FTC Staff Comment to the Hon. Rodney T. Berry Concerning Proposed Revisions to Chapter 24-A of the West Virginia Code to Partially Deregulate the Tow Truck Industry

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CLEVEL\ND /{~GIUNAL UI"FICE
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A pdl 5, 1989
The Honorable Rodney T. Berry
West Virginia House of Delegates
State Capitol
Charleston, West Virginia 25305
Dear Delegate Berry:
The staff of the Federal Trade Commission is pleased to respond to your
request 	for 	co..mments 	on 	proposed 	revisions 	to 	Chapter" 24-A 	of 	the 	West
Virginia 	Code.1 	Those 	revisions 	would 	partially 	deregulate 	the 	tow 	truck
industry 	in 	West 	Virginia, 	allowing more 	rapid 	entry 	and 	price 	competition.
We 	believe 	that 	the lroposals would benefit consumers by mcreasing choices,
improving service, an 	reducing prices.
Currently, tow trucks in West Virginia are regulated as common carriers
under 	the 	state's 	Motor 	Carrier 	Law. 	That 	Iaw 	creates 	an 	apparently
significant 	entry 	barrier 	by 	requiring 	that 	all 	tow 	truck 	operators 	obtain 	a
Certificate of Convenience and. Necessity. 	We understand that such certificates
are ~ranted only after a complex application process and a sometimes lengthy
heanng before the Public Service Commission (PSC). 	By increasing the cost of
entering the 	tow truck business, this process may Increase the price of towing
services in West Virginia, to the detriment of consu.mers.
The proposed legislation will streamline entry requirements by eliminating
the CertifIcate of Convenience and Necessity. 	All common .carriers engaged in
the business of towing, hauling or carrying wrecked or disabled vehicles would
be required to register with the PSc, comply with applicable safety regulations
and 	maintain 	adequate insurance. 	In addition, the 	PSC would s~t maximum
_~_. ~_ ... _. towing rates, ~ with_.~mpetitio~:_pe~mitt~~.::c1?eneat.1l._!?_os~:_~~~i~~ll1~ 	-:::=-~.. _ ..
1 	These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Cleveland 	Regional
Office and the Bureau of Economics of the Federal Trade Commission. 	They
are not necessarily the views of the Commission or of any individual Commissioner.
2 	We 	do 	not 	address 	the 	costs and 	benefits of this 	form 	of rate regulation
in Our comment..
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1. 	Ioterest 80d Experience of the Federal Trade Commission
The Federal Trade Commission (FTC") is an independent regulatory agency
responsible 	for 	fostering 	competition 	and 	safeguarding 	jhe 	interests 	of
consumers. 	Section 5 of the Federal Trade Commission Act 	prohibits unfair
methods 	of 	competition 	and 	unfair 	or 	deceptive 	acts 	or 	practices. 	Through
investigations. of 	~leged viC?lations 	of 	this 	statut~, the 	staff 	of 	t.he 	FTC 	has
gained 	expenence 	In analyZing 	the effects of vanous trade restramts, and 	the
costs 	and 	benefits 	of these 	restraints to consumers. 	Upon 	request 	by 	federal,
state 	and 	local 	governmental 	bodies, 	the 	staff 	of 	the 	FTC 	regularly analyzes
legislative 	and 	regulatory 	proposals 	to 	identify 	provisions 	that 	may 	impair
competition or increase costs without offering offsetting benefits to consumers.
