As part of the Bipartisan Infrastructure Law,1 The US Department of Energy ("DOE") is expected to infuse more than $62 billion into the economy through its departments and loan programs office ("LPO"). With much of the money financing large and innovative energy projects through such programs as Carbon Capture Demonstrations, Carbon Capture Large-Scale Pilots, Regional Clean Hydrogen Hubs, Front-End Engineering and Design (FEED) Studies, the Title 17 Clean Energy Financing loan program, and the Advanced Technology Vehicles Manufacturing loan program, it is paramount for grant and loan recipients to understand their obligations under the Cargo Preference Act and to develop a comprehensive compliance strategy as close to project inception as possible.
Which Cargo Preference Act Applies to DOE Funded Projects
Cargo Preference is a national shipping strategy implemented to sustain the United States' economic viability in the global shipping market. It necessitates that certain percentages of specific cargo classes be transported on US-flagged vessels. This includes cargo termed "government-impelled," meaning that it is moving due to Federal Government involvement through financial sponsorship or guarantees (i.e., grants, loans, or loan guarantees).
The term "Cargo Preference Act" is often used informally to encompass a range of statutes and regulations governing cargo transportation. However, it's essential to recognize that this term refers to distinct legal frameworks, each imposing specific obligations on the government, contractors, or shipping entities. Each of the cargo preference regulatory schemes imposes different obligations on how cargo must be shipped:
- Military Cargo Preference Act: Originating as the Cargo Preference Act of 1904, this law, now codified at 10 USC. § 2631, mandates the use of US-flag vessels for military cargo transportation. Compliance is enforced through DFARS 252.247-7023, "Transportation of Supplies by Sea."
- Public Resolution 17: Enacted in 1934 and currently codified at 46 USC. § 55304, this resolution generally requires 100% percent of certain cargoes generated by loans and loan guarantees from the Export-Import Bank of the United States are required to be carried on US-flag vessels.
- Civilian Cargo Preference Act of 1954: Added to the Merchant Marine Act of 1936 in 1954, this legislation, also known as the Cargo Preference Act of 1954, requires that at least 50% of government cargo tonnage be transported on privately owned US-flag vessels. Compliance is governed by FAR 52.247-64, "Preference for Privately Owned US-Flag Commercial Vessels."
DOE grant and loan programs almost universally impose the obligations of the Civilian Cargo Preference Act of 1954, and this is the regulatory obligation that will be detailed in this summary. However, companies who receive DOE funding should carefully review the cargo preference obligations outlined in their contract, grant or loan documents. In addition, companies or sponsors considering the "Make More in America" Program offered by the Export-Import Bank of the United States should be prepared to comply with program requirements based on Public Resolution 17.
Civilian Cargo Preference Act of 1954 Details
The Cargo Preference Act of 1954 ("CPA"), as amended and codified in 46 USC. §55305, Title 46 CFR Part 381, and P.L. 83-664, requires that at least 50 percent of the gross tonnage of all Government generated cargo – meaning cargoes procured, furnished, or financed by the United States Government – be transported on privately owned, US-flag commercial vessels to the extent such vessels are available at fair and reasonable rates. Cargo preference applies to all phases of the shipping process, including shipments made foreign-to-foreign, foreign-to-US, or US- to-foreign. The "at least 50 percent" requirement is applicable to the extent such vessels are available at fair and reasonable rates for commercial vessels of the United States as determined by the Maritime Administration ("MARAD").
CPA Reporting Mechanics
Under 46 CFR Part 381.7, companies must ensure that at least 50% of federally funded equipment, materials, or commodities transported by ocean vessel are shipped on privately owned US-flag commercial vessels. Compliance involves furnishing rated on-board Bills of Lading within specified timeframes to the Contracting Officer and MARAD as detailed below.
Within 20 days following the date of loading for shipments originating within the United States or within 30 working days following the date of loading for shipments originating outside the United States, a legible copy of a rated, ‘on-board' commercial ocean bill-of-lading in English for each shipment of cargo must be furnished to both the Contracting Officer (through the prime contractor in the case of subcontractor bills-of-lading) and to the Division of National Cargo, Office of Market Development, Maritime Administration, Washington, DC 20590 ("MARAD").
