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Mr. CHUMBRIS. Mr. Chairman, just one question. Senator Kennedy had introduced S. 2028 in the 94th Congress. It passed out of the Judiciary Committee and it was referred to the Commerce Committee, also. As I understand it, from talking to some of the staff on the Commerce Committee, there was some objection at that time and the bill did not pass at that particular Congress. Now, in the CAB, did you have any objection to S. 2028 or successor bill, in the 95th Congress, and now we are in the 96th Congress. This is a third bill on this subject. There have been some changes made.
Chairman COHEN. Let me ask legal counsel here.
Mr. BAKES. I don't recall exactly, but I think the CAB responded by letter. To the extent that they were critical, I think they were critical of some procedural provisions, the de novo review provisions. The general principle of competition is something they had already begun to adopt, and as I recall, I will check, and supply it for the record, I thought they were generally supportive of the principle that is now incorporated in 3 (a) of S. 382.
Chairman COHEN. I would be happy and this still goes for this committee and the Congress, I would be happy to do whatever I can to assist the Congress.
Mr. CHUMBRIS. Thank you, Mr. Chairman. Thank you, sir.
Senator KENNEDY. Thank you very much. Your testimony was very, very helpful.
[The prepared statement of Mr. Cohen follows:]
PREPARED STATEMENT OF MARVIN S. COHEN
I appreciate this opportunity to give the views of the Civil Aeronautics Board on the Competition Improvements Act of 1979. I don't think there is much question that competition was an undernourished plant at the CAB until just a few years ago. But given some sunlight and encouragement, it has produced impressive benefits for both consumers and the industry. I do not know whether all other industries are as ripe for a thoroughgoing transition to competition as the airline industry was, but I suspect a few of them are and the others could use at least a good dose of competition. The Competitive Improvements Act will help on both scores.
Our Nation's economic system is based on a belief that the open market is the best regulator. Any substitution of Government regulation should be reviewed to make sure that resulting distortions to the market are not worse than the original problem, and that if competition must be hedged in, it is done carefully and cautiously. As I understand it, that is what S. 382 is all about. It is the same approach that the CAB has been using for about 2 years. The well-publicized results of our policies speak for themselves, and they make a good case for applying the same process Government-wide.
We at the CAB have been living under a self-imposed "Competition Improvements Act" for some time. Well before the Airline Deregulation Act, the Board, under Chairman John Robson, began flirting with competitive principles, and under former Chairman Alfred Kahn that flirtation grew into a passionate and notorious love affair. The Federal Aviation Act of 1958 essentially directed the CAB to regulate in the "public interest" and in accordance with the "public convenience and necessity." The general policy statement of the act contained a variety of factors that the agency was required to consider in determining the public interest. We were supposed to "foster sound economic conditions" in the industry, to promote the airline industry, and to avoid "destructive competitive practices," on the one hand, and still make sure that the Nation's air service was "efficient" and "economical," and that consumers were charged "reasonable" prices. "Competition" was only to be considered "to the extent necessary to assure a sound air transportation system." Of course, the Airline Deregulation Act has since made the competitive mardate both clear and preeminent, but not so long ago the agency was laboring under the more contradictory and ambiguous man
date I have just described. It was in that statutory context that the CAB-without the benefit of new legislation-began applying competitive principles to some of its major decisions and eventually to all activities.
There are three fundamental points I would like to make about the usefulness of the Competitive Improvements Act approach in our experience. First, the injunction of section 3(a) to consider less anticompetitive alternatives has been applied voluntarily to all areas of Board activity. The results from the public's viewpoint have been generally quite good and certainly better than the results of regulation when competition was not taken seriously. Second, the absence of a firm statutory basis to allow us to choose the least anticompetitive alternative in discharging our regulatory responsibility was an impediment to sound and prompt decisionmaking. With the eventual passage of the Airline Deregulation Act, which provides a firm legal basis for procompetitive decisions, we will thankfully never know just how serious the impediment might have been. And finally, the 40-year absence of a vigorously procompetitive set of CAB policies was costly to the public and was due in part to the absence of a legal and judicially reviewable requirement to choose the least anticompetitive means among the various alternatives.
Let me briefly develop each of these points.
First, our experience at the CAB leads me to conclude that one of the virtues of the Competition Improvements Act is that it will be triggered whenever a major action is taken that has serious competitive implications. It is my view that the discipline of section 3(a) should be applied consistently to regulatory activities, and the committee, if it should err at all, should err on the side of overinclusion. At the CAB we have adopted virtually the exact standard of section 3(a) to govern our decisions involving the grant of antitrust immunity. These decisions primarily involve consideration of mergers and airline agreements. I can't say much about the current merger cases pending before us, except to note that the section 3(a) standard, now incorporated into section 408(b) by the Deregulation Act, was used almost word for word in most of our orders predating the Deregulation Act.
