97035: Maritime Economic Deregulation: Background and Selected Public Policy Issues

Stephen J Thompson
Economics Division

November 13, 1998

CONTENTS

SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Maritime Economic Regulation
Major Provisions of P.L. 105-258
Changes That Were Sought Prior to Senate Passage
Selected Economic Issues
The Federal Maritime Commission
The Proposed Intermodal Transportation Board
LEGISLATION
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
FOR ADDITIONAL READING

CRS Reports

SUMMARY

The Ocean Shipping Reform Act of 1998 ("the Act") (P.L. 105-258, October 14, 1998) takes effect May 1, 1999. The Act requires the Federal Maritime Commission to have implementing regulations in place by January 1, 1999.

The Act allows individual ocean ship operators (primarily containerships, often called ocean liners) who belong to one or more rate-setting conferences to sign (mostly) confidential contracts with their customers without making the same terms available to all similarly-situated customers. Railroads have been allowed to sign contracts with shippers since 1980. The limited authority of interstate trucking to sign contracts was made open-ended that same year. There is support among some groups for changing the economic regulation of railroads, but that interest in change is not related to the right to sign contracts. There seems to be no effort to limit trucking from signing contracts. Rail financial health had been precarious before 1980, as ocean carrier financial health is today. Rail profitability increased significantly after 1980, when they were granted authority to sign contracts with shippers, and were granted other partial economic deregulation.

The Act allows the ocean carrier contract rate to be kept confidential, while most other terms of the contract must be made public. The Act provides for shore-side labor unions to obtain dock-movement information from contracts for use in monitoring collective bargaining agreements with ship operators. The Act does not affect the Jones Act.

The Act has widespread support from ocean carrier customers, ship operators, ports, and maritime labor. Freight consolidators (sometimes called non-vessel operators, NVOs, or non-vessel common carrier operators, NVOCCs) combine small shipments into larger shipments. The freight charges they save by doing this provides their operating profit. NVOs want the Act amended to allow them to sign confidential contracts with their customers. Other freight consolidators, known as shipper associations, are permitted to sign contracts with shippers. Shipper associations support the Act.

Other provisions in the Act include a requirement that ship operators make rates known to customers, such as via the internet, but rates do not need to be filed with the Federal Maritime Commission.

Negotiations preceding enactment of the Act occurred among interested groups over the past several years. Shipper interest in reducing maritime economic regulation has been evident for many years, both preceding and subsequent to enactment of the Shipping Act of 1984.

Hearings on the effect of the Act on freight consolidators are very likely to be held by the House during 1999 because of a commitment to freight consolidators before the Act was passed by Congress in October 1998. That commitment was made by the Chairman of the House Subcommittee having jurisdiction over ocean shipping economic regulation. The purpose of hearings would be to assure that the Act does not drive freight consolidators from the industry.

MOST RECENT DEVELOPMENTS

The Ocean Shipping Reform Act of 1998 (P.L. 105-258, October 14, 1998) takes effect May 1, 1999, and the Act requires the Federal Maritime Commission to have implementing regulations in place by January 1, 1999.

After the House passed S. 414 (the bill that became P.L. 105-258) on August 4, 1998, Representative Gilchrest, Chairman of the Subcommittee on the Coast Guard and Maritime Transportation of the House Committee on Transportation and Infrastructure, was quoted in the Journal of Commerce as having assured ocean freight consolidators (sometimes called non-vessel-operators) that their concerns would be addressed during 1999, to assure they do not go out of business as a result of the Act.

The Senate passed S. 414 by unanimous consent on April 21, 1998, after defeating by a vote of 72-25 an amendment that would have allowed freight consolidators to sign confidential contracts with individual shippers.

A maritime bill containing stronger deregulation provisions than S. 414 passed the House in the 104th Congress but was not acted upon by the Senate.

