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Tuesday, August 15, 2017
Jones Act: Matson and Pasha Seek Every Loophole
By Michael Hansen @ 10:41 PM :: 5215 Views :: Jones Act

Matson & Pasha skirt Jones Act U.S. build laws with Coast Guard okay

by Michael Hansen, Hawaii Shippers Council, August 15, 2017

The national law firm of Winston & Strawn LLP posted on August 1, 2017, to the Maritime Fed Watch feature on their website the update, “U.S. Coast Guard Issues Jones Act Build and Rebuilt Guidance.” It was written by Constantine “Charlie” Papavizas, a Washington, D.C.--Partner and Chair of Maritime Practice for the firm. Papavizas is a internationally recognized legal expert regarding Jones Act and U.S. maritime law.

Papavizas describes two recent U.S. Coast Guard (USCG) determination letters issued by their National Vessel Documentation Center (NVDC). One is a U.S. build letter of July 25, 2017, covering two containerships currently under construction at Philly Shipyard Inc. for Matson Navigation Co., Inc. (Matson). And, the other, is a foreign rebuilt letter of May 25, 2017, covering two older containerships to to be refit in Chinese shipyards for Pasha Hawaii Transport Line LLC. (Pasha).

The reason that U.S. shipowners and shipyards request these USCG determination letters is to ensure that the shipbuilding or ship refitting work they are proposing to undertake will not violate the legal restrictions on the use of foreign materials in the construction of new Jones Act ships in the U.S. or exceed the limitations on the refitting of existing Jones Act ships in a foreign shipyard. Exceeding either limit would result in the loss of what are known as “coastwise privileges” and cause the vessel declared “not Jones Act eligible.” The loss of coastwise privileges means that the vessel would not be allowed to trade domestically or “coastwise” and its much higher value as a Jones Act ship would be lost (falling to international foreign flag vessel valuation levels and incurring a significant loss).

Matson is constructing two 3600 TEU (Twenty-foot Equivalent Unit) Aloha Class containerships (denoted CV3600) at Philly Shipyard for the domestic U.S. West Coast / Hawaii trade. The ships are being built under license to a foreign shipyard (which supplies the design), much of the materials used to construct the hull and superstructure will be imported and equipment to outfit the ship will be of foreign origin. However, the shipbuilding yard must be very careful not to exceed the limits on foreign fabricated materials and components of the hull and superstructure referred to as the watertight envelope. The standard is that the foreign fabricated components cannot exceed 1.3% of the steelweight (of the hull and superstructure).

In the instance of the two Matson containerships, Philly Shipyard wrote through their attorney -- Jonathan K. Waldron of Blank Rome LLP -- to the USCG requesting a U.S. build determination. The USCG found that the shipyard’s proposed use of foreign fabricated hull and superstructure components would represent approximately 1.25% of the steelweight of the containerships. Therefore, the USCG determined that upon completion, the ships would be found “assembled” in the U.S., obtain coastwise privileges as a fully Jones Act ship and would be issued a USCG vessel certificate with coastwise endorsement.

We reported on Mat 26, 2017, Dakota Creek Shipyard encountered a U.S. build determination problem constructing the fishing vessel AMERICA’S FINEST at their Anacortes, Washington State, yard. They inadvertently used several imported preformed steel plates exceeding the 1.3% of the vessel’s estimated final steelweight upon delivery. The shipowner and shipyard have had to seek federal legislation to make the vessel coastwise eligible for the fisheries of the U.S. That legislation is currently moving through the U.S. Congress.

Pasha wrote directly to the USCG asking whether or not their plans to refit two elderly containerships – the HORIZON PACIFIC (built 1979) and HORIZON ENTERPRISE (built 1980) – acquired through their purchase of Horizon Lines Inc. Hawaii service in 2015 would comply with the limits on foreign rebuilding. These two containerships are C8 class sister ships with a nominal profile capacity of 2,303 TEU each.

There are two tests for foreign rebuilding: (i) the “considerable part test” limits adding steel to the hull and superstructure collectively more than 7.5% of the vessel’s original steelweight; and, (ii) the “major component test” that limits adding any single foreign-manufactured steel component to the hull and superstructure weighing more than 1.5% of the vessel’s original steelweight.

In response, the USCG wrote to Pasha, “Based upon these findings, I conclude and confirm that performance of the proposed work to the vessels outside of the United States would not under currently applicable law and practice adversely affect the eligibility of those vessels to engage in the in the coastwise trades of the United States.”

