I. INTRODUCTION
In accordance
with the Federal Maritime Commission’s regulations at 46 C.F.R. §502.67, United
Parcel Service, Inc. and its wholly-owned subsidiary, UPS Ocean Freight
Services, Inc. ("UPSOFS")
(collectively, United Parcel Service,
Inc. and UPSOFS are referred to herein as "UPS")
request that the Commission grant an exemption pursuant to Section 16 of the
Shipping Act of 1984 (the "Act") to permit UPSOFS to utilize
confidential service contracts with its shippers.
UPS is a
worldwide surface and air freight carrier providing service as both an ocean
transportation intermediary ("OTI") and non-vessel operating common
carrier ("NVOCC"), as such are defined in the Act. UPS transports
substantial volumes of freight which move via vessel-operating common carriers
("VOCCs") in end-to-end connection with UPS's other
transportation modes.
Many of UPS's shippers,
both large and small, depend on UPS both for
transportation and full-service global supply chain management solutions,
including features such as labeling and tracking of freight shipments, document
processing, customs clearance, warehousing, "just-in-time" inventory
delivery capabilities and specialized trade financing. In order to fulfill shipper service
requirements, and to meet competition from large vertically-integrated VOCC
organizations that also own or control OTIs, UPS needs the
flexibility to negotiate and perform confidential service contracts with
shippers covering the entire end-to-end movement.
An exemption
to permit UPS to offer service contracts subject to Section
8(c) of the Act and the Commission's service contract regulations is necessary
and appropriate in light of industry developments since enactment of the Ocean
Shipping Reform Act of 1998 ("OSRA"), including ownership of OTIs by
large VOCCs. The proposed exemption is
consistent with the intent of Congress in enacting OSRA in 1998. Although Congress decided at that time to allow
service contract authority only to VOCCs, there have been substantial changes
in industry conditions since the Congressional deliberations in 1998. UPS, with its
large asset base and strong presence in the surface and air freight industries,
does not exemplify the concerns that Congress expressed about expanding service
contract authority during the OSRA debate.
The requested
exemption will promote commerce, and will not result in any reduction of
competition. UPS will show
that there is substantial support for this exemption among shippers.
II. STATEMENT OF EXEMPTION REQUESTED
United Parcel
Service, Inc. and its wholly-owned subsidiaries, including UPSOFS, hereby
request an exemption pursuant to Section 16 of the Shipping Act of 1984, as
amended, 46 App. U.S.C. §1715 (the "Act"), to permit UPSOFS, a
Non-Vessel Operating Common Carrier as defined in Section 3(17) of the Act, to
enter into and perform service contracts, as defined in Section 3(19) of the
Act, in the manner permitted in and subject to the requirements of Section 8(c)
of the Act and subject to the Federal Maritime Commission's regulations at 46
C.F.R. Part 530.
III. JUSTIFICATION FOR EXEMPTION
A. BACKGROUND
1. UPS Corporate Profile
UPS, a Delaware corporation, was
founded in 1907. UPS is the
world's largest package delivery company and provider of specialized
transportation and logistics services, serving some 200 countries
worldwide.
Statistics
regarding UPS are set forth in Appendix
"A" to the attached Verified Statement of Michael Gargaro
("Gargaro Statement"). UPS, with 2002
corporate revenues of $31.3 billion, has 360,000 employees. UPS delivers some
3.4 billion packages and documents annually, including 13.3 million daily
global deliveries, two million daily U.S. domestic air
packages and documents and 1.2 million daily international packages and
documents. On a daily basis, UPS picks up from
1.8 million customers and delivers to an average of 6.1 million U.S. and
international addressees and consignees.
UPS operates from
1,748 facility locations worldwide. The
company operates a fleet of 88,000 trucks and other vehicles, and 581
aircraft. UPS flies nearly
1,900 daily air freight segments serving 364 U.S. airports and
405 terminals overseas. Principal UPS air freight
hubs are in the U.S., Canada, Europe and South and
East
Asia. UPS capital
expenditures average $2 billion annually.
