February 15, 2006

USCG proposes rule change for some lease-financed vessels

The Coast Guard proposes to amend its regulations for documenting lease-financed vessels that have a "coastwise endorsement'' (i.e., vessels used in trade and passenger service within the U.S. or between U.S. ports and those used in dredging and towing in U.S. waters).

The Notice of Proposed Rulemaking appears in today's Federal Register.

The vessels affected by this proposal are owned by foreign-owned or controlled U.S. companies, where there is a demise charter' to a U.S. citizen (i.e., an agreement for the charterer to assume responsibility for operating, crewing, and maintaining the vessel as if the charterer owned it).

This proposed rule addresses amendments provided by Congress under the Coast Guard and Maritime Transportation Act of 2004 concerning information needed to determine the eligibility of a vessel owner for a coastwise endorsement under the lease-financing law.

Under the 2004 law, the owner of a lease-financed vessel must now certify each year:

That it (or, if the vessel is owned by a trust or similar arrangement, the beneficiary of the trust or similar arrangement) is a leasing company, bank, or financial institution;

That it owns or holds the beneficial interest in the vessel solely as a "passive investment;"

That it does not operate any vessel for hire and is not an affiliate of any person who operates any vessel for hire; and

That it is independent from, and not an affiliate of, any charterer of the vessel or any person who has the right, directly or indirectly, to control or direct the movement or use of the vessel.

Under the NPR, the Coast Guard proposes the following changes:

Update and provide consistent documentation requirements to determine the eligibility of lease-financed vessels for coastwise endorsements.

Permanently grandfather, from the new requirements, all lease-financed vessels, except for offshore supply vessels (OSV) documented on or before August 9, 2004.

Require owners of lease-financed OSVs with valid coastwise endorsements issued before August 9, 2004, to reapply for a new coastwise endorsement by August 9, 2007.

Require all owners of lease-financed vessels with recently-issued coastwise endorsements (i.e., those issued after August 9, 2004) to certify each year that their ownership and investment status has not changed.

Based on Coast Guard data, there are currently eight owners of OSVs that would be affected by this proposed rule. It is estimated from the Coast Guard data and from NVDC information that there would be 25 current and future owners affected by the annual certification requirements of this proposed rule, which includes the eight owners of OSVs affected by this proposed rule. The Coast Guard does not have historical data on the number of affected entities impacted by the proposed collection-of- information requirements for demise sub-charter agreements. It is assumed there would be approximately three demise sub-charter agreements over the next 10 years based on NVDC projections.