# Appendix — AMERICAN MARITIME ASSOCIATION v. SECRETARY OF COMMERCE (Nos. 75-800, 75-798)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1975

## Text

D&C 4 1975

IN THE p MICHAEL F

Supreme Court of the United States

OCTOBER TERM, 1975

No. 75-800

AMERICAN MARITIME ASSOCIATION,

Petitioner,

PETER G. PETERSON,
Secretary of Commerce, ef al.,

Respondent.

APPENDIX TO
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

JOSEPH A. KLAUSNER

— 1028 Connecticut Avenue, N.W.

Washington, D.C. 20036
Attorney for Petitioner
December 4, 1975

_ ———————
Lene nnn ns
Washington, 0.C. « CLB PUBLISHERS © LAW PRINTING CO. « (202) 393-0625

- — wo oe

(i)

INDEX
Page
OPINION OF THE COURT OF APPEALS........------ A-1l
OPINION OF THE DISTRICT COURT.......----++-> A-29
FINAL OPINION AND ORDER OF THE MARITIME
SUBSIDY BOARD. ......----cccccccccccecces A-33
TEXT OF RELEVANT STATUTES:
Merchant Marine Act, 1936, Act of June 29, 1936
§101 ff., 49 Stat. 1985, 46 USC. §1101 ff.
7) ) eee A-81
£20), 0) ee ie A-82, 83, 84
i 9. (|) A-85, 86
i A387
10) (C) A388, 89
OGD . cw cccccccccccsccccesscceeescccers A-89
7c () ae A-90
TC) |) ce A-90, 91
7” 0) eee A91
0! (2 A-92
BOD nc cccccceccescseseccessesesesseses A-93
oo) ) A-94,95
Ue ) oe A-96,97
ts! C) A-97
Title 10 US.C. §2631 [Military] Supplies: Preference
to United States Vessels .......--- +--+ eee eee rees A-98

Title 1S U.S.C. §616a Shipment of Exports Financed
by Government in United States Rc cveénwseeens A-98

A-l
UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

STATES MARINE INTERNATIONAL,
INC., et al., Plaintiffs,

v.
Peter G. PETERSON, Secretary of

Commerce, et al.,
Defendants- Appellants,

v.
LINER COUNCIL, AMERICAN INSTI-

TUTE OF MERCHANT SHIPPING,
Intervenor-Appellee.

AMERICAN MARITIME ASSOCI-
ATION, Plaintiff-Appellant,

v.

Peter G. PETERSON, Secretary of
Commerce, et al.,
Defendants- Appellants,

v.
LINER COUNCIL, AMERICAN INSTI-

TUTE OF MERCHANT SHIPPING,
Intervenor-Appellee.

Nos. 74-1499, 74-1502.

United States Court of Appeals,
District of Columbia Circuit.

Argued April 17, 1975.
Decided Sept. 5, 1975.

A-2
STATES MARINE INTERNATIONAL, INC. v. PETERSON

Before MacKINNON and WILKEY,
Circuit Judges, and JAMESON,* United
States Senior District Judge for the Dis-
trict of Montana.

Opinion for the Court filed by Senior
District Judge JAMESON.

JAMESON, Senior District Judge:

This is an appeal from an order hold-
ing that, under the Merchant Marine Act
of 1936, 46 U.S.C. § 1101 et seq., the
Maritime Subsidy Board may not limit
or reduce the award and payment of an
operating differential subsidy (ODS) for
the carriage of preference cargo, i. e.,
cargo reserved by law for carriage only
on United States flag ships.

Plaintiff-appellant, American Maritime
Association (AMA), an organization of
independent unsubsidized American flag
carriers, and two other plaintiffs!

* Sitting by designation pursuant to 28 U.S.C.
§ 294(d).

1. States Marine International, Inc. and Isthmi-
an Lines, Inc., plaintiffs below, have not ap-
pealed in No. 74-1499. The federal appellants,
Peter G. Peterson, Secretary of Commerce, et
al., have appealed in both cases.

A-3
STATES MARINE INTERNATIONAL, INC. v. PETERSON

brought these actions to challenge a
final order of the Maritime Subsidy
Board (1) requiring subsidized shipping
lines to carry at least 50% non-prefer-
ence cargo and providing for the propor-
tional reduction in subsidies for vessels
earning less than 50% of freight reve-
nues from non-preference cargo; and (2)
rejecting AMA’s contention that the
owner of a vessel built with a construc-
tion differential subsidy (CDS) on which
an operating subsidy is paid should be
required to rebate the construction subsi-
dy where the vessel fails to “meet for-
eign-flag competition”. The American
Institute of Merchant Shippers (AIMS),
an association of subsidized ocean carri-
ers, intervened and contended that the
Merchant Marine Act does not permit
any reduction of subsidies because of the
carriage of preference cargo. The dis-
trict court agreed and granted interve-
nor-appellee’s motion for summary judg-
ment.?

The federal appellants, including the
Secretary of Commerce, Maritime Ad-
ministration, and Maritime Subsidy
Board, contend that the court erred in
adopting the intervenor’s position insofar
as it conflicts with the order of the
Board. Appellant AMA eontends that
the court erred in failing to hold that

2. In a footnote, the court stated that the issues
relating to the construction differential subsidy
were precluded by the court's decision in
American Maritime Association v. Stans, 329
F.Supp. 1179 (D.D.C.1971) aff'd, 157 U.S.App.
D.C. 394, 485 F.2d 765 (1973).

aaa aaa cm aaa i

A

STATES MARINE INTERNATIONAL, INC. v. PETERSON
the payment of any subsidy, ODS or
CDS, is precluded when vessels carry
preference cargo. In addition, AMA ar-
gues that the Board erred in its formu-
lae for determining the existence of
“substantial competition”, in failing to
find that double subsidies were being
paid, and in not ruling that the subsidy
program was creating unfair competi-
tion. In essence the cases involve the
interaction of provisions of the Merchant
Marine Act of 1936 and various acts pro-
viding a preference for American ships
with respect to the carriage of certain
cargo.

BACKGROUND

The Merchant Marine Act of 1936

The Merchant Marine Act of 1936 was
enacted to foster the development and
continued maintenance of a modern Mer-
chant Marine fleet. The Act recognized
that, “It is necessary for the national
defense and development of its foreign
and domestic commerce that the United
States shall have a merchant marine (a)
sufficient to carry its domestic water-
borne export and import foreign com-
merce of the United States to provide
shipping service essential for maintain-
ing the flow of such domestic and for-
eign water-borne commerce at all times,
(b) capable of serving as a naval and
military auxiliary in time of war or na-
tional emergency... .”. 46 U.S.C.
1101l(a, b) (1970). To accomplish this
purpose the Act established two subsi-
dies for American flag carriers, an oper-
ating differential subsidy (ODS) and a
construction differential subsidy (CDS).

Under section 601 of the Act, 46
U.S.C. § 1171(a), the Secretary of Com-
merce is authorized to grant an ODS
only if he determines that (1) the opera-

tion of such vessel or vessels in an essen-
tial service is “required to meet foreign

A-5
STATES MARINE INTERNATIONAL, INC. v. PETERSON

flag competition and to promote the for-
eign commerce of the United States”;
(2) the applicant’s vessels are such as are
required to enable him to operate in an
essential service, “in such a manner as
may be necessary to meet competitive
conditions, and to promote foreign com-
merce”; (3) the applicant possesses the
qualifications “necessary to enable him
to conduct the proposed wperations of
the vessel or vessels as to meet competi-
tive conditions and promote foreign com-
merce”; and (4) the subsidy “is neces-
sary to place the proposed operations of
the vessel or vessels on parity with those
of foreign competitors, and is reasonably '
calculated to carry out effectively the
purposes and policy of this Act”. (Em-
phasis added).

The CDS is authorized under 46 U.S.C.
§ 1151 et seq. to aid in construction of
vessels to be used in the foreign com-
merce of the United States. As with the
ODS, the Secretary of Commerce is re-
quired to determine that the applicant
meets various criteria, including a deter-
mination that the vessel “will meet the
requirements of foreign commerce of the
United States, will aid in the promotion
and development of such commerce, and
will be suitable for use by the United
States for national defense or military
purposes in time of war or national
emergency”. § 115l(a). Unlike the
ODS there is no requirement that the
granting of the construction subsidy be
necessary to “meet foreign flag competi-
tion.” 5

Cargo Preference Legislation

In order to promote American flag
carriers, Congress from time to time has

3. Prior to 1952, 46 U.S.C. § 1151 did require
the Board to establish that the proposed con-
struction was necessary “to meet foreign-flag
competition” before granting a subsidy.

A-6

STATES MARINE INTERNATIONAL, INC. v. PETERSON

enacted statutes providing that ship-
ments of certain American cargo must
be carried exclusively or primarily in
ships of United States registry. In 1904,
the first of these statutes, the Cargo
Preference Act, 10 U.S.C. § 2631, provid-
ed that only vessels of the United States
may be used in transporting American
military supplies. Numerous other pref-
erences discussed infra were enacted la-
ter. In 1954 Congress amended the 1936
Act to require in 46 U.S.C. § 1241(b) that
whenever government owed or financed
cargo is shipped, at least 50% of the
gross tonnage must be carried on pri-
vately owned vessels of United States
flag registry. The effect of the acts is
to guarantee that substantial quantities
of both civilian and military cargo will
be shipped on American vessels.

Proceedings before Maritime Subsidy
Board

Seeking relief from what it considered
unfair competitions AMA on July 1,
1969 petitioned the Secretary of Com-
merce to exercise his rule making au-
thority under the Merchant Marine Act,
46 U.S.C. § 1114(b), to adopt four rules
governing administration of the ODS
and CDS programs. Its proposed rules
reflected AMA’s position that neither
ODS nor CDS could be awarded or paid,

in full or in part, for the carriage of
preference cargoes.’ On December 1,

4. AMA contended that subsidy payments to
vessels handling preference cargo are in con-
tradiction to the stated purposes of the subsi-
dy statute to subsidize ships con peting with
foreign vessels. Subsidized lines can use their
subsidies to make bids on military and prefer-
ence cargoes necessarily below the costs for
unsubsidized vessels. The problem has in-
creased with the end of the Vietnam involve-
ment and has resulted in the demise of some
unsubsidized lines.

5. AMA filed its petition on behalf of its 78
member steamship companies which were un-

ee

ane

A-7
STATES MARINE INTERNATIONAL, INC. v. PETERSON

1969 the Maritime Subsidy Board, on be-
half of the Secretary of Commerce, com-
menced rule making proceedings, under
Docket No. S—244, to consider the rela-
tionship between ODS and CDS and
preference cargo. Extensive hearings
were held in which the American Unsub-
sidized Lines (AUL) joined the AMA in
representing the unsubsidized carriers.
The AIMS, United States Lines, Inc.,
and the Military Sealift Command of the
Department of Defense represented the
subsidized lines.

On June 22, 1971 the Chief Hearing
E aminer of the Board issued proposed
F. ndings of Fact in which he recom-
mended, inter alia, that the AMA pro-
posed rule calling for the refund of ODS
proportionate to revenues derived from
preference cargo be adopted with respect
to military and open-rated civilian pref-
erence cargo carried at premium rates.
The Examiner further concluded that
open-rated civilian preference cargo
should not be the subject of subsidy re-
fund. Appeal was taken to the Board.

The Board issued its Final Order and
Opinion on June 12, 1972. It declined to
adopt the rules proposed by the AMA
and rejected the legal conclusions of the
examiner. Instead the Board formulat-
ed a new rule and regulations to govern
the award of future subsidy contracts.®

subsidized under the Act and which relied

heavily on preference cargoes for their liveli-
hood.

6. The June 12, 1972 Final Order and Opinion is
reported in Pike & Fischer, 13 S.R.R. 44
(1972). The proposed regulations were pub-
lished for comment in the Federal Register on
July 18, 1972 (37 F.R. 14236). In response to
comments minor revisions were made and
final regulations, which became effective Janu-
ary 1, 1973, were promulgated October 4, 1972
and published in the Federal Register on Octo-
ber 7, 1972 as Part 280 of 46 C.F.R. (37 F.R.
21323).

A-8
STATES MARINE INTERNATIONAL, INC. vy. PETERSON

In concluding that it could not accept
the position of either AMA or AIMS
with regard to the meaning of the 46
U.S.C. § 1171(a) requirement that vessels
“meet foreign-flag competition”, the
Board said:

“The Board specifically rejects AMA’s
contention that subsidized vessel oper-
ations must be devoted almost exclu-
sively to carriage of cargo subject to
foreign-flag competition in order to
qualify for an ODS contract. The
Board also rejects AMA’s contention
that ODS may be paid under a valid
contract only for carriage of cargo
subject to foreign-flag competition.
We think the statute and its legisla-
tive history clearly establish that the
purpose of the ODS program is not to
subsidize cargo carriage but instead to
subsidize operation of vessels so that
the vessels are in a position to carry
cargo on a competitive basis. On the
other hand, we do not accept the
AIMS position that the actual per-
formance of a vessel operator as a
competitor can be ignored. Rather, it
is our judgment that payment of sub-
sidy for operation of vessels must be
governed by the degree to which the
competitiveness of that operation is re-
flected in actual operating experi-
ence.”

