Comments of FMC Commissioner Michael A. Khouri at the 2010 Global Liner Shipping Conference

I am pleased to be with you today and I want to thank Containerization International for the invitation to speak. My remarks today reflect my own individual views and thoughts. They are not offered as the official positions of the United States or the Federal Maritime Commission.

Briefly for those who may not be familiar with the Federal Maritime Commission, it is an independent US agency with responsibility for the regulation of oceanborne transportation in foreign commerce between the US and our trading partners. The FMC’s mission is to administer the laws assigned by the Congress, and to develop and administer regulations and policies that foster a fair, efficient and secure maritime transportation system.

Among the statutes within our purview is the Shipping Act of 1984 as it was amended by the Ocean Shipping Reform Act of 1998. The Shipping Act provides, on one hand, that liner carriers will have a limited antitrust immunity for certain discussions that occur within agreements that are filed with and monitored by the FMC. On the other hand, the Commission is charged with responsibility to ensure that such agreements do not result in unreasonable increases in transportation costs or decreases in transportation services. We also review and monitor service contracts between ocean common carriers and shippers with a view to guard against detrimental affects to shipping in the US foreign trade.

My background is not the traditional course to a seat on the Federal Maritime Commission. I spent 35 years in what in American is called the Brown Water trade. I started as a crewman on towboats moving barge flotillas on the Mississippi River, then a brief rotation through the engine room and then up to the bridge where I served as pilot and then captain. Along the way, I earned my sequence of licenses, ultimately receiving my US Merchant Marine Officer’s License as Master & First Class Pilot, Steam and Motor Vessels. Then back to school, earning a law degree and joining American Commercial Lines’ management team in 1979, first in the law section, then broader administrative assignments and last as chief of marine operations.

What happened in the US domestic marine industry during my years with ACL is a very close overlay of what has been happening and evolving in the US international trades since the 84 Shipping Act. Let me briefly outline those changes.

When I joined ACL, the domestic industry had tariffs and a freight bureau or conference with antitrust immunity that allowed carriers to jointly set rates and all other terms of carriage. I clearly remember my first freight bureau meeting and the business discussions. A deviation from the tariff structure required a process called independent action that was time and paper intensive.

Then, as a part of the deregulatory initiatives in the early 1980’s that led to sweeping reforms in marine, rail, air and truck transportation – the Interstate Commerce Commission received permission to grant contract authority to domestic marine common carriers. These contracts were virtually identical to the service contract that emerged some 15 years later in 1998 OSRA legislation.

I wrote the first service agreement at American Commercial, incorporating the essential parts from the tariff and from our bulk affreightment contract, and, after a few test runs with some shippers, we were off and going. I commented to one of our sales executives that I thought we would be doing all regulated movements, even a single barge, by contract rather that tariff, within two years. I was way off – it only took one year.

So I have some understanding and appreciation for the changes that have occurred in the ocean liner trades, first with the 84 Shipping Act, which preserved many aspects of the tariff-based common carriage model while allowing and streamlining independent action and then the 1998 OSRA amendments which encouraged confidential one-on-one service contracts, but preserved the limited antitrust immunity for carriers.

I also have a growing understanding of the added layers of complexity surrounding the international trades as compared to US domestic trades – there are simply more moving parts and they are coming at us from more directions. With that acknowledgement, a blue water colleague recently said to me – but, at the end of the day, marine freight is marine freight, and basic fundamentals still apply. From that perspective, I offer these observations.

The US Congress, by the late 1980’s ultimately deregulated the US domestic marine industry from economic oversight. Of course, that business remained subject to full US flag requirements and the US Justice Department can get its hands around that business from a geographic and jurisdictional perspective. Further, the potential market distortions that come into play are all domestic, such as tax credits, depreciation and incentives, government sponsored loan guarantees and similar matters are controlled by our own US Congress.

Congress decided to take a less far reaching approach to the international liner trades in the OSRA amendments to the Shipping Act. While Congress took into account the laws and regulations of our trading partners, it also was considering the market distortions that can exist, such as various nation’s policies and agendas, various subsidies by way of direct involvement or by indirect tax incentives.

Following OSRA and then following the EU’s elimination of its block exemption in October, 2008, there are currently no rate discussion agreements on file with the FMC that relate to US / EU liner trades. There are 43 efficiency enhancing operational agreements that involve one or more EU member states. Therefore, taken as a whole, the inverse question could be posed – “”what is left to talk about?””

