign shipyards. 
This appears to be a gap in the law, which is clearly 
inconsistent with traditional policy."
    The "gap in the law which is clearly inconsistent with 
traditional policy" that exists today is the inconsistent 
application and enforcement of the foreign rebuild regulations 
by the Coast Guard. Simply put, the Coast Guard has failed to 
enforce the major component test of its own regulations in a 
core element in the Second Proviso.
    In addition, the Coast Guard has never exercised its 
discretion to determine that a vessel has been rebuilt when 
foreign work projects involve between point 7.5 percent and 10 
percent of a vessel's steelweight. Instead, with no analysis, 
the Coast Guard has simply implemented a de facto 10 percent 
steel work threshold test to determine whether a vessel has 
been rebuilt foreign. It is important to note to the Committee 
that a 10 percent total steelweight rebuilding is a large job, 
and U.S. shipyards can do it and very much want to do this 
    Further complicating the Coast Guard's regulations is the 
fact that the standards and tests for what counts in a foreign 
rebuild project are constantly changing. The Coast Guard once 
counted the total steel added and steel removed from a vessel. 
Now it only counts the greater of either the steel removed or 
added in calculating the 10 percent threshold test.
    The agency determined that adding an entire hull to a 
single-hull vessel was not considered a rebuild. We have heard 
a lot about this today. The work, they concluded, was 
"intrinsic to the hull itself" and not a component; and they 
went on to further define this as saying this wouldn't be 
"similar to the addition of decks added to the superstructure."
    However, in a subsequent ruling which involved the addition 
of several decks to the superstructure of a Jones Act vessel in 
China, the Coast Guard disregarded its previous analysis that 
decks are considered separable components and instead applied a 
new test that looked at whether or not any crane in the Chinese 
shipyard can lift a single component weighing at least 1.5 
percent of the steelweight of the vessel. Upon determining the 
Chinese shipyard did not have cranes that could lift a 
component of this size, the Coast Guard determined no 
rebuilding took place.
    The lift capacity of cranes in a foreign shipyard has 
nothing to with the Second Proviso. It serves only to frustrate 
congressional purpose, intent, and to prohibit the foreign 
rebuilding of Jones Act vessels.
    The lack of enforcement of the Second Proviso by the Coast 
Guard has resulted in confusion and uncertainty not just for 
U.S. shipyards but across the maritime industry. Jones Act 
operators no longer have faith in what the capital construction 
costs are to operate in domestic trade. Is it rebuilding a new 
vessel in a U.S. shipyard, or is it rebuilding your Jones Act 
vessel in a Chinese shipyard?
    The Shipbuilders Council of America supports the Jones Act 
and the consistent application of the Second Proviso. I 
recommend this Committee consider legislation to clarify the 
Coast Guard regulations to provide a transparent and 
predictable process so everyone in the maritime industry 
understands the standards for rebuilding Jones Act vessels. 
This clarification should take a common-sense approach to the 
identification of components of the hull and superstructure. A 
component should be looked at in its entirety, irrespective of 
its manner of installation.
    The U.S. District Court for the Eastern District of 
Virginia recently remanded and revoked the Coast Guard's 
endorsement of a Jones Act vessel rebuilt in China because 
"However the manner in which the component is added to the 
vessel, piece by piece or wholesale, is irrelevant to whether 
the component is major. Although a deck or a component of the 
hull can be added to a vessel as one discrete preconstructed 
structure, it surely can be added piece by piece, beam by beam, 
rivet by rivet. Shipowners could easily frustrate the entire 
operation of the Second Proviso."
    The SCA agrees with this assessment and believes the Second 
Proviso has effectively been written out of the Jones Act.
    Thank you again, Mr. Chairman, for the opportunity to 
testify here today.
    Mr. Taylor. The Chair now recognizes Mr. Roberts.
    Mr. Roberts. Mr. Chairman and Members of the Committee, 
good morning. I am Michael Roberts with the law firm Venable, 
and I appear this morning on behalf of Crowley Maritime 
    Crowley is a leading American shipping company based in 
Jacksonville, Florida. I have represented Crowley on maritime 
regulatory and policy issues since 1991 and have spent a large 
part of that time involved in Jones Act issues.
    I want to compliment you for holding this hearing. It is a 
very important subject, and I feel a little bit like a member 
of the choir singing to the preacher here, but we have a Jones 
Act because we need an American maritime industry for reasons 
of national security.
    Could we have cheaper ships and cheaper transportation if 
we left it up to the Chinese to take care of that? Of course. 
But Congress has said very clearly that you can't do that in 
American domestic markets, and to a large extent that is a 
reason that is how we maintain an American maritime industry.
    The issue today concerns what it means to rebuild a vessel, 
what kind of work can be done on a Jones Act vessel in a 
foreign shipyard without disqualifying that vessel from 
domestic trades. It is very important to the industry that we 
get this right.
    American shipping companies have been told essentially 
this: Build ships in the United States for domestic trade. 
Don't worry that those ships are much more expensive than ships 
built overseas. They will compete on a level playing field in 
our domestic trades. That is a risky proposition unless there 
is real confidence that foreign-built ships or foreign-rebuilt 
ships are in fact excluded from domestic trades; and, 
unfortunately, some recent decisions by the Coast Guard have 
undermined that confidence by letting foreign-rebuilt vessels 
into domestic trades.
    I will quickly go over how this issue has come up in the 
tanker business.
