oversight

Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990

Published by the Government Accountability Office on 1999-04-16.

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

                 United States General Accounting Office

GAO              Report to Congressional Requesters




April 1999
                 RAILROAD
                 REGULATION
                 Changes in Railroad
                 Rates and Service
                 Quality Since 1990




GAO/RCED-99-93
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-280294

      April 16, 1999

      The Honorable Conrad Burns
      The Honorable Byron L. Dorgan
      The Honorable Pat Roberts
      The Honorable John D. Rockefeller, IV
      United States Senate

      In response to your request, this report discusses how rates and service quality for freight rail
      transportation have changed since 1990 and actions being taken by the Surface Transportation
      Board and others to address service quality issues. We previously transmitted a companion
      report to you entitled Railroad Regulation: Current Issues Associated With the Rate Relief
      Process (GAO/RCED-99-46, Feb. 26, 1999).

      Unless you publicly announce 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 with responsibilities for transportation and regulatory
      issues; the Honorable Rodney E. Slater, Secretary of Transportation; the Honorable Linda J.
      Morgan, Chairman of the Surface Transportation Board; and other interested parties. We will
      also make copies available to others upon request. Please call me at (202) 512-3650 if you have
      any questions about the report. Major contributors to the report are listed in appendix IV.




      Phyllis F. Scheinberg
      Associate Director,
        Transportation Issues
Executive Summary


             The Railroad Revitalization and Regulatory Reform Act of 1976 and the
Purpose      Staggers Rail Act of 1980 gave freight railroads increased freedom to price
             their services according to market conditions. In response to this freedom
             and to recent consolidations within the rail industry, some shippers have
             raised concerns that freight railroads have abused their market power in
             setting rates for those shippers with fewer alternatives to rail
             transportation while at the same time providing poor service.

             Concerned about the potential abuse of market power by freight railroads
             in setting rates and a deterioration of service quality in recent years,
             Senators Conrad Burns; Byron L. Dorgan; Pat Roberts; and John D.
             Rockefeller, IV, asked GAO to examine issues related to railroad rates and
             service. In particular, this report provides information on (1) the
             environment within which railroad rates have been set since 1990, (2) how
             railroad rates have changed since 1990, (3) how railroad service quality
             has changed since 1990, and (4) actions taken by the Surface
             Transportation Board and others to address railroad service quality
             problems.


             By the 1970s, many of the nation’s largest freight railroads (called Class I
Background   railroads) were in poor financial health. With passage of the Railroad
             Revitalization and Regulatory Reform Act and the Staggers Rail Act, the
             Congress sought to improve the financial health of the rail industry by
             reducing economic regulation of freight railroads and providing railroads
             more freedom to price their services according to market demand. In
             particular, the Staggers Rail Act made it federal policy for railroads to rely,
             where possible, on competition and the demand for service to establish
             reasonable rates. Under this policy, shippers with less effective
             transportation alternatives pay a higher proportion of a railroad’s fixed
             costs than those with more effective competitive alternatives (this is called
             “differential pricing”). The Interstate Commerce Commission (ICC)
             continued to regulate rates where there was an absence of effective
             competition. During the 1980s, railroads used the increased freedoms to
             improve their financial health and competitiveness.

             The ICC Termination Act of 1995 abolished the ICC and created the Surface
             Transportation Board (the Board), a bipartisan, independent adjudicatory
             agency administratively housed within the U.S. Department of
             Transportation. The Board has continued many of ICC’s rail regulatory
             functions, including regulating rail rates where there is an absence of
             effective competition and adjudicating disputes about service.



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                   Executive Summary




                   As part of its review, GAO received survey responses from about 700
                   shippers on how the quality of service they have received from Class I
                   railroads has changed since 1990. GAO surveyed the major associations of
                   grain, coal, chemicals, and plastics industries—industries whose freight
                   constitutes the largest portion of rail shipments. GAO’s survey used a
                   statistical sample; as a result, when GAO reports survey results, they
                   represent estimates, based on the views and experiences of these groups.


                   The environment in which railroads set their rates has been influenced by
Results in Brief   ongoing industry consolidation, competitive conditions, and railroads’
                   financial health. As a result of mergers, bankruptcies, and the redefinition
                   of what constitutes a major railroad, the number of independent Class I
                   railroad systems has been reduced from 30 in 1976 to 9 in early 1999, with
                   the 5 largest Class I railroads accounting for 94 percent of industry
                   operating revenue. This increased concentration has raised concerns
                   about potential abuse of market power in some areas due to railroads’ use
                   of market-based pricing. Under market-based pricing, rail rates in markets
                   with less effective competition may be higher than in markets that have
                   greater competition from railroads or other modes of transportation.
                   Railroads’ financial health has also improved since 1990. However, despite
                   these improvements, the Board has determined that most Class I railroads
                   are “revenue inadequate” because they do not generate enough revenue to
                   cover the industry’s cost of capital. Although such determinations are
                   sometimes controversial, revenue inadequacy affects the ability of a
                   railroad to attract and/or retain capital and remain financially viable.

                   Railroad rates have generally decreased since 1990. However, the decrease
                   has not been uniform, and in some cases, rail rates have stayed the same
                   as, or are higher than, they were in 1990. This was particularly true on
                   selected long distance (greater than 1,000 miles) rail shipments of wheat
                   from northern plains states like Montana and North Dakota to west coast
                   destinations. In general, rail routes with effective competitive
                   alternatives—either from railroads or from trucks and
                   barges—experienced greater decreases in rail rates.

                   As the rail industry has consolidated, shippers have complained that
                   service quality has deteriorated. Shippers’ complaints have included a lack
                   of railcars when and where they were needed and inconsistent pickup and
                   delivery of cars. Roughly 60 percent of the coal, grain, chemicals, and
                   plastics shippers responding to GAO’s survey (representing 329 shippers)
                   said that their service was somewhat or much worse in 1997 than it was in



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                             Executive Summary




                             1990. In general, railroads believe the service they provide is adequate but
                             agree improvements can be made. According to railroads, service
                             problems have been caused by such things as capacity constraints and
                             industry downsizing. At the current time, the overall quality of rail service
                             cannot be measured. There are few industrywide measures of service, and
                             service measures recently developed are not comparable from one
                             railroad to another, nor do they fully address service quality.

                             Federal agencies and railroads have taken a number of actions to address
                             rail service problems. These include an October 1997 emergency service
                             order issued by the Board to facilitate the resolution of service problems
                             in the West that originated in the Houston/Gulf Coast area; the creation of
                             a government task force to disseminate information that can help railroads
                             and shippers to anticipate changes in transportation demand and supply;
                             and the Board’s adoption in December 1998 of procedures for expediting
                             relief from inadequate rail service. Although these actions are expected to
                             yield benefits, they do not address some shippers’ belief that greater
                             competition in the rail industry is needed to improve service. If it decides
                             to address this issue, the Congress will need to weigh the potential
                             benefits of increased competition with the potential financial and other
                             effects on the railroad industry.



Principal Findings

Rate Setting Influenced by   Since 1990, the environment within which railroads set their rates has
Numerous Factors             been influenced by a number of factors. One is continued consolidation
                             within the rail industry. While there were 30 independent Class I railroad
                             systems in 1976, by early 1999 the number had been reduced to 9, with half
                             of that reduction due to consolidations.1 Although consolidations and
                             mergers were expected to yield cost efficiencies and improve service, they
                             have also concentrated the industry into fewer and larger railroads. The
                             five largest railroads accounted for about 94 percent of industry operating
                             revenue in 1997 (the latest year for which data are available). Rail shippers
                             and others have raised the issue of potential abuse of market power by
                             these larger railroads.

                             Differential pricing has also played a role. Under differential pricing,
                             shippers with less effective transportation alternatives generally pay

                             1
                              Conrail is expected to be formally absorbed by CSX Transportation and Norfolk Southern in 1999.
                             This will reduce the number of Class I railroads to eight.



                             Page 4                                                     GAO/RCED-99-93 Railroad Regulation
                              Executive Summary




                              proportionately greater shares of a railroad’s fixed costs than shippers
                              with more effective transportation alternatives. This allows railroads to
                              price their services more aggressively in areas where shippers have more
                              transportation alternatives. The effect of differential pricing can be seen
                              when railroad revenues from shipments are compared to railroad variable
                              costs (costs that vary according to the quantity shipped). In general,
                              railroads can obtain more revenue in relation to variable costs from
                              shippers with less effective transportation alternatives than from those
                              shippers with better alternatives—even though both groups of shippers
                              may share similar cost characteristics, such as the number of railcars to be
                              shipped or lengths of haul to destination.

                              The percent of rail industry revenue from shipments transported at rates
                              generating revenues exceeding 180 percent of variable costs (the current
                              threshold for the Surface Transportation Board’s jurisdiction over rail rate
                              complaints) has generally declined from about 33 percent in 1990 to
                              29 percent in 1996. However, the ratio of revenue to variable costs varied
                              widely by commodity.

                              Railroads’ financial health has also improved since 1990. From 1990
                              through 1996, railroads’ return on investment and return on equity (both
                              measures of profitability) averaged about 8.5 and 11 percent,
                              respectively—about 60 percent and 24 percent higher, respectively, than
                              railroads’ returns on investment and equity during the 1980s. Although
                              financial health has improved, the Board has found most Class I railroads
                              to be revenue inadequate, a condition that may induce investors to place
                              their money elsewhere and affect a railroad’s financial viability. Revenue
                              adequacy determinations for the railroad industry have been controversial.
                              In recent years, shippers and others have questioned the meaningfulness
                              of the current method of determining revenue adequacy, particularly when
                              railroads that are designated revenue inadequate are able to attract capital
                              to acquire other railroads.


Rail Rates Have Fallen, but   The reduction in railroad regulation that began in the 1970s continues to
Not All Shippers Have         yield benefits for shippers. According to the Board, from 1982 through
Benefited                     1996, average real (inflation-adjusted) rail rates for Class I railroads had
                              fallen about 46 percent. However, rates had not necessarily decreased
                              proportionally for all shippers. GAO’s analysis of real rail rates since 1990
                              for coal, grain (corn and wheat), certain chemicals, and transportation
                              equipment (finished motor vehicles and parts) in selected transportation
                              corridors found that rates had generally fallen. However, for some



                              Page 5                                         GAO/RCED-99-93 Railroad Regulation
                            Executive Summary




                            long-distance shipments of wheat from northern plains states such as
                            Montana and North Dakota, rates had stayed the same as, or were higher
                            than, they were in 1990. Rail rates were also sensitive to competition, and
                            GAO found that rates in some markets/corridors that are considered to have
                            less effective competition, such as the northern plains states, were
                            generally higher than rates where there may be more effective competitive
                            options, such as barges or other railroads.

                            Ratios of revenue to variable costs (R/VC) are often used as indicators of
                            railroads’ dominance of markets—by statute, a railroad does not dominate
                            a market if its revenue is less than 180 percent of its variable costs for
                            transporting the shipper’s commodities. GAO’s analysis of R/VC ratios
                            suggests that competition plays a role in ratios for specific commodities
                            and markets. In general, GAO found that R/VC ratios exceeded 180 percent
                            on some short-distance (500 miles or less) movements of coal and
                            long-distance movements of wheat—movements for which there may be
                            less effective competition. In contrast, R/VC ratios were 180 percent or less
                            on some long-distance movements of coal where there may be more
                            competition. Although R/VC ratios are used as proxies for railroad market
                            dominance, such ratios can be increasing at the same time rates are
                            decreasing and, conversely, decreasing at the same time rates are
                            increasing.


Quality of Service Cannot   In recent years, shippers have increasingly criticized railroads for
Currently Be Measured       providing poor service. These complaints include such things as a lack of
                            railcars when and where needed and inconsistent pickup and delivery of
                            cars. GAO’s survey of approximately 700 coal, grain, chemicals, and plastics
                            shippers found that roughly 60 percent believed their rail service in 1997
                            was somewhat or far worse than it was in 1990. Shippers and shipper
                            associations have attributed poor service, at least in part, to railroad
                            mergers and consolidations. Some shippers told us that they are
                            dependent on railroads to meet their transportation needs and that they
                            believe such dependence has reduced railroads’ incentives to provide good
                            service. In general, Class I railroad officials believe their railroads provide
                            adequate service and that rail service in 1997 was at least as good as it was
                            in 1990. However, the officials acknowledge that problems exist and that
                            improvements can be made. Among the reasons cited for service problems
                            were increased rail traffic and industry downsizing, which have created
                            capacity constraints in the rail system.




                            Page 6                                        GAO/RCED-99-93 Railroad Regulation
                           Executive Summary




                           The quality of rail service cannot be measured currently. There are few
                           industrywide service measures, and service information from individual
                           railroads is either not available, inconsistently defined across and within
                           railroads, or not available going back in time. The rail industry has
                           recently developed quantitative measures of performance, such as average
                           train speed. Although these measures may be helpful in assessing some
                           aspects of service, they are more an evaluation of railroad operating
                           efficiency rather than quality of service.


Actions Taken to Resolve   Actions have been taken by both federal agencies and railroads to address
Service Issues, but Some   service issues. These include the issuance of an emergency service order
Concerns of Shippers Not   by the Board to facilitate the resolution of recent service problems in the
                           West that originated in the Houston/Gulf Coast area and the creation of a
Addressed                  joint Board-U.S. Department of Agriculture Grain Logistics Task Force to
                           disseminate information on anticipated changes in transportation demand
                           and supply. In December 1998, the Board also adopted new procedures
                           allowing shippers to receive expedited temporary relief from inadequate
                           rail service through access to an alternative carrier. Unlike the procedures
                           for obtaining more permanent relief, the new procedures do not require a
                           shipper to show that a railroad has engaged in anticompetitive conduct.

                           All the actions taken are expected to yield benefits in addressing service
                           problems. However, the actions do not address some shippers’ belief that
                           increased competition in the rail industry is needed to improve service.
                           Because of the divergent views of railroads and shippers on this issue,
                           resolving service and competition issues will be difficult and may require
                           congressional action. If it decides to address this issue, the Congress will
                           need to weigh the potential benefits of increased competition against the
                           potential financial and other effects on the railroad industry.


                           This report makes no recommendations.
Recommendations
                           GAO provided a draft of this report to the Surface Transportation Board
Agency Comments            and to the Department of Transportation for review and comment. GAO
and GAO’s Evaluation       met with a number of Board and Department officials, including the
                           Board’s Deputy General Counsel and the Director of the Office of
                           Intermodal Planning and Economics of the Federal Railroad
                           Administration. The Board agreed that the draft report was a fair
                           representation of the issues covered. The Department of Transportation




                           Page 7                                        GAO/RCED-99-93 Railroad Regulation
Executive Summary




made no substantive comments on the draft report. Among the specific
comments made by the Board were that GAO should better depict that
(1) competition is better measured by the effectiveness of transportation
alternatives rather than the number of competitors; (2) the Board, in its
decisions on mergers, has taken actions to ensure that no shipper has
become captive to a single railroad; (3) controversy over revenue
adequacy issues is not new and that these issues were addressed at length
by the Board’s predecessor; (4) 1997 was not a typical year in terms of the
quality of railroad service due to the unusual, severe congestion that
occurred in the West; (5) the Board has an informal mechanism to handle
railroad service complaints through which many problems with service are
resolved; (6) as noted in its December 1998 report to Members of
Congress, providing open access (where one railroad is required to make
its tracks and facilities available to other railroads for a fee), or otherwise
dramatically modifying the current regulatory scheme, could have
far-reaching impacts for shippers and railroads; and (7) service problems
in the Houston/Gulf Coast area during 1997 were not caused by the Union
Pacific/Southern Pacific merger and that the merger’s implementation
helped resolve the problems. The Board also suggested that recently
developed performance measures by the railroad industry could be of
some usefulness in determining service quality.

GAO added information, or modified and/or clarified wording, in this report
to address each of these issues and to recognize the Board’s concerns
and/or position. For example, GAO modified the report’s language to better
recognize the importance of effective competition rather than the number
of competitors. Board and/or Department officials also made other
technical comments, which GAO incorporated where appropriate. The
Board’s comments and GAO’s responses are discussed in greater detail at
the end of chapters 1 through 5.




Page 8                                        GAO/RCED-99-93 Railroad Regulation
Page 9   GAO/RCED-99-93 Railroad Regulation
Contents



Executive Summary                                                                                     2


Chapter 1                                                                                            14
                         Reduced Regulation of the Railroad Industry                                 14
Introduction             Consolidation Within the Railroad Industry                                  15
                         The Surface Transportation Board Replaces the ICC                           22
                         Objectives, Scope, and Methodology                                          24
                         Agency Comments and Our Evaluation                                          28


Chapter 2                                                                                            30
                         Ongoing Industry and Economic Changes Influence Rate Setting                30
Industry and Other       Using Differential Pricing, Railroads Set Rates According to                38
Factors Have               Competitive Conditions
                         Railroad Financial Health Has Improved, but Most Railroads Do               40
Influenced the             Not Earn the Industry Cost of Capital
Rate-Setting             Agency Comments and Our Evaluation                                          46
Environment Since
1990
Chapter 3                                                                                            47
                         Rail Rates Have Generally Decreased Since 1990                              47
Rail Rates Have Fallen   Rail Rates in Some Markets Have Not Fallen                                  51
Since 1990, but Not      Revenue to Variable Cost Ratios Reflect Differential Pricing, but           61
                           With Some Caveats
All Shippers Have        Agency Comments and Our Evaluation                                          65
Benefitted
Chapter 4                                                                                            66
                         Shippers Believe Railroad Service Has Been Poor                             66
Widespread Concerns      Railroads Believe That Service Is Adequate, but Improvements                71
About Rail Service,        Are Needed to Meet Shipper Expectations
                         Quality of Rail Service Cannot Be Determined Since Industrywide             74
but Overall Quality of     Measures Do Not Exist
Service Cannot Be        Railroad Industry Is Developing Limited Measures of                         80
Assessed                   Performance
                         Agency Comments and Our Evaluation                                          80




                         Page 10                                      GAO/RCED-99-93 Railroad Regulation
                     Contents




Chapter 5                                                                                       82
                     Union Pacific and the Board Address Service Problems Beginning             82
Despite Recent         in Late 1997
Actions to Address   Government Agencies and Railroads Take Some Actions to                     84
                       Address Broader Service Issues
Service Issues,      Railroads and Shippers Remain Far Apart on the Key Issue of                89
Concerns Continue      Competition
                     Agency Comments and Our Evaluation                                         91


Appendixes           Appendix I: Class I Railroads in Selected States, 1980 and 1997            92
                     Appendix II: Real Rail Rates for Selected Commodities                      98
                       Transported by Rail
                     Appendix III: Organizations Contacted                                     105
                     Appendix IV: Major Contributors to This Report                            107


Tables               Table 2.1: Revenue Adequacy of Class I Railroads, 1990 Through             45
                       1997
                     Table 3.1: Average Annual Change in Real Rail Rates for Selected           48
                       Commodities, 1982 Through 1996
                     Table 3.2: Percent of Rail Industry Revenue Exceeding 180                  62
                       Percent R/VC for Selected Commodities, 1990 Through 1996
                     Table 4.1: Percent of Shippers Responding to Our Survey                    68
                       Experiencing Somewhat or Much Worse Service in 1997
                       Compared With 1990, by Commodity Type
                     Table 4.2: Average Railcar Cycle Time, Selected Car Types, 1990            77
                       Through 1995


Figures              Figure 1.1: Class I Freight Railroads in the United States, 1997           18
                     Figure 1.2: Class I Railroads in Kansas, 1980 and 1997                     21
                     Figure 2.1: Miles of Road Owned by Class I Railroads, 1990                 33
                       Through 1997
                     Figure 2.2: Class I Railroad Employment, 1990 Through 1997                 34
                     Figure 2.3: Class I Railroad Productivity, 1980 Through 1996               36
                     Figure 2.4: Railroad Industry Returns on Investment and Equity,            41
                       1990 Through 1997
                     Figure 2.5: Short- and Long-term Solvency of Class I Railroads,            42
                       1990 Through 1997
                     Figure 2.6: Railroad Market Share, 1990 Through 1997                       44
                     Figure 3.1: Rail Rate Index for the Transportation of Selected             49
                       Products, 1990 Through 1996




                     Page 11                                     GAO/RCED-99-93 Railroad Regulation
Contents




Figure 3.2: Rail Transportation of Export Wheat and Domestic              50
  Corn, 1990 Through 1996
Figure 3.3: Real Rail Rates for Coal, Selected Medium-Distance            52
  Routes, 1990 Through 1996
Figure 3.4: Real Rail Rates for Wheat, Selected Medium-Distance           55
  Routes, 1990 Through 1996
Figure 3.5: Real Rail Rates for Corn, Selected Medium-Distance            56
  Routes, 1990 Through 1996
Figure 3.6: Average Shipment Size, Selected Wheat Routes, 1990            58
  Through 1996
Figure 3.7: Real Rail Rates for Potassium/Sodium Shipments,               60
  Selected Routes, 1990 Through 1996
Figure 3.8: R/VC Ratios for Medium-Distance Rail Shipments of             64
  Wheat, 1990 through 1996
Figure 4.1: Railroad-Owned Revenue Freight Cars Undergoing or             78
  Awaiting Repair, 1990 Through 1996
Figure I.1: Class I Railroads in Montana, 1980 and 1997                   93
Figure I.2: Class I Railroads in North Dakota, 1980 and 1997              95
Figure I.3: Class I Railroads in West Virginia, 1980 and 1997             97
Figure II.1: Real Rail Rates for Coal, Selected Short- and                98
  Long-Distance Routes, 1990 Through 1996
Figure II.2: Real Rail Rates for Wheat, Selected Short- and               99
  Long-Distance Routes, 1990 Through 1996
Figure II.3: Real Rail Rates for Corn, Selected Short- and               100
  Long-Distance Routes, 1990 Through 1996
Figure II.4: Real Rail Rates for Potassium/Sodium Compounds,             101
  Selected Short- and Long-Distance Routes, 1990 Through 1996
Figure II.5: Real Rail Rates for Plastic Materials or Synthetic          102
  Fibers, Resins, or Rubbers, Selected Short-, Medium-, and
  Long-Distance Routes, 1990 Through 1996
Figure II.6: Real Rail Rates for Motor Vehicles, Selected Medium-        103
  and Long-Distance Routes, 1990 Through 1996
Figure II.7: Real Rail Rates for Motor Vehicle Parts or                  104
  Accessories, Selected Medium- and Long-Distance Routes, 1990
  Through 1996




Page 12                                    GAO/RCED-99-93 Railroad Regulation
Contents




Abbreviations

4RAct      Railroad Revitalization and Regulatory Reform Act
AAR        Association of American Railroads
CONRAIL    Consolidated Rail Corporation
DOT        U.S. Department of Transportation
GAO        General Accounting Office
ICC        Interstate Commerce Commission
R/VC       revenue to variable cost
URCS       Uniform Railroad Costing System
USDA       U.S. Department of Agriculture


Page 13                                  GAO/RCED-99-93 Railroad Regulation
Chapter 1

Introduction


                     Throughout this century, railroads have been a primary mode of
                     transportation for many products, especially for such bulk commodities as
                     coal and grain. Yet, by the 1970s American freight railroads were in a
                     serious financial decline. The Congress responded by passing landmark
                     legislation in 1976 and 1980 that reduced rail regulation and encouraged a
                     greater reliance on competition to set rates. Railroads also continued a
                     series of combinations to reduce costs, increase efficiencies, and improve
                     their financial health.2 In 1995, the Congress abolished the Interstate
                     Commerce Commission (ICC)—the federal agency responsible for
                     overseeing rates, competition, and service in the rail industry—and
                     replaced it with the Surface Transportation Board (the Board).

