CONTROL OF ENTRY AS AN ECONOMIC AND

REGULATORY PROBLEM

BYRON NUPP

ICC Administration Overemphasizes Detailed Procedures And Ignores Economic Considerations

In the generation that has elapsed since the inauguration of controls of entry in transportation, the administrative emphasis has shifted away from problems of original entry and "grandfather rights" to the problems of adjustment of existing services to meet new demands and take advantage of new efficiencies. The problems of service extension and adjustments have been a severe test of regulatory administration. Advances in aviation technology and expanding air markets have led to widespread problems in the extensions and modifications of trunkline routes, the development of large spheres of action for the local service airlines, and the emergence of third level air carriers for even more localized service. In the motor carrier field, the very detailed descriptions of routes and commodity rights present a problem of extreme complexity.

As a result of the case-by-case method, the characteristics of the motor carrier industry, and the operation of the grandfather clause in the Motor Carrier Act, a conglomeration of operating authorities of incalculable complexity has resulted.

Not called for in the basic legislation itself, the over-particularized aspects of entry control may have been administrative responses to conditions which no longer exist. This inference is supported by the emergence of a number of important cases before the ICC which attempted to deal with outstanding problems arising from this type of regulatory doctrine. Both inertia and opposition of vested interests have prevented effective action to deal with what appears to be a growing problem.

This came to a head in the question of common carrier service on the Interstate Highway System. Adjustment of certificates to accommodate this major result of the Nation's transportation policy was a subject of a major rule-making proceeding before the ICC, Ex Parte

Mr. Nupp is Deputy Director of the Office of Economics, Department of Transportation. The views expressed in this article do not necessarily reflect any policy of the DOT. The author acknowledges the research assistance of Mr. John Spychalski of the University of Maryland who, however, is in no way connected to the conclusions offered. Mr. Richard Lawson offered valuable editorial and substantive comments in the preparation of this article.

MC-65. Ex Parte MC-65 deals with amending bus and truck authorities to accommodate the Interstate Highway routes.

Common Carrier Services on the Interstate Highway System

Two other rule-making investigations have involved the ICC in consideration of liberalized control of operating authority insofar as existing carriers were concerned. Ex Parte MC-55, decided in 1961, dealt with elimination of many restrictions governing routes and service of trucking firms. More recently Ex Parte MC-68 was instituted to consider removal of truckload lot restrictions from existing certificates. In an order instituting rule-making consideration in MC-55, the ICC put forth five proposals to liberalize routing restrictions for regular route and irregular common carriers of property. Four of the proposals would have had the effect of eliminating gateway restrictions and enabling carriers to serve authorized points by the most direct routes. The remaining proposal would have entirely eliminated the distinction between regular route and irregular common carriers.

Opposition to the entire set of proposals was voiced by most motor carriers. Irregular route carriers gave some support to the elimination of the distinction in their basic authority setting them apart from regular route carriers. The National Industrial Traffic League gave some support to the liberalization principles advanced in the proposed rules.

In its decision, the ICC recommended "no affirmative action on the proposals advanced . . . at this time." Legal protections, carrier opposition, and precedents were advanced as the principal rationale for lack of action. No findings were made on the ground of economic efficiency or improved service to the public.1

In MC-65, and the related case MC-65 (Sub 1), motor carriers of passengers and of property respectively petitioned the ICC to institute rule making proceedings to provide expedited means of transferring operating authorities to routes on the Interstate Highway System. In June 1964 the Department of Commerce intervened in the case, and later presented evidence on the legislative history of the Interstate Highway System, carrier benefits from use of the system, and economic effects of Interstate Highway locations on adjacent areas.

The carrier proposals generally set forth criteria for relating existing routes and territories to sections of new routes. Carriers related to a given route in accordance with these criteria would be granted temporary operating authority if a showing could be made that the authority would maintain the existing competitive relationships among carriers. Applications for temporary authority would be subject to protest on the ground of established competitive relationships. Once such an authority had been granted, however, it would in time mature into permanent certification without further proceedings.

1 Motor Common Carriers of Property-Routes and Service, 88 MCC 415, 1961.

In its response to the carrier petition, the Department of Commerce criticized the proposed rules as being too protective of existing carriers on one hand, and not sufficiently attentive to findings of public convenience and necessity on the other. The Department proposed eligibility criteria for Interstate routes similar to the carrier proponents. The Department, however, would have granted all eligible carriers temporary certificates automatically, but would have required a test period and specific performance showings prior to permanent certification.

To expedite the handling of permanent certification applications, the Department of Commerce recommended that rules be adopted for the preparation and presentation of evidence which would be prima facie proof of public convenience and necessity. Such evidence as measures of improved efficiency, increased volumes of traffic, faster and better service, and other quantitative measures of performance were suggested as the basis for a prima facie showing of public convenience and necessity.

On January 12, 1966, the ICC instituted a proceeding entitled Ex Parte MC-68-Removal of Truckload Lot Restrictions. The order invited consideration by trucking companies of a proposal to remove present certificate restrictions on truckload lot traffic.

With the motor industry now in a mature phase, and enjoying the fruits of an expanding economy, the problem of over-specified route and service regulation, brought out in MC-55, MC-65, and MC-68, could be solved by allowing the initiative of existing carriers to respond to the challenges and opportunities of a transportation market. The issues forced by MC-55, MC-65, and MC-68 could be furthered by legislation opening up opportunities of expansion for existing motor carrier firms.