    When Congress passed the Oil Pollution Act of 1990 
requiring the phaseout of all single-hold tankers, Crowley and 
other company OSG and other tanker owners had a tough decision 
to make. Do they start replacing tankers, building them in the 
United States or not?
    Keep in mind that if they build the ships in the United 
States, the cost is going to be much higher. They are not going 
to be competitive in international trade from a capital cost 
    But Crowley did its analysis, lots of analysis on lots of 
different options, including retrofitting older U.S. tankers in 
U.S. shipyards, and decided that the economics worked out for 
building a series of new tank vessels in the United States. 
Crowley and OSG are in the middle of building programs that 
will run about a billion dollars for each company to build new 
tankers in the United States, about 29 of them altogether at 
this point for use in domestic trades.
    In taking that step, these companies are not only complying 
with the Jones Act but they are making a very large financial 
contribution to American security interests by helping to keep 
U.S. shipyards active and modernizing. This is precisely what 
Congress asked the industry to do.
    The other company in this scenario, Seabulk, didn't want to 
take the risk of building U.S. ships in the United States and 
felt it was just too expensive to retrofit older tankers in 
U.S. Shipyards, although other companies have done exactly 
that. So Seabulk asked its lawyers to send a letter to the 
Coast Guard. The letter described a basic double-hole retrofit 
project and argued that if Seabulk were to go ahead with the 
project in China, this vessel would nevertheless keep its Jones 
Act privileges.
    Nobody knew anything about this letter except Seabulk and 
the Coast Guard. From what we can tell, the Coast Guard didn't 
dig into it very much, didn't ask the hard questions, and went 
on and issued a private letter ruling as Seabulk requested. 
While these rulings are not published, eventually it all came 
out not only that Seabulk had obtained permission for two 
retrofit vessels but that two other companies had obtained 
similar authority, for a total of 10 vessels that would be 
retrofitted in China with double holes. Those decisions, if 
implemented, would destroy the markets that Crowley and others 
had planned on when they made their investment decisions.
    So, at that point, in April of 2007, Crowley filed a 25-
page appeal to the Coast Guard Commandant giving the Coast 
Guard a chance to clean up this mess, and we still haven't 
heard anything on that appeal.
    When Seabulk----
    Mr. Taylor. Excuse me, Mr. Roberts. For clarification, when 
did that happen?
    Mr. Roberts. We filed an appeal in April of 2007.
    Mr. Taylor. So 14 months.
    Mr. Roberts. Correct.
    Mr. Taylor. Would you be so kind as to send a copy of that 
to my office?
    Mr. Roberts. I would be happy to do that.
    Mr. Taylor. Sorry to interrupt.
    Mr. Roberts. That is fine.
    When Seabulk completed work on the first ship, the Coast 
Guard issued a coast-wise endorsement within 24 hours of the 
request and without looking further into it. This was finally 
the final agency action that we needed to take the matter to 
court. Crowley was joined by OSG and the Shipbuilders Council 
and the lawsuit against the Coast Guard.
    You know the results of that lawsuit at this point. A 
conservative court in the Eastern District of Virginia reversed 
the Coast Guard's ruling on three different grounds. Seabulk 
has appealed that decision to the Fourth Circuit, and that is 
where things stand at this point.
    And I would like to make two brief observations, if I may.
    First, the practical effect of the Coast Guard's letter 
ruling dealt with one issue only, where the work could be done. 
By letting Seabulk do the retrofit work project in China 
instead of the United States, the ruling was like a discount 
coupon with two-thirds off the regular price. Crowley, OSG and 
others have been paying full retail price and contributing 
hundreds of millions of dollars to U.S. security by complying 
with the Jones Act; and yet the Coast Guard has rewarded 
Seabulk with a two-thirds off coupon for taking its ship to 
China. And that Chinese-American ship has put Crowley's vessels 
at a tremendous competitive disadvantage since its return.
    My second point quickly gets to the procedures, and I can 
talk further about that during the Q&A, if you would like. But 
I genuinely believe that the issue is bad procedure and not bad 
faith on the part of the Coast Guard. And I think it has been 
echoed across the board here, and I will say that we have as an 
industry worked out at least to some level a set of procedures 
that I think would improve considerably on the process. And I 
would be happy to go over those if that would be helpful.
    Mr. Taylor. Thank you.
    Before I recognize Mr. Larson, I would like to at least get 
you three gentlemen's opinion on something.
    I think the Admiral at some point said, we don't make the 
request to do work public because it contains proprietary 
information. I serve on the Armed Services Committee, and I can 
see where the plans to a nuclear submarine we probably don't 
want on the Internet. Plans for a rail launch to an aircraft 
carrier, we spent a lot of money to develop that, we probably 
don't want that on the Internet either. Would there be anything 
of a proprietary nature to a modification of the hull of any of 
the vessels of the companies you represent that would trouble 
you being made available to the public? I have trouble 
believing that.
    So, Mr. Love, I will start with you.
    Mr. Love. The claims of confidentiality are completely 
spurious, Mr. Chairman.
    Mr. Taylor. I am sorry. Could you speak up, sir?
    Mr. Love. The claims of confidentiality are completely 
spurious, Mr. Chairman.
    First of all, if you take the Mokihana as an example, it is 
a rebuilding of a C-9. To my knowledge, there are two other C-
9s, both of them owned by Matson Navigation. So the plans for 
the conversion of the C-9 would not be very helpful to anybody 
else that I can think of in the industry.