                     Rail shippers and others have expressed concern about the lack of
                     competition in the railroad industry, the extent to which railroads are
                     using their market power to set rates, and the quality of service provided,
                     especially for those shippers with fewer alternatives to rail transportation
                     to move their goods to market. They have also questioned whether the
                     Board is adequately protecting shippers against unreasonable rates and
                     service.


                     By the 1970s, America’s railroads were in serious financial trouble. In a
Reduced Regulation   1978 report to the Congress, the U.S. Department of Transportation (DOT)
of the Railroad      indicated that in 1976, 11 of 36 Class I railroads studied were earning
Industry             negative rates of return on investment, and at least 3 railroads were in
                     reorganization under the bankruptcy laws.3 Some of the railroads’
                     problems were due to federal regulation of rates that reduced management
                     control and the flexibility railroads needed to react to changing market
                     conditions.4 Prior to 1976, almost all rail rates were subject to ICC oversight
                     to ensure they were reasonable. The Congress sought to improve the
                     financial health of the rail industry by reducing railroad rate regulation and
                     encouraging a greater reliance on competition to set reasonable rail rates.
                     The Congress did so by passing two landmark pieces of legislation—the
                     Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) and
                     the Staggers Rail Act of 1980.


                     2
                      Combinations include mergers, purchases, changes in control, acquisitions, and other forms of
                     consolidations among railroads.
                     3
                      Class I railroads are the nation’s largest railroads as measured by revenue. In 1997, Class I railroads
                     were those railroads with operating revenues of $256 million or more. Return on investment measures
                     the profit made on assets used to provide transportation services.
                     4
                      Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980
                     (GAO/RCED-90-80, May 16, 1990).



                     Page 14                                                       GAO/RCED-99-93 Railroad Regulation
                        Chapter 1
                        Introduction




                        The 4R Act limited the ICC’s authority to regulate rates to those instances
                        where there was an absence of effective competition—that is, where a
                        railroad is “market dominant.” Furthermore, the Staggers Rail Act made it
                        federal policy to rely, where possible, on competition and the demand for
                        rail services (called differential pricing)5 to establish reasonable rates.
                        Among other things, this act also allowed railroads to market their
                        services more effectively by negotiating transportation contracts
                        (generally offering reduced rates in return for guaranteed volumes)
                        containing confidential terms and conditions; limited collective rate
                        setting to those railroads actually involved in a joint movement of goods;
                        and permitted railroads to change their rates without challenge in
                        accordance with a rail cost adjustment factor. Furthermore, both the 4R
                        Act and the Staggers Rail Act required the ICC (now the Board) to exempt
                        certain railroad transportation from economic regulation. The Staggers
                        Rail Act required ICC to exempt railroad transportation from regulation
                        upon finding that the regulation was not necessary to carry out the rail
                        transportation policy and either (1) the transaction was of limited scope or
                        (2) regulation was not needed to protect shippers from an abuse of market
                        power. During the 1980s, railroads used their increased freedoms to
                        improve their financial health and competitiveness.


                        The railroad industry has continued to consolidate in the last 2 decades, a
Consolidation Within    condition that has been occurring since the 19th century. In 1976, there
the Railroad Industry   were 30 independent Class I railroad systems (comprised of 63 Class I
                        railroads); by early 1999, there were 9 railroad systems (comprised of 9
                        Class I railroads) and half of that reduction was due to consolidations.6
                        (See fig. 1.1.) The nine remaining Class I railroad systems are the
                        Burlington Northern and Santa Fe Railway Co.; Consolidated Rail
                        Corporation (Conrail); CSX Transportation, Inc.; Grand Trunk Western
                        Railroad, Inc.; Illinois Central Railroad Co.; Kansas City Southern Railway
                        Co.; Norfolk Southern Railroad Co.; Soo Line Railroad Co., and Union
                        Pacific Railroad Co. In 1998, the Board approved the division of Conrail’s




                        5
                         Inherent in the rail industry cost structure are joint and common costs that cannot be attributed to
                        particular traffic. Under demand-based differential pricing, railroads recover a greater proportion of
                        these unattributable fixed costs from rates charged to those with a greater dependency on rail
                        transportation.
                        6
                         In addition to consolidation, other reasons for the reduction in the number of Class I railroads were
                        carrier bankruptcies and a 1992 ICC change in the threshold for qualifying as a Class I railroad (from
                        $50 million to $250 million). Bankruptcies eliminated 2 of the 30 Class I railroad systems, while
                        changes in the Class I standard moved 9 systems out of Class I status.



                        Page 15                                                       GAO/RCED-99-93 Railroad Regulation
Chapter 1
Introduction




assets between CSX Transportation, Inc., and Norfolk Southern
Corporation. Conrail is expected to be formally absorbed by CSX
Transportation and Norfolk Southern in 1999, leaving a total of eight Class
I railroad systems.




Page 16                                     GAO/RCED-99-93 Railroad Regulation
Chapter 1
Introduction




Page 17        GAO/RCED-99-93 Railroad Regulation
                                                  Chapter 1
                                                  Introduction




Figure 1.1: Class I Freight Railroads in the United States, 1997




           Union Pacific Railroad

           Burlington Northern and Santa Fe Railway

           Canadian National

           Conrail

           Norfolk Southern

           CSX Transportation

           Canadian Pacific Railway System

           Illinois Central Railroad

           Kansas City Southern Railway

           Class I trackage rights over non-Class I railroad or government owned track.




                                                  Page 18                                 GAO/RCED-99-93 Railroad Regulation
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Introduction




               Note: This map includes Class I trackage rights--that is, the authority of
               one railroad to operate over another railroad's track--over non-Class I
               railroads and/or over government owned track and joint ownership of track.
               The map does not reflect Class I trackage rights over other Class I railroads,
               including the 4,000 miles of Burlington Northern and Santa Fe Railway
               trackage rights over Union Pacific imposed as a condition in the
               Union Pacific/Southern Pacific merger.

               Source: Federal Railroad Administration, Office of Policy.




Page 19                                                   GAO/RCED-99-93 Railroad Regulation
Chapter 1
Introduction




Railroads consolidated to reduce costs and increase efficiencies, making
them more competitive. For example, one of the justifications for the 1995
Burlington Northern-Santa Fe merger was to provide shippers with more
efficient and cost-effective “single line” service. Both the Board and the
railroads involved expected reduced costs and improved transit times
because the railroad on which a shipment originated would no longer have
to transfer the shipment to another railroad for routing to its final
destination. Cost reductions and increased efficiencies were also expected
from, among other things, rerouting of traffic over shorter routes, more
efficient use of equipment, and increased traffic densities. Consolidations
were also justified as providing competitive benefits—both within the rail
industry and between railroads and other transportation modes. For
example, the Board in its 1996 approval of the Union Pacific/Southern
Pacific merger expected the merger would intensify rail competition in the
West between Burlington Northern and Santa Fe Railway and the
combined Union Pacific/Southern Pacific. The acquisition of Conrail by
Norfolk Southern and CSX Transportation is expected to yield
benefits—both by diverting substantial amounts of highway freight traffic
to railroads and by introducing new railroad-to-railroad competition in
those areas previously served only by Conrail.




Page 20                                     GAO/RCED-99-93 Railroad Regulation
                                           Chapter 1
                                           Introduction




Figure 1.2: Class I Railroads in Kansas, 1980 and 1997

   Kansas 1980
                                                                                                        Missouri Pacific Railroad
                                                                                                        Missouri-Kansas-Texas Railroad
                                                                                                        Chicago Rock Island & Pacific
                                                                                                        Railroad
                                                                                                        Kansas City Southern Railway
                                                                                                        Burlington Northern Railroad
                                                                                                        Union Pacific Railroad
                                                                                                        Atchison Topeka & Santa Fe
                                                                                                        Railway




   Kansas 1997
                                                                                                        Kansas City Southern Railway
                                                                                                        Burlington Northern and Santa Fe
                                                                                                        Railway
                                                                                                        Union Pacific Railroad
                                                                                                        Non-Class I railroads




                                           Source: Federal Railroad Administration, Office of Policy.




                                           Page 21                                                      GAO/RCED-99-93 Railroad Regulation
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                       Introduction




                       As Class I railroads consolidated, non-Class I railroads increased their
                       importance in providing service. For example, in 1980, Kansas was served
                       by seven Class I railroads (see fig. 1.2); in 1997, this number was three.
                       Between 1991 and 1996, Class I railroads reduced their mileage operated
                       in the state by about 1,400 miles while non-Class I carriers increased their
                       mileage by about 1,700 miles (175 percent greater than in 1991). (App. I
                       shows how Class I and non-Class I rail mileage changed in Montana, North
                       Dakota, and West Virginia from 1980 to 1997.)


                       In 1995, the Congress passed the ICC Termination Act of 1995, which
The Surface            abolished the ICC. The act transferred many of ICC’s core rail functions and
Transportation Board   certain nonrail functions to the Board, a decisionally independent
Replaces the ICC       adjudicatory agency that is administratively housed in DOT. Among other
                       things, the Board approves market entry and exit of railroads; approves
                       railroad mergers and consolidations; determines the adequacy of a
                       railroad’s revenues on an annual basis; adjudicates complaints concerning
                       rail rates on traffic over which a railroad has market dominance; 7
                       adjudicates complaints alleging that carriers have failed to provide service
                       upon reasonable request; and exempts railroad transportation from
                       economic regulation under certain circumstances. The ICC Termination Act
                       made several significant changes to railroad regulation. For example, the
                       act eliminated the requirement for railroad tariff filings. 8 However, the act
                       did not alter railroads’ authority to engage in demand-based differential
                       pricing or to negotiate transportation service contracts containing
                       confidential terms and conditions that are beyond the Board’s authority
                       while in effect.

                       Several of the Board’s functions are particularly relevant to this report: the
                       (1) responsibility for determining the adequacy of a railroad’s revenues,
                       (2) jurisdiction over rail rate complaints, and (3) jurisdiction over
                       complaints alleging that carriers have failed to provide service upon
                       reasonable request. First, the Board is required to determine the adequacy
                       of railroad revenues on an annual basis. In addition, the Board is required
                       to make an adequate and continuing effort to assist railroads in attaining

                       7
                        The Board’s market dominance analysis 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 (R/VC) level. Variable costs are those costs that change according to the quantities shipped (e.g.,
                       fuel and labor). If the revenue produced by the traffic exceeds the statutory threshold, the Board
                       conducts a qualitative analysis of any intramodal or intermodal competition.
                       8
                        A tariff is a schedule of rates and general terms and conditions under which a product or service is
                       supplied.



                       Page 22                                                       GAO/RCED-99-93 Railroad Regulation
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Introduction




adequate revenues—that is, revenues that under honest, economical, and
efficient management cover total operating expenses plus a reasonable
and economic profit on capital employed in the business.

Second, the Board is also responsible for protecting shippers without
feasible transportation alternatives from unreasonably high rail rates.
Where the Board concludes that a challenged rate is unreasonable, it may
order the railroad to pay reparations on past shipments and prescribe
maximum rates for future shipments. The Board does not have authority
over rail rates for car movements made under contracts or for movements
that it has exempted from economic regulation.9 Only about 18 percent of
the tonnage moved in 1997 was subject to rate reasonableness regulation
by the Board. The remainder was either moved under contract
(70 percent), according to the Association of American Railroads (AAR),10
or was exempt from economic regulation (12 percent).11 Furthermore,
rates on rail traffic priced below the 180-percent revenue-to-variable cost
threshold are not subject to regulation by the Board. According to the
Board, over 70 percent of all rail traffic in 1997 was priced below this
threshold.

Third, the Board has the authority to adjudicate service complaints filed
by shippers. The Board’s process for handling formal service complaints,
like its rate complaint process, is an administrative litigation process, in
which parties to the dispute file pleadings, disclose and receive
information from each other, and present evidence.12 If the Board decides
a case in favor of the complainant, it can require the carrier to provide the
shipper with monetary compensation or to adopt or stop a practice.
Moreover, the Board is authorized to impose “competitive access”
remedies, under which shippers can obtain access to an alternative
carrier.13 However, to obtain permanent relief, the complaining shipper

9
 The Board may revoke exemptions from economic regulation when it determines that such regulation
is necessary to carry out the rail transportation policy.
10
    AAR is a railroad trade association.
11
  Examples of commodities and services that have been exempted from economic regulation include
farm products (except grain, soybeans, and sunflower seeds), fresh fruits and vegetables, boxcar
traffic, and new highway trailers or containers.
12
 The Board also has a process for handling service complaints informally, and, according to Board
officials, many service complaints are handled this way quickly and inexpensively.
13
  Three kinds of competitive access remedies are available: (1) alternative through routes, under which
railroads are required to interline traffic with other railroads and provide through routes and through
rates for that traffic; (2) reciprocal switching, under which a carrier must transport the railcars of a
competing carrier for a fee; or (3) terminal trackage rights, under which a carrier must permit another
carrier to use its lines in or near a terminal area for a fee.



Page 23                                                      GAO/RCED-99-93 Railroad Regulation
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                     Introduction




                     must demonstrate that the rail carrier currently providing the service
                     (called the incumbent carrier) has engaged in anticompetitive
                     conduct—that is, the carrier has used its market power to extract
                     unreasonable terms or, because of its monopoly position, has disregarded
                     the shipper’s needs by not providing adequate service. As discussed in
                     chapter 5, the Board also has other procedures for providing temporary
                     relief from service inadequacies without a showing of anticompetitive
                     conduct where the carrier is not providing adequate service.

                     The Board may also address service deficiencies through emergency
                     service orders. The Board may issue an emergency service order if it
                     determines that a failure of traffic movement has created an emergency
                     situation that has a substantial impact on shippers or railroad service in a
                     region or that a railroad cannot transport traffic in a manner that properly
                     serves the public. Through emergency service orders, the Board may,
                     among other things, permit the operation of one rail carrier over another
                     carrier’s line to improve the flow of traffic. The Board may also direct a
                     rail carrier to operate the lines of a carrier that has ceased operations.
                     These arrangements may not exceed 270 days. Since 1990, the ICC and the
                     Board have issued eight emergency service orders; prior to its termination,
                     the ICC, in five of these instances, directed a carrier to operate the lines of
                     another railroad.


                     Senators Conrad Burns, Byron Dorgan, Pat Roberts, and John D.
Objectives, Scope,   Rockefeller, IV, expressed concern that the continued consolidation
and Methodology      within the rail industry has allowed railroads to charge unreasonably high
                     rates and provide poor service. The Senators asked us to report on
                     (1) how the environment within which rail rates are set has changed since
                     1990; (2) how rates for users of rail transportation have changed since
                     1990; (3) how railroad service quality has changed since 1990; and (4) what
                     actions, if any, the Board and others have taken (or propose to take) to
                     address rail rate and service quality issues. The requesters also asked us to
                     identify difficulties and barriers for shippers, including small shippers, in
                     obtaining relief from unreasonable rates from the Board. We addressed
                     this latter topic and actions that the Board and others have taken to
                     address rail rate issues in our companion report on issues associated with
                     the Board’s rate relief process.14




                     14
                      Railroad Regulation: Current Issues Associated With the Rate Relief Process (GAO/RCED-99-46,
                     Feb. 26, 1999).



                     Page 24                                                   GAO/RCED-99-93 Railroad Regulation
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Introduction




To identify how the environment within which rail rates have been set has
changed since 1990, we reviewed (1) legislation regarding the economic
regulation of railroads, (2) regulations and decisions issued by ICC or the
Board regarding rail rate and service issues, and (3) literature available in
professional journals and trade publications. We also used reports we have
issued on various aspects of the railroad industry and the Staggers Rail Act
of 1980 and reviewed selected position papers prepared by railroad and
shipper trade associations. To identify the economic and financial status
of railroads in the 1990s, we collected information available from various
AAR surveys of Class I railroads on the percent of railroad tonnage moved
under contract and collected financial information from ICC’s Transport
Statistics in the United States, the Board’s Statistics of Class I Freight
Railroads in the United States, and AAR’s Railroad Facts. We also obtained
information on the amount of intercity freight tonnage transported in the
United States annually by transportation mode from Transportation In
America, published by the Eno Transportation Foundation, Inc. To identify
structural changes in the railroad industry since 1990, we reviewed
information from AAR on Class I status, information on railroad industry
combinations, and reviewed ICC’s and the Board’s decisions in selected
railroad merger cases.

To identify how railroad rates have changed since 1990, we obtained data
from the Board’s Carload Waybill Sample for the years 1990 through 1996
(latest data available at the time of our review). The Carload Waybill
Sample is a sample of railroad waybills (in general, documents prepared
from bills of lading authorizing railroads to move shipments and collect
freight charges) submitted by railroads annually. We used these data to
obtain information on rail rates for specific commodities in specific
markets by shipment size and length of haul. According to Board officials,
revenues derived from the Carload Waybill Sample are not adjusted for
such things as year-end rebates and refunds that may be provided by
railroads to shippers that exceed certain volume commitments.

Some railroad movements contained in the Carload Waybill Sample are
governed by contracts between shippers and railroads. To avoid
disclosure of confidential business information, the Board disguises the
revenues associated with these movements prior to making this
information available to the public. Using our statutory authority to obtain
agency records, we obtained a version of the Carload Waybill Sample that
did not disguise revenues associated with railroad movements made under
contract. Therefore, the rate analysis presented in this report presents a




Page 25                                      GAO/RCED-99-93 Railroad Regulation
Chapter 1
Introduction




truer picture of rail rate trends than analyses that may be based solely on
publicly available information.

The specific commodities selected for analysis were coal, grain (wheat
and corn), chemicals (potassium and sodium compounds and plastic
materials or synthetic fibers, resins, and rubber), and transportation
equipment (finished motor vehicles and motor vehicle parts and
accessories). These commodities represented about 45 percent of total
industry revenue in 1996 and, in some cases, had a significant portion of
their rail traffic transported where the ratio of revenue to variable costs
equaled or exceeded 180 percent. Since much of the information contained
in the Carload Waybill Sample is confidential, rail rates and other data
contained in this report that were derived from this data base have been
aggregated at a level sufficient to protect this confidentiality.

We used rate indexes and average rates on selected corridors to measure
rate changes over time. A rate index attempts to measure price changes
over time by holding constant the underlying collection of items that are
consumed (in the context of this report items shipped). This approach
differs from comparing average rates in each year because over time
higher- or lower-priced items can constitute different shares of the items
consumed. Comparing average rates can confuse changes in prices with
changes in the composition of the goods consumed. In the context of
railroad transportation, rail rates and revenues per ton-mile are influenced,
among other things, by average length of haul. Therefore, comparing
average rates over time can be influenced by changes in the mix of
long-haul and short-haul traffic. Our rate indexes attempted to control for
the distance factor by defining the underlying traffic collection to be
commodity flows occurring in 1996 between pairs of Census regions.

To examine the rate trends on specific traffic corridors, we first chose a
level of geographic aggregation for corridor endpoints. For grain,
chemical, and transportation equipment traffic, we defined endpoints to be
regional economic areas defined by the Department of Commerce’s
Bureau of Economic Analysis. For coal traffic, we used economic areas to
define destinations and used coal supply regions—developed by the
Bureau of Mines and used by the Department of Energy—to define origins.
An economic area is a collection of counties in and about a metropolitan
area (or other center of economic activity); there are 172 economic areas
in the United States and each of the 3,141 counties in the country is
contained in an economic area. For each selected commodity and each
corridor, we determined the average shipment distance over the 1990



Page 26                                      GAO/RCED-99-93 Railroad Regulation
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Introduction




through 1996 time period. We placed each corridor in one of three
distance-related categories: 0-500 miles, 501-1,000 miles, and more than
1,000 miles. We then determined, for each selected commodity, the
aggregate tonnage over the 1990 through 1996 time period and selected the
top five corridors (based on tons shipped) within each distance category
for further examination, including changes in revenues and variable costs
per ton-mile over the time period.

To assess how railroad service quality has changed since 1990, we
(1) reviewed literature on how railroad service is (or can be) measured;
(2) reviewed railroad and shipper statements on the quality of rail service
in recent years; and (3) interviewed Class I railroads, shipper associations,
and several individual shippers. To obtain a wider perspective on shippers’
views about the quality of service they have received and how it might be
improved, we sent a questionnaire to members of 11 commodity
associations that ship using rail in the United States and to those shippers
that had filed rate complaints before the Board. The member organizations
represent shippers of the four commodities that comprised the largest
volume of rail shipments—coal, chemicals, plastics, and bulk grain.15 For
coal, chemicals, and plastics, we surveyed all members of the associations,
and this report provides the views of the 87 coal shippers and 99 chemicals
and plastics shippers that responded to our survey.

Because we used statistical sampling techniques to obtain the views of
members of one grain association, the National Grain and Feed
Association, the statistics we provide relating to the views of grain
shippers and of all shippers responding to our survey are presented as
estimates. The report provides estimates of the views of 523 grain
shippers. In all cases, these estimated 709 coal, chemicals, plastics, and
grain shippers indicated that they had shipped goods by rail in at least 1
year since 1990. Some estimates presented in this report do not represent
the views of 709 shippers because some shippers did not answer all the
questions. For more information on how we conducted our survey, as well
as responses to individual questions, see our companion report on current
issues associated with the Board’s rate relief process (GAO/RCED-99-46).

We also determined the number of formal service complaints that were
being adjudicated by ICC on January 1, 1990, and the number that have
been filed with the ICC/Board from January 1, 1990, through December 31,
1998. To do this, we asked the Board to identify all formal service

15
  Corn, wheat, sorghum grains, barley, rye, and oats represented nearly all grain shipments by rail in
the United States in 1996.



