The Committee on the Judiciary United States of America - May 5, 1999
May 5, 1999
THE HONORABLE HAROLD J. CREEL, JR.
CHAIRMAN, FEDERAL MARITIME COMMISSION
800 NORTH CAPITOL STREET, N.W.
WASHINGTON, D.C. 20573
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES
MAY 5, 1999
Mr. Chairman and Members of the Committee, it is a pleasure to appear before you to discuss the antitrust aspects of the Ocean Shipping Reform Act of 1998 ("OSRA"), which amended the Shipping Act of 1984 ("1984 Act"), the primary statute administered by the Federal Maritime Commission ("FMC" or "Commission"). I thank you for the opportunity to address these important issues.
In order to put these issues into proper perspective, I will first discuss the history of antitrust immunity in the maritime industry and describe the scope of antitrust immunity under the 1984 Act. I will then discuss the various limitations on antitrust immunity under the 1984 Act and some additional changes occasioned by OSRA which will further limit the impact of collective activity by ocean common carriers. I shall then address how other governments deal with similar issues and describe how collective carrier activity is evolving in our trades. Lastly, I shall discuss Fact Finding No. 23, a recent Commission initiative that looked into carrier conduct in the Trans-Pacific trades.
International ocean transportation is the vital link between the United States and the world's markets. Unlike our domestic transportation industries, international ocean transportation involves the interests of our trading partners, as well as our own, and includes many foreign carriers that are subject to the laws of their home countries. International ocean transportation is crucial to the efficient movement of U.S. exports and imports. In 1997 alone, this industry transported over 14.5 million containerloads of U.S. imports and exports, with a value of greater than $414 billion.
The ocean transportation market is truly unique. There are no barriers to entry other than the fact that the costs of entry are significant, yet the principal assets are extremely mobile and can be moved from trade to trade. Cargo volumes can be cyclical and many trades are unbalanced between inbound and outbound legs. Many trades suffer from chronic overcapacity resulting from worldwide subsidization of shipbuilding and shipping carriers. Moreover, demands on capacity can fluctuate wildly by season and, as is currently the case in the Pacific trades, due to changing economic conditions. Many foreign governments subsidize their national flag carriers or take other actions to aid their development. In addition, carriers can be subject to a range of foreign laws or regulations.
Since 1916, Congress has recognized the unique nature of the ocean transportation industry and has deemed it beneficial and advantageous to permit cooperative arrangements among carriers. From the outset, Congress found that if the liner industry were left to its own devices, it would create monopolies in U.S. trades with all of their attendant abuses. On the other hand, Congress noted that if carrier agreements and combinations were not allowed in U.S. trades, and unfettered competition reigned, rate wars would result to eliminate the financially weak carriers or force them to consolidate ownership. In either event, Congress concluded that unbridled competition could subject the U.S. trades to monopolies as effective as any that would be created by agreements. Congress therefore chose to obtain the advantages of conferences and other arrangements while checking their abuses through government regulation designed to ensure a degree of competition and curb potential abuses.
The Shipping Act, 1916 ("1916 Act") required common carriers to file their agreements with the U.S. Shipping Board, and, if approved, those arrangements were protected from application of the U.S. antitrust laws. The 1916 Act also allowed conferences to fix rates and other practices, but prohibited discriminatory rates and services, in addition to deferred rebates and the use of "fighting ships" (vessels put in a trade to drive out competitors by using predatory rates). In 1961, the 1916 Act was amended to authorize the use of dual-rate contracts (lower rates for a shipper who exclusively used a conference), and to address certain abuses that had arisen over the years in the conference system. The antitrust exemption for carrier agreements continued, but they were subject to a new review standard - they could not be contrary to the public interest. The amendments also required conferences to remain open to all qualified members, who were free to exit without penalty. All common carriers and conferences were further required to file with the Commission tariffs showing all their rates and charges and keep them open for public inspection.
The 1984 Act is the currently operative shipping statute. It continues the legislative scheme first adopted in 1916 and reaffirmed in 1961, by providing that certain types of carrier arrangements are not subject to otherwise applicable antitrust laws. The Conference Report noted that the Act permits a greater degree of cooperative conduct among carriers. It further stressed that certain carrier arrangements may enhance the quality, frequency, or efficiency of transportation services and should generally be permitted. Most recently, the basic antitrust immunity afforded carrier agreements was maintained when Congress enacted OSRA in October of last year. I view OSRA as establishing a 3-legged stool: there is greater confidentiality in contracting, with individual conference carriers having greater guaranteed rights to enter one or more contracts; antitrust immunity for joint carrier operations is continued; and government oversight is maintained, and, in my view, is even more important, in light of the greater confidentiality and continued antitrust immunity.
