TRANSPORTATION REGULATION AND PUBLIC POLICY. After reading this chapter, you should be able to do the following:

Transcription

1 Chapter 3 TRANSPORTATION REGULATION AND PUBLIC POLICY Learning Objectives After reading this chapter, you should be able to do the following: Understand the bases for the regulation of transportation in the United States Appreciate the roles of regulatory agencies and the courts in regulating transportation Obtain a knowledge of previous and current regulations affecting transportation Understand the need for a national transportation policy Identify and assess the need and roles of public promotion in transportation Appreciate the role of user charges Obtain a knowledge of transportation safety and security regulations in the United States 54

2 Transportation Regulation and Public Policy 55 Transportation Profile Reregulating the Railroads The railroads in the United were the first major industry to be economically regulated by the federal government. The driving factor in this decision was the railroads tendency to be monopolistic in nature. Because of the high level of fixed investment in track and equipment, the railroads faced little, if any, competition during the developmental period of the United States in the late 1880s. Because of this, many shippers complained that rail prices were excessive and service was poor. This was especially true for small and captive shippers. As a result, the United States federal government regulated the railroad industry with the passage of the Act to Regulate Commerce of From 1887 to 1979, the federal government strengthened the regulation of the railroads and brought motor carriers, water carriers, airlines, and pipelines under federal regulatory control. The intent of this regulation was to provide shippers with a level of competition within and between modes that would result in reasonable rates and adequate service. The theory behind this was that a sound, efficient, and effective transportation system would benefit not only freight shippers but also the general public as well. In 1980, however, the federal government deregulated the railroad industry with the passage of the Staggers Rail Act. The intent of the Act was to allow railroads more freedom in how they set prices and served markets. With this freedom, the railroads were supposed to be able to attract private capital for infrastructure investments. The ability to set differential prices (that is, prices that reflected not only the cost to provide the service but also the shipper s willingness to pay) by the railroads was intended to help grow railroad revenue to allow railroads to be selective in the freight they carried. Some opponents of this legislation argued that small and captive shippers would now be without adequate rail service, which would harm them and the general public. Proponents countered that now the railroads could operate as firms normally do in a free-market economy. The deregulation of the railroad industry culminated with the passage of the ICC Termination Act of The Surface Transportation Board (STB) replaced the Interstate Commerce Commission as the regulatory body for the railroad industry. This Act increased the freedoms enjoyed by the railroad industry in setting prices, entering or leaving markets, and determining service levels. The deregulatory environment seemed to work as the railroads have enjoyed substantial profitability since the Act passed in However, new legislation proposed in 2007 by both the House of Representatives and the Senate seeks to reregulate the railroad industry. This legislation, the Railroad Competition and Service Act (H.R. 2125, S. 953), proposes to: (1) ensure competition in the railroad industry; (2) enable rail customers to obtain reliable rail service; and (3) provide customers (shippers) with a reasonable process for challenging rate and service disputes. The proposed legislation would empower the STB to determine rate reasonableness, allow the STB to define areas of inadequate rail competition, and establish an Office of Rail Customer Advocacy. The rationale behind this proposed legislation is to limit the ability of the railroads to set differential prices because they discriminate against small and captive shippers. Many industry and trade groups oppose this proposed legislation on the grounds that reregulating the railroad industry would cause much needed capital for infrastructure projects to disappear because industry revenues would decline. This lack of funds for improvements would cause a severe deficiency in rail capacity to meet increasing railroad freight demand. The role of transportation in our economy cannot be overstated. It provides a means for commerce and our national defense. Because of its impact on the general public, the federal

