In the US regulatory developments have differed in several important respects from those in the UK. Generally the regulation of industry has proceeded by the setting up of individual agencies such as the Federal Communications Commission, the Federal Energy Regulatory Commission, the Food and Drug Administration, the Interstate Commerce Commission, the Civil Aeronautics Board and so forth. In the UK outright nationalisation of the railways, the coal industry and the gas and electricity industries was initially preferred to regulation.
Some qualitative impression of the growth of regulation in the US is provided in Tables 9.4 and 9.5. Table 9.4 records the number of Congressional Regulatory Acts (including Amendments) by decade up to the end of the 1970s. The first three decades of the twentieth century saw between 10 and 15 regulatory Acts per decade. Between 1930 and 1960 this number increased to an average of nearly 30. The years 1960–79 however, were characterised by a substantial growth in regulatory legislation to nearly 100 Acts per decade.
| Decade | No. of Acts |
| 1900–9 | 9 |
| 1910–19 | 15 |
| 1920–9 | 11 |
| 1930–9 | 34 |
| 1940–9 | 18 |
| 1950–9 | 34 |
| 1960–9 | 92 |
| 1970–9 | 102 |
Source: Moore (1982)
| (Number established in given periods) | |||||||
| Before | |||||||
| Field | 1930 | 1930s | 1940s | 1950s | 1960s | 1970s | Total |
| Consumer safety and health | 1 | 2 | 1 | 0 | 1 | 6 | 11 |
| Job safety and other labour conditions | 0 | 2 | 0 | 0 | 2 | 5 | 9 |
| Environment and energy | 2 | 0 | 0 | 0 | 1 | 2 | 5 |
| Finance | 2 | 2 | 0 | 0 | 0 | 3 | 7 |
| Industry | 3 | 5 | 1 | 1 | 2 | 2 | 14 |
| General business | 4 | 0 | 0 | 1 | 0 | 2 | 7 |
| Total | 12 | 11 | 2 | 2 | 6 | 20 | 53 |
Source: Weidenbaum (1980)
A similar story of regulatory growth is indicated by Table 9.5 which records the number of Federal Regulatory Agencies established in each decade. The 1970s especially were associated with the establishment of 20 new regulatory Agencies compared with a total of 53 for the entire period from the late nineteenth century to 1979. The changing preoccupations of the regulators can also be seen. In the 1970s environmental protection, consumer safety, health, job safety and labour conditions became the main areas of concern.
To explain the trend towards deregulation which began in the late 1970s we need to look at the gainers and losers from regulatory activity. A reappraisal of the effects of regulation in practice took place in the 1970s, and this cast doubt on standard assumptions about its impact on different interest groups.
In the economic sphere the regulation of the railroads by the Interstate Commerce Commission (ICC) set up in 1887 or the regulation of telecommunications, initially by the ICC and after 1934 by the Federal Communications Commission (FCC), might be seen as a means of protecting consumers facing a natural monopoly. Similar arguments could be used to explain federal regulation of inter-state trade in electricity or natural gas by the Federal Energy Regulatory Commission (FERC). Historical research has revealed a more complex picture in which producer groups often had much to gain from regulation.
Before 1887 competition between the railroads resulted in secret price cutting for large shippers over longer hauls. These secret arrangements often did not remain secret for very long and were rapidly matched by rivals. On shorter hauls between mid-points on a particular line, the railroad companies could take advantage of their natural monopoly and charge higher prices. This was resented by the farming interests. Although the railroad and farming interests seemed opposed, the regulation of rates and the forbidding of secret rebates in the Act to Regulate Commerce 1887 were not unwelcome to the railroad interests.
Source: Kolko (1965)
In the first decade of the century the Bell telephone system was subjected to intense competitive pressure from new entrants following the expiry of patents which had protected it in the 1880s. Bell responded by refusing to interconnect with the new companies while offering to take them over. When the more aggressive independent companies began to wire into areas served by Bell, the latter responded by actively supporting regulation to restrict new entry.