BACKGROUND AND ANALYSIS

This issue brief first describes current maritime economic regulation, then the changes in such regulation that will occur May 1, 1999, as a result of enactment of the Ocean Shipping Reform Act of 1998 (P.L. 105-258). Next, the issue brief discusses changes that some proposed before the Senate passed the bill that became P.L. 105-258. The issue brief discusses some economic issues associated with maritime economic regulation and the Act, including how it might affect ports, members of shore-side labor unions, ocean common carriers, and consumers generally. The issue brief describes the Federal Maritime Commission (FMC or Commission) and its various functions. The issue brief makes some observations about how maritime economic regulation and antitrust exemptions compare with that of railroads and trucking.

Maritime Economic Regulation

Ocean common carriers (primarily containerships and often referred to as ocean liners) are exempt from the U.S. antitrust laws (subject to prescribed conditions) to set rates as a group on traffic carried by individual ocean common carriers, as well as on traffic that is interchanged (i.e., passed off to another carrier somewhere between origin and destination). In addition to their exemption from the antitrust laws for conference rate-making, ocean common carriers are also exempt from U.S. antitrust laws (subject to prescribed conditions) to enter into agreements to pool their ship capacity, and to offer joint services.

Rates (compiled in written or electronic form called "tariffs") for ocean common carrier transportation must (until May 1, 1999) be filed with the Commission, and these rates are made available to the public by the Commission.

Ocean common carriers were permitted to enter into service contracts with their customers, both individually and as a group of carriers (49 App. U.S.C. § 1707(c) (1998)) and to provide time-volume rates (49 App. U.S.C. § 1707(b) (1998)) even before the 1998 Act was enacted.

Federal law states that (until May 1, 1999) specified information in service contracts relating to all commodities (except several that are listed in federal law at 49 App. U.S.C. § 1707(c) (1998)) shall be filed with the Commission and made available to the public. The information that must be made available to the public is: (1) the origin and destination port ranges in the case of port-to-port movements, and the origin and destination geographic areas in the case of through intermodal movements; (2) the commodity or commodities involved; (3) the minimum volume; (4) the line-haul rate; (5) the duration of the contract; (6) service commitments; and (7) the liquidated damages for non- performance, if any (49 App. U.S.C. § 1707(c) (1998)).

Major Provisions of P.L. 105-258

Public Law 105-258 ("the Act") allows the price of a contract to be kept confidential, removes the requirement for the essential terms of a contract to be made available to all shippers similarly situated, and prevents the conference from retaliating against its members who contract individually. The unpublished terms of a contract must be made available to a party to a collective-bargaining agreement for use in monitoring collective-bargaining agreements with vessel operators.

After May 1, 1999, rates no longer must be filed with the Commission but they must be made available to the Commission and to the public.

The Act reduces the notice period for conference member independent actions on conference tariffs from 10 days to 5 days.

The Act does not remove the antitrust exemption for conferences and their members to set rates as a group on single-line traffic, to negotiate as a group for service contracts with customers, to have pooling agreements, or to have shared-service agreements among vessel operators.

Changes That Were Sought Prior to Senate Passage

Some customers of ocean carriers wanted the bill that became P.L. 105-258 to be amended to eliminate the antitrust exemption for conference rate-setting on single line rates, on negotiating service contracts as a conference or group of carriers, on pooling agreements, and on joint service agreements among ocean common carriers.

Some freight consolidators wanted the bill amended to allow them to have confidential contracts with shippers but ocean carriers opposed on grounds that freight consolidators have less liability and less assets at risk compared to carriers. They said the provision would give freight consolidators an unfair competitive advantage compared to ocean carriers. Shore-side labor opposed because the provision could result in less employment dockside by moving some freight-handling activity away from the dock area.

Selected Economic Issues

This section discusses selected economic issues associated with the Act, and makes some general observations about maritime economic regulation and exemptions from the antitrust laws for ocean common carriers and their rate-setting conferences, including some comparisons with that of railroading and trucking, and possible effects on carriers, shippers, unionized employees, and consumers generally.

