FTC Staff Comment Before the South Carolina Legislative Audit Council Concerning Possible Restrictive or Anticompetitive Practices in Statutes Governing the South Carolina Public Service Commission

,..
COMM1SSJON AUTHORIZED
FEDERAL TRADE COMMISSION
Washington, DC 20580
BUREAU OF ECONOMICS
September 29, 1987
Thomas Bardin, Principal Auditor
Legislative Audit Council
State of South Carolina
620 NCNB Tower
Columbia, South Carolina 	29201
Dear Mr. Bardin:
y.'e 	are 	pleased 	to 	respond 	to 	your 	invitation 	of 	April 	21, 	1987 	to
"comment on 	possible restrictive or anticompetitive practices" in the statutes
governing 	the South 	Carolina 	Public Service Commission. 	These comments
represent the views of the Bureaus of Competition, Consumer Protection, and
Economics of the Federal Trade Commission, and do not necessarily represent
the 	views 	of 	the 	Commission 	or 	of 	any 	individual 	Commissioner. 	The
Commission, 	however, 	has 	voted 	to 	authorize 	the 	submission 	of 	these
comments to you. l
In addition to the comments, we are including a copy of an FTC staff
report on taxi regulations and would be pleased to provide copies of any of
the other studies or materials cited in the comments. 	Should you have any
questions about our comments, please contact staff economist John C. Hilke
at (202) 326-3483.
I 	believe 	that 	both 	consumers 	and 	producers 	can 	benefit 	from 	your
review of the SCPSC statutes.
Sincerely,
--. 	--:--'j 	:', 	" I
i-~' 	. JuJtt~
David T. Scheffman, Director
Bureau of Economics
1 FTC 	staff 	provided 	comments 	to 	the 	Legislative 	Audit 	Council 	of
South 	Carolina 	on 	two earlier occasions 	this 	year. 	On 	February 	19, 	1987,
FTC staff commented on the "sunset" audit of the Boards of Optometry and
Opticianry. 	On April 23, 1987, FTC staff commented on the sunset audit of
the Boards of Podiatry Examiners, Occupational Therapy Examiners, Speech
and Audiology Examiners, and Psychology Examiners.

Comments of the Federal Trade Commission Sta((
to
The Legislative Audit Council of the State of South Carolina'
on
Possible Restrictive or Anticompetitive Practices in
South ,Carolina's Public Service Commission Statutes 1
September 29, 1987
1 These comments 	represent 	the 	views of 	the 	Bure3.us of Competition,
Consumer 	Protection, and 	Economics of the 	Federal Trade Commission, and
do 	not 	necessarily 	represent 	the 	views 	of 	the 	Commission 	or 	of 	any
individual Commissioner. 	The Commission, however, has voted to authorize
the 	submission 	of 	these 	comments. 	Questions 	concerning 	these 	comments
may 	be 	directed 	to 	John 	C. 	Hilke, 	Federal 	Trade 	Commission, 	Bureau 	of
Economics, at (202) 326-3483.

TABLE OF CONTENTS
Section Number 	Title 	Page
Introduct~on and Summary 	3
II 	Interest and Experience of the FTC Staff 	4
III 	Regulation of Surface 	6
Transp~rtation and Utilities
IV 	Trucks 	8
A 	Introduction and Conclusions 	8
B 	Arguments Advanced for Continued Regulati'on 	9
C 	Benefits of Deregulation 	15
,v 	Other Surface Transportation 	18
A 	Buses 	18
B 	Railroad Rates and Services 	20
C 	Railroad Mergers 	24
D 	Taxicabs 	25
E 	Moribund Transportation Industries 	26
VI 	Utilities 	28
A 	Electric Utilities 	28
B 	Telegraph Services 	29
VII 	Specific Provisions 	30
\' f f T 	Conclusion 	~J
2

I. 	INTRODUCTION AND SU1vfMARY
The 	Federal 	Trade 	Commission 	staff 	believe 	that 	several 	features 	of
South 	Carolina's 	Public 	Service 	Commission 	statutes 	are 	likely 	to 	have
an ticompeti ti ve effects.
First, entry 	and 	price 	regulation 	is 	likely 	to be 	anticompetithe in six
modes of transportation: trucking (Section IV), intercity buses (Section V.A.),
many railroad lines (Section V.B.), and street railways, steamboats, and canal
companies 	(Section 	V.E.). 	The 	same 	is 	likely 	to 	be 	true 	of 	regulation 	of
telegraph 	services 	(Section 	VI.B.). 	Each 	of 	these 	industries 	has 	either
disappeared 	from 	the 	economic 	landscape 	or 	now 	competes 	with 	other
industries 	so 	that 	the 	potential 	for 	exercise 	of 	market 	power 	has 	been
greatly reduced or eliminated. 	Moreover, these industries have already been
substantially 	deregulated 	at 	the 	interstate 	level. 	In 	remaining 	instances
where competition within or between transportation industries is determined
to 	be 	insufficient, 	continued 	restraints 	on 	pricing 	are 	less 	likely 	to 	be
anticompetitive than restrictions on entry.
Second, 	state 	authorization 	of 	local 	taxi 	regulations 	may 	result 	in
antic?mpetitive effects. 	(Section V.D.)
. 	Third, statutes banning railroad mergers may be anticompetitive because
they may arbitrarily exclude consideration of competition between different
modes of transportation. 	(Section V.c.)
Fourth, South Carolina may be able to prevent the regulation of public
utilities, particularly electrical utilities, from becoming anticompetitive within
the 	next 	several 	years 	by 	conducting 	periodically 	the 	kind 	of 	review 	in
which 	it 	is 	now 	engaged. 	We 	believe 	that 	while 	local 	distribution 	of
products and services provided by utilities seems likely to continue to exhibit
major 	economies 	of 	scale 	that 	may 	justify 	regulation, 	production 	and
wholesale 	distribution 	often 	do 	not 	now 	exhibit 	continuous 	economies 	of
scale or may cease to do so in the near future. 	Continued 	reevaluation of
the re:1 s ih i1it\' (, r de reg u 13 tin gut i1i tie s co U 1,1 c n h :1 '1: C .: (0 m r,: r j tin n :1 '"1 j 	h.:; ': .:; f ;!
consumers through lower prices and impro\ed sen Ices. 	(Section V l.A.,)
Finally, some specific pricing and service 	provisions in 	the statutes are
t likely 	to 	be 	anticompetitive. 	These 	provisions 	are 	likely 	to 	discour:lge
cj','i':I·:nt pricing Jnd contr3cting Dct'.\CCn ~"u:-crs J'1J <'icr~. ':-;,,'':[1,','1 \11,
Section 	II 	of 	this comment 	rcviews 	the 	interest :lnd expcrience of 	the
Fedcnl Trade Commission S[:11'1' in dercgulJtion issues in\ol\ing the industries
that 	in 	South 	Carolina 	are 	regulated 	by 	the 	Public 	Service 	Commission,
Section 	III 	provides an 	introduction 	to deregulation 	and 	competition 	issues,
Sections IV, V, and 	VI present our analyses of the 	primary elements of the
Public 	Service 	Commission 	statutes 	that 	we 	believe 	are 	anticompetitive.
Section 	VII 	notes 	specific 	statutory 	provisions 	th:lt 	we 	believe 	are
an ticompeti ti ve.
3

(
II. 	INTEREST AND EXPERIENCE OF THE FEDERAL TRADE CO\1\1TSSJO'J
STAFF
During 	recent 	years, 	the 	Commission 	staff 	has studied 	the 	effects of
deregulation in many of the industries that in South Carolina are regulated
by 	the 	SCPSc. 	In 	the 	trucking 	industry, 	the 	FTC 	staff 	has 	found 	that
deregulation, at both the federal 2 and state levels, benefits consumers.3 	The
Commission staff has also studied and commented upon recent deregulatory
proposals in 	the railroad 	industry,· the intercity 	bus 	industry,S the 	taxicab
industry,6 and 	utilities. 7 	These 	activities, 	coupled 	with 	our 	experience 	in
2 See 	"Comments 	of 	the 	Staff 	of 	the 	Federal 	Trade 	Commission 	on
Pricing 	Practices 	of 	Motor 	Common 	Carriers 	of 	Property 	Since 	the 	Motor
Carrier Act of 	1980, Ex Parte No. MC-166," before the Interstate Commerce
Commission (January 	19, 1983); and 	Breen, D., Bureau of Economics of 	the
Federal 	Trade Commission, 	Regulatory 	Reform 	and 	the 	Trucking 	Industrv:
An 	Evaluation 	of 	the 	Motor 	Carrier 	Act 	of 	1980. submitted 	to 	the 	Motor
Carrier Ra temaking Study Commission (March 1982). 	.
3. See 	"Statement 	of 	the 	Staff 	of 	the 	Federal 	Trade 	Commission 	on
Econ'omic 	Deregulation 	of 	Trucking 	to 	House 	and 	Senate 	Transportation
Committees," provided to the Washington State Legislature (March 7, 1985).
• FTC staff commented on S. 447 (May IS, 1985) and H.R. 1140 (June 9,
1986), "The Railroad Antimonopoly Act of 1986."	/
S The 	FTC 	staff 	provided 	analysis 	on 	"Collective 	Ratemaking 	in 	the
Intercity Bus Industry" for the Motor Carrier Ratemaking Study Commission
(June 16, 1983); then Chairman James Miller III testified on the Intercity Bus
Regulatory 	Reform 	Act 	(March 	8, 	1982) 	and 	the 	FTC 	staff 	prepared 	an
analysis of the House version of the bill; the FTC staff commented on ICC
Ex Parte No. MC-133, "Entry Flexibility -- Regular Route Passenger Service"
(January 	7, 	1980); 	and 	the 	Commission 	filed 	in 	opposition 	to 	Section 	5a
, -\r:>rliotion 	'\;() 	9 of 	the 	!'::ltion:l1 	Bus Tr:lrri-: 	..\sso-:i:1.tii'n. 	h: 	i, 	WI 	r',
P:lTtC 	No. 	297 	(Sub-01o. 	~), Reopening 	of 	Section 	Sa 	Proceeding 	to 	TJke
~dditional Evidence (July 12, 1978).
6 The FTC staff has submitted comments concerning t1Xic3b regu!:ltion
to 	''':Ity 	g<J\:::rnll1::::;t~ in 	Anchor:lge. 	CJi:lbriJgc. 	l-hi':,'l';d. 	'-c" 	'I 	! '" 	"'~
FrJl1Cisco. 	S::::1ttk. 	:lnJ 	Washington, 	D,C.. 	:lS 	\\ell 	:lS 	~o 	lh::: 	\!:l".:l 	,1:1"j
Colorado 	legislatures. 	In 	1984, 	the 	FTC 	issued 	administrative 	complJints
J,gainst 	the 	CitIes 	of 	~linneapolis :lnd 	0:ew 	OrlcJ,ns. 	ch:lil:::nging 	(20[[:
restrictions and price restraints imposed in these cities,
7 Recent 	exampks 	of 	utilities 	regulation 	comments 	include: 	testimony
before the Federal Energy Regulatory Commission (FERC) on the purchasing
practices of 	interstate 	natural 	gas 	pipelines, July 	I, 	1983; 	testimony 	before
the Senate Committee on Small Business on "Competition 	by Utilities in the
Energy Conservation and Home Appliance Field," November 3, 1983; comments
to the Department of Energy and the Vermont Department of Public Service
4

enforcing 	the 	federal 	antitrust 	laws, 	have 	provided 	us 	with 	substantial
experience in analyzing the potential competitive effects of deregulation.
on exemptions to the National Energy Conservation Policy Act. December 17,
1984; 	comments 	to 	FERC 	on 	its 	"Proposed 	Rulemaking 	Regarding 	the
Regulation of Natural Gas Pipelines After Partial Wellhead 	Decontrol," July
19, 	1985; comments 	to 	the 	Federal 	Communications 	Commission 	concerning
the Auctioning Licensing Act of 1985, October 29, 	1986;' comments to FERC
on natural gas marketing affiliates, January 29, 1987; and comments to FERC
in the Matter of Texas Gas Transmission Corporation, July 29, 1987.
5

