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The Containerisation International 30th Anniversary Conference - February 25, 1998

February 25, 1998

Remarks of Commissioner Harold J. Creel, Jr.

The Containerisation International 30th Anniversary Conference

February 25, 1998

I am pleased to be participating in this important conference on the future of liner shipping. It has been most valuable for me to meet and speak with many of you. And, each conference session involves topics that are both timely and integral to international ocean commerce. Containerization International has assembled a distinguished group of industry representatives, individuals who should both entertain and inform. I personally am privileged to be joining three esteemed industry experts on my panel -- I am anxious to hear their views on how the U.S. and the European Union can best serve their regulatory roles. My thanks to Jane Boyes and to Containerisation International for inviting me.

My comments today focus primarily on the maritime regulatory reform effort in the U.S. -- the status of that effort, the most relevant changes it would bring, and the probable effects of those changes. The current proposal in the U.S. Senate, S. 414, definitely would have a significant impact not only on the two main participants in the ocean transportation chain, carriers and shippers, but also on the various other sectors so intricately involved in ocean shipping. Every business that participates in or is directly affected by ocean commerce involving the U.S. trades would be wise to be fully prepared to operate in the new regulatory structure that would emanate from any U.S. reform legislation. Before addressing my main subject though, I would like to touch briefly on U.S./E.U. relations as they regard maritime regulation and oversight.

As a starting point, I thought it might be useful to give you my perspective on how the Federal Maritime Commission and the E.U.'s Competition and Transportation Directorates have been fulfilling their regulatory responsibilities - what the status quo is, so to speak. This may establish something of a foundation for the subsequent presentations on how these bodies "should" be exercising these responsibilities.

Let me assure you that the FMC and the E.U.'s DG IV and DG VII maintain a close working relationship, one that is facilitated by our mutually shared policy objectives. These objectives stem from the U.S. Shipping Act of 1984, and the E.U.'s Competition Rules.

Generally speaking, we both aim to achieve openly competitive trade -- in other words, commerce that is dictated by prevailing market conditions. I'm not advocating "competition at all costs," or "cut throat" shipping practices. Such a focus could easily lead to unintended destructive competition. This objective of open competition clearly is tempered by the antitrust exemptions available under both regimes. Both systems realize that such antitrust immunity is essential if liner shipping is to operate effectively. Achieving the appropriate balance between the necessary degrees of competition and concerted activity is where the real test lies.

Additionally, both the FMC and the E.U. strive for the maintenance of efficient ocean transportation systems, where customers receive timely and efficient movement of their goods at a fair price, and providers of the service can afford to implement technological and service innovations while earning a fair profit. A key here is to preclude the festering of undesirable business practices that unfairly swing the pendulum too far in one direction to the detriment of either side.

And, believe it or not, each "regulator" attempts to achieve the two foregoing objectives with minimal government intervention and regulatory costs, and while maintaining international harmony and comity. This objective may be the most difficult of the three to achieve. When dealing in an industry that is central to the commerce and economy of several nations, and which involves numerous businesses often struggling to successfully enter a market or achieve acceptable bottom lines, solutions to a given trade issue are not easily obtained. The challenge for the regulators, on each side of the Atlantic, is to exercise sound regulatory judgment that truly fosters international trade to the benefit of all involved in or affected by the industry.

Having cited our common goals, I freely admit that the U.S. and the E.U. achieve those goals via different routes. While we share the same ideals concerning trade and commerce, our operating structures, or approaches to achieve these ideals, do differ. I am advised that the U.S. approach is superior. My sources for this are the U.S. executive agencies and Congressional officials in Washington who are the proud architects for our system!

The major differences I see include the tendency of the E.U.'s Rules to prescribe what conference activities are permissible, with the presumption that anything outside that prescription is impermissible, barring a specific exemption. The 1984 Act takes the opposite approach. It contains a detailed list of prohibited actions relative to carrier operations, with added proscriptions set forth elsewhere in the Act. If not within those proscriptions, an activity generally is considered permissible.

Also, the E.U.'s antitrust exemption authority envisions ocean carriers operating under a traditional conference structure. The 1984 Act contemplates a host of varying carrier arrangements, as liner operators adapt to changing industry conditions. This difference in perspectives obviously affects the type of concerted activity that each system will deem acceptable.

Finally, the E.U.'s regulatory oversight is conducted via competition or antitrust analyses by DG IV, with transportation aspects within DG VII's purview factored into that calculus. In the U.S., our regulatory regime is the responsibility of one agency, the FMC, with specific expertise in ocean shipping. Our antitrust experts at the Department of Justice have no direct involvement in the acceptance of carrier agreements -- our statute presumes such arrangements to be desirable. I know Hal Levy was truly saddened when the Justice Department's role was reduced in 1984, although as a shy man of few words, he would be reluctant to admit this.

I would like to emphasize that these organizational and procedural differences do not preclude consistent, effective oversight by the FMC and the E.U. The fundamental beliefs and principles I stated earlier enable us to avoid potential conflicts that unduly disrupt the liner shipping industry. Despite our diverse approaches, we have maintained a harmonious and cooperative relationship, one based on respect for our institutional and operational differences, understanding of specific strategic objectives, and, most importantly, a firm resolve to achieve the mutual policy objectives established by our governments. I am certain that most of you are familiar with the ongoing intergovernmental discussions and exchanges we undertake in pursuit of maintaining comity in this regard.

