Senate Subcommittee - March 20 1997
March 20, 1997
Remarks of Commissioner Harold J. Creel Jr.
Senate Subcommittee, March 20, 1997
Madam Chairman and Members of the Subcommittee, it is a pleasure to appear before you today to discuss the Federal Maritime Commission's views on S. 414, which has been jointly sponsored by yourself and Senators Lott, Gorton, and Breaux. Accompanying me today is Thomas Panebianco, the Commission's General Counsel. I am also pleased to be sharing the table today with my good friend Linda Morgan, with whom I had the pleasure of working for many years in this very Committee.
You and your staff are to be commended for working with all segments of the ocean transportation industry and obtaining their input before crafting this delicate compromise to amend the Shipping Act of 1984 ("1984 Act") and for holding this hearing on these contentious but significant issues. We appreciate your concern for the views of the FMC on this bill today as well as during the drafting stage.
Madam Chairman, this agency's mission is not so much to regulate ocean shipping, but to ensure that the mode by which 94% of our nation's imports and exports are transported -- that is, ocean transportation -- remains fair and efficient, and that it promotes, rather than encumbers, our nation's foreign trade. The FMC, on its budget of $14 million, oversees the means by which U.S. trade, over $440 billion in imports and exports, moves, and ensures that U.S. interests and operations are afforded fair treatment and opportunities to compete in the international market.
As a general matter, service in the liner industry is excellent, technological advances are being implemented continuously, and rates are lower now than they have been in decades. Specifically, rates on average are almost 40% lower, adjusted for inflation, than they were in 1984. Transportation costs are a shrinking percentage of the value of the cargo. While there are always anecdotes and individual circumstances that contradict any generalization, on the whole U.S. ocean shipping has rarely operated under such positive trading conditions.
Nevertheless, shippers and carriers alike are correct to want a greater degree of flexibility in meeting the demands of the marketplace. This bill provides a great deal of such flexibility, and in a more measured and responsible manner than did the proposalthat was stalled in the last Congress. I am concerned, however, that the bill's provisions allowing completely secret contracts go too far, and risk discrimination and abuse adverse to U.S. trade interests. Thus, while the comments that follow reflect that I fully support many aspects of S. 414, there are other parts of the proposal which I believe would benefit from further consideration.
We would like to offer the following comments on some specific aspects of the bill.
Confidential Service Contracts and Rate Transparency
Perhaps the most controversial aspect of S. 1356, as originally introduced in the 104th Congress, was its provision for totally confidential service contracts. This approach to service contracting was criticized by many interests including small and medium shippers, maritime labor, ports, smaller carriers, shippers' associations and others. S. 414 permits confidential service contracts with individual ocean common carriers, but requires all other service contracts to be filed with the new Intermodal Transportation Board ("ITB") and their essential terms made available to similarly situated shippers. The bill would preserve the existing Act's provision that breaches of service contracts are to be remedied by the parties in an appropriate court; the FMC is not that forum.
Allowing confidential service contracts for individual carriers while requiring transparency for contracts of carriers exercising concerted activity appears to reflect a compromise between opposing interests. This compromise partially accommodates the concerns both of those who favor confidentiality of service contract information to guard against access by their competitors, and those who favor transparency of service contract rates in order to ensure against discriminatory treatment. It also attempts to address the concerns raised by members of this Committee last year that rate transparency and government oversight are necessary antidotes to the grant of antitrust immunity for concerted carrier activity. At the very least, I support the imposition of government oversight as the quid pro quo for receipt of antitrust immunity for concerted activity related to service contracts.
We have concerns, however, which I understand may be shared by shippers and others in the industry, with allowing total confidentiality for contracts of individual carriers. If individual contracts are exempted from agency filing as well as publication, there is a danger that conference or rate discussion agreement carriers will seek to exploit this dispensation by first reaching understandings among themselves on service contract policies and rate strategies, and then executing individual contracts reflecting those discussions. The individual contracts would be confidential, benefitting from this bill's grant of secrecy, although their terms had been discussed within the protections of the antitrust-immune conference agreement. In other words, carriers could subvert the intention of Congress that contracts involving two or more carriers which benefit from antitrust immunity must be made public. To protect shippers against this kind of maneuvering, we recommend this bill be revised to require at minimum that all contracts be filed in their entirety with the FMC or its successor. The idea is not to inject the agency into the legitimate contracting process, but rather to ensure that filed contracts are truly individual carrier undertakings, and not the product of collusive activity enjoying antitrust immunity.
