Segment 2 Of 2 Previous Hearing Segment(1)
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OCEAN SHIPPING REFORM ACT
WEDNESDAY, MAY 3, 2000
House of Representatives, Committee on Transportation and Infrastructure, Subcommittee on Coast Guard and Maritime Transportation, Washington, D.C.
The subcommittee met, pursuant to call, at 10:00 a.m., in room 2167, Rayburn House Office Building, Hon. Wayne T. Gilchrest [chairman of the subcommittee] presiding.
Mr. GILCHREST. The Subcommittee on Coast Guard and Maritime Transportation will come to order.
As you know, we will be limiting opening statements, but I don't think we have to worry about that right now because we don't have a whole lot of members here. But as they arrive, they can submit their statements to the record.
Last Monday marked the first anniversary of the implementation of the Ocean Shipping Reform Act of 1998. The bill took nearly 4 years to develop and contained the most important changes to international ocean shipping since 1984. The most significant reforms contained in the Act give shippers and ocean carriers the right to sign confidential contracts for the ocean transportation of goods. This is especially important for American exporters who want to keep their transportation costs private from foreign competitors. The Ocean Shipping Reform Act also maintains antitrust immunity for ocean carriers and requires the publication of tariffs on the Internet.
Today we will review the effects of the Ocean Shipping Reform Act on international ocean transportation. We will also review the implementation of the Reform Act by the Federal Maritime Commission. I commend the Federal Maritime Commission for its timely implementation of the Reform Act and urge the agency to focus on the big picture and guard against anti-competitive practices that distort the marketplace.
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The main focus of this hearing this morning is to see, after one year of implementation of the Ocean Shipping Reform Act of 1998, whether or not it is working effectively, efficiently, in the way we wanted it to work, and that all parties involved in ocean shipping are given a fair shake in this entire process. We look forward to the testimony of the witnesses this morning.
Mr. GILCHREST. On that note, I will yield to the gentleman from Pennsylvania, the chairman of the full committee, Mr. Shuster, for any opening remarks he may have.
Mr. SHUSTER. Thank you very much, Mr. Chairman.
The reason I wanted to be here during the kickoff of this hearing was to emphasize its importance. The Ocean Shipping Reform Act was signed into law after nearly 4 years of consideration and debate. It was a compromise and actually I believe it contains the most important changes in international ocean shipping practices for over a decade. The final bill—although there were some bumps along the way—was supported by a broad coalition of American businesses, including U.S. shippers, ocean carriers, and labor organizations. The major regulatory reform contained in the Reform Act allowed confidential transactions for ocean transportation.
I want to emphasize the landmark importance of this legislation. I urge the Federal Maritime Commission to reallocate its enforcement resources to meet the challenges of a more competitive ocean shipping environment, and I believe they should concentrate on major violations of the Reform Act and allow the reforms enacted in 1999 to boost trade and benefit the entire United States.
I would ask that my entire statement be made a part of the record at this point, Mr. Chairman.
Mr. GILCHREST. Without objection, your prepared statement will appear in the record.
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Thank you, Mr. Shuster.
I now yield to Mr. DeFazio for an opening statement.
Mr. DEFAZIO. Thank you, Mr. Chairman.
I am sorry that I was delayed at another committee meeting. I am pleased that you are bringing this issue before the committee. Obviously it is a timely review, given the changes made last year. I am looking forward to testimony.
I have a statement which I submit for the record.
Mr. GILCHREST. Without objection, your prepared statement will appear in the record.
We will now introduce the first panel: Hon. Harold Creel, Jr., Chairman, Federal Maritime Commission, accompanied by Thomas Panebianco, General Counsel, and Bruce Dombrowski, Executive Director of the Commission.
I would like to remind the witnesses that we have a very long, exciting, fascinating, interesting hearing today. But we would like you to limit your oral statements to about 5 minutes and submit your entire statement to the record.
Mr. Creel?
TESTIMONY OF HON. HAROLD J. CREEL, JR., CHAIRMAN, FEDERAL MARITIME COMMISSION, ACCOMPANIED BY THOMAS PANEBIANCO, GENERAL COUNSEL, AND BRUCE DOMBROWSKI, EXECUTIVE DIRECTOR, FEDERAL MARITIME COMMISSION
Mr. CREEL. Thank you, Mr. Chairman.
Mr. Chairman, Chairman Shuster, Mr. DeFazio, thank you very much for having me here today. It is a pleasure to appear to address the Ocean Shipping Reform Act of 1998, or OSRA.
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With me today at the table are the real brains of the Commission, Tom Panebianco, our General Counsel, and Bruce Dombrowski, our Executive Director. Also, in the audience are the other brains at the Commission, fellow Commissioners Won, Moran, Brennan, and Merck. We are pleased to have them on board. We are lucky to have a full contingent. They are excited, interested, and knowledgeable. We are very pleased to have them on board.
Mr. Chairman, you are to be commended for holding this hearing today, which is timely, given that the anniversary of the passage of OSRA was just 2 days ago.
As I mentioned during my testimony last February, the FMC has initiated a 2-year study on the impact of OSRA to determine whether it is achieving the goals envisioned by Congress. We will involve all segments of the ocean transportation industry and will issue a final report in the summer of 2001. We hope to have an interim report out next month.
I would like to offer you some preliminary observations based on our view of OSRA to date.
The cornerstone of OSRA, as you know, is the ability of shippers and carriers to enter into confidential, one-on-one, service contracts. Not surprisingly, there has been an absolute explosion in the number of service contracts filed with the FMC. Since May 1, 1999, the FMC has received about 35,000 new service contracts. In addition to that, about 78,000 amendments have been filed with the Commission. That is a 116 percent increase over the previous year, the period prior to OSRA.
The vast majority of these are individual service contracts between an individual shipper and an individual carrier. Mr. Chairman, 75 percent of the shippers were cargo owners; 20 percent were non-vessel-operating common carriers, or NVOCCs; and 5 percent were shippers' associations.
The majority of the contracts—about 83 percent—contain no provisions regarding confidentiality. That was somewhat surprising to me given that confidential contracts was the cornerstone of the Act. But I would like to remind you that OSRA does not mandate confidentiality. If the parties would like to have a confidential contract, that is up to them to negotiate. It is simply an issue that they have to negotiate between themselves.
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The contract terms are generally standardized at this point. I think it is probably more of a function of the fact that OSRA went into effect at about the same time that the new contracts were being negotiated. We expect, however, in this second contracting cycle that the contracts will be much more innovative and shipper-friendly.
Regarding agreements, there has been a dramatic decrease in the number of traditional rate-setting conferences. There were about 32 conferences; we are down to about 22 today. Operational agreements such as vessel-sharing agreements are the main form of agreements that are filed with the FMC, and that reflects a focus on increasing operational efficiency. Conferences have been supplanted by discussion agreements, and these discussion agreements do not set joint rates or have a common tariff. They can, however, agree on voluntary service contract guidelines, and those guidelines are filed confidentially with the FMC.
So far, the FMC has received 11 sets of these voluntary guidelines. Nine of those have been from discussion agreements and two from conferences. It appears that the overall adherence to the guidelines has been limited, but it depends more or less on the trade. There are mixed results on that.
As for tariffs, the Commission has been reviewing the accessibility of private tariffs since last May. Many of the carriers appear to limit the public's access to their tariff systems. We recently issued a press release and circular letter to the industry to alert them of the shortcomings of some of these systems. We intend to work with the industry to help bring them into compliance and make it easier for the public to access their tariffs.
As you know, there have been concerns raised about the impact of OSRA on non-vessel-operating common carriers. We have reviewed data from PIERS, a Journal of Commerce subsidiary, which is an import/export reporting service. It is probably the best barometer of what is going on in our trades today. Those data seem to indicate that NVOs are not harmed by OSRA.
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In 1999, the proportional growth of NVO exports over 1998 far exceeded the total U.S. exports. NVO exports were up 20.5 percent, whereas total United States exports were flat. The proportional growth was much more than the U.S. exports generally. NVO import growth also was higher. It more than doubled the proportionate growth of total U.S. imports, up 23.5 percent compared to 11 percent for total U.S. imports.
And, as I noted earlier, NVOs and shippers' associations are getting about 25 percent of all service contracts.
Mr. Chairman, our preliminary assessment of OSRA is that it is working as intended. There has been a boom in service contracting between individual shippers and individual carriers, and we expect more innovation to come. Our ongoing review of the shipping statutes is essential to ensure that our regulatory system meets the needs of the industry as it evolves and as our trade lanes change.
I look forward to working with you and the Committee and the Subcommittee on this issue. I would be happy to answer any questions you might have.
Thank you.
Mr. GILCHREST. Thank you, Mr. Creel.
You mentioned that 83 percent of the service contracts filed with the Commission since the Ocean Shipping Reform Act took effect do not contain confidentiality provisions. Is there a reason for that?
Mr. CREEL. I think there are a couple of reasons. As I mentioned, the carriers and the shippers are getting used to this new relationship. It's going to take a while for them to build the trust and build relationships up. I think that is one thing.
I think it is also a difference in the needs of shippers—large shippers versus small shippers. A large shipper may want to protect his rights because he is probably getting a better rate than a small shipper would because he has more volume, obviously. A small shipper, if he doesn't have the volume, may be not getting below marketplace rates. Therefore, he has no reason to hide that number.
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Mr. GILCHREST. Part of the provisions of this, I thought a year ago—especially for U.S. carriers—was the confidentiality of this. Now that doesn't seem to be the big issue anymore?
Mr. CREEL. I think it is a huge issue in terms of availability of that as an option. The carriers and shippers are welcome to negotiate that and are encouraged to have that provision if they want it.
Probably, what I have seen as equally important—if not more important—is the ability to be able to negotiate one-on-one—whether it is confidential or not—to be able to negotiate outside the framework of the conference. So what you have now are carriers and shippers who are negotiating as they never would before.
One thing I would like to point out—I just read this before I came over and I thought it was pretty interesting. You would never hear these sorts of words coming from freight forwarders, NVOs, carriers before OSRA passed. This was in the American Shipper this month. It hit me as being very interesting.
This gentleman is the general manager of corporate forwarding and distribution for a multinational company and welcomed the opportunity for confidential agreements: ''Working with service providers on continuous cost improvement is more important than trying to get freight rate savings by riding the market''—in other words, establishing these relationships so you have something to rely on, this continuous reliance on predictability in the market.
Mr. GILCHREST. You mentioned a decrease in rate-setting conferences and more discussion agreements. Is that from the European side and the U.S. side? All these carriers and shippers have just gotten together as a result of this format and actually created another dimension that may not have been anticipated but seems to be a positive impact?
Mr. CREEL. What we saw overnight was the disbanding of conferences, especially in the Pacific. On May 1, we saw a disbanding of conferences, just like that.
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I think that most people in the industry probably expected that to happen, just not nearly as quickly as it happened. I think it surprised some of the participants, including some of the carriers.
Mr. GILCHREST. So this is—correct me if I am wrong because I don't want to have a perception that is not correct—this is a situation, as a result of this Act, that created a marketplace that now is conducive to intelligent, professional, informed people using their initiative?
Mr. CREEL. Absolutely. And it seems like such an obvious thing, but it is not. This is a dramatic change for this industry. And while carriers continue to have antitrust immunity, there continues to be oversight by the Federal Maritime Commission to make sure there is no abuse of that immunity. But there are also these confidential one-on-one contracts which allow the carriers and shippers the freedom to establish these relationships and to really customize their contracts as they wish to meet their individual needs.
Mr. GILCHREST. Mr. Creel, you also talked about the growth and the interactions and opportunities for NVOs. I know you have a 2-year report that will be out in another year, but is it your perspective that NVOs in general have been hurt by this, have had no impact on their business, or actually increased their opportunities?
Mr. CREEL. I think it is all of those, from what we have seen. Some of this evidence is anecdotal, just being out in the field and speaking to people who are NVOs around the country. We haven't heard the complaints we have been hearing here in Washington, D.C.
We have heard that their percentage share of imports and exports, compared to total U.S. imports and exports, has grown. In some cases it is double. So I think there are opportunities out there. Shippers' associations represent small shippers. I think the Wine and Spirits Shippers' Association indicated that they had an increase of 30 members since OSRA. So it is an opportunity for the shippers associations to take on more importance as well.
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It is a mixed bag, and that is something we really want to look at. You have to be careful when looking at the number of contracts we have looked at here. We have looked at 408 contracts and 13 carriers, and they were the 13 major U.S. carriers. These were only 408 contracts out of 35,000 contracts, over 100,000 filed items with us. So that is a very small number. We intend to look at this from a much broader perspective with a more statistically significant sample for the final OSRA Impact Study.
Mr. GILCHREST. It is my understanding that you have regulatory authority to change some of these provisions that the NVOs now live under. Are you likely to change any of those provisions that the NVOs have been asking for prior to the 2-year study being completed?
Mr. CREEL. Under the 1984 Act, as amended by OSRA, we do have exemption authority, which is actually broadened under OSRA. It did away with a couple of hurdles petitioners had to jump over, so we do have broader exemption authority. However, we have to look at what Congress has done in regard to these issues.
There was an amendment offered by Senator Gorton in the Senate that struck down this particular issue—service contracting by NVOCCs— but it is something we would have to look at in detail.
Mr. GILCHREST. But are you leaning to look at what Congress did in the Act, even though you have the authority to do it? Or would you base most of your decision on that regulatory reform on the market and how it affects the shippers, the carriers, and the NVOs?
Mr. CREEL. Clearly, we will be looking at all of that. We could be making recommendations to Congress on some of the things we have seen that we couldn't address through our rules but Congress would have to address through changes in the statute.
And clearly that is the emphasis now: the marketplace and allowing the marketplace to dictate rates, not conferences or cartels.
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Mr. GILCHREST. Thank you, Mr. Creel.
Mr. DeFazio?
Mr. DEFAZIO. Mr. Creel, I have some concerns about how we are monitoring and implementing some of the aspects of the Act. I will go to one example—this is not my only concern, but one that perhaps could give me some idea of how you are dealing with some of these things.
COSCO, the Chinese shipping group, has pretty widely stated that they have an intention of becoming one of the largest shipping companies in the world. They are already quite large.
I am concerned about how they might get there and whether they are getting there by charging just and reasonable rates or not. And I am wondering how the Commission is dealing with—since you have confidential data, you get to review the confidential data, you get to make determinations about whether the things are just and reasonable—how are you comparing these rates currently? How are you doing enforcement? Are you contemplating enforcement? How is this process going to work?
It seems kind of odd, since you are dealing with all these confidential things, how does one do enforcement?
Mr. CREEL. You may be referring to China Shipping Container Lines, rather than COSCO. Their names are very similar.
Mr. DEFAZIO. Oh, sorry.
Mr. CREEL. But they have indicated that they intend to be one of the top five carriers within the next 5 years.
