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Regulatory Policy Institute Annual Competition Policy Conference

Regulatory Policy Institute Annual Competition Policy Conference. Developments in the Enforcement of Articles 81 and 82 The New Shipping Guidelines John Pheasant September 2008. 638382/1. The Early Days. First there was sail Then there was steam And then there were “liner conferences”.

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Regulatory Policy Institute Annual Competition Policy Conference

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  1. Regulatory Policy InstituteAnnual Competition Policy Conference Developments in the Enforcement of Articles 81 and 82 The New Shipping Guidelines John Pheasant September 2008 638382/1

  2. The Early Days • First there was sail • Then there was steam • And then there were “liner conferences”

  3. Early Antitrust Regulation in the USA • Shipping Acts 1916, 1984 • Antitrust immunity • Federal Maritime Commission • Ocean Shipping Reform Act 1998

  4. The Position in Europe • Generally, transport, including shipping, excluded from the application of national and then EC competition law • The adoption of Council Regulation 4056/86

  5. What Did Regulation 4056 Do? • Articles 81 and 82 were applicable to shipping, as to other transport sectors • But, the European Commission did not have enforcement powers • Regulation 4056 gave the Commission enforcement powers in respect of international maritime transport except tramp vessel services • Exemption for liner conferences • Exception for technical agreements

  6. Tramp Vessel Services • Defined in Regulation 4056 as: “the transport of goods in bulk or in break-bulk in a vessel chartered wholly or partly to one or more shippers on the basis of a voyage or time charter or any other form of contract for non-regularly scheduled or non-advertised sailings where the freight rates are freely negotiated case by case in accordance with the conditions of supply and demand” • Rationale for excluding tramp vessel services from the Commission’s enforcement powers

  7. The Liner Conference Block Exemption (1) • United Nations Convention on a Code of Conduct for Liner Conferences • Definition of a liner conference in Regulation 4056: “a group of two or more vessel-operating carriers which provides international liner services for the carriage of cargo on a particular route or routes, within specified geographical limits and which has an agreement or arrangement, whatever its nature, within the framework of which they operate under uniform or common freight rates and any other agreed conditions with respect to the provision of liner services”

  8. The Liner Conference Block Exemption (2) • Article 3: Agreements, decisions and concerted practices of all or part of the members of one or more liner conferences are hereby exempted from the prohibition in Article 85(1) of the Treaty … which have as their objective the fixing of rates and conditions of carriage, and, as the case may be, one or more of the following objectives: • the co-ordination of shipping timetables, sailing dates or dates of calls • the determination of the frequency of sailings or calls • the co-ordination or allocation of sailings or calls among members of the conference • the regulation of the carrying capacity offered by each member • the allocation of cargo or revenue among members

  9. What Pricing Agreements were Exempted? • Through intermodal freight rates: exemption for pricing agreements on the inland leg? • When is a conference agreement an agreement between conference members and outsiders? The meaning of “uniform or common freight rates”

  10. The Economics: The Stability Issue (1) • The rationale for the liner conference block exemption: “liner conferences have a stabilising effect, assuring shippers of reliable services; whereas they contribute generally to providing adequate efficient scheduled maritime transport services and give fair consideration to the interests of users; whereas such results cannot be obtained without the cooperation that shipping companies promote within conferences in relation to rates and, where appropriate, availability of capacity or allocation of cargo for shipment, and income” • What does “stability” mean in this context?

