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The Steamship Association Of Southern California - January 26, 1999

January 26, 1999

REMARKS OF

THE HONORABLE HAROLD J. CREEL, JR.

CHAIRMAN

OF THE

FEDERAL MARITIME COMMISSION

BEFORE THE

STEAMSHIP ASSOCIATION OF SOUTHERN CALIFORNIA

LONG BEACH, CALIFORNIA

JANUARY 26, 1999

I am honored that the Steamship Association invited me to serve as the keynote speaker at its annual meeting. I have been asked to speak about the Ocean Shipping Reform Act of 1998 or "OSRA." I also will be addressing the Propeller Club of Los Angeles-Long Beach on the new Act tomorrow. If you happen to be attending that event as well, you have my sympathy for having to listen to me twice. Although I'll be speaking about the reform act there as well, I promise you a completely different text.

Your letter of invitation to me cited your interest in hearing about the immediate and long-term impact of shipping reform, and sought any forecasts I'd be willing to make. While I never shy away from giving my opinion, I often feel a bit uncomfortable suggesting to those who work in the industry every day what they might expect in the future. So I thought I might highlight what the new Act does, and just as importantly, does not do, and explain how we at the Commission will be adapting to this new regulatory regime. Time permitting, I will throw out some possible scenarios that may develop under this new shipping environment.

Broadly speaking, OSRA is a deregulatory measure intended to encourage the establishment of effective business relationships and ease certain regulatory burdens so as to facilitate U.S. ocean commerce. Remember that in 1984, landmark shipping legislation was passed for the purpose of reducing government involvement in the marketplace, maintaining international comity, and ensuring a U.S.-flag fleet capable of satisfying our Nation's security needs. OSRA, while recognizing these goals and even effectuating changes to more readily accomplish them, is a response to the plea of those in the industry who wanted competition and the basic laws of economics to play a larger role in the fate of U.S. ocean commerce. The revised statute certainly lays the groundwork for achieving that objective.

OSRA becomes effective on May 1st of this year, and the FMC is required to complete all implementing regulations by March 1st. Believe me, we have been hustling at the Commission to hold up our end of the bargain. While we are in the process of drafting the changes required by OSRA, we have taken the opportunity to revamp our entire rules structure in an attempt to make it more user friendly. The time constraints imposed by the Act have put all of our rulemakings on a fast track, but we still have to consider all of the comments received before finalizing our rules. I'd like to emphasize that come May 1st, everyone should be prepared to be operating pursuant to the requirements of OSRA. The statute's schedule provides for a 60-day "get familiar" period (from March 1st to May 1st) regarding our new rules. So I urge you to become well versed in those rules that directly impact your daily operations, and to do all you can in that window to be prepared for May 1st. Prudence would dictate that you have your ducks in a row as early as possible.

Substantively speaking, OSRA's most significant changes involve one-on-one contracting. Service contracts now will be filed confidentially with the Commission, fewer essential terms will be made public, carriers can negotiate with more than one shipper and will not be bound by the current requirement to offer the same contract to any similarly situated shipper, and agreements must afford their members the right to individually contract with shippers. This new scheme clearly creates a wide-open environment with all sorts of opportunities for developing specialized relationships in line with company needs. Carriers, shippers, shippers' associations, and certain intermediaries will have an extensive degree of latitude to tailor service contracts to their unique circumstances. This authority is a cornerstone of the new legislation, and many are anxious to put their new-found flexibility and freedoms into practice.

The new Act does prohibit certain forms of service contract discrimination and preference, and continues the prohibition against using false or unjust means to obtain ocean transportation at less than the rates of a filed contract. So the Commission does maintain an enforcement role, one that will be more difficult than at present since we will be the only ones in possession of the actual contract. Leads or detailed information from competitors will not be as readily available. Instead, the onus will be on the Commission to assess trade activities so as to identify and address the malpractices specifically proscribed by the statute.

