THE JONES ACT ONE MORE VARIABLE IN THE OFFSHORE WIND EQUATION

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1 THE JONES ACT ONE MORE VARIABLE IN THE OFFSHORE WIND EQUATION By Douglas Burnett and Michael Hartman 1 Of the many pieces to the offshore wind puzzle for the United States, the Jones Act and other statutory requirements concerning installation and maintenance vessels for an offshore wind farm create uncertainties that can dramatically effect project planning, completion and financing. This paper highlights the special shoals for offshore wind farm operators and the institutions that finance them. Next vessel Custom and Border Patrol (CBP) rulings are examined on: a) the requirements for a foreign vessel as a jack up to be used in wind turbine construction and compliance with United States maritime cabotage laws, and b) the classification of drilling, pile-driving and installation activities on the US Outer Continental Shelf. A word of warning there are dramatic debates between those interested in making the Jones Act more restrictive and others who want to relax or abolish the Act. For example the House Committee on Transportation and Infrastructure has proposed new safety and environmental regulations including a provision that vessels operating in the 200 NM US Exclusive Economic Zone (EEZ). In contrast, Senator McCain proposes a repeal of the Jones Act. Not all of the change momentum is coming from Congress. In June 2009 the CBP 2009 issued a notice of proposed rulemaking to overturn years of precedent allowing non-us flag vessels to perform certain tasks related to offshore construction and cable laying. In the face of massive comments both for and against these changes, the CBP withdrew its proposed changes, but, in withdrawing the changes, the CBP indicated that it planned additional future changes in its interpretation of the Jones Act. The Key US Maritime Laws The United States maritime cabotage laws apply to US territorial waters (navigable waters). The US territorial seas limit applicable to these laws is three nautical miles. These laws consist primarily of the Jones Act (Merchant Marine Act of 1920) 2, the Passenger Vessel Services Act of , the Dredging Act of , and the Towing Statute of Outside of three nautical miles, the application of these laws 1 Douglas R. Burnett, a partner in Squire Sanders New York office, and Michael P. Hartman, an associate in Squire Sanders New York office are members of the firm s Maritime Practice Group U.S.C. 1 et seq (2006). 3 Ch. 421, 8, 24 Stat. 79, 81 (codified as amended at 46 U.S.C ) (formerly 46 U.S.C. app. 289). 4 Ch. 2566, 34 Stat. 204 (codified as amended at 46 U.S.C ) (formerly 46 U.S.C. app. 292). 5 Ch. 324, 54 Stat. 304 (codified as amended at 46 U.S.C and 55118) (formerly 46 U.S.C. 316). 6 Papavizas and Morrissey III, Does the Jones Act Apply to Offshore Alternative Energy Projects?, 34 Tul. L. Mar. J 378 at 379 (Vol. 34, Summer 2010).

2 is likely limited because the Outer Continental Shelf Lands Act of , that extends certain federal laws to the Outer Continental Shelf (OCS), appears likely restricted (OCSLA) to mining, gas and oil activities. 8 A. Outer Continental Shelf Lands Acts of 1953 (Amended 1978) OCSLA acts to extend the jurisdiction of all federal laws to: to the subsoil and seabed of the outer Continental Shelf and to all artificial islands, and all installations and other devices permanently or temporarily attached to the seabed, which may be erected thereon for the purpose of exploring for, developing, or producing resources therefrom[.] Additionally, OCSLA, enacted in 1953 and amended in 1978, limits federal laws and their application to certain types of installations and devices on the US OCS based on their function. 9 The 1978 Amendments to OCSLA Section 4(a)(1) limit the application of federal law to those installations and devices erected thereon for the purpose of exploring for, developing, or producing resources therefrom, 10 while extending United States maritime cabotage laws to artificial islands and fixed structures which may be erected thereon for the purpose of exploring for, developing, removing, and transporting resources therefrom[.] 11 (the purpose requirement). 12 While OCSLA does not define the term resources in the statute, the Geneva Convention on the Continental Shelf to which the United States is a party defines natural resources to consist of the mineral and other non-living resources of the seabed and subsoil together with the living organisms belonging to sedentary species [immobile or constantly in contact with the seabed]. 13 This description limits itself to resources on or under the seabed, excluding most creatures of the sea and birds. The question remains to whether the OCSLA extension of US maritime cabotage laws is limited to the particular purposes of exploration, development, and production in an oil and gas context as enumerated in Section 4(a)(1) of the statute. In the Alliance case, the United States First Circuit Court of Appeals recently interpreted OCSLA Section 4(a)(1). 14 The court found the language to be ambiguous and reviewed the legislative history underlying the 1953 original enactment and 1978 amendments, as well as looking at the governing law provision in 7 OCSLA, Pub. L. No , 67 Stat. 462 (1953) (codified as amended at 43 U.S.C a (2006)). 8 Papavizas, at 397, Id. at 420, citing OCSLA, Pub. L. No , 67 Stat. 462 (1953) (codified as amended at 43 U.S.C a (2006)) U.S.C. 1333(a)(1). 11 Id. 12 Photo courtesy of Global Marine Shipping Ltd. 13 Article 2.4, Geneva Convention on the Continental Shelf (29 Apr. 1958). 14 Alliance To Protect Nantucket Sound, Inc. v. U.S. Dep t of the Army, 398 F.3d 105 (1st Cir. 2005).

