US Flag iconThis site is an official U.S. Government Website.

Statement from Commissioner Maffei on Puerto Nuevo Terminals LLC Cooperative Working Agreement

Posted

Commissioner Daniel B. Maffei voted against allowing the Puerto Nuevo Terminals LLC Cooperative Working Agreement to take effect, arguing that the potential negative effects provided sufficient reason for the Commission to intervene. Given that the agreement will take effect despite his vote, he applauds the Commission’s unanimous decision to conduct enhanced monitoring of this agreement.

His statement follows:

“I am not convinced the agreement should survive the § 41307(b)(1) analysis. This agreement certainly reduces competition, so the question is whether there is a likelihood that this reduction in competition would produce either an unreasonable reduction in transportation service or an unreasonable increase in transportation cost, or substantially lessen competition in the purchase of certain services.

In terms of the possibility that the agreement could substantially lessen competition for covered services, I am not satisfied with the extent of the analysis on this point. If a particular stevedore company invested in developing an expertise in a unique geographic area such as the Port of San Juan, then it is quite conceivable that a consolidation of purchasing power in that area could put it at a substantial disadvantage and thus trigger a violation of the new prong of § 41307(b)(1) created by the LoBiondo Act.

In terms of the other prongs of § 41307(b)(1), I have four points of concern about the conclusion that the Agreement is not likely to produce an “unreasonable” reduction in service or increase in cost.

First, the analysis in this case seems unusually inconclusive describing that the likelihood that the reduction in competition would result in unreasonable rate increases is “unclear” and that, while a rate increase is likely, the percentage increase is “uncertain.” In cases where the likelihood of an unreasonable increase in costs cannot be established, the default is to conclude that it is not likely. However, in this case, there are reasons to suspect that there is insufficient information to make a full assessment. If this is the case, then the agreement should be rejected as incomplete rather than allowed to take effect due to lack of sufficient evidence of a § 41307(b)(1) violation.

Second, while I have no doubt that the economic analysis was performed diligently (as it always is), several speculative assumptions were made in order to reach the conclusion. While assumptions about the future factor into any economic analysis, there are points where a slightly different (and I think defensible) assumption could have triggered the “unreasonableness” standard. For example, it was considered that if rates were raised enough, carriers might simply stop service to the island rather than pay the new rates. It was suggested that this would create a tension that would help keep prices under control. I am not so sure. Given that a major party to the agreement is itself a carrier, it may have incentives to keep other carriers out and would therefore not limit price increases based on this tension. Furthermore, if a carrier found the prices too high in Puerto Rico as a result of this agreement and made the business decision to stop service, it may not have a substantial negative impact on that carrier because Puerto Rico is a small portion of overall trade for any major carrier, but it could conceivably lead to an unreasonable reduction in service to the people of Puerto Rico.

Third, the fact that this agreement allows the parties to discuss and collaborate on both capacity issues and price setting through their joint venture also makes me uncomfortable with allowing the agreement to take effect. Congress expressly prohibited carriers from participating simultaneously in agreements with the same partners on both price and capacity in cases where such interplay would be likely to produce unreasonable reductions in service or increases in cost. While it did not do so for other types of entities, it is an indication that Congress was concerned about the increased likelihood that negative effects from a reduction in competition would result in cases where both of these aspects can be coordinated by parties to an agreement. I am not convinced the issue has been fully considered.

Fourth, and affecting all of the other points, the assessment of whether the reduction in competition would be likely to cause negative effects that meet the § 41307(b)(1) standard is a much more subjective part of the overall analysis than the competition analysis. In using the word “unreasonable” Congress largely left it up to the Commission and Federal courts to determine what is “unreasonable.” We do, of course, have many precedents but each case is also unique. In this case, the agreement will clearly result in a major decline in competition and there is a likelihood that price increases will result. However, the likelihood of “unreasonable” negative effects has not been fully addressed, despite the comments of many of those who would have to bear the burden of those negative effects – not the least of which being the people of Puerto Rico speaking through their elected representatives and several trade associations. Depending on one’s definition of “reasonable,” the agreement may be appropriate. But then I must ask if it is even possible given any small market such as an island territory, to ever predict an “unreasonable” impact? Indeed, given that the Commission has only objected to an agreement on these grounds once, will it ever again object to an agreement on the grounds that it fails to meet the § 41307(b)(1) standard? If the answer is that the Commission never will, at least on the onset of an agreement, then why did we establish a timeline for an agreement to take effect and why does the Commission have a process of assessing an agreement before it takes effect?”

Daniel B. Maffei is a Commissioner with the U.S. Federal Maritime Commission. The thoughts and comments expressed here are his own and do not necessarily represent the position of the Commission.