Another major change involves the system for making tariff information public. In an attempt to reduce the expense and burden of filing with the government, OSRA eliminates the current requirement that carriers file their tariffs with the Commission. The new Act requires carriers to develop and utilize their own electronic systems for notifying the public of the prices and practices applicable to their various shipping services. The Commission's authority to specify the form and manner for such tariffs is replaced by a more general requirement for us to prescribe requirements for the accessibility and accuracy of carriers' automated tariff systems.

Yes, the FMC is out of the tariff filing business. We no longer will be the central repository for tariff information. And while that is a very significant change, the Commission does retain specific responsibilities relative to tariffs. As I just mentioned, we now must prescribe regulations for the accessibility and accuracy of carrier systems and then review those systems for compliance with the established requirements. This is an extremely important function inasmuch as our requirements and subsequent review will have a large bearing on the extent to which the public is able to obtain useful tariff information. Additionally, the Commission must ensure compliance with the numerous prohibited acts that still pertain to tariff activity.

The Commission is supportive of the policy objectives of this deregulatory measure, and we are cognizant of the intent of Congress and the President to liberalize the regulatory environment and minimize the government's intrusion into daily business operations. But the Commission will continue to do its very best to implement all of its responsibilities under the statute. You shouldn't worry that the FMC police will be interfering with your every move, or that government oversight will become the tail that wags the dog of ocean commerce, but you should expect the FMC to address egregious malpractices or industry trends that unjustly or unfairly have negative consequences for certain entities or liner shipping as a whole.

Moving on to carrier agreements, the new Act has maintained antitrust immunity for concerted carrier actions. That feature was a trade-off for shippers' desire for the confidential filing of service contracts. But one must not lose sight of the fact that OSRA added certain pro-competitive aspects in this area. For example, the notice period for a carrier to initiate a rate or charge independent from that published by the agreement has been reduced from 10 to 5 days. Also, agreements are precluded from requiring members to disclose members' service contract negotiations or the details of any contracts they have entered into. And although an agreement is free to publish general guidelines applicable to members' individual contracting practices, these guidelines must be voluntary and non-enforceable by the agreement.

In addition, the Committee Report reflects Congressional intent that the Commission take a more active and forward-looking approach to enforcing the general standard of section 6(g) of the Act. As you know, that statutory provision permits the Commission to seek an injunction when an agreement, through a reduction in competition, is likely to unreasonably increase costs or reduce services. Congress has admonished the Commission to avoid a restrictive reading of section 6(g) and to redirect its focus to a modified analytical approach. As is our practice today, we will not pursue minimal reductions in competition that would have insubstantial impact. We will follow the Committee's instruction to balance any probable increase in costs or decrease in service with the apparent benefits to be derived from the agreement.

And one last point regarding the provisions of OSRA. Specific changes have been made to facilitate the Commission's implementation of actions to address the restrictive practices of foreign governments or the pricing practices of controlled carriers. These provisions definitely enhance the Commission's ability to guard against both predatory pricing and the types of activities that create unfavorable conditions in our foreign trades. However, I do not read these changes as Congressional intent for the Commission to take a different direction or approach to these responsibilities. I am quite proud of our performance in this area and believe that we have been quite effective in addressing problematic situations in several of our foreign trades. Instead, I interpret this as strengthening our hand to deal with what Congress believes may be a continuing trend for foreign governments to support their national interests to the detriment of U.S. companies or U.S. trade. In that vein, I can assure you that we will maintain the vigilance we have exercised to date in addressing these situations.

So what should we expect once the new Act becomes effective? Remember, I mentioned earlier that you all have just as good, if not a better handle on future events than I do. So I thought I would discuss a few words or concepts that come to mind when I picture ocean shipping in the near future.

"Planning"

So many in the industry tell me about the great deal of time they and their company have expended on planning future operations given the passage of OSRA. And I can understand why. OSRA has changed the industry, granting new freedoms and encouraging technological and operational innovations. You simply cannot succeed under those circumstances without successful planning. And I would think that those planning efforts would be ongoing.

