Statement of the Honorable Harold J. Creel Jr. before the Committee on the Judiciary United States House of Representatives - March 22, 2000
March 22, 2000
THE HONORABLE HAROLD J. CREEL, JR.
CHAIRMAN, FEDERAL MARITIME COMMISSION
800 NORTH CAPITOL ST., N.W.
WASHINGTON, D.C. 20573
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES
MARCH 22, 2000
Thank you, Mr. Chairman, for giving me this opportunity to testify on H.R. 3138, which eliminates antitrust immunity for shipping lines in our international trades. As I will explain, we have some preliminary signs that the Ocean Shipping Reform Act ("OSRA") is working as Congress intended, bringing more competition into the marketplace. However, it is too soon to evaluate in meaningful detail the full effects on the industry of the changes made by the shipping reform legislation. Thus, I cannot at this time support making major changes to the carefully crafted, long-established system of competitive checks and balances set forth in the Shipping Act of 1984 ("1984 Act").
As a general matter, let me begin by noting that the purpose or rationale for antitrust immunity is not simply to ensure adequate returns for the liner shipping sector. Rather, the objective is far broader and much more important: to ensure an adequate and efficient supply of ocean transportation services so that U.S. exports and U.S. trade can compete in the global marketplace. When shipping lines use antitrust immunity to coordinate their operations or share assets to cut costs or improve service, or to stem losses from low rates that might threaten their viability, it is not just the carriers, but also U.S. businesses and consumers, who stand to benefit.
Historically, the liner shipping industry has been given limited antitrust immunity to allow it the flexibility to address serious pricing and service volatility, which arise from a number of factors peculiar to this industry. For example, the industry has always had to contend with chronic overcapacity, which creates sharp short-run downward pressure on rate levels. Overcapacity can result from the introduction of progressively larger ships necessary to accommodate projected trade growth, or from chronic imbalances in trade flows, so ships sailing full in one direction will have empty space and empty equipment on the return. Unlike airline passengers, cargo rarely books a round-trip ticket. Overcapacity also stems from seasonal fluctuations in trade flows, so that vessel space adequate for strong summer months leads to overcapacity in a weaker winter season. Non-commercial interests, such as national pride or national security, also lead some nations to maintain the presence of a national flag fleet.
When faced with overcapacity, carriers compete aggressively on price in order to fill their ships, as an empty slot generates no revenue at all. Given carriers' high fixed costs for vessels and equipment, it is not economical for carriers to simply idle their ships to reduce capacity. Thus, in their efforts to fill empty slots, carriers are prone to bidding rate levels down so that they are close to or even below their long term average costs. A degree of antitrust immunity allows carriers to engage in limited "self-regulation" - through conferences or discussion agreements - to try to keep rates from sinking to loss-making levels, or to try to restore rates to provide adequate returns when overcapacity abates.
We know from the minutes of the carrier agreements filed with the FMC, and from the low rates of return of the carriers themselves, that their efforts to influence prices often fail because individual carrier pricing decisions are very much subject to market forces. Nevertheless, the ability to engage in some collective self-regulation apparently provides many carriers with some protection from risk, sufficient to justify their continuing to make enormous long-term investments in serving our trades. Without these protections, operating ships to serve U.S. shippers would look like an even riskier and less attractive investment for many of these carriers, one that some may well be unwilling to make.
Antitrust immunity allows for a broad number of other efficiency-creating arrangements as well. It has provided carriers a valuable way to form alliances, groups of carriers which integrate their operational activities, such as vessel operations, terminal and shoreside services, equipment use, and information and electronic data management, while often preserving separate competing commercial and marketing entities. These groupings create operational efficiencies, leading to lower costs and improved service for customers. Such cooperation can also facilitate entry into new trades, as carriers often begin serving a new route through a partnership with another line, instead of investing in putting a whole new string of vessels in the trade. While not all such arrangements would run afoul of the antitrust laws, I am concerned that, under this bill, the status of many of these operational agreements would be unclear. The result could be the disintegration of these alliances, causing serious disruptions and inefficiency for both carriers and shippers, or a rapid move towards full-scale mergers by alliance partners.
