The Case for the Federal Hopper Dredge Fleet

1. The status of the US Army Corps of Engineers Hopper Dredge Fleet has been a source of controversy for quite some time. Previous analyses have focused on the capability of industry to carry out the federal program and audits of the cost of operating individual vessels in the Corps fleet. There has been little or no analysis of how current policy regarding the federal fleet impacts the cost effectiveness and efficiency of the program as a whole. The intent of this report is to provide such an assessment. This report analyzes the impact of current policy on the national program in general and the West Coast in particular. This report makes the case for a continued and expanded role for the federal hopper dredge on the West Coast. The report demonstrates how reducing or eliminating current limitations on the number of days Corps vessels can operate per year will improve responsiveness and service to West Coast ports, improve the efficiency and cost effectiveness of the program as a whole, thereby providing better value to the taxpayer by potentially increasing the amount of work that can be performed without adding additional tax dollars. A fundamental conclusion of this report is that the emphasis on developing industry capability has proceeded at the expense of the goal of programmatic cost effectiveness. [NEXT SLIDE]The status of the US Army Corps of Engineers Hopper Dredge Fleet has been a source of controversy for quite some time. Previous analyses have focused on the capability of industry to carry out the federal program and audits of the cost of operating individual vessels in the Corps fleet. There has been little or no analysis of how current policy regarding the federal fleet impacts the cost effectiveness and efficiency of the program as a whole. The intent of this report is to provide such an assessment. This report analyzes the impact of current policy on the national program in general and the West Coast in particular. This report makes the case for a continued and expanded role for the federal hopper dredge on the West Coast. The report demonstrates how reducing or eliminating current limitations on the number of days Corps vessels can operate per year will improve responsiveness and service to West Coast ports, improve the efficiency and cost effectiveness of the program as a whole, thereby providing better value to the taxpayer by potentially increasing the amount of work that can be performed without adding additional tax dollars. A fundamental conclusion of this report is that the emphasis on developing industry capability has proceeded at the expense of the goal of programmatic cost effectiveness. [NEXT SLIDE]

2. Issue Areas: Goals of Public Law 95-269 Importance of hopper dredging to West Coast ports Cost of the federal dredge fleet Competitiveness in the hopper dredge industry Impact of operating limitations on cost effectiveness The cost of the ready reserve Data gaps The reports findings are organized under seven issue areas, shown here. In the interest of time, we are only going to discuss the key findings and conclusions for the first five [PAUSE: ALLOW AUDIENCE TIME TO READ SLIDE] We will start with the goals of PL 95-269 �. [NEXT SLIDE].The reports findings are organized under seven issue areas, shown here. In the interest of time, we are only going to discuss the key findings and conclusions for the first five [PAUSE: ALLOW AUDIENCE TIME TO READ SLIDE] We will start with the goals of PL 95-269 �. [NEXT SLIDE].

3. Key Findings and Conclusions Goals: Develop a domestic commercial hopper capability Reasonable prices in a timely manner Emergency and national response capability NOTE TYPO ON THEIR PRINTED COPY Public Law 95-269 was enacted in 1978 in response to requests from the dredging industry to provide federal hopper work to private contractors. Prior to 1978, all hopper work was done by Corps vessels. PL 95-269 was codified into the existing 33 USC 622 which governs management of the Corps dredging program. The provisions of 33 USC 622 can be boiled down to three basic elements. These are: Reduce the federal hopper fleet in order to develop a domestic hopper dredging industry Cost effective management of the program Emergency and National defense response. Industry promised that domestic hopper capacity would be developed once sufficient, reliable levels of work were made available. Industry has greatly expanded its hopper dredge capacity since 1978�. [NEXT SLIDE] NOTE TYPO ON THEIR PRINTED COPY Public Law 95-269 was enacted in 1978 in response to requests from the dredging industry to provide federal hopper work to private contractors. Prior to 1978, all hopper work was done by Corps vessels. PL 95-269 was codified into the existing 33 USC 622 which governs management of the Corps dredging program. The provisions of 33 USC 622 can be boiled down to three basic elements. These are: Reduce the federal hopper fleet in order to develop a domestic hopper dredging industry Cost effective management of the program Emergency and National defense response. Industry promised that domestic hopper capacity would be developed once sufficient, reliable levels of work were made available. Industry has greatly expanded its hopper dredge capacity since 1978�. [NEXT SLIDE]

