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07/02/85 American Maritime v. United States of America

July 2, 1985










Before this court decided Aeron, the AMA petitioned the Board to reconsider its initial determination that existing U.S.-flag service in the preference trade was inadequate within the meaning of section 605(c) of the Act. The AMA contended that intervening changes in the shipping industry had cured whatever inadequacy in U.S.-flag service had existed in 1978 and that all of Aeron's ships must therefore be excluded from the preference trade. After we issued Aeron, the Board denied the AMA's motion for reconsideration of the adequacy finding, eventually concluding that our opinion precluded any further section 605(c) proceedings by ordering the admission of all seven Aeron ships. See Aeron Marine Shipping Co., 22 Ship. Reg. Rep. 319, 323 (M.S.B. 1983) [hereinafter Tentative Order ]; Aeron Marine Shipping Co., 22 Ship. Reg. Rep. 599, 604-05 (M.S.B. 1983) [hereinafter Final Order ].



Nos. 84-5381, 84-5502, 84-5503 1985.CDC.150

Appeals from the United States District Court for the District of Columbia. (Civil Action No. 84-249).


Wald, Edwards and Bork, Circuit Judges. Opinion for the Court filed by Circuit Judge Wald.


The various appeals and cross-appeals in these consolidated cases constitute the latest round in the efforts of the Maritime Subsidy Board (the Board) and the Maritime Administration (MarAd) of the Department of Transportation to implement Congress' 1970 amendments to the Merchant Marine Act, 46 U.S.C. §§ 1101-1295g (the Act). Those amendments provided direct subsidies to certain U.S.-flag bulk vessels and envisioned that such "subsidized" vessels would carry foreign bulk preference cargoes at low world rates as the existing service provided by "unsubsidized" shippers became inadequate. *fn1 In 1978, the Board concluded that existing service in the preference trade was inadequate and determined that two of the seven subsidized bulk vessels operated by the Aeron Marine Shipping Company (Aeron) should be allowed to bid on preference cargo contracts. In Aeron Marine Shipping Company v. United States, 224 U.S. App. D.C. 373, 695 F.2d 567 (D.C. Cir. 1982), this court concluded that the Board must admit all of Aeron's subsidized vessels into the preference trade given its finding that existing service was inadequate by an amount greater than the capacity of all seven Aeron ships. We further directed the Board to reconsider the appropriate rate structure for those ships.

While Aeron was under submission to this court, the American Maritime Association , which represents unsubsidized shippers in competition with Aeron for preference cargo contracts, and Phoenix Bulkship I, Inc. (Phoenix), an individual unsubsidized carrier, petitioned the Board to reconsider its 1978 inadequacy finding in light of intervening changes in the shipping industry. On remand from Aeron, the Board concluded that our decision precluded any reconsideration of its 1978 adequacy finding and, through several orders and a rulemaking, established a complex regulatory structure for Aeron's carriage of bulk preference cargo. Although the Board decided to allow Aeron to bid for preference cargoes at relatively high cost-based rates, it adopted a rule requiring government shipper agencies to account for Aeron's subsidies when evaluating its bids for such cargoes (the bid augmentation rule). The Board also determined that Aeron must forgo a portion of its government subsidy if it derives more than half of its annual gross revenues from preference cargo carriage (the subsidy abatement scheme).

The AMA, Phoenix and Aeron each sought review in district court. While the district court upheld the rate decision and the subsidy abatement scheme, it concluded that the Board had erroneously read our mandate in Aeron to bar any further consideration of its 1978 adequacy finding. It therefore remanded to the Board for a determination of whether that adequacy proceeding should be reopened. Both Aeron and the unsubsidized shippers have appealed various aspects of the district court's order. We now affirm the district court's ruling that the Board must determine whether to reconsider the adequacy finding and its conclusion that the Board's rate decision constitutes a reasonable accommodation of the conflicting policies committed to the agency's care by statute. Although we also believe that a subsidy abatement scheme is authorized by the Act, we conclude that the Board failed to offer an adequate explanation for the particular abatement formula it adopted for bulk vessels. We therefore reverse the district court on this single issue and instruct the court to remand to the Board for further proceedings consistent with this opinion. I. THE BACKGROUND

A. The Statutory And Regulatory Framework

This dispute involves the interaction of several provisions of the Merchant Marine Act of 1936, ch. 858, 49 Stat. 1985 (codified as amended at 46 U.S.C. §§ 1101-1295g), its 1970 amendments, Merchant Marine Act of 1970, Pub.L.No. 91-469, 84 Stat. 1018 (codified at scattered sections in 46 U.S.C.), and various acts which establish preferences for U.S.-flag ship carriage of certain cargo. See Aeron, 695 F.2d at 569-70; Aeron Marine Shipping Co. v. United States, 525 F. Supp. 527, 531-33 (D.D.C. 1981). Congress enacted these statutes to create a strong domestic merchant marine capable of competing with foreign carriers in the world market, and each act recognizes that foreign subsidies and high domestic labor costs place American-built and American-operated ships at a competitive disadvantage with foreign vessels in the absence of government assistance. See, e.g., S. Rep. No. 1721, 74th Cong., 2d Sess. 4-5 (1936).

