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Remarks of Commissioner John A. Moran before the Apparel Trade & Transportation Conference, November 29, 2000

November 29, 2000

PREPARED REMARKS

COMMISSIONER JOHN A. MORAN
FEDERAL MARITIME COMMISSION

APPAREL TRADE & TRANSPORTATION CONFERENCE

NEW YORK, NEW YORK

NOVEMBER 29, 2000

 

Introduction

Hubert, thank you for that kind introduction, and I want to thank both the associations - the American Import Shippers Association and the United States Association of Importers of Textiles and Apparel - for the invitation to be here today. I am very honored to have the opportunity to participate in this year's Transportation Review and I am particularly pleased that the topic this year is "Service Contract Shipping Under the Ocean Shipping Reform Act." For reasons that I will discuss, this is a timely and important topic.

I have been asked here today as one of the five Federal Maritime Commissioners to share with you my thoughts about the Commission's mission and strategic goals for the future, especially as these relate to small and medium shippers, shippers associations, and transportation intermediaries. In particular, I intend to spend my time this morning focusing on the Ocean Shipping Reform Act of 1998, the implications of the new law for your industry, the future of ocean liner regulation and - something that has not gotten much attention recently, but could prove of increasing importance to you in the future - the Commission's responsibility to monitor and address unfair foreign shipping practices. For the record, my views and opinions are my own, not official Commission positions.

But before I address these issues, I want to take a moment to talk about the relationship between the Commission and the members of the two associations meeting here today.

I am aware that at times in the past the Federal Maritime Commission may have been perceived as uninterested or even hostile to the concerns of small and medium shippers, shippers associations, and the transportation intermediary community. I hope that perception - and any reality that may have been behind it - has changed over the last several years.

Chairman Hal Creel deserves a great deal of credit for his efforts during his tenure to ensure a balanced and fair approach to the Commission's statutory missions and activities. I hope that you now find a group of Commissioners and a Commission staff with open doors, open ears, and open minds. I hope you believe that there is now a Commission willing to listen to and attempt to understand your concerns, and that - even if you do not always agree with Commission actions - you view the process as fair and the decisions informed and principled.

I know that I arrived at the Commission two years ago more familiar with the big shipper and vessel owning carrier communities than with the small and medium shipper, shippers association, or the transportation intermediary community. At Hal's suggestion, I have made an effort to remedy that deficiency.

And events like this conference are an important part of that effort. It is true that I am here today in part to share with you some of my views about the Commission's mission and the Ocean Shipping Reform Act. And I hope you will find that exercise of some value.

But for me, the more important reason to be here today is so that I can hear from you.

One of my primary objectives here this morning is to listen and learn. I hope you will help me achieve that objective before I return to Washington, D.C. I hope that the knowledge and understanding I gain from events like today's make me a better decision maker at the Commission.

And for me, decision making is probably the most exciting new challenge of being a Commissioner. In my career as a lawyer, Congressional staffer, lobbyist, and trade association representative, I have always analyzed the issues, weighed the pros and cons, and made recommendations for someone else's consideration and decision. Now, for the first time in my career, I have to swallow my own poison. That reality is both bracing and terrifying. And I assure you, nothing clears the head like facing a room full of stakeholders unhappy with the law you administer, your agency in general, and your vote on a particular issue. But the responsibility to meet with stakeholders, and listen and learn, accompanies the privilege of making decisions. And it is part of the job I enjoy.

I hope we will have some time this morning for discussion following my remarks. And I will be here for a little while after the program.

The Federal Maritime Commission

It is almost impossible today to peruse any publication or see any news program without reading or hearing about "globalization" and how our world is being radically transformed by global trade, transportation, and communications. For us in the United States, and in particular those of us involved in the maritime industry, globalization is a critically important development. The United States is the largest trading nation and the importance of trade to our economic prosperity cannot be underestimated. And the volume, value and importance to the U.S. economy of international trade is expected to grow dramatically in coming years.

The ocean shipping industry is the underpinning - the basic infrastructure - for the international trade on which the vitality of the U.S. economy depends. Some might even say that the "globalization" of the world's economy has only been possible because of the efficiency of maritime transportation, an efficiency facilitated by a relatively free and open international ocean transportation. Keeping the ocean shipping industry that way is vitally important to the maritime industry and the Nation's future prosperity. And, in a nutshell, this is the mission of the Federal Maritime Commission.

The Ocean Shipping Reform Act

Now, let's talk for a few moments about the Ocean Shipping Reform Act and the Commission's role and responsibility under that new law.