Page 27                                                       GAO/RCED-99-93 Railroad Regulation
                     Chapter 1
                     Introduction




                     complaints between these two dates. In order to test the completeness of
                     the Board’s identification of service complaints, we reviewed selected
                     cases that the Board did not consider to be service-related. We found one
                     service complaint not contained on the Board’s original list of complaints.
                     We discussed this complaint with Board officials, who agreed that it
                     should be considered a formal service complaint. We did not review the
                     merits, or appropriateness, of any ICC/Board decisions associated with
                     these complaints.

                     To determine actions the Board and others have taken or have proposed
                     to take to address service issues, we interviewed officials from the Board,
                     DOT, and U.S. Department of Agriculture (USDA); industry association
                     officials; and officials from Class I railroads and reviewed the documents
                     that they provided. We also reviewed statutes and regulations pertaining to
                     service issues, recent Board decisions on service issues, and emergency
                     and directed service orders issued by the ICC or the Board since 1990. We
                     interviewed officials from the Board, DOT, and USDA about their recent and
                     planned efforts to address the needs of agricultural shippers and obtained
                     and reviewed relevant agency agreements and reports. We interviewed
                     Class I railroad and AAR executives about, and obtained and reviewed
                     documentation on, their 1998 meetings with shippers; efforts to develop
                     and disseminate measures of service; agreements with grain and feed
                     shippers and small railroads; and efforts to improve customer service. We
                     also attended the railroad/shipper meetings held in Chicago in August 1998
                     and in Atlanta in October 1998.

                     The organizations we contacted during our review are listed in appendix
                     III. Our work was conducted from June 1998 through March 1999 in
                     accordance with generally accepted government auditing standards.


                     In commenting on a draft of this report, the Board noted that our map of
Agency Comments      Class I freight railroads in the United States in 1997 (fig. 1.1) did not
and Our Evaluation   include trackage rights of Class I railroads over other Class I railroads,
                     including about 4,000 miles of Burlington Northern and Santa Fe trackage
                     rights over Union Pacific. The Board also noted that it has an informal
                     process for handling railroad service complaints and that this process can
                     be used to resolve service problems quickly and inexpensively. In
                     response to these issues, we modified the note to figure 1.1 to indicate that
                     Class I trackage rights over other Class I railroads is not shown on the
                     map, including the 4,000 miles of Burlington Northern and Santa Fe




                     Page 28                                      GAO/RCED-99-93 Railroad Regulation
Chapter 1
Introduction




trackage rights over Union Pacific. We also added language better
recognizing the Board’s informal service complaint process.




Page 29                                    GAO/RCED-99-93 Railroad Regulation
Chapter 2

Industry and Other Factors Have Influenced
the Rate-Setting Environment Since 1990

                             Railroads’ rate setting since 1990 has increasingly been influenced by
                             ongoing industry and economic changes such as continued rail industry
                             consolidation, which has concentrated the industry into fewer and bigger
                             railroads, and the need for investment capital to address infrastructure
                             constraints. Rail rates are also a function of market competition. Using
                             differential pricing, railroads continued to set rates in the 1990s according
                             to the demand for their services. Overall railroad financial health has
                             improved during the 1990s, and railroads increased their share of the
                             freight transportation market. However, many Class I railroads continued
                             to earn less than what it costs them to raise capital (called the revenue
                             adequacy standard).


                             Ongoing industry and economic changes have influenced how railroads
Ongoing Industry and         have set their rates. Since 1990, there has been considerable change in the
Economic Changes             rail industry and the economic environment in which it operates. Not only
Influence Rate Setting       has the rail industry continued to consolidate, potentially increasing
                             market control by the largest firms, but capacity constraints have led to an
                             increased need for capital; industry growth has raised the specter that
                             productivity gains may moderate; and domestic and worldwide economic
                             changes have caused fluctuations in the demand for rail transportation.
                             Many of these changes are expected to continue into the future. Other
                             actions are also expected to influence the rate-setting environment,
                             including ongoing actions to deregulate the electricity generating industry.


Continued Railroad           The 1990s have seen significant consolidation within the railroad industry.
Industry Consolidation Has   For the most part, this consolidation has concentrated the rail industry in
Potentially Increased        fewer and larger companies and potentially increased market control by
                             these firms. The number of independent Class I railroad systems has
Railroads’ Control Over      decreased from 13 in 1990 to 9 in early 1999.16 These firms control a
Industry Revenues and Rail   significant portion of industry revenues as well as traffic. In 1990, the five
Markets                      largest railroads accounted for about 74 percent of total rail industry
                             operating revenue.17 In 1997, this percentage had increased to about
                             94 percent.18 In fact, the two largest Class I railroads (Union Pacific and


                             16
                               This includes one railroad (the Florida East Coast Railway) that was reclassified from Class I to Class
                             II in 1992.
                             17
                              The five largest railroads in terms of operating revenues were Burlington Northern; Conrail; CSX
                             Transportation; Norfolk Southern; and Union Pacific. The analysis excluded the Florida East Coast
                             Railroad because it was reclassified to Class II in 1992.
                             18
                              In terms of total operating revenues for 1997, these railroads were Burlington Northern and Santa Fe
                             Railway, Conrail, CSX Transportation, Norfolk Southern, and Union Pacific.



                             Page 30                                                       GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced
the Rate-Setting Environment Since 1990




Burlington Northern and Santa Fe Railway) accounted for about
55 percent of total industry operating revenue. An analysis of ton-miles of
revenue freight transported shows similar results. In 1990, the five largest
railroads accounted for about three-fourths of total revenue ton-miles
transported by the railroad industry. In 1997, the five largest railroads
accounted for about 95 percent of revenue ton-miles transported. Again,
the two largest Class I railroads accounted for just under two-thirds of all
revenue ton-miles transported in 1997.

Some shipper groups and others have expressed concerns about industry
consolidation. For example, the Railroad-Shipper Transportation Advisory
Council, created by the ICC Termination Act, reported in 1998 that, because
of rail industry consolidation, some shippers have developed fears that the
railroad that serves them not only dictates the terms of their relationship
but also whether they remain economically viable. The Consumers United
For Rail Equity, representing various shipper and industry trade
associations, has also expressed concerns that dwindling competitive rail
options resulting from industry consolidation have increased the number
of shippers that consider themselves captive to railroads. Finally, the
Alliance for Rail Competition, also representing various shipper and
industry trade associations, has expressed concern that deteriorating rail
service and the potential for monopoly rate abuse by railroads have
resulted from the creation of fewer and bigger railroads. This organization
believes increased competition in the railroad industry, rather than
regulation, would better protect shippers against abuses.

The Board plays a role in rail industry consolidation. Not only does the
Board approve proposed mergers and acquisitions when it finds them in
the public interest, but monitors them once they have been approved.19 As
part of the review and approval process, the Board has the authority to
attach conditions to a merger or acquisition. In general, these conditions
are designed to protect the public against any harm that might otherwise
be experienced as the result of one railroad taking over another and to
protect against the potential loss of competition or protect affected
shippers from the loss by another rail carrier of the ability to provide
essential service. According to the Board, merger conditions are routinely
imposed to ensure that any shipper that was capable of being served by
more than one railroad before a merger will continue to have more than
one railroad available after the merger. These conditions typically involve

19
  During a proceeding involving two or more Class I railroads, the Board considers, among other
things, how the transaction will affect competition among railroads (in the affected region or in the
national transportation system), railroad employees, and the adequacy of transportation provided to
the public.



Page 31                                                      GAO/RCED-99-93 Railroad Regulation
                             Chapter 2
                             Industry and Other Factors Have Influenced
                             the Rate-Setting Environment Since 1990




                             granting another railroad either rights to operate on the combining
                             railroads’ track or some form of switching rights to gain access to affected
                             customers of the combining railroads. These conditions have been
                             imposed in all large mergers occurring during the 1990s. Board officials
                             have acknowledged, however, that due to staff and resource limitations
                             they must by necessity be less proactive in monitoring mergers to ensure
                             that conditions imposed are working properly to preserve pre-merger
                             competition.


Capacity Constraints and     The rate-setting environment has also been increasingly affected by
Moderation of Productivity   railroads’ infrastructure needs. Railroads have increased their market
Gains May Slow Railroad      share and the amount of tonnage they carry each year. However, even with
                             the increased demand for rail transportation, real rail rates have declined,
Cost Reduction               necessitating that railroads seek ways to continue to reduce costs. Two
                             ways such costs have been cut are reductions in miles of road operated
                             and employment levels.20 (See figs. 2.1 and 2.2.) From 1990 to 1997, the
                             miles of road operated by Class I railroads decreased about 15 percent
                             (from about 119,800 miles to about 102,000 miles), and Class I employment
                             decreased by about 18 percent (from 216,000 employees to 178,000
                             employees).




                             20
                              A mile of road operated represents the aggregate length of roadway, excluding yard tracks, sidings,
                             and parallel lines. Some of the reductions in miles of road operated resulted from lines sold to
                             non-Class I railroads, while in other cases, lines were abandoned.



                             Page 32                                                     GAO/RCED-99-93 Railroad Regulation
                                       Chapter 2
                                       Industry and Other Factors Have Influenced
                                       the Rate-Setting Environment Since 1990




Figure 2.1: Miles of Road Owned by
Class I Railroads, 1990 Through 1997   Miles

                                       140,000

                                                      119,758
                                       120,000                  116,626
                                                                          113,056   110,425   109,332   108,264   105,779
                                                                                                                            102,128
                                       100,000


                                        80,000


                                        60,000


                                        40,000


                                        20,000


                                               0
                                                      1990      1991      1992      1993      1994      1995      1996      1997

                                               Year


                                       Source: AAR.




                                       Page 33                                                     GAO/RCED-99-93 Railroad Regulation
                                Chapter 2
                                Industry and Other Factors Have Influenced
                                the Rate-Setting Environment Since 1990




Figure 2.2: Class I Railroad
Employment, 1990 Through 1997   Number of employees (in thousands)
                                250

                                             216
                                                   206
                                200                         197       193    190         188
                                                                                                  182      178


                                150



                                100



                                 50



                                  0
                                          1990     1991    1992      1993    1994       1995     1996     1997

                                      Year


                                Source: AAR.




                                Although reductions in miles of road operated and employment have
                                helped to reduce costs, they have also created capacity constraints and a
                                need for investment capital to address these constraints as the rail market
                                has grown in recent years. Obtaining this capital has become a concern of
                                the rail industry, particularly given falling rates and revenue trends. Some
                                of the railroad officials we spoke with acknowledged this concern and
                                were unsure about how this problem would be addressed. For example,
                                officials of one Class I railroad told us that, in the future, their company
                                would have a difficult time meeting increased market demand because of a
                                lack of equipment and inadequate track and rail facility infrastructure. The
                                officials suggested that additional capital investment would be needed to
                                address choke points—that is, sections of track and facilities that have
                                more traffic than they can handle. However, making such investments
                                would be difficult given falling rail rates. Officials at two other Class I
                                railroads also expressed concern about market growth and capacity
                                constraints and said that additional investment would be needed. The
                                officials also agreed that this would be difficult, at best, given rail rate
                                trends and the need to price their services to be competitive.



                                Page 34                                             GAO/RCED-99-93 Railroad Regulation
Chapter 2
Industry and Other Factors Have Influenced
the Rate-Setting Environment Since 1990




The rate-setting environment has also been influenced by productivity
gains. In particular, productivity gains have helped railroads reduce costs,
which in turn has allowed railroads to reduce rates in order to be
competitive.21 The productivity gains achieved in the 1980s have largely
continued into the 1990s. (See fig. 2.3.) We looked at three measures of
productivity—net ton-miles per train hour,22 revenue ton-miles per gallon
of fuel consumed, and revenue ton-miles per employee-hour worked. In
general, each of these measures, except net ton-miles per train-hour,
increased since 1990. Net ton-miles per train-hour has fluctuated since
1990, and in 1996, was about 2 percent lower than it was in 1990. Revenue
ton-miles per employee-hour worked, in particular, has shown dramatic
increases since the late 1980s. Using an index based on 1980 (1980 equals
100), revenue ton-miles per employee-hour worked more than doubled
from 1986 through 1996—rising from an index value of 151 to an index
value of 344.




21
  For more information see GAO/RCED-90-80.
22
 A net ton-mile is the movement of one ton of revenue or nonrevenue freight, or both, a distance of 1
mile.



Page 35                                                      GAO/RCED-99-93 Railroad Regulation
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                                                      Industry and Other Factors Have Influenced
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Figure 2.3: Class I Railroad Productivity, 1980 Through 1996

Index value
400



350



300



250



200



150



100



 50



  0
      1980     1981    1982    1983    1984    1985     1986    1987    1988    1989    1990   1991   1992   1993   1994   1995   1996

      Year

              Net ton-miles per train-hour
              Revenue ton-miles per gallon of fuel consumed
              Revenue ton-miles per employee-hour

                                                      Source: GAO’s analysis of AAR’s data.




                                                      According to railroad officials, most of the productivity gains achieved
                                                      have been shared with customers through rate reductions. Although
                                                      productivity gains have played a significant role in past rate making, there
                                                      is some question as to whether these gains can continue to be achieved.




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                          Industry and Other Factors Have Influenced
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                          One recent study suggests that the prospects for continued productivity
                          improvements may be diminishing.23 This was attributed to the
                          expectation that, because industry consolidation has permitted significant
                          reduction in miles of road operated and employment levels, the next round
                          of industry consolidation and mergers (network rationalization) might
                          yield only modest productivity benefits. If so, then there may be fewer
                          opportunities for the rail industry to rely on productivity gains to achieve
                          cost reductions and therefore rate reductions. In fact, future productivity
                          gains may be reduced because what was once redundant track and
                          facilities (and therefore eliminated to reduce costs) might have to be
                          brought back into service to meet market growth. Doing so could
                          minimize productivity improvement.


Economic and Regulatory   The rate-setting environment has been affected by domestic and world
Changes Have and Will     economic changes. This is especially true for rail commodities that are
Continue to Affect Rail   exported. For railroads, volatility in world grain markets can affect the
                          volume of grain transported by rail. Over the last 10 years, the volume of
Markets                   export grain transported by rail has ranged from a low of about 28 million
                          tons in 1994 to a high of about 56 million tons in 1988. Other rail
                          commodities can also show fluctuations over time. From 1992 through
                          1996, the nation’s coal exports ranged from a low of about 71 million tons
                          in 1994 to a high of about 103 million tons in 1992. The volatility in
                          commodity markets can affect railroad rates because it affects the demand
                          for rail transportation. As demand changes, railroads adjust rates to attract
                          or retain business. For example, officials at one Class I railroad told us
                          that it has a wide range of pricing policies for chemicals that allow it to
                          react to changes in world chemicals markets. Officials from the same
                          railroad said that export demand can play a particularly strong role for
                          grain. Although grain rates can be affected by decreases in demand, there
                          is more of an impact when exports are strong and their railroad is trying to
                          keep business away from a competitor.

                          The rate-setting environment has also been affected by legislative and/or
                          regulatory actions. In 1990, the Clean Air Act was amended to, among
                          other things, reduce sulfur dioxide emissions by electric generating plants.
                          The act spurred the demand for low sulfur coal for use in generating
                          electricity. This increased the demand for western coal, especially from
                          the Powder River Basin area of Wyoming and Montana, which is known
                          for its low sulfur content. In 1996, Wyoming produced more coal than any

                          23
                             Sources of Financial Improvement In the U.S. Rail Industry, 1966-1995, Carl D. Martland,
                          Massachusetts Institute of Technology, as presented in the Proceedings of the Transportation
                          Research Forum, 39th Annual Meeting (1997).



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                         Industry and Other Factors Have Influenced
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                         other state in the nation (about 278 million tons or about 63 percent more
                         than the next highest state, West Virginia). About 85 percent of this coal
                         moved by rail. Although demand for Powder River Basin coal has
                         increased substantially, our analysis shows that inflation-adjusted Powder
                         River Basin rail rates on both long (over 1,000 miles) and medium distance
                         (over 500 miles) routes have generally decreased since 1990.

                         Ongoing efforts to deregulate the electricity generation industry can be
                         expected to affect future rail rates. Electricity generation is heavily
                         dependent on coal as a fuel source. A recent Energy Information
                         Administration study found that over 87 percent of all coal consumed in
                         the United States was for electricity generation by utilities.24 Moreover,
                         railroads are the largest carrier of coal, and transportation is a major
                         component of the price of coal delivered to electric power generators. The
                         study suggested that as the electricity generating industry becomes more
                         competitive there will be pressure for the industry to reduce its costs,
                         including the price it pays for coal and the transportation of coal. These
                         cost reductions may have significant impacts on the railroad industry and
                         future rail rates.


                         In reducing the economic regulation of railroads through the 4R Act and
Using Differential       Staggers Rail Act, the Congress expected that rates determined by market
Pricing, Railroads Set   competition would, in general, benefit both railroads and shippers. In
Rates According to       many instances, railroads faced competition from other railroads or modes
                         of transportation, and the new congressionally set rail transportation
Competitive              policy recognized the broader nature of this competition by permitting
Conditions               railroads the flexibility to set their rates in response to rates and services
                         available to shippers from other transportation options. In particular,
                         railroad rates set in response to truck, barge, or railroad competition
                         would typically be different (lower) than rates based primarily on a
                         railroad’s full cost to provide service. Differential pricing then is a means
                         by which railroads set rates reflecting the demand characteristics of
                         shippers, with the result that shippers with similar cost characteristics
                         (such as the number of railcars to be shipped or lengths of haul to
                         destination) can pay quite different rates.

                         Although rail rates set using demand-based differential pricing reflect the
                         demand characteristics of shippers and market competition, such rates are
                         also linked to railroad costs. Generally, the nature of a railroad’s fixed

                         24
                          Challenges of Electric Power Industry Restructuring for Fuel Suppliers, Energy Information
                         Administration (Sept. 1998).



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costs (e.g., physical plant such as rail, bridges, and signalling) is such that
the costs of providing it are (1) incurred before any traffic moves and
(2) insensitive to the level of rail traffic. Fixed costs are also largely
unattributable to any particular shipper. For a railroad to be profitable, it
must recover all of its costs—fixed as well as variable costs. Differential
pricing is a pricing mechanism in which a railroad’s fixed costs can be
recovered collectively from all shippers but not necessarily
proportionately from each shipper. Under differential pricing, shippers
without effective alternatives to a railroad’s transportation generally pay
proportionately greater shares of the railroad’s fixed costs, while shippers
with more alternatives pay proportionately less.

Differential pricing was envisioned as benefitting both railroads and
shippers. Railroads were expected to benefit from gaining the pricing
flexibility to retain or attract shippers that would otherwise choose other
transportation modes. In this way, railroads were expected to benefit from
a larger and more diversified traffic base than under the previous
regulatory scheme. Those shippers with competitive alternatives were
expected to benefit from lower rail rates. Shippers without competitive
alternatives were also expected to benefit. In theory, these shippers would
pay less than if competitive traffic were diverted to an alternative
transportation mode, thus leaving those shippers without alternatives to
bear the unattributable costs previously assigned to the diverted traffic.25

The Congress expected that the transition to differential pricing and a
more market-oriented system would not affect all shippers equally
because, in general, transportation characteristics and market conditions
vary among commodities.26 In practice, these expectations have been met.
Data from the Board show that in 1990 about one-third of all rail traffic (as
measured by revenues) was transported at rates generating revenues
exceeding 180 percent of variable costs. By 1996, this percentage had
decreased to 29 percent.27 That means that about 70 percent was
transported at rates generating revenues that were less than 180 percent of
variable costs. In addition, in 1996, the percent of commodity revenue for
shipments transported at rates generating revenues exceeding 180 percent
of variable costs fluctuated widely by commodity—ranging from a low of
near 0 percent for fresh fish and tobacco products to a high of about

25
 Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation of Rail Rates
(GAO/RCED-87-119, Sept. 9, 1987).
26
  See GAO/RCED-90-80.
27
 According to the Board, this decrease was remarkable since the level of rates needed to reach
180 percent of variable costs fell as rail productivity gains reduced Board-measured variable costs.



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                            73 percent for crude petroleum and gasoline.28 Among the commodities
                            included in our analysis of rail rates (coal, grain, chemicals, and
                            transportation equipment), the percent of commodity revenue for
                            shipments transported at rates generating revenues exceeding 180 percent
                            of variable costs ranged from about 23 percent for farm products (grain) to
                            about 54 percent for chemicals.


                            One important factor that has played a role in how railroads set their rates
Railroad Financial          has been the financial health of the railroad industry. During the 1990s,
Health Has Improved,        railroad financial health generally improved compared with the 1980s. Not
but Most Railroads Do       only were returns on investment and equity higher, but railroads were able
                            to increase their market share. However, most railroads have been
Not Earn the Industry       determined by the Board to be “revenue inadequate”—that is, their
Cost of Capital             earnings were less than the railroad industry’s cost of capital. Revenue
                            adequacy determinations have been controversial, and some shippers have
                            questioned the meaningfulness of the current method of determining
                            revenue adequacy. Not being able to earn the cost of capital can affect a
                            railroad’s ability to attract and/or retain capital and remain financially
                            viable.


Railroad Financial Health   In general, railroad financial health improved in the 1990s. For example,
Has Improved, and Market    railroad returns on investment and returns on equity—both measures of
Share Has Increased         profitability29 —were higher during the 1990s than they were in the 1980s.
                            From 1990 through 1997, returns on investment averaged 8.5 percent per
                            year while returns on equity averaged 10.7 percent per year. (See fig. 2.4.)
                            This was about 61 percent and 24 percent greater, respectively, than the
                            5.3 percent and 8.7 percent returns on investment and equity achieved
                            during the 1980s. The operating ratio, which shows how much of a
                            railroad’s operating revenues are taken up by operating expenses, also
                            showed improvement. From 1990 through 1997, railroad operating
                            expenses accounted for, on average, about 87 percent of operating
                            revenues annually—about 1 percentage point less than the average from
                            1980 through 1988. According to a Board official, every 1-percentage point
                            change in the operating ratio can be significant to the railroad industry.




                            28
                              The commodity groups in this example accounted for less than one-tenth of 1 percent of total
                            industry revenue.
                            29
                             Return on investment measures the profit made on assets used to provide transportation services.
                            Return on equity measures the profit made on funds provided by stockholders.



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                                        Industry and Other Factors Have Influenced
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Figure 2.4: Railroad Industry Returns
on Investment and Equity, 1990          Percent
Through 1997
                                        14



                                        12



                                        10



                                         8



                                         6



                                         4



                                         2



                                         0
                                             1990         1991       1992      1993          1994       1995       1996      1997
                                             Year

                                                    Return on investment
                                                    Return on equity


                                        Note: Excludes special charges taken by railroads.