UPS's transportation assets, including
aircraft, vehicles, terminals and technology, exceed $25 billion on a cost
basis and $13 billion on a depreciated basis.
Gargaro Statement, at 3 and Appendix "A."
UPS is a
publicly-traded company. Its shares, traded
on the New York Stock Exchange, have a current market capitalization of $33.2
billion.
2. UPS International Parcel Shipping Service
As international volumes have grown,
UPS has increasingly relied on ocean
common carrier services to move containerized shipments of parcels for its
customers. UPS combines
ocean freight movements with its surface and air delivery capabilities to offer
shippers the right combination of delivery times and economics for their
needs. To provide the most comprehensive
service at all levels, UPS has also made
strategic acquisitions, like that of the Fritz Companies, Inc., a full-service global
freight forwarder, customs brokerage and warehousing firm.
UPS does not own
or operate any vessels. All UPS ocean freight
is shipped via ocean common carriers, in many instances pursuant to service
contracts entered and performed pursuant to the Shipping Act and the Commission’s
regulations. UPS's service
contracts with VOCCs range in volume up to 10,000 20-foot equivalent units ("TEUs"). In other cases, depending on volume and
routing, UPS ocean shipments move in accordance
with VOCC tariffs, or they may be shipped under UPSOFS’s own NVOCC tariff
or through arrangements with other NVOCCs under their tariffs, or via other OTIs. Gargaro Statement at 13.
UPS moves
approximately 300,000 TEUs of ocean freight annually. UPS serves a
number of larger ocean freight shippers moving up to 4,000 TEUs each year. However, the majority of UPS's ocean
movements are provided by shippers moving an average of about 350-500 TEUs
annually. Such smaller shippers are
typically suppliers to larger manufacturers or retailers importing products
from overseas sources to consolidation, manufacturing, assembly, warehousing
and delivery points in the U.S. Unlike bigger companies, these smaller shippers
have few internal transportation or trade finance resources. They look to UPS to provide a
"portfolio solution" covering aspects of their business from vendor
management, packing and bar code labeling for tracking and processing purposes,
loading and transport, to customs clearance.
In many instances, UPS locates its
own facility adjacent to the shipper’s consolidated freight terminal or
factory, or next to the shipper’s customer’s facility, to provide "vendor-managed inventory services." This allows the shipper's customer to avoid
the cost of carrying inventory while still having access to goods on a timely
basis as needed. Gargaro Statement at
13-14.
UPS also manages
the flow of information and trade financial services that facilitate
movement of parcel freight through its UPS Supply Chain
Solutions Group. UPS Supply Chain
Solutions Group offers logistics, global freight, trade finance and consulting
to enhance customers' business performance and improve their global supply
chain management. UPS Supply Chain
Solutions can manage complex transportation networks, carriers and multi-modal
shipments, and deliver orders anywhere through its global network. UPS can put
together the most effective solution for each shipper, using ocean, air, road,
or rail. UPS manages the
transportation details for the shipper, including shipment booking, carrier
routing, tariffs, customs and documentation requirements. While the shipper's goods are in transit, the
UPS information system provides visibility
in the transportation process via the Internet, providing information on all
aspects of the shipments. Gargaro
Statement at 13-16.
For shippers whose goods can move
most efficiently by ocean freight for all or part of the route, UPS has developed
its UPS Trade DirectSM Ocean service. This service is presently available from
locations in Asia and Brazil for inbound
shipments to the United States. Trade DirectSM Ocean provides a
port-to-door distribution center bypass delivery solution for U.S. importers
that simplifies logistics management, reduces costs, and minimizes the risk of
loss or product damage. Gargaro
Statement, Appendix "B." Based
on purchase order allocation and distribution information, UPS labels are
placed on individual packages at the Customer's container freight station at
the point of origin. Packages from ocean
containers arriving at a U.S. port are fed
directly into the UPS small package
delivery network upon arrival and clearance in the United
States.
