Maritime Transportation: Major Oil Spills Occur Infrequently, but Risks Remain
Published: 2007-12-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: When oil spills occur in U.S. waters, federal law places primary liability on the vessel owner or operator--that is, the responsible party--up to a statutory limit. As a supplement to this "polluter pays" approach, a federal Oil Spill Liability Trust Fund administered by the Coast Guard pays for costs when a responsible party does not or cannot pay. This testimony is based on GAO's September 2007 report on oil spill costs and select program updates on the recent San Francisco spill. Specifically, it answers three questions: (1) How many major spills (i.e., at least $1 million) have occurred since 1990, and what is their total cost? (2) What factors affect the cost of spills? and (3) What are the implications of major oil spills for the Oil Spill Liability Trust Fund?
section_title: What GAO Found
paragraphs: On the basis of cost information collected from a variety of sources, GAO estimates that 51 spills with costs of at least $1 million have occurred from 1990 to 2006 and that responsible parties and the federal Oil Spill Liability Trust Fund (Fund) have spent between $860 million and $1.1 billion for oil spill removal costs and compensation for damages (e.g., lost profits and natural resource damages). Since removal costs and damage claims may stretch out over many years, the costs of the spills could rise. The 51 spills varied greatly from year to year in number and cost. All vessel types were involved with the 51 major spills GAO identified, with cargo/freight vessels and tank barges involved with 30 of the 51 spills. According to industry and agency officials, three main factors affect the cost of spills: a spill's location, the time of year, and the type of oil spilled. Spills that occur in remote areas, for example, can increase costs involved in mobilizing responders and equipment. Similarly, a spill occurring during tourist or fishing season might produce substantial compensation claims, while a spill occurring during another time of year may not be as costly. The type of oil affects costs in various ways: fuels like gasoline or diesel fuel may dissipate quickly but are extremely toxic to fish and plants, while crude oil is less toxic but harder to clean up. The total costs of the recent San Francisco oil spill are unknown, but these identified factors are likely to influence the costs. To date, the Fund has been able to cover costs from major spills that responsible parties have not paid, but risks remain. Specifically, GAO's analysis shows that the new 2006 limits of liability for tank barges remain low relative to the average cost of such spills. Since 1990, the Oil Pollution Act (OPA) required that liability limits be adjusted above the limits set forth in statute for significant increases in inflation, but such changes have never been made. Not making such adjustments between 1990 and 2006 potentially shifted an estimated $39 million in costs from responsible parties to the Fund.

section_title: Letter
paragraphs: We appreciate the opportunity to be here today to discuss the costs of  major oil spills. As the recent accident in San Francisco Bay illustrates, the  potential for an oil spill exists daily across coastal and inland waters of the  United States. Specifically, on November 7, 2007, a cargo ship leaving the  Port of Oakland struck the San Francisco-Oakland Bay Bridge, tearing the  hull of the ship. As a result, over 50,000 gallons of heavy oil spilled into the  bay. The total cost of cleaning up the spill, as well as the damage to  marine wildlife and fisheries is still undetermined. As this spill also  illustrates, the potential for costly spills is present for vessels other than  tankers and tank barges involved in the petroleum industry. Cargo, fishing,  and other types of vessels also carry substantial fuel reserves and  accidents can release this fuel and create substantial damage. Spills can be  expensive, with considerable costs to the federal government and the  private sector.
The framework for addressing and paying for maritime oil spills is  identified in the Oil Pollution Act of 1990 (OPA), which was enacted after  the Exxon Valdez spill. OPA created a “polluter pays” system that places  the primary burden of liability and the costs of oil spills on the vessel  owner or operator who was responsible for the spill—that is, the  responsible party.  However, there are financial limitations on that  liability. Under this system, the responsible party assumes, up to a  specified limit, the burden of paying for spill costs—which can include  both removal costs (cleaning up the spill) and damage claims (restoring  the environment and payment of compensation to parties that were  economically harmed by the spill). Above the specified limit, the  responsible party is no longer financially liable. To pay costs above the  limit of liability, as well as to pay costs when a responsible party does not  pay or cannot be identified, OPA authorized the Oil Spill Liability Trust  Fund (Fund), which is financed primarily from a per-barrel tax on  petroleum products either produced in the United States or imported from  other countries. The Fund is administered by the National Pollution Funds  Center (NPFC) within the U.S. Coast Guard. The balance in the Fund— about $600 million at the end of fiscal year 2006—is well below its peak of  $1.2 billion in 2000. The decline in the Fund’s balance primarily reflects an  expiration of the barrel tax on petroleum in 1994. The tax was not  reinstated until 2005.
