Transportation

		While federal policies have virtually eliminated economic regulation of competitive transportation providers, the State maintains vestiges of rate-setting that are known to increase consumer prices.
		Safety and licensing are the prevailing State functions concerning transportation providers, and those duties are shared by the PUC and the State's transportation agencies.
		Rail safety and rail planning are closely related issues, but those duties are split between different State agencies, and in some cases are duplicated.

In Whose Interest?

Finding 8: Some of the PUC's transportation regulatory activities are remnants from an era when industry asked for government intervention as a shield against the rigors of competition. Those regulations, disguised as consumer protection, can have the effect of raising prices without a commensurate benefit to the public.

The PUC has been regulating the rates of transportation providers for more than a century. In the beginning the PUC's clear purpose was to guard the public against the abuses of the powerful railroad interests. But priorities shifted with the Depression when the trucking industry asked for rate regulation to protect companies from cutthroat competition, and government, with an eye toward stabilizing the national economy, responded.

As a consequence, the Public Utilities Commission, like commissions nationwide, strove to fulfill dual and conflicting mandates -- to protect the public and at the same time to protect regulated companies. With this contradictory mission the PUC has at times put the interests of carriers first -- redefining the public interest through the lens of what is good for industry. As a result, many of the companies under the PUC's regulatory umbrella have come to see the agency's main task as preserving industry well-being.

The PUC is now pre-empted by federal law from regulating rates for railroads and trucks. But the PUC has yet to abandon rate setting for other carriers, and it has a number of other requirements that discourage new entrants and can lead to higher consumer prices.

A Decade of Deregulation

Deregulation of transportation carriers was not driven by industry, but by consumers. Consumer advocates fought for deregulation before Congress because they believed that consumers stood to benefit from open competition among transportation providers. They convinced policy makers that when government set rates in markets where competition existed or was possible, the effect was to raise prices and limit services. And they convinced policy makers that just as trucking had eroded the monopoly of the railroads, in other transportation markets consumers increasingly also had choices -- among buses, trains, airplanes, taxi-cabs, limousines and shuttle buses.

One lesson from transportation deregulation is that consumer welfare can be diminished as much by too much regulation, as by too little -- and sometimes simultaneously within the same industry. When deregulation is complete but some providers maintain market power, prices can rise. When deregulation is incomplete and competitors are hindered by government rules, prices can also rise.

Airline deregulation illustrates the first type of failure. In prohibiting all rate regulation regardless of the level of competition, the federal government erred on the side of the market -- hoping that new market players would enter routes where prices were too high. That policy has subjected customers in under-served markets, at least temporarily, to high prices charged by sole providers. The benefits of deregulation have been reaped by air travelers between major destinations where competition is fierce. In effect, the captive customers of sole providers have subsidized the lower prices available to air passengers in high traffic areas. Where this kind of rate inequity exists in California, the PUC is prevented by federal deregulation of air transportation from intervening on behalf of captive customers.

The second failure of transportation deregulation -- the failure to completely deregulate rates when open competition might lower prices -- can have the effect of limiting new entrants and encouraging market players to charge the same price. In the wake of price deregulation, and in trying to balance the interests of industry and consumers, the PUC has retained three requirements from its economic regulations of years past:

1. Passive Rate Regulation. The PUC still keeps a hand on rates charged by household goods movers and some passenger carriers. The Commission sets the maximum rates movers can charge for a menu of specified services. Under legislation enacted in 1995, the maximum rates are adjusted annually. The PUC also requires scheduled bus lines and shuttle services to file tariffs specifying rates. The Public Utilities Commission allows passenger carriers to make small rate changes within a "zone of rate freedom," but approves significant changes in rates only if it first determines that the carrier faces adequate competition.

2. Financial Reports.The Commission requires carriers to file two kinds of financial reports. New carriers must file information to prove they have the financial wherewithal to provide a proposed service. And existing carriers must file detailed financial reports every year -- solely to determine the fee the company must pay to the PUC.

