A Shift Toward Murkiness: How Conflicting Transportation Policies Have Forced Unsupervised Oligopolies on Jones Act Trades in the Past 23 Years

Share

Government policies can affect market competition for good or for bad. In some instances, policies restricting competition are intentional, the result of business lobbying, while in other cases they may simply be the result of insufficient scrutiny at the policy design stage.i In the case of the Jones Act, it may be both. Although the Jones Act is nearly 100 years old and is clearly a protectionist law meant to keep international carriers outside of domestic water trades, until 1995 other federal statutes somewhat prevented market concentration abuse. Unfortunately, transportation deregulation during the 1980s and 90s meant to increase competition was incomplete and contradictory, causing the opposite effect on the Jones Act trades, inhibiting market competition and forcing even more concentrated unsupervised oligopolies prone to market power abuse.

The Jones Act

The Jones Act requires all maritime trade between U.S. ports to be done by ships that are U.S.-flagged, U.S.-crewed, U.S.-owned and U.S.-built. Its initial objective was to guarantee the United States with a merchant marine in case of emergencies and war by limiting access of international competitors to the domestic water trade market. So, by definition it is a protectionist law. Furthermore, it has failed miserably in its objectives with the U.S. Merchant Marine seeing record low numbers after a century of the Jones Act and several other laws with similar purposes. Commercial shipbuilding and employment have decreased even while trade has increased exponentially.

The main reason for its failure is that higher operating and ship construction costs make U.S.-flagged Jones Act vessels less competitive than carriers using international flags.ii In fact, the U.S. carriers that forcefully defend this protectionist law founded most of the international ship registries such as those in Panama, Liberia, and the Marshall Islands, because they do not want to sail under the U.S. flag unless they have guaranteed cargo or a closed market as is the case of Puerto Rico, Alaska, and Hawaii.iii But for those jurisdictions, the clear lack of competitiveness of the Jones Act fleet directly translates into their own economies’ lack of competitiveness.

Consequence of Regulatory Changes: Unsupervised Market Concentration

In addition to higher operating and construction costs, the situation is worsened by extreme market concentration. Although the Jones Act has existed for almost 100 years, for most of those it was applied in tandem with transportation regulations that sought to prevent abuse, protecting shippers and consumers. The Interstate Commerce Commission (ICC) and the Federal Maritime Commission (FMC) had regulatory oversight over both domestic and international carriers. Tariffs had to be public and “reasonable,” assured by these agencies’ authority for passing judgment, including through public hearings where carriers had to open their books. The system was imperfect and claims of abuse by carriers were often filed with either agency.

But in 1995, a shift towards murkiness occurred. As part of the deregulation process of all transport in the United States that began in the 1980s, this oversight was eliminated with the Interstate Commerce Commission Termination Act of 1995 (ICCTA).iv The basic premise being that competition was a better regulator than the government. Unfortunately, the deregulation process was incomplete. It kept the Jones Act intact and instead of fostering competition and transparency, the changes created a scenario of mostly unsupervised oligopolies in the main three markets under the Jones Act.

Congress did create a new agency, the Surface Transportation Board (STB), to supplant the ICC. However, its main focus is railroad transportation and it has little authority over ocean transportation. Congress also maintained the FMC to oversee international ocean carriers, but for reasons unknown transferred its oversight over Domestic Offshore Carriers to the STB.

In terms of specific oversight, regulations under the FMC for international carriers are now very different than those under the STB for domestic carriers. Probably most important is that Jones Act carriers are not required to file any data on private service contracts, which in the Puerto Rico trade accounts for almost all movements. This means there are no reliable public statistics on the actual costs of transportation from the U.S. mainland to Puerto Rico. This information is paramount to an island that depends on this traffic, and its absence is actually used by the pro-Jones Act sectors to make all sorts of farfetched allegations based on “confidential data” they alone have access to. In contrast, the FMC regulation that still applies to international carriers does require the filing of service contracts for oversight purposes.v There is no reasonable explanation for this difference considering that competition in the Jones Act trades has always been limited and thus more prone to abuse.

