Michael Khouri discusses the FMC’s role as a regulatory agency in the ever-changing container shipping industry and what’s on his agenda for the remainder of 2019.
The Federal Maritime Commission’s Acting Chairman Michael Khouri has kept his agency focused on reducing burdensome and outdated regulations. While a certain amount of regulation may be necessary to ensure that the U.S. container shipping business is conducted both efficiently and competitively, Khouri has been a strong advocate for commercial solutions, rather than regulatory responses, to resolving industry matters, whenever possible. He recently sat down with the Adam Smith Project to discuss the FMC’s role as a regulatory agency in the ever-changing container shipping industry and what’s on his agenda for the remainder of 2019.
Q: In early 2017, the FMC demonstrated its commitment to President Trump’s executive order to review and, if necessary, eliminate outdated and burdensome regulations by forming the Regulatory Reform Task Force. So far, what regulations has the task force deemed to be no longer useful to the FMC or industry? How will the elimination of these unnecessary regulations proceed?
A: Well, first off, from a broad perspective, this deregulatory process throughout government started long before the current president’s initiative. For those who have been in this for a while, we remember President Clinton and Vice President Gore in front of the White House with stacks of regulations that they were going to attack and recall President Obama and Vice President Biden renewed some of those efforts. I think part of what’s been going on with this administration is that some individuals have been put in place to seriously drive the process, with acting Chief of Staff Mick Mulvaney being one, and the agencies are now more and more focused on deregulation.
However, deregulation is a deliberative process. You have the Administrative Procedures Act which requires you to go through numerous steps, including public participation. In my view, deregulation benefits from all stakeholders having their say.
For example, in 2009, a year before I joined the commission, we had non-vessel-operating common carrier negotiated rate agreements (NRAs) come into play. However, there were limitations to it. We listened to the industry, and in 2011 there were amendments brought to the NRA process where they could opt out of rate tariff publications with NRAs. Now, at the end of fiscal year 2018, we have 1,800 NVOs out of a total of 5,500 NVOs, that have filed notice declaring they have invoked the NRA exemption to rate tariff publication. In 2017, this process continued, and again we listened to the stakeholders and additional relief was granted through the NRAs. In 2017, for the NVO Service Agreements (NSAs), we eliminated the filing publication requirements, allowed more flexibility in the commercial terms that could be utilized, and added flexibility in creating and amending those NSA documents, all to the end of reducing costs and how the NVOs were adding value through each one of these changes and essentially, regulatory relief processes. And we continue to look for other improvements.
The Regulatory Reform Task Force, led by Karen Gregory, has really been doing a good job and they embrace this effort, which is the most important part.
We’re now looking at the possibility of certain technical amendments to ocean common carrier marine terminal operator agreements subject to the 1984 Shipping Act, as well as procedures for environmental policy analysis, passenger vessel financial responsibility, carrier automated tariffs, marine terminal operator schedules and service contracts. All of this should take us through 2019. (A summary of the FMC’s current regulatory reform activities is available here.)
Now that we have two new commissioners on board it’s going to take a little bit of time to get them up to speed. Obviously, Commissioner [Daniel] Maffei was here before and only about six months out of service, and while Commissioner [Louis] Sola is new to this particular area. I will tell you that he’s bright, he’s hardworking, he’s anxious to get going with all this.
Q: You have long stated that the ocean shipping industry needs, and I quote, “cost-effective regulations.” In fact, you used this language during your confirmation hearing before the Senate Commerce Committee in December 2009, a month before being sworn in as an FMC commissioner. Do you feel that you have helped move the FMC in that direction and in what sense?
A: With all modesty, I do. This is a collegial group and the commissioners by and large work well together, but I think I’ve been a constant shoulder to the wheel of asking the question, “Why are we doing this?” The simplest answer could be, “That’s the way we’ve always done it.” Those are the places where you start digging in and saying, again, “Why?” and, “To protect whom?”
We were first constituted more than 100 years ago with the Shipping Act of 1916. It’s the nature of any federal agency that there’s a lot of inertia before we get to the point and saying, “OK, we’re going to let go that particular function.” It can be hard, but I think we’re doing better and better in that regard.
