[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                        LIABILITY AND FINANCIAL
 RESPONSIBILITY FOR OIL SPILLS UNDER THE OIL POLLUTION ACT OF 1990 AND 
                            RELATED STATUTES

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

                               (111-117)

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              June 9, 2010

                               __________


                       Printed for the use of the
             Committee on Transportation and Infrastructure




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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 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                             VERNON J. EHLERS, Michigan
JERROLD NADLER, New York             FRANK A. LoBIONDO, New Jersey
CORRINE BROWN, Florida               JERRY MORAN, Kansas
BOB FILNER, California               GARY G. MILLER, California
EDDIE BERNICE JOHNSON, Texas         HENRY E. BROWN, Jr., South 
GENE TAYLOR, Mississippi             Carolina
ELIJAH E. CUMMINGS, Maryland         TIMOTHY V. JOHNSON, Illinois
LEONARD L. BOSWELL, Iowa             TODD RUSSELL PLATTS, Pennsylvania
TIM HOLDEN, Pennsylvania             SAM GRAVES, Missouri
BRIAN BAIRD, Washington              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              JOHN BOOZMAN, Arkansas
MICHAEL E. CAPUANO, Massachusetts    SHELLEY MOORE CAPITO, West 
TIMOTHY H. BISHOP, New York          Virginia
MICHAEL H. MICHAUD, Maine            JIM GERLACH, Pennsylvania
RUSS CARNAHAN, Missouri              MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California      CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois            CONNIE MACK, Florida
MAZIE K. HIRONO, Hawaii              LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          JEAN SCHMIDT, Ohio
TIMOTHY J. WALZ, Minnesota           CANDICE S. MILLER, Michigan
HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma
MICHAEL A. ARCURI, New York          VERN BUCHANAN, Florida
HARRY E. MITCHELL, Arizona           BRETT GUTHRIE, Kentucky
CHRISTOPHER P. CARNEY, Pennsylvania  ANH ``JOSEPH'' CAO, Louisiana
JOHN J. HALL, New York               AARON SCHOCK, Illinois
STEVE KAGEN, Wisconsin               PETE OLSON, Texas
STEVE COHEN, Tennessee               VACANCY
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland
SOLOMON P. ORTIZ, Texas
PHIL HARE, Illinois
JOHN A. BOCCIERI, Ohio
MARK H. SCHAUER, Michigan
BETSY MARKEY, Colorado
MICHAEL E. McMAHON, New York
THOMAS S. P. PERRIELLO, Virginia
DINA TITUS, Nevada
HARRY TEAGUE, New Mexico
JOHN GARAMENDI, California
HANK JOHNSON, Georgia

                                  (ii)

                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................     v

                               TESTIMONY

Abbey, Bob, Acting Director, Minerals Management Service.........    65
Anderson, Charles B., Esquire, Senior Vice President and Head of 
  Office, Skuld North America, Inc. (P&I Club)...................    22
Bennett, Craig A., Director, National Pollution Funds Center.....    65
Castor, Hon. Kathy, a Representative in Congress from the State 
  of Florida.....................................................     9
Gerard, Jack, President and Chief Executive Officer, American 
  Petroleum Institute............................................    22
Gordon, Kate, Vice President of Energy Policy, Center for 
  American Progress..............................................    22
Greenstone, Michael, Massachusetts Institute of Technology, 
  Department of Economics, and Director, The Hamilton Project, 
  and Senior Fellow, Economic Studies Program, the Brookings 
  Institution....................................................    22
Hartwig, Robert P., Ph.D., CPCU, President and Economist, 
  Insurance Information Institute................................    22
Holt, Hon. Rush D., a Representative in Congress from the State 
  of New Jersey..................................................     7
Jackson Lee, Hon. Sheila, a Representative in Congress from the 
  State of Texas.................................................    11
McAllister, Brian Buckley, Vice President and General Counsel, 
  McAllister Towing..............................................    22
Perrelli, Tom, Associate Attorney General, U.S. Department of 
  Justice........................................................    65

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Carnahan, Hon. Russ, of Missouri.................................   104
Castor, Hon. Kathy, of Florida...................................   105
Costello, Hon. Jerry F., of Illinois.............................   109
Graves, Hon. Sam, of Missouri....................................   113
Johnson, Hon. Eddie Bernice, of Texas............................   117
Larsen, Hon. Rick, of Washington.................................   122
Mitchell, Hon. Harry E., of Arizona..............................   125

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Abbey, Bob.......................................................   126
Anderson, Charles B..............................................   136
Bennett, Craig A.................................................   148
Gerard, Jack.....................................................   155
Gordon, Kate.....................................................   161
Greenstone, Michael..............................................   171
Hartwig, Robert P., Ph.D.,.......................................   178
Jackson Lee, Hon. Sheila.........................................   192
McAllister, Brian Buckley........................................   204
Perrelli, Tom....................................................   212

                       SUBMISSION FOR THE RECORD

Gerard, Jack, President and Chief Executive Officer, American 
  Petroleum Institute, response to request for information from 
  Hon. Oberstar, a Representative in Congress from the State of 
  Minnesota......................................................   158
Perrelli, Tom, Associate Attorney General, U.S. Department of 
  Justice, response to request for information from Hon. Taylor, 
  a Representative in Congress from the State of Mississippi.....    80


                        ADDITIONS TO THE RECORD

Independent Petroleum Association of America, Bruce Vincent, 
  Chairman, letter to the Committee..............................   220
International Chamber of Shipping, statement for the record......   223

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  LIABILITY AND FINANCIAL RESPONSIBILITY FOR OIL SPILLS UNDER THE OIL 
               PETROLEUM ACT OF 1990 AND RELATED STATUTES

                              ----------                              


                        Wednesday, June 9, 2010

                  House of Representatives,
    Committee on Transportation and Infrastructure,
                                            Washington, DC.
    The Committee met, pursuant to call, at 10:35 p.m., in room 
2167, Rayburn House Office Building, Hon. James Oberstar 
[Chairman of the Committee] presiding.
    Mr. Oberstar. The Committee on Transportation and 
Infrastructure will come to order. Today in our continuing 
review of the underlying causes, conditions, and factors 
involved in the spill of oil in the gulf, we will examine the 
issue of liability and financial responsibility of the Oil 
Pollution Act of 1990.
    I would add parenthetically I have had the privilege of 
being associated with oil spill liability and technical issues 
since my first term in Congress in 1975-76, shortly after the 
Tory Canyon disaster in the English Channel, and Mr. Young, 
then-member of the Merchant Marine and Fisheries Committee, and 
I participated in much of that legislation, all the way through 
the oil spill liability of 1989 and OPA 90.
    The liability, financial responsibility, and insurance 
issue surrounding the Deepwater Horizon are complex. There are 
estimates that suggest losses associated could result in 
between 1 billion and $3-1/2 billion in claims. Those will far 
exceed the liability caps that apply to offshore facilities 
with a limit of $75 million.
    If the predictions prove accurate, total damages will 
exceed the amount available in the Liability Trust Fund. This 
tragedy shows the need for a comprehensive review of liability 
concepts in the law now in effect. When you look at the body of 
law, it goes back at least 150-plus years. Existing laws were 
developed from centuries of maritime history. As I learned back 
in my first term in Congress, maritime is one of the oldest, 
most encrusted bodies of law in existence.
    The purpose then was to deal with damages to persons and 
property involved in accidents involving sea-going vessels. A 
vessel carries a known quantity of oil or other cargo. There is 
a reasonable basis for estimating the worst possible case of 
damages for release of all of the oil in the cargo of that 
vessel. This in turn establishes a basis for a liability cap 
and for setting levels of required insurance.
    One of the lessons of Tory Canyon of Amoco Cadiz and other 
smaller spills, that there had to be--the insurance industry 
insisted on a known amount against which they could insure.
    In contrast, Deepwater Horizon shows that when we are 
dealing with a facility for drilling, rather than a merchant 
vessel, the amount of oil is unpredictable, unknown, and could 
be astronomical.
    Deepwater Horizon also demonstrates that the technology for 
drilling in deep waters and deeper regions below the sea floor 
is riskier and more uncertain than merchant vessel technology. 
It shows us that we need a financial and liability program 
based on the technological complexities and realities of 
deepwater drilling, rather than simply adapting and adjusting 
concepts that were originally developed for surface vessels.
    In addition to the liability issues, the Deepwater Horizon 
tragedy shows that deepwater drilling's complete reliance on 
industry does not provide the safety margin nor the safety 
regime that we need. The Federal Government has allowed the 
drilling industry to self-police, self-certify, self-engineer 
and design, and it is time that we set new standards and exert 
authority over safety issues associated with deep sea oil 
drilling, as we do with high-level aviation operations.
    The issues for consideration in this hearing include 
raising or eliminating the cap on liability for both facilities 
and vessels, raising the levels required for demonstration of 
financial responsibility. A subsidiary issue of importance is 
whether any changes should be applied retroactively. I make no 
judgment on those. I want to hear the testimony that comes out 
of this hearing on whether caps and insurance requirements that 
exist and are incorporated into existing leases, whether the 
government would likely be in breach of contract, liable for 
damages, if liability or insurance requirements were raised 
under existing leases.
    With regard to the liability caps for facilities, one 
option is to remove the caps altogether. A major argument 
against liability caps is that they reduce the incentives for 
operators to take steps necessary to ensure safety. In 
addition, liability caps that are well below the level of 
damages from the spill will mean persons who suffer damages 
will have to be reimbursed exclusively from the oil spill 
Liability Trust Fund, and if there is not enough money in the 
trust fund the injured persons either will not receive 
compensation or may be compensated by taxpayers from general 
revenues.
    The argument in support of liability caps is that without 
caps, only the largest companies will be willing to drill in 
the deepwater, only the largest companies will be able to run 
the risk of huge damages, and this could lead to less 
competition for drilling leases and lower proceeds to the 
Federal Government in selling the rights. Limiting drilling to 
the largest companies could result in less drilling and a 
reduced supply of oil.
    Somewhat different factors are involved when considering 
raising or eliminating caps for vessels, for smaller vessels. 
Tug barges carrying home heating oil are subject to a major 
increase in expense for insurance. There may be loss of 
shipping capacity that could have a detrimental effect on 
consumers. The potential damages from a spill from a vessel are 
more predictable than losses from an uncontained well. The 
amount of oil carried by a vessel is known. The amount of oil 
released by a spill such as Deepwater Horizon is speculative, 
scientific guesswork.
    The caps for facilities have not been adjusted since the 
Oil Pollution Act was enacted, and the caps for vessels have 
been raised by law and administrative action to adjust for 
inflation, so facilities have stayed unadjusted and vessel 
liability caps have increased. The Deepwater Horizon tragedy 
shows a need for a change in the trust fund that backs up the 
individual responsibility for damage. If the cost of cleaning 
up an oil spill and the cost of claims for damages from the 
spill exceed the limits in the Oil Pollution Act, the trust 
fund is available to cover the costs.
    The trust fund is funded predominantly by an 8-cent per 
barrel tax on crude oil at U.S. refineries, and the tax is paid 
by refinery operators. It now has a balance of about $1.6 
billion, with a cap on expenditures of a billion, and 500 
million for natural resource damages. We have passed 
legislation to raise the tax on crude oil to 34 cents a barrel 
and raised the caps on trust fund expenditures to $5 billion. 
Still, the Coast Guard tells us that they will run out of money 
to fight this disaster possibly next week, because they will 
have exhausted the authority for the $100 million advance out 
of the trust fund.
    On May 13, 2010, just prior to our previous hearing, 
Transocean, a Swiss company, filed a complaint in Federal Court 
in Houston to limit its liability to $26.7 million under a 
little-known statute, the Limitation of Liability Act of 1851. 
The Department of Justice has since filed a motion opposing 
Transocean. The 1851 act was put into place before shipowners 
had access to insurance, to encourage American shipowners to 
invest in shipping and put the American shipping industry on an 
even footing of competition with its European competitors. It 
allows shipowners to limit their liability to the value of the 
vessel and the value of her cargo.
    Claims for personal injury and for death and economic 
losses that are coming forward or will come forward will far 
exceed the value of the rig in the gulf and whatever was owed 
to Transocean by BP and others. In researching the 1851 act, 
which I recall from my earlier days on the Merchant Marine and 
Fisheries Committee, we found that in The Law of Admiralty 
book, Gilmore and Black observation on that 1851 act: ``No 
doubt when more obscure statutes are drafted, the Congress will 
draft them. But it is difficult to believe that any future body 
of lawmakers will ever surpass this extraordinary effort. The 
only safe thing to do with such a statute is to repeal it.'' 
And maybe that is what we will wind up doing.
    As we examine the existing liability laws, we have to 
consider revisions to the Death on High Seas Act, the Jones 
Act, both enacted in the 1920's, to prevent persons injured on 
vessels from recovering noneconomic damages generally available 
under tort law.
    Now that is the broad scope of what I expect to cover in 
this hearing. A lot of questions and answers yet to be found.
    Mr. Oberstar. I look forward to the testimony and yield now 
to the gentleman from Florida, my good friend, Mr. Mica.
    Mr. Mica. Thank you, Mr. Oberstar, and I look forward to 
working with you.
    And one of our responsibilities is to learn from tragedies, 
to learn from disasters, and to make certain that we put 
positive measures in place to make certain they don't happen 
again. Now, we can't bring back the loss of 11 lives, but 
people who have lost lives or property or their business, their 
opportunity to earn a living in this country or in the areas 
affected, need our assistance and we may need to make certain 
that we have measures in place to assist those folks that are 
hurting now.
    Let me just say we will be doing legislation. I am told 
that the leadership has made a decision to have legislation 
before the Fourth of July recess. I look forward to cooperating 
in a bipartisan effort to make certain that we have, again, in 
place, measures that will assist folks.
    And this Committee does have jurisdiction, checked it over 
all liability questions dealing with this matter and the 
legislation Mr. Oberstar outlined, including a National 
Response Plan, in addition to the liability question. And I 
think that Mr. Oberstar has also brought some things forth that 
he didn't talk about a great deal in public today, but I think 
I concur with him and we need to look at eliminating some of 
the self-certifying that the industry has done and we will talk 
about that in a second.
    I didn't know too much about how the fund worked. I knew we 
had one in place. Mr. Oberstar is correct.
    If you want to put the oil spill Liability Trust Fund slide 
up there, if we have got that, the trust fund is between $1.5 
and $1.6 billion. This was set up some time ago as you heard 
the history of, I think, back in 1990. It was adjusted in 2006, 
and it is about 1.5 to $1.6 billion balance in the fund.
    The thing that is interesting: I said, well, what about 
people who are hurting; are they getting getting compensation, 
the ones that have economic damages? And the answer to me was, 
the response to me was, No. I said, well what about this 
emergency fund of $150 million? And I was told that that is 
being used right now. In fact, this 150 million emergency fund 
they told me was just about expired.
    So my question is, Where did the money go? Well, it is 
being spent to pay for operational funds, for some cleanup 
costs, and for some other items. None of it goes to economic 
damages at this point.
    Now, the poor son-of-a-gun that has been hurt by this has 
to put an application into BP first, I guess, and get refused 
before they are eligible. Now, the fund, I am told, is already 
expired. So I said, I will introduce legislation to expand it 
because we need to have funds available immediately. And I will 
support that, Mr. Oberstar.
    Mr. Oberstar. Will the gentleman yield?
    Mr. Mica. Yes.
    Mr. Oberstar. The fund--and it is not an emergency fund. It 
is limiting the oil spill liability to $100 million per 
incident, and the Coast Guard has drawn up to that so we need 
to change that cap and give them more authority.
    Mr. Mica. Exactly and I have no problem with that. But 
listen to this. That money is all the responsibility of BP. Is 
there anybody here who doesn't know who is responsible for this 
spill? Raise your hand if you don't know who is responsible for 
the spill. The government and the taxpayer and the people who 
have been paying the 8 cents on the barrel have put the money 
into this fund, and we are front-financing BP's responsibility.
    So I am fine with opening this up. But the first thing the 
government needs to do is get some payments from BP and 
responsible parties so that we are just doing this to front-
finance their responsibility. In this, we should never let BP 
off the hook, or responsible parties off the hook. But in the 
process of changing things, you don't want to do damage or you 
don't want to reward offenders and penalize people who have 
done the responsible thing. So that is the first item.
    Now, of course, on the other side of the aisle, the first 
thing they do is, we have to raise taxes or fees. It is not the 
8-cents-per-barrel fee that got us to this 1.6 billion, 1.5 
billion. There are some other fines and penalties in there, but 
for the most part it is that 8 cents. So what did the other 
side propose? In fact, they passed it in legislation last week 
that we increase this to 34 cents. Now, I don't mind increasing 
it, but I will tell you one thing: I am not going to pay BP's 
expenses up front from this fund. They should be held 
responsible, or responsible parties pay for that. So we may 
need to adjust this upwards, and I have no problem with that.
    The Senate has a proposal for 41 cents per barrel. But what 
we have got to do is get the right figure and keep--and still 
hold people responsible, not use this fund to let people off 
the hook.
    The other thing, too, is we need to find some way to allow 
those who are affected by economic damage--the business closed 
down, their job lost, their resort activity or tourist income 
killed by this disaster--that they get some immediate relief, 
not going through some bureaucratic things. So don't think, 
folks, that those people are being helped in this situation 
right off. So that is the first caveat that I have.
    Economic damages. We now have the $75 million cap, and I 
say it is fine to raise that. But what we have to do is be 
careful that we don't raise it and have unintended 
consequences. When you raise the cap too high, what happens? 
Small business people, small operators, cannot get the 
insurance. They cannot meet the liability limits. So what do 
you do? You reward the big companies.
    Put the second slide up there, the one on the number of 
spills. The number of wells. I am sorry--the number of wells.
    This is interesting, and this is actually put by the 
majority staff into the report that they provided. And I tell 
them, the majority staff, you did a very good job. It was 29 
pages. It was one of the most thorough reports I have read that 
the Committee produced, Mr. Chairman.
    Mr. Oberstar. Thank you.
    Mr. Mica. But this is interesting, and what we want to do 
if we raise again the liability and the economic front, we 
don't want to put everybody out of business. We don't want to 
make only the big operators protected and put everybody else 
out of business, because I come from a business background. If 
you can't get insurance, if you can't meet these liability 
caps, as a small business person I wouldn't be able to compete.
    Now, we don't have that many that we have to worry about in 
deepwater if you look at the chart. And most of the wells and 
the activity, the drilling, is done under 600 feet. Look at 
that. It is almost 3,500. So what we want to do is target and 
keep responsible those people who are posing the biggest risk 
and also would have the biggest resources, and should be held 
on the liability issue responsible financially.
    One other point I want to make on this, Mr. Chairman, as we 
do this. Last week the administration had three different 
positions on moratoriums on drilling. Did you watch that? And 
it threw everybody into a panic. Actually, some people are out 
of business as a result of just a few days of uncertainty in 
this market.
    And what we have got to do is make certain that we don't 
have the same kind of havoc when we go forward with these 
liability proposals; again, not letting anyone off the hook, 
making certain they are held responsible.
    Finally, let me just say that Thad Allen who is in charge, 
he was recently quoted--we will put this in the record, May 
24--when he asked, Why doesn't the government take this cleanup 
over--he was very frank, Thad Allen is a great guy and we are 
fortunate to have him in charge--he said, ``because the 
government doesn't have any capability.''
    Now, probably the worst thing the administration could have 
done, as on June 1, they sent the Attorney General, Eric 
Holder, down there and Eric Holder said he is going to launch a 
criminal investigation. I submit that what he did is he 
probably put the biggest damper on the cleanup you could 
possibly do. If you are a small business or one in business, 
and you are needed or going to be contracted to be involved in 
the cleanup, and the first thing they do is send in the 
attorneys and the Attorney General to start threatening people 
as if they are looking at criminal activity there, that is 
going to get people out of that business of cleaning up an 
activity.
    I think where they need to start--and there may be a time 
for that, and I want people held criminally responsible--but 
right now we need to get that cleaned up.
    Finally, there is one other point I think we should do in 
cleaning that up now. This is a report that we had. It is in 
Newsweek, June 7. We need to start with the Minerals Management 
Office in the Department of Interior. Let me just read this, 
and if Eric Holder wants to investigate, it says the MMS 
appears to have had a coziness, sometimes creepy corruption 
activities, and we saw three criminal investigations in that 
department, which I submitted evidence to under the Bush 
administration. It says oil companies filled out inspection 
forms in pencil, and then the Department of the Interior 
official, the inspector, traced over their writings in ink.
    Now, there is a place to start investigating, start looking 
at criminal activity, is our own Department of the Interior 
that issued the permits, that set the parameters for drilling, 
and then penciled in their opinion on what was done in 
inspections. Something is rotten in Denmark and also in oil 
drilling in the Department of the Interior, and that is a good 
place for Eric Holder to start.
    I yield back the balance of my time.
    Mr. Oberstar. I want to thank the gentleman for his 
comments and for his reference to our Committee staff 
preparation memo. I appreciate your acknowledgment. These are 
all very thorough, very factual, documented pieces that I 
personally review, and I appreciate.
    I would like to just supplement the gentleman's comments. 
Under the OPA 1990 law, BP must reimburse the Federal 
Government to the oil spill Liability Trust Fund. Last week, 
the Obama administration sent BP a $69 million bill for 
reimbursement to the trust fund for expenditures from that 
fund. And under the act, there will be no taxpayer 
expenditures; all that, for compensation for losses and damages 
resulting from the spill, that all must come out of the fund.
    Mr. Mica. Will the gentleman yield?
    Mr. Oberstar. Yes, I will yield.
    Mr. Mica. Again, I was asked why this fund is depleted. And 
they said, basically, We are covering those costs now, waiting 
for reimbursement.
    So I will send a letter if you want to join me or whatever. 
I want BP to be paying now, rather than depleting this fund. I 
don't mind changing it, increasing it, and we need to adjust 
it. But I will be damned if I am going to have that fund 
depleted by front-forwarding the financing of BP's 
responsibility. And if they have got a $69 million bill, they 
sure as hell need to pay it sooner rather than later.
    Mr. Oberstar. Exactly. And there are other costs that BP is 
paying, as they must do when bills are submitted. But the OPA 
90 established this trust fund so that the Coast Guard could 
act promptly, and not wait for oil companies to come forward 
with money, and then come back to them and demand funds and do 
these concurrently. But the law itself, we are going to change 
that law, and we will of course discuss this with the gentleman 
when we proceed, following this hearing, to draft legislation.
    But the Oil Pollution Act of 1990 limits the Coast Guard to 
$100 million expenditure out of the oil spill Liability Trust 
Fund per incident. It is not that the fund has run out. It is 
that they are limited by law to spending $100 million out of 
that fund. We need to raise that amount and change other 
factors within the oil spill Liability Trust Fund.
    And further, I would note that the 8-cent contribution into 
the trust fund expired at the end of 1994 and, unfortunately, 
the previous management of the Ways and Means Committee didn't 
reinstate it until 2006. We had 12 years when the funds were 
not going into the trust fund.
    I know other members have statements they would like to 
make. I would ask them to withhold until our congressional 
panel makes their statements, and then before the second panel 
comes, I will recognize members for individual statements. And 
we will begin with Mr. Holt.

    TESTIMONY OF THE HON. RUSH D. HOLT, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Holt. Thank you, Chairman Oberstar and Ranking Member 
Mica and Members of the Committee. I appreciate the opportunity 
to testify about oil spill liability.
    As we speak, the oil continues to gush into the gulf at an 
unprecedented rate. We can watch it instantaneously any time of 
the day or night. The environmental effects are already evident 
along hundreds of miles of coastline from Louisiana to Florida; 
and, despite a variety of efforts, top hat, top kill, junk 
shot, the recent modified top hat or sombrero, we are still not 
containing the leak. There are signs that the spill won't be 
stopped anytime soon.
    Our concern must be simultaneously stopping the leak, 
limiting the damage to natural resources in the Gulf States and 
addressing the loss of people's jobs and dislocations resulting 
from the incident. This goes beyond the important questions of 
just liability that you are considering today.
    I will restrict myself to the liability.
    Since the catastrophe began, we have all been concerned 
about the long-term economic livelihood of the 200,000 people 
employed by Gulf Coast fishing, 2.8 million people employed in 
Florida in the tourism industry and so forth, and all Americans 
who rely on the Gulf of Mexico for economic livelihood. BP 
should be liable for every last cent of the natural resources 
and economic damage it caused; not the small business owner, 
not the restaurateur, not the vacation home renter, not the 
fishermen, not the American taxpayer.
    Revisiting the liability issue is long overdue. As the 
Chairman said, it has been two decades since the Oil Pollution 
Act was enacted in response to the Exxon Valdez spill. Under 
this act, oil companies are required to cover the full cost of 
``removal.'' However, the law set a $75 million cap for 
liability for other losses such as economic losses and the cost 
of providing extra public services for the response.
    For a catastrophe of the magnitude that we see now, $75 
million is laughable. Initially BP said it would cover ``all 
necessary appropriate cleanup costs .'' More recently it said 
it would pay for all legitimate claims, including those above 
$75 million.
    If you look at the last decade of BP's operations in the 
U.S., you see a decade of BP's management repeatedly 
disregarding safety and environmental rules in ways that are 
deadly and dangerous. The current spill in the gulf, the 
explosion of the Texas City refinery in 2005 that resulted in 
the deaths of 15 people and injuries to more than 150, the four 
explosions along the Alaskan pipeline due to corrosion in 2008 
and 2009, the 200,000-gallon spill in Prudhoe Bay pipeline in 
2006, the falsification of compliance reports in the Carson 
refinery in California over a period of years, why should the 
American public trust BP?
    And history shows, this history and the rest of the history 
shows that mild sanctions and lower liability limits do not 
provide adequate care, prudence, and preparation. It is fair to 
ask if BP's word is enough. It is nice that BP says it will 
cover claims over the legal limit of $75 million. It sounds 
good. But it doesn't satisfy me, and it shouldn't satisfy you. 
I don't think it should satisfy any Member of Congress.
    I disagree with the administration that BP's word is 
sufficient. The liability cap needs to be raised to ensure BP 
is legally responsible, and it needs to be raised 
retroactively. The law allows that.
    Therefore, I have introduced the Big Oil Bailout Prevention 
Act, which would raise the liability cap for offshore well 
spills from $75 million to $10 billion. Those provisions would 
be made retroactive, as permitted by environmental law 
precedent, so that the Deepwater Horizon incident would be 
covered under the bill. The bill has nearly 70 cosponsors, 
including a dozen or so members of this Committee.
    I am glad that the Transportation and Infrastructure 
Committee is holding this hearing today, and I am sure that 
other members and witnesses who are testifying today will help 
us figure out what is the proper level of liability. If $10 
billion is too low, then we should set it at a level that will 
ensure that those responsible are fully liable and the people 
affected do not have to spend the rest of their lives fighting 
with BP and other companies in court.
    Limits should be set not by the size of the company, for 
example, so as not to disadvantage smaller companies; rather, 
limits should be set by the possible expense of harm, injury, 
and damage.
    The Deepwater Horizon is the most catastrophic spill that 
we have experienced. In a fair and just world, companies like 
BP, which made over $16.9 billion last year, should pay for 
every cent of the mess it made, not taxpayers.
    Our bill is clear. The buck stops with the oil companies. 
It shouldn't spill over to taxpayers.
    The American people clearly want to see Congress holding BP 
accountable. And it is fair for them to ask why Congress, 
nearly 7 weeks later, is only now getting around to acting. I 
urge the Committee to act quickly to reassure the American 
people that we will hold BP accountable and bring the Big Oil 
Bailout Prevention Act to the floor of the House expeditiously.
    I thank you for the opportunity to testify. I look forward 
to working with you on this legislation.
    Mr. Oberstar. Thank you, Professor, for your very thorough 
presentation and your very scientific manner.
    Mr. Oberstar. Ms. Castor.

