Author: Dr. Geraldine Knatz
University of Southern California Sol Price School of Public Policy. Executive Director, Port of Los Angeles (2006-2014)
1. Introduction: Adjacent Ports
The Ports of Los Angeles and Long Beach, both municipal operations run by their respective cities, are located directly adjacent to each other within San Pedro Bay, California. Early development of harbor facilities began on the Los Angeles side of the bay in the mid-19th century and accelerated after 1871 once the federal government began to invest in infrastructure. Long Beach did not begin to develop its port until after 1900 and only received federal aid beginning in 1919. Both Ports became municipal operations of their respective cities by acts of the California State Legislature in 1911 after an aborted attempt to combine the ports under state control. Both cities created semi-autonomous harbor departments, headed by citizen commissions charged with overseeing the development of harbor facilities.
In the early decades of the 20th century Los Angeles’s cargo volume grew quickly, surpassing San Francisco as the leading port on the US west coast. While Long Beach was slower to obtain control of the waterfront and develop its municipal facilities, the discovery of oil in Long Beach in 1921 provided the funds to expand the Long Beach port. Long Beach was able to invest in port facilities without acquiring debt until 1970 while the Port of Los Angeles had to rely first on general obligation bonds approved by the voters and then revenue bonds. As a result, by the middle of the 20th century, Long Beach grew significantly and became comparable in size to Los Angeles. Long Beach’s debt free status meant that it could offer lower rates than Los Angeles fueling the rivalry between the two ports as both sought to capture containerized cargo. Since 1980, the two ports passed have aggressively competed to maintain the lead port position on containerized volume in the Bay.
2. Competition for Containerized Cargo
Competition for terminal space within the finite area of the San Pedro Bay ports had traditionally led ocean carriers to seek dedicated terminals to ensure their position in the market. There was intense competition between the two ports for containerized cargo and both ports invested to reconfigure their existing terminals, filling slips to make marginal wharfs suitable for containerized cargo. Los Angeles’s containerization leasing strategy was to enter into long term agreements directly with the shipping lines in order to bind their cargo to a Los Angeles terminal for the life of the lease through exclusivity language. Typically that language required all cargo carried by a particular ocean carrier to call at its home terminal and if that terminal was congested, cargo could be handled at another terminal but only within the Port of Los Angeles.
The Port of Long Beach approach was to lease to stevedoring companies, most notable Stevedoring Services of America (SSA), who would then market the terminal to multiple ocean carriers until they were full. The advantage to the Los Angeles model was locking in a particular carrier’s business, in good times and in bad. The disadvantage was the carrier focused on service to its own customers rather than maximizing use of the terminal. Overtime, Long Beach began to lease their terminals to joint ventures of SSA and a particular ocean carrier as a way to lock that cargo to a specific terminal and Los Angeles proprietary terminal operators, like Maersk line, began to recognize the need for third party business.
When annual container growth rates reached double digits though the 1980’s and 1990’s, generally the ports had all they could do to keep developing facilities fast enough to meet the demand of their own customers. Nevertheless, competition between the two ports influenced their actions. Although there have been several instances of litigation between one of the cities against the other cities port, there has been only one case of litigation between the two ports. In 1993, the Port of Los Angeles sued the Port of Long Beach to block the purchase 725 acres of land from Union Pacific Resources Company that was located primarily within the port Long Beach with some land parcels in Los Angeles or straddling the city boundary.
The acquisition was large enough to increase the size of the Port of Long Beach by 35% and included land areas suitably shaped for container terminals. Long Beach’s proposed acquisition posed a competitive threat to Los Angeles, occurred at the time when both ports were hoping to provide a future home for American Presidents Lines, a Los Angeles tenant that was seeking a larger terminal. Los Angeles maintained in their lawsuit that Long Beach failed to comply with the California Environmental Quality Act and that a full Environmental Impact Report should have been prepared by Long Beach prior to acquisition. Los Angeles lost the suit and Long Beach completed the acquisition in 1994. American President Lines stayed in Los Angeles, moving to Pier 300 and the ports vowed to work closely together going forward, a necessity considering they were in the midst of negotiating the purchase of railroad rights-of-way for the Alameda Corridor Project.
