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Statement of the Honorable Harold J. Creel Jr. before the Committee on Transportation and Infrastructure Subcommittee on Coast Guard and Maritime Transportation United States House of Representatives - February 29, 2000

February 29, 2000

STATEMENT OF
THE HONORABLE HAROLD J. CREEL, JR.
CHAIRMAN, FEDERAL MARITIME COMMISSION

800 NORTH CAPITOL ST., N.W.
WASHINGTON, D.C. 20573
(202) 523-5911

BEFORE THE
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
SUBCOMMITTEE ON COAST GUARD AND
MARITIME TRANSPORTATION

UNITED STATES HOUSE OF REPRESENTATIVES

FEBRUARY 29, 2000

Mr. Chairman and members of the Subcommittee, it is a pleasure to appear before you today to present the President's fiscal year 2001 budget for the Federal Maritime Commission. With me today are Thomas Panebianco, the Commission's General Counsel, and Bruce A. Dombrowski, our new Executive Director.

The President's budget for the Commission provides $16,222,000 for fiscal year 2001. This represents an increase of $2,125,000 over our FY 2000 appropriation. However, I would like to point out that this amount is only $537,000 more than the amount authorized by the House for FY 2000 in H.R. 819 and actually $90,000 less than what you authorized for FY 2001. This budget provides for 144 workyears of employment.

The budget contains $12,463,000 for salaries and benefits to support the Commission's programs. This includes all salaries for FY 2001, promotions, within-grade increases, and an anticipated cost of living adjustment. It also contains funding for 12 additional positions, including full staffing for all five Commissioners. Official travel has been increased only $18,000 over the FY 2000 level, but this increase should help us to provide better service to the ocean transportation industry and more effectively accomplish our oversight duties. Lastly, administrative expenses have increased $286,000 over FY 2000.

As we have noted in prior years, the Commission's budget contains primarily non-discretionary spending. It is composed of mandatory or essential expenses such as salaries and benefits, rent and guard services, health services, accounting services, telephone and other communication costs, supplies, mandatory training, and printing and copying costs. These items represent the basic expenses any organization faces in order to conduct its day-to-day operations and are crucial to allow us to effectively meet the responsibilities Congress has entrusted to us. The majority of the increase over our FY 2000 appropriation is in staffing. The additional positions represent the recovery of lost ground in terms of the Commission's staff and attrition in important areas which previously had to be absorbed due to budget restrictions.

As you know, Mr. Chairman, the Ocean Shipping Reform Act of 1998 ("OSRA") was enacted in October 1998, and went into effect on May 1, 1999. This statute significantly altered the Shipping Act of 1984 ("1984 Act"), the primary statute relied on by the Commission to oversee the ocean transportation industry. It has produced dramatic changes in the way business is conducted in this essential industry. An increasing amount of cargo is moving under service contracts which are being negotiated between individual ocean carriers and shippers. And certain terms of these contracts, particularly the rates charged, are no longer made public. Indeed, carriers and shippers can agree to keep their deals confidential from their competitors. Moreover, conferences cannot restrict or prohibit their members from entering into service contracts on their own. Although ocean carriers have retained the right to obtain antitrust immunity for certain concerted activities, it appears that in many trades, rate-setting conferences are becoming a thing of the past, and are being replaced by discussion agreements.

In light of the Commission's changed mandate as a result of OSRA, I would like to highlight some of our more significant activities to provide you a better understanding of how we are approaching our new mission.

In anticipation of the enactment of OSRA, the Commission engaged in a preliminary analysis of the rulemakings that would be required to implement the new law, but our efforts began in earnest once the new law was passed. The Commission analyzed the new statute and issued eight proposed rules based on our interpretation of OSRA's regulatory impact. We reviewed and assessed the comments submitted by the affected parties and then adopted those which we believed were consistent with the Commission's mandate. I am confident that the rules ultimately promulgated as a result of the notice and comment procedures both reflect the interests and address the concerns of the industry. In particular, we implemented an internet-based service contract filing system in response to industry comments that our initial proposal was too burdensome. We refined our approach to tariff publication systems so as not to impede technological innovation, and we incorporated many constructive suggestions submitted by the commenters regarding the ocean transportation intermediary licensing and financial responsibility provisions. Further, we instituted changes to our agreement filing rules to address concerns raised by the industry. Moreover, based on industry requests for further clarification and guidance in that proceeding, we subsequently issued a notice of inquiry relating to the content of agreements filed with the Commission pursuant to the 1984 Act. We are currently reviewing those responses to determine whether, and in what manner, another notice of proposed rulemaking would be warranted.