During recent years, the Commission's staff has studied the deregulation of
trucking and 	has disiussed the llenefits of increased reliance on market forces
at 	both 	the 	federal 	and 	stat~ levels. 	Our 	activities 	in 	this 	area 	and 	in
matters 	of competition 	policy 	generally 	have 	provided 	us. with experience 	in
analyzing the potential competitive consequences of trucking deregulation. 	We
have not conducted a specifIC empirical study of tow truck deregulation in West
Virginia. 	We 	are 	familiar, 	however, 	with 	the 	literature 	examining 	trucking
deregulation nationally and in other states. 	While the West Virginia legislation
covers only the 	tow 	truck industry, literature on the broader consequences of
trucking deregulation may 	be 	useful 	The 	weight of that literature supports
3 	15 U.s.c. 	45
" 	~ Comments 	of 	the 	Federal 	Trade 	Commission 	on 	Pricing Practices 	of
Motor Common Carriers of Property Since the Motor Carrier Act of 1980, Ex
Parte 	No. 	Mc·l66, 	before 	the 	Interstate 	Commerce 	Commission 	(Jan. 	1983);
Supplementary Comments of the Bureaus of Competition, Consumer Protection
ana Economics of the Federal Trade Commission on the Exemption of Motor
Contract Carriers from Tariff Filing Requirements, Ex Parte No. Mc-l65, before
the Interstate Commerce Commission (1983); D. Breen, Bureau of Economics of
the Federal Trade Commission, ReJUlatQry Reform and the Iryckjn~ Industry;
An 	Evaluation Qf the M9 t qr Carner Act of 1980. s~bmitted 	to Motor Carrier
Ratemaking Study Comm1SS1on (March 1982). 	0
5 	~ Comments 	of 	the 	Federal Trade 	Commission staff 	to 	the Speaker of
the 	Rhode 	Island 	House 	Joseph .DeAngelis, 	on 	legislation 	to 	exempt 	motor
carriers 	such 	as 	tow 	trucks 	providing 	services 	to 	cooperative 	groups 	from'
regulation 	by 	the 	Public 	Utilities (April 26, 1988); 	Comments of the Federal
Trade 	Commission staff 	to, California Sen. Rebecca 	Morga~ on 	legislation' to
repeal the Public Utilities Commission's authority to set contract carrier ·motor
freight-rates (Dec. 31, 1987); 	Comments of the Federal Trade Commission Staff
to 	the Legislative 	Audit Council 	of 	the 	State 	Qf South Carolina on 	Possible
Restrictive 	or 	Anticompetitive 	Practices 	in 	South. Carolina's 	Public 	Servi~e
Commission 	Statutes 	(Sept. 	29, 	1987); 	Statement 	of 	the 	staff 	of 	the 	Federal
Trade Commission on Economic Deregulation of Trucking to House and Semite
Transportation Committees, Washington State Legislature ~ (March 7, 1985).
Page 2 of 8
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what we believe will be th~ b~ncfits of the proposed revisions to Chapter 24-A.
It 	Arguments Advanced in Support of Continued Regulation
Trucking 	regulation originally was intended to help Jrotect 	the regulated
railroads 	from 	competition 	from 	the 	then~unregulated nn 	expanding 	trucking
industry. 	It 	also 	was 	designed, 	in 	part, 	to 	support 	the Crucking 	industry 	by
restrictIng com peti tion during the depression of the 1930's.
In 	our 	experience, 	those 	who 	support 	continued 	regulation 	of 	motor
common carriers usually advance three major arguments: 	preventing predatory
pricing, 	forestalling 	destructive 	competitIOn, 	and 	maintaining 	safety. 	As
discussed 	below, 	however,a 	number 	of 	empirical 	studies 	on 	trucking 	have
concluded that 	none of these rationales supports the contention that
7 continued
regulation of common motor carriers is either necessary or desirable.
A. Predatory Pricing
A 	primary argument advanced in support of continued 	regulation 	is tbe
prevention of predatory pricing. 	The yrinclpal thrust of this argument is that
larger, 	better 	financed 	companies 	wi! 	attempt 	to 	drive.. out 	competitors 	by
selling trucking services below cost. 	The surviving firms will then raise their
prices 	above 	the 	competitive 	leve~ 	eventually 	recouping 	their 	losses 	and
Increasing their profits.
One 	condition 	necessary 	for 	successful 	predatory 	pricing 	is 	high 	entry
barriers. 	High 	entry 	barners, 	which 	may 	take 	the 	form 	of 	government
re~lation, prevent 	a 	return 	of 	competitors 	when 	the 	predatory 	firm 	raises
prIces above the competitive level to recoup its losses. 	One of the conditions
necessary 	for 	predatory pricing exists when entry is regulated, and so, to the
extent 	that 	a 	threat 	of 	predatory 	pricing exists, entry 	regulation 	exacerbates
this 	threat, 	thus 	increasing the 	necessity of state trice 	controls 	to avoid 	this
threat. 	Barriers 	to 	entry 	will 	no 	longer 	exist 	i 	the 	proposed 	revisions 	to
Chapter 24-A are enacted. 	The simplified registra.tiop. requiremc:n~s will permit
new tow truck operators to enter th§ market qUickly when eXIstmg operators
raise 	rates 	above 	competitive 	level~ 	The 	absence 	of 	entry 	barners 	makes
detailed regulation of prices less necessary, assuming predation was more than a
6 	Nelson, The Chaoldng Economic Case for Surface Transport Regulation. in
Perspecti ves on _F ederalTransportatloD_ Poll_cy.:_(J~~~s__S._~~I!e,L}JI, ed. 1975)..