While this system is well understood, the costs involved in responding to  oil spills are less clear. Costs paid from the Fund are well documented, but  the party responsible for the spill is not required to report the costs it  incurs. As a result, private-sector and total costs for cleaning up spills and  paying damages are largely unknown to the public. The lack of  information about the cost of spills, the declining Fund balance, and  significant claims made on the Fund—for spills in which the removal costs  and damage claims have exceeded established OPA liability limits—have  all raised concerns about the Fund’s long-term viability.
Although we have not assessed the November 2007 San Francisco oil spill  in depth, we have done considerable work looking at the cost of major  spills in recent years and the factors that contribute to making spills  particularly expensive to clean up and mitigate. My remarks today are  intended to provide a context for looking at the nation’s approach to  paying the costs of such spills. Specifically, my testimony today focuses on  (1) the number of major oil spills—i.e., spills for which the total costs and  claims paid was at least $1 million—from 1990 to 2006 and the total costs  of these spills, (2) the factors that affect major oil spill costs, and (3) the  implications of major oil spill costs for the Oil Spill Liability Trust Fund.   My comments are based primarily on our September 2007 report on oil  spill costs, which was issued to the Senate Committee on Commerce,  Science, and Transportation and the House Committee on Transportation  and Infrastructure. In preparing our September report, we analyzed oil  spill removal cost and claims data from NPFC, the National Oceanic and  Atmospheric Administration’s (NOAA) Damage Assessment, Remediation,  and Restoration Program, and the Department of the Interior’s (DOI)  Natural Resource Damage Assessment and Restoration Program and the  U.S. Fish and Wildlife Service (FWS). We also analyzed cost data obtained  from vessel insurers and through contract with Environmental Research  Consulting. We interviewed NPFC, NOAA, and state officials responsible  for oil spill response, as well as industry experts and representatives from  key industry associations and a vessel owner. In addition, we selected five  oil spills on the basis of the spill’s location, oil type, and spill volume for an  in-depth review. During this review, we interviewed NPFC officials  involved in spill response for all five spills, as well as representatives of  private sector companies involved in the spill and spill response; and we  conducted a file review of NPFC records of the federal oil spill removal  activities and costs associated with spill cleanup. We also reviewed  documentation from the NPFC regarding the Fund balance and vessels’  limits of liability. Because private-sector and total costs for cleaning up  spills and paying damages are not centrally tracked and maintained, we  obtained the best available cost data from a variety of sources, as  previously described. We then combined the information that we collected  from these various sources to develop cost estimates for the oil spills.  However, because the cost data are somewhat imprecise and the data we  collected vary somewhat by source, we present the cost estimates in  ranges. The lower and higher bounds of the range represent the low and  high end of cost information we obtained. Based on reviews of data  documentation, interviews with relevant officials, and tests for  reasonableness, we determined that the data were sufficiently reliable for  the purposes of our report. We also conducted additional research and  interviewed NPFC officials to update our September 2007 report’s findings  and to gather information on the recent oil spill in San Francisco Bay. We  conducted this work in December 2007 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: With more than 100,000 commercial vessels navigating U.S. waters and  12.2 million barrels of oil being imported into the United States each day,  some oil spills in domestic waters are inevitable. Fortunately, however,  spills are relatively infrequent and are decreasing. While oil transport and  maritime traffic have continued to increase, the total number of reported  spills has generally declined each year since 1990.
OPA places the primary burden of liability and the costs of oil spills on the  vessel owner and operator who were responsible for the spill. This  “polluter pays” system provides a deterrent for vessel owners and  operators who spill oil by requiring that they assume the burden of spill  response, natural resource restoration, and compensation to those  damaged by the spill, up to a specified limit of liability—which is the  amount above which responsible parties are no longer financially liable  under certain conditions. (See fig. 1 for the limits of liability by vessel  type.) For example, if a vessel’s limit of liability is $10 million and a spill  resulted in $12 million in costs, the responsible party only has to pay up to  $10 million—the Fund will pay for the remaining $2 million. The Coast  Guard is responsible for adjusting limits for significant increases in  inflation and for making recommendations to Congress on whether other   adjustments are necessary to help protect the Fund. OPA also requires  that vessel owners and operators must demonstrate their ability to pay for  oil spill response up to their limit of liability. Specifically, by regulation,  with few exceptions, owners and operators of vessels over 300 gross tons  and any vessels that transship or transfer oil in the Exclusive Economic  Zone are required to have a certificate of financial responsibility that  demonstrates their ability to pay for oil spill response up to their limit of  liability.