The bill's provision for confidential individual service contracts may also not address the specific concerns of some shippers who believe that large, foreign independent (nonconference) carriers should be subject to some degree of transparency in their service contracts. For example, one West Coast shipper expressed the concern before a House Subcommittee hearing in the last Congress that some foreign independents may use confidential contracting as a means to give discriminatorily favorable rates to shippers who are fellow nationals, to the detriment of competing U.S. shippers and U.S. exports. However, we recognize that this is an extremely difficult issue to address, and it is likely that no solution will satisfy all interested parties.
An alternative approach that might address the general impetus behind confidential contracts (i.e., that shippers are at a competitive disadvantage if their transportation rates and conditions are disclosed) would be to require that certain essential terms of service contracts be made public, but that specific rate information, shipper identity, and perhaps other commercially sensitive information be kept confidential. This approach would permit carriers to contract confidentially with one or more shippers without revealing the precise rate information to their competitors. It would also put in other shippers' hands useful market information -- that is, which carriers are entering into favorable deals for particular commodities on specific trade lanes -- giving shippers a potential negotiating tool and heading off unreasonable refusals to deal. The details of individual arrangements, however -- most importantly, the rate and the name of the shipper -- would be protected from disclosure, averting commercial harm to the contracting shippers.
If Congress does authorize some form of confidential contracting, it is essential to the government's enforcement capabilities to retain the requirement that complete copies of the contracts themselves be provided (with requisite protections from disclosure) to the FMC or its successor agency. Confidentiality from competitors and from other carriers could be maintained, while giving the agency charged with policing unduly anticompetitive and discriminatory practices immediate, direct access to this major source of rate and trade information. If Congress determines to allow individual, as opposed to conference, service contracts to be kept secret from the signatories' competitors, it will be especially important that the FMC have direct, immediate access to those contracts. Many of those individual contracts will be entered by conference and alliance members who are benefitting from a degree of antitrust immunity, and it will be incumbent upon the agency to ensure that they are not using that dispensation to agree upon what rates will be offered in "individual" secret contracts. Having those contracts filed confidentially with the agency will give the agency the tools to identify such abuses of the grant of antitrust immunity, and to prevent this legislation from having the unintended effect of broadening, rather than curtailing, the impact of concerted activity.
Also, section 10 under this bill would still prohibit carriers from charging rates not in accordance with rates in service contracts. It will be extremely difficult for the agency to enforce this prohibition without prompt access to this rate information. Moreover, the Commission is fully capable of ensuring the confidentiality of any information provided to it. Given the bill's requirement that carriers maintain these contracts for three years, there would appear to be little additional burden for carriers to supply copies to the appropriate oversight body.
Thus, while we support more transparency in service contracting, as noted above, it is especially important, if contracts are to be kept confidential from competitors, that the oversight agency have direct access. In our opinion, in order to keep the necessary check on carriers' concerted activities, the less transparency to the public there is, the more essential government oversight becomes.
Another concern I have regarding service contracts is that the Prohibited Acts section of the bill now exempts service contracts, even conference service contracts, from several areas of proscribed behavior. New section 10(b)(7) of the bill now specifically permits carriers to be "unjustly discriminatory between shippers or ports" with respect to their service contract rates. Section 10(b)(9) would also allow carriers and conferences to subject shippers, forwarders, ports and others to "undue or unreasonable prejudice or disadvantage." These prohibited acts formerly applied to all service contracts. Under the bill they apply to none.
While I appreciate that service contracts are inherently "discriminatory" in that the signatories get better deals than non- signatories, these prohibited acts proscribe unjust discrimination and unreasonable prejudice. There is no reason to authorize carriers and conferences to discriminate in unjust or unreasonable ways in their contracting. For example, a foreign carrier should not discriminate against a U.S. shipper in order to promote a fellow national. Nor should ports be lawfully subjected to unduly, unreasonably prejudicial preferences. I would therefore urge that Congress carefully consider whether carte blanche authority for carriers and conferences to unjustly and unreasonably disadvantage shippers, ports and forwarders is truly in the best interest of the United States.
