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Statement of the Honorable Harold J. Creel, Jr., Chairman, Federal Maritime Commission Submitted to the Committee on the Judiciary, United States House of Representatives, June 5, 2002

June 5, 2002

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
SUBMITTED TO THE
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES

JUNE 5, 2002

The Ocean Shipping Reform Act of 1998 ("OSRA") was implemented after five years of debate in which Congress received input from all segments of the ocean transportation industry and various Federal agencies. The resulting legislation was a compromise among the affected parties, and included retention of antitrust immunity for agreements among ocean common carriers. OSRA has significantly transformed the industry and is working as Congress intended, resulting in more competition in the industry. As a consequence, I cannot support H.R. 1253, which eliminates antitrust immunity for shipping lines in our international trades.

Since 1916, the liner shipping industry has been given limited antitrust immunity to allow it the flexibility to address serious pricing and service volatility, which arise from a number of factors peculiar to this industry. For example, the industry has always had to contend with chronic overcapacity, which creates sharp, short-run downward pressure on rate levels. Overcapacity can result from the introduction of progressively larger ships necessary to accommodate projected trade growth, or from chronic imbalances in trade flows, as ships sailing full in one direction will have empty space and empty equipment on the return. Overcapacity also stems from seasonal fluctuations in trade flows, so that vessel space adequate for strong summer months leads to overcapacity in a weaker winter season. Non-commercial interests, such as national pride or national security, also lead some nations to maintain the presence of a national flag fleet.

The aim of allowing limited antitrust immunity in ocean transportation is not simply to ensure adequate returns for the liner shipping sector. Rather, the primary objective is far broader and much more important: to ensure an adequate and efficient supply of ocean transportation services so that U.S. exports and U.S. trade can compete in the global marketplace. When shipping lines use their limited antitrust immunity to coordinate their operations or share assets to reduce costs or improve service, or even to stem losses from low rates that might threaten their viability, it is not just the carriers who benefit, but also U.S. businesses and consumers.

Agreement efforts to influence prices often fail because individual carrier pricing decisions are very much subject to market forces. This is reflected in minutes of the carrier agreements filed with the FMC, the low rates of return of the carriers themselves, and press reports of failed carrier attempts at rate restoration and surcharge implementation. Nevertheless, the ability to engage in some collective pricing and/or cost-saving arrangements provides many carriers with some protection from risk, sufficient to justify their continuing to make enormous long-term investments in serving our trades. Without these protections, operating ships to serve U.S. shippers would be an even riskier and less attractive investment for many of these carriers, one that some may well be unwilling to make.

Antitrust immunity also allows for a broad range of other efficiency-creating arrangements as well. It has provided carriers a valuable way to form alliances, groups of carriers which integrate their operational activities, such as vessel operations, terminal and shoreside services, equipment use, and information management. These groupings create operational efficiencies, leading to lower costs and improved service for customers. In addition, it allows for the preservation of separate competing commercial and marketing entities who are otherwise facing pressures to consolidate. Such cooperation can also facilitate entry into new trades, as carriers often begin serving a new route through a partnership with another line, instead of investing in a whole new string of vessels in the trade. While not all such arrangements would run afoul of the antitrust laws, under this bill, the status of many of these operational agreements would be unclear. The result could be the disintegration of these alliances, causing serious disruptions and inefficiency for both carriers and shippers, or a rapid move towards full-scale mergers by alliance partners.

While carrier consolidation itself may be troubling because it reduces shippers' options, what is more alarming is the question of who may benefit from consolidation. While supporters of the proposed legislation may suggest that the most efficient and well-run carriers would prevail in such an environment, the more likely winners could be those carriers with the highest level of government support. Of particular concern are the major Chinese state-owned carriers which, taken together, now control a substantial portion of the China-U.S. inbound trade (16.5%), which is the largest U.S. trade lane by volume. For example, although China Shipping Container Lines entered our trades in November, 1999, with only six vessels, it is now a significant presence in international shipping, and among the top ten Transpacific carriers.

Moreover, in the event that government-owned carriers are faced with financial pressures, their governments would be faced with political pressure to protect their carriers from losses, perhaps in the form of direct regulation, where governments could step in to bar below cost spot pricing which is so common in shipping. In fact, the recent promulgation of a decree to regulate liner shipping by the People's Republic of China raises substantial concerns of just such a nature. The Commission has recently used its existing proceeding on Chinese laws to inquire into the likely effects of this decree.

