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A Transparent FMC Strategy

In Federal Maritime Commission, Ports, Uncategorized, Vessels on September 21, 2018 at 9:08 am

The Federal Maritime Commission met this week to hear Commissioner Rebecca Dye describe her interim report on the Fact Finding No. 28 (FF28) examination of detention, demurrage and free time practices of ocean carriers and marine terminal operators (MTOs). Dye reported to Acting Chairman (and only other seated commissioner) Michael Khouri. Her report was publicly released on September 5. A final report on the investigation, prompted by petitioning cargo and drayage interests who fault carrier and terminal practices and fees, is scheduled to be delivered on December 2.

The 19-page interim report on the non-adjudicatory investigation is based substantially on information obtained through FMC “served orders comprising questions and document requests on twenty-three ocean carriers and forty-four marine terminal operators and operating ports, and solicited evidence concerning demurrage and detention practices from cargo interests (shippers and consignees).”  The FMC also held two days of hearings in January of this year. The report’s conclusion points to both a stated desire to avoid issuing regulatory prescriptions — that some have argued the FMC would not have authority to do — and an inclination to reprise Commissioner Dye’s prior experience of shepherding industry people to develop a solution that the agency has no power to require.

Based on the volume of valuable information provided by VOCCs, MTOs, shippers, OTIs, drayage providers, and others in the industry, it is apparent the industry’s demurrage and detention practices can be improved with the involvement of industry leaders.

Commissioner Dye sees the experience of the complaining parties as more widespread than episodic.

The resulting record strongly suggests that concerns about demurrage and detention in U.S. trades are not limited primarily to weather-or-labor-related port congestion in 2014-2015, a small subset of large ports, or episodic events unrelated to potentially systemic issues.

Examples are cited as to how current carrier and MTO practices vary in many respects, including even how detention and demurrage are defined. According to the commissioner, the collected data suggest “six areas to be developed” by the FMC as approaches to improve current practices in the market:

  1. Transparent, standardized language for demurrage, detention, and free time practices;
  2. Clarity, simplification, and accessibility regarding demurrage and detention (a) billing practice, and (b) dispute resolution processes;
  3. Explicit guidance regarding types of evidence relevant to resolving demurrage and detention disputes;
  4. Consistent notice to shippers of container availability;
  5. An optional billing model wherein (a) MTOs bill shippers directly for demurrage; and (b) VOCCs bill shippers for detention; and
  6. An FMC Shipper Advisory or Innovation Team.

One can’t help noting in the last item the reference only to “shipper” (cargo interest) in the FMC’s summary version. The somewhat longer version is phrased similarly, suggesting that Dye would give special status — and the agency’s ear — to shippers.

The record supports the need for continual input from U.S. shippers into issues affecting the international freight delivery system, including the potential future formation of a Shipper Advisory Board or Innovation Team after the close of the investigation. The Commission will also consider Advisory Boards or Innovation Teams comprised of Ports and FMC stakeholders as well. [emphasis added]

“Innovation team” is a reference to a tool employed by Commissioner Dye in her follow-up to the FMC’s 2015 report, “U.S. Container Port Congestion & Related International Supply Chain Issues: Causes, Consequences & Challenges.” In that instance, the commissioner invited supply chain stakeholders to participate in closed-door deliberations intended to identify both the central cause of the “congestion” problem and how to solve it. Doubtless, many participants thought it better to be in the room than not.

In her 2017 report, “The Commission’s Supply Chain Innovation Initiative,” she summarized the work of the six “supply chain innovation teams” (three each addressing import and export trades).

[T]he “Value Proposition” for increasing supply chain performance is providing visibility of critical information throughout the commercial supply chain.

~ ~ ~

[Such visibility] across the American freight delivery system was the one operational innovation that would most increase US international supply chain performance. It was not about information technology per se – but an effort to (a) achieve changes in perspective and in behavior to “harmonize” the operation of the freight delivery system and to (b) increase systemic efficiency and performance. Without the right information, supply chain actors are essentially “flying blind.”

A web-based portal for the sharing of cargo status information was the suggested solution by the import teams. The kind that is being tested in the San Pedro ports now.