3 56 Chapter 3 government has an obligation to ensure a sound, efficient, and effective transportation network. However, the question remains as to how this type of transportation network should be achieved. Does government regulation or the free-market economy provide the best transportation network that satisfies the demands of the transportation providers, customers, and the general public? This chapter will examine the role of government in transportation, the role of regulation in transportation, and the benefits of transportation to the general public. Introduction Transportation has long been a critical component of every world economy. From the development of the Egyptian empire because of the Nile River to the establishment of colonies on the east and west coasts of the U.S. because of ocean transportation, transportation has allowed civilizations to expand through trade with other countries. Because of its impact on a nation s economy, many countries have developed policies and regulations for transportation to assure a safe, reliable, and fair transportation network for their citizens. When the United States was an agricultural society, it relied on wagons and railroads to move products from points of surplus to points of demand. As the United States evolved into a manufacturing economy, it utilized railroads, motor carriers, water carriers, pipelines, and air carriers to create time and place utilities. Today, while the United States is mainly an Internet-based society, it still relies on transportation to add value to products not only for domestic movements but also for global movements. All through this history, the United States has attempted to set policies and establish regulations, at both the state and federal levels, to govern its transportation network so it is fair and equitable to transportation providers, shippers, and citizens. However, because of the boundary-spanning nature of transportation and its multiple constituents, developing a fair and equitable transportation network for all parties has been and continues to be a challenge for U.S. government agencies. This chapter will examine the basis of this regulation, along with the roles of the regulatory commissions and the courts. A discussion of the development of transportation regulation from its inception at the federal level in 1887 to its role today will be presented, along with the national transportation policies directing and promoting transportation and national security. Regulation of Transportation Nature of Regulation In the United States, the government influences the activities of industries in many different ways. The amount of influence in industry activity varies from providing the legal foundation and framework in which industries operate to government ownership and control of firms in some industries. The degree of government regulation in some industries has sometimes met with stiff opposition from firms in those industries. However, because of the impact some industries have on the economy of the United States, some level of government intervention is necessary. The amount of government control and regulation has increased as the United States has grown and prospered. If the amount of government controls in existence 150 years

4 Transportation Regulation and Public Policy 57 ago was compared to that in place today, the former would seem insignificant. The expansion of government influence, however, has been necessitated by the increase in the scope of activity, complexity, and size of individual firms. In the United States, our economic activity is usually viewed as one of private enterprise. Competition is a necessary requirement for a free-market economy. A competitive market can decide the allocation of scarce resources. Economists have soundly developed the concepts of competition and free markets for years. The definitions of pure competition and free market involve several conditions that might not exist in reality. Products are justified only by the market s willingness to buy them. A product should not be sold at a price below the marginal cost of making the last unit. The free market theory also assumes that producers and consumers are able to assess whether or not a given economic act will provide them with a positive return. Although pure competition provides a marketplace that is desirable to consumers, a monopoly does not. In a monopoly, only one seller exists and can control the price of each individual unit of output. Consumers have no opportunity to switch suppliers. If all market structures took the form of either pure competition or monopoly, the solution would be simple. Most individuals would not disagree with government regulation of a monopoly, and a valid case could be made for no government intervention in an economy characterized by pure competition. However, the prevailing situation is not that simple. Market structures usually take some form between the extremes of pure competition and monopoly. The imperfections in the marketplace in a free-enterprise economy provide the rationale for government controls. The controls exercised by the government can take one of several forms. One form is that of maintaining or enforcing competition for example, the antitrust laws set forth by the government. Second, the government can substitute economic regulation for competition, as it has done in the transportation industry. Third, the government can assume ownership and direct control, as it has done with the U.S. Post Office. The basic challenge of regulation in our society is that of establishing or maintaining the conditions necessary for the economical use of resources under a system of private enterprise. Regulation should seek to maintain a competitive framework and rely on competitive forces whenever possible. The institutional framework for regulating transportation is provided by federal statute. A perspective on the overall legal basis for regulation is important to the student of transportation, and will be examined in the next section. Common Law The legal system in the United States is based upon common law and civil or statutory law. The former is a system basic to most English-speaking countries because it was developed in England. Common law relies on judicial precedent, or principles of law developed from former court decisions. When a court decision establishes a rule for a situation, then that rule becomes part of the law. As conditions change, the law sometimes needs further interpretation. Therefore, an important feature of the common law system is that it changes and evolves as society changes. There are many examples of such change in the interpretation of the areas of federal and state control or responsibility for regulation of transportation. 1 The common law approach fits well with a free market economy because the individual is the focus of attention and can engage in any business that is not prohibited. Each