Admittedly, the market share rules concerning consortia are different in the EU and the US. However; to propose that US antitrust immunity be removed from all of these types of non-rate and non-capacity agreements turns a cold eye to a fundamental of antitrust enforcement philosophy.

In the EU, the various countries and the EU, as a body, may initiate civil proceedings and ultimately obtain monetary fines. In the US, private citizens can bring actions for triple damages and the US Department of Justice can bring either civil actions orcriminal actions against the companies and against the individual executives involved. An EU member state that has adopted the EU rule and provided for criminal sanction may also bring such action. Significant jail time has been imposed in cases.

Without antitrust immunity, literally all discussions between competitors concerning sharing or cooperating on vessel operations and efficiency matters would become problematic. I served many years as the General Counsel to American Commercial Lines, at a time when ACL had a 25 percent market share in the domestic inland market. All conversations with competitors were carefully monitored – if allowed at all. The removal of the carefully tailored and limited US antitrust immunity could well result in chilling the willingness and ability of carriers to explore and craft cost-saving efficiencies that benefit shippers and consumers. I have heard from some attending this conference that such effect is occurring in the EU.

Immunity or no – there will still be swings in the markets, in rates, and capacity. I can offer the following long term observations on antitrust immunity in the smaller and confined US market place. As I mentioned earlier, in the 1970’s and early 80’s, the US domestic trade enjoyed full antitrust immunity. During that period, they collectively overbuilt the dry bulk fleet. Then in the mid 90’s, with antitrust immunity a thing of the past, they went through a second wave of overbuilding. Then in the mid naughts – or the preceding decade – the tanker segments saw record high freight rates and proceeded to over build their fleet, with a resulting collapse in rates. Again, no antitrust immunity and violent peaks and valleys in capacity and rates. Two different regulatory regimes – same business cycles.

That view of a smaller market is a reflection covering 20 to 30 years – more than one business cycle. We are only 18 months removed from the EU action repealing the block exemption. And, as publically announced some time ago, the FMC is conducting an economic study that looks at the US / EU trades over a five year period – that is two years prior to the change, plus one transition year and then the two subsequent years.

I do not want to preempt any part of that study; but allow me to look at a few of the original assumptions that were published in a study leading up to the elimination of the block exemption together with the current – if still raw – data.

Prior to the repeal of the block exemption, the EU commissioned a study which identified a number of anticipated benefits. I asked our staff economist to research a few of these issues and to provide a current view.

1. The study anticipated positive impact on ocean rates – expecting moderate declines. Recent data shows that there were sharp declines in rates – attributed mainly to the economic slowdown, but most recently, we have seen steady rate increases, in fact over a 110 percent rate increase over the past few months in Asia / EU trade.
2. As to anticipated positive impact on ancillary charges and surcharges – we have seen European terminal handling charges go up. Bunker adjustments, after falling sharply at first, are now on the rise.
3. The study anticipated positive impact on service quality “”due to liberalization of the market – similar to the airline industry””. Our analysts report that carriers reduced capacity and service in response to lower volumes and that currently there are news reports of capacity constraints in Europe.
4. In terms of impact on EU trade; the study stated that “”if transport costs drop, external EU trade will grow””. With the global recession, we have seen all trade volumes contract; so this area will need further study.
5. The study anticipated carrier cooperative arrangements may increase. In fact, such joint ventures, alliances and consortia have increased – some say in efforts to survive. But also note that these cooperative agreements have increased in other US trades as well.

Clearly, as if there is anything that is clear from these examples – the jury is still deliberating. Obviously, the global recession that we are just now beginning to shake off has added an additional layer of complexity to the data and added uncertainty to the data’s interpretation. With those caveats – our economists at the FMC hope to complete their study by the end of 2011.

So, to directly address while not answering the question of – should the rest of the world follow the EU action and ban liner conferences? I have these observations:

First, with very minor exception, the traditional old style conferences have been all but eliminated in the US following the OSRA amendments to the Shipping Act.

Second, discussion agreements concerning rates and terms of service have disappeared in the US / EU trades, while consortia agreements in this trade continue and are monitored.

Third, discussion agreements concerning rates and terms of service continue in the US / Pacific arena. And, I should hasten to note that those trades have seen capacity shortages, rolled cargo and the like. It may be coincidence that these capacity issues look quite similar, if not identical to the recent problems the EU has been experiencing.

Note that the FMC may make policy recommendations; however, we do not make ultimate decisions concerning the competition rules governing liner carriers that call on US ports. That is the exclusive province of the legislature.