The system under which the U.S. presently regulates carrier operations in U.S. foreign trade involves competitive checks and balances that appear to be working. Carriers do not enjoy unlimited, unfettered antitrust immunity to manipulate the market at will. They are subject to major pro-competitive checks on the privilege of antitrust immunity, including stringent prohibitions enumerated in section 10(c) of the 1984 Act, barring boycotts, allocation of shippers, unreasonable discrimination and predatory practices. Conferences must allow their members to deviate from rate and service items on no more than 5 calendar days' notice, providing competition within conferences and ensuring that members can leave conferences without penalty. Finally, OSRA prohibits cooperating carriers from discriminating in their service contracting against shippers' associations and ocean transportation intermediaries ("OTIs").

The FMC has successfully carried out its mandate to review carrier agreements for excessively anticompetitive effects. We have used our authority to seek injunctive action as leverage to negotiate changes to agreements which may violate the section 6(g) standard of the 1984 Act, i.e., whether an agreement is likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation cost. Although the Commission has not taken formal action under that provision, i.e. sought an injunction, the Commission's less formal actions on review of agreements have had notable effects. For example, the Transpacific Stabilization Agreement ("TSA"), which in 1996 filed an amendment which would have permitted it to artificially limit capacity, dropped that provision after the Commission indicated that it was prepared to seek an injunction. Similarly, the North Atlantic Agreement, the broadly-worded agreement filed in 1999 by the members of the Trans Atlantic Conference Agreement ("TACA") to replace TACA, was withdrawn following the Commission's formal request for additional information under section 6(d). More recently, the planned use of a pooling system for refrigerated cargo by members of the Westbound Transpacific Stabilization Agreement ("WTSA") was withdrawn following Commission notification of its intention to hold a hearing in connection with its review of that agreement.

The Commission's review of agreements for substantially anticompetitive effects does not apply only to newly-filed agreements or amendments. The Commission actively monitors agreements throughout their duration, reviewing the minutes and other periodic reports filed by carriers, as well as other available information. At present, the Commission has before it the formal petition of two organizations of OTIs requesting that the Commission investigate service contract practices of TSA and its members that allegedly discriminate against OTIs.

While OSRA did not amend the standards and procedures of section 6(g) for the review of agreements for anticompetitive effect, the Senate Report accompanying the bill, S. Rept. 105-61, has encouraged the Commission to maintain more aggressive oversight of agreements. In addition, OSRA removed the ability of conferences to prohibit or restrict a member from negotiating service contracts. Nor may a conference require disclosure of contract negotiations or adopt enforceable rules affecting service contracting. These statutory reforms, in particular the ability of carriers and shippers to engage in confidential service contracts, have freed shippers from the administrative impediments and the collective inflexibility which had in the past often accompanied conference and agreement control over the contracting process, and have had profound effects on the industry.

The Commission assessed the results of OSRA's significant changes in its OSRA Impact Study issued in September 2001, two years after the reforms went into effect. The changes we noted in that Report, which was provided to the Committee, were quite remarkable. In the first two years after passage of OSRA, the proportion of cargo moving under service contracts increased precipitously (anecdotally reported to be 80% and higher in some trades), and the migration of cargo from conference-controlled service contracts to individual service contracts was enormous. For example, the number of conference service contracts entered into by TACA declined from 596 to 3, and for the U.S. Australasia Agreement, from 125 to 7. The concomitant effect, of course, has been the precipitous decline and fall of the conferences themselves as the dominant forum for collective carrier pricing activity; although there had been 37 conferences operating in U.S. trades in 1998, at present there are only 18 actively operating conferences. In the responses we received to the Notice of Inquiry used to gather information for the OSRA Impact Study, not one shipper reported being unable to secure a service contract. Not only do contracts appear to be widely available, the range of service and cargo commitments appears to be exceedingly diverse. Our random sample of service contracts in the Report indicated that contract commitments ranged from a single TEU to 68,000 TEUS and generally covered periods of one year or less. For the first year of OSRA's effectiveness, from May 1999 through April 2000, there were 40,327 service contracts and 86,643 amendments filed with the Commission, representing increases of 223 and 92 percent, respectively. From May 1999 to the present, there have been 134,356 service contract filings and 458,874 amendments, and the numbers continue to grow.

Of course, carriers have not simply given up on collective efforts to influence the market, or walked away from the antitrust immunity available to them under the Shipping Act. With respect to pricing, conferences have largely been replaced by more loosely structured "discussion agreements" under which carriers may discuss and agree on rates (or other subjects specifically authorized in their agreements), but may not require each other to adhere to those agreements. Thus, while they may agree upon general or specific rate levels to be offered to shippers in service contracts, those "guidelines" may only be "voluntary." The degree to which collective action may effectively impact rates under these "voluntary guidelines" appears to depend substantially upon economic factors beyond the control of the carrier groups engaged in rate setting. For example, the Commission noted in the OSRA Impact Study that TSA, despite having an 80% market share, had been less than successful in meeting its pricing objectives for several recent years.

