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Chapter 3 TRANSPORTATION REGULATION AND PUBLIC POLICY Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Understand the bases for the regulation of transportation in the United States 2. Appreciate the roles of regulatory agencies and the courts in regulating transportation 3. Obtain a knowledge of previous and current regulations affecting transportation 4. Understand the need for a National Transportation Policy 5. Identify and assess the need and roles of public promotion in transportation 6. Appreciate the role of user charges 7. Obtain a knowledge of transportation safety and security regulations in the United States Chapter Overview Transportation has long been a critical component of every world economy. From the development of the Egyptian empire because of the Nile River to the establishment of colonies on the east and west coasts of the U.S. because of ocean transportation, transportation has allowed civilizations to expand through trade with other countries. Because of its impact on a nation’s economy, many countries have developed policies and regulations for transportation to assure a safe, reliable, and fair transportation network for their citizens. This chapter will examine the basis of this regulation, along with the roles of the regulatory commissions and the courts. A discussion of the development of transportation regulation from its inception at the Federal level in 1887 to its role today will be presented, along with the national transportation policies directing and promoting transportation and national security. Nature of Regulation There has been a long history of governmental regulation and control. The amount of governmental control and regulation has increased as the United States has grown and prospered. The expansion of governmental influence, however, has been necessitated to some extent by the increase in the scope of activity, complexity, and the size of individual firms. The imperfections in the marketplace in a free enterprise economy provide the rationale for governmental control. This control can take one of several forms; maintaining or enforcing competition, substitute regulation for competition or the government can assume ownership and direct control. The institutional framework for regulating transportation is provided by federal statute. A perspective on the overall legal basis for regulation is important to the student of transportation. Common and Statutory Law The legal system of the United States is based upon common law and civil or statutory law. Common law relies upon judicial precedent, or principles of law developed from former court decisions. Statutory law or civil law is based upon the Roman legal system and is characteristic of continental Europe and the parts of the world colonized by European countries. There is a very close relationship between common law and statutory law as many statutes were in effect copied from common law and need to be interpreted by the courts. The regulation of transportation began at the state level with the development of state laws, and later federal laws which gave rise to independent regulatory commissions. Role of the Independent Regulatory Commission The federal government is set up the Interstate Commerce Commission (ICC) which exercised legislative, judicial, and executive powers. On December 31, 1995, the ICC was abolished and replaced it with the Surface Transportation Board (STB). The role of the STB has been greatly reduced as congress intended the marketplace to be the primary control mechanism for rates and services. Today, the STB exercises economic controls primarily over railroads. The Federal Maritime Commission (FMC) administers the regulations imposed on international water carriers. The FMC exercises controls over the rates, practices, agreements, and services of common water carriers operating in international trade and domestic trade to points beyond the continental United States. The Federal Energy Regulatory Commission (FERC) was created to administer the regulations governing rates and practices of oil and natural gas pipelines. Role of the Courts The courts are the sole judges of the law, and only court decisions can serve as legal precedent under common law. The courts make the final ruling upon statutes and the interpretation of the legislation. The courts act as a check upon arbitrary or capricious actions, actions that do not conform to statutory standards or authority, or actions that are not in accordance with fair procedure or substantial evidence. Over the years, the courts had come to recognize the ICC as an expert body on policy and the authority on matters of fact and, to some extent, the STB. Safety Regulations Various federal agencies administer transportation safety regulations. Some of these regulations are enacted into law by Congress, whereas others are promulgated by the respective agencies. These include the Federal Aviation Administration (FAA) governs the operation of air carriers and airports. The Federal Motor Carrier Safety Administration administers motor carrier safety regulations, and the National Highway Traffic Safety Administration has jurisdiction over safety features and the performance of motor vehicles and motor vehicle equipment. The Federal Railroad Administration exercises railroad safety regulations, and the Coast Guard is responsible for marine safety standards for vessels