4. Findings: Corps hopper dredges decreased from 14 to 4 Industry hopper dredges increased from 0 to 17 Industry built a fleet of 17 hopper dredges over the past 30 years. Concurrently, the Corps hopper dredge fleet - consistent with the provisions of PL 95-269 - has been retired in �an orderly manner� to the minimum size determined necessary for emergency response and national defense. The Corps fleet now stands at 4 vessels, down from 14 in the 1970s. Private industry now owns and operates over 80% of the national hopper dredging capability (based on number of vessels. The dredging program is distributed between the private and federal sector as shown on the next chart�. [NEXT SLIDE] Industry built a fleet of 17 hopper dredges over the past 30 years. Concurrently, the Corps hopper dredge fleet - consistent with the provisions of PL 95-269 - has been retired in �an orderly manner� to the minimum size determined necessary for emergency response and national defense. The Corps fleet now stands at 4 vessels, down from 14 in the 1970s. Private industry now owns and operates over 80% of the national hopper dredging capability (based on number of vessels. The dredging program is distributed between the private and federal sector as shown on the next chart�. [NEXT SLIDE]

5. Industry: Performs 83% of federal dredging (volume) Accounts for 89% of program (expenditures) Performs about 75% of all hopper dredging Hopper contracts average $135 million per year Industry now performs about 83% of the nation�s dredging work, as measured in volume of material excavated, and accounts for an average of 89% of annual program expenditures. Industry performs 75% of hopper dredge volume. In recent years, an average of $135 million in hopper dredge contracts have been awarded to private firms. It is therefore reasonable to conclude that� [NEXT SLIDE] Industry now performs about 83% of the nation�s dredging work, as measured in volume of material excavated, and accounts for an average of 89% of annual program expenditures. Industry performs 75% of hopper dredge volume. In recent years, an average of $135 million in hopper dredge contracts have been awarded to private firms. It is therefore reasonable to conclude that� [NEXT SLIDE]

6. Conclusions: The goal to establish a commercial hopper dredge industry has been met. No further restrictions on the Corps fleet are necessary. The goal to establish a commercial hopper dredge capability in the United States has been met, and that no further restrictions are required on the Corps fleet. This report now asks the question of whether the goal of program cost effectiveness is being adequately addressed, and if the program fosters the responsiveness to port needs to the degree it is capable. The second issue area addresses the needs of the West Coast Ports. [NEXT SLIDE]The goal to establish a commercial hopper dredge capability in the United States has been met, and that no further restrictions are required on the Corps fleet. This report now asks the question of whether the goal of program cost effectiveness is being adequately addressed, and if the program fosters the responsiveness to port needs to the degree it is capable. The second issue area addresses the needs of the West Coast Ports. [NEXT SLIDE]

7. Key Findings and Conclusions [NEXT SLIDE][NEXT SLIDE]

8. Key Findings and Conclusions Findings: Hopper dredging: 50-60% of all West Coast dredging 85% of Oregon dredging Corps dredges = 60% Unique conditions: High proportion of small projects High incidence of adverse weather Only one private firm on West Coast 5 to 12 weeks to move dredge from East Coast... Hopper dredging comprises about 25% of the nation�s total dredging program. In most cases, hopper dredges are best suited for work under the conditions found at most West Coast ports exist, particularly coastal ports. Some of the unique conditions in the West are shown here. About 60% of West Coast dredging is performed by hopper dredges, and about 60% of that work is performed by two Corps vessels. These are the small class Yaquina and medium class Essayons, stationed with the Corps� Portland District in Portland, Oregon. There is only one private firm on the West Coast, in Seattle. The distances over which dredges mobilized from the East Coast must travel to respond to work on the West are substantial. [NEXT SLIDE]Hopper dredging comprises about 25% of the nation�s total dredging program. In most cases, hopper dredges are best suited for work under the conditions found at most West Coast ports exist, particularly coastal ports. Some of the unique conditions in the West are shown here. About 60% of West Coast dredging is performed by hopper dredges, and about 60% of that work is performed by two Corps vessels. These are the small class Yaquina and medium class Essayons, stationed with the Corps� Portland District in Portland, Oregon. There is only one private firm on the West Coast, in Seattle. The distances over which dredges mobilized from the East Coast must travel to respond to work on the West are substantial. [NEXT SLIDE]

