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Remarks of Commissioner Antony M. Merck before the Containerisation International 3rd Annual Conference Global 2000 - March 22 and 23, 2000

March 22, 2000

Remarks of Antony M. Merck

Commissioner
Federal Maritime Commission

Containerisation International
3rd Annual Conference
Global 2000

March 22 and 23, 2000

Queen Elizabeth II Conference Centre, London



OVERVIEW OF EXISTING U.S. LEGISLATION

The principal body of law administered by the Federal Maritime Commission is contained in the following statutes:

1.The Shipping Act of 1984 (as amended by the Ocean Shipping Reform Act of 1998 "OSRA");

2. The Foreign Shipping Practices Act of 1988;

3. The Controlled Carrier Act of 1978; and

4. Section 19 of the Merchant Maritime Act of 1920;

LIFE AFTER OSRA:
EXAMINING THE IMPACT ON TRANSATLANTIC TRADES

The Shipping Act of 1984 as amended by Ocean Shipping Reform Act of 1998 ("OSRA")

In essence OSRA reduces role of the federal government and allows greater flexibility between shippers and ocean carriers. Implicit in these changes, and explicit in the stated purposes of the Act is the placing of greater reliance on the market place. That said, however, anti-trust immunity was retained. I will return to that topic in my discussion of pending U.S. legislation.

I would like to concentrate on three topics in examining life after OSRA that are applicable in general: tariffs, service contracts and agreements. I will then return to the transatlantic.

Tariffs

Section 8 The Shipping Act of 1984

The most significant change to tariffs brought on by the OSRA amendments is that common carrier and conference tariffs are not required to be filed with the Commission but rather must be made accessible electronically by remote access. The legislative history tells us that the new privatized tariff system was to be free of government constraints as to design as long as the system assures integrity as a whole and provides an appropriate level of public access. The Senate Committee that reported out the bill also indicated that tariff information should be simplified and standardized. Therefore, the FMC's previous Automated Tariff Filing and Information System (ATFI) is no longer in current use and regulations have been promulgated concerning the statutory requirement of accessibility and accuracy.

The FMC has conducted an audit of a sample of carrier published tariffs to examine accuracy and accessibility and found a number of deficiencies. First let me say that there seems to be a divergence of opinion between carriers as to the usefulness from a business stand point of publishing an accurate and accessible tariff. Some see it as a marketing tool using the power of the internet to reach the widest market, whereas others, see it as giving competitors the ability to see what rates they have to beat and would rather do business without an accessible and accurate tariff. Besides the application of the Act, some have questioned the importance of tariff requirements at all since so much cargo is carried under service contracts anyway. The FMC is charged with enforcing the law and our audit has found that by far most published tariffs comply with it but there are also many which are deficient.

Therefore, earlier this month the FMC made a public announcement and will issue a letter of its intention to enforce its regulations regarding accessibility, specifically that published tariffs provide: adequate user instructions, retrieval capabilities, historical information, and capable software. With regard to accuracy, we will enforce regulations regarding current bonding and licensing information, and accuracy of rates in effect. We intend also to issue an advance notice of rule making as to what is a reasonable fee for access to a carrier tariff system. According to our audit, fees vary from a low set up or minimum fee and a few cents a minute to as much as $449 per month with a three month minimum.

A finally point about tariffs and one that is telling to me. As the Commission has looked at service contracts we find that a large portion of them refer to tariffs and incorporate many provisions and rates by reference. Therefore, accuracy and accessibility are relevant not simply holdovers from the bygone days when all tariffs were publicly filed with the Commission.

Service Contracts

Section 8(c) of The Shipping Act of 1984

An individual ocean common carrier or an agreement between ocean common carriers may enter into service contracts with one or more shippers. Each contract is required to be filed confidentially with the FMC but a concise statement of the essential terms must be published and made available to the public in a tariff format. The essential terms that must be published include: the commodity, volume, duration, and origin and destination port ranges. The rate is not an essential term that must be published.

