Chairman Michael A. Khouri’s Speech for the 2020 NCBFAA Government Affairs and Annual Conference

Good morning. Thank you, Ed, for the introduction, and thanks for the invitation to join you today. I find it helpful to share what we are doing at the Federal Maritime Commission with NCBFAA’s membership, and more important – to hear directly from you about your interests, concerns, and priorities. I am pleased to be joined on the panel by not only Ed but also by Rich Roche and Melzie Wilson.

First, I want to note that in September 2010, I first addressed this group. I read through my remarks from that talk ten years ago and I was both interested and amused about how much has changed and how much remains the same. There was discussion of: the EU repeal of their antitrust block exemption and the FMC study on changes in trans-Atlantic container rates and changes in rate volatility cycles, also noted was House T&I Committee Chairman Oberstar’s proposed legislation to end conferences and rate discussion agreements. The issue of NVO tariff publication and the newly proposed Negotiated Rate Agreement was discussed. Also mentioned was Fact Finding 26 concerning lack of available vessel capacity, container shortages for U.S ag exporters, and – wait for it – cargo rolling.

Jumping ten years forward to today, Ed asked me to discuss the ongoing initiatives at the Commission that are important for the shipping industry and especially, the NVO and freight forwarder community.

As a standard disclaimer, my remarks today reflect my personal thoughts and opinions. I do not speak on behalf of the Federal Maritime Commission or the Administration.

1. The Commission and COVID-19

As you all have, the Commission has been grappling with the challenges presented by COVID-19. The Commission is committed to fulfilling its statutory and constructive role for the U.S. economy in ensuring competition and integrity in the international ocean supply chain.

I am pleased to say that, because of advance planning and preparation, the Commission 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 Commission 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 of 1984.
• 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 ( CADRS) continues to offer ombuds assistance, mediation, facilitation, and arbitration to resolve challenges and disputes involving cargo shipments, household goods shipments, and cruises.

And I am also pleased that the Commission now has a full complement of members with the confirmation of Carl Bentzel by the Senate in November of last year.

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

In Fact Finding 29, Commissioner Dye is using this approach to help address supply chain bottlenecks as economic activity resumes and commerce begins to flow. Teams have been at work in Los Angeles/Long Beach, New York/New Jersey, and in New Orleans as soon as storm recovery allows.

In Fact Finding 30, Commissioner Sola is working with key industry stakeholders of the passenger cruise industry to identify commercial measures that can be adopted to mitigate COVID-19 related impacts to this sector of the maritime industry and those stakeholders who are reliant on the cruise industry but with primary focus on passengers who book cruises departing U.S. ports.

2. Detention and Demurrage

A collaborative teams approach was utilized by the Commission in Fact Finding 28. Recall that fact finding resulted from a petition by shippers and other stakeholders – including NCBFAA and many of its members – and requested relief from practices of ocean carriers and marine terminal operators with respect to detention and demurrage.

Commissioner Rebecca Dye engaged a large number of stakeholders from across the country to provide feedback using the process that served as the basis for the interpretive rule. I know that many NCBFAA members – including Rich Roche – provided valuable expertise and insight to Commissioner Dye during those interviews.

The new rule addresses how the Commission will interpret “unreasonable practices” in cases brought under the Shipping Act. The rule recognizes the important role of detention and demurrage charges in incentivizing cargo movement and productive use of assets and applies an “incentive principle” in general terms. Its application will vary depending on the facts of a given case.

At this point, the Commission 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 anecdotal evidence by way of the CADRS complaint resolution processes that marine terminals and ocean carriers – when presented with the new rule as a defense to detention demurrage charges – are reducing or even canceling charges in certain fact situations. 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. 