OPA consolidated the liability and compensation provisions of four prior  federal oil pollution initiatives and their respective trust funds into the Oil  Spill Liability Trust Fund and authorized the collection of revenue and the  use of the money, with certain limitations, with regard to expenditures.  The Fund’s balance has generally declined from 1995 through 2006, and  since fiscal year 2003, its balance has been less than the authorized limit  on federal expenditures for the response to a single spill, which is  currently set at $1 billion (see fig. 2). The balance has declined, in part,  because the Fund’s main source of revenue—a $0.05 per barrel tax on U.S.  produced and imported oil—was not collected for most of the time  between 1993 and 2006. As a result, the Fund balance was $604.4 million  at the end of fiscal year 2006. The Energy Policy Act of 2005 reinstated  the barrel tax beginning in April 2006. With the barrel tax once again in  place, NPFC anticipates that the Fund will be able to cover potential  noncatastrophic liabilities.
OPA also defines the costs for which responsible parties are liable and for  which the Fund is made available for compensation in the event that the  responsible party does not pay or is not identified. These costs, or “OPA  compensable” costs, are of two main types:    Removal costs: Removal costs are incurred by the federal government or  any other entity taking approved action to respond to, contain, and clean  up the spill. For example, removal costs include the equipment used in the  response—skimmers to pull oil from the water, booms to contain the oil,  planes for aerial observation—as well as salaries and travel and lodging  costs for responders.
Damages caused by the oil spill: OPA-compensable damages cover a wide  range of both actual and potential adverse impacts from an oil spill, for  which a claim may be made to either the responsible party or the Fund.  Claims include natural resource damage claims filed by trustees, claims  for uncompensated removal costs and third-party damage claims for lost  or damaged property and lost profits, among other things.
The Fund also covers costs when responsible parties cannot be located or  do not pay their liabilities. NPFC encounters cases where the source of the  spill, and therefore the responsible party is unknown, or where the  responsible party does not have the ability to pay. In other cases, since the  cost recovery can take a period of years, the responsible party may  become bankrupt or dissolved. Based on our analysis of NPFC records,  responsible parties have reimbursed the majority—about 65 percent—of  the Fund’s costs for the 51 spills.
Response to large oil spills is typically a cooperative effort between the  public and private sector, and there are numerous players who participate  in responding to and paying for oil spills. To manage the response effort,  the responsible party, the Coast Guard, EPA, and the pertinent state and  local agencies form the unified command, which implements and manages  the spill response. Appendix I contains additional information on the  parties involved in spill response.
section_title: Oil Spills Costing At Least $1 Million Occurred Infrequently Between 1990 and 2006, but Estimated Costs Total $860 Million to $1.1 Billion
paragraphs: On the basis of information we were able to assemble about responsible  parties’ expenditures and payments from the Fund, we estimate that 51 oil  spills involving removal costs and damage claims totaling at least $1  million have occurred from 1990 to 2006. During this period, 3,389 oil spills  occurred in which one or more parties sought reimbursement from the  Fund. The 51 major spills represent less than 2 percent of this total. As  figure 3 shows, there are no discernable trends in the number of major oil  spills that occur each year. The highest number of spills was seven in 1996;  the lowest number was zero in 2006.
These 51 spills occurred in a variety of locations and involved a range of  vessel types. The spills occurred on the Atlantic, Gulf, and Pacific coasts  and include spills both in open coastal waters and inland waterways. In  addition, as figure 4 shows, 30 of the 51 spills involved cargo/freight  vessels and tank barges, 12 involved fishing and other types of vessels, and  9 involved tanker vessels.
The total cost of the 51 spills cannot be precisely determined because  private-sector expenditures are not tracked, the various parties involved  in covering these costs do not categorize them uniformly, and spills costs  are somewhat fluid and accrue over time. Because spill cost data are  somewhat imprecise and the data we collected vary somewhat by source,  the results described below will be reported in ranges, in which various  data sources are combined together. The lower and higher bounds of the  range represent the low and high end of cost information we obtained.
Our analysis of these 51 spills shows their total cost was approximately $1  billion—ranging from $860 million to $1.1 billion. This amount breaks  down by source as follows:    Amount paid out of the Trust Fund: Because the NPFC tracks and reports  all Fund expenditures, the amount paid from the Fund can be reported as  an actual amount, not an estimate. For these 51 spills, the Fund paid a  total of $239.5 million.
Amount paid by responsible parties: Because of the lack of precise  information about amounts paid by responsible parties and the differences  in how they categorize their costs, this portion of the expenditures must  be presented as an estimate. Based on the data we were able to obtain and  analyze, responsible parties spent between $620 million and $840 million.  Even at the low end of the range, this amount is nearly triple the  expenditure from the Fund.
