Prepared Remarks of Michael A. Khouri, Chairman, U.S. Federal Maritime Commission London International Shipping Week 2019 Government Stakeholder Workshop – The Future of International Maritime Trade Policy September 10, 2019
Good afternoon. Thank you for the invitation to speak today about recent issues and activities of the U.S. Federal Maritime Commission.
Role of the FMC
Because the ocean transportation industry plays such an essential role in America’s economy, the United States Congress assigned the economic and commercial regulation of U.S. international ocean transportation to a specialized agency with a developed expertise in the ocean container industry, together with sensitivity to the interests of both U.S. stakeholders and international trading partners. The U.S. Shipping Board – the predecessor agency to the FMC – was first constituted with the Shipping Act of 1916. I am told we were the first country to establish such a regulatory board.
The FMC’s mission is to ensure a competitive and reliable international ocean transportation supply system that supports the U.S. economy and protects the public from unfair and deceptive practices. In short version – our job is to ensure competition and integrity in America’s ocean supply chain.
Within the U.S. federal government, the FMC is designated as an “independent agency”. Created by Congress and nominally a part of the Executive Branch – we are not a part of the cabinet branch of the Administration. The agency charter provides for five commissioners, each nominated by the President and then confirmed by the Senate. Each serve for a five-year term. By virtue of our Congressional charter, we are bipartisan – meaning the political party in the White House may have three members and the loyal opposition has two members. However, because of staggered terms and vacancies, an incoming President may not have a majority of Commissioners until later in his term. The President does designate one Commissioner to serve as Chairman and chief executive of the agency. On substantive policy matters, the Commission acts by majority vote.
The Commission performs its mission under the Shipping Act with various bureaus and programs. A primary program is the economic competition review of cooperative alliance agreements among ocean common carriers serving the U.S. foreign trade lanes. The focus of these reviews is to ensure that the carrier agreements do not result in unreasonable increases in transportation costs or decrease in transportation services. We also review cooperative agreements among marine terminal operators using the same standard.
Industry analysts and shipper interests recognize that the alternative to the current status of closely monitored and well-regulated ocean common carrier alliances would be further mergers and consolidation in the industry. Such alternative outcome would result in fewer ocean carriers, less service options and increased potential for higher freight rates. Therefore, the United States believes that the Shipping Act and the FMC is a good model for regulating competition in the international ocean transportation industry arena.
Because the alliance agreements are ongoing cooperative agreements rather than mergers, the Shipping Act calls for ongoing and continuous monitoring following the agency’s initial review and commencement of agreement operation. The Commission may challenge an agreement in our Federal courts at any time after the effective date. Because of this ongoing monitoring role, consistent experience is important, and the Commission staff has developed a fair level of expertise in the ocean liner industry, dedicated to understanding the nuances of this important and unusual industry.
The Commission also protects the shipping public from unlawful, unfair, and deceptive ocean transportation practices and helps in resolving shipping disputes. We ensure system integrity through licensing and financial responsibility requirements of ocean transportation intermediaries, called freight forwarders on this side of the pond. We have some 6,500 forwarder companies with licenses and financial bonds. We investigate and rule on public party complaints regarding rates, charges, and practices of vessel common carriers, marine terminal operators, and freight forwarders. America’s exporters, importers, and consumers are the ultimate beneficiaries.
FMC Response to Larger Alliances and Fewer Carriers
As everyone in this room is well aware, the ocean transportation industry has changed over the last few years. The number of major global shipping companies decreased from 21 to 12. Both worldwide containerized trade volumes and container ship capacity continue to grow, with over 5,300 vessels deployed globally providing over 22 million TEUs of carrying capacity. The size of ships serving the U.S. market has grown dramatically in the last decade, the largest ship serving the U.S. trades carrying 19,500 TEUs. And, at the end of 2018, the three global alliances controlled 86% of vessel capacity in the two largest U.S. trade lanes, the transpacific and the transatlantic.
The Commission has responded to these structural developments with new alliance agreement negotiation practice that narrows agreement authority, restricts operational scope, and provides for enhanced monitoring programs. For all agreements, our staff maintains a careful watch on industry trends, being alert for indications of anticompetitive behavior.
The Commission and Marine Terminal Issues
The Commission also registers and regulates marine terminal operators, with over 300 ocean terminals serving ports along the Atlantic, Gulf, and West coasts, and Alaska and Hawaii. The operating demands of significantly larger vessels unloading more containers at each port call directly translates to a need for higher port productivity and new expanded infrastructure.