The Board determined that the follow-
ing three principles would apply in any
future award and payment of ODS:

“First, no ODS contract will be
awarded unless the applicant can es-
tablish that the vessel operations pro-
posed to be subsidized will be conduct-
ed in a manner which will not preclude
the applicant from earning a substan-
tial portion of its gross freight reve-
nues for each service covered by the
application from the carriage of car-

A-9
STATES MARINE INTERNATIONAL, INC. v. PETERSON

goes subject to foreign-flag competi-
tion. Secondly, ODS will be paid in
full for vessel operations on each serv-
ice covered by an ODS contract only if
a substantial portion of the gross
freight revenues earned for that serv-
ice are earned from the carriage of
cargoes subject to foreign-flag compe-
tition. Thirdly, to the extent that less
than a substantial portion of the gross
freight revenues earned for a service
are earned from carriage of cargo sub-
ject to foreign-flag competition, CDS
payable under the ODS contract for
that service will be reduced in propor-
tion to the decreased gross freight rev-
enues earned from such carriage. In
each of the three cases, ‘substantial
portion’ is interpreted by the Board to
mean 50%.” 7

The Board issued regulations establish-

ing a sliding ODS payment schedule for

vessels having less than 50% of the cargo

subject to foreign competition.

Utilizing these standards, the Board
divided preference cargoes into their
component parts of military preference
cargoes and civilian preference cargoes.
The Board held that military cargo is
never subject to foreign competition;
nor is civilian preference cargo carried at
premium rates (agricultural commodities
shipped pursuant to Department of Agri-

7. The Board specified two situations in which
cargo is ‘subject to foreign-flag competition’:
“The first is where a U.S.-flag carrier seek-
ing to carry cargo faces at least one foreign-
flag carrier who is eligible to carry the same
cargo and who is reasonably likely to bid for
and be available to carry the cargo. The
second situation is where a U.S.-flag carrier
is seeking to carry cargo and, although no
foreign-flag carrier is eligible to carry the
cargo, the rate at which it is carried is di-
rectly influenced by a foreign-flag carrier or

A-10
STATES MARINE INTERNATIONAL, INC. v. PETERSON

culture or AID programs which are ex-
clusively handled by American shippers).
The Board found, however, that other
classes of civilian preference cargo—car-
go shipped at rates established by inter-
national conferences (conference-rated),
shipped at rates negotiated between the
parties (open-rated), or shipped at pre-
vailing competitive rates (world-rated)—
were subject to foreign-flag com-
petition.’

Order of the District Court

All of the parties moved for summary
judgment. The court concluded that
“the statute contemplates neither the re-
lief sought by the Plaintiffs herein nor
the partial relief granted by the Board”?
In granting the motion of the intervenor,
AIMS, the court held:

“There is no indication that Congress
ever intended that ODS payments
would be either eliminated or propor-
tionally reduced due to the carriage of
preference cargo. The statute speaks
in terms of necessity for foreign com-
petition in a ‘service, route, or line’,
not in terms of competition as to each
kind of cargo carried. Thus, the Act
subsidizes vessels not cargo.”
The court found “convincing Interve-
nor’s presentation of the legislative con-
text of subsidy and preference cargo leg-

8. None of the parties sought reversal or modi-
fication of the Board order through appeal to
the Secretary. Instead AMA and States Ma-
rine International filed their complaints in
these actions in August, 1972. A motion of
AIMS for summary judgment for failure to ex-
haust administrative remedies was denied.

9. AIMS did not seek affirmative relief against
the Board, because of its “uncertainty as to
the actual extent to which the regulations will
injure AIMS members”. AIMS does contend,
however, that the position of the Board is
wrong and that the AMA proposal “would de-
stroy a number of AIMS members”. (Appel-
lants’ Brief, p. 34).

A-11
STATES MARINE INTERNATIONAL, INC. v. PETERSON

islation and the absence of any affirma-
tive indications of Congressional action
to alter an administrative interpretation
of 37 years standing, especially where
Congress was aware of the situation and
in the interim enacted rather specif-
ic amendments to the statutes in
question.”

With this background, we turn to the
issues raised by the respective parties on
these appeals.

I. ODS AND THE CARRIAGE OF
PREFERENCE CARGO

The primary issue is whether, under
the Merchant Marine Act of 1936, when
a vessel carries preference cargo, (1) any
award or payment of ODS is precluded,
as plaintiff-appellant, AMA, contends;
or (2) no limitation or reduction in ODS
may be made by the Board, as the court
found and intervenor-appellee, AIMS,
contends; or (3) the requirements and
reductions imposed by the Board are per-
missible under its rule making power, as
the Board found and the federal appel-
lants contend.

A. The 1936 Act

[1] The language of the Merchant
Marine Act of 1936 and its legislative
history indicate that the legislation was

10. The district court rested its decision on an
opinion of the Comptroller General, Opinion
10264 (1966). In that opinion the Comptroller
General advised Senator Paul Douglas that
ODS should not be reduced for carriage of
military cargo:

we believe that this legislative
background and the long-established admin-
istrative subsidy is payable without reduc-
tion, even though a part of the cargo carried
on a particular voyage is military cargo
which is reserved for U.S.-flag vessels.”

A-12

intended to help develop an American
merchant fleet that would be competi-
tive with foreign flag fleets. The pay-
ment of operating subsidies was aimed
toward this goal and is the primary tool
Congress sought to use in bringing
American shippers to a parity with for-
eign competitors.

Section 60l(a) of the Act, 46 U.S.C.
§ 1171(a), which was set out above, pro-
vides that the payment of subsidies to
promote American shipping may be
granted only if required to meet “com-
petitive conditions”. Section 603(b) of
the Act, 46 U.S.C. § 1173(b), which pro-
vides the formula for determining the
amount of subsidy which may be award-
ed, states that the payment shall be
made in such a way as to equalize the
costs of American vessels and ships of
foreign registry which are “substantial
competitors” with their American coun-
terparts. Section 604, 46 U.S.C. § 1174,
provides for additional subsidies to offset
the effect of U.S. aid which may be paid
to “foreign competitors”.

This orientation toward paying subsi-
dies in order to meet foreign competition
is indicated also in the legislative history.
In 1935, President Roosevelt in proposing
the legislation spoke of the need to
match subsidies given by other countries
to their merchant ships in order to main-
tain “fair competition”. Committee re-
ports to Congress contained the same
type of statements.” Two witnesses tes-
tifying before House and Senate Com-
mittees were even more explicit in stat-
ing the objective of the subsidy meas-
ures. Alfred Haag, Chief Division of

11. H.R. Doc. No. 118, 74th Cong., Ist Session
at 1 (1935).

12. Id. at 29, 30. Senate Rep. No. 898, 74th
Cong., Ist Session at 2 (1935).

A-13
STATES MARINE INTERNATIONAL, INC. v. PETERSON
Shipping Research, United States Ship-
ping Board Bureau, Department of Com-
merce, stated:
“If we provide the aid that is neces-
sary to place the American shipowner
on an equality with the foreign ship-
owner, and also if we match the aid
that other countries are rendering
their merchant ships . . . we
will also have ships that will enable
American industry to go into the for-
eign field and sell its products.” *

Karl Crowley, Solicitor of the Post Of-
fice and a chief draftsman of the Mer-
chant Marine Act testified in response to
a question about whether a subsidy
would be awarded to ships not having
foreign competition that:

“ it’ [the Act] is intended
ay to provide for a subsidy to
put our shipping on a parity with oth-
er foreign competitors. Naturally, if
they have an exclusive trade, where
there is not any competition at all,
there is nothing to put them on a pari-
ty with.” ™

[2] The Act aad its history make it
clear that the operating subsidy estab-
lished in 46 U.S.C. § 1171 was intended
by Congress to be paid in order to meet
foreign competition. It does not appear
that Congress intended that the subsidy
would compensate shippers which had no
actual or potential competition from for-
eign lines.

B. Cargo Preference Legislation
Legislation requiring that certain ship-

ments be made on United States ships

was enacted both before and after the

13. Hearings on H.R. 7521 before House Com-
mittee on Merchant Marine and Fisheries, 74th
Cong., Ist Session at 833 (1935).

14. Hearings on S. 3500, S. 4100 and S. 4110
before the Senate Committee on Commerce,
74th Cong., 2d Session at 60-61 (1935).

A-14
STATES MARINE INTERNATIONAL, INC. v. PETERSON
Merchant Marine Act of 1936. As early
as 1904, Congress provided that Ameri-
can military cargo be shipped on Ameri-
can vessels. The provisions of 15 U.S.C.
§ 616a, enacted one year before the Mer-
chant Marine Act required cargoes
obtained through government loans to be
shipped on American vessels. The 1936
Act itself created certain classes of pref-
erence cargo. Section 405 (since re-
pealed) provided preference for ship-
ments of United States mail. Section
212d), 46 U.S.C. § 1122, called for the
Board to seek cargo preferences. Sec-
tion 90l(a), 46 U.S.C. § 1241, required
federal employees to travel on United
States ships. In addition, sections 506
and 605(a) of the Act provide for certain
reductions in subsidies when American
ships are carrying domestic cargo which
is completely protected from foreign
competition. Of course, the cargo pref-
erence legislation primarily in question,
46 U.S.C. § 1241(b), providing that 50%
of the relief and aid cargoes be carried
in United States flag vessels, was not
enacted until 1954, eighteen years after
the passage of the Merchant Marine Act.

Intervenor-appellee argues that the
cargo preference provisions predating
the Act, contained in the Act itself, and
enacted subsequent to its passage indi-
cate a Congressional awareness of pref-
erence laws over the three decades since
the Merchant Marine Act established the
operating differential subsidy. It is con-
tended that this awareness coupled with
Congressional inaction indicates that
Congress did not intend that the subsi-
dies be affected by cargo preferences.
According to the Intervenor, “Where no
provision was made, no subsidy reduction
was intended.”

[3,4] It is true that the legislative
history of the various preference acts

Dennen teil

A-15
STATES MARINE INTERNATIONAL, INC. v. PETERSON

manifests a Congressional awareness
that subsidies might be paid to prefer-
ence cargo carriers. In fact, it appears
that Congress intended that subsidized
vessels could carry preference cargo.
Recently the Ninth Circuit held that the
Merchant Marine Act does not prohibit
the carriage of preference cargo by sub-
sidized carriers. Columbia Steamship
Company, Inc. v. American Mall Line,
Ltd. et al., 510 F.2d 29 (9th Cir. 1975).
We agree and thus reject the contention
of AMA that no subsidies may be paid to
vessels carrying preference cargo.

However, while the Act may contem-
plate the payment of subsidies to prefer-
ence carriers, we agree with the federal
appellants that the legislative history
does not show that Congress was aware
over the years that subsidized lines
might end up with a concentration of
preference cargo not subject to foreign
flag competition, as the plaintiffs main-
tain has occurred and which precipitated
this litigation."* There is nothing to in-

15. For example, during the debate in the
House on the Wheat for Pakistan Act, Rep.
Shelly stated in 99 Cong.Rec. 7091:

“It does not make sense for us to start the
building of them to subsidize the operation
of them, and then give them nothing to carry
. . . $0, as a result, the policy was es-
tablished that at least 50 percent of this ma-
terial that we give them . . . should go
in our vessels so that we would not be wast-
ing the money that we spent to build them
and the money we paid to subsidize the op-
eration of them; so that we could keep them
alive and keep them going.”

16. The Examiner found, inter alia, that (1) sub-
sidized lines participated significantly in the
preference cargo market, (2) subsidized and
unsubsidized lines in some instances compete
vigorously for the carriage of military and
open-rated civilian preference cargo not sub-
ject to foreign competition, and (3) on some
routes subsidized lines concentrated heavily on

A-16

STATES MARINE INTERNATIONAL, INC. v. PETERSON
dicate that Congress ever considered the
problem of a possible concentration of
preference cargoes among subsidized
lines until 1970. That year Congress
passed Public Law 91-469, which sub-
stantially amended the Merchant Marine
Act.

Informed during the hearings on the
1970 amendment of the proceedings in
Docket No. S-244, which were at that
time awaiting Board determination, the
respective House and Senate committees
stated that their recommendations were
not to be construed as indicating a posi-
tion with respect to the Board proceed-
ings,” and witnesses at the committee
hearings stated that the amendments
would not influence the outcome of the
proceedings."® It would have been a
simple matter to resolve the issue
through appropriate legislation but Con-
gress left the solution of the subsidy-
preference cargo problem to the Mari-
time Subsidy Board by providing in Sec-
tion 40(a) of the 1970 Act (84 Stat. 1037)
that:

“Nothing in section 16 of this Act
amending section 603 of the Merchant
Marine Act, 1936, or in the contracts
made thereunder, shall be deemed to
affect or change existing law or con-
tracts with respect to the proceedings
now pending before the Secretary of
Commerce relating to the payment of
subsidy in respect of cargoes covered
by section 901(bXi) of the Merchant
Marine Act, 1936, section 616(a) of ti-

carriage of preference cargo not subject to for-
eign-flag competition.

17. See H.Rep.No.91-1073, 91st Cong., 2d Sess.
at 39 (1970) and S.Rep.No.91-1080, 9ist
Cong., 2d Sess. at 34 (1970), U.S.Code Cong. &
Admin.News 1970, p. 4188.

18. See 1970 S. Hearings at 126 and 1970 H.
Hearings at 647.

A-17
STATES MARINE INTERNATIONAL, INC. v. PETERSON

tle 15, United States Code, or section
2631 of title 10, United States Code.”

And since there is no indication that
Congress knew of the problem until 1970
it cannot be taken to imply approval of a
policy that subsidies be awarded without
regard to the competitive nature of the
shipments.

