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The Coalition of New England Companies for Trade - April 9, 1999

April 9, 1999

Remarks of Commissioner John Moran

Federal Maritime Commission

Before The Coalition of New England Companies for Trade

"The Role of the Federal Maritime Commission in the 21st Century"

Newport, Rhode Island on April 9, 1999


International Trade, Ocean Transportation, and the Federal Maritime Commission

Good morning. One of the most enjoyable parts of my responsibilities as a Commissioner is the opportunity I have to speak to different groups about the work and the role of the Federal Maritime Commission. Recently I have had a lot of opportunity to speak with those most directly concerned with the Commission and its work - ocean carriers, shippers, and ocean transportation intermediaries. These are the groups that were most involved with, and will be most immediately affected by, the recently enacted Ocean Shipping Reform Act.

I am particularly pleased to have the opportunity to address this meeting of the Coalition of New England Companies for Trade. This is the first chance I have had to address a group primarily interested in the benefits of international trade and whose mission is the advocacy of free and fair trade practices. Today provides me with a couple of opportunities. First, this affords me the opportunity to talk to a broader audience about the Commission's work and its mission. Second, addressing a group like CONECT reminds me that ocean transportation and my work at the Federal Maritime Commission are only a part of a bigger picture.

I do not need to talk to this group about the importance of international trade or that the volume, value and importance of international trade to the U.S. economy are expected to grow dramatically in coming years. The ocean shipping system is the underpinning for this international trade on which the vitality of the U.S. economy depends. In 1997, liner vessels carried a total value of $414 billion in waterborne exports and imports, amounting to more than 90% of U.S. foreign commerce. A fair and open maritime transportation system is as fundamental to our international commerce as our waterways, ports and intermodal connectors. A fair and open system creates business opportunities for U.S. shipping companies and provides more favorable transportation conditions for U.S. exports. While market distorting practices may benefit individual parties or countries for a limited period of time, they ultimately undermine the efficient market to everyone's detriment. Ensuring a fair, open, competitive, and efficient ocean transportation is the mission of the Federal Maritime Commission.



The Future of the Federal Maritime Commission

I have been asked to speak this morning about the future role of the Federal Maritime Commission in the 21st century. Inherent in this topic is the question, "Is there a future role for the Commission in the new century?" For me, the answer is clearly, "Yes." Congress just spent four years reviewing the regulation of ocean shipping. Just last October, the President signed the Ocean Shipping Reform Act of 1998 -- or OSRA. In OSRA, Congress continued the antitrust immunity for ocean carriers. Congress also continued the Federal Maritime Commission as the regulatory body to ensure that carriers do not abuse that antitrust immunity.



In addition, the Commission continues to protect U.S. oceanborne trade and U.S. carriers from discriminatory or unfavorable treatment by foreign governments. In OSRA, Congress recognized the increasing importance of the FMC's activities in this area and enhanced the Commission's responsibility for unfair practices of foreign governments. The Commission has, and will continue to use, its statutory authority to encourage foreign governments to abandon protectionist policies and to open maritime markets to U.S. companies. Therefore, it appears to me that Congress and the President believe that there is an important and valuable future mission, and a continued need, for an independent and strong Federal Maritime Commission.



The Ocean Shipping Reform Act

I am going to spend the remainder of my time talking about the potential of the Ocean Shipping Reform Act, and some of the challenges for both the Commission and the ocean transportation interests that must be met to ensure the Act is a success.



The Potential

I'd like to touch on a bit of history here, which may provide some necessary context for understanding last year's Ocean Shipping Reform Act, what Congress intended it to achieve, and the challenges facing both the Commission and industry.

Ocean carriers engaged in the United States international trade have been regulated since the early part of this century. Congress passed the Shipping Act of 1916, which first provided ocean carriers with antitrust immunity. Even in 1916, Congress recognized that this was a less than perfect way to regulate ocean transportation, but determined that because of factors unique to international ocean shipping, carriers should have a limited immunity from the antitrust laws to engage in certain types of collective behavior.

In exchange for this immunity, ocean carriers became "common carriers," obligated to serve the public in a non-discriminatory manner and were subject to government regulation and oversight. Since 1961, the Federal Maritime Commission has been the regulatory body charged with ensuring a fair system of oceanborne transportation.