and ports. The newly created Pipeline and Hazardous Material Safety Administration (PHMSA) contains a Pipeline Safety Office that is responsible for hazardous materials standards for oil and natural gas pipelines and a Hazardous Materials Safety Office that manages hazardous materials regulations for all other modes of transportation. The National Transportation Safety Board is charged with investigating and reporting the causes, facts, and circumstances relating to transportation accidents. The states exercise various controls over the safe operation of vehicles and on occasion these safety regulations can conflict with federal safety regulations. After the September 11, 2001 transportation safety has taken on a new dimension of national security. Securing the nation’s transportation system from terrorism became a major governmental focus but the free flow of commerce within the 50 states makes it very difficult to increase security measures without curtailing commerce. The responsibility for transportation security has been given to the Department of Transportation and the Department of Homeland Security and to agencies within the departments. State Regulations The states establish various transportation safety and exercise limited economic regulation over the transportation of commodities and passengers wholly within the state. States generally cannot impose stricter regulation than that imposed on that mode at the federal level. The intrastate economic regulations vary from state to state, but they are generally patterned after federal economic regulations and in 1994 the federal government eliminated the intrastate economic regulation of motor carriers except household goods carriers. The determination as to what constitutes commerce subject to state economic regulations is generally based on whether the shipment crosses a state line. The move within the state from the distribution center to the final destination can be considered interstate commerce and subject to federal regulations. Development of Regulation Transportation does not operate in a completely free market environment. Transportation regulation has been a major force shaping the transportation industry. Without a sound transportation system, the level of economic activity, the exchange and movement of goods and services, would be greatly limited and the well being of the citizens reduced. Thus, government involvement has been directed toward ensuring that the public has equal access to an economically viable transportation system. Current Economic Regulations The air carrier industry is deregulated and cargo and passenger rates are not controlled. Economic regulation over pipelines has been transferred to the Federal Energy Regulatory Commission. As most water carrier operations are exempt from economic regulation is a now moot issue. The Surface Transportation Board administers the remaining economic regulations exercised over railroads. Motor carrier economic regulation has been drastically altered as the requirements to file tariffs and the control over rates has been removed. Carriers are liable for the full value of damaged freight but are permitted to use release value rates to limit their liability and any motor carriers can contract with shippers. Antitrust Laws in Transportation The Sherman Antitrust Act first established antitrust regulations. The key points of this act are that trusts and other devices used to restrain trade are illegal as are monopolies. The Clayton Act described some other practices that would be interpreted as attempts to monopolize or actual monopolization. The Federal Trade Commission (FTC) is the primary overseer and enforcement agency in this business practice area. The repeal of those parts of the Interstate Commerce caused this practice to become subject to the antitrust laws. Collective rate making over single line rates of rail, motor, air, and household goods carriers is not allowed by law. The Robinson Patman Act of 1936 which prohibits price discrimination to the buying and selling of goods and it may be possible that this law might be applied in carrier pricing. There are two types of antitrust violations can occur, per se violation and the rule of reason. Carriers may be subject to antitrust regulations and because transportation has been subject to antitrust laws only since around 1980 shippers are also subject to these same laws and are at an equal risk of committing an antitrust violation. This theory has not yet been fully tested in court. TRANSPORTATION POLICY The federal government’s policy toward transportation is a composite of federal laws, rules, funding programs, and regulatory agencies and there are more than 60 federal agencies and 30 congressional committees are involved in setting transportation policy. WHY DO WE NEED A TRANSPORTATION POLICY? The transportation system ties together the various communities of a country, making possible the movement of people, goods, and services. Transportation is fundamental to the economic activity of a country. An efficient transportation system is fundamental to national defense and an efficient transportation system reduces the amount of resources consumed for national defense. The purpose of transportation policy is to provide direction for determining the amount of national resources that will be dedicated to transportation and for determining the quality of service that is essential for economic activity