    TESTIMONY OF THE HON. KATHY CASTOR, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF FLORIDA 

    Ms. Castor. Thank you, Chairman Oberstar and Ranking Member 
Mica and all of my colleagues on the committee. We must act 
swiftly to update this outdated Oil Pollution Act of 1990. That 
says it all, doesn't it?
    Mr. Oberstar. Or 1851.
    Ms. Castor. We have learned a lot from this, from BP's oil 
disaster in the Gulf of Mexico. This isn't just affecting all 
Gulf States, this is America's economy. Just when we have 
fought to come out of this recession, BP wreaks havoc on our 
economic recovery. But I am confident, especially, Mr. 
Chairman, with your depth and breadth of knowledge on these 
issues, we will be able to bring legislation to the floor 
swiftly to address this outdated law.
    It is very difficult to characterize liability in this case 
when we are talking about the worst environmental disaster in 
our Nation's history.
    And those of us living on the Gulf Coast, we are going to 
be living with the impact of this disaster for years and years 
to come.
    I met last week with tourism officials, fishermen, 
environmentalists on Saint Pete Beach--and you know the oil 
isn't washing up in the Tampa Bay area yet and we hope and pray 
it will not. But there are still very significant economic 
impacts that we are dealing with: cancellations of hotels and 
vacations. And they are able to chronicle this. Fishermen are 
beside themselves because they will go off the west coast 100 
miles to where the fishing grounds are, and the Commerce 
Department has said, don't go there because it is not safe.
    We have got to make sure that this, when we update the act, 
that we are really looking at the true economic impacts. And 
you have very talented staff, professional staff here. And I 
look around, and they are very thoughtful and knowledgeable 
members, and we have got to ensure that when we update the act 
they are delving into the legal terminology that is used. And 
when you look at the terminology that is used, ``responsible 
parties,'' are we really able to capture everyone in this 
scenario, or a future scenario, that is a responsible party?
    ``Removal costs,'' removal costs include the cost of 
removing spilled oil from water and shorelines or taking of 
other actions that may be necessary to minimize or mitigate the 
damage to public health or welfare. Is that broad enough?
    ``Recoverable damages'' cover, among other things, injuries 
to natural resources, destruction of property, loss of 
subsistence, use of natural resources, public services. But I 
am concerned that that doesn't go far enough.
    We had an economist from the University of Central Florida 
yesterday that said the potential impact on our economy is over 
$10 billion--that is his early estimate--and that the State of 
Florida alone could lose 195,000 jobs, like I said Mr. 
Chairman, just when we are coming out of this economic 
disaster.
    So you have got to put all of your talented folks to work, 
and I ask all of the Committee members to get into the 
terminology of this legislation. It is not a complicated act, 
the Oil Prevention Act. But if we take Mr. Holt's bill, which I 
am a cosponsor of--and I am heartened to know that so many of 
you are cosponsoring--we take that, we have got to update it so 
that we prevent these, that we are able to compensate folks and 
our economy in addressing the environmental impact.
    And one other thing that the Ranking Member has raised, if 
an oil company that is drilling cannot get insurance because 
they can't cover the risk, the potential damages, should they 
be drilling at all? If we cannot insure that we can mitigate 
the harm and damages, and they can't get insurance, should that 
operation be going on in America's waters?
    These are not the waters of big oil companies. These are 
the resources of the people of the United States of America. 
And they deserve all the protection that we can bring.
    So I thank the Committee very much for your attention and 
all of your ongoing efforts to address this horrendous disaster 
that is not just the Gulf Coast disaster but it is is all of 
ours. Thank you, Mr. Chairman.
    Mr. Oberstar. Thank you very much, Ms. Castor, for your 
very thoughtful presentation. Just a footnote to your last 
comment about insurance. In aviation, if an airline cannot get 
insurance, it cannot fly.
    Mr. Oberstar. Representative Jackson Lee.

 TESTIMONY OF THE HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Ms. Jackson Lee. Mr. Chairman, thank you so very much for 
the invitation to provide testimony this morning, and to the 
Ranking Member. To all of the members that are here, let me 
thank the T&I Committee for the important jurisdiction and 
leadership that you give to so many of these issues.
    Publicly, again, I want to acknowledge the lost lives of 
those who have lost their lives. My sympathy to the family of 
the 11 workers who lost their lives in the Deepwater Horizon, 
but also to the many impacted employees whose stories are now 
being told, who are suffering from post-traumatic stress 
disorder. And we know that this is not only catastrophic as it 
continues, but it is catastrophic in the lives of so many 
Americans.
    I believe America is crying out for action now. And 
therefore, I believe Congress would be excused for looking at 
all of the legislative initiatives and amending them and 
reforming them retroactively. That always poses a lot of sticky 
questions and concerns because Congress wants to do the right 
thing. But I don't believe America wants to wait around and pat 
us on the back for legislation that will be enacted for 
operation after this tragic incident.
    I recently had the opportunity to join my colleague and 
friend, Chairman of the Subcommittee on the Coast Guard, Elijah 
Cummings, and my friend Corinne Brown, the Chairwoman of the 
Rail Committee, as we went out over the gulf last week to look 
at the operations that were clearly mind-boggling.
    First, the fireboats were spewing water on fires to burn. 
Then you could see the oil lines going through the pristine 
waters. Then, of course, you could see the enterprise which is 
trying to draw up the oil spill. My friends, this is 
catastrophic, it is overwhelming, it is going to continue. And 
I come from oil country in the city of Houston.
    And so I would suggest that we look at this in the way that 
we have talked about--a seamless energy policy or green energy. 
It has all been on the basis of trying not to hand our destiny 
over to terrorists. That is important. And therefore, I think 
as we become thoughtful in this process, I think we need to 
have that as part of our consideration. But we also need to 
raise this beyond the level of an individual company and say 
that this is the oil industry problem; that as they proceed for 
permits in shallow water and deepwater, one of the legislative 
aspects of our work should be the reforming of how permits 
should be issued. And therefore, I believe no permit should be 
issued without insurance, obviously, at a certain level, but 
also recovery plans.
    I can tell you for sure that deepwater drilling is like a 
surgeon who knows how to do heart surgery, to open the patient, 
perform the surgery, but with no idea how to close on the 
surgery. That patient dies. And even though I come from this 
industry and represent thousands who are now frightened about 
their jobs, I believe for their safety and security, and those 
that I have spoken to, they want increased liability, they want 
safety for their jobs to be protected long range.
    So I believe that we need, first of all, to raise the cap, 
and then I think we need to look at, as the Chairman so 
articulately mentioned, the various legislative initiatives, 
the Oil Pollution Act, the Death on the High Seas Act, but also 
the Jones Act, Mr. Chairman.
    And let me just briefly go through these. As relates to 
collateral damage, after I left the overview of the deepwater 
drilling rig, I want into Plaquemines Parish and visited with 
those at Pointe la Hache: the oystermen, the fishermen, and the 
shrimpers. The claims process is broken. And I thought, Well, 
let's give this process a chance. They are taking paperwork, 
they are filing, and maybe the processes is working.
    Well, let me tell you this: First of all, the offices are 
closed by the company. They are here today, they are closed the 
next day.
    The second thing is, fishermen, oystermen, and shrimpers 
don't necessarily have the paperwork that an accountant has. 
They have their boats, they go out, water may impact, and BP is 
asking them to provide the kind of documentation that you would 
think the greatest accountant would have.
    They are not trying to cheat. When I sat down with these 
folk they said, We simply need to get our money. The last 
payment they got was in May, $5,000. Therefore, they asked 
whether they could get a 6-month lump sum. We thought that was 
something they were responding to because the claims process is 
so erratic.
    Well, lo and behold, they had a meeting on Monday, and that 
meeting resulted in a zero response. ``We don't know what you 
are talking about. We have to keep doing what we are doing.'' 
And right now, the shrimpers, the fishermen, and the oystermen 
are literally dying because they have no way of providing for 
their families.
    I think they want Congress to act now, whether we demand 
that there be a claims process that is set independently, away 
from BP, and whether or not you then ask that process to 
address to the particular industry, such as tourism, such as 
the restaurants, that are likewise being impacted in my own 
community.
    As relates to the Oil Pollution Act, I would suggest that 
the cap be raised, and I join Mr. Holt on that. I think we need 
to be deliberative on how that process is calculated. I also 
think it is important that we independently assess how many 
gallons are going out of the deepwater spill at this point, so 
that any funding payment is not based on industry assessment 
but our assessment.
    I do believe it is important to act now, immediately, to 
provide for the Coast Guard to draw down on that fund beyond 
the $100 million. The Coast Guard says it is absolutely 
imperative.
    Mr. Chairman, there is something called the multidistrict 
courts claims process, and I would suggest--and this is 
overlapping jurisdiction that, as the attorney general Jim Hood 
said, the multidistrict is to form all these cases into one 
court and not allow these cases to be filed in State court.
    I would suggest that the Anti-Injunction Act be amended to 
specify that no Federal court may enjoin parallel litigation 
pursued by a State in its own courts. That will allow Florida 
and other particular States to have cases if necessary.
    Also as I indicated, the lifting of the cap should be done 
immediately. And I would suggest that we engage, as you are 
doing today, the oil industry collectively on providing for 
answers to how you put in a recovery plan if you are trying to 
get a permit.
    The Death on the High Seas Act I think is extremely 
important and only allows for pecuniary damages to be 
collected. This of course, Mr. Chairman, is what you said. It 
is because when this industry was formulated,, this legislation 
was 1920, all they could think of was ships and captains. They 
couldn't think of offshore drilling to the level that we have 
now, and they didn't want to say that a bad weather storm was 
going to be the fault of that captain.
    I am going to be introducing legislation that will add 
punitive damages as well to the issue of the Death on the High 
Seas.
    In addition, the Jones Act, Mr. Chairman, only allows or 
refers to seamen. Many of those who died were engineers. One of 
the witnesses that came before the Judiciary Committee was the 
father of Gordon Jones, I believe. He was an engineer and spoke 
of the fact that his widow could only receive pecuniary damages 
and not punitive damages for what may have been or may become 
the most horrific tragedy that we can experience. I believe 
that there should be an immediate correction of that right now, 
so that those who have lost their lives, their families, will 
not suffer.
    Might I just conclude by adding this point and a story 
about Linda Smith, who had a restaurant or has a restaurant, 
with all of her savings in it, called the Alligator Cafe. But 
it is in Houston, Texas where most people would assume that she 
relies on the Louisiana crop, if you will, of oysters and 
shrimp and fish. And I might tell you, Mr. Chairman, it is darn 
good. Well, her business is literally almost shut down; one, 
because people are asking whether the product is contaminated; 
two, because she cannot get product.
    When I spent time in New Orleans, there were restaurants 
that were closed because they indicated that they could not get 
product. We have seen a number of stories that are now part of 
the collateral damage.
    So I would suggest that in addition to the lifting of the 
cap, that there needs to be an immediate assessment of whether 
or not a recovery plan needs to be part of the permitting 
process, legitimate permitting process, of the MMS. Lifting, of 
course, the cap, amending the Death on the High Seas, and 
amending the Jones Act is required now, and then allowing 
States to be able to file their own lawsuits in spite of the 
multidistrict litigation that I believe came after the Valdez. 
The Valdez, of course, was a tanker spill. This is an oil spill 
of large proportions never seen before.
    And I would just close by saying I represent roughnecks. 
They are frightened for their jobs. These are hardworking 
Americans. And I want to protect them, too. What I hope most of 
all is that Congress will be deliberative in their response, 
that they will move quickly, that the oil industry will see 
that it is in their advantage to collaboratively work to make 
sure that this never ever happens again.
    A heart surgeon would not operate on a patient and not know 
how to save them. That is what happened with the Deepwater 
Horizon drill. And I think it is imperative that we act now. 
Thank you Mr. Chairman.
    Mr. Oberstar. Thank you very much for your testimony, for 
your firsthand experience with those in the gulf. And I would 
say that on the matter of safety of operations, we don't let 
airplanes leave the ground unless they have all the redundancy 
needed to get that aircraft safely back on the ground. At 7 
miles in the air, there is no curb to pull over, look under the 
hood and see what is wrong. You get it right before you leave. 
And when the aircraft returns, there are redundant systems, 
safety, that aircraft is approaching the runway at 165 miles 
per hour. It has flaps that deploy automatically to slow the 
aircraft down. When it hits the ground, the thrust reversers 
kick in and then the brakes apply. Any one of those is supposed 
to stop that aircraft. But under certain conditions, even that 
isn't enough. But we ensure in aviation.
    But if at a mile below the ocean surface, at a depth below 
that which our Los Angeles class nuclear submarines can 
operate, we don't have sufficient redundancy and protection and 
backup, and we have to end the industry self-certification.
    One question I have: Should your bill be retroactive for 
the incident in the gulf?
    Mr. Holt. I want to make clear, Mr. Chairman, that it 
should be. It can be. It is written that way. And I think that 
is what the American people want, and we have research to say 
that the law allows that.
    Mr. Oberstar. If the permits include the limitation on 
liability, is there a cause--have you researched whether there 
is a cause of action by the oil company under that lease?
    Mr. Holt. I am not the best person to testify on that, I 
think.
    Mr. Oberstar. We will get a lawyer, not a physicist.
    Mr. Mica, do you have any questions?
    Mr. Mica. First, let me make one thing clear; that I don't 
think there should be any limits on economic liability. And 
also if there is negligence, these people need to be held 
accountable.
    Mr. Oberstar. If there is negligence, if the gentleman 
would yield, the law sets no limits.
    Mr. Mica. Exactly. That is the first thing. I think my 
point, too, is when you set terms of--blanket terms for again 
increasing some of the liability responsibility, what we don't 
want to do is end up with only the BPs and the Royal Dutch 
Shells and the others as the only ones that can play in this 
game. And what you don't want to do is accidentally put tens of 
thousands of people in the industry out of business because you 
created a very limited playing field in which very few can 
participate. There are many subcontractors and small businesses 
people in this business who, just by the action last week for a 
few days, some of those people have been put out of business. 
So we are talking about creating stability and responsibility.
    And then I point again to the staff's chart. Mr. Holt, you 
saw the staff's chart, and you saw how limited, actually, the 
deepwater wells and the deepwater drilling activity is. Would 
you have a problem with again focusing on where the potential 
risk is in making certain that those that are actually taking 
on that risk or that additional liability, we could limit that 
scope so we aren't putting the small guys out of business.
    Mr. Holt. Thank you, Mr. Mica.
    As I tried to make clear in my testimony, the judgment, the 
operative thinking, should be not whether a small company can 
afford the insurance. The consideration should be how much 
damage might possibly be done. And just as the Chairman said, a 
plane doesn't take off if it doesn't have insurance. You don't 
first ask is it owned by a small company or a large company; 
you ask, does it have the insurance?
    Mr. Mica. But there are different levels of insurance. And 
people who are in the industry--and, yes, first I want no 
limits on economic responsibility, and if there is negligence, 
and I have no problem increasing the cap. But I think you just 
said what I was saying; as those that incur that type of risk 
should be covered and held responsible, and people with lesser 
risk should--for example, a small operator cannot get $10 
billion worth of liability coverage. But that may not be the 
person that is drilling. That is a person that is a 
subcontractor or a small business person in the industry.
    Mr. Holt. There is developed law about how liability is 
passed through subsequent participants, and that is not the 
subject of this legislation. The responsible parties should not 
be able to hide under a liability cap that is so small that it 
allows them to engage in imprudent behavior.
    Mr. Mica. I agree with that. But, again, you want those 
with a higher liability have a higher responsibility of making 
certain that they are insured or covered or can meet that 
liability. Otherwise----
    Mr. Holt. And I think Ms. Castor has made my point, that 
same point, very well.
    Mr. Mica. Thank you Mr. Chair.
    Mr. Oberstar. Do other members have questions of our panel?
    Mr. Nadler.
    Mr. Nadler. Yes, thank you.
    Let me just ask, Representative Holt, in light of what you 
were just saying, it seems to me--and I would ask if you would 
agree that if a company undertakes an activity, the result of 
which may lead to billions and billions of dollars worth of 
damage, in the end result, either that company is going to pay 
for that damage or the people who are damaged are going to be 
unrecompensed or the taxpayers are going to pay for the damage. 
There are no other alternatives. Can you think of any other 
alternatives? OK.
    That being the case, then, someone who says that, Well, 
eliminating the liability cap for that would say small 
companies can't do that business. Why shouldn't we say small 
companies can't do business that puts millions of people at 
risk of billions of dollars unless they can cover the risks 
that they set up?
    Mr. Holt. Let me repeat--thank you Mr. Nadler.
    The Chairman said, Well, with regard to aviation, if you 
are not insured, you don't fly. You don't ask whether it is a 
large company or a small company or a mom-and-pop airline or 
not. If you can't cover the damages, then you shouldn't be 
engaging in the activity. And I think that----
    Mr. Nadler. I think that is the end of the statement. Which 
is another way of saying that if a company--that either a very 
large company that can cover the damages should do it, or 
government should do it, or nobody should do it.
    Mr. Holt. Maybe Ms. Castor wants to add a word to that.
    Ms. Castor. I think it is obvious. It is obvious and the 
devil would be in the details of any insurance negotiation 
between the insurer and the insured. It is ultimately, how do 
you quantify the risk? In this disaster where they downplayed 
the risk, I think now has demonstrated what the true risks are. 
And it is enormous and it is probably not $10 billion.
    Mr. Nadler. A lot more.
    Ms. Castor. We should probably look at something 
significantly more in liability caps for this kind of activity.
    Mr. Nadler. I agree with you. I think it is obvious. I just 
want to make the point that someone who says you have to wipe 
out liability caps because it will inhibit smaller companies 
from doing it, is really saying that either the people who are 
damaged should not be recompensed, that the environment should 
be at risk, or that the taxpayers should pay for it.
    Ms. Jackson Lee. Mr. Nadler, may I respond?
    Mr. Nadler. Certainly.
    Ms. Jackson Lee. Let me try to answer that question coming 
from a community that has what we call independent oil 
producers.
    I think there is a distinction between the insurance that 
major airlines have versus the mom-and-pop airplane that the 
family takes out on a Sunday afternoon joy ride. Certainly the 
death and disaster that may come about is devastating no matter 
what you say.
    But I do think there is something to the concept of a 
tiered review. When you look at the graph, there are about 
3,000 applications for zero to 200 feet in drilling. That is 
called shallow-water drilling. There are only about 1,000 
permits.
    What I have indicated is that I believe whatever permit you 
seek, you should have a defined, vetted recovery plan. What 
happened with Deepwater Horizon is they were in the highest 
levels of technology in terms of drilling, but they had a poor 
response in terms of recovery. When you are talking about 
companies that are in the top five in terms of wealth, and 
certainly, unfortunately, this tragedy, the sky is the limit; 
but when you look at the independents, you can tier the 
recovery and tier the cost.
    Mr. Nadler. Reclaiming my time, let me just say in the few 
seconds left that I would agree, obviously, if the risk is 
limited, then the liability can be limited, and it may be that 
there are tiers. I am not familiar with technology, but where 
the risk is really limited, then the liability can be limited. 
But where the risk is very, very large, you cannot limit that 
liability unless you are willing to have the taxpayers or the 
public eat that liability, and if the liability potential is so 
large that it is uninsurable, then that is the market telling 
you you should not engage in that kind of activity, and we 
should heed the market in that kind of situation.
    Mr. Oberstar. We will have plenty of time to engage with 
our colleagues as we progress with this bill over the next 
couple of weeks. I appreciate the enthusiasm of Members of the 
Committee and those on the panel. I thank you for your 
contributions. I know each of you have Committee 
responsibilities as well.
    Mr. Oberstar. We will conclude this panel and continue with 
our second panel.
    Mr. Gerard, president and CEO of America Petroleum 
Institute; Mr. Charles Anderson, senior vice president and head 
of Skuld North America, P&I Club; Mr. Brian McAllister, vice 
president and general counsel of McAllister Towing; Mr. Robert 
Hartwig, president and economist, Insurance Information 
Institute; Mr. Michael Greenstone, MIT Department of Economics; 
and Kate Gordon, vice president of energy policy, Center for 
American Progress.
    While they are taking their seats, I will now go to Members 
on the Democratic side who may want to make opening statements.
    Mr. Nadler.
    Mr. Nadler. Thank you, Mr. Chairman.
    Let me begin by thanking you for holding this hearing on 
the liability issues under the Oil Pollution Act as it relates 
to the Gulf Coast oil spill. I obviously support efforts to 
greatly raise or eliminate the liability cap in the act. I have 
heard the argument that if the cap is raised or eliminated, 
then drilling companies will not be able to get insurance, but 
that would be the market telling us that we shouldn't be doing 
this kind of drilling, or not in this way, without greater 
safety requirements and oversight. The government should not be 
in the business of shielding companies from the check of the 
free market and providing cover for bad or overly risky 
behavior.
    I have also heard it said that we don't need to raise the 
cap because BP will ignore the cap and cover all damages. If BP 
can afford to do that, why do they need a cap in the first 
place? Frankly, I am very concerned that despite BP's 
statements, they ultimately won't pay for all the damages 
caused by this disaster. BP says it will pay ``all legitimate 
claims.'' But who makes the determination what is legitimate 
and on what basis if they are not statutorily required to pay 
the claim? So far BP has refused to answer that question. And 
there are certain types of damages not covered under the OPA; 
namely, personal injury and punitive damages.
    I have tried to get BP to accept responsibility, for 
example, for health problems caused by this disaster, and so 
far they have refused to do so. BP is trying to look like a 
good actor that will cover all of the damages, but the fact 
that BP refuses to acknowledge liability for health problems 
tells me that they have no intention of paying such claims. And 
if BP doesn't pay, that means it will fall upon the taxpayers 
and the victims themselves.
    Making matters worse is BP's use of toxic chemical 
dispersants. The only thing that the toxic chemical dispersants 
have accomplished, as far as I can, see is to hide the true 
nature, the true extent of the damages by getting the stuff off 
the surface of the water where it can be picked up more cheaply 
but where it is visible, and causing these huge underwater 
plumes to form, the plumes which BP denies exist. We are 
basically air-dropping this toxic stuff all over the gulf, as 
we did Agent Orange in Vietnam.
    I have a deep personal concern about this because it 
reminds me of the World Trade Center disaster in my district. 
The government authorized use of these dispersants and is 
saying everything is safe; there is no need for respirators. 
Yet everyone knows that defies logic. And in the meantime, 
people are getting sick. BP's CEO had the nerve to insinuate 
that people got sick from food poisoning, while OSHA seems to 
think it is probably just from the heat. So sick workers are 
filing injunctions against BP to try to enforce respirator use 
on their own. This is crazy. Chairman Oberstar and I wrote to 
the EPA and OSHA asking that respiratory protection be 
enforced, but based on some of the statements in the press so 
far, I am not optimistic.
    I cannot believe we are repeating the same mistake again, 
the same mistake we made in weeks after 9/11 when the United 
States Government caused thousands of people to get sick by 
denying that the air was toxic. And we are doing it again, only 
this time BP is doing it, and having thousands of workers 
working in what amounts to unsafe conditions. They are going to 
get sick; some of them are getting sick, and BP is going to 
deny liability.
    I cannot believe we are repeating the same mistake again 
and personally causing even more harm to the people of the Gulf 
Coast while BP could get off the hook. I urge everybody here to 
start asking these questions.
    Chairman Oberstar, I know you share these concerns, and I 
thank you for aggressively pursuing these issues on behalf of 
the people of the Gulf Coast and of the entire Gulf Coast 
region, because I believe that all of the harm we are now 
seeing in some of the States bordering the Gulf Coast we are 
going to see in all of the countries bordering the gulf, and 
this is going to become an international crisis.
    Mr. Chairman, I yield back.
    Mr. Oberstar. I now recognize Mr. LoBiondo and then two 
others, and then we have to go our witnesses.
    Mr. LoBiondo. Thank you, Mr. Chairman.
    I think it is great that you are holding this hearing to 
examine the proposed changes to the liability limits 
established under the Oil Pollution Act. As we know, several 
Members on both sides of the Capitol have proposed to 
dramatically raise or even eliminate statutory caps on 
liability. I want to ensure our Committee reviews these 
proposals closely to determine their impact on operations in 
the maritime industry which could be very far reaching. I hope 
today's hearing will be the first step in a process that resets 
liability in a way that is commensurate with the risk and 
potential damages associated with activities on board the 
vessel or facility.
    I strongly believe we should raise the liability limits. In 
2006, I was the lead sponsor of a bipartisan bill that 
restructured and raised these limits for the first time since 
Congress originally passed OPA in 1990. We were forced to do 
this because three successive administrations failed to follow 
the law's requirement to periodically adjust the law's limits 
according to inflation. While they have finally done that for 
vessels, the current administration has still not done so for 
offshore facilities. If the administration had followed the law 
and adjusted limits for offshore facilities like the Deepwater 
Horizon, the cap on damages for this incident would be more 
than $50 million higher than the current $75 million cap. This 
adjustment could be made immediately, and I urge the 
administration to do so as soon as possible. The administrative 
action would be a good first step, but I agree we must raise 
liability standards to account for the significant changes that 
have occurred in the offshore drilling industry since 1990.
    I look forward to working with the Chairman of the Full 
Committee and the Chairman of the Subcommittee to develop 
legislation that adjusts liability limits to come in line with 
the risk; however, as we undertake this process, we must not 
fall into the trap of treating all vessels and facilities in 
the same manner. I think it is important, the risk for a major 
oil spill from a small, nontank vessel is not the same as the 
risk associated with an oil-laden tanker vessel or an offshore 
drilling operation. The current spill in the Gulf of Mexico has 
presented the Federal Government with a new set of challenges 
not foreseen during the development of OPA.
    I hope our witnesses share their suggestions on new or 
amended authorities necessary to respond to the current and 
future spills. And I want to thank all of the witnesses for 
participating in the hearing and look forward to working with 
them and Members of the Committee as we move forward on this 
legislation to protect our waters.
    Thank you, Mr. Chairman.
    Mr. Oberstar. Thank you.
    Mr. Oberstar. Ms. Johnson, Chair of the Water Resource 
Subcommittee.
    Ms. Johnson of Texas. Thank you, Mr. Chairman.
    To put this hearing in context, today marks the 51st day of 
the ongoing BP oil spill disaster in the Gulf of Mexico. One of 
the reasons why I think that it was nearer to Louisiana than 
Texas, because Texas has no cap on liability.
    While this committee's last meeting focused on what went 
wrong and how we have gotten to where we are today, today's 
hearing will focus on what needs to be done and to make sure 
similar disasters do not happen again. Today's witnesses, I 
hope, will focus on liability and financial responsibility for 
oil spills and the resulting damages. This issue is becoming 
increasingly important as the impact of the gulf spill is 
currently unknown, but is still under assessment, and as 
questions arise on who will ultimately bear the responsibility 
for cleanup costs and economic damages.
    Today this Committee will investigate how the Oil Pollution 
Act of 1990 and other statutes should be amended to increase or 
lift the cap on liability for companies or individuals 
responsible for oil spills. BP testified under oath that it 
will pay all legitimate claims and will not be bound by the $75 
million liability cap under the Oil Pollution Act. However, as 
Congress continues its investigation of the BP oil spill 
disaster, this Committee should rightly question whether or not 
the current $75 million--and obviously we think it is worth 
more than that--should be just eliminated.
    The President and Members of Congress have called for 
significant changes to the liability cap or for the cap to be 
eliminated altogether. In light of these proposals, today's 
hearing compels us to ask important questions about how much 
liability we should expect oil companies to maintain and how 
much financial responsibility we should expect them to have 
when accidents of this nature happen.
    According to reports in the Washington Post earlier this 
week, BP is currently capturing as much as 15,000 barrels a day 
with its latest effort. This is in sharp contrast to the amount 
that BP has reported is leaking. It seems to me that we have to 
rely on BP for data and information, and we have no way of 
confirming it. Given that we may not know the full extent of 
the oil spill for years to come, it might not make sense for us 
to cap any amount of financial responsibility for BP and other 
companies, and this is what we are here to discuss today.
    While the entire story of this disaster might not be told 
for decades, we have an obligation to see those responsible for 
this spill held accountable for their actions not only to the 
people of the Gulf Coast, but to the American people. We also 
have an obligation to learn from this disaster and make 
necessary changes to our laws and update our laws to ensure 
companies are held accountable in the future.
    Mr. Chairman, I thank you, and I look forward to hearing 
the witnesses today.
    Mr. Oberstar. I thank you for your statement, despite 
limitations on your voice. It is getting better, and it is good 
to hear that.
    Mr. Cao, and then two more, and then we will go to our 
panel.
    Mr. Cao. Thank you, Mr. Chairman, for holding this very 
important meeting, and I thank the Ranking Member for all of 
his support following the oil spill. And as we speak today, oil 
continues to flow in the Gulf of Mexico, affecting thousands of 
businesses, fishermen; destroying our ecosystem; as well as 
impacting people's physical and mental health issues.
    I represent a district that is directly impacted by the 
Deepwater Horizon disaster, and I feel the pain and the 
suffering of my people, and want to do everything that I can to 
address their needs. Therefore, I support the raising of the 
liability cap. But, Mr. Chairman, we must do it in a very 
deliberate way that will prevent the loss of thousands of jobs 
in Louisiana.
    Another decision that might have unintended consequences is 
the administration's decision to impose a 6-month moratorium of 
deepwater drilling. Again, the primary issue we have is the 
issue of safety and how to prevent the same disaster from 
happening in the future, but at the same time, Louisiana is 
very much dependent on the oil and gas industry, and to impose 
a 6-month moratorium will cost Louisiana approximately 40,000 
jobs.
    I do believe we need a time period in order to inspect all 
of the rigs that are in the deepwater portion of the gulf and 
to ensure that they have the plans and the procedures necessary 
to prevent a disaster from happening; but at the same time, I 
hope that we move, at least the administration moves, in a very 
responsive way as to limit the potential job loss to the State 
of Louisiana.
    Again, the Deepwater Horizon disaster is a disaster of 
grave magnitude, and it is impacting and destroying the lives 
of thousands of my constituents. We must do everything that we 
can as a Federal Government to help those who are in need, to 
provide a long-term recovery plan for the district, as well as 
to rebuild the coast and the wetlands of Louisiana that are 
being destroyed by the disaster.
    With that, Mr. Chairman, thank you for this important 
hearing. I yield back.
    Mr. Oberstar. Thank you very much.
    Ms. Brown has an introduction to make.
    Ms. Brown of Florida. Yes, Mr. Oberstar. Thank you for your 
leadership on this matter.
    They will be leaving, but we have 20 SCUBAnauts from 
Florida who are here. They are very interested in the 
environment; not just in diving, but the whole marine biology. 
They are here visiting us from Florida.
    Mr. Oberstar. We welcome them. Thank you very much for your 
enterprise and work. With the experience learned, you will be 
helping us prevent future disasters in the gulf and elsewhere.
    Thank you for the introduction.
    Mr. Cummings, a brief opening statement.
    Mr. Cummings. Thank you, Mr. Chairman. As Chairman of the 
Subcommittee on the Coast Guard and Maritime Transportation, I 
am pleased that we are here today holding our second hearing on 
the Deepwater Horizon incident. Today's hearing will enable us 
to examine whether liability limits for offshore facilities and 
vessels under the OPA of 1990 should be changed, and if so, 
how.
    I have now made two trips to the gulf. Most recently I have 
traveled with Congresswoman Brown, Chairwoman of the Rail 
Subcommittee, and Congresswoman Jackson Lee, who testified 
earlier, and have had an opportunity to see firsthand the 
astounding devastation that has resulted from the blowout at 
the Macondo well site.
    BP has said that regardless of their current legal 
liability, they will pay all costs associated with the spill. 
The government must be aggressively vigilant in holding BP to 
its commitment.
    I have been deeply concerned about the reports that BP may 
be nickel-and-diming Gulf Coast residents and businesses. Many 
thousands in the gulf are facing the loss of their livelihoods 
for what may be a long time to come, and, by extension, they 
are facing the risk of losing their homes, businesses, and the 
futures for which they have worked their entire lives.
    Based on my discussions as recently as this Monday with the 
Federal officials in the gulf, I am confident that the 
government is working diligently to require that BP processes 
claims as expeditiously as possible; but this must continue to 
be a top priority, and I question whether it has been.
    As with so many aspects of this disaster, BP urgently needs 
to improve its performance. As late as this morning, Mr. 
Chairman, Thad Allen was saying that they will be meeting 
with--that is, the Coast Guard will be meeting with BP 
officials to speed up the process of addressing those claims. 
That said, although facilities are legally liable for all costs 
associated with cleaning up the oil-based spill, the cap of $75 
million in liability for the damages that a spill from an 
offshore facility might cause is unrealistically low given what 
we are now seeing, and it is obvious when we see all of the 
problems associated with this bill. It is imperative that this 
cap be raised to a level that reflects the extent of the 
potential consequences associated with spills from offshore 
facilities.
    Further, under current statutes, facilities are not 
required to demonstrate more than $150 million in financial 
responsibility, although it is apparent their potential 
liabilities may be many times that figure. As we consider, Mr. 
Chairman, the appropriate liability level for offshore 
facilities, we must also assess the appropriate level of 
financial responsibility they should be required to 
demonstrate. The current threshold of $150 million is 
unrealistically below the extent of the potential liability in 
light of what has happened in the gulf.
    We will also consider the adequacy of current liability 
caps for vessels. Unlike facilities, vessels are currently 
required to demonstrate financial responsibility for the full 
amount of their liability. And we must consider what impact a 
liability increase would have on the smaller vessels that are 
critical particularly to our domestic maritime commerce.
    That said, over the longer term it is also imperative that 
we move away from our dependence on oil. Simply ceasing all 
offshore drilling is not the answer, particularly if that means 
we just import increasing amounts of oil from nations that seek 
to use those payments to destroy us. Reducing our demand and 
creating reliable alternative energy sources are essential 
steps we must take now to ensure our future security and 
prosperity.
    I thank you, Mr. Chairman, and I yield back.
    Mr. Oberstar. Thank you for your work as Chairman of the 
Subcommittee on the issue at hand.
    Now we begin with Mr. Gerard, American Petroleum Institute. 
Thank you for being with us. You have heard concerns expressed 
by colleagues on the first panel and Members of this Committee, 
and we look forward to your presentation.