    Also, the concept and the process of building a vehicle 
carrier are well-known to everybody in the industry.
    Mr. Taylor. Mr. Paxton, since you represent the 
shipbuilders, and I guess I am asking you on behalf of the 
shipbuilders, would you have a problem with Congress mandating 
that these proposed changes become public information? Because, 
again, with my limited knowledge, I can't see a modification to 
a hatch, adding a bulbous bow, adding a midbody section, I 
really can't see anything about that that would fall into the 
category of the requiring it be classified information.
    Mr. Paxton. Absolutely not, Chairman. We would support a 
great deal of process and transparency.
    In case in point, we have bid on these projects. Our 
shipyards have bid on the double hulling. So information was 
made available to the extent that yards got to bid on these 
    There may be some confidential aspects of it, but the fact 
of the matter is information is made available such that we 
could bid on these projects and we were told were too expensive 
before they headed off to China. So, absolutely not. We would 
support greater process, greater transparency, and very much so 
have worked with Mr. Roberts on the process of using the 
Federal registry as a way to put out comments on proposals to 
do extensive work on Jones Act vessels overseas.
    Mr. Taylor. Mr. Roberts.
    Mr. Roberts. Yes. I think the confidentiality has been used 
in a way that allows, potentially, manipulation of the process 
right now. And to take it a step further, not only do we not 
know that an application is filed, not only do we not see what 
an application says at any point in the process, but even when 
we go to court, the court reviews the decision under the 
Administrative Procedures Act which says that the agency record 
is the only thing you are supposed to look at. The agency 
record is what the applicant put in, so we have been through 
litigation now for over a year in the Seabulk case. We were 
extraordinarily fortunate in getting some information, but we 
have taken no depositions. We have gone no further than that. 
So the confidentiality works very much to the benefit of the 
applicant; and, as a consequence, naturally it tends to erode 
the Jones Act.
    I would only say this. There may be engineering issues that 
are involved in a proposed project that a company has spent 
money on the architecture and wants to keep that confidential. 
That is not unusual. That happens all the time. There are 
mechanisms, confidentiality agreements, protective orders, and 
so on so that the information can be disclosed to a limited 
extent as necessary to evaluate it but not broadcast to the 
    Mr. Taylor. Thank you very much.
    The Chair recognizes Mr. Larsen.
    Mr. Larsen. Thank you, Mr. Chairman.
    Mr. Roberts, in your testimony on page 4 I think you lay 
out five steps, if I am not mistaken, five possible changes to 
the procedures. I would like to ask a few questions 
specifically about those steps and then ask a question of their 
impact on something else.
    First one is public notice that an application has been 
filed. By that do you mean a public notice that a preliminary 
rebuild determination has been requested from the Coast Guard?
    Mr. Roberts. Yes. I think that would be appropriate. The 
preliminary rebuild application. Notice that it has been filed.
    Mr. Larsen. Notice it has been filed.
    And then the opportunity for interested third parties to 
participate fully in the proceedings. How would then that 
manifest itself?
    Mr. Roberts. That could be handled on the basis of a 30-day 
comment period, simply submit comments. If there is information 
that is submitted with the application, an interested party 
could obtain that information and then submit comments within 
30 days.
    Mr. Larsen. Now getting this set for judicial review under 
the APA, is that something that would be a necessary step or is 
that--would that be an appeal step?
    Mr. Roberts. The current process, virtually any agency 
action is subject to review under the Administrative Procedures 
Act, so that would continue to apply to these decisions.
    Mr. Larsen. All right. And then publishing and indexing of 
the decisions on these issues I think would be fairly 
important, given the fact that there is lots of talk of 
consistency, but I am not gathering that there is--there has 
been consistent application, it seems.
    Mr. Roberts. No, Congressman. I think the fact that you 
can't even obtain the decisions without submitting a Freedom of 
Information Act request just tells you how untransparent the 
current process is.
    Mr. Larsen. The Coast Guard testified earlier about the--in 
response to my question about the triggers that exist to send 
something over to the Naval architect's office if there are 
questions. It seems to me that seems to be a fairly informal 
process, a--"loosey-goosey" would be another term--loosey-
goosey process. Are there triggers that would send something 
over to the Naval architect's office and do you have 
suggestions for what those ought to be?
    Mr. Roberts. I am sure my colleagues may want to comment on 
that issue.
    Mr. Larsen. Sure.
    Mr. Roberts. I would say that if you allowed public 
participation, participation of competitors and others who 
might have an interest in this, in a particular application, 
you will take care of a lot of those issues. I don't think very 
often--I don't believe very often that the information at the 
Naval Architecture Branch is going to necessarily decide the 
case or not. So I think the core is getting the public 
involved. But I will defer to my colleagues on that.
    Mr. Larsen. Yeah. Mr. Paxton?
    Mr. Paxton. I think primarily it is one of maintaining some 
standards that are consistent. I think where the problem has 
evolved over time is--and I have a letter ruling here where the 
Coast Guard said we counted the total steel in and we counted 
the total steel out and you are below the 7.5 percent threshold 
so you are not rebuilt. And then 4 years later they said, well, 
now our test is that we have the greater of.