II I. 	REG l- L-'\ TIO'.; OF SLR FACE TR-'\ ".:S POR T-'\ TIO\! ,-,\ \JD LTI Ll TI ES
Several 	of 	the 	statutes 	now 	under 	review 	by 	the 	Legislative 	Audit
Council limit the number of firms that may compete in particular markets or
provide for rate regulation. 	Whatever the initial reasons for adopting such
programs, entry and price regulation may benefit special interest groups who
use 	regulation 	to 	exclude 	competitors, 	raise 	prices, 	and 	delay 	the
introduction of more efficient technologies. 	Even where regulation 	is most
economically justified _. in the case of natural monopolies 8 -- it has fallen
considerably short of its ideal.
Entry 	and 	rate 	regulation 	can 	adversely 	affect 	consumer 	welfare 	for
several 	reasons. 9 	First, 	regulations 	are 	more 	likely 	to 	represent 	the
interests 	of 	directly 	affected 	firms 	than 	those 	of 	consumers 	because 	the
affected 	firms 	are 	likely 	to 	be 	better 	organized. 	Second, 	regulated 	firms
may lack incentives to minimize costs or to innovate due to their inability
8 A 	natural 	monopoly occurs 	in a 	market where 	unit costs decline as
the 	level 	of 	output 	from 	a 	single 	firm 	increases. 	Examples 	of 	industries
commonly 	classified 	as 	natural 	monopolies 	include 	local 	natural 	gas,
electricity, 	and 	water 	distribution, 	and-local 	telephone 	services. 	Where
natural 	monopoly conditions exist, 	industry-wide costs can be minimized 	by
organizing the industry as a monopoly. 	A monopolist, however, may be able
to 	charge 	higher 	prices 	and 	thereby 	earn 	higher 	profits 	by 	restricting 	the
quality 	or 	quantity 	of 	its 	output, 	or 	may 	allow 	costs 	to 	be 	excessive.
Regulation of price and quality has been offered as a remedy to preserve the
c9st efficiency of natural monopoly while eliminating the unfavorable pricing
and quality problems.
9 See, 	for 	example, 	Kolko, 	G., 	Railroads 	and 	Regulation, 	1877-1916,
Princeton, 	N.J.: 	Princeton 	University 	Press, 	(1965); 	MacAvoy, 	P., 	The
Economics 	Effects 	of Regulation: 	The Trunkline 	Railroad 	Cartels and 	the
!"":~-:,:'c (.-''":':i"1.,:r.::c C'}f1lmj~sion Before 	1QI1 (\. C]ml'ri,~~c. \h e ", 	\IIT 	P:-:
1965; Kahn, A., The Economics of Regulation, 2 vols., New York: \Viley and
Sons, 1970; Stigler, G., "The Theory of Economic Regulation, Bell Journal of
,..Economics and 	Management 3 (Spring 1971), PP. 3-21; Peltzman, S., "Toward
a 	More 	General 	Theory 	of 	Regulation." 	Journ::lf 	nf 	L1W 	'lnd 	ECl1no!"'l!es 	10
(-'\ugusr 	19-1)). 	i)D, 	211-2-10; 	Olson. 	\1.. 	The 	LJQic';f' 	C,,-,II~·~-ti\c \'::[:"0.
C.lmbriclgc. 	\1353,: 	l-LlT\3rd 	Cniversiry 	Pr:ss. 	1965: 	Owen. 	B" 	JnJ 	R,
Braeutigam, 	The 	Regul3tion 	Game: 	Str3tegic 	Use 	of 	rhe 	Administr3tive
Process, 	Cambridge, 	\lass.: 	Ballinger, 	1978; 	Johnson, 	B" 	Rcgul3tion 	of 	[he
Intercitv Bus 	Industrv: A Comparison of the Public 	Interest Theon' 3nd the
Economic 	Theon' 	of 	Regulation, 	Ph.D. dissertation, 	University 	of 	Virginia,
1985; Moore, T., "The Beneficiaries of Trucking Regulation," Journ31 of La v,:
and 	Economics 	21:2 (October 	1978), 	pp. 	327-344; 	and 	Moore, T., "Rail 	and
Truck Reform -- The Record So Far," Regulation (November/December 1983),
pp. 	33-41; 	Rogowsky, 	R., 	and 	B. 	Yandle, 	eds., 	The 	Political 	Economv 	of
Regulation: 	Private 	Interests 	in 	the 	Regulatory 	Process, 	Washington, 	D.C.:
Federal Trade Commission, ) 984.
6

to 	profit 	from 	cost 	savings 	and 	to 	the 	lack 	of 	competition. 	Third, 	the
regulated 	firm 	mJy 	have 	incentives 	to 	overinvest 	or 	underinvest 	in
unrcgulated 	businesses 	if 	the 	regulated 	rate 	or 	return 	diverges 	from 	the
firm's actual costs of capital. lO 	Finally, regulation can create prolonged lags
in 	meeting 	new 	consumer 	demands or 	utilizing 	new 	cost-saving 	technology
due to extended procedures often required to restructure rates.
As a result of these problems, the benefits of competitIOn and the costs
of 	regulation 	have 	become 	more 	apparent, 	and 	many 	governments 	have
decided 	to 	reexamine 	the 	need 	for 	numerous 	regulations. l1 	A 	major
incentive to reevaluate regulation has been the realization that the high cost
and 	low quality often characteristic of regulated services affect 	more than
just 	the 	regulated 	firms 	they 	hurt 	consumers 	and 	undermine 	the
competitiveness and 	employment 	potential of local 	industries 	that 	use 	these
services.
Reexamination 	of 	rate, 	entry, 	and 	quality 	of 	service 	regulation 	is
particularly 	timely 	in 	the 	area 	of 	transportation. 	Economists 	have
accumulated compelling evidence that different modes of transp~)ftation can
effectively compete with each other without most rate and entry restrictions.
For example, although railroads may once have had monopoly power on many
rout~s; they 	now 	face 	effective competition 	from 	trucks as 	well 	as barges,
airplanes, buses, and/or pipelines on most if not all routes. 	Concerns about
the effects of a substantial market positibh 	within one transportation mode
(buses, 	trucks, 	trains, 	etc.) are, 	therefore, 	no longer as 	pertinent. 	There 	is
increasing 	recognition 	of 	potential 	competition 	between 	utilities 	currently
serving 	different 	a'reas, 	which 	could 	be 	facilitated 	by 	separating 	the 	local
distribution 	network 	(which 	still 	appears 	to 	be 	a 	natural 	monopoly) 	from
production and wholesale distribution and deregulating the latter.
It is with this background in mind that the FTC staff examined South
Carolina's Public Service Commission statutes. 12
10 This 	is 	known 	as 	the 	Averch·Johnson 	effect.
L. 	J0nnson. 	8ch3.\ ior 	,)f 	th(: 	Firm 	under 	R.~~UiJt0r:.
Economic Review 52 (December 1962), pp. 1058-1059.
after 	Averch. 	H .. Jnd
_. 	i... _~ r ~l I :"'t : •
t 	11 For 	a 	recent 	extensive 	review 	of 	empirical 	research 	about 	the
err ..:.:!,; "I' r~~'J:]·i"n. see 	Joskow. P. :lnd 	'-: 	R(\se. "Tt,:~ Fl'l'ccts (\1' F'':''f'nmi.:
R::gu!:lti,jn.'· \1:l3';J:hl!SCtts Institute of T~:hr.·)!,)g\·, L)c;,·:~~:'::;:t "d' [:-."FI11::'
Working P:lper =-1-17l.-\.pril 1987).
12 South 	Carolina's statutes 	provide 	the 	PSC 	with 	gencrJI 	authority 	to
determine 	rates 	and 	service 	charJcteristics 	and 	to 	b:lr 	discrimin:ltory 	:1nd
unreasonable 	practices 	in 	the 	following 	industries: 	Gas. 	HC:1t, 	Water.
Sewerage Collection and 	Disposal, and Street Railway Companies (Chapter 5
and 	Articles 	4, 	5, 	and 	7 	of 	Chapter 	103 	of 	the 	Code 	of 	Laws 	of 	South
Carolina 	1976); Telephone, Telegraph and Express Companies (Chapter 9 and
Article 6 of Chapter 103); Radio Common Carriers (Chapter I I and Article 6
of Chapter 	103); Railroad, Street Railway, Steamboat and 	Canal Companies
(Chapter 	15 and 	Article 	I of Chapter 	103); 	Electric, 	Interurban 	and Street
7

IV. TR CCKS
A. Introduction and Conclusions
The SCPSC regulates rates and service of intrastate trucking 	firms 	to
serve 	the 	public 	interest 	under 	authority 	of 	Chapter 	23 	and 	Article 	2 	of
Chapter 	103 	of 	the 	state's 	Code 	of 	Laws. 	We 	believe, 	however, 	that
consumers 	benefit 	when 	trucking 	rates 	and 	entry 	are 	deregulated.
Deregulation of both entry and rates in trucking at the national level and in
several states 	has resulted 	in 	major 	increases in efficiency, lower transport
rates, and greater availability of specialized services.
We 	do 	not 	believe 	there 	is 	an 	economic 	justification 	for 	supplanting
competition with government regulation of trucking. 	There appears to be no
viable natural monopoly or other market failure here. 	Many trucking routes
evidently face strong competition from railroads, barges, pipelines, ships, and
airplanes. 13 	In 	addition, 	entry 	into 	many 	trucking 	services 	appears 	to
involve relatively few financial or technical barriers or obstacles (other than
regulations).I" 	The council consequently may wish to consider recommending
the 	'elimination 	of 	rate 	regulation 	and 	entry 	restrictions 	in 	intrastate
tru.cking. 15 	By 	deregulating, 	many 	states 	have 	realized 	lower 	prices 	and
increased 	individualized 	services 	that' 	better 	meet 	shippers' 	needs. 16
Railways (Chapteli 21); Motor Vehicle Carriers (Chapter 23 and Article 2 of
Chapter 	103); 	and 	Electric 	Utilities 	and 	Electric Cooperatives 	(Chapter 	27
and Article 3 of Chapter 103).
13 See 	Lewis, 	K., 	and 	D. 	Wid up, 	"Deregulation 	. and 	Rail-Truck
Competition," 	Journal 	of 	Transportation 	Economics 	and 	Policy 	16:2 	(May
1982), 	pp. 	139-149; 	Moore, 	T., 	"Rail 	and 	Truck 	Reform 	-- 	The 	Record 	So
Far," 	Regulation 	(December 	1983), 	PP. 	33-41; 	Standard 	and 	Poor's, 	"Rail
Piggyback Poses Serious Challenge," in Stand3rd and Poor's Industrv Surveys:
T t' ~J .:- ~, i ;r g 8:1 S: ,: 	'\;I :\1 \ sis (J:1 n u 3r y 17, I '-1 S:; ), ~'p. r ~ -:; 3- , <)
1" See, 	for 	example, 	Breen, 	D., 	"Market Structure 	and 	Competition 	in
, Trucking," FTC Staff Working Paper #21 (September 1984).
is We 	.jo 	n(,t 	oppose 	other 	forms 	I)" 	tfu.:king 	r:~c;:_l~:,--n 	~1{~1:.J 	.I:
pro \ I J I n g :1 nap p r(, p r i:1 te k 'i d 	\) f 	"f i inc ss '. I) r S:1 f e t y, 	r il cr c mJ J 	~'C 1l1.Ir t-. :.: [
failure 	problems 	that 	justify 	some 	such 	regul:uions. 	We 	:Ire 	not 	J.ble.
however, to comment on [he appropri:1te level of such regul:Ition.
16 Kidder found 	that stringent enforcement of restrictions on cntry 	In
South Carolina deprived the state of the 	increase in service options enjoyed
by both 	rural and 	urban 	intrastate shippers in Georgia and 	North Carolina.
See 	Kidder, 	A., "Economic Consequences of 	the 	1980 Motor Carrier 	Act 	on
Freight 	Service 	to 	Rural 	Areas," 	in 	Kidder, 	ed., 	Conference 	on 	Regulatory
Reform 	in 	Surface 	Transportation, Syracuse, 	N.Y.: Syracuse 	University/U.S.
Department of Transportation, 1983.
8

Trucking deregulation 	may encourage the entry of 	new trucking 	firms and
the formation of new jobs. 	It may also enhance the growth opportunities of
firms 	that 	transport by truck 	within South Carolin3, by reducing their costs
and improving the quality of their distribution systems.
Because 	government sponsored 	rate 	setting 	has 	been 	an 	institution 	in
the trucking industry for many years, it is possible that some trucking firms
may continue to collaborate on setting 	intrastate rates. 	To discourage 	this
legacy 	of 	regulation, 	it 	may 	be 	necessary 	to 	issue 	a 	clear 	statement 	that
continued coordination of such rates is illegalP
B. Arguments Advanced for Continued Regulation
Trucking 	regulation 	was 	originally 	intended 	to 	help 	protect 	the
regulated 	railroads 	from 	the 	then-unregulated 	and 	expanding 	trucking
industry.1s 	It was 	also 	designed, 	in 	part, to support 	the 	trucking 	industry
by restricting competition during the depression of the 	1930s. 19 	We believe
that neither rationale has any validity in 1987.
Four 	major 	arguments 	are 	usually 	advanced 	by 	those 	who 	support
trucking regulation today. 	The proponents argue that regulation is necessary
to: 	-(1) 	preserve 	service 	to 	smaller 	communities; 	(2) 	prevent 	"destructive
competition;" 	(3) 	maintain 	safety; 	and 	(4) 	achieve 	efficiencies 	in 	making
pricing 	decisions. 	However, 	on 	closer 	examination, 	we 	believe 	these
arguments 	are 	neither 	accurate 	nor 	persuasive 	rationales 	for 	economic
regulation of the trucking industry.
17 For a discussion, see Breen, D., "Antitrust and 	Price Competition 	in
the Trucking Industry," Antitrust Bulletin (Spring 1983), pp. 201-225.
Experience 	in 	antitrust 	enforcement 	suggests 	that 	collusive 	activities,
particularly 	through 	trade 	associations, 	are 	more 	likely 	to 	take 	place 	in
industries 	that 	ha\e 	been 	cartelized 	under g,)\-:rn,r,~.~[ .):.;~l-.. ,.:.:_l~: n 	,,1 	:,~
past. 	See 	Scherer, 	F., 	Industrial 	Market 	Structure 	and 	Economic
,Performance, 	Chicago: 	Rand 	McNally, 	1980, 	pp. 	521-25; 	Fraas, 	A., 	and 	D.
(Greer, "Market Structure and Price Collusion: An Empirical Analysis," Journ:l!
of 	fnd'JQri:l1 	Ecnnomics 58:1 	(1977), pp. :1- J 4; 1nd 	H:1\'. G. 	1nci 	f) 	K-:l!c::.
".-\n 	Empiric:l! 	SUf\(~Y of 	Price 	Fixing 	Conspineics." 	:.-,:,-,.1.; 	)·\"~.i
Economics 17, pp. 13-38, p:Hticul:Hly pp. 16 and 25-2b.
18 See Locklin. D., 	Economics of Transportation, 	Homewood. Ill.: Irwin.
1966, Chapter 	31. 	Federal 	and 	numerous 	st3te 	13\\'s 	followed 	the 	Ic:td 	of
Texas in requiring that many truck r3tes be no lower than r:til r::ltes.
19 See 	Nelson, 	"The 	Changing 	Economic 	Case 	for 	Surface 	Transport
Regulation," 	in 	Miller, 	ed., 	Persoectives 	on 	Federal 	Transportation 	Policy,
Washington, D.C.: American 	Enterprise 	Institute, 	1975). 	See also, Moore, T.,
"Rail 	and 	Truck 	Reform 	-- 	The 	Record 	So 	Far," 	Regulation 	(November!
December 1983), pp. 33-41.
9

