Freight Railroads
Industry Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed Gao ID: GAO-07-94 October 6, 2006The Staggers Rail Act deregulated the freight rail industry, relying on competition to set rates, and allowed for differential pricing (charging higher rates to those more dependent on rail). The act gave the Surface Transportation Board (STB) authority to develop remedies for shippers "captive" to one railroad and set a threshold for shippers to apply for rate relief. GAO was asked to review (1) changes in the railroad industry since the Staggers Rail Act, including rates and competition; (2) STB actions to address competition and captivity concerns and alternatives that could be considered; and (3) freight demand and capacity projections and potential federal policy responses. GAO examined STB data, conducted interviews, and held an expert panel.
Changes in the railroad industry since the Staggers Rail Act are widely viewed as positive, as the industry's financial health has improved and most rates have declined; however, concerns over competition and captivity remain. Rail rates generally declined between 1985 and 2000, then increased slightly from 2001 through 2004. Concerns about competition and captivity remain as traffic is concentrated in fewer railroads. It is difficult to determine the number of "captive" shippers as proxy measures can overstate or understate captivity. Nevertheless, GAO's analysis of limited available measures indicates that the extent of captivity appears to be dropping, but the percentage of traffic traveling at rates substantially over the threshold for rate relief has increased. Also, some areas with access to only one major railroad have higher percentages of traffic traveling at rates above the threshold. These findings may reflect reasonable economic practices by the railroads or a possible abuse of market power. GAO's analysis is limited by available data and proxy measures but suggests that shippers in selected markets may be paying excessive rates, meriting further inquiry and analysis. While STB has taken action, further efforts to improve its rate relief processes and assess competition could help address competition and captivity concerns and inform the merits of proposed alternative approaches. STB's rate relief processes are largely inaccessible and rarely used. STB recognizes this and is taking steps to improve its processes. STB has broad statutory authority to inquire into and report on railroad industry practices and, given a reasonable possibility that some shippers may be paying excessive rates, an assessment of competition could determine whether there is sufficient evidence that market power is being abused in specific markets. While competition between railroads may not always be feasible, alternative approaches have costs and benefits that should be carefully considered to ensure the balance envisioned in the Staggers Rail Act--including the railroads' need for adequate revenues. Significant increases in freight traffic are forecast, and the industry's ability to meet them is largely uncertain. Investments in rail projects can produce public benefits, such as reducing highway congestion. As a result, federal and state governments have increasingly participated in freight rail projects. In 2005, for example, Congress provided $100 million for rail improvements in the Chicago area. Congress faces additional decisions about potential federal policy responses in years ahead. Responses should recognize that the freight transportation system includes many modes that are treated differently by the federal government and functions in a competitive marketplace and a constrained federal funding environment. In developing a National Freight Policy, the Department of Transportation (DOT)has made a good start by providing context for those decisions and DOT can help sustain the role of the competitive marketplace through strategies that promote a level playing field for freight transportation decision making and acknowledge the constrained federal fiscal environment by focusing federal involvement where demonstrable, wide-ranging public benefits exist.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-94, Freight Railroads: Industry Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
October 2006:
Freight Railroads:
Industry Health Has Improved, but Concerns about Competition and
Capacity Should Be Addressed:
Freight Railroads:
GAO-07-94:
GAO Highlights:
Highlights of GAO-07-94, a report to congressional requesters
Why GAO Did This Study:
The Staggers Rail Act deregulated the freight rail industry, relying on
competition to set rates, and allowed for differential pricing
(charging higher rates to those more dependent on rail). The act gave
the Surface Transportation Board (STB) authority to develop remedies
for shippers’captive“ to one railroad and set a threshold for shippers
to apply for rate relief. GAO was asked to review (1) changes in the
railroad industry since the Staggers Rail Act, including rates and
competition; (2) STB actions to address competition and captivity
concerns and alternatives that could be considered; and (3) freight
demand and capacity projections and potential federal policy responses.
GAO examined STB data, conducted interviews, and held an expert panel.
What GAO Found:
Changes in the railroad industry since the Staggers Rail Act are widely
viewed as positive, as the industry‘s financial health has improved and
most rates have declined; however, concerns over competition and
captivity remain. Rail rates generally declined between 1985 and 2000,
then increased slightly from 2001 through 2004. Concerns about
competition and captivity remain as traffic is concentrated in fewer
railroads. It is difficult to determine the number of ’captive“
shippers as proxy measures can overstate or understate captivity.
Nevertheless, GAO‘s analysis of limited available measures indicates
that the extent of captivity appears to be dropping, but the percentage
of traffic traveling at rates substantially over the threshold for rate
relief has increased. Also, some areas with access to only one major
railroad have higher percentages of traffic traveling at rates above
the threshold. These findings may reflect reasonable economic practices
by the railroads or a possible abuse of market power. GAO‘s analysis is
limited by available data and proxy measures but suggests that shippers
in selected markets may be paying excessive rates, meriting further
inquiry and analysis.
While STB has taken action, further efforts to improve its rate relief
processes and assess competition could help address competition and
captivity concerns and inform the merits of proposed alternative
approaches. STB‘s rate relief processes are largely inaccessible and
rarely used. STB recognizes this and is taking steps to improve its
processes. STB has broad statutory authority to inquire into and report
on railroad industry practices and, given a reasonable possibility that
some shippers may be paying excessive rates, an assessment of
competition could determine whether there is sufficient evidence that
market power is being abused in specific markets. While competition
between railroads may not always be feasible, alternative approaches
have costs and benefits that should be carefully considered to ensure
the balance envisioned in the Staggers Rail Act”including the
railroads‘ need for adequate revenues.
Significant increases in freight traffic are forecast, and the
industry‘s ability to meet them is largely uncertain. Investments in
rail projects can produce public benefits, such as reducing highway
congestion. As a result, federal and state governments have
increasingly participated in freight rail projects. In 2005, for
example, Congress provided $100 million for rail improvements in the
Chicago area. Congress faces additional decisions about potential
federal policy responses in years ahead. Responses should recognize
that the freight transportation system includes many modes that are
treated differently by the federal government and functions in a
competitive marketplace and a constrained federal funding environment.
In developing a National Freight Policy, the Department of
Transportation (DOT) has made a good start by providing context for
those decisions and DOT can help sustain the role of the competitive
marketplace through strategies that promote a level playing field for
freight transportation decision making and acknowledge the constrained
federal fiscal environment by focusing federal involvement where
demonstrable, wide-ranging public benefits exist.
What GAO Recommends:
GAO recommends that STB analyze the state of competition and consider
appropriate actions. GAO also recommends that DOT consider strategies
to level the playing field for all freight modes to maximize public
benefits from federal investment. STB disagreed with our recommendation
because it would take resources from efforts it believes will address
GAO concerns, among other reasons. We recognize STB‘s efforts, but
believe further analysis is needed. STB should seek more resources from
Congress if needed. DOT took no position on our recommendation.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-94].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact JayEtta Z. Hecker at
(202) 512-2834 or heckerj@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Railroad Industry Increasingly Healthy and Rates Generally Down Since
Enactment of the Staggers Rail Act, but Concerns about Competition and
Captivity Remain:
Despite STB's Actions, Analysis of Competitive Markets Is Needed to
Address Lack of Effective Relief for Captive Shippers:
Uncertainty about Future Freight Rail Demand and Capacity Points to
Opportunities for a More Strategic Federal Approach to Rail
Infrastructure:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Participants in GAO's Expert Panel:
Appendix II: Objectives, Scope, and Methodology:
Appendix III: Comments from the Surface Transportation Board:
GAO Comments:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Changes in Percentage of Industry Revenue and Tonnage on
Origin and Destination Routes with Access to One Class I Railroad:
Table 2: Possible Changes in R/VC Ratios:
Table 3: Potential Public Benefits of Rail Transportation Investments:
Figures:
Figure 1: Railroads' Tax-Adjusted Return on Investment, 1980-2004:
Figure 2: Trends in Industry Rail Rates, 1985-2004:
Figure 3: Commodity Rate Changes, 1985-1989, 1990-1999, and 2000-2004:
Figure 4: Rate Changes for Coal, Grain, Miscellaneous Mixed Shipments,
and Motor Vehicles, 1985-2004:
Figure 5: Rail Rate Increases and Decreases across 604 Routes, and for
Long-, Medium-, and Short-distance Routes, 2000 through 2004:
Figure 6: Tonnage Carried by Railcar Ownership, 1987-2004:
Figure 7: Miscellaneous Revenue Tracked in Carload Waybill Sample, 2000-
2004:
Figure 8: Percentage of Railroad Market Represented by Four Largest
Class I Railroads, 1985-2004:
Figure 9: Comparison of Rates Charged on Long-distance Grain Routes,
1997-2004:
Figure 10: Rate Changes after the Introduction of a Second Carrier:
Figure 11: Comparison of Rate Changes from Champaign, Illinois,
Economic Area to New Orleans, Louisiana, Economic Area and Champaign,
Illinois, Economic Area to Atlanta, Georgia, Economic Area, 1990-2004:
Figure 12: Number of Class I Railroads Serving Economic Areas, 2004:
Figure 13: Percentage of All Industry Tonnage Originating in Economic
with Access to One Class I Railroad, 2004:
Figure 14: Changes in Percentage of All Industry Traffic Tonnage with
Access to One Class I Railroad Originating in Economic Areas, 1994
through 2004:
Figure 15: Percentage of Industry Tonnage and Revenue Generated from
Traffic Traveling at Rates Equal to or Greater Than 180 Percent R/VC,
1985-2004:
Figure 16: Tonnage Traveling at Rates over 300 Percent R/VC, 1985-2004:
Figure 17: Percentage of Tonnage by R/VC, 1985 and 2004:
Figure 18: Changes in Percentage of Tonnage Traveling at Rates over 300
Percent R/VC, by Originating Economic Area, 1985 through 2004:
Figure 19: Long-distance Grain Route Changes in Percentage of Tonnage
Traveling at Rates over 300 Percent R/VC, 1985-2004:
Figure 20: Overlap between Percentage of Tonnage over Threshold for
Rate Relief and Access to Only One Class I Railroad:
Figure 21: Reciprocal Switching:
Figure 22: Terminal Agreements:
Figure 23: Trackage Rights:
Figure 24: Bottleneck Rates:
Figure 25: Paper Barriers:
Abbreviations:
AASHTO: American Association of State Highway and Transportation
Officials:
ATA: American Trucking Association:
BEA: Bureau of Economic Analysis:
CBO: Congressional Budget Office:
CDOT: Colorado Department of Transportation:
CREATE: Chicago Region Environmental and Transportation Efficiency
program:
DOT: Department of Transportation:
FAF: Freight Analysis Framework:
FHWA: Federal Highway Administration:
FOA: Final Offer Arbitration:
GDP: gross domestic product:
ICC: Interstate Commerce Commission:
RRIF: Railroad Rehabilitation and Improvement Financing:
R/VC: revenue to variable cost:
RRIF: Railroad Rehabilitation and Improvement Financing program:
SAFETEA-LU: Safe, Accountable, Flexible, Efficient Transportation
Equity Act: A Legacy for Users:
STB: Surface Transportation Board:
United States Government Accountability Office:
Washington, DC 20548:
October 6, 2006:
Congressional Requesters:
Over 25 years ago, Congress transformed federal regulation of the
railroad industry. After almost 100 years of economic regulation, the
railroad industry was in serious economic trouble in the 1970s, with
rising costs, losses, and bankruptcies. In response, Congress passed
the Railroad Revitalization and Regulatory Reform Act of 1976 and the
Staggers Rail Act of 1980. Together, these pieces of legislation
substantially deregulated the railroad industry. In particular, the
1980 act encouraged greater reliance on competition to set rates and
gave railroads increased freedom to price their services according to
market conditions, including the freedom to use differential pricing--
that is, to recover a greater proportion of their costs from rates
charged to shippers with a greater dependency on rail transportation.
At the same time, the 1980 act anticipated that some shippers might not
have competitive alternatives--commonly referred to as "captive
shippers"--and gave the Interstate Commerce Commission (ICC), and later
the Surface Transportation Board (STB), the authority to establish a
process so that shippers could obtain relief from unreasonably high
rates. However, only a rate that produces revenue equal to at least 180
percent of the variable cost of transporting the shipment can be
challenged. Since the passage of the Staggers Rail Act in 1980, we have
issued several reports on the freight railroad industry.[Footnote 1]
These reports described the significant changes that have taken place
in the railroad industry and reported that rates have generally
decreased, but shippers and others have found the rate relief process
long, complex, and expensive.
Policymakers continue to believe that the federal government should
provide a viable process to protect shippers against unreasonably high
rates, as well as address competition issues, while still balancing the
interests of both railroads and shippers. Over the past 10 years,
significant consolidation has taken place in the freight railroad
industry, while railroads--particularly Class I railroads[Footnote 2]-
-have seen their productivity and financial health improve. Railroad
officials worry that any attempt to increase economic regulation will
reduce carriers' ability to earn sufficient revenues and limit future
infrastructure investment. At the same time, a number of academic and
government studies are predicting a significant increase in the demand
for freight rail over the next 10 to 15 years. In light of these
concerns, we reviewed:
* the changes that have occurred in the freight railroad industry since
the enactment of the Staggers Rail Act, including changes in rail rates
and competition in the industry;
* the actions STB has taken to address concerns about competition and
captivity and any alternative approaches that could be considered to
address remaining concerns; and:
* the projections for freight traffic demand over the next 15 to 25
years, the freight railroad industry's projected ability to meet that
demand, and potential federal policy responses.
To fulfill our objectives, we examined STB's Carload Waybill Sample
from 1985 through 2004 (the latest data available at the time of our
review).[Footnote 3] This database includes information on rail rates,
tonnage, federal regulation, and other statistics but disguises some
revenues to avoid disclosing confidential business information to the
public. We obtained a version of the Carload Waybill Sample that did
not disguise revenues. We held an expert panel consisting of 11
individuals with expertise in the freight railroad industry and the
economics of transportation deregulation. Those individuals are listed
in appendix I. We also interviewed, and reviewed information from,
representatives of each Class I railroad in North America, shipper
groups, economists, and experts in the rail industry. In addition, we
reviewed pending legislation, transportation planning literature, and
forecasts of future freight rail demand and capacity, including
syntheses of such forecasts; and interviewed federal and state
transportation officials, financial market analysts, national
association representatives, and transportation experts. We determined
that the data used in this report were sufficiently reliable for the
purpose of our review. We conducted our review from June 2005 to August
2006 in accordance with generally accepted government auditing
standards. Details of our objectives, scope, and methodology appear in
appendix II.
Results in Brief:
The changes that have occurred in the railroad industry since the
enactment of the Staggers Rail Act are widely viewed as positive, since
the financial health of the industry has improved and most rates have
declined since 1985. However, concerns about competition and captivity
in the industry remain. The freight railroad industry's financial
health improved substantially as railroads cut costs through
productivity improvements; streamlined and right-sized their rail
networks; implemented new technologies; and expanded business into new
markets, such as the intermodal market.[Footnote 4] Between 1985 and
2000, rail rates generally declined, but then increased slightly from
2001 through 2004.[Footnote 5] Although rates have declined since 1985,
they have not done so uniformly, and rates for some commodities are
significantly higher than rates for others. Several factors could have
contributed to recent rate increases, including broad changes in the
domestic and world economy, the emergence of a capacity-constrained
environment in which demand exceeds supply, and consolidation in the
1990s in the industry leading to changes in competition. Other costs,
such as fuel surcharges, have also shifted to shippers, and STB has not
clearly tracked the revenues the railroads have raised from some of
these charges. Some concerns about competition and captivity in the
industry remain because traffic is concentrated in fewer railroads. It
is difficult to determine precisely how many shippers are captive
because available proxy measures can overstate or understate captivity.
In addition, STB does not accurately collect railroad revenue data.
Nevertheless, our analysis of available measures indicates that the
extent of captivity appears to be dropping, but the percentage of
industry traffic traveling at rates substantially over the statutory
threshold for rate relief has increased. For example, the amount of
traffic traveling at rates over 300 percent of the railroad's variable
cost increased from 4 percent in 1985 to 6 percent in 2004.
Furthermore, some areas with access to one Class I railroad have higher
percentages of traffic traveling at rates that exceed the statutory
threshold for rate relief. These findings may reflect reasonable
economic practices by the railroads in an environment of excess demand,
or they may indicate a possible abuse of market power. We are
recommending that STB conduct a rigorous analysis of the state of
competition nationwide and, where appropriate, consider the range of
actions available to address problems associated with the potential
abuse of market power. In addition, we are recommending that STB review
its method of data collection to ensure consistent and accurate
reporting of railroad revenues, including fuel surcharges.
STB has taken a number of actions to improve the rate relief process
and assess competition, but further actions could help address
remaining competition and captivity concerns. The Staggers Rail Act and
the ICC Termination Act encouraged competition as the preferred method
to protect shippers from unreasonable rates and granted STB broad
legislative authority to monitor the performance of the railroad
industry. Under this authority, STB established both a standard and a
simplified rate relief process so that captive shippers could obtain
relief from unreasonable rates. However, these processes have proven to
be largely inaccessible because the standard process is expensive, time
consuming, and complex, and the simplified process has not been used.
