normally do and provide a disincentive, we would certainly consider something like that.

I believe that there has been a proposal made in the Senate to amend OPA 1990 to do something similar to that. That's currently under review.

Mr. TAYLOR. May I ask-and, again, the chairman has been very generous. I will wrap it up by saying I will ask you to give some thought to that. If you can put some recommendations along those lines in writing, I would certainly appreciate it.

Mr. SHEEHAN. Yes, sir.

Mr. TAYLOR. Thank you, Mr. Chairman.

Mr. COBLE. The gentleman from Tidewater, Virginia, Mr. Baker. Mr. BAKER. Mr. Chairman, I'm in my listening and reading mode this morning, so I have no questions.

Mr. COBLE. Thank you, sir.

Mr. Sheehan, again, we appreciate your being here, and I thank you for your testimony.

We will ask the second panel to come forward, if they will.

I will introduce the second panel as they advance to the podium: Mr. Richard H. Hobbie, III, president, Water Quality Insurance Syndicate, also representing the American Institute of Marine Underwriters, known as AIMU; Mr. Chris Horrocks, secretary general, the International Chamber of Shipping; Mr. John Gallagher, chairman of the board, Gallagher Marine Systems, Inc.; and Svein Ringbakken, chief counsel, International Association of Independent Tanker Owners, known as INTERTANKO; and Mr. Winthrop Wyman, vice chairman, OMI Petrolink Corporation.

Gentlemen, it is a pleasure to have you all before us. If you all will do as well as Mr. Sheehan did-and, I repeat, nobody is going to be penalized if you violate the 5-minute rule, but there are five of you, and if you could stay within, on, or about that 5-minute time frame, we would be appreciative.

If you all have a preference of your order of appearance, I'll leave that to you. If not, I can start with Mr. Wyman and work our way to my right. I'll let you all make that call. Mr. Wyman, you will be first.

When the red light appears, that means that the 5 minutes have elapsed.

TESTIMONY OF RICHARD H. HOBBIE, III, PRESIDENT, WATER QUALITY INSURANCE SYNDICATE, ALSO REPRESENTING THE AMERICAN INSTITUTE OF MARINE UNDERWRITERS (AIMU); CHRIS HORROCKS, SECRETARY GENERAL, THE INTERNATIONAL CHAMBER OF SHIPPING; JOHN J. GALLAGHER, CHAIRMAN OF THE BOARD, GALLAGHER MARINE SYSTEMS, INC.; SVEIN RINGBAKKEN, CHIEF COUNSEL, INTERNATIONAL ASSOCIATION OF INDEPENDENT TANKER OWNERS (INTERTANKO); AND WINTHROP WYMAN, VICE CHAIRMAN, OMI PETROLINK CORPORATION

Mr. WYMAN. Thank you, Mr. Chairman. Good morning to the members of the committee.

My name is Win Wyman. I'm vice chairman of OMI Petrolink in Houston, a company that provides lightering service-in fact, the

only U.S.-owned, American-owned lightering services in the Gulf of Mexico.

company that

providers

It is my pleasure to be here this morning, and I appreciate the opportunity to share my thoughts with you on the impact of the COFR, which was implemented right at the end of 1994.

OMÍ Petrolink has been in business since 1987. We were a profitable business until 1995, when we sustained major losses. A very substantial portion of those losses can be attributed directly to the cost of compliance with COFR requirements, and I'll try to explain why.

Petrolink is a $50 million company which has employed as many as 100 persons, right now about 25 percent less. We provide lightering services to companies that charter large, very large, and ultra large crude carriers to bring oil to feed the refineries in the United States.

Our company provides the mooring master and all equipment and supplies needed for lightering the ships, which typically make several trips from a mother ship especially the larger ones to the port, delivering the cargo to the refineries.

We own a number of supply boats, lightering support boats, but we charter the vessels that are needed to bring the oil into port. Typically, these ships bring in oil in 500,000 barrel lots.

The vessels we charter must carry $700 million in P&I pollution coverage; in other words, the basic $500 million and $200 million optional. We require that and our customers require it of us.

Since December 28, 1994, vessels have complied with this COFR requirement by either self-insuring, if the owner has sufficient U.S. assets, or by purchasing coverage from, as everyone knows here in this room, from Shoreline or Firstline, two Bermuda companies which were set up for that purpose.