Now, what about this legislative reform effort in the U.S.? What's the current status? Are regulatory changes on the horizon? And if so, what effects will these changes have on the manner in which ocean commerce with the U.S. is conducted?

As I am sure you will recall, prospects seemed very good that maritime reform legislation would pass last year. The process begun by the U.S. House of Representatives early in 1995 begot a three-year review which considered the entire spectrum of possible changes to our current structure and process. I choose not to discuss the more radical, fortunately overtaken, proposal first initiated by the House. The open process in the Senate, which included a public hearing with testimony from all sectors of the industry, ongoing discussions, and consideration of numerous proposals, culminated in draft legislation, known as S.414, which came close to meeting the primary objectives of the reform effort's supporters. When that proposal became linked to the OECD shipbuilding legislation, its chances for enactment improved greatly. But certain Senators had a legislative "hold" placed on S. 414 at the behest of constituents who viewed it as injurious to their interests. Despite last minute tinkering and maneuvering, opponents could not be pacified, and S. 414 never was put before the Senate for a vote.

At this time, the last official version of S. 414 is that which was introduced in May 1997. The bill has been the subject of extensive discussions among Committee staffers and major industry players in the process. A floor manager's proposed amendment was released in October last year, which contains several suggested changes to the official draft version. It is my expectation that the Senate will consider S. 414 sometime this spring. Senate Majority Leader Lott continues to support Senate consideration of the bill and recently was quoted as saying that he believes its passage has at least a 50/50 chance of happening.

The major stumbling block to enactment of legislation has been, and continues to be, service contracting. Most other issues have been worked out, though that's not to say that they are universally accepted or that there is total agreement on their effect.

As an example, S. 414 would terminate government tariff filing and replace it with the requirement that carriers maintain automated systems reflecting their tariff rates and practices. This information would be accessible to the public. Certain groups continue to question the wisdom of eliminating government tariff filing, but a consensus apparently has been reached to move in that direction. All indications are that any legislation passed would put an end to government tariff filing. I consistently have maintained that if tariffs were no longer filed at the FMC, then the replacement process must ensure ready access and complete clarity of all pertinent tariff information. My view is that elimination of the FMC's automated tariff system - ATFI - with its central location of all tariff information under a prescribed format, will reduce the ease of access of this data. The degree of reduction that will emanate from the proposed legislation remains to be seen.

S. 414 revises the FMC's authority to address rates of controlled carriers, and also adds specific authority to address restrictive government practices that result in predatory pricing. We welcome each of these changes and view them as facilitating our important monitoring functions.

Non-vessel-operating carriers and freight forwarders will be combined under the label "ocean transportation intermediary" and U.S. NVOs must be licensed under the bill. These changes hopefully will resolve some of the interpretative and legal questions that have arisen over the years. They also will necessitate a change in FMC regulations, and will increase significantly the number of freight forwarder applications the FMC must process.

The status of the FMC, or an institution performing the FMC's functions, seems to have come full circle during this 3 year review of the shipping statute. From the House's initial proposal to totally abolish the FMC, we have progressed to the Senate's initial idea of transferring our remaining functions to another Federal agency - the Surface Transportation Board. This evolved to a suggested merger of the FMC and the STB within the Department of Transportation, to creating separate railroad and maritime Boards within Transportation, and then to the current proposal, reflected in the latest draft amendments to S.414, which is to continue the FMC as a free-standing, independent agency - just as we are now. We at the FMC have maintained throughout that it is of paramount importance that we maintain our decisional independence free from political or bureaucratic intrusions, so as to effectively and decisively address the myriad international trade issues we face such as we did with Japan last year. We also have argued that combining the FMC with another Federal agency made little sense from a substantive and program perspective, and resulted in minimal administrative cost savings. We are pleased that most in the industry have spoken positively about the FMC and its performance over the past few years, and we are encouraged that the Senate now seems to agree that the best organizational approach is to continue the agency in its current status. It is our hope that any legislation which ultimately is enacted will maintain the FMC as currently established.

That leads me to the substantive change that continues to be the most complex, discussed, and hotly contested issue -- to what extent should service contracts be confidential or transparent? Resolution of the disagreements surrounding service contracts will very likely be the key to enacting legislation. Accomplishing that resolution so far has been impossible, and it is uncertain when and how it may be achieved.

Every attempt to resolve the service contract debate has either created procedural problems, or caused certain groups to pull their support for the bill altogether. The most recent draft of the bill now calls for a bifurcated approach -- all service contracts would be filed with the FMC confidentially, while any service contracts negotiated pursuant to agreement authority - and therefore enjoying the benefits of Antitrust immunity - would be required to publish specific essential terms. This approach has not gained universal acceptance, and I am told that informal discussions over the past few months have moved the debate towards a uniform treatment of service contracts, with all contracts confidentially filed with the FMC and all subject to the publication of very limited essential terms. Although the details of such a plan have yet to be made public, this general proposal sounds like a compromise that I offered for consideration in my testimony before the Senate Commerce Committee in May 1997. I should emphasize here that the FMC continues to take an objective, unbiased approach to legislative reform. We consistently have maintained our neutrality - our role is that of technical advisers on both the effect of proposed changes and the actual terminology that can best implement policy decisions.

