out, on the possibility of altering divisions. Such action would, of course, raise the question: assuming the rich are expected to give to the poor, are there any rich?

The Act of 1920 may tell us more about the characteristics of regulation of railroads by its failures that it could have told us if it had been successful. First of all, to the extent that railroads are at least partially competitive, the "local monopoly" attribute which is the foundation-stone of public utility regulation is not so much a rock on which to build as a potential quicksand. Regulation of many partially competitive firms in different industries is much harder than regulation of one. Second, a merger or any other policy carried out solely to enable the introduction of full public-utility type regulation would be likely to sacrifice a number of truly economic objectives on the altar of administrative convenience. Third, an attempt to force or persuade independent enterprises to combine for such purely administrative reasons cannot work on a voluntary basis; it contains no appeal to any private profit motive. Fourth, palliatives such as changes in rate divisions can work only if disequilibria are regional and not evidenced by parallel or otherwise competing railroads; also, like any other form of redistribution, this form requires wherewithal at the source as well as need at the destination.

In sum, the Act was a failure not because of any intellectual deficiencies on the part of its proponents, but because, by 1920, history was already beginning to pass them by.19

THE MOTOR CARRIER ACT OF 1935

So far, the discussion has been entirely about regulation of railroads. Part of the reason for this is jurisdictional: water transport of all kinds is excluded from the purview of this paper, unless it specifically impinges on rail transport, because it is largely unregulated. But the main reason is historical: the main alternative to rail freight is trucking, and that only became significant in the 1920s.

The leading Supreme Court cases related to motor carriers which resulted in decisions against state regulation were all decided in 1925.20 The regulatory vacuum created by the Supreme Court decision was first approached through self-regulation, under the N.R.A. codes; and, after the Schecter decision, replaced by the Motor Carrier Act of 1935.21

In view of subsequent developments, the massing of forces with respect to this Act is of particular interest. Groups favoring regulation included state commissions, the Interstate Commerce Commission, the railroads, bus operators, and "a few of the common-carrier truck operators." 22 There was "strong and active opposition" from the automobile manufacturers, the organized shippers, and the majority of truck operators-particularly the contract carriers.23 This confron

19A lively history of the railroad rate-of-return problem which set the stage for the Act of 1920 is contained in Albro Martin, "Enterprise Denied: Origins of the Decline of American Railroads, 1897-1917." Columbia University Press, 1971. In ideological position, this is almost the exact reverse of Kolko. But the book does lead one to speculate that the Act of 1920 was the best possible railroad legislation, passed about twenty years too late.

20 Locklin, op. cit., p. 674: James C. Nelson, "The Motor Carrier Act of 1935," Journal of Political Economy, 44 (1936), 464.

Nelson, op. cit., pp. 469-470.

"Ibid., p. 466.

23 Ibid.

tation was somewhat confused during the N.R.A. period by the fact that trucking organizations were in favor of "self-regulation" under the N.I.R.A. codes; the Supreme Court's Schecter decision, which wiped these codes away with one stroke, converted the American Trucking Associations, Inc., from an opponent to a sponsor of the bill.24

The Act of 1935, which became Part II of the Interstate Commerce Act in 1940, is probably more remarkable for the respects in which it does not differ from Part I (railroads) than for the respects in which it does. This Act treated regulated motor carriers as if they were railroads in important ways:

(1) Motor carriers who could establish that they were in business for hire, and performing specific services (e.g., between stated points, over stated routes, carrying specified commodities), at the time of the passage of the Act in 1935, were granted "grandfather rights.” Other carriers who could not establish such prior performance were forced to obtain "certificates of convenience and necessity" for common carriers ("permits" for contract carriers) for the specific new service they wished to render, whether they were already in the industry or not. Thus "control of entry" was not introduced in the generalized sense that one would expect to result from the technology and economics of the trucking industry, but often in the specific sense (e.g. for regular route common carriers) appropriate to railroads. (2) The provisions of the Act with respect to rates, tariffs, and method of price quotation are practically identical for rail and truck. This means that, in both cases, the Interstate Commerce Commission can establish the maximum, minimum, and actual rate; in both cases, thirty-days' notice is required for changes in rates, publication of rates is required, these rates must be adhered to, and the Commission) may suspend proposed rates for a period of not to exceed seven months. The original tariffs filed by motor carrier rate bureaus (except for New England) were taken over bodily from railroad rates. No one would contend that present-day motor carrier tariffs are tied to those charged by rail. Nevertheless, the original 1935 approach was based on the essential proposition that "fair competition" should require Mode B to try to assume all possible characteristics of Mode A, whether or not they were even appropriate to Mode A and utterly without reference to the economic characteristics of Mode B. Hence a whole series of mutually-aggravating anomalies: railroad rates on manufactures and miscellaneous tended, in 1935, to be based on valueof-service in addition to or in some instances almost in place of cost of rail transport; costs of truck transport had nothing to do, in level or structure, with costs of rail transport. Thus motor carriers adopted a rate structure which was two removes from any cost justification. This anomaly has since been chipped away, not primarily (if at all) by regulation, but by competitive forces within the trucking industry which will be described and analyzed in the next section. But a further anomaly remains, connected not with the level and structure of final rates but with the process of rate-making. Any kind of systematic railroad rate-making (including systematic favoritism and discrim