C. Decision of the Board and Rule Pro-
posed for Adoption

Based on a review of an “extensive
factual record” developed through “ex-
tensive hearings”, the Maritime Subsidy
Board, in a detailed opinion and order,
concluded that the Board’s previous poli-
ey of awarding subsidies to preference
cargo carriers without regard to the
competitive nature of their shipments re-.
quired modification. The Board noted
that before the proceeding in Docket No.
S-244 the relationship between ODS
payments and cargo subsidy laws was
never examined in depth by the Board or
its predecessors.” With “exceptions of
minor significance”, the Board had not
theretofore drawn any distinction be-
tween carriage of preference cargo and
non-preference cargo. The economic
data presented™ convinced the Board

19. AIMS refers to reports to Congress from
various government agencies, prior to the S-
244 proceedings, showing an increase in the
carriage of preference cargo subsidized lines.
We agree with the federal appellants, however,
that these reports did not provide either the
Board or Congress a basis, for concluding, pri-
or to the S—244 proceedings, that subsidized
lines were concentrating heavily on the car-
riage of preference cargo to the exclusion of
substantial amounts of cargo open to foreign-
flag competition.

20. The data included subpoena responses filed
by every U.S.-flag carrier operating in the U.S.
foreign commerce, reports and testimony of
economic consultants for the parties, and testi-
mony (and supporting documentation) of nu-
merous government agencies (including all
agencies responsible for movement of prefer-

A-18
STATES MARINE INTERNATIONAL, INC. vy. PETERSON

that this policy should be changed. The
Board concluded on the basis of the evi-
dence presented and its interpretation of
the relevant statutes that the rule it pro-
posed for adoption reflected the competi-
tive requirements of the Merchant Ma-
rine Act as they relate to carriage of
preference cargoes and should govern
the future administration of the ODS
and CDS programs. The Board held
that the rule would apply prospectively
to all ODS contracts existing on the ef-
fective date of the rule # and to all new
ODS contracts made after that date.
The order provided further that nothing
stated therein “should be construed as
rendering illegal any prior acts, policies,
rulings or interpretations of the Secre-
tary, the Board or the Maritime Admin-
istration (and predecessor bodies) under
the ODS and CDS programs”.

[5] The question arises as to whether
the change in policy, particularly with
respect to existing contracts, could be
effected in the rule making proceeding
conducted by the Board. In Section

ence cargoes) and officials of subsidized and
unsubsidized carriers.

21. The Board recognized that the Act does not
require absolute and complete foreign competi-
tion, but rather “substantial" competition.

22. The AIMS members have 20 year operating
subsidy contracts made in the period 1955-
1958.

23. In rejecting AIMS’ argument that any rule
adopted may not be applied to existing ODS
contracts, the Board noted that all contracts
provide that:

“In order to induce favorabie action upon its
application for financial aid provided for in
this Agreement the Operator . . does
hereby warrant and represent, among other
things, as follows _

H. . . Events of Default. The fol-
lowing shall constitute events of default un-
der this agreement:

A-19
STATES MARINE INTERNATIONAL, INC. v. PETERSON

204(b) of the 1986 Act, 46 U.S.C.
§ 1114(b), the Secretary of Commerce
was “authorized to adopt all necessary
rules and regulations to carry out the
powers, duties and functions vested in
him by the Act”. We agree with the
federal appellants that under this grant
of authority the Secretary, and through
him the Board, has broad discretionary
authority to deal with the everchanging
technological and economic conditions of
the commercial shipping industry, as
long as its actions are reasonable and
consistent with the 1986 Act.¥

Section 606 of the Act, 46 U.S.C.
§ 1176, provides for Board review and
readjustment of future ODS payments.
The Board “on its own motion or appli-
cation of the contractor shall, after a
proper hearing, determine the facts and
make such readjustment in the amount
of future payments as it may determine
to be fair and reasonable in the public
interest. . . . Its decision shall be
based upon and governed by the changes
which may have occurred since the date

(f) Failure by the Operator to comply with
any applicable provision of the Act, any law
administered by the . . . Maritime Ad-
ministration, or any rule or regulation of the

. . Maritime Administration published
in the Federal Register, relating to the opera-
tion of subsidized vessel(s)." (Emphasis
added by Board).

24. The report of the Senate Committee on
Commerce noted:

“Title Il creates a Maritime Authority
The Authority is given a considera-
ble amount of discretion in the solution of
its problems. This discretion is necessary
since many questions will require prompt
treatment. Shipping is a business of a high-
ly competitive and changing nature, and its
governmental contact must be given the
power to prompt decision in dealing with
situations as they arise.”
S.Rep.No.713, 74th Cong., Ist Sess. at 4
(1935).

eee

A-20
STATES MARINE INTERNATIONAL, INC. y. PETERSON
of the said contract.” The decision
“shall be promulgated in a formal order,
which shall be accompanied by a report
in writing in which the Board shall state
its findings of fact”.

The question is thus whether the con-
tractors received a “proper hearing”
within the meaning of Section 606. It is
clear from the record and all parties
agree, that the hearings conducted by
the Board were extensive and that all
interested parties presented evidence and
briefs in support of their respective posi-
tions. In its motion to intervene in
these cases, AIMS stated that it is an
association “composed of 12 steamship
companies, all but one of which is a par-
ty to an operating-differential subsidy
(‘ODS’) contract under the Merchant Ma-
rine Act, 1936, and each of which owns
and/or operates certain vessels built
with the assistance of construction-dif-
ferential subsidy (‘CDS’) under said
Act”; and that “AIMS was a party to
Maritime Subsidy Board Docket S-244,
representing the interest of its members
in that proceeding”. It sought and was
granted intervention under F.R.Civ.P.
Rule 24(a).%

[6] Moreover, as noted supra (Note
23), all ODS contracts pro ‘ide that “fail-
ure to comply with . |. any rule
or regulation by the Maritime Adminis-
tration published in the Federal] Regis-
ter, relating to the operation of subsi-

25. AIMS’ memorandum in Support of its mo-
tion reads in part:

“First, AIMS has an interest in the trans-
action. The standard is ‘primarily a practi-
cal guide to disposing of lawsuits by involv-
ing as many apparently concerned persons
as is compatible with efficiency and due
process.’ Nuesse, supra, 385 F.2d at 700.
{Nuesse] v. Camp, [128 U.S.App.D.C. 172,)
385 F.2d 694 (D.C.Cir.1967). AIMS is clear-
ly concerned. Decision of the issues raised

A-2]
STATES MARINE INTERNATIONAL, INC. v. PETERSON

dized vessel(s)” shall constitute an event
of default under the contract. In our
opinion the Board was correct in con-
cluding that by reason of this provision
each ODS contract “is expressly subject
to any reasonable interpretation of the
1936 Act by the Maritime Administration
and any rule or regulation, applied pro-
spectively, implementing such interpreta-
tion”.

[7,8] While a close question of statu-
tory intent is presented, we conclude
that in the circumstances of this case a
hearing received in the context of formal
rule making constituted a “proper hear-
ing” and the proposed rule may be ap-
plied prospectively with respect to both
existing and new contracts.

It is next contended that the long
standing administrative interpretation of
the Act absent affirmative action by
Congress precludes the Board’s order and
proposed rule. While the Board has not
heretofore adopted any rule and in gen-
eral has not in the past drawn a distinc-
tion between preference and non-prefer-
ence cargoes in awarding subsidy con-
tracts, it has in a number of decisions
considered whether the vessel service as
a whole met foreign flag competition.
Although those cases vary in factual de-
terminations and did not consider the
precise question here presented, they do
show the Board has clearly recognized its
“responsibility to determine, among oth-

by plaintiff's complaint is of paramount im-
portance to its member steamship compa-
nies which are ODS contractors and which
as a matter of course carry reserved cargoes
in substantial volumes. In these circum-
stances and with ‘the greater impetus to in-
tervention that inheres in administrative
cases’ [id.], AIMS must be considered to
have the requisite interest in the transac-
tion.”

A-22
STATES MARINE INTERNATIONAL, INC. v. PETERSON

er things, what constitutes foreign-flag
competition on a particular trade route,
and whether such competition is substan-
tial”. The Board held also that “dimi-
nution of competition must be considered
in computing the amount of subsidy to
be awarded” and “where foreign-flag
competition is eliminated, the basis for
award disappears. So, too, where com-
petition has diminished from the level
existing upon computation of the award,
the basis for the award may be affected
to the extent of the change in competi-
tion”.” We agree with the federal ap-
pellants that the prior cases do not sup-
port the arguments of either AMA or
AIMS and that the Board’s interpreta-
tion of the foreign-flag competition re-
quirement of section 601 is “consistent
with and a further development of the
interpretation contained in prior admin-
istrative decisions”.

[9,10] Nevertheless, it is true, as the
district court concluded and intervenor-
appellee argues on this appeal, that the
rule proposed by the Board in Docket
No. S-244 does change a long standing
administrative interpretation and that no
affirmative action has been taken by
Congress to change that interpretation.
We are not persuaded, however, that un-
der the factual situation and relevant
statutes discussed supra the Board may
not change its policy through adoption of
the proposed rule. The question of an
agency’s power to change an established
practice without legislative mandate has
been considered by many courts. While
the decisions are not uniform, due in

26. Review of Grace Lines Subsidy, Route 2, 4
F.M.B. 40 (1952).

27. Lykes-Harrison Pooling Agreement, 4
F.M.B. 515 (1954). See also American Presi-
dent Lines, Ltd.—Subsidy, Route 29, 4 F.M.B.
51 (1952); Review of Mississippi Shipping Co.

A-23
STATES MARINE INTERNATIONAL, INC. v. PETERSON

large part to varying factual situations,
the better rule appears to be that an
agency is free to act when conditions
change and is not tied to past practices,
as long as its decisions are fairly rea-
soned and considered.

In Columbia Broadcasting System, Inc.
v. Federal Communications Commission,
147 U.S.App.D.C. 175, 183, 454 F.2d 1018,
1026 (D.C.Cir.1971) this court stated that

an administrative agency con-
cerned with furtherance of public inter-
est is not tied to rigid adherence to its
prior rulings.” In Pennsylvania Water
& Power Co. v. Federal Power Commis-
sion, 74 U.S.App.D.C. 351, 358, 123 F.2d
155, 162 (1941), cert. denied, 315 US.
806, 62 S.Ct. 640, 86 L.Ed. 1205 (1942),
this court held that succeeding depart-
ment heads may reverse even a well es-
tablished practice if convinced that the
past course of action was incorrect.

The Supreme Court in Helvering v.
Wilshire, 308 U.S. 90, 60 S.Ct. 18, 84
L.Ed. 101 (1939) considered a contention
much like that of AIMS, that the enact-
ment of statutes by Congress after ad-
ministrative regulations had been issued
precludes the Agency from changing
those rules. In Helvering at 100-101, 60
S.Ct. at 24 the Court stated:

“It does not mean that a regulation
interpreting a provision of one act be-
comes frozen into another act merely
by reenactment of that provision, so
that that administrative interpretation
cannot be changed prospectively
through exercise of appropriate rule-
making powers.”

—Subsidy Route 20, 4 F.M.B. 68 (1952); Re-
view of Farrell Lines—Subsidy, Route 15A, 4
F.M.B. 117 (1952); Moore-McCormack—Swed-

ish Lines Sailing Agreement, 4 F.M.B. 558
(1955).

A-24
STATES MARINE INTERNATIONAL, INC. v. PETERSON

[11,12] As noted supra, the district
court relied heavily on a 1966 opinion of
the Comptroller General advising Sena-
tor Douglas that ODS should not be re-
duced on a voyage basis for carriage of
military cargo. While this opinion might
be interpreted to mean that the 1936 Act
does not authorize abatement of subsidy
for any carriage of preference cargoes,
we are persuaded that the Board was
correct in concluding that the ruling
“cannot be read that broadly”. The
opinion did not consider the _ issue
presented to the Board in this proceed-
ing of whether foreign-flag competition
is being met when the operation of ves-
sels for annual service derives more than
50% of gross freight revenues from car-
goes not subject to foreign competition.
Rather it held that ODS is “payable,
without reduction, even though a part of
the cargo carried on a particular voyage
in military cargo is reserved for U/S.
flag vessels”. (Emphasis added). The
1966 opinion of the Comptroller General
does not in our opinion preclude the
adoption of the rule proposed by the
Board. Moreover, the opinion would not
be binding on the Board, particularly un-
der a different factual situation.

Based upon the provisions of the Mer-
chant Marine Act of 1936 and its legisla-
tive history, the interaction of the oper-
ating subsidy provisions of the Act and
the cargo preference statutes, and the
evidence considered by the Board follow-
ing extensive hearings, we conclude that
the determination of the Board and the
proposed rule to effectuate its change in

policy are proper. The Act consistently
speaks of awarding subsidies only to ves-
sels “meeting foreign compétition”. The
legislative history, however, indicates
that Congress had contemplated the pay-
ment of some “double subsidies” to ship-

A-25
STATES MARINE INTERNATIONAL, INC. v. PETERSON
pers carrying preference cargo. Wheth-
er or not this is “unfair competition”, as
AMA contends, it was foreseen by Con-
gress. The Board’s rule reducing subsi-
dy when a vessel is not in “substantial
competition” appears to strike a sound
balance between the intention of Con-
gress and the competitive needs of the
industry. Additionally, the Board’s deci-
sion 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 car-

go or voyages.