7 	Stt 	generally, 	~ 	Weinstein 	& 	Gross, 	Tran~fiQrtation 	and 	Economic
Development: 	The Case for Reform of Trucking R~uation in Texas, Center for -
Enterprising, Southern Methodist University (Feb. 	87); D. Breen, S1!l2.@ note. 4.
8 	J. 	C. 	Miller 	III, 	Economic 	Re~latiQn 	of 	Truckin~, in 	Report 	of 	the
Economic 	Advisory 	Panel 	to 	the 	National 	Commission 	for 	the 	Review 	of
Antitrust Laws and Procedures (Nov. 9, 1978).
Page 3 of 8

-; :.-••:-:--.:-..23 -The possibility of predation rDlght, "under certam circumstances, justify the ..-.
. . 	imposit~on ~f minim~ prices. 	However, to justify economically minimu'm price
" " 	regulation In a speCIfIc Industry, more than a general theoretical posSibility of
predati?n should exi~t 	It .wo";\ld be ~esirable to also sho~ that ~li~ conditionS
conduclve to 	predatIon 	eXiSt 	10 	the 	mdustry. 	Further, smce 	nnmmum' price
regulations can hurt consumers if the minimum price is set too high., it would
also 	be 	desirable 	to 	show 	that 	the 	expected 	benefits 	from 	setting 	minimum
prices more than offset the expected costs.
. ~
~ ,
remote 	threat 	Moreover, 	because 	trucks 	arc 	highly 	mobile 	and 	can 	be
transferred quickly, the costs of entering (and exiting) a particular geographic
area 	are apt 	to be 	relatively 	low. 	If 	the 	predator tried 	to raise its prices 	to
noncompetitive levers, other 	firms should enter or re-enter the market, taking
business away from 	the p'redator and forcing prices back to competitive levels.
Because predation is unlIkely to 	be profitable, motor carriers are not likely· to
attempt it.
In 1987, 	the 	General 	Accounting 	Office 	joined 	the 	Interstate 	Commerce
Commission, 	the 	Motor 	Carrier 	Ratemaking 	Study 	Commission 	and 	the
Department of Justice in conclUding that 	predation IS 	unlikely to occur as a
consequence of truckin~Oderegulation.9 In Matsushita Electrical Industrial Co,
y. 	Zenith 	Radio 	Corp., 	the 	Supreme 	Court 	stated 	that 	"predatory 	pricing
schemes are rarely tried, and even more rarely successfuL"ll
Predatory 	pricing 	remains 	at 	least 	a 	theoretical 	possibility.12 	However,
this 	possibility 	does 	not 	seem 	to 	us 	to 	justify 	thi:; type 	of 	entry 	restrictions
embOdied in the current West Virginia regulations. 	In any event, firms that
attempt 	to engage 	in 	predatory 	pricing 	also 	would 	be 	subject 	to 	public 	and
private antitrust enforcement actions.
B. 	Destructive Competition
9 	United 	States 	General 	Accounting 	Office, 	I'ruckins- 	Re~ulatiQn; 	Price
.CampetitigU 	and 	Market 	Structure in 	the 	Truckin~ Indust(L SolO (Feb. 1987).
The positions of the ICC MCRSC, and DOJ are discussed in the GAO rep0r:t-
.' .10 	475 U.s. 574 (1986).
U 	Id' at 	589-90, 	citing 	R. 	Bork, 	The 	Antitrust 	Paradox, 	149-Se{ 	(1978);
Areeda &. Turner, Predatory Prjcjn~ and Relatyd Practjces Under Sectjon 2 of
the 	Sherman 	Act. 	88 	Harv. 	L 	Rev. 	6'J7, 	fU) 	(197~ 	Easterbrook, 	Predatory .