24 Ibid., pp. 469-470.

ination) involves a certain amount of inflexibility and hierarchical organization. Large and far-flung firms cannot merely charge prices; they must have a price policy. None of these conditions was even remotely applicable to the vast majority of trucking firms in 1935 for rail-competitive truckload traffic-or to most trucking firms even today. Organizationally, they are small enough to be flexible as to rates. Economically, they are also small enough so that this flexibility could not possibly assist some potential new Standard Oil Trust. But the process of ratemaking by motor common carriers is still the process. designed around the peculiarities of an industry which was first subject to regulation 48 years before 1935. Mode B is regulated not only as if it were Mode A, but also as if it were Mode A in the complete absence of Mode B.

Against this background of the "as if" regulatory similarities of rail and motor common carriers, differences in the law are few and grudging. These are among the more important:

(1) Motor carriers must, as railroads need not, carry external liability protection. Some of the larger motor carriers are now a good deal more solvent than many railroads. But this difference in legal standards gives at least some acknowledgement to the vast difference in modal size of firm as between rail and motor carrier in 1935. In lesser degree, this difference in modal size persists.

(2) Although the Interstate Commerce Commission has power to compel railroads to establish through routes and joint rates, it has no such power over motor carriers. This lack of power has provided the occasion for the introduction of numerous bills.25 The problem of through routes and joint rates is one of first importance. Shippers, understandably, prefer single-line trucking service to multiple-line service.26 Motor carriers, understandably, are convinced that profitability decreases as the number of carriers involved with a particular shipment increases." In 1966, joint line revenues ranged from 16 per cent of the total for the rate bureau reporting the lowest proportion to 51 per cent for the highest two.28 But with the consent, if not at the insistence, of the Interstate Commerce Commission, rate divisions. have been based on railroad division scales.29

In terms of operating revenues, motor common carriage of general commodities is largely a less-than-truckload business. Less-than-truckload transportation is likely to involve physical transfers. If a shipment passes from carrier to carrier, the number of these transfers is likely to increase. So the present system, by its reliance on operating rights, gives a differential advantage to concerns who already have the most extensive systems, and may impose penalties on a carrier with less extensive operating rights who would still like to try to overcome his differential disadvantages and compete for long-haul business.

25 As one example, see "Through Routes and Joint Rates." hearings before the Subcommittee on Surface Transportation of the Committee on Commerce, U.S. Senate, 91st Congress. 2d Session, on S. 2245 and S. 3626, G.P.O., Washington. D.C., 1970.

20 See James C. Johnson, "An Analysis of the ICC's Administration of Section 5 Trucking Mergers." Proceedings-Fourteenth Annual Meeting, Transportation Research Forum, v. 14, No. 1. 1973, Richard B. Cross Co., Oxford, Ind., 1973, pp. 773-793. especially pages 774-775 and 781.

27 Gerald E. Hawkes, "Motor Carrier Divisions of Revenue on Joint Rates Traffic," Transportation Journal, vol. 8, No. 1 (fall 1968), table 4, p. 28.

Thid.. table 3. p. 27.

29 Ibid., especially p. 31.

CURRENT REGULATION

WHAT FREIGHT TRANSPORT REGULATION IS NOT

It is not effective control of each firm's rate of return

As should already be clear, all railroad regulation lacks one dimension of public utility regulation: it is not concerned, in practice or even in principle, with return on investment. There are two reasons for this.

