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The Singaport '98; International Maritime Exhibition & Conference - March 25, 1998

March 25, 1998

Remarks of Commissioner Harold J. Creel, Jr.

The Singaport '98; International Maritime Exhibition & Conference

March 25, 1998

I am extremely pleased to be here participating in SINGAPORT 98. This event is recognized as one of the premiere international shipping conferences, and I can see why. The entire program has been so well organized and is providing the opportunity to exchange views and both hear and see where our industry is heading in the years ahead. My compliments to the sponsors for putting together such a valuable and professional conference.

I also am honored that SINGAPORT asked me to offer the keynote presentation for this session which is concentrating on strategies ports can employ to deal with the ever-changing world of ocean shipping. Believe me, I do not envy you in the industry who must be prepared to adapt to the dynamic international shipping scene. Developments seem to be occurring so rapidly in our present environment, influenced by the increasing number of regulatory, political, and operational changes that have broad and significant impact. That only complicates your strategic planning efforts, not to mention the difficulty it can create for your short-term operations.

It appears that the United States Government may be close to removing some of the uncertainty that has affected all participants in our ocean commerce the last few years. I speak, of course, about the effort to amend our underlying ocean shipping statute, the Shipping Act of 1984. Recent weeks have seen a movement towards compromise among the competing factions participating in the process, that just may permit reform legislation to be enacted this year. That legislation, and its impact on shipping in the Pacific Rim, are what I have been asked to address today.

I must admit that when I decided on my topic for this seminar, I honestly assumed that I would be speaking about something that at best had a 50/50 chance of occurring. Our majority leader in the U.S. Senate, Senator Trent Lott, used that exact description earlier this year when speaking about the likelihood of ocean shipping reform happening. Since that time, things really have been rolling. Major players in the industry achieved a compromise on the key issues that had been stalling movement of proposed legislation. It's been described as a delicate compromise, one that gives everyone something and no one everything. Even when preparing this speech, I wondered whether that delicate compromise would survive. Further changes and amendments were being offered and considered as I wrote. Naturally, I could not wait to see what developed. So I prepared myself to speak about the essence of that industry compromise. But allow me to move back a few steps before I begin the substance of my comments.

A number of you have been asking me why the United States feels so compelled to change a statute that was enacted less than 15 years ago. You have questioned just what has occurred necessitating the dramatic proposals which our Congress is considering. Actually, I've had that question posed to me fairly regularly over the past two years. After all, freight rates in U.S. trades continue to be favorable -- in many instances, they remain significantly below the levels of the early 90s. Service is terrific. Carriers continue to implement technological innovations and other efficiencies that render their overall operations more effective, and many have altered their corporate culture to increase the focus on customer needs. Ports are adopting plans and changing operations to better serve their clients. Shippers continue to develop various means of improving their logistics efforts. And consolidators are identifying areas where they can increase their value to the ocean transportation chain. So much is happening that is benefiting international commerce as well as those directly involved.

Given all of that, why the need for legislative reform? Well, in a nutshell, there are those in the industry who desire both more flexibility in developing their business arrangements, and fewer Federal rules and procedures applicable to their daily dealings. Advocates of reform made a strong case to our Congress that all of U.S. ocean commerce would benefit by an increased ability to establish one-on-one partnerships and a relaxation of certain requirements. From my perspective, despite what I consider to be the existence of generally positive trading conditions, I recognize that existing law always can be refined to better address emerging trends and market dynamics. If legislation can be crafted towards that end, without impairing effective government oversight, then it certainly deserves serious consideration.

The legislative proposal presently on the table, Senate bill S.414, as amended, certainly aims in that direction. That is evident by the specific "purpose" it would add to our current statute's Declaration of Policy. The addition reads: ". . . to promote the growth and development of United States exports through competitive and efficient ocean transportation and by placing a greater reliance on the marketplace." Certainly a lofty and commendable goal. But it is obvious that the Senate proponents are convinced that reform legislation is necessary. They saw a need to provide shippers and carriers with more choice and flexibility in their contractual relationships, and determined that certain business information should be protected from disclosure via the confidentiality of specific service contract terms. Similarly, the process by which the FMC may authorize exemptions from statutory requirements, in their minds, required some relaxation. They also believed that the expense and procedures applicable to the current tariff filing system needed to be reduced and simplified. Additionally, the Senate deemed it necessary to strengthen the FMC's authority to provide protection from the harmful effects of unfair foreign shipping practices. And finally, it was determined that the current system for regulating ocean consolidators or intermediaries was less than perfect and required reform.

