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The Transition to Deregulation: Developing Economic Standards for Public Policies.

This is hardly a book one would read voluntarily from cover to cover. It is much more useful as a reference book which treats various policies that have been argued before regulatory bodies and courts since the 1970s.

The book is principally a collection of previously published articles, as well as verified statements presented in Interstate Commerce Commission proceedings, sometimes revised and updated. The author notes in his preface that some overlap may exist, but that it is offset by his intention that each chapter be a self-contained response to a particular issue. In fact, however, repetition is far from minimal. Yet to read it as a whole makes it possible to obtain a good understanding of what was going on in rail regulation in the post-Staggers era.

Most of the issues discussed have been faced in railroad regulation as a result of efforts to apply the 4-R and Staggers Acts. However, the book is offered partly as a guide to regulatory transition in other industries as well. Applications to oil and gas pipelines and to electric utilities frequently are noted. Chapters 3.1 and 3.2 on rate of return regulation are more relevant to other industries than to railroads. Competitive access has also been dealt with in utility and gas pipeline cases as demonstrated in the Chapter 7.1 examination of the essential facility doctrine.

The author notes that the literature designed to promote regulatory revision avoided, in its zeal, considerations bound to arise when moving from a long-standing pattern of regulation toward a regime designed to maximize competition. In the rail industry the problem is confounded by incompatible objectives embraced by the Staggers Act, e.g. maximum reliance on competitive forces, protection of captive shippers, and revenue adequacy for the carriers. He argues that successful transition must be guided by a theme and states that two themes guide his book: "1. maximize the success of the greatest reliance--when justified-- upon competitive markets and traditional remedies in the new long-run equilibrium and 2. conversely minimize the need for intervention by traditional regulatory methods." The objective becomes clearer in Chapter 2.1, coauthored with John R. Meyer, where the obstacles to a contractual equilibrium posed by sunk costs and prior contractual agreements are considered. "A clean slate for negotiating a market-driven contract...will emerge only as the previously committed capital (sunk cost) is amortized." Until then residual regulatory constraints are called for on a self-terminating basis, but without creating insurmountable barriers to a market-determined outcome in the long run.

The book deplores much that the Commission has done during the period since 4-R and Staggers. The several sections of Chapter 4 which deal with market dominance determinations are highly critical of the standards which the Commission has sought to impose. The revenue/variable cost test is judged to be entitled to greater respect as an indicator of possible market dominance. Indeed, an unusually high R/VC ratio coupled with constraints on shipper choice of mode and carrier ought to be considered prima facie evidence of such dominance. Geographic and product competition are shown to have limited usefulness as tests of captivity, particularly in the case of utility coal where the controversy has centered.

Chapter 5 deals in six segments with the problems of pricing in monopoly and competitive markets. The difficulties of applying Ramsey pricing and the Commission's stand-alone cost concept and alternative constructs are examined. Also scrutinized is the Commission's use of R/VC ratios to determine reasonable rates for traffic which is captive in the short run.

Since the book argues that competitive alternatives within the rail industry are essential to reliance on market forces in the long run, it is highly critical of Commission merger and access policies. Indeed, merger policy became highly permissive until Santa Fe-Southern Pacific came along. Moreover, the Commission ceased to apply protective provisions and proposed retroactive repeal of DT&I conditions. The author admits a difficulty in enforcement, but may underestimate it in the absence of complaint until diversion has gone too far for correction. This reviewer was astonished at the speed with which Penn Central was able to divert traffic from the Reading after the 1968 merger despite protective conditions and deterioration of Penn Central service. Prescribed trackage rights are offered as a corrective, and Chapter 6.4 seeks a means for pricing such rights on equal terms.

Despite a method provided by Staggers for surcharging prescribed divisions of joint rates that had become unduly low, carriers usually resorted to cancellation of joint rates over junctions which short-hauled the cancelling carrier. The preference to cancel rather than renegotiate may simply reflect the intractability of divisions cases historically and the necessity to control originating and terminating traffic in order to secure reciprocity from connections. The tactics employed prior to the Hepburn Act of 1906 are not explored here. But the Commission's refusal to stand in the way of wholesale cancellations is deplored. Concern is with shippers' access to competitive routings. Nothing is said about the fate of carriers heavily dependent on overhead traffic to nourish service needed by shippers local to their lines. One gets the impression that much of the argument turned on simplistic examples rather than systemwide considerations.

The theory of vertical foreclosure offered by the Chicago School is dismissed as a means to secure efficient routing, its alleged purpose, because of the inability to negotiate a perfect price squeeze. Such a squeeze would require zero transaction costs and perfect information about the connecting carrier's incremental costs and delta. Indeed it becomes apparent that the voluntary negotiations approach is offered principally not out of concern for static efficiency, but rather for the revenue adequacy of the singe-line carrier. A revenue/variable cost test is offered as the appropriate resolution of the pricing problem and Chapter 7.4 argues its incentive compatibility. As in the case of trackage rights it seems likely that the reopening of gateways would have to be forced by the Commission and the basis of divisions prescribed.

Much of the controversy recorded in this volume occurred in the early years following Staggers. Few references note verified statements filed subsequent to 1984. Presumably after more than a decade of experience with Staggers, considerable progress has been made toward the contractual equilibrium suggested by Chapter 2.1. The lessons offered should, however, be helpful to regulatory transition in other industries.
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Author:Williams, Ernst W.
Publication:Transportation Journal
Article Type:Book Review
Date:Sep 22, 1992
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