Freight Railroads
Updated Information on Rates and Competition Issues Gao ID: GAO-07-1245T September 25, 2007The Staggers Rail Act of 1980 largely deregulated the freight railroad industry, giving the railroads freedom to price their services according to market conditions and encouraging greater reliance on competition to set rates. The act recognized the need for railroads to recover costs by setting higher rates for shippers with fewer transportation alternatives. The act also recognized that some shippers might not have access to competitive alternatives and might be subject to unreasonably high rates. It established a threshold for rate relief and granted the Interstate Commerce Commission and the Surface Transportation Board (STB) the authority to develop a rate relief process for those "captive" shippers. GAO's reported on rates, competition, and other industry trends in reports issued in October 2006 and August 2007. This statement is based on those reports and discusses (1) the changes that have occurred in the railroad industry since the enactment of the Staggers Rail Act, including changes in rail rates since 1985, (2) the extent of captivity in the industry and STB's efforts to protect captive shippers, and (3) STB's actions to address GAO's recent recommendations.
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. The freight railroad industry's financial health improved substantially as railroads cut costs through productivity improvements and new technologies. However, rates began to increase in 2001, and in 2005 rates jumped nearly 9 percent--the largest annual increase in twenty years--and rates increased for all 13 commodities that we reviewed. Revenues that railroads report as "miscellaneous revenue"--a category that includes some fuel surcharges--increased more than ten-fold from $141 million in 2000 to over $1.7 billion in 2005. It is difficult to precisely determine how many shippers are "captive" because available proxy measures can overstate or understate captivity. However some data indicate that potentially captive traffic appears to have decreased, while at the same time, data also indicates that traffic traveling at rates significantly above the threshold for rate relief has increased. In October 2006, we reported that STB's rate relief process to protect captive shippers have resulted in little effective relief for those shippers. We also reported that economists and shipper groups have proposed a number of alternatives to address remaining concerns about competition--however, each of these alternative approaches have costs and benefits and should be carefully considered. STB has taken some actions to address our past recommendations, but it is too soon to determine the effect of these actions. Our October 2006 report noted that the continued existence of pockets of potentially "captive shippers" raised questions as to whether rail rates in selected markets reflected reasonable pricing practices, or an abuse of market power. We recommended that the Board undertake a rigorous analysis of competitive markets to identify the state of competition. STB has awarded a contract to conduct this study; while this is an important step, it will be important that these analysts have STB's authority and access to information to determine whether rail rates in selected markets reflect reasonable pricing practices. We also recommended that STB ensure that freight railroads are consistently reporting all revenues, including miscellaneous revenues. While STB has revised its rules on fuel surcharges, these rules did not address how fuel surcharges are reported and STB has not yet taken steps to accurately collect data on other miscellaneous revenues. STB has also taken a number of steps to revise its rate relief process. While these appear to be promising steps, it is too soon to tell what effect these changes will have and we have not evaluated them.
GAO-07-1245T, Freight Railroads: Updated Information on Rates and Competition Issues
This is the accessible text file for GAO report number GAO-07-1245T
entitled 'Freight Railroads: Updated Information on Rates and
Competition Issues' which was released on September 25, 2007.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
United States Government Accountability Office:
GAO:
Testimony:
Before the Committee on Transportation and Infrastructure, House of
Representatives:
For Release on Delivery:
Expected at 10:00 a.m. EDT:
Tuesday, September 25, 2007:
Freight Railroads:
Updated Information on Rates and Competition Issues:
Statement of JayEtta Z. Hecker:
Director:
Physical Infrastructure Issues:
GAO-07-1245T:
GAO Highlights:
Highlights of GAO-07-1245T, a report to House Committee on
Transportation and Infrastructure.
Why GAO Did This Study:
The Staggers Rail Act of 1980 largely deregulated the freight railroad
industry, giving the railroads freedom to price their services
according to market conditions and encouraging greater reliance on
competition to set rates. The act recognized the need for railroads to
recover costs by setting higher rates for shippers with fewer
transportation alternatives. The act also recognized that some shippers
might not have access to competitive alternatives and might be subject
to unreasonably high rates. It established a threshold for rate relief
and granted the Interstate Commerce Commission and the Surface
Transportation Board (STB) the authority to develop a rate relief
process for those ’captive“ shippers. GAO‘s reported on rates,
competition, and other industry trends in reports issued in October
2006 and August 2007. This statement is based on those reports and
discusses (1) the changes that have occurred in the railroad industry
since the enactment of the Staggers Rail Act, including changes in rail
rates since 1985, (2) the extent of captivity in the industry and STB‘s
efforts to protect captive shippers, and (3) STB‘s actions to address
GAO‘s recent recommendations.
