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Remarks of Commissioner Rebecca Dye General Stevedoring Council Luncheon

October 28, 2016

Thank you very much, Tom, for that generous introduction. It’s a pleasure to be here this afternoon addressing the members and guests of the General Stevedoring Council.

Recent Regulatory Relief

When I arrived at the FMC, I assumed that the Commission would continue the gradual deregulation of the liner industry that started with enactment of the Ocean Shipping Reform Act of 1998. The Reform Act contained a liberalized exemption authority that allows the FMC to grant a regulatory exemption if it finds that the exemption will not result in substantial reduction in competition or be detrimental to commerce.

Although the Commission has not continued to deregulate international ocean shipping as I had hoped, I continue to encourage the Commission to use our exemption authority to grant reasonable regulatory relief whenever possible.

I am delighted to say that FINALLY the Commission has proposed that ocean carriers may postpone filing of service contract amendments for up to 30 days. This regulatory change will give ocean carriers and their shipper customers greater flexibility in their service contract arrangements and save contract filing costs. I expect that a final rule should be issued soon.

Strategic Regulatory Philosophy

My general approach to rulemaking is:

  • Proposed rules should not add unnecessary costs to our international supply chain;
  • Proposed rules must be supported by data that illustrates the existence of a clear, substantial harm that should be addressed. Otherwise, it is impossible to determine if the regulation is successful; and
  • Anecdotal impressions are not enough to support imposition of a regulatory change, and
  • Exercising caution and restraint is necessary to avoid unintended consequences of additional regulatory requirements.

My votes on regulatory matters before the Federal Maritime Commission reflect this basic philosophy. Other regulatory approaches I support include risk assessment and collaborative partnerships.

Hanjin Shipping Bankruptcy

The Commission is continuing to follow the developments related to the Hanjin bankruptcy and the impact on the transportation community. The Commission has no jurisdiction when it comes to resolving bankruptcy claims and does not intercede in legal actions between third parties that will be heard by the courts.

What the Commission can do – and is doing -- is using our industry expertise to offer guidance and direction to affected parties, and investigating any behavior by regulated parties – carriers, marine terminal operators or ocean transportation intermediaries – that may violate the Shipping Act.

The bankruptcy court is holding a second hearing on three motions today, two motions by cargo interests, one motion involving maritime lien creditors. Additionally, the court is holding a hearing on October 25th, on two different motions, one motion by chassis lessors and a motion by Hanjin for a final recognition hearing. It is our understanding that Hanjin is continuing to seek funding in Korea and to find space for empty containers in the United States.

Economic Environment

The Hanjin bankruptcy and the rise of ocean carrier alliances in the world’s East/West trades have a common origin: the continuing imbalance between the supply of container vessel space and the demand for vessel services. Worldwide economic growth remains, to put it mildly, less than robust. The resulting slower trade growth means that aggregate supply of vessel space continues to exceed shipper demand, and freight rates and carrier revenues have reached record low levels. Unfortunately, the liner industry’s negative operating revenues are forecast to persist. In his recent column in the Washington Post entitled "The Snooze Economy," Robert Samuelson stated that "The truth is that we don’t know how strong or weak the economy is.

The most reliable economic indicators are not enlightening, because they’re telling opposite stories." "On the one hand," he continues, "gross domestic product—the economy’s production—suggests that he economy could be on the brink of recession….By contrast, job figures depict a booming economy." Samuelson discusses other alarming trends, including the 5 percent drop of corporate profits in 2015, GDP weakness that continues this year, a peaceful equities market that could nonetheless lead to a sharp correction, and of course, there’s the Federal Reserve. Under such unfavorable and uncertain economic conditions, liner companies are trying to reduce their costs and minimize their financial risks.

You know the result: larger vessels, to realize economies of scale and remain competitive in a punishing environment, and operational alliances, to spread the cost and risk of providing extensive international service networks. Today’s financial pressures also result in mergers and acquisitions among even the larger lines – most recently China Shipping Container Lines, APL and United Arab Shipping – and, as in the case of Hanjin Shipping, bankruptcy.

Alliances

Which raises what I believe is an important distinction, and one we take seriously at the Commission when we review proposed alliance agreements: Alliances are not mergers. Consequently, industry consolidation into a few operational alliances is not the same thing as market concentration of sellers. For America’s importers and exporters, the creation of global alliances normally presents no significant competition problems.

Alliance lines continue to market and price their services separately. Mergers and acquisitions, on the other hand, do reduce the available number of sellers in a market and may affect market concentration. Let me emphasize that point: Acting in response to market forces and financial pressures, carriers sometimes feel they must choose between mergers or operational alliances. Of those two options, shippers should prefer alliances.