Pressure from the airline interests was instrumental in establishing the Civil Aeronautics Board (CAB) in 1938. The arguments were about the dangers of ‘destructive competition’ and safety, but protection from new entrants was what was asked for and what was eventually granted. One commentator remarked that ‘Few interest groups have ever been so overtly and uncontestably pre-eminent in legislative proceedings as the airline industry was during the congressional deliberations that led to the passage of the (Civil Aeronautics) act’ (Behrman 1980).
With producer interests influential in the regulatory agencies it might be expected that entry into a regulated industry would be highly restricted. As explained in Module 3, it could be argued that restrictions on entry will benefit consumers if a natural monopoly is ‘not sustainable’ (i.e. it cannot cover its costs without attracting new entry). This is one of the ideas which lies behind the objection to disruptive competition. However, entry restrictions were applied in industries which were not natural monopolies.
By the 1930s, trucking was becoming an important competitive threat to the railroad.
Railroad interests therefore lobbied for protection. The Motor Carrier Act 1935 gave the ICC power to fix maximum and minimum rates and to control entry to the trucking industry. We have already seen that the CAB controlled entry into the air transport industry. Road or air transport between two points is not necessarily a natural monopoly, and even where one carrier can serve the market at lowest cost the potential for new entry is an important competitive discipline. Yet no application from a new entrant to start a domestic inter-state trunkline air service was granted by the CAB in the twenty-five years from 1950 to 1974.
Regulation in the economic sphere designed to protect consumers might have been expected to result in lower prices. Widely held doubts that any such effects were forthcoming have encouraged the trend towards deregulation in recent years. A contrary is that protection has resulted in ‘X’ inefficiency and higher prices to consumers.
Electricity Regulation
In an investigation of the effects of electricity regulation, George Stigler compared rates prices) in regulated and non-regulated US states for the years 1912, 1922, 1932 and 1937. Allowing for other influences on electricity rates – density of population, per capita income and proportion of power from hydroelectric sources – no effect of regulation on the average of rates could be detected.
Source: Stigler (1962)
Trucking Regulation
Entry restrictions and regulated rates give rise to technically inefficient operations especially over-frequent service and excess capacity. The existence of an exempt trading sector for transporting agricultural commodities in the US and a number of international comparisons of truck rates in countries with differing regulatory environments enabled estimates of these costs to be made. One study calculated that rates were one-third to one-half higher than they would have been in the absence of regulation and that the costs of trucking regulation, including the direct costs of administration, amounted to over $5000 million per year.
Source: Felton (1978)
The evidence concerning the influence of regulation on prices does not always point to the domination of producer interests. Holding down of prices well below free market levels has also occurred in the case of natural resources.
The Federal Energy Regulatory Commission (FERC) began to control the ‘wellhead price’ of natural gas (i.e. the price charged to the pipeline companies by producers of gas) in the mid-1950s. Simply to regulate the wholesale price of gas traded on inter-state markets gave the commission no option but to permit the passing on of any price increases charged to the pipeline companies by producers. Regulation therefore extended to the wellhead price of inter-state gas. This price over time fell below the level required to stimulate the discovery and confirmation of new reserves. Supplies dwindled and interruptions of supplies were experienced. Businesses began to move to gas-producing states to buy gas on the intrastate market which was not regulated by the FERC. Although, in the short run, producers of gas could do little to resist price controls on existing sources because the cost of opening up these resources had been ‘ sunk’, in the long run their responses ensured that regulation was removed.
The above example is a useful illustration of how new concerns and interests begin to undermine economic regulation. Environmental concerns became increasingly important during the 1970s and the oil crisis of 1973 focused attention particularly on the problem of depletable energy resources. The pricing policy of the FERC towards natural gas ran directly counter to the idea that, for a clean ‘premium’ fuel such as natural gas with limited reserves, the price should rise to encourage its efficient use and to conserve supplies. Similar criticisms were levelled at the electricity tariffs imposed by the FERC which gave discounts to large buyers. Thus certain consumer groups and environmentalists could, on occasion, make common cause against the regulators.