9. MobilizationTimes and Distances to West Coast In general, it can take 5 to 12 weeks to move a dredge from the West to the East. Conclusions: West Coast ports: Depend to a greater degree on hopper dredging Depend to a greater degree on Corps dredges Depend to a greater degree on small class, shallow draft dredges This unique dependence was recognized by Congress in report language to the 2002 Energy and Water Development Appropriations Act, which limited the McFarland to historic dredging in the Delaware river. The report stated, that these restrictions were not to be considered precedents for limitations on any other Corps dredges, especially those operating in the Pacific Northwest. Citing limited availability of commercial dredges and the long distances from the East Coast, the report notes that the McFarland restriction is ��not to be considered a precedent for any other Corps of Engineers dredge, especially any dredge operating in the ports and harbors of the Northwest.� [NEXT SLIDE] In general, it can take 5 to 12 weeks to move a dredge from the West to the East. Conclusions: West Coast ports: Depend to a greater degree on hopper dredging Depend to a greater degree on Corps dredges Depend to a greater degree on small class, shallow draft dredges This unique dependence was recognized by Congress in report language to the 2002 Energy and Water Development Appropriations Act, which limited the McFarland to historic dredging in the Delaware river. The report stated, that these restrictions were not to be considered precedents for limitations on any other Corps dredges, especially those operating in the Pacific Northwest. Citing limited availability of commercial dredges and the long distances from the East Coast, the report notes that the McFarland restriction is ��not to be considered a precedent for any other Corps of Engineers dredge, especially any dredge operating in the ports and harbors of the Northwest.� [NEXT SLIDE]

10. Key Findings and Conclusions One of perennial issues of the federal hopper fleet issue is the cost of the federal fleet. [NEXT SLIDE] One of perennial issues of the federal hopper fleet issue is the cost of the federal fleet. [NEXT SLIDE]

11. Key Findings and Conclusions This chart reflects collective costs-per-yard for the entire hopper fleet from 96 - 2000. The price per yard fluctuates each year, depending on market conditions and allocation of work between sectors. On average, over the last five years, Corps dredges have cost about $.08 (3%) more than their industry counterparts. What is sometimes lost in strict cost comparisons is the additional value provided by the Corps fleet. These include: - General capability for extended deployment / system redundancy - Bottom dump and pump out capability - Potable water production - Defense related design features (mechanical redundancy, deck cranes, additional crew accommodation, helicopter pad) - Double hulled for increased service life. - More versatile, heavier than commercial counterpart. - Research and development. Key point: added value comes with added cost. [NEXT SLIDE]This chart reflects collective costs-per-yard for the entire hopper fleet from 96 - 2000. The price per yard fluctuates each year, depending on market conditions and allocation of work between sectors. On average, over the last five years, Corps dredges have cost about $.08 (3%) more than their industry counterparts. What is sometimes lost in strict cost comparisons is the additional value provided by the Corps fleet. These include: - General capability for extended deployment / system redundancy - Bottom dump and pump out capability - Potable water production - Defense related design features (mechanical redundancy, deck cranes, additional crew accommodation, helicopter pad) - Double hulled for increased service life. - More versatile, heavier than commercial counterpart. - Research and development. Key point: added value comes with added cost. [NEXT SLIDE]

12. Key Findings and Conclusions Data comparisons for the Yaquina and privately owned Westport are shown here. Each bar represents a project within the same river reach on which both vessels worked. In some cases, the Yaquina is less expensive; in others, the Westport. For these projects, the Yaquina was a little over 4% more expensive than the Westport. Similar data for the Essayons indicates that the Essayons is about 11% more expensive than its industry counterparts. On the surface, from these comparisons, it would appear that industry offers the most cost effective option for routine dredging. But this conclusion assumes the cost relationship between the two sectors is static. In fact, it is dynamic, and can be greatly affected by changing the amount of work assigned each sector�s fleet. [NEXT SLIDE]Data comparisons for the Yaquina and privately owned Westport are shown here. Each bar represents a project within the same river reach on which both vessels worked. In some cases, the Yaquina is less expensive; in others, the Westport. For these projects, the Yaquina was a little over 4% more expensive than the Westport. Similar data for the Essayons indicates that the Essayons is about 11% more expensive than its industry counterparts. On the surface, from these comparisons, it would appear that industry offers the most cost effective option for routine dredging. But this conclusion assumes the cost relationship between the two sectors is static. In fact, it is dynamic, and can be greatly affected by changing the amount of work assigned each sector�s fleet. [NEXT SLIDE]