If their rates are good and their service is good, it is possible. I think it is unlikely because they aren't even in the top 20 right now. With them, I am concerned that they are a controlled carrier and, as you said, we are the only ones who have access to their contracts. But that is the purpose Congress had in that provision, allowing us the oversight of those contracts so we can look at the rates and see if they are just and reasonable compared to other carriers and exactly where they fall in the hierarchy, in terms of the rate structure.
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Mr. DEFAZIO. So if someone is saying, ''Gee, we have really low costs, we are using pressed labor on our ships'', ''and we can justify these rates''—how do you come up with a measure of just and reasonable? Do you compare it to U.S. carriers, or European carriers? How do you come up with a measure? Does it go to their costs? To comparative rates among shippers? What is just and reasonable?
Mr. CREEL. It is certainly both of those. You have to look at what their costs are. Again, I think you put your finger on a very difficult issue. Sometimes it is easier than others. If a carrier were to go in and undercut the rates at a level that just flat out bottomed out the rest of the rates, that is easy to see. When it is a little closer, it gets a little dicier.
Mr. PANEBIANCO. Part of the process is to compare the rates of the controlled carriers to what the constructive costs of the rates would be for non-controlled carriers, for example, U.S. carriers. So it is a subjective analysis, but basically our role is to make sure that they are not unfairly engaging in predatory rates, that they are not using the Government support or the Government ownership they have to have rates that are so low that non-Government-owned or controlled carriers cannot compete fairly.
That is the process we use.
Mr. DEFAZIO. And if you make a determination, does this then become a public process? How do we know there is an enforcement action going on?
Mr. PANEBIANCO. It is a public process. There would be a proceeding.
The contract rates are routinely filed with the FMC. They are not something that is routinely made public. But if the Commission were in the process of having to engage in a proceeding to determine if those rates are unfairly low to the detriment of other carriers, there comes a point where that information would have to be made public.
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Mr. DEFAZIO. Has there been an instance of this in the last year?
Mr. PANEBIANCO. No.
Mr. DEFAZIO. So at the moment you are not looking at any rates as being predatory?
Mr. PANEBIANCO. We are monitoring rates now on a regular basis to determine if they are too low. And some of the controlled carriers tend to have rates that are lower than many of the other carriers. But it is not so extraordinarily low that we have been able to say that it meets the standards such that we would have to take action.
I think the existence of our controlled carrier rate review authority helps to deter some of these carriers from engaging in more rate-cutting than they might.
Mr. DEFAZIO. Thank you.
Thank you, Mr. Chairman.
Mr. GILCHREST. Thank you, Mr. DeFazio?
Just a quick follow-up, Mr. Creel.
Could you tell us the difference between FMC's relationship with, let's say, Evergreen and COSCO?
Mr. CREEL. COSCO is a controlled carrier, meaning that it is Government owned or controlled. Evergreen is not. Therefore, because COSCO is a controlled carrier, it is subject to many more requirements than non-controlled carriers. So they are really apples and oranges. Evergreen is not Government owned.
Mr. GILCHREST. Can you give me one or two examples of the hoops that COSCO has to go through as opposed to what Evergreen has to go through.
Mr. CREEL. One of the main things is the threat of predatory pricing and whether it is just and reasonable.
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Mr. GILCHREST. You haven't seen any of that with COSCO?
Mr. CREEL. No, we haven't. We have been monitoring them and continue to monitor them, as we do all controlled carriers. But we haven't seen it.
Mr. GILCHREST. Has COSCO asked you not to be considered a controlled carrier?
Mr. CREEL. Oh, yes.
Mr. GILCHREST. What was your response?
Mr. CREEL. Oh, no.
[Laughter.]
Mr. GILCHREST. That's good.
Just another quick question about these discussion groups. The European Union doesn't allow discussion agreements between carriers and trading with European nations?
Mr. CREEL. That is right. And I think the basis of this is really historical in context.
The Europeans are signatories to UNCTAD, an agreement which came out of the UN. That agreement specifically exempted conferences from their competition laws. It was very specific, so discussion agreements fall outside that exception. So what we have in the Atlantic now is not discussion agreements, but rather a conference.
Mr. GILCHREST. Are they the same as what we thought of as conferences before?
Mr. CREEL. They are very, very close. The difference between a discussion agreement and a conference is that a discussion agreement can't impose binding rate authority on its members. They can have voluntary guidelines and make recommendations for any number of things—including rates—but that is not binding upon the members. The discussion agreement itself has no policing authority, whereas in a conference it does. If you want to be a member of the club, you have to abide by the rules and go with the rate increases the conference dictates.
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Mr. GILCHREST. When you said that 83 percent of these are non-confidential contracts, is that 83 percent mostly with discussion groups?
Mr. CREEL. Mostly discussion groups?
I'm sorry. They are individual, one-on-one contracts, those 83 percent. 100 percent of these contracts are service contracts and 83 percent do not have confidential provisions.
Mr. GILCHREST. This is a fascinating evolutionary process.
Mr. CREEL. And it is happening very quickly.
Mr. GILCHREST. This will be the last question.
Mr. CREEL. I have nothing better to do. I would be happy to stay here and answer your questions.
[Laughter.]
Mr. GILCHREST. The International Brotherhood of Teamsters will testify later about an equipment interchange discussion agreement, which was filed with the FMC last May, that has allowed ocean carriers to establish unreasonably low pay scales for Harbor truck drivers.
Do you agree with this assessment? Do you believe that the Act amendments to Section 10(c)(4) of the Shipping Act of 1984 allows this type of discussion agreement?
Mr. CREEL. I am not familiar with that particular agreement you are talking about. However, I would say that the Ocean Shipping Reform Act was very explicit in stating that the carriers do not have antitrust immunity to talk about and agree on rates with truckers. They do not have that authority. They can do it, but it has to be subject to the antitrust laws.
So in that particular agreement, if they are doing that and it doesn't say that it is subject to the Ocean Shipping Reform Act—I believe that agreement may say that it is subject to the Ocean Shipping Reform Act—if it does, then what that means is that it refers to the section that says that these discussions are subject to the antitrust laws of the United States. There is no exception for that authority.
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Mr. GILCHREST. I see.
Mr. CREEL. I would also point out that we are looking at—the Teamsters raised issues about antitrust immunity before Congressman Hyde's committee and testified. That was the first time we had heard from the Teamsters in the 5-year review of this legislation or the 5-year development of this legislation. But we will be looking at their concerns as part of our 2-year study. We included that after they raised those concerns.
Mr. GILCHREST. Thank you.
Mr. Taylor?
Mr. TAYLOR. Mr. Creel, I am going to ask you my favorite town meeting question. One year from today, what do you hope the Federal Maritime Commission will do better than it is doing right now?
Mr. CREEL. I appreciate that question.
Actually, I think that what we will be doing a year from now is a follow through on the implementation of OSRA. That will be the second year under the Ocean Shipping Reform Act. Hopefully by that time we will have seen more of the innovations and go through a picture of what is happening in the industry after significant changes to the law have been made.
Specifically, our study will be done then. We will have a better picture there. Tariff accessibility—hopefully we will have some resolution of that particular issue. The reorganization that we did at the Commission to reflect the changes that have been made by OSRA will be fully implemented. I think we will be in a much better position to get on with life under the new Act. I think the industry will also be more comfortable—shippers, carriers, ocean transportation intermediaries—I think everybody will have more time under their belts. I am hoping that we will continue to see the reliance on the marketplace that we have seen so far and the really quick changes we have seen occurring in the industry—positive changes we have seen occurring in the industry.
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Mr. TAYLOR. One of my constituents asked me the proverbial question, What have you done for them lately? And what have you done in your agency to earn their appropriation?
What do I tell them?
Mr. CREEL. I think that is an excellent question that you don't ever hear. It is sort of like the most obvious.
We are so far removed from the individual. In fact, the Box Club, which is a group of container operators from around the world, did a video a few years ago which really struck me. All of us who have worked on these issues of international shipping for years never hear about it in the United States. You go to Europe and it is front-page news. You go to conferences there and it is major news.
Over 94 percent of everything that comes into this country comes on a ship. That is significant.
The Box Club did this video which I thought was just brilliant. They interviewed people on the streets of New York City. ''What kind of television do you have?''
''Mitsubishi or Sanyo or something.''
''Where do you think it was made?''
''Korea.''
''How much did you pay for it?''
''Six hundred dollars.''
''How much do you think it cost to get it from Korea to your house in Queens?''
''Two hundred dollars.''
''Try fifteen dollars.''
I think that is exactly what we do. We create a situation and environment that is favorable for shipping in and out of the United States. What that does is make shipping very cheap. All the stuff that we have here that comes on a ship, nobody knows how it gets here because it works. If the cost was outrageous, if it cost $200 to get that television here, you would be hearing from people. But you don't hear complaints because it works.
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It is something that I think really needs to be addressed and there needs to be a message out there that these things that we have in our homes, the food that we eat, comes on a ship. The industry hasn't done a very good job of it. I think that now that we have a less divisive industry maybe there is a message that could be put out there that shipping is a huge industry, a global industry. Other industries talk about being globalized—shipping is global by nature and always has been.
That is what we do for your constituents. We get them their stuff, we get it there on time, we get it there with no complaints, we get it there fresh—or the carriers and shippers do that. We provide the environment free from controlled carriers skewing the market, free from fighting ships that would like to skew the market, to provide a free and open trade to the United States.
Mr. TAYLOR. Thank you, Mr. Chairman.
Thank you, Mr. Creel.
Mr. GILCHREST. Mr. DeFazio, do you have a follow-up?
Mr. DEFAZIO. I would just like to follow up on the line of questioning you were pursuing, Mr. Chairman, about the discussion agreements and comparing the conference system in the Atlantic to the discussion agreements in the Pacific. A large portion of the trade in the Pacific is subject to these discussion agreements. Is that correct?
Mr. CREEL. About 85 percent.
Mr. DEFAZIO. Since you review the data—and I assume you are privy to whatever the discussion agreements are—
Mr. CREEL. They file their minutes of their meetings with us.
Mr. DEFAZIO. Then you have some idea of the proceedings and what targets are set.
What variance do we see from those targets?
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Mr. CREEL. I think it really depends on the trade. For example, what we are really talking about here is a voluntary guideline that the discussion agreements have. By law, under OSRA, the carriers can adopt in discussion agreements voluntary guidelines. But they also have to state that those guidelines do not have to be followed. They are not enforceable.
What we see is typically—for example, in Latin America the voluntary guidelines are not followed. In the transpacific, they are.
Why is that? You have a strong market. If the voluntary guidelines have a rate base, the rates would probably be higher anyway. Maybe they are higher because of the voluntary guidelines. I don't know. That is one thing we are going to be looking at.
When we were writing our regulations on voluntary guidelines, I personally was concerned because basically the carriers can say in their voluntary guidelines that you are required to do this, that, and the other—anything they want to—but they have to say it's voluntary. So they can say that you can't have a service contract—well, legally, they can't restrict a carrier from having a service contract, but they can say it because it is voluntary.
So my concern was that, they are members of this club if they want to be a member, so they are going to abide by the rules.
That really hasn't necessarily proven to be the case because of the confidential one-on-one contracts. You have seen a lot of breaks from the discussion agreement and not the adherence that I would have expected early on.
So I think that if you have a strong market—and this is more of an indication of the market working—yes, the rates are going to go up. If you have a weak market, maybe they aren't and there is no adherence to the guidelines.
Mr. DEFAZIO. In the Atlantic trade, where you have the conferences, they are binding agreements. So do the shippers. What is the monitoring there? In the Pacific, they have a meeting, they set targets, and then your organization is the only one who is privy to what is actually charged. That is not shared among the shipping companies.
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Mr. CREEL. That's right.
Mr. DEFAZIO. But in the Atlantic, how do you they enforce it? Does the conference require that they make available to their competitors actually what their charges were?
Mr. CREEL. You mean the competitors within the conference?
Mr. DEFAZIO. Yes.
Mr. CREEL. Yes. There will be a common tariff and enforceable rates.
Mr. DEFAZIO. But is that a published thing?
Mr. CREEL. Yes.
Mr. DEFAZIO. So then the shippers are privy to that so they know what they are getting—but in the Pacific we have all these secret negotiations and you are the only one who is privy to where they ended up in terms of charges?
Mr. CREEL. That is correct, because we have one-on-one contracts.
Mr. DEFAZIO. And in the Pacific, we are still seeing substantially one-way shipping?
Mr. CREEL. That is correct.
Mr. DEFAZIO. What percentage?
Mr. CREEL. I am not sure. I may have to get back to you on that.
Mr. DEFAZIO. A very high number?
Mr. CREEL. Absolutely. It is picking up a little bit on the westbound, and I think that is largely a result of the Asian financial crisis lessening somewhat. That is certainly the reason for the one-way trade. It is picking up some on the westbound, but it is very much an eastbound trade.
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Mr. DEFAZIO. So therefore, probably seasonally, the eastbound is not very competitive. It is basically capacity limited.
Mr. CREEL. Actually what we saw last year—I guess it was 1998 when we saw some of the shippers not getting their cargo because there wasn't the capacity there. Then all of a sudden we started seeing some smaller carriers coming in. I think the capacity increased about 25 percent in that inbound trade. There is concern about capacity on the eastbound this coming contracting cycle, but I would expect the same thing to happen.
Mr. DEFAZIO. Thank you.
Thank you, Mr. Chairman.
Mr. GILCHREST. Are there any other questions?
My last question, Mr. Creel, and then I will let you go.
Do you have any idea of the percentage of increase in traffic, both in the Pacific and the Atlantic, over the next 20 years?
Mr. CREEL. If I did, I wouldn't be in this position, I don't think.
[Laughter.]
Mr. CREEL. I think we are going to continue to see the increase in imports from the west in the Pacific. The increase in the Atlantic is also imports from Europe.
I think that is right.
You might want to ask the carriers that. They probably have a better idea than I do.
The strange thing about this industry is that it is so seasonal. It is seasonal, it is based on the economies of our trading partners. It does fluctuate. What makes it difficult for the carriers is—and I was thinking about this last night in detail for some reason—you have these containers that are basically—they start over here, you fill them up with goods from China, they come in through Los Angeles, they end up in Des Moines, and then there is nothing going back the other way. So they are having to deal with the logistics problem of getting these containers moving with nothing in them so that they are making money rather than just moving an empty container back across the ocean.
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Logistically, that is a difficult issue for the carriers and I think it has a significant effect on their bottom line because of the cost. A ship has the same static costs whether it is full or empty.
That is one of the challenges in this industry. It is different than the passenger industry. On the airlines, you have a passenger airlines going from Dhubai to Des Moines—I guess that wouldn't happen anyway—but from one point to the other you are picking up passengers and letting off passengers. It is continuous trade. Here it is oftentimes one-way.
That is one of the challenges that often faces this industry.
Mr. GILCHREST. Mr. Creel, thank you very much. Your testimony was very informative.
Mr. CREEL. Thank you very much.
