Columbia River Pilots; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 9410047]

Columbia River Pilots; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Action proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before February 19, 1999.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

K. Shane Woods or Charles A. Harwood, Seattle Regional Office, Federal

Trade Commission, 915 Second Ave., Suite 2896, Seattle, Washington

98174, (206) 220-6363.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreement containing a consent

order to cease and desist, having been filed with and accepted, subject

to final approval, by the Commission, has been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for December 14, 1998), on the World Wide Web, at ``http://

www.ftc.gov/os/actions97.htm.'' A paper copy can be obtained from the

FTC Public Reference Room, Room H-130, 600 Pennsylvania Avenue, N.W.,

Washington, D.C. 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Such comments or views will be considered by

the Commission and will be available for inspection and copying at its

principal office in accordance with Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii).

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted a proposed consent order

from Columbia River Pilots (``COLRIP''). COLRIP is an association of

approximately forty marine pilots licensed by the State of Oregon to

provide navigational assistance to vessels on the Columbia River.

COLRIP facilitates the provision of marine pilotage by its members by,

among other things, dispatching marine pilots to incoming and outgoing

vessels and collecting and distributing marine pilots' fees.

In 1989, two pilots resigned from COLRIP to form a competing

pilotage group, Lewis & Clark Pilotage, Inc. (``L&C''). For the first

time in forty years, there was competition for pilotage services on the

Columbia River. The benefits from this competition were immediate and

significant. L&C made several improvements in its service that reduced

costs to shippers.

The profitability of shippers depends on the speed and volume of

shipments. Ships cost tens of thousands of dollars a day to operate.

Shippers' costs are lower the less time ships are on the river and the

more product they ship. Marine pilots play an important role in this

effort, because they influence the time a vessel is on the river and

how much cargo is transported. L&C quickly improved efficiency on the

Columbia River by expanding the hours pilots moved vessels, by working

with shippers to get a maximum load for the time of sailing, and by

being available to move vessels twenty-four hours a day, without

significant advance notice. The results were dramatic. For example, at

Peavey Grain Company, a ConAgra-owned grain elevator that is among the

largest on the West Coast, L&C's practices improved the rate at which

Peavey funneled grain through its elevators by more than 10%, resulting

in significant cost reductions for Peavey.

L&C's innovations reverberated through the market. COLRIP improved

its services in response to L&C by, e.g., dispatching pilots more

quickly and moving longer and deeper vessels under a broader range of

conditions with fewer tugs. Before L&C's entry, COLRIP offered none of

the service innovations that L&C provided Peavey. After L&C's

formation, the Oregon legislature modified Oregon's pilotage statute to

protect competition from regulatory interference in marine pilotage.

Unfortunately, the benefits of competition were short lived. COLRIP

took actions to eliminate L&C and any future competitors. Soon after

L&C's formation, COLRIP adopted a series of penalties for its remaining

members so severe that no other COLRIP pilot was likely to leave COLRIP

to join L&C or to form a new company. Any COLRIP pilot who left to

compete with COLRIP would forfeit $200,000, appreciation in stock in a

corporation owned by COLRIP members, pension benefits, and six months'

work on the Columbia. This last penalty would not only cost the marine

pilot approximately $70,000 in lost revenues, but would also provide

grounds under Oregon law for requiring that the pilot either be

retrained or have his license revoked. Because COLRIP was responsible

for pilot training, this penalty could have effectively ended a pilot's

career on the Columbia River.

In 1991, L&C sued COLRIP, alleging that COLRIP instigated a series

of acts to eliminate competition and preserve its monopoly, including

threatening shipping agents with labor disruptions should they hire L&C

for work outside Peavey. See Lewis & Clark Pilotage Inc. v. Columbia

River Pilots, No. CV91-25 (D. Ore. filed January 8, 1991). COLRIP and

L&C settled this ligation on terms that allowed L&C to survive, but

restricted competition. COLRIP agreed to let L&C serve shippers berthed

at Peavey, but L&C could not provide pilotage to any other vessels. L&C

could bid on business at new docks, but it could not expand by more

than a single pilot, which limited its ability to serve new business.

