Prepared Remarks of Commissioner Michael A. Khouri “FMC – On the Bridge, On Watch, and Proper Lookouts are Posted” Before the Global Shippers’ Forum Toronto, Canada

Good afternoon and thank you for the kind introduction. My thanks to the Global Shippers Forum, our host – the Freight Management Association (FMA) of Canada, the National Industrial Transportation League, and Bruce Carlton for the invitation to join your group today and share some of my views on current maritime regulatory issues.

As a standard preamble, my comments today reflect my personal observations, views, and opinions. I do not speak on behalf of the Federal Maritime Commission or the U.S. federal government administration.

Bruce asked me to address the basic program of the Federal Maritime Commission, to offer some perspective on how the FMC fits in with other international regulatory programs, and, generally, how the FMC is monitoring the various vessel sharing agreements – the Alliances – in our regulatory process.

To start with a quick walk through history.

The Commission is an independent federal regulatory agency that was originally chartered by the U.S. Congress in 1916 and first titled the U.S. Shipping Board. It was charged at that time with the mission to rein in the many ocean carrier conferences that dominated the international liner trade. These conferences would selectively admit carrier members and then those member carriers would set all terms of transportation on a given trade route for a specified commodity. Such commercial terms included freight rate, sailing schedule, liability for cargo loss, if any, and all other customary commercial terms. Conference members were required to follow all conference rates, practices, and rules.

Under the 1916 regulatory regime, each conference had to file their agreement with the Commission. Then the Commission determined if the agreement met certain fairness and non-discrimination standards. Further, the conference members were required to observe and obey all other provisions of the Shipping Act, for example, requirements for fair and non-discriminatory rates, providing all rates and terms in a publicly published tariff and offering transportation to all shippers together with other competition fairness provisions. The Commission had the power, under the 1916 law, to declare a freight rate or a shipping practice as unfair or unreasonable and to order a new rate or new practice.

Jump forward to 1984, when the U.S. Congress decided to introduce free and open marketplace influences into international liner ocean shipping. For example, shippers were newly empowered to enter into individual contracts and the conferences system was limited and pulled back into a rate discussion status. All contracts were still publicly filed and any shipper could claim that it was similarly situated and thus eligible for the same contract rate. Also of significance, Congress removed the Commission’s power to determine and order “fair” rates or commercial terms.

Last, the 1984 Act made substantial changes to the method and standards under which the Commission reviewed agreements between regulated entities, primarily vessel operators and marine terminal operators.

In 1998, more free market provisions were added to the Shipping Act. Shipper-carrier contracts were now confidential – no more “me too” piggy backing on other shipper’s contracts. The NIT League was a leading supporter of the 1998 Shipping Act amendments that ushered in the confidential contracting provisions and increased free market dynamics.

To focus on agreements – under today’s Shipping Act, any time two or more liner vessel operating common carriers or two or more marine terminal operators want to jointly meet and discuss issues that could affect commerce, then that agreement must first be filed with the Commission. Then the professional economists and staff in the Bureau of Trade Analysis – a dedicated group that does excellent work – analyze the agreement for competitive effects under standards that are, in general, quite similar to the legal standards applied by the U.S. Federal Trade Commission and the U.S. Department of Justice when those federal agencies review commercial joint ventures and mergers.

The Commission’s monitoring and special periodic reporting requirements for vessel alliance agreements focus on metrics that would evidence a well working and competitive international container transportation marketplace or; conversely, would evidence possible non-competitive activity. The metrics are intended to tie directly to Section 6(g) of the Shipping Act.

As applied to an existing alliance agreement, that Shipping Act section provides that, in the event an agreement has substantially reduced competition and such decrease in competition has produced an unreasonable reduction in transportation service, or, has produced an unreasonable increase in transportation cost; then the Commission shall, first notify the agreement parties to correct, modify, or cease such behaviors and ultimately, go into federal court in Washington D.C. and seek to enjoin further operation of the alliance agreement. That is the legal standard and the legal process.

The monitoring metrics that the Commission may employ for agreements under the agency’s oversight include rate and revenue issues and capacity issues.

On the capacity monitoring side, alliance participants may be required to submit frequent and timely reports on:

• Number of sailings, by trade lane and by direction for vessels deployed by the alliance members,
• Aggregate number of loaded TEUs on such sailings, by trade lane and direction,
• Average effective capacity in TEUs and average percentage of vessel utilization per sailing,
• Prompt and timely verification of any material reduction in vessel capacity agreed upon by the alliance.

