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3 Consolidation of QS Holdings

3.1 Introduction

Initial allocations of halibut QS started near the end of 1994. A year later most of the eligible applicants had received their allocations; however, some remaining initial allocations have continued through 1996. People began transferring quota shares shortly after they were allocated. Some of the transfers have gone to new entrants to the fishery whereas other transfers have gone to persons who received initial allocations and were adjusting their QS holdings.

Transfer transactions, revocations, and administrative actions can change the distribution of QS holdings. Permanent transfer activity includes routine transfers, transfers associated with "sweep-ups," transfers associated with CDQ compensation QS "swaps" across catcher vessel categories, and court-ordered transfers. This chapter provides an overview of the consolidation of QS holdings that have occurred due to all these factors during the first two years of the IFQ program.1

Persons may consolidate QS within the limits of the IFQ program regulations. There are a number of regulations designed to affect the nature of transfers and to limit the amount of QS aggregation. Some of the more important ones are:

The halibut IFQ program created non-severable "blocks" of QS that constrain QS aggregation. Persons received their QS in a block at initial allocation if their QS would have resulted in less than 20,000 pounds of halibut, given 1994 TACs.6 Blocks cannot be broken up for sale, meaning all the QS in a block has to be sold as a single unit. A person can hold no more than two blocks in an area, and a person with two blocks cannot hold any unblocked QS for the area. The regulations allow persons to combine, or "sweep-up," more than two blocks if their combined total is worth less than 3,000 pounds of a hypothetical halibut IFQ.7 These sweep-ups are discussed in more detail in Chapter 8.

Quota share blocks were introduced to accomplish social objectives. Members of the Council were concerned about protecting access to the fishery for small part-time operators. The block system was designed to prevent all the QS from being accumulated by larger fishing operations. In addition, proponents suggested that smaller blocks would sell for less per unit of QS than larger blocks or unblocked QS. As shown in Chapter 4, there is evidence that smaller blocks often sell for less per QS unit.

The IFQ program also included provisions to set aside part or all of the TAC in Areas 4B, 4C, 4D, and 4E for community development quotas (CDQs). Individuals who received QS in these areas were faced with reduced harvest limits.8 The IFQ plan contained provisions designed to compensate QS holders in these areas for the reduction in their harvests imposed by the CDQs. The goal of the plan was to spread the burden of the compensation equally among all fishermen from all areas who received halibut QS. Compensation was provided by giving fishermen from the CDQ areas (Areas 4B, 4C, 4D, and 4E) additional QS in each of the management areas in which CDQs were not allocated (Areas 2C, 3A, 3B, and 4A).

If a person already had QS for the non-CDQ area and vessel category, then their CDQ compensation was rolled into their existing QS holding. It was either "blocked" or "unblocked" depending upon the size of the combined holding.

However, in many cases persons received CDQ compensation QS in areas where they had not previously fished or were issued QS. When this occurred, the IFQ regulations allow the transfer of catcher vessel CDQ compensation QS across catcher vessel categories within a management area, upon first transfer, and under certain conditions. There are two exceptions to the rule. IFQ from swappable CDQ compensation QS for an area can be fished from any catcher vessel category, or it can be permanently "swapped" to another catcher vessel category upon the first transfer. See CFR 679.41(i). Catcher vessel IFQ can be fished from a freezer vessel as long as the length of the freezer vessel is within the bounds of the length category of the catcher vessel and as long as there is no frozen or processed product on board when the catcher vessel IFQ is used. See 679.42(i)(2).9 This "swapping" provision was added to make it easier for persons to sell their CDQ compensation QS. The IFQ regulations exempt such CDQ compensation QS from being tied to non-severable QS blocks if the person was not an initial issuee of regular QS in the area and vessel category.

Because of the CDQ compensation "swap" regulation, the total amount of QS within an area- vessel category combination may change from initial allocation to the end of 1996. This does not affect the management area totals, however, as QS is only being swapped between catcher vessel categories within an area.