What GAO Found:
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. The freight railroad industry‘s financial health
improved substantially as railroads cut costs through productivity
improvements and new technologies. However, rates began to increase in
2001 and in 2005, rates jumped nearly 9 percent”the largest annual
increase in twenty years”and rates increased for all 13 commodities
that we reviewed. Revenues that railroads report as ’miscellaneous
revenue“”a category that includes some fuel surcharges”increased more
than ten-fold from $141 million in 2000 to over $1.7 billion in 2005.
It is difficult to precisely determine how many shippers are ’captive“
because available proxy measures can overstate or understate captivity.
However some data indicate that potentially captive traffic appears to
have decreased, while at the same time, data also indicates that
traffic traveling at rates significantly above the threshold for rate
relief has increased. In October 2006, we reported that STB‘s rate
relief process to protect captive shippers have resulted in little
effective relief for those shippers. We also reported that economists
and shipper groups have proposed a number of alternatives to address
remaining concerns about competition”however, each of these alternative
approaches have costs and benefits and should be carefully considered.
STB has taken some actions to address our past recommendations, but it
is too soon to determine the effect of these actions. Our October 2006
report noted that the continued existence of pockets of potentially
’captive shippers“ raised questions as to whether rail rates in
selected markets reflected reasonable pricing practices, or an abuse of
market power. We recommended that the Board undertake a rigorous
analysis of competitive markets to identify the state of competition.
STB has awarded a contract to conduct this study; while this is an
important step, it will be important that these analysts have STB‘s
authority and access to information to determine whether rail rates in
selected markets reflect reasonable pricing practices. We also
recommended that STB ensure that freight railroads are consistently
reporting all revenues, including miscellaneous revenues. While STB has
revised its rules on fuel surcharges, these rules did not address how
fuel surcharges are reported and STB has not yet taken steps to
accurately collect data on other miscellaneous revenues. STB has also
taken a number of steps to revise its rate relief process. While these
appear to be promising steps, it is too soon to tell what effect these
changes will have and we have not evaluated them.
What GAO Recommends:
In October 2006, GAO recommended that STB analyze the state of
competition and consider appropriate actions. GAO also recommended that
STB review their method of data collection to ensure that all freight
railroads are consistently reporting all revenues collected from
shippers.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-07-1245T]. For more information, contact
JayEtta Z. Hecker at (202) 512-2834 or heckerj@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
We appreciate the opportunity to testify on the freight railroad
industry. As you know, 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.
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 1]-
-have seen their productivity and financial health improve. Railroad
officials express concern that any attempt to increase economic
regulation will reduce carriers' ability to earn sufficient revenues
and limit future infrastructure investment.
Since the passage of the Staggers Rail Act in 1980, we have issued
several reports on the freight railroad industry.[Footnote 2] My
comments today are based on our most recent reports issued in August
2007 and October 2006, and cover (1) the changes that have occurred in
the railroad industry since the enactment of the Staggers Rail Act,
including changes in rail rates since 1985, (2) the extent of captivity
in the industry and STB's efforts to protect captive shippers, and (3)
STB's actions to address our recent recommendations. We reviewed STB
documents to update the information in our recent reports and conducted
our review in September 2007 in accordance with generally accepted
government auditing standards.
In summary:
* 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. 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 3] Over 20 years rates have
generally declined for most shippers and most railroad rates have
declined since 1985. However, they began to increase in 2001 and in
2005, rates experienced a 9 percent annual increase over 2004[Footnote
4]--the largest annual increase in twenty years--and rates increased
for all 13 commodities that we reviewed. In addition, over the last 20
years, railroad companies have shifted other costs to shippers,
including railcar ownership. Revenues that railroads report as
"miscellaneous revenue"--a category that includes some fuel surcharges-
-increased more than ten-fold from $141 million in 2000 to over $1.7
billion in 2005. We have recommended that STB revise its data
collection methods to more accurately collect data on railroad revenue.