and national defense. The federal government has been a major factor in the development of transportation facilities such as highways, waterways, ports, and airports. DECLARATION OF NATIONAL TRANSPORTATION POLICY The ICC Termination Act of 1995 included a national transportation policy to provide direction to the STB in administering transportation regulation over railroads, motor carriers, water carriers, and pipelines. Policy Interpretations Although the declarations of national transportation policy are general and somewhat vague, they apply to STB regulated modes and as such, air carriers are excluded as are exempt carriers. The STB must administer transportation regulation in such a manner as to recognize and preserve the inherent advantage of each mode; this inherent advantage is the innate superiority one mode possesses in the form of cost or service characteristics over other modes. Safe, adequate, economical, and efficient service is not totally attainable but when lives are involved, safety takes precedence over economical and efficient service. Providing adequate service has been construed to mean meeting normal demand. The STB must consider the economic condition of carriers in rate rulings so as to foster stability of transportation supply. The STB was charged with the responsibility of encouraging fair wages and working conditions but no attempt was made to interpret these conditions. The policy statement regarding reasonable charges, unjust discrimination, undue preference, and unfair competitive practices is merely a reiteration of the common carrier obligations. The cooperative efforts between the federal and state governments have not always been smooth but the judicial decision was that only the federal government could regulate interstate transportation. The stated goals of the national transportation policy are to provide a system of transportation that meets the needs of commerce, the U.S. Postal Service, and national defense. Who Establishes Policy National transportation policies are developed at various levels of government and by many different agencies. EXECUTIVE BRANCH Many departments within the executive branch of government influence (establish) transportation policy including appointment of individuals to head the various transportation agencies. The Department of State is directly involved in developing policy regarding international transportation by air and water. The Maritime Administration and the Military Sealift Command, Military Airlift Command, and Military Traffic Management and Terminal Service influence various aspects of ocean and air transportation. Others such as the Department of Energy, the Postal Service the Department of Housing and Urban Development (HUD) and the Army Corps of play a role. The Department of Transportation is the most pervasive influence of policy at the domestic level. CONGRESSIONAL COMMITTEES The laws that are formulated by Congress and within the two Senate committees, the Committee on Commerce, Science, and Transportation and the Committee on Environment and Public Works have transportation responsibilities. The House of Representatives’ transportation committees include the Transportation and Infrastructure Committee and the Energy and Commerce Committee. In addition to the above standing committees, numerous other congressional committees have an impact on transportation including the Appropriations Committee, Senate Banking Committee, Housing and Urban Affairs Committee, House Ways and Means Committee, or Senate Finance Committee. REGULATORY AGENCIES The STB and FMC are independent agencies charged with implementing the laws regulating transportation. JUDICIAL SYSTEM The courts have been called upon to interpret laws or reconcile conflicts. The role of the courts is basically to interpret the meaning of policy as stated in laws, regulations, and executive orders. INDUSTRY ASSOCIATIONS Industry associations in transportation such as the Association of American Railroads (AAR) and the American Trucking Associations (ATA) serve two basic purposes: establishment of industry standards, and policy formulation and influence. The other modes also have associations as well. Shippers are represented by the National Industrial Transportation League (NITL) and the National Shippers Strategic Transportation Council (NASSTRAC). Both are active before congressional bodies, regulator agencies, and carrier groups. One of the most important governmental policy issues has been the public promotion of transportation. All of the above groups and associations have been involved over the years in this important area. PUBLIC PROMOTION This section presents an overview of the public sector transportation planning and promotion activities. Promotion connotes encouragement or provision of aid or assistance so transportation can grow or survive. Transportation Project Planning in the Public Sector Transportation project planning is the process whereby government entities review the needs or demands of a region or population segment, develop transport alternatives, and usually propose or implement one of them. Transportation project planning is a public activity as public transportation processes can open trade or movement where private actions have not or would not have been enticed to do so for financial gain alone. Many forms of transportation require large capital investments that would normally discourage or prohibit