Prior to May 1, 1999 when OSRA took effect the essential terms of service contracts were filed publicly and similarly situated shippers could demand identical terms. Abolishment of the "me too" provisions and the ability of the parties to keep the rate confidential was intended to foster greater competition and resulting efficiency.

Service contracts are filed with the FMC through an internet based electronic mail system that is intended to be user friendly and reduce regulatory burden and expense. We have been flooded with contracts. Since last May, 104,000 contracts and amendments were filed which is a 128 increase over the same period the year before.

It is estimated that 85% of liner cargo is carried pursuant to a service contract rather than a tariff. Only the FMC has the service contracts and we intend to examine developments in service contracting trends in rates and services.

In general, we want to know whether there are innovative and creative approaches, and confidentiality. Some have predicted "clever contracts" with service performance clauses, rewards and penalties based on performance, equipment availability or document completion. Evidence of "customized" not "standardized" service contracts will indicate OSRA is succeeding in doing as intended: placing greater reliance on the market and one on one negotiations.

Agreements

Sections 4, 5, 6, and 7 of The Shipping Act of 1984

As was the case prior to OSRA ocean common carriers may enter into agreements but there are several changes. One of the most important and timely relates to voluntary service contract guidelines. Congressman Hyde asked that his Committee be provided with copies of discussion agreement voluntary guidelines for service contracts.

Voluntary Service Contract Guidelines.

OSRA Section 5(c)(3) provides that agreements may not prohibit or restrict members from negotiating service contracts with one or more shippers, and may not require members to disclose the terms and condition of service contracts. In addition agreements cannot adopt mandatory rules affecting a member's right to negotiate and enter into a service contract. Where voluntary guidelines relating to service contracts are included in an agreement it must be stated that members do not have to follow them.

As of October of last year 10 sets of voluntary service contract guidelines had been filed mostly by discussion agreements and covering almost all US trades. Voluntary service contract guidelines covering the European trades have not been filed because the European Union authorities do not allow service contract guidelines.

Some discussion agreement members have expressed a willingness to share information to establish a standard for terminal charges, free time, demurrage, credit terms, etc. Guidelines that pertain to non commercial or administrative matters would seem fairly benign.

But the current service contract guidelines also appear to be used primarily to facilitate discussion agreements regulation of the rates of members individual service contracts. To the extent they prove effective and the degree of confidentiality is reduced, such guidelines reduce service contract flexibility and are an obstacle to innovative commercial negotiations. This result would be contrary to OSRA's intended purpose of promoting competition. Will they be permitted under OSRA?

Some service contract guidelines seem to attempt to restrict members from entering into service contracts by stating they will not actively seek service contracts and if a shipper asks for a service contract the carrier will endeavor to bring the shipper to the discussion agreement office.

Even though "voluntary" do such guidelines not to engage in service contracts "restrict" a member from engaging in negotiations for service contracts with shippers and thus constitute a violate of Section 5(c)(1)? Perhaps as long as the guidelines include the caveat "voluntary" they may not run afoul of the law. But if the guideline is solidly adhered to so that shippers are denied the opportunity to sign service contracts it may be considered a substantially anti competitive agreement. If by reducing competition it produces an unreasonable reduction in transportation service or an unreasonable increase in transportation cost there may be a violation of Section 6(g).

In other words, voluntary guidelines may pass the word test if sprinkled liberally throughout with the term "voluntary" but the more significant measure, the economic test, where the inquiry is anti competitiveness brought about by lock step adherence to voluntary guidelines is more likely to be where the battle is fought.

Transatlantic Trades.

The transatlantic is unique primarily because of its EU regulations in addition to FMC regulation. Voluntary service contract guidelines covering the European trades have not been filed because the European Union authorities do not allow service contract guidelines. However the Trans-Atlantic Conference Agreement's (TACA) model service contract rate matrices developed to accord with European regulations have been provided to the Commission.