Service to Smaller CQmmunities
The 	first 	argument 	is 	that 	small 	cQmmunities 	will 	lose 	seT\lce 	if
trucking is deregulated. 	Empirical studies in Qther states suggest that SQuth
CarQlina's 	small 	cQmmunities 	will 	nQt 	IQse 	service 	because 	Qf 	trucking
deregulation.
TWQ 	studies 	conducted 	in 	the 	western 	United 	States 	fQund 	that,
fQllQwing 	federal 	deregulatiQn 	Qf 	trucking, 	the 	quantity 	and 	quality 	of
service 	fQr 	small 	towns 	remained 	essentially 	unchanged. 2o 	This 	result 	is
cQnsistent with the finding of an ICC study that small cQmmunity trucking
has 	never 	been 	subsidized 	by 	big 	city 	rates. 21 	Because 	regulatiQn 	has 	nQt
fQrced 	crQss-subsidizatiQn, 	ik, 	the 	setting 	of 	big 	city 	rates 	at 	a 	level
needed to suppQrt small cQmmunity rates that are set belQw costs, firms will
nQt 	have 	financial 	incentives 	tQ 	refuse 	to 	prQvide 	service 	tQ 	small 	towns
when prices are deregulated/
Further sUPPQrt fQr the prQpQSltlOn that small cQmmunities will not be
harmed 	CQmes 	from 	Florida's 	actual 	experience 	under 	deregulation. 	In 	a
recent survey, 65 	percent Qf the shippers in small communities 	in 	FIQrida,
which 	has 	deregulated 	trucking, 	stated 	a 	preference 	fQr 	deregulation. 22
Indeed, deregulatiQn may make it easier to provide flexible service tQ small
shippers in rural areas.
There is even mQre specific evidence suggesting that small cQmmunities
will nQt suffer under deregulatiQn. 	A recent study by PrQfessor Michael W.
20 Impact of RegulatQry RefQrm Qn Shipper/Receiver Freight Service in
Selected 	Rural 	CQmmunities. 	1982: 	A SecQnd 	FQIlQwup Study, 	WashingtQn.
D.C.: 	U.S. 	Department Qf 	Transportation (March 	1983). 	See 	also 	Statement
of Reese H. Taylor, Jr., Chairman of Interstate CQmmerce CQmmission, Before
the Surface TransPQrtatiQn SubcQmmittee Qf the HQuse Committee on Public
Works 	and 	Transportation Qn 	Implementation of 	the 	MQtQr 	Carrier 	Act 	of
1980 (NQvember 7, 1985).
21 An 	EvaluatiQn 	Qf 	Charges 	That 	RegulatQrv 	RefQrm 	Will 	Degrade
.Small 	CQmmunity 	MotQr 	Carrier 	Service, 	WashingtQn, 	D.C.: 	Interstate
(CQmmerce CQmmissiQn (March 1980).
~z FrecmJn. 	J .. 	",\ 	Survey 	of 	\fotor 	C:nri::r 	Dcrcgu1.Hit)n 	in 	rL',r,cia:
One 	Year's 	Experience," 	ICC 	Practitioners 	Journal, 	Jt 	51 	\:\o\.-Dc.:. 	;:d:J.
See 	also 	BQlton, 	S.. 	R. 	CQnn, 	and 	J. 	Smith. 	"Florida 	\1otor 	C3rr;er
Deregulation: 	The 	Immediate 	Effect 	of 	Sudden 	Deregulation 	from 	the
Perspective 	of 	Shippers/Receivers 	in 	Sm3l1 	Communities." 	in 	Kidder. 	cd ..
Conference on 	Regulatorv Reform in Surface Tr3nsport3tion, Syracuse, N.Y.:
Syracuse University/U.S. Department of Transportation, 1983.
It should also be 	noted that 	in 	1985 	United 	Parcel Service decided 	to
offer 	next-day 	service 	to 	every 	community 	in 	the 	U.S. 	(HighliQhts 	of
Activity 	in 	the 	Property 	Motor Carriers Industrv, Office of Transportation
Analysis, 	Interstate 	Commerce 	Commission, 	Staff 	Report 	No. 	10: 	(March
1986), pp. 9-10).
10

Pustay of Texas A. & M 	University examined service to such communitIes.
Lfnder current Texas Railroad Commission (TRC) procedures. c3rriers C1nnot
be compelled to serve communities at unremunerative prices.~3 	Pusray found
that 	common 	carriers 	were 	not 	reluctant 	to 	serve 	small 	communities 	and
concluded that the overall pattern of service does not support the argument
that regulation of 	intrastate trucking increases the level of service offered
to 	small 	communities.H 	Pustay's 	study 	is 	one 	of 	many 	that 	refute 	the
contention 	that the quality of service to small communities will deteriorate
with deregulation. 	A recent extensive survey of shippers found that quality
of 	service 	after 	federal 	deregulation 	had 	improved 	for 	20.1 	percent 	of
respondents. 	Over 	97 	percent 	of 	the 	mostly 	rural 	shippers 	found 	that
trucking service was at least as good before federal deregulation. 	Only two
percent considered quality of service to be lower. 25
Destructive Competition
Another 	argument 	in 	support 	of 	continued 	regulation 	is 	that
deregulation 	would 	inevitably 	lead 	to 	"destructive 	price 	competition." 	A
major concern is that larger, better financed companies will drive out their
competitors 	by 	selling 	at 	prices 	below 	average 	variable 	cost. 	When 	the
weaker competitors are driven out, according to the argument, the remaining
fiqns 	will 	raise their prices to supracompetitive levels, thus recouping their
losses 	and 	increasing 	their 	profits. 	Another 	concern 	is 	that 	easy 	entry,
barriers to exit, or declining demand will' foster chronic excess capacity and
the accompanying threat of destructive price competition, persistent pricing
below costs. 	The destructive price competition will cause losses for all firms
and result in detef'ioration of the quality of service. 26
The conditions necessary for destructive competition to occur, however,
do 	not 	generally apply 	to 	the 	trucking 	industry today. 	In 	the 	absence 	of
substantial fixed costs and high barriers to entry or exit, attempts to engage
in 	so-called 	predatory 	pricing 	would 	have 	little 	chance 	of 	achieving 	their
goal 	and 	chronic 	excess 	capacity 	would 	be 	unlikely 	to 	developY 	The
~:l PU5>tJy, .\1., "Intrastate :'-lotOr C:HrlCf 	RC:5uljrivn 	in 	ICX,h, 	L:'''lo(I~'S
& Transportation Review 19 (1983), p. 141.
( 	2« This 	willingness 	to 	serve 	small 	communities 	suggested 	that 	such
SC f'. i.:'~ 'x :1 ~ ;' r-, fit J !' k, 	Pus tJ Y com pJ rcJ 	the se f\ icc " r.. .: r C j 	t'J 	' :'" '1 : 1 ,,, \ '1 '
:nr]rcs ',\ i:;'.l 	',Hiety of types ot' rru.:king regulJti"ns I lex:,,,, (j:1i'J, ';,·u:h
Oal-;ot:1, and Florida), Pustay, supra nOte 23 at 159.
25 Office of Transportation Analysis, ~ note ..,.., at 30,
26 See Locklin, supra footnote 18 at 653-654.
27 See Matsushita 	Electric 	Industrial 	Co. 	v. 	Zenith 	Radio 	Corp, 	106 S,
Ct. 1348, 1357-1358 (1986); and Miller, J" 	"Economic Regulation of TrUCking,"
in 	Report of the 	Economic Advisorv 	Panel to the National Commission 	for
the Review of Anti-Trust Laws and Procedures (Nov. 9, 1978).
Proponents 	of 	regulation 	have 	argued 	that 	setting 	up 	an 	extensive
II

trucking 	industry does 	not 	appear 	to be characterized 	by substantial 	fixed
costs 	since 	trucks. 	the 	predominant 	asset. 28 are 	highly 	mobile 	and 	C3n 	be
qui<::kly 	transferred to other 	mHkets 	if a carrier 	faces overcapacity. 	Other
assets, such as terminal space can be rented, rather than purchased, making
them 	variable 	costS. 29 	To 	the 	extent 	that 	barriers 	to 	entry 	are 	low, 	a
carrier 	would 	be 	unable 	to 	later 	recoup 	the 	losses 	it 	sustained 	while
engaging in predatory pricing. 	When the predator tried to raise its prices to
supracompetitive 	levels, 	other 	firms 	would 	enter 	or 	re-enter 	the 	market,
taking 	business 	away 	from 	the 	predator 	and 	pressuring 	prices 	back 	to
competitive levels. 	Recently, the General Accounting Office joined the ICC,
the 	Motor 	Carrier 	Ratemaking 	Study 	Commission, 	and 	the 	Department 	of
Justice in concluding that predation is unlikely to occur as a consequence of
trucking deregulation, and that there is no evidence of predatory pricing in
markets 	that 	have 	been 	deregulated 	to date.3o 	Similarly, 	if 	there 	are 	low
barriers 	to 	exit, 	excess 	capacity 	should 	not 	persist 	even 	when 	demand
declines.
terminal network, which is required in the less than truckload (L TL) segment
of 	the 	industry, constitutes a 	barrier to'entry that 	raises the attractiveness
of 	predation. 	However, 	a 	study 	by 	transportation 	economist 	Denis 	Breen
indicates 	that 	competition 	along 	routes 	has 	increased 	with 	deregulation, as
efficient L TL competitors expand route networks. 	Examining 248 city-pairs,
Dr. 	Breen 	found 	that 	"the 	number 	of 	competitors 	per 	route 	increased
between 	1979 and 	1981 	for 	179 of the 248 	major routes despite 	the overall
,decline 	in 	the 	number 	of 	L TL 	firms." 	See 	Breen, 	"Market 	Structure 	and
Competition 	in 	Trucking," 	FTC 	Bureau 	of 	Economics 	Working 	Paper 	#21
(September 	1984). 	The 	larger 	market 	shares 	of 	L TL 	traffic 	for 	growing
carriers 	result 	primarily 	from 	those 	carriers' 	expanding 	the 	number 	of
terminals and 	places served, rather 	than 	from 	increasing concentration 	and
market 	share 	in 	markets 	already 	served. 	See 	Office 	of 	Transportation
·... n:1I~:;j:. '~''':j:'n ::'.:'te::'::' Jt 10.
28 Even in the L TL segment, property accounts for only roughly 20% of
( assets. 	See Breen, supra note 17 at 213.
~J The 	trucK 	is 	not 	a 	fixed 	cost 	,:>1 	Joing 	busln;;~s :-C::',":'::':Tl 	!r". 	t··,·,·
points or 	in ]n~ :,[)[:,: ,;r 	region 	be<::3use 	l[ ,:]n 	rc.:3dii> 	t:c ~~U[ in c,;,;r\ l,:e ,)11
some other route or in some other area,
For 	a 	discussion 	of 	bHriers 	to 	entry 	in 	less 	th3n 	truck-load 	c3rriage
concluding 	that 	b3rriers 	to entry are 	only 	moder3te 	in 	this segment of 	the
industry, 	see 	Gener3l 	Accounting 	Office, 	Trucking 	Regul3tion: 	Price
Com pet it ion 	:1 n d 	\1ark e t 	St rue t u rei nth e 	T r uc kin g 	! nd u S t r v, 	\\' :1 S h i n g ton.
D.C.: Government Printing Office, 1987.
30 United States General Accounting Office, TrUCking Regulation: 	Price
Competition and Market Structure in the Trucking Industry, (February 1987),
pp. 8-10.
12

Safety
A third argument advanced against deregulation is that it will 3.d\crscly
affect trucking safety. 	Economic deregulation does not necessarily implicate
reduced safety. 	Licensing, inspection, and enforcement of safety regulations
can all be pursued independently of economic regulation. 	As the Wall Street
Journal concluded in a recent editorial: "The way to improve truck safety is
not to restore economic regulation but to do a better job of enforcing safety
rules."31 	Recent 	federal 	legislation 	reflects 	this 	realization. 	In 	particular,
the Commercial Motor Carrier Safety Act of 1986 requires written and road
tests to exclude poor drivers,· a national uniform commercial driver's license,
and 	a 	national 	clearinghouse 	for 	records 	of 	commercial 	drivers. 32 	In
addition, DOT is expected 	to repeal 	the commercial zone exemption, which
excuses 	locally driven 	trucks from 	federal 	safety 	inspections in 	many 	high
density traffic areas, particularly in the Northeast. 33
Although 	some 	advocates 	of 	regulation 	have 	sought 	to 	connect
deregulation to decreases in safety, there is no necessary connection between
the two and, as discussed below, the results of safety research :;tre generally
inconsistent 	with 	this 	hypothesis. 	Deregulation 	may 	in 	fact 	contribute 	to
greater 	safety 	by 	ending 	route 	restrictions 	and 	stimulating 	more 	efficient
operations that employ higher vehicle load factors, thus reducing the number
of vehicle miles travelled to perform any given volume of freight transport.
Regulation is associated with extra trips, such as empty back hauls. 34
In 	addition 	to 	reducing 	inefficient 	freight 	movements, 	empirical
evidence 	suggests 	,that 	deregulation 	has 	not 	reduced 	safety 	on 	the 	more
efficient freight 	movements that take place under deregulation. 	Indeed, an
index of injury and 	fatality 	rates per vehicle mile in 	the interstate market
sl).ows a decline since deregulation. 35 	Recent studies by academic economists
who 	have 	addressed 	the 	safety 	issue 	have 	generally 	concurred 	that
31 "Unsafe Statistics," Editorial, Wall Street Journal (April 7, 1987).
32 L'.S. 	Gcncr3.! 	Accounting 	Ollic;:, 	Tr'J:'>L~ 	D~~::.;::': ·1: 	p., 	.~ .•
Sunset of ICC's Trucking Regulatory 	Responsibilities, Washington, D.C: U.S.
General 	Accounting 	Office, 	1987, 	pp. 	19-20; 	Wallack, 	"New 	Licensi ng
~tandards for Truck and Bus Drivers," N:ltion's Cities Weekly (November 	10,
1986), 0 	:(\).
;;3 Kirkman. 	D., "L'.S. 	Wants 	to Stii'L:n 	SJt'cty 	R.ui;;~ un 	Lv"':Jl 	rru..:,,~.
Buses, and Drivers," Washington Times (July I-I. 1987).
34 MacAvoy, 	P., and 	J. Snow, eds., Reeu!::ltion of 	Entrv :lOci 	PricioQ 	in
Truck Transport3.tion, Washington, D.C., American Enterprise Institute, 1977.
35 Wall Street Journal, supra note 31. 	This index, based on 	DOT data,
was calculated by Americans for Safe and Competitive Trucking.
13

