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

Transportation Regulation in America—Past, Present, and Future

Francis P. Mulvey


Surface Transportation Board

George Mason University

Arlington, VA

April 25, 2011

Transportation regulation
Transportation Regulation Future

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
Railroad Regulation Future

  • 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
Early Railroad Regulation Future

  • The Granger Laws

  • Primarily in Upper MidWest

  • Maximum Rate Legislation

  • Pro Rata Clauses

  • Prohibitions against bribes/kickbacks

Early railroad regulation1
Early Railroad Regulation Future

Problems with the Granger Laws

Munn vs. Illinois

Windom and Cullom Reports

Act to Regulate Commerce 1887

Railroad regulation1
Railroad Regulation Future

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 regulation2
Railroad Regulation Future

  • Strengthening the Act

    • Carmack Act

    • Hepburn Act

    • Other Legislative Responses

  • Nationalization of the Railroads

Railroad regulation3
Railroad Regulation Future

Transport Act of 1920

Problems with Prior Regulation



Service Adequacy

Labor Disputes

Defects in Regulatory System

Policy of Enforced Competition

Restrictive Regulation

Railroad regulation4
Railroad Regulation Future

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 regulation5
Railroad Regulation Future

Hoch-Smith Resolution of 1925

Railway Labor Act of 1926

Emergency Transport Act of 1933

Early road development
Early Road Development Future

  • Packhorsemen and Tote Roads

  • Early Turnpikes

  • Federal Involvement – The Cumberland Road

  • Plank Roads

  • The Good Roads Movement

Development of highway system
Development of Highway System Future

  • 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

Motor carrier regulation
Motor Carrier Regulation Future

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 regulation1
Motor Carrier Regulation Future

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 regulation2
Motor Carrier Regulation Future

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 regulation3
Motor Carrier Regulation Future

Rate Regulation - Operating Ratio Standard

Operating Expenses/Operating Revenue

Trucks and Ruinous Competition

Empty Back Haul Problem

Transportation law and regulation
Transportation Law and Regulation Future

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 regulation1
Transportation Law and Regulation Future

  • 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
Water Carrier Regulation Future

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

Air transport regulation
Air Transport Regulation Future

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
Public Promotion of Air Transport Future

  • 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
US Transportation Under Regulation Future

  • Restricted Entry

  • Low Rates of Returns for some modes

  • Relatively Rigid Rates

  • Regulatory Lag

  • Regulatory Mentality

  • Restrictions on Innovations

Motor carrier deregulation
Motor Carrier Deregulation Future

  • Condition of Motor Carriers under Regulation

    • Wasteful – empty backhauls

    • Uneconomic – excess capacity

    • Inefficient carriers

    • Protected –entry limits

Motor carrier deregulation1
Motor Carrier Deregulation Future

  • Opposition to Regulatory Reform

    • Organized Labor

    • Trucking Companies

    • Shippers happy with service quality

  • Triumph of the Economists

Motor carrier deregulation2
Motor Carrier Deregulation Future

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 deregulation3
Motor Carrier Deregulation Future

Intercity Bus Industry

Condition Under Regulation


Losing Traffic to Air and Auto and

to Amtrak

Uneconomic Traffic

Motor carrier deregulation4
Motor Carrier Deregulation Future

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
Motor Carrier Deregulation-Aftermath Future

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
Airline Deregulation Future

Condition of the Industry Under Regulation

Low Profits

High Costs

High Fares

Stagnant Growth

Wasteful Service Competition

Airline deregulation1
Airline Deregulation Future

Experience in Intrastate Markets

Theory of Contestable Markets

Air Cargo Deregulation in 1977

Opposition of Labor, Some Large Carriers

Airline deregulation2
Airline Deregulation Future

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 deregulation3
Airline Deregulation Future

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
Aftermath of Airline Deregulation Future

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
Airlines Today Future

  • 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
Railroad Deregulation Future

  • Condition of the Railroad Industry

    • ROI

    • Market Share Trends

    • Deferred Maintenance

    • Bankruptcies

    • Subsidized Competition and Uneven Regulation

    • Low Labor Productivity and Work Rules

Railroad deregulation1
Railroad Deregulation Future

  • 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

Railroad industry pre staggers
Railroad Industry Pre-Staggers Future

  • 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 deregulation2
Railroad Deregulation Future

  • 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 deregulation3
Railroad Deregulation Future

Interstate Commerce Commission

Termination Act of 1995

Creation of Surface Transportation Board

STB’s Limited Regulatory Role

Rationalization of the Rail Network

Railroad deregulation4
Railroad Deregulation Future

  • 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

Railroad roi 1970 2009
Railroad ROI Future 1970-2009


Railroad employment 1939 2009
Railroad Employment Future 1939-2009




Class i capital expenditures 1994 2010
Class I Capital Expenditures Future 1994 - 2010



Roadway & Structures


Since staggers
Since Staggers Future

  • 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

The railroad industry today
The FutureRailroad 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
Intermodal Shipments 1965-2010 Future




New regulatory regime
New Regulatory Regime Future

  • 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
Early Experience at the STB Future

  • 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
Changes in STB Practices and Procedures Future

  • 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
New Approaches to Rate Cases Future

  • 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
Rail Rate Cases at the STB Future

  • 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
Recent Activities at the STB Future

  • 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
Simplified Standards for “Small” Rail Rate Cases Future

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
Simplified Standards for Rail Rate Cases Future

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
Experience with Small Rate Case Guidelines Future

  • 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
Review of Carrier Operating Practices Future

  • 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
Railroad Restructuring Future

  • 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
Environmental Reviews Future

  • 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
Changes in the STB’s Practices and Procedures Future

  • 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
Pending Legislation Involving the STB Future

Senate legislation proposes to

Reauthorize the STB

Change how the railroad industry is regulated

Proposed Removal of Railroad Antitrust Exemptions

Rail Investment tax credits