private investment. Public planning of transportation is generally found in situations where environmental or social needs override financial ones. It is apparent that public planning of transportation involves a different viewpoint and set of objectives than does capital investment analysis in private firms. AN APPROACH TO PUBLIC PLANNING PROJECT ANALYSIS Public planning agencies compare the initial costs of a project to the financial, environmental, and measurable social benefits to everyone affected by the project. The major costs of a project include those expenses typically involved in private projects and could include delay or congestion. The benefits of a project include any measurable benefit to the agency, other agencies, and the public at large and while some are easily quantified, others pose analytical difficulties. The timing and time value of funds is an important part of any capital project analysis. By including benefits for 25 years or more, it is easy to inflate the ratio or cause it to be above the break even point when it would not be otherwise. Conservative risk analysis states that costs should be analytically considered higher and benefits lower than what a first glance measure indicates. Public planning involves many of the basic concepts inherent in private project planning, but the application is different since costs and benefits to all parties affected by the project. Thus, costs, benefits, and Aprofits@ are measured for society as a whole in tangible and intangible ways. Air The domestic air system received the benefits of several government programs such as the FAA air traffic control system. Another direct air system benefit is the subsidy system that applies to short and medium non-jet flights to cities that are unable to support high traffic volumes. In recent years, The Air Deregulation Act of 1978 accelerated the growth of commuter airlines which has enabled the regional airlines to discontinue service to small cities. The U.S. Postal Service is a major revenue source for the industry while state and local agencies help promote the airline industry through air terminal development and construction. The airlines rent terminal and hangar facilities and pay landing fees for each flight. The FAA provides aircraft construction and safety rules as well as pilot certification and the National Transportation Safety Board investigates accidents so that many can be avoided or reduced through aircraft specification or flight procedures. Through government ownership, many airlines are subsidized so those countries can operate their airlines for various purposes such as national pride. On domestic traffic only American flag carriers may originate and terminate domestic passengers and freight within the U.S. This home flag requirement serves to protect the domestic lines. Several forms of user charges such as the Airport and Airway Trust Fund gather funds which are used for airport facility projects on a shared basis with local agencies. Motor and Highway There is no direct promotion to motor carriers themselves, but indirect benefit comes to the industry through highway development which is done with government funds. The Federal Highway Administration is largely devoted to highway research, development, and safety. It also is charged with certain repair projects on critical parts of the Federal and Interstate Highway System. The National Highway Traffic Safety Administration is responsible for highway safety and provides administrative regulations for certain minimum automobile safety features. The Federal Motor Carrier Safety Administration imposes strict standards on truck safety, which affects all highway users. One of many highway related “user charges” is the gas and fuel tax which is the source funds to build and maintain the highway network. Other sources include a federal excise tax on tires while states obtain revenues through vehicle registration fees or a ton mile tax. Tolls are a form of user taxes on many turnpikes and bridges. Major controversies are currently taking place with regard to Federal Highway Trust Fund and state user taxes. Even though 96 percent of the interstate system has been built, the fuel tax continues to be collected and accumulated in the fund. Some states have earmarked some of these funds for education and other uses while industry groups seek a greater share for highway development and improvement. Rail The railroads currently can avail themselves of direct assistance from the Regional Railroad Reorganization Act of 1973, the Railroad Revitalization and Regulatory Reform Act of 1976, and the Staggers Rail Act of 1980. Another form of funding has been available as a subsidy to lines that are abandoned by railroads but that states and other groups continue to operate. The Federal Railroad Administration has become a major source of gains in technology as well as safety. The Transportation Technology Center at Pueblo, Colorado once owned by the FRA has been privatized and is managed by the AAR. Amtrak was created to relieve the railroads of the burden of passenger traffic while providing needed services to the public. Domestic Waterway Operations The inland barge industry receives two major forms of federal promotion, one from the Army Corps of Engineers and the second from Coast Guard. Each provides services and benefits that support the industry. There is now a fuel tax user charge to cover the cost of certain