Regulation

1. Regulation

2. Stages of regulation, continuous cycle • Market failure • Safety • Inability to provide service • Monopoly or oligopoly • Entry • Need for social justice • New technology or methods and make regulation less relevant • Deregulation

3. Historical phases of regulation • Anti-monopoly phase pre – 1930 • Anti-competitive phase 1900 – 1945 • Central control 1945 – 1950s • Creation of controlled competition 1950s – 1970 • Deconstruction of regulatory framework 1970 – 1980 • The age of regulatory reform 1980 – 2001 • Re-introduction of regulations???? 2001 - future

4. Modern day regulator issues • Contracting for services previously provided by civil servants • Service contractors providing all kinds of public work services • Security services, fire and military • Ownership and fee collection of prior public sector exclusive • Design-build arrangements • Private sector finance of road construction • Private maintenance or roadways • Private sector operation of transportation facilities • Private sector ownership of transportation facilities • Pricing and safety regulation of private facilities

5. Justifications for regulations • Economic monopoly power • The control of excessive competition • The regulation of externalities • The provision of public goods • The provision of high-cost infrastructure • The assistance of groups in need of transportation • The existence of high transaction costs • The integration of transportation into wider economic policies • The need to reflect the genuine resources costs of transportation • The improvement of transportation coordination

6. Applying regulation The application of regulation most often covers more than one purpose an therefore it may be more appropriate to discuss regulatory instruments.

7. Regulatory instruments • Taxes and subsidies • Direct provision • Laws and regulations • Competitive polic and consumer protection • Licensing • The purchase of tranportation services (the mail services) • Moral suasion (advertising seat belts) • Research and development (ITS) • Policy regarding inputs (our middle east policy has much to do with transportation fuels)

8. Railroad regulation • Justification – To prevent unreeasoable prices and earnins in situations where technology and demands create natural monopolies. • To prevent discrimination among groups with unequal bargaining power.

9. Granger revolt • Through the 1970s – the granger movement created a call for equity among rates • States tried to regulate railroads • In 1987 Created the Interstate Commerce Commission (ICC) • Shipping rates had to be "reasonable and just" • Rates had to be published • Secret rebates were outlawed • Price discrimination against small markets was made illegal.

10. ICC • Hepburn Act of 1906 and the Mann-Elkins Act of 1910 strengthened the ICC • The Hepburn Act empowered the ICC to change a railroad rate to one it considered "just and reasonable," after a full hearing of a complaint. • The Mann-Elkins Act placed the burden of proof on the railroads; for the first time, they would have to actively demonstrate that a rate was reasonable. • With these new powers, the ICC gained almost complete control over rail rates, • The railroad industry continued in decline from that point on • Peak in mileage in 1916 254,000 miles • 1975 – 199,000 miles • ICC – Replaced by Surface Transportation Board in 1995 • 2004 – 140,000 miles 96,000 by class I RRs

11. Regulatory Policy – aimed at causing zero economic profit MC Monopolist price Dead Weight loss AC Transfer to consumers MR Since AC = P there is a natural urge on the part of producers to inflate costs

12. Predatory pricing • For a decreasing average cost industry, there is an incentive, in the presents of competition to reduce cost below long run marginal cost to variable costs. • This creates market instability. • So long as a producer is providing services between marginal and average costs they are not preditory pricing.

13. Example of fair price discrimination D1 AC MC A P1 AC P3 D2 B P2 MC C D1 Q3 Q1 Q2

14. Price discrimination Both shippers can not be served at their marginal cost otherwise the railroad would operate at a deficit. If we discriminate and sell D1 at average cost and D2 at P2 then the total sales are qual to Q1+(Q3-Q1). The Railroad still covers its average price and by virtue o the two pat pricingt it produces a more efficient level of output; P3 as opposed to P1. The net benefits is ABC. Who deserves the marginal cost price?