Eliminating the requirement to file tariffs with a regulatory agency brings maritime economic regulation more into line with rail and trucking economic regulation. Experience suggests that the internet and other mechanisms for notifying customers of rates are sufficient.

As stated above, federal law specifies what information a regulatory agency must make available to the public regarding service contracts by ocean common carriers. In contrast, the Surface Transportation Board has authority to decide what rail service contract information must be made public (49 U.S.C. § 10709(d)(1) (1998)). No trucking service contract must be made public. The regulation of railroads in this regard is more flexible than maritime economic regulation. As stated above, some commodities are exempt from the requirement on ocean common carriers to report service contract information. By comparison, the exemption is broader regarding rail economic regulation, where no service contract information must be reported for any non-agricultural commodity.

The Act requires information on dock movement of freight under a service contract to be provided so shore-side labor unions can monitor compliance with collective-bargaining agreements they have with vessel operators. Use of information on vessel movements in bargaining with ocean common carriers might be helpful to some ports and some dock workers at the expense of other ports and other dock workers who would otherwise receive the business. Furthermore, to the extent that ships call at ports that are less efficient, or that do not serve the needs of ocean common carriers and their customers as well as the ports the carriers would prefer to serve, ocean common carriers, their shippers, and consumers generally might be adversely affected.

The Act requires more disclosure of vessel movements than is required of railroad and trucking movements. In the absence of such a requirement, perhaps much of the information could be obtained by the private sector without public intervention, possibly on a sampling basis.

Information regarding service contracts by non-U.S.-flag carriers is not required to be made public. A rationale for not requiring public disclosure of information on service contracts by U.S.-flag carriers is that foreign flag carriers would have an unfair competitive advantage if U.S.-flag carriers are required to make public information about their service contracts that their competitors are not required to make public.

The Act provides a right to independent contract negotiations by ocean carriers that are members of ocean carrier conferences, allow greater confidentiality of service contract terms, and reduce regulation of service contracts. Consequently, shippers, and consumers generally, will likely benefit from the Act. From an economic perspective, shippers and consumers generally benefit more the greater the reductions in the antitrust immunity of carrier conferences and the greater the reductions in maritime economic regulation.

Current maritime economic regulation shields from the antitrust laws groups of ocean common carriers and their conferences to negotiate group service contracts with their customer(s), and the Act does not reduce that exemption. In contrast, service contracts by groups of trucking companies (other than carriers of household goods) and railroads are not shielded from the antitrust laws. Similarly, conference rate-setting for single-line shipments by railroads and trucking is not shielded from the antitrust laws. Consequently, railroads, trucking, and their rate-setting conferences would seem to be subject to stronger competitive forces than ocean common carriers and their conferences regarding single-line shipments, and regarding contracts negotiated by groups of carriers. To the extent such competition in trucking and railroading lowers prices, it is likely more beneficial to consumers.

Several rationales for continuing antitrust exemption for single-line shipments were presented by ocean liner conference carriers to a bipartisan commission that examined public policy issues associated with ocean carrier conferences, but opposing rationales were presented by shippers and others who oppose continued antitrust exemption. (See pages iii-vi of the Report to the President and Congress of the Advisory Commission on Conferences in Ocean Shipping cited in For Additional Reading.)

In summary, railroads are less regulated than ocean common carriers even after enactment of P.L. 105-258, and trucking is almost totally deregulated. Most important, perhaps, is that rate-setting conferences of railroads and trucking (except household goods carriers) have no antitrust immunity to set single-line rates. Thus, the Act leaves more maritime economic regulation, and more exemption from the antitrust laws, than exists for railroads and trucking. U.S.-flag carriers are required by the Act to make public more information about service contracts than their non-U.S.-flag carrier competitors are required to disclose about their service contracts, perhaps adversely affecting U.S.-flag carriers.

