Surface Freight Transportation Deregulation

With the establishment of the Interstate Commerce Commission (ICC) to oversee the railroad industry in 1887, the federal government began more than a century of regulating surface freight transportation. Railroad Regulation was strengthened several times in the early part of the twentieth century. Those changes stifled price competition between railroads by prohibiting rebating, discounting, and secret price cutting. The federal government nationalized the railroads during World War I, and by the end of the war had provided about $1.5 billion (1919 dollars) in subsidies to the ailing railroads. The major concern after the war was to make the railroads profitable. The Transportation Act of 1920 essentially cartelized the railroad industry and mandated that the Interstate Commerce Commission establish rates to provide a “fair rate of return.” The ICC was given complete authority over entry, abandonment, mergers, minimum rates, intrastate rates, and the issuing of new securities.

Even during the prosperous 1920s, railroad earnings never reached what the act indicated might be a fair rate of return. New competition from the growing trucking industry presented a major problem for the railroads. With the advent of the Great Depression, earnings plummeted and, for the first time, became negative for the whole railroad industry. In an attempt to improve their profitability, leaders of the railroad industry, together with the ICC, urged Congress to regulate these competitors.

The trucking industry also suffered during the Depression and began to favor allowing the ICC to restrict competition. With the major spokesmen for a number of large truckers arguing for controls to prevent “cutthroat competition,” Congress moved to control motor carriers and inland water carriers.

The Motor Carrier Act of 1935 required new truckers to seek a “certificate of public convenience and necessity” from the ICC. Truckers already operating in 1935 could automatically get certificates, but only if they documented their prior service—and the ICC was extraordinarily restrictive in interpreting proof of service. New trucking companies found it extremely difficult to get certificates. In 1940, Congress extended ICC regulation to include inland water carriers, another competitor of the railroads. Thus, with pipeline regulation, which originated with the Hepburn Act of 1906, the ICC controlled all forms of surface freight transportation (air freight was controlled separately).

From 1940 to 1980, new or expanded authority to transport goods was almost impossible to secure unless an application was completely unopposed. Even if no existing carriers were offering the proposed service, the ICC held that any already certified trucker who expressed a desire to carry the goods should be allowed to do so; new applicants were denied. The effect was to stifle competition from new carriers.

By reducing competition the ICC created a hugely wasteful and inefficient industry. Routes and the products that could be carried over them were narrowly specified. Truckers with authority to carry a product, such as tiles, from one city to another often lacked authority to haul anything on the return trip. Regulation frequently required truckers to go miles out of their way.

During the first three-quarters of the twentieth century, the ICC kept a stranglehold on railroads, preventing them from abandoning unprofitable lines and business. Regulations restricted rates and encouraged price collusion. As a result, by the end of this period many railroads faced bankruptcy, and Congress faced the prospect of having to take over the railroads to keep them operating.

Studies show that regulation increased costs and rates significantly. Not only were rates lower without regulation, but service quality, as judged by shippers, also was better. Products exempt from regulation moved at rates 20–40 percent below those for the same products subject to ICC controls. Regulated rates for carrying cooked poultry, compared with unregulated charges for fresh dressed poultry (a similar product), for example, were nearly 50 percent higher.

A number of economists were critical of the regulation of motor carriers right from the beginning. James C. Nelson, in a series of articles starting in 1935, led the attack. Walter Adams, a liberal Democrat, followed in 1958 with a major critique in American Economic Review. In 1959, John R. Meyer of Harvard, Merton J. Peck of Yale, John Stenason, and Charles Zwick coauthored an influential book, The Economics of Competition in the Transportation Industries, spelling out the harm regulation caused.

In 1962, John Kennedy became the first president to send a message to Congress recommending a reduction in the regulation of surface freight transportation. In November 1975, President Gerald Ford called for legislation to reduce trucking regulation. He followed that proposal by appointing several procompetition commissioners to the ICC. By the end of 1976, those commissioners were speaking out for a more competitive policy at the ICC, a position rarely articulated in the previous eight decades of transportation regulation.

President Jimmy Carter followed Ford’s lead by appointing strong deregulatory advocates and supporting legislation to reduce motor carrier regulation. After a series of ICC rulings that reduced federal oversight of trucking, and after the deregulation of the airline industry, Congress, spurred by the Carter administration, enacted the Motor Carrier Act of 1980. This act limited the ICC’s authority over trucking.

