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Remarks of the Honorable Harold J. Creel, Jr. before the Lloyd's List 1st International Shipping Convention, October 19, 2000

October 19, 2000

REMARKS OF

THE HONORABLE HAROLD J. CREEL, JR.
CHAIRMAN
FEDERAL MARITIME COMMISSION

BEFORE

THE LLOYD's LIST 1ST INTERNATIONAL
SHIPPING CONVENTION

LONDON, ENGLAND

October 19, 2000

It is a pleasure to be here today to address the Lloyd's List 1st International Shipping Convention. You have put together a truly impressive program - covering a vast array of topics that are of vital interest to the global shipping industry.

Today, I would like to address the impact of recent legislation in the United States on the liner shipping industry. I will begin by discussing some of the more important changes bought about by the Ocean Shipping Reform Act of 1998, or "OSRA." I will then discuss the FMC's ongoing efforts to assess the full impact of OSRA, focusing primarily on our preliminary observations after one year. Lastly, I will discuss our future efforts and the reactions of the various segments of the ocean shipping industry to OSRA.

OSRA was enacted on November 18, 1998, and became effective May 1, 1999. It represents the most significant change to the regulation of liner shipping in the United States since the Shipping Act of 1984, which itself amended a system of regulation that had remained essentially unchanged since 1916. OSRA's changes to the 1984 Act have resulted in an ocean transportation system that relies more on the marketplace and less on government intervention. It encourages all parties to focus on mutually beneficial business relationships, rather than adversarial dealings. As a result, the Commission has shifted its emphasis somewhat to ensure that the new regime operates in a fair, non-discriminatory manner.

One of the cornerstones of OSRA is its treatment of service contracts between ocean common carriers and their shipper customers. The rates agreed to by the contract parties are no longer public knowledge and carriers do not have to offer the same deals to other shippers. Moreover, the parties can agree to keep all or a portion of the contract terms confidential. Even more importantly, carrier conferences can no longer prohibit or restrict their members from offering service contracts. As a result, contracts now can be negotiated individually between a single carrier and a single shipper.

On the carrier side, OSRA continues to provide immunity from the U.S. antitrust laws for certain concerted activities among carriers. However, the extent of permissible activities has been circumscribed somewhat. In particular, agreements can not require their member to disclose service contract negotiations or the details of any service contracts entered into. However, agreements may adopt voluntary guidelines concerning service contracting. The guidelines must be filed confidentially with the Commission and must be truly voluntary and non-enforceable. Lastly, only ocean common carriers, and not non-vessel-operating carriers ("NVOCCs"), can offer service contracts to shippers.

One could argue that, as a result of OSRA, the United States and European systems for the regulation of liner shipping have become much closer. In many respects, regulation of liner shipping in the United States and Europe has progressed on parallel, complimentary tracks over recent years. Both Europe and the United States maintain exemptions from their general competition laws for liner shipping, and both have made it clear that there are no plans at this time to change these exemptions. However, against this backdrop, both sides have taken steps to promote competition, especially by fostering and protecting shippers' and carriers' rights to negotiate independent, confidential service contracts. Specifically, both sides effectively bar carrier agreements that limit or restrict independent service contracting, or require disclosure of the terms of those deals. These measures provided the legal groundwork for the explosion of independent service contracting activity that we have seen in 1999 and 2000.

In some ways, the European rules differ from, and are broader than, those administered by the FMC. Discussion agreements, where rate and service matters are voluntarily discussed, are permitted under the U.S. Shipping Act, but are not within Europe's competition exemption. Also, U.S. law allows carrier groups to adopt "voluntary guidelines" for service contracts. The European Commission does not permit such guidelines (although they do allow some model contracts to be used), nor do they allow carriers to agree on common prices for the inland portion of intermodal movements. On the other hand, the European Commission is less strict in its oversight in some areas. For example, most efficiency-enhancing consortia and operational agreements are not subject to regulatory filing requirements, review, and waiting periods, as they are in the U.S.