improvements. International Water Carriage The Maritime Administration (MARAD) administers construction differential subsidies (CDS) to offset higher cost of U.S. ship builders. The survival of the U.S. shipyard is viewed as essential to U.S. military capability. There are operating differential subsidies (ODS), which cover the higher cost increment resulting from having higher paid American crews on ships. The U.S. cabotage laws state that freight or passengers originating and terminating in two U.S. points can only be transported in ships constructed in the United States and owned and manned by U.S. citizens. The United States also has a cargo preference law that stipulates that at least 50 percent of the gross tonnage of certain U.S. government owned and sponsored cargoes must be carried by U.S. flagships. MARAD exercises decision powers over ship design and construction and plays a major role in the routes. This form of control is unique to the transportation industry in the United States. The rationale for such extensive assistance to this one industry is that a strong fleet is a vital part of national defense sealift capacity in the event of war. The Shipping Act of 1984 is a further example of the U.S. policy toward supporting a strong U.S. ocean fleet. The act was designed to reduce the regulation on foreign ocean shipping with the following goals: Establishing a non-discriminatory regulatory process for common ocean carriers with a minimum of government intervention and regulatory costs; Providing an efficient and economic transportation system in the ocean commerce of the United States that is in harmony and responsive to international shipping practices; and, Encouraging the development of an economically sound and efficient U.S. flag fleet capable of meeting national security needs. Pipeline The pipeline industry receives no public financial support, but it has benefited in a legal sense from the right of eminent domain. Miscellaneous Forms of Promotion Various other activities directly or indirectly benefit the transportation industry such as those performed by the DOT. Other research and development studies are conducted by the Transportation Research Board and the National Science Foundation. The Department of Defense continually examines methods to improve shipping, and many improvements spill over into the commercial area. TRANSPORTATION PROMOTION IN PERSPECTIVE Two major promotion concepts are user charges and nationalization. User charges are used to pay for some or all of the services used by a carrier or mode while nationalization represents an extreme form of public assistance. User Charges User charges are assessments or fees charged to carriers by public bodies for a variety of reasons. Examples here are airport landing fees, road tolls, and state fuel tax when it is applied to road maintenance. A user charge also can serve to equalize intermodal competitive conditions. FORMS User charges are present in three basic forms which are an existence charge, a unit charge or relative use. Examples include a driver’s license issuing fee, tolls and gas mileage or an increased truck registration fee for heavier vehicles. A form of nonuser fee also has arisen in recent years where a tax partially pays for rapid transit development and while many persons do not, or might not, ever use the rapid transit system, they do bear some of its costs. Nationalization Nationalization is an extreme form of public promotion. It basically consists of public ownership, financing, and operation of a business entity. TRANSPORTATION SAFETY The federal government has assumed the responsibility of ensuring the safety of travelers. Federal safety regulations cover all aspects of transportation operations from labor qualifications and operating procedures to equipment specifications. The primary objective of the safety regulations is to establish a minimum level of safety for transportation providers to maintain. The policy of safe transportation has been extended to the specification of standards for transportation vehicles. Hazardous materials transportation poses the greatest threat to public safety and the movement of hazardous materials and hazardous wastes has been subjected to considerable regulations. These regulations overlap somewhat because of the overlapping jurisdiction of the regulatory agencies originating and enforcing the rules. The police powers of the Constitution grant the states the right to protect the health and welfare of their citizens and the states have established safety regulations governing the safe operations of transport providers. Transportation safety matters have been extended to include environmental safety for all modes. One effect of these myriad safety regulations is an increase in the cost of transporting people and goods but society feels that the benefits of safety regulations more than offset the direct cost. More government oversight is likely in the future. Transportation Security The Department of Homeland Security (DHS) was established in response to the events of 9/11. Its goal is the mobilizing and organizing the nation to secure the homeland from terrorist attacks DHS is charged with protecting the security of the transportation system. The security programs and regulations are administered through the Coast Guard (CG), Customs Service (CS), and Transportation Security Administration (TSA). The Coast Guard patrols the U.S. coastline