inforMARE - FORUM of Shipping and Logistics

It now has been two years since the implementation of the Ocean Shipping Reform Act of 1998 ("OSRA") -- a sufficient period of time for those in the industry to begin to adjust to the new regulatory environment and for the Federal Maritime Commission ("FMC" or "Commission") to make an initial candid assessment of how the impact of the legislation appears to be unfolding. While there may be divergent views ripe for intriguing debate on various issues, the focus of the following pages is to provide objective, impartial findings on the regulatory and commercial impact of OSRA to date. We have relied on a broad range of sources in collecting information on how the legislation has played out across the industry. Representatives of all sectors of the industry have provided the Commission with their views and comments throughout this two-year period. The responses to the Commission's Notice of Inquiry ("NOI") on OSRA's impact were voluminous. An in-house review of hundreds of service contracts provided a rich source of information, as has our continued monitoring of carrier activity exercising statutory antitrust immunity. We also have drawn on the Commission's numerous and varied experiences in dealing with all aspects of this new law over the past two years. Taken together, this information provides a wealth of insight on the state of US ocean shipping under OSRA.

It is important to emphasize that this report concentrates on the impact of OSRA -- we have not undertaken to present a general trade study on everything that has occurred in US liner shipping since May 1, 1999. Our focus is the manner in which OSRA has shaped or affected operations and developments in that time frame. As indicated throughout the report, OSRA does appear to be achieving its primary policy objectives. However, several areas do present significant issues that the Commission must continually assess to determine if responsive action becomes warranted.

This study is divided into five topics: service contracts, agreements, ocean transportation intermediary ("OTI") licensing and bonding, tariffs, and a grouping of other relevant issues. The views of the various sectors of the industry, as well as an assessment of OSRA's impact on these groups, are reflected throughout each section. We have focused on what we believe to be more significant points or developments so as to offer a streamlined report. Nonetheless, we have cited some particular details or nuances to clearly convey OSRA's impact on those who participate in US liner shipping.

EXECUTIVE SUMMARY

General

The major regulatory changes made by OSRA were aimed at promoting a more market-driven, efficient liner shipping industry. After two years of operations under this statute, indications are that it generally is achieving this objective.
The liner shipping industry has been experiencing dynamic structural changes over the past several years. OSRA was enacted in full recognition of these changes, and has helped to foster their continuing evolution.
Developments in US liner shipping in the past two years, while occurring in large measure due to the interplay of market forces, were impacted by the changed business environment brought about by OSRA.
While there is no industry-wide consensus on most specific issues involving the impact of OSRA, this disparity of views has not had a major negative effect on business relationships or ongoing arrangements among industry participants.
The FMC developed comprehensive regulations to implement OSRA, and has altered its approach to industry oversight to facilitate the attainment of OSRA's basic policy direction.

Service Contracting

Numerous pro-competitive reforms enacted under OSRA to increase industry market responsiveness focused on service contracting. The ability to deal with individual carriers, the elimination of the "me-too" requirement for similarly situated shippers, and the confidentiality of certain commercially sensitive service contract terms have fostered a shift to contract carriage -- carriers generally report that 80 percent or more of their liner cargo currently moves under service contracts.

The 200 percent increase in the number of service contracts and amendments filed since May 1999, as well as the increase in the volume of cargo moving under service contracts is due, in part, to the flexibility and confidentiality of individual service contracting.
Most shippers presently are negotiating one-on-one with individual carriers for confidential service contracts, instead of negotiating with rate-setting conferences or groups of carriers.
Many service contracts continue to be linked to tariffs for accessorial charges, surcharges, and certain rules.

Responses to the Commission's NOI contained no allegations that shippers could not secure service contracts.

Non-vessel-operating common carriers ("NVOCCs") would like to have the authority to engage in service contracting with shipper customers, so as to put them on equal footing with vessel-operating common carriers ("VOCCs").

Agreements

The emergence of global markets, the improved service of non-conference carriers, and the deregulatory nature of OSRA are catalysts that have contributed to the restructuring of the liner shipping industry. This has led to a de-emphasis of traditional conferences and a dramatic increase in efficiency-enhancing operational types of agreements, such as vessel-sharing and space charters.
While there were 35 conference agreements on file with the Commission in 1998, there were only 19 as of June 1, 2001. Operational agreements made up 58 percent of all effective agreements as of June 1, 2001. Internet portal agreements, basically "one-stop shopping" Internet sites, are innovative agreements that promise to further improve operational efficiencies.
Carriers continue to use supply-side operational agreements, including global strategic alliances, to expand service and geographic coverage, while limiting individual risk and capital. Industry reports indicate that in the main east-west trades, alliances now account for between 60 to 65 percent of all capacity deployed, and have, along with the use of new technologies, enabled ocean carriers to reduce their average cost by more than $260/TEU over the past four years.
Broad-based discussion agreements with non-binding rate authority have become the primary forum for carriers to exercise their antitrust immunity with regard to rate levels. Attention has focused on agreement members' adoption of and adherence to voluntary service contract guidelines affecting individual service contracts. These guidelines must be strictly voluntary and are non-enforceable by the agreement.
At present, the Commission receives confidential guideline submissions from 19 agreements. The guidelines establish objectives for general rate increases ("GRIs"), minimum rate levels, or rate increases for specific major-moving commodities, surcharges, or accessorials. A Commission audit of 2000 and 2001 service contracts indicated that carrier success in gaining guideline adherence generally depended upon overall market conditions.

OTI Licensing and Bonding

Since OSRA's implementation, the number of individual NVOCCs and ocean freight forwarders has declined slightly, whereas the number of OTIs that are both NVOCCs and freight forwarders more than doubled.
Consolidation among OTIs, similar to that occurring elsewhere in the liner industry, and the merging of NVOCC and freight forwarding functions into one firm, help explain the decrease in the number of NVOCCs and freight forwarders.
OSRA requires that NVOCCs in the US now be licensed. Additionally, the Commission's rules implementing OSRA subjected all NVOCCs and ocean freight forwarders to a higher bonding level than pre-OSRA. OTIs generally have not objected to these additional licensing and bonding requirements, nor is there any evidence that these new requirements have had a significant effect on OTI operations.

OTIs voiced concern over what they perceive to be a closer FMC scrutiny of their activities vis-a-vis those of VOCCs. Similarly, NVOCCs in the US pointed to the significant and unfair advantage enjoyed by unlawfully-operated NVOCCs who do not establish or adhere to published tariffs.

Tariffs

The Commission's proposed tariff publication rules sought to implement OSRA's requirements and enable the industry to take advantage of existing technology. Based on comments received, the Commission significantly altered its proposal so as to reduce compliance burdens further, and to provide carriers with additional flexibility in publishing their tariff systems.
The Commission continues to monitor accessibility of tariffs, and works with tariff publishers to ensure an effective and efficient tariff publication system. Systems that do not achieve statutory compliance are subject to appropriate enforcement action as circumstances warrant.

NVOCCs are of the opinion that they are at a competitive disadvantage in relation to VOCCs because they must make all of their rate information publicly available, while VOCCs are free to enter into confidential service contracts with their shipper customers.

Other Issues

Unfair Foreign Shipping Practices

OSRA amended section 19 of the Merchant Marine Act, 1920, and the Foreign Shipping Practices Act of 1988 ("FSPA") to clarify that pricing practices are among the types of activities that create unfavorable conditions to shipping in the US foreign trades.
Most commenters to the Commission's NOI believe that OSRA did not materially impact this area. The Commission remains active in monitoring and addressing unfair shipping practices as they arise. Periodic reports from carriers in specified trade areas are used when appropriate to monitor developments.
The Commission has established a permanent Task Force that meets regularly to exchange information about new and continuing areas of concern, and to formulate recommended approaches to restrictive foreign shipping practices that may require Commission action.