Note the similarity of the commissioner’s conclusion in the above 2017 report and the direction that her new interim report on terminal and carrier practices is taking. Both look for transparency and standards. Both aim to corral [one or more] stakeholders to have them devise a potentially system-wide solution.

At the FMC meeting this week, Commissioner Dye wrapped up her oral report by asking and answering, “how will the investigation proceed?” She said the commission wants to “determine how to ensure that reasonable notice of cargo availability and reasonable opportunity to pick up cargo can be achieved.” In developing the final report, she said she “will not be repairing to a regulatory ivory tower to reflect in solitude on these issues” but will seek input from the practitioners.

Dye will look for those who have been “most helpful and thorough” during phase one of the investigation. She said she already has heard from “quite a few” carriers and MTOs who want to help, and she firmly indicated she want to hear from people. To emphasize her availability, the commissioner will post her travel schedule to facilitate outreach by persons outside the Washington Beltway.

Acting Chairman Khouri followed Dye’s remarks by encouraging stakeholders to participate. He said that any recommendation for a rulemaking would be “premature,” but he isn’t ready to rule one out.

[That is not] a first choice but…at the end of the day, if there are persistent practices that are found unjust and unreasonable, and stakeholders do not want to listen and proactively adjust business practices for other stakeholders, it will remain on the list.

One hears both commissioners issue more than a cordial invitation to stakeholders to help them bring the FF28 examination of carrier and terminal practices to a satisfactory conclusion. Their message is clear. Fix it — (we’ll gladly facilitate) — or be regulated.

Carriers and terminals consider detention and demurrage fees, and free time practices, to be wholly a matter of the commercial relationship. Nothing the FMC need involve itself in. Regardless of whether they have the necessary statutory authority to regulate this aspect of the commercial relationship, the commissioners have hit upon a non-regulatory way. They are empowered with the expectation that the concerned parties, terminal operators and carriers included, will be willing to address supply chain problems as Rebecca Dye’s report depicts them.   Pbea

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Still a Compelling Alternative

In Efficiency, Energy/Environ, Green Transportation, MTS Policy, Vessels on April 19, 2016 at 10:56 pm
TOTE_LNG_PropulsionSystem

Rendering of TOTE LNG Propulsion (NASSCO)

One can imagine the LNG pioneers – TOTE, Crowley, and Harvey Gulf Marine – looking over their shoulders and asking, “where is everybody?”

Others might wonder if LNG is losing its luster. If it will ever achieve its potential to become a dominant marine and transportation fuel.

Before we start hanging black crepe, let’s not lose sight of the ample evidence that LNG remains a compelling alternative to meet growing emissions requirements.

Interest in LNG as a marine fuel was initially driven by three factors: Emissions Control Areas (ECAs) in North America and Northern Europe; the rapid growth of natural gas production; and LNG’s potential to significantly reduce all categories of marine air emissions, particularly sulfur oxide. LNG was predicted to displace a significant portion of the marine fuel market by the end of the decade with forecasts of 30 percent market penetration by 2030. This development then likely would spur broader adoption of LNG and CNG by other transportation modes.

The optimism, however, was tempered by the challenges encountered by the first adopters. These challenges were not a matter of technology. Rather, first adopters encountered a lack of regulatory structures and existing market relationships. It would require creating entirely new market relationships, and logistics, distribution and fueling infrastructures.

These challenges persist, particularly in the United States, where infrastructure development remains tied to specific vessel projects. Unlike in other countries, here there are no national policies or programs to foster and promote LNG development. There has been no credible signal from the gas supply industry that the fueling infrastructure will be built absent assured demand. With the exception of Tacoma and Jacksonville, which are tied to specific vessel projects, no major US port has stepped forward to actively promote and facilitate the construction of LNG terminals or to partner with gas suppliers to construct distribution facilities.