Consumers cannot usually be regarded as a homogeneous interest group and regulation can be seen as a way of taxing one group of consumers in order to subsidise another. One argument in defence of the regulation of many forms of communication and transport, including telephone services, railways, electricity supply, bus and air services, is that without regulation a universal service will be impossible. Services to isolated areas will not occur or will be extremely expensive unless financed by profits made on the more crowded services, and profits can only be made there if entry (in this context often called by the somewhat loaded term ‘cream skimming’) is prevented. Regulation can therefore be seen as a form of taxation which enables redistributional policies to take place without recourse to Congress or Parliament. The stability of these arrangements may not be threatened while consumers using the profit-making services are individually only slightly disadvantaged. If the productive inefficiency of operations becomes too pronounced, however, the individual benefit to consumers of greater competition may become large and pressure for reform will be encouraged in spite of possible threats to marginal services.
Before deregulation, airlines would compete by increasing the services offered and the frequency of flights. The result was excess capacity. Load factors in the early 1970s were about 55 per cent. The losses associated with this system were revealed, as in the case of trucking, by the existence of intrastate deregulated markets. One estimate put inter-state fares for short hauls at 1.8 times those prevailing in the unregulated Californian intrastate market. Figures of this magnitude suggest that a high price was being paid for maintaining flights to out of the way places.
Effects on Technological Change
Where producer interests are dominant there is a danger that technical change will be inhibited by regulation. There is some evidence consistent with this view, and there is also evidence that technical change was a significant factor in the eventual deregulation of many industries.
The growth of cable television was hindered in its early stages by the Federal Communications Commission (FCC). Where cable was used merely to improve the signal received in particular areas there was no opposition, but the ability to use cable to import ‘distant signals’ was considered dangerous to established interests. The stations and networks depended on advertising revenue, and any reduction in the audience for the local stations could jeopardise this revenue. Regulation was seen to support local news content and cross subsidies could be used to finance public service obligations and programmes for minority audiences. The enormous potential of cable, satellites and pay TV eventually proved too much for the established interests to resist. It was not even clear that minority or local interests were best served by restrictions on the development of alternative systems which opened up the prospect of ever greater choice to the consumer, and the FCC moved towards deregulation.
Deregulation cannot be quantified precisely. Whereas we could chart the growth of regulation by the establishment of Federal Regulatory Agencies, the trend towards deregulation only occasionally results in the abolition of an entire agency or in the passing of a Congressional Deregulation Act. Table 9.6 lists some of the more significant Acts of the late 1970s and early 1980s. The most famous of these, because it was the most radical and one of the earliest, was the Act to deregulate the airlines. A similar effect in road transport was achieved by the Motor Carrier Act and the Bus Regulatory Reform Act which greatly loosened control of rates and new entry. The Natural Gas Policy Act introduced a regime of gradual de-control over the wellhead price of gas while the Rail Act gave companies greater discretion over rate setting. The Cable Communications Policy Act phased out all local control over cable pricing.
| Air Passenger Deregulation Act 1978 |
| Natural Gas Policy Act 1978 |
| Public Utility Regulatory Policies Act 1978 |
| Depository Institutions Deregulation and Monetary Control Act 1980 |
| Staggers Rail Act 1980 |
| Motor Carrier Act 1980 |
| Bus Regulatory Reform Act 1982 |
| Cable Communications Policy Act 1984 |
Much of the impetus towards deregulation occurred as a result of changes in policy within the various regulatory agencies and as a result of court cases brought to challenge regulatory decisions. Legislation simply confirmed the direction of events. For example the rules imposed by the FCC on cable and pay-TV companies which restricted their ability to broadcast films or sports events were challenged in the courts and rescinded. Similarly, terminal equipment in the telecommunications market was opened to competition following a series of cases from 1968 onwards in which manufacturers tried to circumvent the restrictions imposed by Bell and the FCC.
The results for the various industries of the deregulatory movement of recent years are still being debated. The effect on new entry has been considerable in areas such as transport and cable TV while estimates suggest that considerable cost savings have been achieved in the more competitive frameworks.