During our review, STB took steps to refine its processes, including
issuing a proposed rule making to clarify eligibility for the
simplified process. Ultimately, our analysis suggests a reasonable
possibility that shippers in selected markets may be paying excessive
rates, and an assessment of competition would determine if this
situation reflects reasonable economic practices by the railroads in an
environment of excess demand or an abuse of market power. This
assessment could also provide further information about the extent of
captivity and the merits of proposed approaches to enhance the
competitive options available to shippers. These approaches--such as
providing trackage rights to allow a railroad to run on another
railroad's track for a fee--have been suggested by shipper groups,
economists, and others. Each of these approaches has costs and benefits
and should be carefully considered to ensure that the approach is
designed to achieve the balance set out in the Staggers Rail Act,
including consideration of the revenue adequacy of the railroads.
However, not all markets may have the demand needed to support
competition among railroads, and so some areas where shippers are
captive are likely to persist. In this regard, there are also a number
of proposals to make the rate relief process more accessible, such as
the increased use of arbitration to settle disputes, and each of these
proposals has advantages and drawbacks.
Significant increases in freight traffic over the next 10 to 15 years
are forecasted, and the railroad industry's ability to meet future
demand is largely uncertain. Investments in rail projects can produce
benefits for the public--for example, shifting truck freight traffic to
railroads can reduce highway congestion. To obtain such benefits,
governments have increasingly been participating in freight rail
improvement projects. For example, Missouri state and local governments
supported two major rail-bridge projects to reduce delays in Kansas
City. At the federal level, Congress, in 2005, provided $100 million
for rail infrastructure improvements in the Chicago area. In the years
ahead, Congress is likely to receive further requests for funding and
face additional decisions about potential federal policy responses and
the federal role in the nation's freight railroad infrastructure. Such
policy responses need to recognize that the freight transportation
system encompasses many modes that are treated differently by the
federal government and are on systems owned, funded, and operated by
both the public and private sectors. Furthermore, the freight
transportation system functions in a competitive marketplace, and the
federal fiscal funding environment is highly constrained. As a result,
policy and decision makers are challenged to ensure that federal
involvement is consistent with competition in the freight marketplace
and that federal funding decisions reflect widespread public
priorities. In developing a draft National Freight Policy, the
Department of Transportation (DOT) has made a good start by providing a
context for decisions about how to apply a more strategic, systemwide
approach, in general, and how to craft a federal policy response to
freight rail investment needs in particular. We are recommending that
DOT, as it continues to draft a National Freight Policy, consider
strategies to sustain the role of competitive market forces by creating
a level playing field for all freight modes and recognize the highly
constrained federal fiscal environment by developing mechanisms to
assess and maximize public benefits from federally financed freight
transportation investments.
We provided a draft of this report to DOT and STB. In oral comments,
DOT took no position on our recommendation related to the National
Freight Policy. In written comments, STB stated that it has already
responded to our recommendation on its method of data collection
through a proposed rule making on collecting fuel surcharge data. While
we commend STB for its proposed rule making, STB has not yet
implemented this change, and other revenues may still not be accurately
tracked. STB also disagreed with our recommendation to conduct a
rigorous analysis of competitive markets to identify the state of
competition nationwide, inquire into pricing practices in specific
markets, and consider appropriate actions available to address problems
associated with the potential abuse of market power. STB commented that
this recommendation was based on inconclusive findings and would divert
resources away from current initiatives. We disagree that our
recommendation was based on inconclusive findings. Our analysis of
multiple sources suggests a reasonable possibility that shippers in
some markets may be paying excessive rates. We believe that such a
possibility merits further inquiry and analysis. We recognize that STB
has limited resources and modified our draft to recommend that STB
request additional resources from Congress if it determines that it
needs more resources to conduct an analysis of competition. STB also
stated that it has several rule makings under way that are designed to
improve the rate relief process and would address many of our concerns.
STB stated that it would be far more practical for STB to finish these
reforms to ensure that captive shippers have an effective forum to seek
rate relief. While we commend STB for recognizing and taking action to
address problems with the rate relief process, we believe action beyond
improvements to the rate relief process is needed. In particular, these
STB rule makings are designed to improve processes available to
shippers after they have been charged a rate they consider to be
unreasonable. In contrast, we believe that an analysis of the state of
competition and the possible abuse of market power, along with the
range of options STB has to address competition issues, could more
directly further the legislatively defined goal of ensuring effective
competition among rail carriers. STB's comments are in appendix III.
Background:
In the past, the ICC regulated almost all of the rates that railroads
charged shippers. The Railroad Revitalization and Regulatory Reform Act
of 1976 and the Staggers Rail Act of 1980 greatly increased reliance on
competition to set rates in the railroad industry. Specifically, these
acts allowed railroads and shippers to enter into confidential
contracts that set rates and prohibited ICC from regulating rates where
railroads had either effective competition or rates negotiated between
the railroad and the shipper. Furthermore, the ICC Termination Act of
1995 abolished ICC and transferred its regulatory functions to STB.
Taken together, these acts anchor the federal government's role in the
freight rail industry by establishing numerous goals for regulating the
industry, including to:
* allow, to the maximum extent possible, competition and demand for
services to establish reasonable rates for transportation by rail;
* minimize the need for federal regulatory control over the rail
transportation system and require fair and expeditious regulatory
decisions when regulation is required;
* promote a safe and efficient rail transportation system by allowing
rail carriers to earn adequate revenues, as determined by STB;
* ensure the development and continuation of a sound rail
transportation system with effective competition among rail carriers
and with other modes to meet the needs of the public and the national
defense;
* foster sound economic conditions in transportation and ensure
effective competition and coordination between rail carriers and other
modes:
* maintain reasonable rates where there is an absence of effective
competition and where rail rates provide revenues that exceed the
amount necessary to maintain the rail system and attract capital;
* prohibit predatory pricing and practices to avoid undue
concentrations of market power; and:
* provide for the expeditious handling and resolution of all
proceedings.
While the Staggers Rail and ICC Termination Acts reduced regulation in
the railroad industry, they maintained STB's role as the economic
regulator of the industry. The federal courts have upheld STB's general
powers to monitor the rail industry, including its ability to subpoena
witnesses and records and to depose witnesses. In addition, STB can
revisit its past decisions if it discovers a material error, or new
evidence, or if circumstances have substantially changed.
Two important components of the current regulatory structure for the
railroad industry are the concepts of revenue adequacy and demand-based
differential pricing. Congress established the concept of revenue
adequacy as an indicator of the financial health of the industry. STB
determines the revenue adequacy of a railroad by comparing the
railroad's return on investment with the industrywide cost of capital.
For instance, if a railroad's return on investment is greater than the
industrywide cost of capital, STB determines that railroad to be
revenue adequate. Historically, ICC and STB have rarely found railroads
to be revenue adequate--a result that many observers relate to
characteristics of the industry's cost structure. Railroads incur large
fixed costs to build and operate networks that jointly serve many
different shippers. Some fixed costs can be attributed to serving
particular shippers, and some costs vary with particular movements, but
other costs are not attributable to particular shippers or movements.
Nonetheless, a railroad must recover these costs if the railroad is to
continue to provide service over the long run. To the extent that
railroads have not been revenue adequate, they may not have been fully
recovering these costs.
The Staggers Rail Act recognized the need for railroads to use demand-
based differential pricing to promote a healthy rail industry and
enable it to raise sufficient revenues to operate, maintain and, if
necessary, expand the system in a deregulated environment. Demand-based
differential pricing, in theory, permits a railroad to recover its
joint and common costs--those costs that exist no matter how many
shipments are transported, such as the cost of maintaining track--
across its entire traffic base by setting higher rates for traffic with
fewer transportation alternatives than for traffic with more
alternatives. Differential pricing recognizes that some customers may
use rail if rates are low--and have other options if rail rates are too
high or service is poor. Therefore, rail rates on these shipments
generally cover the directly attributable (variable) costs, plus a
relatively low contribution to fixed costs. In contrast, customers with
little or no practical alternative to rail--"captive" shippers--
generally pay a much larger portion of fixed costs. Moreover, even
though a railroad might incur similar incremental costs while providing
service to two different shippers that move similar volumes in similar
car types traveling over similar distances, the railroad might charge
the shippers different rates. Furthermore, if the railroad is able to
offer lower rates to the shipper with more transportation alternatives,
that shipper still pays some of the joint and common costs. By paying
even a small part of total fixed cost, competitive traffic reduces the
share of those costs that captive shippers would have to pay if the
competitive traffic switched to truck or some other alternative.
Consequently, while the shipper with fewer alternatives makes a greater
contribution toward the railroad's joint and common costs, the
contribution is less than if the shipper with more alternatives did not
ship via rail.
The Staggers Rail Act further requires that the railroads' need to
obtain adequate revenues to be balanced with the rights of shippers to
be free from, and to seek redress from, unreasonable rates. Railroads
incur variable costs--that is, the costs of moving particular
shipments--in providing service. The Staggers Rail Act stated that any
rate that was found to be below 180 percent of a railroad's variable
cost for a particular shipment could not be challenged as unreasonable
and authorized ICC, and later STB, to establish a rate relief process
for shippers to challenge the reasonableness of a rate. STB may
consider the reasonableness of a rate only if it finds that the carrier
has market dominance over the traffic at issue--that is, if (1) the
railroad's revenue is equal to or above 180 percent of the railroad's
variable cost (R/VC) and (2) the railroad does not face effective
competition from other rail carriers or other modes of transportation.
Railroad Industry Increasingly Healthy and Rates Generally Down Since
Enactment of the Staggers Rail Act, but Concerns about Competition and
Captivity Remain:
The changes that have occurred in the railroad industry since the
enactment of the Staggers Rail Act are widely viewed as positive. The
railroad industry's financial health improved substantially as it cut
costs, boosted productivity, and right-sized its networks. Rail rates
generally declined between 1985 and 2000 but increased slightly from
2001 through 2004. Likewise, rail rates have declined since 1985 for
certain commodity groups and routes despite some increases since 2001,
but rates have not declined uniformly, and some commodities are paying
significantly higher rates than others. For example, from 1985 through
2004, coal rates declined 35 percent while grain rates increased 9
percent.[Footnote 6] Concerns about competition and captivity in the
industry remain because traffic is concentrated in fewer railroads. It
is difficult to determine precisely how many shippers are captive to
one railroad. Nevertheless, our analysis indicates that the extent of
potential captivity appears to be dropping, but that the percentage of
all industry traffic running at rates substantially over the statutory
threshold for rate relief--traffic traveling at rates over 180 percent
R/VC--has increased. Furthermore, some areas with access to only one
Class I railroad have higher percentages of traffic traveling at rates
that exceed the statutory threshold for rate relief. This situation may
reflect reasonable economic practices by the railroads in an
environment of excess demand, or it may represent an abuse of market
power.
Railroad Industry's Financial Health Has Improved Substantially:
There is widespread consensus that the freight rail industry has
benefited from the Staggers Rail Act. Ten of the 11 members of our
expert panel believed that the Staggers Rail Act has had a strongly
positive overall effect on freight railroad companies, while 8 believed
the Staggers Rail Act had a strongly positive effect on shipping
companies. In addition, various measures indicate an increasingly
strong freight railroad industry. Freight railroads' improved financial
health is illustrated by a general increase in return on investment
since 1980, as shown in figure 1.[Footnote 7] Freight railroads have
also cut costs by streamlining their workforces; right-sizing their
rail networks; and reducing track miles, equipment, and facilities to
more closely match demand.[Footnote 8]
Figure 1: Railroads' Tax-Adjusted Return on Investment, 1980-2004:
[See PDF for image]
Source: STB.
[End of figure]
Freight railroads have also expanded their business into new markets--
such as the intermodal market--and implemented new technologies,
including larger cars, and are currently developing new scheduling and
train control systems. Some observers believe that the competition
faced by railroads from other modes of transportation has created
incentives for innovative practices, and that the ability to enter into
confidential contracts with shippers has permitted railroads to make
specific investments and to develop service arrangements tailored to
the requirements of different shippers.[Footnote 9]
Freight rail is an important component of our nation's economy.
Approximately 42 percent of all intercity freight in the United States,
measured in ton-miles,[Footnote 10] moves on rail lines. Freight rail
is particularly important to producers and users of certain
commodities. For example, about 70 percent of automobiles manufactured
domestically and about 70 percent of coal delivered to power plants
moves on freight rail.
Industrywide Rates Declined from 1985 through 2000 and Rose Slightly
from 2001 through 2004:
Rail rates across the freight railroad industry have generally declined
since the enactment of the Staggers Rail Act. Because changes in
traffic patterns over time (for example, hauls over longer distances)
can result in a decrease in the average revenue per ton-mile, purely
relying on cents per ton-mile can present misleading industrywide rate
trends. Therefore, we developed a set of rail rate indexes[Footnote 11]
to examine trends in rail rates over the 1985 through 2004 period.
These indexes account for changes in traffic patterns over time that
could affect revenue statistics but do not account for inflation. To
provide a measure for inflation, we also included the price index for
the gross domestic product (GDP) in figure 2.
From 1985 through 1987, rail rates dropped by 10 percent and then
continued to decline, although not as steeply, through 1998. Rates
increased in 1999, then dropped again in 2000. In 2001 and 2002 rates
rose again. Rates were nearly flat in 2003 and 2004, finishing
approximately 3 percent above rates in 2000, but were 20 percent below
1985 rates (These trends are shown in figure 2). While our rail rate
index does not reflect the general effects of inflation, the continuous
increases in the GDP price index over this period indicate that real
rates decreased by more than 20 percent from 1985 through 2004. Rate
data are not available for 2005 and 2006, but shippers, railroad
officials, and financial analysts with whom we spoke told us that rates
have generally increased during those years.
Figure 2: Trends in Industry Rail Rates, 1985-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
For Many Commodities and Particular Routes, Rates Have Also Declined
Since 1985, but Declines Are Not Uniform:
Similar to industrywide changes in rail rates, the rates for many
commodities have declined since 1985 and have recently increased. In
2004, four commodities each made up 5 percent or more of freight
railroad revenue--grain, coal, motor vehicles, and miscellaneous mixed
shipments. In both the 1985 through 1989 and the 1990 through 1999
intervals, the rates for most of these commodities declined, while in
2000 through 2004, the rates increased for two commodities and
decreased for two (see fig. 3).
Figure 3: Commodity Rate Changes, 1985-1989, 1990-1999, and 2000-2004:
[See PDF for image]
Source: GAO analysis of STB data.
Note: From 2000 to 2004, the rate index for coal was largely unchanged.
[End of figure]
Although many rates have decreased, rates have not declined uniformly,
and rates for some commodities are significantly higher than for
others. Figure 4 compares commodity rates for coal, grain,
miscellaneous mixed shipments, and motor vehicles from 1985 through
2004 using our rail rate index. Over the 20-year period most rates
declined, with coal rates dropping the most sharply by 35 percent.
Miscellaneous mixed shipments and motor vehicle rates also declined,
although to a lesser extent than coal rates. Grain rates initially
declined from 1985 through 1987, but then diverged from the other
commodity trends and increased, resulting in a net 9 percent increase
by 2004.
Figure 4: Rate Changes for Coal, Grain, Miscellaneous Mixed Shipments,
and Motor Vehicles, 1985-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
We examined rate changes for commodities traveling along hundreds of
particular routes and found that the rates on a majority of the routes
we analyzed decreased from 2000 through 2004. Figure 5 shows that from
2000 through 2004 rail rates decreased on about 55 percent of the
routes in our analysis[Footnote 12] (334 of 604 routes). More
specifically, the rates for most long-distance (over 1,000 miles) and
medium-distance (501 to 1,000 miles) routes decreased. In one distance
category, short-distance routes (up to 500 miles), there were more
routes with increases (103) than decreases (94), from 2000 through
2004. While figure 5 shows that, for the long-distance routes we
examined, the number of routes with rate decreases was nearly twice the
number of routes with rate increases. Many of the largest rate
increases were on long-distance routes carrying miscellaneous mixed
shipments--which include intermodal goods--that originated in the Los
Angeles-Long Beach-Riverside, California, economic area and terminated
at various destinations across the country. Several shipper groups
reported that many rate increases occurred after 2004; however, data
are not available for 2005 and 2006.
Figure 5: Rail Rate Increases and Decreases across 604 Routes, and for
Long-, Medium-, and Short-distance Routes, 2000 through 2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
Many Factors May Have Contributed to Recent Rate Increases:
Several factors could have contributed to recent rate increases.
Ongoing industry and economic changes have influenced how railroads
have set their rates. Since the Staggers Rail Act was enacted, the
railroad industry and the economic environment in which it operates
have changed considerably. After years of reducing the size of its
workforce and shedding track capacity, the industry is increasingly
operating in a capacity-constrained environment in which the demand for
its services exceeds its capacity in some areas. In addition, the
industry has more recently increased employment and invested in
increased capacity in key traffic corridors. Additionally, changes in
broader domestic and world economic conditions have led to changes in
the mix and profitability of traffic carried by railroads. For example,
railroads have developed high-volume traffic by shipping import and
export containers, leading them to price these shipments differently.