TESTIMONY OF JACK GERARD, PRESIDENT AND CEO, AMERICAN PETROLEUM 
INSTITUTE; CHARLES B. ANDERSON, ESQUIRE, SENIOR VICE PRESIDENT 
AND HEAD OF OFFICE, SKULD NORTH AMERICA, INC. (P&I CLUB); BRIAN 
    BUCKLEY McALLISTER, VICE PRESIDENT AND GENERAL COUNSEL, 
 McALLISTER TOWING; ROBERT P. HARTWIG, PH.D., CPCU, PRESIDENT 
    AND ECONOMIST, INSURANCE INFORMATION INSTITUTE; MICHAEL 
 GREENSTONE, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, DEPARTMENT 
 OF ECONOMICS, AND DIRECTOR, THE HAMILTON PROJECT, AND SENIOR 
 FELLOW, ECONOMIC STUDIES PROGRAM, THE BROOKINGS INSTITUTION; 
 AND KATE GORDON, VICE PRESIDENT OF ENERGY POLICY, CENTER FOR 
                       AMERICAN PROGRESS

    Mr. Gerard. Thank you very much, Mr. Chairman and Mr. Mica, 
Ranking Member, and Members of the Committee. I am Jack Gerard 
of the American Petroleum Institute. API's 400 member companies 
represent all sectors of America's oil and natural gas 
industry. Our industry supports 9.2 million jobs, including 
many in the offshore development business, and provides most of 
the energy the Nation needs to power the economy and our way of 
life.
    The tragic and heartbreaking accident in the gulf was 
unprecedented, and our thoughts and prayers go out to the 
families who lost loved ones, to the workers who were injured, 
and to all of our neighbors in the gulf who were affected. The 
people of the oil and gas industry understand our 
responsibility to find what happened and why, and work in 
cooperation with government to come up with recommendations for 
improving this process across the board.
    We have already assembled the world's leading experts to 
conduct a top-to-bottom review of offshore drilling procedures 
from operations to emergency response. And our industry is 
providing data and expertise to the Federal Government to stop 
the flow of oil, clean up the environment, and understand the 
causes and correct them.
    As Congress considers legislative changes that impact 
domestic oil and natural gas production from our offshore 
resources, it is critical that proposals both protect the 
taxpayers and advance our country's energy and economic 
interests. This Nation's energy and economic security demands 
must be met by increased domestic oil and natural gas 
production now and for several decades to come. We want to work 
with the Congress and the administration as we consider the 
best ways to protect taxpayers and to provide our country its 
energy needs.
    The Oil Pollution Act of 1990 established the Oil Spill 
Liability Trust Fund as an important insurance policy to cover 
the cost of potential economic damages from oil releases from 
exploration, production or transportation accidents. It is 
funded by a per-barrel tax on the oil industry that has been 
mentioned earlier, not by the taxpayers. We accept that 
responsibility to ensure the support and safety net is 
adequately funded well into the future.
    Some are proposing to increase liability limits for 
economic damages from $75 million up to $10 billion, or even to 
remove the limit altogether. We recognize that changes are 
needed, but believe that some proposals to arbitrarily raise or 
remove the fund's cap would threaten the viability of offshore 
operations and could significantly reduce U.S. domestic oil and 
natural gas production, cost jobs, and harm U.S. energy 
security.
    We are not alone in this assessment, as independent 
insurers and analysts have reached similar conclusions. 
Preliminary analysis indicates the following are some 
anticipated results of increasing the liability amounts for 
economic damages from $75 million to $10 billion. Let me share 
just a few.
    Some of the leading insurance companies in the oil and gas 
market have told Congress that they would be unable to offer 
adequate insurance protection for offshore operations, making 
the economic risk of conducting offshore operations too great 
for small-, mid- and even large-sized companies. Estimates 
indicate that aside from national oil companies owned by 
foreign governments, only a few of the very largest oil and 
natural gas companies could meet a potential $10 billion 
financial assurance test for self-insurance. Lack of insurance 
created by a $10 billion cap would, in effect, push all small, 
medium and even most of the major integrated companies out of 
the gulf.
    An estimated 170,000 direct and indirect jobs are supported 
by the oil and natural gas industry in the Gulf of Mexico. As 
the companies that could meet the self-insurance threshold 
account for about 15 percent of the total gulf production, 
raising the liability cap would place about 145,000 jobs at 
risk. Even the largest companies would see premiums for 
additional insurance skyrocket, raising overall cost for 
offshore operations by as much as 25 percent. The impacts could 
be devastating. For example, Wood Mackenzie estimates that just 
a 10 percent increase in development costs could render seven 
current discoveries subeconomic, reducing production jobs, and 
putting $7.6 billion in future government revenue at risk.
    In conclusion, Mr. Chairman, as Congress considers this 
issue, thoughtful consideration must be given to harmonize the 
need to provide necessary resources to this important industry-
funded safety net to protect our environment, while allowing us 
to safely and reliably provide the energy our Nation relies on 
for our economic and energy security. To help achieve these 
critical objectives, the API has initiated an effort with our 
member companies to quickly develop and provide to you and the 
administration our recommendations on how to effectively 
address liability limits and financial responsibility for 
offshore exploration activities. We are committed to providing 
quick and constructive input to this important policy debate, 
and will provide our recommendations to you soon.
    That concludes my statement. Thank you, Mr. Chairman.
    Mr. Oberstar. Thank you.
    Mr. Oberstar. We certainly look forward to receiving that 
set of recommendations, and I would urge you to get it in 
within a week. We don't have much time. We have a goal of 
getting a package of bills from several committees ready for 
introduction before the July 4 recess.
    Mr. Oberstar. Mr. Anderson, welcome and thank you for 
participating today. Your testimony is of particular interest.
    Mr. Anderson. Thank you very much, Mr. Chairman. I am 
honored to be here before the committee. My name is Charles 
Anderson. I am a senior vice president with Skuld North 
America, which is the U.S. and North American representative 
for the Skuld Protection and Indemnity Association. Skuld is 1 
of 13 not-for-profit mutual marine underwriting associations 
which make up the international group of P&I clubs, which in 
turn collectively insure over 90 percent of the world's 
oceangoing tonnage and 95 percent of the world's oceangoing 
tankers.
    Just a few words about what protection and indemnity 
associations are. They are commonly referred to as ``clubs'' 
for historical reasons, because ship owners, going back as far 
as the mid-19th century, recognized the need for new forms of 
insurance to cover compensation to third parties, such as 
injuries to crew and passengers, damage to cargo interests and 
collision. These liabilities were insured on a mutual basis. 
The ship owners pooled their resources in mutual associations. 
And most recently, as pollution has become a concern in ship 
operations, P&I cover is now available to cover removal costs 
and damages resulting from pollution incidents up to $1 
billion.
    Again, cover is provided on a mutual basis, and it is 
important to note that cover is available worldwide for 
virtually all types of vessels arising from liabilities in 
many, many different jurisdictions. Cover is provided for 
liabilities that arise directly in connection with the 
operation of a ship. It is important to note that P&I cover is 
not available on a mutual basis for offshore oil exploration 
and production facilities, although there is limited cover 
available on a fixed-premium basis.
    The clubs operate on a very unique claim-sharing pool. For 
claims that exceed the individual club's retention, which is 
currently $8 million, the pool is reinsured by commercial 
reinsurers worldwide, including virtually all major reinsurers 
in the U.S. market. Through these pooling arrangements, the 
group member clubs are able to offer the highest levels and 
broadest range of cover for the benefit of victims of marine 
casualties.
    Mr. Chairman, you have already pointed out, I think very 
eloquently, the difference between the carriage of cargo aboard 
seagoing vessels from one port to another and that this 
represents a very different risk from deep-ocean drilling and 
exploration of undersea oil fields, such as the Deepwater 
Horizon incident, and also, back in the 1980's, the Piper Alpha 
incident in the North Sea.
    Vessels have a limited capacity for oil and fuel. Coast 
Guard regulations require tank and nontank vessels to insure by 
contract the availability of resources to respond to a worst-
case discharge, which is defined as the discharge of the 
vessel's entire cargo- or fuel-carrying capacity in adverse 
weather conditions.
    Another important distinction between vessels and offshore 
facilities is that the enforcement and oversight of vessel 
safety and environmental protection has been delegated to the 
U.S. Coast Guard. Mr. Chairman, I work with the U.S. Coast 
Guard on an almost daily basis on compliance issues, and I 
don't need to tell this panel that the Coast Guard does not 
rely on industry self-certification or self assessment. The 
Coast Guard personnel are motivated, dedicated, highly trained 
individuals who carry out systematic and vigorous on-site 
inspections of all vessels entering U.S. Ports to verify 
compliance with Federal law and regulations and international 
conventions. And statistics compiled by the Pollution Fund 
Center show that the Coast Guard Port State Control Program, in 
partnership with the shipping industry, has led to significant 
decreases in the number of ship-source oil pollution incidents 
in the U.S.
    Since my time is limited, I wanted to particularly 
emphasize the importance of vessel certification, or the COFRs. 
COFRs are essentially what makes ships able to trade in the 
United States. COFRs, however, are supplied by independent, 
dedicated companies, and they are not provided by the P&I 
companies. These COFR providers rely on the same system of 
reinsurance as the P&I clubs; 85 percent of all ship owners 
trading to the U.S. use one of these dedicated COFR providers.
    It is important to realize, as I said, that these providers 
are reliant on the same system of reinsurance as the P&I clubs. 
Current proposals to remove caps on liability, or to have a 
one-size-fits-all limit regardless of vessel capacity or type, 
would require an enormous increase in reinsurance capacity at a 
time when it is questionable whether this capacity would be 
available. The reinsurance market is very broad in the sense 
that it must respond to a great variety of casualties, such as 
floods, earthquakes, and other disasters, and in any given year 
that capacity may be very limited. So the reinsurance capacity 
is finite and dependent on the risk perception of the 
reinsurance market and on essentially the experience of the 
reinsurance market in any given year with respect to these 
other claims.
    The current proposals, which would essentially strike out 
any limit for removal costs and replace the current vessel 
limits, which are a tonnage-based system, with an as yet 
unquantified damages limit, would lead to an uninsurable ship 
owner liability, and it would bring to an end the current 
system of certification of financial responsibility, which 
would in turn mean that ships would have to cease trading to 
the United States, or that job would be relegated to 
substandard ship owners who were willing to take risks and bet 
the company assets essentially on delivery of oil cargoes to 
our country.
    Mr. Chairman, that concludes my remarks. Thank you very 
much for your time, and I am happy to answer any questions the 
Committee may have.
    Mr. Oberstar. Thank you very much.
    Mr. Oberstar. The distinctions you have drawn are very 
important, and we will come back to those. The administration's 
proposal is going in one direction, and we are looking at 
bifurcation of the responsibilities; those of vessels where 
there is a quantifiable amount of oil, and from rigs and sea-
bottom wells where there is both an unquantifiable and perhaps 
unknowable amount of oil.
    Mr. Oberstar. Now Mr. McAllister.
    Mr. McAllister. Thank you. I am Bucky McAllister. I am the 
vice president and general counsel of McAllister Towing, a 
company that was founded in 1864. It is a fifth-generation, 
family-owned company with a fleet of U.S.-flagged tugboats, 
barges and ferries on the east coast of the United States. I am 
testifying this morning on behalf of the American Waterways 
Operators, the national trade association for the inland and 
coastal tugboat, towboat, and barge industry. Our company and 
other AWO members are in the business of marine transportation, 
not oil exploration or production.
    McAllister Towing and AWO's 350 member companies share a 
deep commitment to marine safety and environmental stewardship. 
Our thoughts and prayers go with the deceased and all those who 
were impacted.
    We understand that no spill is acceptable. They damage the 
natural environment, and they jeopardize our ability to stay in 
business. We did not come to this realization this April. Our 
industry woke up long ago. Two decades ago Congress passed the 
Oil Pollution Act of 1990. Our fundamental message today is 
this: With respect to vessel spills, OPA 90 is working.
    Let me cite a few examples. Tank barge oil spill volumes 
have plummeted 99.6 percent since you passed OPA 90, with a 
record low of 4,347 gallons spilled in all of 2009. To put that 
in perspective, that is about the same amount of oil that is 
estimated to be escaping from the ocean floor in the gulf every 
10 minutes. With nearly 69 billion gallons of oil transported 
by barge on U.S. waterways, this means that 99.99 percent of 
the oil moved by tank barges is being moved safely. More than 
90 percent of the U.S. tank barges are double hulled, 5 years 
ahead of the schedule you set in OPA 90.
    Since OPA 90, our industry has been challenged to lead 
improvements in safety and stewardship above and beyond the 
requirements of law and regulation, and we have done so. 
Developed in 1994, the AWO Responsible Carrier Program, which 
is a safety management system for tugboat and barge operators, 
has long been a condition of membership in AWO. All AWO members 
must undergo an independent, third-party audit every 3 years. 
Companies that fail their audit forfeit their membership.
    In 2004, AWO joined the Coast Guard in supporting 
legislation to bring towing vessels under a Coast Guard 
inspection regime and require all towing vessels to have a 
safety management system.
    Mr. Chairman, we join you in urging the Department of 
Homeland Security to publish its Notice of Proposed Rulemaking.
    The liability and financial responsibility provisions of 
OPA 90 have been an important contributor to this record. 
Vessel owners must demonstrate financial responsibility up to 
the limits that were raised by Congress in 2006 and by the 
Coast Guard in 2009 to keep up with inflation. Those limits can 
be breached in events of gross negligence, willful misconduct 
or violation of regulation. Today, liability limits for vessels 
are two or three times higher than they were in 1990, and a 
mechanism is in place to continue increasing the limits over 
time.
    In exercising its oversight mission, we urge the Committee 
to be mindful of this history and the potentially severe 
consequences of changes in the liability and financial 
responsibility regime for vessel owners. The current statutory 
and regulatory framework reflects a careful balance. It ensures 
that vessel owners have access to appropriate levels of 
insurance cover, typically $1 billion for companies that obtain 
their coverage through the P&I clubs. If the costs of a spill 
exceed those limits, claims are then paid by the Oil Spill 
Liability Trust Fund you have been discussing. This fund is not 
drawn from the General Treasury to shift the cost of the spill 
to U.S. taxpayers; rather, it is essentially a supplemental 
insurance pool that is funded by the oil industry itself.
    We are troubled by proposals to further increase liability 
limits for vessel owners as a reaction to the current disaster. 
Tank vessels are not oil-production facilities. A worst-case 
discharge from a vessel is a quantifiable amount, as you have 
pointed out. The liability limits for vessels, unlike limits 
for offshore facilities, have already been increased by 
Congress and the Coast Guard. For a vessel owner, unlimited 
liability is not insurable. However, it is not only unlimited 
liability that places vessel owners at risk; proposals to raise 
liability limits also threaten to raise the cost of insurance 
to a level where responsible small- and medium-sized companies 
could not afford it.
    We urge the Committee to be sensitive to the impact of its 
changes on responsible, tax-paying American companies that 
provide family-wage jobs for tens of thousands of Americans 
citizens. We urge you to recognize the differences between a 
tank barge or a towing vessel and an oil rig, and we urge you 
to be thoughtful and judicious as you exercise your very 
important oversight responsibility. Thank you.
    Mr. Oberstar. Thank you very much. You referenced my 
concern in my opening remarks, and I will come back to that 
theme during the questioning period.
    Mr. Oberstar. Dr. Hartwig.
    Mr. Hartwig. Thank you, Chairman Oberstar and Ranking 
Member Mica and Members of the Committee, for inviting me to 
testify here today. My name is Robert Hartwig, and I am 
president and economist for the Insurance Information 
Institute, an international property casualty insurance trade 
association based in New York.
    I have been asked by the Committee to testify on the 
insurance implications of the Deepwater Horizon accident; and 
specifically I will address the following three issues: the 
insurance arrangements in place at the time of the Deepwater 
Horizon accident; the immediate and current insurance market 
reaction to the accident; and the potential market reaction to 
proposed changes by Congress to various acts governing the 
limits of liability associated with offshore drilling activity.
    Since April 20, when a fire and explosion on the Deepwater 
Horizon tragically claimed the lives of 11 workers, we have 
seen an estimated 800,000 barrels of oil spill into the Gulf of 
Mexico through June 1, and this is shown in figure 1 at the 
back of my testimony. This makes the Deepwater Horizon event 
the second largest oil well blowout in world history, and the 
largest ever in the U.S., approximately eight times larger than 
the magnitude of the largest prior event. And by way of 
reference, it is also three to four times larger than the 1989 
Exxon Valdez event.
    Given these sobering statistics, and from an insurance 
perspective, offshore oil platforms are among the most 
difficult and complex commercial risks to insure in the world. 
They feature a number of risk-financing components such as: 
self-insurance; high retentions and deductibles; traditional 
insurance; reinsurance, which is insurance for insurance 
companies; participation in mutual insurers; the use of 
captives; and even accessing the capital markets.
    Many of the largest offshore energy operators, like BP, are 
self-insured. In terms of discussing some of the key coverages 
that are in place, I have a page-long list of these in my 
testimony. I will not go through what is in the written 
testimony there. But basically these coverages provide these 
offshore operators with protection for physical loss, for 
instance the rigs and the pipes, but also the liability losses 
they might have obviously to workers, but also in terms of 
pollution and other sorts of liabilities they may incur.
    Specifically with respect to the operators involved in the 
Deepwater Horizon disaster, BP had a number of partners. The 
partners outside of BP all had private insurance protection in 
place. As I mentioned, however, BP, which was the lead in this 
particular endeavor with a 65 percent interest in the project, 
was self-insured. BP did self-insure in part through the use of 
a captive known as Jupiter Insurance, which had $6 billion of 
capital on the day the event occurred. This protected it mostly 
against property losses; but, in effect, BP's prodigious 
earnings power are, in fact, its insurance policy.
    Now, ultimately in terms of when we add together the 
private-insurance-sector losses that we are seeing from the 
other parties, again it is still too soon to tell ultimately 
where we will wind up, but estimates today range from private 
insurance that will be contributed to recovery from this event 
to be in the range of $1.4 billion to $3.5 billion.
    In terms of the immediate market response to the event, the 
global energy market response to the Deepwater Horizon loss 
has, in fact, been quite orderly. Capacity has not fled the 
market. Prices have indeed risen, but commensurate with the 
rapidly changing outlook in demand for liability coverages and 
mounting uncertainty over government action related to both 
future and potential retroactive liability, estimates are that 
the cost of insurance for drillers operating in the Gulf of 
Mexico has increased from 15 to 50 percent, depending on the 
nature of the operation.
    In terms of capacity, the typical third-party limit for 
liability coverage that can be purchased on the market is 
approximately $1 billion, and that has not changed in the wake 
of the Deepwater Horizon event. At the same time, as I 
mentioned, prices have risen, but those increases in prices do 
not appear to have attracted significant additional capital.
    Contributing to the skittishness of new capital is the fact 
that the Deepwater Horizon event could, in fact, unleash one of 
the largest tort actions in United States history. As displayed 
in figure 2 at the back of my testimony, a total of 126 
Deepwater Horizon lawsuits have been filed through May 24 
against just the four primary companies involved.
    In terms of potential market impacts associated with 
changes in the Oil Pollution Act of 1990, since the Deepwater 
Horizon incident, there has been a great deal of discussion in 
Congress and at this hearing about changing the limits of 
liability from those that existed originally under the act from 
$75 million to a number in the vicinity of perhaps $10 billion. 
Now, currently the OPA features a compulsory liability 
insurance structure combined with strict liability rules for 
oil pollution damages associated with offshore energy 
facilities. These parties are responsible for offshore 
facilities. They must establish and maintain oil spill 
financial responsibility capability to meet their liability for 
removal costs and damages associated with oil discharges. That 
capability is demonstrated in a variety of ways, but most 
importantly through insurance.
    Now, in the wake of the Deepwater Horizon spill, as we have 
mentioned, Congress has proposed raising the limit under OPA to 
$10 billion from the current $75 million. As discussed already, 
the typical maximum available third-party liability coverage is 
somewhere between 1- and perhaps, if you stretch it, 1.2- and 
perhaps even $1.5 billion. But as a practical matter, energy 
insurers and reinsurers simply cannot at the current point in 
time provide $10 billion in capacity.
    There are a number of reasons for this: The entire global 
energy insurance market currently consists of no more than $3 
billion in premiums annually. Higher limits of liability will 
increase the demand for coverage, perhaps greatly, potentially, 
exhausting available capacity. Underwriting for very low-
probability, extremely high-severity events is very challenging 
for insurers and reinsurers, and the higher cost of coverage, 
of course, as we have already heard, could disadvantage smaller 
offshore operators that do not have the resources to self-
insure.
    The current tort liability environment increases 
uncertainty as to the frequency and severity of future events. 
As I mentioned, if Congress retroactively raises the limits of 
liability under OPA, it may well do so in the future, raising 
potential future payouts unexpectedly, thereby increasing the 
uncertainty in costs associated with offering such coverage in 
the near future.
    So in conclusion, while the availability of liability 
coverage in offshore energy insurance markets remains at pre-
Deepwater Horizon levels, it is unlikely that the insurers at 
the current point in time could provide limits sufficient to 
meet a proposed $10 billion limit in terms of what is being 
discussed today under the context of a revised Oil Pollution 
Act.
    Thank you for the opportunity to testify before the 
Committee today. I will be happy to respond to any questions 
that you have.
    Mr. Oberstar. Thank you very much for a thoughtful and very 
comprehensive statement.
    We now turn to Dr. Michael Greenstone, MIT Department of 
Economics, and a lot of other titles that you wear.
    Mr. Greenstone. Thank you for the kind introduction. I 
thank Chairman Oberstar, Ranking Member Mica, and Members of 
the Committee for inviting me here today.
    The Deepwater Horizon disaster is the worst spill that our 
country has experienced in both economic and environmental 
terms. A key purpose of my testimony today is to use economic 
theory and evidence to take a critical look at the economic 
incentives around drilling decisions that impact the chances of 
future oil spills.
    As I see it, we have two objectives related to oil 
drilling. The first is to support energy security through 
increased energy production in the United States. The second 
objective is to protect the environment by making sure that 
energy producers put the appropriate safeguards in place 
against oil spills and other environmental damages. These two 
objectives are often in conflict with each other.
    The American people depend on the government to determine 
the appropriate level, type and location for drilling. In 
trying to set safety standards and conduct inspections, the 
government faces an information disadvantage relative to 
industry. With that information disadvantage, it is crucial 
that drillers face the proper economic incentives to prevent 
spills. However, this is not the case under the current law. As 
has been pointed out today, the 1990 Oil Pollution Act capped 
firms' liability for economic damages from oil spills at $75 
million, and this cap effectively shields companies from 
responsibility for their decisions. This misalignment of 
incentives is a classic case of what economists like to call 
moral hazard. Firms just behave differently when they are 
protected from the consequences of their decisions.
    My primary argument here today is that the removal or 
substantial increase of the liability cap on economic damages 
is the most effective way to align oil companies' incentives 
with the American people's interests.
    I want to take a minute to explain why caps are so 
troubling in aligning oil company incentives with the interests 
of the American people. Consider what an oil company does. The 
oil company makes decisions about where to drill and which 
safety equipment to use based on benefit-cost analyses of the 
impact on their bottom line. However, the cap distorts a 
company's decisionmaking because it protects them from the full 
cost of any spills. The result is that the cap effectively 
subsidizes drilling and substandard safety investments, like 
blowout preventers, in the very locations where the damages 
from spills would be the greatest.
    In the case of the Deepwater Horizon venture, BP and its 
partners made drilling decisions with the legal guarantee of a 
$75 million cap on economic damages. Just to put that in 
perspective, many estimates place the economic damages from the 
spill at more than 100 times the cap that BP was making 
decisions under. The point is that the cap provides economic 
incentives for companies to cut corners. These incentives will 
remain as long as the cap is set at such a low level relative 
to the potential risk.
    In my written testimony, I evaluate several of the 
arguments from an economic perspective against lifting the cap. 
And here, I am going to try to provide a brief summary of some 
of those conclusions.
    Number one, lifting the cap will not have a meaningful 
impact on gasoline prices. The U.S. is a small producer. In 
total, the U.S. is a small producer in a very large, worldwide 
petroleum market.
    Two, job losses that may result from lifting the cap would 
be concentrated at risky drilling sites. And what I want to 
underscore is these sites are economically viable only because 
of the protection from the liability cap.
    Three, lifting the cap does not target small firms; rather, 
it will raise the cost of production for firms of all sizes 
that do not take adequate safety precautions.
    Number four, the economic case for lifting the cap on 
damages for shipping companies is as strong as it is for 
raising the cap on drillers, in my opinion.
    If the cap on liabilities is removed or raised, there are a 
number of important implementation issues, and I discuss them 
in greater detail in my statement, and I want to summarize them 
here.
    Number one, the economic case for a higher cap is equally 
strong for all well types. That includes shallow water, 
deepwater, productive wells and exploratory wells.
    Number two, an increase in the cap must be accompanied by a 
requirement for proof of liability insurance, a certificate of 
financial responsibility, or the posting of a bond to cover 
potential damages. Without those requirements, increasing the 
cap could allow for changes in corporate organizations that 
undermine the purpose of a higher cap.
    Number three, there is a very strong economic case for 
raising the cap on new drilling.
    Number four, the economic case for raising the cap on 
existing drilling sites is less clear-cut. One possibility with 
some intuitive appeal is a transitional strategy that raises 
the liability cap on existing operations slowly over the course 
of several years.
    Mr. Greenstone. The $75 million limit on liabilities for 
economic damages distorts oil companies' decisions and actually 
provides economic incentives for spills to take place.
    Number 2, the removal or substantial increase of the 
liability cap is the most effective way to align oil companies' 
incentives with the interests of the American people.
    Number 3, it is possible that a higher liability cap would 
reduce the domestic production of oil. If this is the case, a 
higher cap could be paired with targeted policies that promote 
domestic production and/or reduce domestic oil consumption. 
Such a pairing would allow us to keep both our energy security 
and environmental goals.
    Thank you once again for the invitation to participate in 
this discussion. I would gladly respond to any questions.
    Mr. Oberstar. Very fine statement. Thank you for addressing 
several of the key issues that we are exploring in the course 
of this hearing.
    And, Kate Gordon, Vice President of Energy Policy, Center 
for American Progress.
    Ms. Gordon. Thank you, Mr. Chairman. Mr. Chairman Ranking 
Member Mica and Members of the Committee, thank you so much for 
inviting me to testify before you today. I am glad to be able 
to share the Center for American Progress Action Fund's 
fundamental belief that the liability cap for damages must be 
changed and other policies put in place to more realistically 
account for the actual cost of oil spills to the environment 
and the economy.
    As you know well by now, the OPA of 1990 currently limits 
BP's liability to this disaster's impact on natural resources 
and the economy to $75 million-- which sounds like a big 
number, especially to many Americans in this recession, but it 
does not come even close to the likely cost of the current 
disaster. The proof is in the last major oil spill in U.S. 
waters. The Exxon Valdez in 1989 spilled more than 11 million 
gallons in crude oil into Alaska's Prince William Sound. 
Cleanup costs and immediate damages ran to at least 2.5 
billion, but these were the early and only immediately 
quantifiable in cleanup and damage costs. In fact, the damage 
was much greater, as we have heard especially lately, and 
continues to this day.
    More than 16,000 gallons of oil remain on the shoreline 21 
years later and some fish populations, for instance the Pacific 
herring, have never fully recovered. Fishing communities in 
that region have seen a decline in income as well as higher 
suicide and alcoholism rates, damages that are hard to quantify 
but are very real.
    Under the OPA liability cap currently in place, Exxon would 
have had to pay only its immediate cleanup costs for the 1989 
spill, which it ended up paying about $121 million in cleanup 
costs plus $75 million in damages. That means essentially that 
Exxon would have paid just under $200 million per spill, where 
the most conservative cost estimates were more than 10 times 
that amount; like a fire sale for oil spills, 90 percent off 
the actual price of a catastrophic disaster.
    The BP disaster is already more expensive than the Exxon 
spill. Here we have the tragic loss of 11 human lives. Here we 
have three times the amount of oil as from Exxon already in the 
water, with more flowing every day. Here the Obama 
administration authorities spent more on direct cleanup than 
Exxon did in 1989, and we are not fully even in cleanup mode 
until BP figures out how to stop the disaster from happening. 
Costs could go as high--as you have heard--as $1 billion per 
direct cleanup and between--I have heard estimates between 8 
and 14 billion for damages.
    How did this happen and what does it have to do with the 
liability cap? Here is how it happened. Over the years, oil 
companies bike BP, as my fellow panelist Michael Greenstone has 
testified, have had no incentive to base their business 
decisions, including decisions about environmental and human 
health and safety, on the true cost of these decisions. With 
every decision BP made, it knew its liability would ultimately 
be limited to $75 million under the OPA. As Mr. Greenstone has 
said, this cap has a perverse result of actually encouraging 
risky practices, such as drilling in the most environmentally 
sensitive areas with cheaper equipment and fewer safety 
standards.
    Take the current disaster. BP could have installed, as we 
have heard, a switch to remotely shut off the flow of oil. This 