These policy objectives have translated into a significant change of the 1984 Act, and the manner in which business will be conducted in the U.S. ocean trades. I thought it might be useful to cite what I think are the pertinent changes proposed by S.414. I'll then address what I believe will be the effects of those changes, particularly as to shipping in the Pacific Rim.

Undoubtedly, the centerpiece of the legislation, and at the same time, the most controversial and hotly debated issue, has been how carrier service contracting will be conducted. After numerous discussions and extensive negotiations, that issue now appears to have been resolved. Actually, resolution of this issue was the primary factor enabling the legislation to move forward. Service contracting definitely is the provision that will see the most significant changes. The Senate has made good on its goal of adding flexibility to the service contracting process.

All contracts would continue to be filed confidentially with the Commission, but business-sensitive information would not be available to the public. The only essential terms of a contract that would be public are: the commodity, the minimum volume or portion of cargo, the origin and destination port ranges, and the duration of the contract. As I am sure many of you are aware, various proposals have been floated and considered over the past three years as to service contract confidentiality. The current proposal would reduce public transparency, but at the same time, it would ensure that the FMC has the entire contract. The Senate has agreed to provide shippers and carriers with that added flexibility that they view as so important. I am pleased, naturally, that the Commission would still have all pertinent information regarding such contracts. I have maintained throughout the process that any reduction in public transparency increases the need for government oversight. That oversight can be effectively accomplished only if the Government agency has ready access to all pertinent data and information.

S.414 also would change how contract relationships may be formed. Carriers would be able to enter into arrangements with more than one shipper -- presently contracts may be with only a single shipper. Multiple carrier service contracts would be permissible, and there no longer is a requirement to offer similarly situated shippers the terms and conditions of a negotiated contract. These changes definitely would increase options for both shippers and carriers, and should facilitate the long-term relationships that so many have argued are crucial to the operations of those entities who perform transportation services as well as those who are so dependent upon them.

The Senate placed a special emphasis on the service contract rights of agreement members. Agreements no longer would have the authority to regulate or prohibit contracting by their membership. Instead, they would be limited to discussing and agreeing upon how service contracting will be handled. All agreements would be required to offer their members the ability to take independent action to offer service contracts. In other words, agreements no longer could prohibit their members from breaking from the group to negotiate a special deal. S.414 also specifies that agreements cannot require members to disclose anything about their ongoing individual service contract negotiations, nor can they force a member to disclose the terms of a contract they have successfully negotiated. And finally, agreements would be prohibited from establishing mandatory rules applicable to members' individual service contract dealings -- only voluntary guidelines may be implemented, with no requirement that a member adhere to the guidelines. Clearly, these changes should open up service contracting in all U.S. trades. They address one of the main concerns shippers have expressed over the years, and they establish a framework for fostering more productive relationships between shippers and carriers. It will be interesting to observe how these changes play out should this legislation become enacted.

The Senate also has added an extensive provision requiring carriers to disclose to labor groups service contract information involving specific dock or port area cargo. The primary purpose of this provision is to enable labor to assess contracts to determine whether the manner in which cargo is moving violates any terms or conditions agreed upon under the collective bargaining process. This addition was a real breakthrough and provided the impetus enabling the legislation to move. Once labor was confident that it could protect the rights and privileges it had earned in its collective bargaining negotiations, it became far more amenable to accepting the deregulatory legislation which it consistently had questioned to that point.

And finally, the Senate has limited service contracting to ocean common carriers -- consolidators, or non-vessel-operating- common carriers -- NVOs as we call them -- would not be permitted to offer contracts. Earlier versions of the bill had provided NVOs with this right, but it was not contained in the final compromise. The consolidator community has voiced strong objections on this matter, and it remains to be seen just what the final outcome will be.

Service contracting is not the only major change in S.414. The Senate has determined to end the requirement that tariffs be filed with the Government, replacing it with a process whereby carriers must publish tariff information in automated systems that are electronically available to all interested parties. The FMC would have to approve and periodically review the automated systems that carriers use, but the filing procedures currently in effect would be replaced by a more generalized requirement that tariffs be accurate and accessible in a standardized and simplified format, as established by the FMC.

