Remarks of Commissioner Creel to the Indo-American Chamber of Commerce, August 19, 2004
August 19, 2004
I am honored to be addressing this extremely important and timely conference on India's resurgent role in the maritime sector. This is my first visit to this beautiful country. At the conclusion of this conference, I plan to travel to Delhi and throughout Rajasthan to more fully appreciate its many diverse attractions.
I would like to focus my remarks today on recent developments in the United States that have affected the way we regulate international liner shipping. But, before doing so, I must offer one caveat. Any views expressed today are solely my own, as a Commissioner at the Federal Maritime Commission. Since 1961, the Commission has been an independent agency that oversees international liner commerce. We are not part of the Executive branch of government, and, as a result, operate free from the Executive's direction. We nonetheless work very closely with the Maritime Administration, and the Departments of Transportation and State.
I am also pleased that Ed Emmett has been involved in developing this conference and will be speaking this afternoon. In a prior life, Ed was director of the National Industrial Transportation League, an organization that represented the interests of shippers in the United States. In that capacity, I worked with Ed when I was on Capitol Hill and during my seven-year tenure as Chairman of the FMC. Often, we were on opposite sides of various issues. In all cases, however, Ed was a gentleman and a man of honor, who passionately and effectively represented his members' interests. Ed played a crucial role in developing the maritime policy and law that we at the FMC operate under today. I can think of no one better qualified than Ed to address this important conference. I look forward to hearing more from him later in the program.
I'm not always sure that most of my fellow Americans fully appreciate the significance of the bilateral trade between India and the United States. Last year, trade between the two countries totaled $18 billion, with India, the 19th largest trading partner of the U.S., having a trade surplus of $8 billion. A large proportion of this trade is carried by liner operators who are subject to the FMC's oversight. The volume of this trade that is being carried by liner operators increased from 304,000 TEUs in 2001 to 338,000 TEUs in 2002, and 398,470 for 2003. Total liner cargo is projected to grow by 12 percent in 2004 and 4.2 percent in 2005. For the past two years, India has ranked 14th as a U.S. liner cargo trading partner.
I'd like to begin by discussing with you what the Federal Maritime Commission is and what we do.
By Washington standards, the FMC is a small agency, with only 130 employees. Nonetheless, our statutory mandates are huge. The principal statute that guides our activities is the Shipping Act of 1984, which was recently amended by the Ocean Shipping Reform Act of 1998 ("OSRA"). These statutes are designed to achieve a fair and nondiscriminatory ocean transportation environment, in which the commercial marketplaces play an increasingly prominent role. Pursuant to these statutes, the Commission oversees the activities of ocean carriers, non-vessel-operating common carriers ("NVOCCs"), conferences, intermediaries, shippers, shippers' associations, marine terminal operators, ports and others. In addition, the Commission ensures that these entities do not violate various activities proscribed by section 10 of the Act. In all such matters the Commission operates in a flag-blind manner. That means, for example, that Indian-flag carriers receive the same treatment as U.S.-flag carriers.
The Commission also receives certain agreements among ocean common carriers and reviews them to ensure that they are not substantially anticompetitive. Once these agreements become effective, they are exempt from U.S. antitrust laws. The Commission also receives all service contracts entered into by carriers and shippers and maintains them in an electronic database that is accessible only by the Commission. The Commission further ensures that the electronic tariffs published by common carriers are accessible to the shipping public. The Commission also licenses ocean transportation intermediaries (that is, ocean freight forwarders and NVOCCs) and ensures that they maintain adequate financial responsibility to protect the shipping public. The Commission also requires passenger vessel operators to demonstrate their financial responsibility in the event of nonperformance of a voyage, or for personal injury to passengers during a voyage. The Commission also regulates the rates of government-owned or controlled carriers, including, of course, the Shipping Corporation of India. Back in 1978, the U.S. Congress concluded that state controlled carriers were not operating pursuant to normal market forces and thus subjected their rates to greater scrutiny. Lastly, the Commission has the ability to address unfair foreign maritime practices through section 19 of the Merchant Marine Act, 1920 and the Foreign Shipping Practices Act of 1988. In other words, to ensure that all carriers operating in U.S. trades have the same access to foreign ports as vessels of that country have to U.S. ports. The Commission has used this authority most recently to address adverse maritime conditions in the Peoples' Republic of China. I am pleased to report that these efforts, together with those of the Maritime Administration, have recently resulted in a much more open maritime transportation sector in China.
I would like to bring you up to date on the approach that the United States has taken to regulate its maritime transportation industry. As I indicated earlier, the United States recently amended its maritime statutes pursuant to the Ocean Shipping Reform Act of 1998. I will discuss briefly the process that led to that law and then address its major changes and effects.
It took 68 years for the U.S. to make its first major overhaul in the way it regulates ocean transportation. The Shipping Act of 1984 replaced the Shipping Act of 1916, an archaic, anachronistic statute whose utility had clearly waned. Under this new regime, the Commission no longer approved carrier agreements pursuant to a public interest standard. Instead, carrier agreements generally become effective within 45 days of their filing. However, these arrangements, which receive immunity from the U.S. antitrust laws, are subject to constant Commission monitoring and review. For the first time, carriers, conferences, and shippers and shippers' associations could enter into service contracts to meet their transportation needs. However, several essential terms of those contracts had to be published and the same terms had to be offered to similarly situated shippers. In addition, non-vessel-operating common carriers were given statutory recognition.