The Federal Maritime Commission

Most of the current regulatory authority of the FMC is directed to the economic regulation of U.S. ocean common carrier transportation in foreign commerce.

This regulation includes investigating discriminatory rates, charges, classifications, and practices of ocean common carriers, terminal operators, and freight forwarders operating in the foreign commerce of the United States. The Commission licenses international ocean freight forwarders (who act as a customer representative in getting commodities from origin to destination), and bonds freight consolidators (who combine small shipments into larger shipments). The Commission monitors individual carriers to be sure they treat customers and other members of the shipping public fairly. Tariffs must be filed with the FMC until May 1, 1999, and rates and charges must conform to those tariffs.

The Commission has authority to protect U.S. carriers and ocean freight customers from unfair rules and regulations of foreign governments and unfair practices of foreign ports and foreign-flag carriers, in commerce between the United States and other countries, and U.S. cargo or carriers between foreign countries. The Commission can do this by promulgating countervailing rules and regulations, and by imposing penalties on offending carriers. The Commission regulates rates, charges, classifications, and tariffs of controlled carriers (carriers in which a national government has substantial ownership or control) transporting commodities for U.S. shippers to or from U.S. ports to ensure the rates are just and reasonable.

The Commission carries out its responsibilities by holding hearings and issuing orders and implementing regulations. The Commission also adjudicates disputes involving the regulated community, the general shipping public, and other affected individuals or interest groups.

The Commission has 5 commissioners appointed for 5-year terms of office by the President with the advice and consent of the Senate. Not more than 3 members of the Commission may belong to the same political party. The President designates 1 of the Commissioners to serve as Chairman. The Chairman is the chief executive and administrative officer of the agency. A Managing Director assists the Chairman in providing executive and administrative direction to the Commission's offices and bureaus. The organization has various offices and bureaus for conducting its regulatory functions and providing administrative support. Most Commission employees are located in Washington, DC, but a few employees with the Bureau of Investigation are in field offices in New York, Los Angeles, and Miami.

The Proposed Intermodal Transportation Board

The Act as originally passed by the Senate Commerce Committee would have terminated the Commission, transferred 2 commissioner positions to an expanded 5-member Surface Transportation Board (STB), transferred the duties of the Commission to the Board, and changed the name of the Board to the Intermodal Transportation Board (ITB). These provisions of the bill were eliminated before the bill was passed by Senate.

LEGISLATION

P.L. 105-258 (S. 414)
Ocean Shipping Reform Act of 1998. Allows ocean ship operators to have confidential contracts with their customers. Signed into law October 14, 1998.

CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

U.S. Congress. House. Committee on Transportation and Infrastructure. Ocean Shipping Reform Act of 1995; report to accompany H.R. 2149. 104th Congress, 1st session. November 1, 1995. Washington, U.S. Govt. Print. Off., 1995. 50 p. (H.Rept. 104-303)

---- Shipping Act of 1984. Hearing, 104th Congress, 1st session. February 2, 1995. Washington, U.S. Govt. Print. Off., 1995. 603 p. (H.Rept. 104-2)

U.S. Congress. Senate. Committee on Commerce, Science, and Transportation. Ocean Shipping Reform Act, report on S. 414. 105^th Congress, 1^st session. July 31, 1997. Washington, U.S. Govt. Print. Off., 1997. (S.Rept. 105-61)

FOR ADDITIONAL READING

U.S. Advisory Commission on Conferences in Ocean Shipping. Report to the President and Congress of the Advisory Commission on Conferences in Ocean Shipping, no report number. April 10, 1992. Washington, 1992. 250 pp. plus appendices.

CRS Reports

CRS Report 97-662 E. The OECD Shipbuilding Agreement and Legislation in the 105^th Congress, by Lenore Sek.

CRS Report 96-67 E. The Surface Transportation Board (STB): An Overview and Selected Public Policy Issues, by Stephen J Thompson.