According to DOT officials, some shippers--such as those in the
automobile and chemical industries--may pay higher rates in order to
secure higher quality service or due to liability issues. Lastly, the
rail industry has continued to consolidate, potentially increasing the
market power of the largest railroads. Our analysis included rate data
through 2004,[Footnote 13] and according to freight railroad officials,
shippers, and financial analysts, since 2004, rates have continued to
increase as the demand for freight rail service has increased, and rail
capacity has not kept pace with demand.
Other Costs Have Shifted to Shippers, and Some Charges Are Not
Accurately Tracked:
While rates have generally decreased since 1985, other costs have been
passed on to shippers, some of which STB has not accurately tracked.
Several shippers with whom we spoke agreed that rates have dropped over
the long-term, but they also said that rates do not reflect the total
cost of shipping by rail. According to some shippers, costs have
shifted from the railroads to shipping companies, including the costs
of railcar ownership. Figure 6 shows that tons carried by railcar
ownership has shifted nearly 20 percent since 1985, indicating less
tonnage shipped on railcars owned by freight railroad companies.
Figure 6: Tonnage Carried by Railcar Ownership, 1987-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
Besides rates, other costs that shippers reported were infrastructure
upgrade costs, fuel surcharges,[Footnote 14] and congestion fees.
Conversely, one Class I railroad told us that some rates in the Carload
Waybill Sample do not account for rebates or incentives that may change
the actual rate paid by the shipper. We are unable to report on the
full extent of all costs because STB has not accurately tracked the
railroad revenues associated with some of these charges. For example,
freight railroad companies do not consistently report revenues raised
from fuel surcharges for use in the Carload Waybill Sample. Some
railroads report fuel surcharges as part of their general revenues,
while others categorize the surcharges separately under a miscellaneous
revenue category, and still other railroads may not report revenue
collected from fuel surcharges at all. Shippers have expressed deep
concerns over how fuel surcharges relate to actual fuel costs. Other
railroad revenues, such as those generated at railcar auctions[Footnote
15] and through congestion fees, may not be included in the waybill
sample either. Understanding what railroads do and do not report as
miscellaneous revenue in the waybill sample may be of increasing
importance because fuel surcharges have become more prevalent, and
railroad revenue reported as miscellaneous revenue has substantially
risen in recent years. From 2000 through 2004, the miscellaneous
revenue reported in the waybill sample has more than quadrupled in
value, from $141 million to $614 million (see fig. 7). Although an
increase in value, $614 million still represents less than 1.5 percent
of the approximately $42 billion in freight railroad revenue reported
for 2004. Since 2004, miscellaneous revenue may have further increased
as railroad and shipper groups with whom we spoke said that many fuel
surcharge increases took effect in 2005. During our review, STB
proposed to more closely track and otherwise monitor revenues
associated with fuel surcharges.
Figure 7: Miscellaneous Revenue Tracked in Carload Waybill Sample, 2000-
2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
Competition and Captivity Concerns Remain:
Concerns about competition and captivity in the railroad industry
remain because traffic is concentrated in fewer railroads, although
there is disagreement on the state of competition in the industry. It
is difficult to determine the number of captive shippers, because proxy
measures can overstate or understate captivity, but our analysis of
available measures indicates that the extent of captivity is dropping.
At the same time, the percentage of all industry traffic running
substantially over the statutory threshold for rate relief has
increased from about 4 percent of tonnage in 1985 to about 6 percent of
tonnage in 2004. Furthermore, some economic areas with access to one
Class I railroad have higher percentages of traffic traveling at rates
that exceed the statutory threshold for rate relief.
The Freight Railroad Industry Has Become More Concentrated:
During the past 30 years, the freight railroad industry has become more
concentrated. In 1976, there were 30 independent Class I railroad
systems, consisting of 63 Class I railroads operating in the United
States. Currently there are seven railroad systems, consisting of seven
Class I railroads. Nearly half of that reduction was attributable to
consolidations.[Footnote 16] The railroad industry is dominated by four
Class I railroads--two in the East and two in the West. As figure 8
shows, the market share of these four Class I railroads has been
increasing and accounted for over 89 percent of the industry's revenues
in 2004.
Figure 8: Percentage of Railroad Market Represented by Four Largest
Class I Railroads, 1985-2004:
[See PDF for image]
source: GAO analysis of STB data.
[End of figure]
There is significant disagreement on the state of competition in the
rail industry and on whether or not federal regulation--resulting from
legislation such as the Staggers Rail Act--has ensured effective
competition among railroads. This disagreement was represented on our
panel of 11 experts, 6 of whom indicated that rail-to-rail competition
has been achieved (either "greatly" or "somewhat") and 4 of whom
maintained that effective competition had not been achieved.[Footnote
17] One member of our panel viewed less competition among rail carriers
as a negative development because it can result in less efficient
railroad companies and fewer options for shipping companies. Another
member of our panel said that industry consolidation was essential to
achieving an efficient and complete rail network under fewer, but
ultimately stronger, railroad companies. Other experts also pointed to
the hundreds of short-line railroads[Footnote 18] that have come into
being since the enactment of the Staggers Rail Act, as well as
increases in other competitive options for shippers from other modes
such as trucks and barges.
A reduction in competitive options can have a significant impact on the
rates railroads charge shippers. There are a variety of contexts that
affect how railroads compete with each other and with other modes, such
as when route origins and destinations can both be reached by more than
one railroad, or by multiple modes of transportation.[Footnote 19]
Comparing two routes for shipping the same commodity, but using a
different number of rail carriers, can illustrate this effect. Figure 9
shows two long-distance grain routes that both terminate in the
Portland, Oregon, economic area from different origin points. Both
routes carry comparable tonnage, but the route originating in the
economic area in and around Sioux Falls, South Dakota, is served by two
Class I railroads, whereas the route from the Minot, North Dakota,
economic area is served by one Class I railroad. The rates for the
Minot route are roughly double the rates for the Sioux Falls route.
Figure 9: Comparison of Rates Charged on Long-distance Grain Routes,
1997-2004:
[See PDF for image]
Source: GAO analysis of STB data.
Note: For some years, data have been removed due to insufficient sample
size.
[End of figure]
The ability to build out to another railroad can also create
competition and improve railroad rates for some shippers. For example,
following a build-out,[Footnote 20] a shipper gained access to a second
railroad at an origin point that had previously been served by one
Class I railroad.[Footnote 21] Figure 10 shows that within a few years
after the introduction of service by the second railroad, the rates had
dropped significantly. Because even a short segment build-out can be
quite costly, shippers are unlikely to pursue build-out options without
a substantial traffic base. Some experts with whom we spoke said that
situations like the one depicted in figure 9 reflect the reality of
differential pricing in the freight railroad industry, or they suggest
that other factors such as differences in the length of two different
routes may be the cause of rate discrepancies. Others believe that a
significant rate decrease after the introduction of competition is
evidence that railroads are extracting monopoly rates from captive
shippers.
Figure 10: Rate Changes after the Introduction of a Second Carrier:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
While competition between rail carriers is particularly important in
some cases, in other cases, competition between rail and other
transportation modes, such as trucks and barges, may be more important.
Particularly for bulk commodities (i.e., grain), when shipper locations
can be served by barge transportation, rail rates will be lower
relative to rail costs than on routes that are not conducive to barge
competition. Figure 11 depicts costs and revenues for two routes, one
(from the Champaign, Illinois economic area to the New Orleans,
Louisiana economic area) with rail and barge options, and the other
(from the Champaign, Illinois economic area to the Atlanta, Georgia
economic area) with just a rail option. Although both routes have the
same origin, for shipping the same commodity over a comparable
distance, the route with the barge option has consistently lower rates
than the route with just rail service.
Figure 11: Comparison of Rate Changes from Champaign, Illinois,
Economic Area to New Orleans, Louisiana, Economic Area and Champaign,
Illinois, Economic Area to Atlanta, Georgia, Economic Area, 1990-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
Besides the number of rail carriers serving a location, the use of
contracts for rail service can affect the competitive landscape. The
Staggers Rail Act allowed railroad and shipping companies to enter into
confidential contracts for rail service and also placed all traffic
running under contract outside the remaining rate regulations.
According to railroad and shipper groups, the duration of contracts has
declined, in part because of the railroads' desire to quickly react to
shifting market demand, which can result in charging higher rates.
Other shippers were concerned that moving away from confidential
contracts to public pricing could represent price signaling and further
reduce competition between railroads. In 2004, 70 percent of tonnage
and 71 percent of industry revenue moved under contract.
Captive Shippers Are Difficult to Identify, but Available Measures
Indicate Captivity Dropping in the Railroad Industry:
It is difficult to determine precisely how many shippers are "captive"
to one railroad because the proxy measures that provide the best
indication can overstate or understate captivity.[Footnote 22] One way
of determining potential captivity is to identify which Bureau of
Economic Analysis (BEA) economic areas were served by only one Class I
railroad.[Footnote 23] In 2004, 27 of the 177 BEA economic areas were
served by only one Class I railroad.[Footnote 24] As shown in figure
12, these areas include parts of Montana, North Dakota, New Mexico,
Maine, and smaller areas in several states.
Figure 12: Number of Class I Railroads Serving Economic Areas, 2004:
[See PDF for image]
Source: GAO analysis of BEA and GIS data.
[End of figure]
Another way of looking at potential captivity is to calculate how much
route tonnage originating in a given economic area has access to only
one Class I railroad. Figure 13 shows the percentage in 2004 of all
industry tonnage originating in economic areas with access to only one
Class I railroad. In particular, economic areas with more than 75
percent of tonnage shipped on one railroad appear most prevalent in
states such as Montana, Idaho, North Dakota, and Texas. Tonnage
originating in these economic areas varies widely, from a little over
55,000 tons to over 36 million tons.
Figure 13: Percentage of All Industry Tonnage Originating in Economic
with Access to One Class I Railroad, 2004:
[See PDF for image]
Source: GAO analysis of BEA, DOT, and STB data.
[End of figure]
According to our analysis of available measures, the overall extent of
captivity appears to be dropping in the freight railroad industry. We
examined tonnage, revenue, and access statistics for all routes--
originating and terminating in economic areas--captured in the Carload
Waybill Sample and other DOT data. In 2004, origin and destination
routes with access to only one Class I railroad carried 12 percent of
industry revenue and 10 percent of industry tonnage, which represents a
decline from 1994, when 22 percent of industry revenue and 21 percent
of industry tonnage moved on routes served by one Class I railroad (see
table 1).[Footnote 25]
Table 1: Changes in Percentage of Industry Revenue and Tonnage on
Origin and Destination Routes with Access to One Class I Railroad:
Year: 1994;
Percentage of revenue: 22.87;
Percentage of tonnage: 20.59.
Year: 2004;
Percentage of revenue: 12.29;
Percentage of tonnage: 10.43.
Source: GAO analysis of BEA, DOT, and STB data.
[End of table]
This decline suggests that more railroad traffic is traveling on routes
with access to more than one Class I railroad. While overall industry
tonnage with access to more than one Class I railroad appears to have
increased, some economic areas have a higher percentage of all industry
traffic tonnage shipping on one Class I railroad. From 1994 through
2004, parts of states such as Texas, Tennessee, and Montana experienced
increases of 25 percent or more in tonnage with access to one Class I
railroad while parts of other states such as Oregon, New York, and
Florida saw their percentages of tonnage with access to one Class I
railroad drop by more than 25 percent (see fig. 14).
Figure 14: Changes in Percentage of All Industry Traffic Tonnage with
Access to One Class I Railroad Originating in Economic Areas, 1994
through 2004:
[See PDF for image]
Source: GAO analysis of BEA, DOT, and STB data.
[End of figure]
While examining BEA areas provides a proxy measure for captivity, a
number of factors may understate or overstate whether shippers are
actually captive. The first three factors may work to understate the
extent of captivity among shippers. First, routes originating within
economic areas served by multiple Class I railroads may still be
captive if only one Class I railroad serves their destination, and a
shipper must use that one railroad for that particular route. Second,
some BEA areas are quite large, so a shipper within the area may have
access to only one railroad, even though there are two or more
railroads within the broader area. Third, an origin may only be served
by one Class I railroad, but one Class I railroad does not serve the
entire route, meaning the route may be partially captive, although more
than one Class I railroad provides service between its origin and
destination. Two additional limitations may work to overstate the
number of locations captive to one railroad. First, this analysis
accounts for Class I railroads only and does not account for
competitive rail options that might be offered by Class II or III
railroads[Footnote 26] such as the Guilford Rail System, which operates
in northern New England. Second, this analysis considers only
competition among rail carriers and does not examine competitive
options offered by rail and other transportation alternatives such as
trucks and barges.
Amount of Potentially Captive Traffic Traveling at Rates at Levels
Substantially above the Threshold for Rate Relief Has Increased:
To determine potential captivity, we applied another measure--traffic
traveling at rates equal to or greater than 180 percent R/VC, which is
part of the statutory threshold for bringing a rate relief case before
STB. STB regards traffic at or above this threshold as "potentially
captive." As with BEA areas, examining R/VC levels as a proxy measure
for captivity can also understate or overstate captivity. For example,
it is possible for the R/VC ratio to increase while the rate paid by a
shipper is declining. Assume that in Year 1, a shipper is paying a rate
of $20 and the railroad's variable cost is $12; the R/VC ratio--a
division of the rate and the variable cost--would be 167 percent. If in
Year 2, the variable costs decline by $2 from $12 to $10 and the
railroad passes this cost savings directly on to the shipper in the
form of a reduced rate, the shipper would pay $18 instead of $20.
However, as shown in table 2, because both revenue and variable cost
decline, the R/VC ratio increases to 180 percent.
Table 2: Possible Changes in R/VC Ratios:
Year: Year 1;
Revenue collected: $20.00;
Variable costs: $12.00; R/VC: 167%.
Year: Year 2;
Revenue collected: $18.00;
Variable costs: $10.00; R/VC: 180%.
Source: GAO.
[End of table]
Since 1985, and as a percentage of all traffic, the amount of
potentially captive traffic traveling at rates over 180 percent R/VC
and the revenue generated from that traffic have both declined. Revenue
generated from traffic traveling at rates over 180 percent R/VC
decreased from 41 percent of all industry revenue in 1985 to 29 percent
in 2004 (see fig. 15).
Figure 15: Percentage of Industry Tonnage and Revenue Generated from
Traffic Traveling at Rates Equal to or Greater Than 180 Percent R/VC,
1985-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
However, since 1985, tonnage from traffic traveling at rates
substantially over the threshold for rate relief has increased. Total
industry tonnage has increased significantly (from 1.37 billion tons in
1985 to 2.14 billion tons in 2004), with the tonnage traveling at rates
above 300 percent R/VC more than doubling--from about 53 million tons
in 1985 to over 130 million tons in 2004 (see fig. 16).
Figure 16: Tonnage Traveling at Rates over 300 Percent R/VC, 1985-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
As a percentage of all industry traffic, traffic traveling at rates
between 180 and 300 percent R/VC decreased from 36 percent in 1985 to
25 percent in 2004. In contrast, the percentage of all industry traffic
traveling at rates above 300 percent R/VC increased from 4 percent in
1985 to 6 percent in 2004 (see fig. 17).
Figure 17: Percentage of Tonnage by R/VC, 1985 and 2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
Increases in traffic traveling at rates over 300 percent R/VC appear
widely distributed throughout the country, although in some areas
increases have been higher than in others. Four economic areas located
in parts of Montana, New Mexico, North Dakota, and West Virginia had
the largest increases in traffic traveling at rates over 300 percent R/
VC, with an increase of more than 25 percent from 1985 through 2004
(see fig. 18).
Figure 18: Changes in Percentage of Tonnage Traveling at Rates over 300
Percent R/VC, by Originating Economic Area, 1985 through 2004:
[See PDF for image]
Source: GAO analysis of BEA, DOT, and STB data.
[End of figure]
In addition to national changes, significant increases in traffic
traveling at rates over 300 percent R/VC can be seen in certain states,
for certain commodities, and for certain routes. For example, in 1985
virtually no coal originating in Ohio traveled at rates over 300
percent R/VC. In 2004, nearly half of coal traffic originating in Ohio
traveled at rates over 300 percent R/VC. Increases in traffic traveling
at rates over 300 percent R/VC can also be seen at the route level.
Figure 19 shows the amount of traffic traveling at rates over 300
percent R/VC on long-distance grain routes from the Minot, North
Dakota, and Billings, Montana, economic areas to the Portland-
Vancouver-Beaver Falls, Oregon, economic area. Of the routes we
examined, these two had the highest percentage of traffic traveling at
rates over 300 percent R/VC for 2004, and on both routes, this traffic
had substantially increased over 1985 levels.[Footnote 27]
Figure 19: Long-distance Grain Route Changes in Percentage of Tonnage
Traveling at Rates over 300 Percent R/VC, 1985-2004:
[See PDF for image]
Source: GAO analysis of STB data.