Correctly stated, our Congress enacted two primary competition laws – the Sherman Act in 1890 and the Clayton Act in 1914. But then, Congress decided that international ocean shipping required somewhat different competition rules. So, Congress enacted the first Shipping Act in 1916 to serve as the rule book in lieu of the Sherman and Clayton Acts. Certain actions that would be automatic violations of Sherman are permitted under the Shipping Act – but only to a limited extent and the actions’ impact on commerce must be moderate. The Shipping Act was reformed and updated in 1984 and again in 1998. The FMC’s role is to regulate, monitor and administer these modified competition rules.

There are some in the US Congress that feel strongly, as a matter of principal, that the Sherman and Clayton Acts should apply to all industries without modification or exception. However, in the most recent consideration of this issue during the OSRA debates in 1998, Congress decided, first, to reform certain rules and carrier practices, but, second and overall, to retain the current system that balances the ability of vessel operators to cooperate under certain limited circumstances with the regulatory authority of the FMC to monitor carrier activity and bring sanctions if carriers engage in prohibited acts. In summary, our Congress has debated this issue on several occasions and it could come up again.

One issue that is currently under investigation at the Commission and could gain some audience in the halls of Congress is the capacity and equipment shortages that are being experienced in the US, especially in areas that are not in large metropolitan areas.

When juxtaposed with a sequence of rate increases, there are shipper representatives who believe that these issues – principally in the US / Pacific trades, are a result of carriers using their legal privilege to discuss rate guidelines while, at the same time, improperly discussing and agreeing upon route capacity issues. To my knowledge, there has not been any, any offer of evidence of such improper activity.

U.S. exporters of agricultural products are particularly exercised about the impact of capacity limitation, equipment unavailability and rate increases on their ability to compete internationally. The media is giving some attention to these concerns. The Wall Street Journal published a front page article about the issue on March 12th. Bloomberg News posted an article on March 29th that focused on the delays on Asian docks of containers bound for both US and EU markets. Congress has held a hearing on the matter and another is pending.

This Wall Street Journal article followed by one day the signing of an Executive Order by President Obama to launch a National Export Initiative to facilitate the creation of jobs in the United States through the promotion of exports. The objective of the initiative is to double U.S. exports in five years.

The capacity and equipment availability issue and its impact on U.S. shippers are of great concern to the FMC. On March 3rd, the Commissioners voted to initiate a Fact Finding Investigation into the current conditions concerning vessel and equipment availability in the U.S. export and import liner trades.

While the FMC’s Fact Finding is not focused on the antitrust immunity – and the Commission has yet to see any evidence linking the current situation to the carriers’ antitrust immunity – if there is indication that capacity issues and higher freight rates are credibly linked to improper use of antitrust immunity by foreign-flag or US flag liner carriers, we may see renewed attention by Congress and the Administration to the issue.

The Commission’s Investigative Officer for the Fact Finding is Commissioner Rebecca Dye. She will issue an interim report of findings and recommendations on June 15th. The House of Representatives’ Subcommittee on Coast Guard and Maritime Transportation intends to hold a hearing on July 2nd. The Commission’s final report of findings and recommendations will be issued by July 31, 2010.

Interested parties are invited to contact Commissioner Dye should they wish to provide testimony, or evidence, or contribute in any other manner to the development of the factual record. As additional assistance, the FMC’s Office of Consumer Affairs and Dispute Resolution Services provides a variety of dispute resolution processes designed to counsel and help shippers, carriers, and other industry participants resolve commercial disputes. Our dispute resolution program is available to help parties with any complications that arise related to U.S. import / export issues.

In addition, the FMC has set up a website to assist the public in locating information on the U.S. export issues which will be updated regularly with a variety of documents, including Commission press releases, Congressional testimony, and Commission actions.

Whether Congress turns its attention back to international ocean shipping or not, the regulatory landscape in the U.S. is not static. Section 16 of the Shipping Act gives the Commission the discretion to grant exemptions from the requirements of the law if doing so will not result in substantial reduction in competition or be detrimental to commerce. The Commission is judiciously but actively using this Section 16 authority.

As example, two months ago, the Commission voted to initiate a rulemaking that would relieve Non-Vessel-Operating Common Carriers (NVOCCs) from the costs and burdens of publishing in tariffs the rates they charge for cargo shipments. According to comments filed with the Commission, this action could save many of these businesses up to $200,000 per year per NVO.

This was my first vote at the FMC and I believe the Commission’s action will foster competition, provide a benefit to the shipping public, and be good for the economy.

This concludes my prepared remarks. Again, it is a pleasure to be here today and I have thoroughly enjoyed to opportunity to hear from and meet so many industry leaders.