Opinion ID: 409578
Heading Depth: 2
Heading Rank: 4

Heading: Substantive Failings

Text: 87 As noted, the 22 October study upon which MarAd's decision was based differs in fundamental respects from the two earlier reports issued by MarAd. The first report, dated 26 August 1980, predicts surplus nonsubsidized tonnage in the Alaskan trade of 984,000 DWT in 1985 and 594,000 DWT in 1990. 87 In the domestic trade generally it predicts a surplus of 506,000 DWT in 1985 and 657,000 DWT in 1990. 88 The Report concludes that there will be sufficient nonsubsidized tonnage to meet not only the tonnage requirements for the Alaskan oil trade, but also the requirements for the other domestic trades, as well. 89 In other words, entry of the Bay Ridge would exacerbate the problem of anticipated overtonnage in the domestic trade generally and the Alaskan trade in particular. 88 The 24 September report departs from the 26 August report only in its discussion of West Coast consumption. The report compares consumption forecasts of the Department of Energy (DOE) with those of the California Energy Commission (CEC). It concludes that under the DOE scenario of declining West Coast consumption (and, hence, a greater need for long-haul carriage), the Bay Ridge and other CDS-built VLCCs would be necessary by 1985 to offset shortfalls in Jones Act tonnage, but the requirement would decline thereafter and by 1990 12-month/year operation by the Bay Ridge would generate surplus capacity. 90 Under the CEC scenario of modest growth in West Coast consumption (the scenario adopted in the 26 August study), VLCC requirements can be met throughout the period 1980-1990 by existing Jones Act tonnage ships augmented by existing CDS-built ships operating under six-month waivers. 91 89 The 22 October report, upon which MarAd relies, paints an even bleaker picture of the domestic tanker market. A chart contained in the report 92 predicts over-tonnage for the trade generally of 2.76 million DWT in 1985, over five times the excess tonnage predicted in the 26 August report, and 1.89 million DWT for 1990, almost three times the excess tonnage previously predicted. No specific figures are given for the Alaskan trade for which the Bay Ridge was destined. 93 But the text is unencouraging, prophesying a continuous decline in demand due to stagnant production levels and a gradual decline in Panama Canal oil transshipments. By 1986 ... (t)he demand for Alaska/West Coast/Panama tankers is expected to decline by 1.4 million DWT.... From 1986 to 1990 ... (this trade) is expected to decline by another 1.4 million DWT .... 94 90 Yet somehow, mirabile dictu, the report finds room for the Bay Ridge which was not there one month before. It does so by providing separate supply and demand figures for vessels of varying sizes. 91 In the prior two reports, tonnage was apparently viewed as interchangeable. The 22 October study takes a more sophisticated approach. Supply and demand figures are broken down by vessel size and, despite huge overtonnage generally, a deficit is predicted for vessels of over 100,000 DWT through 1985 of at least 244,000 DWT, just enough to accommodate the 225,000 DWT capacity of the Bay Ridge. The demand for such vessels will then rapidly decline so that a surplus of 81,900 DWT is predicted for 1988, increasing each year thereafter. 95 92 The text of the report explains why tankers of 100,000 DWT and above are treated as an insulated category. 93 These vessels are engaged exclusively in the Alaskan crude oil trades, primarily between Valdez and the Panama Canal.... Competition with the 40,000-99,999 DWT size vessels could occur in the Alaska/West Coast trades, but it is unlikely to occur in the Alaska/Panama Canal oil trades because of economies of scale inherent in the larger crude carriers. 96 94 Thus, an anticipated 1985 surplus of 1.841 million DWT in the 40,000-99,999 DWT category 97 is not thought to alleviate the shortage of the larger vessels. 95 Unfortunately, this conclusion and the chart generally are directly contradicted two pages earlier in the report, where it is predicted that shipments between Alaska and the Panama Canal will steadily decline. The partial equalization of domestic and world crude oil prices at the wellhead and the increased refining capacity for sour crude on the West Coast are expected to result in a decline of Panama transshipments to about 200,000 barrels per day. 98 Panama Canal transshipments should continue to decline to marginal levels by 1990. 99 96 Where, then, stems the exclusive need for tankers in excess of 100,000 DWT? Two hundred thousand barrels per day through the canal generates a need for 1 million DWT in tankers of over 100,000 DWT. 100 It follows that in 1986 there will be a surplus of 2.192 million DWT of ships in that category for the Panama trade, not a deficit of 161,000 DWT as the chart predicts. These extra ships will have to ply the Alaska-West Coast trade where, by the report's own admission, they will compete with surplus ships in the 40,000-99,999 DWT category. 97 Since the statistical chart is presented without any explanation for the derivation of its figures, the apparent contradiction between text and chart is impossible to resolve. In the face of this contradiction, we cannot allow MarAd's conclusion that there is room for the Bay Ridge in the domestic trade to stand. 