REBATING PRACTICES

TUESDAY, DECEMBER 6, 1977

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON MERCHANT MARINE OF THE

COMMITTEE ON MERCHANT MARINE AND FISHERIES,

Washington, D.C. The subcommittee met, pursuant to notice, at 10:08 a.m., in room 1334, Longworth House Office Building, Hon. John M. Murphy, chairman, presiding.

The CHAIRMAN. The subcommittee will please come to order.

This morning we will continue hearings on H.R. 9518, a bill to amend the Shipping Act, 1916, to provide for a 3-year period to reach a permanent solution of the rebating practices in the United States-foreign trade.

The subcommittee has already held hearings on October 14, 20, and November 1 and 30, 1977.

Among the many subjects that have been considered during the course of these hearings there has developed a central theme which deserves special attention and examination. And that is, that the antitrust policies of the Department of Justice as applied to our liner trades and the philosophy of freedom of access by carriers of all nations to the United States ocean trades is in conflict with the goals articulated by the Congress in section 101 of the Merchant Marine Act, 1936.

We must maintain a strong and competitive U.S. merchant marine that is so essential to our future as a maritime nations. And, further, we must have stable United States ocean trades to safeguard our shippers and consumers, to assure that our products will be competitive in the world markets, and that we achieve a positive balance of trade.

In January, 1977, the Antitrust Division of the Justice Department issues a comprehensive analysis of ocean shipping regulation and existing antitrust exemptions entitled "Study of the Regulated Ocean Shipping Industry." The study comes to the general conclusion that antitrust immunity within the ocean shipping industry should be done away with. Specificially, the Department of Justice task group reported that:

* the regulated conference system operates to transfer wealth from consumers of shipping services to carriers. While the magnitude of the transfer cannot be ascertained with any great accuracy from available evidence, it seems clear that it is substantial; one authority has estimated that freight rates on one route are 45 percent higher than necessary. Carriers do not necessarily receive a benefit from the system in the form of monopoly profits, (519)

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however, because profits are drained by service competition and the tendency toward overcapacity engendered by the system. Furthermore, the system keeps the long run cost of shipping high by discouraging cost saving innovations. By raising the price of shipping and introducing inflexibilities into the industry, the regulated conference system may also reduce the volume of world trade.

On balance, regulation has served to promote the increasing cartelization of the ocean shipping industry. The maintenance of restraints which could counter-balance conference power has long since been abandoned. As a result, shipper choice and consumer welfare are subordinated to the goal of preserving conference power on the presumption that they are thus benefited, but real evaluation of the benefits is rarely undertaken.

It is the purpose of the hearings today to examine the position of the Department of Justice on our regulatory maritime policy.

Our witnesses are Mr. Donald Flexner, chief, Regulated Industries Section, Antitrust Division; accompanied by Mr. Joe Sims, Deputy Assistant Attorney General, Antitrust Division of the Department of Justice.

Gentlemen, we welcome you to the subcommittee.

The issue, as I have just laid it out, is one of the prime issues that we have before the committee for our record prior to the markup and consideration of legislation.

The Justice Department, and the Federal Maritime Commission, as we know, and understand, have conflicting views, and many experts in the industry have conflicting views, particularly with the thesis that I just quoted; because of the nature of America's position, not just in its own maritime trades, but as part of the world's maritime trading nations, we just cannot stress the importance of this morning's hearings.

STATEMENT OF DONALD FLEXNER, CHIEF, ENERGY SECTION, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE; ACCOMPANIED BY JOE SIMS, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, AND JAMES P. DENVER III, STAFF ATTORNEY, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

Mr. SIMS. We are very happy to be here, Chairman Murphy. I should point out that in addition to Mr. Flexner, I am accompanied by James P. Denver III, a staff attorney in the Antitrust Division, who is one of the primary authors of the Division's Ocean Shipping report.

We are pleased to be here to discuss the report, its conclusions, the rationale that was used to arrive at those conclusions, and any of our other activities that might impact upon the ocean shipping industry,

As I think you know, we feel that we have a responsibility generally in the regulated industries to serve as a competition advocate before, among others, the economic agencies, and we have been performing that function, we hope, effectively, before the Federal Maritime Commission in recent years, and especially in the last few

months.

With that, we would be glad to respond to any questions that you might have about the report, or our other activities.

The CHAIRMAN. I am going to ask counsel, Peter Kyros, to proceed with the questioning.

Mr. KYROS. Thank you, Mr. Chairman.

Mr. Sims, Mr. Flexner, nice to see you both again.

