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ceive expedited decisionmaking in some cases. One of the most frequently heard criticisms of the ocean steamship conference system is that it is too rigid and inflexible. Here is a way to introduce some degree of flexibility in the conference ratemaking scheme.

There are some who will say that the right of independent action in a ratemaking group will never be used, so it will be ineffective. We believe that whether the independent action is actually exercised is not necessarily the best indicator of its effectiveness. Let us construct an example which we believe may be close to the real world of ocean shipping. Start with a conference with 6 carriers and where a 2/3 majority is needed for all rate actions-or 4 affirmative votes. The conference meets to consider rate adjustments. Some rate applications are approved but many are met with a compromise proposal, and some are denied outright.

Along comes a shipper with a brand new product, and he finds no specific commodity rate in the conference tariff. He tries to sell his product using the “General Cargo, Not Otherwise Specified” rate and no sales result because his delivered costs are too high. The shipper approaches the conference for a new specific commodity rate. The conference, at a regular rate meeting, takes up the shipper's application and the vote is 3 for and 3 against. The shipper is disappointed-he sells no goods. The three carriers supporting want the cargo at the proposed rate level and they have the unused capacity. The smart shipper goes around and honestly approaches the carrier members to find out what happened. The carriers who want the extra business seek out the shipper and encourage him to beef up his rate application and to reapply to the conference.

The shipper decides he will reapply to the conference-and again he fails. The shipper is now really upset, so he starts looking at carriers outside the conference. The shipper has confidence in his ability to penetrate the markethe knows some of the conference lines think his rate proposal has merit. One of the supporting carriers, being a responsible common carrier, concludes that the conference as a whole and he himself is going to suffer if some rate action is not taken. At this point, the carrier considers taking independent notice. Let us assume he gives the 48 hour advance notice to his fellow conference carrier members. Most likely a special rate meeting will be held and the intense bargaining between conference lines starts. The other carriers are concerned that if the one line gives in on a rate, the other conference carriers will lose goodwill with the conference shipper. Then some one of the five carriers remembers a shipper's rate request that was turned down in the recent past, primarily because of negative views of the carrier now threatening to take independent action on the current shipper's rate request. A trade off is then negotiated and both shippers' rates are adjusted. The new product shipper gets some action and a previously frustrated shipper gets a belated happy surprise.

Some conferences have very crowded rate dockets and rate applications can get pushed off from one meeting until another one, sometimes to a third, and a fourth later meeting. The right of independent action threat can give a concerned responsible conference carrier a handle on forcing other members to take decisive action and prevent items from being continued on the conference docket without any action. One of the shippers' most frequently voiced complaints is the slow decisionmaking of the conference relative to rate matters. Independent action can help here also.

In those cases where independent action results in one single carrier publishing a lower rate, other carriers will most likely be forced to meet the rate within 30 days particularly if cargo actually starts to move at the lower rate.

We would suggest some modification to Sea-Land's proposed recommendation on independent action. That is in regard to advance notice for reduced rates under the independent action. Unlike Sea-Land, we do not believe advance notice is required. As an example, FMC-approved Agreements No. 10107 and 10108 in the Trans Pacific trades have independent action language. Neither of those agreements contain any advance notice period for rate reductions to become effective.

At the present time, independent action is a discretionary provision of conference agreements and is generally found in agreements which do not employ the dual rate system. Our suggestion would be to make independent action mandatory to all agreements-dual rate or otherwise which are subject to Section 15 of the Shipping Act, 1916.

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A full discussion of advance notice for rate reductions in the foreign commerce of the United States took place as early as the 87th Congress before the Special Subcommittee on Steamship Conferences of the House Committee on Merchant Marine and Fisheries where executives of U.S. flag, foreign flag, conference chairmmen and U.S. shippers unanimously opposed any advance notice of rate reductions. The essence of the testimony was that advance notice of rate reductions will be to the detriment of U.S. shippers because it gives foreign competitors 30 or 60 days to adjust their rates and perhaps spoil the fruits of a lower rate the U.S. shipper obtained. We, therefore, urge no change in the present system in allowing rate reductions to become effective with the date of filing at the FMC. We believe industry leaders will reaffirm that position.

To sum up, the advantages of independent action are as follows. First, the insidious shipper discrimination involved in rebating will be ameliorated by the exercise of independent action by individual carriers. Second, a legitimate alternatve to rebating is introduced into the conference system. Third, independent action would provide a tool for speeding up conference ratema king procedures.