The first has already been discussed in connection with the Act of 1920. But it may be summarized briefly here. Railroading is an industry all of whose competing enterprises must charge the same prices from the same origins to the same destinations, and in which more-orless competitive firms have different historical backgrounds, different cost levels and structures, different marketing skills, and different complementary and competitive relationships with other elements in the system beyond the relationships which exist on the route from A to B. Therefore it is impossible to establish any target rate of return which all enterprises have an equal chance of attaining. Moreover, in an industry which is geographical in its very essence, differential rates of change in economic conditions in different regions will tend to shift relative rates of return over time even if they were equal at the outset.

The second reason is that neither the railroad industry nor the Interstate Commerce Commission even thinks in terms of the kind of argument, or the kind of rate of return, which are staples in rate cases involving telephone or electric power companies. Underlying this fundamental reason is an obvious doubt, on the part of all concerned, as to the prospects of the railroad industry as a whole of earning what a utility would consider a "normal" rate of return.

Both of these difficulties have important economic consequences, which will be discussed later. It should be remembered that the very idea of "fair return on fair value" or "on original cost," or on any other basis, has disappeared from railroad economics, except when its opposite "inadequate return"-is cited as a reason for granting a rate increase.

There are, of course, persuasive arguments against attempting to give the railroad industry a normal rate of return on its investment. The obvious one has already been mentioned: why try, when it is probably impossible? This in turn is associated with the allegation that much railroad investment is obsolete, if it was even justified in the first place, and kept on the books only because the accounting principles used for railroad way and structure are different from the accounting principles used for all other fixed assets in the economy. Finally, there is a combination of "sunk cost" and "senescent industry" arguments: railroad fixed capital is there; much of it need not or, economically speaking, should not, be replaced; why not get the maximum use out of it in the meantime by pricing its output on a basis which excludes capital costs?

These general arguments do not hold for regulated motor carriers. By anyone's standards, this has been and is a growth industry: no one suggests that the capital investment should be gradually squeezed out of it. The "way and structure" portion of its growth has been

29 The 4-R Act of 1976 has created the occasion for ex parte 353-which addresses this problem in principle, if not in practice.

largely created by very extensive governmentally-financed road programs. The railroad industry has always approached public utility status in its ratio of capital investment to current reveunes, which even with recent precipitous rate increases is still running close to 2:1. The trucking industry, on the other hand, has a ratio of capital investment to operating revenues which places it somewhere between manufacturing and grocery chains. It also has many more competitive firms on most major routes than the railroad industry. So the regulatory problem with the common carrier trucking industry is not whether it should earn a normal return. In view of the growth of capital assets in the industry pari passu with its growth in revenues, the pragmatic answer has obviously been, "Yes, a normal return at least." Nor, obviously, is the question whether it can earn a normal return. The real question is, "What should, and can, the Interstate Commerce Commission do about all this?" And an attempt to answer this question leads one from the mechanics of "fair return on fair value" into the underlying question-which is not necessarily "Should common carriers by motor be regulated?", but "With respect to rate of return, is there any economically-meaningful and administratively-practicable basis on which they can be regulated?"

To summarize this section, freight transport regulation is not rateof-return regulation, in any way, for railroads. Its status in the trucking industry remains ambiguous. The problem with respect to motor carriers is not Interstate Commerce Commission recognition of rate of return as a criterion. Its administrative aspect is: how, with a capital-revenue ratio of 1:3 or 1:4, and with as many as fifty or so competitors on the busiest routes, can any administrative body make decisions which are relevant to particular carriers? From a purely administrative standpoint, can any meaningful criteria be developed for appropriate rates of return on capital in an industry with a high rate of capital turnover, a high rate of national unionization, and a high ratio of direct wages to operating revenues?

Some of the differences which have just been described are presented in quantitative form in Table 1 below, for pre-depression 1973.

TABLE 1.-SELECTED INCOME AND BALANCE-SHEET DATA, CLASS I LINE-HAUL RAILROADS
AND CLASS I MOTOR CARRIERS, 1973

1 "'Ordinary income" is derived from "Net transportation operating income" by adding income from nontransportation sources, and by subtracting interest or other payments attributable to the acquisition or use of capital assets, and income taxes.

Source: Interstate Commerce Commission, 88th Annual Report to Congress, 1974, Washington, D.C., GPO, 1974, appendix E, tables 6 and 10, pp. 122 and 125.

(Data are for 1973 instead of for 1975-the most recent year for which data are available because net railway operating income was negligible, and railway ordinary income negative, in the latter year.)