Commissioner Dye’s Prepared Remarks to The European Maritime Law Organization Spring Seminar in Valletta, Malta
Thank you for the generous introduction. It is a great pleasure for me to be with you today. The opinions I am offering today are my own, and do not represent the views, official or unofficial, of the Federal Maritime Commission.
1998 OCEAN SHIPPING REFORM ACT
Before joining the Federal Maritime Commission , I served as Counsel on the Coast Guard and Maritime Transportation Subcommittee of the Transportation and Infrastructure Committee in the U.S. House of Representatives. In that position, I was involved — early and actively — in the decisions that produced the Ocean Shipping Reform Act of 1998.
In cooperation with our Department of Justice, and before any meetings were held among liner operators and shippers, we established a framework for ocean shipping legislative reform, based on competition policy. We wanted successful procompetitive reform, not only a political agreement. Our goal was to increase competition, efficiency and responsiveness to the marketplace. To attain that goal in subsequent legislative negotiations, our “bottom line” was confidential, individual service contracting.
There are three major elements of the 1998 reform act: (1) the establishment of confidential service contracting; (2) the elimination of the ability of liner conferences to regulate their members’ service contracts; and (3) the expansion of Commission exemption authority, allowing the Commission to exempt specified activities of parties subject to the Shipping Act from any requirement of the Act.
After enactment of ocean shipping reform, traditional conferences were virtually eliminated. Nearly 98 percent of containerized imports and exports in the U.S. trades have, for over a decade, moved under confidential contracts.
Today, ocean carriers in U.S. trades respond largely to market forces, not conference rules. The Commission’s responsibility is to ensure that limited antitrust immunity is not used to stifle market-driven competition.
In this regard, the Commission performs an initial analysis of proposed agreements and maintains ongoing monitoring of the agreements once those agreements take effect. Regarding the analysis of proposed agreements, the Commission does not “approve” agreements. Rather, by law, proposed agreements take effect, unless the Commission seeks to have agreements that it deems substantially anticompetitive enjoined by the U.S. District Court for the District of Columbia.
The Commission analyzes the likely competitive effects of agreements filed with the Commission under section 6(g) of the Shipping Act of 1984. Under section 6(g), if the Commission determines that an agreement is likely, “by a reduction in competition,” to produce “an unreasonable reduction in transportation service or an unreasonable increase in transportation cost” the Commission’s sole remedy is to bring an action in the U.S. District Court for the District of Columbia to enjoin the operation of the agreement.
The competition analysis employed by the Commission under section 6(g) is similar, in most respects, to the merger and the joint venture (competitor collaborations) guidelines employed by the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.
For example, in the analysis of joint ventures under a “rule of reason,” procompetitive efficiency benefits and other benefits of cooperative ventures are balanced against possible harm due to a reduction in competition. Many factors are relevant to an agreement competition analysis. These include: market concentration, the potential for new entrants, current supply and demand dynamics in the relevant market, efficiency benefits, innovations, and capacity management.
Those are, of course, the same economic factors that other competition agencies consider. And, by the way, the Commission used those same factors in evaluating the new P3 Alliance and the expansion of the G6 Alliance’s geographic scope – two recent high profile agreements about which I will say more in a few moments.
First, however, I would like to briefly comment on the third major element of the 1998 Reform Acts procompetitive reforms that I mentioned earlier: the expansion of Commission exemption authority.
Regulation and Supply Chain Efficiency
When I came to the Federal Maritime Commission over 11 years ago, I had hoped that the Commission would use its liberalized exemption authority to continue to reform international ocean shipping in an incremental way that allows time for the marketplace to adjust. As I approach the end of my third term at the Federal Maritime Commission next year, I regret that the agency has not moved forward to eliminate the remainder of a regulatory system originally designed for a common carriage regime that no longer exists.
I believe that we need to tailor our regulations to ensure that they are clearly justified, and are not just the result of our agency’s regulatory convenience or inertia. I believe that we can – and should – use the authority that Congress gave us to remove any and all unnecessary regulatory impediments to efficiency and innovation in the international supply chain.
We have an obligation to revise our regulations so that ocean carriers can deliver services with their customers’ needs in mind. We also have an obligation to revise or eliminate regulations that may be impeding reasonable commercial practices, customer service innovations, or more efficient transportation operations. These regulations most directly involve tariff publication and enforcement and service contract amendment filing.
P3 and G6 AGREEMENTS AND COMPETITION ANALYSIS
Shipping Act Agreements
Under the provisions of the Shipping Act of 1984, certain agreements by or among ocean common carriers must be filed with the Commission. Effective agreements are exempt from U.S. antitrust laws, and instead subject to Shipping Act competition restrictions and continued Commission oversight.
