A New Era Dawns

Shippers and maritime carriers get their wished-for deregulation.

On May 1, the U.S. maritime industry will enter a new era. On that date, maritime deregulation in the form of the Ocean Shipping Reform Act (OSRA) of 1998 takes effect. Signed into law by President Clinton last Oct. 15, OSRA propels the regulation-bound ocean-shipping sector toward a more free-market system, something that many shippers and some carriers have wanted for a long time. It reforms the 1984 Shipping Act. "We've been trying to get this legislation passed for many years," says Mick Barr, senior international services manager with Procter & Gamble Co., Cincinnati. "It allows us to negotiate one-on-one with the steamship lines. It takes the rates we pay out of the public domain and puts us on an even playing field with the rest of the world." OSRA's Key Provisions The most important change wrought by OSRA is that it allows shippers and liner carriers to enter into confidential service contracts. These are contracts where a shipper guarantees to move a specific amount of cargo with a particular carrier over a certain amount of time for a discounted price. Although these service contracts will continue to be filed with the Federal Maritime Commission (FMC), several key provisions will no longer be made public, such as rates, service commitments, or intermodal origin and destination points. Currently, industry statistics put the percentage of cargo moving under contracts at less than 50%. This is expected to rise to more than 75%. "The reform legislation marks the beginning of a shift from the current common-carriage system, where all tariff rates are on file and made public, to a contract-based system, where service contracts can be kept confidential, allowing each shipper to be treated differently by liner carriers depending on that shipper?s volume and commodity being shipped," explained FMC Commissioner Joe Scroggins, speaking before the Georgia Foreign Trade Conference last fall. "In other words," Scroggins added, "the current system is, in theory, completely open. Every shipper essentially knows what every other shipper is paying to have their goods moved. This allows a shipper to go to a particular carrier and ask for the same deal that his or her competitor is getting to ship a similar product. "With more confidential service contracts, there will be no more of these 'me-too' contracts," Scroggins noted. "It is hoped that the act will create a climate in which most cargo moves under negotiated contracts -- making filed tariffs less important." The bill allows shippers to include specific service requirements in the contract -- something that is not permitted under the current system. "The name ?service contract? really was a misnomer," P&G'?s Barr notes. "The carriers would just say to you, 'We'll try to give you X number of containers per vessel, but in the end, what we didn?t end up giving you, you can just deduct from your commitment.'" Ocean carriers still will be penalized for charging shippers other than the tariff or service-contract rates, according to Richard Bank, a partner with the Washington law firm of Graham & James LLP. "However, those same carriers cannot later collect from the shipper the difference between the rate agreed to and the one that was published -- which is the case now." Although its fate was in doubt at several points during the four-year evolution of OSRA, the FMC survived more than intact. "The status of the FMC has been enhanced by its retention as an independent regulatory agency with retained authority in several areas," explains Bank. Specifically, the FMC will oversee:

