Job Name:2081773 Date:14-12-05 PDF Page:2081773pbc.p1.pdf Color: Cyan Magenta Yellow Black FREIGHT TRANSPORTATION REGULATION Evaluative Studies This series of studies seeks to bring about greater understanding and promote continuing review of the activities and functions of the federal government. Each study focuses on a specific program, evaluating its cost and effi­ ciency, the extent to which it achieves its objectives, and the major alternative means­ public and private-for reaching those objec­ tives. Yale Brozen, professor of economics at the University of Chicago and an adjunct scholar of the American Enterprise Institute for Public Policy Research, is the director of the program. FREIGHT TRANSPORTATION REGULATION Surface freight and the Interstate Commerce Commission Thomas Gale Moore American Enterprise Institute for Public Policy Research Washington, D. C. Distributed to the Trade by National Book Network, 152.00 NBN Way, Blue Ridge Summit, PA 172.14. To order call toll free 1-800-462.-642.0 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 2.0036 or call 1-800-862.-5801. Thomas Gale Moore is a professor of economics at Michigan State University and an adjunct scholar of the American Enterprise Institute. Evaluative Studies 3, November 1972 Second printing, December 1974 Third printing, February 1979 Library of Congress Catalog Card No. L.c. 72·93994 © 1972 by American Enterprise Institute for Public Policy Research. Washington, D.C. Permission to quote from or to reproduce materials in this publication is granted when due acknowledgment is made. Printed in the United States of America CONTENTS INTRODUCTION .................................... .. 1 I BACKGROUND OF REGULATION 3 Railroad Interest in Government Help 4 Shipper Support for Government Control .......... .. 6 Economic.Justification for Regulation. ............. .. 9 II THE INTERSTATE COMMERCE ACT .. ............... .. 11 The Act of 1887 ................................ .. 11 Early Actions of the Commission ................. .. 13 The Breakdown of Regulation .................... .. 14 Elkins Act 14 Hepburn Act 15 Mann-Elkins Act of 1910 16 Transportation Act of 1920 18 The Depression and the Railroads ................. .. 23 III THE DEVELOPMENT OF MULTI-MODAL REGULATION 25 Motor Carrier Regulation ........................ .. 25 Water Carrier Regulation ........................ .. 31 Freight Forwarder Regulation 32 Intermodal Regulation 36 Reed-Bulwinkle Act 37 Transportation Act of 1958 38 IV REGULATORY PRACTICES ....... .. 41 Entry . .. 41 Rates . .. 48 Service 55 Mergers . .. 64 V EFFECTS OF REGULATION .......................... .. 71 Prices 71 Service. ....................................... .. 75 Market Share 77 Cost to the Economy 79 VI ALTERNATIVES 83 Surface Transportation Act of 1971 83 Transportation Regulatory Modernization Act 86 Total Deregulation .............................. .. 90 NOTES 95 INTRODUCTION The federal government has regulated U.S. transportation with vary­ ing degrees of stringency since 1887 while state efforts to control rates go back to very early periods. In fact, regulation of transpor­ tation in the form of setting legal maxiInum rates for toll roads probably goes back to colonial days. Systematic national regulation, however, originated with the Act to Regulate Commerce of 1887, which established the Interstate Commerce Commission. From that time to this, regulation of transportation has grown and multiplied in the United States. Recently, there has been increasing agitation to modify or elimi­ nate much of the regulation. Proponents of a free market in trans­ portation have claimed that such markets will provide major savings to shippers, consumers, and carriers. In their view, innovation would be more rapid, service would improve, and costs would decrease in the absence of regulation. The recent bankruptcy of the Penn-Central Railroad, the poor financial condition of other roads, the weak earn­ ings of major airlines in recent years and the decreasingly competi­ tive position of our merchant marine all make it imperative that a thorough examination of the regulatory structure be carried out. It may be that much of the weakness of the transportation indus­ tries can be attributed to regulation. It has been argued that regula­ tion imposes large costs on carriers, shippers, and consumers and, by encouraging cartel behavior, causes higher expenses, less flexi­ bility and, in the long run, reduced profits for the carriers themselves. On the other hand, advocates of regulation have urged that the I would like to thank Yale Brazen, James C. Miller, and George Hilton not only for reading the manuscript but especially for their valuable insights and suggestions. 