In January 1996, the Council approved a "buydown" amendment that allows catcher vessel QS to be used on vessels of the same vessel size class or smaller. The Council did this to allow more flexibility for QS owners to acquire more catcher vessel QS. The amendment allows the use of larger vessel category QS on smaller vessels, except in Area 2C where buydown of category B (greater than 60 feet) QS is allowed only for blocks worth less than 5,000 pounds (based upon 1996 quotas). This amendment became effective August 16, 1996.10

Table 3-1a provides an overview of the distribution of halibut QS at initial allocation and at the end of 1996. It shows both the amounts of QS in an area and the number of QS holders, along with the change and percent change from initial issuance through year-end 1996.

The negative net changes in total QS in Areas 2C, 3A, 3B, 4A, and 4B are the result of QS revocations by NMFS-RAM. NMFS-RAM may revoke some, or all, of a person's QS after initial issuance if subsequent information provides details on a person's fishing history that were not formerly available to NMFS-RAM. Revocations do not occur until the QS holder has been given an opportunity to appeal the administrative revocation decision.

The number of QS holders dropped in all areas. This results mainly from consolidation of QS holdings, although QS revocations may also lower the number of persons who hold QS. The drop in the number of QS holders was significant in Areas 2C through 4B, ranging from 6.6% to 20.3% of the total persons who were initially issued QS in those areas. In Areas 4C, 4D, and 4E there was no change in the total number of QS holders between initial issuance and year-end 1996.

Table 3-1b provides further data on QS consolidation. Consolidation of QS holdings is indicated by the increase in the average and median QS holdings from initial issuance to the end of 1996. The average and median QS holdings rose in all areas.

Table 3-1b also shows the median QS holdings in all areas were substantially lower than the average QS holdings, indicating a skewness toward persons with small holdings.

Table 3-1a. Initial Issuance and Year-end 1996 QS and QS Holders by Management Area

Table 3-1b. A Comparison of Average and Median QS Holdings Between Initial Issuance and Year-end 1996

3.2 QS Consolidation by Vessel Category

The halibut IFQ program created four distinct vessel categories in each of the eight halibut regulatory areas. One vessel category consists of freezer-processor vessels; the other three consist of catcher vessels less than or equal to 35 feet, from 36 to 60 feet, and greater than 60 feet. Under many circumstances, QS from one vessel category cannot be used to fish in another vessel category; exceptions being vessel category "swaps" of CDQ compensation, use of catcher vessel QS on freezer vessels, and QS "buydown."11

Tables 3-2a and 3-2b show that at initial issuance halibut QS had been issued in 30 different area-vessel category combinations. There were no qualifying freezer vessels in Area 4E, nor were there vessels in the "35 foot or less" category in Area 4D.

Table 3-2a indicates that in Areas 2C and 3A, vessels in the 35-60 foot category received more QS than other vessel categories. In Area 4E, the majority of QS was issued in the "35 foot or less" category. In all other areas, the greatest percentage of QS was issued in the "over 60 feet" vessel category. At the end of 1996, the greatest percentage of QS was still held by these same vessel categories in their respective areas.

As explained previously, changes in QS distribution between vessel classes are necessarily small, because QS transfers across vessel categories are only allowed by special rules for the "swap" of CDQ compensation QS. Quota share revocations may also change the amount of QS within a vessel category between initial issuance and year-end 1996.

Table 3-2b shows the initial and year-end 1996 distributions of QS holders in each area-vessel category combination. It also indicates the average QS holdings, the changes in number of persons, and average QS holdings for each vessel category.

A person may hold QS in more than one vessel category in an area. For this reason, the sum of QS holders in the different area-vessel category combinations can be greater than the number of unique persons who hold QS in the area, as reported in Table 3-1a and other tables in this report.

In most vessel categories and areas, the number of QS holders declined or stayed the same between initial issuance and the end of 1996. The freezer vessel category in Areas 3A, 4A, and 4D, and the "less than 35 feet" category in Area 4C were the only instances where the number of QS holders increased even slightly.

