Sector Workshop Blog Archive

Panel Discussion: New Solutions for New England Fisheries?

Elizabeth Butler ('Lib'), of local law firm Pierce Atwood, has a tricky job. She's going to lead a diverse group of panelists in a discussion about how we might move forward toward cooperative harvesting in New England. My tough job will be capturing -- best I can -- the fast-moving conversation.

On the panel are Joe Sullivan and Don Kassilke, who we've already heard from this morning, plus:

• Gene Martin, from the National Marine Fisheries Service;
• Robert Horne, from the Farm Credit Cooperative Lending Institution;
• Eric Brazer of the Cape Cod Commercial Hook Fishermen's Association;
• Maggie Raymond, from Associated Fisheries of Maine; and
• Andrew Minkiewicz, of the law firm Kelley Drye Collier Shannon.

Lib tells us she has faith in the people in this room, and asks us to be pragmatic, thrifty Yankees, and put our heads together to create a custom-tailored sector agreement for a hypothetical groundfish client wanting to put together a sector here in New England. Maggie Raymond will represent that client, and keep us honest about the particulars of our fishery, and Gene Martin of NMFS will be the voice of the regulator. Other panelists will chime in.

The first questions for our client are the obvious ones: who are you, what do you want to do, when and how and why do you want to do it?

Maggie tells us more about this hypothetical client and what they're looking for: Associated Fisheries of Maine and its members. Our sector is not area or gear specific. Our membership runs from Maine to RI, and has several different vessel sizes -- mostly trawlers, but some gilnets, too. We have a multispecies sector (19+), and that's going to be a lot harder to monitor. We want to allocate multiple species. Members fish in 3 different stock areas, in more than one stock area on single trips, and put in to multiple ports. Our goals are to land as much of the sector's allocation as we can -- we need to. Individuals will bring varying levels of allocation to the sector. We want our allocation to be marketable fish, and minimize discards -- build incentives for members to prevent overages and discards. Maggie is concerned about the infraction penalties, and after today's presentations still doesn't understand how to read the regulations and the sector infraction penalties. She wants the sector to permit members to fish and/or sell in whatever ports they choose. We don't really want to divide the quota up monthly -- we'd rather maximize flexibility of individual members. We're not so interested in the governance structures, but rather the operating and management agreement.

Lib points out that, under Maine law, we need to be very careful about the liquidated damages provisions we might put into a sector agreement. We also need to watch out not only for the federal anti-trust laws, but also the state anti-trust laws. Although our client has said she's not interested in governance structure and would rather focus primarily on management and operations, we need to think about whether to be a nonprofit or a for-profit organization in the first instance. If you use a nonprofit, you fall out of the cooperative exemption under state law. Maybe we need to engage the state and get an exemption ahead of time. So beware!

The panel now starts to tackle these issues.

Gene Martin of NMFS is up first. How do we create a sector that permits maximum flexibility to individuals? He points out that any proposal first must pass muster with the NE Fisheries Management Council before it gets passed along to the NMFS. The two goals the agency protects are 1) to conserve the resource, and 2) to maximize the economic return from the resource, consistent with sustainable harvest. It seems reasonable that the proposed sector will meet this. The next hurdle is that the proposed sector is compared with 16 or 17 other proposals out there. The sector is going to have to deal with a lot of complexity in its plan -- monitoring across lots of species, boat and gear types. If the NEFMC passes along the proposed sector plan to NMFS, Gene's organization checks to make sure the plan meets those two main criteria, then asks: can we monitor this? Can we enforce it? Do members put themselves on the hook? Is this better than the exisiting system -- or does the existence of this sector ADD to the national complexity of regulation that NMFS must oversee.

Q: When will the Council and NMFS start considering sectors again? A: Not sure, but we'll know in November, or soon.

Q: Jimmy Odlin asks: do we really have the antitrust problem here? We aren't like the pacific northwest, we don't sell to limited dealers, we don't set prices.
A: You pay the lawyers to worry about documenting the fact that there's no antitrust violation. Things (e.g. cooperative agreements, not just fish) migrate, and Atty Generals see things differently than harvesters. So it seems sensible to seek an opinion letter that will mirror the federal exemptions to antitrust.

Eric Brazer, manager of the Hook Sector, speaks up. He's working with Maggie now. The Hook agreement is particular to its members, vessel size, etc, and he's been thinking about how to scale it and apply it to different people in different areas. His advice to members: shoulder as much of the burden as you can, and be patient -- nothing gets through the Council or the NFMS quickly. It falls on fishermen and industry to anticipate and answer their questions. This will be a complete regime change in New England, so it's going to go even more slowly.

Lib asks Eric -- how did your association go about choosing its members: who's in, who's out? Choose your partners carefully! The written document is no substitution for the integrity of your members.