3. Certificates of Public Convenience and Necessity.Every passenger carrier who wants to enter a market under the Commission's jurisdiction must apply for a certificate of public convenience and necessity. In order to obtain a certificate, applicants must show the PUC that they will not adversely affect other carriers in the area. They also must notify any carriers already operating in the market of their proposed entry, effectively inviting protests against the potential competition. The Public Utilities Code calls for the PUC to grant certificates only if it finds that carriers already serving the area are not providing satisfactory service. While the PUC is moving toward an "open entry" policy for new service providers, it still retains the public convenience and necessity filing requirements that allow incumbent providers to challenge the applications of potential competitors.⁽⁸²⁾

From the Consumer's Perspective

Representatives of some companies regulated by the PUC argue that maximum rate setting is necessary to give consumers a way of comparing the cost of services from one company to another. But a number of studies in various industries have shown that in competitive markets, passive rate setting and other kinds of economic regulation lead to higher prices.⁽⁸³⁾ The PUC's passive rate setting, financial reporting and public convenience and necessity rules are vulnerable to this charge:

Passive Rate Setting. Researchers have found that setting maximum rates undermines competitive pricing by encouraging companies to charge similar amounts for like services. Passive rate setting takes a number of forms across the country. Several states exempt the moving industry from antitrust laws and allow moving companies to specify rates as a group.

At the federal level, interstate movers are allowed to define maximum rates for designated services through the Household Goods Carriers Bureau, a "rate bureau" made up of moving companies. The bureau publishes the rates in a tariff and petitions every year for usually automatic approval from the Surface Transportation Board.

In California the PUC sets maximum rates movers may charge. Until recently the moving industry had to apply to the PUC and go through a hearing process whenever it wanted to raise rates. But in 1995 the moving industry, complaining to the Legislature that this process was too protracted, managed to have the law changed.

Under legislation sponsored by movers and effective in January 1996 (AB 877, Conroy), the maximum rate will be adjusted automatically every year according to an industry "productivity index," yet to be defined. A former PUC Transportation Division Chief explained the rationale:

The industry productivity factor will be adopted to allow industry as a whole to get an increase. The more efficient you are, the more you'll be making. It's like incentive rate making.⁽⁸⁴⁾

Said the president of the California Moving and Storage Association, which represents household goods movers: "The automatic rate review is a slam dunk for us. It takes only an few hours."⁽⁸⁵⁾

California moving industry representatives maintain that the rates movers charge are typically 10 to 20 percent below the maximum rates. Nonetheless -- and by whatever mechanism it is carried out -- maximum rate setting encourages competitors to charge similar prices, reducing the market's downward pressure on rates.

Customers may indeed be able to compare prices for similar services from company to company, but they are likely to find that the rates are all the same, and that they are all high. The Director of the University of San Diego Center for Public Interest Law told the Little Hoover Commission:

Where truckers are allowed to set rates in concert, and where public filing of rates prior to or at the time of effective charge is allowed, the state creates a ready-made mechanism for private price fixing....The fact of common gain through price increases becomes a part of the price setting fabric.⁽⁸⁶⁾

Researchers have found the same principle in telecommunications, where early price competition among long distance competitors was replaced by nearly uniform rates across the industry.⁽⁸⁷⁾ Because rate changes and discount schemes have to be approved by the Federal Communications Commission, competitors are signaled in advance to changes and can respond by raising or lowering their own prices. One pair of researchers described the dynamic from the business perspective:

Adam Smith suggested that businessmen rarely meet but to fix prices. A modern Adam Smith might suggest that businessmen prefer the regulatory market over true competition since the regulator has the power to affect the market outcome without exposing the firm to the risk of antitrust prosecution.⁽⁸⁸⁾

The PUC's rate restrictions on passenger carriers similarly has little benefit to consumers. The requirement that rate tariffs be filed and that only minor rate changes be allowed assumes in advance the need for rate regulation. The PUC looks for competition only after the fact. A better approach might be to determine where competition exists and cease all economic regulation in those areas. If residents in a remote or under-served area remain captive customers of a sole provider, the PUC might then be justified in overseeing rates.

Financial Reporting. Requiring new companies to prove they have the financial resources to provide a proposed service is another remnant of the PUC's economic regulation of monopolies. The requirement may have some value in preventing customers from being victimized by a company's inadequacy, but there is little evidence that protection is needed in bus, shuttle or moving services more than any other industry.

