oversight

Railroad Regulation: Current Issues Associated With the Rate Relief Process

Published by the Government Accountability Office on 1999-02-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




February 1999
                 RAILROAD
                 REGULATION
                 Current Issues
                 Associated With the
                 Rate Relief Process




GAO/RCED-99-46
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-279888

      February 26, 1999

      The Honorable Byron L. Dorgan
      United States Senate

      The Honorable John D. Rockefeller IV
      United States Senate

      The Honorable Conrad R. Burns
      United States Senate

      The Honorable Pat Roberts
      United States Senate

      In response to your request, this report describes (1) the Surface Transportation Board’s
      (Board) relief process for rail rate complaints and how it has changed since the ICC Termination
      Act of 1995 became law, (2) the number and outcome of rate relief cases pending or filed since
      1990, and (3) the barriers that shippers face when bringing rate complaints to the Board and
      potential changes to the process to reduce these barriers.

      As arranged with your offices, unless you publicly anounce its contents earlier, we plan no
      further distribution of this report until 14 days after the date of this letter. At that time, we will
      send copies of the report to interested congressional committees, the Secretary of
      Transportation, and the Chairman, Surface Transportation Board. We will also make copies
      available to others upon request.

      If you or your staff have any questions about this report, I can be reached at (202) 512-2834.
      Major contributors to this report are listed in appendix V.




      Phyllis F. Scheinberg
      Associate Director,
        Transportation Issues
Executive Summary


             As a result of mergers, bankruptcies and the redefinition of what
Purpose      constitutes a major railroad, the number of major freight railroads in the
             United States—collectively known as class I freight railroads—declined
             from 63 in 1976 to 9 in 1997.1 These major railroads moved almost
             1.6 billion tons of freight in 1997, generating $35 billion in revenue. Some
             shippers and their associations have raised concerns that mergers and
             consolidations in the railroad industry have significantly reduced
             competition and have given large railroads wide latitude in controlling the
             rates they charge the many companies that use rail to transport their
             commodities. In 1995, the Congress passed the ICC Termination Act, which
             eliminated the Interstate Commerce Commission (ICC) and transferred
             various functions—including the adjudication of rail rate complaints—to
             the new Surface Transportation Board. The Board is a bipartisan,
             independent, adjudicatory body within the Department of Transportation.

             Concerned about the potential barriers that shippers face in seeking relief
             from allegedly unreasonable rail rates, Senators Byron L. Dorgan, Conrad
             R. Burns, John D. Rockefeller IV, and Pat Roberts asked GAO to examine
             issues related to the Board’s oversight of rates shippers pay. This report
             describes (1) the Board’s rate relief complaint process and how it has
             changed since the ICC Termination Act of 1995 became law, (2) the number
             and outcome of rate relief cases pending or filed since 1990, and (3) the
             opinions of shippers about the barriers they face when bringing rate
             complaints to the Board and potential changes to the process to reduce
             these barriers. In the spring of 1999, GAO will issue a companion report that
             will address how freight railroad rates and service have changed since
             1990.


             In the late 1970s, the freight railroad industry underwent severe financial
Background   distress. Several of the nation’s largest freight railroads earned a negative
             rate of return on investment, and at least three railroads were in
             bankruptcy reorganization. The Railroad Revitalization and Regulatory
             Reform Act of 1976 (P.L. 94-210) and the Staggers Rail Act of 1980 (P.L.
             96-448) facilitated changes in the freight railroad industry, providing the
             railroads with greater flexibility to negotiate or set freight rates and
             respond to market conditions. In particular, the Staggers Rail Act made it
             federal policy for freight railroads to rely, where possible, on competition
             and the demand for services, rather than on regulation, to establish


             1
              In July 1998, the Surface Transportation Board approved the division of the Consolidated Rail
             Corporation’s (Conrail) assets between CSX Transportation and Norfolk Southern, further reducing
             the number of class I railroads to eight.



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                   Executive Summary




                   reasonable rates. As a result of the changes fostered by the acts, the
                   freight railroads’ financial health has improved.

                   Prior to 1976, the ICC regulated almost all the rates that railroads charged
                   shippers. The 1976 and 1980 acts limited the regulation of the freight rail
                   industry by allowing the ICC to regulate rates only where railroads had no
                   effective competition and required that the ICC’s process for resolving rate
                   disputes address the issue of effective competition. The Board, the
                   successor to the ICC, has no jurisdiction over rates that are negotiated
                   between shippers and railroads—referred to as contract rates. Most rail
                   tonnage in 1997—70 percent—moved under contracts and therefore was
                   not subject to the Board’s rate regulation. In addition, as a result of the
                   statutory directive to exempt rail transportation from regulation where
                   regulation is not needed, the Board has exempted from regulation the
                   transportation of certain recyclable materials, some agricultural products,
                   and intermodal containers. Traffic exempted from rate regulation
                   accounted for 12 percent of all rail tonnage moved in 1997. As a result, in
                   1997, only about 18 percent of rail transportation rates in the United States
                   was potentially subject to the Board’s regulation. In addition to assessing
                   the reasonableness of rates, the Board also approves mergers,
                   acquisitions, line constructions, and line abandonments and must take into
                   account the need of freight railroads to attain adequate revenues to cover
                   their operating costs and provide a reasonable return on capital.

                   As part of GAO’s methodology, GAO surveyed over 1,600 shippers and all
                   nine class I railroads to obtain information about potential barriers to the
                   rate complaint process and possible solutions to these potential barriers.
                   GAO surveyed the members of the major associations of grain, coal,
                   chemicals, and plastics shippers whose freight constitutes the largest
                   portion of rail shipments. GAO’s survey used a statistical sample from one
                   of the associations GAO surveyed because the association’s membership
                   list was large. As a result, when GAO reports survey results, they are
                   statistically projectable to the groups that responded to the survey.


                   The Surface Transportation Board’s standard procedures for obtaining
Results in Brief   rate relief are highly complex and time-consuming. Under these standard
                   procedures, the Board (1) evaluates all competition within the market
                   allegedly dominated by a railroad and (2) typically assesses the results of a
                   shipper-developed model of a hypothetical, optimally efficient railroad
                   that could provide comparable service in place of the shipper’s railroad.
                   The process reflects a statutory scheme whereby the Board must balance



                   Page 3                                 GAO/RCED-99-46 Railroad Rate Relief Process
Executive Summary




two competing objectives: considering the need of the railroad industry for
adequate revenues while simultaneously ensuring that the industry does
not exert an unfair advantage over shippers without competitive
alternatives. Since the ICC Termination Act, the Board has attempted to
improve the rate complaint process and simplify the process for shippers.
For example, the Board has implemented alternative, simplified rate
complaint procedures for cases that cannot be processed under the
standard procedures; imposed case-processing deadlines; encouraged
railroads and shippers to engage in an open dialogue about problems; and
reduced its criteria for assessing whether a railroad dominates a shipper’s
market. It is too early to tell if these steps will significantly lessen the
burden of the rate complaint process.

Very few shippers served by class I railroads have complained to the
Board about the railroads’ rates. As of January 1, 1990, 17 rate complaints
were active with the Board’s predecessor. Between January 1, 1990, and
December 31, 1998, shippers filed 24 additional rate complaints with the
Board (or its predecessor). The low number of complaints (41) is
attributable to a number of factors, including growth in the number of
private transportation contracts between railroads and shippers as well as
a significant decline in railroad rates over the past 10 to 15 years. Shipper
associations also noted that the complexity of the rate complaint process
may have reduced the number of complaints. Generally, only those
shippers that depend on rail transportation, such as coal, chemical, and
grain shippers, have filed complaints. Eighteen of these complaints were
resolved by negotiated settlements with the railroads before the Board or
its predecessor determined whether the contested rate was reasonable. In
addition, seven complaints were dismissed in favor of the railroad, five
were dismissed for other reasons, and two complaints resulted in rate
relief to shippers. Nine complaints remain before the Board.

GAO’s results suggest that of the 709 rail shippers that responded, 531 do
not believe that their rail rates are always reasonable and therefore might
use the rate complaint process. Of the shippers who expressed an opinion
about the rate complaint process, GAO estimates that over 70 percent
believe that the time, complexity, and costs of filing complaints are
barriers that often preclude them from seeking rate relief. All the major
U.S. railroads, on the other hand, are generally satisfied with the standard
rate complaint process, contending that it is well suited to determining
whether a railroad dominates the shipper’s market and what rate relief
may be needed. However, railroads do not support the simplified
procedures or the Board’s December 1998 decision to change aspects of



Page 4                                 GAO/RCED-99-46 Railroad Rate Relief Process
                          Executive Summary




                          its market dominance approach. This divergence of opinion may make
                          responding to shippers’ concerns about the barriers in the rate relief
                          process difficult to resolve. Some shippers view the improvements to the
                          rate complaint process that the Board has made as helpful in easing the
                          process’s administrative burdens but unresponsive to what they see as
                          underlying inadequacies in the level of competition in the railroad
                          industry. They assert that adequate competition would negate the need for
                          this complex process. Railroads maintain that competition is adequate and
                          therefore no Board actions to promote competition are needed. These
                          divergent and seemingly intractable views mirror the competing goals that
                          the Board is charged with balancing as an agency and during a rate
                          complaint case.



Principal Findings

The Surface               As a result of the 1976 and 1980 legislation that limited the regulation of
Transportation Board’s    the rail industry, the ICC and its successor, the Board, retained rate
Standard Rate Complaint   regulation only over freight traffic not subject to competition. Since the ICC
                          was terminated, the Board has the authority to determine the
Process Is                reasonableness of challenged rates in the absence of competition. After a
Time-Consuming, Costly    shipper files a complaint, the Board assesses whether the railroad
and Complex               dominates the shipper’s transportation market. To determine this
                          “market-dominance,” the Board conducts quantitative and qualitative
                          analyses. The Board first determines the railroad’s revenues and variable
                          costs (costs that vary with the quantity shipped) associated with moving
                          the shipper’s commodities. By statute, a railroad does not dominate the
                          market if its revenue is no greater than 180 percent of its variable costs for
                          transporting the shipper’s commodities. If the railroad’s percentage
                          exceeds the statutory level, the Board next determines whether the
                          shipper has a competitive alternative in the form of access to other
                          railroads or other forms of transportation (trucks or barges). Until
                          January 1999, the Board also considered two other forms of competition:
                          the ability to ship from or to alternative locations (known as geographic
                          competition) and the ability to effectively substitute other products for the
                          one the railroad currently ships (known as product competition). If the
                          Board finds that a railroad dominates the shipper’s market, the Board
                          proceeds with further assessments to determine whether the actual rate
                          the railroad charges the shipper is reasonable.




                          Page 5                                 GAO/RCED-99-46 Railroad Rate Relief Process
                            Executive Summary




                            Under its standard guidelines, to determine whether a rate is reasonable,
                            the Board requires the shipper to demonstrate how much an optimally
                            efficient railroad would need to charge. To accomplish this task, the
                            shipper must construct a model of a hypothetical, optimally efficient
                            railroad to replace the dominant railroad. Shippers’ associations and
                            nearly 72 percent of rail shippers responding to GAO’s survey indicated that
                            constructing a hypothetical railroad is a difficult task, particularly for
                            small shippers, because the time and cost associated with the model’s
                            development may outweigh the compensation afforded the shipper should
                            the Board determine that the challenged rate was unreasonable. The 41
                            rate complaints that GAO reviewed cost shippers from about $500,000 to
                            $3 million each and required a few months to about 16 years to resolve
                            through the rate complaint process. The process is lengthy because the
                            legal procedures afford the railroad and shipper a full opportunity to
                            present their facts and viewpoints as well as the opportunity to present
                            new evidence. The process also provides the opportunity for either side to
                            respond to and challenge each other’s information. In addition, Board
                            officials stated that court reviews and the lack of rate standards when
                            some complaints were filed have contributed to lengthy rate complaint
                            cases.

                            Since the ICC Termination Act, the Board has attempted to reduce the
                            potential barriers in the rate complaint process. The Board has
                            implemented alternative guidelines to simplify complaints involving lower
                            dollar amounts, and it has established specific deadlines for accelerating
                            steps in the rate relief process. To further simplify the process, the Board
                            eliminated product and geographic competition as criteria for determining
                            market dominance, which many shippers had identified as a major barrier.
                            The Board concluded that these elements of competition complicated and
                            prolonged rate complaint proceedings and discouraged shippers from
                            pursuing rate complaints. In addition, the Board has encouraged private
                            discussions between shippers and railroads to settle their differences. It is
                            too early to assess the collective results of these recent actions because
                            the Board has not rendered a decision under the simplified guidelines or
                            the accelerated schedule.


Few Shippers File           Since January 1, 1990, 41 complaints have been filed with or are pending
Complaints, and Few Rates   before the ICC or the Board; only two shippers filed a rate complaint in
Are Found to Be             1998. The low number of complaints may be attributed to the growth in
                            the number of private transportation contracts between railroads and
Unreasonable                shippers not subject to rate regulation, a general decline in railroad rates



                            Page 6                                 GAO/RCED-99-46 Railroad Rate Relief Process
                            Executive Summary




                            over the past 10 to 15 years, or the perceived complexity of the rate
                            complaint process. Coal, chemical, and grain shippers that accounted for
                            60 percent of the total rail traffic for large railroads in 1997 filed 31 of the
                            41 complaints.

                            The Board or its predecessor dismissed nearly half—18 of the
                            41—complaints because the shipper and railroad settled their differences
                            during the rate review process and then requested the case to be
                            dismissed. Five additional complaints were dismissed primarily because
                            the rate was either subject to a contract or the remedy that the shipper
                            wanted was not available. Seven complaints were dismissed in favor of the
                            railroad when it was found that either the railroad did not dominate the
                            shipper’s market or the rate was reasonable. In two cases, the Board
                            decided in favor of the shipper, awarded damages and prescribed
                            maximum rates for the future. As of December 31, 1998, the Board has not
                            rendered a final decision on the nine remaining complaints.


Opinions Differ on the      GAO surveyed over 1,600 shippers, and we are reporting on 709 that use rail
Barriers and Solutions to   to transport their products. The survey results suggest that about
the Rate Complaint          75 percent of these rail shippers believe that at times, they were charged
                            rates they did not consider reasonable. However, they assert that barriers
Process                     to seeking rate relief precluded them from using the Board’s rate
                            complaint process. In response to GAO’s survey and in discussions with
                            commodity shipping associations, shippers cited several barriers to using
                            the rate complaint process but particularly emphasized the time, cost and
                            complexity involved in filing a rate complaint. Shippers’ associations
                            contend that these barriers, as well as the low number of rate complaints
                            that shippers have won, demonstrate a regulatory environment that does
                            not adequately address shippers’ rate complaints. GAO’s estimates show
                            that at least 70 percent of shippers want the Board to shorten the time for
                            deciding rate complaints, reduce the costs associated with preparing and
                            filing complaints, and take measures to simplify the process. Some
                            shippers and their associations also contend that the improvements
                            already made to the rate complaint process are at best incremental steps
                            and point to a lack of competition in the railroad industry as the
                            underlying problem. Some rail shippers believe that greater competition
                            would lower rates and diminish the need for the rate relief process.

                            In response to a separate GAO survey, the nine class I freight railroads offer
                            a different view on the rate complaint process and railroad competition. In
                            general, railroads disagree with shippers about the extent to which the



                            Page 7                                   GAO/RCED-99-46 Railroad Rate Relief Process
                       Executive Summary




                       rate complaint process is burdensome. While the railroads acknowledge
                       the importance of shippers’ concerns, they state that the standard rate
                       complaint process is well suited to determining the reasonableness of
                       rates, and therefore no changes in the process are necessary. Railroad
                       officials state that they are willing to work with shippers and the Board to
                       improve the process and reduce the burden on shippers, provided that the
                       process maintains the necessary elements to effectively determine market
                       dominance. The officials contend that shipping rates declined by
                       46 percent from 1982 through 1996 and that market forces continue to
                       provide adequate competition. The railroads assert that increasing
                       competition through additional regulation is not appropriate in situations
                       in which market dominance has not been shown. They are concerned that
                       increased federal regulation could stifle the growth of the industry and
                       hinder the capital investment necessary to maintain and expand the rail
                       infrastructure in the United States.


                       GAO provided a draft of this report to the Department of Transportation
Agency Comments        and the Surface Transportation Board for review and comment. GAO also
and GAO’s Evaluation   discussed the report with officials from the Department and the Board,
                       including the Board’s Deputy General Counsel, directors of three board
                       offices, and a representative from the Chairman’s office; as well as a
                       representative from the Federal Railroad Administration’s Office of Policy.
                       The Board indicated that the draft report should provide additional
                       information to better depict (1) the complex task the Board faces in
                       balancing competing statutory policy objectives, (2) the strides the Board
                       has undertaken to streamline and simplify the rail rate complaint process,
                       and (3) external factors that can affect the length of time required to
                       complete action on a rate complaint. In addition, the Board expressed
                       concerns about the methodology GAO used to conduct its survey of rail
                       shippers, such as how the results of the survey were portrayed.

                       In response, GAO has added information in the report to better reflect the
                       competing policy objectives that the Board must balance as it reviews rate
                       complaints. GAO has also cited additional factors in the report that the
                       Board noted can affect the length of time required to complete rate
                       complaints. GAO believes that it has sufficiently depicted the strides the
                       Board has undertaken to simplify the rate complaint process. In the
                       absence of any cases initiated under the simplified procedures since they
                       were instituted in 1996, GAO has not revised the report because GAO
                       believes that it is too early to declare the simplified procedures a success.
                       Finally, GAO has added information to better explain the methodology used



                       Page 8                                GAO/RCED-99-46 Railroad Rate Relief Process
Executive Summary




to survey rail shippers and more clearly convey the survey’s results. The
Board’s comments and GAO’s evaluation appear at the end of each report
chapter. In addition, the Board provided technical comments on the
report, including updated information on the 41 cases GAO reviewed.
Where appropriate, GAO incorporated these comments into the report.