While these technical differences exist, I believe that the two systems are so fundamentally similar, and have been moving in such complimentary directions, that the industry has been able to make the transition to a service contract-based commercial environment without encountering conflicts of laws, or other legal ambiguities and uncertainties.

As soon as the Commission completed its arduous task of adopting new rules to implement OSRA - on time I might add - it turned its attention to an assessment of how the new Act was affecting the ocean transportation industry. The Commission undertook this task because it recognized that future decisionmakers, including the U.S. Congress, could not assess the impact of OSRA in a vacuum and needed a neutral party to assess whether it was working as envisioned, whether any unintended consequences had developed, and whether additional changes might be necessary.

The Commission thus embarked on a two-year endeavor to assess the impact of the Act. This two-year period was deemed sufficient to draw long-term conclusions about the industry's response to OSRA. The Commission intends to issue its report next summer. Meanwhile, on June 22, of this year, the Commission issued an Interim Status Report on OSRA. This report is based primarily on the information readily available to the Commission, including its service contract database. It provides preliminary views on the short-term effects OSRA has had on the ocean transportation industry, and can be viewed on the Commission's Internet website at www.fmc.gov.

I would like to share with you some of the more salient findings in the Interim Report.

• Not surprisingly, the use of service contracts has increased exponentially. During the first year under OSRA, 46,035 new service contracts and 95,627 amendments were filed with the Commission through our new, Internet filing system. In some trades, service contracts cover 80-90% of the cargo carried.

• Most service contracts are individual contracts, negotiated one-on-one between a single carrier and a single shipper. There were virtually no service contracts entered into by carrier agreements or by two or more unrelated shippers. The majority of contracts involve only one trade lane and are for a year's duration. Approximately 50% of the contracts contained some type of confidentiality provision, though the scope of the provisions varied greatly.

• A random sample indicates that 75% of the service contracts were entered into by cargo owners, 20% by NVOCCs, and 5% by shippers' associations.

• OSRA accelerated the shift away from the traditional rate-setting conferences. In 1997, there were 32 conference agreements on file with the Commission. There are only 22 today, with only one conference operating in the major east/west trades. Conferences have been essentially replaced by discussion agreements as the primary vehicle for concerted activity among ocean carriers.

• The majority of agreements filed with the Commission since May 1, 1999, are operational agreements, including vessel sharing agreements. 140 of the 260 agreements on file involve operational matters, rather than pricing authority.

• The Commission has received eleven sets of voluntary guidelines relating to service contracts, most filed by discussion agreements. There were none, of course, in the U.S./European trades. Overall adherence to these guidelines appears to have been limited, depending on trade conditions.

• Commission audits have revealed a number of deficiencies in the tariffs privately published by common carriers. Many of them hinder the public's ability to access these tariffs. The Commission continues to attempt to resolve these problems informally.

• OSRA has had minimal impact on the overall number of NVOCCs and licensed ocean freight forwarders. However, the amount of coverage to protect consumers against losses has increased from $214 million to $378 million. In addition, many foreign NVOCCs have opted to become licensed, as their U.S. counterparts are required to do.

• OSRA's reforms have resulted in a more market-driven shipping industry. It appears that both rates and services are being affected by these market forces.

When the Interim Report was released, the Commission cautioned that it is based on initial observations and, in effect, provides a snap-shot of the first year under OSRA. We need the full two year review period in order to gain a greater insight into OSRA's effects on all sectors of the ocean transportation industry. Since issuance of the Interim Report, the Commission has embarked on an ambitious schedule to obtain a greater understanding of OSRA's effects. At this point in time, the Commission's staff has met with representatives from all affected parties - carriers, shippers, intermediaries, ports, labor, and agreements, - and has conducted in-depth, informal interviews with them. These interviews will be helpful in developing questions that may be subsequently served on the industry, possibly by a Notice of Inquiry. The Commission can then use responses to the questions to better complete its final report.

