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Remark of Commissioner John A. Moran before the Marine Log - February 16, 2000

February 16, 2000

REMARKS OF

COMMISSIONER JOHN A. MORAN
FEDERAL MARITIME COMMISSION

"OSRA AND ITS IMPLICATIONS FOR INTERNATIONAL SHIPPING"

SAFE PASSAGE, SAFE HARBOR 2000

WASHINGTON MARRIOTT HOTEL
WASHINGTON, D.C.

FEBRUARY 16, 2000


Introduction

I want to thank Marine Log, BIMCO, and the Moderator, Admiral Sid Wallace, for the invitation to be here. And, thank all of you for being here today. I always enjoy the opportunity to talk about the Federal Maritime Commission and its work.

When I received my advance copy of the Presentation Program for this conference, "Safe Passage, Safe Harbor 2000," I was struck by the wide range of issues being considered over the course of the two days. The program reminded me of just how diverse and interesting the policy issues affecting the maritime transportation industry are, and how great are the challenges affecting this particular corner of the world. But if the challenges are great, so are the opportunities to positively influence an activity of vital importance that is the underpinning for the international trade on which the vitality of the world's economy depends.

The Ocean Shipping Reform Act

I have been asked here today as one of the five Federal Maritime Commissioners to give you my thoughts about the Ocean Shipping Reform Act of 1998, its implications for international ocean liner shipping, and the future of ocean liner regulation.

In the most expansive version of my standard speech about the Ocean Shipping Reform Act of 1998, I trace the history

of the ocean carrier antitrust immunity all the way back to Alexander Committee investigation of 1913. It is a stem winder!

My first public appearance as a Commissioner was a speech to a trade group on the new legislation. It was an evening event and my remarks began after 9:00 p.m., following several hours of cocktails, dinner, and a lengthy business meeting. You know, I started my speech and I had not even gotten through the 1959 hearings of the House Special Subcommittee on Steamship Conferences when I heard bodies falling off chairs and hitting the floor all over the room.

You all are very lucky! Sid has heard that speech and threatened to cut me off pretty early in the century if I started down that road.

Ocean carriers engaged in the United States international trade have been regulated since the early part of the last century. In 1994, Congress began to seriously consider revisions to the most recent version of the law providing for the oversight and regulation of international ocean liner shipping -- the Shipping Act of 1984. Following four years of review and deliberation, Congress passed and the President signed the Ocean Shipping Reform Act of 1998. The Federal Maritime Commission, the body charged with the regulatory and oversight mission to ensure a fair system of ocean transportation, completed its work on the implementing regulations and the new act became effective last May.

As we approach the one year anniversary of OSRA's effective date, this is a very appropriate time to review the goals of the new law, whether it is working as intended, and consider what challenges may lie ahead.

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 body to oversee and address substantially anticompetitive collective carrier activity.

But, even if the new law is more evolutionary than revolutionary, it is a dramatic shift in emphasis for ocean shipping regulation -- Congress and the President believed that a more competitive and efficient transportation system would be fostered by placing greater reliance on market forces rather than government regulation.

OSRA was designed and intended to encourage and facilitate commercial relationships tailored to meet the needs of the parties. OSRA contemplates a diverse, dynamic world of ocean shipping. OSRA is about -- creating "win-win" partnerships. The possibilities for creative business relationships and the opportunities contemplated by OSRA are much greater than under the previous law.

The corollary to this enhanced freedom is that more responsibility is placed on the parties themselves. A carrier representative recently observed that "[service contracting] forces both sides to sit down at the negotiating table .... and negotiate what's best for them." As one shipper recently noted, 'the contract today is really a blank sheet of paper."

The parties must now examine and thoroughly understand their own needs and capabilities. They also have to understand the business and needs of their partners. And, especially in the realm of global contracting, the parties will have to learn to trust each other in order to achieve truly mutually beneficial long-term commercial relationships.

The Mission of the Federal Maritime Commission
Under the Ocean Shipping Reform Act of 1998

So, how does the new act change the mission of the Federal Maritime Commission and what will the Commission look like as we move into the new millennium under OSRA?

First, I expect that the Commission will devote more of its attention to identifying and addressing major 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 believe that service contacting and carrier agreements must be at the center of Commission interest and activity.

The single most important pro-competitive element of OSRA is the provision allowing for confidential service contracts. Under OSRA, the Commission is the only entity with access to all service contracts. I expect a major focus for the Commission in the future will be to understand what is happening with service contracting to ensure that the important role for these contracts envisioned under the new act is not circumvented or undermined.

