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The Competition Improvements Act is founded on the fundamental economic tenet that free-market competition, protected by vigorous enforcement of the antitrust laws, is the most effective way to protect consumers, promote efficiency and spur innovation. Exceptions from this general rule have historically been limited. They have been made, however, where there has been evidence of the unworkability of competition or when a clearly recognized paramount social objective, such as the protection of health, safety, or the environment was sought.
Thus, regulatory systems have been established only to correct specific and narrowly defined defects in the usual healthy atmosphere of a free and competitive market.
Regulation should never be seen as a mandate to ignore the continued value of and public commitment to the needed presence of competitive market forces within most of the regulated industries. Indeed, competition should be perceived of and used as a "regulatory tool." But this has generally not been the case. The past decision to impose regulation on a particular industry has not addressed the question of the appropriate role of competition. The time to correct this omission is long overdue.
The Competition Improvements Act squarely addresses the problem of Government regulations which unnecessarily impede competition. The act charges every regulator with the responsibility of systematically considering competitive issues. The bill creates a clear antitrust standard against which proposed agency actions must be tested. The bill further prohibits the imposition of anticompetitive regulations unless the agency involved finds that the regulation is essential to accomplish an overriding statutory purpose and that there is no less anticompetitive means to accomplish that purpose.
Today's hearing begins consideration of the Competition Improvements Act in the 96th Congress. The bill's predecessor, S. 2028, was extensively studied in the 94th Congress. Based on a record created. by 4 days of hearings during that Congress, the Judiciary Committee favorably reported S. 2028. In the 95th Congress, the bill became S.
The provisions of the bill were also closely examined by President Carter's National Commission for Review of the Antitrust Laws and Procedures. The Commission devoted an entire chapter of its report to the issue of regulatory inattention to competitive issues. More specifically, the chapter is, in most part, a detailed discussion of S. 2625, the Competition Improvements Act of 1978.
The recommendation concludes that Congress should enact legislation to require increased consideration of competitive issues in regulatory decisionmaking and, specifically, that the legislation should adopt the principles contained in S. 2625.
I will ask that the bill be printed in the record, together with a summary of its major provisions-adapted from the Judiciary Committee report of the 94th Congress. Additionally, so that the record reflects the comprehensive and important views of the President's National Commission for Review of the Antitrust Laws and Procedures, I will ask that the chapter of the Commission's final report. concerning S. 2625 also be included.
[The material referred to above appears in the appendix.]
Senator KENNEDY [continuing]. Let us turn to our distinguished witnesses this morning. Our first witness today is Marvin S. Cohen, Chairman of the Civil Aeronautics Board. Chairman Cohen is in the unique position of presiding over the first deregulation of a major industry in our country. He has observed firsthand the impact that increased competition within the airline industry has brought. Welcome, Mr. Chairman.
Mr. CHUMBRIS. Mr. Chairman.
Senator KENNEDY. Yes.
Mr. CHUMBRIS. May I reserve the right for each of the minority Senators to submit an opening statement? We would provide you with it, sir.
Senator KENNEDY. We will certainly welcome those comments, of course. We are delighted to welcome your general counsel, Mr. Bakes. He has been a long-time associate of this committee, a knowledgeable figure on the issues of competition and the airline industry, and a good friend. We are delighted you are here.
STATEMENT OF MARVIN S. COHEN, CHAIRMAN,
CIVIL AERONAUTICS BOARD
Chairman COHEN. Thank you, Mr. Chairman.
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 thorough-going 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 Competition 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 wellpublicized results of our policies speak for themselves, and they make a good case for applying the same process governmentwide.
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 were still to 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 mandate both clear and preeminent, but not so long ago the agency was laboring under the more contradictory and ambiguous mandate 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 Competition 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 alternatives 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 legal 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.
Senator KENNEDY. I suppose that the question is, if you were able to do it within the CAB, why not let other agencies develop their own criteria to apply to their particular situations? Do we need a new statute in order to get greater consideration of competition in agency decisionmaking?