What do those most affected by OSRA - the carriers, shippers, intermediaries, shippers' associations - think of it so far? Based on their testimony before Congress, articles in the trade press, speeches before groups like this, and informal discussions with Commission staff, I can offer the following observations.

The providers of liner transportation, the ocean common carriers, appear to find the OSRA changes extremely beneficial. Just this past May, at an oversight hearing on OSRA, representatives of twenty-nine carriers operating in the U.S. trades testified 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 become 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 believe that OSRA allows them to more easily accommodate shippers' needs for short-term or small volume contracts. The carriers maintain that agreements are operating as anticipated under OSRA, noting the increasing diversity of carrier agreements. They assert 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"), which represents major U.S. shippers and which initiated the effort that led to the passage of OSRA, testified at the same hearing that it believed OSRA is working as intended for most shippers. NITL stated that in response to a survey it sent to members shortly after OSRA became effective, 74 percent reported that OSRA has benefitted them in the contracting process. A more recent questionnaire distributed by NITL's Ocean Transportation Committee has generated similar responses. Ninety percent of the respondents either "completely" or "partially" agreed that OSRA has produced positive results with respect to service contracting. Moreover, 70 percent agreed that conferences have had a diminished role in their relationships and a similar percentage thought that carriers have become more flexible in dealing with their shipper customers. However, NITL continues to express reservations about the use of voluntary guidelines by discussion agreements.

Small shippers, of course, lack an advocacy group for their interests. Nonetheless, the Commission has heard little in the way of complaints from these shippers. Indeed, some have argued that OSRA's service contract confidentiality aspects may actually accrue to the benefit of small shippers. The expectation is that with the lack of contract transparency, carriers may be more willing to use spot contracts to fill their vessels or offer other small volume contracts to small shippers. This may explain the fact that the Commission has received some contracts for as little as 5 TEUs and many for 25 to 50 TEUs.

The primary means for small to mid-sized shippers to take advantage of the ocean transportation market post-OSRA is by forming or joining shippers' associations. Though this option has existed since 1984, it appears that OSRA has greatly increased the popularity of these entities. As mentioned earlier, shippers' associations account for about 5 percent of the service contracts on file with the Commission. There appear to be about 100 shippers' associations currently active in international trade. The president of the trade association for shippers' associations recently noted that he had received a large number of inquiries from importers and exporters interested in using or forming a shippers' association. Most industry analysts expect that shippers' associations will continue to grow and prosper under OSRA.

Not everyone is happy with the results under OSRA. Some NVOCCs, apparently dissatisfied with their inability to obtain the right to offer service contracts during the legislative process that led up to OSRA, have instituted a two-pronged attack against the statute. I might add, parenthetically, that this is occurring at a time when NVOCC trade growth is increasing and NVOCCs account for about 20 percent of the service contracts ocean carriers filed with the Commission. Nevertheless, these NVOCCs have raised concerns about carrier antitrust immunity, and are the main mover of legislation that would do away with it. Although there were hearings on this bill last March, it is highly unlikely that Congress will do anything on this bill this late in an election year. Moreover, there appears to be little interest in Congress in doing away with antitrust immunity in the near future.

These NVOCCs are also raising questions about the efficacy of the tariff publication requirement for NVOCCs. There are indications that an NVOCC association is surveying its members, and that, depending on the result, it may petition the Commission for an exemption from tariff publication. The Commission will, of course, give due consideration to any petition that may be filed.

All in all, OSRA appears to be working as well as Congress had expected. Shippers are negotiating one-on-one with ocean common carriers and entering into service contracts that reflect their mutual needs. The influence of carrier conferences has significantly waned and voluntary discussion agreements have arisen in their stead. In a year's time, we will all be in a better position to evaluate the long term effects of OSRA and any unintended consequences.