Rep Pierluisi announces release of GAO Jones Act Puerto Rico report
by Michael Hansen, Hawaii Shippers Council
Representative Pedro R. Pierluisi (PDP / D), the Resident Commissioner of Puerto Rico to the U.S. Congress, issued a press release today announcing the release by the Government Accountability Office (GAO) of their report on the economic impact of the Jones Act on Puerto Rico.
In response to the GAO report which identified insufficient domestic capacity to carry liquid and dry bulk cargoes to Puerto Rico, Rep Pierluisi intends to introduce legislation to assist shippers of energy – including liquefied natural gas (LNG) and refined petroleum products – and agricultural supplies including feed grains and fertilizers in the domestic noncontiguous Puerto Rico trade.
The solution Rep Pierluisi identified for the liquid bulk cargoes would be to allow foreign flag vessels in to the domestic Puerto Rico trade, his remedy for the dry bulk market is less well defined and he states it would be his intention to “relax” the Jones Act restrictions in this sector of the trade.
Because the GAO review of the domestic liner container trade between the U.S. Mainland and Puerto Rico is inclusive, Rep Pierluisi deferred on this sector despite the fact that this is the most important ocean transportation sector in the domestic Puerto Rico trade.
LINK: PUERTO RICO--Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones Act
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Pierluisi Announces Release of GAO Report on the Economic Impact of the Jones Act in Puerto Rico
Resident Commissioner intends to introduce legislation in light of report’s findings
News Release from Office of Rep Pedro Pierluisi, March 20, 2013
Washington, DC—Today, Resident Commissioner Pedro Pierluisi announced the release to the public of a 41-page report prepared by the U.S. Government Accountability Office (GAO), the non-partisan investigative arm of Congress, entitled “Puerto Rico: Characteristics of the Island’s Maritime Trade and Possible Effects of Modifying the Jones Act.” The report, which Pierluisi requested in May 2011, is the most comprehensive analysis of the Jones Act’s impact in Puerto Rico that has been conducted to date. The report identifies several areas where Jones Act-qualified bulk cargo vessels are not available to meet the legitimate economic needs of individuals and businesses in Puerto Rico, namely with respect to the maritime transportation of energy supplies, agricultural inputs and commodities, and other products from the U.S. mainland. Accordingly, the Resident Commissioner intends to introduce legislation to relax the Jones Act to enable the shipment of natural gas and other fuel products from the U.S. mainland to Puerto Rico, thereby reducing the cost of electricity, improving air quality, and making Puerto Rico a more attractive place to raise a family and conduct business. In addition, Pierluisi will introduce legislation to relax the Jones Act to provide economic relief for Puerto Rico’s farmers and ranchers, enhancing their ability to purchase agricultural inputs and commodities that are not available in Puerto Rico from the U.S. mainland rather than effectively limiting them to importing those products from foreign countries. Pierluisi believes these bills will be mutually beneficial to the economy of Puerto Rico, which is a U.S. jurisdiction, and the national U.S. economy. The Resident Commissioner has not ruled out the introduction of additional legislation on this matter following further study of the report and consultation with stakeholders.
Puerto Rico is subject to Section 27 of the Merchant Marine Act of 1920, commonly known as the Jones Act. The Jones Act requires that maritime transportation of cargo between ports in the United States be carried on vessels that are owned by U.S. citizens and registered in the United States; built at shipyards located in the United States; and operated with predominantly U.S. citizen crews. As the GAO notes in its report, Puerto Rico “depends heavily on maritime transportation to move goods to and from the island.” As in other non-contiguous areas of the United States that rely upon maritime transportation, whether they are states or territories, there is a vigorous debate in Puerto Rico on the question of whether the Jones Act raises the cost of domestic shipping and harms the Island’s economy.
At Pierluisi’s request, the GAO report examined maritime transportation to and from Puerto Rico and analyzed how the Jones Act affects this trade. The GAO also assessed the possible effects of modifying the application of the Jones Act in Puerto Rico. The GAO extensively reviewed information relevant to the issue and spoke to a wide range of stakeholders, including during a visit to Puerto Rico in April 2012.
As the GAO report details, most of the cargo shipped between the U.S. mainland and Puerto Rico is carried on 17 container vessels operated by four Jones Act carriers. These carriers provide regularly scheduled, weekly service between the Port of San Juan and five ports in New Jersey, Florida and Texas. The GAO notes that this cargo is primarily consumer goods and raw materials related to the manufacturing of pharmaceuticals and medical devices.
According to the GAO, the remaining maritime trade between the U.S. mainland and Puerto Rico is shipped on bulk cargo vessels, which carry dry bulk goods (such as fertilizer, animal feed and grains) and liquid bulk goods (such as oil and other fuels). Unlike scheduled container services, bulk shipping services are generally based on unscheduled operations. At least three Jones Act carriers were identified by the GAO as offering bulk services between the U.S. mainland and Puerto Rico. However, the GAO reports that, according to multiple sources in Puerto Rico, only “a limited number of qualified Jones Act vessels may be available at any given time to meet shippers’ needs.”
