Chairman Michael A. Khouri’s Remarks for the 2020 NITL Webinar Series

Good morning. Thank you, Jennifer for that introduction and for the invitation to join you today. I find it helpful to share current FMC activities with maritime stakeholders like the many members of NITLeague. More important to me is to hear directly from you about your concerns, priorities, and interests.

NITLeague is one of the Commission’s most important stakeholders, representing American shipper interests.  For NITLeague, a “modern, safe and efficient freight transport system which meets our country’s commercial needs both domestically and internationally” is vitally important to its members. For the FMC, our mission is, in short form, “competition and integrity for America’s ocean supply chain.”

Over the years, NITLeague has been involved in many important issues with the Commission, from implementation of the Shipping Act of 1984 and the 1998 OSRA amendments, to the more recent petition to address concerns about detention and demurrage. NITLeague has been at the leading edge of regulatory reform in ocean shipping, advocating deregulation and placing a greater reliance on the marketplace.

Jennifer asked me to discuss current initiatives at the Commission that are important for the shipping industry and especially, the shipper, NVO and freight forwarder community.

As a standard disclaimer, my remarks reflect my personal thoughts and I do not speak on behalf of the FMC or the Administration.

The Commission and COVID

Like everyone, the Commission has been grappling with the challenges presented by COVID. The Commission is committed to fulfilling its constructive and statutory role for the American economy. I am pleased that, due to advance planning and preparation, the FMC has remained fully open and operational throughout these difficult times. We hold meetings and other public-facing activities via phone, e-mail, and ZOOM type technology platforms that allow for reduced in-person contact. The FMC has provided its employees with maximum flexibility to work remotely. Every bureau and office of the Commission is fully engaged and available by email or telephone.

• Agreements continue to be filed and are reviewed by the Bureau of Trade Analysis, which monitors the cooperative activities of ocean common carriers and marine terminal operators under the standards of the Shipping Act.
• Complaints brought to the Commission for violations of the Shipping Act are being adjudicated before the Commission’s Administrative Law Judge.
• The Commission’s Bureau of Enforcement continues to investigate Shipping Act violations.
• The Office of Consumer Affairs and Dispute Resolution Services continues to offer ombuds assistance, mediation, facilitation, and arbitration to resolve challenges and disputes involving cargo shipments, household goods shipments and cruises.

An important role for the Commission is its ability to bring different stakeholders in the ocean supply chain together to address problems proactively and to collaborate as they pursue non-regulatory solutions. This role continues to be robust, even in the current environment.

Of particular interest to NITLeague is Fact Finding 29. Commissioner Dye is using this collaborative approach to address supply chain bottlenecks resulting from COVID and then as economic activity resumes and, in fact surges. Fact Finding Teams have been at work in Los Angeles/Long Beach, New York/New Jersey, and in New Orleans.

Detention and Demurrage

This team approach was utilized in Fact Finding 28. Recall that fact finding resulted from the Coalition for Fair Port Practices petition requesting relief from practices of ocean carriers and marine terminal operators concerning detention and demurrage.

Commissioner Dye engaged a large number of diverse stakeholders from across the country to provide feedback that served as the basis for the interpretive rule. Many members of NITLeague provided valuable expertise and insight to the fact-finding team.

The new rule addresses 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 stimulating prompt cargo movement and productive use of assets and applies an “incentive principle” in general terms. The rule’s application will vary depending on the facts and context of any particular case.

At this point, the FMC is closely monitoring the behavior of ocean carriers, ports, intermediaries, and truckers to determine if the interpretive rule is having the intended effect to incentivize the movement of cargo and promote freight fluidity.

We have some preliminary evidence by way of CADRS complaint resolution processes that marine terminals and ocean carriers are reducing or even canceling charges in certain fact situations when presented with the rule as a defense to assessed charges. If you have examples where the interpretive rule has made a difference, we would be happy to hear about it. If you have examples of where carriers or terminals are not in compliance with the interpretive rule, we need to hear that as well.

Capacity and Rate Issues

Regular cargo volumes and shipping patterns were altered in response to changes in U.S. – Asia and U.S. – Europe trade agreements and tariffs. Then came COVID impacts on international trade, including disruptions to production and changes in consumer demand. Both contributed to short term volatility in cargo volumes.

Some ocean carriers participating in agreements filed with the FMC responded to these challenges by reducing carrying capacity through cancelled or “blanked” sailings to adjust available capacity to coordinate with the lower demand. Such actions are permitted under the Shipping Act so long as the joint actions do not violate the Shipping Act. Section 6 g of the Act provides that the operation of an agreement may not – first – result in a substantial reduction in competition and then – such loss of competition may not produce an unreasonable reduction in transportation service or an unreasonable increase in transportation costs.

Recent press articles have raised concerns about the ability of alliances to restrict capacity and to unreasonably raise rates.

A core function of the FMC is the monitoring of ocean carrier alliance agreements filed with the agency. The FMC receives exhaustive information from regulated entities, in this case, parties to an ocean carrier alliance agreement. That information is carefully analyzed, along with other information that permits FMC staff to determine trends in the marketplace and the potential for illegal behavior.