* It is difficult to precisely determine how many shippers are
"captive" because available proxy measures can overstate or understate
captivity. However some data indicate that potentially captive traffic
appears to have decreased, while at the same time, data also indicates
that traffic traveling at rates significantly above the threshold for
rate relief has increased. In October 2006, we reported that STB's
efforts to protect captive shippers have resulted in little effective
relief for those shippers. We also reported that economists and shipper
groups have proposed a number of alternatives to address remaining
concerns about competition and capacity - however, each of these
alternative approaches have costs and benefits and should be carefully
considered to ensure the approach will achieve the important balance
set out in the Staggers Act of allowing the railroads to earn adequate
revenues and invest in its infrastructure while assuring protection for
captive shippers from unreasonable rates.
* STB has taken some actions to address our past recommendations, but
it is too soon to determine the effect of these actions. Our October
2006 report noted that the continued existence of pockets of
potentially "captive shippers" raised questions as to whether rail
rates in selected markets reflected justified and reasonable pricing
practices, or an abuse of market power by the railroads. Based on the
STB's statutory authority to adjudicate unreasonable rates and to
inquire into and report on railroad practices, we recommended that the
Board undertake a rigorous analysis of competitive markets to identify
the state of competition nationwide and to determine in specific
markets whether the inappropriate exercise of market power is occurring
and, where appropriate, to consider the range of actions available to
address such problems. STB has awarded a contract to conduct this
study; while this is an important step, It will be important that these
analysts have the ability that STB has through its statutory authority
to inquire into railroad practices as well as sufficient access to
information to determine whether rail rates in selected markets reflect
justified and reasonable pricing practices or an abuse of market power
by the railroads. We also recommended that STB review it's method of
data collection to ensure that all freight railroads are consistently
and accurately reporting all revenues collected from shippers. While
STB has revised its rules on establishing and collecting fuel
surcharges, these rules did not address how surcharges are reported in
the waybill and STB has not yet taken steps to accurately collect data
on other miscellaneous revenues. STB has also taken a number of steps
to revise its rate relief process. Specifically, in October 2006, STB
refined the rate relief process to reduce both the expense and length
of the process. In September 2007, STB simplified the rate relief
process for small shippers and created a separate new process for
medium size shipments. It is too soon to tell what effect these changes
will have and we have not evaluated the effect of these changes.
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 Is Increasingly Healthy and Rail Rates Have Generally
Declined Since 1985, Despite Recent Rate Increases:
The changes that have occurred in the railroad industry since the
enactment of the Staggers Rail Act are widely viewed as positive. In
addition, rail rates have generally declined since 1985, even though
rates began to increase in 2001 and experienced a 9 percent annual
increase between 2004 and 2005--the largest annual increase in 20
years. Likewise, rail rates have declined since 1985 for certain
commodity groups and routes despite some increases since 2001, but
rates have not declined uniformly. Railroads have also shifted other
costs to shippers, such as the cost of rail car ownership, and have
increased the revenue they report as miscellaneous more than 10-fold
between 2000 and 2005.
Railroad Industry's Financial Health Has Improved Substantially:
There is widespread consensus that the freight rail industry has
benefited from the Staggers Rail Act. Various measures indicate an
increasingly strong freight railroad industry. 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 5] 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.
Industry Rates Have Generally Declined Since 1985:
Rail rates across the freight railroad industry have generally declined
since 1985 despite a recent increase. Rates rose in 2001 and
experienced a 9 percent annual increase from 2004-2005, which
represents the largest annual increase in rates during the 20-year
period from 1985 through 2005. This increase also outpaced inflation--
about 3 percent in 2005. However, despite these increases, rates for
2005 remain below their 1985 levels and below the rate of
inflation.[Footnote 6] Because the set of rail rate indexes we used to
examine trends in rail rates over time does not account for inflation
we also included the price index for the gross domestic product (GDP)
in figure 1.
Figure 1: Trends in Industry Rail Rates, 1985-2005:
[See PDF for image]
This is a line graph with two lines: GDP price index and Industry. The
vertical axis of the graph represents Rate Index (0.0 to 1.7). The
horizontal axis of the graph represents Year (from 1985 to 2005).
Source: GAO analysis of STB data.