In any case, the conflicting policies and the potential for abuse were clear to Congress when they passed the ICCTA in 1995. In apparent premonition of the risks and contradictions of eliminating the federal supervision of such concentrated markets, Section 407 established that:

[T]he Secretary of Transportation shall transmit to the Committee on Commerce, Science, and Transportation of the Senate and the Committee on Transportation and Infrastructure of the House of Representatives a study that analyzes each of the noncontiguous domestic trades, including analyzing--
(1) carrier competition in both regulated and unregulated portions of those trades;
(2) rate structures in those trades;
(3) the impact of tariff filing on carrier pricing;
(4) the problems of parallel pricing and its impact on competition in the domestic trades;
(5) the impact on domestic cargo pricing of foreign cargo services;
(6) whether additional protections are needed to protect shippers from the abuse of market power; and
(7) the extent to which statutory or regulatory changes should be made to further the transportation policy of section 13101 of title 49, United States Code. [emphasis added]

Such language leaves no doubt that Congress knew there were problems but assigned its evaluation to the Department of Transportation (DOT), a historical guardian of the Jones Act not focused on protecting shippers. In compliance with this mandate, the DOT published a report in 1997 titled “Competition in the Noncontiguous Domestic Maritime Trades.” It relied on information submitted by interested parties with little independent or government produced data. In the area of competition, it acknowledged the markets were very concentrated, but it argued that the entry and exit of competitors in previous years meant that carriers could not unreasonably raise prices or others would enter the market. It concluded that even though shippers argued there was parallel pricing between carriers, the report’s authors found no clear evidence. They finally concluded that while the public comments provided suggestions for additional protection, no respondent provided clear evidence to justify further investigation by the DOT. As we will see, these conclusions were later proven wrong by price fixing cases.

In 2006 the DOT with the Maritime Administration (MARAD) published another report with the same title and similar conclusions. Surprisingly, it admitted that such powerful agencies didn’t have data on the subject, so they instead relied on a study by a private firm, Reeves and Associates, prepared for the Maritime Cabotage Task Force, a group that also defends the Jones Act carriers. This admission should have seriously undermined its credibility. But facts are difficult things to permanently hide.

The Results of Policy Contradictions for Puerto Rico

In any case, at the same time the DOT and MARAD were denying shippers’ claims of abuse, and as would be expected in an oligopoly operating without oversight, the Jones Act carriers began fixing prices in the Puerto Rico trade and were convicted for antitrust violations committed between 2003-08. The criminal cases were followed by a private class action and independent lawsuits which cost the Puerto Rico economy hundreds of millions of dollars during its economic recession.vi Amazingly, due to the lack of transparency and oversight, it is unclear if prices were ever adjusted after these cases. What is known is that neither the DOT, MARAD nor the STB—as the agencies that should oversee the market and had reported to Congress there were no problems—have taken any specific actions or even acknowledged the situation.

The lack of transparency has been further deepened by the corporate movements of these carriers after the antitrust cases. Two of the carriers that were previously publicly traded became private, a move oftentimes done to avoid scrutiny by regulators. Adding to the problem, in 2015 the largest of the shipping lines, Horizon Lines, left the market. At the time it had 30 percent of the market and was the only carrier operating ships from the 3 main ports connecting Puerto Rico to the mainland: New Jersey, Jacksonville, and Houston. Just two companies now have over 80 percent of the Jones Act market serving Puerto Rico, both of which participated in the antitrust violations.

But the lack of reliable information, the antitrust convictions, and the occurrence of particular emergencies such as the sinking of the ship El Faro in 2015 and more recently, Hurricane María, underscore the situation of an island dependent on two companies that have almost complete control of its ports, no oversight, and a proven history of market abuse. Shippers, and by that token consumers, are defenseless. Antitrust laws that presume open markets are not enough if there is no permanent oversight or data gathering that would provide the basis for criminal or civil claims. As is, Puerto Rico and the federal government are deliberately blind to what is actually happening with this service. After the antitrust convictions, the Government Accountability Office (GAO) released a report in 2013 titled “Puerto Rico: Characteristics of the Island’s Maritime Trade and Potential Effects of Modifying the Jones Act” in which shippers again complained in similar fashion of what they had said in the previous DOT studies. But the GAO once again downplayed their claims stating:

Shippers doing business in Puerto Rico reported that freight rates for foreign carriers going to and from foreign ports are often—although not always—lower than rates they pay to ship similar cargo from the United States, despite longer distances. However, data were not available to allow us to validate the examples given or verify the extent to which this occurred. According to these shippers, lower rates, as well as limited availability of qualified vessels in some cases can lead companies to source products from foreign countries….vii

In sum, after a century of the Jones Act, the situation has further deteriorated in the past two decades by the conceivably unintended actions of Congress and the possibly intentional lack of action of the DOT and STB.