The types of ocean common carrier agreements subject to the 1984 Act, as amended by OSRA, include agreements to discuss or fix rates, cargo space accommodations, and other conditions of service; pool or apportion traffic, revenues, earnings or losses; allot ports or regulate the sailings; limit or regulate the volume or character of cargo to be carried; engage in exclusive, preferential, or cooperative working arrangements; control, regulate, or prevent competition in international ocean transportation; and discuss and agree upon any matter related to service contracts. Any agreement covering the above activities must be filed with the Commission, which reviews it to ensure that it complies with the Act and the Commission's regulations. If not rejected by the Commission, agreements become effective 45 days after filing. However, during that period, the Commission can request additional information or materials, and thereby stay the effectiveness of an agreement.
The antitrust laws do not apply to any agreement that has been filed and become effective. In addition, the antitrust laws do not apply to any activity or agreement undertaken or entered into with a reasonable basis to conclude that it is pursuant to a filed and effective agreement or that it is exempt from any filing or publication requirement.
The 1984 Act contains several provisions to prevent carriers from taking unfair advantage of their antitrust immunity; these provisions are the checks designed to prevent antitrust immunity from resulting in excessively anticompetitive activity. For example, conference agreements which maintain ratemaking authority must allow open admission and withdrawal without penalty. In addition, section 10 of the Act sets forth an extensive list of prohibited acts, barring many anticompetitive practices such as boycotts, predatory practices, unreasonable refusals to deal, and allocation of shippers among carriers. This section also bars carriers from engaging in a variety of unfair practices, such as retaliating against a shipper who has patronized another carrier, refusing to deal or negotiate with a shipper, and offering deferred rebates, which are essentially kickbacks to selected customers. If the Commission determines that an agreement has operated in violation of the Act, it may disapprove, cancel, or modify the agreement; it also may impose penalties on the agreement carriers.
Section 6(g) of the 1984 Act also authorizes the Commission to seek an injunction in U.S. district court for D.C. against substantially anticompetitive agreements that have produced unreasonable price increases or service cutbacks. During its 45-day review process, the FMC routinely utilizes the threat of action under section 6(g) to persuade carriers to modify or remove agreement provisions which could lead to unduly anticompetitive results, thereby deleting onerous agreement provisions without the costly and protracted litigation that prevailed under the 1916 Act.
One of the most pro-competitive elements of the 1984 Act is the requirement that all members of conferences have a right to take independent action ("IA"). This provision allows any conference member to establish its own competitive rates on ten calendar days' notice to the conference. Mandatory IA introduces a strong element of internal price competition within conferences that complements the external price competition from non-conference, independent carriers. Mandatory IA has been used extensively in the U.S. trades since it was introduced in 1984. For example, in 1998 the members of the Transpacific Westbound Rate Agreement took 1,208 independent actions on rates and in the North Atlantic trades 671 IAs were taken by conference members.
OSRA has made several changes to the 1984 Act that will provide further competitive elements to conference agreements. The time frame for taking IA on rate actions has been shortened from 10 calendar days to 5 calendar days. But more importantly, independent action has been extended to service contracts -- off-tariff, written arrangements between shippers and carriers in which agreed upon rates are provided in exchange for cargo volume commitments. Conferences cannot under OSRA prohibit or restrict their members from entering into service contracts, nor can they require members to disclose a negotiation on a service contract or the terms of a service contract. The introduction of confidential service contracting also should have a significant pro-competitive impact on the U.S. trades. Lastly, the Senate Committee Report repudiates the 1984 Act legislative history concerning the Commission's analysis under section 6(g) and replaces it with a more expansive approach directing the agency to take a less restrictive reading of its authority to address anticompetitive behavior. In particular, the Committee directed the Commission to use forward-looking analyses, and to act prospectively to block substantially anti-competitive carrier plans before they result in adverse effects on shippers and trade. It made clear that direct evidence of actual commercial harm to shippers is not necessary for a 6(g) case, and the Commission should not wait for the disruption of oceanborne commerce before taking corrective action.
