[Federal Register Volume 77, Number 54 (Tuesday, March 20, 2012)]
[Rules and Regulations]
[Pages 16172-16174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-6588]



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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.

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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:[sol][sol]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 <a href="/cdn-cgi/l/email-protection#a2e7d0cbcc8cea8ceec7c6c4cdd0c6e2d7d1c1c58ccfcbce"><span class="__cf_email__" data-cfemail="317443585f1f791f7d5455575e435571444252561f5c585d">[email protected]</span></a>. 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 
rebuilt-foreign 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. Sec. Sec.  12101, 12112, 12132(b), and 
55102.
    In their submission in response to the request for comments, the 
petitioners stated that amending Sec.  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 Sec.  67.177 as they 
proposed would be beneficial because this regulation would then--
    <bullet> Specifically define ``major component,'' and thus clarify 
what constitutes a major component.
    <bullet> 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.
    <bullet> 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 non-
structural 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--
    <bullet> 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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    <bullet> The inclusion of items as major components which have 
never before been so included because they represent non-structural 
``outfit,''
    <bullet> The procedural impediments which would have the effect of 
discouraging applicants, and
    <bullet> 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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