3. Bureau of Enforcement Processes and Policy Changes

In December 2019, the Commission revised its delegations of authority to the Bureau of Enforcement (– BOE) and revised procedures for initiating and settling enforcement actions. This seemingly modest change is of more importance to NCBFAA members than you might think. The purpose of this change was to enhance Commission oversight of these aspects of agency enforcement actions. Under the new procedure, the Commission itself – that is the five Commissioners – must vote to approve commencement of compromise negotiations by BOE and then, must approve any compromise agreements reached by BOE before the agreement become final.

In addition, the rule provides for a new pre-enforcement process that will:

1. provide notice to the subject of an investigation that BOE intends to recommend that the Commission initiate an enforcement proceeding; and
2. allow such parties the opportunity to respond before BOE submits a recommendation to the Commission to initiate an enforcement proceeding. These party responses will be provided to the Commissioners along with BOE case analysis and recommendation.

As with any new process, there are questions to be resolved about exactly how things will work, and kinks will need to be worked out. This process is modeled after the process that the Security and Exchange Commission has used for several decades. I am confident that, in the end, these changes will achieve a better result for both the Commission and its stakeholders through:

• more due process for the targets of agency enforcement efforts;
• more involvement by the Commissioners in setting agency enforcement priorities and appropriate civil penalty assessments;
• better oversight of enforcement activities; and
• the approval by the Commission of compromise negotiation commencement and settlements reached.

Commission Enforcement Priorities

One of the more important roles for the Commissioners is to provide guidance to BOE about the agency’s enforcement priorities and where limited Commission resources should be focused. To that end, in July 2019, the Commissioners began a conversation with BOE and the agency’s Area Representatives as to enforcement areas that should receive priority attention.

This list included:

• Unlicensed and unbonded OTI operation, with an emphasis on those advertising or “holding out” on the internet.
• OTIs operating without an approved Qualified Individual (QI) or approved owner.
• Ocean carriers accepting cargo from non-NVOCCs and Freight Forwarders operating as NVOCCs.
• Misdeclared cargoes with a focus on misdeclaration of hazardous cargos. First, there is the clear issue of the cargo interests receiving a freight rate that is lower than what the carrier would charge if it knew the true nature of the cargo – thus a violation of the Shipping Act. Second is the issue of these misdeclared cargos being stowed far below deck and then – due to the dangerous nature of the cargo – catching fire and imperiling other cargo, the crew and the ship itself. We welcome the help of the ocean carrier and OTI community to address these dangerous situations.
• Failure of licensed OTIs to respond to Commission process, particularly complaint proceedings. Failure to respond to an agency inquiry could lead to a notice of intent to revoke their OTI license.

I am also in favor of written enforcement guidelines such as other agencies have, together with a set of guidelines for civil penalties and fines.

4. Co-loading

The last time I appeared before this group a topic came up that the Commission has since turned its attention to – our co-loading regulations. Differences of the definition of co-loading between the Commission and other agencies, such as Customs and Border Protection, and even within the Commission, has created confusion among stakeholders. I talked with Ed about this, as well as other representatives of the OTI community.

As a result, and as part of our agency’s ongoing Regulatory Reform Initiative, I asked the Office of Managing Director to examine the issues raised by NCBFAA and others and report back to the Commissioners.

Tariff filing requirements applicable to co-loading were first proposed following enactment of the Shipping Act of 1984. The Commission’s tariff regulations were revised and republished following enactment of the Ocean Shipping Reform Act of 1998 but the tariff filing and documentation requirements regarding co-loading were retained at that time. The Commission last considered the co-loading requirements in 2004 but discontinued the matter without further action.

It is time for the Commission to revisit the co-loading rules in light of the continuing evolution of the competitive container shipping industry and changes in Commission regulations over the last 16 years including the important effects that NRAs and NSAs have had in bringing greater rate flexibility to the NVO market.

The Managing Director established a cross-Bureau working group specifically to look at what changes might be appropriate to the co-loading regulation.

I cannot, at this stage, predict a final result of this “must-do” project, but look forward with great interest to its completion and in engaging my colleagues on the Commission in a candid discussion upon the topic of the co-loading regulations.