3 Section 4(e). 15 The court determined that Congress had intended to import the purpose requirement. 16 The CBP, charged with enforcement of the Jones Act, has interpreted Section 4(a)(1) to apply to points on the US OCS used for the exploration, development, or production of seabed mineral resources. 17 The consensus seems to support the view that the terms exploration, development and production apply exclusively to mineral activities in the seabed, and thus the Jones Act would not apply to a nonmineral resource such as offshore wind energy. B. Jones Act 18 The Jones Act (Merchant Marine Act of 1920) covers transportation of merchandise by water that occurs between points in the United States to which the coastwise laws apply 19 and requires that all goods transported by water between US ports be carried in US-flagged ships, constructed in the United States, owned by US citizens, and crewed by US citizens and US permanent residents. 20 The CBP, which administers the US maritime cabotage laws, has promulgated a regulation providing, No vessel shall transport, either directly or by way of a foreign port, any passenger or merchandise between points in the United States embraced within the coastwise laws, including points within a harbor[.] 21 Moreover, [t]he CBP has consistently ruled that a point in the United States territorial waters is a point in the United States embraced within the coastwise laws 22. The CBP recently stated that the Jones Act applies to US waters defined as the belt, three nautical miles wide, seaward of the territorial sea baseline, and to points located in internal waters, landward of the territorial sea baseline. 23 The CBP has been careful to limit the Jones Act to the OCSLA governing law provision, giving effect to the installations and other devices, attachment, and exploration, development, or production purpose provision in Section 4(a). A review of recent CBP decisions demonstrates that the CBP interprets OCSLA to apply federal law to artificial islands and attachments that have specific mineral, oil or gas purposes (exploring, developing and producing). Clearly an offshore wind farm is not involved in any of these specific purposes should be exempt, since purpose appears limited to the mineral, gas and oil context. 15 See id F.3d at Papavizas, at Photo courtesy of Global Marine Shipping Ltd U.S.C (b) (2006). 20 See 46 U.S.C. 1 et seq (2006) C.F.R. 4.80(a). 22 CBP, HQ H (Nov. 7, 2007). 23 CBP, HQ H (Aug. 1, 2008). 24 See 42 U.S.C. 1333(a) (2006). 25 Papavizas, at 415.