The Senate would continue to permit marine terminal operators to publish tariffs, and should such terminal operators do so, those tariffs would have the force of law and would have to be filed pursuant to specific format requirements the Commission must establish. I also should point out that terminal operators would maintain their antitrust immunity to set rates and otherwise participate in joint activities.

This new approach to the availability of tariff information certainly will be a change. No longer will such information be readily obtainable from a single repository. It is my hope that this new system will still provide anyone interested with the data and information integral to their daily operations.

The Senate also has reduced the time frame for agreement parties to take independent action from established agreement rates, from ten days to five days. This is yet another procompetitive move that should help promote various shipper/carrier dealings.

Two very prominent changes emanated from the final compromise bill. First, carriers would not be forced to collect undercharge amounts from shippers, i.e., the difference between a published rate and the rate actually assessed. However, the FMC still would have the authority to prosecute either party for statutory violations in such instances. This appears to be yet another attempt by the Senate to make our ocean transportation system more reliant on marketplace dynamics. And secondly, agreements that share vessel space now would be permitted to negotiate inland transportation rates and charges in the U.S., subject only to any applicable antitrust restrictions. Such authority consistently has been prohibited, but appears to have been added in response to the emerging trends of increased intermodalism and shipper desire for one-stop shipping. I am certain that shippers and carriers alike already are looking forward to the benefits that should result as ocean carriers develop new and improved partnerships with inland carriers in various trades. It also will be interesting to see how this provision will be reconciled with our friends in the European Union who adamantly have proscribed such joint carrier activity.

Continuing the move towards deregulation and more flexibility for the industry, S.414 exempts new motor vehicles from applicable tariff and service contract requirements and expands the type of cargo that qualifies under the current "forest products" exemption. These changes definitely should enhance the treatment and movement of these specialized types of cargo. Also, the bill simplifies the process by which the FMC can grant exemptions from statutory provisions. The current law allows the FMC to grant exemptions, providing a number of strict criteria are satisfied. Under S.414, fewer tests need be met by those seeking such exemptions, with a resulting reduction in the legal considerations the Commission must apply. Naturally, any exemption still would need to be justified, with a clear demonstration that it will not act as a detriment to commerce or unacceptably reduce competition. And the FMC would retain its broad discretion in this area, and would continue to focus on narrow exemptions as opposed to those with broad application that could improperly go too far in altering the statutory scheme envisioned by Congress. Needless to say, the less onerous process that should evolve should expedite such matters and produce actions that benefit ocean commerce without injuring participants in that commerce.

As I stated earlier, the Senate revealed a firm resolve to strengthen the Commission's ability to deal with the harmful effects of any trade actions that flow from the laws or influence of foreign governments. Specifically, the Senate has clarified that the Commission can use its authority to address restrictive practices in the area of unfair pricing. Specific changes also have been made to facilitate the Commission's implementation of actions intended to address restrictive practices of foreign governments. Also, the Senate paid particular attention to ocean carriers affiliated with or owned by their governments, what we term "controlled carriers." A loophole has been closed that presently could allow a controlled carrier to avoid Commission scrutiny by merely flagging out its vessels. Specific instances where controlled carriers are exempt from Commission action have been eliminated and refinements have been made in the manner in which the Commission will conduct any investigations of their activities. The Senate also included a provision that precludes the forum by which service contract disputes are resolved from being controlled by a controlled carrier or the government that owns the carrier. All these changes would enhance the Commission's ability to guard against both predatory pricing and the types of activities that create unfavorable conditions in our foreign trades.

Finally, S.414 seeks to remove current uncertainties and legal complications involving the regulation and oversight of freight consolidators. Our freight forwarders and NVOs would be included under one definition of "ocean transportation intermediary," although each would maintain its identify within that definition. Only one bond would be required for an entity that acts in both capacities and, what should prove to increase my staff's processing and oversight work, all NVOs in the U.S. now would have to be licensed. And in a late addition, the Senate has voiced its preference that parties try to settle any claims against an intermediary's bond prior to pursuing a judgment in court.

I apologize for this rather lengthy rendition of the more substantive changes contained in S.414. But with the various proposals and statements that you may have read in the preceding months, I thought it would be worthwhile to identify exactly what this much-anticipated legislation actually does say.