About 2 years ago we began to consider two factors in all of our antitrust proceedings: whether there had been a clear and convincing showing that the public benefits of the transaction outweighed the probable anticompetitive effects, and if so, whether there was any less anticompetitive way to achieve the same benefits. This, in essence, is the standard of section 3(a) of S. 382. Substantively, we found that using such a standard encourages a more imaginative approach to dealing with regulatory problems. The entire focus of decision and argument is changed. Too often the agency and those appearing before it stop thinking after considering whether public interest factors outweigh estimated anticompetitive effects. Unless the agency also asks whether a less anticompetitive option is available, it may settle for only a second- or third-best solution. The S. 382 standard requires the additional investigation to find the first-best solution.
Procedurally, this process has disciplined us to keep from snapping at what, on first glance, may seem the best and most reasonable solution to a problem, but one which tarnishes after a sober second thought. The procedural benefit may be even more important than the substantive one. There is a tendency in human nature, even in regulatory agencies, to grab for the obvious, direct, short-run solution almost like a life preserver, especially if it is presented with the skillful advocacy so abundant in Washington. The long-run effects, which usually include anticompetitive ones, go unperceived unless agencies acquire the habit of purposely and routinely considering them. Purposeful and routine consideration is what would be required of agencies under this bill.
Actions involving antitrust immunity are not the only cases where the agency on its own adopted what section 3(a) essentially requires. The two major areas of Board action-pricing and route policy-have evolved radically in the last several years. The Board's pricing rules provide one of the best examples of how a vigorously procompetitive approach to regulation can mean greater freedom for companies to compete, a better shake for the consumer, and still maintain a firm and certain power on the part of the agency to substitute its judgment for that of the market when the public interest requires. For many years, the agency established by rigid formula all first class and coach fares in the country. Our rules literally forbade airlines to offer lower or higher fares than those dictated by our formula. This method of regulating prices was intended to achieve two quite reasonable goals: first, to make sure airlines didn't charge too much, or not more than a price to cover costs and a reasonable profit, and thus not gouge the consumer; second, 46-505-79- -2
to make sure the airlines didn't charge too little, to prevent predatory pricing against weaker competitors, and to prevent uneconomical service and consequent bankruptcy. If I might oversimplify to make my point, a careful and painstaking analysis convinced the Board last year that a great deal of the worry over excessively high or low air fares could be shifted to the marketplace where it would be policed better than at the CAB.
In choosing the least anticompetitive alternative, however, we did not find ourselves required immediately to relinquish all regulatory price controls. We transformed the previous fare formula into a fare ceiling, and allowed airlines freedom to charge above that ceiling depending on how many competitors were authorized to fly in any particular market. We allowed airlines to charge below the ceiling but maintained the right to suspend any predatory rates. We expected that our price ceiling-a regulatory tool-and competition in the market would keep air fares from becoming unreasonably high. Corporate self-interest and a regulatory prescription against predatory pricing would keep prices from going too low. And the ability to compete within a wide price range would, we hoped, bring benefits to consumers. The point of this story is that, by applying essentially a section 3(a) standard to our pricing policy, considerable benefit in the form of lower air fares came to the consumer, and the agency still maintained sufficient control over the industry.
There are many other examples. The smoking problem is one of the most difficult and hard-fought issues the Board has had to face. In an airplane cabin, it seems that the inherent conflict between those who want to smoke and those who find tobacco smoke obnoxious reaches a fever pitch. It seems that the solution of merely requiring the airlines to provide some sort of no-smoking section no longer satisfies the non-smoking public. We cannot claim to have solved this problem to the satisfaction of everyone-if anyone knows of such a solution we will be grateful forever to hear it but we have tried to keep competitive considerations in the forefront of our decision.