There also is little evidence that the PUC's test of financial fitness is effective at keeping under-financed companies from operating. One reason is that the financial fitness test conflicts with the PUC's open entry policy for new providers. Representatives of limousine and airport shuttle services said that too often the open entry policy hurts the industry by licensing companies that soon go out of business.

Requiring incumbent companies to file extensive annual financial reports for the sole purpose of assessing PUC fees based on company revenues began when the PUC had a heavy hand in determining those revenues. The financial reporting requirement adds to the costs ultimately borne by consumers while adding little value to the services provided.

One company president said it takes her company 30 hours each year to assemble the data requested to determine the fee. She questioned how much of the information is really needed:

It is my experience that hardly anyone looks at these reports nor even knows if they are submitted. (A recent experience by a colleague brought to light a company who had not filed an annual report since 1992!) If the CPUC needs figures to validate a transportation company's worthiness to stay in business, one only has to require an annual reporting of their financial statements and a copy of their corporate structure.⁽⁸⁹⁾

Certifying Public Convenience. The PUC has required Public Convenience and Necessity Certificates in nearly all of the industries it regulates. The most common reason for the certificates has been to determine whether the capital expansion proposed by a monopoly would provide enough benefit to warrant the additional expenses imposed on captive customers. When the application was from a potential competitor, the PUC used the certificate process to determine whether a new applicant would undermine the economic position of the incumbent, which was seen as counter to the public

In today's transportation climate, the certificate serves principally to protect incumbents from competition and is inconsistent with the goal of encouraging new market entrants. Not surprisingly, licensed carriers favor this requirement. But the public does not benefit from limiting the number of carriers offering services in a given market simply to avoid harming incumbents.

In a competitive market, the entry of virtually any new provider should be assumed to be in the interest of public convenience and necessity because competition leads to lower costs and improved service.

To promote competition in electricity generation, the PUC has advocated that new power plants not have to pass any kind of needs test and that new market players be held to minimal entry standards.⁽⁹⁰⁾ But at the same time the PUC maintains an antiquated entry requirement for companies that want to drive passengers to the airport.

Besides being anti-competitive, there are indications that the PUC's economic regulation of carriers also may be ineffective, in that many upstart companies operate "illegally." Household movers, limousine companies and others complain that the PUC does not track down unlicensed operators and that competition from illegal operators hurts business. One limousine company owner complained to the Commission that there was "too much competition" in his industry and that the PUC should do something about it.⁽⁹¹⁾

An example of how the PUC's handling of carriers can work against the public interest is in the regulation of airport shuttle vans -- ironically one of the most competitive areas of passenger service. Airport operators, usually county officials, are frustrated because terminals are jammed with large numbers of vans and limousines jockeying to pick up customers. The PUC, trying to pursue pro-competition policies, is reluctant to help by limiting market participants.

Some airports have tried to solve the problem by contracting with selected companies to provide the passenger shuttle services. State law specifically allows airports to enter into exclusive contracts with shuttle companies, even if the contracts limit competition. By law, the airport can define the services expected and otherwise control shuttles operating on airport property. But the PUC, with its jurisdiction over passenger carriers, can step in to render the contracts meaningless.

The Commission reserves the right to judge a company's rates and "fitness" to serve the public. If the company fails the PUC's test, the PUC can assert control over the rates or revoke the company's authority to operate.

Creating New Standards

In the transportation market, taxi-cabs, limousines, chartered buses, scheduled bus lines, and shuttle vans are all vying for the same customers, but operating under different regulatory schemes -- with taxi-cabs licensed by cities and other carriers under varying requirements of the PUC as well as the California Highway Patrol and other agencies.

It is difficult to see what value the PUC's filing requirements and passive rate setting add to the health of this market. Eliminating these regulations would allow customers to more fully benefit from competition by encouraging new entrants and requiring market players to more aggressively price their services.

Recommendations

Recommendation 8: The PUC should cease all transportation-related activities.

Policy makers at the federal and the state level have determined that competition, not regulators, should set prices for transportation providers. Preserving remnants of economic regulation -- such as issuing certificates of public convenience and necessity for new providers, posting tariffs and requiring detailed financial reports -- can reduce competition and increase consumer prices without providing significant consumer benefits.