Over the last quarter of a century, Congress has sharply curtailed regulation of transportation, starting with the Railroad Revitalization and Regulatory Reform Act of 1976 (the 4-R Act), the Motor Carrier Act of 1980, the Household Goods Act of 1980, the Staggers Rail Act of 1980, the Bus Regulatory Reform Act of 1982, the Surface Freight Forwarder Deregulation Act of 1986, the Negotiated Rates Act of 1993, the Trucking Industry Regulatory Reform Act of 1994, and the ICC Termination Act of 1995. Those acts deregulated successively, either totally or in large part, trucking, railroads, bus service, and freight forwarders, and lifted most of the remaining motor carrier restrictions, including those imposed by the states.

Deregulation of motor carriers became complete—except for household movers—at the end of 1995 with the ICC Termination Act of 1995, which also established the Surface Transportation Board as part of the Department of Transportation to continue to monitor the railroad industry. The act transferred truck licensing, mainly for safety purposes, to the Federal Highway Administration. At that time, the federal government also preempted state regulation of trucking, eliminating the last controls over price and service in the motor carrier industry. It eliminated the need for motor carriers to file rates and authorized truckers to carry goods wherever they wanted to serve. Railroads were given more freedom to price, except when “captured shippers” could show that they faced a single carrier without significant alternatives.

Deregulation has worked well. Between 1977, the year before the ICC started to decontrol the industry, and 1982, rates for truckload-size shipments fell by about 25 percent in inflation-adjusted terms. The General Accounting Office found that rates charged by LTL (less-than-truckload) carriers had fallen by as much as 10–20 percent, with some shippers reporting declines of as much as 40 percent. Revenue per truckload-ton fell by 22 percent from 1979 to 1986. A survey of shippers indicates that they believe service quality improved as well. Some 77 percent of surveyed shippers favored deregulation of trucking. Shippers reported that carriers were much more willing to negotiate rates and services than they had been prior to deregulation.

The Surface Transportation Board reports that railroad rates fell by 45 percent in inflation-adjusted dollars from 1984 to 1999. The demise of the ICC at the end of 1994 eliminated many of the statistics collected on the motor carrier industry. However, limited data show that revenue per ton-miles, adjusted for inflation, continued to decline, falling by 29 percent from 1990 to 1999. How much of this is due to deregulation and how much might be attributed to technological improvements, improvement in roads, and other factors is difficult to determine.

In arguing against deregulation, the American Trucking Associations predicted that service would decline and that small communities would find it harder to get any service at all. In fact, service to small communities improved, and shippers’ complaints against truckers declined. The ICC reported that, in 1975 and 1976, it handled 340 and 390 complaints, respectively; in 1980, it dealt with only 23 cases, and in 1981, with just 40.

Deregulation has also made it easier for nonunion workers to get jobs in the trucking industry. This new competition has sharply eroded the strength of the drivers’ union, the International Brotherhood of Teamsters. Before deregulation, ICC-regulated truckers paid unionized workers about 50 percent more than comparable workers in other industries. In 1997, the median wage for union and nonunion drivers was $43,165 and $35,551, respectively, while the median wage in the United States for that year was only $25,598. Thus, union drivers still commanded a premium of roughly 21 percent, but even nonunion drivers make more than the wage earned by half the labor force. The number of unionized workers in the industry has fallen considerably, with only 13 percent of the drivers and warehouse workers belonging to the union in 2002, down from around 60 percent in the late 1970s.

The number of new firms has increased dramatically. In 2004, the American Trucking Associations, the largest trade association for the motor carrier industry, reported having nearly thirty-eight thousand members, considerably more than double the number licensed by the ICC in 1978. While the ICC used to license carriers for specific routes, now all carriers can go wherever their business takes them. The value of operating rights granted by the ICC, worth hundreds of thousands of dollars when such authority was almost impossible to secure, has plummeted to zero now that operating rights are easily obtained.

Intermodal carriage surged sharply from 1981 to 1986, but has since leveled off. The ability of railroads and truckers to develop an extensive trailer-on-flatcar network is a direct result of the Motor Carrier Act of 1980 and the Staggers Act (1980), which partially freed the railroads. Table 1 shows the market share of the principal modes of freight transportation in the United States for the year 2003.

Domestic water carriers, which operate primarily on the Mississippi and its tributaries, the Columbia River system, the Sacramento and San Joaquin rivers connecting to the San Francisco Bay, and the Great Lakes, have not suffered from burdensome federal controls, but have benefited from taxpayers’ subsidies. Through the Army Corp of Engineers, the waterways have been kept open and improved, locks have been built and maintained, and dams constructed. For a long time the industry paid nothing toward maintaining and improving the waterways, but since 1980 the government has required barge traffic to pay fuel taxes, the proceeds of which have gone into the Waterways Trust Fund. The revenues, however, are not adequate for the updating that the industry believes is necessary.