Page 9                               GAO/RCED-99-46 Railroad Rate Relief Process
Contents



Executive Summary                                                                                     2


Chapter 1                                                                                            14
                        Changes in the Freight Railroad Industry                                     14
Introduction            The Surface Transportation Board                                             15
                        Objectives, Scope, and Methodology                                           18
                        Agency Comments and Our Evaluation                                           22


Chapter 2                                                                                            23
                        The Standard Rate Complaint Process Is Complex                               23
The Board’s Rail Rate   Too Early to Assess the Board’s Actions to Ease Shippers’                    30
Complaint Process         Burdens
                        Agency Comments and Our Evaluation                                           32


Chapter 3                                                                                            35
                        Few Shippers Complained About Rail Rates                                     35
Decline in Complaints   Resolving Rate Cases Can Take Considerable Time                              38
Filed, and Few Rates    Few Cases Complete the Rate Complaint Process                                40
                        Agency Comments and Our Evaluation                                           44
Have Been Found
Unreasonable
Chapter 4                                                                                            45
                        Time, Cost, and Complexity Keep Shippers From Filing Rate                    45
Barriers to the Rate      Complaints
Complaint Process       Challenges in Improving the Rate Complaint Process                           49
                        Prospects for Increasing Competition in the Railroad Industry                56
and Possible            Agency Comments and Our Evaluation                                           59
Solutions
Appendixes              Appendix I: McCarty Farms, Inc. et al. v. Burlington Northern,               62
                          Inc.
                        Appendix II: Rate Complaints Either Pending or Filed With the                65
                          Board, 1990-98
                        Appendix III: Survey Response Frequencies                                    71
                        Appendix IV: Survey of U.S. Class I Railroads                                96
                        Appendix V: Major Contributors to This Report                               110


Tables                  Table 1.1: Association Memberships Selected, Shippers Surveyed               20
                          by GAO, and the Survey Response Rate




                        Page 10                              GAO/RCED-99-46 Railroad Rate Relief Process
Contents




Table 3.1: Resolution of Rate Reasonableness Decisions, 1990-98            39
Table 3.2: Phase in Which the Parties Settled or the ICC/Board             43
  Dismissed Complaint
Table 4.1: Percentage of Rail Shippers Responding That a Barrier           46
  Was a Major or Moderate Reason for Not Filing a Rate Complaint
Table 4.2: Percentage of Rail Shippers Responding That Options             50
  for Improving the Rate Complaint Process Were Extremely to
  Very Important
Table 4.3: Percentage of Rail Shippers Responding That                     57
  Increasing Aspects of the Railroad Competition Was Extremely to
  Very Important
Table II.1: Complaints Dismissed at Shipper’s Request                      65
Table II.2: Complaints Dismissed/Discontinued in Favor of the              67
  Railroad
Table II.3: Complaints Otherwise Dismissed                                 68
Table II.4: Complaints Decided in Favor of the Shipper                     69
Table II.5: Complaints Pending With the Board                              69
Table III.1: Percentage of Shippers Using Various Transportation           89
  Modes, 1997
Table III.2: Average Annual Out-bound Rail Shipments by                    90
  Commodity
Table III.3: Percentage of Annual Rail Shipments Using                     90
  Company-owned Rail Cars
Table III.4: Percentage of Shipments Using Contract Rates or               91
  Published Tariff Rates Since 1990
Table III.5: Percentage of Public Tariff Shipments Exempt From             91
  Federal Regulation
Table III.6: Percentage of Rail Shippers Who Indicated that Their          92
  Shipments Went From Origin to Destination Using Only One
  Railroad, 1990 and 1997
Table III.7: Percentage of Rail Shippers Who Believed That A               93
  Barrier Was a Major or Moderate Reason for Not Filing a Rate
  Complaint
Table III.8: Percentage of Rail Shippers That Believe Suggested            94
  Changes for Improving the Rate Complaint Process Were
  Extremely to Very Important
Table III.9: Percentage of Rail Shippers Who Believed That                 94
  Increasing Aspects of Rail Competition Was Extremely to Very
  Important




Page 11                            GAO/RCED-99-46 Railroad Rate Relief Process
          Contents




Figures   Figure 1.1: Percent of Rail Tonnage Moved in 1997                            16
          Figure 2.1: The Board’s Rail Rate Complaint Process                          25
          Figure 3.1: Rate Complaints Filed With ICC/Board, 1980-98                    36
          Figure 3.2: 41 Complaints Pending or Filed Since January 1, 1990,            37
            by Commodity
          Figure 3.3: Status of 41 Rate Complaints, as of December 31, 1998            41




          Abbreviations

          AAR        Association of American Railroads
          ASLRRA     American Short Line and Regional Railroad Association
          CMP        Constrained Market Pricing
          DOT        Department of Transportation
          FRA        Federal Railroad Administration
          ICC        Interstate Commerce Commission
          NCGA       National Corn Growers Association
          NGFA       National Grain and Feed Association
          STB        Surface Transportation Board


          Page 12                              GAO/RCED-99-46 Railroad Rate Relief Process
Page 13   GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 1

Introduction


                         In response to financial stresses in the railroad industry, the Congress
                         passed legislation in 1976 and 1980 that dramatically reduced federal
                         regulation over the industry. As a result of the 1976 and 1980 legislation,
                         most rail traffic in the United States is not subject to the Surface
                         Transportation Board’s (the Board) rate regulation, and fewer large
                         railroads account for most of the industry’s revenue and mileage operated.
                         The Board, established pursuant to the ICC Termination Act of 1995, is a
                         bipartisan, independent, adjudicatory body that is organizationally housed
                         within the Department of Transportation (DOT). The Board is responsible
                         for the economic and rate regulation of freight railroads and certain
                         pipelines, as well as some aspects of motor and water carrier
                         transportation.


                         The Railroad Revitalization and Regulatory Reform Act of 1976 and the
Changes in the Freight   Staggers Rail Act of 1980 facilitated changes in the freight railroad
Railroad Industry        industry. These acts provided the railroads with greater flexibility to
                         negotiate freight rates and respond to market conditions. The Staggers Act
                         in particular made it federal policy that freight railroads would rely, where
                         possible, on competition and the demand for services rather than on
                         regulation to establish reasonable rates. As a result of mergers and
                         acquisitions fostered by these statutes, as well as changes in bankruptcies
                         and changes in the definition of a class I railroad, the number of large
                         railroads in the United States has declined substantially from the 63 class I
                         railroads operating in 1976 to nine by 1997.1

                         In spite of the reduction in the number of class I freight railroads, these
                         railroads accounted for 91 percent of the industry’s freight revenue and 71
                         percent of the industry’s mileage operated. In 1997, class I freight railroads
                         originated almost 1.6 billion tons of freight, of which coal, farm products,
                         and chemicals accounted for about 61 percent. The nine class I freight
                         railroads in 1997 were the Burlington Northern and Santa Fe Railway Co.;
                         CSX Transportation; Consolidated Rail Corporation; Grand Trunk Western
                         Railroad, Inc.; Illinois Central Railroad Co.; Kansas City Southern Railway
                         Co.; Norfolk Southern Corp.; Soo Line Railroad Co.; and Union Pacific
                         Railroad Co.

                         Since 1997, additional railroad consolidations have occurred. In July 1998,
                         the Board approved the division of the Consolidated Rail Corporation’s

                         1
                          According to Board officials, these 63 class I railroads represented independent 30 rail systems. The
                         Board classifies railroads according to operating revenues. For 1997, class I railroads had annual
                         operating revenue of $256.4 million or more; class II railroads had revenues of $20.5 million to
                         $256.4 million; and class III railroads had revenues of less than $20.5 million.



                         Page 14                                             GAO/RCED-99-46 Railroad Rate Relief Process
                           Chapter 1
                           Introduction




                           (Conrail) assets between CSX Transportation and Norfolk Southern
                           Railway. This will reduce the number of class I freight railroads to eight in
                           1999. Also, in July 1998, Canadian National Railway, the Canadian parent
                           of Grand Trunk Western Railroad, Inc., requested the Board’s
                           authorization to acquire Illinois Central Railroad Company. The Board’s
                           proposed schedule provides for a final decision on the proposed
                           acquisition no later than May 25, 1999. Officials from the Federal Railroad
                           Administration (FRA) believe that within the next 5 to 10 years, the
                           remaining class I railroads could be merged into two transcontinental
                           railroads.2


                           The ICC Termination Act of 1995 eliminated the ICC and transferred its core
The Surface                rail adjudicative functions and certain non-rail functions to the Board.
Transportation Board       Among other things, the Board has economic regulatory authority over
                           freight railroads, addressing such matters as the reasonableness of rates,
                           mergers and line acquisitions, line constructions, and line abandonments.
                           Under the statute, the Board is responsible for balancing shipper and
                           railroad interests by assisting railroads in their efforts to earn adequate
                           revenue to cover their costs and provide a reasonable return on capital
                           while ensuring that shippers that depend on one railroad are protected
                           from unreasonably high rates.


The Board’s Oversight of   The 1976 and 1980 acts provided railroads with significant flexibility to
Railroad Rates             negotiate freight rates and respond to market conditions. The 1976 act
                           retained federal rate regulation only for traffic where the railroad
                           dominates the market, that is, it provides service for which there is no
                           effective competition to otherwise control rates. In such cases, the ICC had
                           jurisdiction to determine whether a challenged rate was reasonable and, if
                           unreasonable, to award reparations and prescribe a maximum rate. The
                           Staggers Rail Act built on the reforms of the 1976 act by establishing a
                           threshold under which railroads would not be considered market
                           dominant. The ICC Termination Act transferred this regulatory function to
                           the Board.

                           The Staggers Rail Act permitted railroads to negotiate transportation
                           contracts containing confidential terms and conditions that are beyond the
                           Board’s authority while in effect. As figure 1.1 shows, most rail tonnage in
                           1997—70 percent—moved under contracts between the railroads and

                           2
                            FRA enforces federal railroad safety statutes under a delegation of authority from the Secretary of
                           Transportation. FRA’s mission is to protect railroad employees and the public by ensuring the safe
                           operation of freight and passenger trains.



                           Page 15                                             GAO/RCED-99-46 Railroad Rate Relief Process
                                      Chapter 1
                                      Introduction




                                      shippers involved and therefore was not subject to the Board’s rate
                                      regulation.


Figure 1.1: Percent of Rail Tonnage
Moved in 1997




                                                                                                Tonnage moved
                                                         70%                                    under contract
                                                                                                (exempt from
                                                                                                economic
                                                                                                regulation).
                                                                                                913 million tons


                                                                            18%                  Tonnage subject
                                                                                                 to regulation.
                                                                                                 238 million tons
                                                                12%
                                                                                                 Tonnage exempt from
                                                                                                 economic regulation.
                                                                                                 153 million tons



                                      Source: Association of American Railroads.




                                      Shipments exempted from rate regulation accounted for an additional
                                      12 percent of all rail tonnage moved in 1997. The Board is required to
                                      exempt any person or class of persons, or a transaction or service, from
                                      regulation, where regulation is not needed to carry out congressionally set
                                      rail transportation policy and either the transaction or service is of limited
                                      scope or regulation is not needed to protect shippers from an abuse of
                                      market power. For example, in April 1998, the Board exempted 29
                                      nonferrous recyclable commodity groups from the Board’s regulation. The
                                      Board found that trucks play a significant role in the transportation of
                                      these commodity groups. Therefore, the Board found that railroads do not
                                      possess sufficient market power to abuse shippers. Other exemptions
                                      issued for the same reason include those for boxcar traffic, certain
                                      agricultural products, and intermodal transportation.




                                      Page 16                                      GAO/RCED-99-46 Railroad Rate Relief Process
                             Chapter 1
                             Introduction




                             The remaining traffic, potentially subject to rate regulation, accounted for
                             18 percent of rail tonnage in 1997. However, the Board’s jurisdiction over
                             this traffic is further limited because it may only provide rate relief where
                             the revenue-to-variable cost percentage exceeds 180 percent and where
                             there is no effective competition.3


The Board’s Oversight of     During the 1970s, the railroad industry was in weak financial condition
Revenue Adequacy             with a rate of return on net investment of 1.2 percent in 1975,4 and a return
                             on shareholders’ equity of about 1.9 percent. By contrast, manufacturing
                             companies and utilities earned rates of return in 1975 of about 15 and
                             12 percent, respectively.5 The financial community was concerned about
                             the railroads’ long-term viability, since the industry faced cash flow
                             difficulties and marginal credit ratings. The 1976 act required the ICC to
                             develop standards for determining whether railroads’ were earning
                             adequate revenues to cover their operating costs and provide a reasonable
                             return on capital. The act provided that railroads’ revenue should
                             (1) provide a flow of net income plus depreciation adequate to support
                             prudent capital outlays, ensure the repayment of a reasonable level of
                             debt, permit the raising of needed equity capital, and cover the effects of
                             inflation and (2) attract and retain capital in amounts adequate to provide
                             a sound transportation system. Despite the reforms of the 1976 act, in
                             1980, the Congress found that railroads’ earnings were still insufficient to
                             generate the funds they needed to make improvements to their rail
                             facilities. While the 1976 act required the ICC to develop standards for the
                             adequacy of railroad revenue, the Staggers Rail Act of 1980 required the ICC
                             to determine annually which railroads were earning adequate revenues
                             and to consider revenue adequacy goals when it reviewed the
                             reasonableness of rates. According to Board officials, even today, the
                             profitability of class I railroads is among the lowest of major industries.


The Board’s Other            When two or more railroads seek to consolidate through a merger or
Oversight Responsibilities   common control arrangement, they must obtain the Board’s approval;
                             transactions requiring the Board’s approval are not subject to the antitrust

                             3
                              According to Board officials, 70 percent of rail traffic is removed from the Board’s rate
                             reasonableness jurisdiction because it yields revenue-to-variable cost percentages below the statutory
                             180 percent threshold.
                             4
                              The rate of return on net investment is the relationship of railroads’ net operating income to average
                             net investment in transportation property.
                             5
                              These returns may not be directly comparable because before 1983 the railroad industry used the
                             retirement-replacement-betterment accounting system for reporting on rail track and structures. In
                             1983, ICC adopted the depreciation basis of accounting for these items.



                             Page 17                                             GAO/RCED-99-46 Railroad Rate Relief Process
                     Chapter 1
                     Introduction




                     laws or other federal, state, and municipal laws. During a merger
                     proceeding involving two or more class I railroads, the Board is required
                     to consider, among other things, how the merger will affect competition
                     among railroads (either in the affected region or in the national
                     transportation system), railroad employees, the environment, and the
                     adequacy of transportation provided to the public.

                     As part of its regulatory responsibilities, the Board also addresses informal
                     and formal complaints that railroads have failed to provide reasonable rail
                     service to shippers. The Board oversees other rail matters, such as line
                     constructions and abandonments. Railroads that want to either construct
                     a new rail line or abandon an existing one must generally obtain the
                     Board’s approval.


                     Concerned about the potential barriers that shippers face in seeking relief
Objectives, Scope,   from allegedly unreasonable rail rates, Senators Byron L. Dorgan, Conrad
and Methodology      R. Burns, John D. Rockefeller IV, and Pat Roberts asked us to describe
                     (1) the Board’s rate relief complaint process and how it has changed since
                     the ICC Termination Act of 1995 became law, (2) the number and outcome
                     of rate relief cases pending or filed since 1990, and (3) the opinions of
                     shippers as to the barriers they face when bringing rate complaints to the
                     Board and potential changes to the process to reduce these barriers. At
                     their request, we are also providing information on McCarty Farms, Inc. et
                     al. v. Burlington Northern, Inc. In addition, in the spring of 1999, GAO will
                     issue a companion report that will address how freight railroad rates and
                     service have changed since 1990.

                     To describe the rate complaint process and how it has changed since the
                     ICC Termination Act, we reviewed prior GAO reports and the Board’s
                     documents, applicable statutes and regulations, and decisions. We met
                     with Board officials, shippers’ organizations, and the AAR to gain a
                     thorough understanding of the process. We then summarized the rate
                     relief process and obtained comments on our summary from the Board.
                     Board officials provided clarification where necessary, and their
                     comments are included in our report. Our description of the rate relief
                     process is contained in chapter 2.

                     To determine the number and outcome of rate relief cases filed and/or
                     pending since 1990, we obtained the rate complaints either filed with or
                     pending before the Board or its predecessor, the ICC, from January 1, 1990,
                     through December 31, 1998. We compared the number of complaints filed



                     Page 18                                GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 1
Introduction




between January 1, 1990, and December 31, 1998, with the number of
complaints that shippers filed from 1980 through 1990. We reviewed the
complaints to determine, among other things, their nature, the complaint
process used in filing them and their outcome. We also examined the
complaints to determine the types of commodities involved, whether the
railroad was found to be market dominant, how much time the agency
required to make a rate-reasonableness determination, and the rationale
for the determination. The Board’s requirement that railroads demonstrate
product and geographic competition for traffic subject to a challenged rate
was in effect during the course of our review. We did not independently
verify the information provided by the Board regarding the number of
complaints filed or pending since January 1, 1990. In addition, we did not
review the merits of the ICC’s or the Board’s decisions or the
appropriateness of the outcome.

To determine shippers’ views on the rate relief process and suggestions for
improvement, we mailed a questionnaire to members of 11 commodity
associations that ship using rail in the United States. To identify the
individual shippers of each commodity, we obtained the membership lists
from each association we contacted. To identify these shippers, we
selected three commodity classifications representing four commodities
that constitute the largest volume of rail shipments—bulk grain,6 coal,
chemicals, and plastics.7 In order to identify a sufficient cross-section of
wheat shippers, we selected wheat associations in states with the largest
wheat production (by volume) for 1997, using data on wheat production
from the U.S. Department of Agriculture’s Economic Research Service. We
selected the top three wheat-producing states—Kansas, North Dakota, and
Montana—and contacted the grain shipper associations in these states.
For the remaining commodity classifications, we contacted the national
associations representing the shippers of each commodity.

For the nine associations that provided a relatively small number of
members, we surveyed all of the members contained on the lists provided.
For the two associations that provided a relatively large number of
members, we selected a random sample of members for our survey. In
instances where a random sample was conducted, the sample can be
generalized to the association’s membership. Table 1.1 lists the
associations we contacted, the number of members in each association,


6
Corn, wheat, soybeans, sorghum, barley and rye, and oats represent nearly all grain movements in the
United States.
7
 Railroad Facts, 1998 Edition, Association of American Railroads, Oct. 1998.



Page 19                                            GAO/RCED-99-46 Railroad Rate Relief Process
                                      Chapter 1
                                      Introduction




                                      the number of shippers we selected from each list to represent a
                                      statistically valid sample of each association, and the response rate.

Table 1.1: Association Memberships
Selected, Shippers Surveyed by GAO,                                                                          Number of             Valid
and the Survey Response Rate                                                                Number of         shippers         response
                                      Association contacted                                  members          surveyed              rate
                                      Chemical Manufacturers Association                             160             160              57.5
                                      Edison Electric Institute                                       91               91             67.0
                                      Kansas Grain and Feed Association                              320             320              66.9
                                      Montana Grain Elevator Association                              93               93             36.6
                                      National Corn Growers Association                          52,353              400              54.0
                                      National Grain and Feed Association                            747             399              67.9
                                      National Mining Association                                    113             113              43.4
                                      North Dakota Grain Dealers Association                         280             280              50.7
                                      Society of the Plastics Industry                               237             237              47.3
                                      Western Coal Traffic League                                     15               15             86.7
                                      Western Fuels Association                                        9                9             44.4
                                      Subtotal                                                   54,418            2,117
                                      Shippers with complaints filed or pending
                                      since 1990a                                                     32               32             12.5
                                      Total                                                      54,450            2,149              60.1
                                      a
                                       We mailed surveys to the shippers who had complaints filed or pending with the ICC and the
                                      Board since 1990. These shippers are not included in the number of shippers surveyed from the
                                      associations. Two shippers filed complaints with the Board in 1998, after our survey was mailed to
                                      shippers.



                                      The selection of 2,149 shippers was reduced by 92 to account for shippers
                                      who were members of more than one association, leaving 2,057. In
                                      analyzing the questionnaires that were returned, we discovered that a very
                                      small percentage of National Corn Growers Association (NCGA) members
                                      were rail shippers. Of the questionnaires returned by NCGA members, only
                                      six indicated they were rail shippers. This does not yield a statistically
                                      valid result, and therefore we dropped the NCGA membership from our
                                      statistical analysis. As a result, we reduced our sample of 2,057 by the 400
                                      NCGA members we sampled. This results in an adjusted sample size of
                                      1,657. Of the 1,657 grain, coal, chemicals and plastics shippers we
                                      surveyed, 996 (or 60.1 percent) returned our survey. The response rates for
                                      grain, coal, chemicals and plastics shippers were 61 percent, 62 percent,
                                      and 55 percent, respectively.




                                      Page 20                                           GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 1
Introduction




Because the National Grain and Feed Association’s (NGFA) membership
was large, we sent our survey to a randomly selected sample of NGFA
members. Our sample was statistically drawn and weighted so that we
could generalize the responses of the NGFA members we surveyed to the
entire membership for each question in the survey. The weights apply only
to NGFA member responses and not the responses of the other shippers
because we surveyed the entire membership of the other associations. We
statistically combined the sample with the responses from the other 10
groups and reported weighted estimates for each question in the survey.
As a result, the views and opinions of the shippers we surveyed are
generalizable to the views and opinions of the 11 groups we surveyed.

Not all shippers who responded to our survey were rail shippers, however.
Therefore, our analysis only considers the responses of shippers that
indicated that they were rail shippers, and have used rail in at least one
year since 1990. Based on our sampling and analysis techniques, our
results are based on an estimate of 709 shippers who shipped grain, coal,
chemicals, or plastics by rail in at least one year since 1990. The responses
of the 709 rail shippers are used as the core of our statistical analysis.

Some of our estimates do not always represent the entire population
because some shippers did not answer all questions. We have indicated
the number of missing responses for each question in appendix III. In all
instances where we discuss our survey results, we are referring to the rail
shippers belonging to the groups we surveyed. Our statistical analyses of
data collected are presented in chapter 4. A detailed technical appendix
and our questionnaire results are presented in appendix III.

