Remarks of the Honorable Harold J. Creel, Jr., Commissioner, Federal Maritime Commission Before the International Transportation Management Conference in Houston, Texas
February 27, 2006
I’m honored to be addressing the second annual International Transportation Management Conference. And I thank Ed Emmett for putting together such an impressive program - and inviting me again.
I am particularly pleased to see that Houston was spared the brunt of Hurricane Rita and was able to rebound quickly from its effects. I was in New Orleans yesterday, and it is quite a different story there.
I have been asked to address the issues that are of particular interest to me as a government regulator:
- The status of the Federal Maritime Commission’s efforts to allow non-vessel-operating common carriers (NVOCCs)to offer confidential transportation contracts to their shipper customers; and
- The attempt in Europe to do away with ocean carrier conferences as we know them.
Please keep in mind, however, that the views I am expressing today are solely my own - as one Commissioner - not necessarily those of the FMC.
As many of you know, NVOCCs play an increasingly vital role in the ocean transportation industry. These middlemen 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.
Since 1984, ocean common carriers have had the ability to enter into service contracts with their shipper customers (including NVOCCs). These are arrangements by which a shipper commits to a certain amount of cargo over a certain time period and the carrier agrees to specific rate and service features. Originally, the essential terms of the arrangements would have to be published by the carrier (including the rate) and similarly situated shippers had the right to obtain the same deal from the carrier, i.e., they could “me-too” the contracts.
Although ocean carriers initially approached service contracts with some degree of trepidation, they eventually embraced such pricing arrangements in a relatively short time. Before long, service contracts became the dominant pricing mechanism in many U.S. trades; in some accounting for 80 percent of the liner cargo carried.
During the course of the consideration of the Ocean Shipping Reform Act of 1998 (OSRA), NVOCCs again sought the right to offer service contracts. However, their attempt to provide NVOCCs such relief was rebuffed.
Unable to secure relief from Congress, several large NVOCCs and a trade association of NVOCCs sought relief at the FMC. Between July 2003 and March 2004, they filed petitions asking the Commission to use its section 16 exemption authority to permit them to enter into confidential rate agreements that were similar to service contracts. After receiving comments on these petitions, the Commission initiated a rulemaking proceeding, based on a consolidated proposal presented by most of the petitioners.
The Commission adopted a final rule, which became effective January 19, 2005, that permits NVOCCs to enter into “NVOCC Service Arrangements” (NSAs). These NSAs are subject to the following minimal conditions:
- The NVOCC must be a registered filer with the Commission;
- NSAs must be filed confidentially with the Commission;
- A brief statement of the essential terms of the NSA must be published in the NVOCC tariff; and
- The NVOCC must comply with all other FMC regulations.
Most important, however, and contrary to my desires, that rule also precluded NVOCCs from entering into NSAs with other NVOCCs or with shippers’ associations that have at least one NVOCC member. Also, two or more NVOCCs could not offer joint NSAs unless corporately affiliated. These restrictions were prompted by concerns that courts might interpret section 7(a)(2) of the Shipping Act in such a way as to provide antitrust immunity to such arrangements.
The American Institute for Shippers’ Associations and the International Shippers’ Association appealed that rule to the U.S. Court of Appeals for the D.C. Circuit. However, while that appeal was pending, the U.S. Court of Appeals for the Fourth Circuit issued its decision in U.S. v. Gosselin World Wide Moving, N.V., which essentially alleviated the Commission’s prior concerns. The Commission subsequently adopted a final rule that permits NVOCCs to enter into NSAs with other NVOCCs and with shippers’ associations with NVOCC members. Most recently, on January 12, 2006, the court granted the petitioners’ motions for voluntary dismissal of their appeals. As a result, NVOCCs are now as unfettered to offer NSAs as ocean carriers are service contracts.
The first NSA was filed with the Commission on January 31, 2005, so we now have a full year of experience with NSAs. Out of 3,398 NVOCCs operating in the U.S. foreign commerce, only 351 have registered with the FMC to become NSA filers. Of that group, only 53 NVOCCs have actually filed NSAs with the Commission. As of February 14, 2006, the Commission received 222 original NSAs and 144 amendments to those contracts. Three NVOCCs are responsible for almost half of those contracts. I have been informed that the terms of these NSAs are virtually identical to those contained in most standard service contracts.
