OPA guaranty. We have built in a defense that says that the execution of the OPA guaranty is solely for OPA and CERCLA and shall not be used in a State court action. If a State court tries to assert jurisdiction over a guarantor on the basis of the execution of the Federal guaranty, the guaranty allows the guarantor to invoke that defense.

Mr. TAUZIN. I want to give you a specific example of how that might come into play. If a guarantor has not submitted to State jurisdiction, has not agreed to be a guarantor under State law and this rule now permits that policy defense to be asserted against the execution of a State law, what type of State law would not operate against that guarantor as a result of that defense?

Mr. HOROWITZ. My thought is that if a State enacts a law that says that a guarantor that provides an OPA guaranty automatically consents to jurisdiction of the State for a State law claim, that is the type of a situation where this defense could be invoked. That doesn't mean that a State, of course, having an independent basis for asserting jurisdiction over an insurer, can't do that because OPA does not preempt State law. That is a fundamental OPA precept, but we want to make it clear, that in executing the Federal guaranty, that alone does not act as a concession to State law jurisdiction.

Mr. TAUZIN. Specifically, if a guarantor wants to allege that the shipper has defrauded the guarantor in statements made with reference to the condition of the vessel or the operation of the vessel, is that a defense that is available to the guarantor?

Mr. HOROWITZ. Those would be in the range of the traditional policy defenses which would not be available.

Mr. TAUZIN. Which would not be available?

Mr. HOROWITZ. That is correct. The only defense in that situation would be the willful misconduct of the responsible party so if some misrepresentation rose to the level of willful misconduct, maybe that would be a defense. But traditional policy insurance defenses, would not be available.

Mr. TAUZIN. So if a guarantor became a guarantor under these rules and he did so under the belief that a vessel was constructed a certain way or operated in a certain way and that was erroneous, the guarantor would still be called to respond?

Mr. HOROWITZ. Yes.

Mr. TAUZIN. Would the normal policy defense of failure to pay a premium be listed as a defense assertable by a guarantor under this rule?

Mr. HOROWITZ. No, it would not be, though these are

Mr. TAUZIN. So that in normal insurance practice, if I don't pay my insurance and never make my premium payment, as I have agreed to do, my insurance company would still cover me?

Mr. HOROWITZ. That is correct, for this guaranty.

Mr. TAUZIN. Can you explain to us why in your regulations you have chosen not to allow the guarantors these rather normal policy defenses?

Mr. HOROWITZ. Because the purpose of these regulations is to ensure that there are funds available in the event of an oil spill and those are the types of defenses which can be invoked to avoid that result. We felt that the purpose of ensuring that funds are avail

able is not served by allowing those defenses. This is a guarantee, not an insurance policy, per se.

Mr. TAUZIN. Please explain the difference for us between what you consider a guaranty and an insurance policy.

Mr. HOROWITZ. Congress specifically in creating guarantor status for providers of financial responsibility was mindful of the fact that it wanted to ensure that funds would be available, and if the whole host of policy defenses could be invoked, that assurance would not be there and then U.S. taxpayers may be left paying the bill through the trust fund.

Mr. TAUZIN. You have obviously concluded that some policy defenses are OK and some are not.

Mr. HOROWITZ. That is correct.

Mr. TAUZIN. How did you decide that a policy defense that would not subject yourself to State jurisdiction was OK, and how that might not leave people uncovered. Yet at the same time, you do not allow a rather common policy defense-that the parties haven't paid the premium?

Mr. HOROWITZ. The policy defense for State law jurisdiction doesn't apply to OPA 90 and CERCLA, which are the measures that Congress has mandated here. We are not dealing with payments under State law. That is for States to deal with. We felt that it was very rational for us to insulate a guarantor in that case against the alleged potential for unlimited liability under State law. We are only looking for a Federal guaranty, not to ensure payments under State law.

Mr. TAUZIN. We have been told that there are some new lines of insurance. I understand that, according to the information that we received, these new lines of insurance have not in fact submitted a formal request to the Coast Guard to be found acceptable; is that correct?

Mr. HOROWITZ. That is correct.

Mr. TAUZIN. All we have is a possibility that they are going to be filing these requests and the possibility that they may be found acceptable?