[End of figure]
While Generally Declining over the Long Term, Rates for Several
Commodities Have Increased in Recent Years:
Rates for several commodities in 2005 remain lower than in 1985.
Similar to overall industry trends, rates for individual commodities
have increased from 2004-2005. In 2005, rates increased for all 13
commodities that we reviewed. Figure 2 depicts rate changes for coal,
grain, miscellaneous mixed shipments, and motor vehicles from 1985
through 2005.
Figure 2: Rate Changes for Coal, Grain, Miscellaneous Mixed Shipments,
and Motor Vehicles, 1985-2005:
[See PDF for image]
This is a line graph with five lines: Coal, Grain, Miscellaneous mixed
shipments, Motor vehicles and GDP price index. The vertical axis of the
graph represents Rate Index (0.0 to 1.7). The horizontal axis of the
graph represents Year (from 1985 to 2005).
Source: GAO analysis of STB data.
[End of figure]
Railroads Have Shifted Costs to Shippers:
Over 20 years, freight railroad companies have shifted other costs to
shippers. Our analysis shows a 20 percent shift in railcar ownership
(measured in tons carried) since 1987. In 1987, railcars owned by
freight railroad companies moved 60 percent of tons carried. In 2005,
they moved 40 percent of tons carried, meaning that freight railroad
company railcars no longer carry the majority of tonnage (see fig. 3).
Figure 3: Tonnage Carried by Railcar Ownership, 1987-2005:
[See PDF for image]
This is a line graph with two lines: Privately owned railcars and
Railroad-owned railcars. The vertical axis of the graph represents
Percentage of tons carried by railcar ownership (from 0 to 70). The
horizontal axis of the graph represents Year (from 1987 to 2005).
Source: GAO analysis of STB data.
[End of figure]
Reported Miscellaneous Revenue, Including Fuel Surcharges, Increased
Ten-Fold Since 2000:
In 2005 the amount of industry revenue reported as miscellaneous
increased ten-fold over 2000 levels, rising from about $141 million to
over $1.7 billion (see fig. 4). Miscellaneous revenue is a category in
the Carload Waybill Sample for reporting revenue outside the standard
rate structure. This miscellaneous revenue can include some fuel
surcharges,[Footnote 7] as well as revenues such as those derived from
congestion fees and railcar auctions (in which the highest bidder is
guaranteed a number of railcars at a specified date). In 2004,
miscellaneous revenue accounted for 1.5 percent of freight railroad
revenue reported. In 2005, this percentage had risen to 3.7 percent.
Also, in 2005, 20 percent of all tonnage moved in the United States
generated miscellaneous revenue.
Figure 4: Miscellaneous Revenue Tracked in Carload Waybill Sample, 2000-
2005:
[See PDF for image]
This is a line graph with one line: Miscellaneous revenue tracked in
carload waybill. The vertical axis of the graph represents Dollars, in
millions (from 0 to 2,000). The horizontal axis of the graph represents
Year (from 2000 to 2005). Two points on the line are specifically
noted: 1) 2004 miscellaneous revenue: $633 million; 2) 2005
miscellaneous revenue: $1.7 billion.
Source: GAO analysis of STB data.
[End of figure]
Captive Shippers Are Difficult to Identify But Concerns Remain and Past
STB Actions Have Led to Little Effective Relief:
In October 2006, we reported that captive shippers are difficult to
identify and STB's efforts to protect captive shippers have resulted in
little effective relief for those shippers. We also reported that
economists and shipper groups have proposed a number of alternatives to
address remaining concerns about competition - however, each of these
alternative approaches have costs and benefits and should be carefully
considered to ensure the approach will achieve the important balance
set out in the Staggers Act.
Captive Shippers Remain Difficult to Identify, but Some Measures
Indicate Captivity Is Dropping in the Railroad Industry:
It remains 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. One measure of
potential captivity--traffic traveling at rates equal to or greater
than 180 percent R/VC--is part of the statutory threshold for bringing
a rate relief case before STB.[Footnote 8] STB regards traffic at or
above this threshold as "potentially captive," but, like other
measures, R/VC levels can understate or overstate captivity.[Footnote
9] Since 1985, tonnage and revenue from traffic traveling at rates over
180 percent R/VC have generally declined. (see fig. 5). In 2005,
industry revenue generated by traffic traveling at rates over 180
percent R/VC dropped by roughly half a percent. Tonnage traveling at
rates over 180 percent R/VC dropped by a smaller percentage.