[End of figure]
For both the Minot and Billings routes, increases in R/VC from 1985
through 2004 were driven more by increases in revenue than by changes
in variable cost. From 1985 through 2004, revenue from all grain
traffic--not just traffic traveling at rates above the statutory
threshold for rate relief--on the Minot, North Dakota, to the Portland-
Vancouver-Beaver Falls, Oregon, economic area increased from
approximately $18.4 million to approximately $30.8 million. Variable
cost increased at a much slower pace, rising from approximately $12.2
million to approximately $12.4 million. For the route from the
Billings, Montana, economic area to the Portland-Vancouver-Beaver
Falls, Oregon, economic area, grain revenue more than tripled, from
approximately $11.2 million in 1985 to approximately $42.7 million in
2004. Variable cost also increased substantially--although still not as
much as revenue--rising from approximately $5.5 million to
approximately $15.1 million.
Some Areas with Access to One Railroad Have Higher Percentages of
Traffic Traveling at Rates That Exceed the Threshold for Rate Relief:
Some economic areas with access to one Class I railroad also have more
than half of their traffic traveling at rates that exceed the statutory
threshold for rate relief. For example, parts of New Mexico and Idaho
with access to one Class I railroad have more than half of all traffic
originating in those same areas traveling at rates over 180 percent R/
VC (see fig. 20). However, there are instances in which an economic
area may have access to two or more Class I railroads and still have
more than 75 percent of its traffic traveling at rates over 180 percent
R/VC, as well as other instances in which an economic area may have
access to one Class I railroad and have less than 25 percent of its
traffic traveling at rates over 180 percent R/VC. Yet there are parts
of the country with access to one Class I railroad that also have
higher percentages of traffic traveling at rates over the statutory
threshold for rate relief.
Figure 20: Overlap between Percentage of Tonnage over Threshold for
Rate Relief and Access to Only One Class I Railroad:
[See PDF for image]
Source: GAO analysis of BEA, DOT, and STB data.
[End of figure]
Our analysis shows that some areas of the country with access to only
one Class I railroad have higher levels of traffic traveling at rates
over the statutory threshold for rate relief. This situation may
reflect reasonable economic practices by railroads in an environment of
excess demand, or it may represent an abuse of market power. Our
analysis provides an important first step in assessing competitive
markets nationally, but it is imperfect given the inherent limitations
of the Carload Waybill Sample and of the proxy measures available for
weighing captivity. When combined with comments from participants on
our expert panel and interviews with shipper and railroad groups, the
results of our analysis suggest that shippers in selected markets may
be paying excessive rates, meriting further inquiry and analysis.
Despite STB's Actions, Analysis of Competitive Markets Is Needed to
Address Lack of Effective Relief for Captive Shippers:
The Staggers Rail and ICC Termination Acts promoted greater reliance on
competition as the preferred method to protect shippers from
unreasonable rates and granted STB broad authority to monitor the
performance of the railroad industry. STB has taken a number of actions
to provide protections for captive shippers from unreasonable rates in
the absence of effective competition, including establishing a process
for captive shippers to obtain relief from unreasonable rates. Despite
STB's actions, there is little effective relief for captive shippers
because STB's standard rate relief process is largely inaccessible.
While STB continues to refine its practices, an assessment of
competitive markets would provide further information about the extent
of captivity among shippers and the merits of a range of proposed
actions to enhance competitive options available to shippers. In
addition, changes to the rate relief process could provide greater
protection from unreasonable rates.
STB Has Broad Authority to Monitor the Railroad Industry:
The Staggers Rail and ICC Termination Acts encourage competition as the
preferred way to protect shippers and to promote the financial health
of the railroad industry. At the same time, the acts give STB the
authority to:
* adjudicate rate cases to resolve disputes between captive shippers
and railroads upon receiving a complaint from a shipper;
* approve rail transactions, such as mergers, consolidations,
acquisitions, and trackage rights;
* prescribe new regulations, such as rules for competitive access and
merger approvals; and:
* inquire into and report on rail industry practices, including
obtaining information from railroads on its own initiative and holding
hearings to inquire into areas of concern, such as competition.
The federal courts have upheld STB's general powers to monitor the rail
industry, including its ability to subpoena witnesses and records and
depose witnesses.
STB has the authority and ability to inquire into and report on
railroad practices, and it also has authority to take a number of
actions based on the results of that inquiry. First, STB could issue a
general rule making that would alter the administrative rules for the
industry. For example, STB has the authority to require a railroad to
make their terminal facilities available to another railroad under
certain circumstances. Second, STB could reopen a past decision if it
found a material error in the case, new evidence emerged, or
circumstances affecting the case substantially changed. Finally, if STB
received a complaint from a shipper, it could then launch a formal
investigation and prescribe specific remedies to address the complaint.
STB Has Taken Actions to Protect Captive Shippers:
Under its adjudicatory authority, STB has taken a number of actions to
provide protection for captive shippers. STB determines the
reasonableness of challenged rates in the absence of competition upon
receiving a complaint from a shipper. The rate relief process is the
principal method by which shippers seek relief from unreasonable rates.
STB developed standard rate case guidelines, under which captive
shippers can challenge a rail rate and appeal to STB for rate relief.
Under the standard rate relief process, STB assesses whether the
railroad dominates the shipper's transportation market and, if it finds
market dominance, proceeds with further assessments to determine
whether the actual rate the railroad charges the shipper is reasonable.
STB requires that the shipper demonstrate how much an optimally
efficient railroad would need to charge the shipper and construct a
hypothetical, perfectly efficient railroad that would replace the
shipper's current carrier. As part of the rate relief process, both the
railroad and the shipper have the opportunity to present their facts
and views to STB, as well as to present new evidence. In 1999,[Footnote
28] we reported that shippers and shippers' associations indicated that
constructing a hypothetical railroad is difficult, particularly for
small shippers, because the time and cost associated with the model's
development may outweigh the compensation afforded the shipper should
STB determine that the challenged rate was unreasonable. Since we
reported on the process in 1999, STB has taken several actions to
reduce potential barriers for filing a complaint. For example, STB now
conducts mediation to begin cases, has added staff to process cases,
and has eliminated certain criteria for assessing whether a railroad
dominates a shipper's market.[Footnote 29]
STB also created alternatives to the standard rate relief process,
developing simplified guidelines, as Congress required, for cases in
which the standard rate guidelines would be too costly or infeasible
given the value of the cases. Under these simplified guidelines,
captive shippers who believe that their rate is unreasonable can appeal
to STB for rate relief, even if the value of the disputed traffic makes
it too costly or infeasible to apply the standard guidelines. In
addition, STB created a voluntary arbitration option that parties can
use to resolve disputes over rates.
Under its authority to approve rail transactions, STB has approved
railroad mergers that it finds consistent with the public interest. STB
has also taken action to ensure that any potential merger-related harm
to competition is mitigated. STB's mitigation efforts have focused on
preserving competition where it could be lost at 2-to-1
points,[Footnote 30] for example, by imposing conditions that allow one
railroad to operate over the tracks of another railroad (called
trackage rights). STB has historically not taken action to introduce
service where shippers have service by only one carrier.
Under its authority to prescribe new regulations, STB established a
process by which shippers can file a complaint if they are captive to
one railroad and believe that the railroad is engaged in
anticompetitive behavior. Under this process, if the shipper proves
that the railroad is engaged in anticompetitive behavior, STB can
prescribe remedies such as trackage rights that would give the shipper
access to another railroad.
Finally, under its authority to inquire into and report on the rail
industry, STB instituted proceedings to review rail access and
competition issues. For example, in April 1998, at the request of
Congress, STB commenced a review of access and competitive service in
the rail industry. In April 1998, STB decided to consider revising its
competitive access rules. However, in its December 1998 report to
Congress, STB declined to take further action on this issue because it
had adopted new rules giving shippers temporary access to alternative
routing options during periods of poor service. In addition, STB
observed that the competitive access issue raises basic policy
questions that are more appropriately resolved by Congress. In 2001,
STB adopted new regulations for rail mergers that require the applicant
to demonstrate that the merger would enhance, not just preserve,
competition.
Efforts Have Led to Little Effective Relief:
Despite STB's efforts, there is widespread agreement that STB's
standard rate relief process is inaccessible to most shippers and does
not provide for expeditious handling and resolution of complaints. The
process remains expensive, time consuming, and complex. While STB does
not keep records of the cost of a rate case, shippers we interviewed
agreed that the process can cost approximately $3 million per litigant.
Shippers told us that, to initiate a case, the case would need to
involve several million dollars so that it would be worthwhile to spend
$3 million on a case that they could possibly lose. Thus, shippers
noted that only large-volume shippers, such as coal shippers, with set
origins and destinations have the money to be able to afford the STB
rate relief process. In addition, shippers said that they do not use
the process because it takes so long for STB to reach a decision.
Lastly, shippers continue to state that the process is both time
consuming and difficult because it calls for them to develop a
hypothetical competing railroad to show what the rate should be and to
demonstrate that the existing rate is unreasonable. Since 2001, only 10
cases have been filed, and these cases took between 2.6 and 3.6 years-
-an average of 3.3 years per case--to complete. Of those 10 cases, 9
were filed by coal shippers.
The simplified guidelines also have not effectively provided relief for
captive shippers. Although these simplified guidelines have been in
place since 1997, a rate case has not been decided under the process
set out by the guidelines. STB held public hearings in April 2003 and
July 2004 to examine why shippers have not used the guidelines and to
explore ways to improve them. At these hearings, numerous organizations
provided comments to STB on measures that could clarify the simplified
guidelines, but no action was taken. STB observed that parties urged
changes to make the process more workable, but disagreed on what those
changes should be. Several shipper organizations told us that shippers
are concerned about using the simplified guidelines because they
believe the guidelines will be challenged in court, resulting in
lengthy litigation. STB officials told us that they--not the shippers-
-would be responsible for defending the guidelines in court. STB
officials also said that if a shipper won a small rate case, STB could
order reparations to the shipper before the case was appealed to the
courts.
STB's arbitration option has never been used. Under this approach, an
arbitrator would decide the rate, using a "give and take" approach--
that is, the arbitrator would determine the rate without being required
to pick one of the two offers. According to STB officials, this option
has not been used, in part, because the cases that go before STB are
contentious, with high monetary stakes. As a result, there is less
willingness from either side to arbitrate.
Shippers have not obtained relief through STB's "competitive access"
rules. Under these rules, shippers can file a complaint to request that
one railroad obtain access to another railroad's tracks when necessary
to remedy anticompetitive behavior by the owning railroad. Shippers who
file a complaint must show that the owning railroad has engaged in
anticompetitive behavior. To date, STB has found that all complaints
have failed to prove that the owning railroad has engaged in
anticompetitive behavior.
STB Continues to Refine the Process:
During our review, STB has continued to refine its processes for
shippers to obtain relief from unreasonable rates and competitive
access. For example, STB recently proposed a rule making to make
changes to the simplified guidelines in order to respond to comments
gathered at the STB hearings held in April 2003 and July 2004 to
examine why those guidelines have not been used by shippers and to
explore ways to improve the guidelines. In addition, STB is seeking
public comment on several measures it has proposed to adopt regarding
railroad practices involving fuel surcharges. The proposals follow
STB's May 2006 public hearing on how railroads calculate and charge
fuel surcharges and respond to extensive testimony on these charges
submitted to STB by the rail industry, the public, and railroad
customers. STB announced its intent to hold a public hearing on certain
issues related to rail transportation rates for grain. Lastly, STB
recently requested written comments and held a public hearing in
response to a petition filed by a shipper group to prevent, or put a
time limit on, paper barriers, which are contractual agreements that
may be made when a Class I railroad either sells or leases some of its
track to another railroad (typically a short line railroad or regional
railroad), but stipulates that virtually all traffic that originates on
that line must interchange with the Class I railroad that sold the
tracks or pay a penalty.
Assessment of Competitive Markets and Changes to Rate Relief Process
Could Provide More Relief:
The results of our analysis suggest a reasonable possibility that
shippers in selected markets may be paying excessive rates related to a
lack of competition in these markets. While our analysis of available
measures shows that the extent of captivity appears to be dropping in
the freight railroad industry, shippers that may be captive are paying
substantially over the statutory threshold for initiating a rate relief
case. This situation may simply reflect reasonable economic practices
by railroads in an increasingly constrained environment in which demand
for rail services increasingly exceeds supply, or it may represent an
abuse of market power. Our analysis provides an important first step in
assessing competitive markets nationally, but it is imperfect given the
inherent limitations of the Carload Waybill Sample and the proxy
measures available for weighing captivity. A more rigorous analysis of
competitive markets nationally is needed--one that identifies the state
of competition nationwide and inquires into pricing practices in
specific markets. If this assessment determines that market power is
being abused or the goals of the Staggers Rail Act are not being met,
STB could consider several methods to ease competition concerns, such
as initiating a generally applicable rule making; or, if a complaint is
filed, providing specific remedies to increase competition.
Shipper groups, economists, and other experts in the rail industry have
suggested several alternative approaches as remedies that could provide
more competitive options to shippers in areas of inadequate competition
or excessive market power. These groups view these approaches as more
effective than the rate relief process in promoting a greater reliance
on competition to protect shippers against unreasonable rates. Some
proposals would require legislative change, or a reopening of past STB
decisions.[Footnote 31]
These approaches each have potential costs and benefits. On the one
hand, they could expand competitive options, reduce rail rates, and
decrease the number of captive shippers as well as reduce the need for
both federal regulation and a rate relief process. On the other hand,
reductions in rail rates could affect railroad revenues and limit the
railroads' ability and potential willingness to invest in their
infrastructure. In addition, some markets may not have the level of
demand needed to support competition among railroads. However, in
markets that do, the targeted approaches frequently proposed by shipper
groups and others include the following:
* Reciprocal switching: This approach would allow STB to require
railroads serving shippers that are close to another railroad to
transport cars of a competing railroad for a fee. The shippers would
then have access to railroads that do not reach their facilities. This
approach is similar to the mandatory interswitching in Canada, which
enables a shipper to request a second railroad's service if that second
railroad is within approximately 18 miles. Some Class I railroads
already interchange traffic using these agreements, but they oppose
being required to do so. Under this approach, STB would oversee the
pricing of switching agreements. This approach could also reduce the
number of captive shippers by providing a competitive option to
shippers with access to a proximate but previously inaccessible
railroad and thereby reduce traffic eligible for the rate relief
process (see fig. 21).
Figure 21: Reciprocal Switching:
[See PDF for image]
Source: GAO.
[End of figure]
* Terminal agreements: This approach would require one railroad to
grant access to its terminal facilities or tracks to another railroad,
enabling both railroads to interchange traffic or gain access to
traffic coming from shippers off the other railroad's lines for a fee.
Current regulation requires a shipper to demonstrate anticompetitive
conduct by a railroad before STB will grant access to a terminal by a
nonowning railroad unless there is an emergency or when a shipper can
demonstrate poor service and a second railroad is willing and able to
provide the service requested. This approach would require revisiting
the current requirement that railroads or shippers demonstrate
anticompetitive conduct in making a case to gain access to a railroad
terminal in areas where there is inadequate competition. The approach
would also make it easier for competing railroads to gain access to the
terminal areas of other railroads and could increase competition
between railroads. However, it could also reduce revenues to all
railroads involved and adversely affect the financial condition of the
rail industry. Also, shippers could benefit from increased competition
but might see service decline (see fig. 22).
Figure 22: Terminal Agreements:
[See PDF for image]
Source: GAO.
[End of figure]
* Trackage rights: This approach would require one railroad to grant
access to its tracks to another railroad, enabling railroads to
interchange traffic beyond terminal facilities for a fee. In the past,
STB has imposed conditions requiring that a merging railroad must grant
another railroad trackage rights to preserve competition when a merger
would reduce a shipper's access to railroads from two to one. While
this approach could potentially increase rail competition and decrease
rail rates, it could also discourage owning railroads from maintaining
the track or providing high-quality service, since the value of lost
use of track may not be compensated by the user fee and may decrease
return on investment (see fig. 23).
Figure 23: Trackage Rights:
[See PDF for image]
Source: GAO.
[End of figure]
"Bottleneck" rates: This approach would require a railroad to establish
a rate, and thereby offer to provide service, for any two points on the
railroad's system where traffic originates, terminates, or can be
interchanged. Some shippers have more than one railroad that serves
them at their origin and/or destination points, but have at least one
portion of a rail movement for which no alternative rail route is
available. This portion is referred to as the "bottleneck segment."
STB's decision that a railroad is not required to quote a rate for the
bottleneck segment has been upheld in federal court.[Footnote 32] STB's
rationale was that statute and case law precluded it from requiring a
railroad to provide service on a portion of its route when the railroad
serves both the origin and destination points and provides a rate for
such movement. STB requires a railroad to provide service for the
bottleneck segment only if the shipper had prior arrangements or a
contract for the remaining portion of the shipment route. On the one
hand, requiring railroads to establish bottleneck rates would force
short-distance routes on railroads when they served an entire route and
could result in loss of business and potentially subject the bottleneck
segment to a rate complaint. On the other hand, this approach would
give shippers access to a second railroad, even if a single railroad
was the only railroad that served the shipper at its origin and/or
destination points, and could potentially reduce rates (see fig. 24).