and internal navigable waterways and can stop a vessel from entering an U.S. port, board the vessel, and prevent any undesirable freight from being offloaded from a vessel. The TSA administers the air passenger security screening processes at U.S. airports. TSA is testing various security devices and procedures to ensure the safety of passengers as well as reduce delays resulting from the security screening process. TSA is moving into the freight sector as well, starting with air cargo. It has also conducted a transit and rail inspection program for rail passenger and luggage screening, similar to that performed in the airline industry. The Customs Service has been focusing on implementing security measures for cargo entering the United States. CS has established the 24 hour rule that requires shippers to electronically transmit a description of the cargo 24 hours before loading and CS can block any prohibited cargo items from being unloaded. As the security measures increase, the impact on the transportation system and transportation user is increased transit times and cost. Study Questions 1. Discuss the rationale for economic regulation of transportation. The imperfections in the marketplace in a free enterprise economy provide the rationale for governmental control. The control exercised by the government can take one of several forms. One form is that of maintaining or enforcing competition, for example, through antitrust actions of the government. Second, the government can substitute regulation for competition, as it did in transportation. Third, the government can assume ownership and direct control, as it has done with the U.S. Post Office. 2. How has common law provided a basis for the government's regulation of transportation in the United States? The early regulation of transportation developed under common law. The obvious connection is with the concept of common carriage. Common law rules were developed for those common carriers because they serve all shippers on a similar basis, at reasonable rates, and without discrimination. The regulation of transportation began at the state level under the common law sys¬tem when a number of important rules for regulation were developed, as well as the basic issue of whether business could even be regulated at all. In the latter regard, a concept of “business affected with the public interest” was developed under the com¬mon law. 3. Discuss the role of antitrust laws in transportation during the regulated era versus the deregulated era. Collective rate making by carriers was made exempt from antitrust laws by the Reed-Bulwinkle Act of 1948, which empowered the ICC to oversee carrier rate making. As such, it limited traditional jurisdiction by the FTC and Department of Justice in this area. A repeal of those parts of the Interstate Commerce Act that tra¬ditionally allowed collective rate making by carriers in rate bureaus caused this practice to become subject to the antitrust laws. Collective rate making over single-line rates of rail, motor, air, and household goods carriers is not allowed by law as mandated by the regulatory changes. This means that any such practices would come under the jurisdiction and penalties of the Sherman Act and those that follow. Carriers, in the selling of transportation services, are normally thought to be the party to which antitrust regulations apply. However, in buying these services, ship¬pers are also subject to these same laws and are at an equal risk of committing an antitrust violation. Because transportation has been subject to antitrust laws only since around 1980, these laws, as they relate to transportation, have not yet been fully tested in the courts. 4. How do the police powers of the Constitution affect transportation? The police powers of the Constitution grant the states the right to protect the health and welfare of their citizens. The states have used this power to establish safety regulations governing the safe operations of trains through a state, and to limit the maximum speed, height, length, and weight of motor carrier vehicles, etc. These regula¬tions are not standard from state to state because of the differing political, economic, sociological, and geographical conditions. However, the common denominator in state safety regulations is that all states regulate transportation safety matters. 5. Why does the United States need a national transportation Policy? What purpose does it serve? A good starting point for examining the nature of our national transportation policy is the consideration of our need for such a policy. The answer to the question of need lies in the significance of transportation to the very life of the country. Transportation permeates every aspect of a community and touches the life of every member. The transportation system ties together the various communities of a country, making possible the movement of people, goods, and services. The physical connection that transportation gives to spatially separated communities permits a sense of unity to exist.
