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Bidding for the S.S. Kuniang Author(s): David E. Bell and Ed Brown Source: Interfaces, Vol. 14, No. 2 (Mar. - Apr., 1984), pp. 17-23 Published by: INFORMS Stable URL: http://www.jstor.org/stable/25060538 Accessed: 09/06/2010 13:51Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=informs. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

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Bidding

for the S.S. Kuniang

Graduate School of Business Administration DAVIDE. BELL George F. Baker Foundation Harvard University Soldiers Field Boston, Massachusetts

02163

New

to bid for the England Electric was pondering whether ship, the S.S. Kuniang. The ship salvage rights to a grounded could be repaired and used to haul coal for the utility's power stations, recently converted from oil. A bid was determined using a decision tree, a simulation, and net present valuecalculations.April 9, 1981, the S.S. Kuniang, built in Britain and sailing under the British flag, ran aground off the coast of Florida. vessel salvageauction.

On

ates

the power

stations

that generate

the

electricity. NEP had of its oil-fired this meant colliers

recently power that NEEI

been

The

a total rights

the ship's owners declared to sell the loss and offered by means of a sealed bid

some converting to coal and stations had to contract for

Electric System England com is a public utility holding (NEES) customers pany serving over one million in Massachusetts, Hampshire. Rhode Island and New A NEES Inc. New subsidiary, has among (NEEI),

The New

to New to bring coal from Virginia NEES had already concluded England. that it could lower the cost of electricity to its customers its shareholders the colliers shipping partnership and improve the return to and operating by owning it had no prior itself. Because NEEI went into experience with an established

England Energy, its duties the job of supplying fuel to another NEES the New Eng subsidiary, land Power Company (NEP) which operCopyright ? 1984, The Institute of Management Sciences 0092-2102/84/1402/0017$01.25 This paper was refereed.

shipping a 36,250 and then commissioned company ton self-unloading from General ship in early 1983, at a for delivery Dynamics,DECISION ANALYSIS ? APPLICATIONS

INTERFACES 14: 2March-April 1984 (pp. 17-23)

BELLcost of $70 million. Because cient NEP, their not be suffi ship would all the coal required by to expand they were exploring ways fleet when the Kuniang went down. to move could be restored with a it would one to guide them, it was unknown basis they would do this. The on what

scrap value of the Kuniang was clearly less than $5 but there was a strong possibility million that the Coast Guard would the consider amount of the winning bid an indication of the ship's true salvage value. Not only a working was it impossible to discover from the of "salvage value" Coast Guard but also they were not to rule on the Kuniang until scheduled definition after the auction. a bid of partner had suggested so that whichever interpreta NEEI's $3 million

If the Kuniang be an excellent of 51,000 modate tons

prospect; it would more remaining

capacity than accom

NEP's

coal needs.

Complications In 1920, in a spirit of protectionism, the US Congress the Jones Act which passed restricted American coastwise trade (American to vessels Americans. the use port built, to American owned port) solely and operated by it gave priority in

Moreover,

of docking facilities to these "Jones Act" ships. This was no small as the wait for coal privilege loading at and Norfolk, News ports like Newport had sometimes reached 45 days. Virginia The Kuniang was not American built; this was a potentially crippling handicap, since without delays a round trip for NEEI would A take only eight days. law (US Code long overlooked Title a

to Not only was it impossible discover a working definition of "salvage value" from the Coast Guard but also they were not scheduled to rule on the Kuniang until after theauction.tion of salvage value there would adopted if NEEI chose the Coast Guard

to bid more

But be no problem. than $5 million

46, Section

14, enacted December 23, a way out. It 1852) provided permitted as foreign built ship to be regarded

itmight have to find some way to increase the cost of repairs in order to qualify the as a Jones Act vessel. Kuniang was to increase the cost of repairs way to install self-unloading in equipment the ship. This would cost an extra $21 mil One lion but would voyage time trip from 8 days to 5 by reducing time substantially. However, shorten the round

American declared

owners built if: (1) the previous the ship a total loss (which the owners of the Kuniang had done) and (2) the cost of repairs was at least three times the salvage shipping repairing lion. Was value of the ship. NEES's had estimated the cost of at around $15 mil

partner the Kuniang

unloading the presence lower

the salvage value of the Kuniang less than $5 million? The US Coast Guard responsible for determining the value for the purposes but with

of the equipment would the capacity of the Kuniang from 51,000 tons to 40,000 tons. A way to avoid complications with the to forget the Jones Act entirely was an American-built Kuniang and buy ship.

was

ship's salvage these provisions,

of

few precedents

INTERFACES 14:2 18

S.S. KUNIANGGeneral had offered NEEI pro Dynamics to a sister ship at virtually duction rights the same price as the first. NEEI also had an offer from another shipbuilder for a tug/barge combination. Table 1 gives financial and operating new vessel details of the four competing alternatives. Figure 1 shows a decision so far. tree representation Ship Overcapacity NEP was planning plants per year were Basic Data Capital Cost ($MM) Equity Required ($MM) (40%)& Capacity (M Tons) Unloading System Speed (knots) of the problem to convert which coal under a already burning environmental temporary permit. Perma was anticipated in the nent permission was near future. At Salem Harbor 750,000 tons a year would be required but the conver sion was not yet finished and the en vironmental less far advanced. hearings require plant would was tons per year but conversion 250,000 not due to take place for a number of

The Providence

three

to coal. Three million required

tons of coal Point,General Dynamics 70 21

at Brayton

for years. So although NEP was planning a 4 million tons per year, it of requirement was possible never that this level would Kuniang (Gearless) 226.6 45.75d Gearless 14

Tug/Barge 329.6 30 Gearless 9 7.15

Kuniang (Self-Unloader) 4312.9 40 Self-unload 14

36.25Self-unload 15

Round Trip (BP) (days)e Round Trip (Egypt) (days)($/Day) Costs

5.15 79

134

8.18 90

5.39 84

Daily Costs

Operating Fixed Costs Interest (18%) Equity Return (20%)

$18,670 2,400 22,200 12,353 $55,623

$12,000 2,400 10,164 5,647 $30,111

$23,000 2,400 6,988 3,882 $36,270

$24,300 2,700 13,659 7,589 $48,248

Revenue per Trip Coal to Brayton Point (thousand dollars per trip) Grain to Egyptc (million dollars per trip)

304.5

222.0a

329.4a

336.0

2.10 2.54 ?These figures have been reduced to reflect the costs of tying up dock space during unloading. "The investment tax credit of 10% reduces the effective contribution to 30%. cThis was considered a representative trip. dThe Kuniang could not carry a full load into Brayton Point because the harbor is too shallow. eIt is assumed that a Jones Act vessel would experience no delays at Virginia ports.

3.57

2.80

Table 1: Financial and operating data for the four ship options open to NEES had been offered two new ships: a sister ship to the collier it had already ordered from General Dynamics, and a if it bid successfully for the Kuniang, it could choose tug/barge combination: Alternatively, whether or not to install self-unloading equipment. The Kuniang data assumes a successful bid of $7 million and, in the case of the gearless option, that the Coast Guard sets a salvage value of $5 million or less.

March-April

1984

19

BELLSelf-Unloader Scrap Value Gearless