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Remarks of the Honorable Harold J. Creel, JR. before the Posidonia Congress - June 2, 2000

June 2, 2000

REMARKS OF

THE HONORABLE HAROLD J. CREEL, JR.

CHAIRMAN
FEDERAL MARITIME COMMISSION

BEFORE

THE POSIDONIA CONGRESS

ATHENS, GREECE
June 2, 2000

It is an honor to address the Posidonia Congress and such a distinguished and knowledgeable audience.

Today, in keeping with the theme for this morning's session - the regulatory environment in international shipping - I would like to discuss some of the dramatic changes in the United States' regulatory scheme as a result of the Ocean Shipping Reform Act of 1998 or "OSRA."

OSRA significantly altered the Shipping Act of 1984, the primary statutory guidance for the Federal Maritime Commission's oversight of the ocean transportation industry. While some have referred to OSRA as "deregulation" - I prefer to view it as "reregulation", but in the general direction of deregulation. OSRA became effective on May 1, 1999, so that we have now had a little over one year's experience under it. I would like to offer you some preliminary observations based on the Commission's review of OSRA during its first year.

However you characterize it, OSRA provides significant new opportunities for ocean carriers and their shipper customers to develop novel, innovative relationships. The primary benefit for shippers under this new legislation is shippers' ability to enter into confidential service contracts with individual ocean common carriers, without any interference from carrier conferences or other types of agreements. On the carrier side, ocean common carriers retained the ability to obtain antitrust immunity for joint ratemaking and to rationalize services. In addition, agreements among carriers may adopt voluntary guidelines relating to the terms of members' individual contracts, and only ocean common carriers, not intermediaries, can offer service contracts to shippers.

In order to more fully determine whether this new statute is working as Congress intended, the Commission has embarked on a study to assess the impact of OSRA on the ocean transportation industry over the first two years of its effectiveness. This study will primarily look at service contracts, carrier agreements, ocean transportation intermediaries ("OTIs") and carrier tariffs. The Commission intends to involve all segments of the industry in this study and will issue a Final Report in the summer of 2001. We will, however, be issuing an interim status report this month. My remarks today are based on this interim study. I would caution you, however, that this is the first step in a long process and that we will be in a much better position to assess the impact of OSRA after another full year of operating under it.

Given the importance of the changes made by OSRA regarding service contracts, it is not surprising that there has been an explosive growth in the number of service contracts filed with the Commission. Since May 1, 1999, the Commission has received almost 35,000 new service contracts and almost 78,000 amendments to contracts. This is approximately a 116 percent increase over the similar period prior to OSRA.

In order to better understand OSRA's impact on these contracts, the Commission reviewed 408 contracts of the top 13 ocean common carriers operating in U.S. trades. Although this was not a random statistical study - which will be done later for the final report - it nonetheless provided some general information that may be of interest to you.

Almost all of these contracts were between one shipper party and one carrier party. Although OSRA permits two or more unaffiliated shippers to enter service contracts, we have observed little or no use of this authority. Shippers appear reluctant to combine their efforts except under the aegis of a shippers' association, something they are very familiar with. Our review identified only one agreement service contract with multiple carrier parties. In essence, conference or agreement control over service contracts is a thing of the past. In a related survey, we found that the vast majority of shippers (75%) party to service contracts identified themselves as cargo owners. However, non-vessel-operating common carriers ("NVOCCs") entered into 20 percent of the contracts and shippers' associations accounted for the remaining 5 percent, so these intermediaries are certainly benefitting from service contracts.

The Commission's initial review of the sample contracts revealed that a low percentage, just under 20%, contained clear and express confidentiality provisions. However, it may be that more contracts require confidentiality than is readily ascertainable on the face of the contracts. It is important to note that OSRA does not mandate confidentiality, and does not require that certain previously public terms, including the rate, be public anymore. It is up to the contract parties to determine whether they desire additional confidentiality of their contracts. In any event, it is obviously important to many shippers that their deals be kept from their competitors, and they now have the ability to ensure it.

The contracts initially reviewed by the Commission contain generally standardized, "boilerplate" terms. This is probably more a function of the fact that most of these contracts were negotiated prior to the time that OSRA went into effect. It is reasonable to expect that contracts in the second and subsequent cycles will be much more innovative and individually tailored to a shipper's particular service needs - be it guaranteed space, "just-in-time" service, cargo tracking or similar needs.

Another area where expectations exceeded reality is in the use of "global service contracts". For the first time, OSRA permits ocean carriers to enter into service contracts which include not only U.S. trades but also foreign-to-foreign trades. Only three percent of the contracts surveyed fell into the category of "global," and these generally included carriage between Mexico or Canada and other foreign countries. There was only one truly global contract. Again, this may be more a function of the newness of OSRA. As carriers and shippers develop more individual, customized contractual relationships, we expect to see more global contracts. In fact, for some major shippers, the ability of an ocean carrier to provide global service may be more important than the cost of such service.

I think almost everyone expected that OSRA's pro-competitive changes would result in the weakening of the traditional rate-setting carrier conference. However, I don't think anyone expected the decline of the conference system to occur so rapidly. In 1997, we had 32 conference agreements filed with the Commission. Today we have only 22, with only one conference still operating in the major east-west trades.

Operational agreements - such as vessel sharing agreements or space charters - are the main type of agreement now being filed with the Commission. This reflects the carriers' focus away from rate-setting and more towards increasing operational efficiencies to lower costs and increase service. Discussion agreements have emerged as the primary vehicle by which carriers can jointly discuss rate levels and other trade-wide issues. Unlike conferences, however, they cannot jointly set rates or have a common tariff.