Controlled Carriers

OSRA expanded the definition of a controlled carrier by deleting the previous limitation that an entity can be a controlled carrier only when it operates vessels registered under the government that controls the carrier. This change removed a potential loophole that may have enabled a controlled carrier to "flag-out" or register its vessels under the laws and regulations of another country, and thereby avoid the controlled carrier provisions.
The Commission's OSRA rules require an ocean common carrier controlled by a government in any manner to provide the Commission with immediate written notification to that effect. The recent addition of China Shipping Container Lines Ltd. ("CSCL") to our controlled carrier list was accomplished after that carrier advised us of its controlled status.
OSRA also removed three conditions that previously qualified as exceptions from controlled carrier provisions: agreement membership, operations in a controlled carrier's bilateral trade with the US, and signatory status to the Organization for Economic Competition and Development ("OECD") shipping policy.
The Commission actively monitors controlled carrier practices to ensure continuing statutory compliance. The Commission intends to intensify its efforts in order to preserve fair competition and promote international trade.

Port Trucking Issues

The International Brotherhood of Teamsters, Port Division ("Teamsters") raised several issues not addressed by others. The Teamsters believe that OSRA permits ocean common carriers, through their agreements' voluntary guidelines, to establish harmfully low, "anti-competitive ceiling rates" for through and inland transportation. They contend that port driver wages have declined, driver bankruptcies and truck repossessions have increased, and working conditions for port drivers are generally "abusive."
A comprehensive examination of voluntary guidelines on file with the Commission did not reveal any indication that inland carriers are unable to negotiate inland rates with ocean carriers, as alleged by the Teamsters. Further, the Commission reviewed the confidential minutes of meetings of conferences and discussion agreements on file and found no indication of discussions among the respective agreement members concerning the negotiation of US inland divisions with motor carriers. Additionally, agreement representatives confirm that no arrangements involving motor carriers have been implemented pursuant to agreements that authorize joint negotiation of inland divisions with motor carriers.

E-Commerce

Although the emergence of e-commerce in the ocean shipping industry is not a direct result of OSRA, the new law did create a more competitive, market-oriented environment in which "dot-com" businesses have grown in importance. Since an explosion in the number of transportation-related e-commerce companies in 1999, many such sites have been bought or gone out of business due to a lack of shipper interest and carrier cooperation.
Track-and-trace technologies, as well as cargo-based e-commerce portals, are the current trend and are receiving much support from the major carrier companies. The concept of "supply-chain collaboration" also has been gaining attention in the industry and promises to streamline the logistics process significantly.

The Commission will continue to address the question of how these entities fit within the Shipping Act of 1984 ("1984 Act"), as well as the appropriate extent of Commission oversight they warrant.

Continuing Regulatory Issues

The FMC recognizes the dramatic changes taking place in international trade against the backdrop of OSRA. The Commission is committed to fulfilling its statutory responsibilities in a manner that gives deference to market processes while defending against market-distorting abuses.
Notwithstanding the apparent widespread general satisfaction with the current US regulatory framework for ocean shipping, the Commission will be focusing on several major aspects of US shipping laws that cause concern for those less than fully satisfied with OSRA's changes.
The Commission will continue to evaluate the impact of discussion agreements on rates. It is incumbent on those who participate in the ongoing debate to address the effects of discussion agreements within the context of the current regulatory environment.
While the Commission's analyses and the comments of parties suggest that discussion agreements are not utilizing service contract voluntary guidelines to unreasonably increase rates, the issue merits ongoing close attention as the industry evolves in the post-OSRA environment.
The Commission's requirements for electronic tariff systems imposed a minimum of restrictions and requirements, so as to maximize carriers' flexibility in meeting their obligation to maintain accurate and accessible tariffs. Although the regulations themselves have generated few complaints, the adequacy of compliance remains a concern, which necessitates continuing review of carrier systems.

Given that service contracts have become the overwhelmingly predominant rate-setting vehicle, the Commission will continue to employ techniques such as random sampling to evaluate trends and activities in this area and to identify any market-distorting practices that arise.
While the Commission intends to encourage the advantages and efficiencies obtained via e-commerce innovations, it will continue to evaluate this area to ensure that any regulatory issues of concern are addressed as appropriate.
Experience in administering the 1984 Act as revised by OSRA, leads the Commission to suggest that several provisions could be revised for greater clarity or to eliminate ambiguities. These provisions include those dealing with controlled carriers, freight forwarder compensation, new or initial tariff rates, civil penalties, and the definition of an ocean common carrier for certain purposes.

REGULATORY AND ECONOMIC OVERVIEW

Regulatory Overview

Service Contracts

OSRA's amendments to the Shipping Act of 1984 ("1984 Act") are dramatically altering the way business is conducted in the ocean liner industry. Nowhere is this more evident than in the material changes made to the service contracting process. The opportunity for shippers and carriers to enter into individual, confidential service contracts, and the inability of carrier agreements to prohibit or directly interfere in that process, are the cornerstones of the new statute. Under OSRA, fewer service contract essential terms and no rates are made public. Shippers no longer have "me-too" rights to obtain the same essential terms as similarly situated shippers, but for the first time, unrelated shippers have the option to collectively enter into service contracts. OSRA also extended the authority to offer joint service contracts to any agreement among ocean common carriers, not just conferences.

Agreements/Voluntary Service Contract Guidelines

OSRA has greatly affected the functions of traditional liner conferences. While OSRA maintained antitrust immunity for concerted carrier activities, agreements no longer may prohibit service contracting by their members, or require members to disclose the details of their service contract negotiations. An agreement may establish voluntary service contract guidelines applicable to members' individual service contracting practices, but they are non-enforceable by the agreement. Additionally, notice of independent action on tariff rates or charges was reduced from 10 to 5 days.

OSRA did not alter the 45-day period for Commission review of agreements -- they continue to become effective in that time absent Commission action to reject, request additional information, or seek to enjoin an agreement. And, while OSRA made no changes to the general standard for opposing substantially anti-competitive agreements, a Senate Commerce Committee Report accompanying OSRA urged the Commission to take a more active and vigilant role in administering it.

Tariffs

OSRA eliminated the requirement that tariffs be filed with the Commission, requiring instead that carriers develop individual electronic tariff systems available to the public for a reasonable access charge. The Commission is mandated to prescribe conditions for the accessibility and accuracy of these systems, and to review them periodically.

Restrictive Foreign Practices

OSRA gave the Commission greater ability to guard against predatory pricing by clarifying that pricing activities are among the practices that may constitute a condition unfavorable to shipping. OSRA also made the suspension of service contracts available as a remedy to address unfair foreign practices.

OTI Licensing and Bonding

OSRA has grouped both ocean freight forwarders and NVOCCs under the heading of OTI. NVOCCs in the US now join ocean freight forwarders in being required to obtain a license -- the Commission's implementing regulations also permit NVOCCs outside the US to apply for a license if they so choose. OSRA also requires that every OTI have a bond or other financial security on file with the Commission. The bond amounts are $50,000 for freight forwarders, $75,000 for NVOCCs in the US, and $150,000 for non-licensed foreign NVOCCs.

Economic Overview of US Trades

Competitive Conditions

The US liner trades continue to reflect the ebbs and flows of the world's economy which distinctively play out in specific trade areas. US international trade volumes continue to grow, with predictions that cargo volume will double over the next ten years. In the near term, US containerized imports and exports for 2001 are forecasted to grow at a slower rate of approximately 5.7 and 1.4 percent, respectively, over last year's totals.

Transpacific - Inbound: The Transpacific Stabilization Agreement ("TSA") is the prime example of a discussion and policy-setting agreement with voluntary pricing authority. The members exchange information and discuss proposed GRIs, standardized surcharges, and other pricing-related issues in the US inbound Far East trade.

TSA members were largely successful in implementing proposed GRIs and peak-season surcharges during 1998 and 1999, a period during which demand consistently outstripped the supply of vessel capacity. More recently, members of TSA have been less effective in implementing proposed pricing objectives. The cohesiveness of TSA and its ability to implement rate increases have been reduced by several changes in underlying competitive trade and market conditions: an increase in the number of carriers serving the trade; an increase in vessel capacity deployed; a reduction in import cargo growth; and a shift to individual, confidential service contracting. Nonetheless, the group still enjoys a high market share, i.e., approximately 80 percent at the end of the first half of 2001. During the latter half of 2000 and into early 2001, carriers and shippers reported declining rates and vessel oversupply following declines in retailers' orders from Asia and rising unemployment rates in the US.