Mr. GILCHREST. Our next panel will be John Clancey, Chairman of the Board of Maersk; Timothy Rhein, Chairman, American President Lines; Jean Godwin, Executive Vice President and General Counsel, American Association of Port Authorities; Edward Emmett, President, National Industrial Transportation League; Frank Pecquex, Executive Secretary, Treasurer, Maritime Trades Department, AFL-CIO; Jon S. Helmick, Captain, United States Maritime Service, Director, Logistics and Intermodal Transportation Program, U.S. Merchant Marine Academy.
Mr. Rhein, you have a train, plane, or automobile to catch you don't have much time?
Mr. RHEIN. I have time.
Mr. GILCHREST. That being the case, we will start with Mr. Clancey.
TESTIMONY OF JOHN P. CLANCEY, CHAIRMAN, MAERSK, INC.; TIMOTHY J. RHEIN, CHAIRMAN, AMERICAN PRESIDENT LINES, LTD; JEAN C. GODWIN, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AMERICAN ASSOCIATION OF PORT AUTHORITIES; EDWARD M. EMMETT, PRESIDENT, NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE; FRANK PECQUEX, EXECUTIVE SECRETARY AND TREASURER, MARITIME TRADES DEPARTMENT, AFL-CIO; DR. JON S. HELMICK, CAPTAIN, UNITED STATES MARITIME SERVICE, DIRECTOR, LOGISTICS AND INTERMODAL TRANSPORTATION PROGRAM, DEPARTMENT OF MARINE TRANSPORTATION, U.S. MERCHANT MARINE ACADEMY
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Mr. CLANCEY. Thank you, Mr. Chairman.
This morning I appear before the committee in a dual capacity, on behalf of Maersk SeaLand, but also on behalf of the Ocean Carrier Working Group, which is a coalition of 29 shipping lines serving the foreign trades of the United States. The industry we represent is unique in a number of respects: global in nature, but with every country we serve throughout the world having different rules, regulations, et cetera. Also, every piece of business we handle either begins or ends in another country other than the United States.
The industry also has antitrust immunity throughout the world, recognizing these facts. In fact, it was recognized when we developed OSRA, which was a delicately crafted compromised, which resulted in legislation which addressed the changing nature of our industry, the advent of the increased use of technology, the Internet, and the globalization of our customers' business throughout the world.
OSRA is today a little over a year old and we believe it is clear that OSRA is working. We hear this from our customers, our competitors, from the ports, and from other industries that work with us in the process of moving cargo throughout the world. OSRA also provides us with a stable and predictable regulatory environment that we believe is very important because the international nature of this industry can be very complex, as Mr. Creel addressed.
The issue is also critical because of the capital-intensive nature of the industry, one in which in the last 5 years the carriers invested $50 billion, along with the ports, with an equivalent amount necessary in the next 5 years to meet the ever-increasing demands of global commerce.
One of the major elements of OSRA was the ability to enter into confidential contracts. From our experience, the confidential nature has increased beyond the 17 percent that the chairman of FMC referred to. But confidentiality was what our shippers wanted first and foremost. They wanted the elimination of transparency, the elimination of conferences or groups involved in our negotiations with them. They wanted the ability to enhance the use of information technology and the ability to deal with them on a global basis rather than just in one particular trade lane.
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The success of OSRA, we believe, can be easily measured in looking at the number of contracts that the carriers individually or as a group had prior to enactment of the legislation and what we have today. There is a significant increase in individual contracts between carrier and shipper.
OSRA certainly has not resulted in increased prices—at least from our experience—and the industry continues to produce less than optimal earnings. Competition continues to flourish with the addition of nine new carriers in the transpacific alone. We should also not lose track of the fact that the industry has given back most of its gains it has secured in carrier alliances and productivity efficiencies in the last 5 years.
OSRA also maintains antitrust immunity, allowing carriers to continue to enter into carrier alliances, which enhance the ability to improve service, frequency, reliability, and reduce costs. And as you know, Chairman Hyde and the Judiciary Committee recently held a hearing on the subject. With your permission, Mr. Chairman, I would like to submit for the record the carrier testimony presented at that hearing and also the testimony of Mercer Management. They supplied supporting data concerning the economics and dynamics of our business.
Mr. GILCHREST. Without objection, that testimony will appear in the record.
Mr. CLANCEY. Thank you.
The Act also provides protection for the interests of U.S. ports, small shippers, shippers associations, and others in the ocean transportation intermediaries. Congress built in these safeguards so that the above changes would not harm other industries associated with global commerce.
We believe that OSRA has worked better than anticipated. Confidential contracts, from our perspective, have stimulated innovation and creativity in the marketplace. The flexibility provided by OSRA has allowed us to introduce new concepts and to tailor agreements with our customers to meet their individual needs.
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Though there has been significant foreign investment in U.S. flag carriers, and though the United States carrier base is predominantly owned by foreign entities, the facts are that these vessels are controlled by U.S. corporations, crewed by American citizens, and have responded and will continue to respond to the needs of this country. The new owners bring financial commitment and the financial resources that previous owners did not.
We believe the issue is not the nationality of the investor. The real issue is whether Congress supports the ocean transportation infrastructure necessary to serve our current foreign commerce. We continue to believe that Congress and the subcommittee should examine the corporate citizen requirements with an idea of making changes that would stimulate investment in the U.S. flag tonnage.
In closing, we believe that the evidence demonstrates that OSRA is working, and we firmly believe that time will only demonstrate the future value we can bring.
Thank you, Mr. Chairman.
Mr. GILCHREST. Thank you, Mr. Clancey.
Mr. Rhein?
Mr. RHEIN. Good morning, Mr. Chairman.
My name is Tim Rhein. I am chairman of American President Lines, Limited, a U.S. flag ocean carrier based in Oakland, California. I am also appearing on behalf of both my company and a spokesman for the Ocean Carrier Working Group, a group of 29 ocean carriers serving the United States.
While it is too early to make definitive judgments after only a year, our experience with OSRA could be summed up as: So far, so good. OSRA is functioning as expected and as Congress intended. It has fostered choice, flexibility, and a market-driven approach to the way carriers and shippers do business.
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The feedback from our customers has been overwhelmingly positive. In a recent speech, FMC Commissioner Merck summarized the responses he gets when he asks how things are going under OSRA: ''Whether they be shippers or carriers, their answers are positive. They seem to be more concerned with doing business than finding fault with the law.''
Let me summarize some of the dramatic changes under OSRA.
Number one, individual confidential service contracting has clearly taken hold. By way of illustration, APL's 1,300 service contracts in 1998 were all conference contracts. Our over 1,400 contracts in 1999 were all individual contracts. In addition, contracts can now be confidential and can include a broad array of service and trades and can no longer be accessed by other similarly situated shippers. I would like to add that the data presented by Chairman Creel is inconsistent with our internal data. Most of our contracts are confidential. So I think there is a gap in the data here for some reason I cannot explain, Mr. Chairman.
Mr. GILCHREST. Are most of your contracts in the Atlantic or the Pacific?
Mr. RHEIN. Yes.
Mr. GILCHREST. Most are Pacific?
Mr. RHEIN. Confidential. In the Pacific they are confidential.
Number two, carrier agreements are more flexible. A key part of the OSRA compromise was maintaining limited antitrust immunity for carriers. It also required agreements to provide their members more flexibility. The result is a move from a system where conference has played a key role in marketing carrier services to one where they are now only one in a broad array of shipper choices.
Vessel sharing agreements and discussing agreements have become more prominent under OSRA. Operating alliances referred to by Mr. Clancey with other carriers permit us to offer our customers many more service options while reducing our costs by sharing terminals and equipment. All this is encouraged by OSRA.
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Discussion agreements are emerging, particularly in the Pacific. They do not set binding rates, do not publish common tariffs, and cannot enter into agreement service contracts. Nor do they have the ability to enforce or monitor members' compliance with group targets. Rather, they discuss trade conditions and trends and rate and service matters on a voluntary basis.
Contract guidelines promote trade stability, which in turn encourages long-term investment. Without this capability, the potentially destructive tendencies of a fixed cost capital-intensive industry with no barriers to entry and many non-commercial operators would be devastating to many carriers, to the shipping public, and to the U.S. economy.
Number three, the market as reflected by supply and demand conditions has become the true and real determinant of general price levels. In addition, individual logistical conditions of the carriers and their customers impact the market in determining specific price levels.
This is a strong change from the previous regime in which restrictions, homogenized group pricing, and total transparency inhibited creativity and differentiation.
Number four, OSRA has reduced administrative burdens and costs. Carriers are no longer required to file tariffs with the Federal Maritime Commission. We publish them directly on our web page and contract rates are no longer published.
Number five, OSRA has benefitted all segments of the industry. Shipper associations continue to actively negotiate contracts. The May 2000 issue of American Shipper magazine reported that OSRA has helped the Wine and Spirits Shippers Association attract new members among smaller shippers. More than 30 companies have become members since last year. This is the case with many other associations as well.
Small shippers have been helped by confidentiality of contract rates, which can eliminate the historic transparent spread between the rates offered to large shippers and the rates offered to small shippers. NVOCCs are thriving under OSRA. NVO participants at a conference in January expressed satisfaction with the current system and stated that OSRA has improved their business prospects. Over 250 new NVO applications have been filed with the Federal Maritime Commission in the past year.
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Number six, the relationship between the carriers and shippers is changing. It is becoming much more symbiotic and supportive versus what could only be characterized by some as an adversarial relationship under the old Shipping Act. One-on-one confidential contracting based on open dialogues and complimentary wants and needs is producing a true win-win environment.
In summary, OSRA has provided shippers and carriers with choice and flexibility in how they do business. Carriers have produced the competitive and service-oriented network of global container services imaginable. Shippers are moving record volumes faster and more frequently and with greater reliability than ever. OSRA enables and encourages this system and provides all parties with the confidence and strength to look favorably into the future.
Mr. Chairman, I would like to add one other comment in response to a question that came up in the previous panel on the equipment interchange agreement. This is an agreement that has been in place for over 10 years. It is an agreement under the antitrust laws that allows the carriers to determine the conditions for the use of our equipment. It addresses how many days of free time are allowed on our equipment. It addresses the issue of damage when it is done to our equipment. It has nothing to do with trucking rates. We are forbidden by the law to collectively set trucking rates and we do not deal directly with individual truck drivers; we deal with trucking companies.
As I mentioned before, the equipment interchange agreement, which has been brought up by the Teamsters Union, has absolutely nothing to do with trucking rates.
Thank you for the opportunity to appear before you today and for your continued interest in the vitally important ocean transportation industry.
Mr. GILCHREST. Thank you very much, Mr. Rhein.
Ms. Jean Godwin?
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Ms. GODWIN. Thank you, Mr. Chairman and members of the subcommittee.
I am Jean Godwin, executive vice president and general counsel of the American Association of Port Authorities. We represent 160 public port authorities throughout the United States, Canada, Latin America, and the Caribbean. In addition, we represent almost 300 sustaining and associate members, which are firms that do business with our ports. My testimony today reflects the views only of our U.S. ports delegation.
As you know, sir, our members are public entities, divisions, or agents of State and local government which are mandated by law to serve public purposes. Essentially, we are the public agencies charged with the responsibility to develop port facilities and facilities of commerce. And toward that end, we have invested billions of dollars of public funds. As a result, we have an enormous financial stake of public funds in the future economic health of the maritime industry.
We very much appreciate the opportunity to testify before the subcommittee today, which is almost the anniversary of the enactment date of OSRA. I would like to state for the record our thanks to the subcommittee and its staff for the hard work in the multi-year effort that led up to this law. It was no easy task.
The U.S. public port community believes that OSRA, which represented a compromise agreed to by the carriers, shippers, labor, and ports, has provided an effective and appropriate balance among the many competing interests. It was a 4-to 5- year process to get to that point.
The concerns raised by U.S. public ports in the early debate on this issue were resolved in the final product. AAPA supported enactment of OSRA believing that it would meet the needs of the U.S. public port community as well as U.S. trade generally. AAPA was pleased that the final product: (a) provided more flexibility in business relationships, particularly between the carriers and shippers; (b) retained limited antitrust immunity for both carriers as well as marine terminal operators; and (c) at the same time ensured continued effective regulatory oversight, particularly over joint activities, in an independent regulatory agency which has expertise in our industry. These are the things that were most important to us.
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U.S. ports believe that OSRA has already worked very well in its first year. It is still very early to tell, as a number of people have pointed out. We have just gone through the first round of contracts last year shortly after the effective date. And we think it will continue to work even better in the future as the industry has time to adjust to its changes. I think Tim summed up my point today very simply in four words: So far, so good. I couldn't agree more. We are on the right track.
We would urge Congress—and particularly your fellow members in the Judiciary Committee—to make sure that we give the statute time to work before we look at making any other changes. We also testified recently before the Judiciary Committee on H.R. 3138, the bill that would alter the compromise reached in OSRA by eliminating antitrust immunity for the carriers under the Shipping Act. That bill would not affect antitrust immunity for marine terminal operators. But we do believe we would be affected by it not only because that might be the first stage of eliminating antitrust immunity for all, but also because of our general concerns over the financial condition in the industry.
We can testify as well as the carriers that this industry is very competitive and the changes that took place in OSRA have helped facilitate even more competition. The right of independent action with regard to service contracts has allowed flexibility for shippers to negotiate with individual carriers and deprived conferences of the discipline necessary to control pricing. The use of service contracts between shippers and carriers has become more common, as evidenced by the large number of filings that Chairman Creel referred to with the Federal Maritime Commission.
Shippers also have the advantage of negotiating confidential contracts, which was a high priority for them. And all of these changes have increased competition within the ocean carrier industry and applied downward pressure on the ocean carriers' rates and profits. As I said, while H.R. 3138 does not directly affect the antitrust immunity for our members, it could affect the financial condition of the ports by impacting our users and tenants in marine terminal facilities.
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Our port industry generates over 13 billion jobs a year, $494 billion in personal income, and according to the U.S. Maritime Administration, which generates numbers every year based on a survey done of our members, public port authorities are investing capital in their port development at record levels. In 1998, our members invested nearly $1.4 billion in the development of facilities, and we project expenditures through 2003 at over $9 billion. These investments need to be protected.
The enormous cost of providing these facilities that serve not only port regions but the Nation as a whole must be paid for from the revenues of the port authorities. We are concerned that any actions that would financially cripple ocean carriers or hinder their ability to contribute to the revenue which supports these capital programs might actually work against the interest of the United States.
To summarize, we believe OSRA is a success story and that the industry is successfully adapting to its changes. We urge Congress to stay the course and to allow the full benefits of the law to be realized.
Thank you again, for allowing us the opportunity today.
Mr. GILCHREST. Thank you, Ms. Godwin.
Mr. Emmett?
Mr. EMMETT. Thank you.
Mr. Chairman, Mr. DeFazio, and Mr. Taylor, we appreciate your being here this morning to hear us, just as we appreciate the opportunity to appear.
My name is Ed Emmett. I am president of the National Industrial Transportation League, which is the Nation's oldest and largest shippers organization. We have been intimately involved in this process for several years and are very pleased to be at the stage we are today.