Costs of these 51 spills varied widely by spill, and therefore, by year (see  fig. 5). For example, 1994 and 2004 both had four spills during the year, but  the average cost per spill in 1994 was about $30 million, while the average  cost per spill in 2004 was between $71 million and $96 million. Just as  there was no discernible trend in the frequency of these major spills, there  is no discernible trend in their cost. Although the substantial increase in  2004 may look like an upward trend, 2004 may be an anomaly that reflects  the unique character of two of the four spills that occurred that year.  These two spills accounted for 98 percent of the year’s costs.
section_title: Key Factors Affect Oil Spill Costs in Unique Ways
paragraphs: Location, time of year, and type of oil are key factors affecting oil spill  costs, according to industry experts, agency officials, and our analysis of  spills. Officials also identified two other factors that may influence oil  spill costs to a lesser extent—the effectiveness of the spill response and  the level of public interest in a spill. In ways that are unique to each spill,  these factors can affect the breadth and difficulty of the response effort or  the extent of damage that requires mitigation.
subsections: section_title: Location Impacts Costs in Different Ways
paragraphs: The location of a spill can have a large bearing on spill costs because it  will determine the extent of response needed, as well as the degree of  damage to the environment and local economies. According to state  officials with whom we spoke and industry experts, there are three  primary characteristics of location that affect costs:    Remoteness: For spills that occur in remote areas, spill response can be  particularly difficult in terms of mobilizing responders and equipment, and  they can complicate the logistics of removing oil from the water—all of  which can increase the costs of a spill.
Proximity to shore: There are also significant costs associated with spills  that occur close to shore. Contamination of shoreline areas has a  considerable bearing on the costs of spills as such spills can require  manual labor to remove oil from the shoreline and sensitive habitats. The  extent of damage is also affected by the specific shoreline location.
Proximity to economic centers: Spills that occur in the proximity of  economic centers can also result in increased costs when local services  are disrupted. A spill near a port can interrupt the flow of goods,  necessitating an expeditious response in order to resume business  activities, which could increase removal costs. Additionally, spills that  disrupt economic activities can result in expensive third-party damage  claims.
section_title: Time of Year Has Impact on Local Economies and Response Efforts
paragraphs: The time of year in which a spill occurs can also affect spill costs—in  particular, impacting local economies and response efforts. According to  several state and private-sector officials with whom we spoke, spills that  disrupt seasonal events that are critical for local economies can result in  considerable expenses. For example, spills in the spring months in areas  of the country that rely on revenue from tourism may incur additional  removal costs in order to expedite spill clean-up, or because there are  stricter standards for clean up, which increase the costs.
The time of year in which a spill occurs also affects response efforts  because of possible inclement weather conditions. For example, spills that  occur during the winter months in areas of the country that experience  harsh winter conditions can result in higher removal costs because of the  increased difficulty in mobilizing equipment and personnel to respond to a  spill in inclement weather. According to a state official knowledgeable  about a January 1996 spill along the coast of Rhode Island, extremely cold  and stormy weather made response efforts very difficult.
section_title: Type of Oil Spilled Impacts the Extent of the Response Effort and the Amount of Damage
paragraphs: The type of oil spilled affects the degree to which oil can be cleaned up  and removed, as well as the nature of the natural resource damage caused  by the spill. The different types of oil can be grouped into four categories,  each with its own set of impacts on spill response and the environment  (see table 1).
Lighter oils such as jet fuels, gasoline, and diesel fuel dissipate and  evaporate quickly, and as such, often require minimal cleanup. However,  these oils are highly toxic and can severely affect the environment if  conditions for evaporation are unfavorable. For instance, in 1996, a tank  barge that was carrying home-heating oil grounded in the middle of a  storm near Point Judith, Rhode Island, spilling approximately 828,000  gallons of heating oil (light oil). Although this oil might dissipate quickly  under normal circumstances, heavy wave conditions caused an estimated  80 percent of the release to mix with water. Natural resource damages  alone were estimated at $18 million, due to the death of approximately 9  million lobsters, 27 million clams and crabs, and over 4 million fish.