13. Impact of Removing Operating Limits The effect is demonstrated here, using data for the Yaquina. Although annual cost go up with increased usage, rental rates per day go down with increase operations. For the Yaquina, adding 48 days to its 178 day schedule reduces the rate 16%. For the Essayons, increasing the operating year from 185 days to 230 would reduce rates about 12%. More days added = greater the cost efficiency as measured in cost per cubic yard. Total cost would increase, but be offset by not having to contract for replacement dredges. Conclusions from cost analysis: - Corps fleet provides value not available from industry - Reduce or eliminate operating year restrictions improves fleet cost effectiveness Some may be tempted to suggest the government turn all hopper dredging over to private industry, and completely forego the expense of maintaining the fleet. Question: Can the mechanisms of the private market provide greater cost effectiveness than the current state of mixed public and private operation? [NEXT SLIDE] The effect is demonstrated here, using data for the Yaquina. Although annual cost go up with increased usage, rental rates per day go down with increase operations. For the Yaquina, adding 48 days to its 178 day schedule reduces the rate 16%. For the Essayons, increasing the operating year from 185 days to 230 would reduce rates about 12%. More days added = greater the cost efficiency as measured in cost per cubic yard. Total cost would increase, but be offset by not having to contract for replacement dredges. Conclusions from cost analysis: - Corps fleet provides value not available from industry - Reduce or eliminate operating year restrictions improves fleet cost effectiveness Some may be tempted to suggest the government turn all hopper dredging over to private industry, and completely forego the expense of maintaining the fleet. Question: Can the mechanisms of the private market provide greater cost effectiveness than the current state of mixed public and private operation? [NEXT SLIDE]

14. Key Findings and Conclusions To answer that question, we looked at competitiveness in the hopper dredging industry. [NEXT SLIDE] To answer that question, we looked at competitiveness in the hopper dredging industry. [NEXT SLIDE]

15. Key Findings and Conclusions Before proceeding with the discussion, there are a couple of key relationships we discovered. The first is probably intuitively obvious: There is a statistically significant inverse correlation between the average number of bidders per contract each year and bid price. In this case, bid price is measured as a percentage of government estimate. This relationship is similar for both national and West Coast data, (National data shown on chart). The implication for program costs is shown here... [NEXT SLIDE] ------------------------------ Statistical note: For nationwide data, r = -.84, p = .001. For the West Coast data, r = -.59, p = .042.Before proceeding with the discussion, there are a couple of key relationships we discovered. The first is probably intuitively obvious: There is a statistically significant inverse correlation between the average number of bidders per contract each year and bid price. In this case, bid price is measured as a percentage of government estimate. This relationship is similar for both national and West Coast data, (National data shown on chart). The implication for program costs is shown here... [NEXT SLIDE] ------------------------------ Statistical note: For nationwide data, r = -.84, p = .001. For the West Coast data, r = -.59, p = .042.

16. Of the 377 hopper contracts reviewed for this report, 42% exceeded the government estimate. Contracts with single bidders exceeded the estimate 90% of the time. Contracts with two bidders, 43%. Contracts with three or more bidders exceeded the estimate about 25% of the time. Consequently, it can be concluded that, on average, at least three bidders per contract are needed to ensure competitive pricing. Even with competition, however, contracts can expect to exceed the estimate about 25% of the time. Therefore, The 17% difference represents an opportunity to reduce program cost. [Click] The 17% represents 64 contracts, with total award bids between $16 million and $41 million between 1993 and 2001. This cost can be at least partially reduced by improving competition. As I mentioned, this relationship is pretty obvious. What is less intuitively obvious is the relationship between material advertised and number of bidders per contract. [NEXT SLIDE]Of the 377 hopper contracts reviewed for this report, 42% exceeded the government estimate. Contracts with single bidders exceeded the estimate 90% of the time. Contracts with two bidders, 43%. Contracts with three or more bidders exceeded the estimate about 25% of the time. Consequently, it can be concluded that, on average, at least three bidders per contract are needed to ensure competitive pricing. Even with competition, however, contracts can expect to exceed the estimate about 25% of the time. Therefore, The 17% difference represents an opportunity to reduce program cost. [Click] The 17% represents 64 contracts, with total award bids between $16 million and $41 million between 1993 and 2001. This cost can be at least partially reduced by improving competition. As I mentioned, this relationship is pretty obvious. What is less intuitively obvious is the relationship between material advertised and number of bidders per contract. [NEXT SLIDE]