An issue related to contract confidentiality is that of transparency generally, including tariff rates. This bill eliminates tariff filing with the FMC, but requires carriers to publish their tariffs in a privatized, not government, format, with the agency's role being only to ensure accuracy and accessibility of the automated system. It also continues a measure of common carriage responsibility by prohibiting carriers from providing service other than in accordance with their published tariffs or their service contracts.
Some might prefer that this bill retreat from this basic tenet of common carriage, by eliminating the requirement that carriers adhere to the rates published in their tariffs. I, on the other hand, applaud the bill for including this minimal and non-intrusive safeguard. The alternative is to have tariffs published which are meaningless and which serve only to mislead shippers into believing that the tariffs reflect actual freight rates. We would not expect taxis to publish a fare schedule in their cabs, and then to charge passengers a different fare based on the passengers' status or nationality. Similarly, I suggest that Congress scrupulously avoid endorsing a system wherein carriers publish rates for public inspection and then assess charges, based on whatever criteria they choose, bearing no relation to the published rates. While the bill commendably provides greater flexibility in commercial relationships, a minimal level of transparency will ensure that this flexibility not result in discriminatory or other activity which is ultimately injurious to U.S. interests. Moreover, if a carrier does not want its transportation rates to be known, it still has the option under this bill to contract confidentially with its shippers.
The Commission generally supports the concept of combining what are presently two separate entities -- the ocean freight forwarder and the non-vessel-operating common carrier ("NVOCC") -- into a newly defined ocean freight forwarder. These entities have historically acted as middlemen in the ocean transportation chain -- between the shipper and the ocean common carrier -- and their functions have often been performed by the same or related companies. It makes good sense to treat them similarly for regulatory purposes.
In this regard, the treatment of ocean freight forwarder bonding is particularly commendable. Section 19(b)(2), will give persons injured by the transportation-related activities of an ocean freight forwarder two options --(1) making a claim to the forwarder's surety company, which would determine the validity of the claim, or (2) if that fails, obtaining a judgment for damages. The provision allowing surety companies to pay on valid claims was meant, we understand, to alleviate a claimant's expenses inherent in obtaining a judgment, and also to give the surety company an opportunity to question the validity of a claim before a judgment (often a default judgment) is entered. By preserving the judgment option, however, bad-faith denial of claims will be precluded. This would give the bonding companies discretion to pay on covered claims, but require them to pay on covered judgments.
We understand, however, that some in the NVOCC/forwarder community are concerned that this provision would allow surety companies to pay meritless claims and then to collect the payout amount from the insured's collateral, all without the insured's consent. This concern, I believe, could be addressed by a minor revision. The bill currently gives the surety the right to pay a claim not based on a judgment after providing the forwarder the opportunity to address the claim's validity. This could be revised to allow the surety this option only if the insured either consents to payment, or does not respond to valid notice.
The Commission is aware that there have been some questions raised about what activities are covered by an ocean freight forwarder's bond. To the extent that legislative guidance is necessary, we believe that it would be better suited as report language, rather than statutory language.
Lastly, the Commission notes that the existing prohibition against disclosure of certain proprietary information set forth in section 10(b)(16) of the 1984 Act (10(b)(14) of the bill) only applies to common carriers. As a result, an ocean freight forwarder acting as defined in paragraph (18)(A) of section 3 of the 1984 Act would not be subject to these strictures. However, the Commission has received informal complaints from shippers alleging that ocean freight forwarders are disclosing sensitive business information. We would suggest, therefore, that the 1984 Act be modified to include ocean freight forwarders within the ambit of this prohibition.