Until last year, the most dramatic changes in ocean shipping regulation occurred in 1984. Congress passed the Shipping Act of 1984 in response to changes in the industry, such as intermodalism and containerization, and the need to address questions about the scope and certainty of the carriers' antitrust immunity. Congress reaffirmed, strengthened, and provided more certainty for the carriers' antitrust immunity. As a counterweight, Congress introduced pro-competitive features intended to benefit shippers, including the ability of shippers and carriers to enter into a form of private carriage through service contracts. Even for these service contracts, however, Congress preserved common carrier obligations in that essential contract terms were made public and similarly situated shippers could obtain the same contract terms.

Congress also recognized that the strengthened antitrust immunity required more oversight and enforcement tools. Congress prohibited specific carrier conduct and provided the Federal Maritime Commission with a general authority, in section 6(g) of the Act, to seek injunctive relief against substantially anti-competitive carrier agreements. The 1984 Act officially recognized the growing importance of intermediaries in ocean transportation

The genesis for the most recent legislative changes was a broad coalition of ocean transportation interests that came to believe that our nation's shipping laws were hampering flexible, creative, mutually beneficial commercial relationships among carriers, shippers, and intermediaries to the detriment of the U.S. foreign trade and all the benefits it brings. It became increasingly clear that ocean transportation was changing and the law needed to change to keep pace with these commercial needs and realities. In response to those needs, Congress passed, and the President signed, the Ocean Shipping Reform Act of 1998.

The Ocean Shipping Reform Act is not a total deregulation of the ocean transportation system. Congress preserved and reaffirmed the antitrust immunity for ocean carriers and retained some elements of tariff publication and the common carriage system. Congress also continued the Federal Maritime Commission as the oversight and regulatory body. While the Act did not change the language of the Commission's authority to enjoin substantially anticompetitive collective carrier activity, Congress did indicate that it intended the Commission to "act prospectively to block substantially anti-competitive carrier plans before they result in adverse effects on shippers and foreign trade." Congress also included a number of additional features and flexibilities intended to substantially reduce regulatory costs and burdens, enhance competition and allow parties to enter into market-driven relationships.

In one respect, the Ocean Shipping Reform Act is another step in the evolution of regulating ocean shipping, which responds to problems with the earlier law and changing commercial circumstances. But, even if OSRA built upon and is an amendment to the 1984 Act, it is important to note that OSRA is much more than a Shipping Act of 1984 "lite" -- merely less of the same. The drafters clearly viewed the legislation as a major change in the conduct of the ocean liner business and its regulation by the FMC. As Senate Majority Leader Trent Lott described it, OSRA is a "paradigm shift."

If not clear in every bit of statutory language, the overall intent of the legislation is simple and clear - a competitive and efficient ocean transportation system is fostered by placing greater reliance on the marketplace. As I went through the rulemaking, I tried to keep the following Congressional goals in mind:

1. Give a creative and dynamic marketplace the opportunity to work;

2. Avoid inflexible "command and control" regulations and unnecessary regulatory burdens that would hinder innovative solutions to commercial needs;

3. Let competitive forces and the marketplace be the primary regulator and enforcement mechanisms;

4. Identify competition-reducing and market-distorting problems; and,

5. Target limited agency resources on these problems.

I believe the Commission approved a balanced and workable package of rules that implements the intent of Congress and the President in enacting OSRA and affords the opportunity for the new law to achieve its promise and potential. The promise of the Ocean Shipping Reform Act is to "let the genie out of the bottle," allowing a fuller and more dynamic play to those forces which were already transforming ocean transportation. I hope that the FMC has done its part to unleash entrepreneurial creativity and allow businesses to build long-term, mutually beneficial relationships, to find new cost-savings, efficiencies, and opportunities to provide service or have commercial needs addressed.

I am not going to discuss the rulemaking at length. I will leave it to the following panel to address the details of the rulemaking. What I would like to do now is discuss the challenges facing the agency and industry. If and how these challenges are met will determine whether the Ocean Shipping Reform Act is a success and the future role of the Federal Maritime Commission.





Challenges for the Federal Maritime Commission

I see two major challenges for the Commission:

Addressing Market-Distorting Conduct: First, I expect that the Commission will devote more of its attention to identifying and addressing market-distorting problems that are not being addressed by competition and, if left unchecked, would undermine the deregulatory or pro-competitive goals of the Ocean Shipping Reform Act. I expect much of this effort will focus on ensuring the integrity of confidential service contracting.