For larger deliveries, Less than TruckLoad ("LTL") service is
also available. Id.
Examples of comprehensive,
customized supply chain management solutions created by UPS for smaller
shippers are described in the Gargaro Statement at 14.
UPS has future
plans for expansion of all these services, and will constantly develop new,
innovative service features for its shippers as the industry changes.
B. PROPOSED UPS SERVICE
CONTRACT OPERATIONS
With
service contract authority, UPS would be
able to satisfy growing shipper demand to offer a single confidential agreement
covering all aspects of UPS's global transportation and supply chain management
services. In a single comprehensive
contract, UPS could provide unique, customized service packages to
each shipper, charging rates appropriate to the specific needs and traffic flow
of the shipper.
Without service contract authority, this is
impossible. Rates are not confidential,
and the parties cannot obtain the most efficient top-to-bottom pricing for the customized
package of service features the shipper receives. The parties cannot effectively cope with
changes in ocean cargo volume.
Additionally, without the shipper's volume obligation provided by a
service contract, UPS cannot reliably negotiate the best service and rate
packages with VOCCs which would enable UPS to provide the optimal pricing for the shipper.
Under the requested exemption, UPS would implement its service contract business in accordance with the
Commission's regulations at 46 C.F.R. Part 530.
UPS service contracts and amendments would be filed with
the Commission and notices and essential terms would be published, as required
in 46 C.F.R. §530.5 and §§530.8 through 530.12 and Appendix A. UPS would be subject to the same regulatory requirements as other carriers
using service contracts.
C. CHANGES IN OCEAN FREIGHT INDUSTRY SINCE
ENACTMENT OF THE OCEAN SHIPPING REFORM ACT OF 1998, AND GROWTH OF
INTEGRATED LOGISTICS SERVICES WARRANT USE OF SERVICE CONTRACTS BY UPS
1. Emergence
of the Integrated Logistics Industry
During the last five years, various
world economic, competitive and technology factors, as well as improvement of
supply chain management techniques and innovative service offerings by freight
carriers in all modes, have led to the emergence of new integrated logistics
services in place of traditional stand-alone or end-to-end multimodal freight
services. Increased international
sourcing of components for manufactured goods, competitive practices in the
field of production management and application of systems management
technologies have caused supply chain management to become a crucial element of
major multinational corporate strategies.
Key considerations in supply chain
management include cost controls, reduction of transit time to shorten order
times and cut inventory carrying cost, predictability of transit times,
tracking of goods to assure arrival and availability, streamlining of
documentation and processing at international frontiers, automation of
inspection, quality control and compliance systems, negotiable title
documentation from upstream points in a form conducive to in-transit inventory
financing, flexibility in routing, ability of carriers to assemble various
multimodal services in a manner most advantageous to the shipper, and warehousing
systems and locations to provide "just-in-time" deliveries either to
the shipper or shipper’s customer. Large
multinational companies have developed methods to maximize their advantages at
each level of the supply chain, enabling them to be highly competitive while
improving profit margins.
While large
shippers have led the way, the demand for such service features applies equally
to many smaller or mid-sized shippers. Large
manufacturers and distributors often require small suppliers to locate their
facilities adjacent to the big company's production center, in order to provide
nearby availability of goods for inspection and "just-in-time"
deliveries. In other cases, smaller
companies independently occupying profitable product market niches can take
advantage of better supply chain management service features, if created in
response to the needs of large-volume shippers.
Once the necessary capital investment and technology development has
been undertaken by the carriers to bring a new service feature on line in
response to big shipper demands, they can eventually make it available to
shippers moving smaller volumes. Gargaro
Statement at 8-12.
The Commission
has recognized the substantial impact of the growth of the integrated logistics
industry on liner shipping. See, Federal
Maritime Commission, The Impact of the Ocean Shipping Reform Act of 1998 (2001)
("FMC OSRA Report") at 14.
