Guam should join Hawaii, Alaska and Puerto Rico for Jones Act reform

Wednesday, 08 Feb 2012 Marianas Variety

TERMINATION of transpacific container service by Horizon Lines in October 2011 spotlights the need for Jones Act reform that would provide regulatory relief for the Territory of Guam and return competition to the domestic Guam trade.

Horizon’s departure has left Guam with a single Westbound common carrier, Matson Navigation Company, which now operates as a true monopoly here. No other U.S. shipping company is likely to provide service to Guam because of the extremely high cost of U.S.-Built ships needed to operate in the trade. Foreign shipping companies are prohibited by the Jones Act from carrying cargo in the domestic Guam trade. This precludes those foreign carriers operating regularly scheduled transpacific container services from calling Westbound at Guam.

Matson’s Guam service is not subject to the kind of effective rate regulation often imposed on monopolies. In the past, the ocean common carriers operating in noncontiguous trades of the U.S. – Guam, Hawaii, Alaska and Puerto Rico – were regulated with some effect by the U.S. Federal Maritime Commission (FMC) on a rate of return standard. The Interstate Commerce Commission (ICC) Termination Act of 1995 created the Surface Transportation Board (STB), transferred noncontiguous rate regulation to the newly created agency, and changed the regulatory scheme to a rate cap model with a “zone of reasonableness” standard for ratemaking. The result was a vague regime for ocean rate regulation in the noncontiguous trades and a new regulatory agency with a primary focus on railroad oversight that has paid scant attention to the ocean carriers and has little competency in that area.

The regulatory issue is particularly acute with the lack of transparency and accountability in respect of fuel surcharges, aka bunker adjustment factor (BAF). The convention is that a BAF should compensate a carrier just for the additional cost of the ships’ bunker fuel due to higher oil prices, and the normal cost of bunker fuel is understood to be included in the freight rate. While bunker costs normally represent around 30 percent of a deep sea liner shipping company’s overall costs, Matson recently announced they will be charging a BAF of 45.5 percent effective Feb. 26, obviously recovering at least 100 percent of their bunker costs through a BAF.

Thus, in the Guam trade, Matson is protected from: foreign competition by the Jones Act; domestic competition by the high cost of U.S. shipbuilding; and from facing real rate regulation by reporting to an ineffective administrative agency. These protections grant Matson great latitude to set Guam ocean freight rates and surcharges as they desire.

The Jones Act is a federal law that governs domestic shipping and imposes four basic requirements on vessels carrying cargo between two domestic points. A Jones Act vessel must be: U.S.-Flag, U.S.-Crewed, U.S.-Owned and U.S.-Built. While most coastal countries around the world have similar kinds of laws and regulations that are generically known as cabotage, the U.S. system is so restrictive it has been referred to as “supercabotage.” This regulatory burden falls most heavily on the noncontiguous jurisdictions because they lack interstate surface transportation alternatives to ocean shipping.

Guam is currently the only noncontiguous domestic jurisdiction exempt from the U.S.-Build requirement of the Jones Act. However, this provision of the law provides little practical benefit because the sustainability of any domestic Westbound container service to Guam is linked to the Hawaii trade, which requires U.S.-Built vessels.

The recent termination of the Horizon service clearly demonstrates this linkage. For 40 years, beginning in the mid-1960s, Horizon’s direct predecessors Sea-Train, U.S. Lines, Sea-Land Service and CSX Lines operated a weekly Westbound service from the U.S. West Coast, Hawaii, Guam and onto East Asia with U.S.-Flag, U.S.-Built container ships. By 2005, Horizon could no longer continue this service because their fleet was too old (averaging 35 years) to operate on the challenging transpacific route. And, replacing their old ships with new U.S.-Built ones would have been far too expensive.