Mr. HOROWITZ. That is correct.

Mr. TAUZIN. What we do know is that the current forms of coverage through P&I clubs, as you have indicated, can't or will not provide evidence of financial responsibility under these regulations. So, we are left with a situation where with the rules you have promulgated, the current customary form of coverage through P&I clubs may not be liable and likely not to be available. And the other new insurance forms have not yet filed with you, both you and I don't know whether they will, and whether you will accept them once they have filed. What have we wrought here?

Mr. SHEEHAN. Sir, I would like to respond to that. We went into this final interim final rule looking at that possibility and certainly with the view that the P&I clubs would not change their stated positions they have put forward over the last three years and in response to the preliminary Regulatory Impact Analysis which we prepared in July and published. We received a wide range of comments because we looked at the economic impact of this particular rulemaking. And, we have on the docket two poten

tial insurers who have indicated their willingness to step forward and come to the National Pollution Funds Center

Mr. TAUZIN. Have they indicated what rates they are going to charge?

Mr. SHEEHAN. No.

Mr. TAUZIN. I am being told that it may be nine times what the shippers are paying now.

Mr. SHEEHAN. We have taken the conservative view of seven times.

Mr. TAUZIN. You have heard seven times.

Mr. SHEEHAN. That was a calculation that we did.

Mr. TAUZIN. Are you comfortable with placing the shipment of critical oil supplies for America in a situation where the current insurance forms may not be available and everybody may have to buy coverage at nine times-seven times current rates?

Mr. SHEEHAN. Mr. Chairman, as we indicated in the rulemaking, we do not believe that a train wreck is going to occur.

Mr. TAUZIN. I didn't ask you that. I said are you comfortable with the rules that currently seem to indicate that shippers are going to have to pay seven times as much for coverage as they formerly did.

Mr. SHEEHAN. Yes, sir, I am comfortable with the fact

Mr. TAUZIN. Have you examined the economic impact on the consumers to America? What is that going to be, the total bill?

Mr. SHEEHAN. Our analysis indicated less that two-fifths of a cent at the pump.

Mr. TAUZIN. What is the total bill, Mr. Sheehan? Do you have it in dollars for us.

Mr. SHEEHAN. I do not have the total number.

Mr. TAUZIN. Has anybody done that in the Coast Guard?

Admiral KRAMEK. We have that and we request to provide that for the record.

[The information may be found at end of hearing.]

Mr. TAUZIN. I would suggest that we advertised this hearing for a long time. If the Coast Guard has done an economic analysis, it ought to be here today. Is anybody prepared to give us the number of the impact upon consumers in America of a seven-fold increase in the cost of coverage?

Mr. SHEEHAN. We did that in the final regulatory economic analysis. I don't have the number.

Mr. TAUZIN. Suppose somebody could get on the phone and get the number and give it to us today.

Mr. SHEEHAN. Yes.

Mr. TAUZIN. We will continue with other questions, but I would respectfully request

Admiral KRAMEK. We boiled that down to the impact to the consumers of America to be two-fifths of one cent a gallon at the pump.

Mr. TAUZIN. I have heard that answer. My question was what is the total dollar impact as calculated in your economic analysis. You tell me that you have it but you cannot share it with us. When will you have it?

Mr. SHEEHAN. Before the hearing is over.

Mr. TAUZIN. When will the Coast Guard know whether these new forms of insurance will, in fact, be available to shippers?

Mr. SHEEHAN. The two entities at this point are putting together their plans. They have indicated that they are going to be coming into the Coast Guard for approval within the next two to three months. I have a meeting on Friday with the representatives of one of the organizations. We will put them through the standard review that we do with other insurers.

We also have the surety bond market which has come forward and said that they will provide surety bonds for the provision of certificates of financial responsibility. We have had a rather large increase in the number of inquiries about entities who would wish to self-insure.

Mr. TAUZIN. Well, if I am looking at a conservative timetable, you are telling me several more months before you know they are ready to submit. It is now approaching August. We have got a December timetable. I take it you cannot assure me that every shipper will be able to buy this insurance, even if they have to come up with seven-times current rates. How do we know that by December this thing will all be in place and working?