During the process that led up to OSRA, the Commission advocated several procedural changes to section 6(g) to enhance its effectiveness. The Commission suggested that it, and not the district court, be the forum for resolving 6(g) actions and that shippers be given the right to petition for such action. Congress declined to adopt these proposals. Despite the pro-competitive aspects of OSRA, Congress left antitrust immunity in place because it found that the same basic reasons justifying it continue to exist. But Congress clearly intended its pro-competitive additions to provide a further check on potential negative effects.
The details and the effects of the U.S. maritime antitrust exemption cannot be analyzed in isolation, i.e., without addressing the competition laws and practices of our trading partners as well. Unlike domestic transportation, international ocean carriage is not governed exclusively by U.S. law; rather, we share jurisdiction for this transportation -- both inbound and outbound -- with the countries at the other end of the voyage. Virtually all of our major trading partners afford shipping some special treatment under competition rules, allowing competitors to cooperate on pricing. In a 1992 OECD survey of seventeen industrialized nations -- including the European Union members, Australia, Canada, Japan, Turkey, New Zealand, and Norway -- all the respondents indicated that their nations maintained some form of antitrust immunity or exemption from restrictive practices legislation for liner conferences.
Of course, these countries' laws do not look just like the 1984 Act. Some countries, especially the European Union, place complex restrictions on carriers' rate-fixing activities. Newly announced rules in Europe move in the same direction as OSRA, but go even further to foster competition; while EU rules permit carriers to fix tariff rates in conferences, they bar carriers from discussing individual service contract rates, and establish a presumption of confidentiality for shipper-carrier contract deals. Japan is also reported to be stepping up its oversight of agreements, considering rules to give its regulators oversight powers similar to the 1984 Act's 6(g) standard. On the other hand, many countries provide no oversight or check on concerted activities at all. But while these systems may differ in detail, they all maintain some degree of antitrust exemption for shipping. Given this global consensus, retention of antitrust immunity under United States law avoids potentially disruptive and unpredictable consequences. Absent immunity for maritime agreements, our antitrust authorities would face the daunting task of investigating and challenging price setting agreements that take place overseas, in countries that may specifically permit such activities. Because of these conflicts, foreign governments could certainly resist attempts to enforce U.S. antitrust laws against their shipping companies. For example, foreign governments could use blocking statutes, already in place, or other limits on discovery, to frustrate aggressive U.S. antitrust enforcement. Of course, shipping lines based in the United States would receive no foreign intervention or protection from prosecution, and could find themselves at a competitive and legal disadvantage.
I believe that the need to maintain comity and international harmony is a compelling reason for taking a cautious approach to antitrust immunity. If any one country makes a radical shift, leading to international conflicts of law or incompatible rules for shipping, the result could be trade disputes, costly international litigation, service disruptions and financial uncertainty for shipping lines. The costs and impacts of such actions ultimately would be borne by the users of the system. A more sound long-term course is the approach we have seen taken in recent years, in which major maritime countries periodically review shipping policies, and gradually introduce procompetitive reforms -- like those in OSRA, and those announced in Brussels -- while at the same time communicating with each other in multilateral fora and bilateral talks, to ensure that there will be compatibility and cooperation, not conflict.
The evolution in liner shipping regulation we have seen in the U.S. and abroad in recent years has been brought on, I believe, by changing market forces, especially the increasingly sophisticated demands of global shippers. In the years since the 1984 Act, and even during my tenure on the Commission, we have seen major changes in the way the industry arranges itself to best serve these customers. In particular, I have seen three major trends that illustrate how the carrier industry is changing, especially in the ways it views and uses its antitrust immunity.
The first trend has been a move toward consolidation and concentration, driven in large part by a desire to cut costs and boost efficiency. There have been several mergers among significant shipping lines in recent years. For example, P&O, Nedlloyd, and Blue Star are now one; two Japanese lines recently merged, as have two French carriers; Korea's Hanjin now controls Germany's DSR Senator; and Brazil's remaining lines are being acquired by foreign carriers. Canada's CP ships has pursued a compelling strategy of acquiring a stable of mid-sized and niche carriers, including the U.S.-flag Lykes Line, to assemble a global network. And Singapore's NOL purchased the U.S. carrier APL Ltd. These mergers are not exempt from the antitrust laws. When shipping lines operating in our markets merge, are acquired, or form joint venture companies, they are subject to Hart-Scott-Rodino requirements like any other company.
