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Thursday, September 20, 2018

Maritime Logistics Professional

Collision Course

Posted to Global Maritime Analysis with Joseph Keefe (by on July 2, 2018

Commerce and state pilot associations, both in the same river, headed in opposite directions, will soon meet in a passing situation. How they negotiate that critical port-to-port passing is more important now than ever.

The news that shares of the German container shipping company Hapag Lloyd had plunged 19 pct, last week hitting one-year low was sober news. It’s no surprise that, in a Reuters report, the firm cited “unexpectedly significant” and continuing increase in operational costs, especially with regard to fuel costs and charter rates. Unspoken in all of that is the advent of stiffer emissions requirements (IMO 2020) and the ever-tightening of ballast water treatment requirements will soon impinge upon that picture even further.

Hapag-Lloyd, of course, isn’t alone in that boat. Most sectors are struggling to one extent or another. Not even record box throughput at North American ports and/or soaring crude oil exports has done anything to lift charter rates. As all of that plays out, the conflict being played out between shippers and the marine professionals who get the exclusive right to guide those vessels into the ports of the world’s biggest trading partner is beginning to heat up – perhaps like never before.

The spiraling cost of pilotage for shippers, charterers and vessel operators alike, has finally reached a point where the ‘push-back’ is becoming more organized. From coast-to-coast, local spats point to a bigger issue that has quickly taken on national implications.

Coast-to-Coast

Here’s a sampling of what’s been happening this spring on all four U.S. coastlines. It surely is an eye-opener:

·         Louisiana:

As Mississippi River ship pilots seek a hefty mileage reimbursement increase, the bigger quest for raises is also being waged with the chemical industry. Disagreements between shippers and the three big pilot organizations here aren’t uncommon, and industry rarely wins against the powerful, well-financed and politically connected pilots. To that end, a report from a local news station in Louisiana revealed that at least one pilot had made as much as $750,000 in just one year. In May, Louisiana's governor was asked to remove three powerful board members from the commission that governs pilots. The commission, made up of four river pilots, four industry representatives and three so-called ‘at-large’ seats has become a bone of contention. Industry contends that the at-large members are cherry picked by the pilots and sent to the governor for approval. Hence, says industry, they cannot be assured a fair shake in any matter related to pilot oversight.

·         California:

In the Senate Assembly:  a bill related to pilotage rates was described as an Act which would remove Legislative authority and oversight over pilotage rates on the San Francisco Bay and River system. AB 3181 proposed to strip the Legislature of any authority in Pilot rate setting and hand the entire process to a sub-committee of the Board of Pilot Commissioners without any additional scrutiny, no internal oversight, no administrative review, no additional resources, no subject matter expertise, no ownership within the Governor’s office, and without any reforms of any real significance. It was defeated. Meanwhile, also in April, another bill related to pilotage rates was in play in the assembly.

·         Washington State:

In Washington a bill revising the establishment of marine pilotage tariffs was enacted. Signed into law in March 2018, with a effective date of July 1, 2019, it removes the following duties and options from the board of pilotage commissioners and places them on the utilities and transportation commission: (1) Establishing the pilotage tariffs for pilotage services provided under chapter 88.16 RCW (the pilotage act); (2) Establishing extra compensation for extra services to vessels in distress, for awaiting vessels, for vessels in direct transit to or from a Canadian port where Puget Sound pilotage is required for a portion of the voyage, or for being carried to sea on vessels against the will of the pilot; and (3) As an element of the Puget Sound pilotage district tariff, considering pilot retirement plan expenses incurred in the prior year in either pilotage district. Prohibits the state from being obligated to fund or pay for any portion of retirement payments for pilots or retired pilots.

·         The Great Lakes:

The Coast Guard announced in the Federal Register that it had established new base pilotage rates and surcharges for the 2018 shipping season. Additionally, the Coast Guard is making several changes to the Great Lakes pilotage ratemaking methodology. Meanwhile, stakeholders who depend on Great Lakes pilots to guide tonnage in three separate districts are facing ‘sticker shock’ in the near term. Previously, the U.S. Coast Guard used the “touchstone baseline” of a local deck officer’s union agreement as the basis for their calculations. Reportedly, however, that data has been made “proprietary” and is no longer available. Vessel operators will now see their rates rising about 13%. With total target pilot compensation targets rising to more than $350,000, the rule, benefiting about 50 U.S. pilots, will require pilot invoice payments to increase by almost $3 million, above and beyond the $22 million shelled out 2017.

·         Portland, Maine (not to be confused with Portland, Oregon):

In January, Gov. Paul LePage reportedly asked board members that oversee local pilots to resign because of their decision to increase the fees pilots charge to guide vessels in and out of port. In this case, local pilots were adamant that they weren’t being compensated enough to cover their costs, while industry says that the increased fees present an unfair burden.