We all know that the Ocean Shipping Reform Act - which became effective on May 1 of last year - is not a total deregulation of the ocean transportation system. Congress preserved and reaffirmed the long-standing antitrust immunity for ocean carriers and retained some elements of the tariff and common carriage system. And, Congress retained the right for shippers to form shippers associations to negotiate collectively. Congress also continued the Federal Maritime Commission as the body to oversee and address substantially anticompetitive collective activity.

But, even if the new law is more evolutionary than revolutionary, it is important to understand that OSRA is a dramatic shift in emphasis. 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. If not total deregulation, the 1998 Act is, as one of the architects of the new law, Senate Majority Leader Trent Lott, said, "a paradigm shift in the conduct of the ocean liner business and its regulation by the FMC."

OSRA contemplates a diverse, dynamic world of ocean shipping. Some vessel operating carriers want to be full service, door-to-door logistics providers. Others simply want to carry a box from Port A to Port B. Some shippers want in-house transportation departments to handle all of their global shipping needs and some shippers want and need someone else to handle all their transportation needs. And services will be needed by small, medium and large shippers and provided by ocean transportation intermediaries in every conceivable variation between these extremes. This is no longer a "one size fits all" world.

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. Majority Leader Lott went on to say, "Where ocean carrier pricing and service options (under the old law) were diluted by the conference system and "me too" requirements, an unprecedented degree of flexibility and choice will result (under OSRA).

The corollary to this enhanced freedom is that more responsibility is placed on the parties. No longer will a heavily regulated and structured environment dictate the conditions of ocean transportation. 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?

In those same remarks about OSRA, Majority Leader Lott said about the FMC's new mission, "Where agency oversight once focused on using rigid systems of tariff and contract filing to scrutinize individual transactions, the 'big picture' of ensuring the existence of competitive liner service by a healthy ocean carrier industry to facilitate fair and open maritime commerce among our ocean trading partners will become the oversight priority."

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.

The single most important pro-competitive element of OSRA is the provision allowing for confidential service contracts. And, under OSRA, the Commission is the only entity with access to all service contracts. So 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 by the carriers.

In addition to focusing attention on service contracts, 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 broad "discussion agreements" among carriers in place of conferences, 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 anticompetitive behavior. Congress clearly indicated it wants the Commission to be more proactive in its application of its injunctive powers.

A second major challenge for the Commission - and it is one I think is worth noting and emphasizing -- 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 to me from the liberalized exemption authority provided to the Commission in the 1998 act that Congress expects us to actively pursue this objective. 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.

Role and Challenges for Small and Medium Shippers, Shippers Associations,
and Ocean Transportation Intermediaries

I think it is important to pause for a moment here and examine the challenges and opportunities presented to small and medium shippers, shippers associations, and ocean transportation intermediaries by the Ocean Shipping Reform Act.

I think it is fair to say that these groups were the most unhappy with the changes contemplated by OSRA and feel least benefitted by the new law. Those of you that feel this way may be right - at least in terms of an immediate reduction of regulatory burdens and benefits flowing from the Act.

Small and medium shippers that liked the ease and transparency of the "me too" requirements for similarly situated shippers under the 1984 Act may believe that they are now at a disadvantage compared to large shippers that may get better rates from the carriers.

It is certainly true that shippers associations saw no specific changes to the law that dramatically enhanced their leverage vis a vis ocean carriers.

And under OSRA, ocean transportation intermediaries are subject to increased licensing requirements, do not have the right to offer confidential service contracts to customers, and continue to shoulder the legal responsibility and expense of publishing tariffs.

But, I think these generally negative and pessimistic views of the Ocean Shipping Reform Act overlook positive aspects of the new law that in the long run may be of great - and unexpected benefit - for all of these affected stakeholders.

Some have argued that OSRA's service contract confidentiality may actually accrue to the benefit of small shippers. With contract confidentiality, carriers may be willing in particular circumstances to offer rates that they would not offer if the same rate had to be provided to all similarly situated shippers under the "me too" provisions of the 1984 act. 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. With contract confidentiality, carriers may be willing able to fill ships with small and medium shipper cargo at even better rates than extended to larger shipper - rates that might not have been available before confidentiality when large shippers would have known about and might not have countenanced lower rates for a small or medium sized competitor. 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.

In addition, under OSRA, shippers are provided with expanded flexibility to aggregate cargo to generate sufficient volume to obtain better rates. The primary means for small to mid-sized shippers to take advantage of the ocean transportation market post-OSRA, however, is by forming or joining shippers' associations. While OSRA made no specific changes to the language in the 1984 Act pertaining to these entities, as it did for small and medium shippers in general, the new law positively and significantly altered the landscape within which they operate. Under OSRA, shippers associations can now - and do - enter into individual contracts with the carriers of their choice without dealing with conference bureaucracies; can now - and do - more easily obtain efficient multi-lane contracts over more limited conference regional contracts; can now - and do - more readily negotiate customized contract language meeting their specific needs; and appear to be better leveraging increased volumes on individual carriers. This makes shippers associations increasingly attractive to small and medium sized shippers looking to compete more effectively in the market and it appears that OSRA has greatly increased the popularity of these entities. 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. Most industry analysts expect that shippers' associations will continue to grow and prosper under OSRA.