There are two broad categories of ocean common carrier agreements filed with the Commission: Pricing agreements, where the main focus is on rates, and operational agreements, where the focus can range from the sharing of vessel space to the management of an internet portal.
At the end of fiscal year 2013, there were only three conference agreements and 24 rate discussion agreements on file at the Commission. The three conference agreements cover the shipment of government cargoes. At the end of fiscal year 2013, operational agreements accounted for 87 percent of all carrier agreements on file at the Commission.
Both the P3 and G6 alliance agreements are, by the way, among those purely operational agreements that contain no authority to discuss or agree on freight rates or other charges.
P3 Network Vessel Sharing Agreement
Under the P3 Network Vessel Sharing Agreement, which took effect in the United States on March 24th, three carriers, CMA CGM, Maersk, and MSC, are authorized to share vessels with one another in the U.S. trades and to enter into cooperative working arrangements.
The P3 creates a new alliance in the largely unconcentrated and highly competitive East/West trades among lines initially operating 255 vessels in these trades. Most of the operational decisions for P3 services would be made through the group’s Network Centre in London.
The Parties have authority to discuss and agree on a variety of measures related to the operation of vessel strings, including:
- terminal services usage, preferred bunker ports, general administrative matters,
- vessel chartering, feeder services, and
- the formation and operation of committees.
Importantly, the P3 lines will maintain independent sales, marketing, and pricing functions. Their alliance will entail no reduction of sellers – as would be the case, for example, with a merger.
G6 Alliance Agreement
The G6 member lines are APL, Hapag Lloyd, Hyundai Merchant Marine, Mitisui, NYK, and OOCL. Their expanded Alliance Agreement went into effect in the United States on April 4th. The original G6 operated in trades between ports in the Far East and ports on the U.S. East Coast, and between ports in the Mediterranean and ports on the U.S. East Coast.
The expanded G6 agreement extended its geographic scope to allow cooperation in the trades between ports in the Far East and ports on the U.S. West Coast, and between ports in Northern Europe and ports on all U.S. coasts.
The agreement Parties may also establish and maintain one or more G6 Service Centers to perform day-to-day management and coordination functions, use information on third party costs, and agree on marine terminal calls and terminal pricing.
The G6 alliance is a purely operational agreement under which the parties can share vessels and implement administrative, operational, and policy decisions. However, like the P3, G6 member lines will continue to market and price independently.
A third global alliance agreement is the CKYH Alliance. It covers the operations of Asian carriers COSCO, K-Line, YangMing, and Hanjin in the U.S. trades. Although Evergreen has joined this alliance in the trade between Europe and Asia, it has not been included in any CKYH’s services in the U.S. trades.
The CKYH Alliance covers the east and west transpacific trades as well as the transatlantic trades between Northern Europe, the Mediterranean and the U.S. Generally, the CKYH Alliance differs from the P3 and G6 Alliances in that it is a much looser alliance which allows its individual members to be relatively more independent in making operational decisions.
Analysis of P3 and G6 Alliances
In its review of the proposed P3 and expanded G6 Agreements, using the economic factors and approach to competition analysis that I described earlier, the Commission determined that there was no indication that either P3 or G6 are likely to unreasonably increase transportation costs or unreasonably reduce service.
That is the case even for the transpacific trade where all of the P3 lines and five of the 6 members of G6 are also members of the Transpacific Stabilization Agreement – a relatively large and sophisticated rate discussion agreement.
The transpacific market is not concentrated, has no barriers to entry, and its supply and demand dynamics regularly undermine the rate increases proposed by carriers. The existence of large alliances, purely operational agreements that do not reduce the number of competitors, does not change fundamental supply and demand dynamics.
And, in any event, the Commission closely monitors the transpacific trades and the TSA, and would respond quickly if we found evidence that the TSA was unreasonably increasing transportation costs or unreasonably reducing transportation service.
Operational coordination by alliance lines makes possible efficiencies and cost savings that should allow liner companies to offer a more extensive network of trade services and reduce service disruptions, such as cancelled sailings. In addition, operational alliances can promote the sharing of best practices and the spread of organizational and technological innovations within an ocean transportation system that is increasingly under financial stress.
I understand the concerns expressed by certain shippers regarding the new alliances.
I was the Investigating Officer for the Commission’s Fact-Finding Investigation No. 26, Vessel Capacity and Equipment Availability in the United States Export and Import Liner Trades. The Commission ordered this investigation in early 2010 when increases in export and import volumes collided with previous vessel capacity reductions.
The resulting supply and demand mismatch created serious supply chain disruptions for American importers and exporters. Many shippers remember their experiences with vessel capacity and equipment shortages and other supply chain disruptions in early 2010.
Be assured, that the Commission will continue to monitor the P3 and G6 Alliances to ensure continuation of the market competition that supports a competitive, efficient, and responsive international supply chain.
Thank you for your invitation and your kind attention.