Heavier oils, such as crude oils and other heavy petroleum products are  less toxic than lighter oils but can also have severe environmental impacts.  Medium and heavy oils do not evaporate much, even during favorable  weather conditions, and can blanket structures they come in contact  with—boats and fishing gear, for example—as well as the shoreline,  creating severe environmental impacts to these areas, and harming  waterfowl and fur-bearing mammals through coating and ingestion.  Additionally, heavy oils can sink, creating prolonged contamination of the  sea bed and tar balls that sink to the ocean floor and scatter along  beaches. These spills can require intensive shoreline and structural clean  up, which is time-consuming and expensive. For example, in 1995, a tanker  spilled approximately 38,000 gallons of heavy fuel oil into the Gulf of  Mexico when it collided with another tanker as it prepared to lighter its oil  to another ship. Less than 1 percent (210 gallons) of the oil was  recovered from the sea, and as a result, recovery efforts on the beaches of  Matagorda and South Padre Islands were labor intensive, as hundreds of  workers had to manually pick up tar balls with shovels. The total removal  costs for the spill were estimated at $7 million.
section_title: Other Factors Also Affect Spill Costs
paragraphs: Some industry experts cited two other factors as also affecting costs  incurred during a spill.
Effectiveness of Spill Response: Some private-sector officials stated that  the effectiveness of spill response can impact the cost of cleanup. The  longer it takes to assemble and conduct the spill response, the more likely  it is that the oil will move with changing tides and currents and affect a  greater area, which can increase costs. Some officials said the level of  experience of those involved in the incident command is critical to the  effectiveness of spill response. For example, they said poor decision  making during a spill response could lead to the deployment of  unnecessary response equipment, or worse, not enough equipment to  respond to a spill. Several officials expressed concern that Coast Guard  officials are increasingly inexperienced in handling spill response, in part  because the Coast Guard’s mission has been increased to include  homeland security initiatives.
Public interest: Several officials with whom we spoke stated that the level  of public attention placed on a spill creates pressure on parties to take  action and can increase costs. They also noted that the level of public  interest can increase the standards of cleanliness expected, which may  increase removal costs.
section_title: Key Factors Will Likely Influence Cost of San Francisco Spill
paragraphs: The total costs of the San Francisco spill are currently unknown.  According to NPFC officials, as of December 4, 2007, the Unified  Command estimated that $48 million had been spent on the response,  which includes approximately $2.2 million from the Fund.  The total costs  will not likely be known for a while, as it can take many months or years  to determine the full effect of a spill on natural resources and to determine  the costs and extent of the natural resource damage. Our work for this  testimony did not include a thorough evaluation of the factors affecting  the spill. However, some of the same key factors that have influenced the  cost of 51 major oil spills will likely have an effect on the costs in the San  Francisco spill. For example, the spill occurred in an area close to shore,  which caused the closing of as many as 22 beaches, according to Coast  Guard officials. A weather-related factor was that the spill occurred during  dense fog, which complicated efforts to determine how much of an area  the spill covered. Moreover, the cargo ship spilled a heavy oil—specifically  intermediate fuel oil—that requires particularly intensive shoreline and  structural clean-up, and harmed scores of birds and marine mammals  through coating and ingestion. Concerns have also been raised about the  effectiveness of the spill response and incident command, another of the  factors cited as contributing to increased costs. The National  Transportation Safety Board, the Coast Guard, as well as other  government agencies, are currently investigating the details of the accident  and the subsequent response.
section_title: Fund Has Been Able to Cover Costs Not Paid by Responsible Parties, but Risks Remain
paragraphs: The Fund has been able to cover costs from major spills that responsible  parties have not paid, but risks remain. Specifically, the current liability  limits for certain vessel types, notably tank barges, may be  disproportionately low relative to costs associated with such spills. There  is also no assurance that vessel owners and operators are able to  financially cover these new limits, because the Coast Guard has not yet  issued regulations for satisfying financial responsibility requirements. In  addition, although OPA calls for periodic increases in liability limits to  account for significant increases in inflation, such increases have never  been made. Aside from issues related to limits of liability, the Fund faces  other potential drains on its resources, including ongoing claims from  existing spills.
subsections: section_title: Further Attention to Limits of Liability Is Needed
paragraphs: The Fund has been able to cover costs from major spills that responsible  parties have not paid, but additional focus on limits of liability is  warranted. Limits of liability are the amount, under certain circumstances,  above which responsible parties are no longer financially liable for spill  removal costs and damage claims. If the responsible party’s costs exceed  the limit of liability, they can make a claim against the Fund for the  amount above the limit. Major oil spills that exceed a vessel’s limit of  liability are infrequent, but their impact on the Fund can be significant.  Ten of the 51 major oil spills that occurred since 1990 resulted in limit-of- liability claims on the Fund. These limit-of-liability claims totaled more  than $252 million and ranged from less than $1 million to more than $100  million. Limit-of-liability claims will continue to have a pronounced effect  on the Fund. NPFC estimates that 74 percent of claims under adjudication  that were outstanding as of January 2007 were for spills in which the limit  of liability had been exceeded. The amount of these claims under  adjudication was $217 million.