One of the major improvements in the bill is the treatment of controlled carriers. As originally introduced, S. 1356 would have extended strict public utility-style rate regulation -- currently applicable only to carriers owned or controlled by foreign governments -- to private carriers as well, if those carriers were "affiliated with nontransportation entities or organizations . . . in such a way as to affect their pricing or marketplace behavior." In effect, the full panoply of strictures against controlled carriers would have been applied to a whole new class of carriers. Serious concerns were raised with this approach, including that it would dampen price competition and result in higher rates for shippers, would be burdensome and expensive to administer, and would unnecessarily harm our relations with other maritime nations.
I am pleased to see that these concerns have been addressed. The bill now addresses the problem of harmful, below-market pricing by amending Section 19 of the Merchant Marine Act, 1920. Thus, the bill makes it clear that carrier "pricing practices" are fully subject to the strictures of section 19. This approach would allow the Intermodal Transportation Board on its own initiative or a private party, by petition, to address actual harmful conduct, and does not require a whole new class of carriers to be subjected to the various proscriptions against controlled carriers.
In this regard, the Commission also supports the proposed change to the definition of "controlled carrier" in section 3(8) of the 1984 Act. The Amendment removes the requirement that a carrier is controlled only if it operates vessels registered in the country which controls it. This will prevent controlled carriers from avoiding the significant requirements of section 9 of the Act by using "flag of convenience" vessels for their U.S. services.
The Commission also notes that the Amendment would delete three current exceptions to the controlled carrier provisions. We take no position on whether these changes are warranted on policy grounds. However, we would be remiss if we did not point out that all of these changes to address below-market pricing, including the deletion of the three exceptions, could augment the agency's responsibilities for monitoring and reviewing carrier pricing activity, resulting in the need for additional agency resources.
The bill continues to permit agreements among ocean common carriers to obtain antitrust immunity if they meet certain statutory requirements. The Commission fully supports this decision. However, we do believe that some changes to the section 6(g) "general standard" governing carrier agreements are necessary to allow the Commission more flexibility and discretion in overseeing carrier agreements and responding to shipper complaints about those agreements.
The difficulty does not lie so much in the substantive language of the standard itself, which authorizes the Commission to take action against any agreement that is "likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost," as it does in the report language accompanying it. Standing on its own, the standard would give the FMC or its successor agency sufficient latitude in addressing the anticompetitive effects of carrier agreements. However, any discretion is largely removed by section 6(g)'s extraordinarily detailed and restrictive legislative history.
The lengthy House-Senate conference report declares that it is intended to "govern interpretation of the new section 6(g)." H.R. Rep. No. 600, 98th Cong., 2d Sess. 32 (1984). The report further states that section 6(g) "must be interpreted in light of the historic [sic] international acceptance of carrier conference agreements," id. at 33, and that "the Conferees have determined that carrier agreements generally will serve this nation's interest in international liner shipping." Id. at 34. More specifically, the Commission was admonished that an agreement could have a market share of 100 percent and still be permissible. Also, the instruction in the conference report that an agreement may not be stopped unless it causes "concrete competitive harm" to shippers, id. at 33, makes action against a newly filed agreement infeasible as a practical matter, since harm in that situation is prospective and cannot be proven to actually have occurred.
We believe that the solution would be simply to disavow the overly restrictive aspects of the 1984 legislative history, and perhaps make certain procedural changes that would enable the agency to apply its expertise to this difficult and controversial area of regulation. The current procedures required to enforce the general standard -- an injunctive action in U.S. district court under section 6(h) of the 1984 Act -- were borrowed from proceedings under the antitrust laws to block a discrete transaction, i.e., a proposed merger. These processes may not be appropriate to a regulated industry where antitrust immunity is allowed for ongoing ventures, subject to constant monitoring and policing. Also, the current section 6(g)-(h) procedures do not allow persons harmed by an agreement (such as shippers, ports or independent carriers) to bring an action if they wish.
Accordingly, we suggest that violations of the "general standard", rather than being set apart from the rest of the Shipping Act and accorded special procedures and requirements, instead could be treated similarly to all the other Prohibited Acts covered by the Act, which already include closely related activities such as group boycotts and predatory practices aimed at independent carriers. Sections 6(g) and (h) could be repealed, and a new prohibition could be added to section 10(c) incorporating the current standard. In addition, the ban against private parties filing complaints alleging violations of section 6(g) could be deleted from section 11(a).
