PART V

SPECIFIED ITEMS OF SENATE RESOLUTION 244

CHAPTER 1. REGULATION OF TRANSPORTATION

Item 1 of Senate Resolution 244 directs a study of the need for regulation of transportation under present-day conditions and, if there is need for regulation, the type and character of that regulation. This is, of course, the fundamental question to be answered by transportation policymakers. It might well be paraphrased thus: "Do we need a coordinated system of regulated for-hire carriers by all modes or will private and unregulated for-hire carriers serve our national requirements?"

1. The need of regulation

The history of transportation regulation, in our country, covering a period of nearly a century, has been too well documented to bear repetition here. It is sufficient to note that the need for such regulation was recognized in an era of intense individualism, before our people were ready to accept antitrust, fair trade, and fair labor laws now applicable to industry generally.

Justification of regulation is generally predicated on protection of the shipper against excessive charges, upon discriminatory practices by the carrier, or upon protection of the carriers from each other. There is far more to the problem. It seems to us that the need for regulation of transportation is rooted in part in the fundamental differences between transportation and other industry, in part upon the existence of the power component of transportation, and in part upon the different characteristics of the component modes.

Unlike most industry, transportation partakes of the dedicated nature of public utilities, which requires acceptance of the responsibility to serve potential as well as actual demand at any time and with little, if any, prior notice. To illustrate, if the big motor manufacturers find production running ahead of demand they step up sales effort but they also move promptly to cut back production-so also for bootmakers and for industry generally. The nature of the industries makes such action possible and Government, in the public interest, has found every reason not to interfere with the process. Not so with public for-hire transportation. Railroads and pipelines have a built-in capacity which can be reduced only by major surgery and which is coupled with a low ratio of avoidable to full costs. In addition, since virtually all commerce and the very survival of our people in thickly populated areas depend on an assured flow of materials, the public has a far greater stake in availability of transportation than it has in the day-to-day production of any other industry. Furthermore, transportation cannot be stockpiled in slack periods to meet peak demands.

The public has demanded and legislators have decreed that public transportation be responsive to spot demands to the extent that an amount of excess capacity is normal to regulated carriers to meet unforeseen requirements of the moment. As a result there are inescapable costs added to regulated public for-hire transportation that are not common to unregulated carriers, who do not share this public responsibility as a condition of their continued operation. This cost is a valid charge which the public must meet if it is to enjoy the benefits of reserve capacity which will be maintained only by carriers who are required to do so, and who, in incurring public interest costs of this nature, are entitled to protection of their traffic.

Another fundamental difference between transportation and either industry generally or the monopoly utilities is the ability of transportation, hitherto largely undeveloped, to combine the characteristics of its several modes to produce a better service than anyone can produce independently. Thus, the truck offers, in general, the most complete door-to-door freight service. Other modes are, in most cases, either cheaper or faster or both, except for the shorter hauls, but they usually involve delivery to and from terminal facilities. We find a growing demand for combination service not matched by a general willingness of competing modes to provide it. If it is not provided voluntarily then, as the public demand grows, it will be brought about either through regulation or by the process of allowing combination of several modes under single ownership. In the case of single ownership, at least for the present, it appears that only regulation will insure that the several modes singly owned are, in fact, operated so as to provide the best possible combined service to the public and not with some other objective.

It has been found to be in the public interest that a degree of stability and uniformity be introduced in the rate structures of the several modes. To this end we have exempted rate associations from the provisions of antitrust laws forbidding collusive pricing, but we have substituted control of the results of collusive pricing through regulation. In view of the growing demand for coordinated through service and appropriate through charges it is probable that we now need intermodal rate associations to facilitate such pricing. Adequate control of the nature and implementation of agreements in this event would be imperative for the foreseeable future. Certainly, under 1960 concepts of the relationship of industry to the public it is inconceivable that specific regulation could or would be abandoned while continuing exemption from this aspect of antitrust regulation.

The power component of transportation (pt. I, ch. 1) may operate constructively or destructively depending on the quality of guidance applied in the public interest. While it is the promotional activities of Government that should be particularly responsive in this area it is vital that regulation or the lack thereof not be permitted to turn this power into destructive channels or otherwise to negate promotional actions.

The fundamental differences between the physical and financial characteristics of the carriers of the different modes of transportation are another part of the rootstock of regulation. Nondestructive free competition is possible only when the competitors serve similar mar

kets and possess similar cost characteristics. This sine qua non of fair competition does not presently exist in transportation. Some modes have significantly higher ratios of full to avoidable costs than others, which naturally leads these carrier managements to place greater emphasis upon obtaining volume at any price above avoidable cost. In some cases the higher full-cost carrier has a lower avoidablecost level than that of the lower full-cost carrier, and is thus able to earn some contribution to overhead while underpricing the lower fullcost carrier in a narrow market. Some carriers enjoy a much broader market than others both as to suitable commodities and geographically. Some carriers exercise disproportionate financial power as compared with competitors. The sum of these internal differences results in a situation in which there appears to be no chance of unregulated competition operating in the national interest until the Golden Rule becomes the universally accepted law of business relations.