4 Jones Act: Exceptions Even if the Jones Act does apply to offshore wind projects, both exceptions and waivers exist to avoid its application. The Jones Act provides, in pertinent part, that: a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port unless the vessel was built in and documented under the laws of the United States and owned by persons who are citizens of the United States[.] 26 Under the language of the Jones Act, the act of installing a wind tower is likely not be coastwise trade or transportation of merchandise between points. A recent CBP ruling speaks directly to this point, and concludes that in the context of a wind farm 27, CBP has long held that neither drilling nor pile driving, in and of itself, conducted by a stationary vessel, constitutes coastwise trade or coastwise transportation. See HQ , dated November 14, 1988 and HQ , dated November 28, 1990, respectively. The proposed activity with respect to the driving of a monopile foundation into the seabed is very similar to pile driving and is governed by the same principle. Therefore, we find that the activity of the stationary construction vessel described above, involving driving of a monopile foundation into the seabed and then adding a platform deck, anemometer tower, and other components does not constitute coastwise trade or coastwise transportation. In summary, we find that the engagement in the proposed activity will not result in a violation of 46 U.S.C Based on this CBP ruling, a vessel used in monopole installation, and even the installation of the turbines themselves, does not constitute coastwise trade under the Jones Act. Foreign-flagged vessels and crews may be used for these activities (albeit the components installed would have to be transported by a US flag coastwise qualified vessel unless all such transportation can be arranged from a foreign port directly to the installation site with no US entry). Jones Act: Waiver US maritime cabotage laws can be waived by the US government in certain limited circumstances, which could come into play if those laws were found to apply to offshore alternative energy projects, specifically On request of the Secretary of Defense, the head of an agency responsible for the administration of the navigation or vessel-inspection laws shall waive compliance with those laws to the extent the Secretary considers necessary in the interest of national defense. 29 Indeed, the recent public debate surrounding U.S.C. 883 app. (2006). 27 CBP, HQ H (May 27, 2010). 28 Id. 29 Act of Dec. 27, 1950, ch. 1155, 1, 2, 46 U.S.C. 501 (amended in 2008 to require the Maritime Administrator to be consulted regarding the nonavailability of qualified U.S.- flagged vessels before a waiver is granted, Pub. L. No , 3510, 122 Stat. 4356, 4769 (2008)).

5 the Administration s handling of waivers for foreign vessels used in oil spill response in the Deepwater Horizon spill demonstrates well the political minefield surrounding Jones Act waivers. 30 Passenger Vessel Services Act of 1886 The Passenger Vessel Services Act of 1886 provides that a vessel may not transport passengers between ports or places in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel is a qualified US-flagged vessel. 31 Regarding the US OCS, the CBP has also carefully limited the application of the Passenger Act consistent with OCSLA Section 4(a) Towing Statute of 1940 The Towing Statute of 1940 provides that a US vessel must be used for towage between ports or places in the United States to which the coastwise laws apply, either directly or via a foreign port or place and from point to point within the harbors of ports or places to which the coastwise laws apply unless a vessel is in distress. 34 The CBP has taken the position that the statute is to be construed consistently with the Jones Act 35 so under this rational places in the United States to which the coastwise laws apply would also encompass points on the US OCS as defined in OCSLA Dredging Act of 1906 The Dredging Act of 1906 restricts dredging, which includes certain pipe or cable laying activities as well as foundation excavations, in the navigable waters of the United States to qualified US-flagged vessels. 38 The CBP has long-held that dredging... is the use of a vessel equipped with excavating machinery in digging up or otherwise removing submarine material. 39 The CBP reasons that [w]ith respect to the applicability of [the Dredging Act] to the OCS, we [CBP] have held that statute to apply only to dredging on the OCS for the purposes described in Section 4 of the OCSLA, and not to dredging done to prepare the seabed of the OCS for the laying of trans-oceanic cable. 40 The Dredging Act does not apply because dredging for a transoceanic cable on the US OCS was not within the purposes outlined in 30 Matt Cover, CNS News, Oversight Report Slams Obama Failure on Oil Spill, August 10, U.S.C (a) (2006). 32 CBP, HQ (Oct. 6, 1998) (discussing that a foreign-flagged vessel anchored on US OCS for use as a stationary hotel and casino is not an OCSLA point for the purposes of the Passenger Act). 33 Papavizas, at U.S.C CBP, HQ H (May 13, 2008). 36 Papavizas, at Photo courtesy of EWE 38 Id CBP, HQ H (Aug. 27, 2007). 40 CBP, HQ (May 9, 1997).