To determine the railroad industry’s views on shippers’ suggestions to
improve the rate relief process and competition in the railroad industry
and to collect additional data on rate complaint cases, we mailed a
questionnaire to each of the nine class I railroads with operations in the
United States. The questionnaires asked the railroads to indicate the
significance of barriers caused by the standard rate complaint process and
their opinions regarding shippers’ suggestions to improve the process and
increase competition in the railroad industry. In addition, we asked them
for information regarding any rate complaint cases in which they were
involved, including the number of complaints and the outcome of each
complaint. AAR officials answered questions pertaining to the rate relief
process and competition issues on behalf of the railroads. Each individual
railroad was asked to answer questions regarding rate complaints
pertaining to its company. We did not receive a sufficient number of



Page 21                               GAO/RCED-99-46 Railroad Rate Relief Process
                     Chapter 1
                     Introduction




                     responses from the railroads regarding the rate complaints to provide any
                     additional data on the cases filed and or pending since 1990. We therefore
                     relied on our independent analysis of the Board’s case files and did not
                     include the small number of responses from the class I railroads. We
                     summarized the data collected through the use of the railroad
                     questionnaire and summaries of that analysis are presented in chapter 4
                     and appendix IV.

                     We performed our work from February 1998 through February 1999 in
                     accordance with generally accepted government auditing standards.


                     In commenting on a draft of this report, the Board disagreed with our
Agency Comments      statistic that 88 class I railroads operated in 1976 and contended that 63
and Our Evaluation   class I railroads, representing 30 independent rail systems, operated in that
                     year. Furthermore, the Board noted that of these 30 rail systems, 9 were
                     subsequently reclassified as smaller (class II or III) railroad systems as the
                     revenue thresholds for class I status were raised, and 2 systems ceased
                     operations as a result of bankruptcy. Thus, officials stated, the actual
                     reduction in the number of class I railroad systems from 1976 to 1998 that
                     resulted from mergers and consolidations was from 19 to 9.

                     Our count of 88 class I railroads was based on information from FRA’s
                     annual safety bulletins. To be consistent with the Board, we changed the
                     number of class I railroads in 1976 to 63 and provided additional
                     information on the 30 systems these class I railroads represented.
                     However, we disagree with the Board’s assertion that the number of 1976
                     railroad systems should be further reduced to 19. While the number of
                     systems may have declined after 1976, Board statistics show that 30
                     railroad systems operated in 1976.




                     Page 22                                GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 2

The Board’s Rail Rate Complaint Process


                         While there have been some changes to the rate complaint process since
                         the ICC Termination Act, the process continues to be relatively complex
                         and time-consuming. However, within the limits of the law, the Board has
                         taken steps to reduce the complexity of the process, such as adopting
                         simplified guidelines for determining the reasonableness of challenged
                         rates and addressing some of the barriers to filing a complaint.


                         The rate complaint process in larger cases is a complex administrative
The Standard Rate        proceeding involving difficult issues. When a shipper files a rate
Complaint Process Is     complaint, the Board must assess many factors related to competition and
Complex                  the disputed rate. The Board first determines whether the railroad
                         dominates the shipper’s transportation market. If the Board finds that a
                         railroad is market dominant, the Board then conducts an economic
                         analysis designed to determine the lowest rate than an optimally efficient
                         railroad would need to charge to cover its costs. If the hypothetical
                         railroad’s rate is less than the rate that the dominant railroad charges, the
                         Board may order reparations for past shipments or prescribe rates for
                         future shipments.


The Board Must Address   The Board addresses a shipper’s complaint in an administrative
Many Procedural Issues   proceeding during which the shipper and the railroad have the opportunity
                         to develop and present evidence supporting their positions. Under the ICC
                         Termination Act, a case may only be initiated upon a shipper’s complaint.
                         A complaint must indicate whether the Board should examine the
                         challenged rate under the Board’s more complex standard or its simplified
                         guidelines and provide information to enable the Board to decide which
                         guidelines to apply.1 The Board charges a fee to process the complaint. In
                         February 1999, the Board raised the filing fee for a case brought under the
                         standard guidelines to $54,500—20 percent of the 1999 cost to the agency
                         of adjudicating a rate complaint. The Board also raised the fee for cases
                         brought under the simplified guidelines issued after the ICC Termination
                         Act to $5,400. After the case is initiated, the parties use a variety of tools to
                         obtain information from each other and present evidence supporting their
                         positions under a schedule established by regulation or by the Board. The
                         Board must decide cases under the standard guidelines within 9 months
                         after the close of the administrative record and cases under the simplified
                         guidelines within 6 months. For cases under the standard guidelines, the
                         Board’s goal is to complete the entire process in 16 months. The railroad

                         1
                          The standard guidelines are often referred to as Constrained Market Pricing (CMP) or “coal rate”
                         guidelines. These guidelines were originally designed for challenges to coal rates. However, they have
                         since been applied to challenges for rates on other commodities.



                         Page 23                                            GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 2
The Board’s Rail Rate Complaint Process




or shipper may make an administrative appeal to the Board or request
judicial review of the Board’s decision after exhausting all administrative
options. According to shipper representatives, a complaint can cost a
shipper from about $500,000 to $3 million. Figure 2.1 illustrates the dates
that govern key parts of the process, including discovery, filing of
evidence, and the date by which the Board has to make a final decision.




Page 24                                   GAO/RCED-99-46 Railroad Rate Relief Process
                                                                     Chapter 2
                                                                     The Board’s Rail Rate Complaint Process




Figure 2.1: The Board’s Rail Rate Complaint Process


         Day 0                                                                          Day 20                       Day 30                                             Day 32
    Complaint filed.            Filing fee for            Complaint should        Railroad's answer to        Shipper's response       The Board considers           Shipper and
 Complaint indicates              simplified             include preliminary       the complaint and         to railroad about use      whether it will use         railroad shall
  that case should be           procedures is               information to          any opposition to             of simplified             simplified                 discuss
   reviewed by using               $5,400.                 support use of           use of simplified            guidelines is             guidelines.              discovery and
 simplified guidelines.                                 simplified guidelines.         guidelines                     due.                                            procedural
           (a)                                                    (b)                    is due.                                                                      schedule.
                                                                                            (c)




      Simplified
      guidelines



   Start        Shipper brings rate complaint and requests
   here         application of standard or simplified guidelines.




  Standard/Constrained
  Market Pricing (CMP)
       guidelines


          Day 0                                                                                Day 7                              Day 20                             Day 75
     Complaint filed.                 Filing fee for            The Board sets            Parties confer to                 Railroad answers                  Discovery completed.
        Complaint                      standard                 up a procedural          discuss discovery            complaint and may contend
      indicates that                 procedures is                schedule for         and procedural matters.             that the Board lacks
      Standard/CMP                      $54,500.                standard case.                                        jurisdiction due to revenue-
     guidelines should                                                                                                      variable cost ratio
         be used.                                                                                                            that is less than
            (a)                                                                                                                180 percent.
                                                                                                                                     (c)




Notes:

(a) The Board first determines if it has jurisdiction to adjudicate the complaint by determining whether the railroad is market dominant (49 U.S.C. 10707).
The Board reviews the revenue-variable cost ratio and the types of competition. Jurisdictional issues can be raised at any time during the complaint proc-
ess.

(b) The information needed to support the shipper's view that the board should examine the reasonableness of the rate using the simplified guidelines con-
sists of (1) a general history of the traffic; (2) the specific commodity; (3) the origins and destinations; (4) the amount of traffic; (5) the total revenue paid per
carload and by commodity; (6) the feasibility and cost of preparing a stand-alone-cost analysis; (7) the estimated other costs of pursuing the rate complaint;
(8) the relief requested; (9) the present value of relief requested; and (10) the supporting assumptions, calculations, and other documentation.

(c) An answer to a complaint may be accompanied by a motion to dismiss the complaint or a motion to make the complaint more definite. A motion to dis-
miss may be filed at any time during the proceedings. Also, a shipper may, within 10 days after an answer is filed, file a motion to make the answer more
definite.

(d) The Board uses three revenue-variable cost measures to assess rate reasonableness and recognizes that they should be supplemented in each case
by more individualized analyses from both shippers and railroads. These measures are the (1) revenue shortfall allocation measure; (2) revenue-variable
costs greater than 180 percent; and (3) a revenue-variable cost comparison.

(e) At any time, a party may petition to reopen an administratively final action of the board by citing material error, new evidence, or substantially changed
circumstances. Parties may also petition for a stay of an action pending a request for judicial review, for an extension of the compliance date, or for modifica-
tion of the date the decision takes effect. Such petitions must generally be filed at least 10 days before the effective date.

                                                                     Page 25                                                         GAO/RCED-99-46 Railroad Rate Relief Process
                                                            Chapter 2
                                                            The Board’s Rail Rate Complaint Process




         Day 39
      Parties shall                                                               The Board              The Board begins
   file a procedural                                                             establishes             analysis of market       The Board may         The Board shall issue
                                        Day 50                               procedural schedule             dominance               request
  schedule with the                                                                                                                                     final decision within 6
                                  The Board decides                           for filing evidence             and rate              briefs that
  Board about future                                               yes                                                                                    months after record
                                   to use simplified                          on a case-by-case            reasonableness         summarize the
      activities and                                                                                                                                            closes.
                                      guidelines.                                     basis.                 using three               case.
       deadlines.                                                                                         revenue-variable
                                                                                                          cost measures.
                                                                                                                 (d)

                                                                                                                                                       Board administrative
                                                                                                                                                    appeals must be filed within
                                          no
                                                                                                                                                      20 days after decision.
                                                                                                                                                                (e)




                                                                                                                                                            Appeals        Judicial
                                                                                                                                                            process         review


Use Standard/CMP Guidelines
                                                                                                                                                     Board administrative
                                                                                                                                                  appeals must be filed within
                                                                                                                                                    20 days after decision.
                                                                                                                                                             (e)




              Day 120                           Day 180                         Day 210                                                                     Day 480
   Evidentiary phase begins.                  Shipper and                Evidentiary record                                                             The Board shall
 Shipper files opening evidence          railroad file the reply         closed with shipper                                                          issue final decision
  on absence of intermodal or                   evidence                 and railroad having                                  The Board may          within 9 months after
    intramodal competition,                  to each other's                 filed rebuttal           The Board's              request briefs            record closes.
   variable costs, and stand-             opening evidence.                    evidence.            analysis begins.          that summarize
  alone-cost issues. Railroad                                                                                                    the case.
        files evidence on
         revenue-variable
         cost percentage.




                                                            Sources: Surface Transportation Board; ICC Termination Act of 1995; 49 CFR Parts 1002 through
                                                            1115.




                                                            The Board’s regulations require the parties to discuss discovery matters
                                                            within 7 days after a complaint is filed. However, either side may be
                                                            reluctant to share information, particularly information that may damage
                                                            its case. Disputes have also arisen when a shipper contended that a
                                                            railroad’s discovery requests were unfairly burdensome. For example, in a
                                                            1998 case, FMC Wyoming Corporation and FMC Corporation v. Union
                                                            Pacific Railroad Company, the Board limited the railroad’s broad requests
                                                            for information on possible product- and geographic-based competition.




                                                            Page 26                                                              GAO/RCED-99-46 Railroad Rate Relief Process
                            Chapter 2
                            The Board’s Rail Rate Complaint Process




                            The Board found that through its broad discovery requests, the railroad
                            had improperly attempted to shift the burdens of identifying product and
                            geographic competition to the complaining shipper. As a result, the Board
                            imposed restrictions limiting discovery requests. The Board later removed
                            product and geographic competition from consideration in all cases.

                            Shipping groups told us that obtaining information during the discovery
                            process can be difficult and that railroads make it burdensome and
                            time-consuming for them. Furthermore, shippers are reluctant to challenge
                            railroads during discovery, fearing that an extended schedule will lead to
                            added costs and the continued disruption of daily operations. On the basis
                            of survey responses, we estimate that about 67 percent of the rail shippers
                            indicated that difficulty in getting necessary data from the railroads would
                            preclude them from filing a rate complaint. While railroads told us that
                            procedural barriers should not be an obstacle in a rate complaint process,
                            they believe that product and geographic competition tests are important
                            aspects of proving that shippers have alternatives to the dominant
                            railroad.


Rate Relief Cases Require   By statute, the Board may assess whether a challenged rate is reasonable
Determination of Market     only if the railroad dominates the shipper’s transportation market. The
Dominance                   requirement to determine market dominance originated with the 1976 act,
                            which broadly defined market dominance as the absence of effective
                            competition from other railroads or other modes of transportation.
                            Underlying this statutory directive was the theory that if the railroad did
                            not dominate the market, competitive pressures would keep rail rates at a
                            reasonable level. The Staggers Rail Act retained this requirement and tied
                            the definition of market dominance to rail rates exceeding a certain
                            revenue-to-variable cost percentage.

                            An analysis of market dominance contains both quantitative and
                            qualitative components. Quantitatively, the Board first determines if the
                            revenue produced by the traffic transported is less than 180 percent of the
                            railroad’s variable cost of providing the service. By statute, a railroad is
                            not considered to dominate the market for traffic that is priced below the
                            180-percent revenue-to-variable cost level. If the revenue produced by the
                            traffic exceeds the statutory threshold, the Board conducts a qualitative
                            analysis using data the shipper and railroad provide on competition. The
                            shipper must prove that it does not have (1) access to more than one
                            competing railroad or combination of railroads that can transport the
                            same commodity between the same origin and destination points



                            Page 27                                   GAO/RCED-99-46 Railroad Rate Relief Process
                       Chapter 2
                       The Board’s Rail Rate Complaint Process




                       (intramodal competition) or (2) access to other competing modes of
                       transportation, such as trucks or barges, that could transport the same
                       commodity between the same origin and destination points (intermodal
                       competition). Until January 1999, the railroad had to show that the shipper
                       had (1) access to alternative origin or destination points for the same
                       commodity (geographic competition) and (2) access to alternative
                       products that could be substituted for the commodity in question (product
                       competition).2


The Board Determines   Until the 1976 act, the ICC regulated almost all rates and judged their
Whether the            reasonableness by various cost formulas and/or by comparing a
Market-Dominant        challenged rate with an established rate for similar freight movements.
                       Together, the 1976 act and the Staggers Rail Act provided railroads with
Railroads’ Rates Are   significant flexibility to set rates in response to market conditions.3
Reasonable             However, neither the Staggers Rail Act nor the 1976 act prescribed
                       quantitative measures for the ICC to use in determining rate
                       reasonableness. In February 1983, the ICC proposed new Constrained
                       Market Pricing (CMP) guidelines for coal shipped in markets where there
                       was only one railroad. After more than 2-1/2 years of comment, the ICC
                       adopted these final standard guidelines. Since the standard guidelines’
                       adoption, the ICC and the Board have used the guidelines to evaluate the
                       reasonableness of rates for noncoal shipments. The ICC Termination Act
                       retained the basic statutory framework for rate reasonableness
                       determinations but, as discussed below, directed the Board to complete
                       the development of alternative, simplified guidelines for rate relief cases.

                       The CMP concept relies on railroads’ setting rates in all markets according
                       to their own estimates of demand—just as many firms set their own prices
                       in other industries—but subjects rates on captive traffic to reasonable
                       constraints. ICC believed that CMP allowed it both to assist railroads in
                       attaining adequate revenues and protect shippers from monopolistic
                       pricing practices. CMP provides for the following:




                       2
                        Ex Parte No. 627, Market Dominance Determinations: Product and Geographic Competition, Dec. 21,
                       1998.
                       3
                        Demand-based differential pricing recognizes that railroads, in order to recover all of their costs,
                       should be able to set rates in competitive markets below fully allocated costs to meet competitors’
                       rates and to set other rates above fully allocated costs. Fully allocated costs is the sum of variable
                       costs plus an apportionment of fixed costs (those that do not vary with quantity, such as land).



                       Page 28                                              GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 2
The Board’s Rail Rate Complaint Process




Revenue adequacy: A captive shipper should not have to pay more than is
necessary for the railroad to earn adequate revenues.4

Management efficiency: A captive shipper should not pay more than is
necessary for efficient service.

Stand-alone cost: The rate should not exceed what a hypothetical efficient
competitor would charge for providing comparable service; the shipper
should not bear any costs from which it derives no benefit.

Phasing of rate increases: Changes in rates should not be so sudden as to
cause severe economic dislocations.

Under the stand-alone cost approach routinely used in rate cases, a
shipper develops a model of a hypothetical, optimally efficient railroad
that could serve the complaining shipper. With the aid of a variety of
experts, the shipper and railroad develop information regarding the
hypothetical railroad’s traffic, operating plan, capital investment
requirements, costs, and revenues. If the hypothetical railroad’s rate,
including revenues sufficient to cover all costs and a reasonable profit,
would be less than the rate the railroad charged the shipper, the Board will
conclude that the challenged rate is unreasonable and may order the
railroad to pay reparations on past shipments and prescribe rates for
future shipments. Conversely, if the hypothetical railroad’s rate would be
greater than the challenged rate, the Board will conclude that the rate is
reasonable and dismiss the complaint.

To reach its final decision, the Board typically employs a multidisciplinary
team that includes a civil engineer to review the shipper’s assumptions in
building the hypothetical railroad, a transportation analyst to review the
shipper’s operational assumptions for the hypothetical railroad, and a
financial analyst to prepare discounted cash flows. According to Board
officials, the complexity of current rate cases and resource constraints on
the Board allow the agency to work on two standard procedures cases
concurrently at an average cost to the agency of $270,000 per case for staff
directly assigned to a given case.5 According to shippers’ associations,
developing a model of a hypothetical railroad requires a shipper to hire
numerous consultants at significant cost. Of the shippers that expressed


4
 A captive shipper is one that can only use one railroad to ship its goods and has no other shipping
alternatives.
5
 This amount also includes the costs associated with making the market-dominance determination.



Page 29                                             GAO/RCED-99-46 Railroad Rate Relief Process
                          Chapter 2
                          The Board’s Rail Rate Complaint Process




                          an opinion in our survey, an estimated 72 percent might not file a rate
                          complaint because developing the model would be too costly.


                          The ICC Termination Act of 1995 directed the Board to complete an ICC
Too Early to Assess       proceeding to develop a simplified alternative to the standard coal-rate
the Board’s Actions to    guidelines within 1 year of enactment. While the Board adopted simplified
Ease Shippers’            guidelines in December 1996, no cases had been filed under the simplified
                          procedures as of January 1999. In addition to the simplified guidelines, the
Burdens                   Board has implemented other measures to reduce the barriers that
                          shippers experience when bringing rate complaints. These measures
                          include establishing procedural deadlines for standard cases as well as
                          more limited deadlines for cases under the simplified guidelines and
                          requiring the parties to discuss discovery matters at the beginning of the
                          proceeding. Furthermore, the Board has eliminated the product- and
                          geographic-based competition aspect of its market-dominance
                          determination. The Board has also encouraged increased communication
                          between the railroad and shipper communities so that they may better
                          resolve their differences outside the regulatory process.


The Board Has Adopted     The Board’s simplified guidelines are intended for complaints in which it
Alternative, Simplified   would be too costly for the shipper to develop a cost model of a
Guidelines                competitive railroad. Since 1986, the Board or its predecessor has
                          attempted to develop simplified guidelines. According to Board officials,
                          efforts to adopt the procedures have often been blocked by the courts.
                          After the Board adopted the simplified guidelines in 1996, AAR challenged
                          the simplified guidelines in federal court, contending that the guidelines
                          did not fulfill the Congress’s directive to establish a simple and expedited
                          method to determine whether rates in small cases were reasonable. AAR
                          asserted that the guidelines were “vague and could undermine the
                          revenue adequacy of railroads.” On June 30, 1998, the court found that the
                          challenge to the simplified guidelines was premature because the Board
                          had not yet applied them to invalidate a specific rate.6 The shippers’
                          representatives that we contacted expect that AAR will challenge the
                          results of the first case in which the Board decides that a challenged rate is
                          not reasonable under the simplified guidelines. These representatives
                          contend that shippers may be reluctant to file a case under the simplified
                          guidelines because they expect the results to be appealed and they would
                          incur additional legal costs in subsequent litigation. In addition, they
                          contend that if the court ruling invalidates the simplified guidelines,

                          6
                           Association of American Railroads v. Surface Transportation Board, 146 F. 3d 942 (D.C. Cir. 1998).