For the size vessel we need, the cost of a COFR purchased through Shoreline can be up to $12,000 for each of the first 20 voyages. I understand that for Firstline it can be more than that.

This cost is paid by us, one way or another. It's either paid directly by us to the ship owner, which is frequently a condition of the charter party, or, if the vessel is owned by a company which is large enough to self-insure, the ship chartering market being as competitive as it is, it's reflected in the cost.

Under normal market conditions, the owner that self-insures can obtain a time charter for his vessel higher, more or less, by the amount that these Bermuda companies charge to the smaller companies.

If we charter a vessel for an entire year-and this is something we've had to start doing with the implementation of the P&I surcharge and the COFR-in order to spread the 20-voyage cost over a lot more voyages, since we do very short sea voyages, we can reduce the daily cost impact to down around $700 or $800 per day per ship. I say "down," but in our business that's a lot of money. The more ships we have to charter for an entire year, the greater our carrying costs are during times when lightering volume is low. The business is not rateable. It tends to fluctuate seasonably.

If we charter ships, which we do, on a voyage basis, in times of high demand for lightering, the added cost of COFR insurance multiplies. I'll try to explain that.

It's simply that, since the owner has to pay for each call, and if we do a lightering in three or 32 days, we divide the cost of that call by the 32 days, so it can be up to $4,000 a day extra for the COFR.

We can't generally pass these costs along to our customers, simply because we operate in a market where one of our primary competitors owns its own lightering vessels and self-insurers. That competitor, which happens to be foreign-owned and includes a significant foreign government equity interest, is organized also to pay little or insignificant taxes to the U.S.

Their lightering rates don't have to be raised to take into account the added COFR cost because they are large enough to self-insure. So lightering is a very competitive business, thin-margin business. When we try to raise our rates to cover our additional cost, we lose business. Our COFR insurance costs come out of our pockets.

In 1995, we paid more than $1 million in COFR costs. A new and sudden $1 million cost for a $50 million company is staggering. And what do we get for it? Insurance that provides no additional funds for cleanup damages, since all ships of the size we charter must belong to P&I clubs.

COFR coverage only provides a guarantee for a fraction of the P&I club coverage in the unprecedented event the P&I club should refuse to honor its coverage. This is insurance that's unlikely to be needed and which could, if it were simple excess coverage, be obtained in the normal insurance market for a very reasonable costthat is, if the OPA requirements related to policy defenses and direct action were either not controlling or somehow settled with the clubs.

No matter the original intention of OPA, the COFR requirement has resulted in two primary impacts. First, it has created winners and losers. Whether that was the intended or not, the market is now divided into those who can self-insure and do not have to pay the additional premium cost, and those who cannot and must assume this enormous expense.

Of course, it's the biggest companies that can afford to self-insure and the smallest ones which cannot.

Petrolink is, in fact, a good example of the small-to medium-sized businesses that are the economic backbone of this country, but as a result of the enormous cost of COFRS, companies like Petrolink are finding it more and more difficult to maintain our business.

If the smaller businesses that are the competitive engine of a market economy are forced out of business, the market is defaulted to the larger self-insured companies who can then raise their prices with less resistance. This is precisely what may happen in the Gulf of Mexico lightering business.

OPA may have the perverse effect of handing the Gulf lightering market on a silver platter to a large foreign company, forcing out a business that has been a profitable U.S. company with an exemplary safety record.

The second major impact of the COFR requirements results from extreme prices that must be paid for what, in all likelihood, will be a non-producing asset. When Congress makes a decision that we must spend our money in this manner, the funds must come from

somewhere. Vessel owners operate in a highly-competitive market with small operating margins. Funds for the COFR payments must compete with the funds needed to train employees, undertake audits and inspections of operations, and numerous other activities. Everyone agrees that human error is the overwhelming cause of most spills. Most people also acknowledge that more attention needs to be focused on preventing spills. But COFR tends to tie the hands of the smaller operator. OPA forces us to spend a very substantial portion of our limited revenues on what is essentially a short-lived and non-producing asset. By forcing this on us, OPA takes away our ability to spend more money on items such as crew training, vessel inspections, new equipment, and so forth.