Figure 24: Bottleneck Rates:
[See PDF for image]
Source: GAO.
[End of figure]
Paper barriers: This approach would prevent or, put a time limit on,
paper barriers, which are contractual agreements that can occur when a
Class I railroad either sells or leases long term some of its track to
other railroads (typically a short-line railroad and/or regional
railroad). These agreements stipulate that virtually all traffic that
originates on that line must interchange with the Class I railroad that
originally leased the tracks or pay a penalty. Since the 1980s,
approximately 500 short lines have been created by Class I railroads
selling a portion of their lines; however, the extent to which paper
barriers are a standard practice is unknown because they are part of
confidential contracts. When this type of agreement exists, it can
inhibit smaller railroads that connect with or cross two or more Class
I rail systems from providing rail customers access to competitive
service. Eliminating paper barriers could affect the railroad
industry's overall capacity since Class I railroads may abandon lines
instead of selling them to smaller railroads and thereby increase the
cost of entering a market for a would-be competitor. In addition, an
official from a railroad association told us that it is unclear if a
federal agency could invalidate privately negotiated contracts (see
fig. 25).
Figure 25: Paper Barriers:
[See PDF for image]
Source: GAO.
[End of figure]
It will be important for policymakers, in evaluating these alternative
approaches, to carefully consider the impact of each approach on the
balance set out in the Staggers Rail Act. One significant consideration
is the revenue adequacy of the railroads. The Staggers Rail Act
established revenue adequacy as a goal for the industry and allowed the
railroads to use differential pricing to increase their revenues. While
the specific method for determining revenue adequacy has been
controversial, the overall trend in revenue adequacy may be more
important. In its last report for 2004, STB determined that one
railroad is revenue adequate and that others are approaching revenue
adequacy. It is too early to determine that the industry as a whole is
achieving revenue adequacy. Nevertheless, this improvement in the
railroads' financial condition represents a significant shift in the
rail industry because for decades after the enactment of the Staggers
Rail Act, the railroads were all considered revenue inadequate. The
railroads need sufficient revenue for infrastructure investment to keep
pace with increased demand. However, each of these changes could
decrease the amount of revenue the railroads receive. Yet, as the
railroad's revenue adequacy improves, the question arises as to what
degree the railroads should continue to rely, for their investment
needs, on obtaining significantly higher prices from those with greater
reliance on rail transportation.
To prevent problems with unreasonable rates, some shipper groups
propose targeted approaches that would provide them with more
competitive options. A number of different approaches have also been
suggested to make the rate relief process less expensive, more
expeditious, and therefore potentially more accessible. Each of the
proposed approaches has both advantages and drawbacks. These approaches
include the following:
* Increase the use of simplified guidelines: The simplified guidelines
use standard industry average figures for revenue data instead of
requiring the shipper to create a hypothetical railroad. This approach
would reduce the time and complexity of the process; however, it may
not provide such an accurate and precise a measure as the standard
process. Both shippers and railroad officials with whom we spoke agree
that it is confusing to determine who is eligible to use the process
and how it would work. STB recently issued a proposed rule making to
pursue changes to the simplified guidelines to provide captive shippers
greater access to regulatory remedies for unreasonable rail rates.
* Increase the use of arbitration: Under arbitration, two parties
present their case before an arbitrator, who determines the rate. This
process replaces the shipper's requirement to create a hypothetical
railroad. Proponents of arbitration argue that the threat of
arbitration can induce railroads and shippers to resolve their own
problems and limit the need for federal regulation. In addition, the
process is quicker and cheaper than the standard rate relief process.
For example, Canada offers an arbitration process known as Final Offer
Arbitration (FOA), under which both parties submit their best and final
offers, and the arbitrator considers the argument from both sides and
picks one rate offer from either the railroad or the shipper. FOA is
quicker--statutorily, once the process begins it has to be completed
within 60 days, or 30 days for disputes involving freight charges of
less than $750,000, unless the parties agree to a different time frame.
In addition, FOA is cheaper--estimates ranged up to $1 million Canadian
dollars, for both parties. On the other hand, the decisions are good
for only 1 year, so the process could in theory be revisited annually.
Critics of this approach suggest that arbitration decisions may not be
based on economic principles, such as the revenue and cost structure of
the railroad, and arbitrators may not be knowledgeable about the
railroad industry. Furthermore, opinions differ significantly about
which types of disputes should be covered and what standards (if any)
should apply.
* Develop an alternative cost methodology: STB could develop an
alternative to the cost methodology used under the standard process in
which a shipper must demonstrate how much an optimally efficient
railroad would need to charge a shipper by constructing a hypothetical,
perfectly efficient railroad that would replace its current carrier.
For example, STB could use a long-run incremental cost approach to
evaluate and decide rate cases. This process, which is used by the
Federal Energy Regulatory Commission for regulating rates charged by
pipeline companies, bases rates on the actual incremental cost of
moving a particular shipment, plus a reasonable rate of return. This
approach allows for a quick, standard method for setting prices, but
does not take into account the need for differential pricing or the
railroad's need to charge higher rates in order to become revenue
adequate. Structuring rate regulation around actual costs can also
create potential disincentives for the regulated entity to control its
costs.
Uncertainty about Future Freight Rail Demand and Capacity Points to
Opportunities for a More Strategic Federal Approach to Rail
Infrastructure:
Recent forecasts predict that the demand for freight and freight rail
transport will grow significantly in the future. While forecasts have
limitations as guides to investing in new transportation
infrastructure, they can present a plausible picture of future freight
demand and capacity. Whether private rail companies will be able and
willing to invest in new infrastructure capacity to meet projected
future demand is uncertain. New rail capacity not only benefits each
private rail company network, but it also has the potential to benefit
the public by improving traffic flow, air quality, and safety at the
national, state, and local levels. As a result, the public sector has
increasingly been investing in freight rail projects. Federal
involvement in the freight system should be consistent with the
competitive marketplace and ensure that funding decisions reflect
widespread public priorities.
Forecasts of Significant Freight Rail Traffic Growth Provide a
Plausible Outlook for the Future:
The demand for freight transportation in general and freight rail
specifically is forecasted to increase, according to recent
studies.[Footnote 33] Several of these studies also quantify their
projections of the volume and value of future freight demand. The
Freight Analysis Framework (FAF) is a comprehensive database and policy
analysis tool maintained by DOT to help identify needed freight
capacity improvements. In 2002, DOT projected, using this tool, that
overall domestic and international freight demand would increase by
more than 65 percent and 84 percent, respectively, by 2020. In 2003,
the American Association of State Highway and Transportation Officials
(AASHTO) released the Freight Rail Bottom Line Report, prepared by a
consulting firm. This report describes the industry and its benefits to
the nation, estimates the industry's investment needs and capacity to
meet these needs, and quantifies the consequences of underinvestment,
including highway deterioration and congestion. The AASHTO study
projected that, by 2020, overall domestic freight demand by ton would
increase by 57 percent and international demand would increase by 99
percent. In 2005, the American Trucking Association's (ATA) report U.S.
Freight Transportation Forecast to 2016 projected tonnage and revenues
for all freight modes. The report predicted that overall freight volume
would increase by about 32 percent between 2004 and 2016.
Freight rail demand is projected to increase less than overall freight
demand and to grow at a slower rate than demand for other modes--such
as truck and air freight. FAF projects that freight rail tonnage will
grow about 55 percent by 2020, but this growth will not be as dramatic
as for truck and air, and will account for a much smaller share of the
market when measured on the basis of shipment value. AASHTO predicts
that freight rail tonnage will increase 44 percent by 2020. However, it
notes that this forecast actually indicates that rail will lose some
market share. This estimate also assumes that considerable investment
will be required--up to about $4 billion annually--to meet future
demand. According to ATA's forecast, freight rail tonnage will grow
annually by 2.4 percent to 2010 and by 2.1 percent to 2016. While rail
intermodal traffic is forecast to grow rapidly, the study anticipates
that rail's overall share of total freight tonnage will decrease
slightly from about 15.6 percent in 2004 to about 15.4 percent in 2016.
However, ow many factors can affect the accuracy of these predictions.
Freight markets are volatile and unpredictable, and thus freight demand
forecasts may prove to be off the mark. Similarly, much freight traffic
is determined by trade that originates outside the United States.
Moreover, since the data and models used to develop these freight
demand forecasts are largely proprietary,[Footnote 34] we could not
assess the validity or reasonableness of the assumptions used to
develop the predictions.[Footnote 35] Nevertheless, forecasts of
freight and freight rail demand are useful as one plausible scenario
for the future. As the Congressional Budget Office (CBO) observed in a
January 2006 report, forecasts of demand are best viewed as
illustrative rather than quantitatively accurate.[Footnote 36]
Railroads' Investments in Capacity to Meet Potential Demand Are
Uncertain:
If demand does develop as forecasted, it is uncertain how able and
willing railroads will be to invest in new capacity. Railroads do not
prepare long-term capacity plans because of concern about the potential
for significant economic changes--for example, officials at one Class I
railroad stated that they prepare capacity improvements plans and
demand projections for 3 to 5 years into the future, with frequent
revisions. In addition, the railroads we interviewed were generally
unwilling to discuss their future investment plans with us in any
detail because this is business proprietary information. It is
therefore difficult to comment on how railroads are likely to choose
among their competing investment priorities for the future compared
with various demand scenarios.
Railroads' ability and willingness to invest in new capacity to meet
demand reflects a number of key considerations. For privately owned
rail companies, a key business consideration is maximizing returns for
shareholders. To do so, realizing the greatest return on investment
from each investment decision is essential and is reinforced by
pressure from shareholders. Rail investment involves private companies
taking a substantial risk which becomes a fixed cost on their balance
sheets, one on which they are accountable to stockholders and for which
they must make capital charges year in and year out for the life of the
investment. A railroad contemplating such an investment must be
confident that the market demand for that infrastructure will hold up
for 30 to 50 years. This is in sharp contrast to other modes such as
highway infrastructure, which is paid for largely by public funds.
Maximizing a rail company's competitive position in key markets is
important in deciding on investments in the company network's size and
facilities. For example, the growth of intermodal transport is a major
development for freight rail because it stands to be the largest
revenue generator for the Class I railroads. As a result, there is
intense competition for this business, although intermodal business
also means that freight rail both competes and cooperates with other
freight modes. However, intermodal growth depends on the railroads'
ability to invest in the new capacity needed to meet this demand.
Investment considerations are complicated by the current status of rail
infrastructure. Although the rail network has been downsized, the
infrastructure remains extensive but aging. Replacing, maintaining, and
upgrading this infrastructure is extremely costly, as the
Transportation Research Board emphasized in its analysis of critical
transportation issues.[Footnote 37] Predicting the extent to which
future rail investments will keep pace with projected freight rail
demand is complicated by the extent of current rail needs. For example,
an annual assessment of America's infrastructure[Footnote 38] conducted
by the American Society of Civil Engineering gave rail infrastructure a
"C-" grade and noted that, for the first time in 90 years, limited
capacity has created significant bottlenecks in the national rail
network. However, railroads must invest in new infrastructure, new
equipment, and substantial new capacity to handle additional traffic in
order to remain viable and effective, a rail industry representative
told our expert panel.
Today, freight railroads are sufficiently profitable to be investing at
record levels. Major freight railroads have reported[Footnote 39] that
they expect to invest about $8 billion in infrastructure during 2006--
a 21 percent increase over 2005--and have told us that they plan to
continue making infrastructure investments. However, not all of this
investment is planned for capital or new capacity. Although we
requested additional detail about how the rail industry's $8 billion
estimated investment was divided between new capacity and maintenance
or renewal of existing capacity, the Association of American Railroads
indicated that this information is not currently available but will be
part of a special study on railroad spending trends.
Rail Capacity Investments Can Produce Private and Public Sector
Benefits:
While private rail networks obtain benefits and improve their
profitability from investments in their capacity, these investments
also can benefit the public. In fact, some public benefits can be large
in comparison to anticipated benefits to the private rail network, as
the CBO report pointed out. For example, shifting truck freight traffic
to railroads can reduce highway congestion for passenger and commercial
vehicles, potentially reducing or avoiding public expenditures that
otherwise would be needed to build additional highway capacity or
provide additional maintenance to accommodate growing truck traffic.
Depending on the rail infrastructure project, the public could realize
several types of benefits, as described in table 3.
Table 3: Potential Public Benefits of Rail Transportation Investments:
Category: Economic;
Potential public benefit:
* Lower transportation costs through higher productivity, making it
cheaper to produce and distribute goods/services;
* Improve global competitiveness through increased efficiency;
* Strengthen local, regional, state economies;
* Expand industry, employment, tax base.
Category: Transportation system;
Potential public benefit:
* Capture each mode's advantages in moving passengers/freight;
* Improve overall system performance;
* Strengthen intermodal connections;
* Improve transportation network efficiency for the future;
* Improve passenger/ freight rail interactions.
Category: Mobility/Congestion;
Potential public benefit:
* Relieve highway congestion by shifting highway freight to rails;
* Reduce public investment to prevent highway deterioration by
preventing diversion of heavy rail freight to roads;
* Give passengers/freight access to more modes;
* Decrease travel time, increase reliability.
Category: Environmental/Air quality;
Potential public benefit:
* Reduce emissions/improve air quality by reducing congestion;
* Consume about one-fourth to one-third less fuel than trucks.
Category: Safety and security;
Potential public benefit:
* Reduce crashes through redesigned/eliminated highway-rail crossings;
* Provide redundant capacity to respond to operational/congestion,
national security, and weather problems.
Source: GAO analysis.
[End of table]
Rail projects can vary widely in the extent to which they may generate
public as well as private benefits; whether benefits are realized by
the private or public sector at the national, state, and local levels;
and how the benefits are quantified for the purpose of fairly
apportioning project financing. Determining what benefits and costs are
associated with a rail infrastructure project and who benefits is
important in deciding whether public funds for public benefits are
justified--but this is a difficult determination.[Footnote 40] For
example, one rail infrastructure project that reduces system
bottlenecks may generate benefits to the national economy by lowering
the costs of producing and distributing goods. Another rail project
that eliminates or improves highway-rail crossings may primarily
produce local benefits by reducing accidents, time lost waiting for
trains to pass, pollution and noise from idling trains, and delays of
emergency vehicles at crossings. The same project also may produce
national benefits by reducing the impact of train delays on the system.
Public Sector's Growing Freight Rail Investments Focus on Securing
Public Benefits:
Increasingly, governments at all levels have been investing in freight
rail improvement projects that offer potential public benefits. At the
state and local levels, government involvement has ranged from planning
and coordination to collaboration and investment with freight rail
companies and other stakeholders. Some states have been investing to
help short-line railroads maintain track in their states for almost 20
years. Other states--such as Florida, Virginia, New York, and
Pennsylvania--are creating significant new programs to invest in rail
projects. Over 30 states have published freight plans that describe
their goals and approach to freight and freight rail.
The scope of state and local freight rail investments continues to
expand. For example, Missouri state and local governments, in
partnership with railroads and other stakeholders, supported two major
rail bridge flyover[Footnote 41] projects to reduce rail delays in
Kansas City. These projects--totaling $134 million--were expected to
provide economic benefits and reduce rail transit time through the city
by about 2 hours. The project also used an innovative institutional
arrangement that created a special type of corporation to facilitate
its funding. Colorado's Department of Transportation (CDOT), other
public entities, and two Class I railroads are exploring an ambitious
partnership to relocate freight train facilities away from the heavily
populated Front Range area of the state, as the two railroads proposed.
CDOT initiated a benefit-cost study[Footnote 42] that found sufficient
public transportation, economic development, land use, safety,
environmental, and passenger rail facilitation benefits to warrant
investing public dollars in the project--estimated to cost about $1.17
billion.
The federal government also has been involved in freight rail projects.
In 1997, DOT provided a $400 million loan for the $2.4 billion Alameda
Corridor project to leverage funds from ports, railroads, and local
governments. As a result, a 20-mile trench for trains was constructed
to eliminate numerous rail-highway crossings and reduce rail transport
time to and from the ports of Los Angeles and Long Beach--a significant
gateway for freight imported from Asia and distributed throughout the
United States. In 2005, Congress provided $100 million to the $1.5
billion Chicago Region Environmental and Transportation Efficiency
(CREATE) program. Its objective is to cut train delays and congestion
and improve passenger rail service by separating 25 rail-highway
crossings, building 6 passenger/freight train flyovers, and upgrading
tracks and controls to improve service for the one-third of the
nation's rail traffic that comes through Chicago each day. Railroads
and state and local governments are contributing to the program's
financing. In 2005, Congress also passed the Safe, Accountable,
Flexible, Efficient Transportation Equity Act: A Legacy for Users
(SAFETEA-LU), which increased the authorized level of funds available
under the Railroad Rehabilitation and Improvement Financing (RRIF)
program from $3.5 billion to $35 billion over a 5-year period. This
program provides loans or loan guarantees that are available to states
or railroads for projects to acquire, improve, or rehabilitate rail
infrastructure.