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After passage of the Ocean Shipping Reform Act, I have had the opportunity to travel around the world on occasions and talk to shippers and carriers in all parts of the world. Many of those shippers, particularly, are league members even though their operations may be somewhere else. They are U.S. companies.
Two observations have struck me in these travels. First and foremost, the Ocean Shipping Reform Act is working as intended. There are confidential contracts being signed. In fact, I would echo a comment made earlier. Our early indications are that there are a lot more confidential contracts percentage wise than the FMC has determined, but that could be in terms of a lot of the contracts that are filed at the Federal Maritime Commission are in fact amendments to other contracts and they may not reflect the same confidentiality.
The marketplace appears to be working for shippers of all sizes and all types. Perhaps more importantly, the marketplace has a uniformity to it that it did not have before OSRA. The U.S. shippers are now in the same circumstance as shippers in other parts of the world, and that is of critical importance.
The second observation I would make is that the industry has changed dramatically since 1994 when the League first launched this effort. And OSRA, either by design or by pure dumb luck—and I would like to think it was by design of the Congress—has been very good for handling that change.
What type of changes are we talking about? Globalization continues. I am forever meeting people who are from mom-and-pop type companies who never thought about being in the global marketplace 10 years ago and now they find themselves selling and buying from all parts of the world. OSRA allows them the flexibility to deal in that marketplace.
The whole question of U.S. flag versus foreign carriers—the early hearings on this subject really focused on the impact of any change on U.S. flag carriers. Now, as you well know, many of those carriers have been sold. They remain U.S. flag but their ownership is different. OSRA has allowed the flexibility to deal with carriers on a global basis, no matter what the ownership is. It has added a new dynamic to the ocean liner industry.
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The whole rise of intermodalism—as you go global, more and more of those containers come. They have to be transferred to trains, to trucks. Intermodalism requires flexibility and OSRA has provided that flexibility if in no other way by creating a new feeling that rather than being antagonists, carriers and shippers are now partners and they are trying to deal from a partnership rather than in some kind of antagonistic way. Are there still some rough spots? Of course.
However, as one who has been in the deregulation fight for a long, long time, I think there are far fewer rough spots in the deregulation of this industry than there were in the deregulation of other industries. As a former member of the Interstate Commerce Commission, for many, many years fights came before that commission between the truckers and the shippers over exactly what it meant. We are not seeing those types of fights to any degree under OSRA, and that is good.
Finally, we are surveying the League members in great detail. A copy of that survey was submitted with my written testimony. We will be happy to share the results of that survey with this subcommittee so you can see directly what shippers are saying. We have actually taken another step and posted that survey on the Global Shippers' Network so that shippers from all around the world can complete the survey and you can have the benefit of that information, too. Just tell us in what form you want it and we will be happy to share those results.
With that, Mr. Chairman, I look forward to your questions this morning and look forward to working with the subcommittee and the staff, as we have over the past couple of years.
Thank you very much.
Mr. GILCHREST. Thank you, Mr. Emmett.
Mr. Pecquex?
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Mr. PECQUEX. Mr. Chairman, thank you very much.
My name is Frank Pecquex. I am executive secretary-treasurer, Maritime Trades Department, AFL-CIO. I am here representing 30 international unions which number among their memberships over 100,000 longshoremen, mariners, and support personnel who are actively involved in the Nation's international waterborne commerce. These organizations participated directly in the 4-year legislative effort that led to the Ocean Shipping Reform Act of 1998.
Initially in that debate there was general reluctance by maritime labor to accept any changes to the previous system, but as the legislation unfolded, a hard-earned compromise was developed. This compromise brought together several groups—labor, vessel operators, shippers and ports—that often hold disparate views on many subjects. The end product of OSRA has been in force just 12 months and all affected parties appear to be functioning well under the OSRA amendments.
In addition to our testimony that was submitted for the record, we would like to raise several points. When you look at OSRA from the context of view of the Federal Maritime Commission's testimony before the House Judiciary Committee, several things come to mind that are important.
First, you have the fact that the FMC noted that there are 128 percent more service contracts in the last 12 months than there were in the same period a year earlier. Secondly, the number of non-vessel operating common carriers has increased while the number of shipping conferences has declined from 32 to 22. And, perhaps in the area which is most important, shipping rates remained stable, as they have for the last 10 years. This stability has occurred despite the carriers' authority to discuss and establish rates.
There is another issue that we would like to bring up which is not necessarily derived from a commercial point of view, but the MTP thinks is important. From our perspective, the 1998 OSRA amendments provide important benefits beyond the continued commercial operation of U.S. flag liner companies and the employment opportunities for maritime industry workers that they generate.
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The U.S. flag industry's ability to serve as a key component of the Nation's strategic sea lift capability remains intact. Although recognized and supported by many members of this panel, it is a fact often overlooked by others outside the industry. It is important to realize that U.S. flag liner companies-especially those participating in the Maritime Security Program- have committed their equipment and are contractually obligated to place their significant intermodal cargo moving capabilities at the disposal of the U.S. Government in times of national emergency. The maintenance of the U.S. flag operations in our international commerce also provides important employment platforms needed to generate sufficient mariners to crew the military's fleet of reserve cargo vessels.
In closing, I would like to say that some may credit OSRA's initial success to blind luck. The MTD's affiliates, however, believe that it was more than a roll of the dice that brought about the positive results we have enjoyed since the OSRA amendments went into force. Instead, we would proffer that thorough congressional analysis and intense deliberations over 4 years led to a compromise that, while not perfect in the minds of some industry interests, should be given additional time to continue proving its merits before any alterations are contemplated.
Mr. Chairman, we thank you for the opportunity to make our remarks today.
Mr. GILCHREST. Thank you very much.
Our next panelist is Dr. Helmick. Welcome.
Dr. HELMICK. Thank you, Mr. Chairman. Good morning. Mr. Taylor, good morning.
I am Jon Helmick, Director of the Logistics and Intermodal Transportation Program at the U.S. Merchant Marine Academy. Thank you for the opportunity to appear before you here today.
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This morning, I would like to survey for you the state of the liner shipping industry and to delineate some of the more important trends affecting this sector of the global transportation network.
Liner service is the backbone of international trade in manufactured goods. International general cargo trade now exceeds 1.2 billion metric tons annually. The portion of this cargo that is containerized approaches 100 percent on routes between developed economies. Worldwide, the penetration of containerization is estimated to be about 55 percent.
As ports and transportation infrastructure improve in the developing world, general cargoes will increasingly move in intermodal containers. Containerized general cargo trade increased by 8.6 percent per year over the period 1993 to 1997, which far exceeds growth rates of other sectors in ocean shipping.
As has been noted previously, a prominent feature of most trade lanes is imbalanced cargo flows, which create major problems for carriers in the form of capacity planning and requirements for empty container repositioning. This aspect of liner operations represents a challenge both from the cost standpoint and from the logistics management perspective.
A brutally competitive environment, low rates, and the need for carriers to reduce costs have led to joint carrier operations, corporate mergers, and acquisitions. Carriers have banded together in operating alliances with the objectives of improving asset utilization and providing shippers with extended route networks and greater service flexibility. Typically, these goals have been pursued through collaborative planning of service offerings and the sharing of vessels, terminals, equipment, and information systems. Today, the top 20 liner operators control 53 percent of existing TEU capacity and are responsible for 55 percent of capacity on order.
This rationalization has not resulted in upward pressure on rates, which are at historically low levels. The profitability of the liner industry also remains low. For those operators that are members of the major liner alliances, reported returns are now between 1 and 4 percent, while niche operators are averaging returns in the vicinity of 8 percent.
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As crucial links in global supply chains involving the transportation of higher-value, more time-sensitive cargoes, liner services are subject to increasing pressures from shippers, who are in turn driven by the ever-rising expectations of their customers. Expanding recognition of the cost reductions that can be achieved through inventory minimization and the creation of compressed, well-integrated supply chains have led to shipper demands for better on-time performance, improved document accuracy, greater in-transit visibility, and enhanced information flows.
Labor and workforce development issues are major concerns for the liner industry. Worldwide, there is a shortage of qualified and well-trained merchant marine officers to man the container ship fleet. There is also a shortfall in the number of talented and appropriately educated individuals entering the managerial ranks of the steamship industry. As I have previously testified before this committee, this problem is not unique to merchant shipping, but extends throughout the transportation industry as a whole.
The Department of Transportation, through Secretary Slater's flagship initiative known as the Garrett A. Morgan Technology and Transportation Futures Program, has made great strides in bringing Government, industry, and academe together for the purpose of increasing awareness of transportation career opportunities and supporting education and training efforts that will develop competent professionals in this field. In the maritime and intermodal arena, the Maritime Administration devotes much attention to education and training through its own institution, the U.S. Merchant Marine Academy, through the support it provides for the State maritime academies and their programs, and through other educational initiatives.
Finally, as was pointed out by Chairman Creel, the industry suffers from near-invisibility where the general public is concerned. Few Americans appreciate the fact that it is liner shipping that provides them with the vast array of products from which they are able to choose and that these goods are sold at prices that are only minimally impacted by the cost of transportation. For high-value imported goods, such as running shoes and VCRs, just 1 to 3 percent of selling price is typically attributable to transportation costs. The efficiency of the ocean transportation system is most impressive when considered in this light.
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This concludes my prepared remarks. Thank you for the opportunity to discuss this important topic with you this morning. I will be pleased to answer any questions you may have.
Thank you.
Mr. GILCHREST. Thank you very much, Mr. Helmick.
I guess the first question would be to the first two panelists, Mr. Clancey and Mr. Rhein. We appreciate your attendance this morning.
Mr. Rhein, I think Mr. Clancey may have alluded to this along with many other people who disagreed with Mr. Clancey's assessment of the percentage of discussion groups versus conference contracts.
Can you elaborate a little bit more on that, Mr. Rhein? Is your arrangement working well? You said that you like the Ocean Shipping Reform Act the way it has progressed in this past year. Do you see the discussion groups as something positive coming out of this? Something that you would want to do more of? Is it something that the FMC should look closely at to determine whether these voluntary arrangements are a good thing?
Mr. RHEIN. Thank you, Mr. Chairman.
The discussion agreements, to me, are extremely positive for both the carriers and the shipping public. Because they do have antitrust immunity, they do require oversight. And to the extent that voluntary targets appear to the shipping public or to the public at large as more mandatory than voluntary, then oversight should take over. Research should take place and remedies are available under the law.
That has not been the case and I do not anticipate that that will be the case. The nature of this business is that when you have in the Pacific alone over 30 carriers, all with their own set of economics and their own goals in terms of profits and returns and reinvestment, it is virtually impossible to restrict in any valid form the activity of those carriers. We all do what is best for each of us independently.
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The discussion agreements only allow us to get together with limited immunity, discuss our business, compare notes, talk about the size of the trade, which direction we think it is going in, is it going to grow, is it going to shrink, how much capacity is coming in, what the price of fuel is going to be, what the port conditions are going to be, how much cargo is going to be moving, where it will be moving from and to, and how best we can tailor our services and work together to provide the very, very competitive and reliable and cheap service we have provided.
As was just mentioned by Dr. Helmick, we are doing this at from 1 to 3 percent of the value of the goods we carry. There is no better bargain in the world. I believe that over time the discussion agreements will prove to be beneficial to both sides of the equation. Thus far, I see nothing at all in what we have done in the Pacific that is in violation of either the old or new Shipping Act under OSRA.
I would caution that I would be very slow to look for something wrong where nothing exists. Watch it very carefully in the future, and if something does appear to be untoward or out of line, there are clear remedies under the Shipping Act.
Mr. GILCHREST. Would you agree with that, Mr. Clancey?
Mr. CLANCEY. Yes, I would, Mr. Chairman. I would only add that I think it is fair to say that the discussion agreement has enhanced competition. The Pacific is a perfect example. This is a forum where the carriers discuss anticipation of trade growth, what the carriers plan individually and collectively in terms of new additions in terms of capacity. Two years ago, it was evident to the carriers that the trade was growing faster than capacity. Discussions about that obviously became public—they were in the newspapers—and in a period of 2 years we have had nine and possibly ten new entrants, which is unheard of. Without the forum to discuss what is going to take place, to provide projections—we spend a lot of time talking about those things—that information would have been very difficult to get.
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Mr. GILCHREST. Can your industry sustain itself with this small margin of profit? Do you see this Act improving your ability to become—whether more efficient, creating a better symbiotic relationship with shippers, carries, and the like—to get a higher profit? It almost sounds like the poultry industry out there.
Mr. CLANCEY. It is a very competitive industry. That is why you are seeing consolidations, mergers, and acquisitions.
The Act, though, does allow carriers to use the antitrust immunity to enter into alliances, to work together to reduce their operating costs, to share equipment, to share vessel assets, to look at technology to better enhance what they are doing. It is an industry that for the last 10 years really hasn't had very attractive returns, and that is clearly evidenced in the capital markets. But it is also an industry that is growing at really startling rates. Many of us remain optimistic that some day we are going to figure it out.
Mr. GILCHREST. Do you see the industry continuing to consolidate through mergers?
Mr. CLANCEY. Yes, I do, as we are seeing in every other industry throughout the world.
Mr. GILCHREST. Mr. Rhein?
Mr. RHEIN. Mr. Chairman, I would also like to add that the discussion agreements have brought together 90 percent of the carriers in the particular trade in the Pacific. And this has fostered a communication and an understanding of the economic realities of our business and the huge capital investments that we have all put into the business and the very, very large percentage of fixed costs we all face, and the historic imbalances and inefficiencies in a round-trip business where one trade may be strong but the other may be weak.
That discussion and understanding has fostered a much better understanding of the other guy's problems and a higher level of sophistication and a realization that we are all really in this together and if we don't succeed in rationalizing and stabilizing our business at least minimally, then we all may not be there for the next round.
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Mr. GILCHREST. I am curious as to your perspective. Being two private carriers in these discussion groups. Does COSCO have an advantage or a disadvantage because they are a controlled carrier in this new situation?
Mr. RHEIN. They have an advantage in that they are funded by the Government of the People's Republic of China. We are funded by investors. Of course, the standards are entirely different. They also have a cost advantage in that their crews are provided from sources that are not available to us. We have American citizen merchant mariners on our ships, with some help from the American Government, but nonetheless we are a more expensive operator. Those are the two most significant differences that we see.
Mr. GILCHREST. So does that give COSCO a huge advantage as a carrier over either one of your lines?
Mr. CLANCEY. They go in with an advantage in that they have unlimited resources and they have a cheaper operation. Our advantage is that we have been doing it longer and in my view we are much more innovative and we are certainly more capable of developing and utilizing the Shipping Act to provide a better service for our customers and with our customers.
It tends to balance out, but eventually they have every opportunity to be as good as we are. So the ability of the Federal Maritime Commission to surveill the controlled carriers is very positive in that their economic comparation is designed around the same standards that ours is and does not deteriorate into a situation that could be disastrous to those of us who are commercial operators by pricing that is below variable costs, or as in the case back in the 1980s when we were competing against the Russians, it was clearly seeking foreign exchange.
There are a lot of different agendas that you run into in this business. The Federal Maritime Commission has been tremendous in keeping a close watch on those.