We identified three areas in which further attention to these liability limits  appears warranted: the appropriateness of some current liability limits, the  need to adjust limits periodically in the future to account for significant  increases in inflation, and the need for updated regulations for ensuring  vessel owners and operators are able to financially cover their new limits.
subsections: section_title: Some Recent Adjustments to Liability Limits Do Not Reflect the Cost of Major Spills
paragraphs: The Coast Guard and Maritime Transportation Act of 2006 significantly  increased the limits of liability from the limits set by OPA in 1990. Both  laws base the liability on a specified amount per gross ton of vessel  volume, with different amounts for vessels that transport oil commodities  (tankers and tank barges) than for vessels that carry oil as a fuel (such as  cargo vessels, fishing vessels, and passenger ships). The 2006 act raised  both the per-ton and the required minimum amounts, differentiating  between vessels with a double hull, which helps prevent oil spills resulting  from collision or grounding, and vessels without a double hull (see table 2  for a comparison of amounts by vessel category). For example, the  liability limit for single-hull vessels larger than 3,000 gross tons was  increased from the greater of $1,200 per gross ton or $10 million to the  greater of $3,000 per gross ton or $22 million.
Our analysis of the 51 spills showed that the average spill cost for some  types of vessels, particularly tank barges, was higher than the limit of  liability, including the new limits established in 2006. As figure 6 shows,  the 15 tank barge spills and the 12 fishing/other vessel spills had average  costs greater than both the 1990 and 2006 limits of liability. For example,  for tank barges, the average cost of $23 million was higher than the  average limit of liability of $4.1 million under the 1990 limits and $10.3  million under the new 2006 limits. The nine spills involving tankers, by  comparison, had average spill costs of $34 million, which was  considerably lower than the average limit of liability of $77 million under  the 1990 limits and $187 million under the new 2006 limits. Similarly, the  15 major spills involving cargo/freight vessels had an average spill cost of  $67 million, which was lower than both the 1990 and 2006 limits of  liability.
In a January 2007 report examining spills in which the limits of liability  had been exceeded, the Coast Guard had similar findings on the adequacy  of some of the new limits. Based on an analysis of 40 spills in which costs  had exceeded the responsible party’s liability limit since 1991, the Coast  Guard found that the Fund’s responsibility would be greatest for spills  involving tank barges, where the Fund would be responsible for paying 69  percent of costs. The Coast Guard concluded that increasing liability limits  for tank barges and non tank vessels—cargo, freight, and fishing vessels— over 300 gross tons would positively impact the Fund balance. With regard  to making specific adjustments, the Coast Guard said dividing costs  equally between the responsible parties and the Fund was a reasonable  standard to apply in determining the adequacy of liability limits.  However, the Coast Guard did not recommend explicit changes to achieve  either that 50/50 standard or some other division of responsibility.
section_title: Liability Limits Have Not Been Adjusted for Inflation
paragraphs: Although OPA requires adjusting liability limits to account for significant  increases in inflation, no adjustments to the limits were made between  1990 and 2006, when the Congress raised the limits in the Coast Guard and  Maritime Transportation Act. During those years, the Consumer Price  Index rose approximately 54 percent. OPA requires the President, who  has delegated responsibility to the Coast Guard, through the Secretary of  Homeland Security, to issue regulations not less often than every 3 years  to adjust the limits of liability to reflect significant increases in the  Consumer Price Index. We asked Coast Guard officials why no  adjustments were made between 1990 and 2006. Coast Guard officials  stated that they could not speculate on behalf of other agencies as to why  no adjustments had been made prior to 2005 when the delegation to the  Coast Guard was made.
The decision to leave limits unchanged had financial implications for the  Fund. Raising the liability limits to account for inflation would have the  effect of reducing payments from the Fund, because responsible parties  would be responsible for paying costs up to the higher liability limit. Not  making adjustments during this 16-year period thus had the effect of  increasing the Fund’s financial liability. Our analysis showed that if the  1990 liability limits had been adjusted for inflation during the 16-year  period, claims against the Fund for the 51 major oil spills would have been  reduced 16 percent, from $252 million to $213 million. This would have  meant a savings of $39 million for the Fund.
