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the Gulf-Puerto Rican trade while South Atlantic Barge Lines entered this Puerto Rican trade in October 1968, providing some breakbulk service between Savannah, Ga. and San Juan with one barge and tug. Representatives of the FMC and Maritime Administration of the Department of Commerce (MARAD) have met with shippers (New York Commerce and Industry Association) and carriers in New York and San Juan in attempts to alleviate the space shortage problem. As a result of these efforts, Sea-Land added one chartered vessel to the West Coast-Puerto Rican trade and three additional containerships to its Atlantic-Puerto Rican service. The Commission has also assisted shippers of potatoes, animal feedstuffs, steel pipe, chemical fertilizers, meat, and automobile dealers to obtain some shipping space.

General inadequacies of shipping space, particularly for noncontainerizable cargo still hamper commerce moving between the U.S. mainland and Puerto Rico. As previously indicated, shipping capacity from the West Coast region is scarce, particularly on the Pacific Northwest to Puerto Rico route. There is some indication that markets on certain commodities have been diverted from the U.S. mainland to Europe because of these inadequacies.

The Commonwealth of Puerto Rico and shippers recognize that the number of breakbulk vessels available in this trade is very limited and, therefore, have suggested two possible solutions. These solutions are: (1) waiver of the U.S. Coastal Shipping Laws (the so-called Cabotage laws) to permit foreign-flag vessels to enter the domestic offshore trade, and (2) grant subsidy under section 805(a) of the Merchant Marine Act, 1936, to provide breakbulk service between the Mainland and Puerto Rico. The U.S. Coastal Laws are discussed in the latter part of this chapter (VIII.).

The Martime Administration of the Department of Commerce (MARAD) can permit U.S.-flag subsidized lines, without further legislation, to operate in the Puerto Rican trade under section 805 (a) of the Mer. chant Marine Act, 1936.10

There appears to be two basic transportation problems which must be answered in considering an application for section 805(a) permission to provide service in the domestic offshore trades. It is necessary to determine: (1) whether the proposed domestic service would interfere with the applicants subsidized service, and (2) whether the present service in the domestic offshore trade by nonsubsidized carriers is adequate or whether additional services by subsidized carriers are needed.

Because of the FMC's regulatory responsibilities and expertise in domestic offshore services, it would seem appropriate to transfer that part of section 805 (a) authority which requires a determination of whether the existing service is adequate to the FMC. It appears that the FMC could deal more effectively with the examination of common carrier service in the domestic coast. wise trade and related competitive factors. On the other hand, it would be necessary for MARAD to control the residual provisions of section 805 (a) dealing with the administration of subsidy to any contractor and person applying under authority of title VI and VII respectively of the Merchant Marine Act, 1936. MARAD should decide whether the proposed domestic service would interfere with the carrier's subsidized service.

D. CONTAINER/TRAILER DEMURRAGE

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The FMC has conducted a number of informal investigations into the practices of carriers engaged in the Puerto Rican trade with respect to the collection of demurrage charges on trailers and containers which are being detained under the present free time and demur. rage regulations contained in the carrier's published tariffs. These investigations have shown that in many cases the carriers have neither collected demurrage bills properly payable under tariff regulations nor taken reasonable steps to collect such charges.

Section 2 of the Intercoastal Shipping Act, 1933 provides that a common carrier by water shall not:

* charge or demand or collect or receive a greater or less or different compensation for the transportation of passengers or property or for any service in connection there. with than the rates, fares, and/or charges which are specified in its schedules filed with the Board (Commission) and duly posted and in effect at the time; nor shall any such carrier refund or remit in any manner or by any device any portion of the rates, fares, or charges so specified, nor extend or deny to any person any privilege or facility, except in accordance with such schedules."

There appears to be a widespread practice with respect to the carriers' failure to collect and enforce their published demurrage and detention charges. The

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*

In New York, representatives of the FMC and MARAD met with carriers and members of the New York Commerce and Industry Association. In San Juan, representatives of the FMC met with shippers at the Puerto Rican Department of Commerce.