The major Jones Act ocean carriers have new build programs underway. In large part, the Jones Act blue water market potential for LNG has been realized but little progress is seen elsewhere. Ferry operators in New York and Washington State have signaled intent to incorporate LNG in their new vessel plans. The inland waterways fleet has seen no significant movement in that direction. In contrast, the 2012 EU Master Plan calls for the entire inland system to be LNG-capable. Considerable effort is also underway to develop harmonized standards and regulations across national boundaries. Conversion of the fleet has begun.

There is a phrase: “Money talks…” and if that is indeed the case, then the continuing investment in LNG vessels and infrastructure around the world is clear evidence that the migration continues elsewhere. The EU has not altered its formal commitment to support LNG-related projects despite economic difficulties and the drop in oil prices. New projects continue to be funded.

At least four LNG bunkering vessels will be operating in the United States and Europe by the end of 2016 and DNV GL estimates that 73 LNG fueled vessels are operating today, with another 80 on order. Upwards of 600 vessels could be operating worldwide by 2020. While this is only a small percentage of the global fleet, it represents significant financial investments by shipowners who clearly believe that LNG will be available to fuel these vessels at prices below the projected costs of MGO.

So there are silver linings on the LNG horizon, and I am convinced the real breakthrough for LNG will come when the major liner companies incorporate LNG as a standard element in their newbuild plans. A decision by any of the major ocean carriers to install either full LNG capability in their new generations of vessels, or, in a hedging strategy, install dual fuel engines with the intent to move to full LNG at a later date, would provide a strong impetus for the expansion of LNG globally. But this has not happened on a large scale for reasons that may be related to oil prices but also to concerns about the availability of LNG in their ports of call and uncertainty related to the 2018 IMO Annex VI consideration.

I believe that this challenge must be approached in a different way by moving forward with infrastructure development without a firm commitment from a shipping company. If LNG infrastructure proceeds first in one of the major load ports in the United States, it would be a powerful signal to the major liner companies that fuel will be available and would likely incentivize ship owners to accelerate the move to LNG.

If one accepts the “inevitability” of LNG, which I believe is a reasonable proposition, it would seem prudent for ports and gas suppliers to move forward to build the necessary infrastructure in the absence of a guaranteed offtake commitment. Clearly there are risks in this approach. Perhaps it is too much to ask ports and gas suppliers to assume this risk in the current investment climate, particularly for public companies. It is far easier to gain approval for a large investment if there is a guaranteed customer. But risk is intrinsic to life and business, and the key is how risks are managed and mitigated, particularly when the upside potential for the gas industry and ports is so great.

Something has to break the continuing “chicken and egg” impasse and energize the slow and somewhat sporadic development of marine LNG in the U.S. If there is broad consensus that LNG is a net positive, then it seems we need to approach this market opportunity in a way that does not fit traditional investment analyses.

One risk that must be addressed is the 2018 IMO global fuel sulfur decision. Global fuel sulfur standards are scheduled to be reduced to 0.5 percent in 2020 from the current 3.5 percent. As written, MARPOL Annex VI gives the IMO only two choices: either affirm the 2020 standard or delay it until 2025, and the basis for the decision is the worldwide availability of MGO and other “relevant” factors.

I strongly believe the IMO should affirm the existing 0.5 percent standard. If this is not possible, I would propose that the IMO implement an interim standard of 1.0 percent in 2020 with the more stringent standard delayed until a later date. Such an approach would essentially mirror the ECA implementation that resulted in LNG moving from a novelty conversation to a serious alternative compliance strategy in the United States and Europe.

This single act would create a powerful regulatory incentive to spur development of LNG infrastructure and vessel construction and provide the impetus to the international liner companies to adopt LNG in their next generation of vessels for delivery by 2020. Therefore, if the ports and gas supply industries have already begun the process of site selection, permitting and possibly construction by 2018, it would serve a dual purpose of undermining arguments that LNG is not a viable replacement fuel for lack of distribution infrastructure..

Yogi Berra was right when he said: “It’s tough to make predictions, especially about the future.” It is certainly true about LNG as a marine fuel. But as a longtime member of the maritime industry and proponent of LNG as a fuel I believe that this year LNG will continue its inexorable growth as the most effective way to meet the increasing environmental requirements our industry is facing.   John Graykowski