I have heard that the ocean common carriers are lobbying hard in D.C. to have their tariff publication obligations removed. I am very concerned if this is true and more so if the request is being considered by those committed “to protect the public from unfair and deceptive practices” in the ocean transportation supply system.
Quick reminder of two key tariff-related obligations detailed in the Shipping Act of 1984, as modified by the Ocean Shipping Reform Act of 1998 (emphasis added by me):
§ 40501. General rate and tariff requirements
(a) AUTOMATED TARIFF SYSTEM.—
(1) IN GENERAL.—Each common carrier and conference shall keep open to public inspection in an automated tariff system, tariffs showing all its rates, charges, classifications, rules, and practices between all points or ports on its own route and on any through transportation route that has been established…
(e) EFFECTIVE DATES.— (1) INCREASES.—A new or initial rate or change in an existing rate that results in an increased cost to a shipper may not become effective earlier than 30 days after publication.
Before the passage of OSRA1998, service contracts were offered by ocean common carrier conferences and were publicly available for any similarly situated shippers to join. Those service contracts were one way that shippers secured rate coverage for their shipments; another way was through the carrier’s (or conference’s) ocean freight rate tariff. Only higher-volume shippers were typically successful in securing service contracts and the rest – speaking from memory, about 75% of shippers (although not as much as 75% of the freight volumes) – shipped their goods pursuant to rates that were published in ocean freight tariffs, often with a validity of several months or longer but never increasing on less than the minimum lawful 30 days.
When OSRA1998 changed the regulations to permit individual ocean common carriers to enter into service contracts with shippers, the use of those individual confidential service contracts flourished and the use of tariff rates dwindled. And that seemed to work for all parties - until it didn’t.
I am not talking about pandemic-days but quite a bit earlier. Speak with small and medium-sized shippers and you will hear that ocean common carriers had begun to decline requests for individual service contracts several years before the arrival of COVID-19. Not surprisingly, ocean common carriers had become more discerning in identifying which shippers were worth the effort and investment of negotiating and administering a service contract. These determinations would be based on a variety of factors but one very important factor was the ability of the shipper to guarantee high volumes and in a lane-specific and predictable way. We saw this approach intensified as from 2020 when ocean carriers were unashamedly vocal in telling SMB’s that, particularly considering the high-demand environment of the day, service contracts with minimum quantity commitments (MQC’s) of the smaller numbers in historic SMB service contracts would no longer be available.
So what happened next? Did the ocean common carriers publish their “non-contract” rate levels in tariffs to enable shippers to book against those rates - the way shippers had in past engaged directly with ocean carriers in the absence of a direct service contract?
The answer is a resounding no, they did not.
Before we get into the tragedy behind that, for the sake of completeness, I want to make mention of an important alternative to either individual service contracts or tariff coverage for rates and carriage: the long-standing tradition of non-vessel-operating common carriers (NVOCC’s) as ocean service providers to smaller shippers. In a way that has some similarities with Shippers’ Associations, NVOCC’s are able to negotiate service contracts with ocean common carriers using the collective volumes of their many SMB customers. When SMB’s lost their ability to secure service contracts directly with their ocean common carrier, they often increased their use of arrangements with NVOCC’s (and Shippers’ Associations) as a means to access ocean carriage.
So what did happen instead of ocean common carriers offering carriage pursuant to service contracts or published ocean freight rate tariffs?
At risk of inspiring some post-traumatic stress, I ask you, fellow shipper, to recall the “bad old days” of 2020-2021. Ocean freight rates were communicated with a validity of one or two weeks while booking requests were not entertained for sailings less than 4 or 5 weeks in the future. Shippers grabbed what space they could and rolled the dice on whatever rate got handed to them at the time of shipment. Prices were set by carriers from a vantage point of knowing the details of a surplus of booking requests already received for specific voyages including by which customers, for what types of cargo (hazardous, reefer, heavy etc.) and in what volumes. Would anyone challenge me if I said that agreeing to pay the highest rates increased a shipper’s chances of having their booking request approved, equipment released and cargo loaded to any of those over-solicited vessel voyages?
This is a model that completely thumbed its nose at the regulations requiring ocean common carriers to have public tariffs, subject to a 30 day notification period for rate increases. While many of you may know the little tricks (ask me privately) about how to fiddle with that 30 day limitation, I sincerely doubt that any grand-scale manipulation of the sort that would have been required to yield the rate volatility seen during the pandemic would have gone unchallenged by the Federal Maritime Commission or, indeed, by President Biden, who frequently decried exorbitant ocean freight rates including no less than his announcement of “a crackdown on those [ocean carrier] companies overcharging American businesses and consumers” in his March 2022 State of the Union Address.
Simply put, the ocean common carriers gamed the system by completely sidestepping the public protections inherent in tariff filing obligations by failing to offer public tariff rate coverage. Perhaps with some administrative ease thanks to having successfully achieved a regulatory change in April of 2021 to lighten the requirements for Service Contract filing (see my then filed letter of opposition to the proposed rulemaking under Docket 20-22 here), ocean common carriers used a loophole to respond to individual rate requests with confidential (secret) rates of uniquely-determined (as high as could be achieved) levels under terms of what were essentially “micro-contracts”. Instead of making public tariff rates available to shippers, ocean common carriers pressed shippers to make use of on-line quote applications, relegating shippers to a dynamic pricing model. If you read my aforementioned 2021 letter to the FMC regarding docket 20-22 – or if you are a Taylor Swift fan! - you’ve heard that term before. Congress recently found the process so objectionable as to warrant an investigation regarding concert ticket sales. Surely it can be no less objectionable in our essential industry.
Remember the NVOCC option for shippers without direct contracts? Those arrangements were also compromised as ocean common carriers offered their continuously skyrocketing rates through those NVOCC service contracts on less than 30 days notification - rates that effectively became valid only after booking requests had been placed and expired before the sailing date for which any new booking request would be entertained by the over-subscribed carriers.
While we are here principally discussing shippers with no direct service contracts, we all know that shippers with service contracts were nonetheless often unable to get space for either their committed (or incremental) traffic and suffered equally. In some instances, those service contract holders were told that space for their particularly requested shipment could be more readily available if they paid a premium over their contracted rate levels. Desperate shippers took desperate measures to move their cargo. Transportation costs that had been negotiated and had figured into the budget and eventual sales price for consumer goods and raw materials imported into the USA blew up and either the importing business hit financial hardship or those costs most certainly – as significant as they were – got passed on down the line to the consumers.
In his April 2023 Journal of Commerce article, “Shipping reform would not have prevented pandemic-era disruption,“ analyst Lars Jensen trivializes the $20,000 freight rates endured by US businesses as nothing more than “a market-driven process caused by the shortage of capacity” and chooses to completely overlook the very important detail that ocean transport to and from the USA is a regulated industry – regulated to protect the public from unfair and deceptive practices. Supply and demand? Extortion and gouging and a flagrant dodge of the regulations that were established to protect the shipping public from freight costs that inflate wildly and without notice.
While the ocean common carriers are pushing hard to have the Federal Maritime Commission eliminate their tariff publishing obligations, we shippers need to consider how valuable a public tariff is – and would have been during the past few years had the ocean common carriers played by the rules.
And I haven’t even here touched on the importance of tariffs to ensure the appropriate and fair application of surcharges. Watch for my next article addressing that boondoggle.
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