A number of proposals before Congress would increase federal funding
for freight railroad projects. One proposal calls for the creation of a
Railroad Trust Fund that would be similar to the Highway Trust Fund,
which is used to pay for highway construction and improvements. Another
proposal calls for a railroad investment tax credit. Under this
proposal, railroads or shippers would receive a 25 percent tax credit
for money spent to expand rail infrastructure.
Federal Response to Freight Investments Should Reflect a National
Policy That Is Impartial Toward All Modes and Produces Maximum Public
Benefits from Public Investments:
Federal decision makers face considerable uncertainty about the future
of freight transportation coupled with considerable certainty that the
federal deficit will be a long-term constraint on federal investment.
At the same time, Congress will continue to face policy and funding
decisions that will affect all freight modes and have a critical impact
in shaping the nation's rail system and infrastructure. As we have
noted in our past work,[Footnote 43] a strategic systemwide approach to
transportation planning and funding that focuses on all modes is
increasingly important to meet expectations for more efficient freight
transport, growing freight demand, and more connections between modes.
Federal funding constraints enhance the need for a strategic federal
approach to freight infrastructure investment, and the implications of
these constraints are a critical feature of a national freight policy.
Given major projected demographic shifts and future federal health and
retirement commitments, federal revenues may barely cover interest on
the federal debt by 2040--leaving no money for either mandatory or
discretionary programs. According to our simulations, balancing the
budget could require cutting federal spending by as much as 60 percent,
raising taxes by up to 2-1/2 times their current level, or some
combination of the two.[Footnote 44] We have concluded that the
impending federal fiscal crisis will require a fundamental
reexamination of all federal programs.[Footnote 45] For example, our
assessment of the federal highway grant program raised significant
issues, such as the absence of a clear federal mission and role since
the completion of the interstate highway system and the absence of a
link between federal funding and goals or outcome measures.
DOT has taken an important step toward a more comprehensive freight
strategy by publishing a draft Framework for a National Freight
Policy[Footnote 46] for comment. It is a step for which we found
considerable support among public and private freight stakeholders. A
systemwide, rather than a modal, perspective is critical to a national
freight policy. As the AASHTO study emphasized, investments at the
freight system level are needed to respond to nationally significant
corridor choke points, intermodal connections, and urban rail
interchanges.
With federal fiscal constraints as the backdrop, two major policy
principles will need to be considered as DOT continues to develop this
national policy. These principles are, first, to adopt a mode-neutral
approach--one that takes a consistent policy and funding approach to
all modes and establishes a level playing field for competition in the
freight marketplace--and, second, to maximize public benefits--
particularly benefits to the national transportation system--from
public transportation investments.
Adopting a Mode-Neutral Approach:
Under a mode-neutral approach, each mode would pay the full costs for
the infrastructure facilities and services that it used as well as the
costs that its use imposed on others--such as added air pollution,
congestion, and accident risks[Footnote 47]--through taxes and user
fees. No single mode would be at a competitive disadvantage. A mode-
neutral federal freight policy and investment strategy would be
consistent with the competitive market's central role in the freight
system. Encouraging a market-based approach and competition that
fosters economic efficiency and innovation is a key consideration in
dealing with the privately owned freight rail industry, as we have
reported.[Footnote 48]
Currently, as we have pointed out, federal programs treat different
freight modes differently. For example, trucks and barges use
infrastructure that is owned and maintained by the government, while
rail companies use infrastructure that they pay to own and maintain.
The trucking and barge industries pay fees and taxes to use this
government-funded infrastructure, but their payments generally do not
cover the costs they impose on highways and waterways, thereby giving
the trucking and barge industries a competitive price advantage over
railroads.[Footnote 49] The most recent Federal Highway Administration
(FHWA) highway cost allocation study[Footnote 50] evaluates highway
costs attributable to different vehicle classes and the extent to which
their user fees cover their responsibility for highway costs. According
to the study, combination unit trucks[Footnote 51] paid 80 percent of
their cost responsibility and the heaviest combinations paid half of
their cost responsibility. The study concluded that only the very
lightest combination trucks pay their share of federal highway cost
responsibility. A recent CBO report[Footnote 52] also concluded that
trucks and barges do not pay their full share of highway costs and
reported that rail may be at a competitive disadvantage, since other
modes are effectively being subsidized. CBO also observed that if all
modes do not pay their full costs, the result is inefficient use of
roads and waterways and greater government spending than otherwise
would be necessary if capacity investments are made in anticipation of
demand that does not occur.
Maximizing Public Benefits from Public Transportation Investments:
As DOT develops and applies a national freight policy, our second
critical principle will be an important consideration--public
investments should depend on clearly defined public benefits.[Footnote
53] Benefit-cost analysis can be a useful tool to define benefits, as
our expert panel on this subject concluded.[Footnote 54] Because this
analysis identifies the greatest net benefits by comparing the monetary
value of each project's benefits and costs, it can help public and
private stakeholders evaluate project alternatives.
States have had experience in evaluating whether rail projects could
yield sufficient public benefits to warrant investments of public
dollars in the projects, and their experience can inform a national
freight policy. For example, the state of Washington's Freight Mobility
Strategic Investment Board leverages transportation dollars by working
with public and private stakeholders to fund projects that deliver
public benefits. The board's project scoring criteria reflect
anticipated benefits, such as freight mobility for the project area;
freight mobility for the region, state, and nation; general mobility;
safety; freight and economic value; environment; project partnership;
consistency with regional and state plans; location on a Strategic
Freight Corridor; and cost benefit.
However, federal decision makers have no such criteria to use in
considering potential freight rail investments. As we have pointed out,
the federal funding structure for surface transportation and federal
program incentives tend to focus decision makers' attention on highway
and transit projects, rather than on freight or freight rail concerns.
And, although state and local transportation decision makers consider
benefit-cost analyses, these analyses often do not have a decisive
impact on investment decisions.[Footnote 55] As DOT has noted, a fair,
balanced approach to allocating public and private funding is a
prerequisite for public-private partnerships.[Footnote 56] We have also
raised concerns about federal tax policies. For railroads, some
industry groups have proposed freight rail tax credits to encourage
investment. However, our work has shown that it is difficult to target
tax credits to the desired activities and outcomes and ensure that tax
credits generate the desired new investments, as opposed to
substituting for investment that would have occurred anyway.[Footnote
57]
Conclusions:
The Staggers Rail Act achieved far-ranging benefits in helping to
create and sustain a healthy and vibrant freight railroad industry, as
well as an efficient rail transportation system that supports the
important role freight plays in the nation's economy. Critical to the
Staggers Rail Act was the concept of balance--on one hand, the act
sought to allow rail carriers to earn adequate revenues so that they
could meet their current and future capital needs. On the other hand,
the act recognized the need for a remnant regulatory regime that would
maintain reasonable rates and prohibit undue concentrations of market
power in areas where no effective competition existed. The act
recognized that it was vital for the federal government to promote
competition and rely on it to set rates. Without a doubt, rates have
decreased for most shippers, and most shippers are better off in the
post-Staggers environment than they were previously. This outcome
suggests that widespread and fundamental changes to the relationship
between the railroads and their customers are not needed. Nevertheless,
the evidence also suggests some basis for believing that--more than 25
years after the act's passage--the balance it envisioned has not been
fully achieved.
The continued existence of pockets of potential captivity, together
with the increase in traffic at higher thresholds, at a time when the
railroads are, for the first time in decades, experiencing increasing
economic health, raises the question whether rail rates in selected
markets reflect justified and reasonable pricing practices, or an abuse
of market power by the railroads. Answering this question requires a
rigorous, national analysis of competitive markets. Our analysis
provides an important first step; however, we are constrained by the
inherent limitations of the Carload Waybill Sample and the available
proxy measures for assessing captivity. In contrast, STB has the
statutory authority to inquire into and report on railroad practices
and could conduct a rigorous analysis of competition in the freight
rail industry that would rely on more than sample data and could
determine whether the inappropriate exercise of market power is
occuring in specific markets. Should STB find evidence of abuse, it
could consider several methods for creating the balance envisioned by
the Staggers Rail Act. For example, STB could consider initiating a
generally applicable rule making to address competition issues or
prescribe specific remedies in response to a complaint.
In assessing competition within the freight rail industry, STB needs
accurate data on railroad revenues. The data that STB currently
collects--in particular, the use of the Carload Waybill Sample to
report on the railroads' finances--are not always captured
consistently, making it difficult to accurately track railroad
revenues. Specifically, while we determined that, in general, the data
in the Waybill were suitably reliable for our reporting purposes, we
also found that some data, including data on fuel surcharges, were not
accurately captured. Accurate data would provide for more accurate
tracking of railroad revenues and railroad charges to potentially
captive shippers and other shippers. This information would help STB to
obtain a clearer picture of the actual fees paid by shippers.
STB is also responsible for ensuring the expeditious handling and
resolution of rate disputes, but the current process for settling these
disputes is ineffective. There are a number of potential alternatives
to the current process, and STB has recognized the limits of the
process and taken further action to improve it. These actions are
commendable and need to be pursued; absent further action, the promise
of the Staggers Rail Act and the balance it envisioned may never be
fully realized.
These are difficult issues that require careful balancing of the
railroads' need to earn adequate revenues with shippers' need for
competition and reasonable rates during a time of uncertainty about the
capacity of freight railroads to meet future demand for freight rail
service. While predictions and scenarios for the future of freight rail
vary, it is likely that multiple levels of government will continue to
be involved in the nation's freight system. Additional investment in
freight rail infrastructure can produce public benefits, and many state
and local governments are involved in freight rail infrastructure
projects. Congress has provided federal assistance as well, and further
requests for and decisions about federal assistance to rail
infrastructure are likely. Decision makers will be challenged to ensure
that federal involvement is consistent with competition in the freight
marketplace, reflects widespread public priorities, and offers benefits
that warrant the commitment of federal funds. DOT's draft National
Freight Policy represents a good start in this direction.
Recommendations for Executive Action:
To ensure an appropriate balance between the interests of railroads and
shippers, we recommend that the Chairman of the Surface Transportation
Board take the following two actions:
* Undertake a rigorous analysis of competitive markets to identify the
state of competition nationwide; in specific markets, determine whether
the inappropriate exercise of market power is occuring; and, where
appropriate, consider the range of actions available to address
problems associated with the potential abuse of market power. If the
Chairman determines that STB requires more resources to conduct this
analysis, then STB should request additional resources from Congress.
* Review STB's method of data collection to ensure that all freight
railroads are consistently and accurately reporting all revenues
collected from shippers, including fuel surcharges and other costs not
explicitly captured in all railroad rate structures.
To ensure the efficiency and effectiveness of our nation's freight
system, we are making the following recommendation to the Secretary of
Transportation:
* As DOT continues to develop a national freight policy and a possible
federal policy response, consider strategies to (1) sustain the role of
competitive market forces by creating a level playing field for all
freight modes and (2) recognize the fiscally constrained federal
funding environment by developing mechanisms to assess and maximize
public benefits from federally financed freight transportation
investments.
Agency Comments and Our Evaluation:
STB provided written comments on a draft of this report. These comments
are presented and evaluated in appendix III. STB generally agreed with
our assessment of the improving financial health of the freight
railroad industry and potential public benefits for freight rail
infrastructure projects. However, STB disagreed with our recommendation
to undertake a rigorous analysis of competitive markets in the rail
industry because it believed the findings underlying the recommendation
were inconclusive, their on-going efforts will address many of our
concerns, and a rigorous analysis would divert resources from other
efforts. Specifically, STB stated that our recommendation was based on
two findings--first, that rail rates have increased for some shippers
and, second, that the amount of traffic with rates reflecting high R/VC
ratios has increased in some areas. STB stated that recent increases in
rail rates are not surprising and that R/VC ratios can increase when
rates and costs are falling and that these findings do not suggest
market abuses. STB also noted that it has several rule makings under
way related to the standard rate relief process and the simplified rate
relief process. STB suggested that, given the limitations on its
resources and the aggressive agenda already under way, rather than
undertake this competitive markets analysis, a more practical approach
would be for STB to finish its reforms to ensure that captive shippers
have an effective forum to seek rate relief if a railroad is charging
unreasonable rates. Concerning our recommendation that STB review its
method of data collection to ensure that all freight railroads are
consistently and accurately reporting all revenues collected from
shippers, STB stated that the revenue in question represents a small
portion of all revenues and that revenue data submitted by freight
railroads are audited and otherwise checked to ensure quality.
Furthermore, STB has initiated a rule making to improve the tracking of
fuel surcharges.
While STB's efforts have been helpful, we continue to believe that STB
should undertake a rigorous analysis of competitive markets to identify
the state of competition nationwide; in specific markets, determine
whether the inappropriate exercise of market power is occuring; and,
where appropriate, consider the range of actions available to address
problems associated with the potential abuse of market power. STB's
comments do not accurately characterize the underlying support for our
recommendation. We did not base this recommendation on an increase in
rail rates or suggest that rate increases alone suggest increased
captivity. On the contrary, we recognize that rates have declined and
that available measures suggest that the extent of captivity has
dropped. Furthermore, STB's response suggests that rail rates and the
amount of traffic with high R/VC ratios were the only data we examined-
-they were not. We examined several factors, including data on the
amount of tonnage originating in economic areas that have access to
only one Class I railroad, data on the amount of tonnage traveling over
300 percent R/VC, and the amount of tonnage that originates in areas
with access to only one Class I railroad and travels at rates that
exceed the statutory threshold for rate relief. Our report explicitly
acknowledges the limitations in the Carload Waybill Sample and of the
proxy measures available for weighing captivity, including R/VC levels.
At the same time, our analyses, when combined with comments from
participants on our expert panel and interviews with shipper and
railroad groups, suggest a reasonable possibility that shippers in
selective markets may be paying excessive rates related to a lack of
competition. This provides the impetus for STB--which has the statutory
authority to inquire into and report on railroad practices--to analyze
competitive markets in the rail industry and, where appropriate,
consider the range of actions to address problems associated with the
potential abuse of market power. Also, this analysis would rely on more
than sample data and could analyze the exercise of market power in
specific markets.
Regarding STB's position that it has several rule makings under way
that address many of our concerns, we commend STB for recognizing and
taking action to address problems with the rate relief process, but we
believe action is needed beyond improvements to the rate relief
process. These rule makings, if implemented, are designed to improve
the processes available to shippers, after shippers have been charged a
rate that they consider to be unreasonable. In contrast, we believe
that an analysis of the state of competition and the possible abuse of
market power, along with the range of options STB has to address
competition issues, could more directly further legislatively defined
goals to ensure effective competition among rail carriers as the
preferred means to both promoting a sound rail transportation system
and maintaining reasonable rates. Regarding STB's assertion that
conducting a rigorous analysis of competition would divert resources
away from its on-going initiatives, we modified our draft to recommend
that STB request additional resources from Congress if it determines it
needs more resources to conduct an analysis of competition. We also
believe that STB should review its method of data collection to ensure
that all freight railroads are consistently and accurately reporting
all revenues. STB commented that it had already responded to this
concern by proposing a standardized report for fuel surcharges;
however, while we commend STB for its efforts to capture these data, we
also note STB has not yet implemented standardized reporting of fuel
surcharges and that other revenues besides fuel surcharges may not be
included in the Waybill. STB also provided technical comments that we
incorporated in this report, as appropriate.
We requested comments on a draft of this report from the Acting
Secretary of Transportation or her representative. On September 21,
2006, DOT officials, including the Deputy Associate Administrator for
Policy, Federal Railroad Administration, and the Chief Economist,
Office of Transportation Policy, Office of the Secretary, provided us
with oral comments on the draft. In its comments, DOT emphasized the
need for the report to clearly recognize the rationale and importance
of differential pricing; the nature and relatively small extent of
potentially unreasonable pricing in the rail freight marketplace; and
the impact of capacity constraints on rail pricing and services. DOT
also suggested that our report should recognize certain factors,
including that competition between railroads is not possible in all
markets because the level of demand may not support more than one
railroad, and that investment in freight rail infrastructure entails
substantial private risk. In contrast, highway investment has been
largely publicly financed. DOT did not take a position on our
recommendation concerning the draft National Freight Policy, but stated
that efforts are under way to develop more effective tools for gauging
the extent to which proposed freight investments provide public
benefits. DOT also endorsed the views contained in STB's September 15,
2006, letter (see app. III). We made changes to this report to reflect
DOT's comments, as appropriate. DOT also provided a number of technical
corrections, which we incorporated as appropriate.
We will send copies to the appropriate congressional committees, the
Chair and Vice-Chairs of the Surface Transportation Board, and the
Secretary of Transportation. We will also make copies available to
others on request. In addition, the report will be available at no
charge on the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff has any questions, please contact me at (202) 512-
2834 or heckerj@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. See appendix V for a list of major contributors to
this report.