17. Key Findings and Conclusions Traditional economic theory teaches us that most markets exist in a state of competitive equilibrium between supply and demand. If demand increases, prices rise. Increased prices attract new providers into the market. As supply rises, prices stabilize until a supply-demand equilibrium is reinstated. Demand for hopper dredging has increased an average of 37% since implementation of the �180 Day Rule� in 1993. Yet the number of competing firms has decreased. The result is shown in the chart. Fewer firms and a greater amount of work advertised reduces the number of bidders per contract. This conclusion will be easily testable. New restrictions on the McFarland and the trend to increased bidding will result in more work allocated to industry. The prediction from this analysis is that bid prices - and overall program cost - will rise as a result. [NEXT SLIDE] ------------------ Statistical notes: National data: r=-.62, p=.022. West Coast data: r=-.68, p=.015.Traditional economic theory teaches us that most markets exist in a state of competitive equilibrium between supply and demand. If demand increases, prices rise. Increased prices attract new providers into the market. As supply rises, prices stabilize until a supply-demand equilibrium is reinstated. Demand for hopper dredging has increased an average of 37% since implementation of the �180 Day Rule� in 1993. Yet the number of competing firms has decreased. The result is shown in the chart. Fewer firms and a greater amount of work advertised reduces the number of bidders per contract. This conclusion will be easily testable. New restrictions on the McFarland and the trend to increased bidding will result in more work allocated to industry. The prediction from this analysis is that bid prices - and overall program cost - will rise as a result. [NEXT SLIDE] ------------------ Statistical notes: National data: r=-.62, p=.022. West Coast data: r=-.68, p=.015.

18. Criterion for an Open Competitive Market Large number of independent buyers and sellers Freedom to enter or leave the market Substitutability of product All participants have equal access to information We noted with the previous slide that the hopper industry did not respond to increases in demand as would be expected. Why? We assessed the hopper industry against four criteria some economists use to define a open competitive market. Note that not all four must be present to have a competitive market. We�ll start this assessment with examining the number of providers for hopper dredge services. [NEXT SLIDE]We noted with the previous slide that the hopper industry did not respond to increases in demand as would be expected. Why? We assessed the hopper industry against four criteria some economists use to define a open competitive market. Note that not all four must be present to have a competitive market. We�ll start this assessment with examining the number of providers for hopper dredge services. [NEXT SLIDE]

19. Commercial Hopper Fleet Industry Consolidations 1980s GLDD / NATCO Manson / Osberg Co. C.F. Bean Co. Williams - McWilliams American Dredging T.L. James (Gulf Coast Tr.) Roger J. Au Co. 1990s GLDD / NATCO Manson Construction Co. Bean - Stuyvesant LLC Weeks Marine Inc. B+B Dredging Corp. Shortly after passage of PL 95-269, seven dredging firms acquired hopper capability. These are shown on the left side of this chart. In 1993, American Dredging was bought by Weeks Marine. As a result of other mergers and buy-outs, by 1998 there were five firms left in the market. Dredge capability ownership for each firm is shown in the next slide. [NEXT SLIDE]Shortly after passage of PL 95-269, seven dredging firms acquired hopper capability. These are shown on the left side of this chart. In 1993, American Dredging was bought by Weeks Marine. As a result of other mergers and buy-outs, by 1998 there were five firms left in the market. Dredge capability ownership for each firm is shown in the next slide. [NEXT SLIDE]

