Francis P. Mulvey Commissioner Surface Transportation Board George Mason University Arlington, VA

1. Transportation Regulation in America—Past, Present, and Future Francis P. Mulvey Commissioner Surface Transportation Board George Mason University Arlington, VA April 25, 2011

2. Transportation Regulation Regulation and its Historical Bases Legal Bases for Regulation Common Law Commerce Clause of the Constitution Police Powers of the State Statutory Law

3. Railroad Regulation • Modern U.S. railroad industry history can be divided into pre- & post- Staggers Act • In the 19th Century railroads expanded rapidly especially after the Civil War • However, much abuse of monopoly power led to the passage of the Interstate Commerce Act and other federal regulations • Federal regulation ultimately extended to all modes, but proved particularly harmful to railroads

4. Early Railroad Regulation • The Granger Laws • Primarily in Upper MidWest • Maximum Rate Legislation • Pro Rata Clauses • Prohibitions against bribes/kickbacks

5. Early Railroad Regulation Problems with the Granger Laws Munn vs. Illinois Windom and Cullom Reports Act to Regulate Commerce 1887

6. Railroad Regulation Gibbons vs. Ogden Provisions of the Act of 1887 Rate reasonableness Discrimination and Undue Preferences Long Haul/Short Haul Clause Pooling Restrictions Created ICC Early Problems with the Act Supreme Court Cases (Councilman vs. Hitchcock, et al.

7. Railroad Regulation • Strengthening the Act • Carmack Act • Hepburn Act • Other Legislative Responses • Nationalization of the Railroads

8. Railroad Regulation Transport Act of 1920 Problems with Prior Regulation Incompleteness Capitalization Service Adequacy Labor Disputes Defects in Regulatory System Policy of Enforced Competition Restrictive Regulation

9. Railroad Regulation Principal Provisions of the Act of 1920 Rule of Rate Making Recapture Clause Division of Joint Rates Minimum Rate Regulation Pooling Consolidation and Acquisitions Financial Regulation Intrastate Rates Abandonments Joint Terminals Labor Disputes

10. Railroad Regulation Hoch-Smith Resolution of 1925 Railway Labor Act of 1926 Emergency Transport Act of 1933

11. Early Road Development • Packhorsemen and Tote Roads • Early Turnpikes • Federal Involvement – The Cumberland Road • Plank Roads • The Good Roads Movement

12. Development of Highway System • Federal Aid Road Act of 1916 • Highway Act of 1921 • Eisenhower’s Cross Country Convoy • Highway Act of 1956 and the Interstate System • The Highway Trust Fund

13. Interstate Highway System

14. Motor Carrier Regulation Three Principal Areas of Motor Carrier Regulation Highway Protection Safety Traditional Economic Regulation Motor Carrier Act of 1935 Exempt Areas Incidental Movements by other Modes Local Transport Agricultural Commodities

15. Motor Carrier Regulation Differences Between Railroad and Motor Carrier Regulation Motor Carrier Regulation More Complicated Many Exempt Carriers Large Number of Motor Carriers Insurance Requirements No Abandonment Restrictions No Joint or Through Rate Requirements No Long Haul/Short haul Clause ICC had No Power over Intrastate Rates

16. Motor Carrier Regulation Problems Faced by Regulators Distinguishing Between Private and “For-hire” Trucking Distinguishing Between Contract and Common Carriers Agricultural Exemptions Entry Considerations Common Carriers – PCN Test (Public Convenience and Necessity) Contract Carriers – Consistent with the Public Interest

17. Motor Carrier Regulation Rate Regulation - Operating Ratio Standard Operating Expenses/Operating Revenue Trucks and Ruinous Competition Empty Back Haul Problem

18. Transportation Law and Regulation TransportationAct of 1940 -Fair and Impartial Transportation -Preserve Modal Inherent Advantages -Eliminate Destructive Competition -Promote Safe Adequate and EfficientService -Foster Sound Econ Conditions in Transport -Encourage Reasonable Rates -Encourage Just Wages and Good Working Conditions

19. Transportation Law and Regulation • Other Provisions of the Act of 1940 -Railroad Consolidation -Rule of Ratemaking -Burden of Proof in Railroad Rate Cases -Water Carrier Regulation

20. Water Carrier Regulation Included in Transport Act of 1940 Included Because They Were in Distress Made Subject to Long Haul/Short Haul Clause Made Subject to Rules Governing Consolidation Many Exemptions - 90 percent Exempt Bulk Commodities When Less Than 3 in Tow Bulk Liquids Contract Carriage

21. Navigable Waterways

22. Air Transport Regulation Earliest Government Involvement – Mail Contracts Immediate Rationale for Economic Regulation Safety Financial Crisis Civil Aeronautics Act of 1938 Public Convenience and Necessity Must be Shown for Entry Rates and Fares Must be Published Rates Can be Prescribed When Existing Found Unlawful Authority over Mergers Created Civil Aeronautics Board

23. Public Promotion of Air Transport • Post War Development of the Airlines • Air Traffic Control • Airport Improvement Program • Essential Air Service Program • CRAF Program • Aviation Trust Fund • State and Local Support for Terminals

