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Remarks of Honorable Harold J. Creel Speech before the Propeller Club of Los Angeles-Long Beach - January 21, 2000

January 21, 2000

REMARKS OF

THE HONORABLE HAROLD J. CREEL, JR.

CHAIRMAN

THE FEDERAL MARITIME COMMISSION

BEFORE

THE PROPELLER CLUB OF LOS ANGELES
LONG BEACH

 

LONG BEACH, CALIFORNIA

JANUARY 21, 2000

 

It is a pleasure to be here once again to speak to you. As you may remember, almost one year ago to the day, I spoke to you on the Ocean Shipping Reform Act and what the Federal Maritime Commission was doing to implement that recently enacted statute.

Well, a lot has happened since then: 1) the Commission completed its arduous task of adopting final rules to implement OSRA in an exceedingly short time-frame; 2) OSRA went into effect on May 1, 1999; and 3) for the past three quarters of a year, the ocean transportation industry has had an opportunity to adjust itself to this new statutory scheme.

Today, in keeping with the theme of your conference - "Transport Challenges" - I will discuss some of the changes and trends we have seen in the ocean transportation industry as a result of OSRA, and some of the changes that have occurred at the FMC. I will also discuss the Commission's recent decision with regard to ocean carrier practices in the transpacific trades during the 1998 shipping season.

Some have referred to OSRA as a deregulatory bill - I prefer to view it as "reregulation," but in the general direction of deregulation. Nonetheless, OSRA altered the Shipping Act of 1984, the statute that serves as the focus of our oversight of the ocean transportation industry, in several significant ways. From a shipper's perspective, the primary benefits of OSRA are: 1) the ability to enter into confidential service contracts with ocean common carriers; and 2) the reduction in the power of traditional conferences to regulate or prohibit service contracting by their members, i.e. it allows independent service contracting by conference members. On the ocean carriers' side of the equation, they retained the ability to obtain antitrust immunity to collectively set rates and coordinate capacity. In addition, agreements may adopt voluntary, confidential guidelines relating to service contracts and only ocean common carriers, as opposed to NVOCCs, can offer service contracts to shippers.

OSRA's service contract changes have opened the door to a lot more innovation in service contracting and more individualized, one-on-one contracting between shippers and carriers. Not surprisingly, the number of service contracts filed with the Commission has increased dramatically. From May to December 31, 1999, we received a total of 84,643 service contract filings: 25,545 were original contracts and the rest were 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. We also believe that shippers will become more adept at negotiating contracts that meet their particular needs, once they have gained experience under this new regime.

As an aside, I would also like to note that in a short, 3-month period, the Commission adopted a system that enabled the industry to use off-the-shelf software and the internet to file their contracts in a simple, nearly cost-free, manner. I am proud of the fact that the Commission was able to adopt such a system in response to earlier industry concerns.

One of the most obvious changes resulting from OSRA's liberalization of service contracting was a sharp reduction in pricing agreements. No truly new conference -- that is, one that doesn't simply replace an existing conference -- has been established since November 1998; and the number of active conference agreements on file has declined by a third -- from 33 to 22. That includes, of course, the suspension of the two inbound transpacific conferences (ANERA and the Japan Freight Conference) and the disbanding of TWRA. So, with discussion agreements already in place in most U.S. trades, operational agreements -- mainly vessel sharing arrangements -- are now the predominant form of agreement being filed with the Commission.

One possible interpretation of this change is that discussion agreements are the clear forum-of-choice for carriers' collective pricing activities -- and are likely to remain so. They allow carriers to set broad policies and exchange information, rather than set individual rates. In addition, new vessel sharing agreements are being established in an effort to reduce costs, and perhaps, rationalize trade-wide capacity.

There is also one "non-trend" worth mentioning. Prior to OSRA's implementation, we anticipated that there might be a significant number of new agreements seeking joint service contracting authority -- for example, by global alliances. So far, however, we have had less than a handful of such agreements filed by individual lines. Instead, most joint contracting authority has been established under discussion agreements. And that non-trend makes perfect sense, given that most major lines are members of discussion agreements, and it's far simpler and less expensive for individual lines to obtain broad joint contracting authority under the auspices of these large umbrella organizations than to file separate, and more limited, individual agreements.

Another OSRA-related change involving discussion agreements is the filing of confidential voluntary service contract guidelines. OSRA, as you know, allows carriers to adopt -- on a voluntary basis -- collective guidelines with respect to the contents of, and sharing of information about, their individual service contracts. Those guidelines are then to be filed confidentially with the Commission, where we review them -- in the context of existing economic conditions and collective carrier activities in the affected trades -- to ensure that they will not contribute to an unreasonable increase in transportation costs or decrease in service.

So far we've received fewer than a dozen sets of guidelines -- almost all of them by discussion agreements. Collectively, these guidelines cover contracting in most of the major U.S. trades including the transpacific trades, South America, the Middle East, Australia, and the Caribbean. No contract guidelines have been filed for the US/Europe trades because, as you know, adoption of service contract guidelines is proscribed by the European Union.

Since the contents of the guidelines are confidential, I won't be discussing particular cases today. But I can say that, in general, the filed guidelines embody a variety of different approaches -- ranging from detailed lists that cover general rate increases, a wide assortment of charges and terms, and common language on contract confidentiality, to lists of particular commodity groups, rates and effective dates for contracts, to simple declarations of general contracting policies and alternatives. Whether these different sets of guidelines will become more standardized as time passes and additional experience is gained remains to be seen. Certainly the development, use, and impact of voluntary service contract guidelines is something the Commission will be taking a close look at in our day-to-day monitoring of agreements and in our two-year OSRA study.