On the rate and revenue monitoring side, alliance members may be asked to provide the Commission with frequent and timely reports on:

• Average revenue per TEU, by trade lane and by direction, for US imports and US exports for each alliance member.

General monitoring includes:

• Semi-annual updates on all service strings
• Semi-annual discussions with alliance representatives to cover operations, seasonal schedules and other current issues
• Minutes of certain meetings of the alliances.

The Shipping Act provides that all information and data submitted to the FMC under all filed agreements shall be held as confidential. Such data may not be shared with any outside parties – and that includes no sharing of data with the EU competition bureau or the Chinese ministries of transport or commerce.

As a comfort to the foreign shippers and shipper’s councils in attendance, this competitive monitoring provides benefit and protection not only to U.S. importers and exporters but also our foreign trading partners in their import and export commerce with the U.S.

To acknowledge a commonly expressed concern, namely, do the alliances provide a forum where the carriers can and even will illegally conspire and collude to secretly fix freight rates or constrain vessel capacity on one or more trade routes in order to achieve higher freight rates? The answer is found in two areas.

First is, with the extensive monitoring that the Commission employs, anti-competitive trends would be exposed and dealt with in the U.S. legal processes. Second, and probably more important, is the actual playing field in the international container marketplace. An old saying goes – opinions are fine, but facts are more troublesome things, they don’t go away.

Current facts in terms of service levels and freight rates in the U.S. inbound and outbound trades give strong evidence that the container shipping business continues to be robustly competitive. Over the last decade, total fleet capacity has increased and service string offerings – by individual carriers and by virtue of vessel sharing agreements – have increased. The alliances, in general, assert that they are offering more efficient service and lowering operating cost. The question is then asked by the shipper community – will those carrier cost savings be passed along to the shipper?

Consider a recent commentary by Alphaliner – a highly respected container industry data analysis company. Between 1998 and 2013, average container freight rates, as measured by the China Container Freight Index have increased by three per cent. Yet, over the same fifteen year period, fuel price has increased by 790 per cent. According to Alphaliner, in 1998, fuel was eight per cent of total container freight costs. Now it accounts for over twenty-five per cent of total carrier cost. It is widely reported in the trade press that carriers are in a constant battle to find cost savings. These Alphaliner data points would indicate that cost saving initiatives are being passed over to shippers.

To touch on the topic of how the Federal Maritime Commission’s regulatory mission and role intersects with other government’s regulatory processes, you need to first consider the FMC’s role within the United States government structure. The U.S. Congress debates and enacts the law – the Shipping Act. Then the Congress enacts the law establishing the independent agency – the FMC. The Commission is assigned the duty to administer and enforce the Shipping Act.

As referenced earlier regarding agreements filed with the Commission – be they vessel sharing agreements or ocean carrier rate discussion agreements – if anti-competitive activity or questionable market indicators appear, then the Commission would address those issues and concerns with the agreement parties. Failing resolution, the Commission’s attorneys go before a federal judge and present their case. If the Judge agrees with the Commission, then the federal court issues an injunction and the activity under the filed agreement stops. The alliance is thus disbanded.

Other countries have different legal processes and different standards. The U.S. Congress has determined that rate discussion agreements are allowed but they must be closely monitored by the FMC. Vessel sharing agreements are not only allowed, but the legislative record, going back to 1984, documents the Congress’s support for agreements that support cooperative and efficiency enhancing operating agreements. Indeed, many shippers and trade associations have likewise supported vessel sharing agreements.

Other countries have decided that rate discussion agreements are not permissible but vessel sharing agreements are, subject to various processes. In the European Union (EU), the agreement participants engage in a self-assessment of compliance within a predetermined market share level, and for anything above that level, their competition council steps in for a review process. The Chinese process does not have the set threshold level that the EU model utilizes, but proceeds through two different state agencies – the Ministry of Transport and the Ministry of Commerce. The Chinese system of competition monitoring and regulation is a more recent government effort and continues to evolve.

The Federal Maritime Commission has been monitoring and regulating the competitive market in the international liner ocean shipping industry and reviewing all manner of carrier agreements for ninety-nine years. The FMC has been utilizing the current Section 6(g) anti-competitive legal standards for the last thirty-one years. We are the only government agency in the world that is exclusively focused on monitoring the international liner trades. Every organization can improve, but I believe the Federal Maritime Commission has a very solid record of success in fulfilling its mission.

The summary takeaway on the Commission’s duty to monitor the ongoing competitive effects of the vessel sharing alliances is that the FMC is on watch, trained and well qualified personnel are on the bridge, and proper lookouts are posted.