In addition, transportation is fundamental to the economic activity of a country. Transportation furthers economic activity—the exchange of goods that are mass-produced in one location to locations deficient in these goods. The carry-over ben¬efits of economic activity—jobs, improved goods and services, and so on—would not be reaped by a country’s citizens without a good transportation system. An efficient transportation system is fundamental to national defense. In times of emergencies, people and materials must be deployed quickly to various trouble spots within the United States or throughout the world to protect American inter¬ests. Without an efficient transportation system, more resources would have to be dedicated to defense purposes in many more locations. Thus, an efficient trans¬portation system reduces the amount of resources consumed for national defense. 6. Analyze the major issues addressed by the ICC Termination Act national transportation policy statements. The ICC Termination Act of 1995 included statements of national transportation policy. Congress made these statements to provide direction to the STB in adminis¬tering transportation regulation over railroads, motor carriers, water carriers, and pipelines. The key provisions of this Act are to assure a healthy rail system capable of generating the capital needed for improvements and modernization while serving shippers with fair and reasonable rates. The policy deals heavily with pricing and service issues. The motor carrier, water carriers, brokers, and freight forwarder are similar in that the Act deals with prices and services and also adds safety to the policy as well. This policy also deals with certain aspects of passenger travel. The pipeline carriers are also covered and this policy statement covers prices and overall operations of the pipeline network. 7. Unlike many industrialized nations, the United States has fostered private ownership of transportation companies. What is the rationale for private ownership? The U.S. has always had a tradition of private ownership even in areas of public monopolies such as electric and telephone companies. Transportation was left to the private sector from the beginning with regulation imposed only to protect the public’s interest. Private capital was used to build the transportation network except for highways which have always been publicly owned. 8. What is the rationale for the public promotion of transportation? Transportation is necessary in an economy to help move goods from where they are produced to where they are needed. As such, transportation provides much needed time and place utilities for goods and services that add economic value. Transportation also allows for the movement of people encouraging the sharing of culture to the benefit of society. Because of the economic and cultural benefits of transportation, public promotion allows society to bear the burden of the costs while reaping the benefits. 9. What are transportation user charges? What is the purpose of such charges? User charges are assessments or fees charged by public bodies against carriers. They are created for a variety of reasons. One is to pay back the public for assistance dur¬ing modal conception and encouragement. Some user charges are assessed to finance construction. The federal fuel tax on gasoline is an example, as is the barge fuel tax. Coverage of operating costs is often a reason for the origin of user charges. Examples here are airport landing fees, road tolls, and state fuel tax when it is applied to road maintenance. In addition, a user charge also can serve to equalize intermodal competitive conditions. The barge fuel tax, while paying for some lock construction, also makes barge operators bear some of the full cost of providing their service. This lessens, to a degree, some of the advantage that existed when right-of-way costs were borne by the public and not the barge firm. 10. Discuss the advantages and disadvantages of increasing regulations relating to transportation safety and security. Be sure to include both transportation providers and transportation users in your discussion. From the perspective of transportation providers, the biggest disadvantage is the increased cost of implementing safety and security regulations. Vehicle safety enhancement costs are directly borne by carriers. Implementing passenger and baggage screening adds time and costs to the carriers. The biggest advantage to transportation providers is the reduced probability of accidents/deaths which reduces the liability of the carrier. From the perspective of the transportation user, the biggest disadvantage is delay. Screening at airports, for example, adds time to the passenger’s commute, thus increasing the passenger’s costs. The costs borne by transportation providers are ultimately passed on to the passenger in the form of higher fares. The biggest advantage to the user, obviously, is a more secure and safe transportation network. Case Questions Case 3.1 Who Pays the Price? 1. In each of the three scenarios presented in the case, opponents and proponents have divergent views of government regulations, One view is on the public benefit, the other is on the cost to private industry. How can you decide which view to accept? There is no one correct answer to this question. Regardless of the side chosen, the ultimate costs of these regulations are borne by the user. Without regulation, transportation safety and security are compromised, probably resulting in more accidents, terroristic actions, and death. With the regulation, transportation providers incur higher operating costs, which inevitably are passed on to the user in the form of higher prices. The analysis should focus on the nature of the costs imposed by regulation or the lack thereof and whether society is willing to incur those costs. 