Under this approach, cases would be heard at the FMC or its successor, brought either by the agency itself on its own initiative, or by private persons upon the filing of a complaint. The determination of whether a violation occurred (or may occur) would be made by the agency, subject to normal judicial review, rather than by a U.S. district court judge with no background in the Shipping Act. This would increase speed and flexibility, and if a violation was found, the remedies would be those already provided for by the Act, including disapproval, cancellation or modification of the agreement under section 11(c).
In the years since the 1984 Act liberalized the standard by which carrier agreements are reviewed, the shipping industry has seen a significant evolution in the ways carriers cooperate and coordinate their operations. Likely the most important of these developments has come in the last three years, with the emergence of "strategic alliances." Broadly stated, the purpose of these agreements is for a small group of shipping lines (currently ranging from two to five) to establish operational cooperation, while maintaining individual marketing and commercial identities.
Since 1994, almost all of the world's major global containership operators have grouped themselves into four major alliances. The view has been widely expressed that alliance membership is a necessity for any line wishing to remain globally competitive. Through operational cooperation, carriers can reduce costs and business risks, while offering improved service, increased frequency of sailings, increased direct port calls, and a broader range of customer options. This cooperation generally includes sharing of vessels, coordination of sailing schedules, joint use of terminals, sharing of equipment, and merger of information technologies. The possibility of coordination of inland transport has also been raised, although such agreements are not afforded antitrust immunity under the current law. Generally, alliances have been viewed as efficiency-enhancing mechanisms which benefit both carrier and shipper.
The growth of alliances does, however, have potential long- term drawbacks, especially if effective oversight is not maintained. The move towards alliances tends to decrease competition in the liner shipping industry. It increases concentration in the market, given that, as lines become more closely integrated, their behavior becomes less like individual competitors and more like a single firm. It also raises barriers to entry and mobility, as entering or leaving a trade lane requires establishing or severing a network of complex long-term arrangements with alliance partners, terminals, inland haulers, and other interests.
Moreover, it has been suggested that this trend towards alliances presages a wave of mergers in the carrier industry, as shipping companies will pursue further cost cutting through full- fledged integration. One example is the recent announcement that P&O and NedLloyd plan to merge. Massive mergers would raise serious competitive concerns, as only a few large companies would be responsible for a large portion of the world's trade. Moreover, such mergers could raise concerns about the maintenance of a U.S.- flag fleet to serve national security needs. On the other hand, the proliferation of alliances and the operational efficiencies they foster may actually forestall further mergers; in this narrow respect, some consider alliances to be pro-competitive. In any event, the continuation of expert oversight is needed to balance the advantageous, efficiency-creating aspects of carrier coordination against any possible long-term competitive harm. Moreover, inasmuch as alliances were not envisioned at the time of the enactment of the 1984 Act, it may be useful to define and clarify the regulatory treatment such coordinated activity is to be afforded in the course of the instant reform legislation effort.
One aspect of the bill that the Commission finds constructive is that maritime oversight is placed in an independent Intermodal Transportation Board, and not subsumed within an Executive branch agency -- the Department of Transportation ("DOT"). Although we believe that this is a step in the right direction, we would urge the Committee to consider leaving maritime oversight in a freestanding agency. The Commission has repeatedly argued the importance of having an independent agency perform the task of administering the complex regulatory scheme for the ocean transportation industry which will continue if the bill is enacted. I am pleased to note that most of the parties involved in the current debate -- including the U.S.-flag carriers -- agree on the need for the retention of a free-standing independent agency.
Experience has demonstrated that effective and impartial regulation of international ocean commerce is best achieved when maritime regulatory programs are kept separate and independent from programs promoting the U.S. merchant marine, such as construction and operating subsidies, cargo preference, and coastwise laws. Responsibility for these functions resides in the Maritime Administration (MarAd) within the Department of Transportation. Prior to the 1961 establishment of the Federal Maritime Commission, the responsibility for regulating the maritime industry was vested in the Federal Maritime Board, while promotion of the U.S.-flag fleet fell to MarAd. At the time, both were part of the Commerce Department, shared staffs, and were functionally thoroughly intertwined.