                          Page 30                                            GAO/RCED-99-46 Railroad Rate Relief Process
                           Chapter 2
                           The Board’s Rail Rate Complaint Process




                           shippers would then have to decide whether to pursue complaints under
                           the more complex standard guidelines. Nonetheless, Board officials noted
                           that the Board would defend the simplification procedures in court and
                           therefore believes that eligible shippers should not be deterred from their
                           use because the procedures have not been judicially affirmed. Board
                           officials expressed confidence that the courts would affirm the simplified
                           procedures.


The Board Has              In addition to establishing simplified guidelines, the Board has
Implemented Some           implemented procedures designed to expedite the rate complaint process.
Improvements to the Rate   For example, in September 1996, the Board issued a 7-month procedural
                           schedule for complaints under the standard guidelines to ensure that the
Complaint Process          proceeding would be completed within 16 months. In January 1998, the
                           Board issued expedited procedures for complaints brought under the
                           simplified guidelines. These procedures established a 50-day schedule for
                           the Board’s determination as to whether simplified guidelines should be
                           used in the complaint. Despite these efforts, the Board has either
                           suspended or extended the proceedings for most of the shippers’
                           complaints as a result of shippers’ and railroads’ requests. Furthermore, in
                           an effort to speed up the process and develop realistic time frames, the
                           parties confer with each other at the outset of a rate case to set the ground
                           rules for the proceedings. During the conference, the parties identify and
                           resolve disputes relating to discovery or the evidentiary schedule. Finally,
                           the Board eliminated product- and geographic-based competition from its
                           market-dominance analysis. While the Board had tried to mitigate
                           problems associated with discovery pertaining to product and geographic
                           competition proceedings, it concluded that such actions were not
                           sufficient to address shippers’ concerns. The railroads sought agency
                           reconsideration of that decision.


The Board Has Promoted     The Board prefers that shippers and railroads settle their differences
Communication Between      without regulatory interference and has made various efforts to facilitate
Shippers and Railroads     such agreements. The ICC Termination Act established the
                           Railroad-Shipper Transportation Advisory Council to advise the Board, the
                           Secretary of Transportation, and congressional oversight committees on
                           rail transportation policy issues of particular interest to small shippers and
                           small railroads. As a result of a proposal by the Council, the Board
                           established a voluntary arbitration process as an alternative to traditional
                           proceedings. The regulations establish a 120-day time frame for arbitration
                           proceedings. Arbitrators’ decisions are binding and judicially enforceable,



                           Page 31                                   GAO/RCED-99-46 Railroad Rate Relief Process
                     Chapter 2
                     The Board’s Rail Rate Complaint Process




                     subject to a limited right of appeal to the Board. Arbitration has not been
                     used as a substitute for a rate complaint. According to officials of the
                     National Grain and Feed Association, arbitration is suitable for service
                     problems, such as the misrouting of cars, but mediation is preferred to
                     resolve rate complaints.

                     As a result of April 1998 hearings, the Board has encouraged further
                     private-sector discussions to address access and competition issues. At the
                     hearings, shippers called for a greater role for smaller railroads,
                     particularly in rural areas. In September 1998, the American Short Line and
                     Regional Railroad Association (ASLRRA) and AAR announced an agreement
                     to improve service. The agreement provides for the arbitration of certain
                     issues contested by class I and smaller railroads. However, the Board also
                     mandated that the railroads and shippers establish a formal dialogue to
                     address concerns raised during the April hearings. In response to the
                     Board’s directive, the National Grain and Feed Association and AAR
                     entered into an agreement to address rate and service issues in the grain
                     industry. The agreement provides for confidential, nonbinding mediation
                     of certain rate disputes and mandatory binding arbitration of service
                     disputes.

                     Other mechanisms to encourage discussions between the railroad and
                     shipper communities include the National Grain Car Council and the Joint
                     Grain Logistics Task Force. The ICC Termination Act directed the Board to
                     consult as necessary with the National Grain Car Council, previously
                     established by the ICC as a means for assisting the Board in addressing
                     problems arising in transporting grain by rail. According to a Board
                     official, the National Grain Car Council generally focuses on addressing
                     issues for the grain industry as a whole, and not necessarily for individual
                     shippers. The Board also established the Task Force in cooperation with
                     the U. S. Department of Agriculture. The Task Force will address shippers’
                     and railroads’ information needs concerning recurring seasonal problems
                     that affect the transportation of grain and grain products.


                     In commenting on a draft of this report, Board officials stated we should
Agency Comments      provide more information on the complex task the Board faces in
and Our Evaluation   balancing competing policy objectives set forth under statute and the
                     strides the Board has undertaken to streamline and simplify the rate
                     complaint process. Officials stated that the standard complaint procedures
                     that the Board currently uses for large cases resulted from many years of
                     debate and judicial interpretations. These standard procedures address the



                     Page 32                                   GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 2
The Board’s Rail Rate Complaint Process




concerns that the Board must consider under the statute as it seeks to
balance two competing goals: considering the needs of the railroad
industry for adequate revenues while simultaneously ensuring that the
industry does not exert an unfair advantage over captive shippers. Board
officials noted that the agency has streamlined the standard process for
handling large cases (such as modifying the market-dominance rule).
However, they stated that the complexity of the standard procedures for
larger rate cases is largely unavoidable, given the complexity of the
underlying issues to be resolved and the need to balance competing policy
objectives laid out by the Congress. Thus, officials contend that to further
substantially reduce the complexity, time, and expense involved in
handling these rate complaints would require legislative action.

Officials noted that the Congress could choose to adopt even simpler
maximum rate formulas for certain traffic. However, officials continued, a
substantial retreat from differential pricing principles could have a
noticeable effect on the railroad industry’s financial health and the type
and scope of services provided and thus could affect the shippers that rely
upon that industry to meet their transportation needs. Similarly, officials
noted that the suggestions for increasing rail competition, such as through
open access, would require substantial changes to the statute, could alter
the shape and condition of the rail system, and limit the ability of the
nation’s rail system to meet the needs of some of the shippers that use the
current system.

In response, we recognize that the Board faces competing policy
objectives as a result of existing laws. These competing policies come to
the forefront not just with rail rate complaints but with many other Board
proceedings, such as actions to approve railroad mergers and
consolidations. Throughout this report, we repeatedly cite the competing
policies, embodied in statute, that the Board must employ in making its
rail-related decisions. However, we have modified the report to reflect the
Board’s views that important aspects of the rate-relief process or the
competitive structure of the railroad industry can only be changed with
the support and approval of the Congress.

Board officials also stated that the report does not adequately address the
simplified procedures. Officials stated that the new procedures were
designed to provide a shorter, simpler, and less expensive means to
address cases in which the more complex standard procedures are not
cost effective. Board officials stated that the report, as well as our survey,
generally focused on the standard rate complaint process—a process that



Page 33                                   GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 2
The Board’s Rail Rate Complaint Process




is inherently more complex and time-consuming. Board officials stated
that the report does not adequately reflect the value that the new,
simplified procedures could have for the shippers that will use them.
Although shippers have complained that the simplified procedures are also
complex, Board officials stated that the procedures are user-friendly and
based on readily available and inexpensive data. Because the Board would
defend the simplified procedures against railroad challenges in court,
Board officials stated that eligible shippers should not be deterred from
using them simply because the procedures have not yet been judicially
affirmed. Officials expressed confidence that the courts would affirm the
Board’s simplified procedures, when they are applied.

In response, we note that since the Board issued its simplified procedures
in December 1996, no shipper has asked the Board to review a rate
complaint under them. As this chapter notes, shippers and their
associations are reluctant to use the simplified procedures because they
believe that AAR will challenge the first rate complaint filed under the new
procedures. Shipper associations have noted that Board statements
declaring the Board’s intended defense of the simplified guidelines offer
little encouragement for any shipper to be the first to file a complaint
under these new procedures. While the new procedures offer shippers the
prospect of resolving their complaints faster, the prospect of future
litigation provides little incentive for shippers to initiate such a complaint.
Accordingly, we believe that it is still too early to declare the simplified
procedures a success.




Page 34                                   GAO/RCED-99-46 Railroad Rate Relief Process
Chapter 3

Decline in Complaints Filed, and Few Rates
Have Been Found Unreasonable

                   Very few shippers served by class I railroads have complained to the
                   Board or the ICC about the railroads’ rates. After filing 130 rate complaints
                   from 1980 through 1989, shippers filed only 24 rate complaints from 1990
                   through 1998. Furthermore, in the 41 complaints we reviewed that were
                   filed or pending since the beginning of 1990,1 the shipper and the railroad
                   were able to settle their differences on 18 complaints before completing
                   the formal complaint process. In addition, the challenged rates were found
                   to be unreasonable in two cases, seven complaints were dismissed in favor
                   of the railroad, and five were dismissed for other reasons. The Board is
                   still examining the remaining nine complaints. Shippers of coal, farm
                   products, and chemicals filed the greatest number of rate complaints. The
                   rate complaint process was quite long for some shippers—time for
                   resolution ranged from a few months to about 16 years.


                   Despite the fact that thousands of shippers transport their products by rail,
Few Shippers       very few have filed complaints about rates to either the ICC or the Board
Complained About   over the past 20 years. From 1980 through 1989, the ICC received 130 rate
Rail Rates         complaints. The number of rate complaints has declined almost every year
                   since 1980, and as figure 3.1 shows, two shippers filed rate complaints in
                   1998.2




                   1
                    As of Jan. 1, 1990, 17 rate complaints were active with the Board’s predecessor. Between Jan.1, 1990
                   and Dec. 31, 1998, shippers filed 24 additional rate complaints with the Board or its predecessor.
                   2
                    In 1981, shippers filed 864 rate complaints as a result of section 229 of the Staggers Act. This provision
                   gave shippers 180 days from Oct. 1, 1980, to challenge railroad rates in existence on that date. Rates
                   not challenged during this time period were presumed to be lawful and not subject to further challenge
                   through the ICC or in court. We did not include these complaints in our analysis because we could not
                   determine whether shippers would have filed these rate complaints in the absence of section 229 of
                   the Staggers Act.



                   Page 35                                              GAO/RCED-99-46 Railroad Rate Relief Process
                                           Chapter 3
                                           Decline in Complaints Filed, and Few Rates
                                           Have Been Found Unreasonable




Figure 3.1: Rate Complaints Filed With ICC/Board, 1980-98
Number of complaints
60



50



40



30



20



10



 0
                                                             90



                                                                          92




                                                                                              95



                                                                                                         97
     80




                                85
                82



                           84




                                           87



                                                       89




                                                                                        94
          81



                     83




                                     86



                                                 88




                                                                   91



                                                                                   93




                                                                                                   96



                                                                                                              98
     19



               19



                          19

                                19



                                          19



                                                      19

                                                            19



                                                                        19



                                                                                        19

                                                                                             19



                                                                                                        19
          19



                     19




                                     19



                                                19




                                                                  19



                                                                               19




                                                                                                   19



                                                                                                              19
                                           Source: Surface Transportation Board.




                                           According to a Board official, the decline in the number of rate complaints
                                           filed may be attributed to the growth in the number of private
                                           transportation contracts between railroads and shippers, as well as a
                                           significant general decline in railroad rates over the past 10 to 15 years.
                                           However, some of the rail shippers that responded to our survey indicated
                                           that the complexity of the rate complaint process also had influenced their
                                           decisions not to file rate complaints. As a result of the Staggers Rail Act of
                                           1980, railroads could establish rates through contracts with individual
                                           shippers rather than only through tariffs—predetermined rate schedules
                                           for particular routes—filed with the ICC. Contracts reflect negotiated
                                           agreements for rates and service levels tailored to the shippers’ needs. A
                                           1988 AAR survey found that 60 percent of all rail traffic was subject to
                                           private transportation contracts between the shippers and the railroads.
                                           By 1997, AAR found that the amount of rail traffic subject to a contract had



                                           Page 36                                           GAO/RCED-99-46 Railroad Rate Relief Process
                                            Chapter 3
                                            Decline in Complaints Filed, and Few Rates
                                            Have Been Found Unreasonable




                                            increased to 70 percent. In addition, according to the Board, the average
                                            inflation-adjusted class I railroad rate steadily declined 46 percent from
                                            1982 through 1996, perhaps also leading to a decline in the number of rate
                                            complaints. Of the 709 shippers that responded to our survey, 25 percent
                                            indicated that they found their freight rates reasonable and therefore
                                            found no reason to file a complaint. However, an estimated 75 percent of
                                            the remaining rail shippers that responded to our survey indicated that
                                            administrative and legal barriers in the rate complaint process may have
                                            precluded them from filing a complaint.

                                            Since 1990, 41 complaints have either been filed with or are pending
                                            before the ICC/Board. Shippers of bulk commodities like coal, grain and
                                            chemicals are highly dependent on rail for their transportation needs and
                                            filed the most rate complaints. Coal, grain, and chemical shipments
                                            constituted about 60 percent of total traffic on class I railroads in 1997,
                                            and accounted for 76 percent (31) of the complaints either pending or filed
                                            since January 1, 1990. Coal shippers alone filed 21 of the 41 complaints, as
                                            shown in figure 3.2.


Figure 3.2: 41 Complaints Pending or                                Coal
Filed Since January 1, 1990, by
Commodity




                                                                       21
                                                                                                                 Coal




                                                        6                                                        Chemical
                                                                                    10
                                                                                                                 Other
                                       Chemical                       4

                                                                                                  Other


                                                            Grain
                                                                                                                 Grain


                                            Source: GAO’s analysis of the Board’s information.




                                            Page 37                                              GAO/RCED-99-46 Railroad Rate Relief Process
                       Chapter 3
                       Decline in Complaints Filed, and Few Rates
                       Have Been Found Unreasonable




                       The six chemical and four grain complaints represented 24 percent of the
                       complaints either pending or filed since 1990. Commodities other than
                       coal, grain, and chemicals identified in these complaints include corn
                       syrup, sugar, pulpwood and woodchips, electric transformers, spent
                       nuclear fuel, railroad cars, and perlite rock. Appendix II contains a list of
                       the commodities associated with each complaint. Board officials believe
                       that the number of rate complaints from coal shippers will increase partly
                       because many long-term private transportation contracts between
                       railroads and utility companies are expiring and there may be disputes
                       regarding rates in the absence of contracts. According to the Board, coal
                       shippers have the most incentive for bringing a rate complaint because of
                       the large amount of dollars potentially in dispute. For example, in 1998,
                       the Board awarded the Arizona Public Service Company and PacifiCorp
                       over $23 million plus interest in their joint complaint against the Atchison,
                       Topeka, and Santa Fe Railway Company. In addition, the stand-alone cost
                       model is relatively less complicated to apply to coal shipments than it is to
                       other commodities, such as chemicals. Railroads usually transport coal
                       shipments between few origins and destinations—mainly between the coal
                       mine and the utility company’s generating plant—over a limited segment
                       of a railroad’s system. Chemical shippers, on the other hand, typically send
                       smaller shipments to many destinations. However, officials from the
                       Western Coal Traffic League stressed that bringing a rate complaint to the
                       Board is the last resort for a utility company because in addition to the
                       extremely high cost of bringing a rate complaint, the effort distracts from
                       and disrupts the company’s everyday operations.


                       The resolution of rate complaint cases has often taken a number of years
Resolving Rate Cases   under the standard guidelines. In some instances, complaints were
Can Take               prolonged because either the railroad or the shipper appealed an ICC/Board
Considerable Time      decision to a federal court, which subsequently remanded the complaint to
                       the agency for another review. Since 1990, the ICC/Board has completed 32
                       rate complaint cases. As table 3.1 shows, some complaints were resolved
                       in a few months, while others took more than 16 years. According to the
                       Board, some cases were lengthy because the standards were not in place
                       when the cases were filed and/or because of extensive litigation.




                       Page 38                                      GAO/RCED-99-46 Railroad Rate Relief Process
                                    Chapter 3
                                    Decline in Complaints Filed, and Few Rates
                                    Have Been Found Unreasonable




Table 3.1: Resolution of Rate
Reasonableness Decisions, 1990-98                                               Range of time
                                                                                for complaint         Average time for final decision
                                                          Number of             resolution                       (years)
                                    Commodity             complaints            (years)              Per complaint        Per case
                                                                a
                                    Coal                  18                    0.3 - 16.1           4.8                  3.9
                                    Chemicals             4                     0.7 - 2.7            1.5                  1.5
                                                            b
                                    Grain                 3                     15.1 - 16.4          16.0                 16.4
                                    Other                 7                     0.2 - 15.2           8.4                  8.4
                                    Pending               9                     Not applicable       Not applicable       Not applicable
                                    complaints
                                    Total                 41                    0.2 - 16.4           6.3                  5.1
                                    a
                                     ICC consolidated Increased Rates on Coal, Louisville and Nashville Railroad and Dayton Power
                                    and Light Co. v. Louisville and Nashville Railroad into a single proceeding. ICC also consolidated
                                    Bituminous Coal, Hiawatha, Utah to Moapa, Nevada and Aggregate Volume Rate on Coal, Acco,
                                    Utah to Moapa, Nevada into a single proceeding.
                                    b
                                     ICC consolidated these three grain complaints into a single proceeding—McCarty Farms v.
                                    Burlington Northern, Inc.

                                    Source: GAO’s analysis of the Board’s information.



                                    The time required for resolving a complaint varied by commodity. Three
                                    complaints filed by grain shippers, which were combined into a single
                                    proceeding, McCarty Farms, Inc. et al. v. Burlington Northern, Inc., took
                                    about 16 years to resolve. According to Board officials, this is principally
                                    because the complaints were filed before the ICC had developed rate
                                    standards and because the parties challenged various ICC and Board
                                    decisions in court. In 1980, about 10,000 Montana farmers and owners of
                                    grain elevators (the McCarty Farms Group) filed a class action lawsuit
                                    against the railroad in federal district court, challenging Burlington
                                    Northern’s rates on wheat shipped from Montana to Oregon and
                                    Washington State. After numerous reviews by the agency and the courts,
                                    the Board found the rates not to be unreasonable in August 1997 and
                                    discontinued the proceedings. In October, 1997, the McCarty Farms Group
                                    appealed the Board’s decision to the U.S. Court of Appeals for the District
                                    of Columbia Circuit. In October 1998, the court upheld the Board’s
                                    decision that the rates were not unreasonable.3 (See app. I for a more
                                    detailed description of the McCarty Farms case.)



                                    3
                                     McCarty Farms, Inc. et al. v. Surface Transportation Board, 158 F. 3d 1294 (D.C. Cir. 1998). The court
                                    held that it did not have jurisdiction over claims that were initially raised by the McCarty Farms
                                    Group’s complaint in federal district court and subsequently referred to the ICC. Accordingly, the
                                    court did not rule on the Board’s decision as it pertained to those claims. The district court has since
                                    dismissed its portion of the case at the request of the parties.



                                    Page 39                                              GAO/RCED-99-46 Railroad Rate Relief Process
                         Chapter 3
                         Decline in Complaints Filed, and Few Rates
                         Have Been Found Unreasonable




                         Coal and chemical complaints have generally been resolved more quickly;
                         average reviews have taken about 5 and 2 years respectively. However, the
                         ICC/Board dismissed some of these complaints in less than 12 months.4 For
                         example, the Board dismissed one coal complaint—Omaha Public Power
                         District v. Union Pacific Railroad Company—after 4 months. Two of the
                         nine pending cases—all concerning disputes over the same traffic—have
                         been active for over 16 years. The Department of Energy and the
                         Department of Defense filed complaints against various railroads in 1978
                         and 1981 regarding the transportation of spent nuclear fuel. The ICC found
                         that the railroads’ practice of requiring special trains to handle this
                         material was unreasonable. On appeal, the court held that the agency must
                         rule on the rate levels instead. The Board told the parties that it will not
                         resolve these cases until it receives information on their progress in
                         settling the dispute. If the information provided shows that there is little or
                         no prospect that the parties will resolve these complaints, the Board will
                         move the case forward. (See app. II for a complete list of the complaints
                         pending with the Board.) Of the complaints we reviewed, those filed after
                         January 1, 1990, were generally completed more quickly.


