The Ocean Shipping Reform Act allows for more enforcement of rising fees. But shippers say the law isn’t a “silver bullet.”
President Joe Biden signed the Ocean Shipping Reform Act of 2022 into law on Thursday, promising sweeping changes to the ocean shipping industry after more than two years of port congestion, delays and rising costs.
The high-profile bill, which sailed through the House earlier this week, is part of the Biden administration’s attempt to rein in consumer price inflation that hit a new 40-year high this month.
“I promised to crack down on ocean carriers whose price hikes have hurt American families and American businesses,” Biden said in a press conference Thursday. “And today I’m proud to say that we got that done on a bipartisan basis.”
Many shippers celebrated the legislation as a significant step forward in addressing shipping disruptions that have arisen during the pandemic, including soaring fees and a lack of containers for agricultural exports. Biden added the law will address the inflation that has plagued businesses and “bring down prices on goods American families need.”
But the true impact will largely depend on how it’s enforced by the Federal Maritime Commission — an agency with limited funding and staff that shippers say has been historically slow to regulate the shipping industry.
While the law will grant the agency more enforcement power to crack down on potential malpractice, FMC Commissioner Carl Bentzel acknowledges there’s only so much the agency can do to address congestion and rising prices.
“A lot of the problems are really problems of supply and demand, and those may be beyond the ability of any agency to handle,” Bentzel said in an interview with Supply Chain Dive.
Congress responds to rising fees, congestion
Lawmakers were spurred to act last year after soaring shipping rates, higher fees and unpredictable schedules disrupted business operations and pushed many companies to raise prices. Companies have said they’ve had to pay significantly more to transport products while also experiencing major delays in service.
“We have received hundreds of complaints from shippers,” said Rep. John Garamendi, a Democrat from California who sponsored the initial House version of the bill.
The law gives the FMC greater authority over shipping companies and empowers the agency to self-initiate investigations into carriers’ business practices. But one of the biggest impacts of the bill, shippers say, is that it pushes the FMC to act more aggressively on detention and demurrage, which carriers charge when cargo isn’t moved quickly enough from terminals.
The legislation shifts the burden of proof to show the reasonableness of these fees to ocean carriers instead of shippers. It also requires the FMC to issue rulemaking within 45 days “further defining prohibited practices by common carriers” in regards to demurrage fees.
Demurrage and detention charges increased 104% from 2020 to 2021 across the world’s 20 largest ports, a Container xChange report found. In March, shippers paid approximately $43.03M in demurrage fees through the Port of Los Angeles, according to an analysis from the Dray Alliance.
“Today, American manufacturers, farmers and consumers are at the mercy of declining ocean shipping performance and rising costs,” said Tom Madrecki, vice president of supply chain and logistics for the Consumer Brands Association. “Unfair practices have contributed to these costs and lack of container availability, which impacts U.S. agriculture stakeholders including many of our member companies. “
Carriers have reduced the amount of free time that containers are allowed to sit at terminals before demurrage fees take effect, contributing to soaring costs, said Peter Friedmann of the Agriculture Transportation Coalition. Port congestion has also made it difficult for shippers to make appointments to get into terminals and remove containers.
“We’ve had instances where the container is still on the darn ship and hasn’t even been offloaded onto the terminal, but for whatever reason, the carrier started the free time,” Friedmann said.
The law requires carriers to provide invoices that lay out the allowed free time and other metrics that would make it easier for shippers to see when they’ve been unreasonably charged. Ocean carriers say detention and demurrage are necessary tools to encourage the flow of goods, arguing new regulations could exacerbate congestion and inject new complexities into the industry.
“Those tools may effectively be lost,” said John Butler of the World Shipping Council, which represents the world’s largest containership operators. “And if that’s the case, then we end up with more congestion, not less congestion. And of course that’s worse for everybody, but especially for shippers.”
Impact will depend on enforcement
Whether the law will lead to substantial changes within the shipping industry depends on how it’s ultimately enforced by the FMC. Shippers have noted that the agency has been reluctant to enforce measures against carriers in the past, and even the agency acknowledges that its limited budget and workforce has hindered its ability to regulate the industry.
The FMC oversees every mode of transportation from the moment a shipment is loaded in a container to when it arrives at its final destination. But despite having oversight responsibility for an estimated $6 trillion in economic activity, it continues to work with limited resources, according to Bentzel.
The FMC had a $30.3 million budget in FY 2021 and the agency said in its budget request it has been unable to meet its desired staffing level of 128 permanent, full-time positions. Bentzel said the lack of resources has been “the real challenge” in regulating the shipping industry in a time of supply chain chaos.
“We have one investigator for every trillion dollars of commerce,” said Bentzel. “The SEC, for every trillion dollars of securities and financial instruments that they regulate, [has] about 150 investigators.”
The Ocean Shipping Reform Act earmarks millions of dollars in funding for the FMC to carry out rulemaking and investigations associated with the law. The legislation includes approximately $32.9 million for FY2022, an amount that will increase to $49.2 million in FY2025.
Beyond more funding, the law also ensures that the FMC more heavily regulates areas in which shippers say the agency’s been slow to act. In some cases, the law compels the FMC to issue rulemaking on subjects the agency has already provided guidance, but no rules.
For example, the Ocean Shipping Reform Act requires the FMC issue rulemaking within 45 days “further defining prohibited practices by common carriers” in regards to demurrage fees. The FMC already issued recommendations on what is considered reasonable demurrage charges in 2019, but stopped short of issuing a requirement.
Bentzel said the law is largely in line with steps the agency is already taking to address demurrage. The FMC began “doing audits of all ocean carriers” in regards to their demurrage and detention practices last July, a process that helped lead to a $2 million fine against Hapag Lloyd.
Shippers expect the new law will not fix many of the structural issues they see in the industry, such as high rates and a lack of competition. Still, they acknowledged any legislative change is welcome in an industry that hasn’t seen major regulatory updates since the Ocean Shipping Reform Act of 1998.
“Is it going to be a silver bullet? No, it’s going to be completely contingent in the enactment of it,” said Aubrey Bettencourt, president and CEO of the Almond Alliance, which represents California’s almond industry. “It has great merits to modernize the FMC. But then it’s up to us to get the FMC to actually flex and utilize that authority.”