5 58 Chapter 3 individual is regarded as possessing equal power and responsibility before the law. 2 The early regulation of transportation developed under common law. The obvious connection is with the concept of common carriage, in which transportation providers were required to serve all shippers and charge reasonable rates without discrimination. Statutory law or civil law is based upon the Roman legal system and is characteristic of continental Europe and the parts of the world colonized by European countries. Statutory law is enacted by legislative bodies, but it is a specific enactment. A large part of the laws pertaining to business in general and to transportation are based upon statutory law. However, two points are important to note in this regard. First, common law rules are still very important in the transportation industry because many statutes were, in effect, copied from common law principles. Second, statutes are usually general in nature and need to be interpreted by the courts. Thus, in the United States, there is a very close relationship between common law and statutory law. The regulation of transportation in the United States began at the state level under the common law system when a number of important regulations, as well as the basic issue of whether a business could even be regulated at all, were developed. In the latter regard, a concept of business affected with the public interest was developed under common law. State regulation also included the use of charters for some of the early turnpike companies and canal operations. The development of the railroad industry necessitated a move to statutory regulation, which was in effect by 1870 with the passage of granger laws in several states. Granger laws were the product of the granger movement, which began about 1867 in states such as Illinois, Iowa, Minnesota, and Wisconsin. Granges were organizations formed by farmers in various states and functioned as political action groups where farmers could discuss problems. Farmers joined the granger movement because of their dissatisfaction with railroad rates and service. The development of state laws, and later federal laws, also gave rise to independent regulatory commissions, which are the topic of the next section. Role of the Independent Regulatory Commissions The U.S. federal government is subject to a system of checks and balances in three separate branches executive, judicial, and legislative. An independent regulatory commission is an administrative body created by legislative authority operating within the framework of the U.S. Constitution. The members of these commissions are appointed by the president and approved by the Senate for a fixed term in office. The Interstate Commerce Commission (ICC) was the first federal independent regulatory commission established in the United States under the Act to Regulate Commerce of This Act gave the ICC the power to regulate the U.S. railroad industry. Originally, the ICC had limited powers, partially because of the inexperience of the U.S. government in regulating an entire industry. However, over several years many additional pieces of legislation were passed to strengthen the powers of the ICC over the railroad industry. The Motor Carrier Act of 1935, the Transportation Act of 1940, and the Freight Forwarder Act of 1942 gave similar powers to the ICC over the motor carrier, domestic water carrier, and freight forwarding industries, respectively. The ICC served as an expert body, providing continuity to regulation that neither the courts nor the legislature could provide. The ICC exercised legislative, judicial, and executive powers. As a result, it was often labeled a quasi-legislative, quasi-judicial, and quasi-executive body. Regulatory agencies can be regarded as a fourth branch of the government. When the ICC enforced statutes, it served in its executive capacity. When

6 Transportation Regulation and Public Policy 59 it ruled upon the reasonableness of a rate, it served in its judicial capacity. When it expanded legislation by promulgating rules or prescribing rules or rates, it exercised its legislative powers. On December 31, 1995, the ICC was abolished. The ICC Termination Act of 1995 (ICCTA) ended the 108-year-old ICC and replaced it with the Surface Transportation Board (STB), which today is focused only on the railroad industry. The STB is housed in the U.S. Department of Transportation (DOT), but it is still considered to be an independent regulatory agency. The president appoints members of the STB with the approval of the Senate. The role of the STB in the economic operations of the railroads has been greatly reduced from that of the ICC. Congress intended for the marketplace, not the STB, to be the primary control mechanism for rates and service. (See Current Economic Regulations, later in this chapter, for more details on the ICCTA regulations). In addition to the ICC and STB, other independent regulatory commissions were established for transportation. In 1938, the Civil Aeronautics Board (CAB) was established to administer the economic regulations imposed upon airlines. The CAB was abolished in 1985 by the Civil Aeronautics Board Sunset Act and the remaining regulatory jurisdictions (safety issues) were transferred to the DOT. The Federal Maritime Commission (FMC) was created in 1961 to administer the regulations imposed on international water carriers. The FMC exercises control over the rates, practices, agreements, and services of common carriers operating in international trade and domestic trade to points beyond the continental United States. The Ocean Shipping Reform Act of 1998 relaxed some of the economic powers of the FMC by allowing shippers and ocean carriers to enter into confidential contracts. This will be discussed more in Chapter 8. The Federal Energy Regulatory Commission (FERC) was created to administer the regulations governing rates and practices of oil and natural gas pipelines. However, the FERC is not an independent regulatory commission that reports to Congress, as is the STB or FMC. Rather, it is a semi-independent regulatory commission that reports to the Department of Energy. Our regulatory laws are often stated in vague terms, such as reasonable rates, inherent advantages, and unjust discrimination. The roles of the regulatory commissions are to interpret the meaning of these terms as they are stated in the law and to develop regulations that define their intent. These regulations, then, are codified and serve as the basis for decisions made by the regulatory commissions. However, these decisions are still subject to the intent of the law and to decisions made by the courts. Role of the Courts Even though the regulatory commissions play a powerful role in regulating transportation, they are still subject to judicial review. The courts are the sole determinants of the intent of the law, and only court decisions can serve as legal precedent under common law. The courts make the final ruling on the constitutionality of regulatory statutes and the interpretation of the regulation. The review of the courts act as a check on arbitrary or capricious actions, on actions that do not conform to statutory standards or authority, or on actions that are not in accordance with fair procedure or substantial evidence. The parties involved in a commission decision have the right, therefore, to appeal the decision to the courts.

