2

The effects of a disruption in our foreign oil supply would be disastrous. Close to 75 percent of the crude oil and approximately two thirds of the refined product imported into the United States in recent years was carried aboard independent vessels. If independent vessel owners cannot obtain Certificates of Financial Responsibility from the Coast Guard because of unavailability of affordable insurance, there will be a major shortfall in our oil supply. If the supply of oil to the independent refineries is disrupted, shortages will occur not only in gasoline and heating oil, but also in jet fuels, fuels for military aircraft, and electricity production. The gasoline lines in this country following the 1973-1974 Arab oil embargo were caused by a shortfall of less than 6 percent of the nation's domestic consumption. Obviously, there is a potential for a much greater disruption under the present circumstances.

Another concern of ours involves the Coast Guard's position that it is appropriate for cargo owners to obtain surety bonds or otherwise enable a tanker owner to obtain a Certificate of Financial Responsibility on a voyage-by-voyage basis. Several of us were members of the Conference Committee for the Oil Pollution Act of 1990 that specifically rejected cargo owner liability for oil spills. The responsibility for insurance coverage lies with the vessel owner, and it is not acceptable to require cargo owners to indirectly assume a vessel owner's liability because no suitable insurance alternative exists.

Α

This year, about 45 percent of our foreign oil supply has been imported by independent oil refineries. Independent oil companies simply cannot afford to act as cargo guarantors. disruption of oil supply to independent refineries would have disastrous effects on their businesses and employees, as well as on the businesses and consumers who depend on them to supply their products.

Finally, we are concerned because there may be many safe, responsible vessel owners who are unable to obtain Certificates of Financial Responsibility using the insurance options currently available. The regulations implementing the requirement for Certificates of Financial Responsibility should not cause U.S. or foreign vessel owners who operate safely in U.S. waters to go out of business. This would concentrate control of oil transportation resources, and have an anticompetitive impact in the world oil market. If safety is not an issue, market forces should control who operates in the international oil transportation business. Implementation of the certificates of financial responsibility requirement under OPA' 90 should not control the supply of vessels that are available to transport oil to the

We encourage you to delay implementation of this Final Rule until there are insurance options available, which are both affordable and reliable for U.S. and foreign vessel owners to obtain Certificates of Financial Responsibility from the Coast Guard. The consequences to our economy and to the citizens of our country of forcing a premature deadline are simply too great to risk.

CERTIFICATES OF FINANCIAL RESPONSIBILITY

A COST BENEFIT DISCUSSION

The present Certificate of Financial Responsibility rulemaking presents an excellent opportunity to examine regulatory costs in terms of the value received.

Background

OPA-90 created a scheme to finance oil spill damages and clean-up costs that involves contributions by both the spiller and the owners of the oil. In the marine transportation context, the shipowner is liable for these costs up to a limit of liability. Above that, the risk is spread to cargo owners and their customers through a tax on refinery receipts. This tax finances the $1 billion Oil Spill Liability Trust Fund. If the shipowner fails to respond to a spill, this fund will also pay the shipowner's share of the cost so that all injured parties are assured of compensation and funds are always available to clean up the spill.

A shipowner's limit of liability is based on vessel size. The average large tanker that enters U.S. ports would have a liability limit of approximately $115 million.' Shipowners mutualize oil spill liability with other shipowners through Protection and Indemnity Clubs which insure 95 percent of the oceangoing fleet. Standard P&I coverage for oil spills is $500 million, about $475 million of which is underwritten by Lloyds of London through a reinsurance contract with the P&I clubs. The clubs are organized to reimburse or "indemnify" shipowners for the costs incurred in paying covered liabilities.2 Under this mutualization and reinsurance scheme, the major portion of oil spill liability risk is spread internationally through premiums or "calls" on all club members. Another portion is concentrated in the United States through a "per-call" surcharge on shipowners whose tankers call here. To manage these risks, the Club rules require the shipowners to mitigate damages3 and operate their ships in a responsible manner.

To maximize the probability that a shipowner's funds will be available to respond to an oil spill, OPA-90 calls upon the Coast Guard to issue Certificates of Financial Responsibility based upon a showing that the shipowner is financially capable of responding to a spill up to the limits of liability. OPA-90 also states that anyone who provides evidence of financial responsibility for the shipowner will be considered a "guarantor" and be subject to direct suit by injured parties.

