In a case with possibly hundreds of millions of dollars at stake for the maritime and shipbuilding industries and the federal government, the Supreme Court has been asked to decide whether a 1920 law allows foreign-flag tankers to carry Alaskan crude oil to a refinery in the U.S. Virgin Islands and then to carry petroleum products from the refinery to the East Coast.
The law, known as the Jones Act, permits only American-built and American-chartered merchant vessels to operate between ports in the United States and its possessions, "either directly or via a foreign port," but specifically exempts the Virgin Islands.
The exemption was challenged in a lawsuit brought by an industry-labor coalition: the American Maritime Association, composed of American steamship companies; the Shipbuilders Council of America, and the Seafarers International Union of North America, AFL-CIO.
The defendants were the Treasury Department, of which the Customs Service is a unit, and Amerada Hess Corp., which owns or charters large numbers of foreign-flag tankers to haul about 100,000 barrels of crude a day from Valdez, Alaska, to St. Croix, where it operates a $650 million refinery. Amerada then ships gasoline and other products to the East Coast, also mainly in foreign-flag tankers.
U.S. District Judge Oliver Gasch, ruling for the government and the oil company, held that the exemption in the Jones Act applies to voyages that "begin or terminate in the Virgin Islands," and that the exemption is triggered by the break in continuity at St. Croix for the processing of one form of merchandise (crude) into another form (refined products).
All of the "credible evidence of record conclusively demonstrates that the products of the Hess refinery are new and different merchandise from the Alaskan crude oil," Gasch wrote. Thus the Jones Act doesn't apply, as it would if there had been a continuous voyage from Alaska to the East Coast "by way of the Virgin Islands."
Affirming Gasch last November, the U.S. Circuit Court of Appeals here rejected a claim that the Trans-Alaska Pipeline Authorization Act repealed the Virgin Islands exemption.
"Finally, fundamentally, and devastatingly, there is not one word in the . . . act which commands that only U.S. flag vessels be used in the transport of Alaskan crude," Judge Malcolm R. Wilkey wrote.
On behalf of the Treasury Department, Solicitor General Wade H. McCree Jr. opposed Supreme Court review of the decision even though, he acknowledged, it "may have substantial consequences for U.S. flag shipping."
He explained that the Commerce Department's Maritime Administration believes that some American-owned vessels, operating under the Jones Act and financed under its vessel-guarantee loan programm, "may be denied employment as a consequence of the Court of Appeals' decision.
"This creates the possibility that there will be defaults in shipowners' bond payments, which could exceed $100 million," McCree wrote. "The government would be required by its guarantees to make payments following such defaults."
But no issue in the case warrants high court review, McCree said. He emphasized that if Congress wants to extend the American-flag requirement to cover the shipments by Amerada Hess, "no one disputes" its right to amend the Jones Act to do so. "Similarly, a presidential proclamation could have the same effect," he said.
The Maritime Association, the only one of the original plaintiffs to seek Supreme Court review, said that if the decision is upheld, "the consequences for American shipping will be catastrophic."
The association cited an October 1977 statement by Robert J. Blackwell, assistant secretary of Commerce for maritime affairs, that, "government guaranteed obligations in excess of $650 million are outstanding with respect to non-subsidized tankers intended for use in the domestic trade of the United States." The association calculated "the amount of risk for the domestic tanker industry as a whole" at "approximately $1.5 billion."