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Remarks of Steven R. Blust - L.A. Long Beach Propeller Club Luncheon, Novemeber 30, 2005

November 30, 2005

The Role of the FMC in Today’s MTO Industry

Thanks for the invitation to speak to you today and for that gracious introduction. It is great to be out here on the West Coast with the L.A./Long Beach Propeller Club.

The terminal industry is facing some major challenges these days. The statistics are staggering: the Port of Los Angeles anticipates a three-fold increase in the number of container units by 2020. Even if you were to deflect even half of the cargo elsewhere, you would still have 1.5 times the amount of cargo that is being handled now. The Port of Long Beach has reported that at the current growth and per acre productivity, in 18 years, LA/Long Beach will require 3,624 new acres of container terminals. In the very short term, the U.S. Chamber of Commerce projects that 75% of the nation’s top ports will experience significant capacity shortfall by 2010.

With maritime, rail, road and air infrastructure operating at or near capacity, issues like security, congestion, pollution, aging infrastructure and intermodal connectors, and ailing land-side infrastructure add to the challenges. Solutions to these challenges must come from public and private initiatives alike. This will require multilevel, creative and collaborative efforts from local, state and federal government, as well as the industry itself. I can tell you that from a federal level, you are not alone, as the government is paying close attention to port issues. Today I will tell you about the role of the FMC in the marine terminal operator industry and how the Shipping Act not only serves as a vehicle to the terminal industry to creatively solve challenges, but also to bring certainty and stability to MTO business processes. I will also update you on some other federal efforts to address port issues that will facilitate public and private collaborative action.

The Commission and Marine Terminal Operator Agreements

The Shipping Act allows for MTOs to enter into agreements with each other to discuss rates, conditions of service or to engage in exclusive, preferential or cooperative working arrangements as long as agreements involve ocean transportation in the foreign commerce of the U.S. The Commission reviews and processes MTO agreements. Certain terminal agreements become effective upon filing under Commission rules that exempt certain classes from the waiting period requirement found under the 1984 Shipping Act. Terminal agreements not entitled to exemption are processed under applicable statutory requirements. As of today, the Commission has 299 terminal agreements on file: 190 lease agreements; seven MTO discussion agreements; nine assessment agreements (arrangements to pay for labor); 33 services agreements; 13 joint ventures; 14 cruise agreements (MTOs & cruise operators: mainly property leases);16 cooperative working agreements; and finally, 17 leasing agreements. Up until four years ago, most agreements on file were made up of discussion agreements, service agreements, joint ventures, and cooperative working agreements. Lately, we have seen agreements that are quite novel.

Because post-9/11 Coast Guard and DHS security requirements have not been completely paid for through government funding, the industry has worked to find ways to cover costs through agreements. Twenty carriers and 15 MTOs initially came together to work out security issues jointly. While this agreement is still on file with the FMC, the groups have refocused as carriers and branched out to do their own security efforts. MTOs have taken a regional approach, where stakeholders have come together to solve security issues in ways that fit their particular areas. An example of this is the Gulf Ports Association, which has an agreement regarding minimum security fees.

As cargo volumes increase in virtually every major U.S. port, MTOs and ocean common carriers are seeking ways through agreements to expedite the movement of cargo to and from ports and to improve utilization of space at marine terminal facilities. LA and Long Beach have instituted a reduction in terminal free time to encourage shippers to pick up containers faster. They have gone from five free days for import containers and seven free days for export containers to four days for imports and six days for exports. By mid-2006, the California Association of Port Authorities is considering reducing free time to three days for imports and four for exports.

Some agreements have allowed MTO parties to implement extended-gate-hour programs. The U.S. West Coast Terminal Agreement, an agreement on file with the Commission that authorizes MTO parties to discuss and agree on a variety of matters related to the operation of their facilities on the U.S. West Coast, enabled the creation of PierPass. While the Commission doesn’t regulate the PierPass program, we monitor the activities of the parties through media reports and informal feedback from industry stakeholders.