deregulation has not reduced safety.36 	For example, researchers have found
no connection between 	net operating income ::Ind ::Iccident r::ltes ::IS would re
expe..:ted if more intense competition reduced s::Ifcty.31
Price Efficiencies
A final argument advanced against deregulation is that it will increase
operating 	and 	transactions 	costs 	of 	many 	shippers. 	Without 	the 	motor
carrier collective rate bureaus, shippers, according to this argument, will be
unable 	to 	readily 	obtain 	price 	information, and 	for 	example, 	will 	have 	to
negotiate 	individually 	for 	each 	segment 	of 	shipments 	requiring 	multiple
carriers. 38 	Experience with deregulation at the interstate level suggests that
brokers 	and 	intermediaries 	will 	provide such 	information 	and 	coordination
services, 	just 	as 	they 	provided 	similar 	services 	following 	the 	1984 	partial
deregulation of interstate rates. 	And brokers and intermediaries will provide
these 	services 	without 	the 	threat 	to 	competition 	inherent 	in 	collusive
36 A 	1987 	study 	by 	B. 	Weinstein 	and 	H. 	Gross 	("Transl?ortation 	and
Economic 	Development: 	The 	Case 	for 	Reform 	of 	Trucking 	Regulation 	in
Texas," Center for 	Enterprising, Southern Methodist University, 	1987, p. 50)
states:
Reported 	truck 	accidents 	for - interstate 	motor 	carriers 	have
shown 	an 	increase 	since 	1984. 	But 	most 	of 	this 	increase 	is
attributable 	to better reporting 	by 	the carriers 	rather than [to] a
rise 	in 	acciqents. 	In 	fact, 	in 	each 	of 	the 	four 	years 	following
passage of the Motor Carrier Act, reported accidents were nine to
twelve 	percent 	below 	the 	1979 figures. 	Most 	important, 	injuries
and fatalities from heavy truck accidents since 1980 have remained
well below the pre-Motor Carriers Act figures for 1978 and 1979.
This is not to suggest that deregulation makes trucking safer;
but 	evidence 	does 	not 	support 	the 	contention 	that 	deregulation
makes trucking less safe.
The 	Weinstein 	and 	Gross 	results 	may 	explain 	why 	other studies 	have
, expressed concern about deterioration of safety after deregulation. 	Examples
t of such expressions of concern include Baker, "Does the Public Benefit from
Dercgul1tion'l" Tnffic World (Febru::Iry q. 	1Q87\. pp. ~~-8Q. :lnd G!:l<:Kn\\<:b.
'\.. 	E!'(ccrs 	0f 	DcreQul1tion 	on 	'{"t',r 	C1rric~<:. 	\1,.:c·C',',rt. 	C-,nn: 	F;'·)
FCtundJtion tor TrJnsporiJtion, In..:., 1%6.
31 Corsi, 	T., 	P. 	Fanara, 	and 	M. 	Roberts, 	"LinkJges 	Between 	\10tor
C:urier 	Accidents 	and 	Safety 	RegulJtion," 	Logistics 	:lnd 	TrJnspori:nion
Review 	20:2 (June 	(984), 	pp. 	149-164, particularly pp. 	156-157; and 	Bcilo..:k,
R., 	"Are 	Truckers 	Forced 	to 	Speed?" 	Logistics 	and 	Tr3nspori3tion 	Review
21:3 (September 1983), pp. 277-291.
38 See, 	for 	example, 	Davis, G., 	and 	J. 	Dillard, 	"Financial Stability 	in
the 	Motor 	Carrier 	Industry 	The 	Role 	of 	Collective 	Ratemaking,"
Transportation Rese::lrch Forum 24:1 (1983), pp. 241-248, footnotes 20 and 27.
14

ratemaking. 	Interstate coordination and brokerage services are now offered
by 	Roadway, 	Consolidated 	Freightways, 	Sun 	Carriers, 	and 	Leaseway
Tr::lnsportation 	Corporation,39 	among 	others. 	In 	fiscal 	year 	1985, 	nc',,'
brokers accounted for ninety-nine percent of the applications for new grants
of operating authority from the ICC. 4o
C. Benefits of Deregulation
The 	experiences 	in 	several 	states, 	including 	New 	Jersey, 	Florida,
Wisconsin, Maryland, and Oregon, illustrate the benefits of deregulation. 	A
study of 	trucking 	in 	New Jersey, 	for example, concluded 	that deregulation
has 	worked 	well. 	Shippers 	were satisfied 	with 	the 	available service, 	rates
were 	about 	10 percent 	lower than 	they 	would 	have 	been 	under 	regulation,
and the intrastate carriers survived and profited. 41
Florida's 	experience 	is, 	particularly 	interesting 	because 	deregulation
occurred so quickly that truckers and shippers had no opportunity to prepare
for 	it. 42 	Nevertheless, according to a 	1982 study:3 88 	percent of shippers,
as 	well 	as 	49 	percent 	of 	truckers, 	supported 	deregulation. 	Most 	shippers
thought that service levels remained constant and that rate fluctuations 	had
posed 	no 	difficulties. 	Only 	a 	few 	shippers converted 	to 	private carriage;
many. more 	such 	conversions 	would 	have 	been 	expected 	if 	"destructive
com~etition" had resulted in a large reduction in the number of truckers.
A 	1984 Department of Transportation study'" found that 90 percent of
Florida shippers believed that post-deregulation service was at least as good
as service before deregulation, and 30 percent reported improved service. 	In
addition, a majority of shippers (58 percent) perceived that deregulation had
39 Office of Transportation Analysis, supra note 22 at 4.
40 Trucking firms must' obtain ICC permission before initiating service
in 	areas 	or 	between 	cities 	they 	do 	not 	already 	have 	permission 	to 	serve.
Office of Transportation Analysis, supra note 22 at 12-13.
41 Allen, B., "The Experience Under Unregulated Motor Carriage in !'.'ew
Jersey," 	in 	Kidder, 	ed., 	Conference 	on 	Regulatorv 	Reform 	in 	Surface
transportation, 	Syracuse, 	N.Y.: 	Syracuse 	University/U.S. 	Department 	of
"rra nsporta tion. 1983.
l~ FioriJ:l 	rcgul:1tion 	01
anticipated 	legislation 	to revise
the regula tions was not cnacted.
43 Freeman, ~ note 22.
trucks 	and 	buscs 	;,;nJcJ 	:It.ruptJ~ 	.ll·tu
and continue 	regulation 	upon 	expiration 	of
H 	Statement 	of 	Matthew 	V. 	Scocozza, 	Assistant 	Secretary 	for 	Policy
and 	International 	Affairs, 	U.S. 	Department 	of 	Transportation, 	Before 	the
Subcommittee on Surface Transportation, U.S. House of Representatives (June
20, 1984).
15

held down rates. 	Other studies report similar results.'5
The 	consumer 	benefits 	obtained 	from 	deregulation 	at 	the 	state 	level
have 	also 	been 	achieved 	at 	the 	national 	level. 	After 	partial 	federal
deregulation, 	the 	number 	of 	grants 	of 	operating 	authority 	to 	carriers
quadrupled, evidencing eased entry into the trucking business..~6 	There also
has been an increase at the national level in the number of independent rate
45 To measure the impact of deregulation on trucking prices in Florida,
economists 	Blair, 	Kaserman, 	and 	McClave 	examined 	rates 	and 	shipment
characteristics for 	10 Florida 	intrastate carriers before deregulation and 	at
three points in time after deregulation. 	Using more than 27,000 observations
on 	individual 	shipments, 	they 	found 	that 	the 	deregulation 	of 	intrastate
trucking 	led 	to a 	15 percent average 	reduction 	in rates. 	See Blair, R., 	D.
Kaserman, 	and 	J. 	McClave, 	"Motor 	Carrier 	Deregulation: 	The 	Florida
Experiment," Review of Economics & Statistics 68 (1986), pp. 159 ..
The experience of other states confirms the evidence from New Jersey
and 	Florida. 	For 	example, 	in 	Wisconsin, 	67 	percent 	of 	shippers 	were
satisfied 	with 	deregulation, and 	only 6 percent were dissatisfied. 	Seventy-
three 	percent said 	that 	rate 	information was just as readily available after
deregulation as before. 	Carriers were evenly divided on the question of the
benefits 	of 	deregulation. 	Those 	with 	increased 	profits 	tended 	to 	favor
deregulation, while some of those opposing deregulation were upset about the
loss of the asset value of their certificates of convenience and necessity, an
inevitable one-time result of converting from a 	regulated 	to a 	free 	market.
See 	Deregulation 	of 	Wisconsin 	Motor 	Carriers, 	Wisconsin 	Office 	of 	the
Commissioner of Transportation (July 1983).
In Maryland, 	intrastate 	household 	goods 	movers are 	not 	regulated. 	A
study conducted in that state in 	1973-1974 revealed 	that the then regulated
interstate 	household 	goods 	carriers 	charged 	27 	percent 	to 	67 	percent 	more
than 	unregulated 	intrastate 	carriers. 	See 	Breen, 	D., 	"Regulation 	and
Household Moving Costs," Regulation, 	(September/October 1978), p. 53.
Ore go n d ere g u IJ ted 	the s hip pin g 0 f .: :: r t :l i n b u i L.: ; ~ g :~; J t ~ ; : .1 ! S ::l 	!'~ SO.
The 	results 	of 	this 	action 	were 	examined 	in 	two 	separate 	surveys 	by 	the
.Legislative Research Office of the Oregon Legislature. 	All parties surveyed
(agreed 	that 	deregulation 	increased 	the 	number 	of 	carriers 	in 	the 	market.
~(:cording t() 0nc 	~urvey, :11 most all shippers and 	mnq "f 	the 	truckers 	with
f.' r 10 r1 'J t h Co r j t y 	t 'J 	': 1r r y 	the se 	p rod uc t s 	!' (' I i(' \ ('.j 	t h J t 	[r u: ~ i n g 	r .1 t (' s 	': :1-:
decrcased. 	:\vne 	of 	thc 	groups 	sune::-cJ 	belic\ed 	l:1.l[ 	therc 	;ud 	teen 	J
general increase in rates as a result of deregulation.
46 The 	Effect 	of 	Regulatorv 	Reform 	on 	the 	Trucking 	lndustr\":
Structure. Conduct. and Performance, Washington, D.C.: 	Office of Policy and
Analysis, 	Interstate Commerce Commission (June 	1981). 	See also 	Statement
of Reese H. Taylor, Jr., Chairman of Interstate Commerce Commission, Before
the Surface Transportation Subcommittee of the House Committee on Public
Works 	and 	Transportation on 	Implementation 	of 	the 	Motor 	Carrier 	Act 	of
1980 (Nov. 7, 1985).
16

changes, 	with 	the 	vast 	number of observed changes 	being 	rate 	decreases. 41
From 	1977-1982, as 	deregulation 	was 	first 	taking 	place. 	rates 	on 	interstate
(ruckload shipments fell 	about 25 percent, and less-th3n-truckl03d 	r3tcs 	t'cil
about 	12 percent. 	These 	declines 	occurred during 	a 	period 	of 	rising 	fuel
costs (when 	prices 	might 	have 	been 	expected 	to 	rise).4s 	A 	recent 	federal
study found 	that regulated rates are higher than competitive rates, in large
part 	because 	regulated 	firms 	are 	able 	to 	"pass 	through" 	cost 	increases
automatically via general rate increases. 49
, 	41 Statement of Reese H. Taylor, Jr., Chairman of Interstate Commerce
Commission, 	Before 	the 	Senate 	Committee 	on 	Commerce, 	Science, 	and
(Transpnrt3tion 	(Sept. 	21. 	1983), 	See 	also 	HiohliQht~ ..... f 	\,:ti,it,· 	;n 	t~~
Pr,''!~crt, 	'\"ll',r 	(.'·Hr:cr 	Industf\', 	W3shing(on. 	D.C: 	Ir~;;;r~r:t:: C':lln~;;r:::
Commi))1011 t\1Jr..:h 	;';361.
~8 See 	Moore, 	supra 	note 	9 	at 	39. 	Rates 	declined 	prior 	to 	(he
recessions 	of 	1979-1980 	and 	1980-1981 	(when 	prices 	might 	have 	been
expected to fall with or without deregulation).
49 	Collective 	Ratemaking 	in 	the Trucking 	Industrv, 	Washington, 	D.C.:
Motor Carrier Ratemaking Study Commission (June 	I, 	1983). 	Evidence also
indicates that regulated firms have less incentive to maximize efficiency.
17