The reporting requirement applies whether cargo moves on a non-US or US-flag vessel and is irrespective of cargo origin or destination (including foreign-to-foreign cargo movements). Documents must be submitted to MARAD either electronically or physically (but MARAD has stated that email is the preferred method or receiving submittals).
CPA Compliance FAQ's
When does compliance with Cargo Preference begin?
Compliance starts when any material or equipment financed or attributed to the loan is transported via ocean, extending to items considered eligible project costs. For Borrowers of LPO loans, this requires records well before the loan is disbursed, going back in time to all expenses that are sought to be counted as eligible costs, including those counted toward the required equity contributions (at least 20% of total project costs).
How deep into the supply chain is compliance required?
Compliance obligations transfer to the entire supply chain, meaning contractors and subcontractors, with purchases typically aligned with the project's intent. 46 CFR § 381.7 provides the contract clauses that must be included for through the supply chain for grants, guarantees, loans and advance of funds agreements. Again, since supply agreements and construction contracts may be in place for a significant period before a loan is disbursed, sponsors and borrowers who are considering an LPO application may need to seek agreements from their contractors to comply with Cargo Preference Act requirements before they are certain that they will use federal funding.
How is compliance monitored?
Compliance is monitored through the submission of freight-rated Bills of Lading (B/Ls), with specific requirements outlined in 46 USC. § 55305, Title 46 CFR Part 381, P.L. 83-664, and MARAD regulations.
What is the DOE's role in enforcing Cargo Preference?
The Department of Energy (DOE), under 46 USC § 55305, administers the program according to regulations issued by the Secretary of Transportation.
Can a company receive a waiver for non-compliance?
While waivers are technically available if granted (on a temporary basis) by the President, Secretary of Defense, or Congress under specific emergency conditions, waivers are generally not a practical solution for companies to consider. A company, however, may be able to obtain a Determination of Non-Availability (furthered discussed below) for specific cargo movements. In addition, compensatory cargo may be possible for cases in which a loan agreement is entered into after certain non-compliant cargoes have been shipped.
What are the consequences for non-compliance?
Non-compliance may result in the request for "compensatory cargo" from MARAD, meaning cargo purchases outside of the DOE covered project must comply with CPA, thereby fulfilling the DOE project's original CPA obligations. Above and beyond this consequence, if DOE or MARAD believes or concludes that a company is intentionally disregarding its CPA obligations, it places the DOE award in jeopardy and could expose grant awardees, loan recipients or contractors to potential False Claim Act exposure for knowing and intentional disregarding of CPA obligations.
Determinations of Non-Availability
Overview and Procedure. The CPA allows for exceptions permitting the use of foreign-flag vessels in cases when US-flag vessels are unavailable, based on a determination of non-availability (or DNA). All projects, including contractors and subcontractors on DOE funded projects, must evaluate their supply chain needs at the earliest opportunity (or ideally at the inception of project) to identify where and when potential exceptions to CPA requirements will be needed. While DNA's are generally disfavored by MARAD, DNA's are available based on vessel non-availability and/or reasonable rate non-availability. Under such circumstances, pursuant to the provisions of 46 USC. § 55304, MARAD certifies that a US-flag vessel is not available "in sufficient number, in sufficient tonnage capacity, on necessary schedules, or at reasonable rates."
Vessel Non-Availability. To reach a determination regarding US-flag vessel availability, companies must provide comprehensive information, including details related to specific shipping needs, time and cost constraints, cargo characteristics impacting vessel capacity, and efforts made to identify US-flag vessels. MARAD may also request supplementary information such as advanced planning details, letters of credit, contracts, project plans, and any other relevant documentation.
MARAD evaluates a shipper's request for vessel non-availability certification based on various factors. These include the absence of US-flag vessel responses to RFQs, unresolvable discrepancies between vessel schedules and the shipper's load/discharge dates, incompatible service/routing requirements, unsuitability of trans-shipment/relay services, and unreasonable delays or costs associated with US-flag shipping. MARAD assesses US-flag vessel availability, service schedules, routing options, and the shipper's good faith efforts to identify US-flag vessel service.
