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Remarks of Commissioner Michael A. Khouri at the Propeller Club of the United States Port, Los Angeles & Long Beach

Posted

Introduction

I am pleased to be with you today and I want to thank the Propeller Club of the United States Port of Los Angeles & Long Beach for the invitation to speak. My remarks reflect my individual views and thoughts. They are not offered as the official positions of the United States or the Federal Maritime Commission. When first asked to talk with you, I was serving as Chairman of the FMC. On March 29th, President Biden designated Commissioner Dan Maffei as Chairman and I reverted to my role as a Commissioner. I congratulate Dan on his appointment, and I will do all in my power to support him in his new leadership role.

The Commission

For those who may not be familiar with the FMC, we are the federal agency with responsibility for the economic regulation of ocean borne transportation between the U.S. and our foreign trading partners.

Congress charged the FMC with responsibility to ensure competitive and efficient ocean transportation services for the shipping public and to protect the public from unfair and deceptive practices. The prime meridian for the Commission is Competition and Integrity for America’s Ocean Supply Chain.

The Commission oversees an industry that is vital to our Nation’s economy – containerized ocean cargo moving in the U.S. import and export trades. Twenty-seven percent of all U.S. import and export cargo is regulated by the FMC.

The Shipping Act allows competing vessel operators to enter into a joint association to discuss commercial issues in a manner that would be a problem for most businesses under the antitrust laws, such as discussion of freight rates, provided there is no mechanism to require loyalty or adherence to any discussed rates. They may also enter into joint operating agreements – some as simple as agreement to swap a fixed number of container slots on each other’s vessels to the highly structured joint operations we now see with the top nine carriers aligned in three alliances that serve the Asia – U.S. and Europe – U.S. trades. Marine terminal operators – such as here in LA and Long Beach – may also receive authority for joint discussion and joint operations.

Agreements must be filed with the Commission for review under the Act’s competition standard. The agreement will become effective in 45 days provided the FMC does not find that the proposed joint operation is not likely, by a reduction in competition, to produce an unreasonable reduction in transportation service or an unreasonable increase in transportation costs or to substantially lessen competition in the purchase of certain covered services. If the FMC does find that such competition problems are likely, then we can go before a federal court and ask for an injunction.

In making this competition decision, the Commission reviews each agreement on a trade-by-trade basis and using all relevant markets. The complexity of America’s ocean supply chain is a primary reason Congress believed it important to have an agency with up-to-date knowledge and particular expertise in this industry.

Capacity and Rate Issues Outlook

Here in San Pedro Bay, you are on the front line of the challenges facing the Nation’s ocean supply chain. As you know, the supply chain is global in scope with many links in the chain. Over the last year plus, that supply chain has been stressed and challenged by the COVID pandemic.

The initial effect of the pandemic led to the shutdown of factories in China, which led to dramatically decreased ocean shipping, creating a litany of problems throughout the supply chain.  Ocean carriers responded with reduced sailings and laid up vessels seeking to balance transportation supply with greatly reduced demand.

As factories started to reopen in China, consumer patterns in the United States began to change dramatically. As economic activity began to pick up, U.S. retailers began to restock inventories and there was a marked shift by U.S. consumers from spending on services to the purchase of consumer goods from Asia. This led to a surge in import cargo that is stretching the supply chain to the limits and can be expected to continue into the immediate future.

U.S. import demand will continue to rise dramatically throughout the remainder of 2021 as “lock downs” end and economic activity returns to normal.

U.S. export demand is expected to increase substantially during the remainder of 2021.

As is happening here in San Pedro Bay, container throughput in U.S. ports is still very slow and costs are up due to a variety of factors affecting port and ocean carrier operations and costs:

  • There are few – if any – available idle vessels to address additional demand and vessel charter rates are at a 10-year high.
  • Fuel/prices are up 50% versus Sept 2020.
  • Vessel idling costs have risen due to waits or disruptions at ports or canal passage.
  • Container repositioning costs are high, due in part to disparity between import and export volumes.
  • Trucking shortage and increased trucking costs.
  • Increased intermodal rail costs together with recent decreases in rail car availability.
  • Some early COVID-related labor shortages and increased costs.
  • Inadequacy of container storage space and increased storage costs at terminals and inland depots.
  • Increased container costs due to production hiatus and shortages.
  • Significant year-over-year freight contract and spot market price increases.