section_title: Certification of Compliance with the New Liability Limits Is Not in Place
paragraphs: Certificates of Financial Responsibility have not been adjusted to reflect  the new liability limits. The Coast Guard requires Certificates of Financial  Responsibility, with few exceptions, for vessels over 300 gross tons or any  vessels that are lightering or transshipping oil in the Exclusive Economic  Zone as a legal certification that vessel owners and operators have the  financial resources to fund spill response up to the vessel’s limit of  liability. Currently, Certificate of Financial Responsibility requirements are  consistent with the 1990 limits of liability and, therefore, there is no  assurance that responsible parties have the financial resources to cover  their increased liability.  The Coast Guard plans to initiate a rule making  to issue new Certificate of Financial Responsibility requirements. Coast  Guard officials indicated their goal is to publish a Notice of Proposed  Rulemaking by the end of 2007, but they said they could not be certain  they would meet this goal.
section_title: Other Challenges Could Also Affect the Fund’s Condition
paragraphs: The Fund also faces several other potential challenges that could affect its  financial condition:    Additional claims could be made on spills that have already been cleaned  up: Natural resource damage claims can be made on the Fund for years  after a spill has been cleaned up. The official natural resource damage  assessment conducted by trustees can take years to complete, and once it  is completed, claims can be submitted to the NPFC for up to 3 years  thereafter. For example, NPFC recently received and paid a natural  resource damage claim for a spill in U.S. waters in the Caribbean that  occurred in 1991.
Costs and claims may occur on spills from previously sunken vessels  that discharge oil in the future: Previously sunken vessels that are  submerged and in threat of discharging oil represent an ongoing liability to  the Fund. There are over 1000 sunken vessels that pose a threat of oil  discharge. These potential spills are particularly problematic because in  many cases there is no viable responsible party that would be liable for  removal costs. Therefore, the full cost burden of oil spilled from these  vessels would likely be paid by the Fund.
Spills may occur without an identifiable source and therefore, no  responsible party: Mystery spills also have a sustained impact on the  Fund, because costs for spills without an identifiable source—and  therefore no responsible party—may be paid out of the Fund. Although  mystery spills are a concern, the total cost to the Fund from mystery spills  was lower than the costs of known vessel spills in 2001 through 2004.  Additionally, none of the 51 major oil spills was the result of discharge  from an unknown source.
A catastrophic spill could strain the Fund’s resources: Since the 1989  Exxon Valdez spill, which was the impetus for authorizing the Fund’s  usage, no oil spill has come close to matching its costs. Cleanup costs for  the Exxon Valdez alone totaled about $2.2 billion, according to the vessel’s  owner. By comparison, the 51 major oil spills since 1990 cost, in total,  between $860 million and $1.1 billion. The Fund is currently authorized to  pay out a maximum of $1 billion on a single spill. Although the Fund has  been successful thus far in covering costs that responsible parties did not  pay, it may not be sufficient to pay such costs for a spill that has  catastrophic consequences.
section_title: Concluding Observations
paragraphs: In conclusion, the “polluter pays” system established under OPA has been  generally effective in ensuring that responsible parties pay the costs of  responding to spills and compensating those affected. However, increases  in some liability limits appear warranted to help ensure that the “polluter  pays” principle is carried out in practice.  For certain vessel types, such as  tank barges, current liability limits appear disproportionately low relative  to their historic spill costs.  The Coast Guard has reached a similar  conclusion but so far has stopped short of making explicit  recommendations to the Congress about what the limits should be.
Absent such recommendations, the Fund may continue to pay tens of  millions for spills that exceed the responsible parties’ limits of liability.   Further, to date, liability limits have not been regularly adjusted for  significant changes in inflation.  Consequently, the Fund was exposed to  about $39 million in liability claims for the 51 major spills between 1990  and 2006 that could have been saved if the limits had been adjusted for  inflation.  Without such actions, oil spills with costs exceeding the  responsible parties’ limits of liability will continue to place the Fund at  risk.  Given these concerns, in our September 2007 report, we  recommended that the Commandant of the Coast Guard (1) determine  whether and how liability limits should be changed, by vessel type, and  make recommendations about these changes to the Congress and (2)  adjust the limits of liability for vessels every 3 years to reflect significant  changes in inflation, as appropriate.  DHS, including the Coast Guard,  generally agreed with the report’s contents and agreed with the  recommendations. To date, the Commandant of the Coast Guard has not  implemented these recommendations.
