Transportation Regulation in America—Past, Present, and Future
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Transportation Regulation in America—Past, Present, and Future. Francis P. Mulvey Commissioner Surface Transportation Board George Mason University Arlington, VA April 25, 2011. Transportation Regulation. Regulation and its Historical Bases. Legal Bases for Regulation. Common Law.

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

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Transportation Regulation in America—Past, Present, and Future

Francis P. Mulvey


Surface Transportation Board

George Mason University

Arlington, VA

April 25, 2011

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

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

Early Railroad Regulation

  • The Granger Laws

  • Primarily in Upper MidWest

  • Maximum Rate Legislation

  • Pro Rata Clauses

  • Prohibitions against bribes/kickbacks

Early Railroad Regulation

Problems with the Granger Laws

Munn vs. Illinois

Windom and Cullom Reports

Act to Regulate Commerce 1887

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.

Railroad Regulation

  • Strengthening the Act

    • Carmack Act

    • Hepburn Act

    • Other Legislative Responses

  • Nationalization of the Railroads

Railroad Regulation

Transport Act of 1920

Problems with Prior Regulation



Service Adequacy

Labor Disputes

Defects in Regulatory System

Policy of Enforced Competition

Restrictive Regulation

Railroad Regulation

Principal Provisions of the Act of 1920

Rule of Rate Making

Recapture Clause

Division of Joint Rates

Minimum Rate Regulation


Consolidation and Acquisitions

Financial Regulation

Intrastate Rates


Joint Terminals

Labor Disputes

Railroad Regulation

Hoch-Smith Resolution of 1925

Railway Labor Act of 1926

Emergency Transport Act of 1933

Early Road Development

  • Packhorsemen and Tote Roads

  • Early Turnpikes

  • Federal Involvement – The Cumberland Road

  • Plank Roads

  • The Good Roads Movement

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

Interstate Highway System

Motor Carrier Regulation

Three Principal Areas of Motor Carrier Regulation

Highway Protection


Traditional Economic Regulation

Motor Carrier Act of 1935

Exempt Areas

Incidental Movements by other Modes

Local Transport

Agricultural Commodities

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

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

Motor Carrier Regulation

Rate Regulation - Operating Ratio Standard

Operating Expenses/Operating Revenue

Trucks and Ruinous Competition

Empty Back Haul Problem

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

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

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

Navigable Waterways

Air Transport Regulation

Earliest Government Involvement – Mail Contracts

Immediate Rationale for Economic Regulation


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

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

US Transportation Under Regulation

  • Restricted Entry

  • Low Rates of Returns for some modes

  • Relatively Rigid Rates

  • Regulatory Lag

  • Regulatory Mentality

  • Restrictions on Innovations

Motor Carrier Deregulation

  • Condition of Motor Carriers under Regulation

    • Wasteful – empty backhauls

    • Uneconomic – excess capacity

    • Inefficient carriers

    • Protected –entry limits

Motor Carrier Deregulation

  • Opposition to Regulatory Reform

    • Organized Labor

    • Trucking Companies

    • Shippers happy with service quality

  • Triumph of the Economists

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


Rates must still be filed with ICC

Motor Carrier Deregulation

Intercity Bus Industry

Condition Under Regulation


Losing Traffic to Air and Auto and

to Amtrak

Uneconomic Traffic

Motor Carrier Deregulation

Bus Regulatory Reform Act of 1982

Eliminated Rate and Entry Regulation

Eliminated Requirement to offer

Regular Route Service to Gain Charter


Preempted State Regulation


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

Airline Deregulation

Condition of the Industry Under Regulation

Low Profits

High Costs

High Fares

Stagnant Growth

Wasteful Service Competition

Airline Deregulation

Experience in Intrastate Markets

Theory of Contestable Markets

Air Cargo Deregulation in 1977

Opposition of Labor, Some Large Carriers

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

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

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

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

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

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

Amtrak System Map

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

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

Railroad Deregulation

Interstate Commerce Commission

Termination Act of 1995

Creation of Surface Transportation Board

STB’s Limited Regulatory Role

Rationalization of the Rail Network

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

Growth & Decline of Class I RR Miles

Railroad ROI 1970-2009


Railroad Employment 1939-2009




Railroad Industry Cost of Capital and ROI 1996-2009

Class I Capital Expenditures 1994 - 2010



Roadway & Structures


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


    -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

Modal Markets Shares

The Railroad Industry Today

  • 7 Class I Railroads

  • 525 Class II and Class III railroads

  • Much reduced system through rationalization

  • Average length of haul – 919 miles (2009)

