coverage, be obtained in the normal insurance market for a very reasonable cost if the OPA requirements relating to policy defenses and direct action were not controlling.

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 what

was intended or not. The market is now divided into those who can self-insure and do

not have to pay additional premium costs and those who cannot self-insure and must assume this enormous expense. And, of course, it is the biggest companies that can afford to self-insure. Smaller companies cannot.

Petrolink is a perfect example of the small to medium size 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 their 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 of business what has been a profitable U.S. company with an exempiary safety record.

The second major impact of the COFR requirement results from the extreme

prices that must be paid for what, in all likelihood, will be a non-producing asset. When

Congress makes the 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 very small operating margins. Funds for 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 in essence a short-lived and non-producing asset. By forcing this expense on us, OPA takes away our ability to spend more money on items such as crew training, vessel inspections, new equipment, etc. 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 re-examined and we urge this Committee to undertake this effort. Protecting the environment is important to shipowners We just want to make sure that the funds spent to 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 today to review the impact of the COFR requirement. I would be happy to answer any questions you may

have.

The American Petroleum Institute (API) is writing to provide the Subcommittee with its views for inclusion in the June 25, 1996 hearing record concerning the status of the marine oil transportation industry's compliance with the financial responsibility provisions contained in §1016 of the Oil Pollution Act of 1990 (OPA'90). API member companies transport large volumes of petroleum and petroleum products into and within the United States, as well as own and operate sizable tanker and tank barge fleets under both U.S. and foreign registry. API member companies also charter a significant portion of the world's independent tanker and tank barge tonnage responsible for carrying the bulk of the imported oil that makes up approximately half of the United States' petroleum consumption. As a result, API has followed closely developments surrounding the ability of the world's tanker industry to comply with the Coast Guard's Final Rule entitled "Financial Responsibility for Water Pollution Vessels" (CGD 91-005), 61 FR 9264.

API strongly supports the goals of OPA'90 to reduce the risks of oil spills and to provide a rapid and effective means of responding to an oil spill. We understand that a critical component of this goal is that vessel owners and operators have the financial means available to meet potential liabilities which may occur after a spill. We endorse the principles codified by the Coast Guard in the final rule that the polluter pays and that funds should be available without legal action. Nonetheless, we believe the financial responsibility issue has always been a technical insurance issue, not an environmental issue.

Congress clearly demonstrated its intentions to provide flexibility and discretion to responsible parties in evidencing the increased financial responsibility called for by OPA '90. The law explicitly provides that the financial responsibility requirements may be established by any one or by any combination of six methods, which the Secretary

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July 26, 1996
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of Transportation determines to be acceptable. The Explanatory Statement of the OPA '90 Conference Committee noted that the Secretary of Transportation's authority in this regard "was to foster a continuing market for providers of financial responsibility." Despite this flexibility, the Coast Guard chose to interpret the statute narrowly. It decided that direct action must be available against an “insurer”, specifically defining the word "insurer" to include Protection and Indemnity (P&I) Clubs. The Coast Guard's rule, therefore, effectively prevented vessel owners from using this established, economical and efficient system to satisfy financial responsibility requirements under OPA '90.

As a result, during the fourth quarter of 1994, as the December deadline approached, companies scrambled to find new methods of financial responsibility which were agreeable to the Coast Guard. Many oil companies and their marine affiliates were able to meet the self-insurance requirements and were able to provide financial guarantees for their fleets. Some large U.S. and foreign-based independent vessel owners also appear to have been able to secure financial guarantees for their vessels. Still, more than half of the world's tanker capacity have been required to enroll in specialty insurance entities which, ironically, require proof of enrollment in a P&I Club as a condition of subscribing to their service. It is reported that tens of millions of dollars are being invested in these entities which merely provide a means for receiving a certificate of financial responsibility (COFR), a piece of paper which allows an owner to trade to the United States. API believes that this represents an inefficient use of scarce capital and ultimately an unnecessary charge to U.S. consumers.

Vessel owners will, out of necessity, continue to carry P&I insurance. P&I Clubs offer coverage far in excess of OPA'90 limits, and are, in fact, contractually obligated to indemnify the vessel owner if he breaks the limits of liability up to the policy limits of $500 million or $700 million where excess coverage has been obtained. Over the past ten years and particularly in recent spill events, the P&I Clubs have demonstrated an impeccable record of paying for oil spill response and clean-up costs. While the Clubs have confirmed that they are not interested in insuring the additional risks associated with being "guarantors” under OPA'90, API continues to believe that Congress gave the Coast Guard significant discretion to write a COFR rule which would allow vessel owners to utilize their P&I coverage. In API's view, as expressed in the O'Melveny and Myers memorandum filed in the docket of the COFR rulemaking, this could be accomplished while still maintaining OPA 90's provisions for direct action against "guarantors." Indeed, API has endorsed options such as utilizing P&I Club coverage

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as an asset for self-insurance purposes and the assignment of right-of-claim, both of which provide a means for using P&I insurance to prove compliance with OPA'90 financial responsibility requirements without requiring changes to the underlying law.

In conclusion, while tankers continue to trade to the United States and methods exist for owners to prove financial responsibility for these vessels, it cannot be said that the best, most cost-effective and least burdensome system for achieving this goal has been chosen. API believes that the COFR rule has been written in a way where millions of dollars are being spent with little or no commensurate value in terms of increased environmental protection. The rule only assures that some entity independent of the responsible party will be available to be sued directly by claimants. API is confident that the tanker industry, working with the U.S. Coast Guard and relying on the guidance of your Subcommittee, can design a better, more cost-effective system to allow vessel owners to prove financial responsibility while providing maximum protection for U.S. coasts and waterways.

We appreciate your consideration of our comments on this matter. We look forward to hearing from you should you require further input on specific aspects of our views.