OSRA does permit agreements to adopt voluntary guidelines relating to the terms and procedures of members' individual service contracts. Adherence to these guidelines is required by law to be strictly voluntary. These guidelines must be filed confidentially with the Federal Maritime Commission. Since May 1, the Commission has received eleven sets of voluntary guidelines - nine by discussion agreements and two by conferences. Our preliminary analysis of these guidelines reveals that carrier adherence to the guidelines has been limited, depending on particular trades. In some trades there was more uniformity or cohesion than in others. This is primarily a function of the degree of competition in any given trade. I am very concerned about the role of voluntary guidelines in the future and the Commission will make a thorough and detailed analysis of them in our final report.

Another fundamental change made by OSRA is the manner in which the public obtains information about a common carrier's rates for its transportation services. Common carriers no longer have to file tariffs with the Commission but must instead make their tariff rates available via their own private, automated tariff systems. These tariffs must be made available to any person, without limits on time or quantity; but a "reasonable" fee may be assessed. The Commission is charged with issuing regulations for the "accessibility and accuracy" of these systems and can prohibit any system that fails to comply.

The Commission has audited a number of tariff systems and has found that many continue to limit the public's ability to access them. The Commission has informed the industry of certain deficiencies and will work with carriers to improve their systems. I would hope that by the time of our formal report, these various access issues will have been resolved. The Commission has also recently sought public input on what a "reasonable charge" for tariff access should be.

So, what do those most affected by OSRA think about it - the carriers, shippers, ports, maritime labor and intermediaries? I would say that most appear to have embraced the new regime with gusto and generally support the changes made by OSRA and the direction in which it is taking the shipping industry. Most recently, on May 3, 2000, the Subcommittee on Coast Guard and Maritime Transportation of the U.S. House of Representatives held an oversight hearing on OSRA, at which I and all affected industry representatives were given an opportunity to testify.

Twenty-nine carriers operating in the U.S. trades found that OSRA is fulfilling its purposes. Noting the dramatic shift to individual contracts, they suggested that individual contracting promotes efficiency and that contract relationships have been more like partnerships, with contracts tailored to the specific needs of individual shippers and carriers. They also contended that individual contracting facilitates global or multi-trade contracts which are now readily available. These carriers also believed that OSRA allows them to more easily accommodate shippers needs for short-term contracts or contracts for small amounts. The carriers also contended that agreements are operating as anticipated under OSRA, noting the increasing diversity of carrier agreements. They also maintained that OSRA has reduced some administrative burdens and costs (e.g., tariff filing) and has protected the interests of small shippers, shippers' associations, and NVOCCs. In particular, they claimed that the range of rates has been compressed between large and small shippers because of confidential contracting and the non-transparency of rates.

The National Industrial Transportation League ("NITL"), representing major U.S. shippers, which started the shipping deregulation debate, believed that OSRA is working as intended for the vast majority of U.S. shippers. It noted the proliferation of individual service contracts and submitted that their most important aspect is the development of confidentiality provisions. NITL stated that in response to a survey it sent to its members shortly after OSRA became effective, 74 percent reported that OSRA had benefitted them in the contracting process. NITL also submitted that the "voluntary guidelines" adopted by discussion agreements need to be closely watched to ensure that they do not, in effect, become mandatory.

The American Association of Port Authorities, on behalf of U.S. ports, likewise suggested that OSRA has worked well in its first year and should be given time to work. It submitted that OSRA's changes have increased competition within the ocean carrier industry and have applied downward pressure on rates and profits. Maritime labor initially had some reservations about OSRA. However, it supported the compromise that resulted in OSRA and now believes that it has promoted regulatory and commercial stability as intended.

Not everyone, of course, is pleased with OSRA. It was a compromise among various interests, and, as we all know, you cannot please everyone in a compromise. The only discordant note was sounded by ocean transportation intermediaries - primarily NVOCCs and freight forwarders. These entities argued, to varying degrees, that: 1) NVOCCs should be given the ability to offer service contracts to their shipper customers; 2) NVOCCs should not have to publish tariffs; and 3) ocean carrier antitrust immunity should be abolished. Although some welcomed the deregulatory aspects of OSRA, they contended that they would flourish with even more deregulation. In addition, one association of NVOCCs stated that it would soon file a petition with the FMC for an exemption from the tariff publishing requirement of the Act.

As some of you may know, it was NVOCC complaints about carrier antitrust immunity that led to the introduction of H.R. 3138 by Congressman Henry Hyde. This bill, which would abolish carrier antitrust immunity, was the subject of a hearing in the U.S. House of Representatives on March 22, 2000, at which I testified. I opposed the bill primarily because OSRA, which continued limited antitrust immunity for carriers, should be given a chance to work. It is highly unlikely that Congress will do anything further on this bill during this session of Congress. There is simply not enough time to address it during this election year; but more importantly, there appears to be very little interest in doing away with carrier antitrust immunity at this time. In addition, the OECD just met in a working group to discuss antitrust immunity.

Another reason for continuing antitrust immunity that was offered by many of its proponents was that this would slow down or prevent further consolidation of the liner shipping industry. As many of you are aware, during the past several years there has been a trend of mergers, acquisitions, and consolidations throughout the liner industry. Some fear that without antitrust immunity, which permits carriers to jointly conduct their operations, we will eventually have only a handful of mega-carriers serving our trades.

I realize that many of you in the bulker industry would welcome or endorse more consolidation in your own industry. I submit that this merely reflects the inherent differences between the two industries, and in no way supports similar calls for consolidation in the liner industry.

In conclusion, it is simply too early to gauge the full impact of OSRA. However, from my perspective and based upon industry comments, it appears to be working quite well. The ocean shipping industry for the most part has been able to adapt to OSRA's changes without any significant problems. I suspect that the industry will continue to evolve and that OSRA will facilitate its ability to respond to changing circumstances.

Thank you for your attention.