[13] Under the Administrative Proce-
dure Act, 5 U.S.C. § 706, a reviewing
court should not overturn the determina-
tion of an administrative agency unless
it is “unsupported by substantial evi-
dence” or is not in accordance with law.
This court has held that this standard
applies when a court is reviewing formal
rule making proceedings under 5 U.S.C.
§ 553. Automotive Parts & Accessories
Association v. Boyd, 132 U.S.App.D.C.
200, 407 F.2d 330, 337 (1968). The pro-
ceedings in Docket No. S—244 were for-
mal proceedings. We find that the de-
cision of the Board is supported by sub-
stantial evidence and a proper interpre-
tation and application of the law.

28. It should be noted that 5 U.S.C. § 553 did
not require the Board to hold formal hearings
to consider subsidy adjustments. However, as
the district court stated regarding the Docket
No. S-244, Sub. | proceedings, § 553 did not
preclude the Board frora choosing “to make
the proceeding subject to the most rigorous
requirements of the Administrative Procedure
Act.” American Maritime Association v.
Stans, 329 F.Supp. 1179, 1182 (D.D.C.1971),
aff'd, 157 U.S.App.D.C. 394, 485 F.2d 765
(1973). When formal proceedings are held,
the “substantial evidence” standard in 5 U.S.C.
§ 706 is applicable.

,

A-26
STATES MARINE INTERNATIONAL, INC. v. PETERSON

II. CDS AND THE CARRIAGE OF
PREFERENCE CARGO

[14] AMA’s appeal in No. 74-1502
raises the issue of whether the owner of
a vessel built with a construction differ-
ential subsidy on which an operational
subsidy has been paid is receiving a dou-
ble subsidy and should be required to
rebate the construction subsidy. The
district court did not consider this issue,
but noted that the “issues relating to
construction differential subsidy were di-
rectly reviewed” in American Maritime
Association v. Stans, supra, (note 28).
The court viewed “such issues as pre-
cluded by the decision” in Stans. Stans
was concerned with a Board order in
Docket S—244, Sub. 1 (October 13, 1970)
in which the Board ruled that the 1936
Act did not prohibit the carriage of mili-
tary cargoes on vessels built with CDS
and upheld charters to Military Sealift
Command. In its order in Docket S—244,
(June 12, 1972) the Board noted the opin-
ion of the district court in Stans and
extended “its conclusions” to hold that a
vessel built with CDS may engage in
carriage of preference cargo without
abatement of subsidy. We agree with
the Board and the district court on this
issue.

The provision for CDS is contained in
Title V of the Merchant Marine Act of
1936, 46 U.S.C. § 1151 et seg. As origi-
nally enacted Title V prescribed criteria
for awarding CDS similar to those for
ODS, including the requirement that the
vessel be used in a service which was
meeting foreign competition.

In 1952, however, Congress amended
Title V and deleted reference to the re-
quirement that a vessel which had re-
ceived CDS be used to meet foreign com-

A-27
STATES MARINE INTERNATIONAL, INC. v. PETERSON

petition.® Instead, the new criteria
called for the Board to find that the
vessel was to be used in “foreign com-
merce”. Again in 1970, the CDS provi-
sions of the Merchant Marine Act were
amended, allowing subsidies to be paid
to shipyards as well as purchasers of ves-
sels. The Report of the House Commit-
tee on the 1970 amendment made it
clear that CDS has an entirely different
purpose than ODS: “[T]he construction
subsidies are subsidies to the shipyards,
not to the shipowners.” *!

The purpose of the CDS program is to
subsidize shipyards of this country to en-
able them to compete effectively with
foreign shipyards. The subsidy allows a
purchaser to buy a ship in the United
States for a price equivalent to that
charged by a foreign shipyard. The only
restrictions on payment of CDS listed in
46 U.S.C. § 115l(a) are that the ship
receiving subsidy be registered in the
United States and be engaged in foreign
commerce. Congress made no distinction
between domestic purchasers who could
or could not avail themselves of CDS.
Instead, the section provides that all ship
purchasers who qualify may buy ships
which are eligible for CDS payments.
The Act does not distinguish between
those carrying preference cargo and

29. The only reference to foreign competition
regarding CDS is in the general definition sec-
tion of the Act, 46 U.S.C. § 1244(a). That
section states that “foreign commerce” shall
include for the purpose of CDS certain vessels
trading between foreign ports if subsidy will
enable them to compete with foreign-flag car-
riers. This section does not make foreign
competition a prerequisite of a CDS award.
Instead it expands the definition of foreign
commerce to include certain vessels which
perhaps would not otherwise be included as
CDS recipients.

30. 46 U.S.C. § 1151(a).

31. House Rep. No. 91-1073, 93 Cong.2d Sess.,
p. 30.

A-28
STATES MARINE INTERNATIONAL, INC. v. PETERSON

those not carrying such cargo. A re-
quirement that certain purchasers rebate
their subsidy due to the type of cargo
they carry would be contrary to the lan-
guage in section 1151(a) and inconsistent
with the Congressional purpose behind
CDS of encouraging American ship
building.

[15] The wording of the Merchant
Marine Act and its history make it clear,
in our opinion, that Congress did not in-
tend to relate the payment of CDS to
the vessel’s actual involvement in for-
eign competition, nor require a rebate of
CDS when a recipient ship hauls prefer-
ence cargo. This conclusion is further
supported by the analysis of the Board
and by this court in the Stans decision.

CONCLUSION

We conclude that the order of the
Maritime Subsidy Board in Docket S244
is a reasonable and proper determination
of a difficult and complex situation, both
factually and legally, and that the rule
prepared by the Board may properly be
adopted. We remand to the district
court for a modification of its order in
accordance with this opinion.

Adm. Office, U.S. Courts—West-Publishing Company, Saint Paul, Minn.

A-29

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

AMERICAN MARITIME ASSOCIATION

v. CIVIL ACTION
1576-72

PETER G. PETERSON, )

SECRETARY OF COMMERCE )

)
> 8 s CONSOLIDATED

)

STATES MARINE INTERNATIONAL,

INC., et al. )
) CIVIL ACTION
Vv. ) 1667-72
, )
PETER G. PETERSON, ) a 5 C —
SECRETARY OF COMMERCE ) = bans

JANES F. DAVEY, Cic:
MEMORANDUM AND ORDER

These consolidated actions seek review of a decision
of the Maritime Subsidy Board, Department of
Commerce,' construing and applying the operating-
differential subsidy (O.D.S.) provisions of Title VI of
the Merchant Marine Act of 1936, as amended, 46
U.S.C. §1171 et seq. Plaintiffs in Civil Action No.

' Docket S-244, Payment of Operating Subsidy for Carriage of
Preference Cargo, Final Order and Opinion June 12, 1972.

A-30

1667-72 also seek a declaratory judgment on the
meaning and application of these statutory provisions.
Plaintiffs in both actions are unsubsidized U.S. flag
shipping operators seeking to halt O.D.S. payments now
being made to other U.S. flag operators for carriage of
cargo reserved by law for carriage only on U.S. flag
ships (preference cargo). In July 1969, the American
Maritime Association (A.M.A.) petitioned the Secretary
of Commerce to initiate a rule-making proceeding to
consider proposed rules eliminating the “double
subsidy” which results when a ship receiving O.D.S.
payments carries preference cargo, which travels at
inflated U.S. rates rather than at world-competitive
rates.’ The Secretary referred the Petition to the
Maritime Subsidy Board, the agency which administers
the subsidy program. The Board ordered a full hearing
on the proposed rules. The American Institute of
Merchant Shipping (A.I.M.S.) joined the rule-making
proceeding on behalf of the subsidized shipping lines,
and subsequently sought and was granted Intervenor
status herein. After lengthy hearings and development
of a substantial factual record, on June 22, 1971. the
hearing examiner (now Administrative Law Judge)
issued Findings of Fact substantially agreeing with the

*The Petition and Rule-Making Proceeding also related to
construction differential subsidy (C.D.S.) pursuant to Title V of
the Merchant Marine Act of 1936, as amended, 46 U.S.C.
S1IS1, et seq. The issues relating to construction differential
subsidy were directly reviewed by the Court in American
Maritime Association v. Stans, 329 F.Supp. 1179 (D.D.C. 1971),
afd 485 F.2d 765 (D.C. Cir. 1973). Plaintiff A.M.A. attempts
to raise collateraily herein issues relating to the construction
differential subsidy. The Court views such issues as precluded by
the decision cited.

A-31

position of the Petitioners, and recommending that
O.D.S. payments be reduced in direct proportion to the
amount of preference cargo carried.*? On review, the
Maritime Subsidy Board, on June 12, 1972, entered a
Final Opinion and Order substantially disapproving the
conclusions of the Hearing Examiner, but granting
Plaintiff-Petitioners partial relief in requiring that O.D.S.
ships carry at least 50% non-preference cargo.* The
present actions followed, and are now before the C ourt
on cross-motions for summary judgment. The Court
agrees that the issues here are primarily legal and that
there is no genuine issue of material fact. Summary
Judgment is therefore appropriate.

The central issue herein is whether the statute
requires or permits the Maritime Subsidy Board to limit
payments of operating differential subsidy on the basis
of the cargo carried. Secondary issues arise only if the
answer to this question is affirmative. The Court has
examined thoroughly the extensive record herein, the
language and legislative history of the Act, past
practice, and prior construction of the Act by the
Board, the Comptroller General (Opinion B-159245),

3The Examiner's decision differentiates among several differ-
ent varieties of preference cargo, as do the parties and the Board.
In light of the result reached, however, the Court finds these
distinctions of no consequence herein.

4More specifically, the Board required the reduction of
subsidy, though not necessarily pro-rata reduction, where less
than a substantial part (50%) of the cargo carried on any leg is
commercial cargo. See Board Rule 1, Appendix C to Final
Opinion and Order, 37 Fed. Reg. 14236 (July 18, 1972), revised
37 Fed. Reg. 213323 (October 4, 1972), 46 C.F.R. Part 280.

A-32

and by the court in Columbia Steamship Co. y.
American Mail Line, et al., Civil No. 71-132 (U.S.D.C.
D. Ore. September 7, 1972). On this basis the Court
concluded that the statute contemplates neither the
relief sought by Plaintiffs herein nor the partial relief
granted by the Board. Accordingly, Intervenor’s Mo-
tions for Summary Judgment will be granted.

There is no indication that Congress ever intended
that O.D.S. payments would be either eliminated or
proportionally reduced due to the carriage of preference
cargo. The statute speaks in terms of necessity for
foreign competition in a “service, route, or line,” not in
terms of competition as to each kind of cargo carried.
Thus the Act subsidizes vessels, not cargo. This is not
to say that Congress might not have spoken in terms of -
cargo if it chose, nor that the factual record herein does
not present a strong argument on policy grounds that
the statutory framework should be altered. It is to say
simply that these arguments are misdirected when
offered to this Court or to the Maritime Subsidy Board
rather than the Congress.

The Court finds convincing Intervenor’s presentation
of the legislative context of subsidy and preference
cargo legislation and the absence of any affirmative
indications of Congressional action to alter an admini-
Strative interpretation of 37 years standing. especially
where Congress was aware of the situation and in the
interim enacted rather specific amendments to the
Statutes in question.

In light of the already massive size of the present
record, and the straightforward nature of the issue in
the Court’s view the Court is content to rest upon
these views and the rationale of the Comptroller

A-33

General in Opinion B-159245, SRR 10,264 (1966).
Upon the above considerations, and upon consider-
ation of the entire record herein, it is this 7th day of
February, 1974,
ORDERED, that Plaintiffs Motions for Summary
Judgment be and hereby are Denied, and it is
FURTHER ORDERED, that Intervenor’s Motions for
Summary Judgment be and hereby are Granted.

/s/ Aubrey E. Robinson, Jr.
Aubrey E. Robinson, Jr.
United States District Judge

(S E R V E D )

( June 12, 1972)
(MARITIME SUBSIDY BOARD)
(MARITIME ADMINISTRATION)

U.S. DEPARTMENT OF COMMERCE
MARITIME ADMINISTRATION
MARITIME SUBSIDY BOARD

DOCKET NO. S-244

FACT-FINDING HEARING RE: PAYMENT
OF SUBSIDY FOR CARRIAGE
OF PREFERENCE CARGOES

In the matter of a fact-finding hearing ordered by the
Maritime Subsidy Board on December 1, 1969, on

A-34

certain specified items relating to a referral by the
Secretary of Commerce of a petition by American
Maritime Association dated July 1, 1969, for the
issuance of rules governing the award and administra-
tion of operating and construction-differential subsidy
contracts and the carriage of preference cargoes.

FINAL OPINION AND ORDER OF
THE MARITIME SUBSIDY BOARD

Andrew E. Gibson, Chairman: Robert J. Blackwell.
Member; and James S. Dawson, Jr., Alternate Member ~

INTRODUCTION

By petition filed before the Secretary of Commerce
(Secretary) on July 1, 1969, the American Maritime
Association (AMA) has requested that the Secretary
exercise his rule-making authority under the Merchant
Marine Act, 1936, as amended (Act),’ to adopt four
rules governing administration of the operating-
differential subsidy (ODS) and construction-differential
subsidy (CDS) programs of that Act. The four proposed
rules’? (designated AMA Rules 1, 2 3A and 3B) together
raise One fundamental question, namely, whether ODS
and/or CDS may be paid under the Act for the carriage

'46 U.S.C. $1101 et. seq.
* The full text of the AMA rules is set out in Appendix A.