The P&I clubs have indicated that they would not be interested in insuring the additional risks associated with becoming guarantors under OPA-90 and would not be in a position

This assumes a 150,000 deadweight ton tanker which is about the size of the average large tanker that enters U.S. ports. The $115 million includes $5 million which is the maximum limit of liability under CERCLA

2 This is generally called the "pay-to-be-paid" rule.

3 Called the "sue-and-labor" rule.

to provide evidence of financial responsibility under a regulatory system which furthered this concept. Although Lloyds has not spoken as an institution on the issue, the indications are that those underwriters would not be interested in this business either.4 Thus, under any rule that contains guarantor status for insurance companies, P&l insurance generally would not be available to shipowners to provide evidence of financial responsibility.

Seventy percent of the crude and petroleum products transported by water in the United States are carried by relatively small independent shipping companies." A similar, if not greater, percentage of small operators carry the imported oil that makes up about 50 percent of America's petroleum consumption. Without the ability to use P&I insurance to demonstrate the ability to respond to an oil spill, most of these small shipping companies could not qualify for a COFR."

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Despite this reality and a great deal of discretion in the matter the Coast Guard appears intent on issuing a final rule that would require these independent shipowners to provide guarantors for their liabilities thus eliminating P&I insurance as an option for establishing financial responsibility. While acknowledging this could cause economic chaos, the agency appears to justify this regulatory approach with the assumption that their proposed rule will create a new insurance market and a new insurance facility will emerge to provide guaranties for these smaller companies. In fact, promoters of two new Bermuda-based companies have provided comments to the rulemaking docket indicating that they would insure shipowners and guarantee their liability for oil spills under federal law. One such group has also publicly stated that they would require $400 million in premiums to issue the guarantees needed under the Coast Guard's proposed rule. These premiums would be in addition to existing P&I "calls" as it is believed that no shipowner would be willing to give up its existing insurance.

This is the best case. Many commentators have observed that the likelihood of this new facility emerging is small particularly due to the reluctance of Lloyds to reinsure these risks. Nevertheless, it provides a basis for comparing costs versus benefits of the proposed rule.

4

See quote of Richard Youell, a leading Lloyd's underwriter in Lloyd's List, April 23, 1994: "You can lead a horse to water but you cannot force an underwriter to drink the poisoned draughts of the Oil Pollution Act."

5 Final Report, Economic Analysis of Alternatives for demonstrating Financial Responsibility under the Oil Pollution Act of 1990, Nathan Associates Inc, April 14,1994.

6 Ibid.

7

Most commentators predict a rationalization of the fleet serving the country providing a shortage of vessels to carry its commerce as the most probable consequence of the proposed rule.

3

Benefits

Oil spills of any consequence aren't regularly happening in the United States as the Coast Guard and cargo owners have been doing an excellent job of screening vessels that come here. Thus, the risk of an oil spill occurring that would test the performance of the P&I system is small. Moreover, the P&I clubs' performance in supporting their members in the United States and worldwide has been outstanding. Consequently, the risk of a shipowner defaulting on its obligations because a P&I 2 club didn't perform are small as well. Combining these probabilities, the risk of the Oil Pollution Fund having to pay the shipowner's share of a spill is even smaller yet. Nevertheless, it could happen, and for the sake of debate we could assume a very conservative five percent annualized

occurrence rate.

A convenient method of monetizing the cost of such occurrences for analytical purposes is to multiply the probability of something happening times the cost of that occurrence. In this case, it would be 5% times the high average limit of liability of $115 million. The product is $5.75 million a year. This represents the potential annualized cost to the fund and, conversely, the presumed value of a regulatory regime designed to create a market for a new insurance facility that would provide guaranties for shipowners.9

Cost

Assuming that a new facility will emerge to guarantee the shipowner's performance, the cost to the American economy of creating these guarantors for the shipowners will be about $400 million.10

Conclusion

Considering only one year's premium, the cost of this regulation exceeds the benefit by almost 70 times. Moreover, the same consumer base will pay the $400 million cost of guarantors as would be paying the $5.75 million potential cost to the fund if no guarantors were in place. The President has ordered that: "Each agency shall assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned

8 Commentators on the rulemaking have proposed alternative approached that would reduce this risk even further while allowing the use of P&I insurance. See December 17, 1993 comments to the regulatory docket by "A Coalition of Eight American Shipping Companies."

9 Guarantor status also contemplates direct suits by injured parties against the guarantor. The reader is left to evaluate the positive or negative aspects of this attribute, particularly in face of the administrative alternative provided in OPA-90 for the administrative settlement of claims by the Oil Spill Pollution Fund. 10 Some of this premium will return to the United States in the form of claims payments. However, the existing P&I system will return the same amount so this $400 million is considered the costs of the "guaranty" that will protect against the need for the fund to pay out $5.75 million annually due to P&I insurance failure.