In addition, I expect that the Commission will continue to focus attention and resources on analyzing and understanding carrier agreements and their potential for unreasonably reducing transportation services or unreasonably increasing transportation costs. This is particularly important in light of the increasing popularity of discussion agreements, combined with the right of carrier agreements under OSRA to issue voluntary guidelines.

It is clear that under OSRA that Congress expects the Commission to be vigilant and willing to take strong action to ensure that the pro-competitive features of the act are not undermined by anti-competitive behavior. While 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,

Congress directed the Commission to be more proactive in its application of its injunctive powers.

OSRA is a "paradigm shift," and it has been the catalyst for the agency to take a completely fresh look at its strategic objectives and performance goals. I am very pleased that Chairman Creel initiated a review to examine the agency's structure and a proposed reorganization has been forwarded to Congress for review before implementation. I believe the proposed reorganization is a major step in ensuring that our priorities and structure comport with the vision of OSRA -- and that we are properly allocating our scarce resources to accomplish these priorities. Congress expected us to do this. And with only 131 employees, we had no choice but to focus our efforts on our most important missions.

A second major challenge for the Commission is to explore ways to further reduce regulatory costs and burdens that limit market flexibility without serving substantial regulatory interests or needs. It is clear from the act that Congress expects us to pursue this objective. Now that we are finished with the major part of the rulemaking, I would like to see the Commission examine all of its rules and regulations in an effort to further identify and eliminate unnecessary regulatory costs and burdens.

And, for the first time in several years, the Commission will be up to full strength. We have two new Commissioners to help meet the challenges of the new legislation. Joe Brennan of Maine was sworn in last November and Tony Merck of South Carolina joined the Commission early this year. Their knowledge and experience will add depth and breadth to the Commission's deliberations. I am looking forward to working with both of them in the months ahead.

What Will Ocean Shipping Regulation
Look Like in the New Millennium?

During the coming year I expect that we will see a lot of Congressional interest in the Ocean Shipping Reform Act. Congress should and will regularly and routinely review the implementation of its handiwork and any changes that may affect the OSRA or its underlying policy. And just as it did in the Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998, Congress can and will change the law if necessary to address problems in the law or changing realities.

Whether to provide carriers with antitrust immunity has been a fundamental ocean shipping policy question for Congress since the Shipping Act of 1916. It was controversial then, but it has been continued in every Congressional review of ocean shipping regulation since, up to and including last year's Ocean Shipping Reform Act.

There are a number of activities and developments that -- combined with the unhappiness of some stakeholders with the legislative efforts that resulted in OSRA -- ensure that the issue of antitrust immunity will continue to be discussed and debated.

As he promised to do last year when Congress passed OSRA, Chairman Hyde will focus the attention of the House Judiciary Committee on ocean shipping regulation and carrier antitrust immunity. He has scheduled a hearing for March 22nd and he intends to reexamine the carrier antitrust immunity in light of several ongoing developments.

One of these developments is the recent sale of the last major U.S. owned global liner carrier to a Danish company. Even though Maersk-SeaLand will operate vessels under the U.S.-flag, this development raises the question in some circles of why the United States should preserve antitrust immunity that, on one level, may be benefit only foreign-owned companies.

Another ongoing development that may influence the future regulation of ocean transportation in the United States is the state of competition policy in the rest of the world. The antitrust immunity provided for collective carrier activities under U.S. shipping law is in part premised on the fact that antitrust immunity is provided for carriers by our trading partners.

International perspectives on competition policy, however, have been evolving in recent years. Just look at the recent experience of the trans-Atlantic carriers with the European Union. A number of entities and countries are currently in the process of reviewing antitrust immunity and the value of collective carrier activities. The Organization for Economic Cooperation and Development, the European Union, Canada, Australia, Japan -- these are a few examples of entities and countries currently reviewing their competition policies.

These deliberations by our trading partners and international organizations of which we are members will certainly influence discussion about the future of carrier antitrust immunity under U.S. law.

The continuation of antitrust immunity in the long-term may well depend on whether policy makers in the United States and abroad continue to believe that the conditions and economics of international ocean liner shipping dictate some degree of antitrust immunity -- that the disadvantages of carrier antitrust immunity are outweighed by broader public benefits to international trade -- and that government oversight is effective in preventing abuse by the carriers of the antitrust immunity.