A-35

of cargoes required by law to be carried on U.S.-flag
vessels (hereinafter “preference cargoes’). It is AMA’s
position that neither ODS nor CDS may be paid, in full
or in part, for the carriage of preference cargoes and
that the proposed AMA rules should be adopted to
reflect this limitation. AMA asserts this position on
behalf of the majority of its 78 member steamship
companies who are unsubsidized under the Act, who
rely principally on carriage of preference cargoes for
their livelihood, and who object to competition for this
cargo by carriers receiving subsidy.’

SUMMARY OF THE PROCEEDINGS

Pursuant to express delegation of authority,* the
AMA petition was referred by the Secretary to the
Maritime Subsidy Board (Board) on July 31, 1969. By
order issued December 1, 1969, the Board formally
commenced a rule-making proceeding to consider the
relationship between ODS and CDS and preference
cargo and directed its Chief Hearing Examiner to
conduct a fact-finding hearing on nine specific points
bearing direct relation to the basic issues raised by the
AMA petition.’ The Board’s order expressly noted that,

3AMA’s petition is actively supported by a similar organiza-
tion — American Unsubsidized Lines (AUL) — for similar
reasons. For convenience, the AMA/AUL positions will be
referred to throughout this opinion as the “AMA position.”

*See Department of Commerce Organization Order 10-8, as
amended January 13, 1971.

SOn July 9, 1970, the Board issued an order requesting the
taking of evidence on two additional points. The eleven points
designated for evidentiary hearing are listed in Appendix B.

A-36

while the ODS and CDS programs are exempt from the
rule-making provisions and hearing requirements of the
Administrative Procedures Act.® it was nevertheless
ordering a hearing so that it could make “a considered
administrative review of the issues presented in the
AMA petition.”

The Chief Hearing Examiner conducted extensive
hearings on the matters directed to him. The principal
parties joining in the evidentiary proceeding (denomi-
nated Docket S-244) were AMA and AUL, representing
unsubsidized carriers, and the American Institute of
Merchant Shipping (AIMS), representing the subsidized
carriers. United States Lines, Inc., and the Military
Sealift Command (MSC) were intervenors. Waterman
Steamship Corp., Central Gulf Steamship Corp., Sea-
Land Services, Inc..” and Matson Navigation Company
Were recognized as “interested third parties.”

An extensive factual record was developed during the
course of the hearings. The focus of the inquiry was on
the years 1964, 1966, 1968 and 1969. Data was
received trom subpoena responses filed by every
U.S.-flag carrier operating in the U.S. foreign commerce,
from reports and testimony of economic consultants for
the principal parties, and from testimony (and support-
ing documentation) of numerous government agencies
(including all agencies responsible for movement of
preference cargoes) and officials of subsidized and
unsubsidized carriers.

*See 5 U.S.C. §553(a\(2).

’Waterman, Central Gulf and Sea-Land were all members of
AMA at the time of the hearing but with views different or
potentially different trom those expressed by AMA in_ its
petition.

A-37

On June 22, 1971, the Chief Examiner served
proposed Findings of Fact on all parties. Comments and
exceptions were filed on August 6, 1971; responses
were filed by August 30, 1971. On October 12, 1971,
the Chief Examiner certified the record to the Board.
At the request of counsel for AMA and AUL, oral
presentations by counsel for AMA, AUL, AIMS and
MSC were heard by the Board on December 14, 1971.

The Board has now reviewed the record, the Findings
of Fact,® the comments and arguments of the parties
and has determined that the rules and principles set
forth in this opinion should govern administration of
the ODS and CDS program.®

STATEMENT OF THE ISSUES

The Board has before it in this proceeding two
primary issues: first, whether ODS may be paid for

8The Chief Examiner's Findings included a variety of
conclusions, legal and otherwise, regarding the advisability of
adopting the proposed AMA rules. Since those conclusions were
not requested by the Board in its order directing the fact-finding
hearing, they are not considered by the Board here.

*It should be noted at this point that the carriers represented
by the parties to this proceeding are, for the most part, engaged
in liner (as opposed to bulk) operations involving carriage of
freight (as opposed to passengers). For this reason, and because
subsidy did not become available to bulk carriers until after this
proceeding commenced, the issues raised by the parties in this
proceeding relate only to liner operations involving carriage of
freight. Accordingly, the rules and principles enunciated in this
opinion are not intended to apply to any other type of
operation.

A-38

carnage of preference cargo and, secondly. whether a
vessel built with CDS may engage in carriage of
preference cargo without abatement of subsidy. A third
issue of subsidiary significance - whether evidence
regarding carriage of preference cargo must be consid-
ered by the Board in hearings under §605(c) of the Act

is also before the Board. All three issues are raised by
the AMA petition and by the proposed AMA rules.

DISCUSSION

A.Payment of ODS for the Carriage of Prefer-
ence Cargo

Until this proceeding, the relationship between the
curgo preference laws and the ODS program has never
been addressed in depth by the Board or its predecessor
bodies. The ODS program is administered by the Board
in accordance with the provisions of Title VI of the
Act.'® With some exceptions of minor significance, it
has been the Board’s policy, in awarding contracts and
paying subsidy under Title VI, not to draw a distinction
between carnage of preference cargo and carriage of
non-preference cargo (hereinafter called “commercial
cargo”).

AMA, however, has taken the position that Title VI
of the Act does not in fact permit payment of ODS for
carnage of preference cargo and, by the same token,
does not authorize the award of an ODS contract where
the service sought to be subsidized is devoted primarily

46 USC. $$ 1171-1176.

A-39

to carriage of preference cargo. AMA’s position is based
on the notion that the paramount purpose of ODS is to
enable U.S.-flag carriers to “meet foreign-flag competi-
tion” and that, because preference cargo is reserved to
U.S.-flag carriers, there is simply no _ foreign-flag
competition involved in its carriage. Beyond this alleged
legal impediment to payment of ODS, AMA also takes
the position that payment of ODS for carriage of
preference cargo constitutes payment of an improper
“double subsidy™'' and promotes unfair competition by
subsidized lines against unsubsidized lines. AMA has
proposed the adoption of Rules | and 3A to remedy
the alleged inadequacies of current Board policy. The
effect of these rules would be to forbid the award of an
ODS contract for predominant carriage of preference
cargo (Rule .1) and to require abatement of ODS under
a valid contract whenever preference cargo is carried
(Rule 3A). |

The AMA position and proposed Rules | and 3A are
vigorously opposed by AIMS. AIMS alleges that Title
VI specifically requires payment of ODS for the
purpose of providing parity of U.S.-flag and foreign-flag
vessel operating costs and that, while a subsidized
carrier is required by Title VI to “meet foreign-flag
competition,” that requirement relates not to the
specific type of cargo carried, but to the overall service
provided. Thus, AIMS takes the position that if a
carrier's overall service meets foreign-flag competition,

"The term “double subsidy,” used frequently in these
proceedings, is defined as the payment of operating subsidy to a
carrier who, by virtue of government protection through
preference laws, is carrying cargo at premium rates. The
operating subsidy and the rate premium are the “double”
subsidies. See also fn. 28 infra.

A-40

the law requires no subsidy abatement and does not bar
the granting of a contract because preference cargo is
carried. AIMS also alleges that payment of ODS for
carriage of preference cargo does not involve a double
subsidy and does not promote unfair competition.

The Board addresses the three issues raised by the
parties legal prohibition, double subsidy, and unfair
competition — as follows:

1. Legal Prohibition Against Payment of ODS
fer Carriage of Preference Cargo

There is apparent agreement among all parties — and
the Board agrees - that a fundamental purpose of the
ODS program is to place U.S.-flag vessels on an
operating cost parity with foreign-flag operators so that
the U.S.-flag operators will be in a position to compete
with their foreign-flag counterparts. This basic purpose
of the program is reflected in §601 of the Act'? which
provides:

“No [application for ODS] ... shall be approved

by the Secretary of Commerce unless he deter-

mines that ... the operation of [the] ... vessel or
vessels [for which ODS is requested] in an essential
service is required to meet foreign-flag compe ti-
tion...” (Emphasis added)
The unresolved question, however, is the exact
substance of the phrase “required to meet foreign-flag
competition.” AMA’s legal prohibition argument turns on

“

a

'246 U.S.C. $1171(a). See also $602 of the Act, 46 U.S.C.

$1172.

A4]

its interpretation of that standard; AIMS’ rebuttal to
the AMA position turns on its disagreement with
AMA’s interpretation.

Leaving to one side the very important question of
what constitutes ‘“‘foreign-flag competition” and fo-
cusing first on the concept of “meeting” foreign-flag
competition, the AMA interpretation of §601 can be
paraphrased as follows: No operator can qualify for an
ODS contract unless the operation of vessels for which
subsidy is sought is “required to meet foreign-flag
competition.” Accordingly, an applicant for an ODS
contract must establish, first, that there is cargo subject
to foreign-flag competition on the route he proposes to
serve and, secondly, that his vessel operations will be
devoted almost exclusively to the carriage of such
cargo. Furthermore, once a contract is granted,
payments of ODS under the contract will be made only
to subsidize carriage of cargo subject to foreign-flag
competition. To the extent that the operator engages in
incidental carriage of cargo not subject to foreign-flag.
competition, he is not eligible to receive ODS.

AIMS’ position excepting to the AMA interpretation
may be paraphrased as follows: It is true that no
operator may qualify for an ODS contract unless the
operation of vessels for which subsidy is sought is
“required to meet foreign-flag competition.” It is also
true that the operator must establish that there is cargo
subject to foreign-flag competition on the route he
proposes to serve. It is not true, however, that an
operator must make a commitment that his vessel
operations will be devoted almost exclusively to carriage
of such cargo. On the contrary, the only commitment
an operator must make in order to qualify for a

A-42

contract under §601 is a commitment to operate his
subsidized vessels in a manner which is competitive with
foreign-flag carriers for cargo. Once an ODS contract is
granted, subsidy is payable under that contract to
sustain vessel operations in full irrespective of whether
the cargo actually carried is or is not subject to
foreign-flag competition. In other words, payment is
not to be gauged by the operator’s actual success as a
competitor with foreign-flag lines but instead on
whether his service is competitive with service provided
by foreign-flag lines.

After careful consideration of the parties’ positions,
the statute and its legislative history, the Board finds
that it can accept neither the AIMS nor the AMA
interpretation of §601. The Board specifically rejects
AMA’s contention that subsidized vessel operations
must be devoted almost exclusively to carriage of cargo
subject to foreign-flag competition in order to qualify
for an ODS contract. The Board also rejects AMA’s
contention that ODS may be paid under a valid
contract only for carriage of cargo subject to
foreign-flag competition. We think the statute and its
legislative history clearly establish that the purpose of
the ODS program is not to subsidize cargo carriage but
instead to subsidize operation of vessels so that the
vessels are in a position to carry cargo on a competitive
basis. On the other hand, we do not accept the AIMS
position that the actual performance of a vessel
operator as a competitor can be ignored. Rather, it is
our judgment that payment of subsidy for operation of
vessels must be governed by the degree to which the
competitiveness of that operation is reflected in actual
operating experience.

eee...

A43

Accordingly, the Board has determined that, in order
to satisfy the competitive standards of §601, the
following three principles must apply to award of ODS
contracts and payment of subsidy: First, no ODS
contract will be awarded unless the applicant can
establish that the vessel operations proposed to be
subsidized will be conducted in a manner which will
not preclude the applicant from earning a substantial
portion of its gross freight revenues for each service
covered by the application from the carriage of cargoes
subject to foreign-flag competition. Secondly, ODS will
be paid in full for vessel operations on each service
covered by an ODS contract only if a substantial
portion of the gross freight revenues earned for that
service are earned from the carriage of cargoes subject
to foreign-flag competition. Thirdly, to the extent that
less than a substantial portion of the gross freight
revenues earned for a service are earned from carriage
of cargo subject to foreign-flag competition, ODS
payable under the ODS contract for that service will be
reduced in proportion to the decreased gross freight
revenues earned from such carriage. In each of the three
cases, “substantial portion” is interpreted by the Board
to mean 50%.

Obviously, the practical impact of this interpretation
of the “meet foreign-flag competition” standard de-
pends to a great degree on a determination of what
cargo is “subject to foreign-flag competition.” AMA, of
course, takes the position that, because preference cargo
is expressly reserved to U.S.-flag vessels, it is by
definition not “subject to foreign-flag competition.”
Accordingly, AMA would argue that only commercial
cargo can be subject to foreign-flag competition and
that, under the Board's interpretation of §601, ODS

A44

may only be paid where at least 50% of revenues from
subsidized vessel operations are earned from carriage of
commercial cargo.'?

The Board does not agree with AMA’s position that
only commercial cargoes are subject to foreign-flag
competition. In the Board’s judgment, there are two
general categories of competition for cargo. The first
category is where two or more carriers are eligible to
carry specific cargo and each is reasonably likely to bid
for and be available to carry the cargo. The second
category of competition is whei:. only one carrier is
eligible to carry the cargo but the rate at which he
must carry it is directly influenced or determined by an
ineligible carrier or carriers. In the first case, the
competition is manifested in the efforts of each
competing carrier to bid the lowest rate for carriage of
the cargo and still maintain a profitable operation. In
the second case, the competition manifests itself in the
effort of the eligible carrier to maintain a profitable
operation while carrying cargo at rates influenced or
determined by the ineligible carrier or carriers.

Applying these same standards, it follows that there
are two situations in which cargo is subject to
foreign-flag competition within the meaning of Title VI.