Since 1995 and the settlement of FMC Fact Finding 21 TACA has been required to offer individual service contracts but until OSRA these were effectively governed by the agreement. Since OSRA and in anticipation of its effective date, the number of conference service contracts has fallen from 400-500 a year to 4 which presently exist. Further, today there are at least 700 service contracts signed by individual TACA members.

In general terms, rates in both east and westbound transatlantic trade have fallen to historically low levels. In our view this is due to increased competition from new carrier entry, former conference members competing as independents, and increased intra-conference rate competition, and US and EU regulatory changes.

EXAMINING HOW CARRIERS AND THEIR CUSTOMERS HAVE FARED A YEAR INTO OSRA.

The FMC has underway an OSRA impact study and even though the Act took effect less than a year ago it seems to be of timely concern. Whether its provisions are having the benefits envisioned are no doubt on the minds of those involved at Congressman Hyde's hearings today. In addition the U.S. House of Representatives Committee on Transportation and Infrastructure has advised us of its intention to hold a hearing in early May on the effect of OSRA.

The short answer is that we do not yet know but I ask the question of everyone in the industry with whom I speak. Whether they be shippers or carriers their answers are positive. Even Ocean Transportation Intermediaries (OTI) who cannot under OSRA enter into confidential service contracts seem to be more concerned with doing business than finding fault with the law.

I have mentioned some of the major legislative changes introduced by OSRA: individual service contracts with confidential rates, voluntary guidelines, and published rather than filed tariffs. In our study the effect of these changes will be gauged in an industry with growing concentration (through global alliances, mergers, and acquisition); discussion agreements which involve a greater number of carriers; increased trade growth; and an expanding role of Asian carriers.

We believe the key issues in the study are:

1. Service Contracts. Have OSRA's service contract provision resulted in a major or only a limited increase in customized service contract terms, improved services, significant changes in shipper carrier relations, increased commitments by shippers and more competitive rates. A central premise of OSRA is that removal of traditional conference authority to regulate members service contracts will lead to customized service contracts with individual lines at rates which reflect market conditions. By an analysis of service contracts filed with the FMC, interviews with industry representatives, and rates studies we intend to quantify the answer to that question.

2. Agreement Activity. Since OSRA are conferences and discussion agreements able to effectively limit capacity or support higher than market rates? As I mentioned the terms of agreements will be "voluntary" but an analysis of market share, capacity, utilization, new entry data, and contract rates will hopefully help determine whether there is an unreasonable level of cartel type behavior.

3. Effect on OTI's. The commercial environment involves greater use of contracts and the most crucial essential term is no longer publicly available. The OTI community may be consolidating and experiencing competitive advantages unrelated to OSRA. This and the inability of OTI's to enter into service contracts will be carefully examined.

4. Published Tariffs. The final key issue in our study will be the accessibility and accuracy of published tariff of which I have already spoken.

LOOKING FORWARD TO FUTURE DEVELOPMENTS IN US LEGISLATION: HOW WILL THESE IMPACT THE US AND THE REST OF THE WORLD?

Anti-Trust Immunity

Free Market Antitrust Immunity Reform (FAIR) Act of 1999

Section 7 of The Shipping Act of 1984 as amended by OSRA continued the exemption to permit ocean common carriers to obtain anti-trust immunity for certain concerted actions among themselves subject to FMC filing and review.

Congressman Henry Hyde, Chairman of the House Judiciary Committee has introduced legislation abolishing anti-trust immunity for ocean common carriers and subjecting them to the anti-trust laws of the U.S. The bill is fairly succinct. It proposes to amend the Shipping Act of 1984 by striking Section 7(a)(3), (4), (5), and (6) thereby removing anti-trust immunity from agreements pertaining to marine transportation and services. The bill does continue immunity for marine terminal operators.

I do not believe the FMC should support Congressman Hyde's bill because:

a. The policy underpinnings of anti-trust immunity remain sound;

b. the current state of the market is healthy and competitive;

c. the pro-competitive provisions of OSRA are only just in place; and

d. there is a need for closer economic analysis.