The Antitrust Subcommittee of the House Judiciary Committee concluded in 1961 that the combination of these promotional and regulatory functions undermined the agency's ability to provide effective oversight. The Subcommittee pointed out, for example, that it would be hard to conceive of the agency exacting heavy fines from U.S. lines that have violated the act, while the same agency administers financial assistance and encourages the purchase of new ships, expansion of sailings and extension of service along new routes for those lines. Noting that as a regulator, the Board was required to appear impartial, meting out justice to shippers, importers, forwarders, foreign lines, and subsidized and nonsubsidized lines alike, the Subcommittee observed that "[e]ven Caesar's wife would find it difficult to maintain the appearance of virtue if forced to work under such compromising circumstances." Report of the Antitrust Subcommittee of the House Judiciary Committee Pursuant to H. Res. 56 on the Ocean Freight Industry, 87th Cong., 2d Sess. 379 (1962).
Moreover, I fear that the ability to address restrictive foreign practices, with which the FMC has had much success, would be lost at DOT as maritime issues become subsumed by other foreign policy concerns. We have been highly effective in protecting U.S. importers, exporters, and ocean carriers from restrictive foreign practices, including cargo reservation schemes in South America and unfair restrictions and charges on U.S. carriers in Asia.
As you know, the FMC recently finalized a rule imposing sanctions on Japanese vessels in our trades in response to restrictive Japanese port practices affecting our carriers and our commerce. A complex and involved system of negotiations and pre- approvals imposed by an association of waterfront employers in Japan, with the permission and authority of the Government of Japan, disrupts, restricts, and inflicts huge and costly operational inefficiencies on U.S. carriers in the U.S.-Japan trade. There are also severe restrictions on licensing for terminal operators and stevedoring companies, which do not reflect the freedom that Japanese entities have to operate their own facilities in the U.S., including at nearly every major West Coast port. These impediments are long-standing, and the Japanese Government has completely resisted addressing these problems despite years of requests and entreaties. The FMC's imposition of fees on Japanese vessels of $100,000 per voyage in response to this situation has, for the first time, prompted the Government of Japan to acknowledge that reform is necessary and has provided a sense of urgency which, we are hopeful, may result in concrete and meaningful reform.
The FMC's success in matters such as these is due in large part to its independence and expertise. Because it can take action against restrictive foreign practices without the concurrence of the Administration, the FMC has been able to quickly identify foreign barriers to shipping and to take measures to force their removal, relatively free from political influence, diplomatic pressures, and threats of cross-sectoral retaliation. I question whether the actions we have taken against the Japanese and other restrictive foreign practices would have been possible if these functions were placed under DOT -- or even in an independent agency within DOT.
Were these responsibilities placed directly in an Executive department, the use of its restriction-combating powers could become highly politicized, and thus less persuasive and credible to our trading partners. Any action to address restrictive foreign practices would likely be met with diplomatic protests and threats of disruptive retaliation in other sectors. As a result, efforts to address restrictive foreign shipping practices could be substantially curtailed, or relegated to lengthy multi-sector or multilateral negotiations. Even though the bill retains the independent status of the agency, I am concerned that placing these functions in an agency under DOT sends the wrong message to our trading partners who respect and fear the swiftness with which the FMC can address unfair foreign shipping practices. The impression will be that Congress is signaling that it wishes to place these critical functions in an agency less independent than the FMC, and therefore less free to take direct and immediate action.
The placement of the ocean shipping regulation functions in an independent surface-ocean board would, as a general matter, resolve these concerns, but might raise others. One is that there may be mistaken expectations that by combining the two agencies, a more "seamless" and improved regulatory system will result. The fact is, however, that there are no overlaps in jurisdiction or functions between the FMC and the Surface Transportation Board ("STB") that hamper effective regulation. There was a split in jurisdiction over domestic offshore ocean rates, but that has been resolved by the ICC Termination Act, which gave sole authority over such rates to the STB. Otherwise, as the General Accounting Office testified in 1995, there are no significant synergies between the FMC's mandate to protect U.S. international commerce from unjust discrimination and trade barriers, and the STB's responsibilities over railroad mergers, rate regulation, and so forth. In that regard, I understand that there have been concerns expressed in the railroad and in the maritime communities about the efficacy of board members with experience and expertise relating to one constituency, having oversight over another, as a result of combining these two distinct jurisdictions.