Most of the competition between the two ports occurs between the port’s terminal operators with the ports marketing staff working to facilitate an agreement. A smaller ocean carrier without a proprietary terminal or a long-term commitment to a particular terminal might shift cargo from one terminal to another seeking better service or rates. Referred to as third party business, if a terminal became too congested, the third party business was a prime target for marketing staff from the other port. Often the terminal would be in the neighboring port. On rare occasions, when a new land area became available and it coincided with the end of a long-term lease at one of the existing terminals in the Bay, a major ocean carrier might switch from one port to the other. An example would be Maersk Line’s move from Long Beach to Los Angeles in 2002 and Hyundai’s move to Los Angeles in 2008.
3. Port Rates
Fueled by the ability to develop facilities without taking on debt in the early days of containerization, Long Beach’s strategy of low rates gave them the ability to market the port as the “business friendly” port. That business friendly posture was also rooted in a significant governance difference between the two ports. The Long Beach City Charter grants the Long Beach Board of Harbor Commissioners the final say on long term leases and agreements. In Los Angeles, all long term leases and any agreement over 3 years or over $150,000 requires city council approval, a process that could become political and typically add several months to the decision-making process. In 2006, a change in Long Beach city administration brought increased political scrutiny to the Long Beach port and its activities.
A review of container minimum annual guarantees for the 13 container terminals in San Pedro Bay in 2015 indicate that Long Beach had higher minimum annual guaranteed (MAG) rates per acre that Los Angeles. They ranged from $160,000 per acre per year to $220,000 per acre per year in Long Beach. Los Angeles minimum annual guarantees per acre ranged from $118,000 to $176,000 in the same year. The low value of $118,000 reflected a terminal impacted by construction. Once construction was completed the guarantee would increase to $166,000 per acre. Most customers pay more than the (MAG) rates, however on a scale that is based on TEU volumes so a higher MAG is not necessarily a competitive disadvantage when overall volumes in the Bay are increasing. The average revenue collected by each port per TEU is actually very close. Los Angeles container terminal revenue in fiscal year 2013 was $313,353,000 with a TEU volume handled of 7,778,469 or an average of $40.28 per TEU. Port of Long Beach received $268.3 million in container revenue, handling 6.648 million TEUs for average TEU revenue of $40.35. Over time, guarantees will change as both cities charters require a compensation reset every 5 years. In addition, changes in the ocean carrier industry including terminal sales could also trigger lease amendments with compensation resets. Updated values for guarantees are listed in each terminal lease. These leases become public documents, once approved by the respective Boards of Harbor Commissioners.
Both city charters require renegotiation of lease agreement compensation every five years. There is one exception to this rule. The Everport lease (Evergreen Line) in Los Angeles includes an annual cost of living increase rather than the five year compensation reset. This has caused Evergreen’s lease to escalate at a faster pace than the other terminals. To address this issue, during the economic downturn of 2008-2010, the port of Los Angeles waived the annual cost of living increase. Currently the lowest MAG’s in the bay are at the Los Angeles Trapac terminal. Prior to 2006, Trapac’s MAG’s were one of the highest but were lowered to reflect they were the only Los Angeles terminal without an on-dock railyard. Further reductions for Trapac are construction rates during terminal modernization. The rates rise again after construction ends. The MAGS adopted for the new fully-automated terminal in the Port of Long Beach at Piers D/E/F, known as the Middle Harbor project and operated by Overseas Orient Container Line involves higher rates. The port negotiated these very high rates to support its 1.3 billion dollar investment in this terminal. The terminal, when fully operational, can handle half the current cargo volume of the entire Port of Long Beach. The impact of this mega-terminal on the competitive environment in San Pedro Bay remains to be seen.
