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The Mid-Atlantic Trade Conference & Shippers's Dialogue - August 11, 1999

August 11, 1999

REMARKS OF

THE HONORABLE HAROLD J. CREEL, JR.

CHAIRMAN

THE FEDERAL MARITIME COMMISSION

BEFORE THE

MID-ATLANTIC TRADE CONFERENCE

&SHIPPERS' DIALOGUE

BALTIMORE, MARYLAND

AUGUST 11, 1999


I would like to thank the Containerization & Intermodal Institute and the Maryland Port Administration for inviting me to deliver the keynote address for your conference today. This is a dynamic time in the maritime industry, and I appreciate the opportunity to speak with you all. One thing I do miss on this visit to Maryland is all of the conjecture and hypothesizing about the Orioles' chances of getting to the World Series - but let's not talk about that.

Instead, a far more pleasant subject for you Marylanders is the rising status of the Port of Baltimore. The excellent leadership of Jim White and his executive team has put Baltimore back on the maritime map. Qualifying for the final cut in the competition to serve as the East Coast hub for Maersk and Sea-Land certainly gave Baltimore tremendous credibility, both here and abroad. MPA's outstanding efforts on that project forced the industry to stand and take notice of everything Baltimore has to offer. You have a prime geographic location here in the Mid-Atlantic. You are fortunate to have an excellent highway system, fine railroad access, and the ability to handle all types of cargo. And you traditionally have enjoyed the benefits of a positive labor force. These all help the port to develop business, create jobs, and contribute significantly to the economy of the entire State of Maryland.

Believe it or not, I wasn't asked to come here to tout the benefits of the Port of Baltimore. Actually, I'd better be careful before I offend many of my friends in ports up and down the East Coast. But in line with your two-day conference focusing on the status of U.S. ocean trade, your sponsors requested that I discuss the impact of shipping reform on the maritime community. I thought I would concentrate on three separate areas in covering this topic:  first, the FMC's rules to implement the Ocean Shipping Reform Act of 1998 ("OSRA") - our general approach and how the industry is complying; second, how various companies are acclimating themselves to the new ocean shipping environment created by OSRA; and third, what to look for in the near future in the maritime industry.

In discussing that first area, the Commission's rulemaking effort, let me remind you all just what was involved. The President signed OSRA in October last year, and the new law required all final rules to be completed by March 1st of this year. That gave the FMC 4 ½ months to review the new Act, develop regulations to cover all of the changes it encompassed, provide a reasonable time for industry comment, assess all comments, and then incorporate any changes we believed necessary. And we had to do this while complying with administrative and substantive requirements and procedures that apply to the rulemaking process. We are fortunate that we began our planning early, which enabled us to have our rules in place on March 1st as required.

Our aim was to craft meaningful rules that effectively implemented the policy direction of our new statute and considered all comments received. The volume and diversity of comments, particularly those which advocated alternative approaches, made this a complex and time consuming process. But the input from the industry definitely enhanced the process and made for better final products. I believe we were effective in developing rules that are minimally intrusive and burdensome to the industry yet still maintain the degree of oversight that is expected by Congress.

So just how has the industry been complying with our rules? Some have done better than others. The critical factor which has affected the entire compliance effort, in my mind, was the limited amount of time the Act provided for accomplishing all required actions. We expected the transition to be bumpy and less than perfect, and our projections proved to be very accurate in that regard.

Take tariff publication for example. I am sure you are all aware that OSRA did away with the requirement that tariffs be publicly filed with the Commission, and replaced that with the requirement that all carriers publish tariff information in their own automated systems. By and large, most carriers have published their tariffs. The Commission will be dealing with those who have yet to publish in the near future.

But the bigger question is, do those tariffs meet the requirements of the new Act? In other words, are they accessible by the general public and the FMC? And, secondly, are they accurate? Our initial review indicates that we may have some problems in terms of the accessibility and accuracy of various tariff systems. I don't mean to include all carrier systems under the same umbrella, but our assessment at this point is that many systems need some work in order to make them readily accessible. We also have our spotlight on the level of charges carriers are imposing for that accessibility. We have identified certain situations that appear to be out of line. Additionally, the larger concern is whether these systems are accurate and contain all relevant information. Our cursory analysis is that more will be needed in many systems in order to make them the information tools envisioned by Congress. We hope to complete our review of tariff systems soon and will appropriately address all concerns that arise.

Carriers appear to have made all necessary agreement filings. OSRA dictated certain changes in this area, and agreement parties generally have been very prompt and effective in accomplishing the amendments necessary to reflect those changes. Of particular note are the voluntary guidelines agreements are free to implement regarding their members' individual service contracting activity. All of these guidelines are receiving special attention by the Commission to ensure that they do not unduly diminish competition or otherwise disadvantage the shipping community.