Eric: this all started a decade ago in Chatham, where a hook-and-line fleet realized they were being regulated out of existence. A hook fishery is like a canary in the coal mine: it's not very efficient or profitable. The sector encompasses a lot of Chatham (and Harwichport) and they started meeting in basements and bars, talking about how to survive. They hooked up with DC law firm Sher & Blackwell. NFMS manages 30' boats as though they're 200' boats, and the hook fishermen wanted the autonomy to manage themselves. The hook fishermen sector is in its 4th year; fixed gear will be starting up soon. We're open to admitting and serving other folks, but that would require a change in operating agreements, which restrict areas and landing ports.

Lib: Joe and Dan K, tell us how to adapt your documents (pollock fishery and hook fishery ones) to our needs: multiple fish stocks, and a range of membership types -- individuals to corporations.

Joe: how many members? A: 65 potential members, 30 potential individuals. Joe: that's a lot of people to bring together. Have these folks ever coordinated their efforts together before? Let's not start spending our money yet, until we're sure people can work together. My rule of thumb is 10 people or fewer -- unless there's a history of past functional cooperation. The second question: what kind of communities of interest are within the group -- regional subgroups, past fishing buddies, etc? Maybe we focus our efforts there. I'd want to know more about social and cultural relationships that might be "glue" for this group. Finally, before I touch this, I'd ask you how much you've discussed the allocation issue. Is there agreement? Are there fights? Cod is the limiting species here -- if you can't figure out how to allocate that, how are you going to allocate everything else? Are people comfortable? Are there factions, within which there are subgroups? I suggest you consider several sectors, not necessarily one. Coops within the sector. I know you're worried about economies of scale, but the coops can have a master agreement at the sector, and be subgroups under a master sector. You want to reinforce the agreements with social, cultural, and historical ties of cooperation. There are natural human tendencies about cooperation, you can't ignore them when forming these sectors. My final advice: how are you going to monitor the cod catch (and the other species)? Until you have some pretty well-formed answers to these questions, hiring a lawyer might be a waste of money. Hire a consultant to help you go through catch allotment and make spreadsheets, identify natural subgroups, etc.

Gene: NFMS is nervous about the administrative burdens coming down the pike with these sector proposals. Will sectors make the regulators' jobs easier or harder? The fear is there will be many regulatory schemes, not one, and NMFS will be running around trying to catch up with, monitor, and enforce sector agreements. Cod and other limiting stocks are going to be the issues: when sectors reach the limit of those limiting species, what happens next? How does NMFS monitor those limits, and the consequences, given cross-sector allocation trading? Yikes.

Dan K: The Cape Cod Hook group was lucky: geographically discrete, and an existing community of interest -- naturally homogenous, culturally similar, same dealers, trust and history with one another. I take issue with Joe's numbers issue -- you can have more than 10 people in a group -- if the group members share culture, history, and a thought process. Geographic diversity creates social, historical, technical, and administrative complexity. Monitoring and enforcement is harder; choice of law is an issue. Essentially, Maggie, you've got a tough job with this sector.

Lib asks the group: what can we learn from New Zealand, about the relationship between industry and regulatory bodies? It seems like there's an efficiency (administrative, and inherent in the relationship of the organization and government) to having one umbrella organization?

Joe: you've got to evolve there. If the ties of a group are artificially structured, it's not very strong. You need a social enforcement mechanism, but for that to evolve, people need to have an affinity. Otherwise the monitoring costs are too high. You need "organic integrity" where people trust the group. If the costs and rewards are superhigh, people can overcome their natural antipathy for cooperating with strangers.

Andrew: One difference is the extraordinary amount of power that NFMS has.
Mike: This isn't so different from New Zealand, really. The difference is the change from prescriptive to instructive role of government. You need someone, some body to talk across the sectors.
[sorry, folks, I missed the nuances of both points....]

Q: can cooperatives exclude members? Should they be able to? There's a pending lawsuit in the Pacific Northwest that may answer that.

Q: Jimmy Odlin: if you bring in an allocation, you should be allowed to take it out of the organization. If the sector's not self-selecting, you'll see very people interested in going forward. There's big liability associated with this -- people will want to control who they're associated with. There's an opportunity for big economic advantages of sectors. I think those advantages will be big incentives for people to band together.

Maggie: there's a strong social relationship within this client group (history together, building the Portland Fish Exchange), but it does make sense for there to be subgroups for ease of monitoring.

Joe: I don't want to be pouring cold water on this group. There are 100 vessels in the Pacific, across 7-9 cooperatives, but they share and cooperate across groups really well. Take communities of interest and create agreements that will work for them, then let the sectors find joint interests and cooperate then. The issue of joint and several liability. Is it fair to require an organization to accept a member, if it comes with joint and several liability, given past operating history and the range of behaviors out there. I say to the regulatory agencies-- if you are going to impose joint and several liabilities on groups, it's not fair to require groups to accept any member. [note: one lone member in the common pool, if everyone else is in a sector, is just a member with an individual fish allocation. Maybe not so disadvantaged, after all, by being left out of the sector.]

Gene: Fishery management is unique -- there's a grassroots council that develops a management scheme and presents it to the national body for adoption. That's important. The Council has certain values and requirements that it must grapple with, and bring back to its constituent members, before a scheme is recommended to NMFS.