It appears that the guidelines are being developed mainly within discussion agreements in an effort to make possible continued solidarity on the pricing policies adopted by their members. We expect that the commercial impact of these guidelines will vary significantly from trade to trade depending on the economic conditions in each trade, and the pricing policies being pursued by each discussion agreement.

As you may be aware, Fact Finding Investigation No. 23, the Commission's non-adjudicatory fact finding investigation of carrier activities in the eastbound transpacific trade during the peak shipping season of 1998, was recently completed to less than thunderous applause from the press and some in the industry. Let me say just a few words about that effort, as well as the associated proceeding concerning the "opt out" provision used in the 1998 ANERA service contracts, and Commission enforcement efforts.

The fact finding was undertaken amidst press reports and numerous shippers' informal protests to the Commission about carrier behavior during the peak season in the fall of 1998. We put a short fuse on the fact finding investigation in order to conduct a timely examination of what was alleged to be inappropriate carrier responses to unanticipated and rare trade conditions: demand outstripping supply. The effort was undertaken to make both the carriers and affected shippers aware of the Commission's intention to pursue the allegations and to secure evidence of specific instances of Shipping Act violations which would be necessary for any adjudicatory enforcement proceedings.

With respect to the hoped-for use of the fact finding as an evidentiary tool, however, shippers affected by the complained-of practices were reluctant to come forward, either publicly by testifying at hearings held across the country, or by supplying testamentary or other documents. Some shippers gave as a reason for their reluctance a fear of retaliation by carriers with which they necessarily have ongoing relations. This aversion never abated. It has been suggested that other NVOCCs declined to come forward lest their own rate actions in response to carrier pressures undergo scrutiny by the FMC. Whatever the basis of such fears or disinclination to step forward, the usefulness of the fact finding investigation as a base from which the Commission could develop specific evidence of carrier wrongdoing was severely hampered. I offer no apologies for that: the Commission's role in enforcing the Shipping Act is circumscribed by the same evidentiary and procedural constraints affecting other enforcement agencies. Nor am I criticizing or blaming shippers, many of whom appeared uncertain as to whether the carrier actions were legitimate, albeit cut-throat, marketplace decisions, or were in fact violations of statutes.

Some, including Commissioner Del Won, have voiced disappointment with the outcome of the investigation as a whole and particularly at the focus of the Commission's enforcement efforts on individual carrier lapses rather than the collective nature of the alleged wrongdoing. I share that latter view. As I have already publicly indicated, I would have preferred to look further into the question of the degree to which the alleged carrier abuses were facilitated or enabled by their collective authority and activities. However, there was obviously no consensus among what was then our body of four Commissioners to go further in that direction.

At the same time, I would also note that the Commission did address concerted activity in some respects. For example, our proceeding on "opt out" provisions addressed a conference practice which permitted carriers to claim entitlement to shippers' committed cargo on the one hand, but on the other hand, allowed the carriers to avoid the contracts' rates by "opting out" of the contracts and imposing their higher tariff rates instead. That practice was found to be unlawful, not merely as exercised in a specific contract or by a specific carrier, but across the board, and will serve as precedent governing future carrier contracting activity. Similarly, our staff settled another claim against carriers who had not fully supplied information on conference meetings. This was an ancillary and supporting part of the effort to secure the information necessary to assess the carriers' concerted activities.

Nevertheless, I recognize that some may remain disappointed that the FMC's investigatory activity did not result in million dollar penalties for the carriers. I am satisfied, however, with the caveat expressed earlier, that our efforts achieved several intended results. Some of the carrier activity - for example, terminating contracts when it was permissible to do so because the shipper had satisfied its minimum cargo commitment - turned out to be perfectly legal, and for shippers who have grown unaccustomed to demand outstripping supply, the events proved a valuable lesson about what kind of contracts they should sign in the future. The hearings and publicity attendant to our efforts also appeared to serve as an adequate warning to carriers as to the Commission's view of the lawful boundaries of carrier responses to high demand for cargo space. Although similar economic conditions occurred in the 1999 service contract year, recurrences of the complained-of actions do not appear to have taken place.

Despite what you read in the press, enforcement efforts continue. Other cases relating to this controversy are still being pursued, as the Commission has authorized its enforcement staff to continue to follow up on leads. The fact that we issued a report at the end of the year to summarize our activities to date, and terminate the formal proceeding, does not indicate we are washing our hands of the issue. There were numerous public requests for a report on our efforts to date, and we also needed to wrap up what we could prior to the December 31, 1999 retirement and departure of one of the Commission members, Ming Hsu, whose vote was an essential component of the Commission's decisions.

We continue to take our enforcement responsibilities seriously at the FMC, but our general approach, which reflects the intent of OSRA, is that our primary objective is to achieve compliance and to clarify uncertainty as to legal issues, not to play "Gotcha" and impose penalties for their own sake. Penalties are and will be an important device in our enforcement arsenal, but their appropriateness will depend on the situation. Together with my fellow Commissioners, I look forward to carrying out OSRA's objectives of clarifying the law and ensuring that illegal behavior ceases.