TSA has adopted and filed with the Commission voluntary service contract guidelines that the members may use in their contract negotiations. A review of TSA members' individual service contracts shows that, in general, TSA's ability to effectively implement GRIs and peak-season surcharges appears to have diminished considerably due to enhanced competition between members in a new individual, confidential service contracting environment ushered in by OSRA. Negotiations for annual contracts in May 2000 often resulted in lower rates and, generally, proposed increases were not achieved. In light of increases in vessel capacity (10 percent) and soft economic trade growth (4-5 percent) during the first half of 2001, it was no surprise that carriers were unable to obtain the May 2001-announced GRI.⁽¹⁾

Transpacific - Outbound: The Westbound Transpacific Stabilization Agreement ("WTSA") is the outbound counterpart to TSA and, likewise, provides a forum for the exchange of information (including pricing) among its members. WTSA became the primary pricing forum in the westbound transpacific trade following the demise of the outbound conference, the Transpacific Westbound Rate Agreement, on May 1, 1999.

Despite the growing post-OSRA prominence of discussion agreements in the transpacific, WTSA, for the most part, was unable to implement relatively minor rate increases as market conditions prevented members from becoming a cohesive group on pricing. The dramatic trade imbalance (with vessels reportedly operating at approximately 50 percent of capacity) significantly contributed to the failure of WTSA members to achieve proposed rate increases. However, between October 1999 and September 2000, the members of WTSA began to experience higher vessel capacity utilization as demand increased. Even though the inbound and outbound trades remained imbalanced, WTSA members were able to achieve some measure of success in increasing rates.

WTSA has adopted and filed voluntary service contract guidelines that the members may use in their contract negotiations. A review of a sample of WTSA members' individual 2000 and 2001 service contracts reveals that, in general, WTSA's relative success in 2000 appears to have been temporary. Declining trade growth, coupled with expanding capacity, precluded achievement of rate increases during the first half of 2001. Carriers, however, were more successful in implementing a chassis usage charge during the first half of 2001.

Transatlantic Trade: From the early 1990s to the present, rate-related agreement activity in the transatlantic trade primarily focused on the major conference between the US and North Europe. At present, the Trans-Atlantic Conference Agreement ("TACA") faces a much higher degree of rate competition from independent carriers than in the past. In addition, the authority the conference once exercised over its members' service contracts has eroded. A combination of regulatory actions both in the US and Europe dramatically altered the structure and influence of the conference. The conference declined both in market share and membership. From its initial formation in 1992, the collective market share of the conference dropped from close to 80 percent to roughly 50 percent at present. In terms of conference participants, TACA's membership has fallen from a high of 17 carriers to a low of 7 carriers.

Starting in 1999, TACA amended its service contract provisions to comply with OSRA, and to resolve legal issues before the European Commission ("EC"). As such, TACA revised its authority to permit TACA members to enter into non-conference service contracts.⁽²⁾ By the EC's directive, TACA members are prohibited from adopting voluntary service contract guidelines that affect their non-conference service contracts. Further, the EC restricts TACA members from discussing their non-conference service contracts, and no data or information on such contracts may be submitted to, or collected by, the conference. TACA, however, may establish a model conference service contract and rate matrices, provided such information is publicly available. TACA members are permitted to refer to and adopt such information in their non-conference service contract negotiations, if they so choose.

Prior to the foregoing changes, a major portion of the trade's cargo moved under TACA's conference service contracts. For instance, TACA reported in its NOI response that nearly 600 conference service contracts were entered into in 1998. In 1999, however, with OSRA becoming effective and competition accelerating in the trade, TACA members actively entered into non-conference service contracts. By the end of 1999, TACA members reported that upwards of 80 percent of their cargo moved under non-conference service contracts. Of over 1,000 service contracts entered into by TACA members in 1999, only 30 were conference service contracts. In 2000, TACA entered into only 3 conference service contracts. Thus, the decline in TACA's direct authority over its members' service contracts, and hence pricing, was precipitated by OSRA and the directives of the EC.

In general, freight rates have reflected market conditions in the transatlantic trade. Over the past several years, a trade imbalance has resulted from higher cargo growth in the inbound direction from North Europe to the US. Consequently, freight rates for inbound cargo have increased steadily in response to higher demand, while outbound freight rates have remained unchanged or fallen due to weaker European demand for US exports. In 2001, TACA implemented moderate tariff GRIs in both trade directions, and plans to introduce further tariff GRIs toward the end of the year. The direct impact of TACA's tariff GRIs is limited, however, since the amount of cargo moved under the conference's rates has diminished. Recently, TACA reported that only about 10 percent of the cargo carried by TACA members moved under conference rates. To further gauge the prevailing trends in freight rates, the Commission examined a limited number of 2000 and 2001 non-conference service contracts for TACA members. The Commission found that contract rates in the inbound direction increased moderately from the 2000 contract period to the 2001 contract period. In the outbound direction, however, the majority of contract rates remained unchanged and, in some cases, declined in 2001. These results tended to correspond to the overall market trends in the trade.

Mediterranean/Middle East Trade: The Mediterranean is a logical collection point for in-transit cargo. This area attracts a number of carriers outside the direct US/Mediterranean and Middle East trade, which contributes to available cargo space. It also has seen numerous types of arrangements focused on bringing stability to a heavily imbalanced trade, with imports into the US far exceeding US exports.

Like the trade between the US and North Europe, rate-related agreement activity in the US/Mediterranean trade is focused primarily on the major conference serving the trade. The United States South Europe Conference ("USSEC") covers the trade between ports and interior destinations in the US, and South European countries on the Mediterranean. USSEC has three carrier members with a collective market share of less than 50 percent as of the first half of 2001. As is the case in the transatlantic trade, the EC prohibits USSEC members from adopting voluntary service contract guidelines that affect their non-conference service contracts, discussing their non-conference service contracts, and sharing information or data on such non-conference service contracts through the conference secretariat. USSEC members advise that they have increased their use of individual service contracts substantially since the enactment of OSRA. The convenience of one-on-one negotiations with shippers is specifically noted as a driving factor for this increase. The intense competitive economic environment in the US/Mediterranean trade has kept freight rates low, especially in the outbound trade from the US. However, conference members are attempting to implement rate increases in the relatively stronger inbound trade - announcing a tariff GRI in January 2001 and a subsequent tariff GRI in May 2001.

The Eastern Mediterranean Discussion Agreement (formerly the Israel Discussion Agreement), which covers the trade between the US and Israel, Egypt and Turkey, has adopted and filed voluntary service contract guidelines. However, given the current overall competitive trade conditions, adherence appears to be limited.

South American Trade: Changing competitive trade conditions in South America, along with regulatory changes under OSRA, have resulted in the demise of the major conferences that once dominated the South American trades. Joint carrier activity now is accomplished pursuant to two rate discussion agreements: the East Coast of South America Discussion Agreement ("ECSADA") and the West Coast of South America Discussion Agreement ("WCSADA"). The members of both discussion agreements have commanded a high market share of at least 90 percent in each trade direction from 1999 through the first half of 2001. Whereas the predecessor conferences had hundreds of conference service contracts, the only collective contracting taking place under either discussion agreement at present involves a number of members contracting jointly without the involvement of the others. Virtually all service contracts in both agreement trades now are negotiated by the member lines on an individual basis. ECSADA and WCSADA have adopted and filed voluntary service contract guidelines that the members may use in their individual contracts. It appears that members are more likely to follow the voluntary service guidelines when the market is tight, i.e., when demand is high and capacity tight, than during slack-demand periods with overcapacity. For example, during 2000 and the first half of 2001, ECSADA members appear to have adhered closely to their respective commodity-specific service contract guidelines most of the time.

Central American and Caribbean Trades: The Central America and Caribbean trades have undergone significant changes since the passage of OSRA. Beginning in 1999, the economies of the region slowed, with a concomitant decline in cargo, causing excess capacity and falling rates. These depressed trade conditions were further compounded by the entry of five new carriers in the trade during 1999.⁽³⁾ Rate instability forced as many as six carriers to either scale back services or leave the trade, contributing to the demise of three conference agreements. Although there remain two conferences serving the Central America and Caribbean trades, as in other trade areas, discussion agreements are now the main forum for rate and policy discussions. Both trades also have witnessed a growth in operational agreements -- mostly two-party vessel-sharing arrangements.