·         Portland, Oregon:

Portland claims to have solved the longshore and terminal issues that, in part, precipitated the departure of ANY container traffic from their docks in 2017. If so, that’s good news. Late last year, the port announced joyfully that container ship service would return to the Port of Portland In 2018. According to local news reports, the development is the port's best and last chance to prove to global carriers and cargo shippers alike that local labor and their new terminal operating masters have found peace and harmony. That news comes with caveats. According to a jointly released press statement from the Oregon Governor’s office and the port itself, the new shipping service “is supported by a $250,000 Strategic Reserve Fund investment to help Oregon businesses get their get products to international markets efficiently and support Northwest shippers.” At least some of that money – according to a November 2017 article by KUOW’s Conrad Wilson – will go towards defraying the eye-popping cost for bar pilots to navigate vessels up the Columbia River. That (the money) is on the table at all may well be a first for North American ports.

·         Texas, City, Texas:

Texas City pilots face another kind of challenge. In April, a State Court in Austin heard motions related to Attorney Justin Renshaw’s pleadings on behalf of five federal pilots, who are hoping to be granted the right to compete in an otherwise closed space. But, the state district judge in Austin sided with the Galveston-Texas City Pilots in the initial skirmish. It was way back in August 2016 that a total of seven applications for state pilot licenses/certificates were submitted to the Board of Pilot Commissioners for Galveston County, Texas. The mariners – a group now pared back to five, who can provide competent, professional and reasonably priced competition to the established group in place – aren’t the first to try this kind of maneuver. This time, they’re going about the task in a slightly different manner. The pilot hopefuls and their attorney [Renshaw] base their argument for a State Issued license, in part, on the premise that “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed, nor shall the law of primogeniture or entailments ever be in force in this State.” Round one has gone to the state pilots.

Separately, the cruise lines that call on this Texas port aren’t altogether happy, either. Local reports place the number of Galveston fog delays in 2017 at more than twice that recorded in previous years. Local pilots say they are being prudent and following good safety procedures. The port itself isn't so sure. Some say the fog delays represent thinly veiled punishment for anyone who had the temerity to oppose the last rate hike. That said; the continuing escalation of delays (of any kind), coupled with the growing cost of local pilots could eventually lead to just one thing. And, that's a future without cruise traffic. Passengers, of course, will mourn the end of that special family photo at the rail as the cruise ship slides by that beautiful jack-up rig, but I suspect that the cruise lines - and their customers - will get over it, and quickly.

True to their word, no one can say that the Texas City Pilots aren’t “careful.” In a press release heralding a so-called “Texas First,” Galveston-Texas City Ship Pilots – four of them, actually – did what they were supposed to do: they steered a loaded VLCC out to sea. Four pilots worked the FPMC C MELODY, guiding it in, and then out of the port of Texas City. To be fair, it was the largest tanker that any of them had ever handled in the port. Nevertheless, we asked who had made the decision to use four pilots to move just one vessel.

“The pilots make that decision,” we were told, with one, in this case, watching each of “all four quadrants of the tanker.” That comes at an increased cost, of course. We then asked if that would be the norm going forward. “As you get more familiarity – that reduces risk,” came the reply, with the spokesman adding, “We tend to be far more conservative” in these situations. Eventually, he said, they might even pare that work assignment to just one pilot. But if not, the good news is that there are five federal pilots awaiting the call to provide help.

Summing up: the Bottom Line (Spoiler alert: for shippers, it’s in the RED)

The ever-expanding cost of marine pilotage anywhere is a fact of life, especially for North American deep draft ports. The service offered by pilots is essential; it provides measurable safety assurances and is an integral part of the supply chain. Any number of industry commissioned studies can attest to why the costs are so high. These are balanced by an equal number of reports paid for by other stakeholders who beg to differ.

The vast majority of pilot associations operating in U.S. ports are so-called ‘state pilots,’ a system whereby just one group of pilots is afforded the monopoly for guiding all registered tonnage in and out of U.S. port. It’s a system based on the premise that individual U.S. States have the right to govern commerce on their own waterways as they see fit, and that ‘competition’ in a safety related function would result in the lowest cost operator – and not necessarily the best one – doing the critical job. The nature of the system has, without a doubt, contributed significantly to the spiraling cost of marine pilot services at U.S. ports.

Not too many would argue that what is described in the previous two paragraphs is not true. They might not like some or all of it, but it is what it is. On the other hand, what can’t be argued is that the financial models for shippers and state pilots are each headed in markedly different directions. And, as the bottom line for containership operators, bulkers and/or tankers remains in the red or at best, break even, the same cannot be said for the single source monopolies that they are collectively required to employ.

At some point, the people that pay the bills will say, “Enough is enough.” Are we there yet? Probably not. But, it is coming. That much is all but certain. – MLPro.

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Joseph Keefe is a 1980 (Deck) graduate of the Massachusetts Maritime Academy and lead commentator of MaritimeProfessional.com. Additionally, he is Editor of both Maritime Logistics Professional and MarineNews magazines. He can be reached at jkeefe@maritimeprofessional.com or at Keefe@marinelink.com. MaritimeProfessional.com is the largest business networking site devoted to the marine industry. Each day thousands of industry professionals around the world log on to network, connect, and communicate.

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