I see a number of other potential risks and pitfalls in doing away with antitrust immunity as well. One is the potential for regulatory uncertainty or conflicts of law that could result if the United States abandons an approach that is shared, to varying degrees, by most of its trading partners. In recent years a number of countries, most recently Japan and Australia, have reviewed their policies of providing competition exemptions for liner shipping. While some countries have proposed or adopted more limits on carriers' collective action -- for example, allowing independent contracting, increasing government oversight, or limiting cooperation on inland rates -- none has seen fit to eliminate immunity altogether. As I testified last year, I see benefits in trying to forge a consensus with our trading partners in this area, to avoid creating an inefficient global patchwork of discordant regulatory systems.
Another potential hazard is the acceleration of the consolidation of the industry. Without limited immunity, carriers' returns could decline even below current standards, chilling investment, and prompting carriers to leave less profitable trades or cease operations altogether. Our trading partners have clearly recognized this possibility. In its December, 1999 report reviewing and reaffirming antitrust immunity, the Australian government recognized that trying to stop cooperation in this industry presents an unsatisfying Catch-22: "if conferences were proscribed, carriers would merge, thus internalizing the conference, or . . . some lines currently operating within a conference would leave the trade, allowing remaining providers to expand and take a larger share of the trade." The point was that in any case, "one form of cooperation, the conference, essentially is replaced by another - a larger, formal company."
While consolidation itself may be troubling, what is more alarming is the question of who benefits from such consolidation. While antitrust optimists may suggest that the most efficient and well-run carriers would prevail in such an environment, I believe that the more likely winners will be those carriers with the highest level of government support and backing. Of particular concern here are the large Chinese state-owned carriers, COSCO and Sinotrans. As a matter of fact, another large government-owned carrier, China Shipping Container Lines, entered our trades in November with six vessels, and has already announced plans for expansion. The possibility of the United States substantially increasing our dependance on the Chinese government-owned entities to move our international trade leaves me ill at ease.
The dream of a free market for shipping could be undermined by foreign countries in other ways as well. If limited self-regulation by conferences and other agreements is ended, national governments will face substantial political pressures to protect their carriers from losses. This protection could take the form of direct regulation, if governments step in to bar the sort of below-cost spot pricing that is so commonplace in shipping. On the other hand, government intervention could come in the form of escalating, market-distorting subsidies. I believe that either scenario could prove more troubling than the current system.
It is these risks and pitfalls that make me unable to support, at this point, sweeping changes to the system of competitive checks and balances that is already in place. That system does not give carriers unlimited, unfettered antitrust immunity to manipulate the market at will. Even before the amendments to the 1984 Act made by OSRA, the statutory regime imposed major pro-competitive checks on the privilege of immunity. Under the 1984 Act, carriers acting concertedly were subjected to stringent prohibitions enumerated at section 10(c) of that Act, barring boycotts, allocation of shippers, unreasonable discrimination and predatory practices. In addition, carriers could deviate from conference rate and service items on 10 calendar days' notice, providing competition within the conferences and ensuring that members could leave conferences without penalty. The FMC was charged with reviewing carrier agreements for excessively anticompetitive effects, and was authorized to use its authority to seek injunctive action as leverage to negotiate changes to agreements which may violate the section 6(g) standard of the 1984 Act, i.e., whether the agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost. For example, in late 1996, the Transpacific Stabilization Agreement ("TSA") filed an amendment to artificially limit capacity. The Commission, fearing such a system would unreasonably diminish competition, coordinated with shippers and prepared to seek an injunction against the capacity management plan; our intention to proceed in this manner helped in ultimately persuading the carriers to delete those provisions from the agreement.
