16172 Federal Register / Vol. 77, No. 54 / Tuesday, March 20, 2012 / Rules and Regulations 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

46 CFR Part 67 

[Docket No. USCG–2010–1124] 

Application for Foreign Rebuilding 

Determination 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of availability and 

response to comments. 

SUMMARY: On February 25, 2011, the 

Coast Guard published a document 

seeking comments on a petition for 

rulemaking to amend the Coast Guard 

regulation concerning foreign-rebuilt 

determinations for vessels entitled to a 

coastwise trade endorsement. Under the 

Jones Act, to maintain a coastwise trade 

endorsement, a vessel must not be 

rebuilt outside the United States. This 

document responds to the comments we 

received on our February 25, 2011 

request for comments, and announces 

the availability of our response to the 

petitioners denying their petition. 

DATES: On March 13, 2012, the Coast 

Guard denied the December 9, 2010 

petition to amend 46 CFR 67.177. 

ADDRESSES: Comments and material 

received from the public, as well as 

documents mentioned in this document 

as being available in the docket, are part 

of docket USCG–2010–1124 and are 

available for inspection or copying at 

the Docket Management Facility (M–30), 

U.S. Department of Transportation, 

West Building Ground Floor, Room 

W12–140, 1200 New Jersey Avenue SE., 

Washington, DC 20590, between 9 a.m. 

and 5 p.m., Monday through Friday, 

except Federal holidays. You may also 

find this docket online by going to 

http://www.regulations.gov, inserting 

USCG–2010–1124 in the ‘‘Keyword’’ 

box, and then clicking ‘‘Search.’’ 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this document, 

call or email Lieutenant Commander 

Erin Ledford, Executive Secretary, 

Maritime Safety and Security Council, 

U.S. Coast Guard; telephone 202–372– 

3857, email Erin.H.Ledford@uscg.mil. If 

you have questions on viewing material 

in the docket, call Renee V. Wright, 

Program Manager, Docket Operations, 

telephone 202–366–9826. 

SUPPLEMENTARY INFORMATION: 

Background 

In a petition dated December 9, 2010, 

Marc J. Fink, on behalf of a coalition of 

maritime organizations, petitioned the 

Coast Guard to amend 46 CFR 67.177, 

Application for foreign rebuilding 

determination. On February 25, 2011, 

we published a document in the Federal 

Register (76 FR 10553) seeking 

comments on that petition for 

rulemaking. 

The regulation the petition seeks to 

amend sets the parameters for rebuiltforeign determinations and directs when 

vessels with coastwise trade 

endorsements whose hulls or 

superstructure are altered outside the 

United States must submit a written 

statement to the National Vessel 

Documentation Center. Section 67.177 

also states when vessel owners 

considering such alterations may seek a 

preliminary rebuilt determination. 

Under 46 U.S.C. 12132(b), to maintain 

a coastwise endorsement a vessel must 

not be rebuilt outside the United States. 

For definitions of ‘‘coastwise 

endorsement’’ and ‘‘rebuilt in the 

United States,’’ see 46 U.S.C. 12101. 

We received five submissions in 

response to our February 25, 2011 

request for comments, and have 

responded to these comments below. 

After considering these comments we 

responded to the petitioners in a letter. 

As reflected in that letter, we 

concluded that amendments to 46 CFR 

67.177 are neither needed nor desired, 

and therefore we denied the petition. 

The petition and its three exhibits, along 

with our letter responding to the 

petition, are available in the docket as 

indicated under ADDRESSES. 

Discussion of Comments 

All five submissions to the docket in 

response to our February 25, 2011 

document, including a submission from 

the petitioners, supported the petition. 

Four of the five specifically requested 

that that we move forward expeditiously 

with a rulemaking in order to clarify 

what types and amounts of foreign 

shipyard work on vessels are allowed 

under the Merchant Marine Act of 1920, 

known as the Jones Act, 41 Stat. 988, c. 