                         Many complaints filed or pending since January 1990 did not complete the
Few Cases Complete       entire rate complaint process. Eighteen of the 41 cases we reviewed did
the Rate Complaint       not complete the rate complaint process. In these cases, the shippers
Process                  reached agreements with the railroads and requested that the ICC/Board
                         dismiss the complaint. The ICC/Board dismissed many complaints in the
                         early phases of the rate complaint process without rendering a decision
                         regarding whether the rates were reasonable. Ten of the 41 complaints
                         reached the rate-reasonableness phase of the process. In two cases, the
                         rates were found to be unreasonable, and in six cases, they were found to
                         be reasonable. While the ICC or the Board considered rate reasonableness
                         in the remaining two cases, the complaints were not ultimately resolved on
                         this basis but were dismissed at the request of the shippers.


Shippers and Railroads   Often, a shipper files a rate complaint with the ICC/Board after the shipper
Negotiated Settlements   and railroad have tried to negotiate terms for rail rates and service.
Outside the Rate         According to Western Coal Traffic League officials, shippers initially use
                         the leverage of possible or actual outside competition and negotiations to
Complaint Process        obtain favorable rates. If this does not work, the shipper’s last opportunity
                         to try and obtain lower rates is to file a complaint. The ICC/Board

                         4
                          The ICC and the Board dismissed the four chemical complaints either because the shipper and
                         railroad resolved the dispute outside of the rate complaint process or for lack of jurisdiction over the
                         disputed rate.



                         Page 40                                              GAO/RCED-99-46 Railroad Rate Relief Process
                                      Chapter 3
                                      Decline in Complaints Filed, and Few Rates
                                      Have Been Found Unreasonable




                                      dismissed 18 of the 41 complaints because the shipper and railroad
                                      reached a settlement. (See fig. 3.3)


Figure 3.3: Status of 41 Rate
Complaints, as of December 31, 1998                                                          Infrastructure ($98 million)

                                                                                             7%
                                                                                             Water quality/habitat protection
                                                                                             ($59 million)

                                                                                             4%
                                                                                             Information management ($32
                                                                                             million)


                                                         •
                                                    •


                                            • 11%                    32% •                   Area/natural resources
                                                                                             management ($291 million)


                                            15%
                                              •


                                                             31% •                           Land acquisition ($274 million)




                                                                                             Science ($128 million)



                                      Source: GAO’s analysis of the Board’s information.




                                      In some instances, the shippers requested that the Board dismiss the
                                      complaint because they had resolved their differences and entered into a
                                      transportation contract with the railroad. Board officials stated that in this
                                      instance they view a dismissal as a success because the parties were able
                                      to settle their differences. According to a Board official, however, the
                                      shippers are not required to provide details of any agreement or settlement
                                      they may reach with the railroad in requesting dismissal. Therefore, we
                                      were only able to determine that five of these dismissals were most likely




                                      Page 41                                              GAO/RCED-99-46 Railroad Rate Relief Process
                           Chapter 3
                           Decline in Complaints Filed, and Few Rates
                           Have Been Found Unreasonable




                           due to private transportation contracts. (See table II.1 in app. II for a full
                           list of complaints that the ICC/Board dismissed at the shipper’s request.)


Outcome of Nonnegotiated   In two cases, the Board found the railroads’ rates to be unreasonable and
Complaints                 awarded the shippers reparations. The Board is still examining nine rate
                           cases. In other cases, the Board found that relief was not appropriate
                           under the law. The ICC/Board dismissed seven complaints in favor of the
                           railroad because the railroad was not market dominant or because the
                           rates were reasonable. The ICC/Board dismissed five complaints primarily
                           because the rate was either subject to a contract or the remedy that the
                           shipper wanted was not available. (See tables II.2 through II.5 in app. II for
                           a complete list of these complaints.)

                           In one case in which the Board found the rates unreasonable, Arizona
                           Public Service Company and PacifiCorp (jointly, Arizona) had filed a
                           complaint with the ICC challenging the Atchison, Topeka, and Santa Fe’s
                           rates for transporting coal from New Mexico to Arizona for electric power
                           generation. The railroad asserted that it faced a hybrid form of product
                           and geographic competition because the electric utility—Arizona—could
                           produce power or purchase power elsewhere on the nation’s electric
                           power grid. However, the Board disagreed, citing significant costs and
                           barriers to Arizona’s obtaining substitute power and found that the
                           revenues produced by the railroad’s rates exceeded the revenues that
                           would be required by Arizona’s hypothetical railroad. The Board awarded
                           the utility more than $23 million plus interest and prescribed future rates.
                           In the second case, West Texas Utilities Company filed a complaint with
                           the ICC challenging Burlington Northern’s rates for transporting coal from
                           Wyoming to Texas. In this case, the railroad also alleged that it faced a
                           hybrid form of product and geographic competition because the electric
                           utility could either produce or purchase power elsewhere. The Board
                           disagreed and found that Burlington Northern dominated the market with
                           respect to the coal shipments at issue. The Board found the rates
                           unreasonable and awarded West Texas more than $11 million plus
                           interest.

                           The Board is currently reviewing nine rate complaints, including three
                           filed by the Department of Energy and the Department of Defense against
                           the numerous railroads that transport spent nuclear fuel. While these
                           complaints involve the same traffic, the Board has not officially
                           consolidated these three complaints into a single proceeding. The Board is
                           also considering three complaints filed by electric utility companies for



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                                        Decline in Complaints Filed, and Few Rates
                                        Have Been Found Unreasonable




                                        the transport of coal, one complaint regarding the transport of grain, and
                                        two chemicals complaints. (See table II.5 in app. II for a complete list of
                                        these complaints.)


Many Complaints Ended                   Many of the complaints did not go through the entire rate complaint
During Early Phases of the              process. These complaints usually ended after reaching the discovery
Rate Complaint Process                  phase (where the railroad and shipper disclose information) or the
                                        evidentiary phase (where the railroad and shipper file evidence with the
                                        Board). As table 3.2 demonstrates, the ICC/Board dismissed 14 complaints
                                        during or prior to the evidentiary phase and 2 complaints during the
                                        evidentiary phase.

Table 3.2: Phase in Which the Parties
Settled or the ICC/Board Dismissed                                                            Number of complaints dismissed during
Complaint                               Rate reasonableness phases                                                           phase
                                        Settled or dismissed before submission of
                                        evidence                                                                                            12
                                        Settled or dismissed during evidentiary
                                        phase                                                                                                2
                                        Settled or dismissed after evidentiary record
                                        closes                                                                                               2
                                        Settled or dismissed after
                                        market-dominance determination                                                                       7
                                        Settled or dismissed during or after rate
                                        reasonableness determination                                                                         8
                                        Rate relief granted                                                                                  2
                                        Other pending complaints                                                                             9
                                        Total                                                                                               42a
                                        a
                                         The table totals 42 because the Board dismissed a complaint for one of four shippers involved in
                                        a case after the market-dominance determination. The Board dismissed the complaint for the
                                        other three shippers after they had made tentative rate-reasonableness findings.

                                        Source: GAO’s analysis of the Board’s information.



                                        Seventeen of the 41 complaints were active after the ICC/Board closed the
                                        evidentiary record. Of these complaints, the ICC/Board dismissed seven
                                        after it had examined market dominance and eight during or after a review
                                        of the reasonableness of the rates. The ICC/Board found that the rates in
                                        six of these eight cases were reasonable; the other two complaints were
                                        ultimately dismissed at the shippers’ requests. In two cases, the Board
                                        found rates to be unreasonable and awarded reparations to Arizona Public
                                        Service and PacifiCorp (jointly, Arizona) and West Texas Utilities.




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                     In commenting on a draft of this report, the Board indicated that
Agency Comments      additional factors beyond those cited in this chapter can affect the time
and Our Evaluation   required to complete a rate complaint. The Board noted that some cases
                     were protracted for two important reasons: The rate complaints were filed
                     before the Board’s predecessor had developed rate standards and/or the
                     parties took various Board decisions to court. Delays in deciding rate
                     cases in the 1980s, for example, were a transitional problem resulting from
                     the process of developing and interpreting rate reasonableness standards.
                     The Board noted that cases initiated in the 1990s were handled
                     significantly faster. In addition, the Board concluded that our approach of
                     counting consolidated rate complaints separately overstated the average
                     time required to resolve rate complaints and suggested that we also
                     include an analysis of what the average time would be to resolve the cases
                     separately.

                     We agree with the Board’s comments and added information in this
                     chapter to reflect the other factors that can affect the time required to
                     complete a rate complaint case. We have also added information on the
                     average time to complete a rate complaint on the basis of the separate
                     cases.




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                       In response to our survey of shippers and discussions with commodity
                       shipping associations, shippers cited several reasons for not using the
                       standard rate complaint process but particularly emphasized its time, cost,
                       and complexity. Shippers suggested methods to simplify the filing process
                       and thereby reduce the time and costs involved. Furthermore, they
                       indicated that increasing competition in the railroad industry would lower
                       freight rates and diminish the need to file rate complaints. In response to
                       our survey, the nine class I railroads stated that maintaining the current
                       regulatory environment is crucial to retaining and improving the financial
                       stability of the railroad industry. They stated that the current process for
                       deciding rate complaints, while not perfect, is an appropriate system in the
                       current regulatory environment. Furthermore, the railroads contend that
                       adequate competition currently exists and that their ability to determine
                       freight rates in a competitive market is key to the railroad industry’s
                       financial stability.


                       On the basis of our survey responses, we estimate that 25 percent of the
Time, Cost, and        rail shippers consider their rates to be reasonable. Our survey responses
Complexity Keep        suggest that the remaining 75 percent believe that their rates were
Shippers From Filing   unreasonable and that barriers kept them from filing a complaint under
                       the standard procedures.1 These shippers found the rate complaint
Rate Complaints        process to be time-consuming, costly, and complex. They cited the legal
                       costs associated with filing a complaint, the complexity of the process, the
                       time involved in seeking relief, and the overall costs associated with
                       developing their cases as the most significant barriers to seeking relief
                       with the Board.

                       During our interviews with shipping association officials, they highlighted
                       several potential barriers that could keep shippers from filing complaints
                       under the standard procedures. On the basis of our questionnaire
                       responses, we estimate that 178 shippers (25 percent) of the 709 shippers
                       that use rail consider their freight shipping rates to be reasonable and
                       therefore had no reason to file a complaint. We asked the remaining 531
                       shippers (75 percent) to indicate whether the barriers that the shipping
                       associations had highlighted were a reason for not filing a rate complaint.2
                       Table 4.1 shows the barriers we presented to these shippers and the


                       1
                        Our survey did not differentiate between the standard and simplified rate processes. Some questions
                       concerning possible barriers and improvements to the current rate process focused on the standard
                       process. No cases have been filed under the simplified procedures.
                       2
                        Those that did not consider their rates to be reasonable were (by commodity) grain (74 percent), coal
                       (83 percent), and chemicals and plastics (70 percent).



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                                         percent of the 531 shippers that found the barriers to be a major or
                                         moderate reason for not filing a rate complaint.

Table 4.1: Percentage of Rail Shippers
Responding That a Barrier Was a                                                                  Chemicals and
Major or Moderate Reason for Not                                      Grain               Coal         plastics
Filing a Rate Complaint                  Barrier                   shippers           shippers       shippers              Totala
                                         Legal costs
                                         associated with
                                         filing complaints
                                         outweigh the
                                         benefits                         78                65               76               76
                                         The rate
                                         complaint
                                         process
                                         is too complex                   78                73               75               76
                                         Rate complaint
                                         process takes
                                         too long                         74                86               64               74
                                         Developing the
                                         stand alone-cost
                                         model is too
                                         costly                           72                76               64               72
                                         The STB will most
                                         likely decide on
                                         behalf of the
                                         railroads, so it is
                                         not worth our
                                         effort to file a
                                         complaint                        69                81               61               69
                                         Too hard to get
                                         necessary data
                                         from railroads
                                         (discovery
                                         process)                         69                67               55               67
                                         Consulting costs
                                         (other than legal)
                                         associated with
                                         filing complaints
                                         are too high                     68                55               64               66
                                         Responding to
                                         railroad requests
                                         for data is difficult
                                         and time
                                         consuming                        68                59               63               66
                                         Fear of reprisal
                                         from railroads                   64                55               44               60
                                                                                                                     (continued)




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                                                              Chemicals and
                                Grain                Coal           plastics
Barrier                      shippers            shippers         shippers                   Totala
The STB filing fee
is cost prohibitive                  62                  44                  42                    57
Other parts of the
complaint
process are too
costly                               40                  28                  41                    39

Note: Each percentage represents rail shippers who expressed an opinion regarding a particular
barrier. Some shippers did not express an opinion for some barriers. App. III lists the sampling
error and the number of missing or “Don’t Know” responses associated with these estimates.

Source: GAO’s survey of railroad shippers.



While rail shippers found most of the barriers cited in our survey to be
significant, they found some to be more significant than others.3 Generally,
shippers found cost, complexity, and time to be significant barriers that
kept them from filing standard rate complaints. Seven out of 10 shippers
responding to our survey cited the following reasons as important barriers
to filing a complaint: the legal costs for filing a complaint, the costs
associated with developing a stand-alone cost model, the length of the rate
complaint process, and the overall complexity of the process. In addition,
6 out of 10 shippers responding indicated that high consulting costs, the
difficulties of the discovery process, the high level of the filing fee, or fear
that railroads might retaliate against them were important reasons for not
filing rate complaints under the standard process.

The barriers most significant to shippers as a whole are not necessarily the
most significant barriers for shippers in each commodity group. Shippers
of specific commodities (grain, coal, chemicals, and plastics) have unique
characteristics that may have affected their responses. For example, coal
shippers make very large, routine shipments throughout the course of the
year and often have few alternatives to using rail; thus, rail shipping costs
are a significant portion of their total shipping costs. Coal shippers
believed that the most significant barrier is the time involved in filing a
complaint. This is because coal shippers would have to continue to pay the
disputed rate over the length of the rate complaint process. However, they
can obtain reparations plus interest if the rate is found to be unreasonable.
Grain shippers cited legal costs as the most significant barrier. Grain

3
 Our analysis did not seek to rank the importance of each barrier but rather to show the relative
significance to shippers. While a distinction can be drawn between the responses by commodity, one
cannot be drawn between barriers because of the similarity in responses and the sampling error
associated with each response.



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shippers make the highest volume of their shipments during the harvest
season and generally have more transportation options available to them.
As a result, they spend relatively less on rail shipping, and therefore the
costs of a complaint may offset or exceed the potential benefits of filing.

The shippers’ concerns identified in our survey are similar to those we
found in 1987, when we examined the rate complaint process and
contacted shippers that had filed complaints with the ICC.4 At that time, we
found that shippers were generally dissatisfied with the rate complaint
process. Shippers were concerned about the complexity of the stand-alone
cost model, the costs and time involved in adjudicating a rate complaint,
the lack of clear criteria for determining rate reasonableness, and fear that
railroads would most likely win any rate complaint case. Of the shippers
we contacted in 1987 that used the process, 53 percent indicated that they
would probably use the complaint process again if they believed their
rates to be unreasonable. This compares to 68 percent of rail shippers in
our 1998 survey who responded that they would probably or definitely use
the rate complaint process again. This could indicate that, while some
shippers are dissatisfied with the rate relief process, they may recognize it
as their only alternative for seeking relief from unreasonable rates. Board
officials provided an alternative interpretation of the results. They stated
that shippers may recognize that the process has been improved and that it
provides a clear basis for leverage in negotiating private contracts or
obtaining relief from unreasonable rates.

Railroads disagree with shippers about the extent to which the rate
complaint process is burdensome. In responding for the class I railroads,
AAR stated that it understood that the rate complaint process can be
difficult for shippers and noted that barriers should not be an obstacle for
seeking rate relief. AAR and its member railroads stated that while they
believed that the process was generally suitable for determining rate
reasonableness, they would not object to the Board adopting more
efficient procedures for rate complaint cases. The railroads, however,
want the standard for determining market dominance to remain. This is
generally the same position that the railroads held in 1987, when AAR
officials stated that the railroads were generally satisfied with the standard
rate complaint process and viewed the criteria for jurisdictional threshold,
market dominance, and rate reasonableness as clear. In our discussions at
that time, railroad officials said they found the process suitable for
adjudicating larger rate complaints. However, representatives from five of

4
 Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation of Rail Rates
(GAO/RCED-87-119, Sept. 9, 1987).



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                     the eight railroads we contacted stated that contract negotiations, rather
                     than the potential for being involved in litigation over published rates, was
                     the preferred method of setting rates. One railroad official noted that it
                     was not in the railroad’s interest to charge a rate that a shipper would
                     challenge and that contract rates were preferred for their predictability
                     and stability.

                     The Board has conducted hearings to identify barriers to the rate relief
                     process. On April 17, 1998, the Board instituted a forum for shippers and
                     railroads to voice their opinions on a variety of rail access and competition
                     issues. Board officials generally support any action that reduces barriers
                     while maintaining the integrity of the process. The Board asked railroads
                     and shipper groups to work together to find solutions outside of the
                     regulatory framework—an environment that the Board contends is a
                     better framework to resolve private-sector disputes. In addition, the Board
                     eliminated product and geographic competition from its
                     market-dominance analysis. The railroads have filed a petition requesting
                     for the Board’s reconsideration of its decision.


                     In our discussions with shippers’ associations and AAR officials, we
Challenges in        identified potential options for addressing shippers’ concerns about the
Improving the Rate   rate complaint process. In our surveys, we asked shippers and railroads to
Complaint Process    rate methods that would improve the rate complaint process and address
                     shippers’ concerns. In response to options for improving the rate
                     complaint process, shippers supported methods to simplify and accelerate
                     the process and reduce the costs they incur when filing rate complaints.
                     The class I railroads contend that the current rate complaint process is
                     well suited to determining rate reasonableness in larger cases and
                     therefore saw no need for substantive changes to the standard process.
                     Board officials stated that in trying to improve the rate complaint process,
                     they must balance the needs of shippers seeking relief from unreasonable
                     rates with the railroads’ need for adequate revenues to continue operating.

                     We estimate that nearly 64 percent of the 709 rail shippers believed that
                     the standard rate complaint process should be changed to a very great or
                     great extent and over 86 percent believed that the process should be
                     changed to at least a moderate extent. Our survey asked the 709 rail
                     shippers to identify what changes should be made to the rate complaint
                     process to make it more useful to them. Table 4.2 lists the options we
                     presented to shippers for improving the rate complaint process. The
                     percentages, for all shippers and by commodity group, indicate the



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                                         proportion of shippers that indicated that the options were either
                                         extremely or very important.