Y. 	OTHER SURFACE TRANSPORTA. TIO:"i I:-\DCSTRIES
A.B..l.!ill
The 	SCPSC 	regulates 	entry, 	rates, 	and 	services 	in 	the 	intercity 	bus
industry under authority of Chapter 23 and Article 2 of Chapter 103 of the
Code 	of 	Laws. 	There 	is 	no 	reason, 	however, 	to 	believe 	that 	markets 	for
intercity 	bus 	transportation 	would 	fail 	to operate 	efficiently 	without 	such
regulation, 	because 	cars, 	limousine 	services, 	car 	pools, 	airplanes, 	passenger
trains, 	etc., 	provide 	strong 	competition 	in 	personal 	transportation. 50
Intercity bus transportation also does not appear to exhibit major economies
of scale that might justify rate regulation if competition from other forms of
transportation 	were 	not 	prevalent. 51 	Moreover, 	to 	the 	extent 	that 	most
costs of serving a 	particuiail route are variable and entry and exit are easy
(aside 	from 	regulatory 	requirements), 	there 	is 	no 	reason 	to 	fear 	systematic
predatory 	pricing 	or 	other 	forms 	of 	"destructive" 	competition 	in' the 	bus
ind ustry. 52
Deregulation 	of 	buses 	at 	the 	national 	level 	and 	in 	many 	individual
states 	may 	have 	helped 	to 	preserve 	the 	industry 	because 	many 	states
evidently 	were 	failing 	to 	allow 	rates 	that 	covered costs or 	were 	requiring
service 	on 	routes 	that 	did 	not 	allow 	bus 	transportation 	firms 	to 	recover
costs 	at 	any 	price. 53 	Although 	deregulation 	has 	been 	accompanied 	by
50 See 	Rastatter, 	E., 	and 	J. 	Walgreen, 	"Regulatory 	Reform 	of 	the
Intercity Bus Industry," in Kidder, ed., Conference on Regulatorv Reform in
Surface Transportation, Syracuse, N.Y.: Syracuse University/U.S. Department
of Transportation, 1983.
51 Id. 	For 	additional 	economies 	of 	scale studies, see 	Franvel, 	F., 	H.
Tanchen, and G. Gilbert, "Regulatory Policy and 	Economies of Scale in the
U.S. 	Intercity 	Bus 	Industry," 	Transportation 	11:2 	(1986). 	pp. 	173-187: 	and
\":,.)n. P.. 'T:'-: Qu-:stion of Effi..::i-:ncy ::1 LILli1 	u~) j":.i.: ;_.i~.::i·_,;1. ~ ~.~.: .,
of Regional Science 26:3 (August 1986), pp. 499-513.
52 Id .
."3 Bcc::Iu-oe for:cd 	'iubsidiz:1tion ot 	intr1st::ltc rnlJt;:'~ " 	'l~~;r'tl';: r',L:t-:'
t h rca ten edt h e' \ j J. b II It Y 0 f 	the 	en t ire 	n::l t ion::ll 	bus 	:> y s r;.; 111. 	l 11 C 	i C l. 	"J j
::Iuthorized 	by Congress 	to 	preempt 	some 	intrastate 	ntc. 	routing. 	and 	entry
regulations. 	See 	the 	Bus 	Regulatory 	Reform 	Act 	of 	1982. 49 	lJSc. 	10935.
For discussion, see Oster. C. and K. Zorn. "Impacts of Rcgul:ltory Reform on
Intercity 	Bus 	Service 	in 	the 	United 	States," 	Transportation 	Journal 	25:3
(Spring 	1986), 	pp. 	33-42. 	To 	the 	extent 	that 	state 	regulation 	of 	intrast::ltc
buses 	has 	continued 	to 	force 	subsidization 	of 	some 	intrastate 	routes 	by
interstate routes or other intrastate routes, deregulation will be accompanied
by 	increases 	in 	fares 	and 	abandonment 	of 	routes 	that 	cannot 	be 	self-
sustaining even at higher prices unless the state specifically subsidizes these
routes.
18

discontinuations of service to some small cOmmUnitIeS, the rate of decline in
rural 	bus 	services 	has 	not 	bcen 	appreciably 	different 	than 	it 	was 	cefnre
deregulation 	of 	interstate 	routes. S4 	Deregulation 	has 	not generally 	rcsultcd
in loss of service to small communities where there is appreciable demand,
and deregulation has precipitated changes in equipment and scheduling that
may 	have 	preserved some 	bus routes 	that otherwise 	would 	have 	had 	to be
discontinued. 55
Because 	there 	appears 	to 	be 	no 	economically 	defensible 	reason 	to
regulate 	entry 	and 	prices 	in 	this 	industry, 	and 	because 	deregulation 	of
interstate and 	intrastate buses has proceeded 	with generally positive results
in other parts of the country, we believe that the practice of continuing to
regulate 	rates 	and 	entry 	in 	this 	industry 	in 	South 	Carolina 	is 	probably
anticompetitive and detrimental to consumer welfare. 	The Council may wish
to recommend eliminating 	regulation 	of 	intercity 	buses. 	If South Carolina
believes 	that 	demand 	is 	tod 	weak 	in 	some areas 	to 	attract a 	supplier, 	but
that service should 	be provided in any case, it may be more efficient (and
fairer 	to 	other 	bus 	passengers) 	for 	the 	state 	explicitly 	to 	subsidize 	such
routes from general revenues. 56
. An example of large economic losses imposed by state regulation is the
route between Logan and Charleston, West Virginia. 	Trailways was forced to
continue 	service 	for 	three 	years 	on 	this 	route 	with 	a 	46 	passenger 	bus
carrying an 	average of 6 passengers. 	The estimated 	loss 	from 	this service
was $176,674. 	See Rastatter and Walgreen, llil2.I.a note 50 at 444.
The recent financial failure of Trailways underlines the extent to which
competition 	from 	other 	transportation 	modes 	reduces 	demand 	for 	bus
transportation services. 	See "Leave the Driving to Us," Economist (June 27,
1987), 	p. 66; "Greyhound 	Lines 	to Take Control of Trailways 	Assets," 	Wall
Street Journal (July 14, 1987), p. 16.
54 See 	Oster, 	C, 	and 	C 	Zorn, 	"Impacts 	of 	Regulatory 	Reform 	on
Intercity 	Bus 	Services 	in 	the 	United 	States," 	Transportation 	Journal 	25:3
(1986), 	pp. 	33-42. 	See 	also 	Bailey, 	A., "Regulatory 	Reform 	and 	Rural 	Bus
Scni.;c: E\iJcn,,:c from South D:lKot:l," So,,:io-L:0rlol11l": I):";::;::~':! :'-':::::_:0 	"~
(1986), pp. 291-298.
( 	55 Stage, 	W., 	"What 	Have 	Been 	the 	Effects 	of 	Deregulation 	on 	the
Inrcrcit\" 	Bus 	Ir,d'.1stry 	in 	Florida'?" 	r<lpcr 	presented 	It 	the 	Tr1fl"i")r·~ti'"'!l
Res CJ r ..: h F'J rum I (k t {'\ be r 29. I 98 2l.
56 Air 	and 	rail 	competitors 	of 	the 	bus 	indu'itry 	ha\"e 	received
significant direct government aid for facilities dedicatcd exclusi\ely to their
use. 	Airlines 	utilize 	government 	supported 	tcrminals 	and 	air 	traffic
controllers. 	Amtrak rail passenger service receives an annual federal subsidy
accounting 	for 	approximately 	40% of its revenues. 	Sce "Outside Jobs 	Help
Pay 	Amtrack 	Fare," Chicago Tribune 	(May 	4, 	1987), 	p. 	4:1; Samuelson, 	R.,
"Cutting Amtrak's Rails," Washington Post (January 14, 1987), pp. FI and F3.
By contrast, 	bus operators 	receive 	little government subsidy 	other 	than 	use
of 	roads 	provided 	by 	the 	government, 	and 	even 	here, 	the 	marginal 	social
cost of bus use of these roads may be small.
19

B. Railro~d Rates and Services
The SCPSC regulates railroad entry, rates, and services under authority
of Chapter 14 and Article 1 of Chapter 103 of the Code of Laws.
In most instances, the case for deregulating railroads parallels the case
in 	trucking. 57 	Until the 	late 	1970s, most interstate and 	intrastate railroads
were 	required 	to 	use 	inefficient 	pricing 	policies 	that 	virtually 	eliminated
their 	incentives 	and 	ability 	to 	pursue 	new 	technologies 	and 	innovative
services. 58 	With 	deregulation 	of 	most 	rail 	services, 	the 	variety 	and
efficiency of services 	has 	been greatly 	increased, real 	rates after adjusting
for 	inflation 	have 	declined 	somewhat, 	and 	the 	financial 	viability 	of 	the
railroads 	has 	been 	enhanced. 59 	For 	example, 	railroad 	piggybacking 60 	and
fresh produce services were languishing until deregulation. 	Regulations had
prohibited 	railroads 	from 	'charging 	enough 	to 	cover 	the 	higher 	costs 	of
providing, these services. 	Without the revenues to finance 	better equipment
and 	routing 	arrangements, 	railroads 	could 	not 	compete 	effectively 	with
trucking firms on these types of shipments. 61
Although 	competition 	among 	different 	transportation 	modes, 	as courts
and the ICC explicitly acknowledge, is usually sufficient to prevent exercise
of market power 	by 	railroads, there may be some routes and 	products that
cannot be effectively served, at least in the short run, by alternative means
or 	by competing 	railroads.62 	When such circumstances prevail 	in 	interstate
routes, 	the 	ICC 	has 	developed 	and 	applied 	sophisticated 	but 	practical 	rate
restriction 	guideliqes. 	Several 	states 	that 	have 	deregulated 	most 	intrastate
57 Transportation analysts have found that deregulation of railroads was
e~'sential to 	the 	economic 	viability 	of 	railroads, 	especially 	since 	trucking
regulations were 	relaxed during the same 	period. 	Lewis and 	Widup, supra
note 	13; and 	Phillips, 	L., "The 	Railroad 	Industry: The 	Road 	to 	Recovery,"
Business Economics 21:2 (April 1986), pp. 52-56.
~8 Th'2 	;:,~')b1cms imposed 	by 	outd:ltcJ 	rcgJ1J:i,':\ 	L: 	~:;::',i.: 	,".
discussed 	in 	Improving 	Railroad 	Productivitv, Washington, 	D.C.: TaskForce
.on Railroad Productivity, National Commission on Productivity, 1973.
(
59 Sce BHnckov. c.. "The Track Rccord." RC'2uhti n n (JJ.nu:H\' FchuJ.f\'
jQS'7L 	r:'P, 1-)-:7: 	J.nd 	\\-illig, 	R .• 	and 	\\, 	B:lUmol. 	"1.·'I:~''; '-'i11rc:;;;,~n 	h 	I
G u i J c " 	R c '2 U IJ t j ,,) n (J:ln u a r Yi Feb r u ar y I98 7L p p. : S-35.
60 Piggybacking 	involves 	transporting 	trucks or shipping containers 	by
rail.
61 See, for example, Moore supra note 9; and Phillips, supra note 57.
62 In 	the longer 	run, excessive 	rates charged 	by 	railroads 	will 	lead 	to
relocation of shippers or development of alternative means of transportation,
such as slurry pipelines in the case of coal.
20

rail 	routes 	have 	also 	adopted 	similar 	continued 	PrICIng 	restraints 	on
particular routes where market power might be expected. 63
South Carolina's regulation of intrastate rail rates has been certified by
the ICC as being consistent with 	the provisions of the Staggers Act and 	is
therefore 	no 	longer 	likely 	to 	have 	anticompetitive 	consequences. 6' 	The
Council, 	however, 	may 	wish 	to 	recommend 	that 	the 	statutes 	be 	revised 	to
incorporate provisions paralleling those in the Staggers Act. 66 	Alternatively,
the Council 	might wish 	to suggest 	that South Carolina join other states in
saving 	the 	costs 	of 	administering 	rail 	rate 	regulations 	by 	abolishing 	these
regulations 	and 	giving 	jurisdiction 	to 	the 	ICC 	to 	regulate 	rates 	in 	any
instances where market power may be present. 66
63 Staff at 	the 	ICC have 	informed 	us that, 	in such 	cases, some states
have retained their own administration of these provisions while others have
shifted the responsibility and cost to the ICe.
6' The 	Staggers 	Act 	is 	49 	U.S.e. 	1150 I. 	The 	South 	Carolina 	Public
Service Commission made the final 	modifications required for' certification
by the Interstate Commerce Commission on March 	14, 	1984 (Docket No. 81-
219- T, Order No. 84-207).
66 The state's regulations already reflect 	the provisions of the Staggers
Act as part of the process of certification. 	Incorporating similar provisions
in 	the 	statutes 	might 	facilitate 	the 	quinquennial 	process 	of 	renewing
certification 	under 	the 	Staggers 	Act 	and 	avoid 	the 	possibility 	that
anticompetitive 	rate 	regulations 	could 	be 	adopted 	by 	the 	SCPSC 	at 	some
future date.
" 	66 Under the Staggers 	Act, 	the 	ICC 	may 	determine 	the 	reasonableness
of 	rail 	rates 	in 	the 	case 	of 	captive shippers. 	The Staggers 	Act defines a
captive shipper as one 	1) that pays a 	rate 	that 	is 	higher 	than 	a 	threshold
level -- currently 170-180 percent of railroad variable costs -- and 2) that is
subject to 	railroad 	market dominance. (In 	the case of coal 	traffic. perhaps
:he 	prim:lrv 	product 	for 	which 	there 	:Ire 	limited 	c:hl,n-run 	tf1fl<;p"rt:lti,':->
substitutes, less 	than 	20 percent of 	railroad revenues comes from 	rates 	that
exceed 	this 	threshold. 	See 	Ex 	Parte 	No. 	347 	(Sub-No. 	I), 	Coal 	Rate
. Guidelines, 	Nationwide 	(August 	8, 	1985) 	p. 	3.) 	The 	ICC 	has 	ruled 	that 	a
f railroad 	has 	market 	dominance 	if 	the 	shipper 	lacks 	both 	nil 	3nd 	nonr3il
t r:1 n,~' 0 -' r Ll t ~, ' n!:c ~ r n:1t i v es 	and 	faces 	n cit hc r 	pr 'I oJ u..:t 	!1 ,j r 	3 ~~, o~ rJ r J1 I"':
,:'JmpctItlon. 	GCI.';s:Jphic competition cxists ·....·here:1 shl[..'per ot":l ':c,mnwciit~
competes 	with 	other' shippers 	of 	the 	same 	commodity 	that 	:ire 	located
elsewhere. 	Product 	competition 	exists 	where 	a 	shipper 	or 	a 	commoJity
competes 	with 	sellers 	of 	other 	commodities 	that 	are 	substitutes 	for 	the
shipper's 	commodity. 	See 	generally 	Ex 	Parte 	No. 	320 (Sub-No.3), 	Product
and 	Geographic 	Market 	Competition 	(1985) 	[slip 	opinion 	at 	2-6] 	for 	the
history behind the present status of the rules for defining market dominance.
The concept 	has 	been 	developed and 	refined 	in 	the Staggers Acts, a 	series
of 	rulemakings, 	and 	court 	decisions. 	See 	Ex 	Parte 	No. 	320, 	Special
Procedures 	for 	Making 	Findings 	of 	Market 	Dominance, 	353 	Le.e. 	875,
modified. 355 Le.e. 	12 (1976); Atchison. T. & 	S.F. Rv. v. 	ICC, 580 F.2d 623
21