Chairman COHEN. I think we were taking some chances. I wasn't there then. I went on the CAB about 2 weeks before the bill actually passed. But from everything I have heard and learned about it, we were taking some chances in going as far as we went. Under our existing law, we were at the time, subject to judicial challenge. Delta Airlines has in court challenged our right to act on a set of principles very similar to what are expressed in the proposed bill.
I think what would happen with the proposed bill is to make it a lot easier for other agencies to follow these principles and have the flexibility to find their own way to do things pursuant to the mandate to find the least anticompetitive alternative when individual decisions are
Senator KENNEDY. Do you think that consideration of a procompetitive standard may cause delay in agency decisionmaking?
Chairman COHEN. Mr. Chairman, we found in applying it to pricing or even health and welfare type decisions like the no smoking rules, like charter consumer protection rules, it has not delayed our process. It has expanded the universe for the frame of reference in which you considered what to do. Instead of seeking one way to go, we stand back and say, "Is there a less anticompetitive way to do this," and in some
instances we have found those ways. It just meant that we looked at other alternatives at the time we were looking at what we ought to do. We have not found it unduly delaying, Mr. Chairman, in our process. I have some examples here of how we have applied that. It has many applications for other agencies in their functions.
Mr. Chairman, 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—and even in the regulatory agencies-to grab for the obvious, direct, short-run solution almost like a life preserver, specially 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
Senator KENNEDY. How much more of an administrative burden will a purposeful and routine search for the least anticompetitive alternative place on an agency? Will it take much more time for the agency to examine the considerations, and make the findings required by this bill? How will this impact the decisionmaking process? Will it slow it down? Will it make it more bureaucratic? Do the agencies have the economic and antitrust expertise to comply with the standard?
Chairman COHEN. Mr. Chairman, as far as the economic considerations, most of the agencies that we are dealing with here throughout the Government have the economic expertise in their particular field just as we have a pretty fair economic expertise as far as airlines are concerned. The other agencies already have the economic expertise and know the fields that they are dealing with. That does not make a new requirement of them. The new requirement is to look at things from a different angle than they have been looking at them. It does not take a great deal of new expertise. The principles are rather clear.
Antitrust, I guess, has been considered by many to be a mystique, at least I thought so. I wasn't an antitrust expert in my law practice in Arizona. I came back here in October. My first inclination was that I didn't know anything about antitrust. It is a mystique. You have to be initiated into it and you have to be expert to deal with it, over a period of years. What I have learned in the past 4 months is that isn't so. You already have in your agency the economic information about that industry. The basic principles of finding the least anticompetitive way of doing things is kind of commonsense.
Instead of reading the examples, let me explain a couple of examples. We found the most important might be pricing, for instance, by the airlines. Under the old way of doing things at CAB, when there was no effort to seek the least anticompetitive way of doing things we would have something called the DPFI, the Domestic Passenger Fare Investigation, that would set price levels for the airlines. There was no effort to find out whether we could protect the public from prices that were too high, and yet protect the industry and the public from predatory pricing by any less anticompetitive means than just telling them what to charge. When we stood back and looked at them from the standpoint of "Is there another way to do this, which preserves some aspects of competition," we found that there was. The thing that apparently took the long time-from what I am told-what took a long time, was to find out whether we could legally do this and try to work out a legal rationale of the old law which did not exist very clearly there.
What we did in fact is to say: There is a range within which the airlines can operate. There is an upper level. If there is competition on the route, you can go 5 percent or in some instances, 10 percent above that upper level, which gives some flexibility upward, and there is a 50-percent range below, and let the airlines then make competitive decisions within that range. That is not giving them total freedom, but it is giving them more freedom and allows them to act more competitively than under the old system in which we didn't consider the competitive needs.
A health and safety example is smoking, which seemed to me to be no problem: smoking on airplanes and merely setting aside a "no smoking area." In recent years, this does not seem to be enough. A lot of people are still upset. Smokers want to be able to smoke and nonsmokers want not to have to breathe unwanted smoke. How do you accord their different rights within this closed tube that is 30,000 feet up in the air? We could have and we were urged to say precisely what to do to the airlines. Instead, we decided to stand back and find out if there was a way to give them more flexibility to compete somewhat among each other, but still preserve the rights of the passengers.