7 60 Chapter 3 Over the years, the courts had come to recognize the ICC as an expert body on policy and the authority on matters of fact. This recognition has now been given to the STB. The courts limited their restrictions on ICC and STB authority. The courts would not substitute their judgment for that of the ICC or STB on matters such as what constitutes a reasonable rate or whether discrimination is unjust because such judgments would usurp the administrative function of the commission. Safety Regulations Various federal agencies administer transportation safety regulations. Some of these regulations are enacted into law by Congress, whereas others are promulgated by the respective agencies. A thorough discussion of the specific regulations pertaining to each type of transportation is beyond the scope of this book, but a general description of safety regulations is warranted. Safety regulations have been established to control operations, personnel qualifications, vehicles, equipment, hours of service for vehicle operators, and so forth. The Federal Aviation Administration (FAA) enforces and promulgates safety regulations governing the operations of air carriers and airports. The Federal Motor Carrier Safety Administration (FMCSA) administers motor carrier safety regulations, and the National Highway Traffic Safety Administration (NHTSA) has jurisdiction over safety features and the performance of motor vehicles and motor vehicle equipment. The Federal Railroad Administration (FRA) has authority over railroad safety regulations while the Coast Guard is responsible for marine safety standards for vessels and ports. The newly created Pipeline and Hazardous Material Safety Administration (PHMSA) contains a Pipeline Safety Office that is responsible for hazardous materials standards for oil and natural gas pipelines and a Hazardous Materials Safety Office that manages hazardous materials regulations for all other modes of transportation. The National Transportation Safety Board (NTSB) is charged with investigating and reporting the causes, facts, and circumstances relating to transportation accidents. In addition, the states, through the police powers contained in the Constitution, exercise various controls over the safe operation of vehicles. These safety regulations set standards for speed, vehicle size, operating practices, operator licensing, and so forth. The purpose of the state safety regulations is to protect the health and welfare of the citizens of that state. Often, federal and state safety regulations conflict. For example, the federal government restricted the automobile speed limit to 55 miles per hour on the highway system during the energy crisis of the 1970s. Some states did not agree with the mandate but followed the requirement to qualify for federal money to construct and maintain the highway system. In 1982, the Surface Transportation Act established federal standards for vehicle weight and length of tractor-trailers operating on the interstate highway system. The states complied with the standards for the interstate highways but many maintained different standards for state highways. After the September 11, 2001 terrorist attack on the United States, transportation security has taken on a new dimension. Securing the nation s transportation system from terrorism became a major governmental focus because of the massive geographic expanse of the U.S. border and the millions of tons of freight and millions of passengers entering and leaving the United States. The Aviation and Transportation Security Act, enacted in November of 2001, created the Transportation Security Agency (TSA) which is responsible for securing the safety of the U.S. air transportation network. In 2002, Congress passed the Maritime Transportation Security Act, which governs the security of U.S. ports. Also,

8 Transportation Regulation and Public Policy 61 the Homeland Security Act of 2002 was passed to provide a central coordinating mechanism, along with the DOT, for all security issues dealing with transportation of passengers and freight within the United States and flowing into and out of the United States. State Regulations The states establish various transportation safety regulations to protect the health and welfare of their citizens. In addition, the states exercise limited economic regulations over the transportation of commodities and passengers wholly within the state. These powers were given to the states by the Commerce Clause of the U.S. Constitution. The states powers were greatly limited under various federal laws. States generally cannot impose stricter regulation than imposed on a given mode at the federal level. States can still regulate safety, provided these regulations do not impose an undue burden on interstate commerce. This type of transportation is known as intrastate commerce, and most states had a regulatory commission that was charged with enforcing these intrastate controls. These agencies might still exist to regulate utilities, such as telephone or electric companies. Intrastate economic regulations vary from state to state, but they are generally patterned after federal economic regulations. In 1994, the federal government eliminated the intrastate economic regulation of motor carriers with the passage of the FAA Authorization Act. The law, which applies to all motor carriers of property except household goods carriers, prohibits the states from requiring operating authority or regulating intrastate motor carrier rates, routes, and services. The states have the option to regulate the uniform business practices, cargo liability, and credit rules of intrastate motor carriers. The determination as to what constitutes commerce subject to state economic regulations is generally based on whether the shipment crosses a state boundary. If the shipment has an origin in one state and a destination in another state, it is an interstate shipment and is subject to federal regulations, if any exist. However, for shipments that are moved into a distribution center from a point outside the state and then moved from the distribution center to a destination in the same state, the distinction is not that clear. The move within the state from the distribution center to the final destination can be considered interstate commerce and subject to federal regulations. Development of Regulation As has been seen in this chapter, transportation does not operate in a completely freemarket environment. Government has controlled the economic operations of transportation since the 1860s. The driving force behind this regulation was the recognition in the 1800s of the importance of the railroad industry to the development of our country and its inherently monopolistic nature. The role of economic regulation by the government is to transform a monopolistic industry into a competitive one. Under economic regulation, the government can: (1) determine if a firm can enter an industry; (2) determine which market(s) a firm can serve in that industry; and (3) determine the prices that firm can charge customers in the markets it serves. By enforcing these three regulatory practices, the government can provide the basis for competition in a monopolistic industry. Table 3-1 provides a chronology of transportation regulation. The regulatory history is broken down into four eras. First, the Initiation Era from 1887 to 1920 saw the establishment of federal transportation regulation and the ICC. Second, the Era of Positive Regulation from 1920 to 1935 was oriented toward promoting transportation. Third, the Intermodal Era from 1935 to 1976 witnessed the expansion of regulation to motor