Madame Chair this concludes my statement. I would be pleased to answer  any questions that you or other Members of the Subcommittee may have at  this time.
section_title: Contact Information
paragraphs: For further information on this testimony, please contact Susan Fleming at  (202) 512-2834 or Flemings@gao.gov. Individuals making contributions to  this testimony include Nikki Clowers, Assistant Director; Simon Galed;  Stan Stenersen; and Susan Zimmerman.
section_title: Appendix I: Information on Spill Response
paragraphs: Response to large oil spills is typically a cooperative effort between the  public and private sector, and there are numerous players who participate  in responding to and paying for oil spills. To manage the response effort,  the responsible party, the Coast Guard, EPA, and the pertinent state and  local agencies form the unified command, which implements and manages  the spill response. Beyond the response operations, there are other  stakeholders, such as accountants who are involved in documenting and  accounting for costs, and receiving and processing claims. In addition,  insurers and underwriters provide financial backing to the responsible  party. The players involved in responding to and/or paying for major spill  response are as follows:   Government agencies: The lead federal authority, or Federal On-Scene  Coordinator, in conducting a spill response is usually the nearest Coast  Guard Sector and is headed by the Coast Guard Captain of the Port. The  Federal On-Scene Coordinator directs response efforts and coordinates all  other efforts at the scene of an oil spill. Additionally, the on-scene  coordinator issues pollution removal funding authorizations—guarantees  that the agency will receive reimbursement for performing response  activities—to obtain services and assistance from other government  agencies. Other federal agencies may also be involved. NOAA provides  scientific support, monitoring and predicting the movement of oil, and  conducting environmental assessments of the impacted area. The federal,  state, and tribal trustees join together to perform a natural resource  damage assessment, if necessary. Within the Coast Guard, the NPFC is  responsible for disbursing funds to the federal on-scene coordinator for oil  spill removal activities and seeking reimbursement from responsible  parties for federal costs. Additionally, regional governmental entities that  are affected by the spill—both state and local—as well as tribal  government officials or representatives may participate in the unified  command and contribute to the response effort, which is paid for by the  responsible party or are reimbursed by the responsible party or the Fund.
Responsible parties: OPA stipulates that both the vessel owner and  operator are ultimately liable for the costs of the spill and the cleanup  effort. The Coast Guard has final determination on what actions must be  taken in a spill response, and the responsible party may form part of the  unified command—along with the federal on-scene coordinator and  pertinent state and local agencies—to manage the spill response. The  responsible parties rely on other entities to evaluate the spill effects and  the resulting compensation. Responsible parties hire environmental and  scientific support staff, specialized claims adjustors to adjudicate third- party claims, public relations firms, and legal representation to file and  defend limit of liability claims on the Fund, as well as serve as counsel  throughout the spill response.
Qualified individuals: Federal regulations require that vessels carrying  oil as cargo have an incident response plan and, as part of the plan, they  appoint a qualified individual who acts with full authority to obligate funds  required to carry out response activities. The qualified individual acts as a  liaison with the Federal On-Scene Coordinator and is responsible for  activating the incident response plan.
Oil spill response organizations: These organizations are private  companies that perform oil spill cleanup, such as skimming and disposal  of oil. Many of the companies have contractual agreements with  responsible parties and the Coast Guard. The agreements, called basic  ordering agreements, provide for prearranged pricing, response personnel,  and equipment in the event of an oil spill.
Insurers: Responsible parties often have multiple layers of primary and  excess insurance coverage, which pays oil spill costs and claims. Pollution  liability coverage for large vessels is often underwritten by not-for-profit  mutual insurance organizations. The organizations act as a collective of  ship owners, who insure themselves, at-cost. The primary insurers of  commercial vessels in U.S. waters are the Water Quality Insurance  Syndicate, an organization providing pollution liability insurance to over  40,000 vessels, and the International Group of P & I Clubs, 13 protection  and indemnity organizations that provide insurance primarily to foreign- flagged large vessels.
At the federal level, the National Oil and Hazardous Substances Pollution  Contingency Plan provides the framework for responding to oil spills. At  the port level, each port has an Area Contingency Plan, developed by a  committee of local stakeholders, that calls for a response that is  coordinated with both higher-level federal plans and lower-level facility  and vessel plans. The federal plans designate the Coast Guard as the  primary agency to respond to oil spills on water. The Coast Guard has a  National Strike Force to provide assistance to efforts by the local Coast  Guard and other agencies. The Coast Guard also has an exercise  program—known as the Spills of National Significance exercise  program—to test national level response capabilities. This program is  focused on exercising the entire response system as the local, regional and  national level using large-scale, high probability oil and hazardous material  incidents that result from unintentional causes such as maritime accidents  or natural disasters. The most recent program exercise, in June 2007,  tested the response and recovery to an oil and hazardous materials release  in the wake of a large scale earthquake in the Mississippi and Ohio river  valleys.
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