technology is actually required in other countries like Brazil 
and Norway. Installing the switch would have cost BP $500,000 
but the company had no incentive to spend extra money on such 
precautions. BP also has a long history of disregarding safety 
and environmental rules at its pipelines and facilities and of 
ignoring workers or intimidating workers who raise these safety 
concerns.
    BP has made these choices throughout with the comfortable 
knowledge that whatever happened, its liability for damages 
would be limited to $75 million. It took a calculated risk, one 
that will affect the gulf region for decades and one that in 
fact killed 11 people.
    We need to take away the incentive to trade American lives 
and livelihoods for oil company profits. Raising or eliminating 
the liability cap is one step toward changing that calculation. 
But we also must begin accounting for the other true costs of 
our oil addiction. Oil companies receive subsidies, including 
some tax deductions for damage payments under oil spills, that 
cost taxpayers billions of dollars per year. They operate in an 
environment where carbon pollution is not capped and has no 
real business cost.
    Taken together with liability limits, these policies, or, 
in the case of carbon caps, lack of policies, create a 
situation where polluters don't pay, pollution pays.
    Thank you so much for allowing me to testify and I look 
forward to questions.
    Mr. Oberstar. Thank you very much for your splendid 
presentation and comments from all of the panelists.
    I will begin with Mr. Gerard. We expect, based on daily 
reports and observations and comments from Admiral Allen, the 
incident manager, that it will be August before relief wells 
begin to reach their goal, relieve the pressure. Some countries 
require relief wells to be drilled at the same time as the main 
well. Should we have a similar requirement?
    Mr. Gerard. I am not aware, Mr. Chairman, of any particular 
nation right now that requires a relief well at the same time. 
But I am happy to go back and review that and to determine. As 
you know, there are risks associated every time you drill a 
well; and what we do is we manage those risks each and every 
time. We are happy to take a look at that, Mr. Chairman. If you 
have got a particular reference I am not aware of it.
    I have had that conversation with others. Others have made 
that suggestion and I am not aware that there is any 
significant producing nation that does that now. But I will 
look into it and I will get back to you on it.
    Mr. Oberstar. We will provide that information to you Mr. 
Gerard.
    Mr. Gerard. Thank you, Mr. Chairman.
    Mr. Oberstar. The American Petroleum Institute has 
developed the standards for construction of blowout preventers, 
including the one used by Deepwater Horizon. There is a great 
deal of concern that there is little oversight by government of 
industry and little capacity by the Coast Guard to undertake 
such regulatory action because they don't have in-house 
capacity. We are going to have legislation that will direct the 
Coast Guard to establish that capacity, to understand the 
industry much better, much better than the Minerals Management 
Agency has done. And we are also considering directing the 
Coast Guard to develop the standards, much as the FAA 
establishes standards for aircraft and engines.
    What would be your view, that of the American Petroleum 
Institute, in response to such a requirement?
    Mr. Gerard. We would welcome working with you on that.
    Let me make a couple of other comments if I can, Mr. 
Chairman, related to that. Secretary Salazar said most recently 
it would be a mistake to assume that the U.S. oil and gas 
industry is not highly regulated. We are highly regulated. As 
he commented in a public hearing, we are one of the most highly 
regulated industries in the country.
    With that in mind, when we talk about standards setting, 
one of the original reasons for establishing the American 
Petroleum Institute in the early part of the last century, in 
1924, we began a standard setting process. This process is 
accredited by an outside group, the American National Standards 
Institute, that is the same group that accredits, for example, 
our national laboratories, our governmental labs, that do a lot 
of research and development.
    Within that standard setting process, we work to develop 
best proven technologies and best practices, and then we 
promote those across the entire industry, not only here in the 
United States but globally. We audit those practices constantly 
and we review those standards at least once every 5 years.
    The standard setting process as is accredited to us, as the 
API requires that we have open forums and invite all relevant 
or other parties to participate in determining what those 
standards should be. So on many occasions we have governmental 
officials who sit in these panels, academics, industry experts, 
et cetera, to develop the standards. Our standards today, we 
have over 500 of them. There are 240 or so of them that relate 
to offshore development, another 78 of them that have been 
adopted by governmental entities as part of their regulatory 
regimes.
    I believe it was in 1995 when the Congress passed the 
National Technology Act and required governmental entities to 
look at these independent accredited standard setting processes 
and use them as part of the regulatory system. That is what we 
do. We put the best minds together. It is audited by outside 
third parties. And our real purpose is to drive to the best 
highest performance in the area of safety, technology as it 
continues to evolve, and best practices, and, like I say, to 
promote that across the entire industry.
    Mr. Oberstar. Thank you for those observations.
    We have looked at some of those 500 standards established, 
and some are certainly very well thought through. Others do not 
account, in my judgment, for human error. And that is the 
direction of aviation safety. The redundancy that is built into 
aviation does not appear to be present in the petroleum sector. 
And you will admit that there is a significant difference 
between tanker standards and facilities, drilling facilities' 
standards, and the apparent--it is obvious--lack of redundancy 
with the blowout preventer on this particular tragedy in the 
gulf.
    Those are the kinds of issues, the categories of concern 
that we have. And I will come back to those later.
    I will restrict myself at this point and recognize Mr. 
LoBiondo.
    Mr. LoBiondo. Thank you, Mr. Chairman. For Mr.Anderson or 
Mr. McAllister, does the current tonnage-based system 
adequately assess liability in accordance with the risk of a 
major oil spill?
    Mr. Anderson. I think it does adequately address the risk 
from certain vessel types. There will almost certainly have to 
be review of these tonnage-based limitations over time. But I 
think, as the Committee has already recognized with respect to 
vessels, those limits have already been increased twice; once 
in 2006, and again in 2009.
    In certain industry segments it may be necessary to look at 
those industries more carefully, but I think on balance the 
existing limits are adequate. And one demonstration of that 
fact is that we have had very, very few incidents, in fact I 
believe only two incidents, since the inception of OPA 1990 
involving ocean-going tankers where the limits have been 
exceeded.
    One was the Athos I spill in the Delaware River. In that 
case, you will recall a tanker was proceeding into berth and 
hit an underwater anchor, an obstruction that was not 
detectable by the vessel.
    Mr. LoBiondo. Have the cost for response efforts and 
damages changed since the Oil Pollution Act was passed in 1990? 
Does anyone have an opinion?
    Mr. Anderson. I am not sure I understand the question, Mr. 
LoBiondo.
    Mr. LoBiondo. The cost for response efforts. I assume costs 
for everything go up, so has this dramatically gone up; a 
little bit; what is your assessment?
    Mr. Anderson. It has dramatically gone up, given certain 
recent incidents. I think in part those may be driven, quite 
frankly, by media and political concerns rather than the actual 
extent of the environmental damage caused by those incidents. 
But there is no doubt that the per-barrel cost in some cases 
has significantly risen in recent years.
    Mr. Oberstar. Thank you Mr. LoBiondo.
    Mr. DeFazio, you are deep in thought and reviewing the 
testimony, as I observed.
    Mr. DeFazio. Thank you, Mr. Chairman. I always look at this 
job sometimes as an extended and ever-unfolding opportunity for 
graduate education.
    Mr. Oberstar. My view exactly.
    Mr. DeFazio. So one question I will throw out to whoever 
can answer it: What sort of limits are imposed on liability in 
the North Sea and what sort of certificates of financial 
responsibility do they require? Can anybody answer that 
question, all these experts here? Dr. Hartwig?
    Mr. Hartwig. Very quickly, in terms of other parts of the 
world for the large operators, it is my understanding that 
these limits are typical not just in the gulf but in other 
places as well. The North Sea, of course, was the site of the 
Piper Alpha disaster more than 20 years ago. That produced 
about $3.6 billion in insured losses, and that was the largest 
in history for an offshore event.
    Mr. DeFazio. How is it that they had $3.6 billion of 
insurance on that?
    Mr. Hartwig. There were a number of parties involved, when 
you add up all the parties involved.
    Mr. DeFazio. In this case, we line them up all up, we don't 
get to that amount.
    Mr. Hartwig. We don't get to that amount.
    Mr. DeFazio. We don't get to that amount; right.
    Yes?
    Ms. Gordon. Just a quick addendum to that. The 
international liability scheme that covers about 104 countries 
including Norway, does have liability limits as you just heard. 
It does have liability limits that are in line.
    One thing that is interesting is that those are taken off, 
the limits are removed, if there is an act of omission from the 
responsible party; for instance, not implementing required 
safety standards. And it is interesting to note that, for 
instance, the blowout preventer that BP did not put in in this 
case would have been required if this had been a Norway 
incident. So in that case, likely the liability cap would have 
been taken off.
    Mr. DeFazio. Right. I was here in 1990 and we had very 
vigorous debate over negligence versus gross negligence, which 
essentially would be more along the lines of omission, and we 
lost that debate. But I think in this case we will probably 
find that that is not going to be a problem from all the 
testimony.
    Mr. Hartwig. I have one addendum to that. In the Piper 
Alpha event, we had 167 workers died, I believe, in that event, 
compared to 11. So a much higher contribution came from the 
liability with the deaths of the workers as opposed to the 
spill.
    Mr. DeFazio. Very unfortunate.
    On the argument that if we had unlimited natural resources 
damages that no one would operate or couldn't get insurance, I 
am confused on two levels. One is I observed that Louisiana has 
no limit on natural resource damages. But I assume there are 
quite a few rigs operating within, in--fact, I think I visited 
one within 3 miles within their State territorial waters.
    Can anybody explain how it is that they can do that, but, 
if we had unlimited liability further out, that companies 
couldn't operate?
    It doesn't seem to be a barrier. Aren't there a number of 
rigs operating within 3 miles of the Louisiana coast? Yeah. OK. 
So no one can answer that question, but I think that kind of 
begs the question.
    And then the second part would be, we haven't thus far, and 
none of the legislation proposed is to change the certificate 
of financial responsibility. So you lift the cap but the COFR 
limits the exposure of the guarantors or insurers. The company 
or the operator, responsible party, would have the excess over 
and above the COFR.
    So let's say we left the COFR where it is, or perhaps we 
raise the COFR to a quarter of a billion, why would that 
provide a disincentive and a lack of insurability out there 
because the liability is incurring to the company, not to the 
insurer? It would be the same as today; there are limits on 
their losses.
    Mr. Anderson. May I address that? The problem with that 
scenario is that I don't know of any reputable shipping company 
whose board of directors would make a decision to call the 
United States, facing unlimited liability or liability that 
exceeds whatever the guarantor's cap is.
    Mr. DeFazio. Right. But you are back to--you are talking 
shipping again versus rigs.
    Mr. Anderson. Yes, sir. I am here entirely to talk about 
vessels as opposed to offshore oil rigs.
    Mr. DeFazio. Although this was technically considered a 
vessel was it not, this rig?
    Mr. Anderson. It is only considered to be a vessel if it is 
in navigation between, say, a supply depot and the drill site. 
Once it is affixed to the ocean bed, or if the platform is 
stabilized and has an umbilical cord into the ocean bed, then 
it is an offshore facility.
    Mr. DeFazio. So we made clear we feel we should continue to 
distinguish between vessels and offshore facilities. I mean, I 
think he has made that point a number of times. And so if we 
were to lift the cap on offshore facilities, the operators, 
since we already--we would still have a COFR--I assume they 
could get insurance up to that amount; and beyond that, it will 
be the responsibility of the company.
    Dr. Greenstone, I am very concerned about your testimony. I 
think it is excellent testimony but it raises to me a question 
that I am very worried about. And you were talking about moral 
hazard, and at one point you reference the potential of 
spinning off liabilities. And I am very worried in this case 
that at some point BP is going to decide to create an entity 
which relates to this accident and this well, and, perhaps 
through a bankruptcy proceeding and otherwise, try to protect 
the rest of their assets. Have you considered that? Are you 
concerned about that?
    Mr. Greenstone. Yes, Congressman. I am quite concerned 
about that as well. I am concerned about that going forward 
with future legislation. And so the one point I tried to 
emphasize in my testimony is that if you raise the liability 
cap but don't raise the requirement of having proven insurance 
at the same level as the liability cap or a COFR at the same 
level, what you have effectively done is create a loophole that 
you can drive a truck through.
    And so the consequence, what would happen, I suspect, is 
that major oil companies would then segregate themselves into 
smaller units and/or limited partnerships, and the result would 
be that they could use bankruptcy laws to get around the higher 
cap that Congress would have tried to impose.
    Mr. Oberstar. Would the gentleman yield?
    Mr. DeFazio. Yes, certainly.
    Mr. Oberstar. Just quickly, would the same rationale apply 
if there were no cap? You said ``raising the cap,'' but if 
there were no cap?
    Mr. Greenstone. If you had no cap it is a little bit more 
complicated. I think, I don't know that one could get a COFR, 
this is outside of my expertise, but I don't know if one could 
get an unlimited COFR or an unlimited insurance policy. But you 
would want to try and get the COFR or the insurance policy or 
the bonds that you are having the company post as high as 
possible, because effectively the cap is not going to bind 
after you reach that limit. What these companies will be able 
to do is to segregate the risk and use bankruptcy to avoid 
damages beyond whatever the COFR or the insurance requirement 
is.
    Mr. DeFazio. If I could--thank you, Mr. Chairman--pursuing 
that line of thought, if in this case with BP, could we--it is 
very problematic to modify a contract or go back and 
retroactively change a statute--but could we ask at this point 
as a responsible party, would we have to have proved gross 
negligence in order to get them to put up a large bond now? I 
am just wondering what insurance can we get beyond their 
president saying, Oh, we will meet all legitimate claims. Every 
time they use the word ``legitimate,'' I wonder what that 
means.
    And secondly, I worry about the scenario where their stock 
goes low enough that someone will try to take them over. Or 
they will say, The heck with this, we will go bankrupt and get 
rid of this albatross we have created. And there will be no 
assets to pay for it.
    Is there some way we can segregate the money or assets now 
out of that corporation?
    Mr. Greenstone. Mr. Congressman, I wondered the same thing 
about what ``legitimate'' claims means, but you are asking a 
finely tuned legal question and that is outside of my area of 
expertise.
    Mr. DeFazio. Does anybody else have ideas on that? And with 
that, my time will have been expired.
    OK. Thank you, Mr. Chairman.
    Mr. Oberstar. Mr. Mica.
    Mr. Mica. Thank you.
    I think I heard some from Mr. Gerard about the economic 
impact of, I guess--did you say a $10 billion--increase to $10 
billion; that would be pretty devastating if it wasn't crafted 
properly. Who could comply with that? As I said earlier, you 
might limit it to the biggest of the big players if that was 
imposed.
    Mr. Gerard. When you say the ``biggest'' and the ``big 
players,'' let me just clarify that a little bit. Obviously it 
would have to be those that have the financial wherewithal to 
assume that.
    Mr. Mica. Exactly. The BP, the Shell, Royal Dutch Shell. I 
don't know all the people who are in.
    Mr. Gerard. Some of the insurers, the underwriters and 
others that we have spoken to--and I am not in the insurance 
business--they have indicated, at least those that currently 
operate in U.S. waters, it would be less than a handful that 
would be able to qualify. But then they go on to remind us, and 
let me pull my list here, the only other ones that would likely 
qualify would be what we call the national oil companies, which 
are foreign governments, and that includes Venezuela Petrobras, 
PetroChina, and others. Those would be the only ones with 
sufficient financial wherewithal around the world to qualify 
to----
    Mr. Mica. And I would imagine PetroChina, they are probably 
salivating at the opportunity to drill off of Cuba, and with 
everything we impose----
    Mr. Gerard. They are there now.
    Mr. Mica. With everything we impose, there are 
consequences. And I think what we want to do is well-intended. 
Now the fund, too, was set up to put some cap on economic 
damages. It is unlimited liability for the spill right now, and 
that is taking place.
    What concerns me is the drawdown of the energy portion of 
the fund; that to me it is clear responsibility that BP needs 
to be paying us back in some sequence in order to keep that 
from being depleted. I have no problem raising the cap and we 
are probably going to have to do that, that emergency cap that 
is in the current legislation. But, I am not front-financing 
people who are responsible and should be held responsible.
    The other question is, too, this fund was set up to cover 
the liability above where something happened--say, an orphan 
spill where you can't identify the perpetrator or go after them 
or to cover the amounts larger than specified.
    Now when you create the fund and you get it, we increase 
the--again, the first thing everybody around here does is 
increase the taxes. So they go from 8 cents or the fee, 
whatever you want to call it, to 41 cents or 34 cents. Somebody 
is paying that. The consumer is paying that. It is sort of 
front-end loading an emergency backup fund; is that correct?
    Mr. Gerard. Yes.
    Mr. Mica. And what concerns me then, now, with what is 
proposed, there is somewhere between 12 and maybe 15 billion in 
the fund. And this gentleman over here, Mr. Greenstone, just 
said, These aren't dummies that are operating these activities 
so now they will figure out a legal mechanism to limit their 
exposures.
    So what concerns me is we are using that fund to assume 
some of that responsibility that should be inherent. The fund 
was set up; if there wasn't some, I thought primarily if there 
wasn't somebody that could be held responsible, say an orphan 
spill, or someone who their resources ran out to cover us over 
and above that, is that simple explanation correct?
    Mr. Gerard. I think you raised a lot of issues, Mr. Mica. 
Let me raise a couple if I can. The first is, obviously, the 
fund is paid into currently by the oil industry at the refinery 
at 8 cents.
    Mr. Mica. But that is passed on in the costs. If it goes 
from 8 to 34----
    Mr. Gerard. Traditional cost.
    Mr. Mica. They are going to be paying big dividends and 
making big profits. That is what they are in business--and they 
stay in business, because they have a positive bottom line.
    Mr. Gerard. The point I was going to make, Congressman, is 
I think there is a combination here that needs to be looked at. 
We need to look at this from a broad policy perspective.
    To your point, if we create a significant fund in this 
trust fund, how does that play, then, into the risk equation? 
If the industry is paying for that fund, then how do we use 
that to set it up to balance, if you will, the potential 
impacts by an unlimited cap, or a $10 billion cap, so that we 
don't have unintended consequences in the economic realm? I 
think it is important for consideration.
    Mr. Mica. Two final things here. This is the plan BP 
submitted. I got criticized for--well, when we had the last 
hearing, I went over the Bush administration, they gave the 
lease, the Bush administration, the Minerals Management Agency, 
had three criminal investigations we submitted to the record 
went on there. We looked at when this was submitted under the 
Obama administration. And it is interesting. Everybody should 
read what they approved and didn't approve, but the lady here 
said there was no acoustical shutoff valve, no acoustical 
shutoff valve, which is common in deepwater off of Scandinavia. 
That is the only place I am familiar with. But then we saw the 
staff, the Committee staff, prepare that there is only three, 
maybe four dozen at the most, of really the deepwater permits 
that have been issued, and that is where we have had the 
problem.
    Does anyone know of instances where we have had the either 
onshore or at the lesser depths most of, I guess, 600 feet, 
which was 200 meters, and is what 3,500 of the wells are--does 
anyone know of a problem that we have had similar that they 
could cite, or protections that we didn't have?
    So what you want to do is focus where we have the risk is 
my point. Someone should pay the premium and be held 
responsible for economic damages. Again, I am not sure what the 
magic figure, the number, is. But we don't want to let anyone 
off the hook. Mr. Gerard?
    Mr. Gerard. Congressman, I just had one other contextual 
comment there. We have been drilling in the Gulf of Mexico for 
over 65 years and we have drilled 42,000 wells out there. And 
this incident, this tragic incident is unprecedented. And when 
you look across the spectrum of what has been going on, the 
protection of the environment, et cetera, I just put that in 
the context we are talking about.
    Mr. Mica. Two things, Mr. Chairman and others here. In 
addition to this liability issue which we must address and 
should address in legislation, I think it is important that we 
look at some backup; because if you look at the two biggest 
spills, and I went back and researched some of them, 1979, the 
biggest spill in the gulf district was not off of the United 
States, it was off of Mexico, and it went for 9 months.
    And then the gentleman just testified they are drilling now 
or testing--are the Chinese off of Cuba?
    Mr. Gerard. There are a number of interests that are off of 
Cuba right now exploring.
    Mr. Mica. But they are not getting permits from us. But we 
should have some backup system in place. I don't know if the 
Coast Guard should contract it or we should get the oil 
companies, so that we are not developing a bell after the 
effect, or a top hat or whatever--so that we have a backup 
system.
    Here is the thing. If you go look at what was required, 
there is no backup system here. Now, I want it for the ones 
that are issued here. But I think in the interest of preserving 
our environment in the future--Florida, we are going to get the 
brunt of whatever happens, particularly off of Cuba--that we 
should have a backup system ready to go with tested technology 
to stop this in its track.
    We are learning a lot about this because I understand this 
is sort of a new venture, closing one of these down with that 
kind of a break at that depth. But maybe we can look at a 
requirement in that area for a backup system. Thank you.
    Mr. Oberstar. We are indeed. And as I mentioned, between 
us, with all the testimony that is going on, I have directed 
staff and am working with them to develop a number of 
redundancy provisions as well as requirements for skills 
development by the Coast Guard to get up to speed and get ahead 
of this.
    Minerals Management Service clearly had no such capability, 
no understanding, and that is completely unacceptable. So we 
have to bring Coast Guard up to a level of understanding of all 
the skills. Mr. Cummings has already explored that matter 
through hearings and work in his Subcommittee.
    We have to address this issue of categorical exclusions. 
The previous administration extended the process for categoric 
exclusion from NEPA requirements for offshore leases. That was 
continued. And then the Minerals Management Service issued a 
multistate environmental impact statement for a proposed 5-year 
lease in the Outer Continental Shelf that estimated a 
likelihood of three spills from platform drilling that would 
produce 1,500 barrels for each spill. Completely missed the 
target, totally missed the reality of what has happened. And 
the assessed impacts from oil spills under the 5-year lease 
were described as minimal.
    And we have heard that from BP, which has a terrible 
record, to say the least. They were convicted in Federal court 
of a misdemeanor action and given an 18-month suspended 
sentence and a $12 million fine of criminal penalties for their 
actions on the--and failures on the North Slope.
    Now we will recognize the Chair of our Hazardous Materials 
and Railroad Subcommittee, Ms. Brown.
    Ms. Brown of Florida. Thank you, Mr. Chairman, and thank 
you very much for holding this hearing.
    Let me just say, last week I traveled to the gulf with Mr. 
Cummings, and I really learned a lot while I was there. And 
this is not just the worst spill in U.S. history, this is the 
worst spill in the world. The world.
    You had scientists, you had agencies there, over 20 
different agencies were there, working together along with the 
different--not just BP but other of the oil companies were all 
there. Everybody had boots on the ground. But it is kind of 
afterthought.
    We have called up over, I think, 15,000 National Guards 
from four States--Florida, Mississippi, Alabama, and 
Louisiana--and the Coast Guard has spent over $100 million to 
date, and they are coming back to Congress this week to 
authorize another $100 million. And so it is the concern that 
there is a cap at $1 billion, with a 500 million cap on 
environmental damage.
    And I guess I got a couple of quick questions. In the 
briefing that we had, one of them, I asked the question about 
the 500,000 technology, why did BP not have this in place as 
another backup, because they said they had five, none of them 
was working. And so they said that it works on shallow drilling 
but not to this depth. And when I listened to television and 
the--I was under the impression that the depth was like 5,000 
feet. It is not 5,000. It is about 15,000 feet, a lot like 3 
miles deep. So there is no technology available for this 
problem.
    But can you respond to that first?
    Ms. Gordon. The specific technology is outside my 
expertise, but I do know that offshore, deep offshore drilling 
rigs in Norway and Brazil, for instance, are required to have 
backup technology such as the acoustic backup preventer that BP 
did not install in this case. So my assumption is it works at 
those depths, but it is not my area of expertise.
    Ms. Brown of Florida. OK, BP has stated--and this is for 
whoever wants to take it--that they would cover all legal 
claims. And I know there has been some discussion. But I am not 
clear on what their definition of legal claims would be.
    What recourses do States like my State of Florida have if 
they decide to declare bankruptcy or something like that? What 
are we doing to ensure that the taxpayers will not be left on 
the hook for this problem?
    Ms. Gordon. Something that we at the Center for American 
Progress have recommended is putting, and I believe it is being 
followed up on by Members of Congress, is putting some amount 
of money into an escrow fund now from the BP revenues so that 
we don't run into this situation. Going back to Mr. DeFazio's 
comments as well, there is a real concern among a lot of people 
that we are going to--BP will either find a way to not pay the 
claims that are currently being paid by the Federal Government 
that will run up against the limits in the trust fund. There is 
a real need to see the money right now put aside and kept safe.
    And I think we have recommended that that happen both for 
short-term recovery costs--and going to an earlier point on 
this side, those may include things like a conservation corps 
to do some of this cleanup, actually creating jobs, not just 
paying claims.
    But the second thing is we need to look at the long term, 
and we have recommended potentially not just BP, but all of the 
oil companies involved in drilling in the region, putting some 
portion of funds into some kind of a new gulf recovery fund 
that would look at long-term consequences of drilling in the 
region, like the erosion of the wetlands that has happened over 
the last 80 years. So there is a real need to do something 
immediately in order to protect those moneys. We agree to that.
    Ms. Brown of Florida. Mr. Greenstone, would you like to 
respond to that?
    Mr. Greenstone. No, it is outside of my area. The only 
point I will make about the extra half million dollar device, 
as long as those caps exist, it will always be the case that 
the drillers or the shippers don't bear the full costs of 
whatever their actions are. And as long as that is the case, 
the interests of the oil companies and the interests of the 
shippers will diverge from the interests of the American 
people.
    So I don't know anything about the specific device, but as 
long as that diversion occurs, we are increasing the chances of 
spills going forward.
    Ms. Brown of Florida. I was asking about the economic 
portions of it. Someone else wanted to respond? Yes, sir.
    Mr. McAllister. When you ask what are we doing, the Oil 
Spill Liability Trust Fund does exist to help fund spills where 
the responsible party is either unavailable or the liability 
limits have been reached. So I think OPA 90 is already 
achieving what you are asking about: What are we doing to set 
aside?
    Granted, this bill is a very significant one, but I think 
that as you review this legislation and you look at 
alternatives for how you may wish to amend it, you need to be 
careful with what you do; because right now you have a balanced 
system that is encouraging responsible entities to engage in 
maritime commerce in an economic environment where they have 
adequate insurance to fulfill their liabilities. And granted, 
those liabilities are limited, but you have responsible 
entities there.
    As you increase those limits or you maybe even make 
liability unlimited, you are creating an economic environment 
where some companies, perhaps my company, at some point is not 
going to be able to get the insurance that you may ask us for. 
And either we would have to get out of the business or we would 
have to roll the dice and continue to function in a liability 
scheme where we did not have adequate insurance. I think over 
time what you could see is a marketplace which is divided 
between very large corporations or corporations that are really 
being set up on a gamble.
    Just to answer your question, I think OPA 90 is doing its 
job.
    Ms. Brown of Florida. My time is limited. And let me just 
say that the Transocean claim liability is capped at 26.7 
million based on a maritime statute from 1851.
    Do you think that needs to be updated?
    And you said something that I find appalling. I don't feel, 
not your company, but I do not feel that BP, an example, have 
been a responsible party. We have a history of them not 
following their own procedures or violating the law. We had 
deaths just last summer, 27 people got killed. So we got a 
culture here that if you don't have strong incentive, and we 
talking about financial incentives, then the companies are not 
doing what they are supposed to do.
    Mr. McAllister. I can only acknowledge what you are saying 
about the current situation in the Gulf of Mexico, and I don't 
know the facts of what is going to happen there legally. It is 
a complex situation and I can't disagree with you either. But I 
can tell you as for our company and the thousands of other 
companies that are operating under this OPA 90 law, there is a 
balance there that has been struck 20 years ago. It has been 
amended several times over the last 20 years. And to radically 
change the balance of that law is going to have consequences on 
many, many, many businesses other than British Petroleum.
    Ms. Brown of Florida. Let me just say as I close, the 
situation in the gulf is radically changing how we do business. 
And so we have got to take a hard look at what we are doing and 
how we can protect the environment and how we can protect the 
public. And that is our responsibility to hold everybody 
accountable, and not hold the taxpayers paying this bill. I 
yield back.
    Mr. Oberstar. I greatly appreciate the gentlewoman's 
passion and concern. She represents a district on the water, 
derives much of its economic activity from the water, and I 
appreciate her passion.
    Mr. Taylor also represents the water and the waters and 
those who ply the waters.
    Mr. Taylor. Thank you, Mr. Chairman, and thank you very 
much for holding this hearing. I want to thank all of our 
panelists.
    Mr. Gerard, this is--really you are the wrong guy to get 
this. I should have asked this a week ago to the representative 
from BP and Transocean, and I will admit by my mistake. But you 
are here today. What I haven't heard from the industry, going 
back to Mr. McAllister talking about OPA 90, what I haven't 
heard from the industry is we have been 20 years without a 
major catastrophe, that we have learned our lesson and there 