, 	. 	48 	U. 	Chi 	L 	Rev. 263, 268 	(1981'); 	Koller,
'i 	- 	. 'ca 	4 Antitrust L. & 	Econ.
Rev. 1 	~~ 	McGee, 	"
1 1.!- & 	n. 137 (1958); 	~~.u.t-..LoL.Ll~...£.»~~
289, 292·94 (1980~
1 	.
12 	J. Tirole, 	The 	Theory 	of 	Industrial 	Or~aniz8tiQn. Cambridge: MIT 	Press,
1988, chs. 8 & 9.
Page 4 of 8
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Proponents of trucking regulation also argue that deregulation will lead to
"destructIve 	competition:' 	Destructive 	competition 	may 	occur 	in 	industries
characterized by fluctuating 	demand, sunk costs, and a high ratio of fixed 	to
total 	costs. 	These 	conditions 	are 	likely 	to 	create 	excess 	capacity 	and
considerable 	pressure 	to 	cut 	prices 	when 	demand 	falls. 	If 	price 	competition
occurs, 	however, 	prices 	may 	persist 	below 	the 	~otal cost of 	providing services
because the sunk nature of costs makes capacity adjustment difficult 	It is also
said 	that firms facing transitory losses may, as a result, try 	to reduce costs by
skimping on service, to the detriment of customers.
Conditions conducive for destructive competition are not likely to exist in
the 	motor 	carrier 	industry 	in 	general, 	nor. 	we 	believe. 	in 	the 	tow 	truck
industry in particular. 	Fixed costs constitute only a small percentage of total
costs, which include such variable costs as labor and fuel expenses. 	Trucks also
are highly mobile assets which may· readily and easily be transferred from less
profitable 	to 	more 	profitable 	uses 	or 	geographic 	markets 	in 	response 	to
fluctuations in demand, suggesting that costs specific to a particular location or
geograp~ic region ~~e apt. to be rf!atively small. 	Therefore, it is unlikely that
destructive compeutlOn w111 occur.
C. 	Safety
Another argument that has been advanced is that dereg.ulation will have an
adverse effect on safety in 	the trucking industry, because carriers facing stiff
competition 	will 	neglect 	maintenance, 	delay 	replacement 	of 	vehicles, 	and
overwork 	drivers. 	We 	believe 	that 	reduced 	safety 	is 	not 	a 	necessary
consequence of economic deregulation. 	In fact, a recent study of truck safety
.-in 	California, conducted 	jointly by 	the 	California Public Utilities Commission
('cPUej and the California HIghway Patrol was "unable to prove the hypothesis
that CPUC economic regulat~ of trucking is significantly and positively linked
to improved highway safety:' 	"
The 	legislature 	has 	a 	legitimate 	interest 	in 	promoting 	safety 	on 	West
Virginia's highways. 	However, rather than attemptin~ to affect safety indirectly
through economic regulation such as this, direct actlon to address safety issues
may be preferable. 	A direct approach is consistent y.rith proposed amendments
to 	Chapter 24-A, which 	mandate 	that 	motor 	carriers comply with 	the 	Public
Service 	Commission's 	safety 	rules, 	and 	that· tow 	truck 	operators 	maintain
adequate liability insurance.
D. 	Market Failures Specific to Towing
u" 	14 	~ 	A. 	Kahn 	III. 	2 	Economics 	of 	Reiulation 	178 	(1971) 	in 	which 	the
author 	states, 	'lD]oes 	trucking 	have 	the 	economic 	attributes 	of 	an 	industry
subject to destructive competition? 	It would be difficult to find one less qualified."
15 	California 	Public 	Utilities 	Commission 	& 	California ·Highway 	Patrol, 	AD
2678 Final Report on Truck Safety, Joint Legislative Report, 3 (Nov. 1987).
Page 5 of 8
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Regulatory 	oversight 	of 	towing 	services 	has 	sometimes 	been 	justified
because 	of 	possible 	abuses 	associated 	with 	the 	towing 	of 	cars 	authorized 	by
someone 	other 	than the 	owner (e.g., 	when 	a 	car is illegally 	parked). 	This 	is
known as "nonconsent" 	towing. 	These alleged abuses consist of damage to 	the
towed vehicle (for which the owner is not compensated), and the imposition of
excessive 	charges 	for 	the 	towing 	and 	storage 	of 	the 	vehicle. 	Although
regulatory mechanisms may' sometimes be necessary to remedy such problems, it
seems unlikely that a CertIficate of Convenience requirement would be useful in
this capacity. 	Indeed, by protecting incumbent towers from new competition, a
Certificate of Convenience requirement may actually facilitate the establishment
of supracompetitive prices and the provision of poor quality service.