In the long-run, ocean transportation intermediaries and their customers - the small and medium shipper - may turn out to be the biggest beneficiaries of the new law. Intermediaries are the most creative, flexible and entrepreneurial part of the ocean transportation industry. Those who creatively fill the niches that develop in this diverse world of ocean transportation under OSRA will thrive and possibly be the new law's biggest beneficiaries.

As with any deregulation, the biggest challenge, especially the ocean transportation intermediaries, may be having the vision to see the needs and meet them. The future will belong to those who quickly identify and understand the need, have the vision about how it can be creatively met, and quickly implement that vision in a manner contemplated in the new law. Some will make the transition to the new environment very successfully. Others may not and will fail to make the changes necessary in a new deregulated environment.

But, shippers associations, and ocean transportation intermediaries should not fail just because they are shippers associations or intermediaries and are victims of collective carrier conduct that violates the Ocean Shipping Reform Act. It is incumbent on the Commission to see that this does not occur. If we fail, I expect that failure will be very quickly brought to the attention of Congress.

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

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 Ocean Shipping Reform Act and the underlying issue of antitrust immunity will continue to be discussed and debated.

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

As he promised to do in 1998 when Congress passed OSRA, Chairman Hyde focused the attention of the House Judiciary Committee on ocean shipping regulation and carrier antitrust immunity in a hearing earlier this year. The Committee reexamined 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 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. In addition to the United States, a number countries have recently revised their laws governing collective carrier activities: Japan, Australia, Korea, and the European Union. Other countries and entities, including the Organization for the Economic Cooperation and Development, are in the process of reviewing antitrust immunity for liner vessel owners. These deliberations by our trading partners and international organizations of which we are members will certainly influence future discussions about carrier antitrust immunity under U.S. law - just as the U.S. experience with OSRA should influence our trading partners' deliberations.

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

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 a year ago last October. I would be surprised to see any repeal or major change to the law until Congress has the opportunity to see how the Ocean Shipping Reform Act does or does not achieve its objectives.

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 midterm, 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 broad, generalized, or theoretical debate over the merits or demerits of antitrust immunity.

This then begs the question of how the Ocean Shipping Reform Act is working. Again, what follows is only my opinion. And while there are certainly those who will disagree both within and without the Commission, I think the testimony and the response of the members at the hearings held by both the House Judiciary and Transportation and Infrastructure Committees earlier this year by-and-large support this analysis.

First, it is really too early to have a clear or complete answer to the question of how the new law 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 fully successful the types of relationships contemplated by OSRA.

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

The Commission issued an Interim Status report on June 22, 2000. That interim report provides a preliminary view of the short-term effects OSRA has had on the ocean transportation industry.

Some of the most notable findings of the interim report indicate that:

  • Use of service contracts is increasing significantly. During the first year under OSRA, 46,035 new service contracts and 95,627 amendments were filed with the Commission. 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 space owners, 20% by NVOCCs, and 5% by shippers' associations.
  • OSRA has 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. Overall adherence to these guidelines appears to have been limited, depending on trade conditions.
  • 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.

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 and action, 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, it is important to note that one contracting season -- or even a couple -- do 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. The Commission will continue to monitor carrier activities, especially for the use of "voluntary guidelines" to undermine confidential service contracting.

Over the next year the Commission will perform an assessment of the Act to provide Congress, the President, and the public with information and analysis about the Act. With this assessment and with surveys conducted by stakeholder organizations such as yours, we should be in a position to understand if the law is working as intended and hoped by Congress and what changes, if any, should be made - either legislatively by Congress -- or administratively by the Commission within the authority provided in OSRA -- to address any problems and help the Act achieve its goals.

 

Federal Maritime Commission's Responsibility to Address
Unfair Foreign Shipping Practices

I want to briefly discuss the Commission's mandate to act on behalf of the shipping public to address foreign barriers to free and fair shipping and how it could be important to you.

Congress and the President have given the Commission as one of its primary responsibilities the duty to protect U.S. ocean borne trade and U.S. carriers from discriminatory or unfavorable treatment by foreign governments.

The Federal Maritime Commission's responsibility to monitor and address barriers to access to maritime services faced by U.S. companies in foreign markets flows from a couple of convictions:

  • the conviction that a stable, efficient, fair, cost-effective and open ocean transportation system is fundamental to our international commerce and is absolutely essential to enhance our exports and ensure affordable imports, and
  • the conviction that market distorting practices may benefit individual parties or countries for a limited period of time, but ultimately they undermine the efficient market to everyone's detriment.