10 "It shall be unlawful to award or pay any subsidy to any contractor under authority of title VI of this act, or to charter any vessel to any person under title VII of this act, if said contractor or charterer, ••• shall own, operate, or charter any vessel or vessels engaged in the domestic intercoastal or coast wise service, * •• or operate any vessel or vessels in the domestic inter. coastal or coastwise service, without the written permission of the Commis. sion ... The Commission shall not grant any such application if the Commission finds it will result in unfair competition to any person, firm, or corporation operating exclusively in the coastwise or intercoastal service or that it would be prejudicial to the objects and policy of this act • * *

lowing provision is one which is published by most carriers:

primary reason for the carrier's failure to collect such charges is that, hitherto, the shippers have not been required to pay for demurrage and detention and have become accustomed to not being billed for such services even though carrier tariffs provide for these charges. As previously indicated in chapter VI. C., consignees in Puerto Rico do not have a sufficient amount of warehouse space to handle large container loads arriving on the Island and have attempted to resolve this problem by retaining the trailers or containers beyond the normal time allowed. Four common carriers in this trade allege that 25 percent of all of their containers, including chassis, have been retained by consignees in excess of the free time allowed; to one carrier, this meant the tieup of 53 percent of its rolling stock. In attempts to alleviate this demurrage problem, representatives of the FMC and Puerto Rico Ports Authority have met with carriers in Washington, D.C. and San Juan. For example, in 1968, the FMC conducted a special field investigation in San Juan of container movements, container demurrage, and related billing and collection procedures maintained by carriers, to facilitate the flow, and/or turn-around time, of containers and trailers. In addition, the Commission attempted to determine whether demurrage was being applied in a just and reasonable manner. There have been numerous dis. cussions involving the carriers, and the situation is improving. But it appears that some carriers may be using demurrage and detention charges as a device to attract traffic from other carriers; and that the shippers, themselves, are playing one carrier off against another in order to benefit from the use of carrierowned trailers in excess of free time.

As already noted, under Agreement No. DC-38, Sea-Land, GPRL, Seatrain, and TTT may collectively agree, among other things, to establish uniform practices in connection with the movement of property between most U.S. mainland ports and Puerto Rico. 11 Hopefully, the carriers will use this forum to establish rules and procedures to substantially resolve the problem of excessive free time and demurrage through the enforcement of these rules.

“All freight and other charges due the carrier are pre-payable in United States currency, but at the option of the carrier may be collected at destination. The carrier may extend credit to shippers who furnish evidence of financial ability deemed by the carrier to be sufficient to assure payment of such charges within the credit period so granted.”

Under this tariff provision a carrier may demand prepayment from one shipper while extending credit to another. There is no quarrel with respect to the right of the carrier to exercise judgment as to which shippers it can reasonably extend credit without fear of financial loss. On the other hand, when the carrier does choose to extend credit to certain groups of financially responsible shippers, it should be extended to all such shippers on an equal basis. As the credit provisions are presently applicable, however, they permit a carrier to discriminate between shippers who have comparable credit standings. For example, one shipper may, because of volume of traffic, be in a position to influence a carrier and receive whatever credit period he demands.

In a 1965 informal investigation of credit practices, various carriers indicated that it is often the large sol. vent shipper who is tardy with payments. This may be due to two factors. First, large firms gear their internal billing and accounting procedures to longer periods. Second, the superior bargaining position of large firms allows them to play carriers off against each other in order to obtain the most favorable credit period.

Under present carrier credit rules, the credit period could extend for an indefinite length of time. On the other hand, a shipper with equally good financial standing but with less influence could be required to pay his freight bill within a restricted period of time; for example, from 15 to 30 days, depending upon the car. rier's desire. Moreover, the vagueness in present credit rules may be used as a competitive device by a carrier. More precision than is afforded by the present credit rules is required to prevent or at least inhibit actions which permit the carrier to discriminate between shippers.