The 	ICC's 	current 	proccdures 	for 	evaluating 	market 	dominJnce 	He
simibr 	to 	those 	used 	by 	the 	FTC 	in 	Jntitrust 	invcstig:uions. 	EJ..:h 	19cn.::y
determines 	the 	extent 	to 	which 	a 	seller 	or 	group 	of 	sellers 	has 	market
power. 	All constraints on that power are taken into consideration. 67 	In the
case of a railroad, the ICC has correctly ruled that constraints on the price
charged 	for 	shipping 	a 	particular 	product 	include 	competition 	between
railroads, competition 	with other modes of transportation, competition from
other 	products 	that 	could 	substitute 	for 	the 	product 	being 	shipped, 	and
competition from producers of the same product located in other geographic
areas. 68
As 	the 	ICC 	has 	noted, 	the 	ideal 	pricing 	standard 	for 	assessing 	the
reasonableness of a 	railroad's 	rates would 	be 	to require the 	railroad 	to set
each 	of its 	rates equal 	to marginal cost. 	However, the ICC has recognized
that 	in 	many 	instances 	marginal 	cost 	rates 	will 	not 	generate 	sufficient
revenue 	to 	cover 	a 	railroad's 	total 	costs, 	including 	a 	normal 	return 	on
investment. 69 	This problem arises because, until a certain voLume of traffic
(D.e. Cir. 1978); Ex Parte No. 320, Special Procedures for Making Findings of
Market 	Dominance, 359 Le.e. 	735 (1979); Section 	202 	of 	the 	Staggers 	Rail
Act 	of 	1980, 	Pub. 	L. 	No. 	96-448, 	94 Stat. 	1895 (1980). 	The 	ICC's 	current
gUIdelines for market dominance determinations were developed in 	Ex Parte
No. 320 (Sub-No.2), Market Dominance Determinations. 365 Le.e. 118 (1981),
aff'd sub nom., Western Coal Traffic League v. 	ICC. 719 F.2d 772 (5th Cir.
1983) (en bane), cert. denied, 466 U.S. 953 (1984).
Some 	refinements 	in 	these 	guidelines 	might 	be 	possible 	to 	better
accommodate 	the 	economic 	principles 	on 	which 	they 	are 	based, 	but 	the
determinations 	that 	would 	be 	needed 	to 	implement 	these 	refinements 	are
likely to be both time consuming and costly relative to the potential gains in
efficiency. 	See McFarland, H., "Ramsey Pricing of Inputs With Downstream
Monopoly 	Power 	and 	Regulation: 	Implications 	for 	Railroad 	Rate 	Setting,"
Journal of Transportation Economics and Policy (January 1986), pp. 81-90.
f',7 <;;:c 	"St:1tcment 	0f 	the 	F~derJl 	Tndc 	C'Jm~:'~i,'., -'n 	f! 	.: .... ~'
Mergers," TrJde Reg. Rep. 546 at 76-79, 8~-85 (June lol, 1982).
68 The 	cou rts 	ha ve 	generally 	upheld 	the 	ICC 	in 	its 	cons idera tion 	of
( these forms of competition. 	Supra footnote 66.
,:·0 S-:~ Lx 	PJrt-: 	:\(1 . .3ol7 (Sub-:\o. 	1). ('In I R:1t-: (;:;!.~-:;:~1:':,. '-if- 	:".'.'.::
(1985)[Slip op. at 	7-9]. 	Total 	cost 	encompasses all 	costs. 	including 	the 	cost
of 	the 	track 	and 	running the 	trains. 	Averagc cost 	is 	lotJl 	cost Jl\iJ-:J 	L'y
the number of units, for eXJmple. totJI costs divided by thc number of tnin
trips on J 	particuIJr route. 	M:nginal cost equals the increment in total cost
attributable to an additional unit of output, the cost of running an additional
trJin 	on 	a 	track 	in 	this example. 	If 	the 	price for each 	train 	trip equaled
the 	marginal 	cost 	of 	the 	trip, 	the 	price 	would 	be 	less 	than 	the 	railroJd's
average 	cost, 	and 	the 	railroad 	would 	not 	earn 	enough 	revenue 	to 	meet 	its
total costs. 	The difference in 	this illustration, would 	include, for example,
the fixed costs of the rails.
22

is achieved, rail routes exhibit economies of scale: that is, the marginal cost
of r3il c:uriage is less than the average cost. 	Where this is true. rates must
exceed 	marginal cost if a railroad 	is to cover total cost including 3 norm:l1
return. 70
The Staggers Act requires that rates be set to permit railroads to earn
"adequate" revenues. 	To satisfy this requirement, the ICC has developed a
flexible regulatory concept known as "constrained market pricing."71 	Under
this 	pricing 	scheme, 	railroad 	rates 	may 	not 	be 	lower 	than 	marginal 	cost.
This 	prevents cross-subsidization 	of 	the carriage of one 	commodity 	out 	of
revenues 	earned 	from 	excessively 	elevated 	rates 	on 	another 	commodity.
Rates may not be higher than "stand-alone cost," which is the lowest cost at
which 	a 	hypothetical 	efficient 	competitor 	of 	the 	railroad 	could 	serve 	the
captive shipper. 	At 	rates 	below stand-alone cost, 	the shipper 	is 	better off
being served 	by the railroad than 	by any competitor, assuming 	that such a
competitor 	were 	in 	fact 	operating. 	Within 	the 	range 	set 	by 	marginal 	cost
Common or joint costs also 	may 	present problems 	in adh.ering strictly
to marginal cost pricing in the railroad industry.
When costs are common, that is two or more products share use of the
same' facilities, some allocation of the common costs is required to establish
the' marginal cost for each product. (For example, both cargo and passenger
trains 	might 	make 	use 	of 	a 	particular' station.) 	Such 	allocations 	may 	be
difficult to make accurately.
When 	costs 	are 	joint, 	that 	is 	producing 	one 	product 	necessitates
producing the oth.er in fixed 	proportion, there is no economically definable
marginal cost that can be attributed to one of the products. 	Some arbitrary
allocation is required to designate marginal cost in this case. 	(For example,
when a railroad hauls a manufacturer's railroad car painted with the name of
a 	product, 	the 	railroad 	provides advertising 	exposure 	for 	that 	company 	as
well 	as 	transporting the car, 	but 	these services cannot 	be separated. 	They
are 	a 	composite 	unit 	and 	the 	costs of 	transporting 	the 	car 	and 	providing
advertising exposure are joint.)
The 	zone 	of 	pricing 	flexibility 	can 	help 	accommodate 	the 	inherent
indecisiveness 	in 	common 	Jrod 	joint cost 	cJI,,:u!.1rions 	-,,;1:'·: 	;~l:l:nLli:,;~; ::,:
marginal 	cost 	framework. 	For 	additional 	discussion, 	see 	Kahn, 	A., 	The
Economics of 	Regulation: Principles and 	Institutions, New 	York: 	Wiley 	and
(Sons, 	Inc., 	1970, 	pp. 	79-83; 	and 	Ex 	Parte 	No, 	347 	(Sub-No. 	I), 	Coal 	Rate
Guide!:":?,. "-"ltii"'nwide (1985).
iO Keeler, 	T., 	RJilroads, 	FreiQht, 	:lnll 	Public 	P,·,ii.:", 	\\:lshington, 	D.C.:
Brookings Institution, 	1983, 	Appendix 	B. 	Keeler 	notes 	that 	many 	railroads
also 	exhibit 	economies 	of 	scope, 	which 	reinforce 	the 	need 	for 	rates 	abo\e
margin31 cost. 	Economies of scope are present when 	the averJge cost of rail
carriage for one commodity decreases as the 	number of commodities ..:arried
increases,
71 See Ex 	Parte No. 347 (Sub-No. 	I), Coal 	Rate Guidelines. Nationwide
(l985)[Slip op. at 4-5].
23

and 	stand-alone 	cost, 	rates 	can 	be 	based 	on 	the 	market 	demand 	for 	rail
service. 72
Constrained market PriCIng is a sophisticated but practical approach to
the 	regulation of 	rates 	where 	railroads 	may 	have 	market 	power. 73 	It can
protect against the exercise of market power while minimizing any potential
anticompetitive 	effects 	of 	adopting 	rate 	flexibility 	and 	does 	not 	stifle
incentives to innovate.
C. Railroad Mergers
The South Carolina statutes restrict railroad mergers that could benefit
consumers 	as 	well 	as 	improve 	the 	competitiveness 	of 	local 	producers 	by
reducing costs. 	Mergers are statutorily forbidden between railroads that can
compete 	in serving any 	pair 	of destinations, 	even 	if 	there 	is 	costly excess
capacity 	on 	both 	parallel; routes 	because 	of 	competition 	from 	trUCking
firms. H 	The 	concern 	apparently 	is 	increased 	market 	power. 	In 	the
presence of competition between different modes of transportation, however,
concern about increased market power based on concentration of ownership
in 	one 	mode 	of 	transportation (the rationale 	for 	restricting 	mergers) 	is 	no
longer 	warranted. 75 	Market 	share 	concentration 	in 	railroads, 	for 	example,
will not lead to market power where trucks, planes, barges, and/or pipelines
are' 	viable 	alternative 	suppliers 	of 	transportation 	services. 	Absolute
restrictions 	on 	railroad 	mergers, 	without, assessment 	of 	actual 	competitive
conditions, may impose higher cost on railroads and 	make them less able to
72 The ICC is encouraging actions on the part of railroads and shippers
that will permit a closer approximation of rail rates to marginal costs. 	One
~xample is the negotiation of mutually beneficial contract rates by railroads
and 	shippers. 	Where 	the 	marginal 	cost 	of 	serving 	a 	particular 	shipper 	is
low, 	a 	contract 	rate 	can 	be 	negotiated 	to 	pass 	on 	the 	cost 	saving 	to 	that
shipper. 	A second example is the abandonment by railroads of routes with
low 	traffic 	volumes 	that 	require 	cross-subsidization 	from 	higher 	rates 	on
other routes.
73 See 	Willig, 	R., 	and 	W. 	Baumol, 	"Using 	Competition 	as 	a 	Guide,"
, Regula tion 	(January/February 1987), pp. 28-35.
The 	ICC's 	decision 	in 	Omaha 	Public 	Power, 	in 	which 	rates 	of 	the
( Burlington "1orthern Railway were found to be unreasonable under the stand-
310nc ,.:ost 	::unJarJ. 	indicatcs 	that 	this 	pri..:ing '<,stC:'l 	,'.111 	h: 	';;'J.-',~n;i\;; t"
the 	concerns 	,.J( 	..:apti\c 	shippcrs. 	Sec 	On1:1ha 	Puh!i..: 	i'",.\", 	f):·t·;.':
Burlington Northern Railroad, No. 38783 (Nov. 20, 1986). 	See also Ark:lnsas
Power and 	Light v. Burlington ~orthern Railroad, i\io. 36719 (\lay 	13. 1'18 7 );
San Antonio. Texas v. Burlington 	Northern 	Railro3d co" 	No, 36180 (Apr. 	11.
1986); Commonwealth 	Edison Co. v. Aberdeen & 	Rockfish 	Railroad Co., '-.;0.
378915 (Aug. 8,1986).
H 	See Code of Laws, Sections 15-17-720 through 	15-17-780, particularly
Section 15-17-740.
75 See Section V.B. of these comments.
24