The 1936 Act established an elaborate system of merchant marine subsidies, two aspects of which are relevant here. First, the Act provided for both operating differential subsidies and construction differential subsidies for U.S.-flag liner vessels in an attempt to offset the lower operating and construction costs enjoyed by foreign liner operators. See Merchant Marine Act of 1936, §§ 601-606 (codified as amended at 46 U.S.C. §§ 1171-76) ; id. §§ 501-511 (codified as amended at 46 U.S.C. §§ 1151-1161) . The 1936 Act, however, did not establish a comparable direct subsidy program for bulk carriage vessels. *fn2 Instead, Congress has from time to time extended indirect subsidies to U.S.-flag bulk vessels by reserving certain cargoes, called preference cargoes, for those ships and by allowing domestic bulk operators to bid for preference cargoes at rates well above world rates. In particular, the Cargo Preference Act of 1954, ch. 936, 68 Stat. 832 (codified at section 901 of the Act, 46 U.S.C. 1241), requires government agencies to contract with domestic ships to carry at least half of all government-sponsored cargoes destined for foreign ports as long as those vessels are "available at fair and reasonable rates for United States-flag commercial vessels." 46 U.S.C. 1241(b)(1). *fn3 Such rates, called premium rates, constitute the maximum allowable charges for a particular ship's carriage of preference cargo and allow unsubsidized bulk vessels to bid for contracts at rates equivalent to the actual costs incurred on a particular voyage plus a reasonable profit. See Payment of Subsidy for Carriage of Preference Cargoes, 13 Ship. Reg. Rep. 44 (M.S.B. 1972). In practice, premium rates can amount to more than twice the world rates charged by foreign-flag carriers in the worldwide commercial market. See H.R. Rep. No. 1073, 91st Cong., 2d Sess. 26 (1970) [hereinafter House Report ]; Aeron, 695 F.2d at 569. The ability of unsubsidized bulk shippers to carry preference cargoes at premium rates thus provided those operators with a substantial and costly indirect government subsidy.

This combination of direct subsidies for liner vessels and premium rates for otherwise unsubsidized bulk ships did not encourage the construction of a competitive U.S.-flag merchant marine. In 1936, liner vessels conducted most foreign shipping. By 1970, however, the majority of foreign commercial commerce was carried by bulk carriers, and efficient U.S.-flag bulk vessels, not liner vessels, were thus needed to compete in the world market. See House Report at 38; 116 Cong. Rec. 32,511 (1970) (statement of Sen. Griffin). At that time, Congress recognized that the premium rate structure had failed to induce the construction of U.S.-flag bulk vessels capable of competing in the world market, see House Report at 121, and that the existing, World War II vintage bulk ships could only turn a profit by carrying non-commercial preference cargoes at premium rates, see id. at 38; 116 Cong. Rec. 16,607 (1970) (statement of Rep. Dent). Faced with these disappointing results, Congress amended the Act in 1970 to extend direct subsidies -- ODS and CDS -- to domestic bulk vessels. See Merchant Marine Act of 1970, Pub. L. No. 91-469, § 14, 84 Stat. 1018, 1023 (amending 46 U.S.C. 1171(a)).4

Congress clearly intended the 1970 amendments both to encourage the construction of efficient domestic bulk vessels capable of competing with foreign commercial carriers in the world market and, gradually, to phase out the expensive and ineffective system of indirect subsidies paid to existing bulk shippers in the form of premium rates for preference cargo carriage. As Representative Dent stated in the debates over the 1970 amendments:

The granting of direct operating subsidy to U.S.-flag bulk carriers as provided by the bill would have two principal advantages.

First, the United States would have the potential of building a bulk carrier fleet in order to effectively compete with foreign vessels in carrying bulk commodities that constitute the predominant share of our foreign commerce. Such a fleet would insure that the commodities vital to our economy would be carried in times of emergency. Second, the United States would be substituting a direct subsidy for the indirect subsidy presently paid through preference rates for government sponsored cargoes.

