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Despite Recent Waivers, Jones Act Will Weather the Storm

Jones Act applies to cargoes movements that no not involve shipments of export cargo and import cargo in international trade.

Despite Recent Waivers, Jones Act Will Weather the Storm

The Jones Act, which requires the use of a U.S.-built, -crewed and -owned vessel to ship cargo between two U.S. ports, is a much beleaguered or much heralded law depending on who you ask. It is one of the most strictly enforced and rigidly interpreted laws on the books, and is hardly ever waived despite the protests of many commodity merchants who, in order to charter a Jones Act-qualified vessel, often have to pay rates two or three times as much as those of a foreign vessel.

That is why the unprecedented waiver of the law on three separate occasions last month in response to the wave of hurricanes hitting the U.S. raised renewed questions about whether the law was outdated and should even be repealed. The waivers also provide important insights into how the Trump Administration operates and their impact on oil and commodity markets.

The Waivers

On September 8, the Trump Administration waived the Jones Act for the first time since Hurricane Sandy in 2012 in response to Hurricanes Harvey and Irma. The September 8 waiver was issued to allow refined products, such as gasoline and diesel, to be shipped via foreign, rather than Jones Act-qualified vessels, from supply centers in Texas, Louisiana, Pennsylvania and New York to areas likely to be significantly impacted by Hurricane Irma—specifically South Carolina, Georgia, Florida and Puerto Rico.

However, there were significant issues with the waiver as it (1) did not cover crude oil and non-petroleum gasoline additives such as ethanol and certain detergents, (2) was silent on the precise end date of the seven-day waiver period, and (3) was ambiguous as to whether vessels must have departed port within the waiver period in order to operate under the waiver.

On September 11, the Trump Administration extended and expanded the September 8 waiver and later issued a guidance document to clarify its terms. Among other things, the guidance clarified that crude oil and other non-refined petroleum products were not covered and that so long as loading of covered cargo commenced within the waiver period, such foreign vessels were covered by the waiver.

Finally, on September 28, the Administration issued a waiver for the delivery of any and all products and supplies (not just limited to petroleum products) to Puerto Rico in response to Hurricane Maria and followed up later with guidance for this waiver.

Lessons Learned and Impact of Waivers

The Trump Administration’s issuance of Jones Act waivers departed significantly from established procedure and came without consultation with the non-political career government officials who typically are the point-persons for determining whether to issue a waiver, then, how that waiver should be implemented. The decision-making process for these waivers appears to have been made at the highest levels of the White House with significant influence and lobbying from high-level government stakeholders, such as the FEMA Director and politicians with impacted political constituencies—especially in the case of Puerto Rico, emphasizing that the waiver was necessary to save lives in light of natural disasters.

The fact that these waivers were issued directly from the highest levels of the Trump Administration led to inconsistent messaging and confusion within the regulated community. In each instance, the Department of Homeland Security and US Customs issued statements that no Jones Act waivers would be forthcoming, only to have within hours and sometimes minutes, a waiver issued by the federal government. In the case of the September 8 waiver, the announcement was made at a White House press briefing, but US Customs continued to deny that a waiver would be issued until hours after the statement was made during the press briefing. As a result, the market was not able to fully respond to the issuance of the waiver in the same manner that it had during Hurricanes Sandy, Katrina and Rita.

That the waivers were issued without input from experienced staff was likely one of the primary reasons for the issues with the original September 8 waiver, which impacted the its effectiveness and the ability of commodity merchants to get gasoline to areas where it was needed most. The lack of input from staff and from the regulated community was also reflected in the failure to include crude oil within the ambit of the waiver—something that had been allowed the last time hurricanes significantly damaged Gulf Coast infrastructure. The failure to include crude oil in the waiver resulted in a glut of crude in certain areas in the Gulf and Mid-Continent, thereby creating significant, artificial and unnecessary price differentials from which the market is only just now recovering. The price spread fueled exports of crude oil to record levels of two-million barrels per day at the end of September as it is often cheaper to export crude oil on a foreign flag vessel than to use a Jones Act-qualified vessel to ship the crude to another port in the United States where there may be a shortage.

Future of the Jones Act

In addition to registering unprecedented levels of weather-related damage, this past September may have also set a record for the most Jones Act waivers issued in a single month. Jones Act waivers are difficult to come by because they can only be issued “in the interest of national defense.” The only waivers that have been issued in the last decade have been in response to hurricanes. The renewed focus on the nearly century-old statute has prompted renewed calls for its repeal. For years, members of Congress that do not have a significant shipbuilding industry presence in their states have proposed legislation seeking to repeal or limit the Jones Act, but none have found success. One of the popular rallying cries for Jones Act opponents is that the Jones Act substantially increases transportation costs for products shipped domestically, especially oil and petroleum products. Since such costs are ultimately folded into the price customers pay for commodities and manufactured products, the Jones Act leads to increases in gas prices at the pump and prices for food on supermarket shelves. US lawmakers generally are quite sensitive in supporting any law that coincides with higher gasoline and food prices for fear of backlash from their constituents. Further, the Jones Act could also be seen as disadvantaging domestic shipments versus foreign imports.

Nonetheless, the calls for repeal are likely to create more noise than action. The Jones Act is designed to protect the U.S. shipping industry, preserve U.S. shipping jobs and is backed by powerful stakeholders and lobbying interests. Most importantly, it employs tens of thousands of blue collar jobs in both red and blue states, from Alabama to Maine to Ohio to Virginia, that would likely all but disappear without the protections of the Jones Act. Moreover, while the number of waivers issued last month was a record, the issuance of waivers during hurricanes that damage petroleum infrastructure is consistent with past precedent and entirely consistent with the statutory provisions of the Jones Act that allow for such waivers. As a result, the Jones Act has remained unscathed against challenges throughout the years and will likely continue as such for many years into the future.

Susan Lafferty is a partner at Eversheds Sutherland in Washington D.C.  and David McCullough is a partner in the New York City office. Chuck Thompson, II and Shelley Wong also contributed to this article.