    So I think process, a healthy amount of process, is 
absolutely necessary, is absolutely needed. But before we even 
get to that process we have got to know what the rules of the 
game are and that we are not constantly moving the goalpost for 
what counts. Separable versus nonseparable, that was cast aside 
when the court decided structural versus nonstructural wasn't 
something we could look at.
    So I just think the Coast Guard--and I agree with Mike that 
the Coast Guard isn't trying to undermine this process. I think 
the Coast Guard has followed poor precedent after poor 
precedent that has got them to a point now where they are 
looking at crane-lift capacity to determine whether or not a 
vessel has been rebuilt.
    So I would also recommend that we need to get the standards 
down first before we can have a healthy public process.
    Mr. Larsen. I need to ask a question before my time is up, 
and it has to do with the WTO and the GATT. Because there are 
concerns that have been expressed about making any major 
changes to the actual provision, the actual language of the law 
would trigger a WTO review. Because, as it exists, it is 
grandfathered in, but if you make changes you would have a 
problem moving forward.
    So two questions. Is it your belief that if we made changes 
to the process as you are suggesting, would that trigger a 
review? And, second, if we were somehow able to get the Coast 
Guard to actually enforce the Second Proviso as we see it, 
which would apparently be different than it is being seen 
today, so the law wouldn't change, it would just enforce it as 
we see it, would that--do you believe that would trigger a 
    Mr. Roberts. I will answer that.
    I think the answer to the first question is, no, that the 
WTO and the GATT grandfather provision applies to substantive 
rules. If we become more restrictive, then we run the risk of 
violating that grandfather provision. It has nothing to do with 
the procedures that are followed in making a determination 
whether or not this particular project complies or doesn't 
comply. So I think there is no risk at all from a GATT 
perspective to improve these procedures.
    I think if the Coast Guard tightens its enforcement 
activities and makes determinations that are more consistent 
with, as you say, what Congress intended in the Second Proviso, 
again, I don't think that that would create a GATT problem. We 
are really clarifying and enforcing the law as it was written 
and it was meant to be enforced. And that is not becoming more 
restrictive, that is not legislating a more restrictive regime. 
So I think in both cases we should not have a problem on that.
    Mr. Paxton. And I would just add one part to that. The 
court case--the recent court case in the Seabulk matter threw 
into question all of this. Because the court clearly said there 
has been no analysis for any of these tests. There may be a 
test called counting the greater of either the steel removed or 
steel added, but you haven't done the analysis.
    So I would pose that any clarification of the regs--and, 
again, just enforcement of the regs, the clear--what the Coast 
Guard has said. The Coast Guard has said through its letter 
rulings 1.5 percent is a major component. It said it in the 
Mokihana ruling, in that letter ruling. We just asked that they 
actually implement that and not try to skirt around it. So I 
don't think there would be any GATT violation, because we are 
actually trying to argue implement what you say.
    And we are not putting in or amending the Second Proviso. 
The Second Proviso speaks to major components. So we would say 
enforce the law.
    Mr. Larsen. Mr. Love?
    Mr. Love. We believe that the regulations are clear and 
that the statutory language is clear, and it is strictly a 
matter of enforcement.
    Ms. Williams said that the Coast Guard gets very detailed 
information. But the administrative record in the case that I 
am involved in, for example, shows that there is no detailed 
information at all. And, in fact, even though the matter was 
eventually referred to the architectural division, there was no 
analysis done by the architectural division as was described 
here. So I think that the only issue is an enforcement issue.
    Mr. Larsen. Thank you.
    Thank you, Mr. Chairman.
    Mr. Taylor. Mr. Love, I would like to follow up on that 
last comment, because I think you have noticed that you are 
going to have a very favorable response, my gut tells me, from 
this Subcommittee. I can't speak for the Full Committee, can't 
speak for the full House, and I certainly can't speak for the 
other body. But I would think the skeptics would come back and 
say, well, it is just a temporary thing. This administration 
has chosen not to enforce the law.
    So my question to you is, is that accurate? Is it something 
that is just unique to this administration or in your years 
have you seen a degradation on the part of the Coast Guard over 
time to enforce these laws?
    Mr. Love. Firstly, I would like to note that over the last 
10 years there has been, rough number, only 40 rebuild 
determinations, so an average of four a year.
    My own personal opinion is that Mr. Willis, in charge of 
the Vessel Documentation Center and responsible for making 
these rulings, really acted on his own. And now the Coast Guard 
is defending the indefensible. There have been very intelligent 
determinations by the National Vessel Documentation Center over 
the years, but in recent years there was just a, let's say, a 
cultural predisposition by the single person who really could 
influence this whole process in finding some way in every case 
to justify avoiding the application of the Second Proviso. So 
this is a process I think that could be easily fixed and would 
not involve the trade issues.
    Mr. Taylor. Okay. Would anyone else like to comment on--
again, is this something unique to the Bush administration that 
gets changed next January, or has there been a degradation over 
time that you have noticed regardless of who is in the White 
    Mr. Roberts. Mr. Chairman, my sense is that it is not a--it 
is too far down into the weeds to be something that the 
administration would likely have an involvement in. I really 
think that it is very technical, it is very complex, it is 
isolated, physically isolated in West Virginia from the main 
Coast Guard activity here in DC.
