Remarks of the Honorable Harold J. Creel, Jr., Commissioner Before the International Transportation Management Conference, Houston, Texas, March 21, 2005
March 21, 2005
It is an honor and a pleasure to be addressing this distinguished conference. As Barry indicated in his opening remarks, this panel will be addressing the following hot topics in ocean transportation: globalization; deregulation; terrorism; new security requirements; antitrust immunity; and NVOCC confidential contracts. I would like to focus my remarks, from a government regulator's perspective, on the latter two topics. I will, of course, attempt to answer any questions you may have on anything that comes up. In this regard, I should further note that the opinions I offer are solely my own and do not necessarily represent those of the Federal Maritime Commission.
When the Shipping Act of 1984 was enacted, Congress, for the first time, permitted the use of service contracts in international liner transportation. These are arrangements by which a shipper commits to a certain amount of cargo over a fixed time period and an ocean common carrier to certain (reduced) rate and service levels. From the outset, the law allowed service contracts to be offered only by vessel operators, i.e., ocean common carriers.
As the use of service contracts continued to grow, (today in some trades approximately 80-90% of the cargo moves under service contracts) there was a segment of the ocean transportation industry that grew increasingly upset over its inability to offer similar arrangements to its shipper customers. These are the type of middle-men characterized as non-vessel-operating common carriers, or "NVOCCs". NVOCCs hold themselves out to the shipping public as common carriers that take responsibility for ocean transportation from point of origin to point of destination. They often consolidate the cargoes of several shippers into one container. Because NVOCCs, by definition, do not operate vessels, they must in turn rely upon ocean carriers for their ocean transportation movements. NVOCCs thus operate as shippers in their dealings with ocean carriers, but they're considered common carriers in their dealings with their shipper customers. As a result, until recently, NVOCCs could enter into service contracts with ocean carriers, but not offer such contracts to their customers - the shippers.
When the Shipping Act was thoroughly reviewed by Congress in the mid-90s, NVOCCs again sought the ability to offer service contracts. With the passage of the Ocean Shipping Reform Act of 1998 ("OSRA"), NVOCCs were again denied this right. Their dissatisfaction with this state of affairs led some NVOCCs to push on Capitol Hill for a review of ocean carrier antitrust immunity. Several bills were introduced and hearings held, but these efforts eventually led nowhere.
The Commission was recently given an opportunity to address this situation when, between, July 2003 and March 2004, it received petitions from seven individual NVOCCs and one trade association of NVOCCs seeking various exemptions from the tariff requirements of the Shipping Act so that they could enter into confidential rate agreements akin to service contracts. The Commission subsequently received comments from more than 80 commenters and 208 Members of Congress.
While the Commission was considering these comments, several petitioners, together with the National Industrial Transportation League and the Transportation Intermediaries Association, offered a consolidated, common approach to the various petitions for relief. The comment period was reopened, and an additional thirty-four comments were received. The Commission used the joint proposal and comments as guidance for its proposed rule, which was published on October 28, 2004, Docket No. 04-12, Non-Vessel-Operating Common Carrier Service Arrangements. After considering the eight comments on the proposed rule at its meeting of December 14, 2004, the Commission adopted a final rule which became effective on January 19, 2005.
The final rule permits NVOCCs to enter into "NVOCC Service Arrangements" ("NSAs") subject to the following conditions:
1. NVOCCs must be registered as filers with the Commission's Bureau of Trade Analysis;
2. NSAs must be filed confidentially with the Commission;
3. A statement of the essential terms of an NSA must be published in tariff format; and
4. NVOCCs must otherwise be in compliance with the Commission's regulations.
In addition, NVOCCs are precluded from entering into NSAs with other NVOCCs or with shippers' associations that have NVOCCs as members. And, two or more NVOCCs cannot offer joint NSAs, unless they are corporate affiliates. The Commission chose not to permit NVOCCs to enter into NSAs with other NVOCCs or with shippers' associations that have NVOCC members because of concerns that a court might interpret section 7(a)(2) of the Shipping Act in such a way as to provide antitrust immunity to such arrangements. This decision was influenced by a Ninth Circuit decision relying on section 7(a)(4) and a more recent decision now before the Fourth Circuit.
This latter aspect caused me some concern, that I expressed at the public meeting during which the Commission considered the final rule. I noted that this would deny small or medium NVOCCs the opportunity to enter into NSAs with larger NVOCCs. I also noted that the purpose of a shippers' association is to permit smaller shippers (including NVOCCs) to aggregate their cargoes to obtain volume rates, but that the proposal would create a second-class of shippers' associations, one with an NVOCC member, and preclude it from enjoying the purported benefits of NSAs. I do not believe that NVOCCs could receive antitrust immunity under the Shipping Act, and I believe that any court interpreting the Shipping Act that way would be incorrect. I nonetheless voted to approve the proposal, with the understanding that the Commission could consider these issues at a later day.
Not surprisingly, not everyone was pleased with the Commission's final rule on NSAs. The International Shippers' Association and the American Institute for Shippers' Associations filed petitions for reconsideration with the Commission. When those petitions were denied, they filed appeals with the U.S. Court of Appeals for the D.C. Circuit. I can't, of course, comment on the merits of these appeals. I can note, however, that the Commission is unlikely to modify its final rule until the court rules on those appeals.