Intermodal Shipments 1965-2010




New Regulatory Regime

  • STB replaces ICC in 1995

  • Three member board—non-partisan

  • Railroad rate and service disputes

  • Railroad restructuring (M&A)

  • Limited jurisdiction over other modes

  • Much railroad traffic exempt from STB regulation

  • STB regulates where market dominance exists--180% r/vc threshold

Early Experience at the STB

  • Board tries to balance shipper desire for low rates and railroads’ need to earn profits

  • Early on, Board looked favorably on railroad mergers

  • Perception among shippers that STB was too pro-railroad

Changes in STB Practices and Procedures

  • New Approaches to Handling Rate Cases

  • Review of Carrier Operating Practices

  • Railroad Restructuring

  • Environmental Reviews

  • Potential Legislative Changes Affecting the STB and/or the Railroad Industry

New Approaches to Rate Cases

  • Streamlined procedures to reduce time and cost for adjudicating large rate cases

  • First large rate cases handled under new guidelines

  • Guidelines for situations where value of case is too small to justify full blown STB litigation

  • Simplified stand alone cost and three benchmark approaches

  • First cases brought under new small rate guidelines

Rail Rate Cases at the STB

  • Much railroad traffic exempt from STB rate regulation

  • Shippers often claimed rate cases took too long and cost too much to bring

  • Many shippers felt they had no access to STB’s processes for rate relief

  • Congress directed the Board to develop procedures for small rate cases

Recent Activities at the STB

  • Streamlined procedures to reduce time and cost for adjudicating large rate cases—Court of Appeals upheld

  • First large rate cases handled under new guidelines—AEP North Texas, Western Fuels, KCPL

  • Major shipper “win” in Western Fuels

  • Major case involving DuPont and CSX resolved through STB facilitated mediation

Simplified Standards for “Small” Rail Rate Cases

STB Decision – September 5, 2007

Provides access to the rate reasonableness process for all sizes of rail rate disputes, and in particular, to the estimated 73% of challengeable rail traffic for which the large rate case process would be financially impracticable

Requires, for all rail rate disputes, mandatory, nonbinding mediation—a mechanism that has been used successfully in previous cases to arrive at negotiated settlements

Simplified Standards for Rail Rate Cases

Allows rail customers to choose the methodology that is most appropriate for consideration for their complaint:

A rail customer choosing the simplest approach, the “Three-Benchmark” methodology, is eligible to recover up to $1 million over a 5-year period.

A rail customer choosing the “Simplified Stand-Alone Cost” methodology is eligible to recover up to $5 million over a 5-year period

Court upheld shipper challenge to maximum recovery levels

Experience with Small Rate Case Guidelines

  • First Cases brought by DuPont

  • Six lines of traffic found market dominant

  • DuPont eventually won lower rates for 3 lines of traffic

  • Cases were appealed, then settled

Review of Carrier Operating Practices

  • STB and the railroads’ common carrier obligation

  • Changes on “paper barriers”

  • STB’s fuel surcharge decision

  • STB-sponsored studies of RR competition and capacity

  • STB response to Clean Railroads Act

  • New responsibilities in passenger rail areas

Railroad Restructuring

  • STB’s Revised Merger Guidelines

  • The Board’s Classification of Railroad Mergers

  • Canadian Pacific’s Acquisition of the DM&E--Significant

  • Canadian National’s Acquisition of the EJ&E—Highly Controversial

Environmental Reviews

  • Overall responsibility for environmental review

    of new railroad construction or abandonments

  • DM&E Powder River Basin expansion project

    and the IC&E

  • Yucca Mountain spent nuclear material

    storage site

  • Environmental review of the CN acquisition of

    the EJ&E

Changes in the STB’s Practices and Procedures

  • Rail cost of capital methodology revision

    and examination of multi-stage discounted cash flow model

  • Rail Energy Transportation Advisory Council (RETAC)

  • Reorganization of Consumer Protection and Enforcement and Public Affairs Sections

  • Reforming the Uniform Rail Costing System

Pending Legislation Involving the STB

Senate legislation proposes to

Reauthorize the STB

Change how the railroad industry is regulated

Proposed Removal of Railroad Antitrust Exemptions

Rail Investment tax credits

Thank you, any questions

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