Table 4.2: Percentage of Rail Shippers
Responding That Options for              Suggestions for
Improving the Rate Complaint Process     improving the                                           Chemicals and
Were Extremely to Very Important         rate complaint               Grain               Coal         plastics
                                         process                   shippers           shippers       shippers              Total
                                         Shorten STB’s
                                         time limits for
                                         deciding rate
                                         relief cases
                                         (currently, the
                                         guideline is no
                                         more than 16
                                         months)                          76                77               73               76
                                         Reduce or
                                         eliminate the
                                         complaint
                                         fees that
                                         shippers must
                                         pay in order to
                                         file a complaint
                                         with the STB                     68                42               56               63
                                         Simplify the STB
                                         requirement to
                                         prove market
                                         dominance by
                                         eliminating the
                                         product and/or
                                         geographic
                                         competition
                                         criteriaa                        57                82               63               62
                                         Use mandatory
                                         binding
                                         arbitration
                                         between
                                         shippers and
                                         railroads to
                                         resolve rate
                                         disputes                         67                30               41               58
                                         Lower STB’s
                                         jurisdictional
                                         threshold from
                                         the current level
                                         of 180 percent of
                                         revenue-to-
                                         variable cost                    51                67               47               53
                                                                                                                     (continued)




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                         Suggestions for
                         improving the                                                  Chemicals and
                         rate complaint                  Grain                 Coal           plastics
                         process                      shippers             shippers         shippers                    Total
                         Increase the use
                         of voluntary
                         binding
                         arbitration
                         between
                         shippers and
                         railroads to
                         resolve rate
                         disputes                             58                  30                   37                     52
                         Use mandatory
                         arbitration with
                         nonbinding
                         results                              20                    5                   8                     16

                         Note: Each percentage represents rail shippers that expressed an opinion regarding a particular
                         suggestion. Some shippers did not express an opinion for some suggestions. There is a sampling
                         error associated with these estimates. App. III lists the sampling error and the number of missing
                         or “Don’t Know” responses associated with these estimates.
                         a
                          The Board eliminated product and geographic competition after shippers responded to the
                         survey.

                         Source: GAO’s survey of railroad shippers.



                         Table 4.2 shows that reducing the time involved in filing and deciding a
                         case is generally most important to shippers. In general, the options most
                         favored by shippers relate directly to reducing the time involved in case
                         decisions, reducing the costs involved in filing a complaint, and
                         eliminating product and geographic competition criteria. According to
                         Board officials, some of the options presented in table 4.2 are beyond the
                         Board’s ability to implement.


Shortening the Time to   We estimate that about 76 percent of rail shippers believed that shortening
Decide Rate Complaints   the time involved in filing and completing a complaint would improve the
                         rate complaint process. Although a shipper would obtain reparations, with
                         interest, for rates paid during the complaint process if the rate is
                         eventually found to be unreasonable, the shipper must continue to pay the
                         higher rate until the case is resolved.

                         The railroads recognize that the standard rate complaint process takes
                         time and agree that the Board should pursue changes to shorten the time
                         involved and reduce the barriers that shippers face. The railroads did not




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                             make any specific recommendations to address timeliness. They said that
                             they stand ready to work with shippers and the Board to reduce the
                             barriers inherent in the process but seek to maintain the process’s
                             effectiveness. While the railroads recognize shippers’ concerns, they
                             contend that the Board’s process is well suited to determining rate
                             reasonableness.

                             The shippers’ concerns about the timeliness of the rate complaint process
                             may partly be due to the ICC’s and the Board’s experience with rate
                             complaint cases filed or pending since 1990. As discussed earlier, the
                             elapsed time for such cases ranged from a few months to about 16 years.
                             This historical record may have affected shippers’ calls for faster rate
                             complaint decisions. The Board has established an expedited procedural
                             schedule designed to ensure that cases under the standard guidelines are
                             completed within 16 months. As of January 1999, no cases had been
                             decided under the expedited procedural schedule.


Reducing or Eliminating      The current filing fee for complaints filed under the standard guidelines is
the Board’s Complaint Fees   $54,500.5 The fee is substantially less for cases under the simplified
                             guidelines ($5,400).6 We estimate that about 63 percent of the rail shippers
                             believe that reducing or eliminating the Board’s filing fee is an important
                             step toward improving the rate complaint process. While a majority of
                             grain, chemical and plastics shippers concurred in this suggestion, we
                             estimate that only 42 percent of coal shippers cited the need to eliminate
                             the fee. The $54,500 filing fee may not be a determining factor in large coal
                             complaint cases where the reparations sought are measured in millions of
                             dollars. However, it can present a barrier to small grain shippers whose
                             rail shipping costs constitute a smaller portion of their total shipping costs
                             and where the damages sought are much lower.

                             The class I railroads did not express an opinion regarding the Board’s
                             filing fee. In a 1996 decision, the Board noted that it was sympathetic to
                             shippers’ concerns that increasing the filing fee could impede the filing of
                             complaints.7 In an effort intended to lessen the burden of the fees, the
                             Board tentatively set the complaint filing fee at 10 percent of the full cost

                             5
                             The Board established this filing fee under the governing statute and Office of Management and
                             Budget guidelines.
                             6
                              At the time we surveyed the shippers, the filing fee was $27,000 for the cases under the standard
                             guidelines and $2,600 for the cases under the simplified guidelines.
                             7
                             Ex Parte 542, Regulations Governing Fees for Service Performed in Connection With Licensing and
                             Related Services (Aug. 14, 1996).



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                             of adjudicating a complaint and proposed increasing the fee 10 percent
                             annually until the fully allocated cost level was achieved. In 1998, the
                             Board chose to increase the fee in proportion to increases in its costs
                             rather than by the annual 10-percent adjustment. A report by DOT’s Office
                             of Inspector General recommended that the Board either annually
                             increase the fee to recover the full cost of complaint adjudication or
                             convene a new proceeding to determine whether such increases are
                             feasible and warranted.8 In February 1999, the Board updated its fee
                             schedule and adjusted its complaint filing fees. As a result, the fee for
                             filing a standard rate complaint increased from $27,000 to $54,500. The
                             new fee represents 20 percent of the Board’s fully allocated costs.


Simplifying or Eliminating   According to our survey responses, an estimated 62 percent of the rail
Product and Geographic       shippers believed that eliminating the product and geographic competition
Competition Criteria         criteria would improve the rate complaint process. During discovery,
                             railroads request operating information from shippers in order to prove
                             the existence of product and geographic competition. However, shippers
                             stated that railroads use these discovery requests to delay the process. In a
                             recent rate complaint case, FMC Corporation and FMC Wyoming
                             Corporation v. Union Pacific Railroad Co., the Board agreed with the
                             shippers’ contention. In addition, in December 1998, the Board issued a
                             decision revising its procedures for market-dominance determinations and
                             eliminated the consideration of product and geographic competition.
                             However, the railroads filed a petition for reconsideration of the petition.

                             In comments submitted for the Board’s proceeding on product and
                             geographic competition, the National Industrial Transportation League9
                             noted that the consideration of product and geographic competition
                             unduly complicated the Board’s market-dominance determination. The
                             League assembled and analyzed the disclosure requests that railroads
                             served on the complaining shippers in seven rate cases. On the basis of its
                             analysis, the League found that railroads submitted hundreds of questions
                             to the shippers that required hundreds of hours of effort by lawyers,
                             consultants, and staff. In addition, many of the questions asked for
                             multiple pieces of information and thus complicated the shippers’ efforts
                             to answer the questions. The League contended that market-dominance



                             8
                              Report on Surface Transportation Board’s User Fees, U.S. Department of Transportation, Office of
                             Inspector General (CE-1999-021, Nov. 17, 1998).
                             9
                              The National Industrial Transportation League is a voluntary organization of shippers and groups and
                             associations of shippers conducting industrial and/or commercial enterprises in the United States.



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                        discovery of this magnitude constituted a formidable barrier for the
                        shippers.

                        The railroads contended that, in order for them to successfully challenge a
                        complaint, product and geographic competition tests are crucial to
                        showing that sufficient alternatives exist for the shipper. The railroads
                        acknowledged that the product and geographic competition criteria can
                        make it unduly burdensome to litigate rate reasonableness cases before
                        the Board.10 They contended that a core premise of the economics of
                        competition is that market power can be constrained by a range of
                        competitive forces, including product and geographic competition. The
                        railroads agreed, however, that procedural obstacles and the cost of
                        litigation should not be barriers to obtaining regulatory relief when such
                        relief is warranted. After considering both the shippers’ and railroads’
                        perspectives, the Board eliminated product and geographic competition
                        criteria from market-dominance determinations. The Board is now in the
                        process of reviewing the railroads’ petition for reconsideration.


Using Arbitration and   We estimate that from 52 to 58 percent of the rail shippers we surveyed
Mediation               support certain types of arbitration as an alternative to bringing a
                        complaint before the Board. Our estimates show that 58 percent of the rail
                        shippers supported mandatory binding arbitration; 52 percent favored
                        voluntary arbitration; and 16 percent supported voluntary arbitration with
                        nonbinding results. Shippers’ support for arbitration as an alternative to
                        the rate complaint process not only differed by the type of arbitration
                        proposed but by the type of commodity shipped. Grain shippers generally
                        favored arbitration more than coal, chemicals, and plastics shippers. In
                        October 1998, the National Grain and Feed Association’s (NGFA) signed an
                        agreement with the class I railroads to submit certain disputes to
                        mandatory, binding arbitration. While rate disputes are excluded from the
                        mandatory aspect of the agreement, they can be mediated on a voluntary
                        basis.

                        AAR  officials point to the NGFA arbitration agreement as evidence that the
                        railroads are willing to work with shippers to address their concerns.
                        Furthermore, the officials added, the agreement is a solution that
                        addresses shippers’ concerns outside of the regulatory framework—at the
                        Board’s request. As a result of April 1998 hearings, the Board asked
                        shippers and railroads to work together to recommend solutions that

                        10
                         The Surface Transportation Board Ex Parte No. 627, Market-dominance Determinations: Product and
                        Geographic Competition.



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                           would improve the existing process. The railroads cite the arbitration
                           agreement as evidence that they are seeking to address shippers’
                           concerns. Board officials generally support any settlement agreements
                           between shippers and railroads that reduce the burdens that shippers face
                           resulting from the rate complaint process.

                           It is too early to tell whether the use of mediation to resolve rate disputes
                           between shippers and their railroads will have a positive impact. As of
                           November 1998, no rate disputes had been mediated under the process.
                           Furthermore, the mediation agreement only extends to NGFA members, not
                           to nonmembers and shippers of other commodities. The mediation
                           process, if successful, could reduce the number of complaints. Board
                           officials note that railroads and shippers currently have the option of
                           agreeing to voluntary mediation or voluntary arbitration of a dispute.
                           Thus, no regulatory or legislative action is required to use such alternative
                           dispute resolution procedures. In addition, Board officials do not believe it
                           has the authority to require mandatory (nonconsensual) arbitration.


Lowering the Board’s       Some shippers suggested that the Board’s current statutory jurisdictional
Jurisdictional Threshold   threshold for rate reasonableness complaints is too high and that a rate
                           that is below 180 percent of a railroad’s variable cost of transporting the
                           traffic can still be unreasonable. We estimate that about 53 percent of the
                           rail shippers believed that lowering the statutory threshold for determining
                           Board jurisdiction would improve the rate complaint process. Of those
                           who suggested a different jurisdictional threshold, the average suggested
                           threshold was 118 percent, while the most common suggestion was
                           100 percent. However, because of the large percentage of shippers that did
                           not answer the question, few conclusions about the jurisdictional
                           threshold can be drawn.

                           AAR  stated that the current revenue-to-variable-cost ratio of 180 percent is
                           an effective and appropriate level for a jurisdictional threshold. One AAR
                           official stated that 180 percent, on average, was not significantly greater
                           than the breakeven point for all railroad traffic. AAR cited past Board
                           decisions showing that rates greater than 180 percent of variable costs
                           were found to be reasonable. AAR is further concerned about some
                           shippers’ proposals suggesting that the Board should consider rates in
                           excess of 180 percent to be a demonstration of market dominance. The
                           railroads contend that they would not be able to make the capital
                           improvements necessary to meet current and future demand and earn a




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                         Possible Solutions




                         fair return on that investment without being able to set differential prices
                         and, when necessary, charge rates in excess of 180 percent.

                         Board officials told us that because the jurisdictional threshold is
                         legislatively set, the Board has not initiated a proceeding to consider
                         whether it should be reduced to a level below 180 percent. Board officials
                         also stated that legislative action to reduce the jurisdictional threshold
                         could lower rates that the Board believes are at reasonable levels as a
                         result of competition, involve the Board in reviewing rates that are not
                         unreasonable, and result in the Board’s needing more staff and resources
                         to accommodate a potential increase in rate complaint cases.


                         While shipper groups suggest that improving the rate complaint process
Prospects for            would reduce the barriers they face when filing rate complaints, they
Increasing               contend that increased competition in the railroad industry would do
Competition in the       more—it would lower rates and diminish the need for the process itself.
                         Shippers and railroads disagree, however, on the need to increase
Railroad Industry        competition. Shipper groups contend that increasing competition would
                         enhance the viability of their businesses, lower the freight rates they
                         currently pay, and diminish the overall need for the rate complaint
                         process. The class I railroads contend that competition is greater than it
                         has ever been and note that current rates are 46 percent lower than they
                         were in 1982. According to the railroads, the deregulation of the industry
                         has increased their revenue, decreased rates, and improved the overall
                         financial viability of the industry—all critical goals of the Staggers Rail
                         Act.

                         Some shippers want the ability to choose between railroads when there is
                         an option and contend that in certain situations, they are unable to do so.
                         In our discussions with shipper groups, the following five different
                         methods emerged as suggestions to increase competition in the railroad
                         industry:

                     •   require the Board to make a track segment owned by one railroad
                         available to competing railroads for a fee (grant trackage rights),
                     •   increase shippers’ access to smaller regional or shortline railroads,
                     •   require the Board to grant reciprocal switching agreements—making a
                         railroad transport the cars of a competing railroad, for a fee,




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                                             Barriers to the Rate Complaint Process and
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                                         •   reverse the Board’s “bottleneck decision,”11
                                         •   and allow shippers to dictate the routing of their shipments, including
                                             interchange points (commonly called open routing).

                                             Of the rail shippers that responded to our survey, an average of 436
                                             expressed opinions on different aspects of the rate complaint process, and
                                             an average of 567 expressed opinions on increasing competition in the
                                             railroad industry. Table 4.3 shows the options we presented to shippers
                                             and their response. The percentages reflect the number of shippers that
                                             responded that the option was extremely to very important. We did not
                                             analyze the implications for implementing these options or the effects
                                             these options would have on shippers or the railroad industry.

Table 4.3: Percentage of Rail Shippers
Responding That Increasing Aspects           Options to                                                          Chemicals and
of the Railroad Competition Was              increase                           Grain                  Coal            plastics
Extremely to Very Important                  competition                     shippers              shippers          shippers                       Total
                                             Require the
                                             Board to grant
                                             trackage rights if
                                             it is found that
                                             competition is not
                                             adequate                                79                    86                    86                    81
                                             Require railroads
                                             to increase rail
                                             access for
                                             shortline and/or
                                             regional railroads                      74                    75                    79                    75
                                             Require STB to
                                             grant reciprocal
                                             switching at the
                                             nearest junction
                                             or interchange
                                             upon reasonable
                                             request of a
                                             shipper or railroad                     72                    73                    84                    74
                                                                                                                                            (continued)



                                             11
                                               Some shippers have more than one rail carrier that serves them at their origin and/or destination
                                             points and have at least one segment of a shipping route that is served by a single railroad. Such a
                                             segment is referred to as a bottleneck. The Board’s bottleneck decision held that, under the current
                                             statute, if a railroad can provide single-line service from origin to destination, it is not required to quote
                                             a separate rate for the bottleneck portion of the route, except under certain circumstances. The U.S.
                                             Court of Appeals for the Eighth Circuit recently affirmed the Board’s decision that a bottleneck carrier
                                             generally need not quote a separate rate for the bottleneck portion of the route. However, the court
                                             declined to rule on the railroads’ appeal of the Board’s holding that separately challengeable
                                             bottleneck rates are required whenever a shipper has a contract over the non-bottleneck segment of a
                                             through movement. Mid-American Energy Co. v. Surface Transportation Board, No. 97-1081 (8th Cir.
                                             Feb. 10, 1999).



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Options to                                                   Chemicals and
increase                        Grain                Coal          plastics
competition                  shippers            shippers        shippers                    Total
Require railroads
to quote rates for
all route
“segments,”
including those
subject to
“bottleneck”
conditions                          67                  84                  78                    71
Allow shippers to
specify the
routing of their
shipments,
including
interchange
points (commonly
called open
routing)                            45                  42                  43                    49

Note: Each percentage represents rail shippers that expressed an opinion regarding a particular
option. Some shippers did not express an opinion for some options. App. III lists the sampling
error and the number of missing or “Don’t Know” responses associated with these estimates.

Source: GAO’s survey of railroad shippers.



Most shippers support four of the five options for increasing competition;
shippers gave less support to the option of allowing them to specify the
routing of their shipments. Of the 709 rail shippers we surveyed, an
estimated 81 percent said that the Board should grant trackage rights to
competing railroads to improve competition in the railroad industry.
Furthermore, our estimates show that from 71 to 75 percent favored
granting reciprocal switching agreements, increasing shortline railroad
access to the major railroads, and expanding the relief provided in the
Board’s bottleneck decision.

The railroads and AAR disagree with shippers on the need for additional
competition. AAR officials contend that the Board may currently grant
trackage rights and reciprocal switching where there are competitive
abuses. AAR sees additional efforts to impose reciprocal switching
agreements and trackage rights as a kind of “forced” access and greater
government regulation of shipping rates that would return the industry to
the poor financial condition it was in before deregulation. Furthermore,
AAR stated that these methods should be used only as a remedy when
needed, not as a means to create additional competition. Regarding
increased access to shortline railroads, AAR officials noted that the



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                     association has recently entered into a cooperative agreement with the
                     American Shortline and Regional Railroad Association. The 5-year
                     agreement seeks to improve customer service through a mutual car supply
                     policy, cooperative interchange service agreements, and reduced
                     switching barriers. AAR officials challenged the Board’s bottleneck decision
                     in court on the grounds that it went too far in requiring railroads to
                     provide separately challengeable rates in certain circumstances.

                     Board officials agreed with AAR that requiring trackage rights and
                     reciprocal switching agreements are remedies that are currently available
                     to shippers and that they have been used where appropriate. However,
                     Board officials stated that it is not authorized to grant trackage rights or
                     reciprocal switching as a remedy for a complaint about the reasonableness
                     of a rate because the only statutory remedies for an unreasonable rate are
                     reparations and rate prescriptions. The Board has approved certain
                     aspects of the AAR/ASLRRA cooperative agreement. With respect to the
                     bottleneck decision, Board officials stated that the decision was required
                     by existing law.

                     Board officials stated that the suggestions for increasing rail
                     competition—primarily through various means of “open access” to
                     private sector rail lines—would require substantial changes to the
                     underlying statute and could alter the shape and condition of the rail
                     system. They stated that many shippers assume that greater competition
                     would lead to lower rates and improved service, without the need for
                     differential pricing. Board officials cited a countervailing concern,
                     however, that not all shippers would benefit equally from such changes
                     and that the result could be a smaller rail system serving fewer shippers
                     and a different mix of customers than are served today. Officials contend
                     that many shippers (particularly small shippers on remote lines) might not
                     benefit from an “open access” system in the way that they might expect.


                     In commenting on a draft of this report, the Board noted that our survey
Agency Comments      did not distinguish captive shippers from those with competitive
and Our Evaluation   transportation alternatives, which by statute are not eligible to use the rate
                     complaint process. Thus, the Board indicated that the views of shippers
                     with competitive options are not instructive in assessing the effectiveness
                     of the rate complaint process. The Board also believed that we should
                     clarify that the survey asked shippers to comment on the standard process
                     and not the simplified procedures, even though the majority of the survey
                     respondents would likely qualify for the simplified procedures.



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We disagree that our survey should have sought comments only from
captive shippers. Such an approach would inject excessive bias into the
survey and would have produced results that represented only a small
segment of the shipper community. More importantly, we disagree that
only captive shippers would be in a position to provide informed analysis
of the rate complaint process and methods to improve it. The
consolidation in the railroad industry has made all shippers keenly aware
of their potential for becoming captive to only one railroad and equally
aware of the means available to seek recourse should they believe that
their rates are unreasonable. In addition, the Board’s position is contrary
to its standard practice of inviting comments from all parties during its
deliberations—deliberations that can vary from improvements to the rate
complaint process to more complex issues, such as railroad mergers and
consolidations. Therefore, we chose to survey all shippers and class I
railroads to garner their insights into the rate complaint process; to
discount any comment minimizes the views and opinions of the shipper
community.