So, where do we stand today with NSAs? As of March 15, 2005, 256 out of approximately 3,000 NVOCCs have registered with the FMC to be able to file NSAs. The actual number of NSAs filed with the Commission has been quite small, less than 20. Interestingly, there have been no NSAs filed by any of the petitioners seeking the original relief. It appears that it will take some time for the industry to adjust to these new filings. As with service contracts in 1984, their use may start slowly and then increase rapidly.
Turning now to the second hot topic - antitrust immunity. Since 1916, liners have been given limited immunity from U.S. antitrust laws if their agreements are filed with an expert agency, today the FMC, and reviewed pursuant to a competition standard. Until 1984, such agreements had to be approved by the Commission; today they become effective automatically unless the FMC takes action to block their effectiveness. The historical justification for such immunity is that it to allows carriers flexibility to address the serious price and service volatility that has been endemic to the industry. At times, carriers have had to contend with chronic overcapacity given the introduction of progressively larger ships, imbalances in trade flows, seasonal fluctuations in trade flows, and the influence of various non-commercial interests, such as national pride and national security.
A degree of antitrust immunity allows carriers to engage in limited "self-regulation" - through conferences or discussion agreements - to keep rates from sinking below compensatory levels or to attempt to stabilize rates when overcapacity occurs. I would note, however, that the primary purpose of antitrust immunity is to ensure an adequate and efficient supply of ocean transportation services in a manner that best fosters the flow of ocean commerce. This allows U.S. exports and U.S. trade to compete in the global marketplace and thus benefits U.S. businesses and consumers, too.
OSRA continues to provide immunity from U.S. antitrust laws for certain concerted activities among ocean common carriers and marine terminal operators. Nonetheless, antitrust immunity for ocean common carriers was considerably limited and circumscribed by OSRA. Essentially, conference control over service contracts was eliminated. In addition, carrier agreements cannot require their members to disclose service contract negotiations or the details of any service contract entered into. As a result, there has been a proliferation of service contracts between individual shippers and individual carriers and an increase in the use of voluntary discussion agreements. OSRA also retained the Commission's authority to review carrier agreements to assess their anticompetitive effects and to require changes in agreements where appropriate.
As I alluded to earlier, there were several attempts to further limit carrier antitrust immunity in Congress, even after OSRA. However, none of these bills passed. These efforts were prompted by some NVOCCs' frustration with their inability to offer service contracts to their shipper customers. Given the Commission's decision to permit the use of NSAs by NVOCCs, Congress is highly unlikely to take up the issue of antitrust immunity at this time.
As many of you know, the United States is not unique in its approach to concerted carrier activity. At least twenty industrialized nations - including the European Union ("E.U.")members - provide some form of antitrust immunity or exemption from restrictive practices legislation for liner conferences. Accordingly, I have always believed that any attempt to limit or eliminate ocean carriers' ability to act concertedly must be done on a somewhat uniform basis.
So, what is happening these days in Europe in the area of liner regulation? Since 1986, European Commission Regulation 4056 has provided for a block exemption for agreements and concerted practices of liner operators who coordinate their services by fixing rates and conditions of carriage as well as their sailings, capacity, cargoes or revenues. The Regulation thus exempts price fixing and capacity rationalization, activities normally regarded as "hard core" restrictions in competition policy, from the otherwise applicable competition laws.
On March 27, 2003, the Competition Directorate of the European Commission ("DG Comp") published a "consultation paper", and thereby initiated a review of the block exemption for liner shipping conferences. A Final Report was issued on November 12, 2003, taking into account comments received on the paper. A hearing was held in Brussels on December 4, 2003, to discuss the consultation paper, and further comments were received. DG Comp subsequently published a "Discussion Paper" on June 16, 2004. A carrier group, the European Liners Affairs Association ("ELAA") also submitted a proposal on revision of the rule on August 6, 2004. Finally, DG Comp published a White Paper on October 13, 2004.
Currently, DG Comp is preparing a legislative proposal to present to the European Council later this year. It appears that this proposal would repeal the block exemption for liner conferences, but perhaps permit a lesser exemption to allow for the coordination of liner services. Indications are that the next member state to hold the EU Presidency, the United Kingdom, also plans to proceed with this agenda item. It is unlikely, however, that anything will be resolved before 2006.
European regulation of liner shipping also extends an exemption to the competition laws for liner consortia, pursuant to EC Regulation 823/2000. Consortia include cooperative arrangements among liner operators such as coordination of sailings, the pooling of vessels and port facilities and the exchange, sale and rationalization of space. The exemption is automatic for consortia with less than 30 or 35% market share (depending on whether it operates within a liner conference); consortia with higher market shares may or may not qualify for the exemption. Due to recent regulatory reform in the EU, consortia falling outside this threshold can no longer seek EC review or so-called "comfort" letters or "negative clearance." Liner operators are now on their own to determine whether their operations would run afoul of the consortia rules. European shipowners have expressed confusion over how the consortia exemption will be applied and have sought further guidance from DG Comp on this subject.
First adopted in 1995, the consortia exemption sunsets every five years, and is now due to expire in April, 2005. The European Commission, however, is planning to extend it for another five years with only minor modifications. The EC does not want to examine the consortia rules while it is reviewing the liner conference rules.
This concludes my remarks today. I thank you for your attention. I'll be happy to try to answer any questions you may have for me.