I am pleased to see that following lunch, Mike Murphy, a representative of American President Lines, will address just this question -- whether the antitrust immunity is still relevant and necessary. I hope that in his remarks Mr. Murphy articulates a broad public policy reason for continuing the antitrust immunity that might be embraced by other stakeholders affected by this issue -- shippers, ports, intermediaries, labor, and consumers.

I expect that both the House Transportation and Infrastructure Committee and the Senate Commerce Committee will hold hearings on the new law. I think much of the Congressional attention will focus on how the law is working in the real world -- whether there is a general satisfaction that the balances and compromises embodied in the act benefit the public and facilitate international commerce, whether the pro-competitive elements built into the act together with FMC oversight have prevented carrier abuse of the antitrust immunity, and whether the various groups involved in ocean transportation -- carriers, shippers, intermediaries, labor, and ports -- are as groups benefitting from the new law as Congress intended. In the short to mid-term, whether the new law is a practical solution to real world problems is more likely to affect the immediate future of the Ocean Shipping Reform Act than any generalized debate over the merits or demerits of antitrust immunity .

This then begs the question of how the Ocean Shipping Reform Act is working.

Because the Ocean Shipping Reform Act contemplates a very different environment from the previous scheme of heavily regulated common carriage, the learning curve is steep. Many of the participants -- shippers, carriers, and intermediaries -- are having to learn a new way of business and a new attitude about entering into ocean transportation arrangements. For all the parties, it is taking some time to prepare for, enter into, and make successful the types of relationships contemplated by OSRA.

While some groups and legislators called for revision of the Ocean Shipping Reform Act even before the new law went into effect, Congress just spent four years considering the regulation of ocean shipping and just completed action on the matter last October. I would be surprised to see any major changes to the law until Congress has the opportunity to see how the Ocean Shipping Reform Act does or does not achieve its objectives. And it is really too early to have an answer to that question.

While it may take some time to fully understand how the act is working, there are at least some preliminary indications that the new law is having a positive impact on the business of ocean shipping.

One indication is that confidential service contracting is increasingly being utilized as the means of moving cargo. 95,357 service contracts and amendments were filed with the Commission between May 1st and January 31st. Over a quarter -- 29% -- of the total service contracts filings during the total fifteen year period covered by the Shipping Act of 1984 have been filed in the last nine months under OSRA. This is a very dynamic market for service contracting.

There is also some indication that the terms and provisions of service contracts are starting to vary from contract to contract as parties obtain experience with the process and tailor contracts to address individual needs. One recent press report indicated that "carrier and shipper representatives who spoke [at a seminar] ... said service contracts negotiated in the busy trans-Pacific trades this year will evolve significantly from those negotiated last year." I believe the use of service contracts will only continue to expand as the parties become more comfortable with the process and with their business partners.

Another indication that the act is performing as Congress intended is this past year's experience in the east bound trans-Pacific trade. In 1998, the conduct of the carriers in that trade gave rise to multiple allegations of abuse, an FMC investigation, and concerns that competition would be all but eliminated in the trade during this year's peak season. To my knowledge, the Commission has heard few reports of the type of alleged carrier abuses that caused so much concern in 1998.

Nor have the fears about the elimination of competition in the trade been realized. This may be due in part to the FMC's interest, but I believe it has more to do with the fact that OSRA dramatically changed the regulatory landscape. Market forces and competition, not regulation, helped determine last year's outcome. Confidential contracting fostered direct and individualized commercial relationships between shipper and carrier. And as rates went up, substantial new capacity was added to the trade by both new entrants into the trade and existing players. This is what OSRA contemplated.

But one contracting season does not a successful act make, and we really do need several rounds of service contracting and more experience with the new law before we know how the act is doing. In this trade, as in others, the Commission continues to monitor carrier activities, especially for the use of "voluntary guidelines" to undermine confidential service contracting.

The Commission will have a very important role to play as Congress reviews implementation of the act and examines these ongoing developments. The Chairman has announced that the Commission will perform an assessment of the Act. With this assessment, the Commission will be well prepared to play a positive and productive role in the process -- providing Congress, the President, and the public with information and analysis about whether the act is performing as Congress hoped and intended.

Conclusion

Again, I thank you for the opportunity to be here with you. I hope I have been able to convey some of the things that have made my tenure at the FMC so interesting for the last year and promise to make the future -- for me and the industry -- even more interesting.