The Central America Discussion Agreement ("CADA") and the Hispaniola Discussion Agreement are the predominant agreements now operating in the trades. Over the past several years, CADA's membership and market share have fallen. As of the first half of 2001, CADA's membership stood at five, down from nine in 1999. However, while CADA's outbound market share to the US remained relatively flat from 1999 through the first half of 2001, its outbound market share from the US fell from 73.5 percent in 1999 to 62 percent as of the first quarter of 2001. Individual service contracting by the members of these two agreements since OSRA became effective appears to have increased, although many of the service contracts are for small volumes, often as little as one twenty-foot equivalent unit ("TEU"). While CADA has adopted and filed voluntary service contract guidelines, a review of its members' service contracts shows that they rarely follow them.

Concentration

Like other transportation industries, international liner shipping has been undergoing major structural changes for several years. Liner companies are being driven by the same fundamental forces: the ongoing globalization of manufacturing, technological innovations (especially those that support vertical integration of transportation services, e.g., electronic communications, automated data systems, larger/faster vessels, etc.), intense competition and relatively low profit margins, development of global service networks, deregulation, and privatization. Carriers have responded to these pressures in several ways, including engaging in a rash of mergers and acquisitions and forming global strategic alliances.

Since 1994, nearly all principal global containership operators have grouped themselves into alliances. Through operational cooperation, carriers have the opportunity to reduce costs and business risks, while offering a broader range of improved customer service options. The formation of global strategic alliances arguably has slowed the pace of concentration in liner shipping because they offer a number of the benefits associated with mergers (i.e., economies of scale, expansion and improvement of services, etc.) while limiting members' exposure to investment risk. Some carriers have chosen to venture beyond alliances and have engaged in mergers or acquisitions that increase their size and expand their scope of operations. Since 1995, seven principal mergers and more than 30 acquisitions have taken place.

As a result of this increased merger and acquisition activity, the liner shipping industry has become more concentrated over the last decade. In 1990, the 20 largest liner operators controlled approximately 40 percent of the global container slots. In 1995, their share grew to 50 percent; three years later it jumped to 77 percent. By 2000, the top 20 operators controlled 81 percent of the worldwide fleet.⁽⁴⁾ While the industry is still highly fragmented -- with several hundred companies (including feeder operators) offering regular liner services -- the largest operators clearly dominate current container supply.

Industry reports suggest that over the next three years, more than 1.5 million additional TEUs will be deployed, representing an increase over current worldwide fleet capacity of nearly 35 percent, or an annualized growth rate of more than 12 percent.⁽⁵⁾ In contrast, worldwide trade growth is expected to increase by less than 9 percent. While the long-term effect of continued industry consolidation remains uncertain, some industry representatives believe that under these pressures, renewed merger/acquisition activity can be expected.

CHANGES IN SERVICE CONTRACTING

Statutory Changes

Before the OSRA amendments, the 1984 Act permitted only individual carriers and conferences to enter into service contracts. Conferences had the authority to regulate or prohibit their members' use of service contracts. Except for brief periods, conferences rarely permitted their members to engage in any form of independent service contracting.⁽⁶⁾ The statute required service contracts to be confidentially filed with the Commission, and rates and other essential terms to be made available to the public in tariff format. To discourage any undue discrimination, carriers and conferences were required to make the same essential terms available to similarly situated shippers for a period of 30 days. This requirement was known as the "me-too" provision. In 1993, the publication of tariffs and essential terms was computerized with the introduction of the Commission's Automated Tariff Filing and Information ("ATFI") System.

Numerous pro-competitive reforms enacted under OSRA to increase the market responsiveness of the industry were aimed at service contracting. Under OSRA, only certain essential terms now are required to be published; significantly, freight rates are among the non-published terms. Consequently, freight rates and other unpublished terms now can be structured in confidence between the contracting parties. In addition, the "me-too" requirement for similarly situated shippers was eliminated.

Significant reforms relating to service contracts were directed at reducing the collective control of conferences. For one, all agreements now are permitted to enter into service contracts, not just conferences, as was the case under the 1984 Act before amendment. With this change, however, strict statutory prohibitions were placed on the contracting authority of agreements. OSRA prohibits agreements from restricting the right of their members to independently negotiate and enter into individual service contracts. Moreover, agreements cannot require members to disclose their individual service contract negotiations or unpublished terms, nor adopt mandatory rules affecting such contracts. Voluntary service contract guidelines, however, may be adopted by agreements so long as they are unenforceable and confidentially submitted to the Commission.

Individual carriers and agreements still are required to file their service contracts confidentially with the Commission under OSRA. For ease of filing, the Commission replaced its former paper-format filing system with the electronic Service Contract Filing System ("SERVCON"). The Commission placed SERVCON into operation when OSRA became effective on May 1, 1999.

The NOI and the Random Sample of Service Contracts

In order to identify pertinent developments concerning service contracting under OSRA, the Commission's NOI solicited comments from carriers and shippers on specific issues. In addition, the Commission conducted a comprehensive service contract survey. As discussed in Appendix II, the Commission's survey was based on two computer-generated random samples of original service contracts on file in SERVCON. Each random sample contained 500 contracts, so that a total of 1,000 separate contracts were reviewed. Relevant information from each contract was entered into a unique database for each sample. This approach allowed the Commission to analyze and compare the survey results of the two separate random samples. A high degree of consistency existed between the two samples on most of the issues examined, which added confidence to the survey results. (See Appendix II.)

Overall, the use of service contracts has increased significantly under OSRA. According to NOI comments, this increase in contracting was due primarily to the change from conference control of service contract availability to easily obtainable and flexible individual service contracts. The 200 percent increase in the number of service contracts and amendments filed with the Commission since May 1999 bears witness to the fact that service contracting is now overwhelmingly the primary rate-setting vehicle. As noted below, however, most service contracts are linked to tariffs for accessorial charges, surcharges, and certain rules. To effect changes across numerous contracts, it is more expedient for carriers to make a single tariff change than amend multiple service contracts. Carriers also use tariffs to publish the required service contract essential terms.

The increase in individual contracting also has altered the structure of the industry. In their NOI comments, carriers related that the high demand for individual contracts led to the termination or suspension of major conference agreements in such trade areas as the transpacific and South America. In their place, carriers have structured their collective associations more loosely under discussion agreements with voluntary rate authority and service provisions. In trades where conferences remain, agreement contracts among conference members have fallen significantly. In comparing calendar years 1998 and 2000, conference service contracts fell from 596 to 3 for TACA, and from 125 to 7 for the US Australasia Agreement. Former and present conference carriers in these trades now are entering into a greater number of service contracts on an individual basis with shippers outside the direct control of their respective agreements.

Service contracts also are being used to ship a greater volume of cargo as a result of OSRA. NOI commenters revealed that substantial portions of cargo shipped under tariffs prior to OSRA shifted to individual contracts. In certain of the major trade lanes, some shippers now are moving nearly 100 percent of their cargo under service contracts. This shift is due primarily to the confidentiality and flexibility achieved through individual contracts. In several trades where the volume of service contract cargo had been 50 to 60 percent, some carriers indicated that the volume jumped to 80 percent and greater under OSRA.

The preference for individual contracting clearly was discernible from the Commission's random sample survey. Of the 1,000 separate contracts surveyed, 98 percent were individual contracts. In their responses to the NOI, carriers and shippers reported numerous advantages of contracting on an individual basis, but acknowledged an increased administrative burden in managing the contracts. The main advantage was the ability to engage in one-on-one negotiations with greater flexibility to structure contracts as needed. Overall, shippers have found carriers more responsive in meeting their specific contract requirements under OSRA. The process of obtaining and amending individual contracts also was reported to be easier and more efficient than in the past when dealing with conference contracts. No longer are extended delays incurred in seeking the approval of contracts and amendments through the conference's voting procedures. Consequently, individual contracts are amended more frequently to reflect changing market conditions.

Specific changes in contracting included a trend toward smaller minimum volume commitments. The Commission's survey showed that roughly 60 percent of the contracts sampled had minimum volume commitments of 100 TEUs or less -- commitments ranged from one TEU to 68,000 TEUs. The willingness of carriers to allow smaller minimum volume commitments was recognized in the NOI comments as a new development attributable to OSRA. Contract duration, however, has remained predominantly within a one-year period as before OSRA. The survey revealed that 90 percent of the contracts had durations of 11 months or less, with a range from a few days to upwards of two years. So far, contracts with smaller cargo commitments and limited durations seem to be the market preference. Several commenters noted, however, that such terms frequently are expanded through amendments beyond those initially agreed to in the original contract.