Regarding the Board’s comment on distinguishing between the standard
and simplified procedures in the report and the survey, we have clarified
the report to better differentiate between the two processes. In addition,
when presenting survey results, we note that the survey refers to the
standard rate complaint process.

The Board stated that the results of our survey reflect the natural response
to be expected from customers when asked if they would like lower prices
and the ability to obtain lower prices through a faster, simpler, and less
costly process. In addition, the Board noted that the report did not address
whether the surveyed shippers were being charged higher rates than they
should reasonably be expected to pay. The Board indicated that, under the
demand-based differential pricing principles that the Congress has
determined should apply to the rail industry, it is not necessarily
unreasonable to have even one shipper paying a higher rail rate than a
comparable shipper with greater transportation alternatives.

The Board’s characterization of our survey is not accurate. We did not ask
shippers if they wanted lower prices. Rather, we sought to determine the
barriers shippers face in filing rate complaints with the Board and options
for improving this process. Furthermore, the survey was not limited to the
Board’s rate complaint process but also sought information about the
quality of service that shippers had received from 1990 to 1997. This
information is presented in our companion report. We agree with the



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Board’s comment that we did not address whether the surveyed shippers
were being charged higher rates than they should reasonably be expected
to pay. Because this is the stated purpose of the highly complex and
time-consuming rate complaint process, we defer these judgments to the
Board.

Finally, the Board believed we should more clearly identify the percentage
of shippers that expressed a specific opinion on issues presented in the
survey to avoid misleading interpretations of the survey results. For
example, because 25 percent of the surveyed rail shippers found their
rates to be reasonable, our presentation of the barriers shippers encounter
in filing a rate complaint should only be attributed to the remaining
75 percent of rail shippers responding. In addition, the Board noted that
those shippers that responded “Don’t Know” or that did not answer
specific questions should be included among those shippers that did not
assign great importance to the choices identified rather than excluded
from the total count.

We have clarified our presentation of the survey responses to distinguish
between those shippers that consider their rates to be reasonable and
other shippers. However, we disagree with the Board’s assertion that we
include “Don’t Know” or missing responses with those shippers that were
satisfied with certain aspects of the rate complaint process. We have no
basis for inferring such a precise meaning from the “Don’t Know” or
missing response categories. Such responses could mean that the
respondents did not understand the question, answered only those
questions for which they had a strong opinion, did not believe their
responses would be kept confidential, or erroneously skipped a question.
Accordingly, the report only tabulates data where the shippers’ responses
are clearly marked.




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Appendix I

McCarty Farms, Inc. et al. v. Burlington
Northern, Inc.

                In 1980, a group of approximately 10,000 Montana farmers and grain
                elevator operators (the McCarty Farms Group) filed a class action suit
                against Burlington Northern Railroad in the U.S. District Court for the
                District of Montana. McCarty Farms alleged that Burlington Northern
                Railroad was charging unreasonable rates for transporting wheat from
                Montana to ports in Oregon and Washington State for the 2-year period
                ending September 12, 1980. The district court referred the matter to the
                Interstate Commerce Commission (ICC) to determine the reasonableness
                of the rates. On March 27, 1981, McCarty Farms filed a complaint with the
                ICC challenging not only Burlington Northern’s wheat rates but also its
                rates for barley. McCarty Farms asked ICC to prescribe future rates. It did
                not limit its request for reparations to the 2-year period specified in its
                complaint filed with the district court. In a December 1981 decision, an
                administrative law judge found that (1) Burlington Northern had market
                dominance over wheat and barley traffic, (2) Burlington Northern’s
                present and past rates were unreasonable insofar as they exceeded
                200 percent of the variable cost of service, and (3) a
                revenue-to-variable-cost ratio of 200 percent would constitute the
                maximum reasonable rate for the transportation of wheat and barley.

                In a separate proceeding filed with the ICC on March 26, 1981, the Montana
                Department of Agriculture and the Montana Wheat Research and
                Marketing Committee (state of Montana) challenged Burlington Northern’s
                rates for multiple-car and trainload shipments of wheat and barley and
                asked the ICC to prescribe rates for future shipments. In a July 1982
                decision, the ICC reopened the McCarty Farms complaint and instituted a
                separate proceeding regarding the reasonableness of barley rates because
                it did not believe they were part of the district court’s referral. The ICC
                consolidated the McCarty Farms and state of Montana proceedings.

                According to Board officials, in 1983, the ICC vacated the administrative
                law judge’s opinion because the rate reasonableness standard used had
                been discredited and held the three consolidated cases in abeyance,
                pending its search for appropriate rate standards for noncoal cases. The
                ICC reopened the proceedings in September 1984 in response to a district
                court directive to move forward with the case. In an April 1986 decision,
                the ICC reopened the record for additional market-dominance evidence
                because of the changes made to its market-dominance guidelines in 1985.
                After extensive discovery, in May 1987, the ICC ruled that Burlington
                Northern dominated the market over wheat and barley movements from
                Montana to the Pacific Northwest. Having determined that Burlington
                Northern dominated the market for the shipments at issue, ICC turned to



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McCarty Farms, Inc. et al. v. Burlington
Northern, Inc.




the rate-reasonableness analysis. ICC decided to use this case to develop a
new rate test—the revenue-to-variable-cost comparison. In 1988, applying
the new comparison, the ICC found some of the rates unreasonable for
some years (1981 through 1986) and directed the parties to calculate
reparations.

In 1991, the ICC affirmed its earlier decisions, concluding that Burlington
Northern dominated the movement of wheat and barley and that
Burlington Northern’s rates for this traffic were unreasonable. According
to Board officials, the ICC calculated the amount of reparations owed by
Burlington Northern through 1988 to be $8.97 million plus interest and
prescribed the level of future rates. The ICC subsequently updated the
amount of reparations and interest due to $16.6 million through July 1,
1991, and removed the rate prescription as unnecessary since the rates had
been in compliance with the rate reasonableness standard for the prior 5
years.

Both Burlington Northern and McCarty Farms sought judicial review of
the ICC’s decision. In 1993, the U.S. Court of Appeals for the District of
Columbia Circuit questioned the ICC’s use of the revenue-to-variable-cost
comparison and the reasons for not applying the stand-alone cost test to
this large volume of traffic. The court sent the case back to the ICC to
reconsider whether the stand-alone cost model would be more
appropriate. On remand, both parties agreed to apply the stand-alone cost
test and from 1993 through 1995, prepared and presented their stand-alone
cost evidence. According to Board officials, the review of the stand-alone
cost evidence was delayed somewhat because key ICC staff who had been
working on the case left the agency as a result of the reduction-in-force
implemented following the ICC Termination Act of 1995.

In an August 1997 decision, the Board found that McCarty Farms had
failed to show that Burlington Northern’s rates were unreasonably high on
the basis of its review of the evidence of the stand-alone cost model.
According to the Board, this conclusion is consistent with the ICC’s prior
conclusion that certain rates during 1981 through 1986 were unreasonable.
On the basis of the 20-year analysis presented in the discounted cash flow
analysis in the stand-alone cost model, Burlington Northern earned more
revenues in 1981 through 1986 than was necessary to cover the
stand-alone costs allocated to those years. However, those additional
earnings were needed to make up for shortfalls in other years. The Board
discontinued the proceedings.




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Appendix I
McCarty Farms, Inc. et al. v. Burlington
Northern, Inc.




In October 1997, McCarty Farms appealed the Board’s August 1997
decision to the U.S. Court of Appeals for the District of Columbia Circuit.
After examining McCarty Farms’ brief to the court, the Board agreed that
there were certain errors in the August 1997 decision and issued a
supplemental decision to correct those determinations that it agreed were
erroneous. Even after it made these corrections, the Board still concluded
that Burlington Northern’s rates were reasonable. In a decision issued on
October 20, 1998, the court affirmed the Board’s decision, agreeing that the
challenged rates had not been shown to be unreasonable under the
stand-alone cost test. As noted earlier, the court held that it did not have
jurisdiction over claims that were initially raised by the McCarty Farms
Group’s complaint in federal district court and subsequently referred to
the ICC. Accordingly, the court did not rule on the Board’s decision as it
pertained to those claims. The district court has since dismissed its
portion of the case at the request of the parties.




Page 64                                    GAO/RCED-99-46 Railroad Rate Relief Process
Appendix II

Rate Complaints Either Pending or Filed
With the Board, 1990-98


Table II.1: Complaints Dismissed at Shipper’s Request
                                                                                  Market-dominance
    No. Title                            Commodity               Date filed       present?a                Date of dismissalb
         Increased rates on coal,        Coal                    Investigation    Yes                      Dec. 26, 1991
         Louisville and Nashville                                instituted,
       1 Railroad, ICC 37063                                     Oct. 30, 1978
         Dayton Power and Light Co.      Coal                    Mar. 27, 1981    Yes                      Dec. 26, 1991
         v. Louisville and Nashville
       2 Railroad, ICC 38025S
         Consolidated Papers, Inc. et    Pulpwood, woodchips Feb. 27, 1981        Yes                      Mar. 25, 1992
         al. v. Chicago and North
         Western Transportation Co.,
         et al.,
       3 ICC 37626
         McGraw Edison v. Alton and      Electric transformers   Mar. 27, 1981    Yes                      July 27, 1990
         Southern Railway Company,
       4 et al., ICC 38238S
         Amstar Corporation v.           Sugar                   Mar. 27, 1981C   Yes, for some            Oct. 18, 1990
         Alabama Great Southern                                                   movements
         Railroad et al., ICC 38239S
         (pre-1983 information only)
         (post-1982 was 38239S
       5 (Sub-No.1))
         Coal Trading Corporation et     Coal                    Mar. 27, 1981    Yes (for three of four   June 13, 1990
         al. v. Baltimore and Ohio                                                complainants)
         Railroad Co. et al., ICC
       6 38301S
         Iowa Power Inc. v. Burlington Coal                      Apr. 27, 1989    Not determined           Nov. 1, 1991
       7 Northern RR Co., ICC 40224
         Kaiser Aluminum & Chemical Coal                         May 22, 1989     Not determined           Jan. 5, 1990
         Corporation v. CSX
         Transportation, Inc. et al.,
       8 ICC 40228
         Exxon Coal USA, Inc. and        Coal                    Mar. 30, 1990    Not determined           Feb. 24, 1992
         PSI Energy, Inc. v. Norfolk
         Southern Corporation, ICC
       9 40424
        Cabot Corporation v.            Carbon black             July 16, 1990    Not determined 1991      Mar. 28,
        Southern Pacific                (chemical)
        Transportation Co., et al., ICC
     10 40464
        Degussa Corp. v. Southern        Tread and carcass       Jan. 8, 1993     Not determined           Jan. 12, 1995
        Pacific Transportation Co., et   grade carbon black
     11 al., ICC 40903                   (chemical)
        Mobil Oil Corporation v.         Synthetic plastic resin Aug. 24, 1994    Not determined           May 23, 1995
        Daniel R. Murray, Trustee of     (chemical)
        the Chicago, Missouri and
        Western Railway Co., ICC
     12 41449
                                                                                                                      (continued)


                                             Page 65                               GAO/RCED-99-46 Railroad Rate Relief Process
                                          Appendix II
                                          Rate Complaints Either Pending or Filed
                                          With the Board, 1990-98




                                                                                                 Market-dominance
No. Title                             Commodity                     Date filed                   present?a                     Date of dismissalb
    Kansas City Power and Light       Coal                          Dec. 30, 1994                Not determined                Dec. 19, 1995
    v. Missouri Pacific Railroad
 13 Co., et al., ICC 41528
      South-West Railroad Car         Retired railroad cars         Dec. 12, 1985                Tentatively found no          Apr. 9, 1998
      Parts Co. v. Missouri Pacific                                                              market dominance
      Railroad, ICC 40073                                                                        based on finding
                                                                                                 geographic
 14                                                                                              competition
    Western Resources, Inc. v.        Coal                          July 31, 1995                Not determined                Aug. 12, 1997
    Atchison, Topeka and Santa
 15 Fe Railway Co., ICC 41604
    Potomac Electric Power            Coal                          Jan. 3, 1997                 Not determined                June 18, 1998
    Company v. CSX
    Transportation, Inc., STB
 16 41989
    Armstrong World Industries,       Perlite rock                  Jan. 10, 1997                Not determined                Mar. 31, 1997
    Inc. v. Conrail Corporation,
 17 STB 41990
    Sierra Pacific Power              Coal                          Aug. 1, 1997                 Not determined                July 17, 1998
    Company and Idaho Power
    Co. v. Union Pacific Railroad
 18 Company, STB 42012

                                          a
                                             Present for at least some of the traffic in question but not necessarily for all of it.
                                          b
                                           In at least five of the complaints, the shipper requested that the ICC/Board dismiss the complaint
                                          because the shipper entered into a private transportation contract with the railroad. This
                                          information was not available for all complaints.
                                          c
                                           In a decision served on June 7, 1989, the ICC divided the proceeding that originated with one
                                          complaint into two proceedings in order to assess the reasonableness of the rates for the period
                                          through 1982, while reconsidering whether market dominance existed after 1982. The ICC
                                          designated the post-1982 part of this case as 38239S (Sub-No.1). For the purposes of this
                                          analysis, we considered this as one complaint.

                                          Source: GAO’s analysis of Surface Transportation Board information.




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                                            Appendix II
                                            Rate Complaints Either Pending or Filed
                                            With the Board, 1990-98




Table II.2: Complaints Dismissed/Discontinued in Favor of the Railroad
                                                                                                Market-dominance
No.      Title                          Commodity                                    Date filed present?a                                        Status
1        Bituminous Coal, Hiawatha,     Coal                                      Investigation Yes                                   The ICC found the
         Utah to Moapa, Nevada, ICC                                                  instituted                                              rates to be
         37038                                                                     Oct. 5, 1978                                             reasonable;
                                                                                                                                           proceedings
                                                                                                                                   discontinued on Oct.
                                                                                                                                               24, 1994
2        Aggregate Volume Rate on       Coal                                      Investigation Yes                                   The ICC found the
         Coal, Acco, Utah to Moapa,                                                  instituted                                              rates to be
         Nevada, ICC 37409                                                         Apr. 4, 1980                                             reasonable;
                                                                                                                                           proceedings
                                                                                                                                   discontinued on Oct.
                                                                                                                                              24, 1994.
3        Amstar Corporation v.          Corn syrup                               July 16, 1980 Yes, for some but not                 ICC dismissed the
         Atchison, Topeka, and Santa                                                           all movements                         complaint on Sept.
         Fe Railway Company, et al.,                                                                                                28, 1995 because it
         ICC 37478                                                                                                                    found rates to be
                                                                                                                                           reasonable.
4        Georgia Power Company, et      Coal                                      May 7, 1991 No                                    The ICC dismissed
         al. v. Southern Railway Co.                                                                                              the complaint due to
         and Norfolk Southern Corp.,                                                                                                            lack of
         ICC 40581                                                                                                               market-dominance on
                                                                                                                                         Nov. 8, 1993.
5        McCarty Farms, Inc. et al. v. Wheat                                    Mar. 27, 1981 Yes                                     The Board found
         Burlington Northern, Inc., ICC (grain)                                                                                              rates to be
         37809                                                                                                                              reasonable;
                                                                                                                                           proceedings
                                                                                                                                  discontinued on Aug.
                                                                                                                                   20, 1997; the Board
                                                                                                                                        made technical
                                                                                                                                    corrections on May
                                                                                                                                              11, 1998.
6        McCarty Farms, Inc. et al. v. Wheat and barley                          July 30, 1982 Yes                                    The Board found
         Burlington Northern, Inc., ICC (grain)                                                                                              rates to be
         37809 (Sub-No.1)                                                                                                                   reasonable;
                                                                                                                                           proceedings
                                                                                                                                  discontinued on Aug.
                                                                                                                                              20, 1997.
7        McCarty Farms, Inc. et al. v. Wheat and barley                         Mar. 26, 1981 Yes                                     The Board found
         Burlington Northern, Inc., ICC (grain)                                                                                              rates to be
         37815S                                                                                                                             reasonable;
                                                                                                                                           proceedings
                                                                                                                                  discontinued on Aug.
                                                                                                                                              20, 1997.
                                            a
                                               Present for at least some of the traffic in question, but not necessarily for all of it.

                                            Source: GAO’s analysis of Surface Transportation Board information.




                                            Page 67                                                  GAO/RCED-99-46 Railroad Rate Relief Process
                                           Appendix II
                                           Rate Complaints Either Pending or Filed
                                           With the Board, 1990-98




Table II.3: Complaints Otherwise Dismissed
                                                                                                Market-dominance
No.      Title                         Commodity                                     Date filed present?a                                         Status
1        Central Power and Light Co.   Coal                                      Apr. 12, 1994 Not determined                     The Board dismissed
         v. Southern Pacific                                                                                                     the complaint on Dec.
         Transportation Co., ICC                                                                                                     31, 1996, because
         41242                                                                                                                      the regulatory relief
                                                                                                                                         sought was not
                                                                                                                                   available. Shipper’s
                                                                                                                                       appeal pending.
2        MidAmerican Energy Co. v.      Coal                                   Sept. 27, 1995 Not determined                      The Board dismissed
         Union Pacific Railroad Co., et                                                                                          the complaint on Dec.
         al., ICC 41626                                                                                                              31, 1996, because
                                                                                                                                    the regulatory relief
                                                                                                                                         sought was not
                                                                                                                                   available. Shipper’s
                                                                                                                                       appeal pending.
3        H.B. Fuller Co. v. Southern   Vinyl acetate                              Dec. 8, 1994 Not determined                     The Board dismissed
         Pacific, ICC 41510            (chemical)                                                                                 the complaint for lack
                                                                                                                                  of jurisdiction on Aug.
                                                                                                                                           22, 1997. The
                                                                                                                                      transportation was
                                                                                                                                        performed under
                                                                                                                                                 contract.
4        Shore Line Enterprises v.     Cars for scenic                           July 17, 1996 Not determined                     The Board dismissed
         Southern Pacific              railroad                                                                                  the complaint on Aug.
         Transportation Co., STB                                                                                                     28, 1997, because
         41907                                                                                                                        the shipper never
                                                                                                                                        filed an opening
                                                                                                                                   statement and failed
                                                                                                                                      to respond by the
                                                                                                                                       appointed dates.
5        Omaha Public Power District Coal                                       June 20, 1997 Not determined                      The Board dismissed
         v. Union Pacific Railroad Co.,                                                                                           the complaint on Oct.
         STB 42006                                                                                                                17, 1997 because the
                                                                                                                                     transportation was
                                                                                                                                       performed under
                                                                                                                                     contract. Shipper’s
                                                                                                                                       appeal pending.
                                           a
                                               Present for at least some of the traffic in question, but not necessarily for all of it.

                                           Source: GAO’s analysis of Surface Transportation Board information.




                                           Page 68                                                   GAO/RCED-99-46 Railroad Rate Relief Process
                                             Appendix II
                                             Rate Complaints Either Pending or Filed
                                             With the Board, 1990-98




Table II.4: Complaints Decided in Favor of the Shipper
                                                                                                Market-dominance
No.      Title                          Commodity                                    Date filed present?a                                        Status
1        Arizona Public Service         Coal                                      Jan. 3, 1994 Yes                                     Decided July 29,
         Company and PacifiCorp v.                                                                                                   1997. Shipper won;
         Atchison, Topeka, and Santa                                                                                                    reparations and
         Fe Railway Co., ICC 41185                                                                                                         prescriptions
                                                                                                                                              awarded.
2        West Texas Utilities Company Coal                                       Jan. 12, 1994 Yes                               Decided May 3, 1996.
         v. Burlington Northern                                                                                                          Shipper won;
         Railroad Co., ICC 41191                                                                                                      reparations and
                                                                                                                                         prescriptions
                                                                                                                                            awarded.
                                             a
                                               Present for at least some of the traffic in question, but not necessarily for all of it.

                                             Source: GAO’s analysis of Surface Transportation Board information.




