Opinion ID: 454658
Heading Depth: 1
Heading Rank: 4

Heading: the subsidy abatement scheme

Text: 66 In its Tentative Order on remand, the Board determined that a subsidized vessel should be required to abate an escalating portion of its ODS if it derives more than half of its annual gross revenues from the carriage of preference cargoes. See supra note 15. The Board noted that this abatement scheme, which it applies to ODS liner vessels, would ensure that ODS was employed to meet foreign-flag competition as provided in section 601 of the Act. See supra pp. 554-555. That section provides, in relevant part, that: 67 No ... application [for ODS] shall be approved by the Secretary of Transportation unless he determines that (1) the operation of such vessel or vessels in an essential service is required to meet foreign-flag competition and to promote the foreign commerce of the United States ... [and] (4) the granting of the aid applied for is necessary to place the proposed operations of the vessel or vessels on a parity with those of foreign competitors, and is reasonably calculated to carry out effectively the purposes and policy of this chapter. 68 46 U.S.C. Sec. 1171(a) (emphasis added); see also id. Secs. 1173-74 (also indicating that ODS is designed to meet foreign competition). 69 In interpreting this provision with respect to the award of ODS to liner vessels, the Board determined that the ODS paid to liner vessels is not being used to meet foreign competition if subsidized vessels derive more than half of their gross revenues from cargoes, such as preference cargoes, that are not carried at world rates and are not subject to foreign competition. See 46 C.F.R. Sec. 280.4 (1984). In the course of considering Aeron's initial application to serve the preference trade, the Board extended its interpretation of section 601 to cover bulk vessels as well. See Atlas Marine, 19 Ship.Reg.Rep. at 493-95. At that time, the Board had no reason to believe that Aeron would abandon the commercial market in search of higher profits in the preference trade and it therefore did not adopt any subsidy abatement rule. See Aeron, 695 F.2d at 579 n. 36. When the Board decided to allow subsidized bulk vessels to charge cost-based rates on remand from Aeron, however, it created the possibility that those vessels would concentrate on the preference trade instead of the world-wide commercial market. The Board accordingly decided to apply its liner subsidy reduction formula to subsidized bulk vessels in order to ensure that ODS is primarily employed to meet foreign competition. See Tentative Order, 22 Ship.Reg.Rep. at 323-24. 70 In States Marine, this court concluded a subsidy abatement rule designed to prevent subsidized liner vessels from abandoning the commercial trades constituted a reasonable interpretation of section 601's requirement that subsidized ships compete in the world market. 71 The Act consistently speaks of awarding subsidies only to vessels meeting foreign competition. ... The Board's rule reducing subsidy when a vessel is not in substantial competition appears to strike a sound balance between the intention of Congress and the competitive needs of the industry. Additionally, the Board's decision that subsidies should be based upon the amount of competition cargo carried during the year rather than upon other formulae suggested by the parties finds support in the language of the Act, which speaks of service instead of cargo or voyages. 72 States Marine, 518 F.2d at 1082. We therefore upheld the particular subsidy reduction scheme the Board adopted for liner vessels in light of the Board's extensive proceedings concerning the relationship of the rule to the needs of the liner carriage industry. See id. (noting the extensive evidence compiled before the Board). In Aeron, we also recognized that the Board could condition Aeron's receipt of ODS on a reduction of subsidy under section 601 if it adopted a cost-based structure that would attract subsidized vessels to the preference trade. See Aeron, 695 F.2d at 579 n. 36. 73 Despite this general judicial approval, Aeron presses two challenges to the Board's subsidy abatement rule. 30 First, Aeron contends that any subsidy reduction rule conflicts with the purposes of the 1970 amendments because it discourages subsidized vessels from taking over the preference trade, with the full advantage of ODS, to the greatest extent possible. Again, however, Aeron's challenge ignores the competing goals embodied in those amendments. Indeed, Congress' central purpose in extending ODS to bulk vessels was to make a substantial inroad in the commercial [i.e., non-preference] bulk trade which we have now virtually forfeited to foreign carriers. House Report at 38 (emphasis added); see id. at 25; see also Aeron, 695 F.2d at 570. As we found in States Marine, a subsidy abatement rule permissibly encourages subsidized vessels to compete with foreign carriers in accordance with that congressional goal. We therefore conclude that, in principle at least, a rule reducing ODS if a subsidized vessel derives substantial revenue from preference cargo carriage under present market conditions reasonably responds to Congress' expectation that ODS bulk vessels would compete with foreign ships in the world market. 