‘This argument should not be confused with AMA’s actual
position in this proceeding. AMA’s position that preference cargo
is not subject to foreign-flag competition, when coupled with
AMA's interpretation of §601 (summarized above at p. 7),
creates the foundation for AMA’s principle arguments — reflected
in AMA Rules | and 3A — that an operator qualifies for an ODS
contract only if his vessel operation is devoted almost exclusively
to carriage of commercial cargoes and that ODS may only be
paid under a valid contract for carriage of commercial cargoes.

A-45

The first is where a U.S.-flag carrier seeking to carry
cargo faces at least one foreign-flag carrier who is
eligible to carry the same cargo and who is reasonably
likely to bid for and be available to carry the cargo.
The second situation is where a U.S.-flag carrier is
seeking to carry cargo and, although no foreign-flag
carrier is eligible to carry the cargo, the rate at which it
is carried is directly influenced by a foreign-flag carrier
or carriers. The first situation is generally applicable to
commercial cargoes on routes or in trades served by
both U.S.-flag and foreign-flag carriers. The second
situation is generally applicable to preference cargoes
carried at rates directly influenced or determined by
foreign-flag carriers.

The three principles determined by the Board to
govern award and payment of ODS, then, may be
restated as follows: First, no ODS contract will be
awarded unless the applicant can establish that the
vessel operations proposed to be subsidized will be
conducted in a manner which will not preclude the
applicant from earning at least 50% of its gross freight
revenues for each service covered by the application
from the carriage’of commercial cargoes or carriage of
preference cargoes at rates directly influenced by
foreign-flag carriers. Secondly, ODS will be paid in full
for vessel operations on each service covered by an ODS
contract only if at least 50% of the gross freight
revenues earned for that service are earned from the
carriage of commercial cargoes or carriage of preference
cargoes at rates directly influenced or determined by
foreign-flag carriers. Thirdly, to the extent that less
than 50% of the gross freight revenues earned for a
service are earned from carriage of commercial cargoes

A46

or carriage of preference cargoes at rates directly
influenced or determined by foreign-flag carriers, ODS
payable under the ODS contract for that service will be
reduced in proportion to the decreased gross freight
revenues earned from such carriage.

Final formulation of these two principles, of course,
requires a determination of what categories of prefer-
ence cargo are carried at rates influenced or determined
by foreign-flag carriers. According to the evidence
developed at the hearings in this proceeding, there are
two general categories of preference cargo; i.e., military
and non-military (or civilian). Civilian preference cargo,
however, can be divided into two sub-categories:
conference-rated and open-rated. Finally, open-rated
civilian preference cargo can be further sub-divided into
Open-rated cargo carried at premium rates and open-
rated cargo carried at “‘world” rates. Based on the facts
developed in this proceeding, the Board makes the
following determinations with regard to each of these
categories and sub-categories of preference cargo:

a. Military Preference Cargo

The Cargo Preference Act of 1904'* provides that,
absent the unavailability of such vessels at reasonable
rates:

“Only vessels of the United States or belonging to

the United States may be used in the transporta-

tion by sea of supplies bought by the Army, Navy,

Air Force or Marine Corps.”

410 U.S.C. § 2631.

A-47

While there has been some uncertainty as to whether
this provision requires the use of privately-owned
vessels,'® it is clear that, absent unavailability, only
U.S.-flag vessels may carry American military cargo.

As a practical matter, the great preponderance of
military preference cargo moves on privately-owned
U.S.-flag vessels on berth service terms pursuant to
shipping and container agreements or through govern-
ment bills of lading. The rates at which the cargo moves
are determined under a “‘request for proposal” (RFP)
competitive bid system managed by the Military Sealift
Command. Under the RFP system, carriers submit to
MSC the rates at which they are willing to carry each
type of military cargo moving on a designated route
during two consecutive six-month cycles. Bids are
evaluated by MSC and a “necking order” is established
ranking carriers in order of their bids, lowest bidder
first. Military cargo is then shipped with the highest
ranking carrier having a vessel in position.

While shipping industry and government officials have"
criticized this procurement system as one which invites
establishment of non-compensatory rates highly prejudi-
cial to all carriers competing for military cargo,'® it is
clear that the rates established are not influenced in any
way by foreign-flag carriers. No foreign-flag carrier can
compete or ever has competed in the RFP process; no
foreign-flag carrier can carry military cargo except in

'SSee H. Con. Res. 403, 92nd Cong., Ist Sess. (introduced
September 16, 1971.)

See, e.g., Federal Maritime Commission Docket No. 71-35,
“Investigation of Competitive Procurement Practices on Military
Cargo.”

A-48

the extremely rare case of unavailability of U.S.-flag
vessels:'7 and the rates are not established by an
international commercial rate conference. Accordingly,
military preference cargo is not a category of preference
cargo carried at rates influenced or determined by
foreign-flag carriers.

b. Civilian Preference Cargo

The Cargo Preference Act of 1954, §901(b) of the
Merchant Marine Act, 1936,'* provides in pertinent
part:

“Whenever the United States shall procure, con-

tract for, or otherwise obtain for its own account,

or shall furnish to or for the account of any
foreign nation without provision for reimburse-
ment, any equipment, materials, or commodities,
within or without the United States, or shall
advance funds or credits or guarantee the converti-
bility of foreign currencies in connection with the
furnishings of such equipment, materials, or
commodities, the appropriate agency or agencies
shall take such steps as may be necessary and
practicable to assure Miat at least 50 per centum of
the gross tonnage of such equipment, materials, or
commodities (computed separately for dry bulk
carriers, dry cargo liners, and tankers), which may
be transported on ocean vessels shall be trans-
ported on privately-owned United States-flag
commercial vessels, to the extent such vessels are
available at fair and reasonable rates for United
'"In 1969, for example, foreign-flag carriers carried 2,769 out
of 9,000,000 measurement tons (.03%) of military cargo
transported.

46 US.C. §1241(b).

A49

States-flag commercial vessels, in such manner as

will insure a fair and reasonable participation of

United States-flag commercial vessels in such

cargoes by geographic areas:....” (Emphasis

added)

Public Resolution 17, 73rd Cong., approved March
26, 1934,'* provides:

*s.

. it is the sense of Congress that in any loans
made by ... any ... instrumentality of the
government to foster the exporting of agricultural
or other products, provision shall be made that
such products shall be carried exclusively in vessels
of the United States ... [unless the Maritime
Administration certifies] that vessels of the United
States are not available in sufficient numbers, or in
sufficient tonnage capacity, or on necessary sailing
schedules or at reasonable rates.”

Those two provisions of law, along with several other

minor provisions,?® delineate the category of cargo

known as civilian preference cargo. The great majority
of cargo moving subject to these provisions is
agricultural cargo shipped pursuant to the Agricultural

Trade Development and Assistance Act of 1954

(commonly known as P.L. 480),?' or the Foreign

Assistance Act of 1961,?? and general cargo moving

under the auspicies of the Export-Import Bank.

915 US.C. §616a.
2°See AIMS Ex. 267.
17 US.C. § 1691-1736.
299 U.S.C. § 2381.

A-50
(1) Conference-Rated Civilian Preference Cargo

A substantial portion of civilian preference cargo is
liner cargo moving at rates set by international
commercial rate conferences. While the record in this
proceeding contains only sparse information about the
structure and operation of the international commercial
conference rate system, the evidence adduced is
uncontradicted.

Generally speaking, international commercial rate
conferences are formal organizations of competing
U.S.-flag and foreign-flag carriers established for the
purpose of fixing rates.?* Rates are commonly fixed by
a conference on the basis of commodity classifications.
Conferences do not, however, have a separate com-
modity classification for civilian preference cargo. Thus,
rates applicable to preference cargo are the same as
those applicable to equivalent commercial cargo,
including commercial cargo comprising the 50% of
government-generated cargoes not required to move on
U.S.-flag vessels. Since commercial cargo and preference
cargo moving under the conference rate system are
generally indistinguishable by physical characteristics,
the competitive attributes of carrying conference-rated
preference cargo are virtually identical to those of
carrying conference-rated commercial cargo.

Because the foreign-flag carriers participating in a
conference very clearly have a voice in rate deter-

3 Al] such conferences involving carriers engaged in the foreign
commerce of the United States are subject to the regulatory
jurisdiction of the Federal Maritime Commission under Section 14
and 15 of the Shipping Act, 1916, 46 U.S.C. § § 813-814.

A-51

minations, it is reasonable to conclude that conference-
rated civilian preference cargo does constitute a
category of preference cargo carried at rates directly
influenced or determined by foreign-flag carriers.

(2) Open-Rated Civilian Preference Cargo

Open-rated civilian preference cargo comprises that
portion of civilian preference cargo which is not
conference-rated. The rates for open-rated cargo, in
other words, are determined by negotiation with the
shipper and not by formal agreement of competitors. In
actual practice, open-rated civilian preference cargo is
either carried at premium rates, i.e., rates higher than
those prevailing in the world market, or “world” rates.
i.c., rates the same as those prevailing in the world
market.

(a) Open-Rated Civilian Preference Cargo
Carried at Premium Rates

The largest sources of open-rated civilian preference
cargo are the Department of Agriculture’s P.L. 480 and
AID’s Foreign Assistance Act programs. Cargoes under
these programs generally consist of wheat, rice, grain
and fertilizer moving in bulk lots. Virtually all of this
cargo moves at premium rates. Unlike conference-rated
preference cargoes, most of the P.L. 480 and AID
cargoes can be identified as preference cargo at the time
of booking.

The rate premiums paid for U.S.-flag movement of
these cargoes are generally considered to be the

A-52

differential between the rate at which the goods
actually move — a rate set by the U.S.-flag carrier —
and the lowest available bid from foreign-flag carriers
for carriage of similar commodities in the trades
concerned (often referred to as the “world’’ rate).
Under the P.L. 480 and Foreign Assistance Act
programs, these rate premiums are calculated by the
Department of Agriculture and AID, respectively. The
foreign shipper of the cargoes, who must initially pay
the U.S.-flag carrier his full rate, is then reimbursed by
these two agencies for the full amount of the premium.
In 1969, the rate premiums averaged 100-150% of the
foreign-flag rate; it is estimated that the rate premium
reimbursements for these agricultural programs has
approximated $100 million a year in recent years and
has perhaps aggregated a billion dollars over the full life
of the program.

Whatever may be the merits of the premium rate
system, it is abundantly clear that U.S.-flag premium
rates for open-rated civilian preference cargoes are not
influenced by foreign-flag carriers but are established
exclusively in the domain of U.S.-flag carriers. Accord-
ingly, open-rated civilian preference cargo carried at
premium rates is not a category of preference cargo
carried at rates influenced or determined by foreign-flag
Carriers.

(b) Open-Rated Civilian Preference Cargo
Carried at “World” Rates

It is not clear from the record in this proceeding
what, if any, civilian preference cargo is carried at
“world” rates. To the extent, however, that such

A-53

carriage is taking place or will take place in the future.
its consideration here is important.

Precise definition of the concept of “world” rates is
difficult. The prevailing description of a “world” rate is
that it is the rate “prevailing in the world market.” i.e..
the rate at which the majority of carriers in a given
trade are carrying cargo. Obviously, the carriers which
are dominant in any particular trade will exercise the
most influence on determination of the “world” rate.
As a practical matter, the dominance of foreign-flag
carners in the trades served by both U.S.-flag and
foreign-flag carriers is sufficient to warrant the
conclusion that “world” rates in those trades are
directly influenced or determined by foreign-flag
carriers.** Since open-rated civilian preference cargo is
Virtually always carried in trades served by both
U.S.-flag and foreign-flag carriers, the Board finds that
open-rated civilian preference cargo carried at “‘world”
rates is a category of preference cargo carried at rates
directly influenced or determined by foreign-flag
carriers.

c. Conclusion

Based on the foregoing analysis of preference cargo
categories, the Board concludes that the following three
final principles must govern award and payment of ODS
under Title VI of the Act: First, no ODS contract will

*Indeed, as indicated above in section Alb(2)(a), the “world”
' rate is often defined as the lowest available bid from foreign-flag
carriers for carriage of given commodities in a given trade.

-

A-54

be awarded unless the applicant can establish that the
vessel operations proposed to be subsidized will be
conducted in a manner which will not preclude the
applicant from earning at least 50% of its gross freight
revenues for each service covered by the application
from the carriage of commercial cargoes, conference-
rated civilian preference cargoes or open-rated civilian
preference cargoes carried at “world” rates. Secondly,
ODS will be paid in full for vessel operations on each
service covered by an ODS contract only if at least 50%
of the gross freight revenues earned for that service are
earned from the carriage of commercial cargoes,
conference-rated civilian preference cargoes or open-
rated civilian preference cargoes carried at ‘“‘world”
rates. Thirdly, to the extent that less than 50% of the
gross freight revenues earned for a service are earned
from carriage of commercial cargoes, conference-rated
civilian preference cargoes and open-rated civilian
preference cargoes carried at “world” rates, ODS
payable under the ODS contract for that service will be
reduced in proportion to the decreased gross freight
revenues earned from such carriage.**

*SThe Board’s third principle — proportionate reduction of
ODS for excessive carriage of cargoes not subject to foreign-flag
competition — does not contravene Op. Comp. Gen. B-159245,
dated October 14, 1966 (unreported). AIMS has interpreted that
decision as holding that the 1936 Act does not authorize
abatement of subsidy for carriage of preference cargoes,
particularly military cargo. The Comptroller General’s ruling,
however, cannot be read that broadly. Taking into account the
fact situation before the Comptroller General, the key holding of
Decision B-159245 is that where military cargoes (and
presumably other cargoes not subject to foreign-flag competition)
constitute no more than 50% of the cargo carried by a subsidized
operator on any one sailing, abatement of ODS is not authorized.
Decision B-159245, pp. 34. The Board’s third principle is
entirely consonant with that holding.

er ce a ee ne a ae an

A-55

Implementation of these three principles will be by
Board rule under authority of § 204(b) of the Act:?¢
Board Rule 1, set out in Exhibit C, is proposed for this
purpose and will be published in the Federal Register
with opportunity for public comment prior to final
adoption. The rule finally adopted will apply prospec-
tively to all ODS contracts existing on the effective date
of the rule?’ and to all new ODS contracts made after
such effective date.