compete with other transportation industries, such as trucks, and less able to
provide 	specialized 	services 	to 	shippers. 	These 	effects 	are 	likely 	to 	be
detrimental to consumer welfare.
The existence of competition among different modes of transportation
could 	be 	recognized 	by 	subjecting 	proposed 	mergers 	in 	this 	industry 	to
review, 	perhaps 	by 	the 	state's 	attorney 	general, 	under 	modern 	antitrust
merger criteria. 76
D. Taxicabs
South Carolina currently authorizes local governments to fully regulate
entry, prices, and services in the taxicab industry under Section 58·23·1510.
Evaluations 	of 	local 	taxicab 	regulations 	conducted 	by 	the 	FTC 	staff 	and
others 	have 	shown 	that 	many 	of 	these 	regulations, 	but 	not 	all, 	are
anticompetitive. 77 	Anticompetitive regulations 	in 	the 	taxicab industry raise
prices and may reduce the quality of service. 	Cities with fewer restrictions
on 	entry, on 	types 	of 	taxi 	services, and 	on 	minimum 	fares 	have 	generally
experienced 	lower 	fares, 	shorter 	response 	times, 	and 	an 	increase 	in 	the
number of cab hours of service than have cities with extensive res'trictions.
We 	believe 	that 	there 	is 	no 	persuasive 	economic 	rationale 	for
regulations restricting the 	number of cabs, nonconventional types of service
(share-a-ride, dial-a-ride, jitney services),' and 	minimum 	fares. 78 	The 	radio
dispatched taxicab market segment, the dominant type of cab service in most
small 	to 	medium 	size 	cities,79 	has 	characteristics 	associated 	with 	effective
competition. 	Firs~, absent 	government 	restrictions 	on 	entry, 	barriers 	to
entry 	appear 	to be low. 	Sunk costs are evidently 	low since cabs could 	be
76 See the "U.s. Department of Justice Guidelines," 2 Trade Regulation
Reporter 	(CCH) 	Par. 	4490, 	et 	~ 	(June 	14, 	1984) 	and 	"Statement 	of 	the
Federal 	Trade 	Commission 	Concerning 	Horizontal 	Mergers," 	2 	Trade
Regulation Reporter (CCH) Par. 4516 (June 14, 1982).
77 For 	the 	FTC staff 	analysis 	and 	::it3tions 	to 	;'!hc~ r] xi 	~t~Jc~ics, 'cc
Frankena M., and 	P. 	Pautler, An 	Economic An:llvsis of T:lXicab 	Regulation,
Washington, D.C.: Federal Trade Commission, 1984. 	(A copy of this study is
fnclosed.)
~~ Therc 	:<1:ly 	bc 	credible 	theoretic:J1 	r3tion3ks 	:'"r 	:.1X,,::1b 	res;ui.:::,)n;
pcrt1ining 	to 	1111ximum 	f1res, 	li1bility 	insur1ncc, 	.1:hl 	SJI'c:y. 	,):hcr
regulations, such as requirements to offer service or to maintain a minimum
number of cabs in operation, may be justified on efficiency grounds to offset
distortions created by other taxicab regulations, such as 	maximum prices on
some trips that are lower than their costs, (Frankena and 	Pautler, supr3. notc
77,)
79 	Wells. 	J., 	and 	F, 	Selover, 	"Characteristics 	of 	the 	Urban 	Taxicab
Transit 	Industry. 	in 	Wells. 	et 	;!,l.. 	Economic 	Characteristics 	of 	the 	Urban
Public 	Transportation 	Industry, 	Washington, 	D.C.: 	Institute 	for 	Defense
Analysis, 1972, pp. 8-24.
25

shifted from one city 	to another 	if prices rose in one city.so 	(A cab also
could 	also be 	converted 	to personal 	use.) 	Second, consumer 	price scarch 	is
incxpensIve. 	Consumers are 	able 	to search 	Cor 	the 	best fare 	by 	phone and
cab companies can make their presence known 	to consumers 	by advertising
and phone listings. 	Third, other modes of transportation or cabs from other
jurisdictions can provide competition in some situations. 	In short, there are
no 	market 	failures 	that 	would 	lead 	to 	a 	need 	for 	regulation 	of 	radio-
dispatched taxicabs.
Local 	taxicab 	entry 	and 	mInImum 	fare 	restrictions 	may 	have adverse
effects 	on 	consumer 	welfare, 	as 	described 	above 	and 	in 	Section 	IlL 81
Because local regulations that are authorized by a state may be exempt from
antitrust 	scrutiny,82 	anticompetitive 	regulations 	may 	persist. 	The 	Council
may 	wish 	to 	recommend 	that 	the 	South 	Carolina 	legislature 	rescind 	local
authority 	to 	regulate 	taxicab 	entry 	and 	prices, 	thereby 	removing 	their
antitrust immunity.
E. Moribund Transportation Industries
The 	SCPSC 	has 	authority 	to 	regulate 	entry, 	rates, 	and 	services 	of
street trolleys, canals, and steamboats under Chapters 15 and 21 	of the Code
of Laws. 	Street trolleys, canals, and steam boats are now of little economic
sig~ificance in large part because of strong competition from other modes of
transportation 83 	and 	regulations 	governing 	entry 	and 	pricing 	of 	these
80 If a firm .can enter or leave a market without impediments and can
recover 	all 	of 	its 	entry 	costs 	when 	it 	leaves 	(i.e., 	there 	are 	no 	sunk 	or
irretrievable 	costs), 	the 	market 	is 	said 	to 	be 	contestable. 	If 	a 	market 	is
contestable, even transitory efforts to exercise market power can 	be readily
undermined 	by 	"hit-and-run" entry. 	See 	Baumol, 	W., 	"Contestable 	Markets:
An 	Uprising 	in 	the 	Theory 	of 	Industry 	Structure," 	American 	Economics
Review 72:1 (March 1982), pp. 1-15.
81 Supra note 9.
62 See generally Town of Hallie v. City of Eau Claire, 	105 S. Cc 	1713
,(1985); Parker v. Brown, 317 U.S. 341 (1943).
(
83 For 	a 	discussion 	of 	compctition 	among 	(iiffercnt 	mndcs 	,~f
tr:1nsp')l"t:1ri,jn 	In·j 	subsequent 	shifts 	in 	m:lrket 	sh~lr:': ,)\ cr 	rime. 	0:'::': 	~':r
:,;umpk, 	Lucldin, 	D., 	ECt)nomi.:s 	of 	Tr:lnsport:ltion, 	!1omcwoc,J. 	Ill.: 	Ir\\in.
1966. Chapters 2 and 5. 	For more detailed accounts of these transportation
modes 	in 	South 	Carolina, see 	The 	Columbia 	Can:ll 	StudY, 	Columbia, 	South
Carolina: 	W. 	Smith 	and 	Associates, 	1979 (indicates 	that 	modern 	use 	of 	the
canal 	has 	been 	primarily 	for 	power 	generation); 	Holis, 	D. 	W.. 	"Costly
Delusion: Inland Navigation in the South Carolina Piedmont," reprinted from
Proceedings of the South Carolina Historical Association, 1968 (indicates that
canals were commercially viable only prior to competition from 	railroads in
the 	1840s); Pogue, N., South Carolina Electric and Gas Company 	1846-1964,
Columbia, South Carolina: SCE&G, 1964; McQuillan, D., "The Street Railway
and the Growth of Columbia, South Carolina, 1882-1936," unpublished masters
26

(
services, therefore, are likely to be unnecessary. 	Such regulations may also
restrict competition 	where 	these 	forms 	of 	transportation 	are 	still 	in 	use 	or
could 	be 	revi\ed. B4 	In 	view 	of 	widespread 	competition 	betwe~n different
modes 	of 	transportation, 	advances 	in 	transportation 	technology, 	and 	the
economic 	decline 	of 	these 	industries, 	the 	Council 	may 	wish 	to 	consider
recommending that these provisions be eliminated.
thesis, 	University 	of 	South 	C3rolina, 	Columbia, 	S.c.. 	1975: 	Langley..-\ ..
Trolleys 	in 	the 	Vallev, publisher 	unknown, 	1972. 	The 	l::lst 	three ref-:rences
above 	indicate that 	trolley service 	in South Carolina 	W::lS termin::lted 	in 	the
1930s 	after 	more 	than 	a 	decade 	of 	decline 	due 	to 	bus 	and 	automobile
competition.
84 The 	risk 	of 	restrictive 	regulation 	of 	rates, 	entry, 	and 	service
characteristics 	could 	discourage 	innovative 	services 	or 	rate 	structures 	that
could revive use of these modes of transportation.
27

VI. 	UTILITIES
A. Electrical Utilities
The 	SCPSC 	regulates 	entry, 	rates, 	and 	services 	of 	electric 	and 	other
utilities under authority of Chapters 5 and 27 and Articles 3, 4, 5, and 7 of
Chapter 	103. 	Regulation of electric utilities has traditionally been based on
the fact 	that 	the 	industry was arguably a 	natural 	monopoly. 	Economies of
scale in generation, transmission, and distribution of e;_~tric power coupled
with high costs of transmitting electricity over large distances (more than a
few 	hundred 	miles) made service to 	individual customers by 	multiple firms
unlikely. 	Low cost transmission could permit competition despite economies
of scale, but this was regarded as impracticable in the past. 85
Rapid 	technical 	change 	affecting 	electric 	utilities, 	however, 	suggests
that 	regulation 	of 	production 	and 	transmission 	of 	electricity 	may 	be
unnecessary 	and 	anticompetitive 	in 	the 	near 	future. 	New 	.technological
developments 	in 	the 	production and 	transmission 	of electricity suggest 	that
independent 	power 	producers 	may 	soon 	be 	able 	to 	compete 	effectively 	to
serve' distribution 	networks 	in 	both 	nearby 	and 	distant 	areas, 	thereby
reducing or eliminating the natural monopoly aspect of electricity production
and 	transmission 	that 	has 	been 	the 	rationale 	for 	regulation. 86 	Such 	a
85 Penn, 	D., 	J. 	Delaney, and 	T. 	Honeycutt, 	Coordination, 	Competition,
and 	Regulation 	in 	the 	Electric 	Utility 	Industry, 	Washington, 	D.C.: 	U.S.
Nuclear Regula tory Commission, 1975.
86 An 	example 	of 	supply 	from 	outside 	a 	service 	territory 	is 	Public
Service 	of 	New 	Mexico's 	plan 	to 	build 	a 	coal 	plant 	in 	its 	own 	service
territory dedicated to producing electricity primarily for southern California,
an 	area 	outside 	of 	its 	service 	territory. 	Some 	states 	are 	encouraging 	co-
generation 	(production 	of electricity 	in connection 	with some other activity
su-::h 	as 	manufacturing) 	and 	expansion 	ot' 	regional 	grids 	(net 	\\OrI-;5 	l)t'
transmission 	lines that allow neighboring utilities to share power) ostensibly
·to 	increase 	reliability 	and 	energy 	efficiency, 	but 	both 	of 	these 	actually
"involve 	further 	separating 	distribution 	from 	production 	of 	power. 	See
Busine,s 	Week. 	"Is 	Deregulation 	Working?" 	(December 	~~. 	\C)86), 	rp. 	50-55:
PlJlhck.\,. 	"'\or.-l.'tility 	Electricity 	Rising." 	;'\:C\\ 	yc,f"I, 	Ti:n~" 	(\II'2,>r 	1:.
1987), 	pp. 	01 	and 	03; 	Pollack, 	A., 	"Shopping 	Around 	for 	t:kctri~ Po\\cr,"
:'-Jew 	York 	Times 	(August 	13, 	1987), 	pp. 	01 	and 	05; 	and 	Rose, 	F., 	"Duke
Power Is Considering Taking Over Idle Plant From Utility Sought by PG&E,
\Vall Street Journal (September 8, 	1987), p. 36. 	Co-generation may be a form
of competition from alternative energy sources. 	Some natural gas producers
reportedly 	offer 	low 	enough 	rates 	to 	large 	industrial 	customers 	th:n 	the
plants have an incentive to produce their own electricity and sell any excess
rather 	than 	buy 	electricity 	from 	the 	local 	utility. 	See 	Paul, 	W., 	"Electric
Utilities 	Push 	New 	Marketing 	Plans 	To 	Meet 	Competition," 	\Va II 	Street
Journal (September 15, 1987), pp. I and 23.
Organizing an 	industry as a combination of regulated and 	unregulated
28

system would permit consumer access to the lowest cost available power and
encourage 	utilities 	to 	locate 	generating 	plants 	at 	the 	most 	efficient 	sites.
While electric utility deregulation may be premature at this time, the Council
may 	wish 	to 	alert 	the 	legislature 	to 	the 	anticipated 	deregulation
opportunities presented by technological advances. 8T 	The Council might also
wish 	to 	recommend 	that 	the 	SCPSC 	be 	requested 	to 	periodically 	evaluate
utilities deregulation opportunities.
B. Telegraph Services
The SCPSC regulates telegraph entry, rates, and services under Chapter
9 and Article 6 of Chapter 103 of the Code of Laws. 	Abundant competition
from 	alternative 	forms 	of 	rapid 	message 	delivery 	services, such 	as 	express
mail, electronic mail, computer networking over telephone lines, and regular
telephone communication, however, probably make regulatory concern about
market 	power 	in 	telegraph; services 	unnecessary.88 	To 	the 	extent 	that
regulation 	actually 	changes 	telegraph 	rates 	or 	entry, 	it 	is 	likely 	to 	be
anticompetitive 	because 	it 	may 	inhibit 	innovation 	and 	restrict 	competition
between 	different 	modes of 	telecommunications. 	The Council 	may 	wish 	to
recommend that telegraph services be deregulated. 	.
firms 	at 	different 	stages 	of 	production 	is 	not 	a 	new 	concept. 	In 	South
Carolina, for 	example, several 	natural 	gas. pipelines are able 	to 	compete to
supply 	local 	gas 	utilities 	that 	in 	turn 	operate 	the 	house-by-house 	natural
monopoly networks of pipes in the state. 	An ongoing FTC staff analysis of
Form 	2 	reports 	submitted 	by 	natural 	gas 	companies 	to 	the 	Federal 	Energy
Regulatory 	Commission (FERC 	Form 	NO.2: 	Annual 	Report of 	Natural 	Gas
Companies 	(Class 	A 	and 	Class 	B), 	Washington, 	D.C., 	Federal 	Energy
Regulatory Commission, 	1983) indicates that there arc at least four potential
bidders (separate companies with pipelines passing through the area or within
100 	miles) 	to 	supply 	natural 	gas 	to 	utilities 	in 	each 	of 	South 	Carolina's
standard 	metropolitan 	statistical areas (SMSAs). 	Similar competition occurs
between 	natural 	gas 	producers 	in 	supplying 	pipelines. 	See 	Braeutigam, 	R.,
"The 	Deregulation 	of 	Natural 	Gas 	Pipeline 	Industry," 	in 	Weiss, 	L., 	and 	M.
KI:1ss. 	cdts., 	Case 	Studics 	in 	RCQuhtion: 	Rcvolution 	:1nd 	Ref0rnl. 	[l,-,ston:
Little, 	Brown 	and 	Co., 	1981; and 	MacA voy, 	P., 	Price 	Formation 	in 	Na tural
Gas Fields: A Stud v of Competition. Monopsonv, and Rcgulation, New Haven,
Conn.: Yale University Press, 1962.
( 	South 	Carolina 	also 	has 	released 	wholesale 	distributors 	of 	\Vatcr 	from
rate regul:ltiCin. 	Sec scction 58-5-40.
87 We understand that the SCPSC statutes are reviewcd every six ye3rs.
88 See 	Brock, 	The 	Telecommunications 	Industrv, 	Cambridge. 	rvbss.:
Harvard 	University 	Press, 	1981, 	particularly 	Chapters 	2, 	4, 	7, 	and 	10 	for
economic 	models 	and 	the 	history 	of 	competition 	bctween 	altcrnative
electronic 	communication 	technologies. 	See 	also Sorkin, 	The 	Economics 	of
the 	Postal 	System, 	Lexington, Mass.: 	Lexington 	Books, 	1980, Chapter 	7; and
Irwin, 	Telecommunications 	America: 	M:uket 	without 	Boundaries, 	Westport,
Conn.: Quorum Books, 1984, Chapter 6.
29