Another form of regulation comes in our private part case adjudications. As the agency issues case decisions, we can either expand the interpretation of a section of the Shipping Act or pull back into a smaller footprint. As an example, over the last 10 years, the commission used a series of cases that ask for relief under section 10(d)(1) of the act. That provision in the prohibited acts section provided that common carriers and marine terminals must establish, observe and enforce just and reasonable regulations and practices in the receipt, handling and delivery of property.
This general wording was first used in the Interstate Commerce Commission Act and incorporated in our original 1916 act. The case law developed over many years that a claimant must establish that the carrier or marine terminal operator had a regulation or practice that is employed in its normal and customary business operations and that such regulation or practice was unjust or unreasonable.
Beginning in the 1990s with a couple of cases, and then more fully in 2010 forward, the agency began to issue decisions in private party cases that subtly but substantively changed the scope of this Shipping Act section. As an illustration, a case where an NVOCC allowed the delivery of cargo to the consignee moving under a negotiable bill of lading without first receiving payment for the goods. The single act of failing to collect payment is certainly unreasonable, and it’s a violation of the Federal Bills of Lading Act. But no evidence was presented to show that such action was the normal and customary business practice of the NVOCC. Nonetheless, the agency ruled that the NVOCC had violated section 10(d)(1) and was liable for the lost cargo and attorneys’ fees.
Rather than simply taking the next case and overruling the prior commission cases, we went out with an interpretative rule with full public notice and comment. The new rule returned the statute interpretation and application to the original case law. I was please to find that the public comments were 100 percent in favor of returning to the time-tested traditional case law. It also put the commission back into its proper role and let the industry take care of its other issues.
There are many reasons for the obstacle course to get a regulation or a series of cases changed. Most important is to make sure we’re making good decisions and that all parties have the effective opportunity to have their say.
Q: With regard to the recent regulatory amendments NRAs and NSAs, how did the FMC benefit administratively from making these changes?
A: From the FMC’s perspective, I can’t tell you how many employees are now free to do other more value-added work. A certain amount of this work had already been automated through our SERVCON process. I think the true benefit of the NRAs and NSA amendments has been to the beneficial cargo owners and the NVOCCs in their ability to more quickly and efficiently quote a rate and consummate a deal.
Take for example, eliminating the process that you must have all your paperwork on file at the FMC before that agreement is effective. So, before the carrier could even touch the container sitting on its dock, all those things had to be completed. That’s a good example of why. As we found now that that has been liberalized you can file it within 30 days, etc., and ships get ready to sail and grab the container and get in on that ship and not miss that sailing. To my knowledge, there’s not been a single complaint since we changed those rules.
It’s been a victory really for the deregulatory emphasis that the agency has right now.
Q: The World Shipping Council recently has submitted a petition via the FMC seeking parity with NSAs by requesting an exemption from service contract filing and essential terms publication requirements. What is the status of this petition? With their limited antitrust immunity, do you anticipate a serious debate regarding this exemption request?
A: Well, No. 1, the petition is a pending docket matter and, as you know, there’s really limits to how much I can say. This is one of those issues that has a lot of pieces to it and we want to give Commissioners Maffei and Sola time to get up to speed. The Sunshine Act allows me to sit down with a commissioner one-on-one to listen to one another’s views. It’s a much more efficient and effective process in which to explore people’s ideas and thoughts. So that’s going to take a little bit of time. We do not have a hard timeline set up on when to act on the World Shipping Council’s petition. As you suggested in the question, we’re likely to have careful but vigorous debate.
One observation, however: The NVOCC pricing, it’s set off from the VOCC (vessel-operating common carrier) rates that are provided to the NVOCC based on market conditions and the other value-added services that the NVOCC provides. That’s a function of competition, market conditions and the NVOCC’s fundamental operating costs. But we cannot lose sight of a simple fact that more than 80 percent of the cargo coming into the U.S. on the East and West Coast trades is delivered within three alliances.