The Commission's survey found no significant changes from the results of past studies on the division of contracts between proprietary owners, NVOCCs, and shippers' associations. Of the contracts sampled, over 70 percent were with proprietary owners, roughly 25 percent were with NVOCCs, and 2 percent were with shippers' associations. No shippers complained of an inability to obtain contracts. However, some shippers' associations noted that since OSRA, carriers have tried more aggressively to solicit independently their individual members. To prevent this, some associations have included specific clauses addressing such solicitation in their contracts.

OSRA also increased the ability of carriers and shippers to expand contract scopes by including multiple US trades and adding foreign-to-foreign trades. Combining more trades and cargo within a single contract gives shippers greater leverage in their negotiations with carriers. While most NOI respondents reported some expansion of contract scopes, the Commission's survey results revealed that the majority of contracts had scopes confined to one US trade or geographic area, particularly in the US/Asia trade. Ten percent of the total contracts sampled had scopes with multiple US trade lanes, and 8 percent had global scopes -- i.e., scopes which included foreign-to-foreign trades. Shippers that conduct a broader and more varied range of business worldwide may take advantage of contracts with expanded scopes. Such shippers include large multi-national companies, NVOCCs, and shippers' associations. Some NOI commenters related problems with the regional dispersion of operations among both shippers and carriers, which complicated structuring multi-trade and global contracts. Carriers further noted a reluctance among some shippers to include their foreign-to-foreign arrangements in US trade contracts.

Changes to the content of contracts have been moderate thus far under OSRA. Carriers commented that the approach to adding contract clauses has been gradual and cautious, with shippers preferring as much contract simplification as possible. Recent developments show a compromise between contracting parties, with some clauses favoring shippers and others benefiting carriers. The most common changes include the addition of confidentiality clauses, specific vessel space guarantees, advance booking notices, slack-season volume guarantees, and certain standard or model contract terms. An increase in the use of vessel space guarantees in contracting occurred post-OSRA, particularly in the inbound transpacific as a result of tight demand during 1998 and 1999. Carriers also mentioned more service guarantees for equipment and set transit times. On the other hand, some shippers expressed concern over the use of service commitment disclaimers to cover cases where the carrier uses chartered vessel space. Shippers also mentioned their interest in increasing carrier liability for cargo loss and damage beyond that provided in the standard bill of lading. The Commission's survey examined contracts specifically for such provisions as equipment guarantees, transit times, and increased carrier liability. Less than 10 percent of the contracts sampled contained any of these provisions. While such provisions are not widespread as yet, both carriers and shippers foresee many of these issues as areas of future contract development over the next five years.

Under OSRA, the prevailing rates no longer are transparent and contracting has become more customized. In their NOI responses, carriers consistently maintained that rate levels are determined by market forces, and contended that individual contracting has created more rate competition. NVOCCs complained that their inability to contract as carriers places them at a rate disadvantage under OSRA. At the same time, NVOCCs acknowledged that carriers are more agreeable to establish "bullet rates"⁽⁷⁾ in contracts, enabling them to amend their contract rate levels with carriers more easily and frequently. Some shippers commented that GRI clauses and other such tariff links in contracts which allow for the pass-through of rate increases and surcharges that are difficult to anticipate or ascertain are antithetical to the purpose of contracting for a specified rate. Carriers maintained that such tariff references and links make drafting and managing contracts easier.

The Commission's survey revealed that roughly 10 percent of the contract rates were completely all-inclusive, while approximately 90 percent were linked or referenced to a tariff. The survey defined completely all-inclusive as single rates inclusive of freight and all other applicable charges for a fixed duration. Many contracts contained rates inclusive of specific surcharges for fixed durations, with the proviso that any other charges in the governing tariff would apply. Such contracts, however, did not meet the survey's definition of completely all-inclusive. In addition, the survey found that 36 percent of the contracts contained GRI clauses or other such provisions for the general increase of freight rates connected to tariff rate increases. Some GRI clauses directly passed through the tariff rate increases, while others gave the shipper the option to terminate the contract. While tariff references in contracts are not new, their use under OSRA has created some controversy regarding the carriers' ability to influence contract rate levels and terms collectively.

Thus far, OSRA's reforms have increased the use of contracting both in terms of the number of service contracts and cargo volume. New options in contracting are available, and business relationships are evolving as contemplated. OSRA has reduced the direct control of conferences, with greater freedom and flexibility of contracting on an individual basis, while preserving the option for agreement contracts. With contract rates and certain service terms no longer published, parties are free to privately structure their contracts in accordance with their individual business requirements. Service contracts are easier to obtain and amend. For the most part, OSRA has enabled contracts to be fashioned and consummated in a more market-responsive environment as intended.

SERVICE CONTRACT CONFIDENTIALITY

OSRA's Changes

As previously discussed, OSRA's changes regarding the confidentiality of service contracts have had a significant impact on the way service contracts are developed and negotiated. OSRA discontinued the publication of rates and certain other terms -- published essential terms now are limited to the origin/destination port ranges, commodities, minimum commitments, and durations of service contracts. All other essential terms now can be kept confidential between the contracting parties. In this new environment, added measures to preserve confidentiality in contracting have evolved. Specific clauses and provisions have been included in contracts to restrict the disclosure of unpublished terms to third parties. In some cases, contracting parties have entered into agreements to ensure confidentiality prior to negotiations, or added penalty provisions for breach of confidentiality. The Commission specifically explored the effects and use of contract confidentiality in both its NOI and its survey of service contracts randomly selected from SERVCON.

Prior to OSRA, carriers and shippers could access the contract rates and terms of their competitors directly, and relied heavily on the published essential terms of service contracts as benchmarks in their own negotiations. Contract terms achieved by a particular shipper were published and made available to any similarly situated shipper through the "me-too" provision. Accordingly, carriers were more reluctant to grant specific contract concessions for a particular shipper since their other customers could request equal treatment. The transparency of information constrained the commercial benefits of contract specialization for both carriers and shippers.

Industry Experiences

The confidentiality of information under OSRA has altered the process of negotiating contracts considerably. Comments in response to the Commission's NOI indicate that contract negotiations are less focused on meeting a market-rate benchmark, or matching the terms of competitors, and more attention is given to internal cost factors and individual service requirements in contracts. Shippers and carriers advise that they can discuss and address commercially sensitive issues more freely, and privately structure their contracts accordingly. Respondents note that greater emphasis is placed on the skill of conducting negotiations to achieve business objectives. In their comments, shippers and carriers reported that confidentiality has created a more favorable contracting process in which it is easier to accommodate specific rate discounts and terms. NVOCCs concurred with the general view that confidentiality has improved the contracting process, but commented that tariff publication puts them at a competitive disadvantage relative to VOCCs.

Since OSRA, more attention must be devoted to evaluating market conditions through other sources of information. Carriers commented that internal contract accounts and rate bids from shippers constitute their main sources of market information. They contended that some shippers use rate quotes from competing carriers as leverage for better rate offers. Carriers noted, however, that such rate information is hard to validate, and added that tariffs generally are not reflective of market rates. Shippers commented that a wide range of published information and data including tariffs is used in their market evaluations. They disclosed that carrier sales representatives also provide a certain amount of market information. Shippers' associations support their shipper members by collecting and distributing market information.

Shippers claimed to be at a disadvantage relative to carriers in terms of market knowledge, noting that carriers can make broader observations due to their greater access to information about the overall market. Further, shippers complained that voluntary service contract guidelines adopted by agreements allow carriers to share contract rate information at agreement meetings. Carriers and agreements acknowledged that some contract rate information is shared at agreement meetings, but stressed that carriers must honor the confidentiality provisions of their individual contracts. Carriers pointed out that much less specific contract information is made available to agreement secretariats as a result of OSRA. They also questioned the accuracy of contract rate information shared by competing carriers at agreement meetings. Clearly, reliable rate information now is more valuable and increasingly sought throughout the industry.