2. Consolidation
of VOCCs
In the five
years intervening since enactment of OSRA, there has been considerable
consolidation among the VOCCs. As the
Commission has observed, the percentage of global containership capacity
controlled by the 20 largest VOCCs has increased from about 50 percent in the
period when OSRA was being legislated to well in excess of 80 percent
today. FMC OSRA Report,
at 15. In 1998 there were still a half-dozen larger
carriers with relatively smaller market shares on most U.S. trade routes. Today two such VOCCs – Maersk Sealand and APL – have
substantial market power in several key US trades. See Appendix "C" of Gargaro
Statement. There has also been
considerable consolidation among the next layer of VOCCs just below these large
companies. As a result, the competitive
landscape at the VOCC level has significantly changed from that Congress was
addressing in 1998.
3. VOCC
Ownership of and Control over OTIs
To meet
shipper demands, larger VOCCs have now established, acquired or affiliated
closely with OTIs providing upstream consolidation,
forwarding and processing functions covering the full range of integrated
logistics services. These companies have
very substantial asset bases, in the billions of dollars, and operate
comprehensive global services. See
table at Appendix "D" of the Gargaro Statement.
UPS faces substantial
head-to-head competition from Maersk-Sealand and its affiliate Maersk Logistics
International A/S, based in Copenhagen. Maersk operates 281 vessels with a capacity
exceeding 750,000 TEUs in worldwide liner services. Maersk Logistics offers supply chain
management, international forwarding, air freight, warehousing and
distribution, vendor management, quality assurance, customs brokerage and
information management services for its shippers. Gargaro Statement at 18.
Another typical large, vertically-integrated
competitor is APL. Part of the NOL Group headquartered in Singapore, APL operates 74
vessels and 450,000 containers in worldwide liner trades serving over 100
countries. APL's affiliate APL Logistics is
the fastest-growing business unit in the NOL Group, with an impressive 29
percent annual expansion rate. APL Logistics is
a global leader in supply-chain management, offering forwarding vendor
management, warehousing and consolidation services. With services including consulting and advanced
information technologies, APL Logistics now
maintains 15 offices in 55 countries. It
also operates a system of more than 200 warehouses. Gargaro Statement at 18-19.
Other large VOCCs which offer
comprehensive supply chain management services include Hanjin Line, Hyundai
Merchant Marine, K-Line, NYK, Yang Ming, P&O Nedlloyd, CMA-CGM, Mitsui OSK and Zim Israel. Still other large VOCCs are offering certain integrated
logistics services to shippers through use of electronic portal systems such as
INTTRA, GT Nexus and CargoSmart. As many
as 15 VOCCs participate in INTTRA. Gargaro
Statement at 18-20 and Appendix D.
These large VOCCs that own and
control OTIs and participate in portals have a
significant advantage over UPS because of
their ability to offer confidential service contracts to their shipper
customers through the VOCC entity in their corporate group. These VOCCs may quote specialized
combinations of rates and service features, offering flexibility with respect
to the ocean freight portions of their services that UPS as an OTI
cannot match. Gargaro Statement at
19-20.
There has also been great
consolidation among OTIs since
1998. NVOCC and freight forwarding
functions have been merged, leaving fewer independent forwarders or
NVOCCs. FMC OSRA Report, at 4,
31. Surface freight carriers and
railroads are now also beginning to offer supply chain management
services. Gargaro Statement at 20.
4. Service Contracts Now Dominate
Bookings
Largely due to regulatory changes
brought about by OSRA, such as elimination of the “me-too” requirement for
similarly-situated shippers, as well as the attractiveness of confidentiality
provisions, service contracts are now the overwhelmingly predominant
rate-setting vehicle in U.S. ocean
commerce. More than 80 percent of all
liner cargo now moves under service contracts.
FMC OSRA Report, at 2. In certain trades, shippers are now moving
virtually 100 percent of their traffic via service contracts. Id. at 17.