The Commission faced an extremely short time frame for promulgating new rules to streamline the administrative regulations governing the industry, while still maintaining the essential protection and oversight retained by the 1984 Act. Working with the industry, we were able to effectuate as smooth a transition as possible to the new regulatory regime under OSRA.

We continue to assess the rules promulgated to implement OSRA and discuss with the industry areas where they might be refined to eliminate unintended burdens. Currently, we have pending a notice of proposed rulemaking to lessen the requirements to obtain a license to operate as an ocean transportation intermediary. We are mindful that there may be other areas where we can make improvements. To that end, we will continue to assess this situation and are prepared to issue additional rulemakings should the need arise.

On February 9, 2000, I advised the relevant committees of Congress of my proposal to restructure the agency. I am pleased to report that the FMC's reorganization became effective two days ago, February 27, 2000. The purpose of this reorganization is to enable the agency to better implement the policy objectives expressed by Congress in OSRA. To accomplish this, we are allocating our resources as much as possible towards assisting consumers, resolving complaints and helping those subject to our regulation achieve compliance.

The FMC is now more streamlined, with three operating bureaus instead of four. There is no longer a Bureau of Administration; the Executive Director is now directly responsible for the administrative offices of the agency, thereby eliminating an unnecessary layer of supervision. I have combined certain of the functions of two bureaus into a single Bureau of Trade Analysis, which is responsible for processing agreement filings, performing competition oversight and analysis, and providing substantive assistance regarding service contracts and tariffs. The Bureau of Consumer Complaints and Licensing is a new bureau comprised of the offices overseeing the licensing and financial responsibility of intermediaries and the certification of passenger vessels for financial responsibility, and also includes an expanded office devoted to handling consumer complaints and achieving informal resolution of disputes. I intend to involve the agency more deeply in alternative dispute resolution, conciliation and mediation, in hopes of finding ways to settle matters without having them processed via the costly and time-consuming channels of formal adjudication. We also intend to augment our ombudsman-type services and our attention to consumer fraud. I believe this is consistent with OSRA's intention to foster an environment in which the government facilitates statutory compliance, and initiates enforcement action to address market distorting or otherwise egregious malpractices.

To be sure, there is still a Bureau of Enforcement, and we intend for that Bureau to remain active and aggressive in responding to evidence of wrongdoing. Even as amended by OSRA, our statutory responsibilities include prosecuting certain proscribed acts, such as unreasonably refusing to deal or negotiate, or willfully misdescribing cargo for the purposes of paying a lower rate, or operating without the necessary financial responsibility, license or published tariff. Yet our primary objective is to attain compliance, to bring entities into conformity with the law, not to penalize the unwary.

The reorganization should assist us to better perform our other essential functions as well. For example, we will continue to aggressively ensure that our trading partners not engage in restrictive, unfair or non-reciprocal practices or policies that impede the United States ocean commerce, either with respect to the carriers serving our trades, the shippers using those carriers, or the intermediaries and others whose services contribute to our ocean commerce. I am creating a Permanent Task Force on Restrictive Foreign Practices within the agency, across several offices and bureaus, so that we can even more promptly and effectively respond to instances in which our authority to address such practices must be exercised. I am confident that this new structure will enhance the Commission's ability to meet its statutory obligations. I look forward to reporting back to you on our success in this regard.