                                        Source: AAR.




                                        However, not all aspects of financial health improved. For example,
                                        railroads’ ability to meet their short-term and long-term obligations were
                                        either about the same as, or worse than, during the 1980s. The current
                                        ratio, which compares the dollar value of current assets (such as cash) to
                                        the dollar value of current liabilities (such as short-term debt), averaged
                                        about 64 percent from 1990 through 1997. (See fig. 2.5.) In contrast, this
                                        ratio averaged about 113 percent from 1980 through 1988. Maintaining a
                                        current ratio of less than 100 percent may jeopardize a firm’s ability to pay
                                        its short-term debts when they come due. A firm’s ability to pay its
                                        long-term debt is generally measured by the fixed charge coverage ratio,
                                        which compares the income available to pay fixed charges with the
                                        interest expense that must be paid on debt outstanding. Since 1990, the




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                                                Industry and Other Factors Have Influenced
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                                                fixed charge coverage ratio for the railroad industry was only marginally
                                                better than it was during the 1980s. From 1990 through 1997, the fixed
                                                charge coverage ratio averaged about 4.7—that is, the income available to
                                                pay fixed charges was about 4.7 times the interest to be paid. From 1980
                                                though 1988, the ratio averaged about 4.6.



Figure 2.5: Short- and Long-term Solvency of Class I Railroads, 1990 Through 1997

Short-term Solvency                                                          Long-term Solvency

Ratio                                                                        Ratio
 3                                                                           7


                                                                             6
2.5

                                                                             5
 2

                                                                             4
1.5
                                                                             3

 1
                                                                             2

0.5                                                                          1


 0                                                                           0
      1990     1991     1992   1993   1994   1995      1996      1997            1990     1991     1992     1993         1994   1995   1996   1997

      Year                                                                       Year
             Current ratio                                                              Fixed-charge coverage ratio


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




                                                Railroads have also increased their market share during the 1990s. (See
                                                fig. 2.6.) In 1990, railroads transported almost 38 percent of intercity
                                                revenue freight ton-miles.30 By 1997, the market share had increased to
                                                39 percent. This increase came despite a general slowdown in the growth
                                                of intercity freight traffic handled by railroads in this decade. From 1990
                                                through 1997, the amount of intercity freight tonnage handled by railroads

                                                30
                                                    A revenue ton-mile is 1 ton of freight carried 1 mile for revenue.



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grew, on average, about 2 percent annually. This compares with about a
3-percent average annual growth in the 1982 through 1989 period.31 The
market share change may be a reflection of railroads’ increased use of
contracts to tailor their rates and service to meet customer needs.
According to AAR, in 1997 about 70 percent of all railroad tonnage moved
under contract—up 10 percentage points from 1988. However, contracts
are more prevalent for the shipment of some commodities than others. AAR
statistics show that, in 1997, over 90 percent of all coal tonnage, but only
about 26 percent of grain tonnage, moved under contract. In fact, the
percentage of grain tonnage moved under contract has decreased over
time. In 1994, about 50 percent of grain tonnage moved under contract
compared with 26 percent in 1997. According to an AAR official, this
decrease was primarily attributable to (1) an increased use by railroads of
noncontract car reservation/guarantee programs to supply grain cars to
shippers and (2) a 1988 regulatory change that increased the amount of
public information about grain contracts.32 Under car
reservation/guarantee programs, for a fee, shippers can obtain a set
number of railcars for delivery at a future date(s).




31
  The reduced growth in tonnage for railroads and for all modes in the 1990s probably reflects slower
economic growth during the period. Real gross domestic product grew, on average, 2.4 percent
annually from 1990 through 1997—about half the 4-percent annual growth rate, on average, from 1982
through 1989.
32
  In February 1988, ICC issued final rules implementing the Conrail Privatization Act. In general, the
act required that, for the shipment of agricultural commodities, such information as the identities of
the shipper parties to a contract and actual volume requirements, if any, be disclosed in contract
summaries filed with ICC. While the ICC Termination Act eliminated the general requirement to file
contract summaries, it retained the requirement to file summaries of agricultural contracts.


Page 43                                                       GAO/RCED-99-93 Railroad Regulation
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                                     Industry and Other Factors Have Influenced
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Figure 2.6: Railroad Market Share,
1990 Through 1997                    Percent
                                      45


                                      40


                                      35


                                      30


                                      25


                                      20


                                      15


                                      10


                                          5


                                          0
                                              1990        1991        1992        1993      1994         1995         1996         1997
                                              Year

                                                     Rail
                                                     Truck
                                                     River and canal
                                                     Other transportation modes


                                     Note: The 1997 figures are preliminary.

                                     Source: GAO’s analysis of Transportation In America data, Eno Foundation for Transportation,
                                     Inc., (1998).




Most Railroads Do Not                Although railroad financial health has improved, most Class I railroads are
Meet Revenue Adequacy                still not earning revenues adequate to meet the industry cost of capital.
Criterion                            From 1990 through 1997, in any one year no more than three of nine Class
                                     I railroads were determined by the ICC/Board to be revenue adequate.
                                     From 1990 through 1994, in any one year no more than 2 of 12 Class I
                                     railroads were determined to be revenue adequate.33 The returns on
                                     investment of the remaining railroads have been below the railroad
                                     industry’s cost of capital. The degree that Class I railroads did not earn the
                                     industry’s cost of capital has fluctuated since 1990. (See table 2.1.) This
                                     appears to reflect fluctuations in average return on investment more than
                                     a change in the cost of capital. The cost of capital has generally remained


                                     33
                                       Excludes the Florida East Coast Railway Co., which was reclassified as a Class II carrier in 1992.



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                                       Industry and Other Factors Have Influenced
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                                       between 11.4 percent and 12.2 percent from 1990 through 1997. In
                                       contrast, return on investment has ranged from just over 1 percent to just
                                       under 9.5 percent. As we reported in 1990, revenue inadequacy affects the
                                       ability of a railroad to attract and/or retain capital.34 Insufficient profit not
                                       only makes it difficult for railroads to cover costs, maintain operations,
                                       and remain financially viable, but may also induce investors to place their
                                       funds elsewhere.

Table 2.1: Revenue Adequacy of Class
I Railroads, 1990 Through 1997         In percents
                                                                                                                                 Degree of
                                                                                Return on                                         revenue
                                       Year                                    investment         Cost of capital              inadequacy
                                       1990                                              8.1                   11.8                   –3.7
                                       1991                                              1.3                   11.6                 –10.3
                                       1992                                              6.3                   11.4                   –5.1
                                       1993                                              7.1                   11.4                   –4.3
                                       1994                                              9.4                   12.2                   –2.8
                                       1995                                              6.9                   11.7                   –4.8
                                       1996                                              9.4                   11.9                   –2.5
                                       1997                                              7.6                   11.8                   –4.2
                                       Note: Return on investment is based on the Board’s methodology for determining revenue
                                       adequacy. These returns may not be the same as returns on investment calculated for
                                       nonregulatory purposes.

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



                                       Revenue adequacy determinations for the railroad industry have been
                                       controversial. According to Board officials, controversy over revenue
                                       adequacy determinations is not new and that these issues have been
                                       addressed at length by the Board’s predecessor. However, in recent years,
                                       shippers and others have again questioned the meaningfulness of the
                                       current method of determining revenue adequacy, particularly railroads’
                                       ability to attract capital for mergers and acquisitions. For example, in 1996,
                                       Union Pacific was expected to spend about $1.6 billion to acquire
                                       Southern Pacific Railroad. Nevertheless, in this same year, the Board
                                       determined Union Pacific to be revenue-inadequate. Similarly, in 1998,
                                       CSX Transportation estimated that it would incur over $4 billion in
                                       acquisition costs in the joint CSX Transportation/Norfolk Southern



                                       34
                                        Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980
                                       (GAO/RCED-90-80, May 16, 1990).



                                       Page 45                                                    GAO/RCED-99-93 Railroad Regulation
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                     acquisition of Conrail.35 In 1997, CSX Transportation was determined by
                     the Board to be revenue-inadequate.

                     In April 1998, the Board began a proceeding to address issues related to
                     railroad access and competition. As part of this proceeding, the Board
                     called upon both railroads and shippers to mutually agree on an
                     independent panel of disinterested experts to review how revenue
                     adequacy is determined and to develop recommendations as to how, if at
                     all, this determination should be changed. According to the Board, as of
                     February 1999, although railroad representatives were satisfied with the
                     neutral panel approach, shipper representatives opposed it and suggested
                     instead that the Board initiate a rulemaking proceeding to address revenue
                     adequacy issues.


                     In commenting on a draft of this report, Board officials said that we should
Agency Comments      better explain that the Board, in its merger decisions, has taken actions to
and Our Evaluation   ensure that no shipper has become captive to a single railroad. The Board
                     also said we should better recognize that controversy over revenue
                     adequacy determinations is not new and that these issues have been
                     addressed at length by the Board’s predecessor. To address these
                     concerns, we have modified the report to acknowledge that the Board
                     imposes merger conditions to ensure that any shipper that was capable of
                     being served by more than one railroad before a merger would continue to
                     have more than one railroad available after the merger. We also added
                     language to better recognize that revenue adequacy determinations have
                     been controversial for some time and that these issues had been dealt with
                     by the Board’s predecessor.




                     35
                      This amount excludes Conrail’s current and long-term liabilities to be assumed by CSX
                     Transportation.



                     Page 46                                                    GAO/RCED-99-93 Railroad Regulation
Chapter 3

Rail Rates Have Fallen Since 1990, but Not
All Shippers Have Benefitted

                      Since 1990, railroad rates have generally fallen both overall as well as for
                      specific commodities. However, rail rates have not decreased
                      proportionately for all shippers and users of rail transportation. Some
                      shippers, like those transporting coal, have experienced larger rate
                      decreases than other shippers. In addition, in other cases, such as
                      long-distance wheat shipments from Montana and North Dakota to west
                      coast destinations for export, real rail rates have stayed about the same as,
                      or were slightly higher than, they were in 1990.36 We also found that
                      revenues were 180 percent or more of variable costs for a number of
                      routes, including short-distance movements of coal and long-distance
                      movements of wheat from northern plains states such as Montana and
                      North Dakota. The degree of competition on a route may have played a
                      role in both how rates changed and/or how high or low a revenue to
                      variable cost ratio may be for a specific commodity or route. While the
                      revenue to variable cost ratio is often used as a proxy for market
                      dominance, use of the ratio for this purpose may lead to
                      misinterpretations. For example, even when railroads pass all cost
                      reductions along to shippers in terms of reduced rates, the ratio can
                      increase. Conversely, the ratio can decrease if railroads pass all cost
                      increases along to shippers in the form of higher rates.


                      In general, real (inflation-adjusted) rail rates have decreased since 1990. In
Rail Rates Have       fact, real rail rates have been falling since the early 1980s. In
Generally Decreased   February 1998, the Board found that the average, inflation-adjusted Class I
Since 1990            railroad rate had decreased by about 46 percent from 1982 through 1996.37
                      The Board found that rates in all major commodity groups decreased,
                      including coal and farm products, which, as bulk commodities, have
                      historically been shipped by rail. However, the decreases were not
                      uniform. (See table 3.1.) Also, in general, the average annual rate of
                      decrease in rail rates was somewhat lower in the 1990s (about 4 percent
                      annually) compared with what it was from 1982 through 1989 (4.6 percent
                      annually). The average annual rate of decrease in rail rates for farm
                      products (which include grains such as corn and wheat) was about
                      7 percent in the 1980s, compared with only about 1 percent in the 1990s. In
                      contrast, the average annual rate of decrease for coal was just over
                      3 percent in the 1980s, compared with almost 8 percent in the 1990s.

                      36
                        Unless noted otherwise, all rates discussed in this chapter are cents per ton-mile stated in 1996
                      dollars. Also, the analysis was based on the following distance categories: long, medium, and short.
                      Long is over 1,000 miles from origin to destination, medium is between 501 and 1,000 miles, and short
                      is 500 miles or less.
                      37
                       The inflation-adjusted railroad rate is gross revenue produced per ton-mile of freight originated, in
                      1982 dollars.



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                                      Rail Rates Have Fallen Since 1990, but Not
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Table 3.1: Average Annual Change in
Real Rail Rates for Selected          In percents
Commodities, 1982 Through 1996                                                      Average annual change in real rail rates
                                      Category                                                   1982-89                            1990-96
                                      Farm products                                                   –6.7                              –1.1
                                      Metallic ores                                                   –5.2                              –5.2
                                      Coal                                                            –3.3                              –7.9
                                      Food and kindred products                                       –6.9                              –3.7
                                      Lumber and wood                                                 –6.2                              –4.0
                                      Chemicals                                                       –3.9                              –2.4
                                      Petroleum and coal products                                     –5.6                              –3.0
                                      Stone, clay, glass, and
                                      concrete                                                        –5.5                              –0.5
                                      Transportation equipment                                        –2.4                              –2.5
                                      Intermodal                                                      –5.8                              –2.9
                                      Average annual rate change
                                      (all commodities)                                               –4.6                              –4.1
                                      Source: GAO’s analysis of the Board’s data.



                                      Our analysis of overall real rail rates showed similar results, with certain
                                      exceptions. Using the Board’s Carload Waybill Sample—a data base of
                                      actual rail rates provided to the Board annually by individual
                                      railroads—we constructed rate indexes38 for coal, grain, certain chemicals,
                                      and transportation equipment for the period from 1990 through 1996. (See
                                      fig. 3.1.) As the figure illustrates, in general, rail rates for most of these
                                      commodities decreased over time. The exceptions were wheat, corn, and
                                      chemicals (potassium and sodium; plastics and resins). Wheat in particular
                                      showed general rate increases from 1992 through 1994—from about 2.1
                                      cents per ton-mile to about 2.5 cents per ton-mile—before falling back to
                                      about 2.4 cents per ton-mile in 1996. Corn also showed increases from
                                      1990 through 1995—from about 1.8 cents per ton-mile to just under 2.1
                                      cents per ton-mile—before decreasing in 1996 to about 1.9 cents per
                                      ton-mile.


                                      38
                                       A rate index attempts to measure price changes over time by holding constant the underlying
                                      collection of items that are consumed. This differs from comparing average rates in each year because
                                      over time higher- or lower-priced items can constitute different shares of the items consumed.
                                      Although an index is a pure number in which each year’s value is expressed relative to a common base
                                      year, because we wanted to maintain a sense of the magnitude of the revenues per ton-mile of the
                                      various commodities, we did not express each year’s value relative to a base year (that is, we did not
                                      divide each year’s value by the value in 1996). We did not adjust for general effects of inflation. The
                                      specific commodities we reviewed were coal (bituminous); wheat; corn; potassium or sodium
                                      compounds; plastic materials or synthetic fibers, resins, or rubbers; motor vehicles; and motor vehicle
                                      parts or accessories.



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                                           Rail Rates Have Fallen Since 1990, but Not
                                           All Shippers Have Benefitted




Figure 3.1: Rail Rate Index for the Transportation of Selected Products, 1990 Through 1996


Rail Rate Index for Transportation of Coal, Wheat,                     Rail Rate Index for Transportation of Potassium/
and Corn, 1990-96                                                      Sodium, Plastics/Resins, Motor Vehicles, and Motor
                                                                       Vehicle Parts, 1990-96
 Cents per ton mile                                                     Cents per ton mile
   3                                                                   14


                                                                       12
  2.5

                                                                       10
   2

                                                                        8
  1.5
                                                                        6

   1
                                                                        4

  0.5                                                                   2


   0                                                                    0
        1990      1991   1992   1993   1994      1995      1996             1990      1991     1992       1993       1994       1995      1996

        Year                                                                Year
               Coal                                                                Potassium and sodium
               Wheat                                                               Plastics and resins
               Corn                                                                Motor vehicles
                                                                                   Motor vehicle parts

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




                                           There may be a variety of reasons behind the rate changes shown in figure
                                           3.1. As we reported in 1990, to become more competitive railroads
                                           reduced rates. In addition, railroads have made extensive use of contracts
                                           to do business. Finally, rail rates reflect the specific characteristics of each
                                           commodity and the demand for rail transportation. According to USDA,
                                           transportation of wheat is dominated by railroads—in 1996 railroads
                                           transported about 57 percent of all wheat in the nation—and exports
                                           greatly affect the demand for rail transportation.39 Since 1990, the demand

                                           39
                                            See Transportation of U.S. Grains: A Modal Share Analysis, 1978-95, U.S. Department of Agriculture,
                                           Agriculture Marketing Service, Transportation and Marketing, Marketing and Transportation Analysis
                                           Program (Mar. 1998).



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                                     for rail transportation of wheat for export has fluctuated from a high of
                                     about 25 million tons in 1993 to a low of about 15 million tons in 1994. (See
                                     fig. 3.2.) In contrast, transportation of corn is more dependent on
                                     trucks—in 1996, trucks transported about 41 percent of corn production
                                     compared with about 38 percent for rail—and corn is primarily used for
                                     domestic poultry and cattle feed, domestic processing into ethanol
                                     alcohol, and other purposes. Also, significant amounts of corn are grown
                                     in areas accessible to navigable waterways, and much of the corn
                                     exported is transported by barge to such ports as New Orleans. As shown
                                     in figure 3.2, since 1990 the rail transportation of domestic corn has
                                     fluctuated from about 58 million tons in 1995 to about 45 million tons in
                                     1991. These commodity characteristics may at least partially account for
                                     the overall difference in prices between wheat and corn—2 to 2.5 cents
                                     per ton-mile for wheat and less than 2 cents per ton-mile for corn.


Figure 3.2: Rail Transportation of
Export Wheat and Domestic Corn,      Millions of tons
1990 Through 1996                    60



                                     50



                                     40



                                     30



                                     20



                                     10



                                     0
                                          1990          1991     1992         1993   1994        1995        1996
                                          Year
                                                 Export wheat
                                                 Domestic corn


                                     Source: USDA.




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                            Our analysis of rail rates since 1990 for coal, grain (corn and wheat),
Rail Rates in Some          chemicals, and transportation equipment in selected transportation
Markets Have Not            markets/corridors generally showed that real rail rates have fallen.40
Fallen                      However, not all rates have fallen, and rail rates were sensitive to
                            competition—both intermodal (competition between railroads, trucks,
                            and other transportation modes) and intramodal (rail to rail). For
                            example, we found that real rail rates for corn shipments from the
                            Midwest, where there is barge competition, to the Gulf Coast were
                            significantly less than rail rates for corn shipments on similar distance
                            routes that appeared to offer little nonrailroad competition. We also found
                            that rates in markets/corridors that are considered to have less
                            railroad-to-railroad competition, such as the plains states of North Dakota
                            and Montana, were generally higher than rail rates on similar distance
                            corridors that might offer more railroad options. Finally, we found that the
                            relationship of shipment size (number of railcars) to rates varied by
                            commodity. Typically, as shipment size increases, rates charged per ton
                            decrease, reflecting increased efficiencies in train operations. For coal and
                            some other commodities we reviewed, we generally found that the size of
                            shipments remained relatively constant from 1990 through 1996. However,
                            at the same time rates were generally falling. This implies that factors
                            other than shipment size accounted for the rate decreases. We also found
                            that on at least one northern plains wheat corridor we reviewed, railroad
                            rates generally did not decrease even as average shipment size increased.


Rail Rates for Coal Have    In general, real rail rates for coal shipments have fallen since 1990. This
Generally Decreased Since   was true for overall rates and for the specific long-, medium-, and
1990                        short-distance transportation corridors/markets. The rates on
                            medium-distance routes (between 501 and 1,000 miles) provide a good
                            illustration of the changes we found in coal rates.41 (See fig. 3.3.) As figure
                            3.3 shows, real rail rates for both the eastern (Central Appalachia) and

                            40
                              The markets/corridors selected for this analysis are those with the highest average annual tonnage
                            (over the 1990-96 period) within each of the distance categories we used. Except for coal and
                            Canadian origins, these markets/corridors represent Bureau of Economic Analysis economic areas.
                            Unless there are problems of data confidentiality, we present information on the leading five corridors
                            for each commodity group and distance category. Where confidentiality problems preclude reporting
                            on a corridor, we substituted the corridor with the next highest tonnage. Even though these corridors
                            are the highest-volume corridors for the particular commodities—the 10 highest-volume short-,
                            medium- and long-distance routes accounted for over 50 percent of tons and over 60 percent of
                            ton-miles of coal, and over 40 percent of tons and ton-miles of wheat—those selected do not represent
                            a statistical sample drawn from the population of all corridors. Thus it is not appropriate to generalize
                            our findings to a population larger than the corridors we analyzed. See chapter 1 for how we selected
                            specific corridors.
                            41
                             See app. II for illustrations of real rail rates for coal shipments in the long- and short-distance
                            categories.



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                                        western (Powder River Basin) coal routes that we looked at generally
                                        decreased since 1990.42 On the eastern medium-distance coal routes, rates
                                        generally decreased one-half to 1 cent per ton-mile. On the western
                                        medium-distance coal routes, rates generally decreased between
                                        two-thirds of a cent and one cent per ton-mile. The only real exception to
                                        the rate decreases was a slight increase in real rail rates from 1994 through
                                        1996 on a route from Central Appalachia to Orlando. However, the rate in
                                        1996 was still about seven-tenths of a cent less than the rate in 1990.


Figure 3.3: Real Rail Rates for Coal,
Selected Medium-Distance Routes,        Cents per ton mile (in 1996 dollars)
1990 Through 1996
                                         4




                                         3




                                         2




                                         1




                                         0
                                             1990         1991          1992          1993            1994         1995         1996
                                             Year

                                                    Central Appalachia to Norfolk economic area
                                                    Powder River Basin to Minneapolis economic area
                                                    Powder River Basin to Kansas City economic area
                                                    Central Appalachia to Macon economic area
                                                    Central Appalachia to Orlando economic area


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




                                        42
                                         The Central Appalachia Coal Supply Region includes eastern Kentucky, Virginia, and southern West
                                        Virginia. The Powder River Basin Coal Supply Region includes Montana and Wyoming.



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There may be a number of reasons why rail rates for the transportation of
coal have fallen. Although changes in shipment size may affect rail rates, in
general we did not find any significant changes in shipment sizes from the
1990 through 1996 period for the routes/corridors we reviewed. On the
medium-distance routes, shipment size for the eastern coal routes
generally remained between 80 and 90 railcars over the entire period,
except for the Central Appalachia to Norfolk, Virginia, route where
shipment size generally stayed between 40 and 50 railcars.43 Shipment size
on the medium-distance western coal routes generally remained between
100 and 115 railcars. Shipment size on western long-distance routes (over
1,000 miles) also generally remained in the 100 to 120 railcar range, while
shipment size on the shorter distance coal routes (500 miles or less)
generally remained in the 70 to 90 car range. One exception was a
short-distance route between Central Appalachia and Charleston, West
Virginia. On this route, the average shipment size increased from about 70
railcars in 1990 to about 100 cars in 1996. Over the same time period, the
rail rate decreased about 30 percent—from about 6.5 cents per ton-mile in
1990 to about 4.5 cents per ton-mile in 1996.