Service contracts have affected
cargo movements of both large and small shippers. The Commission’s 2001 OSRA survey of service
contracts showed that 60 percent of them have minimum volume commitments of 100
TEUs or less. Id., at 18.
5. Shipper
Demand for Integrated Logistics Services
With the
explosive emergence of the modern integrated logistics industry, and with even
modest-sized shippers having critical supply chain control needs, competitive
multi-modal carriers must provide innovative and comprehensive transportation
services to satisfy shipper demand. As
the world's largest parcel carrier, UPS has developed
a substantial transportation asset base and technologies to fulfill these
needs, as have many of its major competitors among the ranks of VOCCs and OTIs. Gargaro Statement at 21-3, 25.
The rapidly advancing need for
integrated supply chain management services also comes at a time when many
smaller shippers are pinched by economic forces to downsize and outsource their
shipping and logistics functions.
Shippers of all sizes have had extra pressure arising from the need to
comply with complex new regulatory requirements, such as the U.S. Customs
Service 24-Hour Rule, and new regulations of the Homeland Security Department
and Transportation Safety Administration.
These shippers have difficulty keeping up with regulatory developments
and meeting these compliance demands with their own staff. Many shippers would prefer to turn to the
expertise of an OTI which has invested in the training and compliance systems
necessary to meet all requirements.
However, they cannot make full use of such an organization without
giving up the benefits of having confidential arrangements and greater rate
flexibility under ocean carrier service contracts. Gargaro Statement at 24-5.
While sophisticated OTIs may seek to
provide the type of “one-stop shopping” necessary to fulfill all of a shipper’s
traffic and compliance needs, the unacceptable complication in this approach is
the requirement for use of NVOCC tariffs in lieu of service contracts. Use of tariffs is cumbersome and
inefficient. Given the
highly-competitive environments in which many shippers operate, and thinner
margins that are possible, if not required, with modern supply chain
management, it can be very disadvantageous for these shippers if their
competitors and customers have ready access to this rate component of their cost
structure.
6. UPS Corporate and Service Characteristics
Support Use of Service Contracts
a.
UPS Has
Substantial Assets and Net Worth
to Assure Performance
UPS has the financial
wherewithal to stand behind service contract commitments to shippers. It is a large public company, with annual
revenues in excess of $31 billion. UPS’s
transportation system assets have a cost basis of $25 billion. UPS’s capital
expenditures have averaged $2 billion annually since 2000. Shippers can be confident UPS will
faithfully perform its time-volume shipping obligations. Gargaro Statement at 2-3.
b.
UPS Is a Major
Freight Carrier by
Air and
Surface Transport Modes
UPS has the
experience and expertise to provide reliable multimodal transportation
services. UPS is the
world’s largest package transportation and delivery service, delivering 3.4
billion packages and documents annually, utilizing its fleet of 88,000 vehicles
and over 500 aircraft. Much of UPS’s annual 300,000
TEU’s of ocean freight is processed
end-to-end with other UPS modes. Gargaro Statement at 13, and Appendix
"A".
c.
UPS Offers
Comprehensive and Innovative Integrated Logistics Services to Large and Small
Shippers
UPS services
include its innovative Trade Direct SM Ocean program,
offering fully-integrated supply chain management for ocean freight. UPS Supply Chain
Solutions provides full vendor management and integrated logistics services, as
well as trade financing. (See Gargaro Statement, Appendix B.)
Because of the
size and diversity of the UPS shipper base,
UPS can also work closely with various
ocean carriers to mutual advantage. In
the Transpacific trades, for example, UPS utilizes some
dozen carriers, including not only the largest companies but also the smaller
VOCCs. UPS's parcel
customers supply chain management needs dictate the quickest possible transit
times. Accordingly, UPS places a
premium on ability to offer "next available departure" status for
these shippers whose cargoes utilize ocean services. By having relationships with the broadest
range of VOCCs, UPS has available
the greatest range of sailing dates and times in this trade. Because of its significant, stable volume and
ability to process shipments expeditiously, UPS is able to
arrange more favorable terms with VOCCs to improve transit time that even
substantial shippers might not be able to obtain based on their own traffic
volumes. Gargaro Statement at 16.