MTOs are also using Shipping Act agreements to establish chassis pools at ports, another short-term solution to congestion. Most chassis pools are limited to one terminal (for example, Seagirt Marine Terminal chassis pool at Port of Baltimore; Maher Terminal chassis pool at Port Elizabeth, NJ; Norfolk Southern Inman Intermodal Facility chassis pool near Atlanta, GA), but earlier this year an agreement was filed with the Commission for the establishment and management of a single chassis pool for all publicly-held terminals in Virginia. The Hampton Roads Chassis Pool Agreement called for all ocean common carriers utilizing one or more terminals to participate in the pool by contributing chassis or paying user fees to a chassis pool manager. Parties to this agreement reported that everyone is pleased with results.

Carriers are pushing for the establishment of chassis pools at other ports. The Ocean Carrier Equipment Management Association recently amended their agreement on file with the Commission to allow parties to form companies that will own and manage chassis pools at marine terminals, rail terminals and intermodal terminals. The parties would use this authority if no other entity agreed to take on the ownership and management of a chassis pool.

We anticipate more agreements between MTOs to discuss security and congestion, especially MTOs in Oakland or the Pacific Northwest under the West Coast MTO Agreement. As most of you know, Port of Oakland’s Oakland International Container Terminal, operated by Stevedoring Services of America, introduced extended gate hours starting September 6, 2005. The Port of Oakland drove this as a trial project, but should the port decided that it is a success, MTOs at the port could certainly establish a program similar to PierPass pursuant to their authority under the West Coast Terminal Agreement. The MTO industry has found a way to make opportunities and deal with challenges by looking to its regulators for a framework. By setting the parameters in which to operate, the FMC brings in consistency and certainty into the operating arena. That way, MTOs do not have to reinvent the wheel with every new deal they execute.

Federal Government Efforts: The Committee on the Marine Transportation System

Up until very recently, the federal government has had widely distributed and therefore, potentially suboptimal oversight of the marine transportation system. No single agency has the lead responsibility. Instead, it has fallen to 17 different federal agencies and 11 departments. Recognizing the ever-expanding problems that we’re discussing today (congestion, strained infrastructure, and limited funding for upgrades), the Bush Administration decided that MTS stakeholders would be best served if the whole MTS was assessed in a collaborative effort by these different agencies and departments.

In the President’s Ocean Action Plan of December, 2004, a directive was issued to form the Committee on the Marine Transportation System at the Cabinet-level. Its mission is to create and carry out a joint strategic plan that will ensure that America’s MTS achieves the expansion goals required to support the level of traffic expected in the 21st century in a safe, environmentally sound and coordinated manner for all MTS stakeholders. The agencies involved are the departments of Transportation, Commerce, Defense, Homeland Security, Treasury, State, Interior, Agriculture, Justice, Labor, Energy, EPA, the Office of the President, the Office of the Joint Chiefs, and the FMC.

The effort is still very much in the early stages, but one thing is clear: while it will be government led, directed and coordinated, the joint strategic plan will not be created in a vacuum. The CMTS will be looking to the industry for input and guidance on issues to ensure that any and all plans reflect the true needs of the MTS. The idea behind this initiative is for the government to work smarter and to pool resources that we already have, be it money, manpower, or brainpower. It is my hope that next time I see you, you will have already experienced the benefits of the Committee’s actions.

50th Anniversary of Containerization and Industry Collaboration

Next year marks the 50th anniversary of containerization. Malcom McLean, truck-driver-turned-Father-of–Containerization, faced the same congestion issues that we do today. He was looking for a more efficient way to transport cargo other than trucking. As a trucker languishing in long terminal lines, he observed the inefficiencies at both ends of terminal functions: in the slow unloading of trucks and the slow piece-by-piece loading of the ships. Moreover, states were adopting weight restrictions and levying fines on heavy loads. These factors combined were making it too expensive and inefficient to do business. This drove, if you’ll excuse the pun, Mr. McLean to go coastwise.