Now, it is true that Congress retained the carrier's antitrust immunity and the Ocean Shipping Reform Act clearly contemplates a greater reliance on the marketplace, minimal government intervention, and flexibility for the carriers when structuring agreements. But, Congress also encouraged the Commission to be more proactive in its application of 6(g), especially in light of the development of discussion agreements and possibility of increasing concentration in the ocean carrier industry. Congress expects the Commission to be vigilant and willing to take strong action to ensure that competition, especially in the area of service contracting, is not undermined by anti-competitive behavior.

Addressing Unnecessary Regulatory Burdens and Costs that Stifle Commercial Relationships and Pro-Competitive Practices: A second major challenge for the Commission is to find ways to further reduce regulatory costs and burdens that limit market flexibility without serving substantial regulatory interests or needs. I believe Congress expects the Commission to find additional ways to reduce or eliminate unnecessary regulatory burdens and costs. For every regulatory cost or burden, the Commission should ask several questions:

· "Is it really necessary to achieve Commission goals and objectives?" If not -- we should not require it -- period.

· If it is necessary, we need to ask, "What is its impact?" Before acting, the Commission should know the costs, as well as the benefits, of the regulation.

· Finally, the Commission needs to ask, "Is there a less "command and control," less costly or less burdensome way to achieve the Commission's objectives?" If so, we should go in that direction, even if it makes the Commission's job more difficult.

One specific legislative change included in the Ocean Shipping Reform Act clearly indicates that Congress expects the Commission consider additional ways to reduce unnecessary regulatory cost and burdens. Section 16 of the Shipping Act of 1984 provides the Commission with the authority to exempt activities from the requirements of the Act. The Ocean Shipping Reform Act substantially liberalized this exemption authority, making it much easier for the Commission to use.

If we successfully meet these two challenges, I believe the Commission will continue to provide a valuable service to the public and remain relevant to a shipping public that is reinventing itself daily.



Challenges for the Private Sector

If anything, the challenges for the private sector are even greater than those posed to the Commission. The main test of whether the Ocean Shipping Reform Act will succeed will largely depend on whether shippers, transportation intermediaries, and ocean carriers meet those challenges. Let's examine some of those challenges for just a moment.

Big Shippers: Of all the groups directly affected by the Ocean Shipping Reform Act, the big shippers -- the "champion accounts" -- are probably best positioned to quickly adapt to the freedoms and opportunities provided by the new law. One reason is that a more deregulated environment will not be new to most of these companies. They have conducted business for years with other substantially deregulated modes of transportation, such as aviation, trucking, and rail. It will not be difficult to apply the lessons learned with these other transportation modes to ocean shipping. I also expect that the negotiation of confidential service contracts between larger shippers and carriers will occur. Long-term business relationships with these large shipping customers are absolutely essential to the carriers.

This market power of big shippers may cause some resentment and concern among intermediaries and small shippers, particularly at first. Some intermediaries and small shippers view OSRA as a "big shippers" act. But the power of the big shippers may ultimately benefit small shippers and intermediaries. The leverage of the big shippers to bring the carriers to a new way of doing business will certainly pave the way for others as carriers gain more experience and confidence in the benefits of confidential contracting and tailored commercial arrangements.

Notwithstanding some advantages, big shippers will have challenges to meet under the new law. The possibilities for creative business relationships and the opportunities contemplated by OSRA are open-ended. Shippers will have to consider new ways of doing business. They will have to examine and thoroughly understand their own global needs. They will have to work with and understand the business of the carriers -- not only to determine how the carriers can meet their rate, service, and logistics needs, but how they can help address carrier needs and concerns.

Shippers may need to learn to trust the carriers in order to achieve truly mutually beneficial long-term commercial relationships. Even for the big shippers, it will take time to prepare for, enter into, and make successful the types of relationships contemplated by OSRA.

Intermediaries and Shippers Associations: Of all of the groups directly affected by the Ocean Shipping Reform Act, I find shippers associations and the transportation intermediaries that serve small shippers to be the most interesting in terms of their opportunities and challenges under the new Act. These groups feel they benefitted the least from the Ocean Shipping Reform Act and, collectively, are the most unhappy with the changes contemplated by OSRA. They may be right -- at least in terms of an immediate reduction of regulatory burdens and benefits flowing from the Act.