Additionally,
by dealing with both large and small VOCCs, UPS is able to
enhance the utilization and competitive reach of the smaller carriers. This improves competition in the trades,
strengthening the ability of these smaller carriers to offer better terms. Gargaro Statement at 24-6.
However,
without service contract authority, UPS cannot
achieve its potential higher level of competitive efficiency. The inability to provide confidential rates
is a disincentive to shippers, and there is not sufficient shipper obligation
on cargo volume to enable UPS to negotiate
the most advantageous rates with VOCCs.
D. BENEFITS TO SHIPPERS WHICH THE EXEMPTION
WOULD PROMOTE
As explained
in the Commission's decisions addressing Section 16 exemptions, the Commission
has authority and broad discretion to consider and grant exemptions, provided
the exemption (i) is not detrimental to commerce and (ii) does not result in a
reduction in competition. Petition of
A.P. Moeller-Maersk Line for an
Exemption from the Notice Requirement of 46 C.F.R. §530.9, Docket No. P5-99,
28 S.R.R. 1209, 1999 WL 1294890 (F.M.C.) ("Maersk Line"). UPS's proposed
exemption would be beneficial to commerce for many reasons.
1. Lower
Cost and More Efficient Services
With service contract authority, UPS will be able
to improve utilization of its capital base and its transportation equipment and
systems in the air and surface modes, and to integrate and unify them better
with its ocean freight services. Service
contracts would also provide UPS with cargo
volume obligations from its shippers which would enable it to negotiate more
favorable rates and terms with ocean carriers.
These factors would enable UPS to offer more
competitive pricing and more advantageous service packages for shippers of all
sizes throughout its system.
Many of UPS's shippers,
especially smaller customers that do not have in-house resources, need
specialized "bundled" combinations of service features. It is far more efficient, and results in
pricing closer to market, if UPS and the
shipper can negotiate individualized service contracts with confidential rates
based upon the particular services the shipper requires. With service contracts, UPS will be able
to provide those specific services the shipper wants – and only those services
the shipper needs – in a customized package at a price tailored to the shipper's unique situation. This promotes better utilization of both the
shipper's and UPS's equipment,
personnel and other resources.
As shown in
the Commission’s 2001 survey, confidential service contracts have created
greater flexibility in pricing policy. FMC OSRA Report, at
59-60. Service contracts, as a concept,
were designed to permit ocean transportation service providers with greater
flexibility in packaging and pricing their services to shippers. Service contracts are now the predominant
means of rate setting. Carriers surveyed
by the Commission indicate that individual service contracting has enhanced
rate competition. FMC OSRA Report, at
19-22. The growth of service contracts
resulting from OSRA has created an environment more conducive to business
transactions, particularly due to the availability of confidentiality. Carriers using service contracts pay closer
attention to internal cost factors and individual service requirements in their
relationship with shippers. Id., at 21.
2. Greater
Reliability of Service Over Entire Range of Modes
Service contracts would enable UPS to provide a more
efficient and productive flow of cargo through the entire intermodal
movement.
Improved efficiency in the UPS system will
also indirectly benefit VOCCs and rail carriers. Service contracting at the shipper level
would help UPS deliver more stable volumes of such
traffic to VOCCs and railroads. As a
cargo source for VOCCs, UPS in turn
enters service contracts with these carriers, allowing benefits of these
contracts to flow back-to-back through to all participants in the integrated
transport system. UPS ocean freight
volume increases slot utilization for all VOCCs in the major ocean trades, and UPS trailer on
flatcar shipments help VOCCs to reduce equipment imbalance problems. Gargaro Statement at 2, 26.