However, confidentiality clauses and provisions increasingly are being added to contracts to restrict the disclosure of unpublished contract terms. The Commission's survey specifically reviewed the texts of the contracts for any of the following forms of confidentiality between the parties: (1) a specific confidentiality clause or provision, (2) a cross-reference to a tariff provision that describes the parties' obligations with respect to confidentiality, or (3) a stamp or mark of confidentiality within the contract. The survey revealed that just over 35 percent of the contracts sampled contained one of the aforementioned forms of confidentiality stated within their texts.⁽⁸⁾ For the most part, the confidentiality clauses found in the survey stipulated that neither the carrier party nor the shipper party could disclose unpublished contract information to third parties. In some cases, clauses were less restrictive and allowed the carrier party to share unpublished information with an agreement secretariat or other carrier members of an agreement without identifying the shipper party.

Certain carriers disclosed in their NOI comments that internal controls and new procedures were developed to limit the exposure of confidential contract information within their companies. On the use of confidentiality in contracting, roughly half of the carrier respondents indicated that standard confidentiality clauses automatically are included in 100 percent of their contracts. Those carriers also reported that shippers requested specifically crafted confidentiality clauses or language in about 5 percent of the carriers' contracts. Such requests were acceptable to the carriers so long as the confidentiality terms were reciprocal. Other carriers stated that as a matter of policy, confidentiality clauses are added to contracts only at the shipper's request. Further comments disclosed that some of the larger shippers sought confidentiality agreements prior to conducting contract negotiations. Such agreements usually were initiated by shippers, and here again, carriers found them acceptable as long as the terms were reciprocal.

On a related issue, the Commission's survey showed that only 2 percent of the contracts sampled contained penalty provisions for breach of confidentiality. The breach penalties predominantly focused on the recourse of legal action with court remedies. Most NOI comments voiced no significant concern with respect to breach of confidential information. Carriers stated that cases of suspected breach usually were treated by limiting the number of participants in future negotiations. Certain carriers recognized that sales representatives and shippers exchanged market information in the course of making contract proposals, but did not characterize breach of confidential information as a problem. Another shippers' association expressed concern over the possible breach of confidentiality given non-contract parties' broad access to rate information on bills of lading.

Overall, the responses reflect that confidentiality under OSRA has provided shippers and carriers with the privacy they deem necessary to freely transact business. With the ability to shield such information, the contracting process is not constrained by the previous standards of meeting benchmarks and matching terms identically. Commercially sensitive issues and business requirements can be discussed more freely and accommodated more easily with specific contract terms. Carriers and shippers are more focused on achieving their individual rate and business objectives through contract negotiations. Specific clauses and other internal measures have evolved to ensure that negotiations and unpublished contract terms remain confidential.

AGREEMENT ACTIVITY/VOLUNTARY

SERVICE CONTRACT GUIDELINES

Industry Structure Overview

While liner operators have enjoyed antitrust immunity since 1916, the last decade has seen dramatic changes in their exercise of this privilege. No longer can the structure of liner shipping be viewed as fifty or so major carriers operating autonomously. It is more appropriate to view the industry as blocs of operational partnerships with crisscross ties via space charters between and among different members of different partnership blocs. Such arrangements are important to understand when reviewing the use of antitrust authority. The Commission is acutely aware of the growing mosaic of vessel-sharing, alliance, and space-chartering configurations that can form a web, often with a discussion agreement bringing all involved carriers together. An economic understanding of a trade no longer can be garnered merely by focusing on a single agreement -- the competitive impact of carrier behavior across a myriad of interconnected relationships must be assessed.

The emergence of global markets and anticipated deregulation under OSRA were the twin catalysts that triggered de-emphasis on traditional conferences and the continual migration to operational agreements. In 1996, one observer opined that "[a]ny history of the industry will have to distinguish between 'Before Global Alliance' and 'After Global Alliance,' so radical are the changes which the new structure promises."⁽⁹⁾ The story of the use of antitrust immunity under OSRA is the progressive shifting from a demand-side focus to a realization of the considerable possibilities to be gained from a supply-side focus.

Discussion Agreements

During the 1980s, the traditional demand-side preoccupation was with rate stability, and the vehicle to address this single concern was the stereotypical, binding-ratemaking conference. The emergence of strong non-conference carriers, bringing a homogeneity of services across most liner operators, fractured the existing industry structure of strong conferences and weak non-conference carriers. The conference system was unable to deal with outsiders that provide a similar level of service, traditionally the exclusive domain of conference carriers. Given continued price-spread tensions between conference and committed non-conference carriers, in the face of endemic overtonnaging, there was pressure for some forum to mitigate rate competition between these two groups. The Eurocorde Discussion Agreement in the transatlantic and TSA in the US inbound Far East trade emerged in response to these forces. While the conference carriers were unable to entice the committed independents to become conference members and engage in binding ratemaking, they were able to bring them under the discussion agreement umbrella of voluntary ratemaking. Furthermore, during the late 1980s, carriers realized that supply-side control could be extremely powerful in curtailing destructive rate competition and consequently turned to capacity management in discussion agreements.

With the demise of the conference system, the discussion agreement, by default, became the sole forum for collective carrier pricing activity in most US liner trades. In the major trades, it is able to attract key players by being less bureaucratic and autocratic than the traditional conference. Members are not bound to specific rate levels, and among the variety of their features found attractive, the opportunity to exchange information and the ability to agree voluntarily on pricing policy are paramount. Although a discussion agreement's ratemaking may not be on the rigid, enforceable scale of the traditional conference, the ability of the members to share commercial information and formulate pricing policy can have a considerable demand-side influence under certain economic conditions.

Unlike conferences, which saw a marked decline in their numbers (almost one-third either disbanded or were suspended about the time OSRA became effective in May 1999), the number of rate discussion agreements has remained somewhat stable during the first two years of OSRA. As of June 1, 2001, there were 19 conferences and 36 discussion agreements in effect. Further, consistent with the decline in the number of conferences, the number of discussion agreements that include a conference as a member has likewise fallen. The Commission's June 2000 Interim Status Report noted that there were 18 such agreements at that time. Currently, there are only four such agreements.

Operational Agreements

The demand-side demise of the traditional conference system and the emergence of discussion agreements undoubtedly are major hallmarks of the OSRA era. But the bigger headline is on the supply side, where carriers have turned to operational agreements to achieve significant efficiencies and global service expansion.

Globalization requires carriers to expand into new markets, and deregulation made it unlikely that strong conferences would be the vehicle for such expansion. The global strategic alliance soon emerged as the key vehicle for a carrier's entry into new markets by offering the ability to expand service and geographic coverage, while limiting individual risk and capital.

Alliances, like globalization and deregulation, developed gradually. Upon recognizing the advantages of operational cooperation, carriers initially ventured into space-chartering, joint services, and vessel-sharing arrangements that were typically confined to a single trade lane. Positive experiences in deployment and vessel-sharing cost savings led to more involved cooperation, and ultimately to the global strategic alliance as we know it. Alliances essentially strove to maximize the advantages of operational cooperation while maintaining individual marketing. Alliance partners worked to capture efficiencies across the entire gamut of shared operational assets such as vessels, containers, marine terminals, equipment, and inland facilities.

Operational agreements comprised 58 percent of all effective agreements on file with the Commission as of June 1, 2001. They range in scope and complexity from simple space-sharing arrangements (for example, one carrier selling to another 25 TEUs of space on one vessel operating in a single trade), to the highly integrated multi-carrier, multi-trade lane, global strategic alliances (typically, 3-5 carriers coordinating the services of numerous -- often as many as 80 -- vessels calling at ports worldwide). Although global alliance agreements are not numerous,⁽¹⁰⁾ reports indicate that in the main east-west trades, alliances now account for between 60 to 65 percent of all slots deployed. Moreover, alliances and the use of new technologies have enabled ocean carriers to reduce their average cost by more than $260/TEU over the past four years.⁽¹¹⁾

While operational agreements such as global alliances and basic space-chartering/vessel-sharing arrangements have the potential to reduce costs and expand the service network of each participant, there may be down sides to such supply-side forms of cooperation. Some shippers pointed out in their NOI responses that, in certain cases, carriers that are party to these integrated operational arrangements no longer have complete control over assets and, therefore, are unable to guarantee vessel space.⁽¹²⁾ There also may be instances in which service levels (i.e., capacity and number of vessel calls) are reduced as a result of carrier cooperation because the service is "shared" among carriers.