Cigars and pipes have been a particular problem, and we have focused on them partly as a result of a petition on that subject by public-interest groups. We have deliberately spoken to the airlines in broad terms, requiring "special segregation" of cigar and pipe smokers, in an attempt to have them maintain a competitive posture on the issue-which in this case would mean some differences in their response, offering some real choices to the public. We are not sure of the result. Several airlines, I understand, have responded by prohibiting cigar and pipe smoking. But the point is that we have passed the mandate to do something that the market by itself would not do, but have done so in a way that leaves considerable freedom. At the same time, we are proposing some more specific rules that we can put into place if the results of our earlier move turn out to be unsatisfactory. Even in later rules, if they are necessary, we will try to adopt the course that leaves as much room as we judge is possible for the carriers to differ in their responses. Our actions in response to the denied problem are, we think, another successful application of procompetitive principles. Here, again, we had a rule, but it didn't seem to be sufficient to handle the problem perceived by the public in being bumped after having a confirmed reservation. Stiffening the rule seemed to be called for, and we did that-doubled the maximum compensation that would have to be paid. But we also gave the airlines another way out, in fact required them to take at least one step before paying the compensation: seeking volunteers. That opens up some competitive daylight, for we didn't specify how much the airlines would have to offer the volunteers. But that daylight is important: it brings some free choice into the situation, meaning a more rational selection of persons who are bumped from a plane, including those whose plans are flexible enough so that it isn't a hardship; it uses denied boarding money more efficiently, thus costing the public less in the end, by directing it at those who want it the most; and it drains off a lot of the public frustration that comes from a transportation system that suddenly seems to have malfunctioned to their personal detriment. The fact that we maintained regulatory control in these cases does not argue that such controls are always or even often required, but simply illustrates for the critics of S. 382 that the discipline of section 3(a) is not too harsh or restrictive for agencies with responsibilities, like health and safety, that cannot be left entirely to the market. We have applied the section 3(a) approach to other consumer protection activities. Just last week the agency adopted a major set of rules to protect charter participants. By relying primarily on disclosure and borrowing from common law notions of contract and restitution, we were able to fashion a rule that allows extremely wide latitude for charter operators to use their competitive energies and marketing skill to offer just about any type of charter option a consumer wil ever want.
For instance, we were faced with the question whether to allow charter operators to specify alternative cities, hotels, or departure dates in their charter contracts. Changing of these elements of a charter has been one of the main complaints of charter passengers in the past-yet we did not want to eliminate the choice of a lower-priced charter where the possibility of some changes by the operator would have that effect, especially since it might mean the difference between running a charter or canceling it. The key element in the situation, of course, is full notice, leading to an informed choice by the consumer.
We answered the question by setting up a special form of contract, the Operator's Option Plan, whereby this flexibility would exist. The choices have to be clearly specified, and the operator has to make his choices 10 days before departure. The prominent labeling of the charter contract by a special name is designed to alert all consumers, and all the other safeguards of the new rules are in place. But the point is that we tried as hard as we could to preserve these especially flexible charters as a low-end option, another competitive opportunity to provide alternatives to the more definite luxurious forms of travel.
The alternative to this approach was to prescribe in more detail the particular services that the charter operator could and could not sell, to protect the participant from buying a lemon. I have no doubt that in some cases and some types of regulation the prescriptive approach—the less competitive approach—is necessary. And as chairman of a regulatory agency that has been trying to take the least anticompetitive approach, I also have no doubt the Competition Improvements Act and section 3(a) give agencies sufficient flexibility to use the prescriptive approach when the circumstances require. Section 3(a) contains a standard that we at the CAB are familiar with, that is and should be applicable to the whole range of regulatory activities, including consumer protection, and that is flexible enough to allow the regulator to choose the appropriate solution for the particular problem at hand.
When the Board first started applying the type of standard contained in S. 382 to our decision-making, our big worry was not that the courts would tell us to be more competitive, but rather that they would not allow us to apply our competitive analysis to our decision-making at all. Without the Deregulation Act, our statutory mandate was unclear, and we feared a court telling us that we did have the authority to adopt the section 3(a) approach without new legislation. Since other agencies are today reforming themselves without new organic statutes-the ICC and FCC are two prominent examples-I suspect that S. 382 will provide a welcome and helpful statutory basis for what all agencies should be doing as a matter of course.
In addition, the systematic analysis required in S. 382 will be far more effective in insuring that agencies pay attention to antitrust policy than the past history of case-by-case review in the courts has been. While the courts seem to agree in principle that effect on competition should be a factor when regulatory agencies determine the overall public interest, the cases are sparse, vague, and differently worded. Each agency has a different precedent to work from, if they have one at all. Also, it is not clear that agencies whose primary responsibilities are health and safety must evaluate the economic effects of their decisions. Thus, specific action by Congress would be a welcome clarification of the picture. I think everyone is now beginning to realize that all regulatory decisions will have some effect on competition, and that it is only sensible to try to evaluate what that effect will be before taking action. This legislation would thus do two useful things that court decisions have not accomplished so far. It would establish a clear duty for all agencies to consider anticompetitive effects, and it would establish a uniform, workable verbal formula to guide them in their analysis, and courts in their judicial review.