2. In each of the scenarios above, identify the benefits and costs for both viewpoints. The analysis should focus on both the economic and social costs associated with each scenario. For example, the higher cost for cleaner diesel engines (economic cost) must be compared with fewer emissions and a cleaner environment (social costs). The analysis must also identify who will bear the costs and enjoy the benefits. Again, the direct cost for diesel engines will be borne by the carriers but the public will reap the benefits. Important in this part of the analysis is to identify who ULTIMATELY bears the costs. In the case of diesel engines, engine manufacturers pass the cost along to carriers, who pass the cost along to shippers, who pass the cost along to consumers in the form of a higher price. So, even though the public ultimately enjoys the benefits of these regulations, they will ultimately pay for them. 3. Should the government intervene in setting regulations to increase security and help the environment? Or should private industry take on this role? Discuss. Any effort to increase security and help the environment will require initial capital investments from private industry. In this situation, one might find that private industry is hesitant, if not reluctant, to support this investment. In such a case, the government has the influence to make these investments a requirement for doing business. However, if firms can be convinced that these investments carry a positive return on investment, they might be more willing to undertake these improvements. For example, Walmart has undertaken huge investments in helping the environment through recycling and alternative fuels for their fleet. However, Walmart also perceives an economic return on investment as well as an improved social identity for making these improvements. So, the analysis here needs to focus again on the costs and benefits associated with improved security and environment. If private firms can enjoy a positive return on their investment, the government might not need to be involved. Case 3.2.The U.S. Airline Industry Public Support 1. What are the arguments in favor of the federal government providing financial support to the U.S. airlines? We need a strong domestic air network to facilitate commerce, national defense, and travel. Should some carriers either go bankrupt or exit the market, the impact on the economy would be substantial. In some case, conventional sources of financing have become unavailable or are too costly. The social cost associated with a poor U.S. airline industry probably exceeds the economic cost of providing a sound airline industry. 2. What are the arguments against the federal government providing financial support to the U.S. airlines? Many of the older legacy carriers have extremely high costs when compared to with the newer carriers such as Southwest, Jet Blue and others. Government support could prop up such legacy carriers when they really need to re-examine their business model in light of current realities. In a free-market economy, government funding is perceived as subsidizing inefficient carriers. An argument can be made that allowing the most efficient carriers to survive actually makes for a more sound airline industry. 3. If federal financial assistance is provided, should the air carriers be expected to repay the government? If so, what form of repayment would you suggest? In 2009, the federal government has given loans to financial institutions and automakers to prevent them from going out of business. With these loans, the U.S. government has become a part owner of these privately-held firms. Because these are loans (or “bailouts”), an argument can be made that they, indeed, should be paid back just like with any other debt-holder. As of now, the situation is not clearly defined as to how these loans are going to be handled. This analysis should review what is currently going on with the U.S. economy and apply the results to the airline industry. Suggested Internet project Have the student log on to the Internet and search for safety regulations relating to motor carriers, airlines, or railroads. They should explain how the rules affect the operation of a carrier. An alternative project would be to log on to the home page for the Surface Transportation Board and review any policy statements in light of the text discussion. The student might also review the STB website for updates on new economic regulations that could affect the railroad industry. Review the information found on the homepage of the Department of Homeland Security. Take two or more items and discuss in light of the chapter. The student should also review one of the agencies with the DHS. Some addresses are: Department of Homeland Security http://www.dhs.gov Department of Transportation http://www.dot.gov Code of Federal Regulations on GPO Access http://www.access.gpo.gov/nara/cfr/cfrtablesearch.html Federal Motor Carrier Safety Administration Home Page http://www.fmcsa.dot.gov Federal Railroad Administration http://www.fra.dot.gov/site/index.htm Hazardous Management Information System http://www.dlis.dla.mil/hmis.htm National Highway Traffic Safety Administration http://www.nhtsa.dot.gov/toc.html Office of Highway Policy Information Home Page http://www.fhwa.dot.gov/ohim Surface Transportation Board http://www.stb.dot.gov/ Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195