It didn't take another 68 years for some to decide that further change was necessary to counter the continued influence of conferences. The initial efforts at change were led by a group of large shippers and a couple of large carriers. Their draft bill eventually failed.
In the subsequent Congressional session, an effort was made to involve all the various affected entities in the process. There were numerous meetings with representatives of these parties, hearings were held, and several changes were made to the original approach. This bill ultimately passed both Houses of Congress and was enacted into law as OSRA - the Ocean Shipping Reform Act of 1998. It represents a true compromise by all involved in the process.
One of the cornerstones of OSRA is its treatment of service contracts between ocean common carriers and their shipper customers. The rates agreed to by the contract parties are no longer public knowledge and carriers do not have to offer the same deals to other shippers. Moreover, the parties can agree to keep all or a portion of the contract terms confidential. Even more importantly, carrier conferences can no longer prohibit or restrict their members from offering service contracts. As a result, contracts now can be negotiated individually between a single carrier and a single shipper.
On the carrier side, OSRA continues to provide immunity from the U.S. antitrust laws for certain concerted activities among carriers. However, the extent of permissible activities has been circumscribed somewhat. In particular, agreements cannot require their member to disclose service contract negotiations or the details of any service contracts entered into. However, agreements may adopt voluntary guidelines concerning service contracting. The guidelines must be filed confidentially with the Commission and must be truly voluntary and nonenforceable. Lastly, only ocean common carriers, and not NVOCCs, can offer service contracts to shippers.
The most obvious result of OSRA has been the influx of service contracts between shippers and individual ocean carriers. In fiscal year 2003, the Commission received over 240,000 service contracts and amendments. In fact, the vast majority of liner cargo now moves under service contracts, 70-80 percent in some trades. This has led to improved relationships between carriers and their shipper customers. Although shippers don't always end up with the lowest possible price, they can receive the mix of services they desire for their particular needs. In a tight market, when space is at a minimum, this can be particularly important. OSRA has also resulted in a decrease in the importance of ratemaking agreements. The traditional conference has virtually disappeared. In its place has been a shift in the importance of voluntary discussion agreements. In addition, carriers are becoming much more effective and innovative in their use of operational agreements such as vessel sharing agreements to the benefit of themselves and their shipper customer.
Has OSRA worked as intended? I believe the answer is an unqualified "yes." I know from my discussions with carrier executives that many were initially skeptical that those changes would benefit their industry. In the six years since OSRA was enacted, most of the industry players appear to have embraced its changes and many - especially carriers - have been pleasantly surprised at the benefits the Act has brought to their business. The compromise adopted by Congress has achieved a good balance between shipper and carrier interests.
There is one industry sector that is less than thrilled with the OSRA compromise. NVOCCs are treated differently depending on who they are dealing with. They operate as shippers in their dealings with ocean carriers, but they're considered common carriers in their dealings with their shipper customers. Under OSRA, NVOCCs were not granted the ability to offer service contracts to their customers, although they could enter into them with ocean carriers. NVOCCs have periodically complained to Congress about this state of affairs.
In an attempt to address this dilemma, the Commission has recently received eight petitions seeking an exemption from the Shipping Act to permit NVOCCs to offer service contracts or be relieved from tariff publication requirements. These petitions were noticed for public comment and the Commission received numerous comments on them. We are now in the process of digesting these comments and deciding on an appropriate course of action.
I would like to now discuss Commission activities that have had a specific impact on the Indian - U.S. trade. U.S. law requires that the Commission review agreements among ocean common carriers to ensure that they do not result in unreasonable reductions in service or increases in costs. One agreement that recently became subject to Commission scrutiny was the TransPacific Stabilization Agreement ("TSA"), the largest pricing agreement in the eastbound bilateral trade, which included the Indian subcontinent in its scope.
In 2002, two associations of NVOCCs filed a petition with the Commission alleging that TSA members had discriminated against NVOCCs in connection with the negotiation of service contracts for the 2002-2003 season. The Commission subsequently conducted a fact-finding investigation that further broadened the issues to be investigated. Ultimately, the Commission was able to reach a settlement with TSA that addressed the concerns raised in the initial petition and that addressed concerns identified by the Commission during the course of its investigations. This settlement was entered into on September 11, 2003, and made a number of structural changes in TSA designed to enhance competition. One of the most significant change for this audience was the elimination of India from the geographic scope of TSA and the cancellation of the Indamex Bridging Agreement. The Commission required this change because it felt that TSA, combined with the bridging agreement, was too dominant in that market - resulting in reduced competition.
On February 27, 2004, five of the carriers who are members of TSA filed with the Commission the Indian Subcontinent Discussion Agreement. This agreement is intended to provide the parties a vehicle to discuss, exchange information, and reach voluntary agreement on matters of interest in the India/U.S. trade. The Commission permitted this agreement to become effective on April 12, 2004, because of the relatively small market shares of the parties. Nonetheless, we will continue to monitor how closely the parties follow the service contract guidelines adopted by their fellow TSA members.
This concludes my remarks today. I thank you for your attention and your gracious hospitality.