20. Private Hopper Dredge Ownership 17 total vessels 15 available for routine maintenance 1 firm owns 40% of private capability Awarded 37% of work 1 firm on West Coast Awarded 60% of work Currently, one firm owns 40% of the private hopper dredging capability available for routine dredging work. Additionally, large and small class sized vessels are consolidating into relatively few hands. [NEXT SLIDE]Currently, one firm owns 40% of the private hopper dredging capability available for routine dredging work. Additionally, large and small class sized vessels are consolidating into relatively few hands. [NEXT SLIDE]

21. Hopper Dredge OwnershipBy Class of Vessel At this time, the only large class vessels are owned are by GLDD/NATCO and Bean / Stuyvesant. Note that the Stuyvesant is currently grandfathered from the Jones Act. Efforts have been made to have that authority repealed. If successful, only one private firm will have large class hopper capability. Two firms own small class vessels, Manson (in Seattle) and B+B. The bidding patterns reflect this distribution of ownership. Medium sized jobs average about 3.1 bidders per project. Large and small projects average 2.0 and about 2.5 bidders respectively. [NEXT SLIDE]At this time, the only large class vessels are owned are by GLDD/NATCO and Bean / Stuyvesant. Note that the Stuyvesant is currently grandfathered from the Jones Act. Efforts have been made to have that authority repealed. If successful, only one private firm will have large class hopper capability. Two firms own small class vessels, Manson (in Seattle) and B+B. The bidding patterns reflect this distribution of ownership. Medium sized jobs average about 3.1 bidders per project. Large and small projects average 2.0 and about 2.5 bidders respectively. [NEXT SLIDE]

22. Criterion for an Open Competitive MarketAssessment: Large number of independent buyers and sellers Only five firms have hopper dredge capability 40% of fleet in one firm Consolidation of large and small dredges One firm on West Coast Freedom to enter or leave the market Cost of new dredge = $30-$60 Million Relatively fixed demand (average 68 mcy / year) Uncertainty of annual funding Substitutability of product Limited, due to specialized nature of equipment All participants have equal access to information Our assessment [CLICK] The limited number firms, the consolidation of vessel class ownership, and the fact that one firm owns 40% of the available fleet leads to the conclusion that criterion 1 is not met. Freedom to enter or leave the market is also limited [CLICK] A new dredge costs between $30-$60 million. That high capital investment, coupled with a fairly stable demand for work and the uncertainty of the amount of funding Congress will approve for dredging each year present formidable barriers to new firms wanting to enter the market. Consequently, criterion 2 is not met. Dredges are specialized pieces of equipment. In most cases, it is not possible to substitute one type dredge for another for reasons of safety, environmental impacts, or vessel capability. It is economically inefficient to substitute one size hopper dredge for another. [CLICK]. Consequently, criterion 3 is met only to a limited degree. The only criterion that is fully met is the one referring to equal access of information. [CLICK] The Corps web site and frequent communications between the Corps and industry allow relatively free and open exchange of market conditions and projects. [CLICK] So.. If the hopper industry is not a fully open competitive market, what is it? [NEXT SLIDE]Our assessment [CLICK] The limited number firms, the consolidation of vessel class ownership, and the fact that one firm owns 40% of the available fleet leads to the conclusion that criterion 1 is not met. Freedom to enter or leave the market is also limited [CLICK] A new dredge costs between $30-$60 million. That high capital investment, coupled with a fairly stable demand for work and the uncertainty of the amount of funding Congress will approve for dredging each year present formidable barriers to new firms wanting to enter the market. Consequently, criterion 2 is not met. Dredges are specialized pieces of equipment. In most cases, it is not possible to substitute one type dredge for another for reasons of safety, environmental impacts, or vessel capability. It is economically inefficient to substitute one size hopper dredge for another. [CLICK]. Consequently, criterion 3 is met only to a limited degree. The only criterion that is fully met is the one referring to equal access of information. [CLICK] The Corps web site and frequent communications between the Corps and industry allow relatively free and open exchange of market conditions and projects. [CLICK] So.. If the hopper industry is not a fully open competitive market, what is it? [NEXT SLIDE]