9 62 Chapter 3 Table 3-1 Chronology of Major Transportation Regulation DATE ACT NATURE OF REGULATION Initiation Era 1887 Act to Regulate Commerce Regulated railroads and established ICC; required rates to be reasonable; discrimination prohibited 1903 Elkins Act Prohibited rebates and filed rate doctrine 1096 Hepburn Act Established maximum and joint rate controls 1910 Mann-Elkins Act Gave shipper right to route shipment 1912 Panama Canal Act Prohibited railroads from owning water carriers Positive Era 1920 Transportation Act of 1920 Established a rule of rate-making; pooling and joint use of terminals permitted; began recapture clause 1933 Emergency Transportation Act Granted financial assistance to railroads Intermodal Era 1935 Motor Carrier Act Federal regulation of trucking, similar to rail 1938 Civil Aeronautics Act Federal regulation of air carriers; established Civil Aeronautics Board (CAB) 1940 Transportation Act Provided for federal regulation of water carriers; declaration of national transportation policy 1942 Freight Forwarder Act Federal Reregulation of surface freight forwarders 1948 Reed-Bulwinkle Act Established antitrust immunity for joint rate making 1958 Transportation Act Eliminated umbrella (protective) rate making and provided financial aid to railroads 1966 Department of Transportation Act Established the U.S. Department of Transportation 1970 Rail Passenger Service Act Established Amtrak 1973 Regional Rail Reorganization Act Established Consolidation Rail Corporation (Conrail) New Economic Era 1976 Railroad Revitalization and Regulatory Reform Act Granted rate freedom; allowed ICC to exempt rail operations; began abandonment and merger controls 1977 Airline Deregulation Act Deregulated air transportation, sunset CAB (1985) 1980 Motor Carrier Act Eased entry restrictions and permitted rate negotiation 1980 Rail Staggers Act Permitted railroads to negotiate contracts, allowed rate flexibility, and defined maximum rates 1993 Negotiated Rate Act Provided for settlement options for motor carrier undercharges 1994 Trucking Industry Regulatory Reform Act Eliminated motor carrier filing of individual tariffs; ICC given power to deregulate categories of traffic (continued)

10 Transportation Regulation and Public Policy 63 Table 3-1 Continued DATE ACT NATURE OF REGULATION 1994 FAA Reauthorization Act Prohibited states from regulating (economic) intrastate trucking 1995 ICC Termination Act Abolished ICC; established STB; eliminated most truck economic regulation 1996 Maritime Security Act Authorized a program to assist an active, privately owned U.S.-flagged and U.S.-crewed merchant shipping fleet 1998 Transportation Equity Act for the 21st Century 2001 Aviation and Transportation Security Act Allocated $216 + billion for the maintenance and safety of surface transportation Established the Transportation Security Administration 2002 Homeland Security Act Moved Coast Guard and TSA into Department of Homeland Security carriers, air carriers, water carriers, and freight forwarders. Finally, the New Economic Era from 1976 to the present was the period of gradual lessening and eventual elimination of economic regulation, culminating in the elimination of the ICC. This era also saw the development and strengthening of transportation safety and security regulations. The next section will provide a summary of current regulations as they pertain to railroads and motor carriers. Current Economic Regulations As previously stated, the air carrier industry is free from economic regulation. Cargo and passenger rates are not controlled by the government and domestic air carriers are permitted to serve any market as long as the carrier meets safety regulation and landing slots are available. The majority of the economic regulation of pipelines has been transferred to the Federal Energy Regulatory Commission. Because most water carrier operations are exempt from economic regulation, domestic water carrier economic regulation is a moot issue. Effective January 1, 1996, the ICC Termination Act of 1995 abolished the Interstate Commerce Commission, further deregulated transportation, and transferred the remaining ICC functions to the Surface Transportation Board (STB) located within the DOT. The STB now administers the remaining economic regulations exercised over railroads, motor carriers, freight forwarders, freight brokers, water carriers, and pipelines. However, the majority of the remaining economic regulations pertain to railroad transportation. The key provisions of the ICCTA are summarized below: Railroad Regulations Rail economic regulation is basically unchanged by the ICCTA. The STB has jurisdiction over rates, classifications, rules, practices, routes, services, facilities, acquisitions, and abandonments. Railroads continue to be subject to the common carrier obligations (to serve, not discriminate, charge reasonable rates, and deliver).