24. US Transportation Under Regulation • Restricted Entry • Low Rates of Returns for some modes • Relatively Rigid Rates • Regulatory Lag • Regulatory Mentality • Restrictions on Innovations

25. Motor Carrier Deregulation • Condition of Motor Carriers under Regulation • Wasteful – empty backhauls • Uneconomic – excess capacity • Inefficient carriers • Protected –entry limits

26. Motor Carrier Deregulation • Opposition to Regulatory Reform • Organized Labor • Trucking Companies • Shippers happy with service quality • Triumph of the Economists

27. Motor Carrier Deregulation Motor Carrier Act of 1980 On Entry– Burden of Proof on Protestor Fit Willing and Able Test Elimination of Operating Restrictions Greater Pricing Freedom Contract Carriers get Common Carrier Certificates Rates must still be filed with ICC

28. Motor Carrier Deregulation Intercity Bus Industry Condition Under Regulation Low ROI Losing Traffic to Air and Auto and to Amtrak Uneconomic Traffic

29. Motor Carrier Deregulation Bus Regulatory Reform Act of 1982 Eliminated Rate and Entry Regulation Eliminated Requirement to offer Regular Route Service to Gain Charter Authority Preempted State Regulation ..

30. Motor Carrier Deregulation-Aftermath Undercharge Issue Effect on Trucking Labor Organization Rise of Independent Owner-Operators Bus Industry Performed Poorer than Other Modes Following Deregulation Bus Focus on Charter and Tourism Traffic

31. Airline Deregulation Condition of the Industry Under Regulation Low Profits High Costs High Fares Stagnant Growth Wasteful Service Competition

32. Airline Deregulation Experience in Intrastate Markets Theory of Contestable Markets Air Cargo Deregulation in 1977 Opposition of Labor, Some Large Carriers

33. Airline Deregulation Airline Deregulation Act of 1978 Provided for Phasing in of New Entry and Rate Freedom Eased exit restrictions Abolished CAB by 1985 Alfred Kahn Accelerated the Process

34. Airline Deregulation Immediate Aftermath of Deregulation New Entrants Falling Market Share of Legacy Carriers Bankruptcies and Mergers Falling Fares External Events—Oil Embargo, Patco Strike, Inflationary Pressures

35. Aftermath of Airline Deregulation Response of the Legacy Carriers Competitive Strategies and Barriers to Entry --Physical Barriers—Hubs, Slots, Gates and Noise Restrictions --Marketing Barriers—Frequent Flyer Programs, CRS’s, Travel Agent Commissions, Code Sharing

37. Airlines Today • Re-emergence of Some Legacy Airlines • Success of Some Low Cost Carriers • Decline in Role of Travel Agents • Recurring Financial Crises • Aftermath of 9/11 • Global Alliances

38. Railroad Deregulation • Condition of the Railroad Industry • ROI • Market Share Trends • Deferred Maintenance • Bankruptcies • Subsidized Competition and Uneven Regulation • Low Labor Productivity and Work Rules

39. Railroad Deregulation • Three R Act of 1973 • Four R Act of 1976 • Reduced ICC Regulation to cases of market dominance • Exempt from regulation if not in public interest • ICC develop standards of Revenue Adequacy Freedom from Obligation to carry Passengers--AMTRAK

40. Amtrak System Map

41. Railroad Industry Pre-Staggers • 40 Class I Railroads • 9 Railroads bankrupt • Industry-wide low return-on-investment • Railroads unable to raise capital • Railroads faced steadily declining market share • Regulation prevented RRs from any flexibility in pricing to compete with other modes • Carriers could not abandon redundant or light density lines to cut costs • Rates could not cover inflation due to regulatory lag in rate adjustments

42. Railroad Deregulation • StaggersRail Act of 1980 • Maximum Rates only in Absence of Comp. • Threshold Revenue/Variable Cost Ratio • 180 percent • Revenue Adequacy a Factor in Rate Reasonableness • ICC can’t consider impacts on othermodes from a rate change

43. Railroad Deregulation Interstate Commerce Commission Termination Act of 1995 Creation of Surface Transportation Board STB’s Limited Regulatory Role Rationalization of the Rail Network

44. Railroad Deregulation • Staggers Act of 1980 (cont’d) • Allowed RR’s to enter into contract rates • Allowed surcharges on light density lines when revenues are inadequate • Time limits of ICC proceedings • Expanded ICC power to exempt categoies of traffic from regulation

45. Growth & Decline of Class I RR Miles

46. Railroad ROI 1970-2009 46

47. Railroad Employment 1939-2009 1,670,000 1,151,000 47

48. Railroad Industry Cost of Capital and ROI 1996-2009

49. Class I Capital Expenditures 1994 - 2010 Billions Total Roadway & Structures Equipment

50. Since Staggers • Rail industry freight traffic ton-mile market share has increased from 30.3% in 1980 to 43% in 2010 • Rail rates down 55% on average (inflation adjusted) -Some year-to-year increases in last decade (2000- 2006 up 3.5%, 2008 up 14.5%) • Railroads’ ROI increased • Railroads substantially increased investment in infrastructure • Improvement in safety performance