VII. SPECIFIC PROVISIONS IN THE STATUTES
Several specific South Carolina statutes explicitly restrict the variety of
serv ices 	that 	transporta tion or 	uti Ii ty 	fi r ms ca n prov ide, there by i ncreasi ng
costs 	unnecessarily 	or 	discouraging 	innovation. 	The 	Council 	may 	wish 	to
recommend that these provisions be modified or eliminated.
Distortions in Carload and Less-Than-Carload Rates
Section 	103-38 	forbids 	charging 	more 	for 	less-than-carload 	(LTC) 	lots
than 	for 	carload 	lots. 	Because 	less-than-carload 	lots 	may 	cost 	more 	to
route, monitor, and handle, regulations dictating that LTC lots be priced no
higher than carload lots may force railroads to abandon some LTC traffic or
to reduce 	LTC service in some other way to compensate for increased costs
and 	lower 	prices. 	Consequently, 	this 	provision 	has 	the 	potential 	to 	reduce
quality of service for LTC lotS. 89
Grain Surcharge Rates Unrelated to Costs
. Section 	103-50 	mandates 	that 	shippers 	pay 	a 	20% 	rate 	surcharge 	on
grain movements that include cleaning and grading of the grain, but it is not
clear that 	the 	cost 	of 	cleaning 	and 	grading 	is 	uniformly 	equal 	to 	20% of
normal 	rates 	for 	any given shipping distance. 	Consequently, this 	provision
will likely give railroads incentives to compete through excessive services (if
costs are 	less 	than 	20% of 	normal 	prices) or 	to skimp on services (if costs
exceed 	20% 	of 	normal 	rates). 	Alternatively, 	this 	provision 	might 	distort
normal prices as railroads tried to make the average combined fare equal to
costs. 	Adjustments 	in 	service 	to 	meet 	particular 	shippers' 	needs 	are 	also
'excluded by this fixed surcharge provision.
Restrictions on Transfers of Ownership of Motor Carriers
Section 	103-155 	makes 	it 	illegal 	to 	transfer 	ownership 	of 	a 	trucking
firm's 	route 	::Iuthority 	without 	permission 	of 	the 	SCPSc. 	Tr::lnsrcrs 	::Ire
generally 	economically 	unobjectionable 	and 	may 	increase 	efficiency 	and
competition. 	Hence the Council may wish to recommend that this provision
be limited to the safety and market power considerations that are applied to
f 	all 	motor 	c::lrriers. 	Elimination 	of 	trucking 	route 	certification 	would 	::Ilso
m::l \-.. c t his p r0 \ is i .) n Il1 0 0 t.
Rail Prices Fixed Regardless of Demand
Section 	58·17·1870 	requires 	that 	railroads 	fix 	the 	price 	for
transportation 	of 	melons 	before 	the 	season 	and 	offer 	this 	fixed 	price
regardless of demand. 	The 	intention of the statute is apparently to protect
89 If 	railroads 	attempted 	to 	discriminate 	against 	LTC 	shippers,
arbitragers could organize LTC lots into carload 	lots and 	thus frustrate 	the
discrimi na tion.
30

melon 	growers 	against 	opportunistic 	price increases after 	the 	growers 	ha ve
incurred 	most of the costs of production. 	However, because of competition
[rom 	trucks. 	concern 	about 	opportunistic 	price 	Increases 	JgJinst 	melon
growers 	by 	railroads 	may 	be 	unfounded. 	Also, 	this 	provision 	places 	the
entire 	risk 	regarding 	fluctuations 	in 	the 	volume 	of 	melons 	shipped 	on 	the
railroads. 	Faced 	with 	this 	legislative 	constraint, 	railroads 	may 	have
incentives 	to set 	rates 	high 	enough 	to cover 	the contingency 	that 	the crop
will be so large that costly extra equipment will be required. 	If the crop is
instead normal or smaller than normal, so that extra equipment need not be
used, contract rates may be higher than they would have been 	without this
regulation. 	If 	a 	problem 	of 	opportunism 	really 	exists, 	a 	better 	solution
might 	be 	to 	allow 	the 	railroads 	to 	negotiate contracts 	with 	farmers 	before
the 	season. 	Such 	contracts 	could 	call 	for 	higher 	prices 	only 	when 	the
railroad's costs are higher.
Matching Service Costs to Prices
Sections 	58-17-1970 	through 	58-17-1990 require 	that 	a 	railroad's 	prices
differ only on the basis of the distance of the haul and the type of cargo
being carried. 	This provision, 	while 	intended 	to avoid discrimination, may
actually 	require 	discrimination 	in 	some 	cases 	if 	services 	that 	cost 	less 	to
provide 	must 	nonetheless 	be 	priced 	the 	same 	as 	high-cost 	services. 	Costs
mi'ght differ for a variety of reasons that are unrelated to the distance and
the cargo, such as, for 	example, different operating conditions on different
lines, different degrees of variation in demand on different lines, different
equipment 	requirements, 	etc. 	These 	sections 	also 	exclude 	temporary
introductory 	or 	promotional 	rates 	and 	"meeting 	competition" 	from 	other
modes of transportation.
Stora ge Cha rges
Section 	58·17-2020 	allows 	the 	SCPSC 	to 	fix 	storage 	charges 	for
railroads 	irrespective of the costs of providing this service. 	This provision
may 	cause 	distortions or 	perverse 	incentives 	whenever 	the 	established 	rates
differ from 	the actual costs. 	The value of alternative uses of storage space
is likely to ch:lnge frcquently :lnd unprcdict:lbly. 	Hence. reg~J!:1ted nrc, ~1rC
unlikely 	to 	match 	competitive 	rates. 	For 	example, 	if 	a 	harvest 	is
particularly good, demand for storage is likely to be high. 	Maintaining low
regulated storage rates may deprive those who have the greatest demand (are	(
willing to pJy the most) for storage facilities of Jccess to them.
\l:nil11l1l11 D:;ii\Cf\ 	Timc Regu!:lrions
Section 	58-13-110 	specifics 	maximum 	delivery 	rimes 	[or 	shipments 	by
railroads once a shipper requests "rapid" delivery. 	Railroads are required to
provide 	rapid delivery upon 	request. 	There is no provision allowing higher
rates 	on 	these 	rapid 	delivery 	requests 	and 	no 	provision 	permitting 	lower
rates for shippers who promise to forego their legal right to rapid delivcry.
The 	rapid
different 	modes
interested 	in 	the
delivery 	requirement 	may 	impede 	competition 	between
of 	transportation. 	In 	particular, 	some 	shippers 	mJy 	be
very 	lowest cost delivery possible Jnd 	would 	be willing to
31

(
forego the quick service option, if the price were lower. 	Railroads may not
be able 	to compete 	for 	this 	low 	price 	business 	because 	their 	rates 	must 	be
high 	enough 	to 	cover 	the 	possibility 	that 	some 	shippers 	will 	request 	free
rapid 	delivery 	that costs 	the railroads more to provide. 	Without 	the 	rapid
delivery requirement (or with an option allowing shippers to forego the right
to rapid delivery) the railroads could offer a lower rate that could increase
competition between trains and other forms of transportation.
Supply Cost Considerations Excluded from Reassignments of Service Areas
Section 	58-27-650 	forbids 	consideration 	of 	rates 	in 	assigning 	service
territories to utilities. 	This provision prevents use of information that could
be 	useful 	in 	making 	service 	area 	reassignments. 	The 	competitiveness 	of
South 	Carolina 	industries 	and 	the 	welfare 	of 	South 	Carolina 	consumers 	is
improved 	when 	lower 	cost 	utility 	service 	is 	substituted 	for 	higher 	cost
service. 	In 	fact, 	one 	way; to encourage efficiency 	by 	utilities is to 	permit
competition 	for 	transfers of consumers 	in 	contestable 	areas 	based on 	lower
costs of service.
Accounting for Unrelated Investments
. Section 	58-27-1030 	requires 	regulated 	utilities 	to 	keep 	separate 	books
for 	unregulated 	activities 	related 	to 	appliance 	sales. 	We 	believe 	that 	this
provision 	is 	intended 	to 	prevent 	uti.lities 	from 	subsidizing 	unrelated
businesses at the expense of their utility customers. gO 	Although, the section
in 	question contains language designed 	to prevent 	utilities from excessively
investing in the sale of appliances, this provision is probably too narrow to
curtail 	adverse 	e'ffects 	generally. 	A 	broader 	provision 	requiring 	separate
accounting 	for 	all 	activities 	not 	directly 	related 	to 	production 	and
distribution of electricity might provide better control of cross-subsidizations
'of 	this 	type 	without 	preventing 	cost 	savings 	associated 	with 	the 	joint
production of regulated and unregulated goods.
Excessive Liabilitv
Section 58-17-950 m:lkes owners of the common stock or some 	r:1illl~<1ds
liable 	for 	the 	obligations of 	these 	railroads 	up 	to 	an 	amount 	greJ.ter 	than
90 Extensions of business into unregulated areas such as this ha\e been
the 	focus 	of 	considerable attention. 	The 	primary concern 	is 	known 	as 	the
Averch-Johnson effect: when the allowed rate of return for a regulated firm
exceeds 	the 	cost 	of 	capital 	by 	even 	a 	small 	amount, 	the 	firm 	has 	an
incentive to enlarge its 	rate base e.g., by investing in 	unregulated businesses
and 	including 	these 	investments 	in 	its 	rate 	base. 	This 	creates 	a 	cross-
subsidization 	from 	utility 	customers 	to 	the 	customers 	of 	the 	unrelated
business 	and 	accompanying 	distorted 	prices 	and 	misallocated 	resources 	in
both markets. 	See A verch and Johnson, supra note 10.

.:
the value of their investment. 91 	This provision increases the risk of owning
these 	particular 	rail stocks and 	thereby 	increases the 	cost of equity c:lpitJI
for 	these 	firms. 	If 	this 	provision 	still 	Jpplies 	to 	any 	currently 	operating
firms, it may be so unusual that some investors may be deceived about the
level 	of 	risk 	that 	they 	are 	assuming. 	This 	provision 	appears 	to 	be
unnecessarily restrictive and potentially anticompetitive .
....
91 Investors 	are 	liable 	for 	the 	value of their 	investment 	plus 	five 	per
cent 	of 	the 	par 	value 	of 	the 	issue. 	Normally, common stock 	investors are
liable 	up 	to 	the 	value 	of 	their 	investment. 	Section 	85-17-950 	applies 	to
railroads 	incorporated 	under 	the 	Constitution 	of 	1868 	and 	prior 	to 	the
adoption of the Constitution of 1895.
33

VIII. 	CONCLUSION
We 	believe 	that 	several 	features 	of 	South 	Carolina's 	Public 	Service
Commission 	statutes 	are 	likely 	to 	have 	anticompetitive 	effects, 	and 	the
Council may wish to propose that these features be revised or eliminated.
First, entry and rate regulation of telegraph and transportation services
is likely to stifle competition both within and between industries. 	Conditions
within 	these 	industries 	make 	it 	unlikely 	that 	market 	power 	or 	predatory
behavior 	will 	be 	present. 	Where 	regulation 	of 	entry 	and 	rates 	has 	been
relaxed or rescinded, consumers 	have generally benefited. 	For the few 	rail
routes where market power may still be a potential problem, rate restrictions
that preserve both pricing flexibility and the incentives to innovate may be
used effectively.
Second, 	impending 	changes 	in 	technology, 	particularly 	for 	electric
utilities, 	may allow 	competition 	in 	utilities 	markets 	heretofore 	regulated as
nafural 	monopolies. 	To avoid 	prolonged 	application 	of 	current 	regulations
when 	technological 	changes 	make 	deregulation 	preferable, 	states 	such 	as
South Carolina may benefit from periodically reviewing the justifica tion for
continued rate and entry regulations for utilities.
,
Third, 	continued 	restrictions 	on 	mergers 	between 	railroads, 	without
regard 	for 	competition 	from 	other 	modes 	of 	transportation, 	may 	be
anticompetitive 	and 	detrimental 	to consumer 	welfare. 	Mergers 	may 	reduce
costs and increase efficiency in the railroad industry. 	When railroads' costs
are higher than necessary, t.hey are unable to provide either optimal services
for shippers or strong competition to other modes of transportation.
Fourth, 	unrestricted 	grants of state authority 	to local governments for
regulation 	of 	taxicab 	scrviccs 	ma:.-· 	shield 	anticompetiti'.c 	restrictions 	on
entry, prices, and types of taxicab services offered.
Finally, specific pricing and service requirements in the SCPSC statutes	(
may 	disco' "1ge cfficient contracting for 	transportation 	and 	utility 	scnices.
thercby in'_i~':1sing costs and/or reducing competition.
34