The second trend, towards operational alliances, is driven by the same forces that spur mergers. Many major carriers have recognized a need to realize economies of scale and scope, cut costs, and improve service, but thus far have shied from the operational and legal difficulties of mergers and acquisitions. Instead, they have pursued vessel sharing partnerships with other lines, often on a global scale. For example, Sea-Land has paired with the Danish carrier Maersk Line, while APL has linked with Japan's Mitsui O.S.K. Lines and Korea's Hyundai Merchant Marine. In these arrangements, which are permitted under the 1984 Act, lines not only share vessel space, but also cooperate on terminal arrangements, information systems, and (given changes made in OSRA) possibly even inland transportation. In addition to cutting costs, individual carriers in these alliances are able to serve more ports and offer more frequent services, by coordinating sailings with their partners, and better serve shippers' global sourcing and time-sensitive logistics needs. At the same time, alliance members usually retain their separate corporate identities, marketing staffs, pricing, and contracts.
I think that allowing and facilitating these operational alliances has been a true success for the 1984 Act and antitrust immunity. It gives carriers an attractive option to cut costs and improve service worldwide without having to leap into a merger to stay competitive. This option likely has slowed down the consolidation of the industry, and thus has given users more choices and more competition.
In fact, despite the increasing concentration of the industry as a whole, in recent years U.S. shippers have been given several new options for carrier service in our major trades. Carriers that have previously focused just on the Atlantic or Pacific have recognized that this approach will not work in the dawning era of global shippers, and have used alliances, acquisitions, or aggressive growth to expand their reach. For example, APL, Mitsui O.S.K. Lines, K-Line, and Yang Ming entered the Atlantic, and at least six new carriers recently announced moves into the trans-Pacific trades, despite the fact that both routes were already well served by a dozen or more major carriers. Moreover, many major lines are establishing services in Latin America, providing new choices for shippers in the North-South trades.
The system of antitrust immunity and oversight seems to have worked well in this regard; while the industry consolidates and becomes more efficient, we have avoided the sort of excessive concentration that has raised special competitive concerns in industries such as domestic rail transport. No major shipping line has achieved a dominant position, or even been able to hold onto market share over 15 percent, so the industry remains naturally competitive, and shippers enjoy a wide range of options.
The third trend we have seen is a shift away from liner conferences, with legally binding common rates for all members, towards discussion agreements, which provide a more flexible approach to cooperation on pricing policies. Most notably, carriers in the U.S.-Asia trades recently announced moves to shut down both eastbound and westbound trans-Pacific conferences. Carriers will continue to cooperate in these trades, however, through the Transpacific Stabilization Agreement and the Westbound Transpacific Stabilization Agreement. The shift to such "discussion agreements" has been driven, in large part, by market pressures. Because discussion agreements do not set fixed common prices or interpose themselves between carriers and customers, carriers seem to have more leeway to tailor prices, and especially individual service contracts, to suit the needs of individual customers. At the same time, discussion agreements provide carriers a forum to talk about pricing policies, a mechanism for initiating trade-wide rate actions, and a system for providing members with up-to-the-minute feedback on individual pricing decisions. Discussion agreements appear to be supplanting conferences in U.S.-Latin American trades as well, but have not taken hold in the Atlantic trades, as the European competition exemption extends only to the traditional conference structure and not to discussion agreements.
So as we view these trends in ocean shipping and the laws applicable to the industry, it is logical to consider whether the current system - antitrust immunity with economic oversight by the Federal Maritime Commission - has worked, and if it can be expected to work in the future. I strongly believe that, if you look at liner shipping today, especially the improvements in service and rate reductions benefitting shippers and consumers in the last decade, and the wide range of transportation options now available to shippers, you must conclude the system has worked. Real rates declined from 1984 to 1996 by an average of 36% (weighted by cargo volume and adjusted for inflation). During that period we have seen continuous improvements in service times and service frequency, with increased intermodal options, carrier-backed advances in double-stack rail transport, increasingly sophisticated container terminals, and an explosion in carrier provided logistics and other value-added services. I further believe that OSRA and its pro-competitive provisions will further enhance the marketplace. New shipper-carrier partnerships under individual service contracts, which are being negotiated even as we speak, should enhance competition, but also provide stability and efficiency-creating opportunities for industry participants.