250; see specifically 46 U.S.C. §§ 12101, 

12112, 12132(b), and 55102. 

In their submission in response to the 

request for comments, the petitioners 

stated that amending § 67.177 is 

necessary to resolve a number of 

industry disputes over what types and 

amounts of foreign shipyard work on 

vessels are and are not permissible 

under the Jones Act. The petitioners 

also stated that amending § 67.177 as 

they proposed would be beneficial 

because this regulation would then— 

• Specifically define ‘‘major 

component,’’ and thus clarify what 

constitutes a major component. 

• Establish clear and uniform 

guidance to the industry regarding the 

Coast Guard’s standards for determining 

when certain work on a vessel in a 

foreign shipyard constitutes a rebuilding 

of that vessel pursuant to the Second 

Proviso to the Jones Act. 

• Resolve ambiguities and open 

questions in the current rules that are 

currently left unanswered by mixed 

court decisions, including what is the 

relationship between the ‘‘major 

component’’ test and the ‘‘considerable 

part’’ test. 

A shipyard company stated that a 

definition of what constitutes a major 

component is needed for purposes of 

determining whether a vessel is rebuilt, 

and of when subassemblies individually 

added to a vessel become, in totality, a 

major component. This company noted 

that the existing discretionary rebuild 

test of 7.5 to 10 percent of hull or 

superstructure steel weight is 

ambiguous when applied to a vessel 

modification for purposes of evaluating 

compliance with the Jones Act, and that 

amending this provision to establish a 

single threshold for applying the rebuild 

test will significantly improve the 

conflicting interpretations of 

compliance that currently exist. 

The Coast Guard believes that, as a 

result of the recent decision of the 

Fourth Circuit Court of Appeals in 

Shipbuilders Council of America v. U.S. 

Coast Guard, 578 F.3d 234 (2009) 

involving the SEABULK TRADER, 

certainty and predictability have been 

achieved on the foreign rebuild 

regulation, and particularly its major 

component test and the relationship 

between that test and the corresponding 

‘‘considerable part test’’. The Coast 

Guard believes there is now a settled 

understanding of the interpretation of 

46 CFR 67.177 to a greater degree than 

there has been over the course of many 

years of attempts to address this 

contentious issue. 

The Coast Guard notes that the 

current regulation was promulgated 

after controversy surrounding the 

previous attempt to regulate on this 

subject. That previous regulation—46 

CFR 67.27–3, Required application for 

rebuilt determination (1988)—was 

challenged in court and overturned in 

1989. See American Hawaii Cruises v. 

Skinner, 713 F.Supp. 452 (D.D.C. 1989). 

The current regulation was then issued 

in 1996, in response to that successful 

challenge. See 60 FR 17290, April 5, 

1995, and 61 FR 17814, April 22, 1996. 

However, it was also challenged in court 

in the SEABULK TRADER case in 2006, 

with initial success at the District Court 

level. See Shipbuilders Council of 

America v. U.S. Dept. of Homeland Sec., 

551 F.Supp.2d 447 (E.D.Va. 2008). But 

this time the Fourth Circuit Court of 


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Appeals reversed that District Court 

decision and held, instead, that the 

Coast Guard’s ‘‘interpretive scheme has 

the great virtue of construing each 

provision of the regulation to have 

functional significance’’ and, further, 

that its interpretation ‘‘offers a holistic 

vision of the regulation that gives effect 

to each of its provisions.’’ Id. at 245. 

Thus, the current regulation now enjoys 

the strong imprimatur of support, giving 

rise to certainty and predictability in its 

interpretation, by a Court of Appeals of 

the United States. 

The petitioners may disagree with the 

substance and effect that the clarity 

established by the Fourth Circuit Court 

of Appeals has revealed. However, the 

changes sought by the petition would, 

in the name of clarity, change the 

substantive outcomes of Coast Guard 

determinations and upset a regulatory 

regime that has been in place since 

1996. 