Figure 5: Tonnage and revenue generated from Traffic Traveling at Rates
Equal to or Greater Than 180 percent R/VC, 1985-2005:
[See PDF for image]
This is a line graph with two lines: Percentage of industry revenue
from tonnage equal to or greater than 180% R/VA; Percentage of industry
tonnage equal to or greater than 180% R/VA. The vertical axis of the
graph represents Industry percentage (from 0 to 45). The horizontal
axis of the graph represents Year (from 1985 to 2005).
Source: GAO analysis of STB data.
[End of figure]
While traffic traveling at rates over 180 percent R/VC has generally
declined, traffic traveling at rates substantially over the threshold
for rate relief has generally increased from 1885 to 2005 (see fig. 6).
This traffic declined in 2003 and 2004, but rose in 2005.
Figure 6: Tonnage Traveling at Rates over 300 Percent R/VC, 1985-2005:
[See PDF for image]
This is a line graph with one line: Tonnage traveling at rates over 300
percent R/VC. The vertical axis of the graph represents Tons, in
millions (from 0 to 180). The horizontal axis of the graph represents
Year (from 2000 to 2005).
Source: GAO analysis of STB data.
[End of figure]
Some 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 had more than half of all traffic originating
in those same areas traveling at rates over 180 percent R/VC. However,
we also found 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.
STB Has Taken Actions to Protect Captive Shippers but Efforts Have Led
to Little Effective Relief:
STB has taken a number of actions to provide relief for captive
shippers. While 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, they also 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.
Under its adjudicatory authority, STB has 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.
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.
Despite STB's efforts, we reported in 2006 that there was widespread
agreement that STB's standard rate relief process was inaccessible to
most shippers and did not provide for expeditious handling and
resolution of complaints. The process remained expensive, time
consuming, and complex. Specifically, shippers we interviewed agreed
that the process could cost approximately $3 million per litigant. In
addition, shippers said that they do not use the process because it
takes so long for STB to reach a decision. Lastly, shippers stated 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.
We also reported that the simplified guidelines also had not
effectively provided relief for captive shippers. Although these
simplified guidelines had been in place since 1997, a rate case had not
been decided under the process set out by the guidelines when we issued
our report in 2006. STB had 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. We reported that several shipper organizations told
us that shippers were 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.
Since our report in October 2006, STB has taken steps to refine the
rate relief process. Specifically, in October 2006, STB revised
procedures for deciding large rate relief cases. By placing restraints
on the evidence and arguments allowed in these cases, STB predicted
that the expense and delay in resolving these rate disputes would be
reduced substantially. In September 2007, STB altered its simplified
guidelines for small shippers to enable shippers who are seeking up to
$1 million in rate relief over a 5-year period to receive a STB
decision within 8 months of filing a complaint. STB also created a new
rate relief process for medium size shipments to allow shippers who are
seeking up to $5 million in rate relief over a 5-year period to receive
a STB decision within 17 months of filing a complaint. Additionally,
STB also stated that all rail rate disputes would require nonbinding
mediation.
Shipper Groups and Others Have Suggested Alternative Approaches That
Have Costs and Benefits:
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 10]
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. 7).
Figure 7: 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. 8).
Figure 8: 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. 9).
Figure 9: 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 11] 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. 10).
Figure 10: 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. 11).
Figure 11: Paper Barriers:
[See PDF for image]
Source: GAO.
[End of figure]
STB Has Taken Steps to Address Problems, but Actions Are Too Recent to
Be Evaluated:
STB has taken some actions to address our past recommendations, but it
is too soon to determine the effect of these actions. In October 2006
we reported that the continued existence of pockets of potential
captivity 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. While
our analysis provided an important first step, we noted that STB has
the statutory authority and access to information to inquire into and
report on railroad practices and to conduct a more rigorous analysis of
competition in the freight rail industry. As a result, we recommended
that the Board undertake a rigorous analysis of competitive markets to
identify the state of competition nationwide and to determine in
specific markets whether the inappropriate exercise of market power is
occurring and, where appropriate, to consider the range of actions
available to address such problems.