Regulation could have an effective role in providing the rules and criteria for this expansion; not curbing the initiative of the carriers but setting the guidelines for the industry to relate its initiative to some reasonable relationships to the performance capacity of the motor carriers. Legislation should clarify the authority of the ICC to provide such guidance to an over-regulated industry.

Over the years the ICC has made no studies of the economic effects of its motor carrier operating restrictions, as evidenced by responses to inquiries by the Senate Small Business Committee in 1956, a 1959 consultant report to the Under Secretary of Commerce for Transportation,2 and an exchange of correspondence between the Under Secretary of Commerce for Transportation and the Chairman of the ICC in 1965. The ICC, as well as representatives of the industry, make gratuitous assertions that any change in regulation would bring "chaos" to the trucking industry.

Despite the failure of the ICC to consider economic questions, there are important economic benefits at stake in the issue of control of

2 See James C. Nelson: Controls of Entry into Domestic Surface Transportation under the Interstate Commerce Act, a paper prepared for Dept. of Commerce, 1959.

original entry. Financial responsibility and business integrity are elements important in a common carrier service, and some control in the public interest may be demonstrated. Such demonstration is not available, but the stakes are sufficiently high that policies amending original entry regulation cannot be entered without careful economic analysis.

A basic difficulty in assessing the economic effects of entry control is the absence of suitable data. The ICC, for example, cannot readily describe or identify the full scope of motor operating authority it has granted. This means that in assessing the public convenience and necessity of a new applicant or the extension of the rights of an old one, it cannot match the proposals against a pattern of existing authority. The pattern is too complex for ready identification and an analytical system of records has not been developed for this purpose.

For a number of years the ICC engaged in a project to record and make useable an inventory of basic motor carrier operating authority.3 Just as this program was nearing fruition, it was abandoned for lack of funds to continue it. Because of the lack of reliable generalizations or useful disaggregated data on outstanding motor carrier authority, assessment of its economic consequences must be stated in very general terms.

Present Administration Reflects Bygone Economic Circumstances

Originally, control of entry and abandonment was a part of the regulatory system founded upon the need to protect the public from natural monopoly. Exclusive franchises assured to the public the right to examine the credentials of monopolistic operators, and to assure that the benefits of monopoly would be preserved in the face of non-economical incursions of competitive interests into areas where monopoly promised the greatest public benefits. Control of abandonment and discontinuance was the other side of the coin, protection of the public against arbitrary actions by monopolistic enterprise.

Paradoxically, the monopolistic experience with control of entry regulation was confined to the utility segment of regulated enterprise, not extended to intercity transportation. The railroad system of the country developed entirely without Federal controls of entry or abandonment. Such controls were introduced only in 1920 at the turning point of regulatory history, that is, at the point in which competition became the principal emphasis of regulatory action in place of monopoly.

Control of entry was extended to the motor carrier, aviation, water carrier and freight forwarder segments of transportation at the same time as Federal regulation was introduced. With all these transportation interests involved, it was inevitable that control of entry should become a basic tool in the regulation of competition. The objective of regulation was to balance the capacity of an industry with its potential

3 A preliminary analysis of some of this material was compiled for internal ICC use entitled, Profile of Motor Carriers of Property Industry Subject to ICC Regulation (July 1965).

market, so that the firms in it would be profitable and could maintain the integrity of their services. This emphasis was greatly intensified by the experiences of the depression beginning in 1929 as all sectors of American industry experienced overcapacity. Overcapacity in transportation was accentuated by the transformation that was taking place in it as new motor, air, and water services competed successfully for the first time with railroads.

Early pressure is most easily traced in the case of the motor bus industry. Throughout the 1920's that industry experienced a rapid concentration of control until by 1930 the Greyhound Corporation was by far the dominant firm in the field, offering nationwide service through a group of subsidiaries, many containing a large share of railroad capital. Such a system needed protection from free competition, always a potential threat due to low threshold costs. The problems of the emerging motor bus industry were foremost in the early considerations of the ICC, receiving expression in its ex parte investigation Motor Bus and Motor Truck Transportation.5 This investigation led the ICC to call for regulation by the Federal Government as the basic protection against competition among motor carriers.

6

The depression brought the pressures for motor carrier regulation to a high point. The ICC conducted another investigation in 1932 and again recommended Federal regulation. In 1933 the motor carriers developed an NRA code, which assisted their adjustment to regular patterns. With the creation of the Office of Federal Coordinator of Transportation in 1934, the pressure became irresistible as the new Coordinator took the lead in advancing legislation to bring motor carriers under regulation by the ICC.7

Depression conditions resulted in great overcapacity in all sectors of the transportation industry as industrial production declined. Many railroads went into receivership. Transport overcapacity was made more evident as a result of two decades of technological development in motor, water, and air transportation, all of which came to fruition in the early 1930's as viable commercial modes of transportation capable of competing with the railroads. Because of the low threshold costs, motor freight transportation faced large apparent overcapacity. It was alleged that the unemployed often entered the business in desperation through the purchase or rental of a truck.

Many scholars of transportation have pointed to the motor carrier field as an example of a naturally competitive industry, with low threshold costs, flexible service, and other characteristics of almost atomistic competition. Entry control and other aspects of regulation were entered

4 Charles A. Taff, Commercial Motor Vehicle Transportation, (Homewood, Illinois, Richard D. Irwin Co., Inc. 3d. ed. 1961) traces some of this development. 5 140 ICC 685 (1928).

6 Coordination of Motor Transportation, 182 ICC 263.

7U. S. Federal Coordinator of Transportation; Regulation of Transportation Agencies, 73rd Congress, 2d Session, Senate Document No. 152, 1934.