98 A further problem is that, even if we were to accept MarAd's chart and ignore the dire predictions in text, entry of the Bay Ridge would begin to generate excess tonnage as early as 1986-87. It would contribute to an increasingly substantial problem during the latter half of the '80s through to 1990 when MarAd's forecast ends. Thus, it seems inevitable that the Bay Ridge will ultimately have a detrimental effect on the domestic trade. 99 MarAd countered this obvious point in its report by pointing to the unusually high breakeven level which makes it the marginal vessel in the trade. Thus, this vessel will be the first to become unemployed as the Alaskan tanker market softens. 101 100 The problem with this argument is that it is belied by the discussion, just six pages earlier, of the financial viability of the Bay Ridge in the Alaskan trade. The Bay Ridge already had contracts for one year and, once the repayment application was granted, they were expected to be renewed for five years. (I)t is considered highly probable that the contracts will be renewed at least until approximately 1986 when the ALPETCO refinery in Alaska is due to go on line. 102 The ALPETCO refinery was then expected to provide employment for the Bay Ridge for the remainder of its economic life pursuant to an exclusive shipping rights agreement with an operating partner of Seatrain. 103 As Richmond's repayment application notes (t)he combination of the above cargo requirements will lead to the employment of the Bay Ridge for the full 20-year period anticipated in this application for subsidy repayment. 104 Again, it seems inevitable that the Bay Ridge will ultimately have a detrimental effect on the domestic trade. 101 In its brief, Richmond has suggested that MarAd thought the advantage of redressing an existing deficit may well outweigh the disadvantages of contributing to a potential future surplus. 105 But no such statement by MarAd is to be found anywhere in the record, and we cannot uphold an agency's decision based on speculation as to what the agency would have thought if it had addressed a problem it chose, rather, to ignore. 102 MarAd's letter announcing the Bay Ridge decision expressly incorporated a finding that (t)he grant of Richmond's application will have no or, at the most, minimal adverse economic impact on the U.S.-flag ... domestic tanker fleet ( ) .... 106 We have pointed to two ways in which inconsistencies in the staff study allegedly adopted by MarAd as part of its decision undermine this finding. As a consequence, we can accept neither the finding nor the decision that stems from it. 103 The inconsistencies in the 22 October report confirm an initial suspicion, raised by MarAd's attempts to keep the report confidential and its refusal to allow any petitions for reconsideration of its decision, that more was involved here than a neutral assessment of how best to serve U.S. interests in a sound merchant marine. MarAd was obviously concerned with its own precarious financial position and the inevitable embarrassment consequent upon a public disclosure of that position. 104 Total government exposure on the Bay Ridge alone, over three-fourths of which is attributable to MarAd, was $87 million. 107 That sum marks only the beginning, however, of MarAd's interest, at the time, in keeping Seatrain solvent. 108 As noted in the 20 October report, 105 Seatrain, the parent of Richmond Tankers, Inc. (the owner of the BAY RIDGE), has guarantees covering another $273,776,000 in outstanding loans, all of which are further guaranteed by the U.S. government. Foreclosure on the BAY RIDGE, if it is unable to operate profitably and service its debt, could force Seatrain in default on obligations to its other subsidiaries. The overall effect could be to call all of the U.S. guarantees which, including the BAY RIDGE, total $354,963,000. This domino or cascading effect would be softened only by the resale of all repossessed vessels, which would probably result in only recovering a small fraction of the guaranteed amounts. Thus, the failure of the BAY RIDGE to operate and repay debt has a much higher potential loss to the Government attached to it than just the vessel's own outstanding debt. 109 106 Thus, MarAd was placed in an extremely embarrassing position. Having continuously financed unnecessary ships for an insolvent company, it was faced by losses that could not but outrage Congress and the public at large. The problem was exacerbated by the leveraged lease transactions allowed by MarAd that enabled financially sound companies like Security Equipment Leasing, Inc. and American Road Equity Corp. to dip their fingers in the subsidized pie without bearing any of the ultimate financial risk and responsibility. 110 107 We do not say that MarAd cannot take account of potential government losses in passing upon a repayment application. The Supreme Court has already said that this is a relevant consideration. 111 But MarAd must be above board in its deliberations. If MarAd decides that its budgetary concerns outweigh any harm the Bay Ridge might cause the domestic trade, it must forthrightly acknowledge that decision instead of offering specious explanations for how the Bay Ridge will be readily absorbed. Moreover, MarAd cannot gloss over its financial predicament in its published decision with a single sentence, noting that (t) he financial interest of the Government ... is substantial, and warrants approval of Richmond's application. 112 Agency candor is crucial to the accountability that the APA is designed to ensure. Only thus can the court pursue its function of ensuring MarAd stays within its statutory mandate. Only thus can Congress and voters generally decide whether MarAd serves, on the whole, a useful or an inimical function.