One item conspicuously absent from my description of these legislative changes involves the status and structure of my agency, the Federal Maritime Commission. I can tell you that our Congress considered a host of possibilities regarding the FMC's future organizational structure. However, the latest proposal, I am happy to report, retains the Commission in its current capacity, as a free-standing, independent agency. I have emphasized continuously the importance of the maritime regulatory agency maintaining its decisional independence, free from any political or bureaucratic intrusions. Such freedom is necessary if we are to effectively and decisively address the various international trade issues that continually come before us.

Well, just what impact will this legislation have on ocean commerce in the U.S. trades? And in particular, how will it affect shipping and ports in the Pacific Rim? I will not suggest to have all the answers, nor do I propose to speak with certainty on all the possibilities. And, it is important to keep in mind that this legislation still must gain the acceptance of our Senate and House of Representatives, and then the approval of our President. But I think we know enough of the basic policy intent, and the provisions that would be necessary to implement that policy, that we confidently can predict several probable scenarios.

I'll begin by stating the obvious -- these changes will not occur over night. Any reform legislation would not become effective until May 1999 at the earliest, and even that date could be pushed back. And of course, the industry must be provided with a reasonable transition period to adapt to and implement any broad, dramatic regulatory changes. However, I would caution you that I don't believe we are going to witness a long transition period in this instance. The basic concepts involved in this legislation have been debated for over three years now, and the industry has been on notice that change very likely will occur. Add to this the fact that the industry slowly has been moving in the direction that many of the proposed changes are aimed, and I truly believe that we will begin to witness the effects of this new statute sooner rather than later. That's not to say that there won't be bumps along the road and various uncertainties to resolve. But I would look for particular changes and specific effects to appear earlier than normally is expected in such circumstances.

A direct result of S.414, as clearly intended by its proponents, would be an increase in the influence of typical market factors. As private service contracting becomes more prominent and as competition in various forms increases, the factors that ordinarily influence market conditions would increase in importance. I'm not suggesting that common carriage is dead or that ocean shipping with the U.S. will become totally cutthroat based on a "competition at all costs" mentality. After all, the Act does retain an extensive number of prohibited acts, and the FMC still will be expected to perform effective oversight and enforcement. But the relaxation of various requirements and procedures should provide all parties with the incentive to be more competitive in their business dealings.

This, I believe, mandates that ports involved in the U.S. trade become more efficient. To keep up with the competitive framework in ocean shipping, ports will need to focus more on controlling costs and perhaps implementing engineering changes that can make them more attractive than their competitors. When one sector of the industry enjoys flexibility and experiences increased competition, it must be expected that those same factors will flow throughout the industry. Therefore, all ports must be in a position to increase their throughput and convince their clients that they are the best option.

This also will be important as the recent trend towards carrier consolidations or mergers continues. I said recently that I don't believe the new legislation will change this trend. Regardless of how carriers decide to combine forces, be it by alliances, mergers, or other forms of joint ventures, the increased competition I just spoke about probably will force carriers to seriously consider some type of joint operations in order to effectively compete in the deregulated environment. This phenomenon is not limited to carriers. I recently read where consolidator groups in the U.S. and Europe have combined forces in order to expand their bargaining clout when negotiating deals and to help them compete with carrier combinations as the latter become increasingly more powerful.

The efficiencies and economies of scale that all such entities will enjoy will demand an appropriate response from the port community. Just as I've emphasized to ports in my country, ports in the Pacific Rim will need to market themselves not only to maintain current business, but to attract new cargo. One could argue that such would be the case regardless of the passage of any reform legislation in the United States. I am convinced though, that enactment of any legislation will only increase the importance of port marketing efforts. Carriers will be looking for special deals, possibly developing long-term plans to establish hub ports, and will be looking for terminal facilities that can best serve their expanded operations, larger ships, and more complex ventures. Ports with geographical advantages and historically respected operations cannot sit still while their competitors actively go out and sell themselves. Continuing successful bottom lines will dictate that they make that extra effort to convince carriers that they are the best option in both the short- and long-term.