The coal rates we examined may have been affected by rail competition.
Currently, two Class I railroads serve the Powder River Basin—the
Burlington Northern and Santa Fe Railway and Union Pacific
Railroad—and three Class I’s serve the Central Appalachia
region—Conrail, CSX Transportation, and Norfolk Southern. Whether
these or other railroads have the market power to extract higher rates
from coal shippers is unclear. On the one hand, data from the Board show
that from 1990 through 1996 the percent of coal shipments transported
where revenues exceeded 180 percent of variable costs averaged about
53 percent. However, in 1996, 47 percent of the coal shipments were
transported at rates where revenue exceeded 180 percent of variable
costs. This was the lowest percentage since 1987. On the other hand, if the
number of rate complaints filed with ICC or the Board is indicative of
shippers’ views of market power wielded by railroads, about half of the
approximately 40 rate complaints filed since January 1, 1990 (or were
pending on that date), involved coal rates.44



43
  Board officials indicated that the comparatively small average shipment size found on this route
reflects the waybill creation and reporting practices that a particular railroad uses for its export coal
traffic. Although the waybill indicates shipments of only one or small groups of cars, Board officials
believe the railroad in question gathers these cars into one or more larger shipments for transport to
destination.
44
  See GAO/RCED-99-46.



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Rail Rates for Some Grain   As discussed earlier, rail rates for transporting grain such as wheat and
Shipments Have Remained     corn have generally stayed the same or increased since 1990.45 However,
Flat or Increased Since     rail rates for medium-distance routes (501 to 1,000 miles), such as from
                            central plains origins around Oklahoma City and Wichita to Houston,
1990                        showed some decreases.46 (See fig. 3.4.) On the other hand, rail rates from
                            Great Falls, Montana, to Portland, Oregon, stayed about the same or
                            increased slightly between 1990 and 1996. We found similar trends in other
                            distance categories, particularly long-distance (greater than 1,000 miles)
                            wheat routes. The rail rates on long-distance wheat routes from Billings,
                            Montana, and Minot, North Dakota, to Portland both stayed relatively
                            constant, at about 3 cents per ton-mile over the entire 7-year period. Rate
                            trends for corn shipments were similar to those of wheat. Again, the
                            variety of rate trends we found for shipments of corn can be seen on the
                            rates for medium-distance routes. (See fig. 3.5.) Although the rates on
                            some of the routes, most notably those routes from the midwest to
                            Atlanta, showed decreases, rates for corn shipments from selected origins
                            in Illinois to New Orleans showed some increases. As with wheat, rail
                            rates for long-distance corn shipments on the routes we reviewed
                            generally varied little, remaining in the 1.4 to 1.6 cents per ton-mile range
                            from 1990 through 1996.




                            45
                              In 1996, of grain transported by rail, corn represented about 49 percent of total rail industry revenue,
                            with wheat an additional 40 percent. According to USDA, in 1997 the top three corn producing states in
                            the United States were Iowa, Illinois, and Nebraska, while the top three wheat producing states were
                            Kansas, North Dakota, and Montana.
                            46
                             App. II contains illustrations of the real rail rates on selected long- and short-distance wheat and corn
                            routes.



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Figure 3.4: Real Rail Rates for Wheat,
Selected Medium-Distance Routes,         Cents per ton mile (in 1996 dollars)
1990 Through 1996
                                         4




                                         3




                                         2




                                         1




                                         0
                                             1990           1991         1992          1993          1994           1995          1996
                                          Year

                                                    Great Falls economic area to Portland economic area
                                                    Wichita economic area to Houston economic area
                                                    Oklahoma City economic area to Houston economic area
                                                    Duluth economic area to Chicago economic area
                                                    Grand Forks economic area to St. Louis economic area


                                         Note: Due to confidentiality, data point for Duluth economic area to Chicago economic area for
                                         1993 was excluded.

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




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Figure 3.5: Real Rail Rates for Corn,
Selected Medium-Distance Routes,        Cents per ton mile (in 1996 dollars)
1990 Through 1996                       4




                                        3




                                        2




                                        1




                                        0
                                            1990          1991         1992           1993        1994        1995        1996
                                            Year

                                                   Indianapolis economic area to Atlanta economic area
                                                   Champaign economic area to New Orleans economic area
                                                   Evansville economic area to Atlanta economic area
                                                   Chicago economic area to New Orleans economic area
                                                   Indianapolis economic area to Knoxville economic area


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




                                        We also found that rail rates for wheat and corn shipments appeared to be
                                        sensitive to both inter- and intramodal competition. For example, as
                                        shown in figure 3.4, rail rates for shipments of wheat from Duluth,
                                        Minnesota, to Chicago, Illinois—a route that is potentially competitive
                                        with Great Lakes water transportation—were significantly less—generally
                                        between 0.75 to almost 2 cents less per ton-mile—than rail rates on other
                                        medium-distance wheat routes. This includes rail rates for shipments from
                                        Great Falls, Montana, to Portland, Oregon, which some consider to lack
                                        effective transportation alternatives to rail. The same was true for corn
                                        shipments. The rail rates for corn shipments from Chicago and
                                        Champaign, Illinois, to New Orleans—routes which are barge
                                        competitive—were substantially less (in some years over 2 cents per




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ton-mile less) than rail rates on the other medium distance corn routes.
(See fig. 3.5.) The sensitivity to intramodal competition is best seen by
comparing rail rates for wheat shipments originating in the central plains
states with the rail rates for shipments originating in the northern plains
states. As figure 3.4 illustrates, rail rates for wheat shipments originating in
Oklahoma City and Wichita were generally about 1 cent per ton-mile less
than rates on the Great Falls, Montana, to Portland, Oregon, route which
originated in the northern plains. Northern plains states, such as Montana
and North Dakota, generally have fewer Class I railroad alternatives than
the central plains states, such as Kansas. (See fig. 1.1.)

Shipment size is an important factor influencing railroad costs and hence
rates, particularly for agricultural commodities. Loading more cars at one
time increases railroad efficiency and reduces a railroad’s costs. We found
that the average shipment size of wheat originating in the northern plains
was typically smaller than for wheat shipments originating in the central
plains. For example, average shipment size on the Great Falls, Montana, to
Portland, Oregon, route was about half that of shipments going from
Wichita to Houston—about 40 railcars from Great Falls compared with
about 70 railcars from Wichita. (See fig. 3.6.) This may partially explain
why rail rates and costs for wheat shipments are higher in the northern
plains than in the central and southern plains.




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Figure 3.6: Average Shipment Size,
Selected Wheat Routes, 1990 Through   Average Cars Per Shipment
1996                                  80


                                      70


                                      60


                                      50


                                      40


                                      30


                                      20


                                      10


                                       0
                                           1990          1991          1992         1993          1994        1995        1996

                                           Year
                                                  Great Falls economic area to Portland economic area
                                                  Wichita economic area to Houston economic area




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




                                      To investigate further the effects of shipment size on railroad rates and
                                      variable costs, we developed regression equations using waybill data in
                                      which annual average revenues per ton-mile and average variable costs
                                      per ton-mile were calculated for export wheat corridors and shipment size
                                      categories, and then regressed on distance, a time trend, and indicators of
                                      the shipment size category. For a set of northern plains export corridors,
                                      the effects of increased shipment size on revenues were modest compared
                                      with the effects of shipment size on variable costs per ton-mile on these
                                      routes, and compared with the effects of shipment size on both revenues
                                      and variable costs for a set of central and southern plains export corridors.
                                      Specifically, revenues per ton-mile for the northern plains corridors were
                                      estimated to be 0.2 of a cent less on shipments between 5 and 50 cars than
                                      for shipments of fewer than 5 cars, while revenues per ton-mile for the




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                            central and southern plains corridors were estimated to be 0.6 of a cent
                            less for a similar shipment size increase.47 Additionally, revenue per
                            ton-mile in the central and southern plains for shipments exceeding 50
                            cars were estimated to decrease an additional 0.3 of a cent, while in the
                            northern plains, the estimated reduction in revenue per ton-mile for this
                            increase in shipment size was not statistically significant. For variable
                            costs per ton-mile, there was more similarity between northern plains and
                            central and southern plains states. For example, estimated cost reductions
                            were statistically significant for all shipment size categories, although the
                            magnitudes were greater in the central and southern plains case.


Rail Rate Changes for       For comparison purposes, we also reviewed rail rates for certain
Chemical and                chemicals and transportation equipment.48 In general, we found that real
Transportation Equipment    rail rates for chemical shipments exhibited many of the characteristics of
                            coal and grain discussed previously—that is, many of the rail rates on
Shipments Were Similar to   various routes fell, but rates did not fall on all routes. An illustration of
Coal and Grain              these trends can be seen for shipments of potassium/sodium on medium
                            distance routes.49 (See fig. 3.7.) As figure 3.7 shows, rail rates from
                            Canadian origins to Minneapolis, Minnesota, decreased about one-third
                            over the 7-year period—from about 5.4 cents per ton-mile to about 3.7
                            cents per ton-mile. However, rates from Casper, Wyoming, to Portland,
                            Oregon, remained relatively stable at 3.4 cents per ton-mile. One of the
                            largest rate changes was a decrease in rail rates for transportation of
                            plastics and resins within the New Orleans, Louisiana, economic area (a
                            short-distance route). On this route, rail rates decreased about 70 percent
                            from 1990 through 1996—from about 47 cents per ton-mile to about 14
                            cents per ton-mile. (See app. II.) According to the Chemical Manufacturers
                            Association, nearly two-thirds of the tonnage of chemicals and allied
                            products shipped are transported less than 250 miles. At these distances,
                            trucks are a competitive option for chemical shippers, and in 1996, about



                            47
                             In the northern plains sample—Great Falls and Billings, Montana, and Minot, Bismarck, and Grand
                            Forks, North Dakota, to Portland—average revenue per ton-mile was 2.99 cents, and average variable
                            cost per ton-mile was 1.55 cents. In the central and southern plains sample—Wichita and Topeka,
                            Kansas; Oklahoma City, Oklahoma; Dallas-Ft. Worth and Amarillo, Texas; and Denver, Colorado, to
                            Houston as well as Denver to Beaumont, Texas—average revenue per ton-mile was 2.41 cents, and
                            average variable cost per ton-mile was 1.75 cents.
                            48
                              The chemicals we included (potassium and sodium compounds and plastic materials or synthetic
                            fibers, resins, rubbers) and the transportation equipment categories we included (motor vehicles and
                            motor vehicle parts or accessories) accounted for about 49 percent and 97 percent, respectively, of
                            total rail industry revenue for these commodities in 1996.
                            49
                             See app. II for illustrations of rail rates for chemicals and transportation equipment shipments in
                            other distance categories.



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                                     52 percent of the tonnage of all chemicals and allied products shipped
                                     were by truck, with railroads only accounting for 21 percent.


Figure 3.7: Real Rail Rates for
Potassium/Sodium Shipments,          Cents per ton mile (in 1996 dollars)
Selected Routes, 1990 Through 1996    6




                                     4.5




                                      3




                                     1.5




                                      0
                                          1990          1991          1992          1993          1994      1995        1996

                                          Year

                                                 Casper economic area to Portland economic area
                                                 Saskatchewan to Minneapolis economic area
                                                 Saskatchewan to Wausau economic area
                                                 Chicago economic area to Philadelphia economic area
                                                 Casper economic area to Los Angeles economic area


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




                                     Rail rates for shipments of finished motor vehicles and motor vehicle parts
                                     and accessories also showed a variety of patterns. One of the most
                                     dramatic rate changes was a decrease in rail rates for the transportation of
                                     finished motor vehicles from Ontario, Canada, to Chicago, Illinois. On this
                                     route, rates fell about 40 percent—from 19.5 cents per ton-mile to 11.7
                                     cents per ton-mile. In general, most rail traffic in motor vehicles and motor
                                     vehicle parts or accessories is under contract or has been exempt from
                                     economic regulation. According to AAR surveys, the percent of motor




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                        vehicle traffic that moved under contract increased from 55 percent in
                        1994 to 81 percent in 1997. Whether railroads have the market power to
                        charge high rates is unclear. Officials from Norfolk Southern told us that
                        automotive shippers “pay a premium rate for premium service.” This
                        suggests that rates may be related to factors other than market power. In
                        addition, officials from Union Pacific said their company has offered
                        shippers reduced rates in return for guaranteed high volumes of
                        shipments, again suggesting that rates are related to factors other than
                        market power.


                        Revenue to variable cost ratios are often used as indicators of shipper
Revenue to Variable     captivity to railroads. If used in this way, the higher the R/VC ratio the more
Cost Ratios Reflect     likely it is that the shipper has used only rail to meet its transportation
Differential Pricing,   needs and the more likely it is that the railroad can use its market power
                        to set rates that extract revenues much greater than its variable costs.
but With Some           Since 1990, about one-third of all railroad revenue has come from
Caveats                 shipments transported at rates that generate revenues exceeding
                        180 percent of variable costs. However, the percentage varies by
                        commodity and has changed over time. Our analysis suggests that
                        competition can influence specific R/VC ratios for specific routes and
                        commodities. In general, we found that R/VC ratios exceeded 180 percent
                        on short-distance movements of coal and long-distance movements of
                        wheat from northern plains states—movements where there may be less
                        competition for the railroad. In contrast, R/VC ratios were consistently
                        180 percent or less on a wide variety of routes, including long-distance
                        movements of coal. While R/VC ratios are often used as proxies for market
                        dominance, use of such ratios for this purpose may lead to
                        misinterpretations because R/VC ratios can increase as rail rates go down
                        and, conversely, can decrease as rail rates go up.


R/VC Ratios Reflect     Overall, the percent of railroad revenue from shipments transported at
Differential Pricing    rates generating revenues exceeding 180 percent of variable costs differs
                        by commodity. (See table 3.2.) As table 3.2 shows, from 1990 through 1996,
                        for all commodities, about one-third of all revenues generated by railroads
                        came from movements transported at rates generating revenues exceeding
                        180 percent of variable costs. However, several commodities, such as coal,
                        chemicals, and transportation equipment, had higher percentages of
                        revenue from shipments at rates generating revenues exceeding
                        180 percent of variable costs. Farm products (which include grain
                        shipments) had a lesser percentage. As table 3.2 shows, these percentages



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                                      can change over time. For example, for coal and transportation equipment,
                                      in 1996, the percentage of revenue generated from shipments at rates
                                      generating revenues exceeding 180 percent of variable costs were the
                                      lowest they had been since 1990. By contrast, for chemicals, in 1996, the
                                      percentage of revenue generated from shipments at rates generating
                                      revenues exceeding 180 percent of variable costs was the highest it had
                                      been since 1990.

Table 3.2: Percent of Rail Industry
Revenue Exceeding 180 Percent R/VC                                  Percent of revenue exceeding 180 percent R/VC
for Selected Commodities, 1990                                 All                            Farm            Transportation
Through 1996                          Year             commodities                  Coal   products   Chemicals   equipment
                                      1990                          34               55         22            44            66
                                      1991                          29               54         22            45            48
                                      1992                          30               55         21            46            48
                                      1993                          32               54         26            48            53
                                      1994                          34               54         32            50            59
                                      1995                          32               54         26            46            54
                                      1996                          29               47         23            54            33
                                      Source: GAO’s analysis of the Board’s data.



                                      We found a wide variety of R/VC results for the specific commodities and
                                      routes that we looked at. In general, R/VC ratios were consistently above
                                      180 percent on short-distance movements of coal (such as from Central
                                      Appalachia) and certain long-distance movements of wheat. The R/VC ratios
                                      were consistently below 180 percent on long-distance movements of corn
                                      and of coal from the Powder River Basin and on medium-distance
                                      movements of corn and wheat. The ratios for the other commodities and
                                      routes that we reviewed showed no consistent pattern.

                                      The ratio results suggest that demand-based differential pricing may have
                                      played a role in how railroads set their rates. The fact that R/VC ratios were
                                      typically higher for short-distance movements of coal than for medium-
                                      and long-distance movements reflects the possibility that, as shipping
                                      distance increases, the shipper or receiver is better able to substitute other
                                      sources of coal. This same distance-related pattern of R/VC ratios was
                                      found for corn, illustrating both the nature of domestic corn markets as
                                      well as geographic considerations that favor barge options for the
                                      transportation of corn. In both the coal and corn cases, various
                                      competitive pressures may constrain the rates that railroads were able to




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charge for longer-distance movements, and this resulted in lower R/VC
ratios.

Long-distance movements of wheat often occurred at much higher R/VC
ratios than were typically found for corn and coal. For example, the R/VC
ratios for long-distance wheat movements originating in Montana and
North Dakota were consistently at 180 percent or higher from 1990
through 1996. In contrast, the R/VC ratios on a Minneapolis, Minnesota, to
New Orleans, Louisiana, route—where barges offer competition—were
always below 100 percent. We also found differences in the ratio between
northern and central plains routes for the medium-distance shipments of
wheat. (See fig. 3.8.) The northern plains states are considered by some to
have fewer rail alternatives than the central plains states. As figure 3.8
shows, the R/VC ratios for those wheat shipments originating in Wichita and
Oklahoma City were consistently below 180 percent from 1990 through
1996. On the other hand, the R/VC ratio for wheat shipments originating in
Great Falls, Montana, were consistently above 180 percent over the entire
period.




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Figure 3.8: R/VC Ratios for
Medium-Distance Rail Shipments of   Percent
Wheat, 1990 Through 1996            260

                                    240

                                    220

                                    200

                                    180

                                    160

                                    140

                                    120

                                    100

                                     80

                                     60

                                     40

                                     20

                                     0
                                          1990          1991         1992          1993         1994           1995          1996
                                          Year

                                                 Great Falls economic area to Portland economic area
                                                 Wichita economic area to Houston economic area
                                                 Oklahoma City economic area to Houston economic area
                                                 Duluth economic area to Chicago economic area
                                                 Grand Forks economic area to St. Louis economic area


                                    Note: Due to confidentiality, data point for Duluth economic area to Chicago economic area for
                                    1993 was excluded.

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




R/VC Ratios Are Subject to          R/VC ratios have their limitations. One of these is how variable costs are
Limitations                         determined. According to the Board, variable costs are developed in
                                    accordance with the Uniform Railroad Costing System (URCS). URCS is a
                                    general purpose costing system used by the Board for jurisdictional
                                    threshold determinations and other purposes. By necessity, URCS
                                    incorporates a number of assumptions and generalizations about railroad
                                    operations to determine variable costs. Because of these assumptions and
                                    generalizations, the variable costs developed under URCS may not
                                    necessarily represent the actual costs attributable to the particular
                                    shipment involved. The revenues used to calculate R/VC ratios may also not
                                    be actual. Board officials told us that revenues shown in the Carload
                                    Waybill Sample are not adjusted for such things as the year-end rebates




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                     Rail Rates Have Fallen Since 1990, but Not
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                     and refunds often provided to shippers exceeding minimum volume
                     commitments. As a result of these limitations, it is possible that some of
                     the R/VC ratios used in our analysis would be different if actual revenues
                     and variable costs were known.

                     Perhaps a more serious limitation is possible misinterpretations of R/VC
                     ratios. Because an R/VC ratio is a simple division of revenues by variable
                     costs, it is possible an R/VC ratio could be increasing at the same time
                     revenues and variable costs are both decreasing. For example, if rail
                     revenues are $2 and variable costs are $1, the R/VC ratio would be 200.
                     However, if revenues decrease to $1.50 and variable costs decrease to
                     $0.50, the ratio becomes 300. Under this scenario, although railroads have
                     passed all cost reductions along to shippers in terms of lower rates, the
                     increased R/VC ratio makes it appear as though the shipper is worse off. On
                     the other hand, R/VC ratios could be decreasing at the same time revenues
                     and variable costs are increasing. For example, using the example above
                     ($2 in revenues and $1 in variable costs with a ratio of 200), if revenues
                     increase to $2.50 and variable costs increase to $1.50, the ratio becomes
                     167.


                     In commenting on a draft of this report, the Board noted that competition
Agency Comments      is better measured by the effectiveness of transportation alternatives
and Our Evaluation   rather than the number of competitors. In response to this issue, we
                     modified report language to better recognize the importance of effective
                     competition in measuring the effects of competition on rail rates.




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Widespread Concerns About Rail Service,
but Overall Quality of Service Cannot Be
Assessed
                       In recent years, shippers have increasingly criticized Class I railroads for
                       providing poor service. Rail service disruptions in the western United
                       States in the summer and fall of 1997 brought national attention to these
                       concerns. Among the problems cited by shippers were an insufficient
                       supply of railcars when and where needed, inconsistent pickup and
                       delivery of cars, and longer than necessary transit times to a destination.
                       In general, railroad officials believe the railroads provide adequate service.
                       However, they agree that service is not what it could be and that the
                       industry has failed to meet shipper expectations.

                       The quality of railroad service, over time for individual rail carriers or
                       between specific railroads, cannot be measured currently. The Board
                       determines whether service is reasonable on a case-by-case basis. In
                       addition, the railroad industry has been reluctant to develop specific
                       service measures for fear they could be misinterpreted or misused by the
                       public or might reveal business-sensitive information. In reaction to
                       widespread criticism of rail service, however, railroads have developed
                       four performance indicators. Although these indicators may be helpful in
                       assessing certain aspects of service, they are more an evaluation of
                       operating efficiency than of quality of service.


                       In recent years, railroad shippers, shipper associations, and local
Shippers Believe       communities have complained in various forums about poor railroad
Railroad Service Has   service. Complaints have been particularly strong from agricultural
Been Poor              shippers and communities in the West and Midwest. Union Pacific
                       Railroad’s merger with the Southern Pacific Railroad in 1996 and the
                       subsequent widespread delays in delivering railcars to destinations
                       brought national attention to the seriousness of railroad service problems.
                       Shippers attribute many of the problems they experience to a decrease in
                       competitive transportation options as a result of railroad mergers. In
                       addition, some shippers believe railroads must improve the consistency of
                       their operations and increase the number of available railcars, among
                       other things, in order to improve service levels.50




                       50
                         The subsequent discussion includes references to the year 1997. In responding to a draft of this
                       report, Board officials noted that, in its opinion, 1997 was an atypical year in terms of quality of rail
                       service. They cited the Board’s emergency service order in the Houston/Gulf Coast service breakdown
                       as reflecting this aberration and pointed out that service problems in this area of the country began
                       before the Union Pacific/Southern Pacific merger had been fully implemented. They also said that rail
                       service has improved since 1997.