I also note that the bill would provide that two of its five members be qualified through standing in and knowledge of the maritime industry. The immediate question that comes to mind, of course, is whether this reflects a determination that maritime concerns are to be afforded less significance than surface transportation matters in the new board. The greater and more general concern, however, which this question merely illustrates, is how are the new agency's resources, as scarce as they are likely to be, going to be allocated among maritime and land transportation concerns? The new Board would have two vastly different constituencies and two entirely separate systems of regulation. While my particular concern is the maritime industry, the danger remains that the combining of these two agencies into one may set off a continuing struggle to determine priority and apportionment of resources.
All of these concerns, I would submit, could be resolved by maintaining both the STB and the successor to the FMC -- either a more streamlined FMC or perhaps an "Ocean Transportation Board" -- as separate independent entities. Rather than having a larger agency with five or six members with a combination of backgrounds, there could be two small, separate, streamlined agencies, each with three members, each with a specific mission and specialized expertise. It has also been suggested that combining the two agencies would result in substantial administrative savings. While there would be some savings in administrative expenses, those savings would appear to be offset by the even more substantial costs of combining and relocating the two existing agencies. Even if the FMC were merged with the STB under DOT, we would have to pay for administrative services procured from DOT, as the STB currently does. Therefore, the relocation of the FMC does not so much save the agency administrative expenses, as it does determine who it is that we will be paying for those services. These administrative savings could be fully realized, however, if the two agencies were left separate, but authorized to use similar administrative systems and share certain resources. In the alternative, if Congress decides to merge the agencies, I would urge that they be merged in a free-standing, independent agency and not placed within an Executive branch department.
Finally, I must emphasize that all the Committee's efforts to achieve meaningful and intelligent shipping reform, including consolidation of government transportation functions, will be for naught unless the FMC receives adequate funding to carry out its statutorily-mandated functions. How to monitor antitrust-immune conferences, how to ensure fair and nondiscriminatory trade practices, how to best protect U.S. interests from predatory foreign shipping activities -- these will all be moot points if our shipping regulatory program is gutted through the funding process.
The FMC is already operating on a barebones budget. Unlike many agencies, the FMC has no budget items like grant and subsidy programs, or R&D programs, to absorb budget cuts. When our funding is slashed, we have to put our employees out of work. Ninety-nine percent of our expenses are nondiscretionary, such as salaries and rent. The Commission currently has but 142 employees on board, down from 231 employees five years ago, and nearly 350 15 years ago. Our field personnel were reduced in number from 37 two years ago to 4 today. Yet we remain charged with the same number of regulatory responsibilities with a budget of $14 million as we had when our budget was almost $19 million. We absorbed a 20% cut already from last year's passback; any further cuts will mean disrupting, or outright discontinuing, the agency's most basic functions, simply through lack of personnel to perform them. I would therefore urge the Committee to ensure that its efforts to reform and revitalize our ocean shipping regulatory system be supported by an appropriate level of funding and personnel to perform the functions you legislate, and that they not be undermined by those who would use the appropriations process irresponsibly.
We are losing some of our most experienced personnel as uncertainty over the agency's future continues. We are unable to replace that expertise, and our ability to implement the responsibilities that Congress has laid out for us is threatened. I urge you to decide where you want to go on oversight of ocean shipping, vigorously support those functions you retain, and pursue funding that will allow the responsible agency to do its job as you in Congress intend.
As we have indicated on numerous occasions, the Federal Maritime Commission does not oppose Shipping Act reform. We recognize that the ocean shipping industry is evolving into new forms of service and cooperation, and that the law must keep pace and not obstruct beneficial change. We must all try to find common round that will lead to a fair and sensible approach to Shipping Act reform. I believe that S. 414, which we are discussing today, goes a long way toward a workable solution. I look forward to working with you and your staff as you further shape maritime reform to address shipping oversight for the 21st century.