Economic Regulation and Deregulation in the U.S.A.: Airlines, Electric Utilities. Professor Dr. Christopher Brown. Outline. “Old regime” economic regulation of the airline industry Airline deregulation: Assessing the outcome “Old regime” economic regulation of electric utilities.
Professor Dr. Christopher Brown
Passenger Miles (PMs) = Passengers Miles Traveled
Cost per passenger mile
1938 Civil Aeronautics Act
The Civil Aeronautics Board (CAB) created to: (1) promote airline safety; (2) to insure the industry operates in an economically sound fashion; and (3) to allow for the adaptation of the airline system to the commercial, postal, and defense needs of the country.
The CAB determined that its primary objective should be to insure that “economical” air service would be widely available.
High load factor, long distance
Low load factor, short distance
The 1971-96 is called the "era of deregulation" because of the major deregulatory initiatives passed—e.g., the abolition of fixed brokerage fees by the SEC in 1975, the Motor Carrier Reform Act
of 1980, and the Telecommunications Act of 1996.
For an overview see Clifford Winston, "Economic Deregulation: Days of Reckoning for Microeconomists," Journal of Economic Literature, September 1993:1263-1289.
Hub and Spoke system
Morrison and Winston estimate benefits (lower fares) from airline deregulation exceed $20 billion per year.
Peltzman, S. and Winston, C., editors. Deregulation of Network Industries: What’s Next? (AEI-Brookings Joint Center for Regulatory Studies, 2000), p. 2
1”So, How much did you pay for your ticket,” New York Times, April 12, 1998
Revenue Requirement Model
RR is the “revenue requirement”
RB is the rate base—an estimate of the value of owners’ investment in the regulated firm.
r is the “allowed rate of return” to owners’ investment.
E is expenses (fuel, wages, etc.)
Electric deregulation is really about the vertical separation of the three stages of production—or the creation of a multi-market industry.
Independent System Operator (ISO)
Average Retail Electricity Prices in California (cents per kilowatt hour)
First year under new regime
Source: California Energy Commission
Energy “speculators” (several employed by Enron) took advantage of these unique aspects of electricity and “rigged” the wholesale market.