This concludes my prepared statement, Mr. Chairman. I will be happy to answer any questions you or other members of the Subcommittee may have.


Mr. SHEFLER. Thank you, Mr. Chairman.

Since my printed statement is submitted for the record, I will summarize it very quickly.

The basic conclusion I have come to is that the problems of rebating are indicative of greater problems in the conference system as it operates today. Something that is not indicated in my statement is that I come to this job from being Assistant U.S. Attorney and dealing with a great deal of crime.

I have heard witnesses in the 2 days of hearings talk about getting documents from foreign countries. Let ms tell you that I have tried to get such documents time and time again without success, and I don't think these kinds of efforts are going to work. If you will examine the rebating bill which you are proposing, you will see that this bill will hurt the American flag carriers more than it will help them. They are going to be the ones who will end up having to pay the penalties—hire the attorneys to face the prosecutions and the grand juries—and I just don't think it will work. What you have to do is get to the core fundamental issues and those core fundamental issues are how to make the system work and work better.

I am making one suggestion for the immediate future. That is, that a right of independent action be made mandatory in conference agreements. But for the longer run we should consider the suggestions made by both the Chairman and the ranking member that the different agencies of this Government and the committees in Congress involved, should sit down and examine the laws and come up with a new comprehensive program in this area. We will be happy to participate with the concerned agencies in doing that. Thank you for this opportunity to testify.

Mr. BREAUX. Thank you very much for summarizing your testimony and making some rather, I think, important comments.

One of the provisions of the bill is to say that foreign shippers who do not provide us the necessary documentation that we are seeking would be barred from calling on U.S. ports.

Is that not an effective means of trying to get the documentation that would be necessary!

I raised the question earlier of determining whether the documentation is valid or not and perhaps that is a problem.

Would you care to comment on that?

Mr. SHEFLER. It would be effective if it were enforced. The difficulties that some of the other Government agencies have mentioned, in terms of working against foreign laws which give protection, the problems of retaliation are there, but if you, in fact, cut off the right of entry, you get results.

Mr. BREAUX. Well then, that really is kind of taking a lot of wind out of the thing he was saying at the beginning; that it is not very effective.

Mr. SHEFLER. Yes, sir. That is right. What I was really saying is the approach would not work because of the protection of the other sovereigns, but, if, in fact, we were willing to take on problems of retaliation and to deny entry we would get results.

Mr. BREAUX. I recognize the majority counsel.
Mr. KYROS. Thank you, Mr. Chairman.
Mr. Shefler, first I apologize to you for having to wait so long.

In your statement, you propose the right of independent action, and this right of independent action was, by the last two witnesses-Mr. Amoss representing the American Institute of Merchant Shipping and also Clark of Delta-protested as harmful to the stability of the conference system, whereas, you present an argument here wherein you say flexibility would be helpful, and even help in rebating.

I just want you to know that proposition has floated around here and is more than very hotly debated.

I want to get to something else.

You stated within your own experience it is very difficult to obtain foreign records. That is one of the issues that confronts this committee and this legislation.

Now, since many years ago we have never been able to get them and unless there is something seriously done, none of those foreign flag carriers, unless the FMC can reconstruct the cases from other consignors or consignees, will ever come before the American bar in regard to rebating.

So, looking at it in that light, what would you think of a limited use immunity that might induce these people to come forward and find with the FMC, limited only to the portions of violations of section 16 and 18 on rebating?

Mr. SHEFLER. If you are talking about the foreign carriers, I don't think it is going to be effective. I sense that basically we are dealing with a carrier fraternity, almost like a college fraternity. You don't rat on your brothers. If we deny entry, there will be the obvious impacts, but granting limited immunity will not help.

Mr. Kyros. What about providing the remedy to the FMC and see what possible effects it might have?

Mr. SHEFLER. That is one way to go, but it is not a wise way. A better approach is to examine the basic structure of the conference system and try to improve that.

Mr. KYROS. We are talking about the basic cause, overtonnage and overcapacity, and apparently the committee is trying to confront the problem of fragmentation within agencies and lack of a coherent, coordinated maritime policy which we are trying to develop.

For example, you from the Department of Transportation were the only ones to make a study of the UNCTAD Code; is that right?


Mr. KYROS. You come out and say there are things in the UNCTAD Code of conduct that are not favorable to the U.S. trade; is that not right?

Mr. SHEFLER. That is right.