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Shippers Believe the          Many rail shippers believe service has been poor. Events in recent years
Quality of Rail Service Has   may have exacerbated the problems. For example, in the summer of 1997,
Deteriorated in Recent        during implementation of the Union Pacific/Southern Pacific merger, rail
                              lines in the Houston/Gulf Coast area became severely congested, and
Years                         freight shipments in some areas came to a complete halt. As the problem
                              spread, many grain shippers experienced delays in railcar deliveries of 30
                              days or more, while some grain shippers in Texas did not receive railcars
                              for up to 3 months. Transit times for movements of wheat from Kansas to
                              the Gulf of Mexico in some cases exceeded 30 days—four to five times
                              longer than normal. In late 1997, the Board determined that the service
                              breakdown, which had a broad impact throughout the western United
                              States, constituted an emergency and, among other things, ordered Union
                              Pacific to temporarily release its Houston area shippers from their service
                              contracts so that they could use other railroads serving Houston, and to
                              cooperate with other carriers in the region that could accept Union Pacific
                              traffic for movement, to help ease the gridlock.

                              The lack of predictable, reliable rail service has been a common complaint
                              among some shippers. For example, during public hearings conducted by
                              USDA in 1997, over 400 grain shippers and rural residents from Iowa,
                              Kansas, Minnesota, Montana, and North Dakota expressed their concerns
                              about cars not being delivered; little, or no, notification when railcars
                              would be delivered; little or no success in trying to reach appropriate
                              railroad officials for information on car deliveries; and the general lack of
                              available cars when and where needed. These same types of problems
                              were identified by shippers and shipper associations during additional
                              hearings in Montana and North Dakota conducted in December 1997 by a
                              Senate Subcommittee and in April 1998 by the Board during hearings on
                              railroad access and competition issues.


Survey Results Also           Our survey responses from about 700 bulk grain, coal, chemicals, and
Indicate Shipper              plastics shippers conducted in the fall of 1998 also reflect concerns about
Dissatisfaction With Rail     railroad service.51 An estimated 63 percent of the shippers responding to
                              our survey (329 of 525 shippers that answered this question) said that the
Service                       overall quality of their rail service was somewhat or far worse in 1997 than
                              it was in 1990. Chemicals and plastics shippers were among the most
                              dissatisfied with the overall quality of their rail service—approximately
                              80 percent of these shippers indicated that the overall quality of rail
                              service they received in 1997 was somewhat or much worse than in 1990.
                              About 71 percent of coal shippers indicated that the overall service levels

                              51
                                See chapter 1 for details on how we conducted our survey.



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                                      provided by the railroads serving them were somewhat or much worse.
                                      Finally, echoing the complaints expressed during congressional hearings,
                                      an estimated 57 percent of grain shippers responding to our survey
                                      indicated their overall quality of rail service was somewhat or much worse
                                      in 1997 than it was in 1990.52

                                      On the basis of our survey results, the types of problems experienced
                                      since 1990 have varied by commodity. (See table 4.1.) About 66 percent of
                                      coal shippers responding to our survey indicated that they experienced
                                      somewhat or much worse service in terms of car cycle time—that is, the
                                      amount of time it takes to deliver a commodity to its destination and
                                      return—in 1997 compared with 1990. Chemicals and plastics shippers
                                      identified problems with the consistency of on-time delivery as most
                                      problematic; about 84 percent of the shippers responding to our survey
                                      identified this problem as worse in 1997 compared with 1990. Grain
                                      shippers identified railcar availability as their most troublesome problem.
                                      An estimated 67 percent of grain shippers indicated that railcar availability
                                      during peak periods was somewhat or much worse in 1997 than it was in
                                      1990. Railcar availability, in general, was rated as worse by an estimated
                                      63 percent of the grain shippers.

Table 4.1: Percent of Shippers
Responding to Our Survey                                                                                                         Chemicals/
Experiencing Somewhat or Much         Aspect of service                     Grain shippers            Coal shippers       plastics shippers
Worse Service in 1997 Compared With   Car transit time                                     41                       65                       78
1990, by Commodity Type
                                      Car availability during
                                      peak periods                                         67                       65                       73
                                      Car cycle time                                       47                       66                       78
                                      Car availability in general                          63                       61                       69
                                      Consistency of on-time
                                      pick up                                              48                       58                       46
                                      Consistency of on-time
                                      delivery                                             53                       57                       84
                                      Note: Not every shipper provided a response for each aspect of service. Between 138 and 261
                                      grain shippers, between 34 and 47 coal shippers, and between 24 and 69 chemicals/plastics
                                      shippers provided responses to each aspect of service.



                                      Shippers responding to our survey also indicated that the quality of service
                                      provided by the railroads has decreased relative to the amount paid for

                                      52
                                        Surveys inherently have sampling errors. Sampling errors define the upper and lower bounds of the
                                      estimates made for our survey results and were calculated at the 95-percent confidence level. This
                                      means that 19 out of 20 times, the sampling procedures used would produce a range that includes the
                                      true value. For the information in this report, all sampling errors were less than 5 percent. The specific
                                      sampling errors are included in our companion report (GAO/RCED-99-46).



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                            that service. This was particularly true in 1997 compared with 1990. An
                            estimated 43 percent of those shippers (247 of 570 shippers) indicated that
                            the quality of service provided by railroads in 1990 was somewhat or far
                            less relative to the amount paid in 1990. In contrast, the percent of
                            shippers indicating that the quality of service they received from railroads
                            in 1997 was either somewhat or far less relative to the amount paid for that
                            service had increased to an estimated 71 percent of those responding to
                            our survey. Coal shippers and chemicals and plastics shippers were the
                            most dissatisfied—about 80 percent and 88 percent, respectively, were
                            dissatisfied with the value of their service. An estimated 66 percent of
                            grain shippers responding to our survey said the quality of rail service was
                            somewhat or far less relative to the amount that they paid for such service
                            in 1997.


Relatively Few Shippers     The widespread dissatisfaction with railroad service has not necessarily
Have Filed Formal Service   resulted in many formal service complaints being filed with the ICC or the
Complaints Before the       Board. Only 25 formal service-related complaints were pending with the
                            ICC as of January 1, 1990, or were subsequently filed with the ICC or the
Board                       Board.53 These complaints involved a wide range of alleged service
                            problems, including failure to provide a sufficient supply of railcars; late
                            inbound and outbound deliveries; and other kinds of inconsistent service.
                            Of the seven cases that had completed the adjudicatory process as of
                            February 1999, five were decided in favor of railroads and two in favor of
                            shippers. Thirteen cases did not result in a decision because ICC/the Board
                            did not have jurisdiction over the matter or the shipper withdrew the
                            complaint. Five formal service complaints were pending as of
                            February 1999.

                            Typically, no more than two or three complaints were filed each year,
                            except in 1995, when seven complaints were filed. Most of the complaints
                            were filed against Class I railroads (68 percent), with the rest filed against
                            smaller railroads (32 percent). Of the Class I railroads involved in these
                            complaints, Burlington Northern had the greatest number of complaints
                            filed against it (six) followed by Conrail (five) and CSX Transportation
                            (three). On a commodity basis, customers who shipped grain products
                            represented the largest proportion of complaints (20 percent), followed by
                            customers who shipped steel and railcars (12 percent each).


                            53
                              There were also four petitions for declaratory orders relating to service matters. The statutory
                            authority for declaratory orders and associated relief differ from those of formal complaints. However,
                            the petitions for declaratory orders reflect the petitioners’ attempts to use a formal mechanism to
                            resolve service problems.



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Many Shippers Believe         Many shippers and their associations have attributed service problems, at
Railroad Mergers and Lack     least in part, to railroad mergers or consolidations. When asked in our
of Competitive Alternatives   survey the extent to which mergers or consolidations since 1990
                              (excluding the Union Pacific merger with Southern Pacific) have affected
Have Contributed to Poor      the quality of rail service they received, an estimated 50 percent of the
Service Performance           shippers (268 of 536 shippers responding) indicated that service levels
                              were somewhat or much worse as a result of mergers or consolidations.
                              When asked specifically about the effects of the Union Pacific merger with
                              Southern Pacific on service levels, an estimated 84 percent of the shippers
                              (371 shippers) indicated that the quality of rail service they received was
                              either somewhat or much worse since the merger. Chemicals and plastics
                              shippers indicated they were most affected by the Union Pacific/Southern
                              Pacific merger—about 97 percent indicated that the rail service their
                              companies received was somewhat or much worse. Similarly, about
                              94 percent of the coal shippers indicated that the Union Pacific merger
                              had resulted in worse rail service. An estimated 77 percent of the grain
                              shippers indicated they received somewhat or much worse rail service
                              after the merger than before the merger.54

                              Shippers have also attributed service problems to a lack of competitive
                              alternatives to rail transportation. Some shippers who told us that
                              historically they have only been served by a single railroad or have no
                              access to other transportation modes maintain that the rail service they
                              receive is poor. For example, some North Dakota grain shippers told us
                              that they are heavily dependent upon railroads to transport their grain
                              because shipping grain by truck (the only other major mode of freight
                              transportation available in the state) over long distances to mills,
                              processors, and export markets is not economically feasible. As a result of
                              this dependence, they claim there is little incentive or reason for the one
                              railroad that serves them to provide quality service. These shippers told us
                              that not only have railroads become more arrogant and stopped providing
                              good service to those shippers for which they no longer face rail
                              competition, but also railroads have tended to serve those customers with
                              competitive alternatives first—leaving those shippers without competitive
                              alternatives to receive the last and worst service.

                              Shippers responding to our survey identified several changes that they
                              believe railroads should make to increase rail service quality. Although
                              grain shippers cited the lack of available cars as the aspect of service that

                              54
                                These percentages represent results from 87 of 90 chemical/plastics, 51 of 54 coal, and an estimated
                              175 of 227 grain shippers. The remaining respondents did not answer this series of questions; indicated
                              they did not know; or it was not applicable to them because they indicated that they were not served
                              by the Union Pacific/Southern Pacific Railroad.



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                            has caused them the most problems, an estimated 68 percent of the grain
                            shippers (331 of 485 shippers responding) indicated that they would like to
                            see the consistency of on-time delivery of cars improved. An estimated
                            51 percent of the grain shippers (246 of 485 shippers responding) believe
                            the number of available cars should be increased, and an estimated
                            33 percent (162 of 484 shippers responding) want to see the consistency of
                            on-time pick up of cars improved. While both coal shippers and chemicals
                            and plastics shippers identified consistency of on-time delivery as among
                            the three most important changes needed to improve service, they
                            identified improving transit times as among the most important changes
                            that should be made by the railroads—about 75 percent of the coal
                            shippers (62 of 83 shippers responding) and about 84 percent of the
                            chemicals and plastics shippers surveyed (81 of 97 shippers responding)
                            expressed the need for improved transit times.


                            In general, rail industry officials believe the service they provide to their
Railroads Believe           customers is adequate. In fact, railroads have made capital expenditures in
That Service Is             recent years to improve system capacity and service levels. However,
Adequate, but               railroad officials recognize that railcar availability and the timeliness of
                            rail shipments, among other things, do not always meet shipper
Improvements Are            expectations. Some industry officials believe capacity constraints, industry
Needed to Meet              downsizing, and an inadequate railcar supply are among the factors that
                            have contributed to the difficulties in meeting shipper service
Shipper Expectations        expectations. In addition, some railroad officials agree that rail mergers
                            and consolidations, in particular the Union Pacific merger with Southern
                            Pacific, have exacerbated service problems. Addressing service problems
                            can be a challenge; railroad officials told us that they often face the
                            difficult task of balancing the service needs of customers with the
                            financial viability of the railroads.


Railroads Believe Service   In general, railroad officials believe that current service is adequate. This
Is Generally Adequate       is particularly true when compared with 1990. With the exception of
                            service problems associated with the Union Pacific/Southern Pacific
                            service crisis, officials from the four largest Class I railroads we spoke
                            with about service said overall service in 1997 was at least as good as it
                            was in 1990. They provided a number of illustrations for why service was
                            as good as or better than in 1990. For example, Norfolk Southern officials
                            said that their railroad and other railroads have made significant
                            investments in cars, locomotives, and people to improve service. Officials
                            from CSX Transportation said that investments in such things as the



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                             installation of continuously welded rail throughout the network, purchase
                             of new cars and locomotives, and the development of better information
                             technology to respond to customer problems have all contributed to
                             improved service. There was also general agreement that rail industry
                             consolidation, including the Union Pacific merger with Southern Pacific,
                             has benefitted shippers by creating more single-line service that reduces
                             the number of trains that must handle goods enroute, thereby reducing
                             costs and transit times.

                             However, many railroad officials also agree that service is not what it
                             should be and may not have met shipper expectations for various reasons.
                             For example, some railroad officials told us that delays on rail systems
                             have been primarily caused by capacity constraints. As railroad traffic has
                             been growing in recent years, and as railroads have been scaling back
                             operations in order to cut costs, system capacity has become inadequate.
                             In addition, to cut costs, railroads have reduced employment levels. Now,
                             given the growth in railroad traffic, railroads have had insufficient people
                             or crews available to provide the required service. For example, train
                             delay data we obtained from one Class I railroad indicated that both a
                             shortage of locomotives and crews were major causes of train delays from
                             1992 through 1996. Finally, an inadequate supply of railcars, especially for
                             grain shippers, has contributed to shipper dissatisfaction. As one railroad
                             official told us, railcar availability will always be a point of contention
                             between railroads and shippers, and some railroads are reluctant to invest
                             in the number of cars needed to handle peak demand if those cars might
                             sit idle for a significant portion of the year.


Railroads Acknowledge        Some rail industry officials we spoke with, including those at the Union
the Union Pacific/Southern   Pacific Railroad, acknowledged that the Union Pacific merger with
Pacific Merger Contributed   Southern Pacific contributed to the service crisis which began in the late
                             summer of 1997 in and around Houston, Texas. According to Union Pacific
to Problems                  officials, Southern Pacific had more problems than Union Pacific officials
                             expected, especially a substantial amount of deferred track maintenance.
                             In general, these officials said that Southern Pacific had made a lot of
                             operating decisions based on short-term cash flow considerations rather
                             than long-term financial health. As a result, Union Pacific’s high traffic
                             levels and a series of external stresses overwhelmed a weak Southern
                             Pacific infrastructure. Union Pacific officials expect that as the railroad
                             recovers from its difficulties, service levels will return to their pre-merger
                             levels—which in their opinion, had improved since 1990.




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                         The difficulties experienced by Union Pacific affected other railroads as
                         well. For example, officials at Norfolk Southern told us that because
                         Norfolk Southern receives cars from Union Pacific Railroad for shipment
                         to ultimate destinations and sends other cars to destinations that are on
                         Union Pacific’s tracks, the Union Pacific’s problems adversely affected
                         Norfolk Southern’s customer commitments. Officials at Burlington
                         Northern and Santa Fe Railway told us that it took on a significant amount
                         of additional business during the service crisis that would usually have
                         been carried on Union Pacific, which resulted in a trade-off: railroad
                         officials decided it was better to serve more shippers with a lower level of
                         service rather than a more limited number of customers at a higher level of
                         service. Officials from CSX Transportation also said the Union
                         Pacific/Southern Pacific failures were a “wake up call” to the railroad
                         industry to do a better job of serving its shippers.


Providing High-Quality   In providing high-quality service, railroad management faces the difficult
Service Involves         task of balancing the needs of shippers with the financial viability of the
Trade-Offs Between       railroad. In discussing service adequacy and shipper dissatisfaction,
                         railroad officials made clear the role financial tradeoffs play in service
Investment and Service   decisions. Officials from CSX Transportation told us that their company
                         could hire more crews and invest in assets to address capacity problems.
                         However, in their opinion, the competitive nature of today’s railroad
                         business precludes these extra costs from being passed on to shippers.
                         Officials from other railroads agreed, saying that railroads need to add
                         capacity—which will require a significant capital investment. In
                         considering this investment, their companies will have to weigh issues
                         such as the potential for future traffic growth; cost of adding capacity; and
                         effects on rates and service. Tradeoffs will also be a part of the decision
                         making process regarding railcars. Some railroad officials noted that
                         shippers and railroads historically have disagreed on the adequacy of the
                         supply of railcars, but actual investment in such cars involves a tradeoff
                         between the investment in railcars and the return on that investment.
                         Often, the return on investment is not sufficient to justify the investment
                         cost.

                         Management discretion that is inherent in railroad operations can also
                         influence the quality of rail service. The logistics of moving different kinds
                         of freight to a myriad of markets in different geographical locations can be
                         a difficult task. Management decision making may play a larger role than
                         technology in influencing service levels. This was the conclusion of a 1993
                         study conducted by the Massachusetts Institute of Technology, Center for



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                          Transportation Studies, on freight railroad reliability.55 This study
                          concluded that decisions regarding power management (availability and
                          positioning of locomotives), train operations (which trains to run, with
                          what cars, and at what time), and the management of railroad terminals all
                          had important consequences on railroad reliability. Some railroad officials
                          we spoke with agreed that management decision making plays a
                          significant role in the quality of service. For example, officials at Norfolk
                          Southern told us that, although it has taken actions to minimize
                          management decisions in providing service, there is still a fairly high
                          degree of management discretion in service decisions. Officials at CSX
                          Transportation told us that 85 to 90 percent of service performance
                          involves management decision making about capital expenditures and
                          operating expenses. In their opinion, at the local level, service decisions
                          are very much influenced by budget and financial decisions, and
                          insufficient funding could lead to reductions in such things as train
                          service.


                          Currently, the overall quality of railroad service provided by railroads
Quality of Rail Service   cannot be measured. While the legislation governing railroad service
Cannot Be                 requires that railroads provide service upon reasonable request, the Board
Determined Since          and federal courts determine what constitutes reasonable service and
                          whether a railroad has satisfied its service obligations in the context of
Industrywide              deciding specific complaints. Industrywide measures of rail service for the
Measures Do Not           most part do not exist. In general, the very limited industrywide measures
                          we were able to obtain suggest some improvement in these measures in
Exist                     recent years. However, these measures are not enough to conclude that
                          service has improved overall. Railroad officials told us they have been
                          reluctant to develop service measures, fearing they could be
                          misinterpreted or misused by customers and/or the public or that they may
                          reveal business-sensitive information. According to AAR, individual rail
                          carriers have developed measures of service over time that, while
                          addressing carrier and/or customer specific service performance, are not
                          necessarily consistent or continuous measures of service either between
                          carriers or over time for individual carriers.




                          55
                            Causes of Unreliable Service in North American Railroads, Little, P., Martland, C.D., Proceedings of
                          the 35th Annual Meeting, Transportation Research Forum (1993).



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Governing Legislation     Railroads are required by statute to provide service upon reasonable
Does Not Prescribe        request; furnish safe and adequate car service; and establish, observe, and
Specific Service Levels   enforce reasonable rules and practices on car service.56 The Board (and its
                          predecessor, ICC) and federal courts determine what constitutes
                          reasonable service and whether a railroad has satisfied its service
                          obligations in the context of deciding specific complaints. For example, in
                          a 1992 case, the ICC addressed the issue of railcar supply in connection
                          with a complaint challenging the legality of Burlington Northern Railroad’s
                          Certificate of Transportation Program. The ICC held that Burlington
                          Northern had not violated its statutory obligations and observed that the
                          common carrier obligation requires that a railroad maintain a fleet
                          sufficient to meet average—not peak—demand for service. According to
                          the ICC, a requirement for a fleet sufficient to meet peak demand would
                          result in a wasteful surplus of equipment detracting from a railroad’s
                          long-term financial health.57 Other cases have involved such matters as
                          whether a railroad was justified in refusing a shipper’s request to restore
                          service on an embargoed line. However, ICC and the Board’s decisions are
                          situation-specific and do not easily lend themselves to developing a single
                          set of measures that would allow an assessment of a railroad’s—or the
                          industry’s—quality of service in all circumstances.


Few Industrywide          For the most part, industrywide measures of service performance do not
Performance Measures      exist. For example, according to AAR, there is no standard railroad industry
Exist                     definition of transit time and no central clearinghouse to collect industry
                          service performance data. As a result, the types of service measurements
                          maintained can vary from one railroad to another. The officials told us that
                          trying to understand and develop industrywide service measures has been
                          an important issue in the rail industry but “the least fertile area for
                          information.” In addition, officials said that some industrywide service
                          data that used to be collected have been discontinued. For example, AAR
                          used to prepare reports on car cycle times, the percent of the railcar fleet
                          that was out-of-service, and car shortages. These reports are no longer
                          prepared because of data quality problems.


                          56
                           These statutory requirements, found in sections 11101(a) and 11121(a)(1) of title 49, United States
                          Code, are collectively referred to as the common carrier obligation.
                          57
                             National Grain and Feed Association v. Burlington Northern Railroad Co., 8 I.C.C.2d 421, 427 (1992).
                          The United States Court of Appeals for the Eighth Circuit subsequently reversed ICC’s decision and
                          remanded the case to ICC for a further examination of whether the Certificate of Transportation
                          program was consistent with the common carrier obligation. However, the court specifically held that
                          ICC’s ruling regarding fleet size was permissible. National Grain and Feed Association v. United States,
                          5 F.3d 306, 311 (8th Cir. 1993). At the National Grain and Feed Association’s request, the ICC
                          proceeding was ultimately dismissed.



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A factor complicating the collection of industrywide service measures is
that individual railroads have been reluctant to make such information
public. According to AAR and officials at some Class I railroads we spoke
with, this reluctance is based on concerns that service information could
be misinterpreted or misused by the public, customers, or others or that
the information may be proprietary. For example, AAR noted that providing
information such as railcar transit and cycle times can be misleading
because (1) cycle times are typically increased when additional railcars
are added to the fleet (because it may take longer to load and unload
trains with additional cars), (2) cycle times should be compared with
target performance levels or standards which reflect seasonal fluctuations,
(3) an increase in long-haul business may lead to a lengthening of cycle
and transit times, and (4) a railroad cannot control what happens to a car
once it leaves its tracks for movement to a final destination via another
railroad. Regarding the latter, AAR said meaningful data on interline traffic
(traffic which interchanges from one railroad to another), which
represents roughly one-third of all rail freight revenue, are generally not
maintained by individual railroads and would, therefore, not be captured
in measuring railroad performance. As officials from one Class I railroad
told us, just getting raw service data may not indicate the root cause of
problems.