During the credit period, the carrier's operating capital is "tied up”. The carrier must meet its operating expenses from other means while waiting for payment. There is at least an indirect relationship between this credit situation and rates because the longer the accounts remain outstanding the more operating capital the carrier requires.

E. CREDIT REGULATIONS

The majority of the carriers in the Puerto Rican trade maintain rather vague provisions in their tariffs with respect to payment of freight monies. The fol

11 This agreement gives parties no authority to fix ocean rates and charges.

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The Shipping Act leaves common carriers free to exercise their rights and privileges with respect to the extension of credit so long as that is not done in an unlawful manner under the Shipping Acts. However, the present situation as to credit rules opens the door to unlawful practices.

Under the FMC's tariff circular rules, the FMC can require carriers in the domestic offshore trades to publish in precise terms all provisions affecting carrier services. The present carrier credit rules do not meet this criterion. Moreover, it follows that if a carrier will extend credit to shippers it must extend the same credit to all shippers with comparable standings.

Rules for extension of credit, therefore, should include: (1) the period within which the carrier will extend credit to all financially responsible shippers, and (2) as a rule, carriers should give identical credit terms to all shippers. If shippers became deficient in payment, the carrier could take remedial action pursuant to prescribed rules.

F. NON-VESSEL OPERATING COMMON

CARRIERS

There is an urgent need today for a single transportation service covering diverse transportation modes. This may be aided by the non-vessel operating common carrier (NVOCC), subject to regulation by the Federal Maritime Commission.12 As its name suggests, the NVOCC does not own or operate the vessel by which the transportation is accomplished. This may be true also where the NVOCC offers a service requiring use of several transportation modes. Then the NVOCC employs rail, water, or air carriers, or a combination of such carriers, to provide the line-haul transportation necessary to the total or through movement. These other carriers are the underlying carriers.

This service is offered at a through, single-factor rate which may or may not be a combination of the local rates for the various transportation modes, and the NVOCC assumes liability for the entire intermodal movement. The NVOCC may add a profit factor to the aggregate of its underlying transportation costs. To make its service competitive, however, it will also endeavor to profit by its ability to consolidate small shipments into larger shipping units to take advantage of volume rates and full container carload discounts and allowances of the underlying carriers.

The NVOCC may perform many functions including preparation of waybills, bills of lading, and manifests for the underlying carriers; collection of the through charges; providing handling services; routing and tracing shipments when necessary; investigation and settlement of claims; and arrangements made for transfer service on interline shipments. The NVOCC ordinarily charges the shipper a rate approximating that which the shipper would have to pay were this shipper to move his own shipment in the small-bulk service of the underlying carrier, and the NVOCC pays the underlying carrier the lower volume rate, FAK, or per box rate as the case may be. The difference between these amounts represents the revenue of the NVOCC from which all operating and overhead expenses must be deducted. In some instances, the NVOCC charges a rate slightly higher than that which the individual shipper would have to pay to the underlying carrier. The NVOCC justifies this added charge by the extra services which he performs. In the case of the small shipper, the NVOCC is rendering some services which are normally performed by the larger shipper's own traffic department.

It appears that the primary benefit of NVOCC's is that they provide services for small LTL-type shipments at rates lower than would otherwise be available. These shippers would, for example, have to pay higher AQ rates.13 As evidenced by the large amount of business done by NVOCC's in the New York area, smaller shippers make considerable use of NVOCC operations. These NVOCC's afford at least some of the benefits of containerization, including faster delivery, less pilferage and damage, and to some extent, lower rates to the shippers. It appears that NVOCC's have not penetrated the South Atlantic, Gulf, or West Coast market to any appreciable extent.