Marine terminals and port authorities have shown increased interest in using cooperative and collaborative agreements to address these productivity and infrastructure needs. Ports and marine terminal operators have filed agreements at the FMC to combine aspects of their operations to gain efficiencies and reduce costs, finance necessary infrastructure improvements, increase terminal velocity, develop collective solutions to mitigate cargo bottlenecks, and a host of other activities – all aimed at enhancing their ability to compete against neighbor ports or port ranges for cargo.
While creating efficiencies and benefits, these marine terminal agreements and joint ventures can result in reduction in competition that leads to a reduction in transportation service or an unreasonable increase in transportation costs. The Commission remains vigilant to prevent any violation of the Shipping Act.
Commercial Solutions Versus Government Regulation
Ocean transportation supply chain efficiency is a primary public policy issue of concern to the Commission. The public will call for less business regulation on one day, and then clamor for new regulations to protect one stakeholder group or another on the next day. Further, our experience instructs us that “one size fits all” regulatory responses are most often not the best solution to business operational problems; especially when dealing with a wide variety of business and operational practices across a wide geographical range of ports and marine terminals. As I noted earlier, the Commission oversees over 300 marine terminals with a variety of operational models.
In 2016, a group representing shippers, ocean transportation intermediaries, and domestic transportation companies, including port and regional trucking companies, filed a petition asking the FMC to address commercial practices by marine terminal operators and ocean carriers related to demurrage, detention, and related fees.
The Commission commenced a Fact Finding Investigation led by Commissioner Rebecca Dye to examine demurrage – detention practices throughout the U.S. All stakeholders were included in a series of discussion and study sessions held around the country. A valuable and important role for the Commission is our ability to bring diverse stakeholders together and to thereby facilitate commercial rather than regulatory solutions to problems.
Late last year, the Fact Finding officer issued a Final Report, which was then followed by work with industry stakeholders to refine the findings and recommendations. That collaborative effort resulted in a proposal that the FMC issue an interpretive rule that clarifies how the Commission will consider the reasonableness of demurrage and detention practices. The goal of the Fact Finding process was to ensure that demurrage-detention charges are assessed in a way that enhances the fluidity and overall performance of America’s containerized freight delivery system.
The proposed rule is designed to meet this goal without inhibiting the industry’s ability to craft flexible commercial solutions to commercial problems. Factors the Commission may consider in assessing reasonableness of charges include accessibility of cargo pick-up and then redelivery to the container port, and the transparency of demurrage and detention policies, including dispute resolution.
The Commission voted last Friday to publish the proposed interpretive rule and open a public comment period. While all Commissioners did not agree with each and every detail of the proposed interpretive rule, the full Commission decided that it was important to move the initiative forward to help resolve a difficult and nettlesome issue for industry stakeholders. The Commission looks forward to public comments as to how the proposal dovetails with its goals or might be improved to help it better achieve its intended purpose.
U.S. Congressional Response to Ocean Carrier Alliances
Given the significant amount of change that has taken place over the past few years, terminal operators, equipment lessors, harbor tug operators, bunker operators, and various other U.S. based service providers view the new commercial environment with questions and more than a little trepidation. Put simply, these service providers were concerned that fewer carriers operating in fewer, yet larger alliances would leverage their joint purchasing power in service contract negotiations.
Responding to these concerns, Congress enacted legislation last year that limits the ability of ocean carriers to jointly leverage any alliance market power in service contract negotiations with domestic suppliers of the mentioned docking and portside services. Congress can be expected to continue to respond to the interests of domestic constituencies facing the real or perceived power of ocean carriers operating in alliances.
Value of International Communications and Cooperation
The FMC regularly meets with competition authority agencies of our global trading partners to discuss container shipping industry issues and developments, such as the carrier consolidation trends, the related development of new carrier alliances, how to address carrier insolvencies, and policy issues specific to each of our governments. Meetings like the ones we are having this week here in London are important to the Commission and its work, providing a forum to discuss our respective approaches to the common goal of ensuring continued free and fair market competition in ocean shipping. I look forward to future consultations and discussions with officials from a broad group of countries with competition regimes for international ocean shipping.
Thank you for the opportunity to be here with you today and share my thoughts. If we have time, I would be happy to entertain questions and hear your comments.