Mr. SHEEHAN. I think that we will have an indication in advance of the December 28th date.

Mr. TAUZIN. Like when? When will we be comfortable in knowing these new insurance forms that are going to replace the old insurance forms are, first, available to every shipper, second, acceptable by every shipper and, third, actually subscribed to by enough shippers to guarantee no interruption in supply.

Mr. SHEEHAN. I would indicate in the next few months. Surety bonds are available today; self-insurance is an option.

Mr. TAUZIN. We have been told that these new lines of insurance may not want to cover certainshippers who do not have financial assets adequate enough to justify coverage. Have you received similar comments or concerns?

Mr. SHEEHAN. We have talked to the surety companies and they have said that they are indeed going to be available. They will look at fleets in terms of their total makeup and in terms of their assets. They said that there may be some fleets, which due to their total net worth as well as their operational record, they will choose not to provide bonds for.

Mr. TAUZIN. Not to cover them. What will happen to those fleets who could be turned down by the sureties and by the new lines of insurance?

Mr. SHEEHAN. I think that with the marketplace, with the surety bond companies and the two insurers, that they are going to have to make a judgment when they come to buy insurance whether or not they are going to be covered. And if I were a

Mr. TAUZIN. What happens to a fleet that can't get this insurance?

Mr. SHEEHAN. They will have to trade somewhere else.

Mr. TAUZIN. They can't come to America.

Mr. SHEEHAN. That is correct. If they can't provide

Mr. TAUZIN. Therefore, these rules are likely going to limit somewhat the number of fleets that come to America. Is that right? Mr. SHEEHAN. They may.

Mr. TAUZIN. Have you calculated in your economic analysis the costs to the American consumer of limiting the choice of shipments and the volume of fleets available to deliver supplies to America? Mr. SHEEHAN. No, we haven't.

Mr. TAUZIN. You haven't calculated that at all!

Mr. SHEEHAN. We don't believe that that is a calculation which can be done at this point in time, sir.

Mr. TAUZIN. The reason I ask this, Mr. Sheehan, is that we received concerns and comments from some folks that we could see as high as 50 percent of the current oil supplied to the U.S. get shifted from current vessel operators to only those qualified under this rule. That is a mighty big shift if that actually occurs.

Have you received any comments or concerns that it could be as high as that level?

Mr. SHEEHAN. In the docket we received a number of comments that said if there were no alternatives available, this might be the end result.

Mr. TAUZIN. What would be the result of a 50 percent shift in oil supplied from vessels currently serving the United States ports to the remaining qualified vessels?

What is the effect of that on deliverability, security, and price in terms of shipments?

Have you not looked at that at all?

Mr. SHEEHAN. We have looked at the issue of the oil companies' fleet mix versus the independent mix. We have been told in the meetings, where API sat with the Secretary of Transportation, that the oil companies would be able to self-insure. They currently provide about 23 percent, as we understand it, of the oil that comes

in.

We also understand that under the self-insurance route that they could extend that to vessels that they bareboat chartered. That would be one means of doing it. We do not rule out the possibility and we anticipate that the other lines of coverage, surety bonds, the alternate insurers and we think that there may be other insurers that come forward to fill in this gap. We do not believe that there is going to be a 50 percent reduction or shift in trade.

Mr. TAUZIN. Mr. Sheehan, you don't believe it. I hope you are right.

Mr. SHEEHAN. So do I, sir.

Mr. TAUZIN. But I have heard from folks who say that is a distinct possibility. I am asking once again, recognizing that there are people who believe that possibility whether they are right or wrong, have you done an analysis of what kind of effect would a 50 percent shift in the oil supply delivered to America from fleets no longer qualified to only fleets that would meet your new qualifications have?

Mr. SHEEHAN. No, sir, we have not done that analysis.

Mr. TAUZIN. So we have no idea what that effect could be on consumers or on the supply of oil to America? You have no idea? Mr. SHEEHAN. We have not done that analysis.

Mr. TAUZIN. If you are right, everything is OK. If you are wrong, you don't know and cannot predict the effects and have not tried to do so.

Mr. SHEEHAN. That is correct.