We have been inundated with service contracts. In May and June alone, we received almost 15,000 confidential service contracts. That compares with the approximate 3,400 contracts we received during the same period last year. It is safe to say that carriers and shippers are making extensive use of this new-found authority to keep their shipping arrangements outside the public's purview. That was precisely the intent of OSRA.

The Commission went to great lengths to facilitate the filing of these contracts, going so far as changing our initial proposal in mid-stream to reduce various burdens and costs identified by contract filers. The filing process has proceeded quite well to date. Certain issues have arisen concerning substantive requirements as to the contents of contracts, which we are in the process of addressing. The Commission will be prepared to issue any clarifying instructions or requirements regarding the contents of service contracts should we perceive issues of industry-wide concern.

And then we have applications to operate as transportation intermediaries, or OTIs as they are known. Again, you are familiar with OSRA's modification which lumped NVOs and freight forwarders under the general heading of "ocean transportation intermediary." All OTIs in the U.S. must be licensed by the Commission. As of this month, we have received 1,600 new applications, while we also are working on reissuing licenses to 2,100 previously approved forwarders. We are a bit backlogged in this area, and have found on numerous occasions that we have had to go back to a filing party to obtain more information or correct simple errors that could have been avoided. Nonetheless, we are moving as rapidly as possible, and are developing a plan to process these applications even more promptly.

Let me focus now on how the industry has been reacting to this new shipping statute. How is it adapting to the new freedoms and flexibilities wrought by OSRA? Who have been the winners and losers so far?

Well the common view, and one to which I wholeheartedly ascribe, is that it is still far too early to make any meaningful judgments. Other than the increased filing of service contracts which I just mentioned, no meaningful trends have emerged nor have any sectors of the industry proven to be the clear-cut primary beneficiaries of this new statute. Sure, certain companies have reaped some benefits. In most instances, those are the companies who did some serious planning in preparation for OSRA's enactment and were in a position to gain some advantages. But for the most part, operations in U.S. ocean commerce have been dictated more by market conditions than the effect of OSRA. The transpacific is a prime example.

Activity in the east bound transpacific has centered more on locking in space on the shipper side or obtaining favorable rate levels on the carrier side. That is understandable given the trade imbalance that continues to exist in the transpacific and the shippers' need to move their goods to market. In this climate, it is not surprising that most parties were more interested in completing their deal for this year with an eye towards more fully employing OSRA's advantages down the road.

That's not to say that all parties took that approach. We've all spoken with certain companies or read in the trade press about others who diligently prepared for May 1st and had a detailed agenda they hoped to accomplish immediately upon the new Act's effectiveness. And some of these entities are pushing forward. But by and large, I think most will agree that the full reach of OSRA's benefits won't be seen for at least another year, if not longer. We simply have not yet witnessed the development of the long-term partnerships or more tailored relationships that were so prominently discussed in the run-up to OSRA. I assume that many of those are in the works, and will take time to finalize. Perhaps it is unfair to even think that most parties could accomplish such relationships in just the few short months since OSRA has passed. Most parties apparently spent a good deal of effort scrambling to ensure that they fulfilled the mandatory requirements of OSRA. The same goes for global service contracts. While many speak of their importance and desirability, few have been filed.

One thing we have observed, however, is carriers' increasing reliance on discussion agreements as opposed to conference agreements. We continue to witness conferences either losing their market power, limiting their range of operation, or being abandoned altogether in favor of voluntary discussion agreements. I've said in the past that this trend is troublesome to me, given the extensive market power discussion agreements enjoy since most include many of the major independents in a given trade. However, I also am keenly aware of the efficiencies that come about through discussion agreements. We at the Commission are planning to continue our vigilant oversight of activities pursuant to such agreements.

And finally, perhaps not directly related to OSRA, the maritime industry has continued its proclivity for joint or combined operations. Be it by merger, joint venture, alliances, or outright acquisitions, all sectors of the industry continue to combine forces in order to reduce costs and increase efficiencies. I read an article in the trade press recently which stated that over 15 major container shipping company mergers or acquisitions have occurred since 1995. That's amazing to me. And this trend does not just apply to carriers. Forwarders, NVOs, and other intermediaries are also joining forces to achieve optimal efficiencies.