There 	are 	other 	types 	of 	regUlation 	which 	might 	be 	better 	suited 	to
alleviating any problems that. might.be associ~ted with nonc~>nsent tov.:ing. 	For
example. because 	the PSC· wIll retaIn authonty to set maxImum towm~ rates.
any problems resulting from excessive rate charges for nonconsent tOWing can
be 	aCidressed 	through 	the 	application 	of 	this 	authority.lO Additionally, 	if 	the
state determines that the uncompensated damage to vehicles resulting from non-
consensual 	towing 	is 	a 	problem 	requiring 	a 	regulatory 	solution, one 	possible
solution 	would 	consist 	of 	requiring 	nouconsent 	towers 	to 	post 	performance
bonds 	that 	would 	be 	forfeitable 	in 	the 	event 	of 	unsatisfactory 	performance.
This would provide nonconsent towers with an incentive to· provide service of
acceptable quality, without depriving consumers of "consene towing services of
the benefits of free entry. 	.
TIL 	BENEFITS OF DEREGULATION
Evidence of the benefits to consumers produced by trucking deregulation
can be gleaned from the experiences of other states. 	California, tor exampl~
experimented with partial economic deregulation of trucking from 1980 to 1986-
During Ithat 	time 	entry 	was 	virtually 	free, 	and rates, though_ regulated, were
flexible,; .7~~ The result was lower rates with no loss in service.I8
Experiences 	of 	other 	states 	also 	attest 	to 	the 	economic 	benefits 	of
intrastate 	trucking 	deregulation. 	A 	study 	of 	trucking 	in 	New 	Jersey,· for
16 	To 	foster 	competition, 	the 	maximum 	rate 	set. should 	not 	be 	below 	a
competitive rate. 	I 	.
17 	Carriers 	were 	permitted 	to 	change 	rates, 	after 	a 	short 	waiting 	period,
without having to show the 	change was cost-JUstified. . There 	was no waiting
period to match a competitor's rate.
18 	M. 	Simmerson, "Analysis 	of 	The 	Impact 	of 	Deregt:l:!!tion 	of the 	General
Frei~ht 	Truckin~ 	Industry:' 	Investigation 	No. 	84-05-048, 	California 	Public
Utilities CommisslOn, 20-21 (Aug. 10, 1984) (based upon survey by CPUC of 239
general 	freight 	carriers 	and 	survey 	by 	California 	State 	University, 	Hayward,
Institute of Research & Business Development of 596 shippers.)
Pnge 6 of 8

example. 	concluded 	that 	deregulation 	has 	worked 	well 	in 	that 	state.19
According to W. Bruce Alle~ one of the study's authors, shippers were satisfied
with 	the available service, rates were about ten percent lower tha~dhey would
have been under regulation, and intrastate carriers have prospered
In Florida, deregulation occurred so quickly that truckers and shippers had
no opportunity to 	prepare for it. 	Nonetheless, according to one study, a year
after 	deregulation 	88 	percent 	of 	shippers, 	as 	well 	as 	a 	surprisingly 	high 	49
percent 	of 	truckers, 	supported 	it. 	Most 	shippers 	thought 	diat 	service 	levels
remained constant and that rate fluctuations haql posed no difficulties. 	Only a
few 	shippers 	converted 	to 	private 	carriage; 	many 	more 	such 	shipper
conversions 	might 	have 	been 	expected 	if 	predatory 	pncing 	had 	resulted 	m 	a
large 	reduction in 	the number of tru:£fers, or if "destructive competition" had
caused 	service 	qua~y 	to 	diminish. 	Likewise, 	a 	1982 	Department 	of
Transportation study 	found that 90 percent of Florida shippers believed that
post-deregulation 	service 	was 	at 	least 	as 	good 	as 	service 	oefore 	deregulation
and 	30 	percent 	reported 	improvements. 	A 	majority 	of 	these 	shippers 	(58
percent) perceived 	that deregulation had held down rates. .. Finally, economists
Blair, Kaserman, 	and 	McClave 	found 	that 	Florida's deregulation of Artrastate
trucking led to a 15 percent average reduction in motor carrier rates.~'
The experience of other states is' consistent with that of California, New
Jersey 	and 	Florida. 	For example, in 	Wisconsin, 67 percent 	of shippers 	were
satisfied 	with 	deregulation 	and 	only 	six 	percent 	were 	dissatisfied. 	Seventy-
three 	percent 	said 	that 	ratc 	information 	was 	as 	readily 	available 	after
deregulation 	as 	before. 	Carriers 	were 	evenly 	divided 	on 	the 	question 	of