The Federal Maritime Commission was established as an independent, bipartisan agency of the U.S. government. Why independent? Congress believed that the importance to the Nation's foreign trade of the ocean transportation system required the creation of a separate agency to devote all its time and attention solely to this critical area, free of distractions from competing interests or mandates. Why bipartisan? Because Congress believed that the importance of a free and open ocean transportation system required decisions that transcend transitory political considerations and are made with a view towards the long-term National interest.

Now the FMC shares with the Department of Transportation's Maritime Administration a concern with and responsibility for unfair foreign shipping practices. And at the FMC we encourage and support MARAD's efforts to address shared concerns about maritime barriers through negotiation and bilateral maritime agreements. I have always believed that mutually satisfactory, negotiated settlements that resolve differences and address maritime trade issues generally provide a better solution than the sometimes blunt and confrontational tools available to the Federal Maritime Commission. But Congress has given the Commission a very specific mission and a statutory mandate. And if Commission concerns cannot be addressed through MARAD's negotiations, the Commission is ready, able, and must act to fulfill its statutory mandate. The authors of that mandate, Congress and the President, expect no less of the Commission.

What does this mean specifically to you as small shippers, shippers associations, and transportation intermediaries? To the extent that unfair foreign shipping practices create inequities, inefficiencies, and distortions of the marketplace that undermine your ability to effectively participate and compete in the international market, the ability of the Commission to address these unfair foreign shipping practices could make every difference to your business.

There are several tools available at the Federal Maritime Commission to address the unfair foreign shipping practices that could negatively impact your business, but I would bet that very few, if any, of you here today have any idea what they are or have ever given any thought as to how the Commission's responsibilities in this area might be of direct importance to or benefit for your business.

To the extent that you may be aware of Commission activities in this area, I would bet you only associate FMC activities in this area with vessel operating ocean carriers. And it is true that one of our major statutory tools - the Foreign Shipping Practices Act - is only applicable wherever a U.S.-flag carrier is not afforded reciprocal rights by foreign laws and practices.

But Section 19 of the Merchant Marine Act of 1920, the statute we principally invoke, directs the FMC to address "conditions unfavorable to shipping in the foreign trade." This is a broad mandate, encompassing our ocean commerce in general. Section 19 is not directed solely at protecting the narrow class of U.S.-flag carriers. Shippers - including exporters and importers of all sizes, foreign-flag carriers serving our trades, transportation intermediaries, ports, maritime and shore side labor, - all of the traditional groups thought of as connected or immediately affected by ocean transportation are also Commission constituencies on whose behalf the Commission has, can, and will act.

Over the years, the FMC has entertained nearly two dozen requests and petitions for action under our "section 19" authority to impose sanctions in the face of restrictive foreign practices. A review of those matters shows that about half the time the interests we have sought to protect are broader and more varied than carriers flying the U.S. flag. We have taken action on behalf of: foreign carriers flying the U.S.-flag; foreign carriers flying a third-flag when they have been unfairly precluded from serving U.S. shippers in our foreign trade; NVOCCs harmed by unfair foreign laws restricting operations; and shippers who were being denied their choice of carrier because of restrictive laws and policies.

The legislative history of section 19 indicates that Congress intended that section to address not only U.S.-flag carriers, but "U.S. interests in the efficient movement of U.S. export and import commerce." It is the facilitation of trade and the benefits it brings to the American producer and consumer that is ultimately the heart of the Commission's responsibility to address unfair foreign shipping practices. The Commission is charged with acting as necessary on behalf of all involved in our ocean commerce who may bear the burdens of inefficiencies or expenses created by unfair laws, land policies and whose viability depends on a marketplace free of discriminatory and arbitrary decisions.

With the Federal Maritime Commission's powers to address unfair foreign shipping practices, the United States has a process that works. It can be relatively quick, it is flexible, and it protects an area of vital U.S. interest with some degree of independence. In the recently enacted Ocean Shipping Reform Act of 1998, Congress and the President recognized the increasing importance of the FMC's activities in this area and refined the Commission's responsibility for unfair practices of foreign governments, especially as it relates to the oversight of controlled carriers - carriers owned or controlled by foreign governments - under section 9 of the 1984 Act.

I believe, that with the growth in international trade and its increasing importance to the Nation's economic welfare, the Commission's responsibilities in this area will remain among the most critical with which this agency is entrusted.

The law is there for your benefit and protection. It is a remedy that I hope you all will keep in mind and avail yourselves of if necessary to protect your businesses.

Conclusion

Again, I thank you for the opportunity to be here with you today. I am here to learn from you as well as to talk, so I hope we will have some time remaining for some discussion.