1 regulatory agencies' powers be incl'eased to deal with the obvious weaknesses of the current system. It has been shown that regulation falls with unequal vigor on different modes and that this, in turn, distorts transportation decisions. Advocates of regulation have urged that it be extended to the exempt areas, and that the same controls be applied equally to all areas. In addition, many have claimed that without regulation the transportation industries would be chaotic, competition would be cutthroat, and while prices might plummet temporarily, they would subsequently rise to great heights. The end result would be that the consumer would suffer through poor service, fluctuating rates, price discrimination, and inefficiency. Given the poor financial position of the transportation industry and the general agreement that regulation, whether too little or too much, has a role to play, major efforts are currently being made to restructure the regulatory framework. Recently, Senator Vance Hartke (D-Ind.) introduced a bill entitled the Surface Transportation Act of 1972 which would have provided equipment subsidies, would have brought under regulation some now exempt commodities, and would have increased regulation of water carriers. This bill was supported and developed by the American Trucking i\ssociations, the Association of American Railroads, and the \Vater Transport Association. On the other side, the Nixon administration introduced a bill to move toward limited deregulation. This proposal received support from academic economists, shippers, and consumer groups. This paper will explore the issue in general terms, while not dealing explicitly with either the administration's bill or the Hartke bill. Although many of the arguments are applicable to other sectors of transportation, the discussion will be confined to the regulation of surface freight transportation with the exception of pipeline carriage. 2 CHAPTER I BACKGROUND OF REGULATION The current status of regulation in the United States is intelligible only in the context of its origins. While the Interstate Commerce Commission was established in 1887, its origins go back to the early years of railroading. After the Civil War, as railroads spread across the nation tying cities and hamlets together, competition between parallel lines began to develop. Almost simultaneously with the development of commercial rivalry came efforts to eliminate com­ petition or reduce its magnitude.1 Cartel-type activity between railroads goes back to at least the Iowa Pool of 1870 and price collusion originates even earlier. By 1870, freight agents from the New York Central and the Pennsylvania Railroad were meeting to agree on rates from Chicago to the East Coast. Although there were only two railroads, the New York Central and the Pennsylvania, operating over the entire route between Chi­ cago and the Northeast, the Erie Railroad carried freight between New York City, Buffalo, and Cincinnati. At the same time, the Baltimore and Ohio Railroad ran between Baltimore and Pittsburgh with an extension to Columbus and Sandusky, Ohio on Lake Erie. With only two railroads competing on the entire eastbound route out of Chicago, and with the major flow of freight being to the coast, eastbound rates were generally adhered to. On the other hand, since there was considerable excess capacity on the return trip, westbound rates were often cut below agreed-to levels. Even though agreed-upon rates were generally adhered to on the eastbound traffic, on routes where there was competition, posted rates were often considerably less than where there was no com­ petition. For example, the Erie Railroad, which ran from New York City to Buffalo and served intermediate points, charged 29¢ per 3 hundred pounds for the fourth class rate on the competitive route from New York City to Buffalo, a distance of 379 miles. but charged 35(' per hundred pounds between New York City and ,L\ddison (330 miles) and 36(' per hundred pounds between New York City and Bath, New York (350 miles). On both of the shorter routes the Erie had a monopoly.:! Coincidental with the establishment of one of thp first formal cartels in October 1874-the Western Railroad Bureau-the B & 0 Railroad extended its lines to Chicago. The Baltimore and Ohio at first refused to join the Western Railroad Bureau and offered lower freight rates than the cartel had posted. As a consequence, the posted rate from Chicago to the East Coast fell from 56(' to 40,1. and indica­ tions were that actual rates paid were reduced considnrably below tha1.;; Shortly thereafter an attempt was made to stabilize this trans­ portation market with the establishment, under the direction of Colonel Albert Fink, of a pool to assure each road a certain