9. REGULATION



Readings for Lecture 9
•Goetz, A. R., & Vowles, T. M. (2009). The good, the bad, and the ugly: 30 years of US airline
deregulation. Journal of Transport Geography, 17(4), 251-263.
•

Learning Objectives
•Basic principles of regulation
•Case study of British infra provider

9.1 REGULATION



Introduction
•This presentation is concerned with control and specifically the control by relevant authorities
on the levels and behaviour of transport users and operators under their control •It concerns all
areas of transport, whether that be public, private or freight

Forms of regulation
•Specify the price to be charged
•Specify the maximum increase in price allowed
•Regulate the (final) price through the tax charged on the good or service
•Specify the rate of return (profit) to be gained
•Through introducing yardstick competition
•Specify a minimum frequency
•Limit market entry
•

The rationale for the regulation
•To overcome the market failure or imperfect/asymetric information
•The market can no longer regulate itself
•To correct for externalities
•To ensure the quality of the service provided
•To provide a transport service where none existed before
•To improve efficiency within the industry

The drawbacks of economic regulation
•Limits free enterprise
•Inefficient, second best solution
•Asymmetry of information
•The issue of regulatory capture
•Cumbersome regulatory procedures make avoidance of regulatory measures possible

Discussion questions
•1. What are some of the main problems associated with government regulation of transport
industries?
•2. What are some of the ways in which the effects of an airport monopoly might be countered in the
marketplace?
•3. If monopolies are social undesirable why does a government actually support having some?
•

Discussion questions
•4. Provide examples illustrating how markets change from one structure to another when technology
or other market conditions change.
•5. What are the implications for the regulatory authorities of the existence of contestable
markets?
•6. Outline the main role and responsibilities of a regulator in the transport industries.
•

9.2 Regulation and deregulation
Based on Ch. Nash (2005) Privatization in Transport


History (1)
•1970s – in much of the world, transport had become a largely public sector activity
•Roads, railways, airports and many ports were publicly owned
•Rail most bus and coach services and many air services were provided by public sector operators
•The one big exception to the rule was road haulage

History (2)
•1980s – transport policy moved progressively in the direction of the market approach and
widespread privatization of transport operations and sometimes even infrastructure took place •UK
under M. Thatcher – deregulation of express coach services in 1980s; deregulation and privatization
of most local bus services, privatization of the major airports, ports and British Airways;
privatization of rail

Why public ownership?
•Natural monopoly argument
•Transport so fundamental that it requires a degree of central planning and control •Large external
benefits and costs of the transport

What went wrong?
•Government decision taking may not always be competent (SR political advantage x LR objectives)
•Publicly owned organizations lacked strong incentives to achieve high quality services at minimum
cost •Transport sector has heavy requirements for investment

Is privatization the solution?
•Privatization can lead to clear and explicit objectives, where operators are motivated by profits
•Politicians need to make explicit arrangements, through regulation, taxes, or subsidy, to achieve
their political and social objectives •Together with hard budget constraint and takeover threats
should be enough to increase efficiency

Competition …. ?
•However, privatization has most often been accompanied by action to open up the market to
competition, by removing regulatory and other barriers to entry •Competition would lead to
provision of services and infrastructure at minimum costs and maximum innovations

Potential pitfalls
•Much of the transport sector was seen as a natural monopoly – competition can lead to loss of
economies of density •Technical efficiency is likely to be maximized by a competitive approach,
whereas revenue from asset sale is highest when the company concerned retains a monopoly

Solution?
•Natural monopoly confined to the infrastructure and it is perfectly possible to have competing
operators over the same infrastructure. •What about the infrastructure?  – privatization, cost-plus
regulation, franchising?

9.3 Rail freight deregulation in North America



Exercise
•Larson (2013) analysed deregulation of US rail industry that happened after 1980. Based on the
table would you call this deregulation success or failure?
•

CDRR
BTM
TnC
Haul
TM/EH
Track
Class I
Oil
Prime
1970
5.96
765
2.363
490.4
605
336.3
71
3.35
7.91
1980
5.94
919
3.059
615.8
863
270.6
40
37.38
15.26
1990
3.69
1034
6.207
725.7
1901
200.1
14
24.49
10.01
2000
2.54
1466
9.177
843.3
3293
168.5
8
30.30
9.23
2007
2.82
1771
12.027
912.8
4182
161.1
7
72.36
8.05

History
•Railways in North America privately owned and vertically integrated •From 1890s – tight regulation
of rail freight tariffs + obligation to operate loss-making passenger rail services •20th century →
tight regulation + increasing competition from road and air = problems (losses) for US rail
companies