In addition to the five year compensation resets required by each port’s city charters, the ports have published tariffs of rates and charges that are periodically increased. The ports can modify specific rates in the tariffs for specific commodities or then can implement a General Rate Increase (GRI) which would affect all cargo and other services like pilotage. Neither port, however, has implemented a general rate increase since the year 2005.
4. The Impacts of Global Shipping Line Alliances
Collectively the ports are a regional, state and national asset. Shippers who move their cargo through San Pedro Bay may know the terminal they do business with but are often oblivious to whether the terminal is in Los Angeles or Long Beach. Recent changes in the global container industry also are contributing to a homogenization of the port operations. Traditionally, cargo handled by one ocean carrier, such as Maersk Line, would have moved through a specific terminal in one of the ports. Ships arriving at the ports today often hold cargo from multiple ocean carriers due to the carrier alliance agreements. Thus, the allegiance of a shipping line to one particular port or one particular terminal has become less important.
As terminals become commoditized, the differentiation between the two ports becomes less apparent. Ocean carriers seek maximum flexibility for their vessel calls at ports and terminals. Unfortunately for the ports, their long term leases were written before the current consolidation of carriers into mega-alliances. Legacy leases with exclusivity language tying a special ocean carrier’s cargo to a specific terminal or port are becoming difficult to enforce and carriers have restructured to divest of these commitments. Since the economic recession of 2008, alliance cargo handled by Maersk Line, CMA-CGM and MSC has switched back and forth between terminals in the two ports. This is reflected in the market share numbers for the years 2010 through 2012, where a decline in one port is offset by an increase in the other, while volumes for the bay remained flat.
A cargo forecast prepared jointly for both ports in 2009 forecasted annual average growth rates decreasing from the previous forecast by approximately 1% with container forecasts for the period of 2009-2013 of 1.7%, followed by a period of annual growth averaging 5.5% until decreasing to 4.8% for the years 2020-2030. This is reflective of the changing competitive landscape due to an expanded Panama Canal, terminal expansions in Canada and Mexico and increased Southeastern Asian cargo using the Suez Canal.
5. The Challenges of Port Congestion
Cargo volumes dropped in the latter half of 2014 and early 2015 due to multiple issues that congested both ports container terminals, particularly because of increasing ship sizes and chassis shortages.This loss of cargo and the increased reputational risk triggered a comprehensive collaboration between the two ports in the area of supply chain management despite that fact that the issues were operational and solutions were primarily within the auspices of the ports terminal operators and not the port administrations. However, like the terminal operators, the ports have significant infrastructure investments to protect. At one point during the congestion crisis, the Port of Long Beach proposed owning and supplying a chassis fleet as a way to address chassis shortfalls. Although that effort did not materialize, it is an indication of how the port was willing to move beyond its traditional landlord role to improve operational issues. The Port of Long Beach has also created a senior executive position devoted to supply chain optimization.
Building on an earlier joint effort known as the “Beat the Canal” program begun in 2011, with the approval of the Federal Maritime Commission, both ports began to take a more focused their interest in supply chain management. In May 2015, the ports announced the creation of stakeholder working groups in seven key areas: Peak Season 2015, Container Terminal Optimization, Chassis, Off-dock Solutions, Key Performance Indicators/Data Solutions, Intermodal Rail, and Drayage.
One key indicator of port performance is truck turn time, the time it takes the trucker to retrieve the container from the terminal. One early outcome of the drayage working groups is an agreement on the definition of “truck-turn time”. As truckers often appear at the terminal and wait outside until 6PM when the Pier Pass fee expires (a fee based incentive program to shift container moves to off-peak hour shifts on weeknights and Saturdays), truckers were reporting turn times that were skewed by their time spent outside the terminals. The agreed upon definition includes only that time the trucker is actually in the terminal from clocking in at the entrance gate to leaving the exit gate.