On the other hand, operational agreements offer an alternative to consolidation through mergers and acquisitions. These operational agreements arguably provide shippers with more service choices and the possible preservation of competition with respect to price and ancillary or related services, as compared with the results of mergers and acquisitions.

Internet Portal Agreements

Like most other industries, ocean shipping is adapting to the age of the Internet. A new carrier innovation that improves operational efficiencies and financial results is the formation of Internet portal agreements. Two portal agreements have been filed with the Commission that provide "one-stop shopping" Internet sites. Under these agreements, the participating carriers have established a common Internet portal and platform through which the carriers and other transportation service providers interact with shippers through a common set of transactions covering tracking and tracing, booking, and the like. The portals also contain links to the individual carriers' own web-sites.

Voluntary Service Contract Guidelines

With the proliferation of individual service contracts since OSRA, greater scrutiny has shifted toward determining the degree of influence agreements are able to exert on the contracting practices of their agreement members. As broad-based discussion agreements evolved in many trades, attention has focused on the agreement members' adoption of and adherence to voluntary service contract guidelines affecting individual service contracts. The extent to which agreement members adhere to voluntary service contract guidelines, especially on rate matters, gives an indication of the agreement's collective influence or market power in its respective trade. Under OSRA, agreements that adopt guidelines are required to submit them confidentially to the Commission. Because of the confidential nature of the guidelines and the service contracts actually filed, the results of our review of the nature of and adherence to voluntary service contract guidelines may be reported only in general terms. At present, the Commission receives guideline submissions from 19 agreements.

Guideline Content

The guidelines adopted by the respective agreements vary considerably. It is evident in some trades that agreement members actively discuss, and set or amend their guidelines, on a regular basis. Activity often centers on very specific rules or charges for particular countries within the geographic scopes of the agreements. Conversely, in other trades, agreement members set very basic guidelines on an infrequent or sporadic basis. Most of the guidelines establish objectives for GRIs, minimum rate levels, or rate increases for specific major-moving commodities, surcharges, or accessorials. One particular set of guidelines recommended that agreement members use time-volume rates rather than service contracts. Many guidelines encouraged open communication between members on information relating to proposed or effective individual service contracts, provided that no confidentiality agreements are breached. Other guidelines discouraged rate discount mechanisms in their contracts, and instead recommended including automatic GRI clauses. Some guidelines further recommended using prescribed confidentiality clauses, as well as establishing specific dollar limitations for cargo loss or damage in line with the Carriage of Goods by Sea Act.

Adherence to Service Contract Guidelines

To measure guideline adherence, the Commission undertook an audit of service contracts for the 2000 and 2001 contract periods. While all guidelines are reviewed, the audit focused on major agreements in various US liner trades including: the transpacific, transatlantic,⁽¹³⁾ Australia/New Zealand, and South and Central America. The Commission selected a range of service contracts on file with the Commission for major commodities moved by a variety of agreement carriers in each trade. Rate levels in each contract were examined to determine whether agreement members were able to implement and/or sustain the rate objectives specified in each agreement's guidelines. In the case of GRIs, contracts and amendments for 2000 were matched with the corresponding 2001 contracts for each identical shipper and carrier to gauge the level of rate change. The rates were evaluated from 2000 through the start of the 2001 contract renewal period to determine whether carriers were able to implement increased rates by the full or partial GRI amount, or not at all. Where guidelines set commodity rates at specific levels, contracts for the same commodities were retrieved for 2000 and 2001 to determine whether the rates adhered to the guideline criteria. Adherence to the commodity rate guidelines was considered to be affirmed if the contract rates were at or above the specified levels. Other common guidelines regarding additional charges also were evaluated. If applicable, contracts were reviewed to determine whether carriers adhered to the guidelines by assessing a peak-season or equipment imbalance surcharge, and/or a chassis usage charge.

The results of the Commission's review of over 600 individual service contracts and rate observations confirm that carriers' success in gaining guideline adherence generally depended upon overall market conditions. For example, it appears that guideline adherence in 1999, when high demand kept inbound Far East vessels relatively full, was greater compared to 2000 and 2001. The current weaker US trade conditions, with anticipated additions in capacity, resulted in actual rate erosion in the inbound Far East trades in the face of guidelines calling for rate increases. However, the audit found that carriers in the inbound Far East trades were more successful with adherence to surcharge guidelines than those pertaining to GRIs. This result was similar across the other trades audited.

The degree of adherence to voluntary service contract guidelines is routinely reviewed by the Commission. In sum, our findings were consistent with the preliminary findings made in the Commission's June 2000 Interim Status Report on OSRA: ". . . overall carrier compliance with [the guidelines] has been limited, depending on the trade in question . . . . The most important factor [to adherence] is the general economic conditions in the trade." While these findings remain true, the results of this audit yielded additional information with respect to adherence. Overall, the percentage of contracts adhering to guideline recommendations on surcharges and/or accessorials was mixed, ranging from 34 to 100 percent depending on the trade. Given the extensive impact of surcharges on a shipper's bottom-line costs, a high degree of adherence on such items merits the continued close attention of the Commission in evaluating the anticompetitive effects of an agreement under the section 6(g) standard. Adherence to guideline-recommended GRIs and commodity-specific rate increases was less successful, ranging from none to upwards of 60 percent.

Agreement Issues Noted in NOI Comments

A number of commenters raised issues concerning agreements, with a particular focus on discussion agreements, agreement filings, and monitoring reports.

Discussion Agreements

There were numerous comments and suggestions for future Commission action regarding agreement structure and activities. Carriers emphasized the necessity for discussion agreements and the benefits of exchanging information, i.e., a more stable environment which benefits shippers and provides carriers with the security to make additional financial investments. Shippers suggested that the anti-competitive effects of discussion agreements should be examined by the Commission. Many believed that voluntary service contract guidelines are not voluntary and that carriers use them, as well as their exchange of information on capacity and surcharges, to increase freight rates. A number of shippers contended that discussion agreements contravene the pro-market thrust of OSRA. (See Appendix I: questions 14-17.)

As noted above, the Commission thoroughly reviews all agreements, with a particular emphasis on discussion agreements. Under the Commission's monitoring program, the activities of discussion agreements and the web of agreements that make up the structure of agreement activity are evaluated through examination of confidentially-filed monitoring reports, agreement minutes, service contracts and other trade sources. The information contained in the Commission's service contract database is evaluated continuously, along with voluntary service contract guidelines, to determine whether there is abuse of antitrust immunity. This information is analyzed in conjunction with other pertinent data, including agreement monitoring reports and minutes of meetings.

Agreement Filings

Several commenters suggested that the Commission consider exempting certain carrier agreements from filing and waiting requirements. For example, commenters variously proposed that agreements regarding specific aspects of space-charter arrangements (i.e., operational matters), changes to space allocations, and the expansion of the geographic scope of agreements, be allowed to become effective on filing or effective on less than 45-days' notice (e.g., effective after five business days). These agreement-related issues, as well as others, currently are being reviewed by the Commission's staff, and proposals are being developed in connection with a Notice of Inquiry - Docket No. 99-13 - The Content of Ocean Carrier and Marine Terminal Operator Agreements Subject to the Shipping Act of 1984, August 3, 1999, 64 FR 42057.

Agreement Monitoring Reports

A number of carrier commenters raised a variety of concerns regarding the Commission's monitoring report program. They suggested that the Commission review, revise, or reduce its monitoring report requirements in light of the changes brought about by OSRA. The commenters acknowledged that some reporting is necessary in order for the Commission to fulfill its regulatory responsibilities. However, they noted that the present reporting requirements "pre-date" OSRA and argue that they are not well suited to a regulatory system in which a majority of cargo moves under the confidential terms of individual service contracts. Several carriers questioned the necessity of having any monitoring report requirements on various types of agreements such as operational agreements which are entered into for efficiency purposes and to meet the specific needs of customers. Carriers made a number of other suggestions for streamlining the reporting process which many found burdensome and costly.

Based on the Commission's experiences with monitoring reports over the last several years, and in light of the reforms introduced under OSRA, the Commission has begun to consider possible changes to the agreement information form and monitoring report requirements. Any proposed changes to these requirements would be addressed at some future date in a proposed rulemaking.