The Commission continues to exercise its authority to address restrictive or unfair foreign shipping practices under section 19 of the Merchant Marine Act, 1920; the Foreign Shipping Practices Act of 1988, or the "FSPA"; and the Controlled Carrier Act of 1978. Section 19 empowers the Commission to make rules and regulations to address conditions unfavorable to shipping in our foreign trades; the FSPA allows the Commission to address adverse conditions affecting U.S. carriers in our foreign trades that do not exist for foreign carriers in the U.S. And, under the Controlled Carrier Act, the Commission can review the rates of government-controlled carriers to ensure that they are not below a level that is just and reasonable.

In August 1998, the Commission initiated a proceeding to investigate whether the laws, rules or policies of the Government of the People's Republic of China might have an adverse impact on U.S. shipping and warrant action under section 19 or the FSPA. The Commission sought information from interested parties including shippers, ocean transportation intermediaries, vessel operators, and others in the ocean transportation industry, on Chinese policies and practices regarding port access, the licensing of multi-modal transport operations, and the establishment of representative and branch offices.

The responses indicated that Chinese laws and regulations discriminate against and disadvantage U.S. carriers and other non-Chinese shipping lines. For example, non-Chinese carriers are barred from opening wholly-owned companies or branch offices in China in areas where the carriers' vessels do not make monthly calls; they are barred from performing a number of vessel agency services for themselves; there are restrictions on their freight forwarding services; they must obtain governmental permission before beginning or changing vessel services. Also, proposed rules under consideration could result in the disclosure of confidential service contract terms and further restrict non-Chinese carriers' ability to offer multi-modal transport services in China. Recently, the Commission issued further information demand orders to two more parties: China Shipping Container Lines, a new Chinese government carrier in our trades, and A.P. Moller Maersk, which just took over Sea-Land's substantial U.S.-flag China services. In addition, it is our understanding that many of these issues will be included in maritime discussions between the Maritime Administration and the State Department, and China, which discussions are being held in Beijing this week. The Commission will continue to assess this situation and will take appropriate action as necessary.

Recent activities of the Government of Brazil also raised serious concerns with the Commission. A Brazilian law appeared to provide unfair tax and duty exemptions to vessels enrolled in its second register and, in late 1998, U.S. ocean carriers were denied access to Brazilian Government reserved cargoes and subject to discriminatory duties. The FMC signaled that it was preparing to take action during the course of several meetings and press releases. Subsequently, as a result of favorable maritime consultations between our two governments, Brazil agreed to take corrective action to address the Commission's concerns. The unfair tax benefits for the second registry are being phased out and the laws restricting access to government reserved cargo and levying discriminatory duties were suspended. The Commission is pleased that our efforts were helpful in attaining a prompt resolution to this crisis.

Perhaps one of the most highly-publicized Commission actions in recent years involved restrictive port practices in Japan. The Commission took action under section 19 against a series of restrictive conditions in the harbor services industry in Japan, including a system that required carriers to receive permission before making any operational changes, and resulted in the disruption of business operations, the payment of unwarranted fees, and the imposition of operational restrictions. As a result of these conditions, both U.S. carriers and U.S. trade were burdened with unreasonably high costs and inefficiencies.

The Commission ultimately issued a final rule imposing a fee of $100,000 per voyage on Japanese ocean common carriers entering U.S. ports. The FMC subsequently compromised on fines after government negotiators reached an accord on a timetable for Japan to change its system, as we had hoped. Our purpose in imposing the fines was not to create further disruptions and impediments in the trade, but rather to motivate Japan to improve its system, with the adoption of written rules, more open decisionmaking and arbitration processes, and the possibility of licenses for new terminal companies. As the Washington Post said in an editorial praising the FMC's efforts, sometimes it takes a sledgehammer to capture the attention of foreign government officials. In May 1999, the Commission issued a notice removing the final rule because it had become outdated in light of changing circumstances. We did, however, impose semiannual reporting requirements on U.S. and Japanese lines to keep us apprised of the process. The first of these reports was received in August 1999, and the Commission will continue to closely monitor developments in Japan that affect our shipping interests.