Mr. Chairman, critics of S. 382 have said that it will foster additional litigation and confusion in the regulatory process. I must emphatically disagree. In fact, had S. 382 been the law of the land when we were embarking on regulatory reform, there would have been less litigation, less uncertainty, more prompt and thus less costly regulatory proceedings.
We think it is crucial that the standard in S. 382 be subject to judicial review. If section 3(a) is worth applying to agencies, then it follows almost inevitably that agency decisions applying it should be subject to court review. Judicial review of agency decisions is somewhat fundamental to our whole system of ad
1 See cases cited in Congressional Research Service report reprinted in the Competition Improvements Act of 1975: Hearings on S. 2028 Before the Subcommittee on Antitrust and Monopoly of the Senate Comm. on the Judiciary, 94th Cong. 1st Sess. 346. and U.S. v. FCC, -F. 2d (D.C. Cir. 1978).
ministrative law and Congressional delegations of power. I think it would be extremely unwise to impose a substantive standard on regulatory agencies and then exempt the application of the standard from judical scrutiny. Without the discipline of judicial review to oversee its application, there is a danger that some agencies will feel immune from 3(a)'s strictures and go about their business as usual. Moreover, lack of judicial review would mean that section 3(a) would be interpreted and applied in contradictory and confusing ways depending on what agency is applying it and, even worse, depending on the political party or prejudices of the decision-maker.
One of the virtues of S. 382 is that it provides a flexible but uniform antitrust standard for government regulation. But that virtue will be lost if the application of S. 382 is exempted from judicial scrutiny. Those who argue that subjecting 3(a)'s application to court review will invite too much litigation are, in my view, raising a bright red herring. The fact is that just about any agency decision of major importance raises competitive issues and gets appealed in the courts today. S. 382 does not I repeat does not-add another layer of review to this inevitable appellate litigation, nor does it lengthen the appellate process. It simply means than another issue has to be briefed on appeal. If the agency has to defend the anticompetitive aspects of its action in court, it is likely to do a better job of deciding the matter before it gets to court.
Let me now turn to some of the more detailed procedural provisions of S. 382. Section 4 would require named independent agencies, of which the CAB is one, to notify the Attorney General of proceedings that might fall within the scope of the bill. We recognize that none of the independent agencies listed has dominated expertise in antitrust matters. The Attorney General (and the Federal Trade Commission) can play a helpful role in coordinating the antitrust programs for all the agencies. We support the notification requirements in section 4(a), and we look forward to cooperating with Justice and the FTC in this joint effort. At the same time, in the interests of fairness and administrative efficiency, we have objections to the other powers given the Attorney General and the FTC in section 4.
First, section 4(b) would apparently permit either the Attorney General or the FTC to intervene as a matter of right in the judical review of an administrative proceeding, even if they were not a party in the administrative proceeding itself. Certainly, either agency should be entitled to participate as of right in any administrative proceeding within the scope of section 3(a) and be able to appeal that decision to the courts. However, if they have not participated at the administrative level, it is unfair to the agency and the other participants to allow intervention at the judicial level. Judical review as a matter of right should be reserved only for parties who participate at the administrative level.
We see a second problem in section 4(c). It gives the Attorney General the right to demand a full evidentiary hearing at any time, if the agency has not already held one. I assume this extraordinary power was included to allow Justice to supervise the agencies' duties under this bill without resorting to time-consuming judicial review. This unrestricted power is a bad idea. It may interfere with the ability of the agency to fulfill its statutory responsibilities. In regulating what is increasingly a fast-changing and competitive airline industry, the Board is often called upon to make decisions without the sort of time-consuming, costly, and cumbersome evidentiary hearings that the Attorney General may prefer. The Attorney General could impose considerable delay by requesting hearings under section 4 (c) that must be honored. Such procedural delay may well be more damaging to competition than prompt decision-making. Since Justice has neither the expertise in the airline industry, nor the responsibility to uphold the Federal Aviation Act, the Attorney General is not in the best position to evaluate the need for a hearing. And if the section is read to allow the imposition of a hearing after final agency decision has been made, that power threatens fundamental notions of fairness and finality of decisions.
The fact is that if the agency does not call a hearing when it should, the courts will order it to do so. We can confirm that with our own experience at the CAB when a few years ago the Justice Department argued successfully to the Court of Appeals that we should have held a hearing.2 We don't object to courts telling us whether the procedure we follow is correct or incorrect, but we do object to placing another agency of the government-with a particular policy ax to grind— in the position of telling us how to structure our proceedings.
The Attorney General may participate as a matter of right in an agency proceeding. At that stage, he can request a hearing. If that request is denied, he can
* U.S. v. CAB, 511 F. 2d 1315 (D.C. Cir. 1975).