Mr. KYROS. Yet other people have thrown the figures 40, 30, 20 around, that it might be helpful to the United States to split up its trades in that manner.

My suggestion to you is that at this very moment the problem of rebating malpractices must be solved and apart from saying providing independent pricing, which perhaps is a tenuous way to approach the problem of rebating, the real problem then is not attack at all.

Mr. SHEFLER. I understand. It seems to me there are two ways to approach the problem. One is to improve the system in such a way as to eliminate rebating.

Mr. KYROS. How?

Mr. SHEFLER. Well, if you want to take that course, increase the number of prosecutors, and take the drastic step of cutting off entry. Those kinds of very hard and tough steps will curtail violations.

Mr. KYROS. Thank you, Mr. Chairman.
Mr. BREAUX. The committee will be in recess.

We have a couple of questions we would like to ask you. I apologize. We have a recorded vote on referring any congressional pay raises which we have to make. We will come right back and ask you a few more questions.

Thank you.
The committee will be in recess.

Mr. BREAUX. The committee will please come to order.

Mr. Shefler, I want to apologize. Mr. McCloskey apparently got tied up on the floor on something else. Our committee bill is being brought up right now and I imagine that is what happened to him. He had some additional questions for you and I would expect that he will submit them to the committee and we will submit them to you in writing.

We first apologize. Thank you for being here. We will submit questions that Mr. McCloskey has.

Mr. SHEFLER. Mr. Chairman, there was only one last thing, I would like to say that Mr. Ralph Thayer of our Office of Transportation Regulatory Policy who deals with maritime policy, is with me.

Mr. BREAUX. Thank you.
Mr. SHEFLER. Thank you, sir.


Mr. Breaux. Our next witness will be a panel consisting of the Honorable Richard J. Deschbach, chairman of the Federal Maritime Commission-Dick, welcome to the witness table—and Mr. Lawrence F. Ledebur, Chief of the Admiralty and Shipping Section, Civil Division of the Department of Justice, who I understand will be accompanied by some of his colleagues, which I would ask him to identify for the record.

Gentlemen, we welcome all of you and I think we have your testimony which will be included in the record.

[The statements referred to follow:]



Thank you, Mr. Chairman. I appreciate this opportunity to testify on H.R. 9518, a bill which is directed at solving the problem of rebating in our foreign ocean commerce. As you know, this is the first time I have appeared before your Committee since becoming Chairman of the Federal Maritime Commission. I am accompanied this morning by Mr. Joseph N. Ingolia, the Commission's new General Counsel, Mr. Arthur Pankopf, the Commission's new Managing Director, Mr. James K. Cooper, Director of the Commission's Bureau of Enforcement, and Mr. Harry C. de Venoge, Deputy Director of that bureau.

Upon my designation as Chairman by President Carter, I requested the Commission staff to analyze S. 2008, the companion bill in the Senate, and prepare some preliminary comments on that bill for my review. Since then, we have thoroughly analyzed the proposed legislation, and recognize both its positive aspects as well as some potential problems that might arise if it were to be enacted as now drafted. Moreover, we have discussed some alternative approaches to addressing the rebating problem, which are set forth in this statement.

Before discussing the specific provision of H.R. 9518 and how they would affect the Commission's current statutory authorities, I want to report to you where we stand with respect to our existing enforcement program to eradicate, or at least reduce, illegal rehating. In May of 1976, the Commission re-established a Bureau of Enforcement. Its mandate is to conduct an aggressive investigative program with respect to rebates and other malpractices. As you know, last year officials of Sea-Land Service, Inc., the largest U.S. flag carrier in our liner trades, made a disclosure to the Commission concerning malpractices in its ocean cargo services. This disclosure resulted in the assessment of a $4,000,000 civil penalty settlement, the largest in Federal regulatory history. The greatest benefit derived from the Sea-Land disclosure, however, is that the Commission gained some hard evidence indicating a pervasive pattern of rebating worldwide. Instead of pursuing allegations based on innuendo and undocumented reports, the Commission began to develop some reliable data on which to proceed.

Since August, 1976, we have initiated investigation of 27 ocean carriers, based upon solid information indicating the payment of rebates and other concessions. Of these 27 ocean carriers, 9 are American companies and 18 are foreign companies.

Also, since last August, we have undertaken investigations of some 215 shippers or consignees known or believed to have received rebates or other monetary concessions from carriers in our liner trades.

In conjunction with these investigations, the Commission has initiated a program under which these companies are invited to make voluntary disclosure of

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