Prior to the decision by the Fourth 

Circuit Court of Appeals, and the Coast 

Guard determinations that it affirmed, 

the foreign rebuild regulation may have 

appeared to some to be less than clear. 

However, that lack of clarity related less 

to the lack of a definition of ‘‘major 

component,’’ which is the centerpiece of 

petitioners’ proposal, and more so to a 

structural tension in the rule itself; 

specifically, the uneasy combination of 

a quantitative test (the considerable part 

test) with a qualitative test (the major 

component test). The Fourth Circuit 

Court of Appeals examined the Coast 

Guard’s balancing of these tests and, as 

noted above, found that the Coast 

Guard’s interpretive scheme had 

resolved those tensions. 

For example, among the items 

deemed by petitioner’s proposed rule to 

be major components are container 

racks. Even by petitioner’s definition, 

major components are components of 

the hull or superstructure of a vessel. 

However, ‘‘hull’’ and ‘‘superstructure’’ 

remain defined terms at 46 CFR 67.3 

and, in both cases, the central 

characteristic for any item to be 

considered a component of either is that 

it be structural in nature. It has long 

been the case that container racks 

(excluding their foundations, pedestals 

or required reinforcements) have been 

determined by the Coast Guard National 

Vessel Documentation Center (NVDC), 

aided with technical support from naval 

architects and marine engineers at the 

Coast Guard Naval Architecture 

Division (NAD), to be non-structural 

‘‘outfit.’’ As such, they would be and 

have been excluded from consideration 

under the major component test as well 

as, for that matter, from the calculation 

of the considerable part test. For a 

recent analysis of the structural or nonstructural nature of container racks see 

the NVDC’s U.S. build determination 

letter dated August 1, 2011, and 

accompanying analysis of the NAD 

dated July 15, 2011, in the case of a 

NASSCO flat-deck container barge, both 

of which are now posted on the NVDC 

Web site, http://www.uscg.mil/hq/cg5/

nvdc/, under ‘‘Latest News’’. 

Consequently, while apparently 

retaining the requirement that major 

components must be structural 

components of the hull or 

superstructure, petitioners would 

nevertheless, as part of the same 

definition, specifically deem an item, 

long-established by expert analysis to be 

non-structural in nature, to be a major 

component. Including this specific item 

(the container rack) as a major 

component in the definition by 

regulatory fiat, would be inconsistent 

with Coast Guard prior practice; it 

would also be inconsistent with the 

proposed rule itself. While 

acknowledging the requirement that 

major components of the hull and 

superstructure must, at the very least, 

have a structural characteristic, the 

proposal would completely revamp that 

basic understanding. 

The petitioners’ proposed 

amendments, in the name of clarity, 

seek to re-balance the ‘‘holistic 

approach’’ found to characterize the 

current rule and its interpretation by the 

Fourth Circuit Court of Appeals. By 

expanding the definition of ‘‘major 

component’’ it would give significantly 

greater weight to the major component 

test over the considerable part test. The 

reason for this effect is that the 

steelweight percentage threshold for an 

item to be considered a major 

component is 1.5 percent, while the 

steelweight percentage threshold of the 

considerable part test (even if amended 

as the petitioners’ propose) is 10 

percent. Consequently, by expanding 

the scope of what would be deemed a 

major component, it would become far 

more likely that proposed foreign work 

would be barred by that 1.5 percent 

threshold without even having to take 

into account the 10 percent threshold. 

The NVDC’s regulatory interpretations 

have been quite clear and consistent. In 

making its determinations, it considers 

the greater of steel added or steel 

removed. This is the conservative 

middle ground between those in 

industry who have advocated, on the 

one hand, that we consider both steel 

added and steel removed, and those 

who have advocated, on the other hand, 

that we consider only the net of steel 

added and steel removed. 

The petitioners’ proposed 

amendments would introduce other 

substantive changes. For example, the 

Coast Guard believes that none of the 

determinations leading up to the 

increase in Agency appeals, litigation 

and Court appeals of the last few years 

(including the MOKIHANA, SEABULK 

TRADER, SEABULK CHALLENGE, 

DELAWARE TRADER, PHILADELPHIA 

and NEW YORK) would be decided the 

same way under the petitioners’ 

proposed amendments. 