The system works, I believe, because it allows carriers to adopt joint strategies for dealing with market instability, but it does not wholly insulate carriers from competition and market forces. Shipping faces a peculiar combination of circumstances not seen in other industries: chronic vessel overcapacity in many trades; chronic imbalances in trade flows, so ships have empty space and empty equipment on one leg of most round-trip voyages; and seasonal fluctuations in trade flows, so that vessel space adequate for strong summer months leads to overcapacity in a weaker winter season. When these market forces are at work, competition will be keenly felt, and rate levels will often decline. For example, the weakness of the Asian currencies and the resulting imbalances in trade flows in the Pacific has led to a tremendous decline in rates. Westbound rates in the transpacific trades declined more than 50% in the last 15 years, while rates in the eastbound transpacific, up until increases implemented last year, were down between 35 to 49% over the same period. Carriers certainly have tried to use their antitrust immunity to arrest this decline. However, they have been largely unsuccessful, as the pro-competitive checks in the 1984 Act ensure that the market, rather than any carrier agreement, ultimately determines the direction rates move.
As long as there has been liner shipping, carriers have had a pressing need to fill ships. Carriers aggressively chase cargo to ensure their ships are full, recognizing that an empty slot generates no revenue for that voyage at all. In their efforts to pull marginal cargo from each other, carriers are prone to bidding overall rate levels down to levels that are close to or even below the carriers' long term average costs of operating their services. Antitrust immunity gives carriers a way out of this cycle, allowing them (especially when market conditions are less unfavorable) to use conferences or discussion agreements to incrementally restore rates to levels that are compensatory. Over the last several years, this approach seems to have worked, allowing many (but not all) carriers to earn sufficient returns to continue operating and to continually improve their services to meet the needs of international trade. Such returns, however, have been persistently lower than other transport sectors.
At the same time, competitive forces and Commission oversight have ensured that carrier groups have not put in place unreasonable rate increases. Only in rare market conditions have we seen signs that collective carrier rate actions may harm shippers or international trade; in those circumstances we have stepped in and secured pro-competitive corrections. For example, in 1996, the Commission, recognizing declining overcapacity in the eastbound Pacific, persuaded carriers to drop an agreement to artificially limit capacity in that trade.
Antitrust immunity has other positive aspects as well. As I noted before, it has provided carriers a valuable way to form alliances, cutting costs and improving service. Antitrust immunity seems to facilitate entry into new trades, as a carrier can begin serving a new route through a partnership or space charter arrangement with another line, instead of facing the economically daunting step of putting a whole new string of vessels in the trade. Also, under OSRA, carrier alliances and other groups will be permitted to offer multi-carrier service contracts, allowing shippers more options to craft deals to cover their entire global transportation needs.
There are a number of myths or misperceptions about antitrust immunity that bear mentioning. First is the notion that ocean carriers are "inefficient," and if there were no antitrust immunity, the industry would cut costs and thus become more efficient. Recent years have seen tremendous pressure on carrier rates and revenue, which has spurred carriers to pursue exceptional cost cutting measures. These have included, for example, pursuing partnerships, alliances, and mergers; selling off non-core assets; building bigger and more efficient ships; pressuring terminals and other suppliers into cutting costs; restructuring or abandoning underperforming vessel services; and embracing the Internet and improved information systems. Many of these lines are publicly traded companies, and a perusal of their annual reports reveals that they are under tremendous pressure from their shareholders to earn a reasonable return on capital. Meanwhile, many lines are currently facing declines in earnings, and some even posted losses last year, as a direct result of market forces, particularly from the weakened Asian economies.
Another misperception about antitrust immunity is that withdrawal of immunity would force weaker carriers out of the market, while allowing more efficient or innovative lines to survive. This idealized scenario ignores the important fact that international ocean shipping does not operate in an open, free market. It also ignores the strategic role that shipping plays in many nations' economic and military systems, including our own. Without immunity, the carriers that prevail very probably would be the ones with the highest levels of government assistance, or those carriers owned or controlled by foreign governments. The result could be a bidding war of subsidies, as governments around the world look to head off the loss of their commercial fleets. An analogous situation seems to have taken place in the commercial shipbuilding industry where, because of its strategic importance, competition has prompted governments to put in place various support measures to keep existing operations viable.