My suggested approach in May of last year was intended to nudge the process a little closer towards resolution. I am convinced that the FMC must have access to all service contract information if it is to effectively oversee the antitrust immunity enjoyed by agreement parties. Similarly, direct access to service contract rate and practice information facilitates the FMC's enforcement of the numerous prohibited acts set forth in the legislation. The publication of essential terms and the extent of information to be published obviously is of more concern to those in the industry. It will be interesting to see just how, and if, this major impediment to legislation can be removed.

Additionally, conferences will be required to permit their members to have independent action on service contracting. This naturally is welcomed by the shipper community, and at this point does not seem to be a problem on the carrier side -- my perception is that this practice is becoming more common and that this statutory change would merely codify the direction the industry is heading.

In the most recent draft of the bill, non-vessel-operating carriers will be permitted to offer service contracts in their capacity as common carriers. The NVO community lobbied hard for this inclusion, and it remains a controversial potential change to the statute. Shoreside labor, in particular, is not enamored with this change. Other interest groups as well are not pleased with it. If retained, it certainly would create some interesting competitive situations in all U.S. trades, as NVOs would be positioned to further encroach on vessel-operating carriers' market shares.

So just what type of regulatory environment would we face should the changes on the table now become law?

Well, I believe the major proponents of reform legislation would achieve their goal of increasing the influence of typical market factors. As we move further from a common carrier system to one which is dominated by private service contracting, the factors that ordinarily influence competition would increase in importance. That's not to say that common carrier principles would be abandoned. The current list of prohibited acts does not change that dramatically, and the FMC retains its oversight and enforcement responsibilities. This should help to ensure the continuance of fair competition and the appropriate protection of the rights of all industry participants.

Then too, with an even further reliance on shipper/carrier relationships built around service contracting, we should expect additional time and energy to be spent in tailoring service contracts more closely to specific operational needs and long-term plans. Negotiating such finely-tailored arrangements would intensify competition at various periods. At the same time, should long-term contracts become prevalent, they could stabilize trade and enable the more effective and efficient movement of cargo.

Tied to that, however, I fear, there is a distinct possibility of an increase in malpractices. A combination of service contracts with only limited or even no public access, and a tariff filing system that may make it more difficult to obtain precise tariff information, certainly can create an incentive for malpractice. Any reduction in the likelihood that malpractices will be uncovered certainly would further tempt those inclined to violate the law to do so.

I also expect a continuing increase in the trend towards carrier consolidations and/or mergers. The new legislation should not change this. Whether it be new types of alliances, company mergers, or other forms of joint ventures, carriers will continue to deem it necessary to combine forces in order to effectively compete in a deregulated environment. While that creates efficiencies and economies of scale, close government scrutiny will be necessary to ensure that the shipping public is not left with too few service options, or a trading environment that improperly or unfairly perpetuates increased costs.

I think most would agree that the proposed legislative changes should enhance future planning. From an immediate standpoint, putting closure to the debate will remove the uncertainty that has existed for the last 3 years. From a long-term perspective, the ability to establish long-term relationships and innovate around service requirements most assuredly will facilitate operational planning.

Finally, I firmly believe that reform legislation will strengthen the FMC's role by streamlining and focusing our responsibilities, thereby rendering our regulatory and oversight efforts all the more essential and all the more effective. That's quite a change from what we were looking at just 3 years ago. Many deemed our role to be of questionable consequence, and argued for our abolition and the transfer of any of our remaining functions. I believe our effective operations and noteworthy achievements over the past several years have convinced most not only that an independent regulatory body is a necessity, but that the FMC is the entity for the job. All of us at the FMC remain committed to implementing any policy or legislative changes that Congress may make.

So we are left with the question of whether this legislative reform effort will bear fruit. Senate Majority Leader Lott seems to think that it will. While labeling passage a 50/50 proposition may not be a ringing endorsement, it remains clear that Senator Lott and other influential Senators have worked long and hard to effectuate reform legislation. You are not going to hear me disagree with Senator Lott's prediction -- after all, he the Majority Leader of the U.S. Senate and is a key player in the process. And I suppose he has a little more influence than I. Regardless, were I in an industry position today, I would be planning for legislative changes should that 50 percent fall in that direction and not the other.

I think one also must presume that any legislative changes will not affect U.S./E.U. cooperation and coordination. One of us may be getting a facelift, but hopefully that will strengthen, not hamper, our relationship. Whatever the changes may be, continuing discussions and dialogue should ensure that our joint regulatory oversight remains sound. Specific issues and potential problems may arise, but I foresee nothing that will be either unresolvable or so dramatic as to necessitate any drastic change in the current relationship.

Thank you very much. I appreciate the opportunity to speak with you today.