Signed by:
JayEtta Z. Hecker:
Director, Physical Infrastructure Issues:
List of Congressional Requesters:
The Honorable Daniel K. Inouye:
Co-Chairman, Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable Conrad Burns:
United States Senate:
The Honorable Byron Dorgan:
United States Senate:
The Honorable Frank Lautenberg:
United States Senate:
The Honorable Trent Lott:
United States Senate:
The Honorable John McCain:
United States Senate:
The Honorable Mark Pryor:
United States Senate:
The Honorable Gordon Smith:
United States Senate:
[End of section]
Appendix I: Participants in GAO's Expert Panel:
Louis S. Thompson (Moderator):
Principal:
Thompson, Galenson and Associates, LLC:
Paul Bingham:
Global Insights:
George Borts:
Department of Economics:
Brown University:
George Eads:
Vice President:
CRA International:
Robert Gallamore:
Director:
Transportation Center Northwestern University:
Darius Gaskins:
Founding Partner Norbridge, Inc.
Carl Martland:
Senior Research Associate:
Massachusetts Institute of Technology:
Department of Civil and Environmental Engineering:
Michael F. McBride:
Partner LeBouef, Lamb, Greene & MacRae, LLP:
Gerard McCullough:
Department of Applied Economics:
University of Minnesota:
Linda Morgan:
Chair of the Transportation Practice Group:
Covington & Burling, LLP:
John V. Wells:
Chief Economist:
U.S. Department of Transportation:
[End of section]
Appendix II: Objectives, Scope, and Methodology:
We used the Surface Transportation Board's (STB) Carload Waybill Sample
to identify railroad rates from 1985 through 2004 (the latest rate data
available at the time of our review), which we then analyzed to
determine rate changes. The Carload Waybill Sample is a sample of
railroad waybills (in general, documents prepared from bills of lading
authorizing railroads to move shipments and collect freight charges)
submitted by railroads annually. We used these data to obtain
information on rail rates across the industry, for certain commodities
and for certain routes by shipment size and length of haul. According
to STB officials, revenues derived from the Carload Waybill Sample are
not adjusted for such things as year-end rebates and refunds that may
be provided by railroads to shippers that exceed certain volume
commitments.
Some railroad movements contained in the Carload Waybill Sample are
governed by contracts between shippers and railroads. To avoid
disclosure of confidential business information, STB disguises the
revenues associated with these movements before making this information
available to the public. Consistent with our statutory authority to
obtain agency records, we obtained a version of the Carload Waybill
Sample that did not disguise revenues associated with railroad
movements made under contract. Therefore, the rate analysis presented
in this report presents a truer picture of rail rate trends than
analyses that may be based solely on publicly available information.
Since much of the information contained in the Carload Waybill Sample
is confidential, rail rates and other data contained in this report
that were derived from this database have been aggregated at a level
sufficient to protect this confidentiality.
We used rate indexes and average rates to measure rate changes over
time. A rate index attempts to measure price changes over time by
holding constant the underlying collection of items that are consumed
(in the context of this report, items shipped). This approach differs
from comparing average rates in each year because, over time, higher-or
lower-priced items can constitute different shares of the items
consumed. Comparing average rates can confuse changes in prices with
changes in the composition of the goods consumed. In the context of
railroad transportation, rail rates and revenues per ton-mile are
influenced, among other things, by the average length of haul.
Therefore, comparisons of average rates over time can be influenced by
changes in the mix of long-and short-haul traffic. Our rate indexes
attempted to control for the distance factor by defining the underlying
traffic as 2004 commodity flows between pairs of census regions. To
examine the rate trends on specific traffic corridors, we first chose a
level of geographic aggregation for corridor end points. We defined end
points as the regional economic areas defined by the Department of
Commerce's Bureau of Economic Analysis. An economic area is a
collection of counties in and about a metropolitan area (or other
center of economic activity); there are 179 economic areas[Footnote 58]
in the United States, and each of the nation's 3,141 counties is
included in an economic area.[Footnote 59] We placed each corridor in
one of three distance-related categories: 0 to 500 miles, 501 to 1,000
miles, and more than 1,000 miles. Although these distance categories
are somewhat arbitrary, they represent reasonable proxies for short-,
medium-, and long-distance shipments by rail.
To determine the areas with access to one or more Class I railroads, we
obtained railroad systems data from the Department of Transportation,
which accounted for trackage rights, mergers, and other industry
developments affecting access. For issues related to revenue-to-
variable cost ratios, we used data from the Carload Waybill Sample to
identify the specific revenues and variable costs and to compute R/VC
ratios for the commodities and markets we examined. Using this
information, we then identified those commodities and areas whose R/VC
ratios were above or below the 180 percent R/VC level, as well as those
areas above the 300 percent R/VC level.
To identify the actions STB has taken to address competition and
captivity concerns, we interviewed officials and reviewed information
from all seven North American Class I railroads, several shipper groups
and associations and STB officials; and we met with experts in the
railroad industry. We reviewed characteristics of STB's current rate
relief process, as well as changes STB has made to the process, and
conducted a comprehensive analysis of STB cases since 2000. We also
held an expert panel through the National Academy of Sciences,
consisting of 11 individuals with expertise in the freight railroad
industry and the economics of transportation deregulation. Moreover, we
conducted a legal analysis of current statutes related to STB's
authority. To discern potential alternatives, we reviewed pending
legislation, testimonies before Congress, previous GAO reports, STB
decisions, rule makings, and proposed rule makings, and conducted a
summary analysis of interviews.
To assess future freight demand and the freight railroad industry's
ability to meet such demand, we reviewed transportation planning
literature and forecasts of future freight rail demand and capacity in
the United States. This review also included state freight plans and
major freight rail projects. We synthesized information on freight and
freight rail, as well as various forecasts to identify similar and
dissimilar themes. We also reviewed involvement by the federal
government in freight railroad projects, including related legislation
and funding decisions. We interviewed several state and federal
transportation officials to gather further information on public-
private partnerships, freight railroad projects, and DOT's draft
National Freight Policy. We also interviewed freight railroad
representatives, financial market analysts, national association
representatives, and transportation experts. For selected public-
private partnerships, we analyzed the genesis of such projects,
motivations for involvement from the public and private sectors, and
benefit-cost analyses that were conducted to support project funding
decisions.
We determined that the data used in this report were sufficiently
reliable for the purpose of our review. We conducted our review from
June 2005 to August 2006 in accordance with generally accepted
government auditing standards.
[End of section]
Appendix III: Comments from the Surface Transportation Board:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Office of the Chairman:
Surface Transportation Board:
Washington, D.C. 20423-DODI:
September 15, 2006:
Ms. JayEtta Z. Hecker:
Director:
Physical Infrastructure Issues:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Hecker:
The Surface Transportation Board has received the draft version of the
Government Accountability Office (GAO) report entitled "Freight
Railroads: Industry Health Has Improved, but Concerns about Competition
and Captivity Should Be Addressed" (GAO-06-1057).
We have reviewed the draft and are submitting the agency's formal
comments which are attached. If you have any questions, please contact
William Huneke, Chief Economist and Associate Director, at 202-565-
1538.
We appreciate the opportunity to work with you on this matter.
Signed by:
Charles D. Nottingham:
Enclosure:
cc: Steve Cohen, Assistant Director, GAO:
Vice Chairman Mulvey:
Commissioner Buttrey:
William Huneke:
Comments of the Surface Transportation Board:
"Freight Railroads: Industry Health Has Improved, but Concerns about
Competition and Captivity Should be Addressed" (GAO-06-1057):
September 15, 2006:
The STB appreciates the opportunity to comment on this report and
commends the GAO staff for their efforts in studying these complex
issues. We are pleased with the report's finding that the changes in
the rail industry since the Staggers Act have been positive. As the
report shows, railroads have seen their productivity and financial
health improve, and inflation-adjusted rail rates have fallen as
carriers have passed cost savings back to their customers. We share
GAO's concern that further rail investment is needed to meet the
significant rise in demand predicted over the next 10 to 15 years, and
that further investment would provide broad public benefits by
improving highway traffic flow, air quality, and safety at the
national, state and local levels. We also agree with GAO's ultimate
finding that "widespread and fundamental changes to the relationship
between the railroads and their customers are not needed."
Based on its national study into the state of competition, GAO offers
two recommendations for Board action. One recommendation is that the
Board review its data collection methods to ensure that all freight
revenues are consistently and accurately reported. For example, the
report highlights the current inconsistent treatment by railroads of
their fuel surcharge revenues. The agency has already responded to this
industry concern by proposing standardized monthly reports of Class I
railroads' fuel surcharges. Moreover, as GAO notes, the amount of
revenues reported as "miscellaneous revenue" represents less than 1.5%
of the total freight rail revenue reported for 2004.
The Board will continue its ongoing efforts to ensure the accuracy and
reliability of the data collected from railroads. Each year, the Class
I railroads submit to the STB reports containing extensive financial
and operational data needed to assist the agency in fulfilling its
regulatory responsibilities. This information is audited and reviewed
by the Board and by independent accounting firms. Railroads also submit
waybill data for a sample of individual movements. The waybill data are
carefully reviewed for accuracy each year by two contractors, and the
Board conducts its own series of checks on the waybill data as well. If
at any of these stages there appears to be inconsistent or questionable
data, the reporting railroad is immediately contacted for clarification
or correction. And where a significant recurring problem is detected,
the STB will take the steps necessary to ensure it has the information
it needs to carry out its statutory responsibilities.
The other recommendation for the Board is that the STB conduct its own
rigorous analysis of competitive markets to identify the state of
competition nationwide; inquire into railroad pricing practices in
specific markets where it finds evidence of an inappropriate exercise
of market power; and consider actions to address any potential market
abuses. This recommendation is based on two findings in the report: (1)
that rail rates have increased in nominal terms since 1980 for some
shippers; and (2) that, even though the overall extent of shipper
captivity has dropped, the amount of traffic with rates reflecting high
revenue-to- variable cost (RNC) ratios has increased in some areas.
These observations, however, do not suggest market abuses. The rate
changes shown in this report have not been adjusted for inflation. The
reported 9% increase in rates for grain shipments (from 1985 to 2004)
has not kept pace with inflation over that same time period. And the
modest increase in rates from 2000 to 2004 is not surprising, given the
escalation in costs during that time period.
The analysis of RNC ratios is also inconclusive. For example, in Figure
19, it is reported that the amount of grain traffic transported from
Minot to Portland at rates with an RNC ratio above 300% increased from
1985-2004. But as shown in Figure 9, even without accounting for
inflation, grain rates per ton-mile from Minot to Portland had fallen.
Thus, the change in R/VC ratios must be due to a drop in costs per ton-
mile, as more grain is shipped in lower-cost shuttle trains or the
railroad has implemented other cost-saving measures. RNC ratios do not
provide a reliable measure of changes in captivity over time, because
they can increase even when rates are falling where a carrier's costs
are also falling. For example, as GAO has previously observed, if rail
revenues are $2 and variable costs are $1, the RNC ratio would be 200%.
However, if revenues decreased to $1.50 and variable costs decreased to
$0.50, the ratio becomes 300%. Under this scenario, "although railroads
have passed all cost reductions along to shippers in terms of lower
rates, the increased RNC ratio makes it appear as though the shipper is
worse off." GAO/RCED-99- 93, Railroad Regulation at 65 (April 1999).
It is noteworthy that the STB has several important rulemakings
underway which bear directly on most of GAO's concerns. Specifically,
GAO reports widespread belief that the STB's standard rate relief
process is inaccessible to most shippers because it is too expensive,
time consuming, and complex. Earlier this year, the agency instituted a
rulemaking intended to resolve contentious issues in its standard rate
relief process. If implemented, these changes should reduce the
complexity of those cases and dramatically reduce the cost by
simplifying the evidentiary inquiry. Final rules will be issued this
fall.
GAO also concludes that the agency's simplified guidelines - which were
defended vigorously by the STB and the shipper community when
challenged by the railroad community in federal court - have not proven
effective because no captive shipper has used them. However, earlier
this year the STB launched a major rulemaking to reform and modernize
its simplified rate relief guidelines to ensure that all shippers have
an effective forum to bring rate complaints. The proposed revisions are
the culmination of public hearings and considerable internal study by
STB staff. Comments from over 65 parties are expected by the end of
this year, with final rules to follow early next year. These important
reforms will be pursued concurrently with the agency's regular docket
of cases requiring Board adjudication.
Given the aggressive agenda already underway at the Board, we are
hesitant to divert resources and attention away from these pending
initiatives to undertake another prolonged national study. GAO has
already used its full resources to carefully review the only
comprehensive dataset for railroad pricing; interviewed and reviewed
information from the railroads, shippers, economists, and experts in
the rail industry; and heard from a panel of experts in the freight
rail industry and in the economics of freight rail transportation.
Finding nothing conclusive, GAO recommends that this far-smaller agency
conduct yet another analysis. Because most of GAO's concerns involve
the possibility that some shippers may be paying excessive rates, we
believe that a far more practical approach is for the STB to finish the
important reforms to its rate complaint procedures to ensure that
captive shippers have an effective forum to seek rate relief if a
railroad is charging unreasonably high rates.
The STB will remain vigilant in monitoring the rail industry and will
initiate inquiries, regulatory proceedings, and recommendations to
Congress as future facts and circumstances require.
The following are GAO's comments on the Surface Transportation Board's
letter dated September 15, 2006.
GAO Comments:
1. STB commented that we conducted a national study into the state of
competition. We did not conduct such a study. Our study included a
broad focus on changes in the freight railroad industry since the
Staggers Rail Act, the actions STB has taken to address concerns about
competition and captivity, and future freight demand and capacity. The
data we collected and analysis we performed--such as a review of rate
changes over 20 years--were too broad to represent a national study of
the state of competition. It is the limitations in the scope of our
analysis of competition, along with limitations in the data available
to us and a reasonable possibility that shippers in selected markets
may be paying excessive rates, which led us to recommend that STB
conduct a more rigorous analysis of competition.
2. STB commented that it has already addressed our recommendation to
improve data collection by proposing standardized monthly reports of
fuel surcharges and also described its efforts to ensure the accuracy
and reliability of data in the Waybill. We commend STB for its recent
action on fuel surcharges, which occurred during our review, but we
also note STB has not yet implemented standardized reporting of fuel
surcharges. In addition, other revenues besides fuel surcharges may not
be included in the Waybill. Specifically, revenues generated through
railcar auctions and congestion fees may not be included. While the
reported miscellaneous revenue is a small percentage of all revenue, it
is not known how much miscellaneous revenue is not reported. Complete
data would provide for more accurate tracking of railroad revenues and
would help STB to obtain a clearer picture of actual fees paid by
shippers. While we commend STB for its actions to audit and review
Waybill data, these accuracy checks do not address our concern that STB
is not collecting the full range of revenue data.
3. STB commented that our recommendation for STB to conduct an analysis
of competition is based on two findings--that rail rates have increased
since 1980 and that the amount of traffic with high R/VC ratios has
increased in some areas. Our recommendation is not based on these two
findings, but on an analysis of multiple sources, such as data on the
amount of tonnage originating in economic areas that have access to
only one Class I railroad, data on the amount of tonnage traveling over
300 percent R/VC, and the amount of tonnage that originates in areas
with access to only one Class I railroad and travels at rates that
exceed the statutory threshold for rate relief. This analysis provides
an important first step in assessing competitive markets nationally;
but it is imperfect, given the limitations of measures used to weigh
captivity and limitations in the Carload Waybill Sample. The results of
our analysis, when combined with comments from participants on our
expert panel and interviews with shipper and railroad groups, suggest a
reasonable possibility that shippers in selective markets may be paying
excessive rates related to a lack of competition in these markets. It
is precisely the inconclusiveness of the available data--and STB's
authority and responsibility to monitor and ensure effective
competition in the freight rail industry--that led us to recommend a
rigorous analysis of competition by STB. Also, we examined rates since
1985, not 1980.
4. STB commented that an increase in rates does not suggest market
abuses and that the rate changes in our report were not adjusted for
inflation. We agree that a change in a rate does not necessarily
suggest the exercise of market power. While our rates were not adjusted
for inflation, we constructed rate indexes, which account for changes
in traffic patterns over time that could affect revenue statistics. We
also included the price index for the GDP to provide a measure for
inflation. However, our recommendation is not based on recent rate
increases. Our recommendation is based on our analyses of multiple
sources, such as data on the amount of tonnage originating in economic
areas that have access to only one Class I railroad, data on the amount
of tonnage traveling over 300 percent R/VC, and the amount of tonnage
that originates in areas with access to only one Class I railroad and
travels at rates that exceed the statutory threshold for rate relief.
5. STB commented that figure 19 shows an increase in grain traffic
which traveled at rates above 300 percent R/VC and figure 9 shows that
grain rates per ton-mile had fallen along that same route, so the
change in R/VC must be due to a drop in costs per ton-mile. We disagree
that the change in R/VC in figure 19 must be due to a drop in costs per
ton-mile. Figure 19 shows only the amount of traffic on the route that
traveled at rates above 300 percent R/VC, while figure 9 shows the
cents per ton-mile for all traffic along that route (not just traffic
that traveled at rates above 300 percent R/VC). Therefore, the decrease
in cents per ton mile shown in figure 9 may reflect a decrease in rates
for traffic along that route that traveled at rates below 300 percent
R/VC.