“I requested this report to better inform the important public policy debate over the economic impact that the Jones Act has in Puerto Rico, and I want to thank the GAO for its diligent efforts. This report makes a unique and substantial contribution to our understanding of the full range of costs and benefits to Puerto Rico from the Jones Act,” said Pierluisi.
The Resident Commissioner pointed to an important observation made by the GAO in its report, namely that “[b]ecause of freight rate differentials or the lack of availability of Jones Act vessels for certain products, the Act may cause businesses in Puerto Rico to import goods from foreign locations when the same goods are readily available from U.S. providers.”
“The GAO report is particularly valuable in illuminating specific areas within the bulk cargo market where an important goal of the Jones Act—to facilitate maritime commerce between U.S. jurisdictions—is not being fulfilled in the case of Puerto Rico. In these particular instances, the Jones Act is actually serving as a barrier to, not an enabler of, of domestic trade. This harms U.S. citizens living both in the mainland and Puerto Rico. That is why I intend to introduce legislation to address these identified shortcomings,” added the Resident Commissioner.
Shipment of Energy Supplies
The GAO report indicates that there are not enough Jones Act-compliant vessels available to transport refined petroleum and gas products from the U.S. mainland to Puerto Rico to meet current demand and, as a result, companies in Puerto Rico are importing most fuel from foreign countries like Venezuela rather than from refineries in the United States.
Pierluisi explained that this problem is particularly evident in the case of natural gas. The U.S. has recently emerged as the top producer of natural gas in the world. Natural gas is produced in over 30 states, with the highest production in Texas, Wyoming, Louisiana, Oklahoma and Colorado. This natural gas is distributed to power plants within the 48 contiguous states via a network of pressurized pipelines.
By contrast, Puerto Rico continues to generate most of its electricity from imported foreign oil, which is more expensive and environmentally harmful than natural gas. Because of Puerto Rico’s excessive reliance on oil, Island households and businesses are paying twice as much for electricity as the U.S. national average, and they are struggling to cope with a further rate increase imposed by the Puerto Rico government earlier this year. This strains family budgets and makes Puerto Rico a less attractive place to live and do business.
“Although plans have been made to convert more of Puerto Rico’s power plants from oil to natural gas, this effort cannot be fully realized unless Puerto Rico can gain access to natural gas produced in the U.S. mainland. Because of its geographic location, of course, Puerto Rico can only obtain this gas via ship, not pipeline. However, the GAO noted in its report that there is an extremely limited pool of Jones Act vessels that could be used to transport natural gas from ports in the U.S. mainland to Puerto Rico,” said Pierluisi.
“Therefore, the bill I will introduce will enable foreign vessels to transport liquefied natural gas and other fuels from the U.S. mainland to Puerto Rico. This will benefit energy producers in the states, who will gain access to an important new U.S. market and make a positive contribution to their local economies. It will also provide a direct benefit to consumers in Puerto Rico, who will see their electricity bills decrease,” added the Resident Commissioner.
Shipment of Agricultural Products
The U.S. Department of Agriculture and the U.S. Congress have recognized that farmers and ranchers in Puerto Rico face higher costs than their counterparts in the U.S. mainland, due to the Island’s geographic location and higher freight rates. The GAO reports that some companies in Puerto Rico indicate that they are unable to purchase goods from U.S. sources because of higher transportation costs on Jones Act vessels compared to foreign vessels, and that this problem is particularly acute in the case of agricultural commodities and inputs transported on bulk cargo vessels. For example, the GAO cites the Puerto Rico Farm Bureau, which explained that Island farmers and ranchers are purchasing animal feed and crop fertilizers from foreign countries like Canada instead of from domestic U.S. sources because of the difference in freight rates.
“In light of the GAO report, I will file legislation to relax the Jones Act in the case of agricultural products shipped on bulk cargo vessels from the U.S. mainland to Puerto Rico. As with the energy-related legislation I intend to introduce, this legislation will benefit both the Puerto Rico economy and the national U.S. economy. There is no principled reason why farmers and ranchers in Puerto Rico should be compelled, as a practical matter, to purchase products that are not available in Puerto Rico from outside the United States. My legislation will serve to strengthen the economic ties between the U.S. citizens of Puerto Rico and their fellow citizens in the states,” said Pierluisi
In the case of containerized cargo, as distinct from bulk cargo, the GAO report reveals a more complex situation. On the one hand, the GAO concludes that the Jones Act “may result in higher freight rates—particularly for certain goods—than would be the case if service by foreign carriers were allowed.” On the other hand, the report observes that the law “has helped to ensure reliable, regular service between the United States and Puerto Rico—service that is important to the Puerto Rican economy.” The GAO was frustrated in its effort to analyze the economic impact of the Jones Act on Puerto Rico by making a credible estimate of the differences in freight rates between Jones Act carriers and prospective foreign carriers that could serve this market, because almost none of the foreign carriers were willing to respond to GAO’s requests for cost and rate information, and GAO cannot compel their cooperation. Moreover, as the GAO explains, even if this information were available, it would be very difficult to measure the precise extent to which current freight rates are higher than they would be in the absence of the Jones Act, because it is not known what other federal laws would be applied to foreign carriers choosing to participate in the newly-opened Puerto Rico trade and because freight rates are influenced by numerous factors not directly connected to the Jones Act.