deregulation. 	Those with increased profits tended to favor deregulation, while
19 	W. Bruce Allen, S. Loner~n & D. Plane, Examination Qf the Unr~ated
Trucking EAperjence in New ~ey. u.s. Dept. of Transportation (July~
20 	W. Bruce Allen, Statement BefQre the National CQmmission for the Revj((w
of Anti-Trust Laws and ~rQcedures (January 22, 1979~
21 	Private carriage occurs where the shipper owns the motor carrier.
22 	Freeman, A 	Survex of Motor Carrier Deregulation in Florida: 	Que Year's
Experience, ICC Practitioners Journal, 51 (Nov.-Dec. 1982). 	1,
.2j 	Statement 	of 	~atthew V. 	Scocozza, 	Assistant 	Secretary 	for 	Policy 	and
International 	AffaIrs, 	US.' -Department' ·of··· TransportatIOn, 	Before 	the
Subcommittee on Surface Transportation, US. House of Representatives (June
20, 1984~
24 	Blair, 	Kaserman 	& 	McClave, 	Motor 	Carrier 	Dere~ulatjQo; 	The 	Florida
Experiment. 68 Rev. ECQn, & Stat. 159 (1986).
Page 7 of 8

some of those opposing deregulation were concerned ab~t the loss of the asset
value of their certificates of convenience and necessity.
In 	Maryland, 	intrastate 	household 	goods 	movers 	were 	not 	regulated. 	A
study 	conducted 	in 	that 	state 	in 	1973-74 	revealed 	that 	the 	then-regulated
interstate household goods carriers charged 27 perce~6to 67 percent more than
unregulated intrastate carriers for comparable moves.
Oregon dere~ulated the shi(>ping of certain building materials in 1980. 	The
results of this actIOn were exammed in tW~7eparate surveys by the Legislative
Research Office of the Oregon Legislature. 	All parties surveyed a~reed that
deregulation increased the number of carriers in the market 	AccordlOg to one
survey, almost 	all 	shippers 	and 	most 	of 	the 	truckers with 	prior authority 	to
carry these products believed 	that 	trucking rates had decreased 	None of the
groups surveyed 	believed that general rate levels bad increased as a result of
deregulation.
IV. 	CONCLUSION:
A 	significant 	body 	of 	evidence 	$Usgests 	that 	deregulation 	of 	trucking
services 	lowers 	rates 	and 	improves 	servIce. 	We 	believe 	that 	the 	proposed
amendments to Chapter 24-A constitute an important stepln moving to a more
com~titive tow-truCk indus~ in West Virgima. 	It should result in significant
benefits 	for 	consumers 	and 	competition. 	Entrepreneurs 	will 	be 	free 	to 	add
needed service and 	to compete on rates without waiting long periods of time
for Public Service CommiSSIon approval.
We appreciate this opportunity to present our views. 	We would be happy
to supply copies of the studies referred to in this letter.
Sincerely,
Mark Kindt
Cleveland Regional Director
\
2S 	Wisconsin Office of the Commissioner of Transportation; '~uJ8tiQn Qf
:w'isconsjn 	Motor 	Carders {July 	1983~ 	There 	may, however, 	be oter 	capital
losses. 	.
'. 	26 	Breen, Re~uJatiQn and 	Household Moyjn~ Costs, Regulation, 53 (Sept-Oct.,
1978).
~
27 	Unpublished 	surveys 	conducted 	by 	the 	Oregon 	State 	LegiSlature's
LegislatIve Research Office (1984). 	.
Page 8 of 8
TOTAL P.09