Despite these limitations, two measures of industrywide service offer a
narrow view of how service has changed since 1990. One is cycle time for
freight railcars, which shows a slight improvement. (See table 4.2.) (In
general, the faster the cycle time the more readily cars are available for
additional trips.) In 1990, the average cycle time for all railcars was just
under 18 days. In 1995 (the last year data were available), the average
cycle time was just under 17 days. However, as table 4.2 shows, cycle time
can fluctuate over time and, as AAR has pointed out, cycle time may be
influenced by several factors, such as change in trip length.




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Table 4.2: Average Railcar Cycle Time,
Selected Car Types, 1990 Through         In days
1995                                                                                                 Car cycle time
                                                                                                  Covered         Open top
                                         Year                                     All cars        hoppers          hoppers         Tank cars
                                         1990                                          17.8             27.0             10.8           42.9
                                         1991                                          18.9             28.5             12.1           44.5
                                         1992                                          18.0             27.0             11.6           42.4
                                         1993                                          17.6             27.4             11.3           42.4
                                         1994                                          16.4             27.0             10.1           41.0
                                         1995                                          16.7             26.8             10.0           41.0
                                         Notes: Covered hoppers are typically used to transport grain; open top hoppers to transport coal;
                                         and tank cars to transport chemicals and plastics.

                                         Cycle time was calculated by dividing 365 by the average number of revenue trips per year by
                                         car type. Industrywide information on car cycle times was discontinued in 1995.

                                         Source: GAO’s analysis of AAR’s data.



                                         Another measure, the number of revenue freight cars undergoing or
                                         awaiting repairs (and, therefore, not available for active revenue service),
                                         also dropped slightly since 1990.58 (See fig. 4.1.) In 1990, about 52,000 of
                                         677,800 cars (about 8 percent of railcars owned) were undergoing or
                                         awaiting repairs. In 1996 (the last year data were available), about 27,000
                                         of 576,800 cars (about 5 percent of railcars owned) were in this category.
                                         However, this measure does not shed any light on how efficiently these
                                         cars were deployed or whether an adequate supply existed.




                                         58
                                          Revenue freight cars provide revenue to railroads by carrying goods. Railroads also operate
                                         nonrevenue freight cars, such as those used to maintain roadbed and track.



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Figure 4.1: Railroad-Owned Revenue
Freight Cars Undergoing or Awaiting   Percent of Cars Owned
Repair, 1990 Through 1996             10


                                       9

                                       8

                                       7

                                       6

                                       5

                                       4

                                       3

                                       2

                                       1


                                       0
                                           1990            1991           1992           1993             1994        1995         1996

                                           Year
                                                  Percent of freight cars undergoing or awaiting repair


                                      Note: As of June 1 each year (except as of Jan. 1 in 1992).

                                      Source: AAR.




Information From                      Measuring service performance of the rail industry is further complicated
Individual Railroads Has              by the fact that individual railroads do not maintain measures of service
Limitations                           performance that are continuous or consistent across the industry. For
                                      example, we asked for, but generally did not obtain, information from
                                      individual Class I railroads about their service performance since 1990 in
                                      the following areas: (1) average car transit time—the amount of time from
                                      the departure of a shipment from an origin to delivery to a destination;
                                      (2) average car cycle time for unit trains;59 (3) car availability, during both
                                      peak and nonpeak periods—this would include the identification of car
                                      surpluses and shortages at each period; (4) on-time pickup of shipments;
                                      (5) on-time delivery of shipments; and (6) train delay summaries, including
                                      causes of train delays. Although some of the railroads we contacted
                                      maintained some of this information, including on-time pick up and

                                      59
                                       In general, unit trains are a dedicated set of cars and locomotives that run in a continuous cycle from
                                      an origin to a destination and return.



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delivery of cars and causes of train delays, most of this information was
either not available going back to 1990 or was only used for specific
analyses.

In general, railroad representatives told us that railroads develop and
maintain their own unique set of service performance measures that are
tailored to their needs and their customers’ needs. Because no two rail
customers may have identical service demands, and what is acceptable
service to one shipper might not be acceptable to another, most railroads
have developed service measures that meet the needs of their specific
customers’ situations. The type and level of service can also be
commodity-specific. For example, officials from CSX Transportation told
us that shippers of different types of commodities demand different levels
of service. For some commodities (such as intermodal containers and auto
parts), on-time pick up and delivery are very important. For other
commodities (such as coal and grain), through-put (total amount of
tonnage) may be more important than timeliness. Finally, officials from
Norfolk Southern also pointed out that differences exist between eastern
and western railroads in terms of the types of service measures a railroad
might keep, because eastern railroads carry, for example, more coal and
western railroads carry more grain. As a result, eastern railcar delivery
delays are generally measured in hours, not days as they might be in the
west.

Railroad mergers have also influenced the availability and consistency of
service measures. As an illustration, Burlington Northern and Santa Fe
Railway officials noted that, prior to the Burlington Northern merger with
Santa Fe in 1995, each railroad collected its own unique service data.
Because of this, data for the pre-merger period may not be available in all
cases or may be inconsistent in what it measured. In addition, officials
from Union Pacific Railroad told us they had concerns about providing us
with service data because the type of measures collected had changed
over the last 10 years—Union Pacific Railroad today is the product of
mergers of several railroads, each of which had maintained unique data
systems. Union Pacific officials also noted that computer technology
advances have allowed Union Pacific to generate new types of data that
were previously impossible to generate and that are not comparable with
any data from pre-merger periods.




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                       In part due to the widespread criticism of the industry over the quality of
Railroad Industry Is   its service, railroads are developing industrywide performance measures.
Developing Limited     As part of its overall review of railroad access and competition issues, the
Measures of            Board directed railroads to establish a more formal dialogue with shippers
                       for this purpose. In response, from August to November 1998, AAR held a
Performance            series of meetings across the country between Class I railroad executives
                       and shippers to discuss service issues. As a result of these meetings, the
                       Class I railroads decided to make available, through the Internet, actual
                       data (not an index) on four measures of performance directed at providing
                       shippers and others with a means to evaluate how well traffic moves over
                       railroad systems. These measures, which the railroads began reporting in
                       January 1999, include (1) total railcars, by type, currently on the rail
                       system; (2) average train speed by type of service; (3) average time railcars
                       spend in major terminals; and (4) timeliness of bills-of-lading (a receipt
                       listing goods shipped). These measures are updated weekly and broken
                       out by individual railroad. According to AAR, these measures are
                       informational in nature, but consideration is being given to establishing
                       standards and goals in these four areas.

                       According to AAR, it is expected that rail customers will be able to use the
                       data to determine what is happening in terms of performance on each
                       railroad. However, according to AAR, these measures are not uniformly
                       calculated across the industry and may be influenced by operating
                       differences among railroads, including traffic mix, weather conditions, and
                       terrain. Therefore, AAR cautions that this information should not be used to
                       compare one railroad against another.

                       Although these measures may be helpful in assessing certain aspects of
                       service, they are more an evaluation of railroad operating efficiency rather
                       than of quality of service. They also may not resolve more fundamental
                       concerns about service. For example, in a November 1998 letter to the
                       Board, several shipper associations and shippers expressed their concern
                       that better information alone will not solve the service problems resulting
                       from railroad consolidations and enhanced market power.


                       In commenting on a draft of this report, the Board indicated that 1997 was
Agency Comments        not a typical year in terms of the quality of railroad service due to the
and Our Evaluation     unusual, severe congestion that occurred in the West. The Board also
                       suggested that performance measures recently developed by the railroad
                       industry can be helpful in measuring some aspects of service quality. In
                       response to the these comments, we added material to the report



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reflecting the Board’s assessment that railroad service in 1997 was atypical
and that service has improved since that time. We also revised the report
to better recognize that recently developed performance measures may be
helpful in measuring some aspects of service quality. However, we
continue to believe that these measures are more an evaluation of railroad
operating efficiency than of quality of service.




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                         Federal agencies and railroads have taken a number of actions to address
                         the service problems that originated in the Houston/Gulf Coast area in
                         1997 during the implementation of the Union Pacific/Southern Pacific
                         merger as well as service issues that are more longstanding and
                         widespread. These actions have led to some progress, particularly the
                         dissemination of new information regarding rail service and additional
                         options for shippers and carriers to resolve disputes. However, in spite of
                         the various actions to address service issues, shippers remain concerned
                         about a lack of access of many shippers to competitive rail alternatives
                         and the effect of this lack of competition on service levels. Shippers and
                         railroads hold widely differing views on this key issue. The Board has
                         tried, without success, to get the two sides to reach some agreement on
                         this issue and has suggested that these issues are more appropriately
                         resolved by the Congress. If the Congress decides to address this issue, it
                         will need to weigh the potential of increased competition to improve
                         service against the potential financial and other effects on the railroad
                         industry.


                         The Union Pacific/Southern Pacific system started experiencing serious
Union Pacific and the    service problems in July 1997 during the process of implementing the
Board Address            merger of the two railroads. Congestion on this system spread to the
Service Problems         Burlington Northern and Santa Fe Railway system, affecting rail service
                         throughout the western United States. Serious rail service disruptions and
Beginning in Late 1997   lengthy shipment delays continued throughout the last half of 1997,
                         particularly in the Houston area. To address service problems on the
                         Union Pacific/Southern Pacific system, Union Pacific adopted a Service
                         Recovery Plan in September 1997. Under this plan, the railroad, among
                         other things, took actions to reduce train movements on the Union
                         Pacific/Southern Pacific system and manage traffic flows into congested
                         areas, acquired additional locomotives, and hired additional train and
                         engine crew employees.

                         In response to growing concerns about the deteriorating quality of rail
                         service in the West, the Board issued an emergency service order in
                         October 1997. This order, and subsequent amendments to it, directed a
                         number of actions aimed at resolving service problems in the Houston
                         area, the source of the crisis. In particular, the order directed temporary
                         changes in the way rail service was provided in and around the Houston
                         area to provide additional options for shippers and carriers and required
                         weekly reporting by Union Pacific on a variety of service measurements,
                         such as system train speed and locomotive fleet size. In December 1997,



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the service order was expanded to require grain loading and cycle time
information to be submitted by Burlington Northern and Santa Fe Railway.
In August 1998, the order expired and the Board decided not to issue
another emergency service order, finding that there was no longer any
basis for such an order given the significant improvements in Houston
area rail service. However, the Board noted that service was still not at
uniformly improved levels, as reflected by congestion in Southern
California. Accordingly, the Board ordered Union Pacific/Southern Pacific
and Burlington Northern and Santa Fe Railway to continue the required
reporting on a biweekly basis so that it could continue to monitor service
levels. In December 1998, the Board discontinued this requirement, citing
further service improvements and the intention of all of the Class I
railroads to start issuing weekly performance reports in January 1999.

As part of its oversight of the Union Pacific/Southern Pacific merger, the
Board has considered requests by various parties for additional merger
conditions that would modify the way in which rail service is provided in
the Houston area. In its December 1998 decision, the Board announced
several changes in response to these requests in order to enhance the
efficiency of freight movements in the area. Most significantly, the Board
authorized the joint Union Pacific/Burlington Northern and Santa Fe
Railway dispatching center at Spring, Texas, to route traffic through the
Houston terminal over any available route, even a route over which the
owner of the train does not have operating authority. However, the Board
declined to adopt a plan sponsored by a group of shippers, two affiliated
railroads, and the Railroad Commission of Texas that would have
displaced the current Union Pacific operations in the Houston terminal
area by establishing neutral switching and dispatching operations by a
third party, the Port Terminal Railroad Association, in order to increase
competition in the area. According to the Board, implementing this plan
would have required Union Pacific to give trackage rights to this
association and all other railroads serving Houston.

In making its decision not to adopt the plan, the Board concluded that the
service crisis in Houston did not stem from any competitive failure of the
Union Pacific/Southern Pacific merger. The Board further concluded that
the plan was not necessary to remedy any merger-related harm because it
would add new competitors for many shippers in the Houston area that
were served by only one carrier prior to the merger and, therefore, had not
experienced a decrease in competition as a result of the merger.
According to the Board, absent merger-related competitive harm, such an
arrangement would thus constitute “open access”—an idea that shippers



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                      should, wherever possible, be served by more than one railroad, even if, in
                      order to produce such a system, railroads that own a majority of an area’s
                      rail infrastructure would be required to share their property with others
                      that do not—an action which Board officials said the law does not provide
                      for at this time.

                      Union Pacific has recently taken further actions aimed at improving its
                      service levels. These actions have included decentralizing railroad
                      operations and implementing capital and maintenance projects, such as
                      projects to improve, expand, and maintain its railroad track. Also, in
                      August 1998, the railroad created a new internal organization, called
                      Network Design and Integration, which will be responsible for identifying
                      the services most needed by shippers and developing plans for delivering
                      them. This organization is expected to serve as a link between the
                      marketing and operating departments, to ensure that service commitments
                      to shippers match the railroad’s capacity to deliver these services. In
                      December 1998, Union Pacific reported to the Board that its operations
                      had returned to normal levels, citing its average system train speed that
                      had risen above 17 miles per hour for the first time since July 1997, when
                      its service crisis began. The railroad acknowledged that its service levels
                      still needed improvement but maintained that its latest service measures
                      demonstrated a recovery from its prior serious service problems.


                      Federal agencies as well as railroads have recently taken a number of
Government Agencies   actions aimed at addressing freight rail service issues of a broader nature
and Railroads Take    than the recent service crisis in the West. These issues include the need to
Some Actions to       foresee and prevent service problems and expeditiously resolve them
                      when they do arise and the need to expand the capacity of the railroad
Address Broader       system to provide service. Among the actions by federal agencies are
Service Issues        efforts by the USDA and the Board to disseminate information that can help
                      railroads, shippers, and receivers anticipate changes in transportation
                      demand and supply and the adoption by the Board of new procedures
                      allowing it to authorize temporary alternative rail service more quickly for
                      shippers affected by serious service disruptions. In addition, individual
                      railroads have recently made efforts to improve service through changes in
                      their customer service organizations and increased investments in
                      infrastructure. Finally, partly at the urging of the Board, the railroad
                      industry has acted to address some service issues. Actions include a
                      commitment by the Class I railroads to issue weekly measures of their
                      service performance, an agreement between Class I railroads and grain
                      and feed shippers to resolve some service-related disputes through binding



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                               arbitration, and an agreement between Class I and smaller railroads aimed
                               at allowing smaller railroads to play a greater role in providing service to
                               shippers.


The Board and USDA Take        The rail congestion that occurred during the 1997 rail crisis in the West
the Initiative in Addressing   severely affected the movement of grain to market. This situation
Service Issues                 illustrated the need to better monitor production levels, the transportation
                               needs of grain shippers, and the capacity of the railroads to meet those
                               needs, so that shippers and railroads could anticipate changes in
                               transportation demand and supply and make adjustments that could
                               lessen the severity of such changes. To meet this need, the Board and USDA
                               signed an agreement in May 1998 to create a Grain Logistics Task Force.
                               This task force, made up of Board and USDA officials, was tasked with
                               identifying and disseminating information on grain production and
                               consumption and transportation requirements. The task force began
                               issuing reports in August 1998 and expects to issue them five times a year.
                               These reports contain information on such things as expected production
                               levels of various grains (by state), grain supplies and storage capacity, and
                               railcar loadings and the demand for rail transportation.

                               To address long-term transportation issues facing the nation’s agriculture
                               sector in the 21st century, USDA also held a National Agricultural
                               Transportation Summit in Kansas City in July 1998. This meeting provided
                               a forum for agricultural shippers and others to express their concerns
                               about grain marketing and demand, and railroad service quality issues. A
                               significant outcome of this summit was an agreement between USDA and
                               DOT to create a Rural Transportation Advisory Task Force. The objectives
                               of this task force include undertaking joint outreach to users and
                               providers of agricultural and rural transportation services to further
                               identify transportation challenges and ways in which these challenges can
                               be met and considering joint research efforts and policy initiatives to
                               address these challenges. While the scope of the task force’s
                               responsibilities will be broad, freight rail service to the nation’s
                               agricultural community will be a key component of its work.

                               At hearings held by the Board in April 1998 to review issues concerning
                               rail access and competition, shippers complained about a number of
                               service problems, including the difficulties in seeking relief from serious
                               service disruptions through the Board’s existing procedures.60 In response,

                               60
                                See Surface Transportation Board, Ex Parte No. 575, Review of Rail Access and Competition Issues
                               (Apr. 17, 1998).



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                       the Board adopted new procedures in December 1998 providing temporary
                       relief from serious service problems, through service from an alternative
                       rail carrier, more quickly.61 Shippers and smaller railroads can seek
                       temporary alternative service in two ways: (1) through an 8-day
                       evidentiary process for requesting short-term emergency relief for up to
                       270 days or (2) through a 45-day evidentiary process for requesting
                       longer-term relief for serious, though not emergency, service inadequacies.
                       Prior to obtaining either type of relief, the petitioning shipper or railroad
                       must discuss the service issues with the incumbent rail carrier and obtain
                       the commitment from another rail carrier to meet the identified service
                       needs. These expedited procedures do not require a showing that the rail
                       carrier has engaged in anticompetitive conduct. Rather, the petitioning
                       shipper or railroad must show a substantial, measurable deterioration or
                       other demonstrated inadequacy in rail service over an identified period of
                       time.


Individual Railroads   In order to be better able to resolve service problems brought to their
Attempt to Improve     attention by customers, individual Class I railroads have recently taken a
Service                number of actions to improve their customer service organizations. For
                       example, some railroads have removed their local customer service
                       personnel from field offices and replaced them with centralized customer
                       service centers. At these service centers, service representatives either
                       route the customer to the appropriate department at the railroad for
                       problem resolution or handle the calls directly. As noted previously, Union
                       Pacific Railroad expects to improve its ability to meet its customers’
                       service expectations through the creation of its new organization that will
                       serve as a link between its marketing and operating departments. In its
                       attempts to improve customer service, Norfolk Southern has added yard
                       operations, billing, and freight claim settlement to the responsibilities of
                       its customer service center. Finally, Burlington Northern and Santa Fe
                       Railway has instituted a Grain Operations Desk that serves as a point of
                       contact for grain shippers throughout its rail system for obtaining
                       information on the arrival of empty grain cars, improving the spotting of
                       loaded cars, and improving overall communications between the railroad
                       and its customers.

                       The Class I railroads have also been attempting to improve service through
                       capital investments to improve their infrastructure and expand their
                       capacity to provide service. Class I railroad capital expenditures in 1997


                       61
                        See Surface Transportation Board, Ex Parte 628, Expedited Relief for Service Inadequacies (Dec. 21,
                       1998).



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                           were about 31 percent higher (in constant dollars) than they were in 1990.
                           Rail industry officials told us that these investments are important because
                           they help relieve capacity constraints caused by restructuring of railroad
                           operations and the growth of traffic in recent years. Investments have
                           included new rail yards and terminals, additional sidings and track, and
                           additional cars and locomotives. However, these railroad representatives
                           believe that further capital investments are needed to address service
                           problems. Railroad officials also told us that hiring new employees is
                           important to increase the number of train crews available.


Railroad Industry and      In April 1998, following its hearings on rail access and competition issues,
Shippers Address Some      the Board issued a decision that called on railroads and shippers to
Service Issues, With the   discuss and identify solutions to a number of service-related problems.
                           One problem that the Board noted was the need for greater
Board’s Encouragement      communications between railroads and their customers and the need for
                           railroads to find a more systematic way of addressing customer concerns.
                           Accordingly, the agency directed the railroads to establish formal dialogue
                           with shippers. In response, from August through November 1998 the AAR
                           held five meetings across the country, attended by the Board’s chairman,
                           between Class I railroad executives and their customers to discuss service
                           issues. At these meetings, the railroads introduced four proposed
                           measures of railroad service predictability and asked for feedback on their
                           usefulness.62 The industry had developed these measures in July 1998 in
                           response to customer suggestions that such measures were needed. The
                           industry maintains that these indicators will reflect the general health of
                           each railroad and will provide an early warning of developing operational
                           problems. The Class I railroads began making these measures available on
                           the Internet in January 1999; they plan to update the measures weekly.

                           In addition, AAR held a “customer service symposium” in March 1999 in
                           order to facilitate further dialogue with shippers on aspects of service
                           such as shipment tracking and problem resolution. Although many
                           shippers have welcomed these efforts, some have expressed skepticism
                           about their impact on broader transportation issues. For example, in
                           November 1998, 27 shipper associations sent a letter to the Board noting
                           that, while they welcomed the railroads’ efforts to improve service
                           predictability, the meetings have not addressed shipper concerns
                           regarding systemic issues such as the lack of competitive rail alternatives
                           and the effectiveness of available regulatory remedies.

                           62
                             The proposed measures were total cars on-line, average train speed, average terminal dwell time
                           (average time a railcar is at a specified terminal), and timeliness of bills-of-lading.



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Shippers with specific complaints regarding rail service may seek a
resolution of the problem through the Board’s formal complaint
adjudication process. However, in order to establish an alternative private
sector process for resolving disputes between agricultural shippers and
rail carriers, the National Grain and Feed Association reached an
agreement with Class I railroads and the AAR in August 1998 that provides
for compulsory, binding arbitration—as well as nonbinding mediation—to
resolve specific types of disputes.63 Although this initiative was not
specifically called for by the Board, the Board noted that it is consistent
with its preference that private parties resolve disputes without Board
involvement and the litigation that it involves. The agreement covers a
wide range of grain and feed products and covers such disputes as the
misrouting of loaded railcars, disputes arising from contracts, and disputes
involving the application of rules governing car guarantee programs.
Those parties agreeing to use this arbitration process are not obligated to
arbitrate claims that exceed $200,000. Officials from one Class I railroad
we spoke with said this agreement is like a small claims court for handling
small rate and service problems. The agreement is not designed to handle
multimillion dollar cases.

The role of non-Class I railroads in providing freight service has been
another issue of concern. These railroads, as well as shippers, have
expressed concerns regarding obstacles, such as inadequate railcar supply
and lack of alternative routings, that prevent small railroads from
expanding their business and providing increased service options to their
customers. In its April 1998 decision, the Board directed short line and
regional railroads (collectively called small railroads) and Class I railroads
to complete discussions they had begun on these problems. In
September 1998, the American Short Line and Regional Railroad
Association and the AAR announced that they had reached agreement on
provisions aimed at giving short line and regional railroads access to new
routing arrangements to develop new business. The agreement also
contains guidelines for how certain fees and rates charged by Class I
railroads to provide service to small railroads will be set and how revenue
would be divided between Class I and smaller railroads.64 As part of the

63
  The Board also has a voluntary binding arbitration process that offers parties involved in a service
dispute a means of informally resolving their differences through arbitration, with limited Board
involvement. The Board adopted rules for this process in August 1997 to promote private sector
dispute resolution and reduce the litigation burdens—particularly to smaller entities—associated with
the Board’s formal complaint process. As of February 1999, this process had not yet been used.
64
 A division of revenue involves an agreement between railroads on how to allocate revenue when a
car travels over two or more railroads’ track. The rate-related aspects of the agreement were subject to
Board approval, which was granted on an interim basis on September 22, 1998, and on a final basis on
December 11, 1998.