11 64 Chapter 3 Rail tariff filing is eliminated; railroads must provide 20 days advance notice before changing a rate. Rail contract filing is eliminated except for agricultural products. Motor Carriers All tariff filing and rate regulation is eliminated, except for household goods and noncontiguous trade (trade between the continental United States and Hawaii, for example). Motor carriers are required to provide tariffs to shippers upon request. Motor carriers are held liable for damage according to the conditions of the Carmack Amendment, (that is, the full value of the product at destination). However, motor carriers can use released value rates that set limits on liability. The Negotiated Rates Act undercharge resolution procedures are retained and the unreasonable practices defense is extended indefinitely for pending undercharge cases. Undercharge/overcharge claims must be filed within 180 days from receipt of the freight bill. The STB has broad powers to exempt operations from economic regulation with the existing exemptions remaining. Antitrust immunity for collective rate making (publishing the national motor freight classification, for example) is retained. The motor carrier is required to disclose to the person directly paying the freight bill whether and to whom discounts or allowances are given. The concepts of common and contract authorities are eliminated; all regulated carriers can contract with shippers. Freight Forwarders and Brokers Both are required to register with the STB. The freight forwarder is regulated as a carrier and is liable for freight damage. The broker is not a carrier and is not held liable for freight damage. The STB can impose insurance requirements for both. The Surface Transportation Board Reauthorization Act of 1999 removed most of the remaining economic regulations imposed by the STB on motor carriers. The STB would no longer consider competitive issues and would eliminate references to federal regulatory approval requirements for collective motor carrier activities submitted to it for approval. The STB would no longer be able to grant antitrust immunity for motor carriers for collective activities such as rate bureaus and national freight classification. The motor carrier industry would be subject to competitive regulations as in other industries. In summary, the ICCTA brought the economic regulation of transportation back to its beginning in 1887 by retaining regulatory powers over the railroads, while allowing the other modes to operate in a free-market economy. While all of the modes, except rail, operate in this environment, they are subject to antitrust and other regulations that govern all other industries. Because of the decreasing cost nature of the railroad industry and its tendency towards monopoly, the STB maintains comprehensive guidelines to assure that railroads operate without discrimination or undue or unjust prejudice towards shippers.

12 Transportation Regulation and Public Policy 65 Antitrust Laws in Transportation The deregulatory movement has exposed many practices to be in violation of antitrust laws. Antitrust regulations were first established in 1890 with passage of the Sherman Antitrust Act. The key points of this act are as follows: Section 1: Trusts, etc., in restraint of trade illegal; penalty. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy declared by Section 1 to 7 of this title to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding one million dollars if a corporation, or if any other person, one hundred thousand dollars, or by imprisonment not exceeding three years, or both said punishments, in the discretion of the court. Section 2: Monopolizing trade a felony; penalty. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony 3 The thrust of the Sherman Act was intended to outlaw price fixing among competing firms, eliminate business practices that tended toward monopolization, and prevent any firm or combination of firms from refusing to sell or deal with certain firms or avoiding geographic market allocations. The law was strengthened in 1914 by the Clayton Act. This act specifically described some other practices that would be interpreted as attempts to monopolize, or as actual monopolization. These practices include exclusive dealing arrangements whereby a buyer and/or seller agree to deal only with the other party for a period of time. Another prohibited practice is a tying contract. This is where a seller agrees to sell goods to a buyer only if the buyer also buys another product from the seller. Also in 1914 legislation was passed that created the Federal Trade Commission (FTC). This agency was the primary overseer and enforcement agency in antitrust situations. Collective rate making by transportation carriers was made exempt from antitrust laws by the passage of the Reed-Bulwinkle Act of 1948, which empowered the ICC to oversee carrier rate making. As such, it limited traditional jurisdiction by the FTC and the Department of Justice in this area. Today, carriers are not immune from antitrust regulations as they pertain to rate bureaus and freight classification. Another major law that might apply to the deregulation of transportation is the Robinson-Patman Act of This law prohibits sellers from practicing price discrimination among buyers unless the difference in price can be justified by true differences in the costs of servicing these buyers (this will be discussed further in Chapter 4, Costing and Pricing in Transportation). Defenses against such a practice are: (1) differences in cost, (2) the need to meet competition, and (3) changing market conditions. Although this law was created for application to the buying and selling of goods, it may be applicable to contracts for transportation services. Whether this law applies in carrier pricing is only determined by the courts as suspected violations occur.