In the domestic offshore trade, there are approximately 179 NVOCC's publishing 106 tariffs, 58 of

19 In docket No. 815, Common Carriers by Water-Status of Express Com. panies, Truck Lines and Other Non-Vessel Carriers, 6 F.M.B. 245 (1961), the Federal Maritime Board found that any person or business association may be classified as a common carrier by water who holds itself out by the establishment and maintenance of tariffs, by advertisement and solicitation and otherwise, to provide transportation for hire by water in interstate or foreign commerce as defined in the Shipping Act, 1916; assumes responsibility or has liability imposed by law for the safe transportation of shipments; and arranges in its own name with underlying water carriers for the performance of such transportation, whether or not owning or controlling the means by which such transportation is affected. The Board had previously reached the same con. clusion in docket No. 701, Bernhard Ulmann Co., Inc. v. Puerto Rican Ex. press Company, F.M.B. 771 (1952) wi respect to NVOCC operations in the domestic offshore trades.

At the time of the decision in docket 815 there were few, if any, NVOCC's in our foreign trade. However, development of the intermodal container con. cept in our international trade has encouraged carriers to offer a through, intermodal service such as NVOCC's.

13 For the difference between LTL and AQ rates see chart IV-2.

which cover general cargo and 48 tariffs covering household goods. In the U.S. mainland-Puerto Rican trade, there are 30 NVOCC carriers of general cargo with tariffs on file with the Commission.14 In 1967, seven of the largest NVOCC's in the U.S. mainlandPuerto Rican trade earned $6,175,010 in freight revenues, based on 105,966 tons, under FAK and TL rates largely from North Atlantic ports to Puerto Rico.15 The principal moving commodities were leather and leather goods, dry goods, rubber and rubber goods, plastic articles, machinery, paper and paper articles, shoes, chemicals, electric appliances, stationary, auto supplies, furniture, drugs, toys, and hardware. Most of these commodities lend themselves to LTL shipments since they are often shipped in smaller quantities. A comparison of Sea-Land and Puerto Rican Forwarding's LTL weight rates on these commodities revealed that, with two exceptions, the LTL weight rates of both carriers were the same. The NVOCC's have not been required to file financial statements of revenues and expenses earned in the trade. In recent years, the FMC has been faced with numerous and perplexing problems in its efforts to administer the shipping statutes in the regulation of NVOCC's. Because of the importance of NVOCC's to the shipping public, the Commission's staff is now conducting an investigation into NVOCC activities. 16

in its domestic trade. 18 In the trade between Puerto Rico and the Mainland, this restriction was made effective shortly after the United States began to exercise jurisdiction over the Island following its 1899 cession by Spain.19 Except for certain emergency situations, this ban on the use of foreign-flag vessels has always been in effect in the Puerto Rican trade. At various times, however, proposals have been made that the restrictive provisions of the Merchant Marine Act of 1920 be repealed to permit the operation of foreign-flag vessels in the Mainland-Puerto Rican trade, on the theory that the foreign-flag ship operates, enjoying the benefit of lower operating costs, will furnish shipping services at reduced rates or provide needed services and thereby benefit the economy of Puerto Rico. Paragraph 1 below discusses the repeal of the Cabotage laws, and paragraph 2 following considers waivers to these laws.

1. Suspension of Coastwise Laws

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The coastwise laws, as applicable to Puerto Rico, have been suspended only twice since 1898. On each of these occasions, the circumstances were not such as to afford any reliable guide to the possible effects of a suspension of the coastwise laws under the conditions and circumstances prevailing today. During World War I, the coastwise laws were suspended because of the extraordinary scarcity of ships.20 This suspension of the coastwise laws did not produce adequate cargo space or hold down the level of water freight rates. The next suspension of the coastwise laws, as far as Puerto Rico was concerned, came in 1962 when Con. gress, finding that no American-flag ships were reasonably available from West Coast ports to Puerto Rico, enacted Public Law 87–877 to permit the shipment, during a 1-year period, of lumber on foreign-flag ships from U.S. ports to Puerto Rico. The quantity of lumber

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14 In addition, there are 95 carriers of household goods in this trade.