Simultaneously, the Commission determined that our enforcement policy with regards to “unauthorized access to a service contract” should be reviewed for effectiveness, ongoing relevance, agency personnel resource allocation, and program fit within the context of the Shipping Act.

To this end, at its meeting in August, the Commission determined to do a comprehensive review of the continuing relevance of prosecutions for “unauthorized access to service contracts.”

The Office of the General Counsel was tasked with producing a memorandum that examines the origins and development of section 10(a)(1) of the Act – now in the code at section 41102(a) – including all relevant statutory changes over the years together with the legislative history, policy rationales, case law development –  as well as the deregulatory measures that the Commission has undertaken since 1998, such as NRAs, NSAs and relaxed filing requirements that may be relevant to the Commission’s current enforcement posture with respect to section 10(a)(1).

The Office of the General Counsel adopted a team approach and agreed upon a general framework for the task. A final product is scheduled in November for Commission consideration.

I am hopeful that this law memorandum will allow the Commission to determine whether prosecution pursuant to our co-loading regulations should continue to be an enforcement priority for the Commission – and, if yes, to what extent.

5. “Merchant” clause in Bill of Lading

The issue of ocean carriers inserting a clause into their standard bill of lading document has been raised by some NCBFAA members. The clause provides that the normal cargo interests are responsible for freight and related accessorial charges, but it goes on to include other parties such as the customs brokers, NVOs regardless of status as “shipper”, and other parties. I have been looking into this and can report that a Notice of Inquiry is near completion that will examine what the major ocean carriers are including in their bills of lading and how their enforcement of those terms are being applied. More news soon.

6. Capacity and Rate Issues

Regular cargo volumes and shipping patterns have been altered in response to changes in U.S. – Asia and U.S. – Europe trade agreements and tariffs and then came COVID-19 impacts on international trade, including disruptions to production and changes in consumer demand. Both have contributed to short term volatility in cargo volumes.

Some ocean carriers participating in agreements filed with the FMC have responded to these challenges by reducing carrier 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 section 6(g) of the Shipping Act that 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 FMC conducts a tiered analytical approach. The first tier is an immediate review of advance notifications of cancelled alliance sailings or other changes in vessel capacity that affect the supply of vessels of any individual alliance service by more than five percent of average prior weekly vessel capacity. The second tier consists of a careful review of submitted committee meeting minutes from the most senior executive management alliance group that make vessel deployment decisions. FMC staff utilizes this information to assess the medium- to long-term outlook for capacity levels and how that could impact freight rates. Under the third tier, changes in individual alliance members’ vessel capacity, capacity projections, and how that relates to changes in freight rates are analyzed. The final tier consists of reviewing and analyzing confidentially filed carrier data submitted by the alliances for completeness and accuracy to determine if this data reveals any potential red flags.

The unusual circumstances and challenges created by the COVID-19 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 some blanked sailings in both the trans-Pacific and trans-Atlantic trade lanes.

Later this week, the Commission will hold a closed meeting in which the Bureau of Trade Analysis will brief the Commissioners on ocean carrier rate trends and ocean carrier alliance activity.

If the FMC detects any indication of carrier behavior that may violate section 6(g), we will immediately seek to address these concerns with the carriers and, if necessary, the FMC will go to federal court to seek an injunction to enjoin further operation of the alliance agreement.

7. Named Account Rate and Service Contract Issues

Ed also brought to my attention NCBFAA’s concern about ocean carrier service contracting practices using Named Account rates. I understand the issue of so-called illusory rate certainty made possible by unilateral tariff changes together with space constraints that might make it possible for ocean carriers to generate higher profits, while making it difficult for NVOs to mitigate the adverse consequences of the carriers’ actions.

I assure you that we have the matter under review, and we are actively considering the Commission’s best course of action with respect to your request for an investigation.

8. Conclusion

I want to thank you for the opportunity to be here with you today and share some thoughts. I look forward to our discussion and the opportunity to hear from you.