Introduction & Background
On September 1, 2019, any vessel larger than 1,100 feet will no longer have open access to the Houston Ship Channel (HSC) absent approval by the newly authorized and independent Board of Pilot Commissioners for Harris County Ports (Board), in accordance with two Texas bills signed into law this summer by Governor Greg Abbott. The bills are the response to recent shutdowns of two-way traffic in the HSC caused by the first-in-time arrivals of ever-growing vessels. Short of a prospective multi-billion dollar widening of the HSC, the bills are meant as interim solutions to ensuring continuous two-way traffic. These bills encountered staunch disagreement among Houston-area energy and maritime industry participants, and the contentiousness is expected to continue as the new restrictions take effect and the Board takes the helm on decision-making on September 1.
In August 2018, the first containership exceeding 1,100 feet in length entered the HSC.1 This disrupted the historical free flow of two-way vessel traffic within the 500-plus mile ship channel. Since the natural veering of the new, larger vessels rendered the HSC unsafe for other vessels to safely pass, the Board gave preference to the larger vessels and shut down oncoming traffic. In turn, other vessels were forced to wait up to 10 hours until the containership passed, causing delivery delays and inflicting demurrage costs (delay costs when vessels sit idle despite being ready for loading operations or voyages).
This spurred Houston-area energy companies into action with both regulators and the Texas legislature. The first action came from port and pilot authorities. In April 2019, the Port of Houston Authority (POHA) enacted a rule limiting vessels of more than 1,100 feet to one per week in the HSC. Though this rule was subsequently slightly relaxed in practice, legislative efforts were sufficiently underway in Austin to provide a more permanent solution, resulting in the enactment of SB 2223 and SB 1915 in June 2019.
New Law Banning Larger Vessels and Introducing the “Two-Way Route” (SB 2223)
The first bill signed by Governor Abbott, SB 2223, limits the size of all “oceangoing, self-propelled vessels” that may operate within the jurisdiction of the Board until the Board establishes rules that ensure such larger vessels may be operated safely and efficiently under two-way traffic conditions. The law changes the Board’s authority in navigational rulemaking, focuses on ensuring “two-way routes” and, in furtherance thereof, bans larger vessels subject to the Board’s approval.
Navigational Rulemaking: The law envisions that the Board would create rules to ensure that all shipping lanes are always open to safe two-way traffic and authorizes the Board to adopt rules and issue orders to pilots or vessels when necessary to minimize the interference with “two-way routes.” “Two-way routes” is a new concept that means a directional route intended to improve safety in waters where navigation is difficult and where traffic flow by all vessels is permitted in opposing directions. To pass any such rules, the Board must receive the recommendation from at least 80 percent of the pilots authorized to operate under the Board's jurisdiction.
Large Vessels Prohibited, Subject to Approval: The law generally restricts port access to longer vessels unless the Board determines that those vessels can be piloted while maintaining safe two-way traffic. The law limits the maximum overall length of a vessel that may be piloted within the Board’s jurisdiction to 1,100 feet, including the bulbous bow. However, the Board may, by rule, authorize piloting of larger vessels if it determines that the rule would allow for efficient two-way traffic. The Board must hold at least two public hearings before adopting such a rule.2
Opinions on the benefits and detriments of this law are largely split between the energy and container carrier interests, whereas the longer containerships are more susceptible to being regulated by this new law than the average tanker. Supporters argue that one-way traffic caused by large vessels temporarily halts vessel access to the HSC, increasingly causes significant delays and unfairly benefits containerships to the detriment of tankers. Companies note the economic impacts of delivery delays and demurrage costs. Opponents worry that such a prohibitive law will be detrimental to the Port of Houston and Texas economy, incentivizing such traffic to call at other ports.
New Law Providing Pilots the Ultimate Decision-Making Power (SB 1915)
The second bill signed by Governor Abbott, SB 1915, entirely restructures the Board that oversees the navigational rulemaking and decision-making as to large vessels and two-way traffic. Currently, there are two statutorily created entities: the POHA, which functions through commissioners of its Port Commission and is empowered to regulate the pilotage of vessels in the HSC and build and maintain port facilities with all associated infrastructure; and the Board, which is composed of commissioners of POHA’s Port Commission.
The new law divorces the Board from the POHA and its commissioners, allowing the Board to be independent of POHA and have exclusive jurisdiction over the pilotage regulations. The new nine-commissioner board will consist of commissioners appointed by the governor, the Houston City Council, the Harris County Commissioners Court, the Pasadena City Council, a majority of the Harris County Mayors' and Councils' Association (who must be located adjacent to the HSC in a population of fewer than 100,000) and a chairman, who will be jointly appointed by the City of Houston Mayor, City Council and the Harris County Commissioners Court.
Supporters say the new law resolves a potential conflict of interest by having commissioners responsible for overseeing matters associated with POHA, a governmental entity operating several money-generating container terminals, distinct from the Board, an entity intended as a neutral regulator of safe channel pilotage. Opponents, however, believe that the Port Commission and Board are deeply related and have functioned well since being combined in 1923. They express concern that the bill will recreate the bureaucratic inefficiencies that led the boards to be combined originally.
Looking Forward
These developments ought to catch the watchful attention of commodities traders and suppliers, vessel owners and operators, terminal owners and operators, and others involved in marine-based transportation services. The new laws will mean real decision-making by the new Board come September 1 that will directly impact the bottom dollar of every market participant that interacts with the HSC. Market participants will want a seat at the table when the Board begins hearing about whether vessels in excess of 1,100 feet will be allowed to partake in the economic development of the Port of Houston and, if so, what accommodations and other considerations businesses may have to make. Companies should evaluate their participation in the process and assess the potential consequences of these decisions on their ongoing and future deals.
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1Hays, K., New Texas laws address Houston's shipping bottleneck, S&P Global Platts (June 17, 2019) (cited for references to the August 2018 incident).
2These rules do not apply to the adoption of rules governing vessel traffic between Morgan's Point and the Houston Turning Basin, effectively the main drag for terminals.
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