Companies will need to alter their strategic outlook and their corporate visions. Short-term tactics have to be identified as to what trades to enter or leave, who to partner with and how, and where to focus marketing efforts. And medium-range planning must consider means of controlling costs, increasing efficiency, and further developing services. Certainly sound planning is required even under normal circumstances; however, the new Act only heightens the importance of spending the time on solid, effective planning. Those who do so definitely will have a leg up over those who devote only marginally more time to their planning exercises.

"Uncertainty"

I believe all sectors of the industry will face two types of uncertainty:  uncertainty as to how to redirect their business operations, and uncertainty as to their statutory and regulatory compliance. As to the former, immediate decisions must be made on how best to achieve the benefits of the new Act coming out of the gate. However, short-term benefits cannot outweigh the importance of long-term success. You all will be facing decisions regarding operations as of May 1 that could have significant impacts on your company's bottom line well down the road. That's where the planning that I just spoke about will be extremely valuable.

And as to the latter form of uncertainty, there clearly will be a shake-out period as the industry and the FMC grow accustomed to operations under the new Act and our implementing regulations. I can say up front that we at the FMC do not expect to have all the answers. We anticipate establishing new policy under cases of first impression, and offering informal guidance on a full range of issues. We may even have to reassess certain of our regulations after a short period, contingent upon experience operating under them.

Therefore, our emphasis will be on assisting the industry in obtaining the compliance envisioned by the statute. We have no intention of imposing fines and making life difficult for those who are honestly attempting to comply with the requirements in this new environment, or in instances where legitimate questions arise on just what is acceptable conduct.

But those who unfairly take advantage of particular situations or unsuspecting entities, and those who wilfully and knowingly demonstrate a total lack of regard for statutory and regulatory requirements, well, that's a different story. Clear and intentional violations, unscrupulous operations, and actions that impede fair and open commerce will not be permitted, and the Commission will address them with the full authority of the law.

"Reliance on Market Factors"

As much as anything, it was the intent of Congress that operations in U.S. ocean shipping be more heavily influenced by typical market factors. Congress believed that competition and efficiency would each be enhanced if the conditions that ordinarily influence a market became more prominent. OSRA certainly moves the industry in that direction. It provides far greater flexibility for all entities to tailor their services more closely to circumstances that may be unique to their company's overall vision or strategic thinking. Regulatory requirements and burdens have been lessened, individual, one-on-one contracting has been promoted, and all participants in the industry will be provided with much more choice in how they will conduct their businesses. With this new degree of latitude comes a greater sense of responsibility, and for some, urgency, to mold their operations so as to more effectively meet the needs of those clients they have targeted as important to their success. It will be interesting to observe who are the winners and losers, and just how long it takes for the effects of this transition to begin to materialize.

"Partnerships"

The new Act, as well as prevailing market conditions, should continue the recent trend towards consolidations. Increased competition will force those in all segments of the industry to seriously consider some type of joint operations in order to effectively compete in the new deregulated environment. This phenomenon will not be limited to carriers via the alliances and mergers that have become so popular over the last few years. Ocean carriers will be negotiating with inland carriers for specialized rates and services, and with ports to obtain the terminal operations and infrastructure best suited to their operation. Consolidators will consider combining forces so as to obtain volume discounts - some NVOs have been doing that in anticipation of the new law. And the list probably goes on. The point is, I would look for the continuing trend towards long-term combinations and relationships throughout the industry.

And, finally, "Reasonableness"

I would ask that you in the industry make a reasonable effort to adapt to the new law. In exchange, we at the Commission will be reasonable and fair in our application of the law. The transition to this new shipping regime that we enter at the end of this century may be rocky. But ultimately, I believe the benefits derived from the new Act will be well worth the bumpy road taken to implement it.

I thank you for having me here today. I am delighted to be with you.