Therefore, Horizon restructured their Guam service with a string of five U.S.-Flag, Foreign-Built container ships operating on a transpacific loop that bypassed Honolulu because their new Foreign-Built ships were not eligible to carry domestic cargo there. Although switching to newer and cheaper Foreign-Built ships allowed Horizon to modernize and continue their U.S.-Flag service to Guam, they had to forgo the lucrative Jones Act cargo on the U.S. West Coast-Honolulu leg and lost their priority for higher paying U.S. preference cargo. The cost savings derived from operating new Foreign-Built container ships could not make up for the lost Westbound headhaul revenue leading Horizon to terminate their restructured transpacific service in 2011 after sustaining significant losses.

In contrast, Matson successfully operates a profitable weekly transpacific service on the U.S. West Coast/Hawaii/Guam/China loop employing a string of five U.S.-Flag, U.S.-Built container ships. Matson is the successor to the Westbound service operated from the U.S. West Coast to Guam by American President Lines (APL) from the end of World War II until the mid-1990s. Although Matson’s overall fleet averages 25 years of age, they have put their newer container ships on the long transpacific route and run their older ships on the shorter routes between the U.S. West Coast and Hawaii.

Without a doubt, had Horizon been allowed to use its five U.S.-Flag, Foreign-Built container ships to carry cargo between the U.S. West Coast and Hawaii, their transpacific service would still be operating and calling Westbound at Guam today. This case clearly demonstrates why the U.S.-Build requirement of the Jones Act is such a key economic issue for the noncontiguous jurisdictions.

The very high cost of U.S. shipbuilding severely inhibits the interstate common carriers in the noncontiguous trades from replacing their oceangoing ships at regular intervals necessary to maintain a modern fleet. This has led to an aging and inefficient common carrier fleet in the domestic noncontiguous trades that now averages 28 years old. The cost of constructing large self-propelled ships in the U.S. is approximately three times more than in South Korea and Japan, where wage levels are at first world levels. The active major shipbuilding yards in the U.S. have constructed fewer than three ships per year since the mid-1980s, and there are only three remaining major shipbuilding yards taking orders for new commercial ship construction.

An exemption from the U.S.-Build requirement for all the U.S. noncontiguous jurisdictions would not only benefit Hawaii, Alaska and Puerto Rico, but would also provide significant relief for Guam too. Such an exemption would generally reinvigorate the noncontiguous trades, facilitate the entry of new operators in to those trades with modern and cost-effective new Foreign-Built ships, and create a more competitive pool of operators and ships for U.S.-Flag service. These changes would surely lead to another U.S. operator calling Westbound at both Honolulu and Hagåtña challenging Matson with real competition in the Guam market.

There is a great deal of support on Guam for a full exemption from the Jones Act that would allow Foreign-Flag ships to carry cargo in the domestic Guam trade. This would give us in Guam the same exemption as our neighbors in the Commonwealth of the Northern Mariana Islands. However, a full exemption would be very difficult for Guam to achieve and its benefits may not be as great as commonly believed, because the mainline transpacific operators are unlikely to call at Guam with their existing ships due to their large size. Perhaps a full exemption can be a longer-term goal that could be achieved through our ongoing political status negotiations with the federal government or even by cooperating on a territorial exemption with Puerto Rico.

In contrast, seeking an exemption from the U.S.-Build requirement for all the noncontiguous jurisdictions is a far more realistic goal that would provide tangible relief for us on Guam in the near term. Furthermore, we are far more likely to obtain relief by joining forces and working together with the other three noncontiguous jurisdictions on this proposed Jones Act reform rather than trying to achieve a full Jones Act exemption by ourselves.

Therefore, I believe we on Guam should join with Hawaii, Alaska and Puerto Rico, and work together as a group to achieve an exemption from the U.S.-Build requirement for all the noncontiguous domestic jurisdictions.

Van R. Shelly,

Nissan Motor Corp. President and CEO, Guam

Related: US-Build requirement for ships: Dilemma for Hawaii, Guam, Alaska, and Puerto Rico