Anti-trust immunity is not just for adequate carrier rates but also to ensure an adequate and efficient supply of ocean transportation. It allows carriers to share assets and coordinate operations but still preserve separate competing commercial and marketing activities. It also allows carriers to address serious price volatility caused by overcapacity, trade imbalances and seasonal fluctuations. To abandon anti trust immunity, a policy shared in varying degrees by our trading partners would cause regulatory uncertainty and conflicts of laws questions. It would also accelerate consolidation in the industry and one must question who would be the beneficiary of that: well run efficient carriers or those carriers with the highest government support?

The state of the market is healthy and competitive and the industry is not using its anti trust immunity privilege to exploitive effect. This is indicated by the fact that rates are at historically low levels, many individual service contracts are in effect, and the traditional rate setting conferences are declining in favor of discussion agreements. While discussion agreement members have higher market share and the possibility of anti competitive behavior by setting general rate increases and service contract guidelines, this is being closely watched by the FMC to see that it is not unreasonable under the Act or frustrates the law's intent.

Carriers do not have unlimited anti trust immunity. The Shipping Act has stringent prohibitions in Section 10. In addition, Section 6(g) allows for review of agreements to see if there is an unreasonable anti competitive effect. Under OSRA agreements cannot restrict individual carriers from entering into confidential service contracts.

Finally, there is a need for closer economic analysis. The Hyde bill strikes out a section of a statute in effect for less than a year. It was five years in the making and was a compromise that built upon an already existing complex and comprehensive statutory scheme. Though the FMC's agency wide impact study is not complete, we have received few complaints concerning OSRA and anecdotal reports of its success. It is too early to change it.

Other than the proposed Hyde bill I am aware of no future developments in US legislation which specifically relates to the FMC. However, as much of the existing legislation which we administer relates to international relations it seems appropriate to mention developments occurring on a much larger stage. President Clinton has sent to the Congress proposed legislation to allow Permanent Normal Trade Relations (PNTR) with The Peoples Republic of China (China). It is linked to the President certifying to Congress that the terms of China's accession to the WTO are at least equivalent to those agreed between the United States and China on November 15, 1999.

The terms of that agreement were only made public last week. I think that if, when examined, those sections relating to maritime services and distribution, are found to be severely restrictive despite public announcements to the contrary, it will be detrimental. Also, I have heard of no breakthrough from bilateral talks on maritime issues between the U.S. Maritime Administration and China which concluded earlier this month.

International Relations

In international relations the efforts of the FMC are directed in three areas: combating restrictive foreign laws and practices which disadvantage U.S. interests; policing the pricing of foreign government controlled carriers; and reducing conflicts with trading partners over shipping regulation. It does so pursuant to authority found three of the statutes that it administers.

Section 11(a) of The Shipping Act of 1984
Foreign Shipping Practices

Originally passed in 1988 the Foreign Shipping Practices Act was amended by the Ocean Shipping Reform Act of 1998 and its provisions are now incorporated into Section 11(a) of The Shipping Act of 1984.

Section 11(a) provides the Federal Maritime Commission with authority to investigate the laws and practices of foreign governments, foreign carriers, and others providing maritime services in a foreign country which result in conditions that "adversely affect" United States carriers and do not exist for carriers in the United States.

Section 13 (b) (6) of The Shipping Act of 1984
Concerted Action

If the FMC finds that a common carrier acting alone or in concert, or a foreign government has unduly impaired access of a U.S. documented vessel the Commission shall take action it finds appropriate including suspension of tariffs or withholding clearance.

Both of these sections of the Act protect US carriers.

Section 19 of the Merchant Marine Act of 1920

Section 19 of the Merchant Marine Act of 1920 is more expansive and authorizes and directs the Commission to "make rules affecting shipping in the foreign trade ... in order to ... meet special conditions unfavorable to shipping in the foreign trade ... which arise out of or result from foreign laws..." A broad range of U.S. interests are protected: all carriers serving our trades and also shippers who have an interest in competitive service and choices in the market place; and other U.S. maritime companies including intermediaries and terminal operators. The "conditions unfavorable to shipping" include carriers' ability to service a trade and activities integral to transportation systems such as inter-modal services, agency services, and cargo solicitation.