Table II.5: Complaints Pending With the Board
                                                                                                                        Market-dominance
No.                   Title                           Commodity                                              Date filed present?a
1                     DOE and DOD v. Baltimore Spent nuclear fuel                                        Mar. 27, 1981 Yes
                      and Ohio Railroad Co. et
                      al., ICC 38302S
2                     DOE and DOD v. Baltimore Spent nuclear fuel                                        Mar. 27, 1981 Yes
                      and Ohio Railroad Co. et
                      al., ICC 38376S
3                     DOE and DOD v. Baltimore Spent nuclear fuel                                         Oct. 3, 1994b Yes
                      and Ohio Railroad Co., et
                      al., I&S 9205
4                     Pennsylvania Power and          Coal                                                Aug. 4, 1994 The parties have asked
                      Light Co. v. Conrail, ICC                                                                        the Board to hold the
                      41295                                                                                            proceedings in abeyance,
                                                                                                                       pending possible
                                                                                                                       settlement.
5                     Shell Chemical Company          Polyethylene terephthalate                        Dec. 26, 1995 Not determined
                      and Shell Oil Company v.        (chemical)
                      Boston and Maine
                      Corporation, et al., ICC
                      41670
6                     Grain Land Coop v.              Grain                                               Apr. 5, 1996 Not determined
                      Canadian Pacific Rail
                      System and Soo Line
                      Railroad Co. D/B/A CP Rail
                      System, STB 41687
                                                                                                                                            (continued)




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                            Rate Complaints Either Pending or Filed
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                                                                                                      Market-dominance
No.   Title                         Commodity                                              Date filed present?a
7     FMC Wyoming Corporation       Soda ash, phosphorus,                              Oct. 31, 1997 Not determined
      & FMC Corporation v.          phosphate rock, coke,
      Union Pacific Railroad Co.,   sodium bicarobonate,
      STB 42022                     including sodium sesqui
                                    carbonate
                                    (chemical)
8     PSI Energy v. CSX             Coal                                                 July 6, 1998 Not determined
      Transportation, Inc. and
      Soo Line Railroad Co.
      D/B/A Canadian Pacific
      Railway, STB 42034
9     Minnesota Power, Inc. v.      Coal                                              Dec. 30, 1998 Not determined
      Duluth, Missabe and Iron
      Range Railway Company,
      STB 42038

                            Legend:

                            DOD = Department of Defense
                            DOE = Department of Energy

                            Note: Other complaints may also be pending because either the shipper or railroad appealed the
                            Board’s decision to the U.S. Court of Appeals.
                            a
                             Present for at least some of the traffic in question, but not necessarily for all of it.
                            b
                             According to Board officials, Investigation and Suspension Docket Number 9205 was initiated on
                            Dec. 8, 1978. The ICC resolved the case by decisions issued in 1980 and 1981. In 1991, the ICC
                            denied a request from certain railroads involved in the case that had asked the ICC to reopen the
                            proceeding. However, in Oct. 1994, the Department of Defense and the Department of Energy
                            asked the ICC to reopen the proceeding. The petition to reopen is still pending.

                            Source: GAO’s analysis of Surface Transportation Board information.




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Appendix III

Survey Response Frequencies


                          This appendix presents the results of our shipper survey in summary form.
                          It discusses the methodology used in controlling for sampling error,
                          nonsampling error, and presentation. In administering this survey, we
                          agreed to hold the responses of individual shippers confidential. In the few
                          instances where the responses of individual shippers could be determined
                          from the data, we have not presented the results.


Sampling Errors and       Since we used a sample (called a probability sample) of grain, coal,
Confidence Intervals of   chemicals and plastics shippers to develop our estimates, each estimate
Estimates                 has a measurable precision, or sampling error, that may be expressed as a
                          plus/minus figure. A sampling error indicates how closely we can
                          reproduce from a sample the results that we would obtain if we were to
                          take a complete count of the universe using the same measurement
                          methods. By adding the sampling error to and subtracting it from the
                          estimate, we can develop upper and lower bounds for each estimate. This
                          range is called a confidence interval. Sampling errors and confidence
                          intervals are stated at a certain confidence level—in this case, 95 percent.
                          For example, a confidence interval at the 95-percent confidence level
                          means that in 95 out of 100 instances, the sampling procedure we used
                          would produce a confidence interval containing the universe value we are
                          estimating.

                          We obtained a response rate of 60 percent. We did not test for potential
                          differences between the respondents who did and did not respond to our
                          survey because we had little or no information about the nonrespondents.
                          As a result, we do not know the effect of these nonrespondents on the
                          results of our survey. Our results are generalizable to the views and
                          opinions of the groups we surveyed. In addition, some estimates do not
                          always represent the entire population because some shippers did not
                          answer all of the questions.


Controlling for           In addition to the reported sampling errors, the practical difficulties of
Nonsampling Errors        conducting any survey may introduce other types of errors, commonly
                          referred to as nonsampling errors. For example, differences in how
                          questions are interpreted, errors in entering data, incomplete sampling
                          lists, and the types of people who do not respond can all introduce
                          unwanted variability into the survey results. We included steps in both the
                          data collection and data analysis stages to minmize such nonsampling
                          errors. Some of these steps included pretesting questionnaires with
                          members of shipping associations, obtaining comments on the



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                    questionnaire from shipper and railroad associations, reviewing answers
                    during follow-up visits with shippers and railroads, double-keying and
                    verifying all data during data entry, and checking all computer analyses
                    with a second analyst.


Data Presentation   Our analysis represents those shippers who expressed an opinion
                    regarding each question. Shippers who did not choose to answer a
                    question have been included with those that indicated “Don’t Know”. In
                    instances where “Don’t Know” is an option, we show the combined
                    number who actually checked “Don’t Know” and those who did not
                    answer. All responses are presented in percentages. Each response was
                    weighted to represent the group to which it belonged. Percentages were
                    rounded to their nearest whole number; totals may be greater or less than
                    100 percent. We also show where a low number of responses did not yield
                    a statistically valid result. Questions 5 through 10 have been converted to
                    ranges and are included in tables III.1 through III.6. Any technical notes
                    regarding the data presented appear at the end of this appendix.




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        U.S. Geographic Regions



                                                                        7
1                          3
    2                                                        8
                                         5

                                         6            9
                           4




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Table III.1: Survey       We asked survey respondents to indicate the percentage of their
Question 5                shipments made using various transportation modes. Specifically,

                      •   In 1997, about what percentage of your company’s shipments of bulk
                          grain, coal, chemicals or plastics went by the following modes of




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                                                  transportation? (Enter percent; Please make sure your responses total
                                                  100%.)

                                                  We selected four categorical ranges for the question, and counted the
                                                  number of responses that fit into each category. Table III.1 shows the
                                                  percentage of respondents whose answers fit each category.


Table III.1: Percentage of Shippers Using Various Transportation Modes, 1997 (Survey Question 5)c
                                          0 - 25        26 - 50      51 - 75      76 - 100
Transportation Mode                       percent       percent      percent      percent                            Missing
Class I railroad                                 54.5           10.5             13.1          21.9                  [n=42]
                                                 +3.20          +2.00            +2.20         +2.58
Short-line or regional railroad                  90.2           3.6              1.5           4.6                   [n=84]
                                                 +2.00          +1.16            +0.88         +1.48
A combination of class I and short-line or       78.6           9.4              5.0           7.0                   [n=69]
regional railroads                               +2.78          +1.92            +1.50         +1.80
Semi-tractor or other truck                      46.4           22.2             11.9          19.4                  [n=24]
                                                 +3.16          +2.74            +2.08         +2.56
Inland waterway (including barges)               94.7           3.1              1.8           1                     [n=84]
                                                 +1.50          +1.16            +0.96         +0.28
Deep water great lakes vessel                    100            0                0             0                     [n=91]
                                                 + 0.00         +0.00            +0.00         +0.00
Ocean                                            98.3           <1               <1            <1                    [n=83]
                                                 +0.76          +0.50            +0.36         +0.44
Air                                              100            0                0             0                     [n=91]
                                                 +0.00          +0.00            +0.00         +0.00
Intermodal (a combination of railroad and        98.7           <1               <1            <1                    [n=83]
other modes)                                     +0.56          +0.40            +0.30         +0.28
Intermodal (a combination of modes not           99.1           <1               <1            <1                    [n=84]
including rail)                                  +0.68          +0.48            +0.22         +0.44
Other                                            98.9           <1               <1            <1                    [n=86]
                                                 +0.56          +0.44            +0.20         +0.30
                                                  Source: GAO’s survey of railroad shippers.




Table III.2: Survey                               We asked survey respondents to indicate the average number of loaded
Question 6                                        out-bound rail shipments. they had made since 1990. Specifically,

                                             •    Since 1990, on average, how many loaded rail cars has your company
                                                  used for out-bound shipments of bulk grain, coal, chemicals or plastics per
                                                  year? (Enter Number)




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Table III.2: Average Annual Out-bound
Rail Shipments by Commodity (Survey          Commodity                                                      Average annual rail cars
Question 6)c                                 Grain                                                                             4,546
                                                                                                                              +1,288
                                                                                                                              62,962
                                             Coal                                                                             +8,495
                                                                                                                                 7,727
                                             Chemicals/plastics                                                                  +944
                                             Source: GAO’s survey of railroad shippers.




Table III.3: Survey                          We asked survey respondents to indicate the percentage of their rail
Question 7                                   shipments made using rail cars owned or leased by their company.
                                             Specifically,

                                         •   Since 1990, on average, what percentage of your annual out-bound
                                             shipments (that you identified in the previous question) of bulk grain, coal,
                                             chemicals or plastics were shipped in rail cars owned or leased (except
                                             leased from a railroad) by your company? (Enter percent, if none, enter 0)

                                             We selected four categorical ranges for the question, and counted the
                                             number of responses that fit into each category. Table III.3 shows the
                                             percentage of respondents whose answers fit each category.

Table III.3: Percentage of Annual Rail
Shipments Using Company-owned Rail                             0 - 25          26 - 50     51 - 75       76 - 100
Cars (Survey Question 7)c                                      percent         percent     percent       percent        Missing
                                             Average          75.2             4.3         3.6           17.0           [n=24]
                                             annual           +2.30            +1.28       +1.12         +1.82
                                             out-bound
                                             shipments in
                                             owned or
                                             leased rail cars
                                             Source: GAO’s survey of railroad shippers.




Table III.4: Survey                          We asked survey respondents to indicate the percentage of their
Question 8                                   shipments that were made using contract versus tariff rates. Specifically,

                                         •   Since 1990, what percentage of each of the following rate setting methods
                                             (contract or published tariff rate) were used to set the freight rates of your
                                             annual out-bound shipments? (Enter percent; if none, enter ’0’)




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                                               We selected four categorical ranges for the question, and counted the
                                               number of responses that fit into each category. Table III.4 shows the
                                               percentage of respondents whose answers fit each category.


Table III.4: Percentage of Shipments
Using Contract Rates or Published                                0 - 25          26 - 50     51 - 75       76 - 100
Tariff Rates Since 1990 (Survey                                  percent         percent     percent       percent        Missing
Question 8)c                                                     47.6            8.1         5.8           38.5           [n=91]
                                               Contract rate     +3.20           +1.94       +1.64         +2.96
                                                                 41.3            8.4         4.4           45.9           [n=69]
                                               Tariff            +3.00           +1.92       +1.44         +3.16
                                               Source: GAO’s survey of railroad shippers.




Table III.5: Survey                            We asked survey respondents to indicate the percentage of their
Question 9                                     shipments made that were exempt from federal rate regulation.
                                               Specifically,

                                           •   Of the published tariff or public rate shipments identified in question 8
                                               what percentage was exempt from regulation — that is, commodities, or
                                               classes of transportation (such as box car) that have been granted
                                               exemption by STB or its predecessor the Interstate Commerce Commission
                                               (ICC) from economic regulation? (Enter Percent)

                                               We selected four categorical ranges for the question, and counted the
                                               number of responses that fit into each category. Table III.5 shows the
                                               percentage of respondents whose answers fit each category.

Table III.5: Percentage of Public Tariff
Shipments Exempt From Federal                                    0 - 25          26 - 50     51 - 75       76 - 100
Regulation (Survey Question 9)c                                  percent         percent     percent       percent        Missing
                                               Percent of    87.7                1.8         <1            9.8            [n=294]
                                               shippers      +2.86               +1.22       +0.74         +2.58
                                               responses in
                                               each category
                                               Source: GAO’s survey of railroad shippers.




Table III.6: Survey                            We asked survey respondents to indicate the percentage of their
Question 10                                    shipments that were limited to a single railroad from origin to destination.
                                               Specifically,



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                                       •   Consider the out-bound movements of bulk grain, coal, chemicals, or
                                           plastics that your company made by railroad. About what percentage, if
                                           any, of these shipments could only go from origin to destination using a
                                           single railroad in 1997 as compared to 1990? (Enter Percent, if none, enter
                                           ’0’)

                                           We selected five categorical ranges for the question, and counted the
                                           number of responses that fit into each category. Table III.6 shows the
                                           percentage of respondents whose answers fit each category.


Table III.6: Percentage of Rail Shippers Who Indicated That Their Shipments Went From Origin to Destination Using Only
One Railroad, 1990 and 1997 (Survey Question 10)c
Percentage of shipments
using one railroad from
origin to destination        0 percent        1 - 20 percent  21 - 40 percent 41 - 60 percent 61 - 100 percent Missing
                           26.6             10.6                10.1                9.2              43.4              [n=105]
1990                       +2.98            +1.86               +2.06               +1.92            +3.38
                           25.8             8.7                 9.3                 7.7              48.5              [n=101]
1997                       +2.94            +1.84               +1.90               +1.74            +3.38
                                           Source: GAO’s survey of railroad shippers.




Chapter 4 Analysis                         Tables III.7 through III.9 present the sampling error associated with the
Estimates and Sampling                     estimates we present in Chapter 4. Our estimates for coal, chemical and
Error                                      plastics shippers do not include sampling error because we sent our
                                           survey to 100 percent of these shippers in our universe. In addition, the
                                           estimates shown in tables III.7 through III.9 differ from the data presented
                                           in questions 15, 17 and 18 above because we have collapsed certain
                                           categories for our analysis.




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Table III.7: Percentage of Rail Shippers
Who Believed That a Barrier Was a                                                                                               Chemicals and
Major or Moderate Reason for Not                                                      Grain                Coal                 plastics
Filing a Rate Complaint (Table 4.1)        Barriera              Total                shippers             shippers             shippers
                                           Legal costs           75.9                 78.1                 65.1                 75.8
                                           associated with       +3.30                +4.12
                                           filing outweigh
                                           the benefits
                                           Rate complaint        76.5                 77.6                 73.4                 74.6
                                           process is too        +3.30                +4.20
                                           complex
                                           Rate complaint    74.1                     73.6                 85.9                 64.5
                                           process takes too +3.48                    +4.48
                                           long
                                           Stand-alone cost      71.7                 72.3                 76.2                 64.5
                                           model is too          +3.58                +4.56
                                           costly to prepare
                                           Railroad will most 69.4                    68.8                 80.6                 61.3
                                           likely win case    +3.70                   +4.74
                                           Getting               66.9                 69.3                 67.2                 54.8
                                           information from      +3.72                +4.68
                                           railroads is too
                                           difficult
                                           Consulting costs      66.5                 68.2                 54.7                 64.5
                                           are too high          +3.74                +4.72
                                           Discovery             65.6                 67.5                 59.0                 62.9
                                           requests from         +3.78                +4.80
                                           railroad difficult
                                           Fear of reprisal      60.0                 64.4                 54.7 4               3.6
                                           from railroads        +3.86                +4.88
                                           Filing fee too        56.6                 62.1                 43.6                 41.9
                                           costly                +3.90                +4.90
                                           Other parts of the 39.0                    40.5                 27.9                 40.8
                                           process are too    +4.42                   +5.58
                                           costly
                                           a
                                            Each percentage represents rail shippers who expressed an opinion regarding a particular
                                           barrier. We estimate that the total number of shippers eligible to answer this question is 531.
                                           Some shippers did not express an opinion for some barriers.




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Table III.8: Percentage of Rail Shippers That Believe Suggested Changes for Improving the Rate Complaint Process Were
Extremely to Very Important (Table 4.2)
Suggestions for improving
the STB’s rate complaint                            Grain            Coal               Chemicals and
process                          Totala             shippers         shippers           plastics shippers Missing
Shorten STB’s time limits for    75.9               76.3                77.1                   72.8                   n=206
deciding rate complaint cases    +3.20              +4.12               +6.22                  +6.60
Reduce or eliminate complaint    63.1               68.4                41.9                   56.2                   n=222
filing fees                      +3.62              +4.58               +7.76                  +7.42
Eliminate product &             62.2                57.0                82.1                   63.0                   n=298
geographic competition criteria +3.98               +5.46               +5.80                  +7.56
Use mandatory binding            58.5               66.7                29.6                   41.3                   n=229
arbitration                      +3.74              +4.60               +7.68                  +7.60
Lower revenue to variable cost 52.9                 50.8                66.7                   46.6                   n=396
ratio                          +4.56                +6.34               +7.72                  +8.76
Use voluntary binding            51.9               58.5                30.2                   37.0                   n=243
arbitration                      +3.90              +4.86               +7.80                  +7.56
Use mandatory nonbinding         16.4               20.2                4.80                   7.60                   n=319
arbitration (mediation)          +3.22              +4.26               +4.06                  +4.36
                                          a
                                           Each percentage represents rail shippers who expressed an opinion regarding a particular
                                          suggestion. Some shippers did not express an opinion for some suggestions.




Table III.9: Percentage of Rail Shippers Who Believed That Increasing Aspects of Rail Competition Was Extremely to Very
Important (Table 4.3)
Suggestions to increase                            Grain              Coal               Chemicals and
competition                      Totala            shippers           shippers           plastics shippers Missing
Require STB to grant trackage    81.2               79.1                86.1                   86.4                   n=128
rights to competing railroads    +2.76              +3.62               +4.82                  +4.88
Increase access for short line   75.2               74.5                75.0                   78.6                   n=133
railroads                        +3.02              +3.88               +6.14                  +5.80
Require STB to grant             73.9               71.6                73.1                   84.4                   n=143
reciprocal switching             +3.06              +4.02               +6.22                  +5.10
agreements
Overturn STB’s “bottleneck”      71.0               67.0                83.5                   77.5                   n=142
decision                         +3.24              +4.26               +5.16                  +5.92
Allow shippers to specify        49.4               45.1                42.5                   73.3                   n=166
routing                          +3.56              +4.64               +7.16                  +6.24
                                          a
                                           Each percentage represents rail shippers who expressed an opinion regarding a particular
                                          option. Some shippers did not express an opinion for some options.




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Endnotes:

a
 Due to the low number of responses to this question, we are either unable
to generalize to the universe, or unable to report for reasons of
confidentiality.

b
    Includes missing responses.

c
 We estimate that a total of 709 shippers were eligible to answer this
question. Not all shippers chose to answer the question.




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Appendix IV

Survey of U.S. Class I Railroads


                In order to obtain the major U.S. railroads’ views of the Surface
                Transportation Board’s rate relief process, we mailed the class I railroads
                a survey similar to the survey we mailed to shippers (See app. III). The
                class I railroads determined that it would be appropriate for the
                Association of American Railroads (AAR) to respond to our questions
                regarding changes to the process. Therefore, AAR answered questions 6 and
                7 of our survey. The remaining questions dealt with the railroads’
                experiences using the process during any rate complaint cases involving
                movements on their lines. Four of the nine class I railroads we surveyed
                responded to this set of questions. The information provided by the
                railroads augmented the information we developed from reviewing the
                Board’s case files. However, because of the low response rate and the
                nature of the information provided, there was not sufficient information to
                present it in summary form in this appendix. We have provided a copy of
                the survey we mailed to the class I railroads for reference purposes.




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Appendix V

Major Contributors to This Report


                       Joseph A. Christoff
Resources,             Helen T. Desaulniers
Community, and         Lynne L. Goldfarb
Economic               Alexander G. Lawrence, Jr.
                       Bonnie Pignatiello Leer
Development Division   David R. Lehrer
                       Luann M. Moy




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