  • Enforcement of tariffs and common-carrier obligations.
  • Oversight of concerted carrier activities pursuant to agreements that are filed and that are protected by antitrust immunity.
  • Protection of U.S. carriers and U.S. ocean commerce against the discriminatory and unfair practices of other countries that create conditions unfavorable to shipping in U.S. trades.
Some Adjustment Required Naturally, there will be a period of adjustment after OSRA goes into effect, as liner companies and shippers learn how to do business under the new terms. Barr doesn't think this adjustment period will be either lengthy or difficult, however. "This has been coming for so long that people already have thought through what they need to do differently," the P&G manager says. From the shippers' perspective, large shippers appear to be elated by the prospect of new ocean-shipping freedoms. Small shippers, however, are not so thrilled. They worry that they will get shut out of lower rates because they lack the volume needed to bargain effectively with carriers. "Small shippers know they will pay more if they don?t have the volume," says Edward M. Emmett, president of the National Industrial Transportation League (NITL), an association representing the transportation interests of large multinational companies. "But if they want to get a lower rate, they can join a shippers? association. (The NITL is exploring the possibility of creating its own shipper? association.) Or if they ship only a box [container] or two every now and then, and it?s not time-sensitive freight, they can tell the carrier to ship it whenever they have space." Regardless of their size, shippers will have to be smarter about buying ocean transportation. "They will have to learn how to predict the rate market for their long-term contracts," says Bank. "The good news is that through contracts they?ll have a more predictable budget. They?ll know what their shipping costs for next year will be. "The bad news is that any failure to move the number of boxes specified in the contract means your shipments will revert to the basic tariff rate. If I have a service contract for 1,000 boxes and I give the carrier only 800, I have not fulfilled my contract. So shippers will need to make sure they manage their service contracts." Impact on Conferences Everyone seems to agree that the new deregulated environment does not bode well for the health of liner conferences -- collections of carriers that band together under antitrust immunity to serve a particular trade. "Ocean carriers are leaving conferences in droves," observes Emmett, "and when it's all said and done, the conferences really won't have any influence or power." Many in the maritime sector believe the conference system discouraged service creativity and flexibility among carriers because of the control it exerted over carriers? activities. During the last 12 months, notable conference defections have included:
  • P&O Nedlloyd Container Line Ltd. and Hapag-Lloyd Container GmbH, both traditional conference lines, withdrew from the Trans-Pacific Westbound Rate Agreement (TWRA).
  • APL Ltd., a founding member of TWRA in 1985, resigned its membership in October, effective Jan. 1.
  • Sea-Land Service Inc. and its partner Maersk Line announced their withdrawal from the Inter-American Freight Conference in October.
  • Hanjin Shipping Co. Ltd., Neptune Orient Lines Ltd., Cho Yang Shipping Co. Ltd., Hyundai Merchant Marine Co. Ltd., DSR-Senator Lines GmbH, Transportacion Maritima Mexicana SA de CV, and Tecomar SA de CV indicated they will leave the Trans-Atlantic Conference Agreement.
If conferences are on the wane under deregulation, another type of agreement -- multicarrier alliances -- appears to be on the rise. These alliances take the form of space charters, vessel-sharing agreements, joint services, and terminal/intermodal services sharing. For example, last year APL, Hyundai Merchant Marine, and Mitsui OSK Lines Ltd.announced an agreement to coordinate vessels and terminals and share vessel space. Under the new law, shippers can negotiate confidential contracts with individual carriers or with alliances. These contracts can cover multiple trade lanes and multiple services. Shippers can negotiate global service contracts that give them much greater flexibility in managing their global supply chains, says Torey Presti, vice president of deregulation for Oakland-based APL. "In these types of global contracts, a customer could turn on and turn off different cargo flows depending on legislation, political unrest, economics, etc. They are able to become more flexible in meeting their customers? needs by turning on and off the manufacturing spigot and sourcing from another area." Trouble in the Pacific While deregulation has monopolized center stage in the maritime sector, it isn?t the only issue on the minds of shippers. U.S. companies plying the Pacific trades have been in an uproar for some months over rates charged by ocean carriers for imported cargoes from Asia. In November, despite ongoing investigations by U.S. and Japanese authorities, a chorus of complaints from maritime users, and the highest rates on imported cargoes from Asia in recent years, the ocean carrier members of the Transpacific Stabilization Agreement (TSA) announced a new round of tariff and service-rate increases. Scheduled to go into effect on May 1 (the effective date for OSRA), rates for shipments from Asia and the Indian subcontinent to the U.S. would increase a minimum of $900 per 40-ft container (FEU) to U.S. West Coast ports and a minimum of $1,000 per FEU to other coasts and inland destinations. In addition, the TSA said it would levy a minimum of $300 per FEU peak-season surcharge to all service contracts and tariff cargo during the period from June 1 through Nov. 30, 1999. Because TSA is a "discussion agreement" among carriers and not a conference, the announced hike is not mandatory but simply a guideline for members to charge. "With confidential service contracts coming into effect [at the same time], it will be a good test to determine whether rate discipline will be held among the TSA member lines," observes the NITL?s Emmett. "We have always said that deregulation could lead to rate increases as well as decreases. Clearly, the trade imbalance dictates some changes. However, the TSA is not a conference, and if it tries to act like one, the League will examine all options for fighting their cartel actions." A Fundamental Improvement Now that OSRA is a done deal, everyone in the maritime sector seems ready to embrace change. The new environment offers the opportunity for "better value for everyone," says John Clancey, president and CEO of Charlotte-based Sea-Land. "The bill will allow ocean carriers to more creatively and efficiently meet the changing requirements of shippers. It will fundamentally improve the commercial dynamics of our industry." And the NITL?s Emmett quips, "Now that the act has passed, everybody is saying, 'why didn't we do this before?'"
OSRA At A Glance
Tariffs and Service Contracts
  • Tariff filing at the Federal Maritime Commission (FMC) will be eliminated.
  • Tariff filing will be replaced by electronic tariff publication through private tariff services or Internet sites.
  • Service contracts will continue to be filed with the FMC. These contracts will be filed confidentially so that the rates, service commitments, and geographic scope will not be available to the public.
  • "Me-too" service contracts will be eliminated.
  • Under the 1984 act, shippers can enter into service contracts as individuals or as shipper associations; but under OSRA, groups of shippers also may enter into service contracts.
  • Under the 1984 act, ocean common carriers can enter into service contracts as individual carriers or as conferences; but under OSRA other types of carriers? agreements/alliances may enter into service contracts.
  • Non-Vessel Operating Common Carriers (NVOCCs), a kind of intermediary, continue to be prohibited from entering into service contracts with their customers.
Common Carriage
  • The common-carrier obligations in the 1984 Shipping Act are retained.
  • The FMC will continue to have access to carrier tariffs through access to electronically published tariffs for enforcement purposes.
Carrier Agreements
  • Carriers will retain antitrust immunity for carrier agreements that are filed with the FMC.
  • Independent action under conference agreements will be on five calendar days' notice instead of the current 10.
  • Groups of ocean carriers will be able to negotiate jointly with inland carriers for inland rates and services, but without antitrust immunity and subject to U.S. antitrust laws.
NVOCCs And Ocean Freight Forwarders
  • A new category of ocean transportation intermediary will be created to include NVOCCs and ocean-freight forwarders.
  • NVOCCs and ocean freight forwarders will have to be licensed, whereas only forwarders are required to be licensed under the 1984 act.
  • Licensing of NVOCCs will apply only to NVOCCs in the U.S.
  • NVOCCs and forwarders still will be required to file a bond or other proof of financial responsibility in an amount to be determined by the FMC.
  • NVOCCs will not be allowed to offer service contracts to their shipper customers. They will continue to be able to enter into such contracts with ocean carriers, however.

OSRA Seminars
The National Industrial Transportation League (NITL) will offer a series of educational seminars on the legal and technical aspects of the Ocean Shipping Reform Act of 1998. The schedule: Jan. 15, Washington; Feb. 11, London; Feb. 22, Los Angeles; Feb. 24, Dallas; Mar. 12, Chicago. Contact Patricia McKenney (phone 703/524-5011; fax 703/524-5017; e-mail mckenney@nitl.org).
TAGS: Regulations
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