The FMC’s section 6(g) review and oversight responsibility for filed agreements is ongoing and continues after a filed agreement has gone into effect. The FMC prioritizes its continuous monitoring of all filed agreements; however, as you would expect, the major global carrier alliances have the top priority and receive the highest scrutiny. These agreements have the greatest potential to cause or facilitate adverse market effects based on the agreement’s authority and scope in combination with underlying market conditions. On an ongoing basis, the FMC monitors key economic indicators and changes to underlying market conditions for all global alliance agreements to detect any joint activity by agreement members that might raise and maintain freight rates above competitive levels. For these agreements, FMC staff conducts more detailed quarterly reviews, and periodically presents current findings and recommendations to the Commission.

The unusual circumstances and challenges created by the COVID pandemic together with trade agreement changes have heightened the FMC’s scrutiny of capacity reductions by global alliances. FMC staff are actively monitoring these changes for any potential effect on freight rates and transportation service levels. To ensure timely information, the FMC generally requires notice to be submitted before “blanked sailings” are implemented and no later than fifteen days after any such change is agreed upon.  We also receive notice of the reinstatement of future blanked sailings. We should note that the FMC is currently receiving notices of the reinstatement of blanked sailings in both the trans–Pacific and trans-Atlantic trade lanes.

Last month, the Commission held a closed meeting in which the Bureau of Trade Analysis briefed the Commissioners on ocean carrier rate trends and ocean carrier alliance activity.

The FMC is closely monitoring carrier behavior and market data. If we detect any indication of carrier behavior that may violate section 6(g), we will immediately seek to address these concerns with direct carrier discussions. If necessary, the FMC will go to federal court to seek an injunction to enjoin further operation of the alliance agreement.

Service Contract Filing Regulatory Reform

On October 9, the Commission announced the initiation of a Notice of Proposed Rulemaking (NPRM) that will, if ultimately approved, make permanent the current temporary exemption that allows initial service contracts by Vessel Operating Common Carriers to be filed at the agency up to 30 days after the agreement’s effective date.

Current Commission regulations require the physical filing of initial service contracts at the FMC before an ocean carrier is permitted to receive and move cargo under the terms of that contract. Amendments to previously filed service contracts may be filed up to thirty days following the commercial effective date of the amendment.

The issue of ocean carrier service contract formation and the filing of such contracts at the FMC has been the subject of a series of regulatory reform initiatives over many years, including steps to deregulate non-vessel owning common carrier (NVOCC) service arrangements with customer shippers. In 2018, the World Shipping Council filed a petition on behalf of their vessel operating members requesting relief for ocean carrier service contract filing requirements, which was supported by NITLeague.

In June, the Commission approved regulatory relief eliminating the requirement for public disclosure of ocean carrier service contract essential terms in tariff format. Earlier this year, in response to COVID disruptions in the ocean container supply chain, the Commission approved a temporary reform to service contract filing by allowing ocean carriers to file their service contracts within 30 days of the agreement’s effective date. Making permanent that exemption would build on the Commission’s experience with the temporary exemption.

Once the NPRM is in final form, and assuming a favorable interim Commission vote, then ocean container industry stakeholders will have the opportunity to share their views through a public comment period. The Commission will consider all public comments before voting on final regulatory actions.

“Merchant” clause in Bill of Lading

Comments filed in the Interpretative Rule on Detention and Demurrage together with other communications from stakeholders raised concerns at the Commission about certain billing practices of ocean carriers.  Allegations were made that ocean carriers have expansively defined the term “merchant” in their respective bills of lading to include persons or entities with no beneficial interest in the cargo and who had not consented to be bound by the terms of the underlying bill of lading.

In response, on October 7, the Commission issued a Notice of Inquiry (NOI) to examine allegations that ocean carriers may be attempting to hold companies financially responsible for ancillary transportation charges that they did not contract for and may not legally be required to pay.

The NOI seeks information related to how ocean carriers apply the term “Merchant” in their bills of lading. For example, does the ocean carrier apply the term “Merchant” in a manner that subjects third parties, that are not in a direct mutually agreed business relationship with the ocean carrier to liability for ancillary transportation charges and whether ocean carriers have sought to enforce the definition of “Merchant” against third parties that have not consented to be bound by, or otherwise accepted, the terms of the bill of lading.

The NOI solicits comments from interested members of the public willing to share their insights. The Commission’s Bureau of Enforcement is also requesting specific information from certain container shipping lines serving U.S. foreign trades.

I encourage NITLeague members and all ocean container stakeholders to share their experiences with bills of lading that contain these described “Merchant” clauses. Without public comment and involvement, it will be difficult for the Commission to address alleged commercial abuse in this area.

2021

Looking out to next year, we will continue to focus on opportunities to relax or remove regulatory burdens on stakeholders in the ocean container transportation space. We will continue to look for opportunities to utilize collaborative cross-discipline teams to facilitate cooperative solutions to bottlenecks and friction points in the supply chain. And we will continuously pursue our goal of ensuring competition and integrity in America’s ocean supply chain.

Conclusion

Thank you for the opportunity to meet with you today and share some thoughts. I look forward to our discussion and the opportunity to hear from you.