My second observation is you have 5,000-plus NVOCCs that do not operate with any antitrust protections, so that’s a rather fragmented group. No NVOCC has 3 or 4 percent market share, not even the biggest ones. And then we have nine carriers in three alliances that deliver that plus-80 percent of the cargo to the U.S. that receive Shipping Act protections. I’m not making any allusion that there is improper activity going on, but it is a core mission requirement of the commission to make sure that we have competition and integrity in America’s ocean supply chains and we follow what the carriers are doing very carefully. So that sort of frames the debate.
Q: We have witnessed unprecedented consolidation among the liner carriers and creation of larger alliances, particularly in the east-west trade. We’ve also seen the introduction of ultra large containerships by the carriers. While this activity has yet to dramatically raise freight rates, shippers are vocal about the persistence of poor customer service from the carriers, not to mention the knock-on supply chain impacts and imposition of demurrage and detention. In the FMC’s history statement, it states the agency has “worked to ensure that neither the activities of liner shipping groups nor foreign government laws and regulations impose unfair costs on American exporters or on American consumers of imported goods.” What is the FMC doing to monitor current liner carrier service shortcomings to ensure shippers aren’t abused?
A: Well, I have to start with where our standard of review begins. As I said earlier, we have these three alliances and we continually monitor their activities through Section 6(g) of the Shipping Act. That’s what makes the Federal Maritime Commission unique compared to the Department of Justice’s Antitrust Division or the Federal Trade Commission. Our statute directs us to continually monitor filed agreements. Because it says before an agreement goes into effect, or at anytime after it’s in operation, we’re supposed to be following it and we can then go into court and say that the operation of the agreement has become problematic. Section 6(g) provides that if an agreement by and among vessel-operating ocean common carriers — and marine terminal operators are also allowed to enter into these types of cooperative agreements — has resulted in a substantial reduction in competition and as a result of that reduction in competition, there has been an unreasonable increase in transportation cost or an unreasonable decrease in transportation services.
So that’s the filter from which we take all of our analysis, all of our monitoring. … And I can assure you as the alliances, like an omelet, have folded together to where we’re down to three, we have consistently, at each turn, said “OK, we’re going to do some more monitoring now.” The carriers, by and large, understand we’ve got to do this as part of our role.
But the other part of what we do, which is perhaps more effective than going to court, is inviting industry stakeholders together in a room to sit down and talk among one another. This is the strategy that Commissioner [Rebecca] Dye used with her recent detention and demurrage fact finding. When brought together at the FMC, stakeholders are encouraged to focus on today and how we can make something better. Obviously there needs to be compromise, or give-and-take from both sides.
When you fly over a seaport and look at the complexity of our ocean supply chain, the first question that would come to anybody’s mind is how in the world does it work in the first place? Because there are just so many opportunities for missteps. It’s in our mutual interests to make this part work better.
Recently, we’ve seen a real surge in cargo because of various parties wanting to accelerate their import orders due to the potential tariffs being filed. As that cargo hits the West Coast, it has caused congestion issues, including those containers moving via rail to places like Memphis, Chicago and Detroit. We’re finding dislocations with the available chassis supply and problems with how much the rail yards in these cities can hold. On the East Coast, Atlanta is another place where we’re seeing this. So we’re looking at how we put together stakeholder groups to address this problem. But it’s an issue of where does the FMC’s jurisdiction stop, what opportunities even if we were to jump in with our regulatory cape on, and where does the Surface Transportation Board’s jurisdiction enter in terms of rail detention and demurrage issues? So we’re looking at perhaps a creative way to bring these stakeholders together. Again, we want to look at how do we facilitate a more efficient transportation system.
Q: Doesn’t COSCO, and perhaps Hyundai Merchant Marine and Yang Ming, which receive government support, play with stacked decks? These governments don’t appear particularly concerned if those carriers are profitable, only that they move their respective countries’ exports cheaply to markets. Do these activities by foreign governments figure into the FMC’s regulatory oversight of U.S. liner carrier trades?