The combination du jour has been the acquisition. Last year, Neptune Orient Line acquired major U.S. carrier American President Lines. Three weeks ago, it was Maersk acquiring Sea-Land's international shipping operations. And just this week, the press is reporting that Hamburg Sud is in fact acquiring the South American operations of the Crowley Company. And I'm only focusing here on the acquisition of U.S. companies. That point in itself raises numerous questions, which I'll get into in a moment. Perhaps OSRA, and its more market-oriented approach to U.S. ocean shipping, will continue this trend -- only time will tell.

I'd like to close my remarks today by discussing what we should expect to see in the maritime industry in the near future.

To begin with, the industry clearly will remain under scrutiny, and questions will be raised if further regulatory reform is necessary. Despite the four-year process that culminated in OSRA and the bold changes implemented by that statute, industry operations will remain on the radar screen. Those dissatisfied with OSRA's final provisions will not be shy about highlighting how they believe the Act has created inequities or impediments to equitable trade. In the center of the spotlight will be carrier antitrust immunity. Congressman Hyde has stated that he has not closed the door on reviewing the continued propriety of antitrust immunity in ocean shipping, and you can be sure that those who pushed for his May hearing will continue to supply him with information and data. And the OECD draft report on possibly removing or altering antitrust immunity in worldwide maritime trades only heightens the issue.

I believe that most are convinced that the industry needs to operate under OSRA for an extended period before any major changes are floated. But that will not discourage those who are less than pleased from voicing their views or suggesting perhaps minor changes.

My view all along has been that we must allow OSRA time to work. Being a compromise piece of legislation, naturally it's not perfect. But the sound course is to move cautiously as we evaluate the new regulatory environment and to be prudent about initiating any modifications that can disrupt the delicate balance that enabled OSRA to gain broad-based industry support.

I think you also can look for my agency, the FMC, to be in a strengthened position as it addresses its international trade responsibilities. Many of our regulatory and oversight roles have been expanded and will be just as essential, and we must be prepared to appropriately administer them. This is particularly true regarding the restrictive practices of foreign governments, oversight of antitrust immunity, monitoring industry practices that distort the marketplace or unfairly disadvantage an individual or group, and ensuring that relevant public information is readily accessible.

As to the actions of foreign governments, some have suggested that the recent acquisition of major U.S. lines by foreign carriers leaves the FMC with no one's interest to protect in such matters. But it must not be forgotten that one of our mandates is to protect against practices that create unfavorable conditions for shipping in U.S. trades generally, not just to look out for U.S. carriers. And, just as importantly, to the extent we have separate authority to assist U.S.-flag lines who are being discriminated against or disadvantaged, that will continue to be relevant should the acquiring companies continue to fly the U.S. flag, as in the case with APL. Maersk also has indicated there will be no loss of the U.S. flag. So it is presumptuous and erroneous to conclude that the Commission will be less active in this area. I anticipate that we will be just as vigilant and forceful in addressing conditions created by foreign governments that impair fair and open ocean trade.

OSRA also should put the focus for international trade where it belongs, on effective partnerships and long-term relationships, along with the flexibility and accountability they require. It encourages the industry to act more as partners than as adversaries. As I mentioned, that hasn't happened to any large degree yet. But I believe most companies are identifying means of tailoring deals to their specific needs and the benefit of a prospective partner. For too long many in ocean shipping have operated with the myopic view of "what advantage can I gain right now." That approach is being replaced with thinking that is more strategic and long term, and which considers a host of logistics questions that can create mutual efficiencies and benefits. Whether it be via more structured service contracts, relationships with new clients or even competitors, or new forms of creative marketing, those in the industry are striving to be both more competitive and more cooperative as they develop their business plans for the next century.

Similarly, there is no reason to expect an end or decline in the trend towards mergers and joint operations. There simply are too many advantages to be gained by such moves. And as I indicated earlier, all sectors of the maritime community will no doubt continue to join in.

I think all in the industry should become accustomed to the recent shift we have witnessed away from liner conferences and their binding obligations, toward discussion agreements which provide members with a more flexible approach to cooperation on pricing policies and other operational matters. While market factors have driven this shift to date, I think OSRA will further it.

And globalization should continue to have a major impact on ocean transportation. In their efforts to maintain an edge or plan for long-term growth and development, organizations are establishing effective global relationships and global operations. The major corporations are entrenched on every continent, and most sectors of the industry are thinking globally. Now, don't get me wrong. Those of you who operate in a niche market or offer a specialized service that is tailored to certain clients or businesses may be well positioned for continued success. But anyone looking for future growth and development has to be thinking beyond their current markets or present sphere of operations.

Hopefully I haven't spoken too long. But there is so much to discuss in our industry at the present time. These are exciting and changing times. I wish you all success as you move forward into the ocean shipping industry of the 21st century.