With the passage of OSRA, which went into effect in May of 1999, additional checks and limits were imposed on the antitrust immunity conferred on ocean carriers. Independent action may now be taken on 5 calendar days' notice rather than 10. OSRA continues to impose specific prohibitions on certain concerted carrier activity in section 10 of the 1984 Act: for example, cooperating carriers are prohibited from discriminating in their service contracting against persons because of their status as a shippers' association or an ocean transportation intermediary. While the standards and procedures of section 6(g) for the review of agreements for anticompetitive effect were unchanged, the conference report for OSRA provided the FMC with directions and guidelines for more aggressive oversight of agreements. Most significantly, a centerpiece of OSRA is that conferences may no longer prohibit or restrict a member from negotiating service contracts, nor may they require disclosure of contract negotiations or adopt enforceable rules affecting service contracting. Given that service contract rates and some other essential terms are no longer made publicly available, these new statutory reforms not only give shippers and carriers the ability to engage in confidential service contracts, but also free shippers from the administrative impediments and the collective inflexibility which often accompanied conference and agreement control over the contracting processes.
Because of these measures, the high level of competition in most trades, and the usual healthy and competitive presence of independent carriers that are not members of conferences and agreements, ocean carriers' freight rates and their rates of return are not excessive. In fact, rates today are significantly lower than they were ten years ago. The mergers and acquisitions commonly occurring in the industry further suggest that this is not an industry which is using its privilege of immunity to generally exploitative effect. It is, in fact, surprising that the carrier industry is somewhat incapable, given its authority to discuss and even set rates, at using that authority better to its advantage. I am often advised by shippers across the country that their focus of attention is not usually the level of rates, with which they are generally satisfied, but rather with service issues, which are more often the distinguishing factor in choosing a carrier.
In addition to rate levels, we have seen a number of other general indicators suggesting that competition and marketplace responsiveness have continued to increase since OSRA took effect. Most dramatic have been the effects of OSRA's service contract provisions on the way business is conducted in the ocean transportation industry. An increasing amount of cargo is moving under service contracts, a majority of which are being negotiated between individual ocean carriers and shippers. Since last May, there has been a tremendous increase in the number of service contracts: we have received more than 104,000 filings, including over 32,000 new contracts and 72,000 amendments, representing an increase of 128 percent compared to the same period in the previous year.
We expect this trend to continue, especially during the upcoming negotiation season. In addition, we anticipate more innovation in contracting, with contracts tailored more to shippers' individual needs, including more variation in the duration of contracts, with the traditional negotiating season becoming less important; spot contracts, which cover a shorter duration and lower volume commitment; an increase in global and multiple trade lane contracts; and more contracts with unrelated shippers. Recent press reports indicate that the National Industrial Transportation League, one of the largest U.S. organizations representing importers and exporters, is no longer pushing to end antitrust immunity, believing that under OSRA, market forces, rather than the conference system, dictate rates. Thus, OSRA appears successful in fostering a market-based transportation system.
Another indication of the market-based changes reshaping the industry is the sharp decline of traditional rate-setting conferences in favor of looser cooperative arrangements. For example, the two major Pacific conferences, the Transpacific Westbound Rate Agreement ("TWRA") and the Asia-North America Rate Agreement ("ANERA"), have suspended their operations. This is a major development in how business is done. In the mid-1990's, neither conference allowed independent service contracting; indeed, TWRA had very few service contracts of any kind. In contrast, those same carriers are now dealing one-on-one with shippers. We've seen a similar move away from conferences in the U.S.-Japan and Latin American trades as well, and the conferences that do remain have been substantially weakened. For example, the Trans-Atlantic Conference Agreement's ("TACA") membership has declined from 17 members to 7 in the past two years and it has entered into only four conference contracts since May 1, compared to 400 for the previous year.
Operational agreements such as vessel sharing agreements are now the predominant form of agreement being filed with the Commission, reflecting carriers' changing focus away from rate- setting and towards increasing operational efficiencies to cut costs and improve service.
Conferences also have been supplanted in large part by discussion agreements. Although discussion agreements long have been among the various forms of carrier agreements filed at the Commission, the decline in conferences in the U.S. trades has increased the role and visibility of such arrangements. Unlike conferences, discussion agreements do not set fixed common prices for numerous individually defined commodities, nor do they negotiate contracts or interpose themselves between carriers and customers. Discussion agreements do, however, provide carriers an opportunity to perform trade-wide economic analyses, and a forum to coordinate the process of implementing rate increases or stemming sharp declines in rates, subject to FMC oversight. In many ways, discussion agreements represent a substantial improvement over traditional conferences, in that they do not interfere with shipper-carrier negotiations and relationships, and they afford carriers far more flexibility to tailor rates and services to meet the needs of particular shippers.