Penn Central
•1970 – bankruptcy of Penn Central – threat to all rail traffic and industrial production in
north-east of the US •US government took action → it took over Penn Central, restructured it (7.8
bn USD) and privatized again (2 bn USD) in 1987

Amtrak
•1971 – US government created Amtrak – state owned operator of passenger rail services that took
over from private companies 50% of the operation of unprofitable passenger rail operations. The
other 50% was cancelled one for all
•Amtrak subsidized by US government by 1 bn USD per year
•Amtrak owns 1000 km of attractive infra (North East Corridor) -
•

Amtrak
•Amtrak owns 1000 km of attractive infrastructure in North East (Boston-New York-Washington) where
due to high speed parameters creates about 50% of total revenues
•In the rest of the network is Amtrak host operator on the infrastructure of freight railways,
however it has the legal right for entry at marginal costs
•

Deregulation
•1980 → Staggers Act; higher freedom to set rates
•Results: impressive growth of output + significant employment decline = efficiency improvement
jump
•Welfare gains → net benefits to customers because due to competition, tariffs went down
•Operators → profitable again

Competition
•Competition of vertically integrated firms
•Significant process of mergers and acquisitions
•7 big Class I railways

Recommendations
•Eliminate cross-subsidies
•Intermodal competition and competition of vertically integrated rail companies
•Deregulation leads to better services
•Rail freight to be vertically integrated and private •To have pragmatic approach both in ownership
and competition attitude

9.4 Deregulation of US airlines
Based on Goetz, A. R., & Vowles, T. M. (2009). The good, the bad, and the ugly: 30 years of US
airline deregulation. Journal of Transport Geography, 17(4), 251-263.

Deregulation
•Deregulation Act – October, 1978
•The government no longer engaged in economic regulation of the airline industry •Private airlines
allowed to make all decisions regarding entry, exit and fares

History



Assessment
•Many experts claim the deregulation is a big success in terms of fares and ridership •Others
expressed concern regarding concentration, profitability and pockets of pains •What is the fair
assessment of the results of US airline deregulation?

Ridership



Fares
•


Fare distribution



Profitability
•


Bankruptcies



Conclusions
•Good → fares, services, ridership
•Bad → uneven distribution of results
•Ugly → financial and employment instability
•

9.5 Regulation of the infrastructure provider. Case study: Railtrack



Case: Regulation of the British railway industry
•1945 - 1994 – British Rail. Vertically and horizontally integrated single nationalized operator in
the UK.
•1994 - 1997 – British railway reform. British Rail divided into 104 separate companies with the
main purpose to introduce competition at all levels of railway operation (train operating
companies, rolling stock leasing companies, infrastructure maintenance and renewal companies).
•The majority of these companies were privatized

British infrastructure provider
•The one exception was the infrastructure provider, where it was considered that the advantages of
having a single national network operator significantly outweighed the drawbacks of splitting the
network up into separate geographical areas.
• This therefore left a monopoly provider of the infrastructure throughout the country
•This was organized into a company called Railtrack which was floated on the stock exchange
•All infrastructure access charges were to be at full cost
•As a result, the firm would return a profit and receive no direct subsidy except to assist the
funding of railway investment
•The strong regulation was introduced to prevent the abuse of monopoly power

British rail industry regulatory structure 1997 - 2001
Transecon vol 2 2.pdf


What went wrong?
•Railtrack investment needs, costs overruns on the major infrastructure projects
•Railtrack had effectively very little control over its own costs; loss of engineering expertise
•Broken rail at Hatfield (October 2000), resulting in a train derailment and four fatalities.
Railtrack panicked and overreacted imposing severe speed limits on the network leading to
widespread delays and chaos (2000 – 2001).
•Under the terms of track access agreements, Railtrack had to pay more than 500m GBP to train
operating companies as a result of the disruption caused.
•This combined with major cost overruns led to bankruptcy of Railtrack in October 2001 and it was
replaced by non-profit organization Network Rail.
•
•
•

British rail infrastructure provider – results



Exercise: UK rail reform (again :-)
UKRail subsidies.jpg
•In the following graph you can observe the development of subsidies into British railway sector.
How would you interpret it? One of crucial goals of British railway reform was to decrease rail
subsidies. Was the reform successful in this respect?
•

9.6 Summary



Summary
•There is a balance between the issues of regulation and ownership •The experiment with private
ownership of rail infrastructure in Britain went wrong •Subsidy plays a vital role in the operation
of transport markets

Readings for Lecture 10
•Alexandersson, G., & Hultén, S. (2006). Predatory bidding in competitive tenders: A Swedish case
study. European Journal of Law and Economics, 22(1), 73-94.
•