will be a new generation of blowout preventers, there will be a 
new generation of skimmers, there will be a new generation of 
booms, there will be a new generation of technology so that 
this doesn't happen again.
    It is fair to say boom technology hasn't improved one iota 
in 40 years. And I realize we are a market-based economy and 
for 20 years there really hasn't been a market for improvements 
because we haven't had a disaster. But I am not hearing any 
reassurance from the industry that you guys got the message and 
you are going to do better.
    Let me take it a step further. Behind you is a Coast Guard 
admiral, Admiral Schultz. What I don't have a clear delineation 
of, and, Mr. Chairman, I think we need to know, is who is going 
to determine if this new generation of things work? Is the 
Coast Guard going to be responsible?
    We tried letting the private sector come up with all the 
solutions. We put all of our faith in them that they would have 
blowout preventers that work, that they would have skimmers 
that work, that they would have booms that work. It didn't.
    So the first thing that--Mr. Gerard, again, you are the guy 
that happens to be here, I should have asked this of the guys 
last week--who in your industry is going to reassure the 
American public you got the message and you are going to fix 
this?
    Second thing, Mr. Chairman, since we have limited time, is 
the term ``gross negligence,'' ``willful misconduct.'' We are 
going back to what everyone else is saying. We are basically 
waiting for a judge somewhere to say that BP was guilty of 
gross negligence or willful misconduct and therefore has 
unlimited liability. I don't know if anywhere in the law that 
term is defined.
    So, again, I think if you ask the American people if after 
40 days a company has not capped its leak in the bottom of the 
ocean, is that gross negligence and willful misconduct? Should 
we as the Congress determine, give them a certain finite amount 
of time or a finite amount of volume to be spilled and say, If 
you cross this threshold you are automatically guilty of it? 
Because in my opinion, in the absence of clear and precise 
laws, we are leaving some judge, we are giving him a free hand 
to come to a bad judgment. And I don't think the American 
people want that.
    So I would hope that one of the things that we try to do is 
at least set a legal threshold of what constitutes gross 
negligence or willful misconduct.
    And last thing, Mr. Chairman, we spoke about this and I 
want to have Mr. McAllister possibly talk about it. I, as 
someone who represents shipbuilders and mariners and shrimpers 
and oystermen and people in the tourism business, all of which 
have been affected, I take personal offense that the vessel 
that did this was built in Korea. I take personal offense that 
it was chartered in the Marshall Islands. I take personal 
offense that the profits went to Switzerland. I take personal 
offense that the shipbuilders who didn't get the contract to 
build it won't get to run their shrimp boats this summer to 
make a little extra money, won't get to take their kids fishing 
on the weekend because the sound is polluted, probably can't go 
swimming on the beach.
    For those folks, this is just injustice after injustice 
after injustice. Oh, and by the way, the profits went to 
Switzerland because that is where the corporation is 
headquartered.
    If someone is going to have the privilege of pulling 
minerals off the American sea bottom, that ought to be a U.S.-
built, U.S.-flagged, U.S.-owned vessel. And if we are going to 
chase somebody down to pay the bill at the end of the day, I 
can tell you if the people of south Mississippi couldn't get 
the folks in Springfield, Illinois to pay claims after 
Hurricane Katrina, you are going to have a heck of a time 
chasing somebody down in the Marshall Islands or Switzerland to 
pay these bills should they determine not to pay.
    But again let me start with you, Mr. Gerard. And I have not 
heard everything your industry has had to say, but has your 
industry at any time in the past 40-something days said, Do you 
know what, we got caught flat-footed, we are going to come up 
with better devices to keep this from happening and to respond 
should it ever happen again.
    Mr. Gerard. Thank you for the question, Congressman Taylor. 
And let me just reassure you here on behalf of the broader 
industry, we get it. And we understand what you are saying and 
we take this as a sober reminder that we have to look, we have 
to reexamine everything we do, how we do it, and how we can do 
it better.
    Let me just give you a couple quick anecdotes of what we 
are doing today. When this thing first happened, we were called 
by Secretary Salazar. We sat down with him at the highest 
levels of industry across the board. We immediately sat down 
and created a task force of the best minds and put together 
ideas where we felt we could improve practices and increase 
some of the regulatory processes. A lot of that was reflected 
in the President's announcement and the Secretary's 
announcement, because we understand our commitment not only to 
our employees and their safety and to the environment but to 
the country as a whole.
    We recognize these are U.S. waters. We also recognize we 
have a key role to play to provide the energy for this economy. 
We are 60 percent of all the energy consumed in the United 
States. So we recognize that role.
    The other thing we are working on right now is we have 
three other task forces. One of them is focused on liability, 
as I mentioned to the Chairman earlier, and we want to be very 
responsive to figure out a way to make some exchanges in OPA 
without destroying the underlying activities, either the vessel 
traffic, be it in deepwater, et cetera, and also to preserve 
the potential opportunities for others in the business 
community, be they mid-sized, small, and others.
    And that is why I say through the Liability Trust Fund to 
use that potentially as pooling the risk where we can make sure 
this doesn't come back on taxpayers. We recognize our 
obligation as an industry.
    The two others we focused on are task forces once again, 
and we do these in collaboration with the best minds, with 
government, individuals, is on control at the seabed floor, the 
very issue that has been raised here today about technologies 
and other things. And the last one is on response.
    While there has been some improvements in the booms and 
others, clearly we need to look harder at that. We need to 
spend more money on research and development. This spill is 
unprecedented. We have lessons to learn. We understand, and we 
will learn those lessons.
    We want to work with this committee, the Congress, and the 
administration, though, to make sure as we come through this 
very difficult time that the public policy that is developed in 
this highly charged environment is such that we can continue to 
do what we do well for many years to provide the energy the 
country needs to fuel our economy, not only for those of you 
down the coastal States but across this land and elsewhere, so 
we can enjoy the high standard of living we do today.
    So I will convey your comments and sentiments back to the 
industry and give you my commitment in the roles--that as head 
of their trade association, we understand and we are going to 
do our part.
    Mr. Taylor. Anyone else? Thank you very much. Thank you, 
Mr. Chairman.
    Mr. Oberstar. I very much appreciate your observations that 
for 20 years had no major spills, but similarly no significant 
dramatic improvements in blowout preventers, in boom caliber 
and quality, in vessel operation. And that led to complacency. 
Complacency then lead to categorical exclusions from NEPA and 
to rulings of the MMS that produced an estimate of the 
likelihood of three spills from platform drilling in deepwater 
that would produce 1,500 barrels for each spill. That is so 
categorically wrong on the face of it, so lacking in perception 
of the risks involved in drilling at those depths, that it is 
unspeakable.
    And then they extrapolated that or expanded it to impacts 
on spills under a 5-year lease with no understanding of or 
expectation of an uncontrolled failure.
    Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    And, Mr. Chairman, as I listen to Mr. Taylor, I just could 
not help but feel what he is feeling. It is very frustrating.
    And, Mr. Gerard, I think what Mr. Taylor is saying is that 
it is one thing for a business to go out and make money, that 
is important we all want that; but I think going along with 
that is certain responsibilities. And it does appear, and as I 
went down there and I saw what I saw, that there is a 
disconnect here in some kind of way. And I think that I know 
your industry is doing a whole lot of wonderful things, but--
and I have said in it in the Coast Guard Subcommittee over and 
over and over again, that I do not want us operating in a 
culture of mediocrity. Because when we do that, what happens is 
this kind of thing happens.
    What I am saying is I think--I tell my kids, I tell them 
you have two tracks that you have to go down in life. One is 
your destiny, the other one is your development. And I said 
they have to be--you have to do both.
    And I wonder sometimes whether--when I see what happened 
here with BP, it seems like the destiny they were shooting off 
and doing real fine and going way down below the sea. And the 
development part, and when I say development and the ability to 
control the situation, I wonder whether that kept up. Do you 
follow what I am saying? Because that is part of the 
development. It makes sense.
    I think it is kind of--and I am not beating up on you, I 
wasn't even going to say this, but I am sitting here and I am 
thinking that is part of the problem. And then the Chairman, 
and I am so happy that the Chairman has taken this on, trying 
to make sure that we have the expertise that we need in the 
Coast Guard and the MMS.
    If we don't have the expertise, we can talk all this stuff 
we want. If we don't have the people that can properly inspect 
the rigs--we keep talking about when the rubber meets the road, 
everything is going to be fine. Well, guess what? Bulletin is 
coming over the wire; when the rubber meets the road we 
discover there is no road. And that is part of the problem we 
saw happening in Katrina. We are seeing it happening in a lot 
of ways. So I just wanted to throw that out for whatever it is 
worth.
    But let me go to you, Mr. Hartwig. Do you believe that the 
estimated $1 billion to around $3.5 billion in liabilities owed 
by insurance firms in association with the Deepwater Horizon 
incident could exceed oil premiums paid for insurance for 
offshore facilities in the past year? And what does this mean 
for potential impact for this event, from this event on the 
industry in offshore facilities? To be frank with you, I 
believe that it will exceed 3.5 billion. I think it will be 
much higher than that. But I am just wondering what you, how 
do--what happens then?
    Mr. Hartwig. Well, what will happen here is, as I mentioned 
in my testimony, somewhere between 2-1/2 and $3 billion are 
earned annually globally by energy insurers, it is possible 
that the high end----
    Mr. Cummings. That is their earnings?
    Mr. Hartwig. Sorry, that is the premiums they earned on 
their annual--not their net income or profits, it is the 
premiums that they generate from this business.
    Mr. Cummings. That is the gross.
    Mr. Hartwig. That is correct. That is the gross.
    Mr. Cummings. So in other words these insurance companies 
get 2--how much?
    Mr. Hartwig. Two and a half to $3 billion a year in 
premiums that they earn from this business.
    Mr. Cummings. Period. Now----
    Mr. Hartwig. Now the expectation is you aren't going to see 
events along the lines of a Deepwater Horizon every year. They 
are very, very rare. So, just as in any type of insurance there 
are years when your bottom line can be larger than your top 
line. That is the nature of the insurance business.
    What will also happen in this instance is while some of the 
losses have already been paid, such as for the value of the 
craft itself, the Deepwater Horizon is a total loss. Some of 
the losses will emerge over time. Liability losses don't all 
emerge instantaneously, they emerge over a period of years. 
Soinsurers will be paying that out out of cash flow of the next 
couple of years. And obviously, this impacts the capacity in 
the marketplace. And the cost of insurance, as I mentioned, is 
rising in the gulf area 15 to 50 percent, the 50 percent being 
among the deepwater rigs and 15 in the shallow-water rigs.
    So the market has been orderly. As I mentioned, insurers 
are accustomed to large-scale losses, although not typically 
this large, but it is something that the industry contemplates 
and plans for.
    Mr. Cummings. And so the larger certificate of financial 
responsibility for a vessel appears to total just over $500 
million; is that correct?
    Mr. Hartwig. Well, the larger drillers can obtain $1 
billion or so, or even more in terms of third-party liability 
coverage, so it is larger than that. They are not going to 
obtain all of that from one individual insurer. It is a program 
that gets put together.
    Mr. Cummings. What is your biggest--and then I will yield 
back, Mr. Chairman--what is your biggest concern with regard to 
all of this? As I see it, it seems as if there is going to be 
unlimited--when I think about all of the folks that are 
affected by this incident, and then I think about the fact that 
you can be, we can be in a position where the liability is so 
great that some folks--I think it has been mentioned here by 
you, Mr. McAllister I think--folks won't even be able to get 
insurance. Is that, that was your concern, Mr. McAllister?
    Mr. McAllister. Certainly.
    Mr. Cummings. And the question I guess, what is the 
reasonable, the way you--in other words, we all want to address 
the problem but we want to address it in a way that makes 
sense. And we don't want to be in a situation, I think it was 
you, Mr. Hartwig, that talked about loopholes--and maybe it was 
Greenstone--and so we don't want to have a Swiss cheese 
resolution where folks can kind of get around what we are 
trying to do, because then we just fall right back to the 
rubber-meets-the-road kind of situation with regard to 
payments. That is, paying for these problems. And we don't want 
it to fall back to the American people.
    So what is the most reasonable way to do it so that we 
cover all of the folks that we want to cover and so the 
American people don't get stuck with these kinds of situations, 
assuming something like this would happen again, God forbid?
    Mr. McAllister. I think when we think about cutting-edge 
technologies, and Deepwater Horizon and ultra deepwater 
drilling is an example of one of those, when we look at the 
history of this over the past century or so, what we see is 
extraordinary new technologies being rolled out. When you think 
about aviation, when you think about space flight, when you 
think about satellites, when you think about even marine 
navigation, when you think about the Internet, what happens? 
All of these encounter very substantial problems. And the way 
that you solve these in the end is not through insurance, it is 
not through limits or higher limits of liability. Ultimately 
what winds up happening is there has to be a dedication towards 
better risk management practices here. Part of the answer is of 
course regulation, and, throughout the entire process, 
financial responsibility has had to be proven in each and every 
one of these industries.
    But at the end of the day, what do we have? We have sound 
risk management. What causes an airplane to crash? And now it 
is safer than ever to fly around the world. What used to cause 
large ships to crash at sea? And that doesn't really happen 
anymore. These are the sorts of things we don't have to worry 
about too much. In the days of the Titanic you worried about 
hitting an iceberg or another ship.
    So what we wound up with is having technological 
innovations which allowed us to improve the risk management 
practices, a variety of them that come together. And I think I 
have been impressed in the course of American history as to how 
this has reduced losses. And this has even occurred in the 
offshore petroleum business.
    This is a terrible event that has happened, but if you look 
at over the past 40 years the number of events, both large and 
small, as well as the total leakage or spillage, whether we are 
talking about offshore platforms or whether we are talking 
about events involving tankers, all of these processes have 
gotten safer over time. Are we going to have setbacks? Yes. Can 
we learn from those? Absolutely.
    And I think that is what is going to happen here. It is 
going to be risk management, the best practices, that in the 
end are what is going to make the biggest difference.
    Mr. Oberstar. Thank you Mr. Cummings, and thank you again 
for your splendid work as Chair of the Coast Guard Subcommittee 
and following up on these numerous issues that you have done 
with great skill.
    The comments, though, Dr. Hartwig, about safety in aviation 
should be accompanied with an observation that the FAA has the 
skills equal to those of the industry to know the capabilities 
of engines and of airframes. We have, in addition, an 
investigative agency, the National Transportation Safety Board, 
that also has those skills. And we have a rigorous regime of 
oversight and a periodic issuance of notices to airlines, to 
their maintenance operations, of failures, and notices sent to 
the manufacturers, Boeing and Airbus, of responsibilities they 
must undertake in inspection or upgrading of equipment and 
operating parts on the aircraft.
    That doesn't exist in the Minerals Management Service or in 
the Coast Guard because we have so relied on the industry for 
so many years. That must end. There has to be backup oversight.
    Mr. Teague, who has had greatly experience in this 
industry, New Mexico, good to have you.
    Mr. Teague. Thank you, Mr. Chairman and Ranking Member. I 
also want to thank all of the panel for being here today. It 
has been interesting to listen to this question-and-answer. And 
I really do look forward to working with the Chairman and 
leaders on both sides of the aisle to craft legislation that 
responds to this disaster in a focused and responsible way. But 
as one of the only Members, if not the only Member, of Congress 
with direct experience in drilling oil and gas wells, I think I 
am in a unique position to understand the facts and hold BP 
accountable for the Deepwater Horizon disaster.
    There are some things that we have to do. First, we have to 
clean up the mess and compensate the victims of the disaster. 
We must hold the responsible parties accountable to make sure 
this never happens again. And we have to understand that some 
of the responsible parties are ours, Minerals Management 
Service, but this is primarily a BP problem.
    You know, as we do this and pass the legislation that we 
pass, we need to be sure that we don't act in haste, that we 
don't legislate out of anger or out of fear. As we work real 
hard to ensure that the safety and update the laws that we need 
to from the liability statutes, we need to take care not to 
negatively impact the ability of smaller companies to compete 
both offshore and across America. Let us not let BP effectively 
put the smaller companies out of business by us painting with 
too broad a brush when we need to be painting BP and deepwater 
drilling and not everything else.
    As we investigate this accident and get all of the facts, I 
think we are going to be pretty pleased with the safety and 
technology that are available. We might not be happy with what 
was utilized, but we will be happy with what is available.
    Just like small businesses all across this country is the 
backbone of our economy and the backbone of America, the small 
oil and gas companies are the backbone of the oil and gas 
industry. We need to keep that in mind, that we don't put 
penalties on the industry that hurt the smaller companies that 
the larger companies can work around. We need to hold the 
responsible people responsible at this time and take whatever 
measures we need to to make the people who make a living from 
the Gulf Coast, whether it be through fishing or restaurants or 
whatever.
    I think there are some responsibilities that BP needs to 
accept that they have and they need to stand up to. Their first 
responsibility is to their employees. They need to provide them 
with a good, safe workplace, all of the things that everybody 
needs to ensure that they get to come home. And they owe it to 
the industry. So many people in the industry work hard and 
abide by the rules and don't try to take shortcuts. And then 
they owe it to the citizens of the United States and of the 
Gulf Coast to clean the mess up. They made the mess, and they 
need to clean it up.
    I guess that gets me to something that we need to be 
careful about as we move forward, and that is how we 
structure--and I will let any of you all comment--how do we 
structure the liability limits to ensure that independent oil 
and gas producers can still buy insurance and participate in 
the gulf, while at the same time ensuring the citizens of the 
gulf that the financial stability is there to take care of a 
problem they may have?
    Mr. Hartwig. I think I did hear a suggestion earlier that 
they could be staggered or staged in a particular way. It is 
clear that many of the small operators that you are talking 
about simply don't have the ability to create an economic or an 
environmental disaster along the lines of what we have seen 
with respect to British Petroleum. Clearly a tiered approach 
where some formula is developed in terms of output and is also 
sensitive to location of where the drillers are.
    Certainly when an insurer evaluates the risk associated 
with providing an insurance, it is looking at what the possible 
maximum loss is with every one of these. It is something that 
we would take a look at, and we certainly don't expect many of 
the small drillers that are in your district to have anywhere 
near the same capability of a BP in terms of the environmental 
damage. So this kind of tiered approach, I think, might make 
some kind of sense.
    Mr. Teague. So we need to be sure that the requirements 
that we ask for differ as the water gets deeper, and that we 
don't try to, with just one sweep of the brush, paint 
everything on land and offshore both. Thank you.
    Thank you, Mr. Chairman.
    Mr. Oberstar. Thank you, Mr. Teague.
    And a very patient Ms. Edwards, thank you for staying here 
and waiting so long for your turn at bat.
    Ms. Edwards. Thank you, Mr. Chairman. This may be a case 
where everything has been said, but I haven't said it yet.
    Mr. Oberstar. No, not everything has been said. There are 
still a lot of questions that I have. But you go ahead.
    Ms. Edwards. Thank you.
    You know, obviously decisions that we have today going 
forward are related to when, where, how, and to whom to attach 
liability and where to strike the balance of risk.
    Dr. Hartwig, you spoke about risk management. I want to 
focus on that, because obviously there must be an environment 
where small and large companies can operate, can be competitive 
and efficient. But the problem with that formulation alone is 
when push comes to shove, under the current statutory 
framework, the taxpayer really bears the real risk. And as Dr. 
Greenstone pointed out, when that happens, companies can 
operate in a way that doesn't effectively take into 
consideration what the real risk is, or the insurance industry 
in terms of its insuring that risk. So that is my concern, that 
the liability limit that we have under current day's dollars, 
especially in these deepwater accidents, that the risk, in 
fact, doesn't allow for the real allocation of responsibility.
    And so I am wondering, for example, when I think about some 
of the smaller spills--I think earlier was referenced a spill 
in the Gulf of Mexico. There was another one in the Timor Sea 
which was only 253 feet, but it took a couple of months before 
it could be retained, and then with a relief well. And my 
understanding, Mr. Gerard, is Canada required relief wells 
until BP pitched such a fit that they began to loosen those 
regulations for relief wells even this last December.
    We are in a circumstance, I think, where the allocation of 
risk is not full enough to allow for that competitiveness in 
terms of determining and investigating new technologies, but 
also place enough of a burden on the industry so it operates a 
little more safely and with greater concern.
    I mean, we saw this, for example, in the financial sector, 
where you had total lack of regulation, bad products, risky 
behavior, and at the end, in that game, too, the taxpayer bore 
the burden.
    Here I think a BP representative sat where Mr. Anderson is 
just a couple of weeks ago and said at that time they had 
revised their estimates, 1,000 barrels a day to 5,000 barrels a 
day, and estimating that the worst-case scenario was 250,000 
barrels a day, but they weren't insured for 250,000 barrels a 
day. And now today, just a couple of hours ago, it looks like 
the independent sort of group of scientists is estimating this 
to be about 28,000 barrels a day and perhaps more than that. So 
what that is saying to me is so BP could say, well, if we are 
going to suffer fines in addition to our liability limit, then 
we will take on the possibility of only having to pay out $20 
million or so in those kind of fines. Or if it is a 28,000-
barrel-a-day spill, as we are now beginning to believe, or 
perhaps more, it is more like $600 million for that spill.
    So I wonder what the relationship--and perhaps, Dr. 
Greenstone, you can answer this--the relationship between the 
gross negligence provisions rather than simple negligence, 
combined with the $75 million liability limitation, and what 
that does, in fact, to depress the proper allocation of risk 
among the entities. So could we consider from a statutory 
standpoint changing that gross negligence to absolve oneself of 
risk, and also look at shifting at some level or other that can 
be determined the liability limits?
    Mr. Greenstone. Thank you for the question, Congresswoman. 
I confess I am not a lawyer, so I can't talk in great detail 
about gross negligence, but let me make a few points about the 
point related to the cap.
    From an economic perspective, there is no reason to have 
differentiated caps, depending on where the oil is being 
drilled or depending on the type of company. The reason which I 
tried to emphasize today is you then put a wedge between the 
oil companies' interests and the American people's interests. 
That has showed up in the Deepwater Horizon case.
    I think there is a more subtle way in which that affects 
the industry in the long run. It effectively removes incentives 
for developing the technologies that can reduce risks in the 
long run, because there is no price for it. There is no market 
for developing new technologies, new and better blowout 
preventers. There is a subtle, longer-running impact.
    Finally, one other thing which has come up several times 
here, and I thought it was worth discussing for a minute. 
Several people have said it would be very difficult, maybe 
impossible, for some companies to get insurance if the cap was 
raised. I want to make the point that I am very confident that 
oil companies that are taking adequate safety protections will 
have no problem getting insurance. The only companies that 
would have a hard time are the ones where insurers would find 
it not a good bet and would want to raise prices to the point 
where no one would buy it.
    There is another point about the rise in premiums that is 
related to all of this, which is if oil companies are already 
taking adequate safety provisions, then there will be no rise 
in premiums. So this claim about the rise of premiums, I think 
it all--I think it bears closer scrutiny.
    Ms. Edwards. Thank you.
    If I can just finish, we have heard suggested a couple of 
times that we should look at small, medium and large companies 
differently. So I take it that you would share the view that we 
shouldn't attach different kinds of liability limits based on 
the size or scope of those companies or the depths at which 
they are drilling?
    Mr. Greenstone. Again, there is no economic case for doing 
that. Any differentiation will put a wedge, will allow the 
relevant oil companies not to take full responsibility or 
consider the full potential of their actions, and that creates 
this incentive for not taking proper precautions.
    Ms. Edwards. Lastly, back to this point of gross 
negligence, because I would like to know if there is a way to 
capture the economic impact when you have sitting out there you 
can only lose your limit if there is an action of gross 
negligence, and what that does to affect the economics of your 
making a decision as a business person about where to allocate 
your risk or what risk to take? I am concerned about that high 
a bar being set out there so that a company could internally to 
its own operation say, well, you know what, the liability limit 
applies unless it is gross negligence. Anything in between 
that, all bets are off.
    Mr. Anderson.
    Mr. Anderson. May I may make a comment? First of all, gross 
negligence and willful misconduct are not the only grounds for 
breaking limitation under OPA 90. In fact, it is rather 
difficult to hold limitation under OPA 90 unless you have a 
pretty stringent operation with respect to safety.
    One of the grounds, for example, for breaking limitation 
would be violation of an applicable Federal safety or operating 
regulation which is the proximate cause of the incident; 
failure to cooperate with Federal officials in the spill 
response; failure to report a spill; failure to lend assistance 
consistence with the National Contingency Plan. There are a 
number of other grounds for breaking through the limits of 
liability under OPA, particularly this safety and operating 
regulation requirement. So that is one thing.
    I just want to go back to your concern, and also, Mr. 
Cummings, I am hearing your concern about what I think is 
really confined to the offshore oil industry, and I think there 
is a little bit of confusion about the differentiation between 
the risks here in terms of insurance cover. Right now in terms 
of vessel liability for oil spills, there is very little risk 
to the U.S. taxpayers because historically we have seen, since 
OPA 90 came into effect, almost no situation where the fund has 
been called upon to respond in damages to a spill.
    With vessels you have many layers of private risk 
absorption, including the COFR system, which I talked about 
before. The system depends very much upon gradation of risk. 
That is the point I wanted to get across. If you are 
considering raising limits of liability, and certainly removing 
caps on liability, you have to look at the specific risks in 
that industry, and there is a great difference between 
international shipping, which really involves navigational 
risks of moving cargo from point to point, and drilling in a 
deep-ocean environment in an untapped oil field. So if you are 
considering changes, what the international group and I think 
the ship owners association would ask you to do is look very 
carefully at the gradation of risk within each industry segment 
before you start adjusting those limits.
    Ms. Edwards. Thank you. I do understand those differences. 
I was speaking here principally about the offshore risk both in 
shallow water and deep water.
    Thank you, Mr. Chairman.
    Mr. Oberstar. I appreciate that very thoughtful line of 
questioning and the responses.
    I yield to Mr. Olson in just a moment, but, Mr. Gerard, the 
pressure at the 18,000-foot level, below mud line where the oil 
reservoir has been located, is by various estimates in the 
range of 2,300 to 12,000 pounds per square inch, or psi. Was 
the blowout preventer tested at those pressures?
    Mr. Gerard. I assume it was, but let me go back and inquire 
about that. I don't want to speak for BP. But I am assuming 
through their typical practices, they are testing for the 
expectation of what they might encounter as they go into 
reservoir. And that is the way the system should be designed.
    Mr. Oberstar. I want to have that response in writing 
because API sets the standards for blowout preventer 
infractions. The manufacture is done by another industry 
representative or organization, but it is an API standard. And 
the standard was not set by MMS or the Coast Guard, and it is 
vitally important to know was it designed and tested to operate 
against those pressures from oil at that depth and against the 
thicker casings of steel for the pipe at that level, which is 
different from the thickness of steel for a 300- to 600-foot 
well, correct?
    Mr. Gerard. I will have to inquire of BP to get the answer. 
We will do what we can to get the answer.
    Mr. Oberstar. Supply both the API standard and the response 
from BP; but it was Transocean, the driller, that actually 
acquired the blowout preventer and installed it with the 
confidence that it would operate at those levels.
    If it is not, if it was not capable of withstanding 
pressures of that--of those numbers that I just cited, then 
even if the sheer had worked and had been able to cut through 
the steel and shut off the flow, it might nonetheless have 
exploded at that level. We don't know that because it hasn't 
been tested.
    Mr. Gerard. That is right. But we haven't pulled it up to 
see what the situation is.
    Mr. Chairman, I have a couple of smart people with me. We 
have a whole group of individuals. We probably should come up 
and sit down with staff, and we can walk you through the 
details of the standards-setting program.
    One clarification, in our certification process on these 
standards in a blowout preventer, we certify the manufacturer 
to make sure that they have the quality control and capability 
to build such products. We don't certify the products. I think 
that is an important distinction for the record. But we can 
have folks that spend their lifetimes, engineers and others, 
and they can sit down and show you this process.
    Mr. Oberstar. There are a great many comparisons here 
between aviation safety and maritime safety. We have passed a 
Coast Guard authorization bill that substantially, dramatically 
changes the way in which Coast Guard will conduct marine 
safety, and I won't go into all of those specifics, but it 
addresses this. The Senate has passed a similar bill, it 
doesn't have our provisions in it, and we are working those 
differences out before conference, but the human factor in 
