Opportunities and Pitfalls of Recent Transportation Deregulation
Dr. M. Theodore Farris II, Ph.D.
Dr. M. Theodore Farris II, Ph.D., Professor University of South Alabama, Mobile, AL 36688, (334) 460-7911
81st Annual International Conference Proceedings - 1996 - Chicago, IL
This paper discusses changes to transportation regulation including the Transportation Industry Regulatory Reform Act of 1994 and the Federal Aviation Administration Authorization Act of 1994. A history of regulatory changes leading up to the current legislative acts is used to identify the impetus for change and the resulting shake-out of the transportation industry. The paper provides a summary overview of the changes resulting from the acts and what this will mean to buyers of transportation services. The paper is geared toward identifying opportunities to effectively procure transportation services by understanding the regulations and utilizing them to pay a fair price for the organization. It identifies potential problem areas for buyers to be aware of and avoid.
The Start of Transportation Regulation.
Prior to the Civil War, there was little need for transportation regulation as the transportation system was in its infancy. Reconstruction following the Civil War encouraged rapid growth of the transportation system, particularly the development of the railroads (which was the newest mode of transportation.) By the 1870's, the railroads had grown into a monopolistic position. A movement was started by the Patrons of Husbandry (also known as the Grangers) to regulate railroads by establishing maximum rates, prohibiting local discrimination, and forbidding mergers. This allowed state commissions to administer, enforce, and interpret the law. The right to regulate industry "serving the public interest" was upheld by a Supreme Court ruling (Munn v. Illinois 1877). Increased regulation started to come about as a result of the business practices of the time.
Protecting the Consumer.
Congressional investigations of the industry (1872 Windom Report, 1886 Cullom Committee) and a Supreme Court ruling (Wabash v. Illinois 1886) resulted in the passage of the 1887 Act to Regulate Commerce. This act was intended to curb pricing and discrimination abuses by both shippers and carriers, codifying the ability to regulate commerce, and set up the Interstate Commerce Commission to administer and enforce the act. Passage of the Sherman Antitrust Act in 1890 and the next thirty years of legislation (Elkins Act 1903, Hepburn Act 1906, Mann-Elkins Act 1910) fine tuned regulatory controls intent on consumer protection. Regulation up to World War I was designed to regulate a monopolistic industry and protect the consumer.
Following World War I, regulation activity began to reflect the need for the regulated carriers to earn reasonable revenues to maintain equipment and attract capital.
Poor economic conditions (such as the Crash of 1929 and the Depression), decrepit physical conditions (due to WWI rail nationalization coupled with increased utilization and minimal upkeep), and competition from developing new modes (motor) changed the operating environment for the railroads. Regulatory legislation (Transportation Act of 1920, Emergency Transportation Act of 1933) was passed to help preserve the railroads.
A developing trucking industry and economic conditions of the Depression resulted in severe rate cutting and carrier bankruptcies. This led to the Motor Carrier Act of 1935 to help stabilize the industry through controlled entry, protected shippers, and the carriers. The act provided an elaborate framework of regulation which was used later to regulate other modes (1938 Civil Aeronautics Act, 1940 Water Carrier Act, 1942 and 1946 Freight Forwarder Acts).
By the 1970's, regulation of transportation had come full circle from the protection of the consumers to the protection of the carrier. Management of the carrier became an exercise in meeting regulations within a controlled competitive environment with little incentive to make meaningful operational changes. Regulatory control was often inappropriate, imposing regulation in place of management decision making. For example, in 1973, while still trying to protect the industry, the legislative solution to the bankruptcy of seven northeastern railroads was the creation of nationally run CONRAIL (total Congressional appropriations eventually exceeded $7 billion). Dissatisfaction with regulation festered.
The Beginning of Gradual Reform.
The beginning of the reform movement can be traced as far back as when the Transportation Act of 1958 encouraged competition between the modes. In 1962, President Kennedy called for more competition in transportation. A series of academic studies (Moore in motor, Friedlaender in railroads, and Jordan in air transportation) in the early 1970's attempted to measure the costs of regulation. Consumer studies (such as those led by Nader) prompted a series of legal actions to challenge regulatory rules. It became evident that regulation had progressed to serve more to protect the carriers than benefit the public.
In 1976, the 4-R Act (Railroad Revitalization and Regulatory Reform) exempted rail from economic regulatory control. This was later followed by the 1980 Staggers Rail Act emphasizing rate reform. Reform in air transportation followed (Cargo 1977, Passenger 1978) as it tends to be the mode of direct concern to a wide public of consumers and had experienced the brunt of regulatory criticism by consumers. Finally, the Motor Carrier Act of 1980 eased regulations in the motor carrier industry.
The Consequences of Federal Economic Deregulation. Prior to the regulatory changes in the 1970's and 1980's, transportation regulation had evolved to:
- control entry and exit
- control rates and earnings
- control service
The intent was initially to protect the consumer, then to protect the carriers. Re-regulation lessened the control of entry, provided more flexibility in pricing, and relaxed regulatory rules.
For the carriers, while some modes have experienced more bankruptcies and mergers (such as the increased concentration of market share in the LTL market and the fallout of air carriers), reregulation has economically reallocated resources more efficiently. Carriers have more flexibility to manage their business resources. In the rail industry, for example, this has resulted in improved financial conditions, increased productivity, lower labor costs, and growth in intermodal transportation. Economic efficiency resulting from regulatory changes have generally rewarded the carrier through increased profits or growth in market share.