Discussion agreements do, of course, have a number of potentially anti-competitive characteristics that necessitate close, ongoing monitoring and oversight by the Commission. For example, their inherent flexibility has made them attractive to traditionally independent lines; as a result, they have been able to amass market shares generally higher than the conferences that came before. For instance, TSA's market share coverage is 85 percent. Moreover, discussion agreements also have shown themselves to be particularly effective in certain market conditions at implementing across-the-board price increases, such as general rate increases and the imposition of surcharges. The Commission must carefully scrutinize such moves to ensure that they are not unreasonable under the standards of the 1984 Act.
In addition, discussion agreements (and other agreements) under OSRA are permitted to collectively agree on guidelines for members' individual or group service contracts so long as such guidelines are voluntary and unenforceable. Different agreements have adopted guidelines covering the content of members' service contracts in varying degrees of detail. The Commission must ensure that use of these guidelines does not unreasonably restrict competition on prices and service among contracting carriers. Also, we are watching closely to ensure that voluntary guidelines are not used to share information about service contracts in a manner that would frustrate Congress' intent regarding the confidentiality of service contracts.
To evaluate these types of issues, the Commission has initiated a project to assess the long term impact of OSRA on the transportation industry based on its first two years in effect. The OSRA Impact Study will examine whether OSRA is yielding the benefits envisioned and whether it has had any detrimental impact on the industry as a whole or on a discrete segment. The study will be conducted in-house, and will explore changes in shipper-carrier relations stemming from the new service contract provisions; the role of pricing agreements and their relationship to capacity in the new environment; whether ocean transportation intermediaries have suffered any competitive disadvantages; and the accessibility and accuracy of common carrier-published tariffs. It will also address OSRA's impact on the Commission's responsibilities and programs. We will, of course, share the results of our study with Congress. In the meantime, we plan to issue an interim status report on the industry under OSRA this summer, which will include documentation of industry compliance efforts and the general direction in which OSRA has led the industry to date.
In light of the extensive policy underpinnings of antitrust immunity, as well as the current state of the marketplace, the new pro-competitive provisions of OSRA and the need for closer economic analysis, I am not able to support H.R. 3138, the subject of today's hearing. As you know, Mr. Chairman, this bill amends section 7 of the 1984 Act, so that only certain agreements among marine terminal operators would be exempt from the antitrust laws, while all agreements among ocean common carriers subject to the 1984 Act and previously exempt would now become subject to the antitrust laws. I believe that there are several problems with the approach taken in the bill.
In the first instance, it amends a statute that was enacted only recently. OSRA went into effect on May 1, 1999, and thus the ocean transportation industry has been operating under it for less than a year. We believe that, at the very least, it is simply too soon to tell whether OSRA's deregulatory and procompetitive provisions are working as intended by Congress, although our very preliminary indications are that it is. In this regard, I would note that OSRA took over five years to enact and during that process Congress received input from all segments of the ocean transportation industry and from various Federal agencies.
In addition, H.R. 3138 addresses only one small section of a fairly complex and comprehensive statutory scheme. Both the 1984 Act and OSRA represent a delicate compromise among all the affected parties. The retention of antitrust immunity for agreements among ocean common carriers was a major part of this compromise. However, the extent of this immunity is extremely limited and is circumscribed by many other provisions of the 1984 Act, including, of course, the agreement review standard in section 6(g), independent action on rates and service contracts, and the prohibited acts proscribed by section 10. Antitrust immunity for carriers, therefore, should be considered in light of the entire statutory scheme enacted by Congress and not considered in isolation.