As mentioned earlier, under the Controlled Carrier Act, set forth in section 9 of the 1984 Act, the Commission can review the rates of government owned or controlled companies to ensure that they are just and reasonable and are not used in a predatory manner. In fact, OSRA recently "beefed-up" this provision by removing the loophole which allowed these carriers to flag out and avoid FMC scrutiny. OSRA also expanded coverage of the Controlled Carrier Act to the bilateral trades.

OSRA made several changes in the area of service contracting that will present major challenges to the Commission and the industry. OSRA eliminates so-called "me-tooing" in which any similarly-situated shipper was entitled to the same service contract as offered to another. It allows confidentiality for most service contract terms (most significantly rates), and requires publication of only four terms. It also broadens who may offer service contracts to shippers to include non-conference carrier agreements; allows unrelated shippers to jointly enter into service contracts; and allows carrier agreements to agree to voluntary guidelines on service contracts.

In anticipation of a large increase in the number of service contracts after passage of OSRA in October 1998, the Commission set to work to implement an electronic filing system which would accommodate the anticipated filings increase. A proposed rule was published in November 1998 which would have adapted the Commission's existing "Automated Tariff Filing System" ("ATFI") to automate service contract filings. However, this proposal met with some criticism from the filing public that the proposed system would be too rigid and onerous on filers. In response to these concerns, between late January and March, 1999, the Commission was able to design and implement an internet-based system which will accept the filing of service contracts and their amendments electronically at minimal expense to filers. But to provide a transition period to accommodate the many commenters who supported the ATFI-modeled filing system, the Commission did not completely eliminate that form of filing until the end of September 1999. Since October 1, 1999, all filers submit service contracts to the Commission electronically via the FMC's internet website.

The service contract filing system employs the latest security and encryption techniques, ensuring the confidentiality of the information filed, and it is able to accept many filing formats, making it extremely filer-friendly. Filers are required to make only a minimal number of keystrokes to file, thereby resulting in a filing process which is very quick and efficient. The Commission in turn is able to receive the entire contract (with the exception of signatures) as it is uploaded directly from the filer's computer, through the FMC's website to the filing database. The Commission has been re-assessing the system almost since its inception, to make filing as simple and efficient as possible, as well as to improve the management of the data on the Commission's side.

In the previous nine months alone (i.e., since May 1, 1999), we have received more than 95,000 filings, including over 30,000 original service contracts and 65,000 amendments. This represents an increase of 142% over the same period in 1998. We expect this trend to continue in 2000, especially during the upcoming contract negotiation season.

Since the implementation of OSRA, the Commission has observed several trends. The first year of contracting has primarily resulted in relatively standard contracts -- similar to those the Commission had seen in the past -- which may be the result of OSRA becoming effective just as the traditional service contracting season ended. This Spring, however, the Commission expects to see more innovation in contracting. We expect to see a continued trend in the increase in numbers of service contracts and amendments filed; shorter durations, more variation in duration, and the annual traditional "contracting seasons" becoming less important; lower minimum cargo volume requirements coupled with these shorter durations (also called "spot contracts"); an increase in multiple trade lane and global service contracts tailored to individual shipper's needs; more service contracts with multiple carriers through non-conference agreements; and more service contracts with shipper parties who are otherwise unrelated.

The Commission has initiated a project to assess the long term impact of OSRA on the ocean transportation industry, based on its first two years in force. We plan to examine whether OSRA is yielding the benefits envisioned and whether it has had any detrimental impacts on the industry as a whole or on a discrete segment. In particular, the OSRA Impact Study will explore changes in shipper-carrier relations stemming from the new service contract provisions; the role of pricing agreements and their relationship to capacity in the new environment; whether ocean transportation intermediaries have suffered any significant competitive disadvantages; and the accessibility and accuracy of common carrier-published tariffs. The study will also address OSRA's impact on the Commission's responsibilities and programs. We will, of course, share the results of our study with Congress.

Mr. Chairman, I hope that my comments have served to give you a clear indication of the important work accomplished by the FMC. I respectfully request favorable consideration of the President's budget for the FMC so that we may continue to perform our vital statutory functions in fiscal year 2001.