In addition, petitioner’s proposal 

would establish new and onerous 

procedural impediments to any 

applicant seeking to have work done at 

a foreign shipyard. Their proposal 

would make the process slower, more 

cumbersome, inflexible, conducive to 

adversarial disputes and appeals by 

third parties—whether or not directly 

affected, and more resource-intensive 

for the Coast Guard. 

For example, new determinations 

would be required as to whether 

proposed work was, or was not, 

casualty-related as well as whether no 

shipyard in the United States is capable 

or available to perform the desired 

work. Notices as to all actions and 

proposed actions would have to be 

posted in the Federal Register. As 

already mentioned, appeals would be 

opened and available to any person, 

without regard to whether or not they 

are directly affected by the 

determination. The Coast Guard would 

be obligated, somehow, to compel 

parties to enter into protective orders in 

connection with those appeals and, of 

course, it would then be incumbent 

upon the Coast Guard to police and 

enforce violations of those protective 

orders. 

Moreover, virtually all applicants 

consider the information submitted to 

the Coast Guard in connection with 

requests for foreign rebuild 

determinations to be highly proprietary. 

When those determinations have been 

contested in the past, including in all of 

the cases already mentioned, they have 

been contested by direct commercial 

competitors of those applicants. 

Consequently, even a protective order 

might not offer sufficient proprietary 

protection to a potential applicant. 

The effect of these procedural changes 

would be to present additional 

impediments, and thus, likely 

discourage potential applicants from 

even applying in the first place. 

Finally, because of— 

• The substantive re-balancing at the 

heart of the petition which would raise 

the bar (by lowering the applicable 

steelweight percentage in most cases) 

for any foreign work, 


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16174 Federal Register / Vol. 77, No. 54 / Tuesday, March 20, 2012 / Rules and Regulations 

• The inclusion of items as major 

components which have never before 

been so included because they represent 

non-structural ‘‘outfit,’’ 

• The procedural impediments which 

would have the effect of discouraging 

applicants, and 

• Other more restrictive measures, 

such as the proposal to take into 

account the weight of both the steel 

added and the steel removed rather than 

the greater of the weight of either the 

steel added or the steel removed, 

alone or in combination, by amending 

the current regulation as petitioners 

propose may cause other countries to 

challenge the continued applicability of 

the exemption from certain provisions 

of the General Agreement on Tariffs and 

Trade 1994 (‘‘GATT 1994’’) that the 

Jones Act statutes and regulations 

currently enjoy. 

The Coast Guard understands that the 

national treatment obligation in the 

GATT 1994 requires the United States to 

treat imported goods no less favorably 

than domestic goods, including with 

regard to the sale, lease and use of the 

goods. Vessels engaged in the coastwise 

trade are considered goods for purposes 

of the GATT 1994. 

The United States has a specific 

exemption from the national treatment 

and certain other obligations of the 

GATT 1994 for the Jones Act statutes 

and measures, such as the Coast Guard 

regulations implementing those statutes. 

That exemption is contained in 

paragraph 3 of the GATT 1994. Any 

changes to the Jones Act statutes or 

measures implementing those statutes 

must not make them less consistent 

with GATT 1994. 

For a more detailed response to the 

specific amendments proposed by the 

petitioners, please see the March 13, 

2012 letter in the docket responding to 

the petition for rulemaking. This 

document is issued under authority of 

33 CFR 1.05–20 and 5 U.S.C. 552(a). 

Dated: March 13, 2012. 

F.J. Kenney, 

RDML, U.S. Coast Guard, Judge Advocate 

General, Chairman, Marine Safety and 

Security Council. 

[FR Doc. 2012–6588 Filed 3–19–12; 8:45 am] 

BILLING CODE 9110–04–P 


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