3. Uniformity
of Contract Attributes over Entire Route
With service
contract arrangements, UPS can provide
greater uniformity of contract terms, including insurance, per-package loss
value limitations and other features, over the entire door-to-door route. UPS could use a single bill of lading containing such terms. This is not currently possible to the degree
shippers want through the use of NVOCC tariffs. Gargaro Statement at 11-12.
4.
UPS Will Offer Greater Port Security and Enhanced
International Transportation Security Access for TSA and Other U.S. Security and Law Enforcement Agencies
The core
feature of the UPS freight
system is its technology. One of the
most significant value-added elements UPS provides
supply chain management customers is shipment labeling, tracking and
monitoring. Because of its substantial
volume of international traffic in other modes, UPS is also a
leader in development of efficient systems for compliance with new security and
inspection requirements imposed by Customs, Homeland Security and other
agencies.
Service contracts will enable UPS to streamline both shipper contracting and the freight documentation
and tracing process to a higher degree.
This will enable shippers to utilize better UPS's know-how with respect to processing, which in turn will facilitate
compliance with new U.S. Customs regulations in the post-9/11 era. This will allow for a higher degree of
security with respect to shippers, carriers and cargo.
E. THE EXEMPTION WOULD HAVE NO MATERIAL
ADVERSE EFFECT ON COMPETITION
The second
part of the threshold test under Section 16 is that the proposed exemption will
not be detrimental to commerce. Maersk
Line, 28 S.R.R. at 209; COSCO, 28 S.R.R. at 147. The proposed UPS exemption
would stimulate competition at many levels of the international transportation
industry, rather than harming it.
1.
VOCCs Would Benefit from Back-to-Back Service Contracting
with UPS as an
Integrated Logistics Service Provider.
As the
Commission noted in COSCO, 28 S.R.R. at 149, allowing a carrier greater
flexibility is likely to increase rather than decrease competition among
carriers. Service contracts have, as
their fundamental feature, greater flexibility for both the carrier and
shipper. By permitting a major
transportation company such as UPS to enter
service contracts upstream with shippers and downstream with VOCCs, more
shippers, at smaller volume levels, will have cargoes moving under advantageous
service contracts than would otherwise be possible. This in effect extends the market reach of
the VOCCs to greater ranges of shippers, and allows them to price and tailor
their services more closely to all segments of the market. It also enables smaller VOCCs that do not
have affiliated OTIs or the
resources to provide integrated logistics services to participate in greater
volumes of traffic, leveraging off UPS’s
capabilities.
2.
VOCC Volume, Capacity Utilization Rates and Efficiency Will
Improve.
UPS moves
substantial volumes of containerized ocean freight. UPS contracts
with many VOCCs in each trade in order to have available the best range of
sailings to satisfy the "next available departure" requirements UPS has with many
of its shippers. The distribution of UPS freight
across this spectrum of carriers will improve utilization of all VOCCs in each
trade. Freight volumes available to
larger VOCCs will be more reliable, due to the provisions of UPS’s own service
contracts with those carriers. Moreover,
UPS practices for prompt loading and
departure of containers, and processing of containers at UPS facilities,
will speed the throughput of cargo in each carrier's system, reducing demands
on the carrier’s own cargo handling infrastructure.
3.
UPS Service Contracts will Not Substantially Affect OTIs.
The proposed
exemption would not have any undue competitive impact on NVOCCs or other
classes of OTIs.
The large OTIs that are part
of vertically-integrated VOCC organizations already have, in essence, the same
authority as UPS seeks.
Other large independent OTI organizations focused in forwarding and
brokerage activities, which are mainly based outside the United States and do
not own or operate their own fleets of transportation equipment, are in a
somewhat different market niche than UPS, which is
first and foremost a parcel delivery operation using its own transportation
assets. Smaller OTIs, especially
forwarders, which typically do not own or operate transportation assets, are in
very different business than UPS, and in fact
are frequently UPS customers
themselves. These smaller entities are
not direct competitors of UPS, and many of
them would benefit from better UPS efficiency
which would result from authorization of service contracts.