2. The “Double Subsidy” Issue

AMA alleges in its petition that any payment of ODS
to support carriage of preference cargo constitutes
payment of ‘an improper “double subsidy.” In_ this

2646 U.S.C. § 1114(b).

7The Board rejects AIMS’ argument that any rule adopted in
this proceeding may not be applied to existing ODS contracts. :
Existing ODS contracts provide that:

“In order to induce favorable action upon its application
for financial aid provided for in this Agreement the
Operator ... does hereby warrant and represent, among
other things, as follows: . . .
H. ... Events of Default. The following shall constitute
events of default under this agreement:
*e eK *

(f) Failure by the Operator to comply with any
applicable provision of the Act, amy law administered by
the ... Maritime Administration, or any rule or regulation

of the ... Maritime Administration published in the
! Federal Register, relating to the operation of subsidized
vessel/s).’’ (Emphasis added)
Each ODS contract, then, is expressly subject to any reasonable
interpretation of the 1936 Act by the Maritime Administration
and any rule or regulation, applied prospectively, implementing
such interpretation.

A-56

context, “double subsidy” is defined as payment of
ODS to a carrier who, by virtue of government
protection through preference laws, is carrying cargo at
premium rates.?* It is AMA’s position that subsidized
operators carrying preference cargo must be content
with rate premiums alone?® and cannot receive ODS in
addition.

The alleged impropriety of paying “double subsidy”
is grounded in the fact that the basic purpose of ODS is
to establish cost parity between U.S.-flag and foreign-
flag vessel operations. Payment of “double subsidy,”
the argument goes, decreases U.S.-flag net operating
costs below the level upon which parity is based and
thus violates the basic purpose of ODS. Quite
obviously, this argument — which the Board accepts as
valid — proceeds entirely on the assumption that the
cargo preference laws do give rise to rate premiums.
Thus, to the extent that preference cargo is not carried
at premium rates, the objections to payment of ODS
clearly have no merit. It is important, then, to examine
the various categories of preference cargo to determine
if, in fact, U.S.-flag carriage is accomplished at premium
rates.

2Note that the term “double subsidy” is not intended to
imply that an operator is receiving twice as much subsidy.
Rather, it means only that the operator is receiving subsidy from
two sources.

295 discussed in section Alb(2)a) above, the rate premium is
generally considered to be the differential between the cost of
U.S.-flag and foreign-flag shipping.

——SS a a —EEawIrere-=~meeeeeeeeeeerree ena eaa.a.a.a.QaQg80 SSS" °»~””

A-57

a. Military Preference Cargo

The method by which rates are determined for
military cargo — the so-called RFP system — is
described in detail in section Ala above. As indicated in
that section, foreign-flag carriers have virtually no
influence on military cargo rates: nor do foreign-flag

carriers engage to any measurable degree in carriage of

military cargo. Furthermore, military cargo is somewhat
unique in its general characteristics so that it is difficult
to find commercial cargo carried by foreign-flag carriers
which can easily be classified as equivalent. For these
reasons, it is extremely difficult to determine whether
the U.S.-flag rate is a premium rate when compared to
the “corresponding” foreign-flag rate for this type of
cargo.

The record in this proceeding, however, is of some
help in evaluating military cargo rates. AIMS, for
example, produced several studies showing that in
isolated instances military rates are below the “‘world”
rates for comparable commercial cargo.*° AIMS also
argued that, since the Cargo Preference Act of 1904
provides that “chamges made by [United States vessels
carrying military cargo] may not be higher than the
charges made for transporting like goods for private
persons,” military mites cannot by law exceed the
“world” rate for comparable cargo. While several
persons testified that foreign-flag liners, if eligible to
carry military cargo, would probably offer lower
rates,*' there was no testimony that forcign-flag lines

*See AIMS Ex. 221, pp. 6-9, 12-15, 17-37, 42: AIMS Ex. B.

pp. 18-19; AIMS Ex. 242; AIMS Fx. 243.

"Tr. 401-402 (Brogan), 182) Stone), 2471 (Barker), 3434
(Lynch), 3781 (Cherington).

-@

A-58

rates or world conference rates for similar cargo are in
fact below the military cargo rates of U.S.-flag carriers.

On this record, the Board is constrained to conclude
that military preference cargo cannot reasonably be said
to be carried at premium rates. Accordingly, payment
of ODS in accordance with the principles set forth in
section Alc above for operation of a vessel which carries
military preference cargo does not constitute payment
of an improper “double subsidy.”

b. Civilian Preference Cargo
(1) Conference-Rated Civilian Preference Cargo

As outlined in section Alb(1) above, rates applicable
to conference-rated civilian preference cargo are the
same as those applicable to equivalent commercial
cargo, including equivalent commercial cargo carried by
foreign-flag carriers. Accordingly, it would appear tuat
there is no rate premium associated with U.S.-flag
carriage of this cargo. AMA argues, however, that there
is in fact a rate premium because, as a practical matter,
conference rates are set at a level to cover fully
allocated U.S.-flag costs and foreign-flag carriers more
or less go along for a very profitable ride at the higher
rate. AMA argues, in other words, that the rate
premium is disguised.

AMA relies on an economic study prepared by an
AMA economist, Robert Nathan, as support for this
position. The Nathan Study, however, is so serivusly
inconsistent with other positions taken by AMA in this
proceeding that the Board cannot accept AMA reliance
on it here. The primary inconsistency stems from the

eo

A-59

direct implication of the Nathan Study that, because
preference cargo is carried at fully-allocated U.S. cost
and because conference-rated commercial cargo is
carried at the same rate as preference cargo, conference-
rated commercial cargo returns fully-allocated U.S. costs
without subsidy. If this were true. then unsubsidized
operators should be able to compete with foreign-flag
carriers for that cargo. AMA has taken a. strong
position, however, that the unsubsidized operators
cannot meet that competition.2? A second serious
inconsistency is that, notwithstanding the Nathan Study
conclusion that conference-rated commercial cargo is
carried at fully-allocated U.S. costs, AMA has not taken
the position which logically follows from that con-
clusion, namely, that carriage of commercial cargo is
ineligible for ODS. Its only argument is that conference-
rated preference cargo, identical in characteristics and
rate to conference-rate commercial cargo, is ineligible
for ODS.

In view of these inconsistencies. the Board rejects the
AMA argument & being without valid support in the
record and finds that conterence-rated preference cargo
is not carried at’ premium rates, disguised or other-
wise.*? Thus, payment of ODS in accordance with the
principles set forth in section Alc above for operation
of a vessel which carries conference-rated civilian

Nathan's analysis and AMA's position with regard to
inability of unsubsidized lines to compete tor commercial cargo
were specifically directed at the trans-pacific trade.

The Board does not reach the issue of whether a “disguised”
rate premium is a proper foundation for an allegation of “double
subsidy.”

A-60

preference cargo does not constitute payment of an
improper “double subsidy.”

(2) Open-Rated Civilian Preference Cargo

(a) Open Rated Civilian Preference
Cargo Carried at Premium Rates

By definition, open-rated civilian preference cargo
carried at premium rates constitutes a category of
preference cargo, the carriage of which generates a rate
premium. Accordingly, payment of ODS for operation
of a vessel carrying such cargo does, in the Board's
judgment, constitute payment of a “double subsidy.”
The appropriate manner in which to address this
“double subsidy” is discussed below in section A2c.

(b) Open-Rated Civilian Preference Cargo
Carried At “World” Rates

Open-rated civilian preference cargo carried at
“world” rates very clearly does not constitute a
category of preference cargo carried at a premium rate,
since the term “premium rate,’ as a practical matter,
refers to a rate in excess of the “world” rate.** Thus,
payment of ODS for operation of a vessel carrying such
cargo does not constitute payment of an improper
“double subsidy.”

4See section Alb(2) above; see also footnote 24 and
accompanying text.

ot ane

A-61

c. Payment of “Double Subsidy” —
The Appropriate Remedy

As discussed above, it is the judgment of the Board
that payment of ODS for the carriage of open-rated
civilian preference cargo at premium rates is the one
situation where the subsidized operator is likely to
receive a “double subsidy” and thus be placed in an
operating cost position more favorable than that
permitted by Title VI.

The Board has available to it two courses of action in
this situation. First, it can reduce the level of ODS
payments to compensate for any rate premiums earned
by carrying this type of cargo. Secondly, it can seek to
eliminate the rate premiums. For reasons explained
below, the Board chooses the latter course.

The government has long recognized that premium
rates earned by U.S.-flag carriers from carriage of
protected cargo are a form of indirect subsidy. This
recognition has been particularly apparent in connection
with bulk (as opposed to liner) operations where, until
1970, premium rates were the only form of subsidy
available. In 1969. however, when the Merchant Marine
Act of 1970 came before the Congress, the wisdom of
continuing the premium rate subsidy system for bulk
carriers was called into question. The President of the
United States, for example, noted, in transmitting to
Congress recommendations for a new maritime pro-
gram:

“We will propose a new direct subsidy system for

[bulk] carriers thus allowing us to phase out these

A-62

premium freight rates and reduce the costs of
several nonmaritime government programs.””**

In addition, the various bills setting forth the new
maritime program all proposed extension of the direct
ODS system to bulk cargo carrying services.

The maritime bill finally enacted on October 21,
1970 — known as the Merchant Marine Act of 1970 —
did in fact extend the ODS program to bulk carriers. In
commenting on this extension, the House Committee
Report noted:

“Another factor prompting the Administration to

extend operating subsidy to U.S.-flag bulk carriers

is the desire to phase out premium freight rates
now paid for government sponsored cargoes carried
on American-flag ships.... The aim of the

Administration’s program and the bill is to enable —

American bulk carriers, eventually at least, to carry
government cargoes at world rates.’’*®

While this proceeding does not involve payment of
ODS to bulk carriers?” we feel that the criticism of
premium rate subsidies reflected in the history of the
ODS program for bulk carriers is equally ap» cable to
premium rate subsidies for liner operations. Phase out
of premium rates and encouragement of U-S.-flag
carriage at “world” rates, in other words, should be the
Board’s objective irrespective of the type of operation
involved.

In the case of open-rated civilian preference cargoes,
phase out of premium rates can best be accomplished

3SH_R. Doc. No. 91-183, 91st Cong., Ist Sess. 4 (1969).
%6H_R. Rep. No. 91-1073, 91st Cong., 2d Sess. 38 (1970).

37See footnote 9, supra.

A-63

by publication and enforcement of guideline rates for
parcel lot carriage of such cargoes by subsidized
operators. Accordingly, guideline rates will be formu-
lated and published in regulation form by the Secretary
of Commerce, acting by and through the Maritime
Administration, in accordance with §901(b)(2) of the
Act.2* A minimum of 90 days will be required to
prepare proposed regulations. Public comment will be
invited prior to final adoption of the regulations.*®

3. The Unfair Competition Issue

AMA’s final contention with regard to ODS is that
payment of ODS for operation of a vessel carrying
preference cargo results in “unfair competition” by
subsidized operators against unsubsidized operators. In
large part, AMA’s position is based on the notion that
payment of ODS for carriage of preference cargo results
in a “double subsidy” which gives the subsidized
operator an undue and improper cost advantage. The
subject of “double subsidy” has been treated in section
A2 above, in a’ manner which effectively prevents
AMA’s reliance on the existence of “double subsidy” to
establish its case for unfair competition. AMA, however,

946 U.S.C. $1241(b)(2).

Once rates for open-rated civilian preference cargo now
carried at premium rates are reduced to “world” rates, all
open-rated civilian preference cargo will, of course, fall into the
category of “open-rated civilian preference cargo carried at world
rates” within the meaning of Board Rule 1, Appendix C.

A-64

also bases its unfair competition argument on the more
general notion that, since unsubsidized operators
depend on preference cargo for a livelihood, payment
of any subsidy — “double” or not — to a competing
carrier places the unsubsidized carrier at an unfair
disadvantage.

The Board has considered the record carefully and
has failed to find sufficient evidence to support AMA’s
allegation that subsidized lines are in fact competing
unfairly with unsubsidized lines. Looking, for example,
at military preference cargo, where AMA’s allegations of
unfair competition are most vigorous, the record shows
that, with respect to breakbulk operations, unsubsidized
carriers greatly increased their carriage of military cargo
during the period of record and earned respectable
profits despite some instances of underbidding by
subsidized breakbulk operators on trades offering large
volumes of military cargoes. It is true, of course, that
the unsubsidized breakbulk fleet is rapidly being
scrapped or sold foreign.*® This status, however, seems
more a product of age and condition of vessels and
decreased volume of breakbulk military cargo than a
product of competition with subsidized operators.

With respect to container operations, the unsub-
sidized operators have carried an increasingly larger
share of military cargo, have held their own in the
bidding positions, and have received far greater profits
from the military cargo movement than the subsidized
lines. If anything, the competition between the two
container fleets has been healthy and vigorous.