    And I think, you know, I hate to be sort of Johnny One Note 
here, but I really do believe that the procedures are such that 
they inherently favor decisions that erode the Jones Act. The 
only people who go ask for these decisions are people who want 
to do work in foreign shipyards. Nobody else knows about those 
requests, and nobody knows about the decision. So the natural 
tendency, human nature, I believe is for the people to try and 
satisfy the people in front of you, who in these cases happen 
to be people who want to do work in foreign shipyards.
    Mr. Taylor. This is coming from one of the staff. If you 
were allowed to comment, what would your reaction be to a 
notice that a shipbuilder proposed to--and I am quoting--
install a double hull in a tanker in a foreign shipyard?
    Mr. Roberts. Say it again? I am sorry.
    Mr. Taylor. What would your reaction be to a notice, if 
such a thing was required, that a ship owner proposed to 
install a double hull in a tanker in a foreign shipyard?
    Mr. Roberts. We wouldn't hesitate to say you can't do that. 
I mean, it is very--in our opinion, if you add a second hull to 
a vessel, a second hull is a major component of the hull. And 
so we would have no doubt----
    Mr. Taylor. Let me turn that around.
    Mr. Roberts. Okay.
    Mr. Taylor. What is the penalty that you pay for living by 
the law? Has anyone calculated the cost advantage to lying on 
your application?
    Mr. Paxton. Lying on your application is the forfeiture of 
that vessel.
    Mr. Taylor. If you are caught.
    Mr. Paxton. If you are caught.
    Mr. Taylor. But, again, you have to, in effect, tell the 
Coast Guard that you lied on your application. Because no one 
is going to check you, unlike that Snapper boat captain today, 
who they are going to look in his ice chest and break out the 
tape measure over a fish. You could do millions of dollars 
worth of work in a foreign shipyard, and if you tell the Coast 
Guard we lived by the rules that is pretty well it, right? No 
one is going to check you. Even when you ask them to check on 
something that you think is suspicious, in effect they did not 
check, did they? It took a Federal court to get you some 
relief. Is that correct?
    Mr. Roberts. That is correct.
    Mr. Love. Mr. Chairman, if you take the case of the vessel 
that was gutted in China, for example, the gutting process, the 
removal process is very, very expensive. It is especially 
expensive if it is done in an environmentally responsible 
    Mr. Taylor. Great point.
    Mr. Love. All of the work on the hull on that particular 
vessel and the superstructure of the vessel, was done in China. 
You mentioned the curved welds, the heavy decks, all the heavy 
lifting was done in China.
    What the U.S. shipyard was allowed to do was the straight 
welds, as you mentioned. They built a box. And the foundation 
for that box was all the work that was done in China. The 
access to that box was all of the work that was done in China.
    So if you were to take the example of that container ship 
that was converted to a combination Ro-Ro container ship, I 
would say that a very high percentage of the expense of doing 
the hull job in the United States was the work that was done in 
    Mr. Taylor. Between environmental compliance, overhead 
welds, skilled welds, et cetera.
    Mr. Love. What Mobile got as their part of the job was 
essentially steel modules that were lifted aboard the 
foundation, the lower garage that was built in China. So what 
you had was you had the demolition, so you took out the 
transverse bulkheads, you took out the holds, you took out the 
weather deck, the combings, the hatch covers, you took it right 
down to the frames, very, very expensive work. And now you are 
in that curved portion of the ship, and you are also doing the 
work that is the foundation for the upper garage. All heavy 
vehicles are supported on work that was done in China. The work 
that was done in the United States was solely concerned with 
the carriage of automobiles.
    So the lion's share--if you look at it from a square 
footage basis, for example, they added over 200,000 square feet 
of vehicle storage on the vessel between the work that was done 
in the United States and the work that was done in China. More 
than 50 percent of that square footage was done in the United 
States. But that 50 percent--or over 50 percent--was much less 
expensive work than the work that was done in China.
    Mr. Taylor. I would be curious to hear your reaction, and I 
realize that the easiest thing that could happen is for the 
folks in the bureaucracy to change their interpretation. I 
guess the most difficult would be congressionally mandated 
change to the rules. But what would your reaction be to a 
congressionally mandated change that did away with the 10 
percent rule?
    Because when you bring up environmental factors, when you 
bring up the skill of the work, all the other things that are 
involved, I personally believe that the 10 percent rule just 
doesn't work in today's society. But I am curious, on behalf of 
the shipbuilders, on behalf of at least one of the operators 
and a spokesman for another operator, what would be your 
reaction to the removal of the 10 percent rule?
    Mr. Paxton. The question is to just abolish the upper limit 
test and--the shipbuilders want a strict test, a test that 
looks at major rebuild projects. We understand that repair work 
goes overseas. But what we have a difficult time with is when 
large, big projects are continually going overseas. So the 1.5 
percent, that major component analysis that never is taken into 
place would prohibit a lot of work going overseas.
    It is not just about ship repair. Crowley made a calculated 
guess--not a guess, a calculated decision based on the law that 
they are going to build new. So that helped the new build 
yards. But the rebuild yards could still do a lot of this work, 
the repair yards. So enforcement of the Second Proviso helps 
new construction and repair.
    So I guess my question, for clarification, we want strong 
tests that enforce what the Second Proviso stands for. Maybe 10 
percent is too high. I don't know. But clearly enforcing that 
first test, the 1.5, whatever it may be, major component test 
would prohibit a lot of work instead of getting into the 
vagaries of a 10 percent, what we are counting and not 
    Mr. Roberts. I will give you my candid reaction when you 
offered that, and that is that I would be concerned about the 
impact under the WTO rules and whether that would violate the 
standstill provision if we eliminated the 10 percent test. And 
I am not sure how we would replace it. I guess it depends on 
what happens at that point.