drilling operations, the master of the vessel is licensed by 
the Coast Guard, meaning that that person has to meet certain 
standards. But to the best of my knowledge, the drill master is 
not licensed by anyone, by any government organization, that 
is, hired by the company and certified by the company to be 
capable, but there is no government standard, no Federal 
Government standard that the drill master must meet; is that 
correct?
    Mr. Gerard. I will get you the details on it. But they are 
trained in the processes and the procedures, and they are part 
of the inspections as people come out to see what is going on.
    Mr. Oberstar. But every mechanic who works on an aircraft, 
every carman in the railroad industry has to meet standards 
that the government has set. You are a licensed avionics and 
power plant--airframe and power plant technician, and if that 
technician does not sign off the ticket on that aircraft, it 
doesn't move. That is the kind of standard I am looking for in 
this industry.
    Mr. Gerard. I understand. These individuals are highly 
trained in what they do, and we can go back and answer the 
question as to what certification processes aside from standard 
training. We provide a lot of that training through the API in 
certifying training schools and others. And we can go back and 
talk with your staff.
    Mr. Oberstar. We will engage you.
    Mr. Olson.
    Mr. Olson. Thank you, Mr. Chairman, for having this hearing 
today. And I thank the witnesses for providing their insights 
on this incredibly important matter for our country going 
forward in the future with our offshore exploration.
    I want to talk to Mr. Gerard first, and I want to get to 
the issue of the limit on the insurance liability, the current 
$75 million that was part of the Oil Pollution Act of 1990. As 
you know, there are proposals from the administration and from 
Congress to up that to $10 billion. And there are even some 
indefinite proposals.
    I represent the 22nd Congressional District of Texas, and 
we have a significant petrochemical industry throughout the 
greater Houston area. At home last week I cannot tell you how 
afraid the operators were in the offshore industry if this 
provision would somehow become law. Again, many of them can't 
afford--a lot of these are small businesses, smaller operators. 
They cannot afford and they cannot purchase a $10 billion or 
indefinite liability for some sort of spill. I want to get your 
thoughts. Is that what you are hearing from your members? What 
can we do to help them?
    Mr. Gerard. What we are hearing, the insurance industry has 
indicated to us, and there have been a number of letters sent 
to the Hill, there are not sufficient capacity within the 
industry to meet those limits. Therefore, you would reduce down 
to only a handful of the largest companies in the world to be 
able to operate because they would self-insure, clearly having 
an impact.
    One estimate done by a third party suggests that of the 
170,000 people employed in the Gulf of Mexico, with such a 
limit you put at risk 145,000 of those jobs just merely by 
raising that cap on liability. So as an industry we think it is 
an important part to have a conversation about what that should 
be and what this system should be, if you will, to make sure 
that the taxpayer doesn't bear the burden of any particular 
spill. But we do think there has to be balance in this to make 
sure that at the end of the public policymaking process, we 
still have the ability to generate and produce the energy our 
economy requires moving forward.
    So we share your concerns and think that is a very 
legitimate consideration that should be looked at as you 
develop this policy.
    Mr. Olson. The people in my district, this is what I heard 
over and over and over, and then concerns about the moratorium.
    Mr. Greenstone and Dr. Hartwig, any comments?
    Mr. Greenstone. Yes. This point keeps coming up, and I 
think it is one that merits a lot of consideration about will 
small and medium-sized companies be able to get insurance 
policies going forward if the cap is raised to $10 billion or 
some indefinite limit.
    One thing I just want to point out is insurance rates are 
based on the risk; they are not based on the size of the 
company. So as long as the company is undertaking adequate 
safety provisions, it is a little hard for me to understand why 
they would have a hard time getting a policy.
    I also want to talk to a related point, which is that the 
current size of the insurance market is not very big, and so 
would not be able to insure such large risk, and only big 
companies would be able to do it, and they would have to self-
insure.
    If we think back to this last decade, it is not hard to see 
that Wall Street is quite capable of shifting money around to 
new markets in the last few years. That was obviously the 
housing market, but shifting around to new markets where there 
are opportunities. So to the extent there was a higher cap, 
that would create a new market, and I have great confidence 
that Wall Street would find a way to shift capital to this 
sector and be able to write insurance policies with much higher 
limits than are currently being written.
    Mr. Hartwig. Just a comment or two on this. I agree 
absolutely that insurance rates at the end of the day are going 
to be based on risk, and they are going to be based on the 
track record of the individual company involved.
    But at the same time, if a company is going to be obliged 
to demonstrate a very, very high threshold of ultimate 
potential responsibility beyond what the insurer would have 
potentially offered in terms of coverage, the insurer itself 
caps its own risk. It sets a limit to the coverage. If there is 
another standard set by the government whereby instead of $1 
billion it is going to be $10 billion, that particular driller, 
even if they have never had a claim, is going to wind up paying 
more because the insurer has more dollars ultimately at risk, 
it has to tie up more dollars in order to hold that in reserve 
if it winds up having to pay that claim.
    Outside of the world of the offshore insurance industry, I 
can only think of one particular major type of coverage where 
there is unlimited liability, and it is a market that is 
completely falling apart. It is Michigan's no-fault automobile 
system. It has nothing to do with offshore drilling, but that 
is where I am spending a lot of my time recently. I testified 
recently there in that State, and a quote from me is with 
unlimited benefits come unlimited costs, and that is exactly 
what is happening in that particular State.
    Mr. Anderson. I just wanted to reemphasize the role of 
reinsurance in this industry. It is not the question of a 
single insurer being responsible for damages, but also whether 
the capacity exists in the reinsurance market. The experience, 
I think, in the international group is there is not infinite 
capacity in that market. That has been demonstrated. It was 
demonstrated by the Exxon Valdez where the group could not 
complete its reinsurance contract because of the magnitude of 
the damages.
    It would be compounded now by an order of magnitude by 
removing liability caps and by imposing a one-size-fits-all 
damages cap on all responsible parties under the act.
    As I said before, if you have major events in the world 
such as earthquakes, floods, storm damages as we had with 
Hurricanes Katrina and Rita, that is going to put incredible 
strains on the reinsurance market, and the capacity is not 
there.
    I would very much disagree that the insurance industry is 
comparable to Wall Street in coming up with different financial 
instruments. That market that we are talking about is much more 
limited, and covers a very, very broad range of risks besides 
simply offshore drilling and exploration.
    Mr. Olson. Thank you very much for that perspective. That 
jibes basically with what I am hearing back at home. People 
feel if they are required to purchase, they won't have the 
capital to purchase the insurance, particularly the smaller and 
middle-sized guys which do the bulk of the work out there.
    Mr. Oberstar. Mr. Cao.
    Mr. Cao. Thank you, Mr. Chairman.
    My question to the panel will focus on the moratorium. 
Based on the knowledge of anyone on the panel, how can we 
address at the same time the issue of safety, preventing 
another disaster from happening in the future, but at the same 
time trying to limit the economic impact of the moratorium? 
Right now there is a 6-month moratorium imposed. Is there any 
way for us to do the review work we have to do without 
extending it all of the way up to the 6-month period without 
compromising safety issues?
    Mr. Gerard. We think there is, Congressman. As you probably 
heard from our statements, the key to where we are now in the 
moratorium, as you know, there were 33 operations under way 
that were just stopped and told to cease. Each one of those 
drilling operations had attached to it about 1,400 jobs. That 
totals 46,000 jobs that were put in limbo as a result of the 
moratorium. We think it is very appropriate to take a pause and 
scrutinize and look closely at what is going on in the gulf 
from a safety standpoint and for protection of the environment, 
but we think there may have been better ways to do that without 
having such severe economic disruption take place.
    We believe one of the ways they could have done it is move 
quickly for increased inspection and oversight. Of those 33 
operations, in the first week they had inspected 29 of them. 
And as an industry we recognize and welcome that additional 
scrutiny to come out and look closely and make sure that the 
testing and inspections and other things are taking place. Like 
you, we are very concerned that we are compounding the economic 
challenge in the gulf. This tragic incident has caused severe 
distress, and now we are going to compound that if we continue 
to pull back on the other economic activities that have 
provided for strength in the gulf all these years.
    Mr. Greenstone. I think the moratorium obviously has severe 
economic consequences, and obviously a lot of them are 
concentrated in your district.
    Just speaking off the top of my head, one solution would be 
instead of having a moratorium for a 6-month period of time, 
you could have a higher cap. It could be a trial run to see how 
businesses operate with a higher cap on liability damages.
    Mr. Cao. Anyone else who has any ideas or comments on the 
question posed?
    My next question, I guess to Mr. Gerard, you basically 
conveyed an idea that I am pretty sure many Members, a lot of 
people in my district would support, is to look at an increase 
in liability, but doing it in a way that would be very 
responsible and to limit job loss. And I believe earlier in the 
session you conveyed to the Chairman that you have certain 
ideas and proposals which you want to submit. I would also ask 
that you submit to my office a copy of that proposal, if you 
don't mind.
    Mr. Oberstar. Mr. Cao, if you would yield, any information 
submitted in requests to witnesses to the Committee will be 
distributed to all Members. That is our standard practice. We 
will be sure you receive it.
    Mr. Cao. Thank you, Mr. Chairman. With that, I yield back 
the balance of my time.
    Mr. Oberstar. Mr. Gerard, you said or you suggest that the 
proposal to go to $10 billion is too severe. What is the number 
between $75 million and no limit that the industry would 
support?
    Mr. Gerard. We haven't yet decided what we think a fair 
number would be. However, we have looked closely at, for 
example, some of the letters we have received from some in the 
insurance industry who typically underwrite these policies. 
They are down closer--I think some of the comments that were 
made by the gentlemen on the panel today, they said the 
capacity in this area is 1.2-, 1.5- at most.
    I am not in the insurance business, and I don't fully 
appreciate all of the nuances of that, but I think it is 
important, Mr. Chairman, we take that in consideration and we 
look at that from spreading that risk and decide what the best 
policy should be. I realize this isn't the Energy Committee, 
but we have also got to take into that equation the role and 
the impact it has on the energy production in our society. 
Today 30 percent of all of our oil comes out of the gulf; 70 
percent of all of that comes out of the deep water. Actually 80 
percent of that, I am sorry. And of the 11 percent of our 
natural gas that comes out of the gulf, 45 percent of that is 
in deep water. So there is a very serious economic energy 
dynamic that we think needs to be considered, as well as 
talking about what the right level of the cap might be. We will 
get you some feedback on that.
    Mr. Oberstar. Very true, but there is also another economic 
factor: Fifty percent of the fish and shellfish of the Nation 
come from the gulf.
    Mr. Gerard. We understand that.
    Mr. Oberstar. There are 300,000 jobs in the recreational 
fishery industry.
    I think the advantage of having long service in the 
Congress is to have been present when this body of law was 
created. I remember very well in the aftermath of the Torrey 
Canyon and the Amoco Cadiz the hearings we held in the Marine 
and Fisheries Subcommittee on the extent of liability that 
should be imposed upon the industry, and the repeated claims 
that you had to have a number against which the industry could 
insure. That became the standard for oil pollution liability in 
the1978 act andthe 1988-1989 act and the OPA 90. Those were 
measures aimed at known quantities. We know how much oil there 
was onboard the Exxon Valdez and the Amoco Cadiz and Torrey 
Canyon and the big supertankers. That is a definable, 
measurable amount.
    But when a well breaks at 5,000 feet from a reservoir that 
is another 18,000 feet further, and the amount of oil in that 
reservoir is only an estimate, you have an unknown or 
unknowable quantity of oil coming out against which it is very 
difficult to insure. I understand that. So if the damages are 
in excess of a billion, $5 billion, or $10 billion, whose 
responsibility is it then?
    Mr. Gerard. Well, I think the other consideration we should 
talk about, we are talking about the liability cap, but we are 
also talking about the trust fund. That is paid into by 
industry. As you know, the House passed provisions recently to 
add $10 billion to that trust fund, and the Senate is 
considering legislation to add $15 billion to that. We think 
that is another piece of the equation that should be considered 
as we try to manage that risk. As it has been talked about, 
that is really what we are doing is trying to manage that risk.
    Mr. Oberstar. That is a fund to which all of the industry 
contributes. It is not just a company responsibility.
    Mr. Gerard. It is assessed at the refinery with the intent 
to pick up both the imported and the domestically produced 
crude. So it is paid for by the refinery sector.
    Mr. Oberstar. I think you have to do some serious soul 
searching about the very fundamental principle of this 
liability and cleanup, which is the basic principle of the 
Superfund Act, which goes back to what I said in this Committee 
room 25 years ago. I spilled something; my mother said, clean 
it up. I was responsible. And so when industry spills, as in 
the case of the Arrowhead refinery in Duluth, all manner of 
stuff was just dumped because it was a convenient location. We 
came back, and you had gasoline, waste motor oil, you had 
wastes from grease from automobile maintenance. They collected 
it all, and we said, you just dumped it all, and you are all 
responsible. They had to have a share and a cost in cleaning up 
that mess.
    So we are dealing with something that is really of 
unimagined magnitude compared to what we were considering 
in1978 and1988 and1989, and 1990 thinking only about surface 
vessels.
    Mr. Anderson, there are 13 of these nonprofit, not-for-
profit mutual insurance associations, the P&I clubs, which I 
have had some experience with over a period of many years. They 
will provide up to a billion dollars in coverage for pollution 
liability for vessels, but they do not issue documents 
necessary to enable a vessel to obtain a certificate of 
financial responsibility, COFR, to operate in U.S. waters. 
Backing for those certificates comes from other insurance 
firms, some of which are in Bermuda. It is like the BP vessel 
built in Korea, registered in the Marshall Islands, with a 
registry maintained in Reston, Virginia. Oversight is limited 
to the laws or the regulations of the IMO. To what extent does 
imposition of direction action against firms providing backing 
for COFRs factor into the P&I club decisions not to provide 
such backing?
    Mr. Anderson. I feel I am preaching to the converted, Mr. 
Chairman, because I know you were present for the hearings for 
the original OPA 90. As you know, the problem for the clubs was 
the direct action provision in OPA 90 and the principle that 
P&I insurance is basically a contract between the ship owner 
member and the individual club wherein the member undertakes to 
keep his vessels in a very seaworthy condition and pay premiums 
in exchange for payment of claims. And the direct action 
provision would essentially mean that the club's assets are at 
risk even though the ship owner may not be operating in 
accordance with club rules.
    Again, we deal with the principle of mutuality, that the 
clubs cannot put assets at risk simply because one jurisdiction 
imposes a very stringent requirement as opposed to worldwide 
trading and jurisdictions.
    The mechanics of the COFR system have operated in a very 
excellent manner because in my experience I don't know many 
cases, if any, where the guarantor company, the Bermuda 
corporation, has actually been called upon to respond. In the 
vast majority of cases, the P&I club is on the front line of 
payment of pollution claims. The COFR basically is there as a 
backup in the rare case that the clubs, for reasons of perhaps 
individual members were not complying with rules, would not be 
paying. But the guarantor is basically there, as the industry 
and the trade would say, as a ticket to trade in the United 
States. It is a requirement to have the guarantee; but as a 
practical matter, at least with respect to the shipping sector, 
it is not in the first line of response to an oil pollution 
incident either in terms of payment of cleanup costs or third-
party damages.
    Mr. Oberstar. Well stated, but following up on a question 
Mr. Olson asked about reinsurance, do you think-- perhaps you 
also, Mr. Gerard--do you think the reinsurance market can issue 
coverage for $1 billion to a $1.2 billion COFR?
    Mr. Anderson. The capacity for a COFR in that amount is 
probably there, between $1 billion and $1.5 billion. One of the 
problems with that is that, again, because of the market 
capacity, if you are increasing limits, as some of the 
administration bills are proposing, that will have an overspill 
effect on all of the market so that the costs for every 
operator, whether it be a vessel operator or a rig operator or 
a small driller, is going to be increased astronomically 
because reinsurance costs will be increased.
    Mr. Oberstar. The Bermuda operators will provide insurance 
only up to the level of liability based on the vessel's gross 
tonnage.
    Mr. Anderson. That is correct, or the limits specified in 
OPA 90 or the relevant law.
    Mr. Oberstar. But if there is a spill, the vessel spills 
and it has to file a claim, does it file first with the 
reinsurance firm in Bermuda and then file with the P&I club?
    Mr. Anderson. The way it typically works is the guarantor 
corporation in Bermuda will receive a notice from the fund 
center of the claim, and that is passed on to the P&I club, or 
in practice the P&I club will already have been involved in the 
response because it is involved from day one. When we get a 
report of an oil spill, we will have correspondents on scene 
dealing with financial response of that spill. So once again, 
the guarantor corporations--and keep in mind that these are not 
simply paper corporations; they have the same reinsurance 
contracts essentially that the club has. So they are backed up 
by first-quality insurance on both the European and U.S. 
markets.
    This is not simply a paper operation that is necessary to 
get the ticket to trade. They can respond through reinsurance 
again in the event of a spill. But again, going back to the 
basic operation of OPA 90 with respect to vessels has operated 
very, very efficiently for 20 years. We have not had to call 
upon the guarantors to respond, because the P&I clubs are there 
in the forefront of a response. Whether it comes to removal 
costs that the government incurs, or damages to natural 
resources that NOAA has, or third-party claimants who are 
claiming economic loss or property damage, P&I clubs will 
respond to those kinds of damages.
    Mr. Oberstar. In fact, there is a relationship between the 
P&I clubs and the reinsurers, whether Bermuda or elsewhere, and 
you do have a relationship and you communicate with each other?
    Mr. Anderson. Absolutely. We would deal with the 
guarantors. Obviously they are going to be very concerned to 
know that the responsible party and the P&I club are 
responding, and so we have a dialogue with them whenever there 
is a spill incident which might involve a guarantor.
    Mr. Oberstar. If the limits were raised or eliminated, as 
occurred in those deliberations back in 1990, or 1989 and 1990, 
on OPA 90, your testimony refers back to the lack of any 
workable substitute to the international group's insurance 
program threatened to cause withdrawal of the majority of the 
world's commercial shipping from the U.S. trade. But if 
liability limits were raised or eliminated, would that same 
circumstance occur today?
    Mr. Anderson. If they were raised or unlimited?
    Mr. Oberstar. Or eliminated.
    Mr. Anderson. It certainly would. If some of the proposals 
were to come into effect, I think, quite frankly, we would be 
facing a similar train wreck to the scenario that we faced back 
in 1990. Mr. Oberstar, you know probably better than anyone 
else there are simply very few ship owners, and I am talking 
only about the international shipping sector, not the 
offshore--there were very few ship owners who could possibly 
meet those kinds of financial responsibility and liability 
requirements by using their own assets. They have to rely on 
P&I insurance to do that, and on the reinsurance scheme. So we 
would be faced with the same situation as we had back in 1990 
where basically the wheels of commerce would come to a grinding 
halt if we had unlimited liability or if we had a one-size-
fits-all liability limit to third-party damages. Those risks 
really would not be insurable or would be insurable at an 
astronomical cost to the industry, and that would cause smaller 
operators, as Mr. McAllister has already said, probably to 
cease their operations.
    Mr. Oberstar. That really raises the question of the 
capacity in the reinsurance sector. Dr. Hartwig and Dr. 
Greenstone, do you have comments on the ability of the first-
line insurance and the reinsurance sector to back up a $10 
billion spill liability?
    Mr. Greenstone. Yes. I am not an expert on the first line 
of reinsurance markets, but I think one thing is clear: As they 
are currently constructed, it sounds like they would have a 
difficult time responding to higher limits. But if we have 
learned--when you watch the massive flows of capital fly from 
sector to sector, from country to country, what would happen, 
the lesson from that is when there are opportunities--so the 
notion that the wheels of commerce were going to come to a 
grinding halt is false--what would happen is that is a 
tremendous opportunity for some new firm to enter that market, 
or a series of new firms to enter that market, and the result 
is that it might not be the same people providing the 
insurance, but there would be new providers of that insurance 
because people would be willing to pay for it.
    Mr. Oberstar. Why would they be willing to pay for it, 
because the industry until up to now has had so few massive 
spills?
    Mr. Greenstone. Well----
    Mr. Oberstar. Because they are out there evaluating risk. 
That is what they are doing. And in evaluating risk, they look 
at the record of the industry to some degree.
    Mr. Greenstone. I think they are evaluating risk, and they 
are evaluating what the cap is, because the companies are only 
asking to be insured up to the cap. If I understand the concern 
that is being raised, if you raise the cap, the current 
insurance companies would not be able to write policies for the 
entire level. The point I am trying to make is I think that 
would create a tremendous incentive for new firms to enter and 
provide insurance to the higher levels.
    Mr. Oberstar. Dr. Hartwig.
    Mr. Hartwig. If I could on that, insurance is very 
different from the banking industry, and that is why during the 
financial crisis precisely zero property casualty insurers 
failed, and so far 300 banks did.
    The reality is capital doesn't go flying around the 
insurance industry at the touch of a mouse. Just because there 
is an opportunity to write $10 billion in limits, I would be 
very wary of a company that came in tomorrow and said they knew 
how to do that, because not even companies that have been 
around 400 years are doing that today. If anyone could do it, 
they could do it, and they are not. That might tell you 
something.
    So the reality is that while some additional capacity can 
potentially be brought into the markets, we are talking about 
orders of magnitude greater than what currently exists, idle 
capital having to stand by which is going to need to earn a 
risk-appropriate rate of return just for that 1-in-50-year type 
of event. It is very, very expensive to do. Can some be 
attracted in on the margins? Absolutely. The billion, billion 
and a half number we are talking about right now includes a 
share of loss that would be paid by the reinsurers. It is 
really spread around the globe. It is already a global 
marketplace. But I can't see a situation where for such massive 
limits that would require extraordinary underwriting expertise, 
that a new company would come and write limits like that. I 
think it is impossible.
    Mr. Oberstar. We are looking for some way to insure, as Mr. 
Mica said earlier, so the public doesn't pay for this spill.
    Mr. Anderson. If I can comment on Dr. Hartwig's comment, 
what would happen, I am afraid the analogy to Wall Street is a 
dangerous one. I think it is important to understand that the 
reinsurance that is available for the P&I clubs is first-class 
security. It has never failed in response to an oil pollution 
incident.
    If you were to open this up to other underwriters with more 
questionable securities, you may find yourself in a Wall Street 
scenario where the insurance industry is not able to respond to 
damages. That has not been a problem up to now because of the 
quality of the reinsurance the clubs are able to procure under 
their contracts of insurance.
    Mr. Oberstar. Mr. Garamendi was here earlier and had to 
leave for another committee. He has experience as the insurance 
commissioner for California, and I am going to recognize him at 
this point.
    Mr. Garamendi. Thank you, Mr. Chairman. I do have some 
experience. I ran a multibillion-dollar insurance program and 
oversaw even more over an 8-year period of time.
    It is entirely possible for the insurance industry, working 
together, to create an insurance program of $10 billion. It is 
possible. And the way it can be done is, for example, in the 
Skuld program, you have the first tranche. I don't know what it 
is; maybe it is 100 million, maybe more than that. Then there 
is a second tranche that may come through with the trust fund 
that already exists, whatever that number may be, and then the 
reinsurers take tranches above that. Let us say you want $10 
billion, it is not just one company; it is multiple companies, 
each one assessing the risk.
    The thing that is critically important here is that you now 
have the insurance companies themselves involved in assessing 
the risk. You are not totally dependent upon the government 
regulators assessing the risk, the risk of a blowout or the 
risk of a particular piece of equipment doing the job. You now 
have multiple insurance companies, reinsurance companies 
involved in taking an assessment because they have money at 
risk.
    The other point I want to make is one brought up by Mr. 
Greenstone. You could not be more right about the economics. We 
have seen this over and over again. We have seen it in flood 
insurance. It is much discussed in earthquake insurance. As 
long as you put a cap on the potential liability, you then have 
incentivized risky behavior. If we want to incentivize risky 
behavior, leave the cap where it is today, and you will 
continue to have risky behavior because it is financially in 
the interest of the operator to run the risk. You know what the 
maximum potential liability is. It is $75 million. Big deal. I 
can make $700 million by drilling this well, and I am going to 
drill the well.
    By superimposing on the risk a limitation, you have 
incentivized bad behavior. We see it over and over again in 
flood insurance. We see it in earthquake insurance. I saw it in 
California over and over again. In fact, it modified the way in 
which earthquake insurance is sold to take account of the risk 
of the building, the nearness to earthquake faults and the 
rest. The same thing applies here.
    The shipping industry, I am not focused on that, but 
certainly with regard to drilling, whether it is shallow water 
or deepwater, you need to build the cost--the risk potential 
into the cost of the activity. If you don't, we are just going 
to continue to have problems. You will also, by the way, have 
problems even if you do build it in, but you will guarantee--by 
eliminating the cap or setting a very high cap, you will 
guarantee that the operator is keenly interested in doing it 
safely. That is the critical point here.
    Thank you, Mr. Chairman. If you want more about 
reinsurance, we can have a great debate here about it.
    Mr. Oberstar. That was a very good textbook discussion.
    Mr. McAllister, I have one question. We have four votes, 6 
minutes remaining. Should there be two standards for insurance, 
one for these very big operations and one for smaller 
operations?
    And in the case of your organization, your tugboat 
operators, where you are delivering home heating oil, there is 
also a provision in OPA 90 that eventually was dropped but that 
would make the owner of the product liable also. And the 
purpose in previous legislation, it was dropped in OPA 90, was 
to engage the owners of the oil in forcing the vessel owners to 
move to double-hull operations. If the owner of the oil was 
liable for the spill, then they would take care that the vessel 
in which their product was carried was the safest as could be. 
That would have had a devastating effect on home heating oil 
operators, because the owner might be a little filling station 
or home heating oil operator somewhere in the hinterland of the 
United States who have no ability to provide financial backup 
for a spill, so that provision was dropped.
    But should there be two standards for your organization, 
smaller operators and those several-hundred-thousand-ton 
tankers on the high seas?
    Mr. McAllister. Well, I think that is a good point. And, 
the fact of the matter is if you look at OPA 90 right now, it 
already does make that differentiation. There are various 
different liability limits in OPA 90, and OPA 90 even 
differentiates between single-skin vessels and double-skin 
vessels.
    I think there is a lot of talk about whether this 
differentiation or these liability limits somehow incentivize 
reckless behavior, but I think it is worthwhile to look back at 
how the existing differentiation between types of operations 
and types of vessels has incentivized responsible behavior, and 
I think it is a success story. There has been a lot of focus on 
the P&I clubs, but the OPA 90 law that you are talking about 
also affects fishing vessels, ferryboats, nontank vessels of 
all sorts. Not all of those vessels are in the P&I clubs. Not 
all of those vessels carry $1 billion worth of insurance. They 
carry insurance that is appropriate for the limits of liability 
that have been set up for them.
    If everybody is required to jump up to those high levels of 
insurance, I think you may see that some modes of 
transportation are going to become unaffordable.
    I would like to highlight here that maritime transportation 
is the most efficient and, in my view, environmentally 
responsible mode of transportation for lots of cargo in 
America. We produce fewer emissions than you would produce by 
rail or truck. We get trucks off the road, and I think it is 
important to keep in mind what is going to happen with the 
cargo that is being carried on America's waterways if a large 
expense for required insurance is placed there.
    There is no question insurance is based on risk. So if you 
require--if you impose a larger liability cap and more risk, 
you are going to require more money to go out the door to pay 
for the insurance for that risk.
    Mr. Oberstar. I am going to have to stop at that point. You 
have all been wonderful. You have been on the stand for 4 
hours. It is a long time without relief. I will have a number 
of other questions that I will submit or have staff submit for 
your response for the record.
    Any supplemental comments that you have or observations and 
material that Mr. Gerard has already committed to providing for 
us, do that within a week. We will be developing legislation on 
a wide range of issues: liability and COFR vessel liability; 
cap per incident; limit on borrowing from the trust fund; 
Americanizing the U.S. Economic zone; the 1851 Limitation of 
Liability Act; and seven other items that are in my agenda to 
address, have legislation developed, and for an overall oil 
spill response package that the Speaker is going to put 
together by the end of this month.
    The Committee will stand in recess, and panel three will 
resume in roughly 40 minutes.
    Mr. Oberstar. The Committee on Transportation 
infrastructure will resume its sitting with Panel III, 
including Mr. Tom Perrelli, Associate Attorney General for the 
U.S. Department of Justice; Mr. Bob Abbey, Acting Director, 
Minerals Management Service; and Craig Bennett, Director of 
National Pollution Funds Center.
    I think some of you or your associates sat through the 
morning and afternoon session and heard a good deal of the 
testimony given and give-and-take with members, so I expect you 
are ready with not only that information but what you had 
already prepared.