The great irony is that, in the long-run, the intermediaries and the small shippers may be the biggest beneficiaries of the law. Why? I am a great proponent of the "law of unintended consequences" where legislation is concerned. There are several factors that lead me to the conclusion that this will be the case for the intermediaries and the small shippers under OSRA. OSRA is designed to encourage and facilitate commercial relationships tailored to meet the needs of the parties. OSRA contemplates a diverse, dynamic world of ocean shipping. The transportation intermediaries are the most creative, flexible and entrepreneurial part of the ocean transportation industry. I believe those entrepreneurial intermediaries and shippers associations that creatively fill the niches of a diverse ocean transportation system may well prove to be the key to the success of the new law. They may also prove to be its biggest beneficiaries.

The biggest challenge for intermediaries and shippers associations may be having the vision to see the needs and meet them. If trucking deregulation is any example, the future belongs to those that quickly identify and understand the need, have the vision about how it can be creatively met, and quickly implement that vision. Indeed, this race to identify a need and meet it is already happening. I recently read about a shippers association, the East-West Shippers Council, that is packaging cargoes in a manner to help carriers balance and reposition containers in the severely imbalanced trans-Pacific trade. I also understand that the Fashion Accessories Shippers Association is doing the same thing. The associations hope to obtain guaranteed space and lower rates during the peak shipping season. The benefit for the carriers is the opportunity to efficiently reposition equipment and generate revenue on westbound containers. This is what OSRA is all about -- creating win-win partnerships. While it may take some time to reach full potential, I am confident it will happen with time.

Carriers: Of all the interests directly affected by the Ocean Shipping Reform Act, the carriers probably have the greatest challenges ahead of them.

First, as a group, the carriers have the biggest adjustments to make in their business cultures and attitudes about the nature of the business relationship with shippers and intermediaries. For many years the conferences have controlled many elements of ocean transportation service, leaving rates as the only area of competition. Even with independents, the practice was often to merely discount off the conference rate. The conference system also encouraged carriers to spend more time monitoring each other than developing close relationships with customers. It may take time for some carriers to undergo the fundamental change in the business of ocean transportation contemplated by OSRA.

Second, the poor economic circumstances in which many ocean carriers find themselves may present a difficult challenge to overcome. A recent report by Moody's painted a dismal picture of both the short-term and long-term financial health of the shipping industry. Carriers may be tempted to abuse their antitrust immunity in a short-sighted effort to maximize short-term profits, which would be unfortunate. Not only would it delay the potential long-term benefits of forming mutually beneficial commercial partnerships with shippers and intermediaries, it will invite - demand - increased regulatory scrutiny and action by the Commission. I hope the carriers will employ discretion and good judgment in the following weeks and months. The Commission will aggressively pursue the carriers to punish malpractices and address anticompetitive behavior. If Commission efforts to address any problems in this area are inadequate, the carriers will most likely face a short trip to Congressional review of the antitrust immunity and they could lose the antitrust immunity entirely.

As an optimist, however, I am confident that the carriers can and will successfully change their business cultures to benefit from the opportunities offered by the Ocean Shipping Reform Act. Some carriers, among them Sea-Land and American President Lines, were among the proponents of the Ocean Shipping Reform Act. Along with others, these companies saw the need for change and understood that it would be good for carriers in the long-term. Carrier companies are preparing themselves and their customers for the anticipated changes in the law. In fact, I recently saw a handbook published by APL to educate its customers about the new law. Carrier representatives have been attending and participating in many of the seminars being given around the country in preparation for the new law's effective date. Now the carriers have to do the right thing.

In the final analysis, carriers will have little choice but to enter into confidential contracts with shippers and arrangements with intermediaries and shippers associations if those arrangements will address carrier as well as shipper needs. With time and experience, confidence in these relationships will grow and they will become the norm. Carriers may one day wonder why they ever wanted it any other way.



Conclusion

The effective date for the Ocean Shipping Reform Act is May 1. What will it bring? Depending on the circles you travel in, there is as much anticipation, excitement, and anxiety about May 1 as there is about the coming millennium and the Y2K problem. I do not expect to see a dramatic change on May 1. The new law will go into effect on that date, but the challenges outlined above suggest that many of the good things expected from the Ocean Shipping Reform Act will take time to achieve. But I do believe, however, that as the Commission and industry meet the challenges outlined above, the benefits of the new law will become apparent over the next two or three years.

There is no question that it will be difficult in the short-term. The challenge for all of us may be to understand that the changes contemplated by the Ocean Shipping Reform Act will take time. We need to keep our eye on the big picture, and have the patience to allow the features of the new law to work and realize its potential.