Choice is what this is all about. Congress has made the choice for us on where we are to spend our limited funds. We believe this decision needs to be re-examined, and we urge this committee to undertake that effort.

Protecting the environment is important to ship owners. It is important to us. We just want to make sure that the funds spent help ensure a clean environment, are directed to the most effective means of achieving that goal.

I very much appreciate the opportunity to appear before you. I apologize for taking a little extra time.

I'd be happy to answer any questions that you may have.

Mr. COBLE. Thank you, Mr. Wyman.

Gentlemen, we have a vote on, but, Mr. Gallagher, can you be heard in about 5 minutes, do you think? Why don't we hear from you; then we'll go vote and come back.

Mr. Gallagher?

Mr. GALLAGHER. Thank you, Mr. Chairman, members of the subcommittee.

My name is John Gallagher. I'm chairman of Gallagher Marine Systems, Inc., and we're a company that provides spill response management services to more than 400 tank vessels in U.S. waters. I'm also the director of the Center for Marine Environmental Protection and Safety at the Massachusetts Maritime Academy, where we create training and teach industry and government in response to marine oil spills in compliance with the OPA 1990 requirements.

Responding to spills for more than 25 years, I have been involved in probably more than 100 spills, including such notable ones as Argo Merchant, Exxon Valdez, and the Desert Storm oil spill in Saudi Arabia.

For the most part, I've acted in the role of spill response manager, hiring, directing, and compensating oil spill contractors mobilized to clean up oil on the water. I've also worked with academia, ship and cargo owners, underwriters, and State and Federal Government agencies.

I served as a member of the panel convened by the General Accounting Office to evaluate Coast Guard responses in connection with legislation triggered by Argo Merchant in 1976.

My interest in testifying today is a concern that the features of OPA 1990 are counterproductive and wasteful of economic resources without providing any identifiable benefit.

Among the measures that I feel in OPA 1990 do this are the change requirements in OPA 1990 concerning certificates of financial responsibility.

My unique experience may be of benefit in evaluating the efficacy of the COFR requirements, and of some use in addressing the problems that have been created by them.

During the years I have been in this business, I have worked extensively with reliance on support from the P&I clubs. I've obligated many millions of dollars on behalf of owners-millions of dollars which have been readily and unfailingly supplied by a P&I club. At no time before or after OPA 1990 had I any reason to be concerned with or have recourse to written contracts. The clubs have always been there.

In view of the trouble-free history of the P&I clubs, both prior to and subsequent to OPA 1990, it appears that the changes in OPA 1990 appear to try to fix something that wasn't broke.

In addition to mandating financial backing, the law now gratuitously and unnecessarily requires that the provider also become a guarantor of that backing. For reasons that others testifying here today would be more qualified to present, the clubs have found it impossible to be a guarantor or out in front of their insured. Vessel owners are therefore forced to pay heavy premiums to a new breed of insurer for a redundant, unproductive, and unneeded layer of in

surance.

These COFR guarantors provide coverage which, though meeting the terms of the new COFR requirements, run very little risk of having to pay out on liabilities. Because it precludes traditional P&I support for COFRS, interpretation of the COFR requirements provides an inordinate windfall for the COFR guarantors.

They collect substantial premiums from a great number of vessels entering U.S. waters, while, as a practical matter, the P&I clubs continue to provide the financial support for spill responses. In responses I have managed since OPA 1990, I continue to look to and be supported by the P&I clubs, with no concern with or interest exhibited by any COFR guarantor. Guarantors have not played a part in financial support of any of the oil spills which have occurred, to my knowledge, since the creation of these enti

ties.

Because of the increased premiums, ultimately increased costs to the consumer inevitably result from this situation. The consequences are that a substantial hemorrhaging of financial resources occurs, with no corresponding improvement of environmental protection or support responses.

Such wasted resources would be much better directed toward something which actually provides protection for the environment or better supports response. I urge that serious consideration be given to eliminating the needless and costly extra layer of insurance they have spawned. If this is properly done, the ability and dedication of vessel owners to respond would be undiminished. At the same time, an utterly useless and wasteful dissipation of financial resources would be eliminated.

I sincerely appreciate the opportunity to make this presentation to the committee, and I trust that my comments will be helpful in the deliberations.