Economic Deregulation in Network Industries: The “First Wave”

Jerry ElligSenior Research Fellow

jellig@gmu.edu

Outline

Focus on “first wave” of U.S. network industry deregulation (1975-90)

Economic effects

Explanations for the effects

Why does this matter?

Get the facts straight

Avoid repeating mistakes

Understand causation to guide future decisions

Network Industries

Local streetsHighwaysTrucks

AirportsAirways/ air traffic control

Airlines

Wireline localWireline long-distance

Telecom equipment

Local lines/ sidings

Trunk linesTrains

Local pipesInterstate pipesGas wells

“Distribution”“Transmission”“Production”

Largely Private Ownership (blue)

Local streetsHighwaysTrucks

AirportsAir traffic controlAirlines

Wireline localWireline long-distance

Telecom equipment

Local lines/ sidings

Trunk linesTrains

Local pipesInterstate pipesGas wells

“Distribution”“Transmission”“Production”

Deregulation of Prices and Entry

Govt ownedGovt owned1980Trucking

Govt ownedGovt owned1978Airlines

1996-

ongoing

Late 1970s-early 1990s

1970sWireline Telecom

1976-19801976-19801976-1980Rail

NoneSome entry mid-1980s

1978-1993Gas

“Distribution”“Transmission”“Production”

“Open” or “Competitive” Access

Govt ownedGovt ownedN.A.Trucking

Govt ownedGovt ownedN.A.Airlines

1984-todayAT&T resale 1984

N.A.Wireline

Telecom

Mergers 1980-today

Mergers 1980-today

N.A.Rail

State-specific1983-1992N.A.Gas

“Distribution”“Transmission”“Production”

% Real Price Reduction After …

28-58%

(1977-87)

3-17%

(1980-85)

N.A.Trucking

29%

(1977-87)

12%

(1977-82)

13%

(1977-79)Airlines

40-47%

(1984-94)

23-41%

(1984-89)

5-16%

(1984-86)Long-Distance

Telecom

44%

(1980-90)

20%

(1980-85)

4%

(1980-82)Rail

27-57%

(1984-94)

23-45%

(1984-89)

10-38%

(1984-86)Gas

10 years5 years2 years

Annual Value of Consumer Benefits ($1995)

$4.2 billion$19.6 billionTrucking

$7 billion$19.4 billionAirlines

N.A.$5 billionLong-Distance Telecom

$4.7 billion$9.1 billionRail

N.A.$4-7 billion?Gas

NonpriceTotal

Hypotheses

1. Reduced Market Power: Deregulation reduced monopoly prices to competitive levels

2. Increased Innovation and Entrepreneurship:Deregulation led to innovations that reduced costs and created unexpected sources of value for consumers

Gas Price Regulation as a “Windfall Profits” Tax (1968-77) Customers buying cheap gas gained $38.7

billion ($1982)

Producers lost additional $6.7 billion due to reduced sales

Customers doing without due to shortage lost $51.7 billion

All Consumers’ Gas Prices Fell

Figure G-1: Natural Gas Prices, 1984-95 ($1995)

0

1

2

3

4

5

6

7

8

9

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Source: Energy Information Administration

$/m

cf

Wellhead

Residential

Commercial

Industrial

Elec. Utility

Citygate

Cost Reductions in Gas Transmission

Figure G-2: Transportation and Distribution Margins ($1995)

0

0.5

1

1.5

2

2.5

3

3.5

4

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Source: Energy Information Administration

$/m

cf Dist. Margin

Trans. Margin

Gas Innovations

Market Hubs/Competition($2 billion savings annually)

Risk Management

Storage

Rail Rate Reductions

Figure 2: Rail Revenues and Operating Expenses per Ton-mile ($1998)

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

cen

ts

RevenueOp expsOp exps-spec charges

Rail Productivity Improvements

Figure 1: BLS Railroad Productivity Indices

0

20

40

60

80

100

120

140

160

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

MultifactorLaborCapital

Rail Innovations

Shed excess capacity

Non-union short line and regional railroads

Unit trains/longer trains

Intermodal

Shipper-owned cars

Rail Predictions vs. Actual

Pre-deregulation studies estimated deadweight loss of $100 million-$1 billion

No consensus on rate reductions

Excess costs estimated at $2.5 billion

Ex post studies show total benefits of $9 billion or more

Long-Distance Telecom Prices

Real Consumer Price Index, Long-Distance Service

0

50

100

150

200

250

300

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Source: Bureau of Labor Statistics, CPI web page

Interstate

Intrastate

Long-Distance Telecom

Long distance revenues net of access charges

0

5

10

15

20

25

30

35

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

FCC, Telecommunications Industry Revenues (2002), p. 30

Ce

nts

/min

ute

Revs/min

Access charges/min

Revs-access charges

Long-Distance Telecom Innovations

Fiber optic transmission

Digital switches

Total Factor Productivity accelerated after long-distance entry (1969-71) and AT&T divestiture (1984)

Average Airline Fares

Figure A-1: Airline Yield (cents per RPM, $1995)

0

5

10

15

20

25

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Concentrated Hub Fares

Figure A-5: Yield at Single-Carrier Hubs, Cents/RPM ($1995)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1979 1984 1988 1994

Flight Frequency Increased

Figure A-8: Total departures

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Small cities Medium cities

May-78

May-95

Airline Innovations

Hub-and-spoke systems

Commuter carriers

Low-cost carriers

Bankruptcy to escape high labor costs

Trucking Costs

Real Operating Cost Per Mile ($1987)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1977 1987 1993

LTL carriers

TL carriers

Trucking Productivity

Trucking Productivity Index

0

20

40

60

80

100

120

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Trucking Innovations

Shipment tracking

Vehicle monitoring (on-board computers)

Freight forwarders

Intermodal

Conclusion

“[E]conomists found it difficult to predict, or even consider, changes in firms’ operations and technology, and consumers’ responses to these changes, that developed in response to regulatory reform ... deregulation led to cost reducing operational and technological innovations … that also benefited consumers.”

-- Clifford Winston, 1993

Caveats

Mistakes were made

Improvement, not perfection

These examples mostly focus on replacing monopoly/cartel with competition, and/or removing regulation from a competitive industry

For more information …

Robert Crandall and Jerry Ellig

Economic Deregulation and Customer Choice (1997)

available at

www.mercatus.org/regulatorystudies/article.php/839.html