    But if we took the 10 percent test down to a 2 percent test 
or a 1.5 percent test, I would be very concerned about how that 
might be perceived under the GATT rules. But we are certainly 
sympathetic with the objectives.
    Mr. Love. Mr. Chairman, the test is 7.5. There is just a 
discretionary allocation to the Coast Guard between 7.5 and 10. 
What the Coast Guard has done is they have moved the 7.5 to 10. 
They have become the legislators as far----
    Mr. Taylor. I guess, Mr. Love, what I am looking for 
clarification is it takes--you know, Congress is asked by the 
American people to try to clean up the environment. Reacting to 
that request, they passed some fairly stringent rules on things 
like PCBs, like on sandblasting, what do you do with lead, what 
type of copper paints can you use on a hull that will cause the 
least harm to the environment, et cetera, et cetera. There is a 
cost associated with each of these things, whether it is the 
individual breathing apparatus for someone working around that 
or disposing of it properly. There is a cost associated with 
all that. And the people who live by the rules pay those costs.
    I doubt any of those rules are followed in some of these 
foreign shipyards we are talking about, without naming names. 
So what I am getting at is, in addition to not only just the 
line of a weld but the difficulty of that weld, I am convinced 
that just weighing a portion of the hull is not a true 
reflection of the total cost of a change to a hull. It is 
nowhere near a true reflection.
    And I guess what I am asking is we are looking for 
something more appropriate than this interpretation, and we 
would welcome your comments on that, whether you are 
comfortable doing it now or later.
    Mr. Love. Yes, sir. I think, Mr. Chairman, just to define 
the scale of the issue, the Mokihana went to China to do the 
rebuilding, but since it was in China it also did its dry 
docking, it also did its sandblasting and coating of the hull, 
it also did numerous repair projects around the vessel, all of 
which was lost to the U.S. shipyards because of the failure to 
enforce the Second Proviso.
    Mr. Taylor. Thank you.
    Mr. Cummings. [presiding.] Mr. Love, you said something 
that was quite intriguing when I was coming in the door--and, 
again, I am sorry, we have got an Amtrak bill on the floor of 
the House, and it has some major provisions in with regard to 
my district in Baltimore. But you said something that really 
intrigued me when you were talking about Mr. Willis. What is 
his position?
    Mr. Love. He was in charge of the National Vessel 
Documentation Center until Ms. Williams took over recently.
    Mr. Cummings. And that person has a lot of responsibility, 
    Mr. Love. Yes, sir.
    Mr. Cummings. And they basically, based on what you said, 
you used the words "acting on his own", but they basically make 
a decision as to whether somebody meets the standard or not, 
work done on a ship meets the standard of the Jones Act or not. 
Is that right?
    Mr. Love. That is correct.
    Mr. Cummings. Is it your understanding that is the way it 
is supposed to be, that a single person, civilian, is supposed 
to do that? Any of you. Any of you.
    Mr. Love. I would think that that is the major issue that 
the Coast Guard should be addressing, which is oversight of 
these decisions.
    Mr. Cummings. Me, too. And I just think that when you have 
a situation--and this is not knocking Mr. Willis. It is not 
beating up on Ms. Williams. But, to me, if I have got one 
person making decisions that could determine whether a company 
makes millions of dollars, that is something that I wouldn't 
want. In other words, I wouldn't want it if I were the person 
making the decision, because I would want always to have 
somebody with me trying to help make those decisions and 
somebody to give some balance to what I am deciding.
    But the other thing I wouldn't like is the invitation--not 
invitation, but the climate that is ripe with possibilities, 
not probabilities but possibilities of some wrongdoing. Not 
accusing anybody of anything. Just saying what I would prefer.
    And, again, when you are talking about millions upon 
millions of dollars, and I take it that some of these decisions 
are kind of discretionary, are they not? Hello?
    Mr. Roberts. Yes, they are.
    Mr. Cummings. Anybody. And so it seems to me that if you 
have a decision that does not favor, say, the losing party, and 
you have a lot of discretion in there, it seems like it would 
be almost impossible to have any type of true appeal. I guess 
you could have an appeal in a court, but it would be very 
difficult to prove. Is that a fair statement?
    Mr. Paxton. Yes, sir.
    Mr. Cummings. Speak up, please. Anybody.
    Mr. Paxton, you look like you want to say something.
    Mr. Paxton. Absolutely, sir. I think you put your finger on 
it. I think the process is entirely one-sided, with no 
transparency. Not to defend the National Vessel Documentation 
Center, but they are out there in West Virginia. They are 
supposed to look at these documents and then decide on those--
on the materials in front of them, whether or not this vessel 
can go overseas and do major work. Well, all the information 
given to that person is entirely geared from the standpoint of 
the person who in fact wants to go overseas and do the work and 
not build in the U.S. So the process is very dark and very one-
sided. So I think this is where a lot of the problems exist. 
And, of course, the standards change over time to allow more 
and bigger jobs to be permitted overseas.
    Mr. Cummings. Now, Mr. Love, in your testimony, you state 
that you are competing against two vessels that operate at 
substantial cost savings after having been rebuilt in Chinese 
shipyards. Can you give us an estimate of the economic 
advantage these vessels have over yours?