Mr. GILCHREST. If you were chairman of the Federal Maritime Commission, what would you recommend, if anything, to deal with the present situation between the independent carriers and a controlled carrier?
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Mr. CLANCEY. I would support the status quo and maintain strong surveillance. If the situation does not improve over time, then encourage them to review further activity.
Mr. GILCHREST. How much time would you let go by?
Mr. CLANCEY. I think we have other agendas on the table right now that probably take precedence, but after those are out of the way, I would think that it might be appropriate to take another look.
Mr. GILCHREST. Within a year? Two years? Five years?
Mr. CLANCEY. I would say within the next year or two.
Mr. GILCHREST. Thank you.
I have some other questions, but I am going to yield right now to the gentleman from Mississippi, Mr. Taylor.
Mr. TAYLOR. Mr. Chairman, I only have one, and it is an unrelated question.
Since I have you here, Dr. Helmick, this is your quote: ''Worldwide, there is a shortage of qualified and well-trained merchant marine officers to man the container ship fleet. There is also a shortfall in the number of talented and appropriately educated individuals entering the managerial ranks of the steamship industry.''
I have been told that for lack of work the Merchant Marine Academy is letting its graduates do anything from going to work for trucking firms to some pretty far stretches of what I consider to be the maritime field. Is that the case? What percentage of your graduates are actually going to sea over the past couple of years?
Mr. HELMICK. Sir, part of our mission is to serve the economic and defense interests of the country by contributing to an effective and efficient intermodal transportation system. That intermodal transportation system has at its core merchant shipping, port operations, and specifically maritime functions.
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The current training of U.S. Merchant Marine Academy midshipmen includes the development of a broader perspective that enables them to help provide the kind of value-added logistics services that have been discussed here today.
The fact is that the liner industry is no longer solely about port-to-port operations. As ocean carriers become full-service logistics providers, expanded competencies are demanded of their personnel. This is the underlying reason for our expansion in this direction. Academy graduates have over time, contributed to many of the developments in the liner field related to intermodal transportation.
Mr. TAYLOR. Dr. Helmick, with all due respect, if you were a candidate for office, the reporters asking you that question would say you dodged it.
What percentage of your graduates are going to go to work in the maritime field this year?
Mr. HELMICK. Are you referring to seagoing positions, sir?
Mr. TAYLOR. Yes. It is called the Maritime Academy.
Mr. HELMICK. Maritime afloat employment has accounted for approximately 35 percent of total placement recently. Some percentage of our graduates go into the military, into active-duty service in the military.
Mr. TAYLOR. What percentage will do that?
Mr. HELMICK. In a given year, that might be 20 percent or so. A very small percentage go on to graduate school but continue to fulfill their obligations through service in the U.S. Naval Reserve and maintenance of a Coast Guard license, making them available in the case of military contingency.
Beyond that, we have those who go into terminal operations, which directly supports the liner industry and its operations, other aspects of logistics and, as I said, intermodal transportation connected to the maritime industry.
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But if you would like a specific breakdown of how our graduates have been employed in recent years, I would be happy to provide that for you, sir.
Mr. TAYLOR. I would like that, sir.
To the panel as a whole, it is a very rare occasion when a panel of this size comes to town and tells us that something is working—pleasant, but rare.
What would those who feel it is not working tell me? Or is it universal that this is the one law out there that everybody agrees with?
Mr. EMMETT. Mr. Taylor, I suspect you will hear on the next panel from some who might not think it is working, so I will leave that to them to say.
Within the customers of the ocean shipping industry, it is a very small number, but there are some who would say—for example, I got a phone call not long after the law took effect from a League member. We have over 700 companies involved in the League, and the only one that was so angry. They said they were going to quit. When I asked what the problem was with the law, they said that under the old law, they were allowed to see all their competitor's rates and do the same and didn't have to negotiate. They didn't feel it was fair that somebody else could negotiate a better rate. My response to that was ''Welcome to the marketplace.''
So you may have some of that. I mentioned that this went so much smoother than deregulation of other industries. I remember when the trucking industry was deregulated. A lot of shippers had made their entire livelihood from learning to read complicated tariffs. If you are not willing to transition from the green eye shade tariff reading type person to someone who operates in the free market, then you might not like this law, either. But as an association executive, a lot of what I do is react to phone calls. Just like you, I don't get a lot of phone calls telling me when things are going great. The phone rings when people are unhappy.
That is what got the League involved in trying to reform ocean shipping in the first place. People weren't happy. I can tell you that my phone doesn't ring now, which is a good sign.
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Generally, will there be some who aren't happy with a particular carrier or a particular conference or a particular discussion agreement? Of course. But by and large—and that is why I will be happy to share the results of the survey that we get worldwide so you can see. I can almost guarantee that there will be some percentage who won't be happy and we will even include their comments as to why they are not.
But overall, I think you are looking at 80 percent or more of the shipping public that are very pleased.
Mr. TAYLOR. Let me take it a step further. In any debate, it is always preferable to be the last one to speak because you have heard what the other guy has to say and then you get your licks in and he can't say anything.
What will the opponents of this say, and how—since you won't have an opportunity to respond at least verbally—would you respond?
Mr. EMMETT. Gosh, I appreciate the opportunity.
Mr. TAYLOR. You are going to get a chance to provide written testimony, which may or may not be read by a lot of people.
Mr. EMMETT. I think there is some concern on the part of some intermediaries that somehow they were not treated fairly under the auspices of the Ocean Shipping Reform Act. However, as I have travelled around, I have found just as many intermediaries who said that they didn't have time to worry about whether they were happy or not. They were too concerned about doing business under the new Act. In fact, we have had a number of intermediary speakers come to our meetings and say, ''For us to be doing our business properly, we need to be going to the shipping public telling them how we can help them under the Act.''
So my answer to them would be to figure out the good parts of the Act and go about doing your business. And if you have a serious concern, go to the Federal Maritime Commission, which does have broad authority under this Act to deal with those concerns, and let's deal with those concerns under the provisions of the Act. Anybody who wants to come to this body and say that the Act needs to be changed—that is going to be a long, drawn-out process.
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We had all these groups together for the last 2 years and it still took a lot of tweaking and moving. As you well know, Congress doesn't necessarily act real swiftly in these matters. In fact, I didn't need glasses when I started this process and I do now.
So I would advise them to make their concerns known to people like me, to people like the carriers, and go to the Federal Maritime Commission and raise those concerns and see if they can be dealt with there first. Otherwise, it is time to get on with business.
Mr. RHEIN. One issue I believe you will hear about later today is the issue of the trucking on the west coast of the United States and the east coast in that the wages are low and the productivity is not high. I think you will find the shipping industry is sympathetic with that, but that is not anything that has any relationship with OSRA. It has nothing to do with antitrust. It is a situation of labor versus independent operators that we have nothing to do with.
So it is not an issue that I think has application to OSRA and whether it is working or not. We all feel very strongly that it is. It is perhaps a legitimate issue, but perhaps for another forum.
Mr. TAYLOR. Mr. Chairman, may I ask a totally unrelated question since we have a panel of experts here?
Mr. GILCHREST. I guess so. Since I am going to ask a totally unrelated question, I will let you ask a totally unrelated question.
[Laughter.]
Mr. TAYLOR. I have followed the transfer of the Panama Canal closer than most. In your collective opinions—worst case scenario, Panamanians fall on their face—what happens to maritime trade for the United States? Worst case scenario—I am not saying it is going to happen, but there are those who think it will happen, and I would like to hear your opinions on what happens.
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Mr. CLANCEY. Well, no one anticipates that happening. America is blessed with ports on both coasts, as well as a vibrant maritime industry in the Gulf. So I think we have the flexibility to deal with that. There have been situations in the past—for example, when the Suez was not a viable alternative.
I think the fact that we are bi-coastal, that we have an enormous railroad infrastructure that we could deal with—it would be difficult and it couldn't go on very long, but when we look at our strategy and alternatives, we have never come to the point where we thought that would be the end game. So hopefully we will see great performance and we are optimistic that it will work out well.
Mr. TAYLOR. But if I may paraphrase your statements—and you correct me—the fact that we have east and west coast ports and the highways and the rails to connect them, it really isn't a show-stopper. It might increase the cost of bulk cargoes coming out of the midwest down the Mississippi getting to a west coast port rather than New Orleans or Mobile, for example. But things continue.
Mr. CLANCEY. The container operator, which we represent, has flexibility that carriers who move oil or natural gas do not. So it would be unfair of me to respond for them.
Mr. TAYLOR. But for containers, it is not a show-stopper?
Mr. CLANCEY. It wouldn't be the end. We could operate. It would be very expensive and difficult, but it could be done.
Mr. RHEIN. I would like to add that of all the large container ships for the major east-west arteries built in the last 10 years, over 90 percent are too big to go through the Panama Canal. That is kind of an answer in itself.
Mr. GILCHREST. Could you say that again? I missed that last statement.
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Mr. RHEIN. Over the last 10 years, roughly 90 percent of all the large container ships that serve the major east-west trades in the world are too big to go through the Panama Canal. The Panama Canal is 109 feet wide; the ships are 139 to 140 feet wide.
Mr. TAYLOR. What does that translate to as a percentage of containers shipped? Is that also 90 percent of what is shipped?
Mr. RHEIN. That is a heard transition to make.
Mr. TAYLOR. But it's a fair question?
Mr. RHEIN. Yes, it is a fair question. The east-west trades probably make up two-thirds of the world's volume. Ships built in the last 10 years probably make up half of the ships that are operating today. So you would have to do the math.
It is inevitable that ships will continue to be bigger than the Panama Canal. So eventually we will have no container ships of any size—
Mr. TAYLOR. I have a maritime district—and I am not just asking this, these are questions that are asked of me.
Would it be an accurate response to say that approximately half of the containers coming from the far east anyway are coming on a ship that is too big to come through the Panama Canal right now?
Mr. RHEIN. At least half.
Mr. TAYLOR. Thank you, sir.
Thank you, Mr. Chairman. You have been very generous.
Mr. HELMICK. I would add one number that might be of interest to you, Mr. Taylor. The trend is very clearly toward larger and larger container ships, particularly in the east-west trades, as Mr. Rhein said. In 1999 alone, over 50 orders were placed for ships of over 4,500 TEU capacity; in other words, what we call the Super-Post-Panamax vessel. By the end of the year 2001 it is expected that about 10 percent of the fleet by capacity will be made up of such ships.
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Mr. GILCHREST. Thank you, Mr. Taylor.
I wasn't going to ask a question about that, but since we are talking about Panamax ships and post-Panamax ships and all those other things, to me it begs the question of port infrastructure, especially on the east coast, not so much on the west coast, and on the gulf coast as well with channel depths, berthing depths.
I read recently an article about fast ships, four of which are going to be built in Philadelphia or some place on the east coast, which are container carriers that go a lot faster than the existing carriers, but their draft is a lot less from maybe needing a 50-foot draft to a 25-foot draft.
Is it inevitable that ships will get larger in the future, that the draft will be deeper, and that ports that have shallow drafts like New York and Baltimore, Wilmington, Philadelphia and other places—will they continue to aggressively pursue their advantage with political influence to get the dollars to dredge those ports, find places to dump the stuff—or is there a possibility that these faster, shallower draft vessels could take up a good percentage of the cargo?
There are many of us here that have really unanswerable problems with dredging. We would like business to continue to come to our ports. From the carrier's perspective, will there be a selection of one or two per coast to bring all the stuff in?
Is this a provision in the Ocean Shipping Reform Act? There must be something in there about it.
Ms. GODWIN. It is certainly an issue for the industry, maybe not in this law, Mr. Chairman.
I am not a naval architect and I don't have a crystal ball, but certainly the trends we see now are all toward the larger and larger ships to get the kind of economies of scale. And it is not just creating demands on the channel depths and dredging, it is also creating demands in terms of the kind of development we need to make in our terminals. We need larger cranes, we need more land.
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So it has a huge impact and something that my members have spent a lot of time and effort and money to try to plan for. I don't believe the fast ships that have been discussed—the ones that are being considered in Philadelphia—are going to resolve this problem. Whether something changes in 20 years, I can't tell you. But those ships are designed to be smaller vessels moving very high value cargo at high speeds. Essentially, they are going to be taking cargo away from air freight more than anything else. They are not going to be carrying the kinds of volumes we will be seeing come into this country where we are looking at volumes doubling or tripling. We would never have enough and the economics are not there. But I will leave it to the carriers.
My members certainly are feeling the pressure to meet the infrastructure demands that the larger ships are going to require.
Mr. CLANCEY. Certainly we are acutely aware of the pressure that our push to the biggest ship is bringing. But large airplanes want more runways, and we want more highways, et cetera, et cetera, and the world goes on. But trade is growing so rapidly. It is possible that it could double in the next 7 or 8 years in transpacific alone. We have the alternative of continuing to build big ships or building a fleet of many, many, many ships requiring four or five port calls versus one.
So I think the trend toward larger ships—particularly with the economic pressures on us—will continue.
Mr. GILCHREST. Is there a limit on the size of the ship, the depth of the channel, that anybody has discussed? Reasonable limits?
Mr. CLANCEY. I think there are, but of course there is initiative and ingenuity out there that is saying there are no limits. I think you will come to a point in time where there is. The airlines are sort of boxed between 650 and 450 passengers just because of access to gates, et cetera.
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Mr. GILCHREST. I guess I am not talking about the size of the engineering structure as far as the limits are concerned, whether you can or cannot drill through bedrock or continue to spend $30 million to $100 million for dredging—for example, the Port of Baltimore—just for maintenance dredging. Or the actual size of the ship. But the virtual running out of capacity for dredged disposal sites—that will begin to hit a number of places in the not too distant future unless you go to the very big expense of hauling it out to the ocean or other things.
These discussion groups have created a symbiotic relationship between shippers and carriers. Is there any chance that this type of situation where you get people together and they reveal this almost miraculous phenomenon of human interaction that creates solutions where you could—I guess, unless there is some incentive to do it, it probably won't be done, and the incentive will probably come from the public or the Government to say that we're going to have a dredging policy for the United States, so we won't go any deeper than this particular depth—at that point, I would assume that the carriers would say that there is some attention being paid to this issue, so we have to pay attention to this issue.
Do you foresee something like that occurring?
Mr. CLANCEY. I think the carriers would be more than willing to sit down with the port association, or with whomever, to discuss this issue. But you can't lose track of the fact that if you go into a department store today in the United States, very little is made in the United States. It all comes from someplace else. It has to get there and it is not going to come on an airplane.
We would be willing to discuss something that made sense.
Mr. RHEIN. I think the only good news, Congressman, is that the demands of our business require that goods move as fast as we can move them. There is a limit to how big a ship can be and still move goods rapidly. And there is also a limit to how quickly you can make a round trip with a ship that is continually getting bigger.
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So you reach a point where the economics cross and you are better off having fewer, but smaller ships. So it is not clear that bigger is better all the time.