Given all these factors, I believe that the 1984 Act, as improved by OSRA, represents a positive, workable approach for liner shipping's future. The provisions for independent service contracting will provide increased competition, keeping pressure on carriers to continually cut costs and improve service, while fostering more efficient long term partnerships between shippers and carriers. Increased use of long-term contracts, especially multi-trade service contracts (now available under OSRA), may well lessen some of the pricing volatility that has characterized this industry. Carriers will continue to use antitrust immunity to form operational alliances, providing an efficient alternative to outright mergers, and will use conferences and discussion agreements to offset exceptional downward rate pressures brought on by chronic overcapacity and trade imbalances. The FMC will continue to stand watch to ensure that, when market conditions swing in the lines' favor, carrier groups do not abuse their antitrust immunity or impose unreasonable rate hikes.
The Committee has expressed interest in the Commission's Fact Finding Investigation No. 23, and has requested and was supplied a copy of the confidential report of the Commission's Investigating Officer in that proceeding. I will leave most of the discussion of that report to Commissioner Won. My discussion is also limited by the fact that the fact finding is an ongoing investigation. Before discussing that report, I will address what a fact finding proceeding is.
A fact finding investigation is one of the range of tools available to the Commission to help it determine whether to take action pursuant to section 6(g) or any other provision of the statutes it administers. Fact finding proceedings are non-adjudicatory information-gathering proceedings which may combine investigatory activity with the authority to require the filing of "special" or other reports, or to subpoena documents or witnesses. The Commission has previously used such proceedings on 22 occasions to investigate matters ranging from general industry practices, such as terminal practices at North Atlantic and South Atlantic ports, to the specific activities of agreements affecting a broad geographical range or large number of shippers, such as the investigation of Trans-Atlantic agreements undertaken in 1994.
These investigations are conducted by an investigating officer, not an administrative law judge, and do not charge specific respondents with specific violations of the Act, or result in the imposition of penalties. Instead, they are used to determine whether further Commission action is warranted against specific parties through adjudicatory proceedings or informal actions to collect penalties, or rulemaking addressed to the problems or practices found. In some instances "respondents" are named in order to identify at the outset those from whom information is to be sought or whose activities are to be examined. "Hearings" in such proceedings are more like Congressional hearings than adjudicatory or "evidentiary" hearings: they present an opportunity for persons with information or particular concerns to be heard, as well as an opportunity to adduce facts about specific events.
Fact finding investigations generally result in a report of the investigating officer to the Commission depicting the subject examined and making recommendations for Commission action. The Commission's rules provide that these non-adjudicatory investigative proceedings may be nonpublic. A report of a fact finding proceeding containing confidential business information or other information protected from public disclosure would not be released to the public. When, on the other hand, investigations are conducted to inform the public and the industry, as well as to ascertain the existence or status of conditions affecting shipping, those reports of fact finding investigations are made available to the public. In any event, because a fact finding report does not state the "conclusions, decisions, findings of fact or orders" of the Commission, it cannot be considered a "Commission report" within the meaning of section 11(f) of the 1984 Act. Unless specifically adopted by the Commission, the report remains just that: the report of the investigating officer, although it may well form the basis and provide evidence for further Commission action.
The Commission initiated Fact Finding Investigation No. 23 in response to complaints from many shippers and NVOCCs about the practices of ocean common carriers in the eastbound Transpacific trade during the 1998 peak holiday shipping season when, as rarely occurs, cargo exceeded capacity. These practices were described as refusals to carry low rated cargo at rates in existing service contracts; the singling out of NVOCCs for the refusal of vessel space; and significant, sudden rate increases in service contracts through "voluntary" amendments. To signal its concern with the seriousness of these complaints, the Commission appointed a member of the agency, Commissioner Delmond J. H. Won, to conduct the investigation.
Commissioner Won invited participation from carriers, shippers, transportation intermediaries and the shipping public, with assurances that commercially sensitive information provided would be accorded confidentiality to the extent permitted by law. Although many shippers were reluctant to provide information or testimony, based on stated fear of retaliation by ocean carriers, hearings were held in San Francisco, Seattle, Long Beach, Chicago and Washington, D.C. In addition to interviews with numerous shippers, witnesses on behalf of 11 carriers or conferences and seven shippers testified, and a record of some 40,000 documents was compiled.