When he decided that ships would be a more cost effective way around shoreside weight restrictions, McLean acquired the Pan-Atlantic Steamship Company (which then led to the sale of his trucking company due to Interstate Commerce Act conflicts); redesigned truck trailers into truck beds on wheels with detachable, stackable containers; converted an oil tanker (the Ideal X) to handle containerized cargo, then sailed from Port Newark, New Jersey to Houston in April 1956.

Not only did he change the trucking industry, McLean forever changed the shipping industry, which was itself stuck in a rut. The Wall Street Journal reported, “One of the nation’s oldest and sickest industries is embarking on a quiet attempt to cure some of its own ills. The patients are the operators of coastwise and intercoastal ships that carry dry cargoes.” McLean breathed new life into the shipping industry. He developed a process to move cargo better, cheaper and faster.

We’ve been fortunate enough to build upon Mr. McLean’s foundation to develop even more streamlined processes. Back when transportation was segmented by mode or trade, there was often confusion as to who was responsible for what. In today’s world of supply chain management, where one party is responsible for cargo door-to-door, great opportunities for efficiency abound. However, fundamentally, containerization has not changed that much. What has changed is the transmittal of information and our ability through government regulations and your own alliances to work together.

I was reading in the press about some of the key messages to come out of the National Industrial Transportation League annual transportation conference. One speaker, Gill Hicks (former regional general manager of the Alameda Corridor Transportation Authority) stated that the economic health of the U.S. depends on billions of dollars of investment to expand Southern California’s port and intermodal capacity. He went on to say that despite the diversion of cargo this year to other ports up the western coast, Southern California will remain the dominant gateway for the growing Asia trade. I also read that shipper panelists from the NITL conference recognize, albeit reluctantly so, that infrastructure upgrades will come at a cost to the private sector and that all parties should equitably share the burden. I thought that Mick Barr, Associate Director of Global Physical Distribution of Proctor & Gamble, put it best when he said, “We have to be able to deliver our product in order to sell it.”

The Asia trade will continue to grow because of America’s demand for the products. Governor Schwarzenegger was promoting China-California trade ties just a couple of weeks ago, so it is safe to say that this cargo is not going anywhere. And rightly so. In my opinion, it is important to Southern California to encourage the modern-day “Malcom McLeans” to find ways to transport goods better, cheaper, faster and as cost effectively as possible. Keep them here and continue to deliver their cargoes thru this gateway instead of diverting them away. Too much is at stake to do otherwise. I understand that there has been a backlash of unintended consequences to the volume that ports and carriers collaborated to induce thru L.A./Long Beach. However, if the port went away, the backlash would be worse. The impact on the economy—both locally and nationally-- would be too great. Jobs would be lost, and communities supported by the port will suffer.

There are also grave security concerns, on the other hand, if the ports maintain the status quo for too much longer. God forbid this area experience a Katrina-sized natural disaster. If incident response is hampered by clogged roads and congested terminals, no aid would get in and out of the port, and again, the community would suffer. There is balancing to be done: conflicting state and Federal transportation laws and policies must be reconciled; the flow of trade must continue unimpeded while security is bolstered; the financing of port infrastructure improvements must produce a tangible benefit of quicker thruput and connectivity to landside infrastructure. Achieving the balance will be a process in itself. In the interim, your collaborative efforts are crucial.

As I said, containerization and supply-chain management have revolutionized what was a disjointed transportation process. However, if there is misalignment in the chain, problems arise, and that is usually when parties come to the Federal Maritime Commission to resolve their Shipping Act-related disputes. My observation is that a good number of the disputes before the Commission stem from a failure to communicate. The solutions to the challenges of today’s shipping industry must be created together. Together we can keep Mr. McLean’s process evolving, and succeed in the years ahead.

Thank you.