The greatest amount of consolidation occurred, both numerically and on a percent basis, in Areas 2C, 3A, 3B, and 4A. Note that these are the management areas where persons received CDQ compensation QS at initial issuance. Many of the persons who were issued CDQ compensation received only small amounts of QS in areas where they had no prior history of fishing. A considerable amount of QS was transferred (see Chapter 7) and contributed to the decrease in the number of QS holders in the areas.

As one would expect, average QS holdings increased in most of the areas and vessel categories where there were declines in the number of QS holders. Changes in average QS holdings will also be affected by QS revocations. If the QS pool is decreased by QS revocations, then average QS holdings will also decrease. Therefore, QS revocations can partly offset increases in average holdings due to consolidation.

Table 3-2a. Initial Allocation and Year-end 1996 QS by Management Area and Vessel Category

Table 3-2b. Initial Allocation and Year-end 1996 QS Holders by Management Area and Vessel Category

3.3 QS Consolidation by Size of QS Holding

The tables in this section provide information on QS distribution at initial issuance and year-end 1996 by area and the relative size of the QS holding. Quota share holdings are classified based upon their percentage of the total QS pool in the area. There are nine distinct size categories.

The IFQ program rules constrain how much QS a single person may accumulate. In 1995 and 1996, no person, individually or collectively, could hold more than 1% of the QS in Area 2C, more that half a percent of the QS in Areas 2C, 3A, and 3B combined, or more than half a percent of the QS in Areas 4A, 4B, 4C, 4D, and 4E combined. The rules allowed some initial issuees to exceed some of these restrictions, but these persons were prevented from accumulating more QS. In June, 1996 the NPFMC approved an amendment that increased the combined total ownership caps in Areas 4A, 4B, 4C, 4D, and 4E from 0.5% to 1.5%. This percentage was then applied to the QS pool as it stood in 1996 to establish a permanent amount of QS that would be used as an ownership from year-to- year. The final rule for this amendment became effective March 24, 1997. See 50 CFR 679.42(f) and (g).12

The distribution of QS holdings by size of holding varied by halibut management area. It is important to remember that a unit of QS translates to different amounts of IFQ in each area. Table 3-3a indicates that the majority of the QS in Areas 2C, 3A, and 3B were issued to persons who held between .01 and 0.5 percent of the total area QS. The amount of QS in this category for those areas ranged from 76.1% of the total QS in Area 2C to 53.8% of the total QS in Area 3B. In Areas 4A through 4E, QS was distributed more evenly among the different size categories.

Consolidation of QS holdings during the first two years of the program led to a reduction in the amount of QS in the smallest size categories in most areas. The differences in the distribution from initial issuance to the end of 1996 largely reflect the degree of consolidation.

Table 3-3b provides similar information as Table 3-3a, but shows the number of persons at initial issuance and year-end 1996 by management area and relative size of QS holding. The table shows that the greatest percentage of persons in Areas 2C to 4A received less than .01% of the total QS. The numbers of persons in this size category dropped significantly in these areas. In Area 4A, there was a 22.5% decrease in the number of persons in the "less than .01%" category, and in Areas 3B, 3A, and 2C the decreases were 26.0%, 20.9%, and 25.2%, respectively.

In the other areas from 4B through 4E, where there were fewer persons who were issued QS, the distribution of persons was more evenly divided among size categories, although in these areas, too, most persons were clustered in the smaller size categories. The actual number of persons who changed QS size categories in these areas was small.

There were relatively few persons who held large percentages of an area's QS pool. The only persons who held percentages larger than 3% at initial issuance and at the end of 1996 were in Areas 4B, 4C, 4D, and 4E. Again, there were relatively few initial recipients in these areas.

Table 3-3a. Initial Allocation and Year-end 1996 QS by Management Area and Size of QS Holding

Table 3-3b. Initial Allocation and Year-end 1996 QS Holders by Management Area and Size of QS Holding