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                       agreement, the railroads agreed to submit disputes regarding these
                       provisions to binding arbitration. The president of the American Short Line
                       and Regional Railroad Association described the agreement as a
                       “framework of partnership and growth for years to come.” In a survey
                       conducted by the association at the end of 1998, executives of small
                       railroads were also optimistic but cautioned that the implementation of
                       the agreement depended on cooperation by Class I railroads.


                       While the actions described above have addressed some service-related
Railroads and          issues, some shippers remain concerned regarding the systemic issue of
Shippers Remain Far    increasing consolidation within the railroad industry. They complain that
Apart on the Key       this consolidation has reduced competition within the railroad industry,
                       leading to a situation in which many shippers are without competitive rail
Issue of Competition   alternatives and must pay higher rates for inadequate service.65 The
                       divergent views held by railroads and shippers on this issue make it much
                       more difficult to address than the issues described previously.

                       The Board is authorized to impose remedies giving shippers access to
                       more routing options—alternative through routes, reciprocal switching,
                       and terminal trackage rights—on a permanent basis. However, under its
                       competitive access regulations, the shipper must demonstrate that its
                       incumbent rail carrier has engaged in anticompetitive conduct.66
                       Specifically, the shipper must show that the carrier has used its market
                       power to extract unreasonable terms or, because of its monopoly position,
                       has disregarded the shipper’s needs by providing inadequate service.67
                       Some shippers have complained that this requirement is too difficult to
                       meet, and as a result, the Board has not imposed competitive routing
                       options where shippers believe such options are needed. Some shippers
                       consider the requirement to demonstrate anticompetitive conduct to be
                       the most problematic aspect of the Board’s interpretation of its statutory
                       authority on this issue. The shippers believe that the elimination of this
                       requirement is essential. However, the railroads believe that the
                       demonstration of anticompetitive conduct is a necessary prerequisite to
                       the imposition of a competitive routing option. Railroads cite concerns


                       65
                         Regarding this concern, Board officials have noted that, while mergers have changed the way the rail
                       system looks, the mergers that have been approved have had conditions placed upon them to ensure
                       that no facility served by more than one railroad before the merger would be limited to service by only
                       one railroad afterwards.
                       66
                         49 C.F.R. § 1144.5 (1998).
                       67
                        Midtec Paper Corp. v. Chicago and N.W. Transp. Co., 3 I.C.C.2d 171 (1986), aff’d sub nom. Midtec
                       Paper Corp. v. United States, 857 F.2d 1487 (D.C. Cir. 1988).



                       Page 89                                                      GAO/RCED-99-93 Railroad Regulation
Chapter 5
Despite Recent Actions to Address Service
Issues, Concerns Continue




that increased competition imposed through regulation would undermine
the industry’s ability to cover their high fixed costs and earn adequate
returns.

In its April 1998 decision regarding rail access and competition issues, the
Board stated that it would consider whether to revise its competitive
access rules. However, the Board directed that, first, railroads should
arrange meetings with a broad range of shipper interests under the
supervision of an administrative law judge to examine the issue. In these
meetings, shippers and railroads were to try to mutually identify
appropriate changes to the Board’s rules that would facilitate greater
access to competitive rail alternatives where needed. In response, shippers
and railroads held discussions in May and June 1998 on proposed revisions
to these rules but, due to widely divergent views on the topic, could not
come to any agreement.

In its December 1998 report to Members of Congress on rail access and
competition issues, the Board declined to initiate further action on this
issue, pointing to its adoption of new rules, described previously, that
allow shippers temporary access to alternative routing options during
periods of poor service. In response to the impasse between the
representatives of railroads and shippers, the Board observed that the
competitive access issue raises basic policy questions that are more
appropriately resolved by the Congress.68 These questions include the
appropriate role of competition, differential pricing, and how railroads
earn revenues and structure their services. The Board noted that this issue
is complex, and it is unclear how changes in its rules pertaining to
competitive routing options would affect the nation’s rail system and the
level of service provided by this system. In its December 1998 decision in
the Houston/Gulf Coast oversight proceeding, the Board recognized the
possibility that opening up access could fundamentally change the nation’s
rail system, possibly benefitting some shippers with high-volume traffic
while reducing investment elsewhere in the system and ultimately
reducing or eliminating service for small, lower-volume shippers in rural
areas. Board officials noted that many small, low-volume shippers have
already lost service options as larger railroads shed their low-density and
otherwise unprofitable lines.



68
 Similarly, as previously explained, the Board recently declined to provide for an open access
arrangement in the Houston area in response to requests from area shippers and others. The Board
explained that the proposed arrangement was not tailored to any demonstrated merger-related harm
and, therefore, was not within the scope of its statutory authority.



Page 90                                                   GAO/RCED-99-93 Railroad Regulation
                     Chapter 5
                     Despite Recent Actions to Address Service
                     Issues, Concerns Continue




                     Fundamental differences exist between shippers and railroads on the issue
                     of mandating additional competition in the railroad industry. If it decides
                     to address this issue, the Congress will need to weigh the potential
                     benefits of increased competition with the potential financial and other
                     effects on the railroad industry. In deliberating this issue, the Congress
                     will need to consider such things as the potential impacts of proposed
                     changes on shipper routing options and railroad service levels as well as
                     the rail system as a whole, including railroad revenues, infrastructure
                     investment, capacity, and operations.


                     In commenting on a draft of this report, the Board suggested that we
Agency Comments      modify our characterization of the 1997 service problems in the West to
and Our Evaluation   make clear that these problems were not the result of the Union
                     Pacific/Southern Pacific merger and that implementation of this merger
                     helped solve the problems. In addition, the Board suggested changes to
                     present a more complete and precise portrayal of both its October 1997
                     emergency service order in response to these service problems and its
                     December 1998 decision in the Houston/Gulf Coast oversight proceeding.
                     Finally, the Board suggested we expand our discussion of the Board’s
                     assessment of the possible impacts of providing “open access” throughout
                     the nation’s rail system. In response to these comments, we revised our
                     description of the service problems in the West to eliminate the
                     impression that these problems were caused by the Union
                     Pacific/Southern Pacific merger; we revised the report to provide a more
                     complete discussion of the Board’s emergency service order and decision
                     in the Houston/Gulf Coast oversight proceeding; and we added material to
                     the report discussing the Board’s views on the potential impacts of
                     implementing railroad open access.




                     Page 91                                     GAO/RCED-99-93 Railroad Regulation
Appendix I

Class I Railroads in Selected States, 1980
and 1997

                The maps in this appendix show how the number of Class I railroads has
                decreased between 1980 and 1997 in Montana, North Dakota, and West
                Virginia. Although the number of Class I railroads operating in each state
                decreased markedly, a substantial portion of the track that is no longer
                owned by Class I railroads has been acquired and is operated by smaller,
                non-Class I railroads. While non-Class I railroads can compete with Class I
                railroads to provide better service, some are restricted from offering better
                rates and service than the neighboring Class I railroad.

                Four Class I railroads operated in Montana in 1980; in 1997 there were
                two. (See fig. I.1)




                Page 92                                      GAO/RCED-99-93 Railroad Regulation
                                           Appendix I
                                           Class I Railroads in Selected States, 1980
                                           and 1997




Figure I.1: Class I Railroads in Montana, 1980 and 1997

                Montana 1980




                                                                Union Pacific Railroad
                                                                Milwaukee Road
                                                                Burlington Northern Railroad
                                                                Soo Line

                Montana 1997




                                                                Union Pacific Railroad
                                                                Burlington Northern and Santa Fe Railway
                                                                Non-Class railroads


                                           Source: Federal Railroad Administration, Office of Policy.



                                           Page 93                                                      GAO/RCED-99-93 Railroad Regulation
Appendix I
Class I Railroads in Selected States, 1980
and 1997




The number of Class I railroads in North Dakota decreased from four to
two between 1980 and 1997. (See fig. I.2.)




Page 94                                      GAO/RCED-99-93 Railroad Regulation
                                            Appendix I
                                            Class I Railroads in Selected States, 1980
                                            and 1997




Figure I.2: Class I Railroads in North Dakota, 1980 and 1997

    North Dakota 1980
                                                                                                Chicago & Northwestern Railroad
                                                                                                Milwaukee Road
                                                                                                Burlington Northern Railroad
                                                                                                Soo Line




    North Dakota 1997
                                                                                               Canadian Pacific Railway
                                                                                               Burlington Northern and Santa Fe Railway
                                                                                               Non-Class I railroads




                                            Source: Federal Railroad Administration, Office of Policy.




                                            Page 95                                                      GAO/RCED-99-93 Railroad Regulation
Appendix I
Class I Railroads in Selected States, 1980
and 1997




Five Class I railroads operated in West Virginia in 1980; in 1997 the number
had been reduced to three. (See fig. I.3.)




Page 96                                      GAO/RCED-99-93 Railroad Regulation
                                            Appendix I
                                            Class I Railroads in Selected States, 1980
                                            and 1997




Figure I.3: Class I Railroads in West Virginia, 1980 and 1997




               West Virginia 1980




                                                                 Baltimore & Ohio Railroad
                                                                 Norfolk & Western Railroad
                                                                 Chesapeake & Ohio Railroad
                                                                 Western Maryland Railway
                                                                 Conrail




               West Virginia 1997




                                                                    Conrail
                                                                    CSX Transportation
                                                                    Norfolk Southern
                                                                    Non-Class I railroads




                                                                    Source: Federal Railroad Administration, Office of Policy.




                                            Page 97                                                   GAO/RCED-99-93 Railroad Regulation
Appendix II

Real Rail Rates for Selected Commodities
Transported by Rail

                                                    The following are real (inflation-adjusted) rail rates for selected
                                                    commodities and markets/corridors that we reviewed in various distance
                                                    categories. The selection of the commodities and routes is discussed in
                                                    chapter 1 of this report. The distance categories are as follows: short is 0
                                                    to 500 miles; medium is 501 to 1,000 miles; and long is over 1,000 miles.



Figure II.1: Real Rail Rates for Coal, Selected Short- and Long-Distance Routes, 1990 Through 1996


Selected Short Routes, 1990-96                                                  Selected Long Routes, 1990-96
Cents per ton mile (in 1996 dollars)                                            Cents per ton mile (in 1996 dollars)

10                                                                                2

 9

 8
                                                                                1.5
 7

 6

 5                                                                                1

 4

 3
                                                                                0.5
 2

 1

 0                                                                                0
     1990      1991      1992      1993      1994      1995       1996                1990      1991      1992      1993      1994       1995      1996

     Year                                                                             Year
            Central Appalachia to Charleston economic area                                   Powder River Basin to Duluth economic area
            Northern Appalachia to Washington, D.C./Baltimore economic area                  Powder River Basin to Chicago economic area
            Illinois Basin to Evansville economic area                                       Powder River Basin to St. Louis economic area
            Illinois Basin to St. Louis economic area                                        Powder River Basin to Paducah economic area
            Central Appalachia to Atlanta economic area                                      Powder River Basin to Tulsa economic area


                                                    Note: The Northern Appalachia Coal Supply Region includes Maryland, Ohio, Pennsylvania, and
                                                    northern West Virginia. The Illinois Basin Coal Supply Region includes western Kentucky, Illinois,
                                                    and Indiana.

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




                                                    Page 98                                                      GAO/RCED-99-93 Railroad Regulation
                                                   Appendix II
                                                   Real Rail Rates for Selected Commodities
                                                   Transported by Rail




Figure II.2: Real Rail Rates for Wheat, Selected Short- and Long-Distance Routes, 1990 Through 1996


Selected Short Routes, 1990-96                                                 Selected Long Routes, 1990-96
Cents per ton mile (in 1996 dollars)                                           Cents per ton mile (in 1996 dollars)

10                                                                             4

 9

 8
                                                                               3
 7

 6

 5                                                                             2

 4

 3
                                                                               1
 2

 1

 0                                                                             0
     1990      1991     1992      1993      1994       1995      1996              1990      1991      1992       1993      1994       1995          1996

     Year                                                                          Year
            Wichita economic area to Wichita economic area                                Billings economic area to Portland economic area
            Fargo economic area to Minneapolis economic area                              Minneapolis economic area to New Orleans economic area
            Wichita economic area to Kansas City economic area                            Minot economic area to Portland economic area
            Dallas economic area to Houston economic area                                 Denver economic area to Houston economic area
            Grand Forks economic area to Duluth economic area                             Grand Forks economic area to Portland economic area

                                                   Note: Origins and destinations with the same label (e.g., Wichita to Wichita) may cover a large
                                                   area. Routes were not further identified to preserve confidentiality.

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




                                                   Page 99                                                     GAO/RCED-99-93 Railroad Regulation
                                                   Appendix II
                                                   Real Rail Rates for Selected Commodities
                                                   Transported by Rail




Figure II.3: Real Rail Rates for Corn, Selected Short- and Long-Distance Routes, 1990 Through 1996


Selected Short Routes, 1990-96                                                Selected Long Routes, 1990-96
Cents per ton mile (in 1996 dollars)                                          Cents per ton mile (in 1996 dollars)

8                                                                               2

                                                                              1.8

                                                                              1.6
6
                                                                              1.4

                                                                              1.2

4                                                                               1

                                                                              0.8

                                                                              0.6
2
                                                                              0.4

                                                                              0.2

0                                                                               0
    1990      1991      1992      1993      1994       1995         1996            1990      1991      1992      1993      1994      1995        1996

    Year                                                                            Year

           Des Moines economic area to Davenport economic area                             Grand Island economic area to Portland economic area
           Champaign economic area to Champaign economic area                              Minneapolis economic area to Seattle economic area
           Minneapolis economic area to Minneapolis economic area                          Sioux Falls economic area to Seattle economic area
           Des Moines economic area to Des Moines economic areaa                           Omaha economic area to Portland economic area
           Des Moines economic area to Madison economic area                               Sioux Falls economic area to Portland economic area

                                                   Note: Origins and destinations with the same label (e.g., Des Moines to Des Moines) may cover a
                                                   large area. Routes were not further identified to preserve confidentiality. Also, due to
                                                   confidentiality, the data point for 1996 on shipments within the Des Moines economic area was
                                                   excluded.

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




                                                   Page 100                                                    GAO/RCED-99-93 Railroad Regulation
                                                   Appendix II
                                                   Real Rail Rates for Selected Commodities
                                                   Transported by Rail




Figure II.4: Real Rail Rates for Potassium/Sodium Compounds, Selected Short- and Long-Distance Routes, 1990 Through
1996

Selected Short Routes, 1990-96                                                Selected Long Routes, 1990-96
Cents per ton mile (in 1996 dollars)                                          Cents per ton mile (in 1996 dollars)

20                                                                            4.5




15
                                                                                3


10


                                                                              1.5
 5




 0                                                                              0
     1990      1991     1992      1993      1994      1995      1996                1990       1991     1992      1993     1994      1995      1996

     Year                                                                           Year

            Los Angeles economic area to Los Angeles economic area                         Casper economic area to Chicago economic area
            Minneapolis economic area to Minneapolis economic area                         Saskatchewan to Chicago economic area
            Chicago economic area to Indianapolis economic area                            Casper economic area to Beaumont economic area
            New Orleans economic area to Baton Rouge economic area                         Casper economic area to St. Louis economic area
            Minneapolis economic area to Des Moines economic area                          Saskatchewan to Huntsville economic area

                                                   Note: Origins and destinations with the same label (e.g., Los Angeles to Los Angeles) may cover
                                                   a large area. Routes were not further identified to preserve confidentiality.

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




                                                   Page 101                                                    GAO/RCED-99-93 Railroad Regulation
                                                            Appendix II
                                                            Real Rail Rates for Selected Commodities
                                                            Transported by Rail




Figure II.5: Real Rail Rates for Plastic Materials or Synthetic Fibers, Resins, or Rubbers, Selected Short-, Medium-, and
Long-Distance Routes, 1990 Through 1996


Selected Short Routes, 1990-96                                                  Selected Medium Routes, 1990-96
Cents per ton mile (in 1996 dollars)                                            Cents per ton mile (in 1996 dollars)
50                                                                              10



40
                                                                                7.5


30

                                                                                 5

20


                                                                                2.5
10



 0                                                                               0
      1990       1991      1992      1993      1994      1995      1996               1990       1991      1992      1993   1994      1995     1996
  Year                                                                            Year
             Houston economic area to           Lake Charles economic area to                Houston economic area to       Baton Rouge economic area to
             Houston economic area              Lake Charles economic area                   St. Louis economic area        Memphis economic area
             Houston economic area to          Beaumont economic area to                     Houston economic area to       Houston economic area to
             Dallas/Fort Worth economic area   Beaumont economic area                        Little Rock economic area      Kansas City economic area
             New Orleans economic area to                                                    Houston economic area to
             New Orleans economic area                                                       Memphis economic area

Selected Long Routes, 1990-96
Cents per ton mile (in 1996 dollars)
10




7.5




 5




2.5




 0                                                                                           Note: Origins and destinantions with the same label (e.g.,
      1990       1991      1992      1993      1994     1995      1996                       Houston to Houston) may cover a large area. Routes were
  Year                                                                                       not further identified to preserve confidentiality.
             Houston economic area to          Houston economic area to
             Atlanta economic area             New York City economic area
             Houston economic area to          Houston economic area to                      Source: GAO's analysis of the Board's data.
             Los Angeles economic area         Boston economic area
             Houston economic area to
             Chicago economic area
                                                            Page 102                                                           GAO/RCED-99-93 Railroad Regulation
                                                    Appendix II
                                                    Real Rail Rates for Selected Commodities
                                                    Transported by Rail




Figure II.6: Real Rail Rates for Motor Vehicles, Selected Medium- and Long-Distance Routes, 1990 Through 1996


Selected Medium Routes, 1990-96                                                 Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)                                            Cents per ton mile (in 1996 dollars)

20                                                                              20




15                                                                              15




10                                                                              10




 5                                                                               5




 0                                                                               0
     1990      1991      1992      1993      1994      1995      1996                1990     1991      1992      1993      1994      1995      1996

     Year                                                                            Year

            Detroit economic area to Philadelphia economic area                             Chicago economic area to Los Angeles economic area
            Chicago economic area to Kansas City economic area                              Kansas City economic area to Los Angeles economic area
            Detroit economic area to Washington, D.C./Baltimore economic area               Detroit economic area to Jacksonville economic area
            Detroit economic area to Kansas City economic area                              Chicago economic area to Dallas/Fort Worth economic area
            Ontario (Canada) to Chicago economic area                                       Kansas City economic area to San Francisco economic area

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




                                                    Page 103                                                    GAO/RCED-99-93 Railroad Regulation
                                                    Appendix II
                                                    Real Rail Rates for Selected Commodities
                                                    Transported by Rail




Figure II.7: Real Rail Rates for Motor Vehicle Parts or Accessories, Selected Medium- and Long-Distance Routes, 1990
Through 1996


Selected Medium Routes, 1990-96                                                 Selected Long Routes, 1990-96
Cents per ton mile (in 1996 dollars)                                           Cents per ton mile (in 1996 dollars)

30                                                                             15


25


20                                                                             10


15


10                                                                              5


 5


 0                                                                              0
     1990      1991      1992      1993      1994      1995      1996               1990      1991      1992      1993       1994      1995      1996

     Year                                                                           Year
            Detroit economic area to St. Louis economic area                               Chicago economic area to San Antonio economic area
            Detroit economic area to Kansas City economic area                             Chicago economic area to San Francisco economic area
            Detroit economic area to Atlanta economic area                                 Detroit economic area to Dallas/Fort Worth economic area
            Detroit economic area to Norfolk economic area                                 Detroit economic area to San Antonio economic area
            Detroit economic area to New York economic area                                Los Angeles economic area to Chicago economic area

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




                                                    Page 104                                                   GAO/RCED-99-93 Railroad Regulation
Appendix III

Organizations Contacted


                        Department of Agriculture
Federal Agencies        Department of Energy
                        Department of Transportation
                        Surface Transportation Board


                        American Short Line and Regional Railroad Association
Railroad Associations   Association of American Railroads


                        Burlington Northern and Santa Fe Railway Company
Class I Railroads       Canadian National Railway
                        Consolidated Rail Corporation
                        CSX Transportation
                        Illinois Central Railroad Company
                        Kansas City Southern Railway Company
                        Norfolk Southern Corporation
                        Union Pacific Railroad Company


                        Red River Valley and Western Railroad Company
Other Than Class I      San Joaquin Valley Railroad Company
Railroads
                        Alliance for Rail Competition
Railroad Shipper        American Automobile Manufacturers Association
Associations            National Association of Wheat Growers
                        National Automobile Transporters Association
                        National Industrial Transportation League
                        North American Millers Association
                        North Dakota Grain Dealers Association
                        Pacific Northwest Grain and Feed Association


                        Agri Sales, Inc. (North Dakota)
Shippers                Berthold Farmers Elevator Company (North Dakota)
                        BTR Farmers Co-op (North Dakota)
                        Columbia Grain Company (Montana)
                        Crete Grain Company (North Dakota)
                        Enderlin Farmers Elevator (North Dakota)
                        Farmers Union Grain (North Dakota)
                        Harvest States (North Dakota)




                        Page 105                                  GAO/RCED-99-93 Railroad Regulation
         Appendix III
         Organizations Contacted




         Hunter Grain Company (North Dakota)
         Kindred Farmers Elevator (North Dakota)
         Marion Equity Elevator (North Dakota)
         Mayport Farmers Co-op (North Dakota)
         Northwest Equity Elevator (North Dakota)
         Otter Tail Power Company (Minnesota)
         Wyndmere Farmers Elevator (North Dakota)


         Fieldston Company, Inc.
Others   GW Fauth & Associates
         LeBoeuf, Lamb, Green & McRae
         L.E. Peabody & Associates
         Massachusetts Institute of Technology, Center for
           Transportation Studies
         North Dakota Public Service Commission
         North Dakota Wheat Commission
         Upper Great Plains Transportation Institute




         Page 106                                   GAO/RCED-99-93 Railroad Regulation
Appendix IV

Major Contributors to This Report


               Stephen Brown
               Helen Desaulniers
               Lynne Goldfarb
               Judy Guilliams-Tapia
               Michael Ibay
               Richard Jorgenson
               Mitchell Karpman
               Lewison Lem
               Luann Moy
               James Ratzenberger
               Deena Richart




(348113)       Page 107               GAO/RCED-99-93 Railroad Regulation
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