STB initially disagreed with our recommendation because it believed the
findings underlying the recommendation were inconclusive, their on-
going efforts would address many of our concerns, and a rigorous
analysis would divert resources from other efforts. However, in June
2007, STB stated that it intended to implement our recommendation using
funding that was not available at the time of our October report to
solicit proposals from analysts with no connection to the freight
railroad industry or STB proceedings to conduct a rigorous analysis of
competition in the freight railroad industry. On September 13, 2007,
STB announced that it had awarded a contract for a comprehensive study
on competition, capacity, and regulatory policy issues to be completed
by the fall of 2008. We commend STB for taking this action. It will be
important that these analysts have the ability that STB has through its
statutory authority to inquire into railroad practices as well as
sufficient access to information to determine whether rail rates in
selected markets reflect justified and reasonable pricing practices, or
an abuse of market power by the railroads.
We also recommended that STB review its 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. In January 2007, STB finalized rules that require railroads
to ensure that fuel surcharges are based on factors directly affecting
the amount of fuel consumed. In August 2007, STB finalized rules that
require railroads to report their fuel costs and revenue from fuel
surcharges. While these are positive steps, these rules did not address
how surcharges are reported in the Carload Waybill Sample. In addition,
STB has not taken steps to address collection and reporting of other
miscellaneous revenues--revenues deriving from sources other than fuel
surcharges.
As stated earlier, STB has also taken steps to refine the rate relief
process since our 2006 report. STB has made changes to the rate relief
process that it believes will reduce the expense and delay of obtaining
rate relief. While these appear to be positive steps that could address
longstanding concerns with the rate relief process, it is too soon to
determine the effect of these changes to the process, and we have not
evaluated the effect of these changes.
Mr. Chairman, this concluded my prepared statement. I would be happy to
respond to any questions you or other Members of the Committee may have
at this time.
Contact and Acknowledgements:
For questions regarding this testimony, please contact JayEtta Z.
Hecker on (202) 512-2834 or heckerj@gao.gov. Individuals making key
contributions to this testimony include Steve Cohen (Assistant
Director), Yumiko Jolly, and John W. Shumann.
[End of section]
Related GAO Products:
Freight Railroads: Industry Health Has Improved, but Concerns About
Competition and Capacity Should Be Addressed. GAO-07-94. Washington,
D.C.: Oct. 6, 2006).
Freight Railroads: Updated Information on Rates and Other Industry
Trends. GAO-07-291R. Washington, D.C.: Aug. 15, 2007.
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.
[End of section]
FOOTNOTES
[1] As of 2004, a Class I railroad is any railroad with operating
revenue above $277.7 million.
[2] See GAO, Freight Railroads: Industry Health Has Improved, but
Concerns About Competition and Capacity Should Be Addressed, GAO-07-94
(Washington, D.C.: Oct. 6, 2006) and Freight Railroads: Updated
Information on Rates and Other Industry Trends, GAO-07-291R
(Washington, D.C.: Aug. 15, 2007). In addition, see the list of related
GAO products at the end of this report.
[3] The intermodal market consists of containers and trailers that can
be carried on ships, trucks, or rail.
[4] We constructed rate indexes to examine trends in rail rates over
the 1985 to 2005 period. In our August 2007 report, we reported a 7
percentage point change in the rate index. Using 1.0 as our 1985 base
we reported the change 0.8 to 0.87 from 2004-2005. This 7 percentage
point change translates into an annual increase of 9 percent. In this
testimony we refer to the annual increase and not the percentage change
in the rate index.
[5] Clifford Winston, Deregulation of Network Industries - What's Next?
(Washington: AEI-Brookings Joint Center for Regulatory Studies: 2000),
pp. 43-44.
[6] We constructed rate indexes to examine trends in rail rates over
the 1985 to 2005 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 2005. 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, we also present the price index for gross
domestic product over this period.
[7] Fuel surcharges are charges associated with recouping the cost of
fuel.
[8] Another condition of bringing a rate relief case before STB is a
railroad not facing effective competition from other rail carriers or
other modes of transportation.
[9] 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, because both revenue and variable cost
decline, the R/VC ratio--$18 divided by $10--increases to 180 percent.
[10] 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).
[11] 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).
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office: 441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Susan Becker, Acting Manager, Beckers@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