A: We have the Controlled Carrier Act and the Foreign Shipping Practices Act. In the mid-1990s, Japan had policies in place that benefited its home country carriers and exports to the detriment of the U.S. trades. It’s not quite so clear cut here.
With that said, the behavior in this area, the shipping sector, is more emblematic of perhaps a broader economic and political policy. If I put on my economist’s hat, I don’t think there’s anyone who argues that subsidies in all their various forms do not distort market dynamics, but then the question becomes how much? To an unreasonable extent? You still have the overall market place, so this is perhaps part of another question, but when you look at the overall market, even given, for example Japan. They just went through encouraging their three container companies to merge into one for publicly announced reasons. They needed more scale to be able to operate effectively. When we now look at the top 10 or 20 carriers, have we reached the point where, under traditional antitrust analysis, that we are getting into concentrated areas? And the answers continue to be no. We’re still well short of a concentrated industry. That is continually reflected in the rate structure and the service levels.
From our view as of right now, with so many other things going on in the trade negotiation arena, it’s certainly my view, and I haven’t tried to walk this around on my list with the new commissioners, that we’re going to try to jump in from our narrow perspective and participate in a broader trade negotiation. With that said, I’ll go back to my first point where we’re aware of foreign government activity, we’re monitoring it. We also talk with other agencies, various trade offices in the administration to stay current, and both give and share information.
Q: Are you concerned about the cyberattack risks to the industry as digitization grows? Does the FMC have any oversight of the accelerated digitization that’s occurring in the ocean shipping industry?
A: Carriers and marine terminal operators have more than enough self-interest in fighting cyber threats. Where it would come directly into our jurisdiction, that might be a little bit problematic. I would venture to say that the chief information officer in every company in this country’s status has gone up because he or she holds some pretty important keys. So is this one of those things that’s front of mind? Yes.
An agreement is being discussed that would allow carriers to discuss and develop a common digital platform and protocols. The driving business reason is to facilitate efficient transfer of shipping information to and between stakeholders and links in the overall ocean supply chain. I think one analogy might be the Underwriters Laboratories model where all things electrical are tested and approved. But there was antitrust scrutiny and review of that model.
The key questions for our agency, as a commercial and antitrust regulator, is to be careful and vigilant that such activity does not facilitate a diminution of competition between the participating carriers or from the perspective of excluding nonmembers of the platform from being able to effectively compete. As I observed, we have nine ocean carriers aligned in three alliances that deliver a large amount of cargo to the U.S. There is also a long list of nonaligned carriers who play an important role in maintaining discipline in the overall marketplace, both from a price perspective and from a service perspective.
So we need to be careful as we, on one hand, want to facilitate the further efficiencies that come with digitalization. But on the other hand, we need to be certain that the common digital platforms and protocols do not facilitate barriers to entry from other competitive carrier’s perspectives.
Q: With the recent addition of Commissioners Louis Sola and Daniel Maffei, do you foresee the FMC’s activities now accelerating with four commissioners? As acting FMC chairman, what is on your agenda for the remainder of 2019?
A: I don’t know that having four commissioners accelerates any particular agenda. There were probably one or two things that I left on a back burner until we came back up to speed. Both Commissioner Dye and I were aware of public perception of, “OK, you only have two Republicans, is that a little bit too cozy of a situation?” On one hand, there were things that needed to move through, and I don’t think we ignored any of those challenges.
In terms of other things going forward, from my position in the chairman’s role, employee morale and engagement has been up and I’m pleased to say in the Partnership for Public Service we were up in the first full year of my tenure, from 17th in the category of best small agencies to No. 9 this year. Moving forward, we continue to foster a workplace attitude that embraces change. That one statement right there probably covers everything we’ve talked about during this interview. We have an industry where stakeholders are changing business strategies quickly and an agency’s bureaucracy that dates back 100 years. Translation, the nature of the regulatory process is we’re always in a position of playing catchup to effectively regulate an industry that’s changing faster than we are. We need to do the best we can to keep up with them and I think a big part of that is having an agency-wide attitude and culture that embraces change. That’s my goal for the year and however long I’m granted the opportunity to serve in this position.