  TESTIMONY OF TOM PERRELLI, ASSOCIATE ATTORNEY GENERAL, U.S. 
  DEPARTMENT OF JUSTICE; BOB ABBEY, ACTING DIRECTOR, MINERALS 
 MANAGEMENT SERVICE; AND CRAIG A. BENNETT, DIRECTOR, NATIONAL 
                     POLLUTION FUNDS CENTER

    Mr. Oberstar. So we will begin with Mr. Perrelli.
    Mr. Perrelli. Thank you, Mr. Chairman, Ranking Member, 
Members of the Committee, thank you for the opportunity to 
testify today about issues related to liability and financial 
responsibility in the offshore oil production area. Before I 
begin I would like to take a moment to express my condolences 
to the families of those who lost their lives and those who 
were injured in the explosion and sinking of the Deepwater 
Horizon.
    The explosion and fire that took place aboard the Deepwater 
Horizon and the spill of oil that followed have created an 
unprecedented environmental disaster for the people and fragile 
ecosystems of the Gulf Coast. This disaster has been met with a 
massive and coordinated response from the Federal Government, 
led by President Obama. The activities have been focused, as 
they must be, on stopping the oil spill and preventing and 
mitigating its effects. While Admiral Allen and the unified 
command have directed these efforts, the Department of Justice 
is looking ahead to issues of financial responsibility and 
liability.
    Our mandate is to make sure that we recover every dime of 
taxpayer funds that the United States spends on all of the 
removal efforts or damages caused by this catastrophe. We have 
been working tirelessly and will continue to do so to carry out 
this mandate and ensure that the American public does not pay 
for damages for which others are responsible.
    At the direction of the Attorney General we have been 
monitoring the situation on the ground, coordinating our 
efforts with the State attorneys general, and working with our 
Federal partner agencies and natural resources trustees to make 
sure we measure and track every bit of cost incurred in damage 
to the United States, the States and the environment.
    Those responsible for these events must be held 
accountable. To this end we will enforce the appropriate civil, 
and, if warranted, criminal authorities to the full extent of 
the law. This administration will explore all legal avenues to 
make sure that those responsible for this disaster pay for all 
of the devastation that they have caused.
    Some of these avenues arise under the Oil Pollution Act, or 
OPA, which is the subject of my testimony today. As you know, 
OPA was passed in the wake of the Exxon Valdez disaster to 
provide specific legal authority for dealing with the 
consequences of oil spills. OPA designates responsible parties 
who first and foremost are required to clean up oil spills and 
then pay removal costs and damages.
    In its current form OPA contains conditional caps that in 
some instances limit the liability of responsible parties, caps 
which are based on the size and nature of the vessel or the 
type of facility that is the source of the spill.
    BP has already stated in several fora, including before 
this Committee on May 19th, that it will not seek to limit its 
payments under an OPA cap. It has also said that it will not 
look to the Federal Government for reimbursement for the claims 
that it pays in excess of a cap. We expect BP to uphold these 
commitments. Rest assured, however, that the United States is 
committed to making sure that all responsible parties are held 
fully accountable for the costs and damages they have imposed 
on our people, our communities, and our natural resources.
    With respect to OPA itself, the liability provisions of OPA 
have not been updated in some time and it is clear that the 
liability caps must be adjusted and in some cases lifted 
altogether. We are convinced that the old liability framework 
is simply inadequate to deal with the potentially catastrophic 
consequences of oil spills. For the future, the liability 
provisions for activities covered by OPA should be reviewed and 
increased, as appropriate, to reflect the inherent risks 
associated with those activities. In particular, we support 
removing caps on liability for oil companies engaged in 
offshore drilling. We want to ensure that those companies have 
every incentive to maximize safety to avoid spills before they 
happen. And if for some reason a spill still occurs, those 
companies must bear full responsibility for all of the damages 
their actions impose.
    Arbitrary caps on the liability of offshore drilling 
implicitly subsidize drilling procedures that may not maximize 
safety, and we must remove those caps to decrease the risk of 
future spills and to ensure that if spills happen, the polluter 
pays. We will work with Congress to develop appropriate 
proposal and transition rules.
    Thank you, Mr. Chairman.
    Mr. Oberstar. Excellent, thank you very much.
    We will go now to Mr. Abbey.
    Mr. Abbey. Thank you, Mr. Chairman and Members of the 
Committee, for the opportunity to testify about the Minerals 
Management Service's authority for oil spill financial 
responsibility pursuant to the Oil Pollution Act of 1990. I 
have worked with many Members of this Committee in my role as 
the director of the Bureau of Land Management. On May 28th 
Interior Secretary Salazar appointed me as the acting director 
of the Minerals Management Service. I appreciate the 
opportunity to be part of the Minerals Management Service 
organization for as long as Secretary Salazar needs me.
    Our focus at MMS has been and continues to be dealing with 
the Deepwater Horizon incident, but other important work 
continues to be performed. The enactment of the Oil Pollution 
Act in 1990 and its implementing regulation superseded the 
Outer Continental Shelf Land Act requirements. And today the 
Coast Guard and MMS jointly administer the offshore oil spill 
financial responsibility program. Under this program the Coast 
Guard has authority over vessels and MMS has authority over 
offshore facilities and associated pipelines located seaward of 
the coastline that handles store of transport oil, except for 
deepwater ports.
    This act gave the Secretary of the Interior, among other 
things, the authority to ensure that the designated applicant 
has the financial resources necessary to pay for the cleanup 
caused by oil discharges from covered offshore facilities such 
as the Deepwater Horizon.
    Pursuant to the regulations, each covered offshore facility 
must have a single designated applicant that must demonstrate 
the ability to pay a specified amount ranging from 35 million 
to 150 million, depending upon the worst-case oil spill 
discharge volume. These regulations also prescribe methods for 
demonstrating oil spill financial responsibility and the 
requirements were submitted related information.
    OPA 90 set lower and upper limits for financial 
responsibility coverage; the lower limit of $10 million for 
State waters and $35 million for OCS waters; and the upper 
limit of 150 million. An applicant can demonstrate their 
financial capability to meet their oil spill responsibility 
requirement by self-insurance, commercial insurance, third-
party indemnification, surety bonds or alternative methods at 
the MMS director's approval. For example, under the oil spill 
financial responsibility, BP Corporation chose the maximum 
coverage of $150 million. BP subsidiary, BP Exploration and 
Production, was the designated applicant for Deepwater Horizon 
and was indemnified by BP Corporation, its parent company.
    In the case of an oil spill from an offshore facility, the 
liability of responsible party is not limited to the level of 
their oil spill financial responsibility. The responsible party 
is liable for all removal costs of the spilled oil and also 
liable for damages from the spill.
    It is important to note that under the Oil Pollution Act, 
oil spill financial responsibility programs attempts to balance 
the need for the responsible party to have sufficient financial 
resources available for adequate cleanup in the unfortunate 
event of an oil spill against financial obligations that are so 
burdensome that they result in a chilling effect on the ability 
of smaller companies to operate and do business on the Outer 
Continental Shelf.
    Because there is no cap on a responsible party's liability 
for removal costs, the limits also take into consideration 
additional layers of protections established by OPA 90, such as 
the oil spill Liability Trust Fund which covers costs for which 
the responsible party is unable to provide. The Administration 
supports a significant increase in the liability for operators 
of offshore oil and gas facilities and welcomes the opportunity 
to engage with Members of Congress to figure out where 
appropriate limits should be set.
    Mr. Chairman, this concludes my remarks and I will be happy 
to respond to questions from you or Members of the Committee.
    Mr. Oberstar. Thank you very much, Mr. Abbey, we appreciate 
it. We will have a number of questions for you and Mr. 
Perrelli.
    And Mr. Bennett next.
    Mr. Bennett. Good afternoon, Chairman Oberstar and 
distinguished Members of the Committee. I am grateful for the 
opportunity to testify today about the Oil Pollution Act of 
1990 limits of liability and financial responsibility.
    My role as director of the National Pollution Funds Center, 
or NPFC, in this response covers four areas:
    First, I fund the Federal response, using amounts Congress 
made available from the oil spill Liability Trust Fund, the so-
called emergency fund.
    Second, I ensure the responsible party is advertising its 
availability to pay claims for removal costs and damages. If 
the claimants are not fully compensated by a responsible party, 
they may present their claims to the NPFC for payment from the 
fund.
    Third, I recover Federal response costs and claims paid by 
the fund from any and all responsible parties.
    Finally, I administer the vessel certificate of financial 
responsibility program, which ensures the vessels operating in 
U.S. waters have demonstrated that they are financially able to 
pay their obligations under OPA.
    With respect to limits of liability, the responsible 
parties in this case are liable under OPA for all oil removal 
costs. OPA does provide for a $75 million cap on damage 
liability under its offshore facility provisions, but that OPA 
limit, as with all vessel and facility limits under the OPA, 
may not apply under certain circumstances, including gross 
negligence, willful misconduct, or violation of Federal 
regulations.
    Whether there is any effective cap on liability for damages 
under OPA in respect to Deepwater Horizon has not been 
determined and pends further investigation and coordination 
with the Department of Justice.
    I can't comment further on how costs or damages may 
eventually be shared or apportioned or how liability for costs 
and damages may ultimately be enforced against responsible 
parties or against any other person under the law. I will note 
that BP has stated it does not intend to assert a limit and 
that it intends to pay all legitimate response costs and 
damages.
    The NPFC has provided Federal funding through the OSLTF to 
11,000 spills from all sources over the last 19 years. Since 
OPA was enacted there has not been a spill from either an 
onshore or offshore facility that tested OPA limits provisions. 
Limits are believed to have been exceeded only 51 times, and in 
all cases those have been oil pollution from a vessel. The NPFC 
submits an annual report to Congress on the limits of liability 
and the adequacy of those limits and we can make that available 
to anybody who hasn't seen it.
    With respect to financial responsibility, the NPFC issued 
certificates of responsibility to over 22,000 vessels that are 
required to demonstrate that they can pay if they cause an oil 
spill in U.S. waters. Certificates of financial responsibility 
are not required for vessels under 300 gross tons unless those 
smaller vessels are transhipping or lightering petroleum 
products in the EEZ.
    It is important to note, however, that these smaller 
vessels are still liable under OPA. They are simply not 
required to carry a certificate of financial responsibility. 
This would apply, for example, to smaller fishing vessels as 
well as most pleasure craft. Vessel operators can demonstrate 
that they meet the financial responsibility requirements 
through insurance, self-insurance or a financial guarantor.
    OPA liability limits were amended by the Delaware River 
Protection Act of 2006 which increased vessel limits by 
approximately 40 to 50 percent and created different limits for 
single-hulled and double-hulled tank vessels. NPFC has since 
implemented consumer price index adjustments to vessel limits 
with an interim rule that was published in April 2009 and final 
rule adopted in January of 2010.
    In conclusion, individuals, communities, and businesses 
have suffered as a result of this spill. The OPA regime is 
working to ensure a robust Federal response that those damaged 
from this spill are compensated and the polluter pays. The 
Department supports the administration's review of the existing 
liability regime and we would look forward to working with 
Congress to set liability limits and caps that properly reflect 
the risk associated with oil spills.
    Thank you for the opportunity to testify today and I look 
forward to your questions.
    Mr. Oberstar. Well, excellent.
    Thank you, Mr. Bennett and all members of the panel.
    Mr. Perrelli, much of the testimony this morning from our 
congressional panel and a great deal of conversation about oil 
spill liability and its limits involves one raising the $75 
million to some number above that. As you heard in the previous 
panel, Mr. Gerard was not prepared to respond to what number it 
should be between 75 million and no limit whatever. But also we 
didn't hear a response to the retroactivity. Should they 
increase the limit, whatever we agree upon, above that $75 
million number apply to leases already issued? And in that 
connection, we requested from legal sources that would not--
there would not be a constitutional prohibition, but there 
might be other real legal implications. Could you address that 
issue?
    Mr. Perrelli. Certainly, Mr. Chairman. And let me state at 
the outset I think the Administration supports review of all of 
the OPA liability limitations. And in particular, our view is 
that caps should be removed for offshore drilling, because we 
think that will create the best incentives for ongoing 
activities to invest in the safe technologies that will ensure 
that a spill of this magnitude never occurs again.
    With respect to other activities, onshore activities and 
transport by vessels, we think that those liability provisions 
need review, and we would like to work with Congress on 
deciding what is the most appropriate level at which to set 
caps, if at all.
    With respect to this question of retroactivity, our focus 
is on going forward with the idea that we would like a new 
liability regime to apply to all activities going forward, 
recognizing that there may need to be a reasonable transition 
period to allow orderly transition in the industry.
    Let me take on the last set of questions which relate to 
constitutional or other issues related to making changes in the 
liability structure retroactive. I think we think there are 
very strong arguments that Congress could enact legislation 
that would have a retroactive effect, and indeed Congress 
enacts legislation all the time that has retroactive impacts. 
Here Congress would be enacting broadly to address problems 
related to compensation and cleanup of the oil spills and it 
would certainly have a rational legislative purpose in doing 
so. So we think there are strong arguments with respect to 
constitutional defense.
    More likely these issues may arise in the context of a 
breach of contract action, where I think we also think that 
there are good arguments and there would be substantial 
defenses to breach-of-contract claims. There is no question 
there would be litigation about it, no question there is some 
litigation risk.
    I would note that OPA itself says that Congress is 
reserving its authority to increase liability in this area, and 
so anyone who is going to operate in a context of, for example, 
offshore water drilling, knows that Congress has said 
explicitly in statute that it has the authority to increase 
liability. And so I think that it is difficult for a contractee 
to make the argument that it relied that the law would stay the 
same.
    Mr. Oberstar. Very good, thank you.
    In the administration's May 12th proposal the 
administration recommended--on the matter of standard of 
judicial review for determination or assessments of natural 
resource damages, they recommended change. It appears the 
proposal would change the standard of review from rebuttable 
presumption to arbitrary and capricious test based on review of 
the operating record.
    Why are you proposing this change and what would be the 
significance of moving from rebuttable presumption to arbitrary 
and capricious?
    Mr. Perrelli. In proposing that change, Mr. Chairman, we 
were trying to bring the litigation related to natural resource 
damages more in line with the way litigation on a record 
created by the government normally is done, which is under the 
APA and the arbitrary and capricious standard.
    The development of the record on natural resource damages 
is going to be done by Natural Resource trustees and the 
Federal Government, States, and Indian tribal governments over 
a number of years, and they will compile an enormous record 
documenting the damage here. Our view is that, again in line 
with the way most litigation over a government administrative 
record is conducted, the APA standard of review is preferable. 
We think it will streamline litigation, and again we think it 
is consistent with the way most agencies build records and 
litigate over those records.
    Mr. Oberstar. Mr. Taylor was here a moment ago. I know he 
had constituents outside. If he returns he may ask this 
question, but I will ask it on his behalf. Oh, he is here.
    Legitimate claims, how and where is the term ``legitimate'' 
defined? I ask that for Mr. Taylor and for myself.
    Mr. Perrelli. The term ``legitimate,'' at least as I have 
heard it, has been used by BP. It is not a statutory term. 
There is no term----
    Mr. Oberstar. No statutory definition. The law is quite 
specific about the various factors: removal costs, natural 
resources, real or personal property, subsistence use, 
revenues, profits and earning capacity, public services. Within 
all of those categories I listed, there are very specific 
references for natural resources damage--to injury of, loss of 
or loss of use of natural resources, including reasonable cost 
of assessing the damage, recoverable by U.S. Estate trustee, 
Indian tribe trustee, or foreign trustee. That is very, very 
specific. Real or personal. The law says damages for injury to 
or economic losses resulting from destruction of real or 
personal property recoverable by a claimant who owns or leases 
that property. But it doesn't say whether if you are living 
in--if you are a travel agent in Michigan and your clients drop 
their plans to travel to one of the Gulf States because of 
their concern of the oil spill, whether that person or agency 
has a claim and whether it is legitimate. How would 
``legitimate'' be determined in that circumstance?
    Mr. Perrelli. As I indicated, ``legitimate'' is not a 
statutory term. Our view is that the scope of damages that are 
available under OPA is quite broad. And we certainly recognize 
that this tragedy is going to raise--is going to cause the 
expenditure of funds in many ways that may not have come into 
play in prior implementation of OPA. But I think our view is 
that the definition of damages is quite broad and we anticipate 
pursuing BP and other responsible parties for a wide range of 
damages.
    Mr. Oberstar. And there is a significant body of case law 
on this subject as well that attorneys regularly turn to.
    Mr. Perrelli. There is. Mr. Bennett and his office and the 
Coast Guard are charged with the fund and they have a 
tremendous amount of experience in this area.
    Mr. Oberstar. Mr. Abbey, how many of the firms that conduct 
drilling or production operations in the Gulf of Mexico self-
insure their risks?
    Mr. Abbey. I don't have the specific numbers, but that 
certainly is something that we can share with you for the 
record, if that is fine with you, Mr. Chairman. I will say that 
BP, which you have heard from earlier testimony, was self-
insured.
    Mr. Oberstar. Yes. But in supplying that information, give 
us the size, the value of those operations, and your assessment 
of whether they could or would ensure unlimited liability for 
the facilities. And I asked the previous panel, the reinsurance 
market, is it capable of handling an amount in excess of 75 
million, beyond 10 billion, or unlimited. They didn't have a 
very concise answer to that question.
    Mr. Abbey. We will get you the information you requested, 
Mr. Chairman.
    Mr. Oberstar. Thank you.
    I now yield to Mr. Buchanan.
    Mr. Buchanan. Thank you, Mr. Chairman.
    Gentleman, I represent a district in Florida. We have 50-60 
miles of pristine beaches and our environment--the 
environmental environment in terms of clean water and beaches 
is critical, not only to future generations but obviously to 
our economic viability in our region. And you take into account 
coastal waters and inland waters and everything along there, it 
is probably 150 miles.
    But Mr. Abbey, I guess I want to get your thoughts. I think 
it was wrong that the MMS granted BP exemptions from 
environmental review. From what has happened this has obviously 
been a mistake reported in the Washington Post and other 
things.
    I have got three questions that relate to this category. 
Are these exemptions still being granted, number 1?
    Number 2, can you please tell us why Deepwater Horizon was 
granted these exemptions? And are these exemptions common 
practice or an exception to the rule? Again, I bring this up 
because, you know, I was told for a long time-- because I am 
one member, at least in Florida, that has been against offshore 
drilling as it relates to our beaches anyway. I was told what 
happened in terms of the implosion in the gulf could not 
happen.
    We had the deepwater technology and the capability, so it 
is shocking to me. And we had people who wanted to drill 3 
miles off our beach, and I have been consistently against that. 
So that is why this is so important, because I think the agency 
you are representing is someone that is looking out for the 
American public. And so when I see things like that, and your 
special exemptions, I want to know why that is.
    Mr. Abbey. Well, Congressman Buchanan, first and foremost 
let me say that I grew up in Mississippi, so I am quite 
familiar with the beaches of the gulf out there in the State of 
Florida and what wonderful resources they are. I have spent a 
lot of time down there enjoying the opportunities to swim in 
the gulf and take advantage of other resources in that part of 
your State.
    Let me say that a spill of this magnitude certainly is 
unprecedented and we are learning an awful lot of lessons as a 
result of events that we are currently dealing with in the Gulf 
of Mexico today.
    I don't have the specific numbers of how many exemptions 
have been granted. I would really need a little more 
specificity relative to the exemptions you are talking about. I 
will say this, though. As we go forward we are looking at all 
safety requirements that we have applied in the past. We are 
making changes. We made changes as late as yesterday afternoon 
regarding the issuance of notices to lessees for operations 
both in deepwater as well as shallow waters in the Gulf of 
Mexico. Those requirements for those operators in the shallow 
waters require them to certify that they are meeting many of 
the safety requirements that came out of the 30-day safety 
report that was issued to both Secretary Salazar and the 
President of the United States a couple of weeks ago.
    We are also requiring the CEOs of the companies who are 
operating to actually verify and to sign their names to the 
fact that they are complying with all those new requirements. 
We are taking actions to move forward, based upon the lessons 
that we have learned from this event.
    I am not here to defend past practices for Minerals 
Management Service, but I would also say that there are a 
number of investigations underway, as well as the Presidential 
commission, that are looking into the facts of matter and we 
will let those facts speak for themselves.
    In the meantime there is a lot of business that needs to be 
done. We are looking at the opportunities to improve our 
overall performance so that the safety that you are looking for 
relative to any future drilling is assured.
    Mr. Buchanan. Since the implosion in the gulf, have we been 
giving consistently--or giving exemptions since that implosion? 
Let's not talk about the past too much, but just in terms of 
what has happened in the last, say, 2 months? It is my 
understanding we are still giving environmental exemptions, and 
I can't imagine why we would give any consideration to that.
    Mr. Abbey. Congressman, you are probably talking about the 
categorical exclusion.
    Mr. Buchanan. Right.
    Mr. Abbey. That are allowed under NEPA. Categorical 
exclusions are used when there has been previous environmental 
analysis performed that has been deemed sufficient to cover the 
proposed action from an applicant. We are certainly reviewing 
the environmental requirements that we have placed upon the 
operators in the past. We are looking at making some 
adjustments over the course of the next couple of weeks. We 
have not reached final determination of how we will move 
forward, but I can assure you that that issue is being 
addressed not only within the Department of the Interior, but 
we are working in close partnership with the Council of 
Environmental Quality to determine how best to move forward. Do 
I have more time?
    Mr. Oberstar. Yeah.
    Mr. Buchanan. Thank you, Mr. Chairman.
    The AP reported that since 2005, Deepwater Horizon has 
missed 16 monthly inspections. I guess I want to know how can 
MMS let this happen? Is it common for these inspections to be 
missed? What are you doing to make sure that our rigs are not 
missing their monthly inspections? And are there consequences 
for missing these inspections?
    Mr. Abbey. Congressman, it is my understanding that the 
Minerals Management Service strives to perform inspections once 
a month. That is the goal, that is the target that is 
incorporated into the annual work plans. There are some months 
that are missed as a result of weather that won't allow the 
helicopters to get out in some of the deepwater facilities. 
There may be some other reasons why a particular platform was 
not inspected each month. But it is a goal.
    It is my understanding based upon the records that I have 
read that Minerals Management Service has done quite well in 
meeting that target, not 100 percent by any means, but they 
have done quite well in meeting the targets of trying to 
perform inspections on the platforms that they manage on a 
monthly basis.
    Mr. Buchanan. They are saying they have missed 16 monthly 
inspections. I can understand missing a couple or being pushed 
off. How can you miss 16 in 4 years? That is almost half of the 
inspections.
    Mr. Abbey. Is that just for BP or Deepwater Horizon?
    Mr. Buchanan. Deepwater Horizon. They are saying this in 
the AP report, that they missed 16 monthly inspections, which 
is concerning to me and I think the American people.
    Mr. Abbey. Well, it should be a concern. And I will respond 
back to you in writing if that is OK with you.
    Mr. Buchanan. I would appreciate that.
    With that I yield back, Mr. Chairman.
    Mr. Oberstar. Thank you, and I will recognize Mr. DeFazio.
    Mr. DeFazio. Mr. Perrelli, I am not certain whether you 
were here earlier, but we are pursuing a line of questioning 
that related--one was, how can we secure or could we in some 
way secure some indemnification or assets from BP? I mean there 
have been numerous news accounts that BP may try and shed 
itself of these obligations by going into bankruptcy and 
forming one company over here with everything else that is 
performing well, and another company over there where it 
failed. Do you have any thoughts on that?
    Mr. Perrelli. Congressman, this is an issue--we have 
obviously seen similar reports. It is an issue of real concern 
because we want to make sure that the responsible parties truly 
have the wherewithal to compensate the American people for the 
damage done. So this is something that we have been focused on. 
We are reviewing our options and hope to be able to report back 
to you soon about the action we will take.
    Mr. DeFazio. Then if we look to the future, if we were to 
significantly raise or eliminate liability caps, how in the 
future--what device might we use to segregate assets ahead of 
time, bonding? Are there things you could think of if we wanted 
to significantly increase the cap to be sure that there were 
assets there that couldn't be removed?
    Mr. Perrelli. Certainly I think in addition to looking at 
the liability caps, I think it is appropriate to reconsider the 
certificates of financial responsibility which provide on the 
front end a surety that payments will be available to be made 
in the event of a disaster such as this. So I think the 
administration also believes that we should, one, take another 
look at those and think about whether they need to be adjusted, 
as well as developing additional regulatory authority to allow 
them to be adjusted or modified over time as we learn about new 
or different risks. I think that is certainly a component of 
this.
    Mr. DeFazio. If you can have those thoughts quickly because 
I expect we may act very soon on these issues, we want to do 
things that make sense and provide more security and assurance 
to the American public.
    I would just observe, I am particularly concerned about 
that first one. And I will give you an example right in that 
neighborhood. There was a company, I believe it was called 
Entergy, that both generated and distributed electricity in 
Louisiana. After all their lines blew down in the hurricane, 
they went to the PUC which happened to be captive to their 
interests, and said, we would like to split the company. We 
would like to put our distribution system over here and put our 
energy generation over there. And PUC said, Oh, it is a great 
idea. That would be really efficient.
    So they ended up with a totally bankrupt, destroyed 
distribution system which very much delayed the recovery of 
Louisiana, and, over here, a very profitable and ongoing energy 
producing company. And I worry that BP could do the same thing.
    I hope you have your best and most rigorous people looking 
at how to prevent them from scamming us that way and ducking 
out on what is their problem which they need to pay for in its 
entirety. So, thank you.
    Mr. Abbey, I know you are new to MMS. We usually talk trees 
and forestry issues, but on these I have raised concerns in a 
couple of hearings about the blowout preventers. And there were 
reports and evaluations done by MMS's own employees, in 
cooperation with some engineers from BP and other companies, 
saying there were significant concerns about the capabilities 
of these blowout preventers to sever the pipe and seal off the 
well even if it was in functioning condition--and apparently 
this one was not, at least not optimally--and that with the 
well casings used at those depths and those pressures, that 
these blowup preventers which were designed for much shallower 
depths and thinner gauge pipe just couldn't do the job certain 
percentage of the time.
    Are we going to take steps to require that all of the 
existing wells, let alone new ones, have blowup preventers that 
have proven capabilities to actually work, in addition to 
looking at their maintenance records?
    Mr. Abbey. Congressman DeFazio, we took steps yesterday to 
do just that. We issued a notice to lessees requiring them to 
perform certain checks and tests and to certify by a 
reliability third-party independent reviewer that such tests--
the operations pass those tests and require the CEOs of those 
companies to verify that they are in compliance with all of our 
safety requirements as well as the law.
    Mr. DeFazio. And if they sign that verification, could we 
attach some special sanctions to anyone who might certify that 
inappropriately?
    Mr. Abbey. I would look to Mr. Perrelli to respond to that 
question.
    Mr. Perrelli. I think that the full panoply of possible 
civil and criminal violations for making a false statement to 
the government would be available.
    Mr. DeFazio. Thank you. Thank you, Mr. Chairman.
    Mr. Oberstar. I have raised that question earlier with the 
American Petroleum Institute. They set the standards for the 
blowup preventer. And I asked whether their standards had been 
tested against the pressure of the oil reservoir at 18,000 feet 
below the mud floor and pressures of 2,300 psi to 13,000 psi, 
and the answer was, I don't know. And I asked whether at that 
depth when thicker pipe casing--as you have just referenced--
had been tested in the blowup preventer and whether the shear 
could cut through that thickness of pipe and they said, ``I 
don't know. We will get back to you.'' But they are the ones 
who should know.
    Mr. DeFazio. Right.
    Mr. Oberstar. Mr. Cummings.
    Mr. DeFazio. Could I ask what is the time line on having 
that testing done?
    Mr. Abbey. Before any new wells are drilled.
    Mr. DeFazio. Right. But I am concerned about--there are 
some--as I understand, the blowup preventers are used in both 
the exploratory initial drilling and they are used until the 
well becomes operational.
    Mr. Abbey. Yes.
    Mr. DeFazio. So are there any deepwater wells out there 
where the blowup preventers are in place now?
    Mr. Abbey. Of course there is a moratorium on any new 
deepwater drilling. There are some maintenance actions being 
allowed. They will be required to comply with the notices to 
lessees that we issued yesterday for all those actions.
    Mr. DeFazio. Thank you.
    Mr. Oberstar. Mr. Cummings.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr Abbey, just following up on that, who does this 
certifying? When you say an ``independent party,'' and you know 
there would have been a time I would never even think of asking 
this question. But the integrity of these systems are so 
upsetting, and I see that we just seem to have these gaps where 
people are not doing what they are supposed to do. I am not 
knocking you, I am just talking about in general. I am trying 
to figure out who the certifiers are.
    The Chairman talked about the standard, so who are the 
certifiers and how do we know that we have got the right people 
doing the certification? Do you follow me?
    Mr. Abbey. I do, Congressman Cummings. We are looking to 
engineers, professional engineers, as well as consultants. We 
are also seeking from the documentation that we are requesting 
from the operators to provide us a full listing of the 
qualifications of that third party who they were using to 
verify that such equipment can meet the standards. We will be 
reviewing the qualifications of those consultants for 
professional engineers to make sure that they are the best 
available, at least to the companies, and to have the 
credibility and integrity that they need to provide us as well 
as the American public greater assurance that the actions that 
are going to take place will be done in the safest manner.
    Mr. Cummings. Because one of the things that happens in the 
law is that when somebody goes to a lawyer and asks for advice 
on certain things and the lawyer gives advice, in some 
instances they can go back and say, A lawyer gave me the advice 
and that is why I acted the way I acted. And in some instances 
it can get some consideration from a judge or--in other words, 
if they got into some trouble.
    I just want to make sure, Mr. Perrelli, that if--I don't 
want a situation where we go to a ``certifier'' and then the 
certifier is not legit and doesn't have the qualifications that 
we need. And then, say, BP would say, ``Well, wait a minute 
now, you told me to go to a certifier. I did it and the 
certifier said I am fine.'' And the next thing you know we have 
problems.
    Mr. DeFazio. Would the gentleman yield for just 1 second. 
Excuse me. I have worked together with the gentleman a lot on 
this as relates to the banking and financial services crisis, 
and this brings to mind the ratings agencies. You pay them for 
a rating and they would then ratings shop. We are worried about 
the same thing here, as opposed to perhaps the government 
designating and they are being----
    Mr. Cummings. That is exactly right.
    Mr. Abbey. If I could respond to that concern because it is 
a valid concern. This certification does not take away the 
government's responsibility to do our own routine checks and 
the verification. We intend to continue the inspections that we 
have been performing to make sure that the equipment that are 
being used will also pass our own inspections. But in lieu of 
our own inspectors going out and making a determination in 
every case, we are asking the operators themselves to also 
provide us that third-party independent verification.
    Mr. Cummings. Now, the Chairman may have asked you about 
this because I know it is one of his major pet peeves. But let 
me ask you. How are we and MMS, with regard to people who are 
qualified to even do the inspections, because what we see here, 
it seems like we have got the industry that is speeding along, 
but again as I said a little earlier, they have created a 
monster that they can't control. And so some folks tell us the 
only way it really gets this expertise so far is to be in the 
industry. That is kind of an expensive way, probably, to get 
it.
    So I am trying to figure out what mechanisms are in place 
to make sure that we have the people in place, and government 
doesn't pay what some folks pay, private industry pays. I am 
just trying to figure out what is the plan there. I think after 
this incident I am sure antennas are going up to be even more 
careful with regard to inspections and whatever. But I want to 
make sure and the Chairman wants to make sure that we have got 
people in place to do the inspections.
    We have seen some problems in certain inspections with 
regard to the Coast Guard and some automatic safety matters. 
And we have had people come in and testify to say that they had 
personnel in the Coast Guard that were looking at their 
equipment and giving inspections and that they weren't totally 
equipped to do that. That is a sad commentary.
    But this is where the rubber does meet the road. I am just 
trying to figure out, what do you see with regard to that 
issue?
    Mr. Abbey. Well, the Minerals Management Service 
administers thousands of leases in offshore. We have 61 
inspectors, 11 engineers, devoted to doing those type of 
inspections. Of that 61 inspectors I believe, if I remember the 
numbers right, there are about 50 inspectors within the Gulf of 
Mexico where most of the operations are occurring. As you have 
read and as I have, some of these inspectors have worked 
previously in the industry themselves. They gain experience 
working within the industry. We hire them based upon that 
experience, based upon their abilities to know what to look 
for, how to document any deficiencies that they have noted on 
these platforms, and to report back so that we can take 
appropriate actions to address any deficiencies.
    Mr. Cummings. Just one last thing. Do you know of an 
instance where you sent inspectors out who were not fully 
qualified to do the inspections that we needed done to the 
degree that they needed to be done?
    Mr. Abbey. Congressman Cummings, again I have very limited 
experience with the Minerals Management Service. I am not aware 
of any inspector that is not qualified to do the job that we 
are asking.
    Mr. Cummings. All I am asking, can you give us documents? I 
mean, if you can go back in your files and provide us with 
information, because this is something that the Chairman has 
been really--we sat in a meeting with him yesterday with the 
Speaker. We are all concerned about this. Because we cannot 
have cultures of mediocrity; we just can't. Because there is 
too much at stake. We want to make sure we have a pipeline so 
that we can have the people, if we don't have them in place, 
have them in place so that they can do what needs to be done; 
because we can do all of this stuff, we can have all the 
standards in the world. If we don't have people who are 
competent and people with integrity doing this stuff, we might 
as well be out playing golf or flying a kite.
    Mr. Abbey. We have common goals in that regard.
    Mr. Cummings. Thank you.
    Mr. Oberstar. Mr. Taylor. Excuse me. Mr. Taylor, you are 
next.
    Mr. Taylor. Thank you, Mr. Chairman. Can any of you tell me 
the legal definition of ``gross negligence'' or ``willful 
misconduct'' as it would apply to this instance?
    Mr. Perrelli. Congressman, gross negligence and willful 
misconduct are not specifically defined in the statute. Gross 
negligence----
    Mr. Taylor. OK to that point, Mr. Perrelli. So then it 
really is up to the judgment of a judge?
    Mr. Perrelli. Ultimately----
    Mr. Taylor. Some judge could say 40-something days of 
pushing oil out into the Gulf of Mexico, ruining thousands of 
people lives, 11 deaths, some judge could make an arbitrary 
decision that this is not gross negligence or willful 
misconduct; is that correct?
    Mr. Perrelli. Certainly the interpretation of both those 
terms would be up to a judge. I will say that both gross 
negligence and willful misconduct are interpreted under many 
different Federal statutes. So I think there is an established 
case law, but they are not specifically defined in this 
statute.
    Mr. Taylor. Again, Mr. Chairman, with this point I would 
certainly hope the legislation be drafted, we try to establish 
at least a legal threshold of what would constitute this. We 
don't need--I will leave it at that.
    Secondly, Mr. Chairman, I had asked in last week's hearing 
for a side-by-side comparison of Coast Guard inspections versus 
foreign-flag inspections that were allowed in the case of the 
Deepwater Horizon. It has just in the past few minutes been 
supplied to me by the Coast Guard, and I would ask that that be 
submitted for the record.
    Mr. Oberstar. Without objection, so ordered.
    [The information follows:]
    