It is interesting to note that at no time in the course of our review of national transportation policy have we found any serious recommentation that specialized regulation of transportation be discarded. On the contrary, there seems to be general recognition that transportation differs sufficiently from either industry generally or regulated monopoly as to justify specialized concepts of regulated competition, designed to suit the needs of transportation in its relationship to the public. We note that, upon examination, most of the complaints about overregulation turn out to be objections that the complainant has been prevented from taking some action which he desired in his own interest without much regard on his part for the overall impact. On the part of user interests many such complaints seem to indicate dissatisfaction that the complainant is not allowed to auction desirable traffic to the lowest bidder or that his present ability to do so is threatened, as the case may be. We find certain private carrier interests resisting limitation upon their ability to enter for-hire carriage at their own convenience, under their own terms, and for their own profit, without any obligation to serve the public convenience and necessity.

Statistics of the Interstate Commerce Commission show that, in far the majority of cases, the applicant carriers are permitted to do what they desire. Much capital is made of the few cases in which they are denied. The fact that application of human laws by humans may, occasionally, result in apparent injustices or inconsistencies is but testimony to human frailty-it is certainly not proof that regulation of transportation is, per se, unnecessary or undesirable. We must not be led to throw out the baby with the bath water.

As we bring out in the second section of this chapter we believe that, in some respects, there is too much regulation. We also believe that, in other respects, regulation is inadequate to safeguard the national interest. We are convinced that private and unregulated forhire transportation will not provide the general public with the service it must have.

We cannot but conclude that specialized regulation of transportation, differing from the regulation of industry generally on one hand or monopoly industry on the other, under policies, practices, and pro

1 One-eighth of 1 percent of rate filings were denied in 1957. Testimony of Commissioner Freas before the Surface Subcommittee of the Senate Committee on Interstate and Foreign Commerce, Mar. 28, 1958.

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cedures specifically developed in accordance with established national objectives, is essential in the public interest.

2. The type and character of regulation 2

When our Government undertook detailed regulation of transportation while preserving competitive private ownership it embarked upon a tightrope act, the complexity of which has caused ever-increasing difficulty. When we started, we were regulating competitors of similar nature, the railroads. As time marched on competitors of dissimilar nature entered the arena. We did not revamp our regulatory philosophy and practices to accommodate these differences. As a result-today-regulation is not working. If it were, there would have been no need for the seemingly endless series of transportation studies-including this one.

It is a curious feature of our problem that at one and the same time there are cries of "too much" regulation and "too little." In fact, it is quite possible for the same carriers to take both positions simultaneously. Beyond question there is too much regulation in some respects and too little otherwise. We are forced to conclude that our problem is not simply one of "too much" or "too little" but rather one of orientation. Somehow regulation has wandered away from its true purpose which can only be the promotion of the long-range public interest. Regulation, as we practice it today, is defeating its purpose of insuring a healthy common carrier system of all modes, obligated to serve our national transportation needs. As we are going now our regulated carriage is on the skids-sliding faster in some areas than in others, it is true, but nevertheless sliding. Unregulated for-hire and private carriage is waxing-capturing for themselves much of the growth that should accrue to the regulated carriers if they are to remain the foundation of our transportation system, as they must if the general public is to be served.

Proof, if any be needed, that our present regulation is unsound can be found in the wholesale evasion of regulation by otherwise law-abiding citizens. Only the Prohibition Act and such blue laws as forbid a man to kiss his wife on Sunday have been so generally flouted. The search for gimmicks and loopholes in the law is widespread and constant. If as much effort were spent on rationalizing the law and its application our troubles might soon be solved.

We conclude that we have not applied research and the lessons of experience to our problem of regulation of transportation nor have we identified with sufficient clarity the objectives of regulation and steadfastly worked toward these objectives-accepting that which leads to attainment thereof and rejecting all actions which would impede or divert our progress, no matter how attractive to special interests.

It is both profitable and interesting to speculate upon the regulatory framework that might result should the Congress repeal all existing transportation laws and start over. We will assume that the first decision would be to preserve a framework of private ownership-otherwise there is no point to further discussion of regulation. It is desirable to differentiate between "free enterprise" and "private ownership." They are not synonymous. A utility, privately owned but granted a monopoly under tight regulation, is not free enterprise.

This section of the report amounts, in effect, to a summary of several other parts thereof. As a result an amount of repetition has been unavoidable.