23. Elements of �Natural� Monopoly High level of initial capital investment Decrease in marginal cost as output increases Capital costs greatly outweigh operating costs Economy of scale exists over entire demand range Example: Utilities Typical Government Responses: Regulated pricing Direct Ownership Economists label industries with high initial levels of capital investment and an economy of scale that exists over its entire demand range as a �natural monopoly.� Other industry sectors meet this criteria as well. For example, water, gas, and electric utility companies operate as natural but regulated monopolies. Regulation most used in this country to ensure critical services are provided the public at reasonable prices. Another is direct ownership and operation of the means of production. Examples include the Federal Columbia River Power System in the Northwest and the Corps dredging fleet. The primary conclusion is that the hopper industry does not behave as one would expect of an open and competitive market. Yet PL 95-269 and subsequent restrictions were predicated on more efficient pricing due to market competition. Question: How did the market respond to operating restrictions on the Corps fleet? [NEXT SLIDE]Economists label industries with high initial levels of capital investment and an economy of scale that exists over its entire demand range as a �natural monopoly.� Other industry sectors meet this criteria as well. For example, water, gas, and electric utility companies operate as natural but regulated monopolies. Regulation most used in this country to ensure critical services are provided the public at reasonable prices. Another is direct ownership and operation of the means of production. Examples include the Federal Columbia River Power System in the Northwest and the Corps dredging fleet. The primary conclusion is that the hopper industry does not behave as one would expect of an open and competitive market. Yet PL 95-269 and subsequent restrictions were predicated on more efficient pricing due to market competition. Question: How did the market respond to operating restrictions on the Corps fleet? [NEXT SLIDE]

24. Two important things happened in 1993. - First year of �180 day� rule - Loss of one competing hopper firm. [NEXT SLIDE]Two important things happened in 1993. - First year of �180 day� rule - Loss of one competing hopper firm. [NEXT SLIDE]

25. Key Findings and Conclusions Nationwide: Nationwide contracts were analyzed for the three years prior to 1993 and compared to the years following implementation of the provisions of the FY 93 Appropriations Act. [CLICK] The average volume advertise per year, the number of firms in existence, the average bidders per contract and the average bid as a percentage of government estimate prior to FY 93 are shown here. [CLICK] As can be seen, while material advertised increased 37%, the number of firms decreased along with the average number of bidders per contract. Predictably, average bid prices - as a % of government estimate - rose. In other words, institutionalization of the �180 Day Rule,� coupled with the decrease in the number of competing hopper firms, resulted in a statistically significant increase to bidders per contract (F (1, 376) = 19.28, p<.001) and overall program bid prices (F (1,376) = 21.4, p < .001)due to a decrease in competitive bidding. Material volume: F(1, 376) = 3.68, n.s. (p = .056). Similar trends are seen in West Coast Data�.[NEXT SLIDE]Nationwide contracts were analyzed for the three years prior to 1993 and compared to the years following implementation of the provisions of the FY 93 Appropriations Act. [CLICK] The average volume advertise per year, the number of firms in existence, the average bidders per contract and the average bid as a percentage of government estimate prior to FY 93 are shown here. [CLICK] As can be seen, while material advertised increased 37%, the number of firms decreased along with the average number of bidders per contract. Predictably, average bid prices - as a % of government estimate - rose. In other words, institutionalization of the �180 Day Rule,� coupled with the decrease in the number of competing hopper firms, resulted in a statistically significant increase to bidders per contract (F (1, 376) = 19.28, p<.001) and overall program bid prices (F (1,376) = 21.4, p < .001)due to a decrease in competitive bidding. Material volume: F(1, 376) = 3.68, n.s. (p = .056). Similar trends are seen in West Coast Data�.[NEXT SLIDE]

26. Key Findings and Conclusions Impacts of 1993 - West Coast: Information from FY 90-92 is shown here. [CLICK] Information from 93-01 here [CLICK]. [PAUSE TO LET AUDIENCE READ] Statistics: Bidders: F (1,60) = 3.03, n.s. (p = .087). Bid prices: F (1,60) = 3.00, n.s. (p = .089). Material: F (1,60) = .39, n.s. (p=.54). Note that many predict an increase demand for dredging in coming years. [NEXT SLIDE]Information from FY 90-92 is shown here. [CLICK] Information from 93-01 here [CLICK]. [PAUSE TO LET AUDIENCE READ] Statistics: Bidders: F (1,60) = 3.03, n.s. (p = .087). Bid prices: F (1,60) = 3.00, n.s. (p = .089). Material: F (1,60) = .39, n.s. (p=.54). Note that many predict an increase demand for dredging in coming years. [NEXT SLIDE]

