Statement of the Honorable Harold J. Creel, Jr. before the Committee on Transportation and Infrastructure Subcommittee on Coast Guard and Maritime Transportation U.S. House of Representatives, 5/3/00
May 3, 2000
STATEMENT OF THE HONORABLE HAROLD J. CREEL, JR.
CHAIRMAN, FEDERAL MARITIME COMMISSION
800 NORTH CAPITOL ST., N.W.
WASHINGTON, D.C. 20573
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
SUBCOMMITTEE ON COAST GUARD AND
UNITED STATES HOUSE OF REPRESENTATIVES
MAY 3, 2000
Mr. Chairman and members of the subcommittee, it is a pleasure to appear before you today to address the Ocean Shipping Reform Act ("OSRA"), which amended the Shipping Act of 1984 ("Shipping Act"), the primary statute used by the Federal Maritime Commission to oversee the ocean transportation industry. With me today is Thomas Panebianco, the Commission's General Counsel.
The Commission is in the midst of a two-year study to identify industry practices and evaluate the effects on the transportation industry of the changes made by OSRA. We plan to issue a report detailing the results of this study next summer. As I testified at the Judiciary Committee hearing on March 22, 2000, we have some preliminary signs that OSRA is working as Congress intended, bringing more competition into the marketplace. We plan to issue an interim status report this summer and my testimony today will offer a preliminary analysis of the results gathered thus far.
As you know, Mr. Chairman, OSRA's amendments to the Shipping Act have dramatically altered the way business is done in the ocean transportation industry. The cornerstone of the new legislation is the ability of shippers and carriers to enter into individual service contracts. Service contracts are still filed confidentially with the Commission, but fewer essential terms are made public, carriers can negotiate with more than one shipper, and they are not required to offer the same contract to any similarly situated shipper. In addition, the parties to the contracts can agree to keep them confidential from anyone else. This new scheme clearly creates an environment ripe with opportunities for developing specialized relationships, tailoring contracts to shippers' particular needs.
Another major change involves the system for making tariff information public. OSRA eliminates the requirement that carriers file their tariffs with the Commission, and instead 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 is authorized, however, to prescribe requirements for the accessibility and accuracy of carriers' automated tariff systems.
With respect to agreements, OSRA has maintained antitrust immunity for concerted carrier actions. However, agreements may not prohibit service contracting by their members. Moreover, agreements are precluded from requiring members to disclose their service contract negotiations or the details of any contracts they have entered into. Also, 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. And, the notice period for independent action has been reduced from 10 to 5 days.
OSRA requires that all ocean transportation intermediaries ("OTIs") in the United States, rather than only ocean freight forwarders, obtain a license. Further, the Commission was instructed to reevaluate the amount of financial responsibility required to be furnished by these entities and to establish an alternative procedure for pursuing a claim against an OTI's financial responsibility.
Finally, specific changes have been made to enhance the Commission's ability to guard against both predatory pricing and the types of activities that create unfavorable conditions in our foreign trades.
Mr. Chairman, as discussed more fully in my testimony during our authorization hearing on February 29, 2000, the Commission engaged in several rulemaking proceedings to implement the mandates established by OSRA. Rather than describe again the details of those rules, I would like instead to discuss the state of the industry after operating under OSRA and the new rules for the past year. However, I would like to note that since OSRA's implementation, we have refined a couple of areas to better address the industry's concerns. First, in response to a petition filed by an association of OTIs, we lessened the restrictions governing who could be a qualifying individual for purposes of obtaining an OTI license. In addition, we adopted a definition of ocean common carrier to better reflect the practical workings of the industry. And finally, we are in the process of drafting a notice of proposed rulemaking, reflecting industry suggestions in the original rulemakings to implement OSRA, to modify the content standards for agreements filed with the Commission.
We have had an explosion in the number of service contracts filed, over 112,000 filings including original contracts and amendments, representing an increase of 116 percent compared to the same period in the previous year. Our initial, cursory review of these contracts has indicated that, in general, the vast majority are individual service contracts between a single carrier and a single shipper. Most contracts thus far are confined to a single U.S. trade lane or area with a duration of 12 months or less. The level of minimum quantity commitment for the majority of contracts is 100 TEUs or higher. One major impact of OSRA's reforms thus far is that shippers and carriers are entering into individual service contracts negotiated one-on-one. The other terms of the contracts are generally standardized at this point, with few new features appearing at this time. It is likely that more time will be required before contract provisions begin to change significantly. While the opportunity for more innovation in contracting is available, it appears that it has not yet been taken advantage of on a wide scale. We expect, however, that during the second contract cycle under OSRA, we will see many more individually tailored contracts.
A high percentage of contracts, 83 percent of those reviewed thus far, do not contain confidentiality provisions. It is up to the contracting parties to determine whether and to what extent they wish to protect their contract terms from disclosure to others. The majority of those that have confidentiality provisions specify complete confidentiality with no disclosure to third parties. Many of those that allow for partial confidentiality contain language allowing the carrier party to disclose terms to the secretariat or another member of an agreement filed with the Commission. Others specify that the carrier party must not disclose terms to another shipper, and the shipper party must not disclose terms to another carrier. As part of our interim status report, we also hope to discern to what degree, and in what manner, shippers and carriers are using confidentiality provisions in their service contracts.