Mr. GILCHREST. This is a very complex and difficult issue because you have carriers wanting to go where the intermodal systems are conducive for their cargo and which ports do you get into and which are the most efficient.
I understand New York now probably won't have a 45 or 50 foot depth until 2015. Then you have squabbles between New York and New Jersey. Then you have the Port of Baltimore screaming that they are the best, Charleston, Los Angeles—you name it. Everybody is worried that you're all going to go to Halifax. I guess that won't happen in the near future—at least I hope.
I am going to ask one more question, then we are going to have a series of votes.
Ms. Godwin, do you see the Ocean Shipping Reform Act moving in a direction of actually consolidating the number of ports that there are around the country?
Ms. GODWIN. No, I think the kinds of pressures we have been talking about over the last few minutes are more likely to affect port consolidation much more so than OSRA. OSRA left largely intact the relationship between ports and carriers under the Shipping Act of 1984. The real significant changes have to do with the relationship between the shippers and the carriers.
Our concern was largely the financial stability of the industry and how that might shake out. I don't think the issues that are coming up under OSRA are really going to affect port consolidation issues. I think the dredging and larger ship issues are much more directly going to influence those kinds of problems.
Mr. GILCHREST. In your position, would you want the U.S. Government to look deeply into the details of dredging and come up with some policy? Or would you rather that just be left as it is?
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Ms. GODWIN. Well, there are no easy answers. You can try to pick winners and losers. Certainly, our members would never agree on picking winners and losers. So speaking for AAPA, we would never suggest that the Federal Government should identify two ports on the east coast and not dredge anywhere else, for example. But you never know how the trade trends are going to evolve. Is the Panama Canal going to be a viable option? Or is more cargo going to come through the Suez Canal? We can pick winners and losers based on what we know today—or try to—but the entire industry can shift in a very short amount of time. We may be talking big ships today and in 20 years we may be talking numerous numbers of smaller ships and need a larger number of ports.
We have an effective nationwide, comprehensive system in place. Not all of our members handle containers, don't forget. We have been focusing on just the container industry and we have talked about dredging in that regard today, but the vast majority of our members handle more bulk cargo than they handle containers.
So it is a much bigger issue and bigger problem and a difficult one to look at. And there are some ongoing efforts like the Marine Transportation System effort within the Department of Transportation. They are trying to at least solve some of these issues—if not around the edges, at least as far as we can get.
Mr. GILCHREST. Thank you very much.
I have a number of other questions. I will submit them for the record and send them off to all of you.
We do have a series of votes going on right now.
First, let me thank all of you for your testimony. It has been very informative. For all of you to assemble here today has been very helpful to us. We look forward to working with all of you in the future.
But I think we will go to the vote—how about if we take a lunch break. So the next panel can eat lunch and come back here in 45 minutes, if that is okay with everyone.
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We will recess and come back in about 45 minutes.
Thank you.
[Whereupon, at 12:02 p.m., the committee was adjourned to reconvene at 1:15 p.m. the same day.]
AFTERNOON SESSION-1:15 p.m.
Mr. GILCHREST. The subcommittee will come to order.
I hope everyone had time to get something to eat, exercise, call home, and all of that.
We look forward to the third panel to discuss the issue. We have today Robert A. Voltmann, Executive Director and Chairman of the Board, Transportation Intermediaries Association; Louis Policastro, Jr., President, Export, New York/New Jersey Foreign Freight Forwarders and Brokers Association, Incorporated; Richard J. Gutierrez, Executive Vice President, Footner and Company, Incorporated; Edward D. Greenberg, Counsel, National Customs Brokers and Forwarders Association of America; and Ron Carver, National Port Coordinator, Port Division, International Brotherhood of Teamsters AFL-CIO.
Gentlemen, thank you for making the trip to Washington, D.C.
We will start with Mr. Voltmann.
TESTIMONY OF ROBERT A. VOLTMANN, EXECUTIVE DIRECTOR AND CEO, TRANSPORTATION INTERMEDIARIES ASSOCIATION, AND THE AMERICAN INTERNATIONAL FREIGHT ASSOCIATION; LOUIS POLICASTRO, JR., VICE PRESIDENT/EXPORT, NEW YORK/NEW JERSEY FOREIGN FREIGHT FORWARDERS AND BROKERS ASSOCIATION, INC.; RICHARD J. GUTIERREZ, VICE PRESIDENT, FOOTNER AND COMPANY, INC.; EDWARD D. GREENBERG, COUNSEL, NATIONAL CUSTOMS BROKERS AND FORWARDERS ASSOCIATION OF AMERICA; AND RON CARVER, NATIONAL PORT COORDINATOR, PORT DIVISION, INTERNATIONAL BROTHERHOOD OF TEAMSTERS AFL-CIO
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Mr. VOLTMANN. Thank you, Mr. Chairman.
TIA has been a long supporter of this legislation as it worked its way through the Congress. We continue to support it even as the final versions of OSRA became apparent were not going to be as even in their treatment of intermediaries. But we believe in deregulation. Our members are fiercely independent and competitive businesses. We pinned our hopes on getting some piece of deregulation through the Congress in the hopes that the regulatory agency would expand that deregulation.
Unfortunately, the opposite has happened. And I will spend my time talking about tariffs.
The FMC ignored congressional mandates to do analyses in the development of its rules implementing OSRA. Since November 1999, 6 months after the effective date of OSRA, the agency has levied $1.4 million in fines against intermediaries for tariff violations while they have levied only $640,000 against carriers. None of those fines were against U.S. flag carriers, but all of those fines arise under violations of the 1984 act, not OSRA.
Instead of minimizing tariffs, as envisioned by OSRA and the Congress, the FMC has recently announced plans that they are going to further strengthen their enforcement and regulation of tariffs. Shippers, intermediaries, and carriers don't need and don't use strict Government-enforced tariffs. Mr. Chairman, 100 percent of our domestic rail and truck freight is moved under rates not governed by the Government. They are not filed in tariffs reviewed by the Government and they are under contracts not reviewed by the Government. You call, you get a rate.
Also, 100 percent of our air travel—both for freight and passengers—is conducted without Government reviewed or enforced tariffs. You call, you get a rate.
And 100 percent of ocean transportation everywhere in the world, except to and from the United States, is conducted without Government reviewed or enforced tariffs. You call, you get a rate.
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Now in these other modes—rail, motor, and air—the Congress began the de-regulatory process. The Motor Carrier Act, the various rail acts, and the Civil Aeronautics Act. And then the regulatory agencies expanded on that deregulation and eliminated tariffs or tariff enforcement. And Congress has eventually caught up and made those exemptions or eliminations of tariffs statutory.
We need the FMC to minimize tariffs, not strengthen them. Since OSRA has become effective, Mr. Chairman, only about 15 percent of ocean freight is now moving under tariff rates. Deregulation drives prices to the market level. Intermediaries need to be able to quickly meet their shipper needs and lower those rates. They are not able to under a strictly enforced tariff regime. All we have done is change them from being filed at an agency to being filed on the Internet or with tariff bureaus.
The carriers can live with tariffs because they can discount the rate. They can negotiate a rate and discount it and put it in a confidential contract. We wish our members had that authority, but they don't. They have to live with the tariff rate.
There could be simple things. With the advent of dot-coms and all these companies out here doing shipping on the Internet, tariffs could be instantly filed. But what we don't need are strictly enforced tariffs. Shippers ask for rate sheets during OSRA. They asked if they could a rate if it was requested.
Mr. Chairman, millions of Americans every week get the equivalent of tariffs in their Sunday newspaper for comparative pricing. These are produced, millions and millions of dollars are spent. The Government doesn't review these and they don't enforce these. And we can still find out what rates are and what the rules about those rates are when requested. We don't need a Government agency to do that.
We are very encouraged by Mr. Shuster's comments earlier in the day encouraging the FMC to turn away from its enforcement efforts against small business. We encourage the committee to work with the agency to minimize tariffs, their impact, and the agency's enforcement to enforce OSRA and not the 1984 Act, and to be more even-handed in their enforcement efforts.
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We believe that OSRA was a great step forward. We believe that it was a true step toward deregulation. But what we are finding is an agency that is standing in the way of even further reform and further de-regulatory efforts.
Thank you, Mr. Chairman.
Mr. GILCHREST. Thank you, Mr. Voltmann.
Mr. Policastro?
Mr. POLICASTRO. Mr. Chairman and members of the subcommittee, thank you for the opportunity to participate in these oversight hearings.
I appear before you as vice president, export for the New York/New Jersey Foreign Freight Forwarders and Brokers Association, the oldest forwarder/broker port association in the United States. Our comments also represent the views of the Pacific Coast Council of Customs Brokers and Forwarders.
Before reviewing the concerns of the OTI community on OSRA, I just want to clarify OTIs generally welcome ocean shipping deregulation. Just as we have in other modes of transport, intermediaries, by their very nature, are well positioned to compete aggressively in an open and unregulated market. OSRA does represent a step forward in the ongoing process of less Government regulation of the ocean shipping industry as well as pro-competitive changes.
However, OSRA is in need of some legislative fine tuning of the Act to correct the floors that currently exist. The main objective of OSRA is to provide increased reliance on the marketplace and less intervention of Federal regulators in the ocean shipping world. One year after OSRA, the new Act appears to have created a system of contract carriage for large shippers and steamship lines, while retaining common carrier obligations for NVOs.
The NVOCC under OSRA must legally make every shipment pursuant to a publicly available electronic tariff since we, unlike the carriers are prohibited from signing service contracts with our shipper clients. We would note that the United States is the only country that legally restricts the rights of transportation intermediaries to sit down and negotiate a business contract with exporters and importers.
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The shipping industry is now focused on total transportation service from the origin to the final destination. We find steamship companies expanding their services into areas that have traditionally been reserved for forwarders, NVOCCs and brokers. Vessel operators are now providing a bundling of services that includes warehousing, freight forwarding, customs brokerage, consolidation, and ocean transportation all in a confidential package.
This is something that OTIs are legally prohibited from offering the shipping public. The association strongly encourages Congress to correct this flaw in OSRA by permitting NVOCCs to sign confidential contracts with shipper clients.
An area of concern to OTIs is freight forwarder compensation. OSRA did not modify the 1984 Act's statutory requirement that conferences pay at least 1.25 percent of the aggregate transportation costs for an export shipment pursuant to a conference tariff. The trouble now is that conferences no longer exist and shipments are rarely made under a tariff. As a result, federally licensed forwarders are no longer being paid a reasonable amount for their forwarding services they provide. This is a serious problem to forwarders and must be addressed by Congress.
While OSRA requires carriers to publish tariffs, in the first 8 months of OSRA, the FMC had reported that over 85,000 service contracts and amendments were filed by carriers. In fact, the FMC commented that this might even be a greater number. Carriers indicate that they are moving almost every single shipment under a service contract. All of this results in a system of common carriage for NVOCCs only. NVOCCs must publish and adhere to tariff rates. This is an unnecessary burden that serves no commercial purpose in today's OSRA environment.
As I mentioned, most OTIs are small companies. Tariff publication, although simplified by OSRA, still represents a regulatory requirement that must be met by allocating financial resources. This regulatory requirement under OSRA has no commercial application. We ask Congress to eliminate or substantially modify tariff publication requirements under OSRA.
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Mr. Chairman and members of the subcommittee, I would be remiss if I did not briefly discuss the issue of ocean carrier antitrust immunity. OTIs are affected by ocean carrier antitrust immunity just as every shipper, including NVOs, are at the mercy of the inherently anti-competitive practices of carrier discussion agreements. OSRA may have weakened traditional rate-setting cartels and provides for confidential contracting between shipper and carrier, but it did not remove or modify carrier antitrust immunity.
Our industry has changed dramatically since 1916. Today, industry analysts tell us that the future is in megacarriers such as Maersk SeaLand and others. It is these very same super steamship lines that are also providing point to point logistics and are directly competing with OTIs. These lines are all foreign-owned, yet they enjoy an extraordinary privilege: immunity from our antitrust laws. At the same time, these companies enjoy all the benefits under OSRA that OTIs are unable to claim. This makes no sense to the tens of thousands of American-owned companies that are OTIs.
When Congress passed OSRA, Mr. Chairman, you pledged to correct some of the flaws in the new law because OTIs add such a great deal to the free and open marketplace. I call upon you and the members of the subcommittee to correct these flaws.
Thank you very much for this opportunity.
Mr. GILCHREST. Thank you, Mr. Policastro.
Mr. Gutierrez?
Mr. GUTIERREZ. Thank you.
Mr. Chairman and members of the subcommittee, thank you for the opportunity to speak here.
Today I provide testimony on behalf of my firm, Footner and Company. We are family-owned and operated international forwarding agents, U.S. Customs brokers, and air cargo agents. We are licensed by the Federal Maritime Commission as an OTI under OSRA and conduct both traditional ocean freight forwarding and NVOCC activities. We have been serving the needs of shippers in global commerce since 1950. We proudly hold FMC license number 10, which is one of the first licenses issued by the FMC in 1961 with the Amended Shipping Act.
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There are over 100 forwarders and NVOs that operate in and around the Port of Baltimore. These companies are largely small to medium-sized and employ as few as five to as many as fifty people. In general, forwarders are small firms serving the needs of small businesses, some located in the State of Maryland and your district, that are involved in international trade.
I see three major areas that need to be addressed by Congress under OSRA. One, providing the same rights to NVOCCs as steamship lines to sign contracts with our customers. Two, eliminating tariff publication for carriers. And three, repealing ocean carrier antitrust immunity.
A year after OSRA, I can say as an OTI, the new Act appears to have created a system of contract carriage—a goal of the legislation—for shippers and carriers but retains leftover common carrier responsibilities for NVOCCs. In the end what we have is a system where the NVOCC is left holding the common carrier bag.
I am concerned about tariff publication requirements because we, as OTIs, are the only targets for enforcement activities by the FMC, as Mr. Voltmann mentioned. Reportedly, 90 percent of carrier shipments are under contract and we must make our shipments pursuant to a tariff, which is subject to periodic review by the FMC. If an NVOCC does not adhere to its tariff, we stand in violation of the shipping laws and are subject to FMC penalties.
This is a reality under OSRA which makes no commercial sense. The FMC is readying new regulations that would sharpen the requirement for tariff publication, which will translate into increased regulatory burdens for our company. I find this inconsistent with the purpose of OSRA. Tariff publication requirements must be eliminated to enable OTIs and small shippers to truly benefit from the competitive changes made by the Act.
OSRA's restrictions on NVOs from signing contracts as carriers with shippers actually places us at a disadvantage, not only to the steamship lines, but also to our foreign OTI competitors since the United States is the only country that legally restricts the rights of transportation intermediaries to negotiate a commercial contract with our customers.
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Some have argued that NVOs do not really mind this prohibition, but I am here to say that that is not the case. We would like to include in the record a copy of a recent article in the American Journal of Transportation that discusses NOL's decision to focus on logistics in addition to its core steamship operation. All major lines have made this jump into logistics such as NOL, APL, and many others that have been in operation for many years.