15. Price discrimination example

16. Numerical example

17. Price Discrimination by Railroads • The demand for freight transportation is typically very inelastic. This is intuitively seen when considering that transportation only accounts for 2% of the final price of goods on the averrage. For bulky commodities with few transportation alternatives, transportation accounts for an even greater share. • Ferrous Mining 9.1% • Chemical and fertilizer mineral mining 6.4% • Lumber and wood 5.1% • Stone and clay 6.0% • Iron and steel products 5.3%

18. What lead to deregulation • The collapse of the railroad industry in the 1970s • Bankruptcy of the New York and Pennsylvania Central Railroads in 1970 • Bankruptcy of the Milwaukee Road (1975) and the Rock Island Railroads (1977) • Loss of rail passenger services by 1970s and organization of AMTRAK • Pre-deregulation reforms • Liberalization of truck and rail rates in the mid-1970s • Regional Rail Reorganization Act (1973) • Created Conrail • Railroad Revitalization and Regulatory Reform Act (1976) • Allow railroads to set rates in markets where they were dominant • Deregulated produce • Create funding for capital improvements

19. U.S. Deregulation • 1978 Airline deregulation act • Deregulated entry, exit, and pricing by 1983 • 1980 Motor carrier reform act • Deregulated entry, exit, and pricing and permit private contract negotiation • Did not deregulate intrastate trucking • 1980 Staggers rail act • Permitted private contract negtiation • Total deregulation occurred slowly.

20. Airline Industry • 1978 Disbanding of the Civil Aviation Board (Airline Deregulation Act) • Impacts • Pricing flexibility • Hub and spoke system for large carriers • More likely to keep passengers on carrier • New carriers – new carriers and entrants • Increased competition • Discount carriers • Southwest, America West, ATA, JetBlue, AirTran, Spirit and Frontier. • Regional Carriers • American Eagle, ExpressJet Airlines, Comair, SkyWest Airlines, Atlantic Southeast Airlines, Atlantic Coast Airlines, Mesaba Airlines, Horizon Airlines, Mesa Ailines, Air Wisconsin, Piedmont Airlines

21. Regional Airline Growth Taken from the Regional Airline Association Annual Report, 2003

22. Change of industry

23. Industry Issues • 2000 slow down in the economy • Declining fares • (9/11) increased security • Increased competition from low-fare carriers • Low fare carriers accounted for 7% of the market in 1991 • Low fare carriers accounted for 20% of the market in 2002 • Reduced willingness of customers to pay for amenities

24. The Staggers Act • Background • Conrail was highly unprofitable • Milwaukee and Rock Island bankrupt • Overall industry rate of return was 1% in 1978 (cost of capital 10.6%) • Significant overcapacity • Lightly-utilized branch lines in poor condition • Stagnant traffic and declining market share • Rate regulation seen as key impediment to profitability

25. Rail Deregulation • Reduction in size of the industry • Large Carrier concentration • 1980 39 class I railroads (rr with more than $¼ Billion in gross revenue) • 2001 8 class I railroads • Only 4 US transcontinential railroads • Expansion of small and niche carriers due to labor regulation

26. Railroad Impacts • Majority of freight is moved under contracts • Many joint rates are eliminated • The operation of third parties (largely steam ship lines) on Transcontinental lines. • Between 1980 and 1995 class 1 railroads shead about 32,000 miles in lines

27. ICC Termination Act of 1995 • Mergers approved • UP-C&NW (1995, by ICC) • BN-Santa Fe (1995, by ICC) • UP-SP (1996) • Conrail split-up (CSX and NS) (1999) • CN Expansion • IC (1999) • WC (2001) • GLT (2004) • KCS-TFM (1996-2004)

28. Technological innovation • Unit train Philosophy • Containerization – Double Stack • Consolidation of terminals • Automated train control system • Positive train control systems • Concentration of intermodel facility in most dense markets

29. What happened since deregulation of Railroads

30. ICC Termination Act of 1995 • Mergers approved • UP-C&NW (1995, by ICC) • BN-Santa Fe (1995, by ICC) • UP-SP (1996) • Conrail split-up (CSX and NS) (1999) • CN Expansion • IC (1999) • WC (2001) • GLT (2004) • KCS-TFM (1996-2004)

31. Trucking Industry Deregulation • Tail of two industries • Less than truckload • Concentration, before 1980 494 Class I (over 5 million) carriers and by 1989 154 • Rates have continued to decline at real levels of 2 percent per year • Truck Load industry • Greater flexibility • Many more entrant – O-O have become TL carriers.