In addition, as part of the litigation settlement, COLRIP required

L&C not to enter exclusive dealing contracts. L&C's

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exclusive dealing contract with Peavey had fostered L&C's entry. It is

likely that an upstart firm such as L&C could be successful only if it

could enter exclusive deals.

Finally, the settlement prohibited L&C from proposing or supporting

a rate structure that did not have the essential features of the

current rate structure. This provision substantially reduced

competition in the rate-setting process. Rates are set by the Board

after soliciting proposals from shippers and pilot groups.

The settlement permitted L&C to continue to compete, although at a

diminished level. The penalties imposed by COLRIP on pilots leaving to

compete with COLRIP were devastating to competition. Because L&C could

not recruit new pilots, L&C was forced to exit the market when its

founding members retired.

The complaint charges that COLRIP's penalties on pilots leaving to

compete and its settlement with L&C violate Section 5 of the Federal

Trade Commission Act, as amended, 15 U.S.C. Sec. 45. COLRIP's penalties

on pilots leaving to compete with COLRIP protected COLRIP from

additional competition. Not one pilot left to compete with COLRIP,

either by joining L&C or by forming another pilotable group, after

COLRIP adopted these penalties. Indeed, no pilot has left COLRIP since

L&C's founders retired and COLRIP regained its monopoly. L&C's pilotage

business was very profitable and, absent COLRIP's draconian penalties,

should have attracted competition. In addition, COLRIP's settlement

with L&C all but eliminated the ability of L&C to compete with COLRIP

before L&C exited the market. The settlement substantially limited

L&C's ability to offer pilotage to customers other than Peavey Grain

Company and reduced L&C's ability to influence rates before the Oregon

Board of Maritime Pilots. The settlement provisions and the penalties

on departing pilots were not justified on efficiency grounds.

The proposed consent order would prohibit COLRIP from penalizing

marine pilots who leave to compete with COLRIP, except where a pilot

either has been a member of COLRIP for less than five years or fails to

give COLRIP ninety days' notice of his intention to leave. COLRIP is

also required to notify its members and the local shippers' association

of this prohibition.

COLRIP's ability to penalize pilots who leave before serving five

years appears unlikely to prevent competition in pilotage, since it

affects only 25% of COLRIP's members. Approximately 75% of COLRIP's

marine pilots would immediately be free to leave COLRIP without a

penalty. Moreover, it appears reasonable for COLRIP to demand that

pilots remain for some period after COLRIP has trained them. Similarly,

the notice requirement appears too brief to reduce significantly a

pilot's incentive to leave and would afford COLRIP the opportunity to

attend to internal issues raised by a departure, such as pilot

scheduling changes and any contractual pay-outs required by a

departure.

Should competition emerge, the proposed consent order also would

protect that competition by prohibiting COLRIP from entering into

agreements similar to the ones with L&C. That is, COLRIP cannot agree

with a competitor to allocate customers, limit a competitor's size, or

restrict the competitor's ability to enter exclusive agreements with

customers or to submit rate proposals or otherwise communicate with the

Oregon Board of Maritime Pilots. Finally, COLRIP cannot prevent a

COLRIP marine pilot from recommending or otherwise supporting an

applicant for a pilot's license or for training to obtain one. This

restriction on COLRIP should encourage more applicants and expand the

number of available pilots.

The proposed consent order has been placed on the public record for

sixty (60) days for receipt of comments from interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreement and the comments received, and will decide whether it should

withdraw from the agreement or make final the agreement's proposed

order.

The purpose of this analysis is to assist public comment on the

proposed order. It is not intended to constitute an official

interpretation of the agreement containing the proposed consent order

or to modify in any way its terms.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 98-33706 Filed 12-18-98; 8:45 am]

BILLING CODE 6750-01-M