The bill also appears to take a much too broad approach to the various types of agreements among ocean common carriers from which it would take away antitrust immunity. As noted above, it would subject all such agreements to our antitrust laws, inflicting a severe chill, if not an outright bar, on such operations. In so doing, it would also affect many arrangements that are beneficial to shippers. For example, vessel sharing and space charter arrangements benefit the shipping public by providing more transportation options or more frequent and extensive service patterns. Yet these kinds of arrangements would be reached by the bill, together with what might arguably be considered the more anticompetitive agreements, such as conference agreements.
Mr. Chairman, you have expressed interest in Fact Finding Investigation No. 23, which was initiated in response to the complaints of carrier activities informally brought to the Commission's attention by press reports and numerous shippers during the peak shipping season of 1998. Commissioner Delmond Won undertook the role of Investigative Officer in the proceeding, in order to conduct a timely examination of what were alleged to be inappropriate and possibly unlawful carrier responses to unanticipated and rare trade conditions: demand outstripping supply. The effort was undertaken primarily to make both the carriers and affected shippers aware of the Commission's intention to pursue the allegations, and to deter any similar unlawful activity in the future. Initiation of the Fact Finding Investigation and the publicly-released summary of the Won Report achieved these objectives. In the 1999 contract season, we did not see a recurrence of the activities giving rise to the Fact Finding. A secondary objective of the Fact Finding was to secure evidence that would be necessary to enforcement proceedings for any violations of the 1984 Act.
Commissioner Won used the Commission's subpoena power in Fact Finding Investigation No. 23 to compel testimony and the production of approximately 40,000 pages of documents relating to peak season pricing and space allocation from the conference, discussion agreement, individual carriers, and specific individuals. These subpoenas went to those who were alleged or appeared to be involved in activities in violation of the Act.
However, there was strong shipper reluctance to assist the Commission's inquiries from the outset. Although seven shippers testified under oath, the remaining 23 of 30 shippers who were interviewed or provided documents in the initial phase of the investigation declined to testify. Some shippers gave as a reason for their reluctance a fear of retaliation by carriers with which they necessarily have ongoing relations. With a single exception, the investigative officers chose not to issue subpoenas to the shippers who had complained of these activities, who appeared to be victims rather than participants or perpetrators of the abuses. The single exception noted involved a shipper initially suspected of participating in possibly unlawful actions.
Although Commissioner Won's Report to the Commission described various carrier actions considered "abusive" by shippers, and was supported by voluminous carrier- and some shipper-provided documents, that documentation alone was insufficient to constitute conclusive evidence of carrier activities which violated the Shipping Act. That is why the Fact Finding Investigation was continued, with appointment of the Commission's Director of the Bureau of Enforcement as the new Investigative Officer.
However, the strong shipper aversion to any visible participation in the investigation never abated. During this second phase of the Fact Finding Investigation, 64 follow-up letters sent to shippers identified through the examination of carrier-provided documents netted only four responses. Although the response to the 64 letters, as well as the initial contacts, was disappointing, it was not inconsistent with the responses from shippers and other industry participants that the Commission has encountered in pursuing other matters, including those involving TACA and, upon occasion, Section 19 inquiries regarding restrictive foreign practices.
I am not criticizing or blaming shippers, many of whom appeared uncertain as to whether the carrier actions were legitimate, albeit cut-throat, marketplace decisions, or were in fact violations of statutes. Many shippers appear to have made a business decision, which we must respect, not to encourage or assist in FMC enforcement action, lest their business relationships with those carriers become strained or encumbered as a result. Some non-vessel-operating common carriers may have feared to come forward because they may have passed on the higher costs to their shippers in a manner not consistent with the 30-day notice requirements for rate increases. Whatever their reasons, the usefulness of the Fact Finding Investigation as a base from which the Commission could develop specific, prosecutable evidence of carrier wrongdoing was severely hampered.