We also are focusing on the status of the shipper party to service contracts. At this point, it appears that for both original service contracts and amendments, the majority of contracts are with shippers identified as owners of the cargo. Among the other groups, contracts with NVOCCs account for a significant portion, while the number of contracts with shippers' associations is proportionally the smallest. Of the original contracts we have reviewed thus far, the average percentage dispersion is 75.3 percent owners, 20.3 percent NVOCCs, and 4.3 percent shippers' associations.
The role of agreements since OSRA likewise has undergone a transformation. We have seen a dramatic decline in the number of traditional rate-setting conference agreements, from 32 in 1997 to only 22 today. The major Pacific conferences dissolved on May 1, 1999, coinciding with OSRA's effectiveness. The major conference in the Atlantic has declined from 17 members to only 7 in the past two years, and we have seen a similar move away from conferences in the Japan and Latin American trades as well. The ability of those that remain to influence market behavior has been substantially weakened by OSRA's pro-competitive changes.
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. These types of agreements, which allow carriers to share vessels and integrate their operations in ways which reduce the cost of terminal and shoreside service, equipment use, and information and electronic data management, have provided greater efficiencies in the marketplace and improved the use of the carriers' assets. These greater efficiencies are very beneficial to all market participants because the benefit of these efficiencies would be expected to be passed on to shippers in the form of lower rates, given sufficient competition in the market.
Conferences have been supplanted in large part by discussion agreements. 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, however, do 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.
But, discussion agreements do 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 them. For instance, the Transpacific Stabilization Agreement ("TSA"), the discussion agreement which replaced the conferences in the Pacific trades, has a market share close to 85 percent. Moreover, discussion agreements also have shown themselves to be particularly effective in certain market conditions at enabling carriers to effectuate across-the-board price increases, such as general rate increases and the imposition of surcharges.
Ultimately, whether the decline in conferences and the rise in the looser discussion agreements will result in greater competition in the liner shipping market depends on how effective discussion agreements are and to what extent their members adhere to their voluntary guidelines. Agreements are permitted under OSRA to adopt, on a strictly voluntary basis, collective guidelines with respect to the contents of and the sharing of information concerning their members' individual service contracts. Those guidelines are filed confidentially with the Commission where they are reviewed in the context of existing economic conditions and carrier agreement activities in the affected trades to ensure that they will not result in an unreasonable increase in transportation costs or unreasonable reduction in service.
Since OSRA went into effect the Commission has received eleven sets of guidelines. Nine of the guidelines were filed by discussion agreements and the remaining two were filed by conferences. One of those conference guidelines was put into place in a trade which also has a discussion agreement that filed guidelines - those guidelines are identical.
The guidelines on file with the Commission cover most of the major U.S. trade lanes, with the only major exception being in the trade between the United States and the nations of the European Union. Though each set of guidelines takes a different approach, they share certain broad characteristics. The most common elements found in the filed guidelines are minimum rates for specific commodities, general rate increases, and a variety of specific charges such as surcharges and fees. They also include limitations on the duration of contracts and language allowing the termination of contracts 30 days after the minimum cargo quantity terms have been met.
A few discussion agreements' guidelines also specify the minimum volume necessary to qualify for a service contract, set limitations on credit and discount policies, and agree on set percentage increases for inland rates. Some guidelines also involve a voluntary agreement to provide information to other agreement members and/or the agreement secretariat about guidelines being negotiated.
Some discussion agreements have also suggested standardized service contract confidentiality language in their guidelines. For example, TSA, which made its initial guidelines public, suggested service contract confidentiality clauses which state that member carriers may provide information about pending contracts to other member lines and to the secretariat, provided the shippers' names not be included.
A preliminary analysis of several of the largest agreements which file voluntary service contract guidelines shows that overall carrier compliance with the guidelines has been limited, depending on the trade in question. However, we will make a much more detailed analysis of voluntary guidelines in the interim report due out this summer and the final report the following summer. In the meantime, I remain concerned about the role voluntary guidelines will play in the future, particularly with the declining influence of conferences and the growing presence of discussion agreements. OSRA fundamentally changed the way the public accesses rates and charges for transportation services. The Commission is no longer the repository for this information; instead, OSRA requires carriers and conferences to publish their rates in private, automated tariff systems. These tariffs must be made available electronically to any person, without limits on time, quantity, or other such limitation, though a reasonable charge may be assessed for tariff access. The Commission is charged with prescribing requirements for the "accessibility and accuracy" of these systems; the periodic review of these systems; and the prohibition of the use of systems that fail to meet the Commission's requirements.
Since May 1, 1999, when the OSRA tariff publication requirements became effective, the Commission has been reviewing the accessibility of tariffs. The Commission's staff experienced a number of tariff access problems in the first few months following the implementation of OSRA and has worked with several tariff publishers to help them comply with OSRA requirements.