Those purely operational agreements benefit shippers by, among other things, avoiding further market concentration and potential competition problems. Or, as the European Commission’s Commissioner for Competition put it in her speech last year explaining why the EC had extended the block exemption for consortia (a category that includes global alliances) for five more years: "Consortia are a logical response to the difficulties that beset the industry and we know that they can create efficiencies. Both small and large carriers see benefits; for smaller carriers, consortia are often the only way to offer a regular service. More generally they lead to economies of scale and better capacity utilization."

When the Commission reviews proposed alliance agreements, market concentration is always a significant factor in the our analysis, along with barriers to entry and existing supply and demand conditions in the relevant markets – just as they are under the competition guidelines followed by the Federal Trade Commission and the Department of Justice’s Antitrust Division. We do, of course, have concerns when alliance members also participate in rate discussion agreements in the same trade – the Transpacific Stabilization Agreement, for example. But that is a factor our analyses always take into account.

Absent such special circumstances, operational agreements acting alone – even major alliances – are unlikely to substantially reduce competition, especially where markets are not concentrated and exhibit no barriers to entry. The Oceans Alliance is currently under review with the Commission, and is scheduled to become effective on Monday, October 24th.

The FMC’s Supply Chain Innovation Teams

Finally, I would like to offer a few remarks on a topic that I hope is of interest to all U.S. marine terminals and stevedore companies: operational inefficiencies that affect container throughput velocity, trucking turn times and the smooth operation of the U.S. international supply chain.

The FMC originally became engaged with these issues during the West Coast congestion crisis of late 2014 and early 2015. Their importance was underscored earlier this year by the uncertainty America’s exporters faced over how to implement the International Maritime Organization’s new rules on verified container weighing.

Fortunately, the U.S. Coast Guard resolved the uncertainty by filing an "equivalency" that allowed our exporters to avoid unnecessary logistics costs or restrictions on cargo movement. FMC Chairman Cordero issued a press release, which I supported, to guide ocean carriers acting under an FMC agreement to choose the less burdensome "equivalency" over other VGM compliance approaches to avoid competition problems.

And, most recently, Hanjin’s bankruptcy -- with its substantial negative effects on chassis availability, drayage trucking and marine terminal operations – reminds us that cooperation among supply chain actors is a continual necessity. Certainly better infrastructure, increased facilities automation and improved information technologies can help, but there is still a need for enhanced supply chain visibility allowing more effective sharing of critical information among supply chain actors.

Last February -- building on a series of port forums the FMC conducted in late 2014, and on last year’s comprehensive report on the issues raised -- the Commission issued an Order directing me to initiate our Supply Chain Innovation Team project.

We had concluded that the FMC could add value to, and complement other ongoing discussions and deliberations on port congestion by giving industry leaders the opportunity they told us they wanted: to "roll up their sleeves" and actively engage with other supply chain actors to develop commercial solutions to supply chain problems.

By early May, we had:

  • Recruited 35 volunteer industry leaders, formed them into three teams of roughly a dozen participants each -- composed of representatives of nine industries – port authorities, marine terminal operators, port labor, drayage trucking, shippers, ocean transportation intermediaries, chassis providers and railways;
  • Established a webpage on the FMC’s website to keep interested parties informed of our progress; and
  • Begun what became monthly team meetings – in person or via conference call.

At the project launch on May 3rd I stressed two points in my remarks: First, we were not developing an FMC – a federal government-directed -- solution. We were acting as a catalyst for committed teams of industry leaders to exchange ideas and debate innovative commercial supply chain solutions.

Second, our teams would not provide a "quick fix" to what is clearly a complex, systemic, inter-locking set of supply chain problems. But we did insist that our teams move beyond discussing problems to actually developing a plan of action for implementing process innovations.

During our first meetings in May, all three Innovation Teams agreed to pursue the development of a national supply chain information platform or portal that could be adapted for use by any port in the country. Since then they have been working to develop the precise information that must be available to each supply chain actor for improved supply chain reliability, resilience and visibility.

The teams concluded their meetings together on Monday and Tuesday of this week. The teams have made enough progress in identifying the critical information needed by all supply chain actors – and the timing and method for making it available -- that I intend to incorporate their work into an interim report to the Commission on this phase of our project and a public summary of the results.

By the way, I say "interim" report because the current three teams have focused mainly on supply chain visibility in the "import" supply chain. Next year, we plan to form a team that focuses on the essential information needs of our international export supply chain.

In addition to the excellent work performed by our Innovation Team members, there are other "intangible" benefits that have resulted from their deliberations. One of these benefits is active collaboration towards a greater depth of understanding and insight into port operations and challenges. In the long run, this could turn out to be one of the most important benefits of our project.

Thank you for your kind attention.

11/2/2016 Update: The text was updated to include additional information from the delivered speech.