If the foreign-owned steamship lines have the right to sign contracts as carriers, why not U.S. companies like ourselves? We encourage Congress to look at this flaw and permit NVOCCs to sign contracts with our customers.
Regarding ocean carrier antitrust immunity, every shipper—directly or indirectly—is adversely impacted by antitrust immunity under OSRA, but especially my fellow OTIs, since we have been targeted by carrier discussion agreements. OSRA may have weakened traditional rate-setting cartels, but it did not touch antitrust immunity.
We agree with those that testified in support of H.R. 3138, Mr. Hyde's legislation, but wanted you to know that as a smaller OTI, speaking only for myself, I believe Congress must revisit carrier antitrust immunity under OSRA. If carriers are relying on marketplace demands, negotiating in confidence with shippers, discussion agreements don't set rates and cartels no longer rule the seas, then I must ask why retain a 1916 law that now exclusively benefits foreign over American interests?
Two years ago we met and discussed concerns with OSRA. We appreciate the opportunity you have given us here and we would like you to continue to look into the interests of the small forwarder OTI and to make any changes necessary.
Thank you.
Mr. GILCHREST. Thank you, Mr. Gutierrez.
Mr. Greenberg?
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Mr. GREENBERG. Thank you, Mr. Chairman.
My name is Edward Greenberg, and as transportation counsel for the National Customs Brokers and Forwarders Association of America, I am pleased to have the opportunity to present the views of that association concerning the Ocean Shipping Reform Act of 1998. My views are going to sound somewhat similar to some of the views you have already heard here, but a slightly different pitch in terms of where we think you ought to go.
The NCBFAA is the national spokesman for the nation's ocean freight forwarders and non-vessel operating common carriers, which are collectively referred to as OTIs under OSRA. As the Nation's international commerce has grown, so too have the number of exporters and importers. Increasingly, small and medium-sized companies have become significantly involved in exports.
In fact, they now ship the overwhelming majority of ocean export cargo. These smaller companies cannot maintain sophisticated in-house traffic departments, relying instead on the service of ocean forwarders and, when consolidation of cargo into full container loads is essential, on NVOCCs to handle the myriad of commercial and logistical requirements necessary to thrive in international markets.
A central purpose of OSRA was to promote the growth of U.S. exports through competitive and efficient ocean transportation and by placing a greater reliance on the marketplace. And judging from the 128 percent increase in the number of confidential service contracts filed with the FMC since OSRA, it appears that this process is largely underway.
Even in the relative infancy of OSRA, the steamship lines have managed to significantly transform their operations and the system of common carriage that has existed for over 80 years to one of contract carriage. This sort of fulfills a prediction that was made during the meetings we had a couple of years ago. That prediction was made by representatives of the steamship lines as they have limited largely common carriage.
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But notwithstanding the evolution of the industry away from the system of common carriage, Section 8 of the Shipping Act still requires the establishment of tariffs with respect to all but exempted and service contract cargo. And although tariffs no longer need be filed with the FMC, the carriers—both steamship lines and NVOCCs—are required to maintain and make available such tariffs in an automated tariff system. Thus, while the FMC itself is spared the expense and burden of maintaining a comprehensive database of all carrier tariffs, the various steamship lines and NVOCCs now must establish and maintain virtually the same system that OSRA eliminated for the agency.
The NCBFAA believes it is time now to change this and exempt all other liner cargo from any mandatory tariff requirements. Why is this necessary? The most significant reason it is necessary is that OSRA itself changed the landscape and made essential the elimination of Government-enforced rate transparency and parody. The goal of OSRA is to promote more competitive and efficient transportation and place a greater reliance on the marketplace.
Yet the current rigid system of tariff establishment is fundamentally inconsistent with the vibrant marketplace that now exists in ocean shipping. Many ships and containers are forced to move partially loaded or even empty because the system does not permit the type of marketplace that exists, for example, over the Internet for virtually every other type of service. Airlines make seats that would otherwise remain empty available at the last moment at incentive prices designed to attract business that cannot otherwise move. Trucking companies routinely auction their services in order to keep their trucks loaded and moving. Yet in the ocean transportation industry, non-service contract cargo still operates by an archaic system that frustrates economically efficient traffic management.
For example, shippers that have entered into tariff-based time-volume rates are forced to ship at higher rate levels in a declining market, even when the NVOCC or steamship line would agree to a rate reduction, because there is no practicable method of adjusting the tariff to meet the changing dictates of the marketplace.
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Small volume shippers, who don't have the amount of cargo necessary to benefit from large service contracts, are compelled to take whatever tariff rate happens to be available since it is simply too cumbersome a process to amend tariffs just to permit one shipper to move his cargo. That is simply, the goals of a competitive ocean transportation marketplace and strict tariff adherence have become contradictions.
But are there policy reasons that justify maintaining the current tariff system, notwithstanding the significant problems?
While the answer may have been different in the years leading up to OSRA, the association no longer believes that this is the case. The overwhelming experience of our intermediary members is that their customers rarely, if ever, consult NVOCC tariffs, which we believe have become commercially meaningless.
The association intends to submit a petition to the FMC in the near future requesting that it use the expanded exemption authority granted by Congress in OSRA to ease what appears to be a counterproductive, unnecessarily costly, and inefficient system. Such an exemption would undoubtedly increase—not decrease—competition. And as tariffs are rarely relied upon by the shipping public, the exemption would appear to further the policy objectives of OSRA.
The association is hopeful that there will be a significant change on this important issue before this committee's next oversight hearing.
Following up a question that was asked this morning, we believe the agency does have the authority to do it now, notwithstanding the legislative history that took place in the passage of OSRA, and we are going to urge the Commission to do exactly that.
We thank you very much for this opportunity to present our views.
Mr. GILCHREST. Thank you, Mr. Greenberg.
Mr. Carver?
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Mr. CARVER. Thank you, Mr. Chairman.
I am here today on behalf of George W. Cashman, the director of the Teamsters Port Division, James P. Hoffa. My testimony will show OSRA and ocean carriers are failing current Teamster members and over 40,000 port drivers who will soon be Teamster members.
Collective again exercised by ocean carriers, and permitted by OSRA, is keeping port drivers at poverty levels. Ocean carriers, most of which are foreign-owned, multi-billion dollar conglomerates, should not be able to determine among themselves how much American port drivers are paid.
Prior to OSRA, two or more ocean carriers were prohibited from negotiating with truck, rail, or air operators. OSRA eliminated this prohibition in Section 10(c)(4) of the Act, which now allows ocean carriers to align themselves in conferences and to enter into discussion agreements to set the rates with trucking companies. Mysteriously, this section of OSRA was added at the last minute before the final passage of the Act. There was no debate, no committee report, or any other consideration of this language. Yet this section authorizes the ocean carriers to abuse port drivers on a daily basis.
The equipment interchange discussion agreements permitted under OSRA have a particularly negative impact on port drivers. As an example, I have provided the committee with a copy of a May 20, 1999 agreement. This agreement is a vehicle by which ocean carriers obtain so-called industry efficiencies not from any great technological innovation, but out of the hides of port drivers.
All of the major ocean carriers involved in United States foreign commerce are signatories to this agreement. The ocean carriers keep denying it, but Section 5.8 of the agreement allows these ocean carriers to collectively agree upon every term, every condition, and every rate to be charged for moving containers in every port in the United States. It allows them to set what they will pay port truckers.
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The witness from APL stated to you that the equipment interchange agreement has been in place for 10 years, and that is true. But it was amended less than 3 weeks after OSRA became effective May 1st of last year. On the 20th of May it was amended and this section, 5.8, was added. The old agreement only went up to a 5.4.
For the trucking companies that employ the drivers, this is a unilateral declaration of what rates will apply to all containers under any type of agreement. These rate-setting practices guaranteed the continued abuse of port drivers.
Under this agreement, ocean carriers have imposed share chassis pools. This practice, coupled with unpaid waiting times, is dramatically cutting down the number of trips a driver can make per day and reducing the driver's already meager income. In this era of chassis pools and ocean carrier alliances, who is monitoring whether OSRA is unfairly impacting the little guy, the port driver? No one. The monopoly power granted to ocean carriers is unchecked and unfettered. This system that allows ocean carriers to abuse port drivers should not have the United States Government's seal of approval.
Under OSRA, everyone except port drivers has been granted antitrust immunity. The huge shipping lines, the ports, and maritime terminal operators all have immunity. Shippers and NVOs can band together in shippers associations to improve their bargaining positions. But not port drivers. Indeed, last year when port drivers attempted to band together to make the public aware of the horrific conditions they face, the Federal Trade Commission, at the urging of the shipping lines, initiated an investigation of their activities.
The only group in the port that does not enjoy a level playing field is the port drivers. The result is devastating. On average, port drivers earn an effective wage of $7 or $8 an hour. They receive no health insurance, no pensions, no job security. Hardworking Americans are entitled to basic fundamental protections.
As it is now written, OSRA offers no protection to the port driver. We respectfully request that this committee repeal the ocean carriers' antitrust immunity in total, or at a minimum their ability to collectively set rates for the inland transportation portion of intermodal container hauling.
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Let me conclude by thanking you, Mr. Chairman, for the opportunity to address these important issues. We truly hope that you will join with the Teamsters Union to level the playing field for port truck drivers and protect them from the unchecked power of the ocean carriers.
Thank you.
Mr. GILCHREST. Thank you, Mr. Carver.
Mr. Carver, do you feel that it is within the regulatory realm of FMC to change this relationship that you just described with the port drivers? Or is it your understanding that it will require an amendment to the Ocean Shipping Reform Act? Or some specific piece of legislation?
Mr. CARVER. We have two recommendations. We do think the FMC has the power to investigate this further and the authority to, and we would recommend that they conduct field hearings as part of their assessment of OSRA and actually go out—because this is the one other area of dispute here—and actually talk with the port drivers and the trucking companies and collect the evidence to substantiate the charges we have made.
We are told by the trucking companies that the rates are imposed on them and they have no choice. They are imposed by the carriers as part of the whole rate and it is a take-it-or-leave-it situation.
Mr. GILCHREST. Do most of the port drivers—work for a company or are they independent? Do they negotiate with the carriers independently?
Mr. CARVER. They are classified as independent, but they are hooked to the carriers by lease agreements, usually exclusive lease agreements. And they have no choice.
Mr. GILCHREST. When you say ''exclusive lease agreements,'' that is one driver, one lease agreement?
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Mr. CARVER. That is one driver to one carrier. In other words, that carrier has the exclusive use of that driver's time and his truck.
Mr. GILCHREST. For a year or for whatever term the lease was signed for?
Mr. CARVER. That's right.
Mr. GILCHREST. Are there any port drivers that belong to companies where the lease agreement was made with the company as opposed to the driver?
Mr. CARVER. There are those agreements also. Some drivers work for the ocean carriers or their direct subsidiaries, although the majority work for common carriers, trucking companies who get their work either through the steamship line or through a broker.
And what the trucking companies tell us is that they would prefer to pay higher rates, but they are given take-it-or-leave-it opportunities to do this work from the steamship lines or the brokers.
Mr. GILCHREST. So you are saying that the port drivers, based on this legislation or past statute, cannot organize?
Mr. CARVER. That is a different issue. But what we do know here is that they are squeezed, that the trucking companies are given take-it-or-leave-it rates that are set, we believe, through the discussion groups. And furthermore, we believe that these offer very little ability to pay a living wage, or no ability to pay a living wage, than to the truck driver who they hire.
Mr. GILCHREST. So this Ocean Shipping Reform Act, from your perspective, has exacerbated a situation that has existed for quite some time?
Mr. CARVER. There is no question that the downward slide of rates began 20 years ago with truck deregulation. But it was exacerbated a year ago with the introduction of Sections 5.8 and 5.9 of the Equipment Interchange Discussion Agreement, sections that did not exist prior to May of last year, in which these same steamship lines that were here today rushed to get into place within 3 weeks of the effective implementation of OSRA.
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They say they don't use them; they say they don't need them or want them; but they rushed to get them in. Maybe they should voluntarily withdraw them. But it is symptomatic, I believe—and the Teamsters believe—that the interests of the port drivers have not been considered in the creation of this law, in the implementation by the FMC, and we are urging that this be done now.
It is true that these over 40,000 port drivers have not had an organized voice. Therefore, there was not perhaps a place at the table for them under the consideration of OSRA. But now that they do have an organized voice, we are asking that their interests be taken into account.
Mr. GILCHREST. So you are saying that these 40,000 port drivers represent U.S. ports. That is from east coast, gulf, and west coast?
Mr. CARVER. And the Great Lakes as well.
Mr. GILCHREST. Well, it is an issue that we will be more cognizant of now, certainly take a look at, and continue to communicate with you about it.
Mr. CARVER. We appreciate that. And we are prepared to take that canoe trip with you whenever it is convenient.
Mr. GUTIERREZ. I would like to add something operationally to what Mr. Carver was speaking about because we deal with this on a daily basis, and we have sympathy with these drivers.
What happens is that a truck driver goes on lease with a trucking company who has to sign an interchange agreement with the steamship line or they are not allowed to pick up the equipment. That right can also be revoked. The steamship lines route a lot of cargo, whereas they made agreements with a shipper in a foreign country to deliver that to a name destination wherever. A lot of it is very local to warehouses in Baltimore, for instance, or it could be for further distances. They have a certain rate.
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When that driver goes in to pick up a container, first he has to pick up a chassis. That chassis should be road worthy. It may or may not be.
Mr. GILCHREST. He has to pick up a chassis from where?
Mr. GUTIERREZ. From within the terminal.
Mr. GILCHREST. Who owns the chassis?
Mr. GUTIERREZ. The steamship line. Or in some instances leasing companies, port agencies. Then the container is put on the chassis. That may or may not have already been done. Then they go out to port.
At that point it is determined if the equipment is safe, do the lights work, do the brakes work, is there any damage.
Mr. GILCHREST. Whose responsibility is that? The driver?
Mr. GUTIERREZ. Well, they go through the line and the stevedores control that and check that. If there are any problems, they have to go back. If the equipment is not road worthy, they have to go get in another line. The box has to be taken off the chassis—
Mr. GILCHREST. Who, then, is responsible for the road worthiness of the chassis?
Mr. GUTIERREZ. Ultimately, the steamship line. They have the repair facilities there to repair it.
Mr. GILCHREST. And the port drivers generally don't own the chassis?
Mr. GUTIERREZ. No. In most of the rest of the world, the truckers move the cargo. It is primarily in the United States that the steamship line provides the equipment to move the cargo. It is their liability to provide road worthy equipment.
Mr. GILCHREST. So the truck driver just brings the truck? The cab?
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Mr. GUTIERREZ. That's correct.
Mr. GILCHREST. Whether it is New York, Los Angeles, Baltimore, Charleston?
Mr. GUTIERREZ. Right. There are some instances where there are special equipment, triaxles, goosenecks that the steamship line may supply, but not primarily.
Mr. GILCHREST. Does most of this cargo go within a few miles? It might even be delivered to Iowa or someplace?