In January 2000, the staff conducted a second audit to see if any changes had occurred. That audit found that tariff systems had different strengths and weaknesses. For example, one tariff system does not charge access fees, but a user must spend several hours to locate a rate because of poor search features. Another tariff system provides a commodity search feature, but does not provide access to historical tariff information. Yet another system provides historical tariff information, but does not provide user instructions. Overall, the Commission's review found that while some tariff systems provide excellent, user-friendly access, others appear to limit the public's ability to access tariffs. Therefore, the Commission issued a press release and a circular letter to alert the industry to certain tariff deficiencies, including inadequate or complex user instructions, lack of commodity indexes, difficulty accessing historical tariff information, too much time to download information or slowness in moving between functions, and excessive fees or minimum monthly requirements. The industry was advised that the Commission plans to work with the industry and to offer its assistance to ensure appropriate public access to electronically published tariffs, but was further notified that the Commission intends to implement corrective action when necessary should informal attempts to achieve statutory compliance prove unsuccessful. The Commission voiced its hope that the industry will cooperate to ensure that tariffs are the information tools envisioned by OSRA.
In addition, the Commission is planning to issue an Advance Notice of Proposed Rulemaking seeking comments on a proposed Commission regulation that would define a "reasonable charge" for tariff access. A review of tariff access fees indicates that the level of some fees appears to be excessive and that some carriers require monthly minimums that may effectively make their tariffs inaccessible to the general public. The informal complaints received by the Commission concerning tariff systems predominantly have concerned the level of access fees. For example, it has been brought to the Commission's attention that, in some tariff systems, a public user who wanted to check one term of a bill of lading or one rate would have to subscribe to a tariff for a minimum of three months at a cost as high as $1,500. The Commission believes that, if an access fee is to be assessed at all, a reasonable charge for providing public access under OSRA and the Commission's regulations should be minimal.
OSRA created a new entity, the ocean transportation intermediary, which is defined as an non-vessel-operating common carrier ("NVOCC") or an ocean freight forwarder. For the first time, all OTIs in the United States, rather than only ocean freight forwarders, must obtain a license. Moreover, in response to industry comments, our rules provide a means by which foreign NVOCCs may obtain a license if they choose. The rules also establish a range of financial responsibility to be established by forwarders, NVOCCs in the U.S., and foreign NVOCCs, as well as branch offices. OTIs can furnish surety bonds, insurance or guarantees, but thus far, have utilized only surety bonds. In fact, 90 percent of those bonds are underwritten by only 9 sureties. Further, the rules establish an alternative claim procedure by which a claimant may seek to settle a claim with a surety, or other financial responsibility provider, without requiring a court judgment.
Some NVOCCs appear dissatisfied with some elements of OSRA, particularly their inability to enter into service contracts with their shipper customers in their capacity as carriers. Congress clearly addressed this issue and determined not to grant NVOCCs this authority. This decision has generated some complaints about carriers' antitrust immunity. As a consequence, Chairman Hyde introduced a bill, H.R. 3138, which would repeal this immunity. A hearing on H.R. 3138 was held on March 22, at which I testified. I opposed the bill primarily because OSRA, with its new restrictions on the use of antitrust immunity, should be given a chance to work.
OSRA allows, for the first time, labor organizations to obtain information from ocean common carriers pertaining to who is responsible for certain work at dock areas and within port areas in the United States. Ocean carriers must disclose such information if they are subject to a lawful collective bargaining agreement and must provide the information within a reasonable time. In the rulemaking implementing the service contract provisions of OSRA, the Commission defined a "reasonable period of time" as two days if cargo is due to arrive in less than five days, but four days if it was due to arrive more than five days from receipt of the request. To date, we have not received any complaints, formal or informal, concerning a carrier's refusal to respond to a request. We assume that if requests are being made for such information, the exchanges are occurring smoothly. If not, the Commission stands ready to address any problems.
Mr. Chairman, our preliminary assessment of OSRA is that it is working as intended. The boom in service contracting with individual lines, the decline in conference activity, the steady numbers of intermediaries continuing to do business, and the general expressions of satisfaction I have heard from diverse industry sources all suggest that some, if not all, of the objectives of the OSRA amendments are being met. To be sure, it is too early to tell if other opportunities presented by OSRA will be seized upon, such as OSRA's encouragement of custom-tailored and innovative service contracts, and the new authority for multi-shipper service contracts. Another service contract cycle will give us a better idea if the new statutory flexibility has translated into all the anticipated benefits. In other areas, such as the impact of voluntary guideline authority and the accessibility of privately published tariff systems, the Commission will remain vigilant in ensuring that Congress' objectives are being met. If in any of these areas, or in areas yet to be identified as potentially troublesome, the need to consider further revisions to any of our shipping statutes is indicated, we at the FMC will certainly advise you. My personal view is that ongoing review and assessment of our statutes is essential in order to ensure that our regulatory system is fair, up-to-date and appropriate for the industry's ever-evolving conditions and needs. In that regard, I commend the Subcommittee for its interest in OSRA's effects to date, and I look forward to working with you in the future.