F. THE EXEMPTION IS CONSISTENT WITH
LEGISLATIVE INTENT IN ENACTING OSRA
The proposed
exemption is consistent with the legislative intent expressed in OSRA. UPS is both a
substantial entity able to assure reliable performance of obligations to shippers
and to bargain effectively with VOCCs, and is also a large transportation
company with a significant capital base in air and surface transport equipment,
systems and know-how.
During the
process of legislating OSRA, Congress considered the possible extension of
service contract authority to NVOCCs and other OTIs. See, S. Rep. No. 105-61 at 4, 19, 23
(1997). However, Congress chose not to
do so for several reasons, including principally concerns that many OTIs are not large
or well-capitalized companies, which might lead to inability to perform
volume-based contracts, and an awareness that most of the larger OTIs were non-U.S.
companies that might gain a competitive advantage. See, 144 Cong. Rec. S3192, S3200 (daily
ed. April 3, 1998) (statement
by Sen. Breaux), 144 Cong. Rec., S3305, S3307
(daily ed. April 21,
1998) (statement by Sen. Breaux), 144 Cong. Rec. H7011, 7016 (daily
ed. August 4, 1998) (statement
by Rep. Clement).
In
the five years intervening since enactment of OSRA, these conditions have
changed in very substantial ways. First
of all, as noted above, there has been considerable consolidation among the
VOCCs. See Appendix "C"
of Gargaro Statement. As a result, the
competitive landscape at the VOCC level is materially different than the one
confronting Congress in 1998. Secondly,
the larger VOCCs now have their own affiliated large, well-capitalized OTIs providing
upstream functions covering the full range of integrated logistics services. Many other VOCCs provide supply chain management
services similar to UPS's with the
use of electronic portals. See
Appendix "D" of Gargaro Statement.
The Commission has observed that such comprehensive changes in the
industry may require further scrutiny and may properly be the subject of an
exemption proceeding. FMC OSRA Report, at.
48.
While Congress did not extend
service contract authority to OTIs through OSRA,
it also expressly and quite wisely recognized that conditions in U.S. ocean trades
change rapidly, and that flexibility is necessary to avoid unnecessary
regulatory restraints and to promote more efficient services. As a result, Congress broadened the ability
of the FMC under Section 16 of the Shipping Act
to grant exemptions to statutory or regulatory provisions to meet changing
circumstances. S. Rep. No. 105-61, at 30.
UPS believes the
circumstances described above justify the requested exemption. The exemption will permit UPS, as an
innovative U.S. company which
has developed a strong global service network, to meet the needs of shippers,
leverage more fully its transportation assets and multimodal services, and to
compete more effectively in global commerce.
Given UPS's large capital base and history of
reinvestment in transportation assets, there is no risk of non-performance of
service contracts in the manner Congress feared when it withheld authority from
OTIs. The exemption will also enable UPS, as a U.S. company, to
meet fairly the energetic, well-financed competition now existing from large vertically-integrated
VOCCs and OTIs.
G. SHIPPER INTERESTS SUPPORT THE UPS PETITION
Shippers with
whom UPS has discussed the exemption have
agreed to support this petition. Support
letters from these shippers will be provided as a supplement to this petition for
the Commission’s consideration.
IV. SUMMARY
For the
foregoing reasons, UPS submits that
the requested exemption to permit UPS to utilize
service contracts, subject in all respects to Commission regulation, is a
fully-justified and sound policy. It is
within the Commission's discretion to
grant the exemption, which satisfies statutory requirements. Accordingly, UPS respectfully
requests that the Commission grant its approval.
Respectfully
submitted.
_________________________________
J. Michael Cavanaugh
Holland &
Knight LLP
2099
Pennsylvania Avenue, N.W.
Washington, D.C. 20006
(202)
955-3000
Charles L. Coleman, III
Holland & Knight LLP
50
California Street, Suite 2800
San
Francisco, California 94111
(415)
743-6900
Counsel for Petitioners
July 25, 2003
WAS1 #1192404 v9