  11. The Economics: The Stability Issue (2) • Scheduled services • Economies of scale • Capacity indivisibilities • High fixed avoidable costs • Low short-run marginal costs

  12. The Economics: The Stability Issue (3) • Mobility of capital • Low entry barriers • Divisible and variable demand • Supply is periodic • Limited opportunities for product differentiation • Government support and excess capacity

  13. The Economics: The Stability Issue (4) • Shippers benefit from • Reliability • Regularity • Frequent services • Availability of space

  14. The Economics: The Stability Issue (5) • Liner operators’ costs • Capacity costs • Fixed operating costs • Fixed port charges • Cargo related costs • Other fixed costs • Inland costs • Total capacity costs are not dependent on the total capacity made available. Capacity costs can be lowered by increasing ship size and reducing the frequency of service

  15. The Economics: The Stability Issue (6) • Balancing customer benefits against liner operators’ costs • In a perfectly competitive market: prices equal to marginal costs • Sectors characterised by economies of scale: prices will fail to cover the full costs of the service being provided • Pricing above marginal costs

  16. The Economics: The Stability Issue (7) • Liner operators’ revenues must be equal to total costs, including capital costs • Prices higher than marginal costs • Differential prices

  17. The Economics: The Stability Issue (8) • Network externalities • Additional users  congestion costs on other users • Liner operators  increasing capacity and frequency • In liner shipping: unrestrained competition leads to: • small ships • too few ships • excessively high load factor

  18. The Economics: The Stability Issue (9) • Short run price competition • Long run price competition • Non-price competition

  19. The Economics: The Stability Issue (10) • Short run competition creates inefficient economic conditions for liner operators • Generically, short run competition raises stability problems in prices, frequency and regular and reliable services • No equilibrium • price competition • scheduling competition • price competition with capacity constraints

  20. The Economics: The Stability Issue (11) • Inefficiencies connected with short run price competition • failure to hold efficient levels of reserve capacity • delayed investment and overshooting of prices when demand is growing • impacts on frequency of service and size of network • Summary: liner operators are inclined to under-invest when price competition drives prices towards marginal costs

  21. The Economics: The Stability Issue (12) • Consequences • monopolisation • state subsidies • FAK pricing

  22. The Economics: The Stability Issue (13) • Agreements and responses to stability problems • conference agreements • remaining short term price pressures • long run competition as pressure to conference agreement

  23. The Economics: The Stability Issue (14) • Stability: withdrawal of capacity  prices overshooting  introduction of capacity  withdrawal of capacity  prices overshooting = loss of reliable, regular services OR • Stability: stability of freight rates?

  24. The Intermodal Pricing Issue • Far Eastern Freight Conference (FEFC) • Stability arguments • Legal interpretation of the scope of Regulation 4056: “international maritime transport services from or to one or more Community ports” • Port gate

  25. The Uniform or Common Pricing Issue • Transatlantic Agreement (TAA) • Independent action • tariff rates • service contracts • Agreement with outsiders

  26. Independent Action and Confidential Service Contracts • Uniform or common freight rates versus • Individual confidential service contracts and • Independent action on: • tariff rates • joint service contracts

  27. The Decline in the Use of Tariff Rates • Tariff rates  “paper rates” • Vast majority of cargo carried under non-tariff rates  Criticism of the conference’s role in stabilising freight rates • The devil and the deep blue sea

  28. The Beginning of the End • Shipper Associations’ criticism of the conference system • The stability arguments undermined • The review of the block exemption: only one outcome

  29. The Review • Repeal of the block exemption (October 2008) • Tramp shipping brought within the scope of the Commission’s enforcement powers (October 2006)

  30. The Future: Liner Shipping • No conferences to/from Europe • Normal competition rules apply • information exchanges • Other jurisdictions • Exemption for liner consortia: cooperation on technical, operational and/or some commercial arrangements, but not prices

  31. The Future: Tramp Vessel Services • The Chemical Tankers cases • Tramp vessel pools: • the Commission’s early position • “Price takers”? • Efficiencies: joint production and joint selling

  32. The Future: Guidelines and Self-Assessment • The Commission’s Guidelines (1 July 2008) • More helpful for tramp operators than liner operators • Self-assessment and compliance

  33. Dominance Issues • TransAtlantic Conference Agreement (TACA) • Collective dominance • internal competition: independent action, etc. • external competition: price discrimination argument • Abuse: increasing membership of the conference = strengthening a dominant position

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