FMC Regulating Capacity? 'Hard to Imagine the Chaos'

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As the leader of the group representing roughly 90% of world container ship capacity, John Butler already has plenty on his plate with Congress looking to give the government more power over commercial decisions on capacity allocation in the container shipping trades.

But in addition to grappling with the implications of that legislation, Butler – the president and CEO of the World Shipping Council – is contending with questions about whether the industry is ready to share data for the sake of moving past the current supply chain disruptions, and the next major cost factor for vessel operators and their customers: greenhouse gas regulations.

He recently spoke with FreightWaves about how these regulatory initiatives will affect his members and their customers.

FREIGHTWAVES: Last month the House passed the Ocean Shipping Reform Act of 2021 with a lot of bipartisan support. Assuming the Senate moves forward with its own bill, are there changes to the legislation that you and your members would be willing to accept?

BUTLER: "We've encouraged the Senate not to repeat the mistakes that we see in the House bill. The House bill puts the Federal Maritime Commission in the position of deciding whether any individual service contract is fair and reasonable. That's really never been the function of the FMC.

"One of the driving forces behind the changes in the 1998 act [the last major ocean shipping reform] was that shippers did not want the government in the middle of their service contracts. And they didn't want their individually negotiated contracts being shared with other shippers.

"Unfortunately, Congress has now created the real possibility that the FMC can be placed as arbiter of what should be in individually negotiated service contracts. When you essentially have a situation where the government can step in and upend any agreement that the commercial parties have reached, you really don't have a contract."

FREIGHTWAVES: What are the practical implications, in your view, of OSRA 2021?

BUTLER: "It's hard to imagine the chaos you would have if the FMC was thrown into the mix of deciding how much cargo [a vessel operator] has to load while at port. But there are provisions in the House bill that would make it a requirement that a particular export cargo would have to be loaded on a ship — as long as it can be loaded safely — before that ship could leave."

FREIGHTWAVES: In other words, it gives the FMC the ability to make cargo capacity decisions?

BUTLER: "It appears to, yes. I'm sure if you asked the FMC, they would say they wouldn't want to do that. But even if they're not standing on the dock with a clipboard saying what cargo to load or not load, what it really comes down to is, all those decisions carriers have to make in order to keep their networks running, they all get second-guessed under threat of a monetary penalty. How does that improve network operations? It doesn't. But it does add a tremendous amount of cost and cost uncertainty for everyone, because you have this threat of government intervention — after the fact — for every business decision you make."

FREIGHTWAVES: You were also critical of how the House bill was negotiated. Do you think the process will be different for the Senate bill?

BUTLER: "What happened with the House bill was quite unusual. You had members standing up on the House floor during a very short debate basically saying, ‘There are lots of problems with this bill, but we have to do something.' That's not a very good way to make transportation policy for a supply chain that undergirds the entire U.S. economy.

"I think the most likely scenario is that there will be an organic Senate bill, probably introduced this month, which starts from a pretty clean piece of paper. I don't expect them to pick up the House bill and act on that.

"I think it's also much more likely that the Senate will go through regular order and have an open markup process with amendments. The Senate tends to be more deliberate and more appreciative of the long-term consequences of its actions; we hope that's the case here."

FREIGHTWAVES: The FMC is coordinating meetings with shippers, carriers and third parties to figure out how to standardize and share information to improve container flow. Can container location data be shared without compromising proprietary information?

BUTLER: "Everybody feels as though their commercial information is critical to their competitive advantage. I won't say that's something that needs to be overcome, because people are always going to want to keep truly commercially sensitive information protected.

"But at a fundamental level, it's not really the commercially sensitive stuff that plays into the operational needs. Operationally, you need to know what cargo is coming in and when, and which marine terminal is going to hand it to which rail or trucking carrier to take it where. It's not necessarily the case that all the information associated with that transaction is commercially sensitive.

"So I think the trick to getting people to buy into this is to give them comfort that they're going to get more advantage in terms of improved efficiency in movement of their goods than they will see by way of any possible disadvantage in terms of increased data transparency."

FREIGHTWAVES: What lessons has the liner industry learned about the current supply chain disruptions?

BUTLER: "Communication becomes key when you have these kinds of problems. Everyone knew that at an intellectual level, but it's really been driven home in the course of the pandemic. Shippers need to know what's going on so that they can make contingency plans. That's the mode everyone's in right now, and it's something that our members have really internalized and have stepped up their communications with customers — there's an awful lot of old-fashioned communication by phone going on. Obviously you can't handle all the millions of transactions this way, but when it comes down to solving individual problems, there's no substitute for the human element."

FREIGHTWAVES: What's the biggest regulatory issue — aside from potential economic reform — that you're keeping an eye on in 2022?

BUTLER: "Along with things like tackling perennial issues like misdeclared hazardous cargoes — which lead to ship fires — greenhouse gas is top of mind, and it's going to be something in which we'll be really active in the coming year. We have to get a clear regulatory signal and set of regulations from the International Maritime Organization in order to move forward with decarbonizing shipping."

FREIGHTWAVES: Getting to zero emissions on the land side equates basically to rolling out electric trucks and trains. What does it mean for ocean shipping?

BUTLER: "For the deep sea fleet, the idea of going directly to electric — batteries, for example — is not feasible based on what anyone has seen so far. It's more a question of finding a fuel that's an energy carrier that was most likely produced on land through the use of green electricity. You hear people talk about the use of hydrogen or ammonia. Those are theoretical possibilities, but they also come with pretty substantial safety and engineering challenges that haven't all been solved yet. And without a significant increase in green electricity, you never really get off the ground with respect to fuels that we're talking about using on ships. We've got real concerns that we end up with a mandate to use fuels that in fact are not available."

FREIGHTWAVES: Last year the European Commission proposed adding shipping to the European Union's Emissions Trading System (ETS) as a way to decarbonize shipping, starting in 2023. What's your take on that proposal?

BUTLER: "There's a question of whether it can be effective if they end up reaching too far and set up a system that is impractical and doesn't work.

"As proposed, the ETS would apply to voyages on the high seas and in the waters of other non-EU nations. So the question is whether that's appropriate from the diplomatic/international law standpoint. There's also the potential that it creates enough ill will among non-EU nations that it undermines the work that the IMO is doing, and makes it that much harder to come to an international agreement."

FREIGHTWAVES: How big a price tag will carriers and shippers see?

BUTLER: "It's hard to say at this point, because so much depends on things that happen outside our industry. But there's no question in my mind that the cost of decarbonization is almost certain to dwarf both the ballast water regulations [in 2017] and the IMO's low-sulfur fuel regulations [in 2020].

"It's quite clear there's going to be a cost differential between whatever fuels come next and the current cost of fossil fuels. So in order to send the right market signal to use alternative fuels, we have to have some kind of a global carbon price applicable to ship fuels. Whether that takes the form of a levy or an ETS is an open question. But we have to have a price signal. Otherwise there's no way we're going to get to where we need to be."

Related articles:

• Ocean shipping lobby grilled on carrier profits
• Amazon, Walmart to advise Washington on ocean freight policy
• Power index: Top 10 regulatory/legislative stories of 2021

Click for more FreightWaves articles by John Gallagher.

Image Sourced from Pixabay

This post contains sponsored advertising content. The content that follows is for informational purposes only and not intended to be investing advice.