The record indicates that by January 1, 1973, there may be
only 40 unsub:.dized breakbulk ships in the U.S.-flag fleet and
that by January 1, 1975, that number may dwindle to 25 ships.

A-65

Even if the record did support the existence of an
undue competitive advantage for subsidized operators,
however, the Board would not necessarily be required
to modify the ODS program or any ODS contract to
eliminate the advantage. On the contrary, § 605(c) of the
Act provides:

“

.. ho contract shall be made with respect to a
vessel operated or to be operated in an essential
service served by two or more citizens of the
United States with vessels of United States
registry, if the Secretary of Commerce shall
determine the effect of such a contract would be
to give undue advantage or be unduly prejudicial,
as between citizens of the United States... unless.
following public hearing ... the Secretary ... shall
find that it is necessary to enter into such contract
in order to provide adequate service by vessels of
United States registry... (Emphasis added)

Thus; where the Secretary (acting through the Board)
finds, first, that U.S.-flag service in an essential service
for which subsidy is requested is inadequate and,
secondly, that the applicant has complied with the rule
established in this proceeding — findings which, for all
practical purposes, must be made before any ODS
contract can be made — the issue of whether there is or
is not an undue competitive advantage becomes
irrelevant.

For the reasons recited in this section, AMA’s unfair
competition arguments are rejected.

B. Abatement of CDS for Carriage of
Preference Cargo

The second primary issue in this proceeding is
whether a vessel built with construction-differential

A-66

subsidy (CDS) may engage in carriage of preference
cargo without abatement of subsidy. The CDS program
is administered by the Board in accordance with the
provisions of Title V of the Act.*' AMA takes the
position that one basic purpose of Title V is to
promote construction of U.S.-flag vessels which will be
able to and will in fact compete with foreign-flag
vessels. Accordingly, AMA argues that the operator of a
vessel built with CDS on which ODS is being paid must
rebate CDS whenever that vessel fails to “meet
foreign-flag competition” (or, by AMA standards,
whenever preference cargo is carried). AMA proposes
Rule 3B to implement its position.

AIMS opposes AMA’s arguments on the grounds that
Title V contains no operating restrictions relating in any
way to foreign-flag competition and that there is no
justification whatsoever in Title V for distinguishing, as
AMA does, between vessels receiving and those not
receiving ODS.

The Board has already considered and decided some
aspects of the AMA position in a related proceeding —
Docket S-244, Sub. 1.4? In that proceeding, the Board
ruled that no provision of the 1936 Act prohibits two
and three year military charters of vessels built with
CDS.43. The Board now extends its conclusions and

4146 US.C. §§ 1151 et. seq.

42Docket §$-244, Sub. 1, was commenced by Board Order
dated April 3, 1970, and decided by Board Order dated October
13, 1970.

The Board also ruled that “the military has statutory
authority alternative ‘o authority through the 1936 Act for such
charters.” The Board’s decision has been upheld by the US.
District Court for the District of Columbia. See AMA vy. Stans,
Civil Action No. 2090-70 (July 12, 1971). The District Court's
unreported decision is presently on appeal by AMA to the US.
Court of Appeals, District of Columbia Circuit.

oer

A-67

finds that AMA’s contentions — and AMA Rule 3B —
have no merit whatsoever.

The purpose of the Title V CDS program is to
provide subsidy to shipyards of the United States so
that a ship purchaser may purchase a vessel in the
United States for the same price he could have
purchased an equivalent vessel abroad. The only
significant restrictions applicable under Title V to
vessels built with CDS are, first, that the vessel be
registered under the U.S.-flag for its statutory economic
life and, secondly, that the vessel engage in the foreign
commerce of the United States (except as provided in
§506 of the Act). Nowhere in Title V is there any
mention of a requirement that a vessel built with CDS
must “meet foreign-flag competition.” Indeed, the only
mention of foreign-flag competition ever appearing in
Title V was removed by amendment in 1952.44
Furthermore, the concept of attaching trading restric-
tions of any sort to vessels built with CDS — other than
the restrictions requiring operation in the U.S. foreign
commerce — was considered and rejected when the
Merchant Marine Act of 1970 was passed.*s

Title V_ also Contains no provision requiring a
distinction between vessels built with CDS receiving and
those not receiving ODS. In other words, the fact that
operation of a vessel built with CDS is subsidized under
Title VI has absolutely no significance under Title V.

For these reasons, AMA’s contention that a vessel
built with CDS and subsidized under Title VI must
either “meet foreign-flag competition” or rebate CDS is

“See Act July 17, 1952, §1, 2.

*SSee, e.g., H.R. Rep. No 91-1073. 91st Cong., 2d Sess. 30
(1970).

A-68

rejected. So long as the vessel engages in the foreign
commerce of the United States when required, the type
and competitive attributes of the cargo carried are not
matters for consideration under Title V.

C. Proof of Preference Cargo Carriage
in §605(c) Hearings

AMA raises a third issue of subsidary significance in
its petition, namely, whether the Board must. receive
evidence regarding carriage of preference cargo in
hearings under §605(c) of the Act.*®

Section 605(c) sets forth various standards governing
grant of ODS applications. Among other things, these
standards require that the Board determine, fi *,
adequacy of existing U.S.-flag service in the essenual
service proposed to be subsidized and, secondly,
consistency of a specific contract award with the
purposes and policy of the Act. The third issue raised
by AMA goes to the evidence which the Board must
consider in order to make these determinations.

It is AMA’s position that the degree to which an
applicant-operator proposes to carry preference cargo is
relevant to both the “purposes and policy” and the
“adequacy of service’ determinations and therefore
evidence on that point must be received by the Board.
AMA offers Rule 2 in support of its position.

In section A of this opinion — and in Board Rule |
(see Appendix C) — the Board states the principle that:

“No ODS contract will be awarded unless the
applicant can establish that vessel operations

#646 USC. 1175(c).

A-69

proposed to be subsidized will be conducted in a
manner which will not preclude the applicant from
earning at least 50% of its gross freight revenues
for each service covered by the application from
carriage of commercial cargoes, conference-rated
civilian preference cargoes or open-rated civilian
preference cargoes carried at ‘world’ rates.”

This principle is intended to reflect the competitive
requirements of §601. However, the applicant's satis-
faction of this standard may, in some cases, be a proper
subject for consideration under the “purposes and
policy” standard of §605(c). To the extent that
compliance with this principle is at issue in §605(c)
hearing, the Board will receive evidence bearing on such
compliance. Such evidence may. of course. include
proof of the extent to which the applicant-operator
may reasonabiy be expected to carry preference cargo.

It may alse be the case that the mix of cargo
proposed to be carried by an applicant will have some
bearing on the “adequacy” issue in a §605(c) hearing.
In that case, evidence with regard to applicant’s cargo
mix, including proposed carriage of preference cargo,
will be received by the Board.

Subject to these general statements, however, the
Board deems it best to leave the question of what
evidence is appropriate to a given case in the hands of
the examiner conducting the §605(c) hearing in that
case. For this reason, the Board does not consider it
appropriate to recommend adoption of any rule on the
subject and does not recommend adoption of AMA
Rule 2.

A-70
CONCLUSION

For the reasons stated in this opinion, the Board
proposes the adoption of Board Rule | (see Appendix
C) as an accurate statement of the competitive
requirements of Title VI of the Act as they relate to
carriage of preference cargoes.

The Board also proposes that regulations be pub-
lished under §901(b)(2) of the Act establishing
guideline rates for subsidized carriage of open-rated
civilian preference cargo. The purpose of those guideline
regulations will be to eliminate carriage of such cargo at
premium rates and thus eliminate payment of a “double
subsidy” to the subsidized operators engaged in such
carriage. °

The proposal of AMA that the Board Adopt AM
Rules 1, 2, 3A and 3B is rejected.

All motions of the parties not otherwise expressly
granted or denied in this opinion are hereby denied.

All principles, rules and conclusions of law enun-
ciated in this opinion shall have prospective application
only and nothing stated herein should be construed as
rendering illegal any prior acts, policies, rulings or
interpretations of the Secretary, the Board or the
Maritime Administration (and predecessor bodies) under
the ODS and CDS programs. See S.E.C. v. Chenery
Corp., 332 U.S. 194 (1947); N.L.R.B. v. Beech-Nut Life
Savers Inc., 274 F. Supp. 423 (S.D.N.Y. 1967), aff d.
F.2d 253 (2d Cir. 1968), cert. denied 394 U.S. 1012

A-71

(1968); N.L.R.B. v. Q-T Shoe Manufacturing Co., 409
F.2d 1247 (3d Cir. 1969).

/s/Aaron Silverman
Aaron Silverman
Assistant Secretary

SO ORDERED
MARITIME SUBSIDY BOARD/
MARITIME ADMINISTRATION

Date: June 1, 1972

APPENDIX A

Text of Proposed AMA Rules
AMA Rule 1

The Secretary of Commerce interprets the statute as
forbidding and he will in no case award Operating-
differential subsidy contracts in the absence of
substantial foreign competition for the cargo applicant —
carries or will carry. Services devoted primarily to
preference cargo are specifically included within this
rule and will not qualify for subsidy.

AMA Rule 2

Hearings under section 605(c) of the Merchant Marine
Act, 1936, will receive proof of the scope and impact

A-72

of all classes of cargo, including military cargo, in the
carriage of which American vessels are by law entitled
to preference. Such proof will include the extent to
which applicants for subsidy or for expansion of
subsidy carried and may reasonably be expected to
carry such preference cargo.

AMA Rule 3A

No operating Jifferential subsidy shall be paid to
carriers holding contracts under the Merchant Marine
Act, 1936, except with respect to commercial carryings.
If the subsidized vessel earns any gross revenue from
other than commercial carryings the subsidy payment
for the entire voyage shall be reduced by an amount
that bears the same ratio to the subsidy otherwise
payable as such gross revenue bears to the gross revenue
derived from the entire voyage. For the purposes of this
computation, gross revenue shall be calculated net of
cargo loading and discharging cost. As used herein
“commercial carryings’” means carryings of private
commercial cargo or passengers in foreign-flag com-
petition. The determinations of the Secretary hereunder
shall be final.

AMA Rule 3B

If a vessel for which construction-differential subsidy
has been paid is subject to an operating-differential
subsidy contract, and such vessel carries cargoes other
than commercial cargoes on /iner terms, the owner shall

A-73

pay annually to the Secretary that proportion of one
twenty-fifth of such construction subsidy plus interest
thereon at 6% per annum (computed on a level basis
over 25 years) which the gross revenue derived from
such cargoes bears to the gross revenue derived from
the entire voyages of such vessel during such year, or if
such vessel shall carry such cargoes on charter terms.
the owner shall pay to the Secretary an amount which
bears the same proportion to the construction subsidy
plus interest thereon at 6% per annum (computed on a
level basis over 25 years) as the duration of such
charter bears to such period of 25 years. Gross revenue
shall be calculated net of cargo loading and discharging
cost.

APPENDIX B

Points Designated for Evidentiary Hearing
By Board Order of December 1, 1969*

“1. The method or methods utilized by the Govern-
ment and shippers for selection of the carriers of
Government-sponsored or Government-impelled cargoes.
which includes military cargoes (hereinafter ‘preference
cargoes’).

2. Circumstances under which foreign-flag lines may
(and the extent to which they do) carry preference
cargoes.

*Points 10 and 11 were added by Board Order of July 9, 1970.

A-74

3. The manner, if any, in which a subsidized operator’s
ability to penetrate into and carry the pool of
commercial cargo is adversely affected by the carriage
of preference cargoes.

4. The extent of available useful free space aboard
vessels which are carrying preference cargoes.

5. The ratio of movement of commercial cargoes to
preference cargoes by both subsidized and non-subsidized
operators On a voyage basis.

6. Identification of all commercial cargoes regarding
which there is an absence of substantial foreign-flag
competition.

7. The financial impact on both subsidized and
non-subsidized American-flag operators resulting from
the carriage of preference cargoes.

8. Identification of companies operating U.S.-flag and
foreign-flag vessels on the same route and the extent to
which they participate in the movement (and the ships
on which moved) of commercial cargoes and preference
cargoes.

9. Any other facts germane to the issues presented by
the AMA petition.”

10. Information relevant to the preference cargo
carriage by unsubsidized operators pursuant to special
contracts, tramping and ship charters.

A-75

11. Cost as well as revenue information relating to the
financial impact upon both subsidized and unsubsidized
American-flag operators resulting from the carriage of
preference cargo.

APPENDIX C

BOARD RULE |

A. The purpose of this rule is to prescribe
regulations governing award of ODS contracts and
payment of subsidy under Title VI of the Merchant
Marine Act, 1936, as amended (Act), as that Title has
been interpreted by the Maritime Subsidy Board
(Board) in Docket S-244.

B. For purposes of this rule:

(1) “Commercial cargoes,” “conference-rated civilian
preference cargoes,” and “open-rated civilian preference
cargoes carried at ‘world’ rates” shall be as defined by
the Board in its final opinion in Docket S-244.

(2) “Gross freight revenues” shall mean gross reve-
nues earned trom the carriage of cargo. Gross revenues
earned from the carriage of passengers and mail and
miscellaneous gross revenues shall not be included
within the term “gross freight revenues.”

(3) “Inbound gross freight revenue” shall mean gross
freight revenues earned from carriage of cargoes in

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_1399%3A2. Public record. Not legal advice.