    Mr. Love. Yes, sir.
    Firstly, we are talking about C9 vessels that were built 25 
years ago with government subsidy. If my recollection is 
correct, the U.S. Government subsidized the building of these 
vessels to the tune of about $48 million each. They were not 
eligible to be in the Jones Act until they were in service for 
25 years.
    The vessels were designed to carry only containers. So we 
built a pure car-truck carrier on the analysis that there was 
no real Ro/Ro capacity to the Hawaiian Islands.
    Now the C9 is taken to China. It is converted to a 
combination container-Ro/Ro ship, and it is now a formidable 
competitor of our vessel. And the price advantage, because of 
the nature of the work, which is something that Mr. Taylor was 
putting his finger on, and that is all of the demolition work 
that had to be done on this old ship, which is very costly in 
the United States for environmental reasons, safety reasons and 
the like and all of the work that had to be done in a very, 
very difficult area, with curved plate--visualize that the 
weather deck was removed from the vessel, the transverse 
bulkheads were removed from the vessel, the cargo holds, the 
combings, the hatch covers, everything. This is extremely 
expensive work. And then six decks were added in China.
    And the length of the project is the length of a Coast 
Guard cutter. We talk about it being aft of the engine room 
casing, but we are talking about a garage that is 270 feet 
long. It was a monumental project, and it was done in the most 
inexpensive yard in the world. So we are very much 
disadvantaged by it.
    Mr. Cummings. And what does that yield with regard--I mean, 
if you just take--I know it is hard, but give me an estimate. 
How many jobs are you talking about and over what period? Jobs 
lost, American jobs lost.
    Mr. Paxton. Chairman, the loss in shipyard jobs is always 
hard to tell.
    Mr. Cummings. Yeah.
    Mr. Paxton. The fact of the matter is, over the 1990s, we 
saw a significant decline in our ship repair facilities. And a 
case in point is the west coast. If we look to the west coast, 
our ship repair and our ship build facilities have been harmed; 
and they are harmed because there are cycles in the 
shipbuilding industry. But what we see is the ship repair 
industry benefits from this work. This is work they can do. 
This is work they want to do.
    Case in point, we used to have a dry dock that could dry 
dock the Alaska class tankers. We no longer have that dry dock. 
It was sold off to Barbados. That was on the west coast. These 
assets we lose.
    These assets are protected, supposedly, by the Jones Act so 
we have the skill sets and we have the infrastructure to do 
this type work. But over time this eroding of the Second 
Proviso has led to more and more work that would go into those 
yards to go overseas. I couldn't put an exact number on the 
amount of lost jobs, sir, but I could tell you there is 
significant job losses and infrastructure loss.
    Mr. Cummings. Yes, sir. Mr. Roberts?
    Mr. Roberts. I would just mention, Mr. Chairman, in the 
case of the double hull retrofit projects, Seabulk went to U.S. 
shipyards, got bids for that work. It came out in an article in 
2006 and basically said it is just too expensive. We are not 
going to do it in the United States. And the figure they gave 
at that time is it would be three times more expensive to do 
the work in the United States than in China. And that--and in 
the case of these projects, $10 million spent in China, so you 
figure 30, $40 million in the United States to do each one of 
these ships. And that is the kind of capital cost advantage 
that they have over U.S. operators who comply with the law and 
build their ships in the United States.
    Mr. Cummings. And the main reason is labor costs? Of the 
    Mr. Roberts. I think Matt can speak to that, but it is 
labor, it is environmental.
    Mr. Cummings. Right.
    Mr. Roberts. It is Occupational Safety and Health Act, all 
those things, and standard of living, also.
    Mr. Paxton. Absolutely. Those are the cost points. And the 
U.S. shipyards aren't upset about paying those cost points. We 
want to pay those cost points. We are proud of our skilled 
labor force, and we point to them as being the best in the 
world. But the fact is in China they use bamboo scaffolding. 
They don't have any of the environmental or health standards 
that we are proud to meet and want to meet, and that is a cost 
point we don't want to ever give up. And we won't.
    Mr. Cummings. Okay. What I would like, and Mr. Taylor I 
think had said that he wanted you all to provide us with I 
guess, what, recommendations, Mr. Taylor?
    Mr. Taylor. Mr. Chairman, I am convinced now that the 10 
percent interpretation under the CFR is just not adequate in 
light of the environmental rules, the difficulty of the type of 
work. I mean, a one-foot weld, for example, on a straight line 
versus a one-foot weld in a circle, they are both one-foot of 
welding, but one is a heck of a lot more difficult from the 
other. One is a heck of a lot more expensive than the other. 
One done overhead is a whole lot more difficult than one done 
on deck. There is so many factors that the 10 percent rule does 
not take into account.
    And, again, the more labor intensive, the more 
environmentally sensitive, the more expensive. And none of that 
is taken into account. And, obviously, the more labor 
intensive, the more environmentally sensitive, it actually 
becomes an incentive for someone to take their ship overseas. 
It circumvents the intent of American law.
    And so, for a lot of reasons, I think we need to revisit 
it. But I would hope we would revisit it in a way that makes 
sense to the shipyards and to the operators. So that is why I 
was asking for their guidance.
    Mr. Cummings. We would really appreciate you all getting 
back to us, say, within the next 30 days, considering all of 
the--I mean, your recommendations. It is a very complicated 
situation; and I realize that when you are dealing with 
complicated situations, trying to set strict rules is not easy. 