For comparison purposes, for calendar year 2005, the Commission received from ocean carriers 46,809 original service contracts and 236,921 service contract amendments. Interestingly, none of the large NVOCCs who were behind the original proposal to the FMC are yet involved in NSAs in any significant way. I suspect, however, that they will soon do so.
This slow growth in the use of NSAs may be attributable to several factors. One, of course, is the newness of this concept. As with service contracts, there could be a slow learning curve as the ocean transportation industry adjusts to a new marketing tool. The pending litigation in the court of appeals may have also put a damper on some activity; but that issue was favorably resolved on January 12th of this year. Another possibility is that NVOCCs are waiting until they complete their negotiations with ocean carriers for service contracts for the 2006 season. These arrangements will generally become effective on May 1st. Until those contracts are locked in, some NVOCCs may not know what terms they can negotiate with their shipper customers. I expect that next year at this time the number of NSAs will have increased significantly.
As for the future of NSAs, I would suggest that it can be best summed up by a recent advertisement I saw in American Shipper magazine. There, a full page ad appeared with a large containership, fully loaded with only dark, brown containers. UPS wants to know, “What can Brown do for you?” I have seen similar ads for BAX Global Ocean Services. I believe that these large integrators will go head-to-head with vessel operators for high-value commodities in certain trades. By the end of 2007, the industry could be significantly altered. This view is consistent with a recent report by IBM Business Consulting Services that suggests that ocean carriers will face increasing pressures from parcel carriers that are also integrated logistics providers. I don’t believe these folks came to the FMC seeking to offer NSAs if they weren’t going to use them.
Now, I’ll turn to what’s happening with shipping regulation in Europe. For over 100 years, ocean carriers have had the ability to band together in conferences that have allowed them to set prices and other conditions of service. These arrangements initially arose in the European trades, and have been permitted in this country since 1916. The effectiveness of conferences in this country was significantly constrained by OSRA in 1998. It now appears that the European Union may be taking action that would effectively end the conference system in Europe.
In 1986, the European Council issued Regulation 4056 that provides a block exemption for agreements, decisions 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 hardcore restrictions in competition policy, and it does not contain market share thresholds.
On March 27, 2003, the Directorate General for Competition of the European Commission (DG Comp) (akin to the Antitrust Division of our Department of Justice) published a “consultation paper” and thereby initiated a review of the block exemption for liner shipping conferences. After publishing several additional papers and considering comments thereon, DG Comp published a White Paper on October 13, 2004, recommending a repeal of the block exemption for liner conferences, with a possible lesser exemption for liner coordination.
The European Commission subsequently presented a proposal to completely repeal the block exemption to the Council of the European Community. This proposal has a two-year sunset provision and a provision for guidelines to be issued by DG Comp by the end of 2007 to assist the industry in complying with the new competition rules. The EC also proposes to publish an “issues paper” in September 2006 taking stock of any progress that has made in discussions between the European Liner Affairs Association (ELAA) and the European Shippers Council on ELAA’s prior proposal for an information exchange system.
It now appears that the EC proposal to repeal the block exemption will be voted on by the Council in June. Because of the sunset provision and the time needed for the Europeans to extract themselves from the UNCTAD Liner Code, however, it is likely that conferences in the European trades will continue until at least 2009. The guidelines to be published by DG Comp by the end of 2007 will likely allow the discussion, through a “trade association” made up of the carriers now participating in conferences as well as “independents,” of information on supply and demand (but not capacity) and possibly the publication of price indices, although the latter remains a subject of much debate.
Since 1995, the EU has also exempted liner consortia from its competition laws (EC Regulation 823/2000). Consortia are cooperative arrangements among liner operators such as coordination of sailings, 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). Liner operators are on their own to determine whether their operations would run afoul of the consortia rules and conduct themselves accordingly. European shipowners have consequently sought guidance from DG Comp on this subject.
The consortia exemption sunsets every five years, and is next due to expire in April, 2010. The EC contends that the consortia rules would not be affected by a repeal of the block exemption for conferences.
The EC states that it will maintain bilateral contacts, especially with the U.S., Canada, Australia and Japan, throughout the Council discussion process. It appears that the Japanese government is particularly opposed to eliminating conferences. The EC believes that conferences in non-EU trades will not be affected by the repeal of Regulation 4056. I personally believe that the U.S. and Europe should do whatever it takes to harmonize their approaches to the regulation of liner shipping. In this regard, I believe that the current U.S. system could serve as a viable blueprint for consideration.
This concludes my remarks today. I thank you for your attention. Enjoy the conference and your stay in Houston.