Airlines
Studies soon after deregulation showed that local airlines gained at the expense of the trunk airlines by moving into inter-state markets and using their already developed local feeder services. Trunk airlines, in contrast, with a heavy investment in wide-bodied aircraft were less flexible in the newly deregulated conditions. Between 1974 and 1985 the market share of trunk airlines fell from 88.3 per cent to 71.1 per cent. Better use of capacity was reflected in substantial productivity increases and consequently in a tendency for air fares to rise more slowly than consumer prices or operating expenses.
More recent work confirms the productivity improvements relative to past trends (after allowing for improvements due to the introduction of new types of aircraft in the 1970s). Restructuring through mergers has also taken place to increase load factors which larger networks can achieve.
Source: Sawers (1987)
A summary of the estimated effects of deregulation on the main industries is given in Table 9.7. In most cases there is evidence of cost reductions and hence improvements in productive efficiency as well as qualitative improvements such as in the frequency and reliability of service. Consumers have gained from lower prices. Winston estimates the annual gains to consumers from the deregulation of inter city transportation alone – airlines, railroads and trucking – as $50 billion in 1996 dollars (p. 102). Of course it is not always very easy to assess what would have happened in the absence of deregulation. Not all price reductions, for example, can be ascribed to deregulation. In the case of natural gas, the anticipated effects of deregulation were that prices would initially rise in order to get rid of market shortages and to encourage the exploration and development of new deposits. In the event, world oil and gas prices fell in the early 1980s as a result of a down turn in general economic activity.
The expansion of cable TV is recorded in Table 9.7. The FCC was already liberalising its policy in the 1970s and the industry grew from 2500 systems with 3.9 million subscribers in 1970 to 8000 systems and 45 million subscribers in 1988. New entry was further stimulated by court decisions which declared the control of cable programming unconstitutional. Of equal importance, the Federal Courts in 1987 declared franchise monopolies to be unconstitutional restrictions on freedom of speech and of the press. Thus the natural monopoly argument for restrictions on entry to the cable industry and the franchise system (discussed in Module 3) has been rejected. Freedom of entry has resulted in ‘overbuilding’, i.e. the construction of new systems in areas already served by a cable company. New technology often made it cheaper to do this than to buy an existing company at prices reflecting the existing monopoly profits available. This case illustrates two important points. First, industries initially thought to be natural monopolies may through technical change or otherwise turn out not to be so. Second, even if an industry is technically a natural monopoly, the losses associated with the absence of competitive pressure when regulation or even franchising is attempted may be greater than the losses associated with permitting the duplication of capacity.
| Industry | Industry Efficiency | Consumer Welfare |
| Airlines | Load factors increased from 52 per cent to 62 per cent. | Average fares approx. 33 per cent lower. |
| Cost per revenue ton-mile have declined at least 25 per cent. | Higher service frequency. | |
| Truckload | Operating costs per vehicle mile have fallen at least 75 per cent | Average rates per vehicle mile have declined by 75 per cent. |
| Profits have declined slightly. | Service times much improved. | |
| Railroads | 33 per cent track miles abandoned. | Average rates per ton-mile down more than 50 per cent. |
| Operating costs per ton-mile down by 60 per cent. | Average transit time down 20 per cent. Standard deviation down 20 per cent. | |
| Banking | Cost of electronic deposit down 80 per cent | Higher interest rates. |
| Operating costs down 8 per cent due to branch deregulation. | More banking offices and automated teller machines. | |
| Natural Gas | More efficient capacapacitycity utilization. | Average prices down 30 per cent for residential consumers. |
| In transmission and distribution down 35 per cent. | Greater fall for industrial consumers. | |
| Shortages eliminated. | ||
Source: Clifford Winston (1998) ‘U.S. Industry Adjustment to Economic Deregulation’, Journal of Economic Perspectives, Vol. 12, No.3, pp. 89-110. Compiled from table 2 (p.99) and table 3 (p.101).
Source: Winston (1998)
In this section we have concentrated on experience in the United States. Similar changes were happening in other countries around the same time. It would be wrong to characterise recent years as a time of continuous deregulation however. Not only have many new regulatory agencies been set up to oversee the privatized utilities, new regulatory interventions have occurred in the social and environmental fields in most OECD countries as we noted in Module 4.