6. STB commented that the measures used in our analysis are not
conclusive. The fact that our analysis is inherently limited by
available data and proxy measures lends more weight to our
recommendation. Specifically, our analysis provides an important first
step in assessing competitive markets nationally, but it is imperfect
given the limitations of measures used to weigh captivity and
limitations in the Carload Waybill Sample. We do not conclusively state
that there are shippers who are captive to one railroad and paying
rates that reflect an abuse of market power. However, the results of
our analysis, when combined with comments from participants on our
expert panel and interviews with shipper and railroad groups, suggest a
reasonable possibility that shippers in selective markets may be paying
excessive rates related to a lack of competition in these markets. We
believe that STB is the agency that has the authority and
responsibility to conduct an inquiry into the potential abuse of market
power and utilize its range of options to address competition issues.
7. STB commented that R/VC levels do not provide a reliable measure of
changes in captivity because they can increase when rates are falling.
We agree that an analysis of R/VC levels is not a conclusive measure of
the use of market power. However, the use of R/VC as an indicator of
railroad pricing power is well-documented both by Congress in the
Staggers Rail Act and by STB, which uses R/VC levels in its process for
determining unreasonable rates. While we acknowledge the limitations of
the ratio in our report, and even include an example like the one cited
above, we believe that R/VC ratios can be used as one of several proxy
measure to determine potential captivity. In fact, STB refers to
traffic traveling at or above 180 percent R/VC as "potentially
captive."
8. STB commented that they have several important rule makings under
way which bear directly on our concerns, including changes to the
standard and simplified rate relief processes. While we commend STB for
taking action to improve its rate relief processes, we note that these
rule makings are designed to make changes to the standard and
simplified rate relief processes and are not designed to analyze the
state of competition or the possible abuse of market power. In
contrast, we believe that an analysis of the state of competition or
the possible abuse of market power, along with the range of options STB
has to address competition issues, could more directly further
legislatively defined goals to ensure effective competition among rail
carriers as the preferred means to both promoting a sound rail
transportation system and maintaining reasonable rates.
9. STB commented that it is hesitant to divert resources away from its
pending initiatives to respond to our recommendation. We have modified
our draft to recommend that, if STB determined that it needs more
resources to undertake a rigorous analysis of competitive markets to
identify the state of competition nationwide, it should request
additional resources from Congress.
10. STB commented that, as a small agency, a more practical approach to
addressing concerns about captive shippers would be for STB to continue
reforming its rate complaint procedures, rather than conduct another
analysis. While we commend STB for continuing its efforts to improve
its standard and simplified rate relief processes, these rule makings
will not address our concerns. Specifically, these rule makings are
designed to improve processes available to shippers after they have
been charged a rate they consider to be unreasonable; these rule
makings are not designed to analyze the state of competition or the
possible abuse of market power. In contrast, we believe that an
analysis of the state of competition or the possible abuse of market
power, along with the range of options STB has to address competition
issues, could more directly further legislatively defined goals to
ensure effective competition among rail carriers as the preferred means
to both promoting a sound rail transportation system and maintaining
reasonable rates. We believe that STB is the agency that is uniquely
positioned to inquire into and report on railroad practices and could
conduct an analysis of competition that would rely on more than sample
data and could determine whether the inappropriate exercise of market
power is occuring in specific markets. STB has the authority to
subpoena witnesses and records. Following its inquiry, STB could also
consider initiating a generally applicable rule making to address
competition issues or prescribe specific remedies in response to a
complaint. We recognize that STB has limited resources, and we have
modified our draft to recommend that, if STB determines that it needs
more resources to conduct an analysis of competition, it should request
additional resources from Congress.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
JayEtta Z. Hecker, (202) 512-2834:
Staff Acknowledgments:
In addition to those named above, individuals making key contributions
to this report include Ashley Alley, Steve Brown, Matthew T. Cail,
Sheranda S. Campbell, Steve Cohen, Elizabeth Eisenstadt, Libby
Halperin, Richard Jorgenson, Tom McCool, John Mingus, Josh Ormond, and
John W. Shumann.
[End of section]
Related GAO Products:
Freight Railroads: Preliminary Observations on Rates, Competition, and
Capacity Issues. GAO-06-898T. Washington, D.C.: June 21, 2006.
Freight Transportation: Short Sea Shipping Option Shows Importance of
Systematic Approach to Public Investment Decisions. GAO-05-768.
Washington, D.C.: July 29, 2005.
Freight Transportation: Strategies Needed to Address Planning and
Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003.
Railroad Regulation: Changes in Freight Railroad Rates from 1997
through 2000. GAO-02-524. Washington, D.C.: June 7, 2002.
Freight Railroad Regulation: Surface Transportation Board's Oversight
Could Benefit from Evidence Better Identifying How Mergers Affect
Rates. GAO-01-689. Washington, D.C.: July 5, 2001.
Railroad Regulation: Current Issues Associated with the Rate Relief
Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999.
Railroad Regulation: Changes in Railroad Rates and Service Quality
Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999.
Interstate Commerce Commission: Key Issues Need to Be Addressed in
Determining Future of ICC's Regulatory Functions. GAO-T-RCED-94-261
Washington, D.C.: July 12, 1994.
Railroad Competitiveness: Federal Laws and Policies Affect Railroad
Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991.
Railroad Regulation: Economic and Financial Impacts of the Staggers
Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990.
Railroad Regulation: Shipper Experiences and Current Issues in ICC
Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September
9, 1987.
Railroad Regulation: Competitive Access and Its Effects on Selected
Railroads and Shippers. GAO/RCED-87-109, Washington, D.C.: June 18,
1987.
Railroad Revenues: Analysis of Alternative Methods to Measure Revenue
Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986.
Shipper Rail Rates: Interstate Commerce Commission's Handling of
Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986.
FOOTNOTES
[1] See the list of related GAO products at the end of this report.
[2] As of 2004, a Class I railroad is any railroad with operating
revenue above $277.7 million.
[3] The Carload Waybill Sample is a sample of railroad waybills (in
general, documents prepared from bills of lading that authorize
railroads to move shipments and collect freight charges); the sample
contains information on rail rates.
[4] The intermodal market consists of containers and trailers that can
be carried on ships, trucks, or rail.
[5] While rate data are not available for 2005 and 2006, shippers,
railroads, and financial analysts with whom we spoke told us that rates
have generally increased during those years.
[6] All of our rate changes--increases and decreases--are presented in
nominal terms.
[7] Return on investment measures the profit made on assets used to
provide transportation services. Return on investment is based on STB's
methodology for determining revenue adequacy.
[8] Clifford Winston, Deregulation of Network Industries - What's Next?
(Washington: AEI-Brookings Joint Center for Regulatory Studies: 2000),
pp. 43-44.
[9] Gallamore, pp. 511-515.
[10] A ton-mile is a standard industry measure that represents 1 ton of
freight transported 1 mile.
[11] We constructed rate indexes to examine trends in rail rates over
the 1985 to 2004 period. These indexes define traffic patterns for a
given commodity in terms of census region to census region flows of
that commodity, and we calculated the average revenue per ton-mile for
each of these traffic flows. The index is calculated as the weighted
average of these traffic flows in each year, expressed as a percentage
of the value for 1985, where the weights reflect the traffic patterns
in 2004. By fixing the weights as of one period of time, we attempted
to measure pure price changes rather than calculating the average
revenue per ton-mile in each year. Over time, changes in traffic
patterns could result in a substitution of lower priced traffic for
higher priced traffic, or vice versa, so that a decrease in average
revenue per ton-mile might partly reflect this change in traffic
patterns. The rate index for the overall industry was defined
similarly, except that the traffic pattern bundle was defined in terms
of broad commodity, census region of origin, and mileage block
categories. For comparison purposes, we also present the price index
for gross domestic product over this period.
[12] Our initial route universe consisted of 932 commodity routes, but
we removed 328 routes that did not have large enough samples in some
years to be valid, or they were not collected in the Carload Waybill
Sample in either 2000 or 2004.
[13] According to STB officials, the 2005 waybill data will become
available in Fall 2006.
[14] Fuel surcharges are charges associated with recouping the cost of
fuel. How fuel surcharges are calculated varies among Class I railroads
because some use a mileage-based system while others use a percentage
of the base rate.
[15] At railcar auctions, railroad companies auction to the highest
bidder the guaranteed delivery of a set number of railcars at specified
future delivery dates. If railroads fail to deliver the railcars at the
specified time, the railroads may pay a penalty to the shippers; if
shippers find they cannot use the railcars at the time delivered then
the shipper may pay a penalty to the railroad.
[16] Other reasons for the reduction in the number of Class I railroads
include carrier bankruptcies and a series of changes in the threshold
for qualifying as a Class I railroad (from $5 million in annual revenue
in 1976 to $250 million in 1992).
[17] One participant did not respond to this question.
[18] A short-line railroad is an independent railroad company that
operates over a short distance.
[19] Winston, pp. 54-57.
[20] A build-out is a shipper's option to build (or have some other
party build) a track connection to a competing railroad.
[21] We do not provide information identifying the location or the
shipper involved because doing so could reveal proprietary information.
[22] Jerry Ellig, "Railroad Deregulation and Consumer Welfare," Journal
of Regulatory Economics (The Netherlands: Klower Academic Publishers:
2002), p. 156.
[23] Economic areas are those areas defined by BEA, which defines the
relevant regional economic markets in the United States.
[24] The number of carriers serving a given location is not indicated
in the Carload Waybill Sample. We obtained this additional information
from DOT.
[25] For our analysis of access to one or more Class I railroads, we
examined data for 1994 and 2004, the earliest and latest years for
which such data were available.
[26] STB classifies railroads according to operating revenues. Class II
railroads had revenues of $20 million to $250 million, and class III
railroads had revenues of less than $20 million in 1991 dollars.
[27] By contrast, the long-distance grain route shown in figure 9 (from
the Sioux Falls, South Dakota, economic area to the Portland, Oregon,
economic area) had no traffic traveling at rates over 300 percent R/VC
for 2004.
[28] GAO, Railroad Regulation: Current Issues Associated with the Rate
Relief Process, GAO/RCED-99-46 (Washington, D.C.: Feb. 26, 1999).
[29] In December 1998 and July 1999, STB excluded product and
geographic competition as factors to be considered in market dominance
proceedings, finding that the applicable law did not require
consideration of those factors; that consideration of those factors
unduly burdened shippers attempting to bring rate cases; and that the
exclusion of those factors would not have any substantial effect on the
rates that the railroads could charge in the marketplace (See Surface
Transportation Board "News" releases Nos. 99-32, issued on Jul. 2,
1999, and 98-82, issued on Dec. 21, 1998). The railroad industry sought
judicial review of the Board's decisions, and in Association of Am.
Railroads v. STB, 237 F.3d 676 (D.C. Cir. 2001), the United States
Court of Appeals for the District of Columbia Circuit (Court) remanded
(returned) the matter for the Board's further consideration. On remand,
STB provided additional analysis to support its earlier decision, and
the court then affirmed (upheld) STB's action, in Association of Am.
Railroads v. STB, 306 F.3d 1108 (D.C. Cir. 2002).
[30] 2-to-1 points are where shippers currently have access to two
carriers but could lose access to one of them through a merger or
acquisition.
[31] Another proposal, articulated by economists Curtis Grimm and Cliff
Winston, calls for the elimination of STB. This proposal recognizes
that captive shippers have likely been hurt by a lack of competition,
but it states that allowing the Department of Justice to review rail
mergers instead of STB and ending the potential for reregulation of the
industry could lead railroad officials and shippers to negotiate an
agreement to address remaining rail competition concerns. Curtis Grimm
and Clifford Winston, "Competition in the Deregulated Railroad
Industry: Sources, Effects, and Policy Issues," (AEI - Brooking
Institution. Washington, D.C.: 2000).
[32] The U.S. Court of Appeals for the Eighth Circuit affirmed STB
decision that a bottleneck carrier generally need not quote a separate
rate for the bottleneck portion of the route. Mid-American Energy Co.
v. Surface Transportation Board, 169 F. 3d 1099 (8th Cir.: Feb. 10,
1999). The D.C. Circuit affirmed STB holding that separately
challengeable bottleneck rates can be required whenever a shipper has a
contract over the nonbottleneck segment of a through movement. Union
Pacific Railroad v. Surface Transportation Board, 202 F. 3d 337 (D.C.
Cir.: 2000).
[33] Studies by the AASHTO, DOT, and American Trucking Association made
specific freight and freight rail forecasts. Studies by the
Transportation Research Board (TRB), the National Cooperative Research
Program (NCHRP 20-24(33)) administered by TRB, and a consortium of
Midwestern states and universities (Upper Midwest Freight Corridor
Study) also assessed future freight demand and capacity issues.
[34] The 2002 FAF used proprietary models to describe domestic and
international commodity flows for rail, water, air, and highways and
forecasted freight flows for 2010 and 2020. A second generation DOT FAF
(being published in 2006) does not use proprietary models and covers
commodity flows for 2002 to 2035.
[35] We were able to interview some of the consultants who authored
these reports and other rail experts. We also independently
corroborated information in these reports through our expert panel.
[36] Congressional Budget Office, Freight Rail Transportation: Long
Term Issues (Washington, D.C.: January 2006).
[37] Transportation Research Board, Critical Issues in Transportation
(Washington, D.C.: Jan. 2006).
[38] American Society of Civil Engineering, 2005 Report Card for
America's Infrastructure (Washington, D.C.: 2005).
[39] Association of American Railroads (AAR), (Washington, D.C.: Mar.
16, 2006).
[40] GAO, Highway and Transit Investments: Options for Improving
Information on Projects' Benefits and Costs and Increasing
Accountability for Results, GAO-05-172 (Washington, D.C.: Jan. 24,
2005).
[41] Railroad flyover bridges separate one set of tracks from another-
-such as freight and passenger trains.
[42] DMJM+Harris and HDR (the Consultant Team), Final Report Project
No. C SWOO-242 Public Benefits & Costs Study of the Proposed BNSF/UP
Front Range Railroad Infrastructure Rationalization Project (May 18,
2005).
[43] GAO, 21st Century Challenges, GAO-05-325SP (Washington, D.C.: Feb.
1, 2005), GAO, Freight Transportation: Short Sea Shipping Option Shows
Importance of Systematic Approach to Public Investment Decisions, GAO-
05-768 (Washington, D.C.: July 29, 2005), and GAO, Freight
Transportation: Strategies Needed to Address Planning and Financing
Limitations, GAO-04-165 (Washington, D.C.: Dec. 19, 2003).
[44] GAO, Highway Finance: States' Expanding Use of Tolling Illustrates
Diverse Challenges and Strategies, GAO-06-554 (Washington, D.C.: Jun.
28, 2006).
[45] GAO-05-325SP.
[46] DOT, (Draft) A Framework for a National Freight Policy,
(Washington, D.C.: Apr. 10, 2006).
[47] Transportation Research Board/National Research Council, Paying
Our Way: Estimating Marginal Social Costs of Freight Transportation,
National Academy Press (Washington, D.C.: 1996).
[48] GAO, Physical Infrastructure: Crosscutting Issues Planning
Conference Report, GAO-02-139 (Washington, D.C.: Oct. 1, 2001).
[49] GAO, Railroad Competitiveness: Federal Laws and Policies Affect
Railroad Competitiveness, GAO/RCED-92-16 (Washington, D.C.: Nov. 5,
1991).
[50] DOT/Federal Highway Administration. Office of Transportation
Policy Studies, Addendum to the 1997 Federal Highway Cost Allocation
Study Final Report (Washington, D.C.: May 2000).
[51] Combination unit trucks are trucks that weigh 50,000-100,000
pounds.
[52] CBO, Freight Rail Transportation: Long-Term Issues, p. 22.
[53] This observation parallels the conclusion and recommendations by
the Transportation Research Board (TRB), which called for the
development of a national policy to promote better management and
investment decisions to maintain and improve freight capacity. TRB
described detailed principles to guide future decisions about using,
enlarging, funding or regulating the freight transportation system.
TRB, Freight Capacity for the 21st Century, (Washington, D.C.: 2003)
pp. 5-13.
[54] GAO, Highlights of an Expert Panel: The Benefits and Costs of
Highway and Transit Investments, GAO-05-423SP (Washington, D.C.: May 6,
2005).
[55] GAO, Surface Transportation: Many Factors Affect Investment
Decisions, GAO-04-744 (Washington, D.C.: Jun. 30, 2004).
[56] U.S. Department of Transportation, Report to Congress on Public-
Private Partnerships (Washington, D.C.: December 2004).
[57] GAO, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to be Reexamined,
GAO-05-690 (Washington, D.C.: Sept. 23, 2005).
[58] Our analysis included 177 economic areas because we did not
include the two economic areas in Alaska and Hawaii.
[59] The Bureau of Economic Analysis updated definitions of each
economic area in November 2004.
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Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