13 66 Chapter 3 Global Perspectives Ocean Cartel Challenged In a move to thwart the price-fixing efforts of the Trans-pacific Stabilization Agreement (TSA), one of the nation s largest shipper coalitions told federal regulators that it had serious concerns about expanding the carrier cartel s antitrust immunity. The National Industrial Transportation League (NITL) told the U.S. Federal Maritime Commission (FMC) that it objects to a proposed amendment to the TSA s effort to gain new authority for member ocean carriers to compare business strategies and share information in the eastbound Asia to U.S. trade. The published amendment to the carrier agreement contained little explanation regarding the reasons for the proposed change other than to note it would provide authority for the (TSA) members to discuss cost savings and more efficient use of vessels and equipment assets and networks. Source: Logistics Management, February 2009, p. 3. Reprinted by permission. In the selling and purchase of transportation services, two types of antitrust violations can occur. The first is called a per se violation. This type of violation is illegal regardless of whether any economic harm is done to competitors or other parties. Types of per se violations include price fixing, division of markets, boycotts, and tying agreements. If economic harm has been caused to any party because of this violation, the damages are tripled as compensation to the harmed parties. The second type of antitrust violation is called rule of reason. In this type of violation, economic harm must be shown to have been caused to competitors or other parties because these activities can be undertaken by firms with no antitrust implications. Rule of reason violations include exclusive deals, requirements contracts, joint bargaining, and joint action among affiliates. Carriers, in the selling of transportation services, are normally thought to be the party to which antitrust regulations apply. However, in buying these services, shippers are also subject to the same laws and are at an equal risk of committing an antitrust violation. Because transportation has been subject to antitrust laws for a short period of time, these laws as they pertain to transportation have not yet been fully tested in the courts. Transportation Policy The federal government has played an important role in molding the transportation system that exists in the United States today. The federal government s role has been defined through various laws, rules, and funding programs directed toward protecting and promoting the different modes of transportation. The federal government s policy toward transportation is a composite of these federal laws, rules, funding programs, and regulatory agencies. However, there is no unified federal transportation policy statement or goal that guides the federal government s actions. In addition to the Congress and the president, more than 60 federal agencies and 30 congressional committees are involved in setting transportation policy. Independent regulatory agencies interpret transportation law, establish operating rules, and set policy. Lastly, the Justice Department interprets statutes involving transportation and reconciles differences between the carriers and the public.

14 Transportation Regulation and Public Policy 67 The purpose of this section is to examine the national transportation policy, both explicit and implicit, that has molded the current U.S. transportation system. Although the national transportation policy is constantly evolving, there are some major underpinnings upon which the policy is built. These basic policy issues will be examined, as well as the declared statement of national transportation policy contained in the ICC Termination Act of Why Do We Need A Transportation Policy? A good starting point for examining the nature of our national transportation policy is the consideration of our need for such a policy. The answer to the question of need lies in the significance of transportation to the very life of the country. Transportation permeates every aspect of a community and touches the life of every member. The transportation system ties together the various communities of a country, making possible the movement of people, goods, and services. The physical connection that transportation gives to spatially separated communities permits a sense of unity to exist. In addition, transportation is fundamental to the economic activity of a country. Transportation furthers economic activity the exchange of goods that are massproduced in one location to locations deficient in these goods. The secondary benefits of economic activity jobs, improved goods and services, and so on would not be enjoyed by a country s citizens without a good transportation system. An efficient transportation system is also fundamental to national defense. In times of emergencies, people and materials must be deployed quickly to various trouble spots within the United States or throughout the world to protect American interests. Without an efficient transportation system, more resources would have to be dedicated to defense purposes in many more locations. Thus, an efficient transportation system reduces the amount of resources consumed for national defense. Many of our transportation facilities could not be developed by private enterprise. For example, the capital required to build a transcontinental highway would very likely be beyond the resources of the private sector. Efficient rail and highway routes require government assistance in securing land from private owners; if the government did not assert its power of eminent domain, routes would be quite circuitous and inefficient. Furthermore, public ownership and the operation of certain transportation facilities, such as highways or waterways, are necessary to ensure access to all who desire to use the facilities. The purpose of transportation policy is to provide direction for determining the amount of national resources that will be dedicated to transportation and for determining the quality of service that is essential for economic activity and national defense. National policy provides guidelines to the many agencies that exercise transportation decision-making powers and to Congress, the president, and the courts that make and interpret the laws affecting transportation. Thus, transportation policy provides the framework for the allocation of resources to the transportation modes. The federal government has been a major factor in the development of transportation facilities highways, waterways, ports, and airports. It also has assumed the responsibility to: Ensure the safety of travelers; Protect the public from the abuse of monopoly power; Promote fair competition;