However, I think that if we are going to have standards those 
standards ought to be as clear as we can make them, and they 
should lend themselves to being able to be applied 
consistently. And so I would ask that you get to us and let us 
take a look at what you might present.
    As you probably know, this Committee--Subcommittee and 
Committee looked into the administrative law judge system; and 
one of our concerns in that system was whether, when people 
walked in the door, did they feel that they had a fair shot. 
Period. Didn't want any advantage but didn't want disadvantages 
either. Everybody, fair shot.
    And that is what I want to make sure happens here, that 
those who come before--and in a sense this is a decision-making 
body, although it is apparently one person--that they have a 
fair opportunity to present their case and be rendered a fair 
    And at this juncture I must tell you that I think you can 
have a situation where things are so confusing that you don't 
know whether you got a fair opinion or not. I think you can be 
in a situation where there is so much discretion that you are 
not sure whether you got a fair opinion. And there is so much 
discretion that it is almost impossible to appeal successfully 
something that--where the standards are not as clear as they 
should be.
    Now, the question is whether we can actually create those 
standards. And as I have said many times, I believe if we can 
send a man to the moon we ought to be able to do some of these 
things on earth. That is, put these kinds of things in place.
    But it does concern me, I got to tell you, when you have 
one person making these kind of decisions. I just think it just 
opens the door for things that I don't think anybody in the 
decision-making position would want to be in, particularly 
here. But be that as it may.
    Mr. Taylor, did you have anything else?
    Mr. Taylor. No, sir.
    Mr. Love. May I make one comment to what you just said, Mr. 
    Mr. Cummings. Yes, Mr. Love.
    Mr. Love. On the fairness of the process, on the Mokihana, 
when the preliminary rebuild determination was obtained from 
documentation center, the allegation was that the project was 
under 7.5 percent.
    Mr. Cummings. Was what?
    Mr. Love. Under 7.5 percent of the discounted steelweight. 
When we filed our protest, contemporaneously with our filing of 
the protest there was a letter from the general counsel of 
Matson that I mentioned earlier where he admitted that now that 
they had a more precise definition of the job that the 
discounted steelweight was over 7.5 percent. That letter was 
withdrawn by the owner of Mokihana when they became aware of 
our protest. And a year later, when the final rebuild 
determination was granted, theallegation was that the project 
was under 7.5 percent.
    And I would like to make two points. One is that the letter 
written by the general counsel and senior vice president of the 
owner of the vessel that was withdrawn disappeared from the 
administrative record, and we only found out about it in a 
hearing before Judge Ellis in district court. And Judge Ellis 
ordered the Coast Guard to produce the letter. The Coast Guard 
produced the letter without the exhibit, and the exhibit was 
the smoking gun of it being over 7.5 percent.
    The Department of Justice refused to give us the exhibit, 
and only when our attorneys were standing on the courthouse 
steps over in the Eastern District of Virginia did the Coast 
Guard finally produce the exhibit. And between the time of the 
original application for the preliminary rebuild determination 
and the granting of the final rebuild determination the job 
that was done in China grew dramatically. It was a much bigger 
job than was originally presented to the Coast Guard. Yet the 
steel percentage upon which the final rebuild determination was 
given went down. So there is just some inexplicable issues 
    Mr. Taylor. Mr. Chairman?
    Mr. Cummings. Yes, sir.
    Mr. Taylor. Mr. Chairman, I would request that the 
Subcommittee request from the Coast Guard that letter. Because 
I think it goes very much to the heart of your concerns, 
everyone's concerns.
    Obviously, somebody inside the Coast Guard not only 
apparently cut a sweetheart deal for somebody, then realized 
they got caught doing a sweetheart deal and they just tried to 
hide all the evidence. And it goes straight to your point this 
should not be happening, and we need an explanation from the 
Commandant of the Coast Guard how this was allowed to happen, 
what is being done to keep it from happening again.
    Mr. Cummings. Very well. We will take care of that. It is a 
wonderful suggestion, and we will take care of that.
    Mr. Larsen, did you have anything?
    Mr. Larsen. I don't have any more questions, but I have a 
suggestion that we on the Committee contact the USTR's office, 
U.S. Trade Representative's office, to talk through some of 
these issues regarding the Jones Act and the Second Proviso and 
hear from them. And as well maybe the Ways and Means Committee 
folks, hear from them specifically, you know, what changes may 
cause us problems or what directions, more appropriately, may 
cause us problems and which directions won't.
    Mr. Cummings. Okay. Sounds good. Understand what we are 
trying to do as we move through here is trying to make sure 
that this process is fair and that the law is obeyed. It is 
nothing more, nothing less. And we want to do whatever is 
necessary to accomplish those goals.
    I want to thank you all very much for your testimony. It 
has been extremely helpful.
    Our Subcommittee tries to take the information we get and 
do something with it, not just let it sit on the shelf 
somewhere for another Committee to take it up 7 years from now. 
This is under our watch, and we are going to do the best we can 
to correct it. Because if it waited another 7 years, that means 
a whole lot of American jobs possibly, possibly have gone down 
the tubes, a lot of American companies are not getting what 
they are due. And that is a problem. That is a major problem.
    So thank you, and this hearing is now called to a close.
    [Whereupon, at 12:42 p.m., the Subcommittee was adjourned.]

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