One marine terminal issue concerning port congestion that I want to “lean into,” so to speak, is the hours of operations. I have been talking with the top C-suite executives of all the major container vessel lines concerning the ocean supply chain and getting their thoughts on how to improve freight fluidity and container velocity throughout the system. Among the many issues and factors raised, virtually every CEO has raised this point.

When there is serious port congestion at most every port in the world, the ports start operating on a 24/7 weekdays and weekends basis until the congestion is cleared. However, this does not occur in U.S. ports, such as here in LA and Long Beach. The marine terminals are not open and working every evening and night and weekend – even in the face of unprecedented congestion. It was noted that in the Port of Oakland, container ships that would normally have five gangs working the vessel once it is at the berth will have only two or three labor gangs assigned. This slows the off load/on load process and delays the vessel departure from the port – all the while as more vessels arrive and are assigned to an anchorage.

This must change. The various marine terminal operators and the respective port authorities need to put their heads together and find solutions. And they cannot fix this on their own. They also need cooperation from other stakeholders and “links” in the supply chain.

Collectively, our American importers are losing sales with out-of-stock items and our consumers are facing higher prices for their daily purchases.

It is a competitive disadvantage for our American exporters who compete on a global basis, and they are suffering the consequences.

The ability of American companies to reach overseas markets is an issue of utmost importance to the FMC. One of the purposes of the FMC as set forth in the Shipping Act is in two parts – to promote the growth and development of United States exports through competitive and efficient ocean transportation and, second, by placing a greater reliance on the marketplace. We do not want more regulation. But we do need the marketplace to work better.

FMC Role

The required response and solutions to the current challenges impacting the global supply chain are multinational and multifaced in nature, involving the participation of many nations, government agencies, and stakeholders. The Federal Maritime Commission is proud to play its part in responding and working to ensure an efficient and economic ocean transportation system for the American economy.

With Fact Finding 29 on “International Ocean Transportation Supply Chain Engagement,” the Commission has been working to address both short term, urgent problems, as well as longer-term port inefficiencies.

The Fact Finding, is focused on (1) demurrage and detention, (2) empty container return to seaports, and (3) the availability of containers for the carriage of U.S. exports.

In its first phase, Fact Finding 28 led to a new interpretive rule that addressed how the FMC will interpret “unreasonable practices” in complaint cases brought under the Shipping Act. The rule recognizes the role of detention and demurrage charges in facilitating freight mobility and prompt cargo movement and productive use of assets. It applies an “incentive principle” in general terms. Freight mobility is especially critical considering the challenges currently facing America’s ocean supply chain.

The Commission has a responsibility to investigate serious impediments to performance in our major port gateways. Therefore, on November 20, 2020, the Commission approved a Supplemental Order to expand Fact Finding 29 to investigate ocean carriers operating in alliances and calling at the Port of Long Beach, the Port of Los Angeles, or the Port of New York and New Jersey to determine if policies and practices related to detention and demurrage, container return, and container availability for U.S. export cargoes violate the Shipping Act.

Commissioner Dye, as Fact Finding Officer, issued information demand orders to ocean carriers and marine terminal operators to determine if legal obligations related to detention and demurrage practices are being met.

The demand orders require carriers and MTOs to provide information on their policies and practices related to container returns and container availability for exporters.

Following evaluation of the submitted information, Commissioner Dye will make recommendations to her colleagues as to the Commission’s next steps.

Looking Forward

Looking out over the next year, we will continue to look for opportunities to address bottlenecks and friction points in the ocean supply chain – using collaborative cooperative solutions wherever possible, and other means if necessary. I hope the Commission will continue to focus on opportunities to relax or remove regulatory burdens in the ocean container transportation space that unnecessarily add costs and reduce freight fluidity. And, through the remainder of the ongoing pandemic and beyond, the FMC will continuously pursue our goal of ensuring competition and integrity in America’s ocean supply chain.

Closing

Thank you for the opportunity to meet with you today and share some of my thoughts. I look forward to your questions.