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3 Consolidation of QS Holdings

3.1 Introduction

Initial allocations of sablefish 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 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

The sablefish IFQ program has many special features that serve to constrain the nature and the extent of QS consolidation. Among them are:

The sablefish IFQ program created non-severable "blocks" of QS that constrain QS aggregation. Persons received their QS in a block if their QS would have resulted in less than 20,000 pounds of sablefish, given 1994 TACs.6 Blocks cannot be broken up for sale or lease, 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 5,000 pounds of 1994 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 quota 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 the Bering Sea and Aleutian Islands management areas for what were called "community development quotas" (CDQs). Individuals who received QS in the CDQ 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 among all fishermen from all management areas who received sablefish QS. Compensation was provided by giving fishermen from the CDQ areas (Bering Sea and Aleutian Islands) additional QS in each of the management areas in which CDQs were not allocated (Southeast, West Yakutat, Central Gulf, Western Gulf).

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 and where they received no other 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 the QS is only being "swapped" between catcher vessel categories and does not transfer outside the 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 the Southeast area where buydown of category B (larger 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 sablefish 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 five of the six areas 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 ranged from 3.0% of the total persons who were initially issued QS in the Aleutian Islands area to 14.1% of the total initial issuees in the Southeast area.

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. In all areas the average QS holding rose at a greater rate than the number of QS holders fell.

Table 3-1a. also shows the median QS holdings 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. Consolidation of Sablefish QS Holdings from Initial Allocation through Year-end 1996, By Area

3.2 QS Consolidation by Vessel Category

The sablefish IFQ program created three distinct vessel categories in each of the six sablefish regulatory areas. One vessel category consists of freezer-processor vessels; the other two consist of catcher vessels less than or equal 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 swappable CDQ compensation QS, use of catcher vessel QS on freezer vessels, and QS "buydown."11

Tables 3-2a and 3-2b show that at initial issuance sablefish QS had been issued in 18 different area-vessel category combinations. A person may hold QS in more than one vessel category in an area. For this reason, the sum of the 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.

Table 3-2a indicates that in the Southeast area vessels less than 60 feet initially received more QS than other vessel categories. In the Aleutians, the majority of QS was issued to freezer vessels. In all other areas, the greatest percentage of QS was issued to the "over 60 feet" vessel category. At the end of 1996, the greatest percentage of the 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 1996 year-end distribution of QS holders in each area- vessel category combination. It also indicates the average QS holdings, the changes in number of persons, and average holdings in each vessel category.

There were often considerable differences between the percentage of QS issued in a vessel category and the percentage of persons who hold that QS. For example, 64.2% of the persons who were initially issued QS in the West Yakutat area received their QS in the "less than 60 foot" vessel category, yet these persons held only 31.2% of the total QS in the area. In contrast, relatively few persons in each area were issued QS in the freezer vessel category, but they were issued a proportionately large percentage of the area QS.

In all catcher vessel categories and areas, the number of QS holders declined from initial issuance to the end of 1996. The freezer vessel categories in the West Yakutat, Central Gulf, Bering Sea, and Aleutian Islands areas 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 Southeast, West Yakutat, and the Central Gulf. Note that these are 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. It is likely that a considerable amount of this QS was transferred (see Chapter 7), contributing to a 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 into nine distinct size categories based upon their percentage of the total QS pool in the area.

The IFQ program rules constrain how much QS a single person may accumulate. No person, individually or collectively, may hold more than 1% of the combined total sablefish QS of all regulatory areas unless the amount in excess of 1% was received at initial allocation. In the Southeast regulatory area, no person may use, individually or collectively, an amount of sablefish QS that is more than 1% of the total for this area, unless the amount in excess was received at initial issuance.12

The distribution of QS holdings by size of holding varied by sablefish 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 52.8% of the QS in the Southeast area was issued to persons who held between .01 and .5 percent of the total area QS. In the West Yakutat area, 29.7% of the area QS fell into this classification, and in the Central Gulf, 35.8%. Much smaller percentages of the total area QS were found in the ".01 to .5 percent" category in the Western Gulf (18.6%), Bering Sea (13.7%), and Aleutian Islands (10.0%).

Table 3-3b provides similar information, 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 majority of persons in all areas received less than .5% of the total QS. Relatively few persons were issued larger amounts. For example, in the Southeast area, 48.2% of the persons were issued QS in amounts that represented less than .01% of the total area QS, and 44.1% were issued between .01 and .5%. The number of persons in these size categories dropped significantly in all areas between initial issuance and the end of 1996 due to QS consolidations.

There were relatively few persons who held large percentages of an area's QS pool. All of the persons who held percentages larger than 3% at initial issuance and at the end of 1996 were in the Western Gulf, Bering Sea, and Aleutian Islands. 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