50 th TRANSPORTATION LAW INSTITUTE The Jubilee Panel! Half-Century - PDF document

50 th TRANSPORTATION LAW INSTITUTE The Jubilee Panel! Half-Century Game Changers that Rocked the Transpo World! And How They Impact Our Practices Today ______________________________________ DEREGULATION OF NORTH AMERICA Eric R. Benton Lorance & Thompson, P.C. 2900 North Loop West, Suite 500 Houston, Texas 77092 Telephone: (713) 868-5560 Facsimile: (713) 864-4671 E-mail: erb@lorancethompson.com www.loranthompson.com

Introduction: Without a doubt, the biggest game changer in motor carrier transportation in the last fifty years was the passage of the Motor Carrier Act of 1980 1 . This act ushered in the deregulation of the motor carrier industry and changed the way trucking companies operated and the services they provided to their customers. This paper and presentation will chronicle that process and the effect that it had in opening up North America to cross-border transportation between the United States, Canada and Mexico. To understand how the deregulation of the motor carrier industry changed the way freight is moved today, a short course in the history and regulatory landscape prior to 1980 is useful. The history of motor carrier transportation is brief compared to transportation by rail and a flash when compared to transportation by sea. Veterans that served in the army during World War I were introduced to transporting men and supplies by truck. The surplus military trucks that were returned to the United States provided an easy source of affordable equipment. This knowledge and equipment allowed the motor carrier industry to grow, and the advent of semi-trailers and diesel fuel in the 1930s allowed it to prosper. Anyone with a surplus army truck could haul freight; thus the entry costs were much cheaper than the costs to provide a rail service. Unlike a railroad, trucks were not limited by a rail line to the area they could serve. Unfortunately, the recession following the stock market crash of 1929 soon caused a reduction in the freight available to ship and caused the railroads to take notice of this startup industry. While it was too late to get rid of the motor carriers altogether, the railroads undertook a campaign to regulate the industry. The Interstate Commerce Commission (“ICC”) was charged with that responsibility Regulation: Not all carriers were caught up in the regulatory process. Some service providers were able to continue their operations without governmental oversight. Contract carriers are motor carriers that do not offer their services to the public but enter into negotiated agreements with specific customers. The “Rule of Eight” restricted contract carriers to provide service to no more than eight shippers or the carrier be would be considered a common carrier. If the shipper owned the goods, then their equipment could haul the cargo without regulation by the ICC. These type 1 Motor Carrier Act of 1980 (1980 Act), Pub. L. 96-296, 94 Stat. 793, 820 (1980).

of motor carriers were defined as “Private Carriers.” Exempt commodities, which are mostly agricultural products, could be hauled by independent owner operators without regulation by the ICC as well. The motor carrier that held itself out to the general public and did not ship cargo that it owned or exempt commodities were known as “common carriers.” The ICC dictated what services a common carrier could provide, what routes it could take, the commodities it could haul, and the price it could charge. The ICC approved the rates for every commodity utilizing the rate bureaus. Fifteen different cargo categories with sub-categories classified every type of cargo. Rates were approved establishing an operating ratio of 93 that allowed a profit of seven percent for the common carrier. Congress even granted an anti-trust exemption to rate bureaus for which collective rate agreements. The Reed-Bulwinkle Act granting this exemption was passed even overriding President Truman’s veto. 2 Whether a common carrier could operate on a given route or serve a particular shipper was dependent upon proving that the service was for “public convenience and necessity.” While Mexico granted concessions to a limited number of carriers to operate on a particular route, both the United States and Canada utilized the public convenience and necessity test to determine whether the service would be permitted. Under the public convenience and necessity standard, a new applicant had the burden to prove the proposed service would satisfy an existing and actual need or demand. Shippers were recruited to serve as witnesses and were required to testify on behalf of the applicant that the existing service was so unsuitable that it could only be remedied by granting the new authority. If the existing carriers could provide the service, then the application for new authority was denied. If the application for authority endangered or impaired the operations of an existing carrier; even if not directly affected, it was denied. Deregulation: In this environment of regulation, the industry and its labor force represented by the International Brotherhood of Teamsters grew and prospered during the forties, fifties and sixties. By the seventies, however, deregulation loomed on the horizon. Subject to much criticism from economists in academia, governmental authorities and repeated assaults by each presidential 2 Pub.L. No. 80-662, 62 Stat. 472 (1948), (current version at 49 U.S.C. Sec. 10706)

administration, deregulation first of the airline industry and then the motor carriers was building momentum. Trucking companies, as represented by the American Trucking Association, and their employees, who were members of the International Brotherhood of Teamsters, had a strong interest in maintaining the status quo because the rates charged and wages paid were included in a set price that practically guaranteed a seven percent profit to the trucking company. New carriers, however, were stymied by the public convenience and necessity standard that the ICC used to determine whether a new competitor would be allowed. In Nashua Motor Express, Inc. v. United States , 230 F. Supp. 646 (D. N.H. 1964), the motor carrier had received certain grandfathered rights in error. Nashua challenged the ICC’s denial of its application for the authority granted in error on the basis of public convenience and necessity. Nashua argued that desirability of competition and greater variety of service should be considered and not just a showing of inadequacy. The court remanded the case back to the ICC, but the arguments raised were pursued in subsequent challenges. The Department of Transportation proposed the Transportation Regulatory Modernization Act of 1971 which would reduce the ICC’s power and allowed a “zone of reasonableness” that permitted carriers and shippers some flexibility in establishing rates. Although the proposed legislation never passed, coupled with the Nashua decision the ICC began to solely rely on adequacy of existing service to the be determining factor in considering applications. The court decisions that followed began to whittle away the public convenience and necessity standard. In Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc ., 419 U.S. 281 (1974), the Supreme Court held that the ICC did not have to protect carriers from competition. In P. C. White Truck Line, Inc. v. Interstate Commerce Com ., 551 F.2d 1326 (D.C. Cir 1977), the Court of Appeals held that the ICC had improperly denied White’s application because the agency had not considered the likelihood of White improving the competition among the carriers serving that area. The public convenience and necessity requirement was dying. Eventually, the ICC discontinued the practice of allowing existing carriers to protest new applicants by showing harm to the existing carrier’s revenue. The new standard switched the burden to showing that the general public would suffer from the entry of the new carrier. Thereafter, the ICC began approving almost all applications without restrictions on routes, commodities or whether the carrier was in the private carriage or contract carriage exemptions.