    [GRAPHICS IS NOT AVAILABLE IN TIFF FORMAT] 
    
        Mr. Taylor. Mr. Perrelli, again I have only had about 2 
minutes to look at this, so please forgive me if I read it to 
you.
    We will start with structure, stability and loading. If 
that vessel had been U.S.-flagged, the United States Coast 
Guard would have had to conduct a comprehensive holding 
section, a drydock inspection, an internal structural and cargo 
tank inspection, a structural watertight integrity and 
inadequacy.
    Contrast that with a foreign-flag vessel where they do a 
spot check for the condition of doors, cargo hatches, vents, 
railings, ladders, a spot check of stability and--but it gets 
better. When it came to fire safety, had it been a U.S.-flagged 
vessel the Coast Guard would have done a systems equipment 
reviewed and approved plan just to build it. They would have 
inspected for proper installation, they would have tested 
operation of all systems and equipment for compliance, and they 
would witness third-party maintenance inspections, and inspect 
the material condition of fire safety equipment.
    I would contrast that with what did occur, where the Coast 
Guard in this instance, because it is a foreign-flag vessel, 
review certificates of third-party maintenance inspections. So 
basically if the folks in the Marshall Islands, for a fee or 
for whatever reason, chose to just issue a certificate saying 
that these guys are living by the rules, that was good enough.
    Now, Mr. Perrelli, a lot of things will come out of these 
hearings. I would hope one of the things the U.S. Justice 
Department would be insisting for those vessels operating in 
United States territorial waters, they have to live by our 
rules. They can't get a pass from some Third World country that 
says this is good enough. And we as a Nation shouldn't be 
expecting the word of some Third World country that this is 
good enough.
    Obviously there are 11 dead mariners and thousands of 
people whose lives have been affected by this. And Mr. 
Chairman, again, U.S. Territorial waters, we should not relying 
on somebody else's self-checkoff list if they are living by the 
rules.
    Going back to the question of who defines ``gross 
negligence,'' has there been any effort on the part of any of 
your agencies to come up with what you think is a fair 
definition of that in this instance?
    Mr. Perrelli. Congressman, we have not focused on writing a 
definition, but we would certainly be happy to work with the 
Committee if you were looking at drafting a new definition for 
that.
    Mr. Oberstar. If the gentleman would yield. We will ask--
following your earlier question, I discussed with counsel a 
request to Justice Department for drafting assistance in 
formulating the principles that you enunciated.
    Mr. Taylor. Mr. Abbey, under the Federal response plan, we 
are both from Mississippi, just this week I inspected the 
contractors that BP hired as far as their land cleanup. I 
visited one of their vessel-of-opportunity operations. And, 
again, they are trying. What I don't see is a comprehensive 
plan to try to keep the oil from getting Mississippi's barrier 
islands and Mississippi's beaches.
    Is your agency, is the Coast Guard, is anybody within our 
Nation the lead agency to look over what should be a 
comprehensive plan? And in the absence of a comprehensive plan, 
is anyone stepping forward to say this is what it ought to look 
like?
    Mr. Abbey. Congressman Taylor, are you talking about after 
the spill or before the spill?
    Mr. Taylor. Yes, sir. I am talking about right now, what I 
don't see--and, again, I am asking this in the form of a 
question----
    Mr. Abbey. Yes.
    Mr. Taylor. Are you, is the Coast Guard, is any--is the 
Department of Homeland Security, does anyone have the legal 
authority to turn to BP and say, ``This is what your response 
plan ought to look like. We gave you 40-something days to come 
up with one and we are not satisfied with what you got.''
    Mr. Bennett. Congressman, I can answer that, in that the 
national incident commander, Admiral Allen, and the FOSC are 
senior, running the response, so they do have the authority to 
direct BP and any response efforts--and that can be pretty 
broad--that they deem are required to respond to this incident.
    Mr. Taylor. Sir, that is my whole point. Is anyone giving 
them a specific list of things to do based on the mistakes that 
were made in Louisiana and apparently the mistakes that are 
being made where water washed up on the Florida panhandle? Is 
anyone giving them a list saying, You need more skimmers out 
there, you need a greater presence, don't wait for it to hit 
the beach? I am asking this in the form of a question because I 
don't know the answer. I am not so certain this is an answer 
coming from our Nation.
    Mr. Abbey. Let me address that. I spent 3 weeks down in 
Robert, Louisiana at the Joint Command Center. There are 
reports and requests received each day by that joint command 
indicating what supplies are needed in order to accomplish the 
goals that are being laid out to protect the resources along 
the Gulf Coast. Based upon those requests there are decisions 
that are being made by the incident commanders to move forward 
and to provide the supplies and the actions that are necessary 
in order to meet those goals.
    So, as already alluded to by Mr. Bennett, there is an 
incident commander that is in charge, who has full authority to 
move forward with any actions deemed necessary in order to 
address your concerns.
    Mr. Taylor. Lastly, I know I am over my time Mr. Chairman, 
but for the record, are any of your agencies stepping forward 
to propose a new generation--since we all got caught flat-
footed on this one--are any of your agencies stepping forward 
to propose a new generation of blowout preventers, skimmers, 
containment booms, collection booms? Because it is just a sad 
fact that this technology has not really progressed one iota in 
the past 20 years. And we sat back and hoped that the private 
sector would do it. They didn't.
    Are any of your agencies making recommendations of what 
those things ought to look like now?
    Mr. Bennett. Congressman, I can speak for the Coast Guard, 
and probably everybody, that this event is of such magnitude, 
the answer is yes, everything is on the table, and everything 
is being looked at, and no stone will be left unturned as to 
where we go to make it right for the future and that all risks 
are taken account.
    Mr. Taylor. Thank you, sir.
    Mr. Oberstar. And further to the gentleman's question, and 
I have discussed this with him and with Mr. Cummings, we are 
going to--in the crafting of legislation we are going to set 
standards for the Coast Guard and regime under which the Coast 
Guard and Minerals Management Service both can acquire the 
skills, the know-how, the understanding and technology of this 
industry to be able to do the certification and do the 
oversight that is necessary and to do it with knowledge of the 
industry. We have got to get closer to the airline sector than 
we are today in maritime safety.
    This regime that exists where the Coast Guard is limited to 
inspecting foreign-flagged vessels to the standards of the 
International Maritime Organization, which allow only a 6- to 
8-hour review compared to 2- to 3-week review of a U.S.-flagged 
vessel operating in our territorial waters--these are two 
widely different standards and unacceptable. But more important 
is the reality that the Coast Guard doesn't have the personnel, 
the skills, the training, the equipment to do the certification 
that is necessary. Anyway, we are going to follow-up on those 
points.
    Mr. Garamendi.
    Mr. Garamendi. Mr. Chairman, thank you for putting this 
hearing together. It is an extraordinary hearing and it is 
setting the stage for some very, very important legislation.
    Earlier we talked about the financial liability issue. I 
just came from an interview and I was asked a question--I guess 
this goes to the Attorney General--I was just asked a question 
that BP has accepted responsibility; what if they turn around 
and say, Well, but there are limits to the liability? What 
action and what opportunities are available to us to hold them 
to their earlier and present acceptance of full responsibility 
and full payment?
    Mr. Perrelli. Mr. Congressman, we will unquestionably 
pursue them to require them to fulfill their promise. I would 
note that there are many legal avenues that we can pursue to 
ensure that they pay the full measure of damages here, whether 
it's BP and Transocean or other potential responsible parties.
    We talk often about a liability cap. As I mentioned in my 
opening statement, it is conditional. It does not exist if 
there is gross negligence or violation of any safety, 
operational, or construction regulation that could be deemed to 
have proximately caused the explosion.
    I would note that my colleagues at the Minerals Management 
Service have many, many regulations. And so we anticipate that 
whether or not BP intends to fulfill its commitments, we will 
pursue BP, Transocean, whoever are the responsible parties, to 
the fullest extent we can.
    Mr. Garamendi. Exactly so. But, however, that pushes the 
responsibility to the government to prove negligence or the 
other factors that you just described. Nevertheless, I am 
pleased to hear your response.
    The second point I want to raise is that let us assume BP 
really is going to wind up in financial trouble as a result of 
this. There are rumors circulating that BP is interested in 
providing some $10 billion of dividend going out to their 
shareholders. If that is, in fact, what they intend to do, do 
you have the ability to issue an injunction to tell them to 
hang on to that money, that it might actually be needed for 
cleanup?
    Mr. Perrelli. We are concerned. We have seen reports with 
respect to BP. We have also seen reports about Transocean and a 
planned dividend. And we are concernedthat--well, we want to 
ensure that these companies have funds available to compensate 
the taxpayers, the individuals harmed throughout the gulf, the 
families of the individuals who were killed or injured. So we 
are looking very closely at this, and we are planning to take 
action. As I indicated previously, we will report back to you 
once we have decided on what steps to take.
    Mr. Garamendi. I will tell you what an insurance 
commissioner in California did when faced with the situation 
where an insurance company that was in trouble decided that 
they would take the assets and run. I went to court the next 
moment, got what amounted to an injunction, hung on to the 
money so that it was available to the policyholders. I would 
highly suggest that the Justice Department take whatever action 
is necessary to make sure that none of these companies in this 
particular moment during this period of time is allowed to 
issue any dividends, to move any of their assets away from the 
company to the shareholders or to anyone else. If you don't do 
that, I am going to be all over you in a way that you will not 
like.
    Mr. Perrelli. We share your concern.
    Mr. Garamendi. Because I have been there, and I have done 
it, and I know it can be done.
    Mr. Oberstar. Thank you, Mr. Garamendi, and for adding your 
expertise in this insurance area, which is very, very valuable 
for us.
    Mr. Cummings, you had a few more questions.
    Mr. Cummings. Mr. Chairman, just two questions.
    I want to go to you, Mr. Abbey. I was just reading this 
report by the Department of Interior, and it is talking about 
the problems that they had at MMS. And I am trying to figure 
out what are we doing to turn around that culture where people 
are--a confidential source said MMS is expected to allow oil 
and gas production company personnel located on the platform to 
fill out inspection forms. So, in other words, the company was 
self-certifying and basically committing fraud, Mr. Perrelli. 
Fraud. That is what I consider this.
    When I think about the accepting of gifts and things of 
that nature, I am trying to figure out, first of all, have 
there been people who have been fired? What have we done to 
begin to straighten this mess out now, because MMS is still 
conducting business. And I want to make sure that people who 
are basically--who we think are guarding us and taking care of 
us are not stabbing us in the back. And that is exactly what 
this is.
    So the question is--I know you have only been there a short 
time, but what is being done to turn that culture around? 
Because I am assuming some of those people are still there, and 
that is a major problem. Major.
    Let me tell you another reason why it is a major problem. 
One of the things about leadership is people, if they trust 
you, they will submit and say, OK, I know you have got 
everything under control, and it will work out. This report 
basically says we can't trust the very people that we are 
supposed to trust and that we pay to guard us.
    So what is being done to turn that culture around? I am not 
blaming you because you are new, but I want to know what is 
going on.
    Mr. Abbey. That is fine. I appreciate you asking the 
question.
    First and foremost, it is my understanding, Congressman 
Cummings, that the allegation that industry employees were 
filling out those forms in pencil and sending them in to the 
inspectors, and all the inspectors were doing was writing--or 
using their pens to write over the pencil----
    Mr. Cummings. Traced over them.
    Mr. Abbey. It is my understanding based upon the documents 
that I have read is that that is unfounded. That did not occur. 
I have seen those same reports that you just alluded to, but it 
is my understanding, based upon follow-up reviews, that did not 
take the case.
    As far as other deficiencies or other allegations of 
misconduct, Secretary Salazar has been very adamant from his 
very first day as Secretary of the Interior to implement a very 
high standard of conduct based upon our own ethical values that 
we have within the Department of Interior to make sure that all 
of our employees understand what the expectations are and that 
they are going to be held accountable.
    Let me also say that even though I have a short period of 
time with the Minerals Management Service as the Acting 
Director, I have had the pleasure of working with MMS employees 
for many years in many different roles. I have found everyone I 
have ever associated with or worked with to be professional and 
ethical. And even though there are some findings based on the 
reviews that have been conducted, and I am sure there may be 
some other deficiencies noted in the ongoing investigations, it 
is our intent to look at every deficiency that may come about 
from these reviews, and we are going to deal with those 
deficiencies in the appropriate manner.
    Mr. Cummings. Thank you very much, Mr. Chairman. I just 
want to make sure that when these kinds of reports come out, I 
am hoping--and I know you are there, and those are the people 
you work with, but if we have reports like that, I can't 
believe they just fell out of the sky. So we need to--and I 
would hate for us to have this kind of information and then 
just sort of dust it up under the rug and say, oh, that doesn't 
exist; everybody is the greatest employee that ever lived. I am 
sure 99.9 percent of them are. But at the same time, I think we 
need to be very careful with that.
    Mr. Abbey. No one is more irritated about the conduct of 
some of those employees than the employees of the Minerals 
Management Service because it does bring this scrutiny, this 
allegations of inabilities, incompetence to the table, and no 
one is very happy with that.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Mr. Oberstar. Thank you for raising that issue.
    Mr. Abbey, it is in your interest and that of the 
administration to be squeaky clean. So you have made a 
statement absolving those implicated of having engaged in 
illegal activity, falsifying records. We need independent 
verification of that. You have an inspector general in the 
Department, and that IG office should take this issue under 
review and submit a written report with his findings and be 
specific about it. We do that with the U.S. Department of 
Transportation. I know Interior is not directly under the 
jurisdiction of this committee, but I think that is in your 
interest and the administration's best interest.
    Mr. Taylor.
    Mr. Taylor. Thank you, Mr. Chairman.
    Mr. Perrelli, I happen to represent the district where 
Katrina hit. A lot of homes were destroyed outright. A lot of 
homes were damaged by wind. A lot of homes were damaged by 
water. Those homes that were damaged by water, I have repeated 
questions from homeowners saying, what if that water that did 
all that damage last time; what if this time it has got crude 
mixed in with it?
    Now, it is my understanding that the refinery in Chalmette, 
Louisiana, when the dam burst there flooded approximately 1,800 
homes, and it took them several years of litigation for the 
refineries to pay those 1,800 homeowners what they were due. 
Now that there has been a legal precedent set in that case and 
other cases, I am making a request of you. I think you can give 
a great many Gulf Coast residents or coastal residents around 
this country--if your Department would step forward and say the 
precedent has been set, even if it is an act of God, that that 
company is responsible.
    I would like you to respond to that.
    Mr. Perrelli. I can't speak to the prior incident, but if 
we are talking about the Deepwater Horizon incident, I think it 
is pretty clear that there is damage to property arising out of 
oily water that has come from the Deepwater Horizon. I don't 
think there is any question that falls within the category of 
damages that should be compensated. Those individuals should be 
able to bring a claim to BP, and if BP doesn't satisfy it, they 
would then be able to bring it to Mr. Bennett at the fund.
    Mr. Taylor. I have heard you say it verbally. You have just 
said it on television. For the sake of the coastal America, I 
would like to see that in writing. The reason being, people 
shouldn't have to go to court. You shouldn't have to hire a 
lawyer. You shouldn't have to wait years to get paid. And I 
think if BP knew what the ground rules were from the Justice 
Department, they would be more likely to settle those claims a 
lot quicker.
    Mr. Perrelli. I think the whole idea behind OPA was so that 
people wouldn't have to go to court and wouldn't have to spend 
years waiting when their property was damaged as a result of an 
oil spill.
    Mr. Taylor. Thank you, Mr. Chairman.
    Mr. Oberstar. You have heard it very clearly. This is from 
the front line of those in harm's way from this tragedy.
    I have a question for the panel, perhaps more for Mr. 
Bennett. We talked just in this exchange about next-generation 
technology and certification and bringing Coast Guard personnel 
skills to a new level and to a new reality, that is of dealing 
with deepwater drilling. How should the development of those 
skills be funded? Could it come out of the trust fund without 
having to go to a direct appropriation?
    I draw a comparison with the Aviation Trust Fund.Airline 
passengers pay on their airline ticket tax into the Aviation 
Trust Fund, which finances construction of runways and 
taxiways, which pays for the facilities and equipment that is 
the air traffic control technology that guides aircraft safely. 
It pays for 80 percent of the operations of our air traffic 
control system, meaning the controllers. Is it fair to draw a 
parallel between these two?
    Mr. Bennett. Mr. Chairman, I think it would be fair. In 
fact, as you probably know, in addition to paying for response 
costs and claims, the trust fund is already available to fund 
implementation and capacity of implementing OPA 90 to several 
Federal agencies. So I don't think it would be unreasonable to 
look at the trust fund as a potential source of funding to--if 
needed, to do more support to any agencies that need extra 
resources.
    Mr. Oberstar. Thank you for that.
    The categorical exclusions that are listed in the Code of 
Federal Regulations were first adopted in 1986, and then 
reaffirmed in 2004 by the previous administration. There is a 
list of a dozen such categorical activities that qualify for 
categorical exclusion. I am really surprised when I read number 
10, approval of an offshore lease or unit exploration 
development production plan in the central or western Gulf of 
Mexico in areas of high seismic risk or seismicity, relatively 
untested deep water.
    That qualifies for a categorical exclusion, Mr. Abbey?
    Mr. Abbey. Well, I am not familiar with the article or----
    Mr. Oberstar. Don't they have to go through the NEPA 
process to drill.
    Mr. Abbey. Mr. Chairman, there is NEPA that you have to 
adhere to. And many of the actions that are being approved 
through categorical exclusion are being addressed in some 
manner with previous NEPA documentation or environmental 
analysis. Whether or not the Minerals Management Service has 
utilized categorical exclusions appropriately is one of those 
areas that we have under review right now in cooperation with 
the Council for Environmental Quality. We are looking at how 
this bureau or this agency has been using categorical 
exclusions to authorize some of those specific actions, and 
based upon that joint review, we will make a determination what 
we might need to do differently.
    Mr. Oberstar. Well, my review of these 15 categorical 
exclusions looks to me--I have done a fair amount of this kind 
of work over the years--was written by the industry, for the 
industry, for its own benefit. You need to take a broom and 
sweep through this whole listing and clean it up. Clean house 
with this. This is shocking. We would never see anything like 
this in aviation. We have never seen anything like this in the 
Motor Carrier Safety Administration. This is appalling, and it 
needs a house cleaning.
    Mr. Abbey. I cannot disagree with you as far as the use of 
categorical exclusions and the appropriateness of categorical 
exclusions.
    Mr. Oberstar. We look forward to the receipt of the 
information requested in the course of this afternoon's hearing 
within 10 days, because we expect to draft legislative language 
in cooperation with the Minority on the Committee and to be 
part of a package of legislation to be introduced at the 
Speaker's request before the July 4 recess. So that gives us 
about 3 weeks to get all this work completed. We look forward 
to hearing from you.
    Thank you very much for your testimony and for your 
dedication to public service. The Committee is adjourned.
    [Whereupon, at 4:47 p.m., the committee was adjourned.]
    
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