15 Examination of eight NVOCC's that carry the bulk of general cargo in the Puerto Rican trade (i.e., Consolidated Express, Inc., Transconex, Inc., Twin Express Co., Acme Fast Freight International, Inc., San Lorenzo Express, Puerto Rican Forwarding Co., Inc., El Sol De Mayo, Express Furniture, and Valencia Baxt Express) shows that the two largest NVOCC's, Consolidated Express, Inc. and Puerto Rican Forwarding Co., Inc., each paid FAK rates exclusively in 1967 while some of the smaller NVOCC's such as Transconex, Inc., and San Lorenzo Express paid only truckload rates.

16 In 1969, the FMC instituted a nonjudicatory review by its staff to ascer. tain if there is a need for guidelines, rules and/or legislation in the area of NVOCC regulation. (Source: See Non-Vessel Operating Common Carrier by Water-Staff Investigation, Federal Register notices, Feb. 12, Apr. 3, and June 18, 1969.

17 Section 27 of the Merchant Marine Act of 1920 provides that no mer. chandise shall be transported by water, or by land and water, on penalty of forfeiture thereof, between points in the United States, including districts, territories, and possessions thereof embraced within the coast wise laws, either directly or by a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States.

18 Under a law enacted in 1798, discriminatory tonnage duties were levied on foreign ships operating in the American coastal trades. Then in 1808, another law extended the restriction to a complete exclusion of foreign-flag shipping from participation in the domestic trade of the United States.

19 The United States is not unique in limiting its domestic shipping trades to its own vessels. As of 1969, there are only six nations of the world that permit foreign-flag vessels to engage in their coastal traffic; Great Britain, Germany, Norway, Sweden, Denmark, and Italy. In their efforts to main. tain a national-flag merchant marine, most countries of the world jealously and rigidly bar foreigners from participation in their domestic trade lanes.

20 The belligerent nations pressed into war service anything that could float; the neutral ship.owning nations, such as The Netherlands and the Scandinavian countries, did not have sufficient tonnage, even at fantastically high freight and charter rates, to meet the insatiable demand for shipping space. The United States, after its declaration of war in 1917, seized neutral Dutch-flag vessels in American ports pursuant to the rarely-exercised right of angary. America's war-built fleet, with which it was hoped to bridge the Atlantic, did not begin to come down the ways until after the armistice of Nov. 11, 1918, and by the time that these vessels were ready to enter service, ships were a drag on the market,

21

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shipped, 4.5 million board feet, represented approxi. mately one full shipload of cargo, a relatively insig. nificant amount to move over the period of 1 full year.? No efforts were, therefore, made to continue the suspension of the law. One point, at least, is certain. The previous instances of suspension of the coastwise laws offer little guidance for future situations, so the probable effect of such a suspension in the Puerto Rican trade under present-day conditions can be appraised only through an analysis of the various factors involved. Since the assumption that use of foreign-flag ships would bring about lower freight rates in the Mainland trade with Puerto Rico is based largely on the existence of a differential in the operating costs of American and foreign-flag ships, the first step in analyzing the situa. tion should be an examination of such operating costs.

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the subsidizable costs, amounts to about 85 percent of the total cost. Thus, the cost advantage of the composite foreign-flag ship would be conservatively about 15 percent. In 1965, an estimate of the cost differential in the Puerto Rican trade was made in a study conducted under the auspices of the Transportation Center at Northwestern University for the Ports Authority of the Commonwealth of Puerto Rico.23 The authors of this study used what they described as the average rates of subsidy in the Atlantic and Gulf services, said to be in the vicinity of 70 percent for wage costs, 25 percent for subsistence costs, 30 percent for maintenance and repair costs, and 40 percent for insurance. Applying these rates to the distribution of costs in the U.S.-Puerto Rico trade, the authors found that, if subsidies were paid in this trade, approximately 12.5 percent of total costs would be covered by subsidy.24 Based on these two estimates, a cost differential favoring foreign-ship operators in the range of 12.5 to 15 percent is as reasonable as can be determined. It is recognized, however, that: (1) there are other elements of cost favoring foreignship operators which do not appear in the subsidy formula, and (2) if dealing with foreign containerships, where cargo handling costs are relatively small and vessel expenses are proportionally greater, the cost differential favoring foreign-ship operators is about 18 to 20 percent.25