27. Trends in Demand Dredging demand fairly stable since 1996 Total demand ~ 270 mcy per year Hopper demand ~ 68 mcy per year Expansion of existing ports Deeper harbors and channels Operating constraints due to environmental windows The demand for larger port facilities and deeper channels to satisfy the requirements of global markets will likely increase dredging demand, at least for the near term. Meanwhile, dredging windows have been imposed in many areas for environmental reasons. The result: an increasing amount of work will be chasing a limited number of firms. Prices will rise, unless the increase demand is met with increased capacity provided by additional firms. [NEXT SLIDE]The demand for larger port facilities and deeper channels to satisfy the requirements of global markets will likely increase dredging demand, at least for the near term. Meanwhile, dredging windows have been imposed in many areas for environmental reasons. The result: an increasing amount of work will be chasing a limited number of firms. Prices will rise, unless the increase demand is met with increased capacity provided by additional firms. [NEXT SLIDE]

28. Conclusions: New restrictions on McFarland + increased demand will result in more work for industry More work for industry will result in fewer bidders per project and increased bid prices unless� More work results in additional competing firms Key conclusion is that the new restrictions on the McFarland and likely trends in facility expansion will result in more work for industry. More work for industry will result in fewer bidders per project and increased prices UNLESS.. The additional work results in creation of additional competing firms. Reducing or eliminating operating limitations on the Corps fleet will increase the cost efficiency of Corps fleet operations, eliminate the costs associated with maintaining vessels in standby during non-operational periods, and result in more competitive bidding for the work allocated to industry. This concludes our discussion of key findings and conclusions. Our recommendations: [NEXT SLIDE]Key conclusion is that the new restrictions on the McFarland and likely trends in facility expansion will result in more work for industry. More work for industry will result in fewer bidders per project and increased prices UNLESS.. The additional work results in creation of additional competing firms. Reducing or eliminating operating limitations on the Corps fleet will increase the cost efficiency of Corps fleet operations, eliminate the costs associated with maintaining vessels in standby during non-operational periods, and result in more competitive bidding for the work allocated to industry. This concludes our discussion of key findings and conclusions. Our recommendations: [NEXT SLIDE]

29. Recommendations Impose no further operating restrictions on the Corps hopper dredge fleet. Repeal the restrictions on the number of days the Yaquina and Essayons are allowed to operate each year. Ensure the Yaquina and Essayons are maintained to a level consistent with the safe and efficient performance of their missions. [CLICK] 1. Impose no further restrictions on the Corps fleet. [CLICK] 2. Repeal existing restrictions on the Yaquina and Essayons. [CLICK] 3. Ensure the Yaquina and Essayons are maintained to technologically modern standards. I would like to conclude with a closing thought.. [NEXT SLIDE][CLICK] 1. Impose no further restrictions on the Corps fleet. [CLICK] 2. Repeal existing restrictions on the Yaquina and Essayons. [CLICK] 3. Ensure the Yaquina and Essayons are maintained to technologically modern standards. I would like to conclude with a closing thought.. [NEXT SLIDE]

30. Closing Thought: �As in the case of public power, a limited government role in a predominately private industry can generate benefits that flow in both directions. The public company is constrained and tested by the record of the private companies, while the private ones are obliged to measure up to the yardstick established by the public activity.� In 1975, Brookings Institute Fellow Arthur Okun published a classic essay on public policy analysis. He challenged the prevailing notion of the time that market mechanisms offered the best vehicle for provision of all services. For essential public services, he suggested a positive, healthy situation when public entities held a limited role in some industries. His example was public power, but his conclusions are equally applicable to the federal dredging program. Thank you for your attention. This concludes the presentation. At this point, I welcome your questions. [NEXT SLIDE] In 1975, Brookings Institute Fellow Arthur Okun published a classic essay on public policy analysis. He challenged the prevailing notion of the time that market mechanisms offered the best vehicle for provision of all services. For essential public services, he suggested a positive, healthy situation when public entities held a limited role in some industries. His example was public power, but his conclusions are equally applicable to the federal dredging program. Thank you for your attention. This concludes the presentation. At this point, I welcome your questions. [NEXT SLIDE]

31. Questions?