116 Cong. Rec. 16,608 (1970); see also House Report at 38; Aeron, 695 F.2d at 570. Congress envisioned that the domestic bulk carriers constructed with the aid of CDS and operated with the aid of ODS could profitably operate at world rates and, therefore, would eventually carry preference cargo at world rates as the existing unsubsidized bulk ships were retired from service. See Aeron, 694 F.2d at 570.5 Congress also expected the substitution of direct for indirect subsidies to reduce substantially the government costs of preference cargo carriage.6

At the same time, however, Congress sought to protect investment in existing unsubsidized vessels by allowing subsidized vessels to enter the preference trade only if the Secretary determines that existing unsubsidized service in that trade is inadequate, see 46 U.S.C. 1175(c), and by permitting the Secretary to give unsubsidized operators priority over subsidized carriers during a phase-in period of approximately five years, see Aeron, 695 F.2d at 570 & n. 9 (citing legislative history). Thus Congress did not expect that subsidized world-rate vessels would immediately displace unsubsidized premium-rate ships in the preference trade; instead, it foresaw a " gradual phase-out of the premium rates now being paid for preference cargoes as a system of direct subsidies was being substituted." S. Rep. 1080, 91st Cong., 2d Sess. 58 (1970) (emphasis added); see House Report at 38; 116 Cong. Rec. 16,593 (1970) (statement of Rep. Mailliard); House Hearings II at 201, 640. Congress did assume, however, that the useful life of existing unsubsidized vessels was rapidly expiring7 and that the availability of ODS and CDS for bulk ships would result in the immediate construction of new and efficient U.S.-flag bulk ships capable of competing at world rates in the worldwide commercial market. See generally Aeron Marine Shipping Co, 19 Ship. Reg. Rep. 111, 118-20 (M.S.B. 1979) (discussing legislative history). In sum, it envisioned a relatively short transitional period during which the existing unsubsidized vessels would be retired from service and after which subsidized vessels would carry preference cargoes at world rates. See, e.g., House Hearings II at 640.

As a consequence, the 1970 amendments did not directly address the conditions under which subsidized vessels could bid against unsubsidized ships for preference cargoes. Instead, Congress left to MarAd and the Board the task of adjusting the preference cargo program in light of the 1970 amendments and the eventual goal of having subsidized ships carry preference cargoes at world rates. See Aeron, 19 Ship. Reg. Rep. at 120 (discussing legislative history). In particular, Congress amended section 901 of the Act, the cargo preference provision, to read as follows:

Every department or agency having responsibility under this [cargo preference] subsection shall administer its programs with respect to this subsection under regulations issued by the Secretary of [Transportation]. The Secretary of [Transportation] shall review such administration and shall annually report to Congress with respect thereto.

84 Stat. at 1034 (codified at 46 U.S.C. 1241 (b)(2)). Congress thus gave MarAd and the Board broad discretion to supervise the implementation of the 1970 amendments and, accordingly, to regulate the conditions under which subsidized shippers would be admitted to the preference trade. See S. Rep. No. 1080, 91st Cong., 2d Sess. 58-59 (1970); H.R. Rep. 1555, 91st Cong., 2d Sess. 6 (1970) (conference statement of House managers); Aeron, 525 F. Supp. at 542 n. 33.8

Unfortunately, Congress' assumptions concerning the ease of transition from an indirect to a direct subsidy program for bulk ships proved incorrect: direct subsidies did not encourage the immediate construction of new U.S.-flag bulk carriers in substantial numbers, and the existing unsubsidized vessels have remained in service and continue to bid on preference cargoes at premium rates. See Aeron, 19 Ship. Reg. Rep. at 120. Moreover, the bulk vessels eventually constructed under the direct subsidy program were not, as it turned out, fully competitive with foreign vessels in the worldwide commercial market and could not operate profitably at world rates.9 The Secretary's attempt to implement the 1970 amendments in light of these essentially unforeseen events forms the basis of the present dispute.

B. The Proceedings in This Case

The pre-1982 history of the Board's attempt to specify the conditions under which subsidized carriers can carry preference cargoes is amply described in our earlier opinion, see Aeron, 695 F.2d at 570-73, and need not be repeated in detail here. Briefly, Aeron, which was the first shipping concern to take advantage of CDS and ODS assistance for bulk vessels, petitioned the Board in 1978 to admit its seven subsidized ships into the preference trade.10 After holding the adequacy hearing required by section 605(c) of the Act, the Board found that the bulk preference trade was inadequately served by existing unsubsidized shippers and that it could accommodate all seven Aeron vessels.11 See Atlas Marine Co., 18 Ship. Reg. Rep. 987, 1002-1010 (M.S.B. 1978). The Board nonetheless admitted only two of Aeron's seven ships and only under the condition that they operate in the preference trade at world rates with a one-way fuel differential allowance. See Aeron Marine Shipping Co., 19 Ship. Reg. Rep. 491 (M.S.B. 1979). Aeron sought review of both the partial admission and the rate decision in district court; that court ordered the admission of all seven Aeron ships to the preference trade and upheld the rate structure. See Aeron, 527 F. Supp. at 547.

On appeal, we concluded that the Board's decision to admit only two of Aeron's ships was arbitrary in view of its inadequacy finding as to all seven vessels and therefore affirmed the order admitting the seven Aeron ships to the preference trade. See Aeron, 695 F.2d at 573-75. We also found that the Board had inadequately justified its rate decision given the evidence that Aeron could not profitably carry preference cargoes at world rates and thus would not be attracted to the preference trade under the Board's rate ...

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