More recently, the arrival, on schedule, of new carrier-ordered vessels appears to have resulted in capacity increases at the same time that general economic conditions make the collective imposition of general rate increases and peak season surcharges less likely. Published reports of low carrier profits also suggest that the carriers have been unable to meet their rate objectives. Even major shippers who asked the Commission to closely review WTSA's proposed refrigerated pool acknowledged that rates and carrier profitability had declined in recent years. Thus, carriers' ability to collectively agree on rates under the shield of antitrust immunity may be more of a goal than a reality, especially in the current world economy.

Other forms of carrier cooperation appear to be at least benign, or more importantly, beneficial to consumers of shipping services as well as carriers. These include agreements for the shared use of assets, ranging from chassis and container pools, which reduce costs and increase economic efficiency for the carriers and make equipment more easily available to shippers. There are also agreements which provide a degree of carrier cooperation in the sharing of vessels through slot exchanges or the more integrated operations of vessel sharing agreements ("VSAs") and alliances. Such agreements enable carriers to maintain an individual presence in a wider range of markets, with a greater frequency of service, while limiting their exposure to investment risk. They may also have the effect of slowing the pace of industry concentration through mergers, by offering carriers the economies of scale associated with mergers without the loss of individual market presence and national identity.

Rather than eliminating immunity altogether, I believe that further fine-tuning of the existing system may be desirable. Throughout the consideration of OSRA, I advocated changes to the administration of the section 6(g) "general standard" to increase the Commission's effectiveness, responsiveness, and efficiency in responding to shipper complaints about carrier agreements, and I continue to support such an approach.

In particular, I favor amending sections 6(g) and (h) to place enforcement of the general standard with the Commission, rather than a U.S. district court. Under this approach, a case under section 6(g) would be treated like any other administrative proceeding involving a violation of the Shipping Act. Private parties could file complaints with the agency, or we could launch an investigation on our own motion. If an agreement were found in violation of the standard, the Commission could use the remedies available under the Shipping Act, including modification or cancellation of the agreement or assessment of penalties. Of course, judicial review of such actions, as with other Commission orders, would be available in the federal appeals courts.

The current procedure required to enforce the general standard -- an injunctive action in U.S. district court -- was borrowed from proceedings under the antitrust laws to block proposed mergers, and is not best suited to a regulated industry where antitrust immunity is allowed for ongoing ventures, subject to constant monitoring and policing. The current sections 6(g) and (h) procedures do not allow persons harmed by an agreement, such as shippers, intermediaries, ports or independent carriers, to bring an action. Moreover, this process imposes a substantial delay, burden, and expense on all parties. Placing enforcement of the section with the Commission would alleviate these problems and provide more efficient and effective oversight of carrier activity benefitting from antitrust immunity.

Finally, I'd like to comment on the Final Report on Competition Policy in Liner Shipping ("OECD Report"), released on April 16, 2002, by the Division of Transport of the Directorate for Science, Technology and Industry of the Organization for Economic Cooperation and Development ("OECD"). Prepared as part of ongoing OECD work on regulatory reform, the OECD Report sought to answer three questions: (1) What are the positive and negative impacts to both carriers and shippers of common pricing under antitrust exemptions; (2) What are the impacts of conference, discussion and stabilization agreements on both carriers and shippers; and (3) What are the possible effects stemming from the removal of antitrust exemptions for liner shipping?

The OECD Report, however, does not conclusively answer any of these questions, but rather, advocates the approach taken by the United States in enacting OSRA four years ago. The OECD Report specifically recommends that OECD member governments take the same approach as set forth in OSRA, and provide for: (1) the freedom to negotiate (mirrored at section 5(c) of the Shipping Act); (2) the ability to keep confidential the key terms of service contracts (reflected in section 8(c)(2) of the Shipping Act); and (3) the freedom of carriers to coordinate operations as long as undue market power is not conferred (compare section 6(g) of the Shipping Act).

The OECD Report is clearly directed at "the majority of OECD Members [which] have not explicitly reviewed their competition policies relating to liner shipping in over 15 years." OECD Final Report at 74. Previously, Canada adopted amendments to its Shipping Conferences Exemption Act in November 2001, which are substantially similar to OSRA. Japan and Australia have also recently determined to continue limited antitrust immunity for rate-setting agreements.

In response to the OECD Report, the Competition Directorate of the European Commission has recently announced that it will undertake a review of the Commission regulation which exempts conferences from the competition laws. The aim of the OECD Report, therefore, is not at the United States or other OECD Member states that have already instituted regulatory reform. Rather, the OECD Report affirms that the United States is the leader in regulatory reform in this area.

Thank you for the opportunity to submit my comments on H.R. 1253 and the current status of the ocean transportation industry. The new market-oriented provisions of OSRA are working well and I believe that removal of the limited antitrust immunity conferred by the Shipping Act of 1984 would impede the efficient operations of the liner industry.