This is not to say that no enforcement action occurred. The Commission instituted an adjudicatory proceeding concerning the "opt out" provision used in the 1998 ANERA service contracts, and directed the Bureau of Enforcement to pursue additional informal enforcement efforts, including those concerning apparent failures by ANERA to file minutes of meetings. The "opt out" proceeding addressed concerted activity among the carriers, specifically a conference practice which permitted carriers to claim entitlement to shippers' committed cargo on the one hand, but on the other hand, allowed the carriers to avoid the contracts' rates by "opting out" of those rates and imposing their higher tariff rates instead. That practice was found to be unlawful, not merely as exercised in a specific contract or by a specific carrier, but across the board, and will serve as precedent governing future carrier contracting activity. An ancillary and supporting part of the effort to secure the information necessary to assess the carriers' concerted activities - a penalty claim against carriers who had not fully supplied information on conference meetings - was settled.
The formal Fact Finding Investigation was discontinued at the end of the year based on the recommendation of the Investigative Officer in his "Second Report and Recommendations." However, the fact that we issued a report at the end of the year to summarize our activities to date and terminate the formal proceeding does not indicate we are washing our hands of the issue. Enforcement efforts continue. Cases relating to this controversy are still being pursued, as the Commission has authorized its enforcement staff to continue to follow up on leads.
Some people have voiced disappointment with the outcome of the investigation as a whole. Particularly mentioned has been the focus of the Commission's enforcement efforts on individual carrier lapses. I share Commissioner Won's concern that the collective nature of the alleged wrongdoing was not more directly addressed. I would have preferred to look further into the degree to which the alleged carrier abuses were facilitated or enabled by their collective authority and activities. There was obviously no consensus among what was then our body of four Commissioners to go further in that direction.
We take our enforcement responsibilities seriously at the FMC, but our general approach, which reflects the intent of OSRA, is that our primary objective is to achieve compliance and to clarify uncertainty as to legal issues, not to impose penalties for the sake of appearances or to appease unhappy shippers. To this extent, our actions in Fact Finding 23 were a qualified success. There have been few, if any, recurring allegations of similar carrier behavior. Carriers are better informed as to the boundaries of permissible activity in conditions of under-capacity. Shippers are better informed as to how to protect their interests, particularly in contract negotiations. I should add that OSRA's enactment and other commercial developments since the 1998 contract season will also preclude the recurrence of some of the activities complained of: conferences no longer control contract terms; ANERA has since suspended operations; and with additional entrants in the trade, capacity and cargo seem to be in better balance. In short, the events which gave rise to Fact Finding 23 do not, in my opinion, lend support to the objectives sought to be achieved by enactment of H.R. 3138.
Rather than eliminating immunity altogether, I believe that further fine-tuning of the existing system may be desirable. Throughout the consideration of OSRA, I advocated changes to the administration of the section 6(g) "general standard" to increase the Commission's effectiveness, responsiveness, and efficiency in responding to shipper complaints about carrier agreements, and I continue to support such an approach now.
In particular, I favor amending sections 6(g) and (h) to place enforcement of the general standard with the Commission, rather than a U.S. district court. Under this scenario, a case under the section 6(g) standard would be treated like any other proceeding involving a violation of the 1984 Act. Private parties could file complaints with the agency, or the agency could launch an investigation on its own motion. If an agreement were found in violation of the standard, the Commission would use the remedies available under the 1984 Act, including modification or cancellation of the agreement or assessment of penalties. Of course, judicial review of such actions, as with other Commission orders, would be available in the federal appeals courts.
The current procedures required to enforce the general standard -- an injunctive action in U.S. district court -- were borrowed from proceedings under the antitrust laws to block proposed mergers, and are not best suited to a regulated industry where antitrust immunity is allowed for ongoing ventures, subject to constant monitoring and policing. The current sections 6(g)-(h) procedures do not allow persons harmed by an agreement, such as shippers, intermediaries, ports or independent carriers, to bring an action if they wish. Moreover, requiring the Commission to analyze an agreement, make its findings, then undertake an entire subsequent proceeding before a district court imposes a substantial layer of delay, burden, and expense on all parties. Placing enforcement of the section with the Commission would alleviate these problems and provide more efficient and effective oversight of carrier activity benefitting from antitrust immunity.
Mr. Chairman, I hope that my comments have served to give you an indication of the importance of the antitrust immunity provisions under the Shipping Act of 1984 and the need to allow sufficient time to evaluate how the ocean transportation industry is working under OSRA.