15 68 Chapter 3 Develop or continue vital transportation services; balance environmental, energy, and social requirements in transportation; and, Plan and make decisions. 4 The statement of the federal government s transportation responsibility indicates the diversity of public need that transportation policy must serve. The conflicts inherent in such a diverse set of responsibilities will be discussed in a later section. Declaration of National Transportation Policy The ICC Termination Act of 1995 included statements of national transportation policy. Congress made these statements to provide direction to the STB in administering transportation regulation over railroads, motor carriers, water carriers, and pipelines. The declaration of national transportation policy is stated in Public Law : In regulating the railroad industry, it is the policy of the United States Government: 1. to allow, to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail; 2. to minimize the need for Federal regulatory control over the rail transportation system and to require fair and expeditious regulatory decisions when regulation is required; 3. to promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate revenues, as determined by the Board; 4. to ensure the development and continuation of a sound rail transportation system with effective competition among rail carriers and with other modes, to meet the needs of the public and the national defense; 5. to foster sound economic conditions in transportation and to ensure effective competition and coordination between rail carriers and other modes; 6. to maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues which exceed the amount necessary to maintain the rail system and to attract capital; 7. to reduce regulatory barriers to entry into and exit from the industry; 8. to operate transportation facilities and equipment without detriment to the public health and safety; 9. to encourage honest and efficient management of railroads; 10. to require rail carriers, to the maximum extent practicable, to rely on individual rate increases, and to limit the use of increases of general applicability; 11. to encourage fair wages and safe and suitable working conditions in the railroad industry; 12. to prohibit predatory pricing and practices, to avoid undue concentrations of market power, and to prohibit unlawful discrimination; 13. to ensure the availability of accurate cost information in regulatory proceedings, while minimizing the burden on the rail carriers of developing and maintaining the capability of providing such information;

16 Transportation Regulation and Public Policy to encourage and promote energy conservation; and 15. to provide for the expeditious handling and resolution of all proceedings required or permitted to be brought to this part. The declaration of national transportation policy for motor carriers, water carriers, brokers, and freight forwarders is stated in the same document: In General. To ensure the development, coordination, and preservation of a transportation system that meets the transportation needs of the United States Postal Service and national defense, it is the policy of the United States government to oversee the modes of transportation and: 1. in overseeing these modes: A. to recognize and preserve the inherent advantage of each mode of transportation; B. to promote safe, adequate, economical, and efficient transportation; C. to encourage sound economic conditions in transportation, including sound economic conditions among carriers; D. to encourage the establishment and maintenance of reasonable rates of transportation, without unreasonable discrimination or unfair or destructive competitive practices; E. to cooperate with each State and the officials of each State on transportation matters; and F. to encourage fair wages and working conditions in the transportation industry; 2. in overseeing transportation by motor carrier, to promote competitive and efficient transportation in order to: A. encourage fair competition, and reasonable rates for transportation by motor carriers of property; B. promote efficiency in the motor carrier transportation system and to require fair and expeditious decisions when required; C. meet the needs of shippers, receivers, passengers, and consumers; D. allow a variety of quality and price options to meet changing market demands and the diverse requirements of the shipping and traveling public; E. allow the most productive use of equipment and energy resources; F. enable efficient and well-managed carriers to earn adequate profits, attract capital and maintain fair wages and working conditions; G. provide and maintain service to small communities and small shippers and intrastate bus services; H. provide and maintain commuter bus operations; I. improve and maintain a sound, safe, and competitive privately owned motor carrier system; J. promote greater participation by minorities in the motor carrier system; K. promote intermodal transportation;