As I mentioned earlier, S.414 would allow groups of common carriers to jointly negotiate for inland transportation rates and services in the United States. You can "bet the farm" that carriers will take advantage of this newfound authority and make extensive use of it. As carriers seek new partnerships with rail and truck companies in the U.S., intermodalism can only further flourish. Again, foreign ports like those in the Pacific Rim cannot remain idle while these changes take place. They, too, must develop new partnerships with carriers and groups of carriers, with consolidators, with the companies that provide inland services, and perhaps even with sister ports throughout the world. It goes without saying that ports constantly need to develop landside facilities and ensure that appropriate infrastructure developments occur in their regions. But any increase in intermodal activity will force ports to focus on becoming an intermodal gateway, one where they can convince all parties involved in the ocean shipping chain that they can provide an efficient, seamless link for the movement of cargo overseas. Some ports historically have shown excellence in this regard, while others have some catching up to do. Regardless of your past efforts, it will be crucial for your future success to begin planning now how you can address the rapidly changing environment of international ocean shipping.

Another area that could affect foreign ports involves the FMC's strengthened authority to deal with restrictive practices of foreign governments and the actions of controlled carriers. The Commission has a very successful track record in addressing such matters. That was never more apparent than this past year when we focused on several trades that have been posing significant problems. I know you all are aware of our case involving the restrictive port practices that exist in Japan. However, the Commission has had this authority since its inception, and has invoked it sucessfully to address unfair practices around the world.

Strengthening our authority and creating the expectation for even closer scrutiny will only further heighten our efforts to respond to any activities that are detrimental to U.S. commerce or otherwise create unfavorable trading conditions. Accordingly, foreign ports must look at themselves to determine whether their current practices or operating conditions may be unduly restrictive, or unfairly preferential to national companies. This makes sense not only to avoid the retaliatory action of one's trading partners, but from a purely business standpoint.

Ports that impose artificial restrictions that increase costs and cause inefficiencies are doing themselves no favor. Despite any short-term gains or national relationships that such behavior can foster, they are just forcing current and potential clients to consider other options. I honestly think this is what is happening in Japan. The unfavorable conditions and restrictive practices that exist in Japan have influenced many carriers to rethink their vessel deployment and overall operations with an eye towards altering service patterns so as to avoid these unnecessary problems and costs. This is not good for Japanese ports or Japanese trade. I think any port in the Pacific Rim would be wise to ensure that existing or potential restrictions that are unnecessary or discriminatory are promptly eliminated.

I also believe that when reform legislation is enacted in the U.S., you would be safe in assuming that everyone is going to be looking for a special deal. I'm not necessarily talking about the specialized relationships shippers and carriers may tailor via service contracting, or any other type of long-term relationships that various groups may negotiate. But with the increased ability of the FMC to grant exemptions, with shippers not being forced to repay undercharges, and with the relaxation of present prohibitions on discrimination, one must expect that all participants in the industry will be looking for that special deal. Ports will be no exception. Much like the increased need to market services, ports, just like any other sector of the industry, must be prepared to deal with this phenomenon. You may ask, "What's new about that?" But with the new freedoms parties will enjoy in the U.S. trades, the desire for that sweetheart deal can only increase. I think that's where strategic planning and a vision of the future come into play. The more you plan and anticipate, the better prepared you will be to address these situations and make the right decisions for your port. All ports will be under pressure to assess the prevailing circumstances and be in the best position to make informed decisions.

Another direct result of enactment of reform legislation should be an enhancement of future planning. As I told another group recently, putting closure to the debate we in the United States have experienced for over three years at least will remove the uncertainty that has clouded us over that time frame.

One last point before I close. It is my view that S.414 will strengthen the FMC as it addresses its international trade responsibilities in the years ahead. We understand that we will be operating under a changed regulatory framework and that we will need to streamline ourselves in order to effectively accomplish our statutory mandates. Our regulatory and oversight roles will be just as essential and we must be prepared to appropriately administer them. I have committed to our Senate that the FMC stands prepared to implement any legislation in line with the new policy goals and objectives that have been established.

I want to thank you for listening to me today. Discussing a new law and its potential effects is not the easiest of tasks. But I think you will agree that the current proposal before our Senate will have a lasting effect on all involved in ocean trade with the United States.

I appreciate the opportunity to be here with you, not only to share my views on our current legislation, but to hear your expert opinions on the challenges ahead of all of us. This conference has been extremely productive, and I look forward to the remainder of it. I especially want to thank PSA for the invitation and for its gracious hospitality. It has been an honor.