The law firm representing Philly Shipyard, Blank Rome, wrote for the JDSupra legal website on June 6, 2017, a short paper regarding the Pasha determination, ” U.S. Coast Guard National Vessel Documentation Center issues rebuild determination with newly imposed “cumulative steelweight” criteria.” It describes how the USCG Pasha foreign rebuilt determination letter added an new factor to the “considerable part test” requiring that previous foreign refitting must be included in any subsequent rebuilt calculation.

Blank Rome stated, “A recently published Rebuild Determination Letter issued by the National Vessel Documentation Center (“NVDC”) adds a significant new criteria in making Jones Act rebuild determinations by calling into question any previous rebuild activity in which a vessel may have been engaged. To ensure future compliance with coastwise trade requirements, industry stakeholders must now consider the additional “cumulative steelweight” test articulated in the recent determination when assessing the extent to which foreign work has been performed on a vessel’s hull or superstructure.”

The USCG in their Pasha determination letter stated in respect of their new “cumulative steelweight test”, “ . . . . . where there have been multiple foreign rebuild determination applications for the same vessel, as in this case, the steelweight limits set forth in 46 C.F.R. § 67. l 77(b) should most appropriately be considered to be service life limitations based upon the vessel's original. or as delivered.”

This new policy has become necessary as U.S. owners are choosing to effect multiple foreign refittings of their Jones Act ships due not only to lower their capital costs but also avail themselves of the efficiency and expertise of foreign yards. The U.S. shipowners find that foreign refitting of their Jones Act ships is significantly less expensive even when considering the costs of repositioning the ships to a foreign location (in the case of Pasha across the Pacific Ocean) and the imposition of a 50% ad valorem tax on foreign repairs (Section 466 of the Tariff Act of 1930 (19 U.S.C. 1466)) collected from the shipowner by U.S. Customs upon arrival of the ship at its first U.S. port of entry.

On May 23, 2017, we wrote that the vessel reporting services were showing the HORIZON PACIFIC at Nantong Port on the Yangtze River Delta near Shanghai on the East China Sea. As Pasha doesn’t operate any Transpacific services, we reasoned the ship was there for refit at one of the large shipyards operating at the port. We further assumed that the purpose was to re-engine and install scrubbers on the ship to comply with international emissions regulations that come into effect on January 1, 2020. This was the same program that Horizon Lines had announced in 2012 for the ships, but was never able to start for financial reasons. Based upon the USCG determination letter, Pasha arranged additional work in China on the hull, superstructure and to the container cell guides in the holds.

Earlier in May 2017, we reported that Matson’s Alaska service containership MATSON ANCHORAGE had returned from shipyard in China after being refitted with scrubbers following the refitting of her two sisters MATSON KODIAK and MATSON TACOMA – all 1987 built -- to comply with the emissions deadline.

This practice of multiple foreign refittings of U.S. built or “assembled” ships clearly demonstrates the degree to which U.S. shipowners of Jones Act ships depend on foreign shipyards to design, construct and refit their ships. This calls into question the need to require that commercial Jones Act ships be assembled in the U.S. to support the U.S. shipbuilding industrial base for national security purposes.

Key excerpts:

U.S. maritime laws generally referred to as the “Jones Act” restrict U.S. domestic commerce to U.S.-built vessels. Once qualified, a U.S.-built vessel can lose its eligibility to participate in U.S. domestic commerce permanently if it is considered “rebuilt” outside the United States. Because the rules governing what constitutes “U.S.-built” and “rebuilt” are technical, and the consequences of not meeting the standards can be financially catastrophic for a vessel owner, the Coast Guard has a regulatory process where it provides advance guidance confirming that a prospective project satisfies the applicable criteria.

Coast Guard regulations provide that a vessel must be assembled entirely in the United States and all “major components of the hull and superstructure” must be fabricated in the United States. Through a number of precedents, the Coast Guard has determined that a “component” must exceed 1.5 percent of the vessel’s steelweight to be considered “major.” Numerous items installed on a vessel are not considered “components of the hull and superstructure,” such as the main and auxiliary engines. Moreover, to be considered part of the “hull,” a component must form part of the watertight envelope of the vessel.

A U.S.-built vessel is considered “rebuilt” abroad if “any considerable part of its hull and superstructure is built upon or substantially altered outside of the United States.” By precedent, the addition of more than 7.5 percent of the vessel’s steelweight to the “hull and superstructure” violates the “considerable part” test. In addition, and similar to the build test, a vessel is deemed “rebuilt” if a “major component of the hull or superstructure” not U.S.-built is added abroad. A component weighing more than 1.5 percent of the vessel’s steelweight is considered “major.”


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