Andrew: A sector gives a species value to the operators, not an efforts based/input control model. This is going to change the management and operating behavior of the people fishing the resource. In the Gulf of Mexico, people's fishing behavior has changed (they're taking other fish than what's been regulated and allocated). Half the fish, but twice the money. Knowing the redfish are in the bank, they sit on a reef and take other fish, first, not having to race to pull out the redfish until it's easier to catch them.

Gene: I'm not officially speaking for NFMS, by the way. But the sectors have to work together.

Vito: there are 600 active permits in our fishery right now. You'd have to monitor all 600 if we don't adopt the changes of the sectors.

Andrew: you can't do a sector just for one species in a multispecies context, or people overfish the non-regulated species.

Lib: supposing it's feasible for Maggie and her large group to form the Sustainable Fishery Sector, what are the financial responsibilities of the individual members and the sector? What will your banker say?

Rob Horne: financier -- "I won't take her call!" If Maggie came to me and said, I want to borrow some money to buy into a sector, I'm going to be very cautious. Our loan documents are going to change. We are currently collateralized with boats and permits, and figuring out how the sector membership can be collateral is going to take some head scratching. I'll look at her past tax returns, but it's hard to tell from a business plan what joining a sector will mean to her cash flow. I'm going to need to analyze not only Maggie and her boat, but also the rest of the people in the sector (if the sector gets shut down, how does the bank get paid?) (if someone in the sector screws up and Maggie is jointly liable, how does the bank get paid?). If the sector wants to borrow money, what collateral does it have to put up? We'd treat this like a lobster cooperative, which is 20 or 30 individuals on the hook for the debt. Down the road, when sectors have an operating history, we might change the way we look into the debt. I'm concerned about this joint and several liability.

The best bond/insurance against the joint and several liability: a letter of credit secured by a line of credit -- to insure against joint and several liability, but cheaper than a bond, or interest. Ouch! Each member of the cooperative has to have a line of credit. [New Zealand required a $5000 bond from each member.]

One option is a line of credit or letter of credit that declines over time -- big risk at the beginning of year, but as fishing season goes forward and there's not an overfishing instance, the risk gets smaller....

Q: is a longer commitment better, or worse, from the financier's perspective? A: not sure.

Joe: in the early stage of sector agreements, banks want everything as collateral. They want allocation, boat, permits, any proceeds from transferability, etc. There's been a shift from the concern of moving into an arrangement like this, to a concern of the arrangement terminating. Sometimes banks now want exit or termination dates removed, and breach of contract actions for people leaving and competing, as different collateral. The "general intangibles" are the biggest asset now -- it's the quota, and its transferability. A history of cash flow changes what matters to the bank.

Bud (a monkfish fisherman): my eyes have been opened to a lot of risks here, but the truth is, our current regime is worse. A couple of days before the fishery opened, it got cut in half; then it's given back to us two months in. The banks might not know or recognize it now, but this is a terribly unpredictable scheme. If we stay in this regime we'll be eliminated, one by one. I was impressed with the New Zealand scheme, and want to get there ourselves: if you can change how you fish -- gear, days, etc -- without enormous burdensome regulatory hurdles, that would be really nice.

Gene points out: this is the HARDEST kind of fishery. It's easier to regulate scallops and quahogs: single species, and they don't move. By contrast, we're looking at multiple species and a diverse range and type of fisherman.

Maggie: let's do that. If we can do this for the hardest kind of fishery, that's where we should start.

You don't need to allocate every species. Look at the limiting species: cod, for instance. It's complicated being a multi-species fishery, but it's not impossible.

Q: How much money do you need to bring to the table to get into a sector?
A: you need to pay a manager's salary and administrative expenses, you need to pay for monitoring (mostly the manager). 2-5% of catch? Hard to say -- monitoring costs vary so widely. It's a pretty low percentage of operating costs, and it's almost all in the monitoring. You need to bring in something to cover the joint and several liability.

New Zealand's joint and several liability solution is relatively small penalties, but good monitoring and high social enforcement, and the situation where members don't hesitate to snitch on one another. But this is a social and cultural development. It's expensive to keep an eye on someone you don't trust. It's cheap to keep an eye on someone you do trust. This is why these group membership commonalities turn out to be important.

Q: Liability issue -- I have two boats. If one of my boats does something it shouldn't, my other boat isn't affected. Why should I suffer for the bad acts of others in my sector?
A: that's what the regs say. And that's because it's trying to give a social pressure and an incentive to the group to follow the regs.
Q: What's the right sector approach to a bad actor -- fishing a closed area? Should the sector enforce violations? Should the sector say it won't defend an individual member who is being prosecuted for an individual violation? There's a due process issue: if you can't control the actions of another, how can you be punished for it?

Q: if a sector issues a stop fishing order, will NFMS enforce it? A: yes.

If a sector exceeds its TAC, many people have failed -- not just one individual.

Q: Chuck Remmel: No equity investor would willingly enter a situation like this. I'm impressed by the banker here -- this joint and several liability is going to drive everyone away.

Posted at 11:15 AM

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