OTI LICENSING AND BONDING

The OTI Industry at a Glance

OSRA, together with the continuing logistics and supply-chain evolution, is bringing about significant change in the structure of the OTI industry. Since OSRA became effective, the number of NVOCCs has decreased by almost 15 percent and ocean freight forwarders by 21 percent; however, the number of OTIs that are both NVOCCs and ocean freight forwarders has more than doubled. Overall, the total number of OTIs has fallen by about 6 percent, but the number of foreign NVOCCs keeps rising.

There are several possible explanations for the decrease in the total number of OTIs. One is the increasing consolidation among OTI firms, similar to that occurring elsewhere in the liner industry. Second, as just cited, is the increase in the number of OTIs adding freight forwarding or NVOCC activities to their existing functions. This increase in the number of OTIs that are both NVOCCs and ocean freight forwarders was explained by some commenters to the Commission's NOI as an effort to remain competitive by offering a wide variety and level of services. These intermediary respondents noted that ocean carriers also are diversifying operations by developing and offering their own value-added services and performing traditional OTI activities. With the increased awareness of efficiencies from, and customer demand for, supply-chain management, carriers are developing and selling services traditionally offered by OTIs and logistics providers. Confidential contracting between shippers and carriers has fostered the rapid growth in carriers providing logistics and value-added services. Through the confidential contracting process, carriers and shippers jointly can customize service packages that include both ocean transportation and logistics services.

Licensing/Bonding and Tariff Publication

OSRA requires that NVOCCs in the US now be licensed by the Commission. Additionally, the Commission's rules implementing OSRA increased the bond amount required from all NVOCCs. Ocean freight forwarders, while already licensed and bonded, also are subject to a higher bonding level under the Commission's implementing regulations. The vehicle for insuring financial responsibility to date has been surety bonds exclusively. (See Appendix III.) OTIs generally have not objected to these additional licensing and bonding requirements, nor have there been indications that these new requirements have had a significant impact on OTI operations. However, OTIs have raised various concerns since OSRA became effective. They are troubled that their regulatory burden increased, and consistently have questioned the regulatory need for NVOCC tariff publication. They also believe that they are subjected to more FMC oversight -- tariff publication, adherence to tariffs, and common carriage provisions of the 1984 Act -- than vessel operators. Similarly, OTIs in the US contend that they have a significant and unfair competitive disadvantage since they face closer FMC scrutiny regarding statutory compliance. Some commenters suggested a relaxation, simplification, or elimination of applicable requirements and/or a reduction of enforcement activities directed at NVOCC compliance with tariff and common carriage provisions of the 1984 Act.

Competitive Activity

As mentioned, many shippers' associations and OTIs expressed concern with the greater level of regulation of OTIs relative to VOCCs. They point to the fact that NVOCCs still must make their rates publicly available, while VOCCs are free to sign confidential service contracts. In their opinion, this gives ocean common carriers a commercially competitive advantage over NVOCCs, who cannot protect their customers' rates and terms of service from public scrutiny via confidential service contracts. They submit that ocean carriers are using all the competitive tools at their disposal, including confidential contracting and antitrust immunity, to compete head-to-head with transportation intermediaries, both on the ocean side and in market sectors such as logistics and supply-chain management. Several intermediary commenters indicated that VOCCs are able to provide a bundling of services from warehousing, to customs brokerage, to ocean shipping all in one confidential package, and therefore have a substantial advantage over OTIs who are legally prohibited from offering confidential "one-stop" transportation packages to shipper-clients. Some commenters believe the Commission should examine more closely carriers' concerted activities and allegedly unfair shipping practices.

While the Commission does not have evidence of specific harm to OTIs vis-a-vis ocean carriers due to OSRA's changes, OTIs as a group have voiced their concerns at the highest national levels. And as previously mentioned, the doubling in the number of OTIs that are both NVOCCs and ocean freight forwarders can be attributed to a perceived need to offer more service to customers in an effort to strengthen competitive position under what is seen as a more difficult operating environment under OSRA. The FMC recognizes the importance of the interplay between the VOCC and OTI sectors, and will monitor future activities closely.

TARIFF PUBLICATION

Tariff Publishing Under OSRA

Tariff publication was the area affected the most by OSRA's regulatory approach. Effective May 1, 1999, OSRA eliminated the requirement that carriers and conferences file their tariffs and essential terms publications with the Commission. OSRA requires carriers and conferences to publish their tariff rates and services in automated systems to be made available to any person, without time, quantity, or other limitation, through appropriate access from remote locations. OSRA also authorizes assessment of a "reasonable charge" for tariff access. Additionally, with respect to service contracts, OSRA removed rates and charges, service commitments, and any liquidated damages from the essential terms required to be made public. Instead, public essential terms of service contracts now are: the origin and destination port ranges; commodity or commodities; minimum volume or portion; and the duration of the contract. OSRA also provides that marine terminal operators ("MTOs") may publish schedules of their rates, regulations, and practices, if they so choose.

OSRA mandates the Commission to prescribe the requirements for the accessibility and accuracy of carrier automated tariff systems ("CATS") and, after periodic review, to prohibit the use of any automated tariff system that fails to meet these requirements. The Commission issued a proposed rule to implement OSRA that covered all relevant aspects of tariff publication. Based on public comments received from affected parties, the Commission significantly altered its proposal to reduce further the burdens of compliance, and to provide carriers with more flexibility and options in publishing their CATS. All conferences, VOCCs and NVOCCs are required to publish the services they offer.

Following the implementation of OSRA, the Commission reviewed a number of tariff systems and found that many appeared to limit the public's access to tariff information. The Commission contacted carriers and publishers in an attempt to rectify significant problems. The Commission consistently concentrated on compliance with OSRA's requirements that tariffs be accessible to the public and accurate -- a number of questions were asked and clarifications sought.

After several failed attempts to obtain overall industry statutory compliance, the Commission issued Circular Letter No. 00-1, Public Access to Tariffs and Tariff Systems Under the Ocean Shipping Reform Act of 1998, on April 6, 2000. The circular letter, addressed to carriers, conferences, and tariff publishers, indicated that a number of tariff systems failed to provide adequate user instructions, had no commodity index or failed to provide a commodity search feature, had no historical data search capability, required a considerable time to download or move from one function to another, and had access fees and/or monthly minimum requirements that appeared to discourage public use. The Commission urged publishers to correct access deficiencies and advised public users to notify the Commission of any problems that might be experienced in accessing tariff systems. The circular letter also expressed the Commission's desire to work with the industry to address any problems that limit public access to tariff systems. The letter concluded with the admonition that, if the problems were not remedied voluntarily, the Commission would consider other remedial actions to ensure public access to tariffs in accordance with the Congressional mandate contained in OSRA.

The Commission also issued an Advance Notice of Proposed Rulemaking addressing the issues of access fees and monthly minimum charges, seeking input from all interested parties on the reasonableness of such fees and charges. Based on a review of the comments, the Commission determined not to proceed with a rulemaking and instead issued Circular Letter No. 00-2, Charges Assessed for Access to Tariffs and Tariff Systems, on October 6, 2000. The Commission stated that while it was not promulgating regulations governing tariff access charges, it was providing guidance with respect to access fees and monthly minimum charges assessed by carriers, conferences, and tariff publishers, as well as certain costs and expenses that should not be recovered when establishing charges for tariff access. The Commission indicated that voluntary adherence to the guidelines mentioned in the circular letter would obviate the need for further Commission action.

No written complaints have been received by the Commission concerning the issues addressed in the two circular letters. The Commission's staff, however, has received informal inquiries from members of the public requesting assistance in retrieving tariff information. During the course of these communications, allegations have been made that some carriers' tariff access fees are too high, hence the request for staff assistance. Such inquiries generally involve only a minor amount of tariff research.

The Commission will continue its monitoring efforts so as to ensure equitable, uniform compliance with OSRA's requirements. Given the various uses of tariffs, particularly their applicability to service contracts, fair and effective administration of this responsibility is important. Additionally, since OSRA, and the Commission's implementing regulations, greatly reduce the burden of publishing tariff information, compliance should not be difficult to achieve. Naturally, our efforts will continue to seek voluntar