Pro-Competitive Policy Options

Alternative approaches can be found to achieve a policy’s purpose that avoid unnecessary restrictions on competition. But in this case the policies are contradictory, or at least unclear. Pro-Jones Act groups cannot have it both ways. Protectionism seems contrary to pro-competitive policy reforms. Basic economic theory suggests that when an essential service, filled with public interest, is concentrated in this fashion, government needs to provide oversight much as state governments do with public service commissions in energy and other sectors. For an island there is no greater public service than maritime transport, and yet Puerto Rico and Hawaii are powerless to protect themselves because there is federal preemption even though the rest of the continental states are not nearly as dependent on this service. This is unacceptable.

A starting point would be to recognize the immense problem created by the policy contradictions previously explained. The concentration of these markets is the direct result of protectionist policies, so governments cannot pretend to ignore this reality and continue to act as if these are open competitive markets that can self-regulate. Regardless of past antitrust convictions or whether data exists to put a specific price tag on all of this, we cannot continue to presume that carriers with extreme market power simply do not use it.

If the policy remains “to encourage the establishment and maintenance of reasonable rates for transportation, without unreasonable discrimination or unfair or destructive competitive practices;…[and] to encourage and promote price competition in the noncontiguous domestic trade,”viii then Congress needs to act. As it stands, the federal government simply doesn’t have the necessary data to determine if they are unreasonable, unfair, or destructive.

The simplest solution is a full repeal of the Jones Act, allowing the market to self-regulate. But if that is not politically viable, or as an interim measure, Congress at least needs to acknowledge that the DOT nor the STB are adequate overseers of competition issues within the Jones Act markets, as the fact that they haven’t taken any actions after the antitrust convictions and further market concentration demonstrates. Neither is the GAO.

There are examples of transportation regulations to deal with such a situation. The most obvious is the FMC requirement that every service contract between carriers and shippers be filed confidentially. This provides for the possibility of real oversight and basic statistics that would help shippers and consumers. Another approach is found in 49 U.S. Code § 10706 dealing with rate agreements and their exemptions from antitrust laws. It orders an evaluation of competition issues in transportation, but instead of the DOT it delegates the task to the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department (DOJ). Specifically, it orders that:

(1) The Federal Trade Commission, in consultation with the Antitrust Division of the Department of Justice, shall prepare periodically an assessment of, and shall report to the Board on—
(A) possible anticompetitive features of— (i) agreements approved or submitted for approval under subsection (a) of this section; and (ii) an organization operating under those agreements; and
(B) possible ways to alleviate or end an anticompetitive feature, effect, or aspect in a manner that will further the goals of this part and of the transportation policy of section 10101 of this title.

Changing the current statute to assign the FTC and DOJ the responsibility previously given to the DOT to perform an accurate assessment of the anticompetitive features of the markets, would produce a better independent analysis of the situation. It would need to be complemented with the mandatory filing of private service contracts providing any agency with the required data to actually fulfill its statutory goals. These findings and statistics should be published in order to provide transparency to the markets and allow shippers to better negotiate their rates, or even be able to defend themselves using private antitrust claims if supported by the published facts.

There are several other alternatives to protect shippers and consumers that could be considered if a truly open market is not politically viable. What cannot continue is the hypocrisy of ignoring the effects of policy contradictions that have recently magnified the negative effects of the Jones Act by forcing and strengthening unsupervised oligopolies on unsuspecting and ill-informed shippers and citizens.

Notes:
i Organization for Economic Cooperation and Development, “Pro-competitive Policy Reforms,”
http://www.oecd.org/competition/reforms/.
ii U.S. Department of Transportation Maritime Administration, “Comparison of U.S. and Foreign Flag Operating Costs,” September 2011, https://www.marad.dot.gov/wp-content/uploads/pdf/Comparison_of_US_and_Foreign_Flag_Operating_Costs.pdf.
iii Wikipedia, “Flag of Convenience,” https://en.wikipedia.org/wiki/Flag_of_convenience.
iv ICC Termination Act of 1995, Public Law 104–88, Stat. 803 (1995).
v Federal Maritime Commission, “How to File Service Contracts,” https://www.fmc.gov/resources/how_to_file_service_contracts.aspx.
vi In Re Puerto Rican Cabotage Antitrust Litigation, 815 F. Supp. 2d 448 (D.P.R. 2011); Plea agreements as recent as 2012, USDCPR – Case No. 3:11-cr-00511-DRD and 3:12-cr-00590-DRD.
vii Government Accountability Office, “Puerto Rico: Characteristics of the Island's Maritime Trade and Potential Effects of Modifying the Jones Act,” March 20, 2013, https://www.gao.gov/products/GAO-13-260 [emphasis added].
viii 49 U.S. Code § 13101 [emphasis added].

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Jones Act: Charting a New Course after a Century of Failure.

Manuel Reyes