Mr. GUTIERREZ. Right. It can go across the country. And business conditions will determine what you have to do, what kind of cargo is in the container, can it be unloaded, can it be moved by rail.
Mr. GILCHREST. Does the port driver work by ship? By signing a lease for a year? How does that work?
Mr. GUTIERREZ. The drivers are usually contracted out to a specific trucking company, in my experience. They are subcontractors or independent operators. So the independent operator gets paid on a per trip basis, whether it takes him an hour to get a container or 4 hours to get a container.
And there are plenty of experiences and plenty of ports where there are more 4 hour trips for multitudes of reasons.
Mr. GILCHREST. But the pay is the same?
Mr. GUTIERREZ. Right. They normally get a certain set fee to pick up a container and move it in a local area.
Mr. GILCHREST. So it is not likely that this truck driver is going to get a salary. He is going to get paid according to the number of trips he makes?
Mr. GUTIERREZ. Right.
Mr. GILCHREST. And that is negotiated between the company and the carrier?
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Mr. GUTIERREZ. Yes.
Mr. GILCHREST. And then the company contracts out to however many drivers they need?
Mr. GUTIERREZ. Right.
Mr. GILCHREST. And the subcontractor, then, is an independent subcontractor, which means a whole lot of other things.
Some of the earlier testimony that we heard this morning—and some just now—is that this is the first step in the right direction, the Ocean Shipping Reform Act. Some of the people this morning mentioned that the NVOs, the freight forwarders, the intermediaries were thriving as a result of this past year.
Does anybody want to comment on that? They said NVOs were doing very well. There was more business now than ever.
Mr. GREENBERG. Yes, Mr. Chairman, there is more business than ever before, and the intermediaries are problem-solvers. Could they be doing better? Absolutely. Does the law or the FMC's implementation of the law cause them problems? Yes. Are they figuring ways around it? Yes. Are they hoping they're not going to get caught? In some instances. I will jump in and said that since I am not one and only represent them.
They are problem-solvers. They get in and they figure a way to do it.
But, Mr. Chairman, the idea behind OSRA was to begin the process of deregulating the industry. And what the intermediaries are asking for is to finish the job. They want to be deregulated. They want the ham strings, no matter how minor the shippers or the carriers may want to think those ham strings are.
OSRA is great if you are a big shipper or a big carrier, and that is terrific. That is what is was designed for. What we are asking for collectively, in our various ways, is to keep moving that process of deregulation and benefit down to its lowest level, as we have with motor carriage and air transport.
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Mr. GILCHREST. As this moves along—and it seemed like some of the earlier people this morning agreed with this—OSRA is a good thing, it opened up the market, it created more interaction between people that didn't interact in the past. But it seems, especially from a couple of the carriers, that consolidation was inevitable. And as these carriers consolidate, and as the arrangements between carriers and shippers become more frequent, and the symbiotic relationship between this consolidation of carriers and, to some extent carriers—how does that affect the intermediaries?
Mr. Policastro?
Mr. POLICASTRO. I would like to comment further and then I will address your question.
The intermediaries—the freight forwarders, NVOs, and OTIs, in general—we are a resilient bunch. Basically, freight forwarding has been around as long as the steamship carriers have. So we welcome the challenge. We support the free market and we want to see the continuation of deregulation and open fair market.
What has happened with regard to OSRA—and as I testified, we certainly support OSRA and the free market process—but what happened is that there were compromises in the legislation and the OTIs were not addressed fully and tremendous disparities were created. We are here today to try to correct those things. And these are some major issues to us.
Some of the comments earlier this morning were not quite accurate in the sense of how they related to or addressed the OTIs' activities. We don't have a level playing field. And as Mr. Voltmann said, there is more business and OSRA has actually driven some of that business toward the OTIs because many of the small to medium-sized exporters cannot compete with the megacontracts that are being signed out there.
To address your question, I think the OTI community can adjust, and we want that opportunity, but we really need the issues resolved—such as the removal of tariffs, giving us the ability to sign service contracts with our shipper clients—to help level that playing field.
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Mr. GILCHREST. So it is confidential contracts, tariff publication, and antitrust immunity.
Mr. POLICASTRO. The antitrust immunity—conferences have been reduced, but really the talking agreements are the same. I would be hard-pressed to think that the discussions or the agenda items within the talking agreements are confined strictly to chassis utilization and space sharing. I would have to think that rates and market shares would come into those discussions. Because the overwhelming majority of the cargo of the carriers is moving under the confidential service contracts, we are at a complete disadvantage because our cargo is moving under completely open to the marketplace under our own filed, published tariffs.
Mr. GILCHREST. How could you benefit from confidential contracts?
Mr. POLICASTRO. We are at a disadvantage because we are not allowed to enter into a contract with our shipper clients. Therefore, when we sign a service contract with a steamship company as a shipper, we make a commitment and obligation. We can't address that same obligation from our clients. So therefore we are at a serious disadvantage.
Mr. GILCHREST. Your clients being?
Mr. POLICASTRO. The same shipper.
Mr. GILCHREST. Why wouldn't the shippers feel the same way you do about having confidential contracts?
Mr. POLICASTRO. In my experience, I don't think the shipping public is adverse to the NVO having the opportunity to sign with us. Many, if not most, of the small and medium-sized shippers would welcome the opportunity to enter a contract with us. We have been their traditional provider of service from the documentation area, to the transportation expertise, arranging space, guaranteeing space. They would welcome the opportunity. All we can to do now is hope that they honor their verbal commitment. But yet we have to contract the carrier.
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It is quite an uneven playing field for us.
Mr. VOLTMANN. Mr. Chairman, it is the only segment of the transportation industry—maybe any industry in America—where two partners are not allowed to enter into a contract. Transportation intermediaries serve their shipper and motor carrier customers confidentially, they serve their railroad shippers through confidential contracts, they enter into confidential contracts with the airlines. It is just in this industry that the Congress has chosen to impose a restriction.
Mr. GILCHREST. And just in the United States?
Mr. VOLTMANN. And just in the United States.
And the same benefits the carriers talked about this morning about being able to tailor agreements to meet specific shipper needs, the intermediaries can do with their shipper customers.
Mr. GILCHREST. It appeared that the carriers and the shippers were content with the legislation and didn't seem to—
Mr. VOLTMANN. The big shippers are content.
Mr. GILCHREST. Why would they not want to see the changes that you have recommended here this afternoon?
Mr. VOLTMANN. The OSRA bill was a compromise of interests and they are holding to that compromise. As I said in my comments, it is working for them. My members, Mr. Policastro's, Mr. Gutierrez', and Mr. Greenberg's members are making this work, but it could be better. And it could be better for the people who own companies in your district.
Mr. GILCHREST. Mr. Gutierrez?
Mr. GUTIERREZ. I was going to say that we do have service contracts with some of the big carriers. We had it before OSRA, we just signed one a couple of months ago—actually April 1st. What I noticed was the simplicity, which was good, from previous contracts to now. It was eight pages and now it is down to maybe three pages.
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We take a risk and a liability by signing that contract for any amount of cargo. It is not that great a number, but still it is a liability. And we hope that we can get our customers so that we can reach that commitment. If not, we are penalized. There is no risk to the shipper. We are assuming all the risk with very little compensation.
Having the ability to sign a contract will limit our liability and put us on an even field with the carrier. As you see, the carriers have signed up the majority of the cargo. If shippers do not meet those requirements, they are liable to penalties. That is in the contract. Whether they enforce it or not is between them and the shippers, but that ability is there.
We would like that same provision so that we are not speculating. I don't want to gamble—which we have been doing and we have been successful.
Mr. GILCHREST. So you aren't playing the NASDAQ or the market on a daily basis?
Mr. GUTIERREZ. No.
Mr. GILCHREST. Mr. Greenberg?
Mr. GREENBERG. I don't want to be so presumptuous as to respond in answer to your question on behalf of the shippers and the carriers, but it is not plain to me that the shippers or carriers would be unhappy with a change in the Congress' approach to tariff enforcement and filing.
The whole issue of NVOCC tariffs and service contracts sort of got lost in the mad rush to end the chaos and get the bill enacted last term. But I believe the shippers and shippers organizations will support the elimination of tariff filing. The NCBFAA and NIT League are jointly going to canvas the shipping public to find out what their views are on tariffs and we will submit that database as part of a petition—we being the association—to the FMC in support of our request that they exempt tariffs.
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I think that would be a very positive step. It eliminates a lot of the enforcement problems you have heard, the concern about an uneven playing field, as well as just the ridiculously formalistic and expensive structure that is visited upon the OTI industry for no particular reason other than it happens to exist today.
Mr. GILCHREST. The FMC is doing a 2-year study that will end about this time next year, an overview of the Ocean Shipping Reform Act. I am assuming that they are looking at the whole issue of your industry. My guess is that you would prefer not to wait for that year, but would like us to act sooner than that.
Mr. GREENBERG. I think that's accurate.
I also don't think we need to wait the year for the agency itself to act. I was a bit concerned about a comment Chairman Creel made with respect to this issue that was sort of tangentially discussed this morning, and that is that he may perceive that the agency—although it has broad exemption authority—may have been instructed sub silentio by Congress in the legislative history not to go forward—
Mr. GILCHREST. Because that amendment didn't pass the Senate?
Mr. GREENBERG. Right. And it is not plain to me that that is an accurate read of what took place at that time.
So it seems to me that since Congress has invested the agency with the statutory authority to provide a broad exemption of any provision of the statute it believes is appropriate—assuming the criteria are satisfied—we would like to see the agency at least test the waters and see if there is a basis to maintain it. If not, let's get rid of it.
Mr. GILCHREST. What do you mean, ''test the waters''?
Mr. GREENBERG. Look at the exemption petition that we are going to file. Look at it on its merits instead of worrying about what may or may not have been intended.
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Mr. GILCHREST. You have an exemption petition?
Mr. GREENBERG. We have not filed it yet, but we will be doing that very shortly.
Mr. GILCHREST. And you want the FMC to look at that?
Mr. GREENBERG. Yes.
Mr. GILCHREST. The exemption petition would then do what?
Mr. GREENBERG. If the Commission accepts it and grants it, then it would eliminate tariff enforcement. So you have, essentially, a de facto system of private contracts being permissible between not just OTIs but essentially eliminate tariff enforcement and filing by steamship lines as well. We just don't think there is a reason to have that any longer.
Mr. GILCHREST. I see.
Does anyone else have any other recommendations or comments? Your testimony has been useful for us today.
Mr. Gutierrez?
Mr. GUTIERREZ. Mr. Taylor asked what would happen if the Panama Canal was closed, and he directed it at one of the steamship line representatives. They replied that there wouldn't be any problem.
I would disagree with that wholeheartedly. One, as a comparison, Baltimore imports and exports about 300,000 TEUs a year. That is how many Los Angeles does in one month. When there was the railroad merger with the UP and SP, it was taking up to one month to move cargo from Los Angeles through to Baltimore on an ocean voyage that was 11 days to 18 days from the Far East. They would not be able to do that just because of the infrastructure with the railroads. The railroads can hardly deal with the cargo moving now by rail, ocean bound cargo. They are good and bad. They have gotten better, but as you know, there were many problems.
So if the Panama Canal were to stop tomorrow, we would have another log jam immediately. I don't think there is any question about that, and I would be willing to debate any steamship person on that.
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Mr. GILCHREST. So Baltimore moves about 300,000 containers a year?
Mr. GUTIERREZ. Yes. Los Angeles is approximately 12 times the size.
Mr. GILCHREST. So that is 300,000 a month?
Mr. GUTIERREZ. Yes.
Mr. GILCHREST. Is that going and coming? Importing and exporting?
Mr. GUTIERREZ. Yes.
Mr. GILCHREST. That raised a question in my mind about what your industry does—I would assume that you deal with the carriers, whether they are large ships or barges. For example, in your case, Mr. Gutierrez, it might come up from Norfolk.
Mr. GUTIERREZ. Yes.
Mr. GILCHREST. Is that the same? Who would own the barges? Is that somebody else in the middle?
Mr. GUTIERREZ. Usually a barge company unrelated to the steamship line.
Mr. GILCHREST. And I understand that Baltimore barge traffic has increased dramatically over this past decade.
Mr. GUTIERREZ. Yes.
Mr. GILCHREST. Has that impacted in a positive or negative way your business?
Mr. GUTIERREZ. Indirectly, in a negative way. Depending more on imports and exports. It depends on the trade lane. When you don't have a direct discharge from a vessel, that cargo will discharge in New York or Norfolk or Charleston and then they will have to move it up. You have equipment problems. The barge service is sporadic. They may miss a barge, it may be overloaded, the container is rehandled again and could be damaged, they could not get a truck, somebody could forget to ship it. So in those instances, there are potential delays.
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Mr. GILCHREST. But you don't deal with the barge industry?
Mr. GUTIERREZ. No. They are subcontracted by the steamship lines.
Mr. GILCHREST. If the carrier industry becomes more consolidated, and then more selective in the ports that they go to, and then there is more lightering and more barging—is that something that has a potential impact? I don't think it would affect the port drivers, but how about your industry?
Mr. GUTIERREZ. Our industry, once again, not directly because the cargo will ultimately come here or move from here irrespective of who is controlling that or who is paying for that. When we get a bill of lading from the steamship line, it is moving from Baltimore to Calshong whether the line comes in direct or they choose to move it through Norfolk or some other port, or through the west coast. A lot of cargo moves through the west coast. Most Australian cargo moves by rail, if possible, although there is east coast service, too.
All the steamship lines have two services. Evergreen, for instance, has an all water service that happens to come through the Panama Canal from the Far East to Baltimore. They also land bridge cargo to the west coast, of course at a different rate. And most shipping is based on a time rate basis.
Mr. POLICASTRO. Mr. Chairman, I would like to make one final comment in a broad sense.
We are here today to protect our industry, the OTI community, in helping OSRA adjust some of the marketplace dynamics for us. The maritime industry is moving forward at a record pace in change and evolution and consolidation. The two carrier representatives this morning alluded to that. Just a week ago, we heard statistics from one of those carriers that the 20 top carriers are controlling over 47 percent of the global transportation. And in two and a half years, those 20 carriers will then be 12 carriers controlling over 67 percent.
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So as the market moves forward, fewer and fewer megacompanies will be controlling and responsible for the transportation of the overwhelming majority of waterborne commerce into and out of the United States. So all these issues—port, efficiencies, and port use, port identification, whether it is land bridge—they will be in fewer and fewer decisionmaking hands.
So I think it is critical that we level the playing field, but the Congress needs to seriously take a look at the authority or exemptions that are presently afforded the maritime industry because these decisions that will be made will impact hundreds of millions of people and billions of dollars worth of commerce, not the least to say, our industry directly.
Mr. GILCHREST. Gentlemen, thank you very much. This has been very helpful. We will continue to communicate with all of you. Please don't hesitate to call us with any issue that you think is important and we will stay close to your industry on this issue and do what we can as quickly as we can.
Thank you very much.
The hearing is adjourned.
[Whereupon, at 2:05 p.m., the subcommittee was adjourned.]
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