At the Commission's direction, Commissioner Won's Report and Recommendations were presented confidentially to the Commission on January 13, 1999. The Report summarized the evidence compiled, illustrated by specific examples from some of the appended supporting documentation, and recited Commissioner Won's conclusion that the practices complained of had occurred and represented significant violations of the 1984 Act. A summary of that Report, which maintained the confidentiality promised individual witnesses and providers of information or documents, was made publicly available on March 12, 1999.
A number of troubling issues with respect to carrier practices in the Transpacific trades were raised by the Fact Finding Investigation. With respect to the now-past activities of the carriers which triggered the investigation, the Report indicated that all of the carriers took advantage of the eastbound market conditions to increase revenues. However, the carriers' responses to these conditions were not merely market-driven responses to the law of supply and demand, but involved practices which did not conform with their obligations under the Shipping Act or existing service contracts. The carriers allegedly sought to increase their revenues by refusing space to those with service contracts covering less profitable cargo so that they could make that space available to shippers of cargo which produced a better financial return; demanded rate increases or premiums in return for space; targeted NVOCCs as a class for specific large rate increases; and refused to honor service contract commitments to shippers' associations, which required members to seek space on their own at higher rates. These alleged practices did not generally affect large contract shippers who received preferential space allocation, although their lower-valued cargo was also affected by the sale of space to higher bidders. In addition, carrier failures to report certain meetings and concerted activities in violation of the 1984 Act and the Commission's regulations were reported to have occurred.
The Commission determined at its March 9, 1999 meeting to further investigate a number of practices by individual carriers through specific enforcement actions. Individual Commission proceedings will commence as necessary preparations are completed. We have kept the Fact Finding Investigation open to ensure that the record in that proceeding may be used and augmented to aid in the other enforcement actions authorized by the Commission on March 9, 1999. It would be inappropriate for me to go into any detail about these ongoing enforcement actions.
In addition, the Fact Finding Report focused on carrier practices which, to my mind, raised troubling issues about the role played by the comprehensive communications network under the Transpacific Stabilization Agreement ("TSA") in the carriers' ability to achieve rate solidarity during the 1998 peak season. Members of TSA, a so-called "discussion agreement," are permitted to discuss and voluntarily agree upon rates but not publish a common tariff. The Report explains that commencing in 1998, TSA members shared information on proposed rate changes, including information on members' service contracts with particular shippers and particular rates, by notifying other members of TSA through the secretariat. The fact finding record also suggests that TSA had replaced the conferences in the eastbound transpacific trades as the ratemaking policy group. This appears likely, since ANERA has filed an amendment suspending the conference agreement for six months and TWRA has announced that it will take similar action.
While I am satisfied that the FMC has taken significant steps to address alleged violations by individual carriers revealed by the fact finding investigation, I believe the agency might have taken additional steps to inquire into the extent to which controversial activities stemmed from the concerted activities of the carriers. Obviously, the Commission, as a whole, did not embrace this view. But I will continue to urge the Commission to take an aggressive approach toward ensuring that we fulfill Congress' expectations that we provide meaningful oversight over the concerted activities of ocean common carriers benefitting from protections from our antitrust laws.
We are all aware that the shipping industry as a whole is in flux as the OSRA reforms come into force. However, I am also mindful that the Commission has an ongoing obligation to assure that those changes occur in an environment in which all participants have a fair shot at the benefits anticipated from those reforms. One of the major issues as we proceed under OSRA will be the extent to which concerted activities of agreements enjoying antitrust immunity may affect the degree to which shippers are able to secure truly "confidential" negotiations and contracts with carriers. In the coming months, as these relationships mature under the 1984 Act as amended, the Commission will need to be vigilant in monitoring these aspects of the many newly-filed agreement authorities, voluntary guidelines, and service contracts under TSA and other agreements. The Commission may also have occasion to hear from shippers who may have similar concerns.
I think that it is useful for the Congress and the Commission to review the reasons for antitrust immunity, how the system is serving the needs of our oceanborne trade, and whether improvements can be made. As I have testified, I believe the rationales underpinning the Shipping Act of 1984 continue to be sound, and the system in general has performed well. I am concerned that radical steps could lead to global discord, legal uncertainty, and unnecessary business risk. I can assure you that the Commission stands ready to take action to head off any abuses by ocean carriers of their antitrust immunity. We would be happy to provide the Committee with additional information or reports as to the effects on the industry of the new, more competitive Shipping Act of 1984.