6 OCSLA Section 4(a) 41. Analogously, dredging to lay or bury in the seabed the undersea cable infrastructure of an offshore wind farm would not implicate the Dredging Act. CBP Rulings Analysis 1. CBP Rulings: Regarding Foreign Vessels & Jack-Ups A recent CBP ruling confirms that foreignflagged jack-up vessels with foreign crews may be used for wind farm drilling, pile driving and installation activities as long as that vessel is stable and stationary, and does not transport persons to or from US ports. 42 Ideally, the jack-up rig would arrive functional from a foreign country with a foreign crew without requiring any US modification ashore. A foreign-flagged vessel with foreign crew vessel entering US port and disembarking for modification would directly violate the ruling, so the foreign vessel should proceed directly to the project site to begin drilling, driving piles and installing the wind tower. This recent ruling conforms to past offshore oil and gas CBP rulings that permit foreign vessels, that are non-coastwise qualified, to be used as a moored construction facility. 43 The coastwise laws do not prohibit the use of a non- coastwise-qualified stationary platform or barge used for construction activities within or beyond the territorial waters of the United States CBP Rulings: Regarding Pile-Driving and Installation Activities A recent CBP ruling squarely addressed whether drilling and pile-driving activities for wind farm towers are subject to the Jones Act. 45 The ruling held that neither drilling nor pile-driving in and of itself, conducted by a stationary vessel, constitutes coastwise trade or coastwise transportation. 46 This ruling conforms to other oil and gas offshore CBP rulings. 47 Therefore, if the activity proposed is only drilling or pile driving, we do not consider such activity to be dredging and it is not subject to the proscription of 46 U.S.C. App and [i]f there is a de minimis dislodging of the seabed incidental to a drilling or pile driving operation, we would not consider that de minimis dislodging to be substantial enough to [invoke the Jones Act or Dredging Act]. 48 Summary: Jones Act Requirements per Phase This Section summarizes whether the Jones Act would be applied to the different but typical phases involved in an offshore wind farm installation. 41 Papavizas, at CBP, HQ H (May 27, 2010). 43 CBP, HQ (August 8, 1990); CBP, HQ (June 7, 1990). 44 Id. 45 CBP, HQ H (May 27, 2010). 46 Id. 47 See CBP HQ (June 29, 1999); CBP HQ (September 14, 1990); CBP, HQ (November 14, 1988); CBP, HQ (November 28, 1990). 48 CBP, HQ (June 29, 1999).

7 Initial Component Delivery The Jones Act does not apply to the transportation of merchandise from foreign ports to US ports. Components may be initially delivered to a US port by a foreign vessel. Component Transportation To An Offshore Wind Farm Site The Jones Act applies since this is the transportation of merchandise from a US port (a point) to another point, that point being a jack-up operating as a stationary, stable construction platform. If the component is moved by barge, the Towing Act will require that the tug utilized be a documented US flag tug. Installation and Assembly Phase Offshore drilling, pile-driving, and component installation are not considered coastwise trade or coastwise transportation under the Jones Act, so it does not apply in this phase. A foreign flag construction vessel (jack-up) that is stable and stationary may be used for this phase. Operation, Repair and Maintenance Phase The Jones Act would likely apply since the these activities would involve a vessel leaving from a US port (a point) and travelling to another point (the completed wind tower) with merchandise (repair components) and then returning to a US port (another point). Under the Jones Act, any vessel moving merchandise or passengers between a stationary platform and another coastwise point must be documented for the coastwise trade. Maintenance 49 Once the offshore wind farm is completed, the wind farm operator faces the problem of maintaining the turbines in terms of normal maintenance but possible repairs necessitated by natural forces or third parties such as a vessel collision with a wind turbine. While beyond the scope of this paper, the model that may well be useful to consider is the cable maintenance agreements used by the various owners of international submarine cable systems. In these arrangements, the costs of a dedicated repair ships on 24/7 standby are apportioned among the various system owners. These agreements, although complicated, have a very solid track record and have provided the submarine cable industry with cost effective and reliable maintenance and repair for more than 55 years. Given the questions surrounding higher costs of offshore wind compared to land energy, such cost effective techniques deserve careful consideration. Conclusion It is likely that US maritime cabotage laws by extension of the Outer Continental Shelf Lands Act do not apply to offshore wind energy farms that are engaged in nonmineral and oil and gas activities. But as demonstrated by CBP rulings, factual details can lead the CBP to rule in unpredictable ways. Because of 49 Photo courtesy of EWE

8 the substantial penalties applicable for violations of the Jones Act, it is always recommended that an advisory ruling request be sent in advance of any operations in order to avoid doubt and reduce the risk of inadvertent violation of US cabotage laws. The key to a successful advisory opinion is a careful recitation of the jurisdictionally related facts in the context of existing CBP rulings. Squire Sanders maritime practice group is well suited to assist in such an endeavor in addition to our experience in drafting repair ship maintenance agreements.