31 74 Aeron also argues, however, that the Board failed to consider whether its specific liner abatement formula was ill-suited to the bulk carriage industry and instead arbitrarily assumed that its liner formula would result in the appropriate degree of participation by subsidized vessels in the preference trade. In particular, Aeron contends that the practical differences between bulk and liner carriage make the liner abatement formula unworkable and inappropriate when applied to bulk vessels. Liner vessels, Aeron suggests, can maintain significant preference cargo service without triggering subsidy reduction because only a small portion of an outbound liner voyage consists of preference cargo and because liners carry commercial cargo on the inbound leg. Aeron also points out that liners often operate at so-called conference rates which are not considered premium rates and therefore are not counted as preference cargo carriage for the purposes of subsidy reduction. See 46 C.F.R. Sec. 280.5 (1984). As a result of these particular shipping characteristics, no liner has ever been required to abate subsidy. See Aeron's Brief at 24. By contrast, Aeron argues, bulk shippers have far fewer opportunities to carry preference cargo without triggering subsidy reduction. Bulk shippers carry large, ship-size cargo on extended chartered voyages, they do not operate at conference rates, and they typically do not carry inbound cargo. Thus a single carriage of preference cargo could occupy a bulk vessel for four months and account for nearly half of that vessel's annual revenues. See id. at 22-30. Consequently, Aeron contends, the Board's reflexive application of the liner abatement formula to bulk carriers may in practice discourage subsidized bulk vessels from carrying more than a single preference cargo per year. 75 We cannot say that Aeron's challenge is frivolous. The Board's rate structure is expressly designed to encourage subsidized vessels to carry preference cargoes in accordance with the goals of the 1970 amendments. If Aeron's assessment of the effects of the subsidy abatement scheme on bulk carriers is correct, however, the Board's particular abatement formula could undercut that rationale by discouraging subsidized vessels from carrying any substantial number of preference cargoes each year. In the orders under review, the Board did not consider whether possible fact-specific differences between liner and bulk carriage required it to adjust its liner abatement formula before applying that formula to subsidized bulk carriers, and it did not consider the overall effects of the rule on Aeron's ability to carry preference cargoes. Instead, the Board apparently assumed that applying its liner rule to bulk vessels would result in an appropriate level of subsidized preference cargo carriage--that it would discourage Aeron from abandoning the commercial trade but nonetheless allow it to carry a reasonable number of preference cargoes. The federal appellees have not responded to Aeron's challenge to the Board's particular abatement formula. The AMA even states that applying the liner reduction formula to bulk shippers presents a number of conceptual and practical difficulties. See AMA's Brief at 31-33. 76 While the general principle of subsidy reduction finds support in the statutory scheme, then, the Board has failed to offer an adequate explanation of whether its particular abatement formula reasonably responds to the practicalities of the bulk carriage industry given the purposes and policies of the Act. In the absence of such an explanation, we cannot uphold the Board's subsidy abatement scheme and must therefore remand the abatement formula to the Board for further consideration. 32 On remand, the Board should consider whether its abatement formula should be adjusted or redesigned in light of both the arguable differences between liner and bulk carriage and Aeron's argument that it thwarts the goals of the 1970 amendments by unreasonably preventing subsidized vessels from serving the preference trade. We do not in any way decide that question today. On remand, the Board is free to reject Aeron's account of the differences between liner and bulk carriage if it finds that account unpersuasive, to adjust its subsidy reduction rule in light of those differences, or to retain its current formula despite those differences or any evidence concerning the needs of bulk carriers provided that it explains why the Act's language and legislative history justify the chosen rule. Cf. Aeron, 695 F.2d at 582. We hold only that the Board must give due consideration to the nature of the bulk carriage industry in designing any particular subsidy reduction scheme aimed at both encouraging substantial subsidized preference cargo carriage and discouraging subsidized bulk vessels from abandoning the worldwide commercial market.