Mr. Sims, recently, at New York, at a Fordham University Law School conference, a speech was delivered in your behalf by Mr. Denver. During the course of this speech, the following remarks were made:

The Antitrust Division is, of course, primarily a law enforcement agency. Its central mission is to punish hard core restraint of trade, and to try to insure that a reasonable range of competitive choices exists within markets. We have a second and equally important mission to serve as advocates before regulatory agencies, before Congress and the Executive Branch. This effort does not include mindless arguing for more competitive practices, regardless of its practices. What it does include is defining the precise definition of goals, and then, where possible, showing pragmatically how a more competitive policy can be implemented to enhance our efficiency."

Mr. KYROS. I suppose that is a touchstone by which you are guided in the enforcement of the Antitrust Department's policy?

Mr. SIMS. That was intended to be a summary of our interest and effort, yes.

Mr. KYROS. And sometime in 1975, was a task force formed under the domestic council, on which you and Mr. Flexner served?

Mr. SIMS. The task group that is referred to, is, I think, the task group on antitrust immunities, which was formed under the auspices. of the domestic counsel review group on regulatory reform. The members of that task group were a number of people from various parts of the executive branch of the Government, and the assistant attorney general was the chairman of that task group, Thomas Kauper, at the time the assistant attorney general.

Neither Mr. Flexner or myself served on the task group, but Mr. Flexner, to a greater extent than I did, worked on a variety of the things that the task force undertook.

Mr. KYROS. Mr. Sims, I am referring to September of 1975, when a task group was set up, which included Mr. Flexner, I believe, but not you.

Mr. SIMS. The task group obviously was a grouping of interested agencies on the ocean shipping aspects of its work. Mr. Flexner was our primary participant.

Mr. KYROS. And it was the purpose of that task group to study the regulatory scheme of the maritime industry, and to see if they could come up with some recommendations.

Mr. SIMS. The purpose of it was to study the existing regulatory scheme, and to reach conclusions after that study, upon what changes, if any, would be desirable.

Mr. KYROS. One product of that study ultimately was the Study of The Ocean Shipping Industry published in January 1977 by the Department of Justice?

Mr. SIMS. That is correct.

Mr. KYROS. When that task force was set up, I notice here you very providentially called in Richard Bank from the State Department.

However, I do not see any representative from the Federal Maritime Commission or MarAd on this task force. Do you know the reason why they were kept out?

Mr. SIMS. I would have to-I do not have any personal knowledge as to how exactly the membership of the task force was put together,

no.

Mr. KYROS. Was Mr. Flexner on that task force?

Mr. SIMS. Mr. Flexner was the Department's primary representative on the group, yes.

Mr. KYROS. Mr. Flexner, did you complain that there was no representation from the very industry that you were supposed to be studying?

Mr. FLEXNER. I did not, and I think the reason is that it was assumed, all along, that there would be a close working relationship throughout the course of the study, with both the Maritime Administration and the Federal Maritime Commission.

In point of fact, when the Department of Justice took over the primary responsibility for the analysis, we did in fact confer, on numerous occasions, with the Federal Maritime Commission, and they were most cooperative in supplying us information which was used in the course of our analysis.

Mr. KYROS. Do you consider the fact that they provided you with data and materials, the same as their taking part in a conference; in reaching the conclusions which ultimately are reflected in your study of the regulated ocean industry?

Mr. FLEXNER. I, basically, think that since the study itself does not purport to State the views of the task force, but rather the views of the Antitrust Department of the Justice, it is clear that it does not represent, or purport to represent any kind of administration viewpoint, and ultimately its objective was to stimulate the kind of debate on the issues which is now occurring, including responses by the Federal Maritime Commission, which you well know about.

Mr. KYROS. Well, you certainly stimulated debate in the industry, and throughout, Mr. Flexner, if that was your intent.

But the fact is, deliberately MarAd and the Federal Maritime Commission, the chief repository, I hope, of our international shipping expertise, were left out of this original task force. Do you know why?

Mr. FLEXNER. No, I do not.

Mr. KYROS. On page three, of a memorandum from Fred Peterson, let me quote what he said before the task force began. He said, "suggested legislation"-this is in rewriting the regulatory scheme "could range from minor changes in the law requiring verbatim transcripts of all discussions between carriers as was suggested by Donald Flexner, to radical changes like removing antitrust immunity, and abolishing most functions of the Federal Maritime Commission."

Do you recall stating, even before the task force began its work, one of its fundamental premises, which may well have been its objective?

Mr. FLEXNER. Let me give you a little background about how the work progressed. In the early stages there was a good deal of ex