Reasonable Rate Non-Availability. Even when US-flag vessels are available, MARAD may certify non-availability based on proposed rates. Factors considered include rates obtained from RFQs, information from interviews with carriers, vessel costs, supply and demand dynamics, historic rate data, and comparisons with prevailing commercial rates. MARAD evaluates US-flag rates, commercial rates, guideline rate calculations, and the shipper's good faith efforts to identify US-flag vessel service.
Once MARAD receives a request for a DNA, it then works to identify an available US-flagged vessel that will resolve the issues identified in the request, thereby confirming the accuracy and sufficiency of the information provided in support of the DNA. For example, MARAD may analyze the following factors:
- US-Flag Vessels. Whether there is advertised or unadvertised/inducement based service from any US-flag carrier that did not receive or respond to the RFQ/shipping details sent by the shipper.
- Service Schedule. Whether there is a US-flag service that matches the shipper's desired or required timeframe, although the shipper has demonstrated a willingness or ability to adjust timeframes to facilitate US-flag availability within the parameters of its contractual obligations. In general, MarAd reviews the documentation received from the shipper related to contractual delivery dates, liquidated damages, or other economic impacts on the shipper as the consequence of failure to meet project schedule.
- Routing. Whether there is a trans-shipment or relay service appropriate for the type of cargo that combines a US-flag vessel and a non-US-flag vessel (also known as Priority 2 Service). In general, MarAd reviews the documentation received from the shipper related to a) the size of the cargo to be transported, including whether the cargo is heavy-lift cargo, b) special handling requirements for the cargo to be transported, and c) the routing for the possible transshipment or relay service.
- Good Faith Effort. Whether the shipper has made good faith efforts to identify US-flag vessel service. Good faith efforts include evidence of advanced planning and advance notices by the shipper, and shipper's willingness and ability to adjust project logistic requirements to accommodate US-flag availability within the parameters of its contractual obligations.
MARAD's review will vary, but if a shipper has provided sufficient documentation and has strong evidence of good faith, the above DNA review can take as little as one week. If, however, the request has little or no supporting documentation, it will take longer. Accordingly, regardless of the basis underpinning a DNA request, it is imperative that companies do not wait until the last minute when attempting to collect information or otherwise engage in good faith efforts to identify US-flag vessels that will work for their project. A DNA's likelihood of success is directly related to the pre-planning and documentation that shippers can demonstrate to MARAD.
Developing a CPA Compliance Plan
Given the planning and supporting documentation needed to ensure CPA compliance, or to seek a DNA when necessary, it is critical that company's work to develop a detailed shipping plan as a part of the project's larger logistics and procurement strategy. This plan should, at a minimum, include the following:
- Plan shipping budgets with US-flag pricing included.
- Contact US-flag carriers early to secure pricing and availability.
- Ensure proper declaration of government-impelled cargo to prioritize compliance.
- Determine viability of aligning construction schedules with US-flag transit times.
- Developing a mechanism or process for collating shipping details from the entire supply chain, so the grant awardee or loan recipient can ensure CPA compliance as the entity with direct privity with DOE.
- Alert project contractors and suppliers of the requirement for CPA compliance and obtain their agreement to collect and provide the necessary records.
In addition to the above, identifying consultants or contractors with knowledge and experience with CPA will assist in ensuring overall CPA compliance for a project. By adhering to these proactive measures, awardees and borrowers can navigate Cargo Preference requirements effectively and minimize impact on a project's overall performance.
Cargo Preference Resources
For assistance with pre-shipment or post-shipment issues related to Cargo Preference, MARAD lists the following resources:
- Utilize the "Find a US-flag vessel" link on the MARAD website to locate US-flag carriers and ensure proper declaration of cargo.
- Contact MARAD's Office of Cargo and Commercial Sealift for vessel availability surveys if necessary.
- Access MARAD's Cargo Preference Frequently Asked Questions.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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