The Interstate Commerce Commission was never very active in overseeing pipelines, so the Congress established the Federal Energy Regulatory Commission in 1977 to regulate oil and gas pipelines. The Surface Transportation Board (STB) regulates all other pipelines, such as those that carry anhydrous ammonia, carbon dioxide, coal slurry, phosphate slurry, and hydrogen. In 1997, only twenty-one pipelines were under the STB’s jurisdiction. Those pipelines are treated as common carriers that must have rates that are reasonable and nondiscriminatory. The abolition of the ICC eliminated the requirement of pipelines to report the rates.

Since 1980, air carriers have been the fastest-growing segment of the freight industry, expanding by 193 percent in terms of ton-miles from that year to 2001. Truck traffic and rail transportation have surged by 89 percent and 63 percent, respectively. Water transportation and oil pipelines have declined. Although the Staggers Act, which partially freed the railroads, enabled them to carry more goods a longer distance, it was less successful in increasing their profits. From 1980 to 1995, revenue ton-miles grew by 42 percent while total revenues inched up by only 19 percent. The greater freedom the railroads experienced allowed them to improve their productivity by reducing labor costs and consolidating their activities.

The “Railroad Rate Study” conducted in 2000 by the Surface Transportation Board’s Office of Economics, Environmental Analysis, and Administration reported that “numerous academic studies have confirmed that rail economic regulatory reform resulted in significant economic efficiency benefits, most notably rapid productivity growth, that enable railroads to become financially stronger while lowering average rate levels.”1 The study claims that shippers gained nearly $32 billion more in 1999 than they gained in 1984.

Between 1984 and 1999, an index of real railroad freight rates fell by 45 percent. On the other hand, the number of class 1 railroads (the largest companies, with operating revenues above $250 million) shrank through mergers from thirty-nine in 1980 to eight in 2001. In many markets in which it operates, the railroad industry is a duopoly (a market with only two sellers) and yet is intensely competitive.

One of the economy’s major gains from trucking deregulation has been the substantial drop in the cost of holding and maintaining inventories. Since truckers are better able to offer on-time delivery and more flexible service, manufacturers can order components just in time to be used, and retailers can have them just in time to be sold. The Department of Transportation estimated that the gains to consumers were $15.8 billion (in 1990 dollars).2 This does not include the annual benefits to industry of reduced inventories, which have been estimated to be as high as $100 billion.

With the virtually total deregulation of motor carriers—household movers must still file rates—railroads alone remain under control. For certain shipments, railroad pricing is still regulated. If the railroad has a shipper who has no good alternative means of moving his product, the railroad cannot charge more than 180 percent of variable costs. In those “captive shipper” cases, the shipper can bring a case before the STB asking the board to force the railroad to lower its charges. The STB must then estimate variable costs and determine whether the rates are unreasonable. Coal and grain companies have exploited this provision to gain lower rates. Thus the government forces the railroads to subsidize coal and grain companies at the expense of other shippers, the railroads’ stockholders, and investments in maintenance and new facilities. Captive shippers represent about 20 percent of the railroad business and do face higher rates, but the cost to the economy is very small and the gain from using the market much greater. In a recent Brookings paper, Clifford Winston and Curtis Grimm argue that the STB should be abolished along with the remaining controls over rates and that antitrust jurisdiction over the railroads should be turned over to the Antitrust Division of the Justice Department.

The Congress should also refrain from adding more regulation. Some shippers and legislators have been urging the government to require “open access”—that is, requiring one railroad that has the only tracks to a particular shipper to let other railroads service that customer over its tracks. The other proposal is to require railroads to quote rates to any two points on their lines (“bottleneck rates”). Both of these steps would force the STB to regulate rates and determine costs of service, a step backward in freeing the railroads from government controls. Railroads were freed of much regulation because it was strangling the industry; additional regulation might easily eliminate the small profit margins the roads currently earn, leading to reduced maintenance, bankruptcies, or both.

The writings of economists have driven the deregulation of airlines, motor carriers, and railroads. Right from the beginning of trucking regulation, economists questioned the need and desirability of government control over rates and service. Research showed how costly those regulations were to the economy. In a 1973 study done for a Brookings Institution conference, this author estimated that the costs imposed on the U.S. economy by ICC regulation were somewhere between $3.8 and $8.9 billion yearly, in 1968 dollars. In 1974, President Ford organized an economic summit meeting dealing with inflation, to which he called some of the leading economists in the country. Although many people believe that economists never agree, twenty-three economists signed a statement at that meeting recommending deregulation of transportation. The result has been all that economists predicted.