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a. Cost Factors and Rate Levels

1

At the outset, it must be borne in mind that in contrast to domestic carriers, foreign vessels operating costs are not easily obtainable. This information generally is considered a trade secret, the disclosure of which would be detrimental to the competitive position of the individual carrier. There are, however, subsidiary means of estimating operating costs; for example, the cost of seafaring labor. The Maritime Administration estimates the operating costs of foreign-flag vessels as a basis for the determination of the amount of operating subsidy to be paid to American vessels operating in the foreign trades.

To arrive at the probable operating cost differential of a foreign-flag carrier entering the Puerto Rican trade, the current costs of the American-flag carriers in this trade have been reduced by the amount which would have been paid as an operating differential subsidy by the Maritime Administration to American-flag carriers in Trade Route No. 4.22 The net cost, after deduction of

b. Benefits to the Public

At this point, the crucial question is, “To what extent would the benefit of the cost differential (lower foreign-flag costs) be passed on to the shippers or users of these transport services if the Puerto Rican trade were thrown open to foreign-flag shipping”? In the beginning, at least, the foreign steamship lines most likely to take advantage of any suspension of the coast

2 Twelve applicants sought permission to ship by foreign-flag vessels, each of which was approved by the Secretary of Commerce, upon recommendation of the Maritime Administrator, subject to the requirement of a “first-refusal" procedure, under which American-flag carriers were allowed 5 days within which to meet the terms of the foreign-flag ships.

22 Subsidies are computed separately for each of the trade routes determined by the Maritime Administration to be essential to the foreign commerce of the United States. No subsidy has ever been computed for the Puerto Rican trade because this is purely domestic. To estimate the operating cost differential of foreign-flag carriers, which might enter the Puerto Rican trade if the coast wise laws were suspended, the closest approximation could be derived from the Maritime Administration's computations for Trade Route No. 4, the service between U.S. Atlantic Coast ports (Maine to Florida) and foreign ports in the Gulf of Mexico, Caribbean Sea, and the Guianas. The foreign-flag carriers which would be the most likely to enter the Puerto Rican trade are those who now are serving nearby islands and areas in the Caribbean. The most recent subsidy computations for this trade route allowed the American-flag carrier approximately 66 percent for wages for seafaring personnel, 9 percent for subsistence of officers and crew, 36 percent for maintenance and repair costs,

17 percent for hull and machinery insurance, and 83 percent for protection and indemnity insurance. There are several categories of operating expenses such as fuel, stevedoring, pilotage, port charges, and dockage that cannot be subsidized for the reason that American shippers pay no more for these goods and services than do foreign ships. Administrative and overhead expenses are also not subsidized because Congress has provided for the payment of sub. sidies only for certain defined categories of operating costs.

23 R. W. Clower and John R. Harris, The Transportation Center at Northwestern University, Puerto Rican Shipping and the U.S. Maritime Lows: An Economic Appraisal (Evanston, III., October 1965), p. 38. 24 Their computation was as follows :

Percent Wages, 70 percent on 15 percent of total costs....

10.5 Subsistence, 25 percent subsidy on 1 percent of total costs..------ 0. 3 Maintenance and repair, 30 percent subsidy on 2 percent of total costs

0.6 Insurance, 40 percent subsidy on 3 percent of total costs.-------- 1. 2

12. 6

Total
* Based on an estimate developed by the staff of the FMC.

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