Large shippers have achieved lower transportation rates and the ability to better specify service through the use of their economic clout. Benefits for the small shippers (and small communities) have been mixed. Rates and service better reflect the true economic value as determined by market forces instead of being determined through regulatory biases.
Regulatory Changes of the 1990's. Regulatory changes in the 1990's initially focused on correcting some of the problems caused by the deregulation of the 1970's and 1980's. These acts include:
- Negotiated Rates Act of 1993
- Trucking Industry Regulatory Reform Act of 1994
- Federal Aviation Administration Authorization Act of 1994
Negotiated Rates Act of 1993. The Negotiated Rates Act of 1993 addressed motor common carrier undercharges. In the period following the reregulation, some carriers failed to file negotiated discounted rates in Interstate Commerce Commission tariffs. Later, some of these carriers entered into bankruptcy. The bankruptcy trustees disavowed the agreements between the carriers and shippers. Shippers who had negotiated in good faith rate discounts found themselves billed by the bankruptcy trustees for the full rate. The Negotiated Rates Act offered shippers options and defenses to undercharge claims on interstate shipments.
In addition, the NRA prohibited off-invoice discounting. Suppliers could obtain a discounted transportation rate from their carriers but the receiver is bill at the "listed" (or full) transportation rate. The discount would go to the supplier contracting the freight but the full list price would be paid by the receiver.
Trucking Industry Regulatory Reform Act of 1994. The Trucking Industry Regulatory Reform Act of 1994 (TIRRA) eliminated the need to file rates with the Interstate Commerce Commission for "individually determined rates." Common carrier rates and rules can now be in the form of price lists, purchase orders, or "exempt-circulars." While tariffs are not required, most carriers will continue to utilize them. The tariffs will not be formally filed with the ICC.
The other key change resulting from this bill is the establishment of a 180-day limitation for contesting bills. This may change some of the operations within a shipping company. Freight bills should be audited much more frequently to allow time to contest any the freight bill.
Federal Aviation Administration Authorization Act of 1994. The Federal Aviation Administration Authorization Act of 1994 (FAAAA) does for the motor carrier industry on a statewide basis what the Motor Carrier Act of 1980 did on a federal basis. As discussed above, the 1980 legislation economically deregulated the industry and there were ramifications to large and small shippers. Similar changes should be experienced with the new intrastate economic deregulation. FAAAA prohibits states from regulating prices, routes, or services of motor carriers and promotes free entry into intrastate trucking. States still have the responsibility to regulate safety and insurance.
The February 1995 issue of Inbound Logistics asked a variety of industry experts to discuss the ramifications of these two legislative changes. The experts suggested the following opportunities and pitfalls:
Managing Private Fleets.
Companies will now be able to lease drivers and trucks from the same single-source instead of having to procure them from different vendors. For those companies owning their own vehicles, they may now lease their vehicles to a transportation provider for a single trip. The result of these opportunities is that some companies may consider expanding their private fleets while others may find it more advantageous to limit their fleet to certain traffic lanes or get completely out of the business. Purchasers may find increased activity in supporting the needs of the private fleet.
An important lesson learned from the federal regulatory changes was that regulatory management of rates artificially control the true application of financial burden. Large shippers benefited from economic deregulation with lower rates by understanding what and where they were shipping. Smaller shippers found freight increases as the rates began to realistically reflect the true unsubsidized cost of shipping their volumes and traffic lanes. The intrastate deregulation should serve to emphasis this point again. To benefit from these changes, the purchaser will need to work closely with the carriers, understand what their freight is and what it means to the carrier, and learn how to be better business partners with carriers.
In the past, buyers of freight services received ample notification of rate changes when the carriers had to file all rate changes with the Interstate Commerce Commission. The absence of filing requirements suggest a greater flexibility in pricing. Prices can immediately change based on a verbal agreement between two parties. Protect yourself by formalizing shipping agreements. Public rates allowed benchmarking to compare how your rates stacked up. These new rates will be confidential. This change will increase the workload for the purchaser, adding yet another variable to the purchasing decision. Finally, before the deregulation, motor carriers were exempt from anti-trust laws due to public filing of rates. Now collusion on rates and service will be subject to anti-trust laws. As a purchaser, expect a variety of rate quotes from different carriers. James A. Calderwood, partner in a law firm specializing in transportation issues suggests, "If you call a couple of different carriers and get the exact rate quote from them all, start wondering."
Financial Stability of Carriers.
The new operating environment of the 1980's resulted in a fallout of carriers through bankruptcies and mergers. Understand the financial stability of your carriers. Ask them what their operating ratio is and compare this information to that of comparable competitors. Proactive questioning helps to avoid later unpleasant surprises.
Negotiation Increases in Importance.
Freedom of ratemaking at both the interstate and intrastate level will increase the importance of effective negotiation skills. The negotiator will have to keep an eye on all aspects of transportation services as carriers will likely attempt to modify non-cost variables as a means of increasing profits. Pay attention to the carrier's rules and terms. A change in liability obligation or a restriction on how long your company can take to file a claim can add up to a significant cost impact and a change in the way your company conducts its shipping activities. Negotiation of these terms will become key to effective transportation purchases.
Your Best Protection: Your Purchasing Expertise.
As the transportation industry moves closer and closer toward a free market system the possibility of abuses and shenanigans will increase. The historical solution to resolve these inequalities was to add more regulation. The current trend is to allow the free market system to sort out the problems. Your greatest protection, as well as the greatest opportunities, stemming from these changes comes from the expertise of the professional purchaser. Keep a careful eye on purchasing basics.