The restrictive practices which Section 19 protects against have been broadly defined and the Commission is empowered as an independent agency to act unilaterally to impose sanctions. The FMC cannot negotiate or make an agreement with a foreign country but it can, using the rule making process of Section 19, receive comments from all affected parties and engage in consultations with executive agencies.

In August 1998, the FMC began a proceeding to investigate whether the laws, rules or policies of the Government of the People's Republic of China (China) might have an adverse impact on U.S. shipping and warrant action under Section 19 or The Foreign Shipping Practices Act. The FMC sought information from interested parties.

The responses indicted 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 the area where carrier's ships make monthly calls; they are barred from performing a number of vessel agency services for themselves; there are restrictions on their freight forwarding services; and they must obtain government permission before beginning or changing vessel service.

There are also proposed rules under consideration that could result in the disclosure of confidential service contract terms and further restrict non-Chinese carriers' ability to offer multi-modal services in China.

The FMC issued further demand orders to China Shipping Container Lines, a new Chinese government carrier in our trades, and A.P. Moller Maersk, which acquired Sea-Land's substantial U.S. flag China services. The response of China Shipping Container Lines is under review. I understand that the response of Maersk is expected to be received very shortly.

Section 9 of The Shipping Act of 1984
Controlled Carriers

OSRA amended the controlled carrier provisions of the Shipping Act of 1984 to provide generally that no government owned or controlled carrier may maintain rates in its tariffs or service contracts below a level that is just and reasonable. The rationale is that a controlled carrier may operate without a commercial motive and, therefore, acutely distort the market.

The definition of a controlled carrier was broadened to include a carrier owned or controlled by a government regardless of registry.

Three prior exceptions available to controlled carriers were deleted:

(a) subscribers to the OECD code, (b) the rates of a controlled carrier that was a member of an agreement, and (c) rates in trades between the U.S. and the country of the controlled carrier. The only exceptions that remain are where the controlled carrier is that of a state entitled to "most favored nation" status or where the trade is served exclusively by a controlled carrier.

Section 9 gives the Commission authority to "prohibit the publication or use" of controlled carrier rates if found to be unreasonable. In determining whether rates are reasonable the Commission is required to take into account whether the rates are below a level that is fully compensatory against actual costs or "constructive costs" meaning the cost of another similar carrier in the same trade.

Except for service contracts the rates and charges of a controlled carrier may not, without special permission of the Commission, become effective sooner than 30 days after the date of publication.

Ocean common carriers, with the exception of controlled carriers, are permitted to reduce their tariff rates effective immediately upon publication. Controlled carriers are subject to a 30 day waiting period.

In 1998 the Commission granted China Ocean Shipping (Group) Company (COSCO), a "controlled carrier" owned by the government of China a limited exemption from the 30 day waiting requirement and allowed it to decrease its tariff rates to levels that would meet or exceed its competitors with no waiting period.

In March of 1999, COSCO, petitioned the Commission for an exemption to this provision of the Act. COSCO's petition and comments are currently before the Commission. The Commission has broad discretion and under the Section 16 of the Shipping Act of 1984 may grant an exemption if it finds that (1) it does not result in a substantial reduction in competition and (2) it is not detrimental to commerce. However, both Commission precedent and the legislative history of the Act make it clear that the exemption power should be used to ease regulatory requirements in relatively narrow circumstances not undo broad aspects of the Shipping Act's statutory scheme.

The previous limited exemption met the commercial need of COSCO to match declining rates without having to wait. Whether a complete exemption will undo the legislated statutory scheme and, in fact, effectively amend the Act, is a question. The present exemption may constitute a ceiling to FMC discretion.