Report to the Chairman, Subcommittee

on Transportation and Related

Agencies, Committee on

Appropriations, House of

Representatives

United States General Accounting Office

GAO

July 2001 FREIGHT RAILROAD

REGULATION

Surface Transportation

Board's Oversight Could

Benefit From Evidence

Better Identifying How

Mergers Affect Rates

GAO-01-689
Page i GAO-01-689 Freight Railroad Regulation

Letter 1

Results in Brief 2

Background 4

The Board Determines Whether Mergers Are in the Public Interest

and Assesses the Implementation of Merger Conditions 5

The Board Has Acted to Address Harm to Competition, but Some

Shippers and Carriers Are Concerned About Merger Oversight 12

The Board Could Benefit From Evidence Better Identifying How

Mergers Affect Rail Rates 19

Conclusions 27

Recommendation for Executive Action 28

Agency Comments and Our Evaluation 28

Appendix I Chronology of Class I Railroad Mergers—

August 1995 Through June 2001 30

Appendix II Scope and Methodology 33

Appendix III Description and Discussion of Econometric

Model Used to Conduct Rail Rate Analysis 36

Tables

Table 1: Volume of Shipments, in Carloads, From the Reno and Salt

Lake City Areas, 1994-99 21

Table 2: Changes in Postmerger Rail Rates Due to Merger and

Other Factors, 1994-99 23

Table 3: Changes in Postmerger Rail Rates for Potential 2-to-1

Shippers Compared With Rail Rates for Shippers Served

Solely by UP 25

Table 4: Shipments to and From the Salt Lake City and Reno Areas,

in Carloads, 1994-99 43

Table 5: Rates and Costs of Shipments to and From the Salt Lake

City and Reno Areas, 1994-99 44

Table 6: List of Variables Used in Our Econometric Analysis of Rail

Rates 46

Contents
Page ii GAO-01-689 Freight Railroad Regulation

Table 7: Changes in Rail Rates, for Shipments to and From the Salt

Lake City and Reno Areas 48

Table 8: Econometric Results of Rail Rates, for Shipments From

the Salt Lake City Area 51

Table 9: Econometric Results of Rail Rates, for Shipments to the

Salt Lake City Area 52

Table 10: Econometric Results of Rail Rates, for Shipments From

the Reno Area 53

Table 11: Econometric Results of Rail Rates, for Shipments to the

Reno Area 54

Figure

Figure 1: Trackage Rights Granted to, and Lines Purchased by,

BNSF in the UP/SP Merger 8

Abbreviations

BNSF Burlington Northern and Santa Fe Railway

ICC Interstate Commerce Commission

SP Southern Pacific Transportation Company

UP Union Pacific Railroad
Page 1 GAO-01-689 Freight Railroad Regulation

July 5, 2001

The Honorable Harold Rogers

Chairman, Subcommittee on

 Transportation and Related Agencies

Committee on Appropriations

House of Representatives

Dear Mr. Chairman:

Railroads have been a primary mode of freight transportation for many

years, especially for bulk commodities such as coal and grain. Over the

last 25 years, the freight railroad industry has undergone substantial

consolidation. Since 1994, just prior to the recent wave of mergers, the

number of independent railroad systems with at least one Class I railroad1

has decreased from 12 to 7.2 In 1999, the five largest Class I railroads

accounted for about 94 percent of the total Class I operating revenue and

about 95 percent of total Class I revenue ton-miles.3

 Railroads have

consolidated largely to reduce costs and increase efficiency and

competitiveness.

Industry consolidation has raised concerns from companies that ship and

receive their goods by rail (rail shippers) and others about the lack of

competition in the industry. In general, rail shippers are concerned that

mergers have led to a reduction in railroad competition and consequently

higher rail rates, poorer service, or both. In the context of railroad

mergers, the Surface Transportation Board (the Board), which reviews

railroad merger proposals, has defined “competitive harm” as the extent to

which merging parties gain sufficient market power to profitably raise

 1

Class I railroads are the nation’s largest freight railroads as measured by revenue. In 1999

(the latest data available), Class I railroads were those railroads whose operating revenues

were $258.5 million or more.

2

The seven independent railroad systems include eight U.S. Class I railroads: Burlington

Northern and Santa Fe Railway Co. (BNSF); 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. It

should be noted that Illinois Central and Grand Trunk Western are commonly controlled by

the Canadian National Railway Co. and the Soo Line Railroad is controlled by the Canadian

Pacific Railway Co.

3

A revenue ton-mile is 1 ton of revenue freight transported 1 mile.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-689 Freight Railroad Regulation

rates, reduce service, or both. (See app. I for a chronology of Class I

railroad mergers since August 1995.)

This report responds to your request that we review the Board’s oversight

of railroad mergers.4

 In particular, this report discusses (1) the role the

Board plays in reviewing proposed railroad mergers and overseeing

mergers that have been approved and how postmerger oversight is

conducted, (2) how the Board mitigates potential harm to competition,

and (3) how the Union Pacific/Southern Pacific merger affected rail rates

in selected geographic areas. This report primarily focuses on mergers of

Class I railroads since the Board was created in 1996. However,

information on prior mergers is included to show how merger oversight

has changed over time. Moreover, this report primarily focuses on issues

pertaining to competition and not other issues that might arise from a

merger.

To accomplish our objectives, we reviewed applicable laws, regulations,

and decisions and met with Board officials, representatives of shippers’

trade associations, and railroad officials. We also developed an

econometric model to analyze selected merger-related rail rates using data

from the Board’s Carload Waybill Sample5

 for the period 1994 through

1999. We focused our analysis on selected geographic areas associated

with the 1996 merger of the Union Pacific Railroad (UP) with the Southern

Pacific Transportation Company (SP) because of the significant

competition issues pertaining to this merger. (See app. II for a more

detailed discussion of how we carried out our work.)

The Board is the federal agency responsible for reviewing railroad merger

proposals and approving those that are consistent with the public interest.

The Board also ensures that any potential merger-related harm to

competition is mitigated. Mitigation efforts have focused on preserving

competition. The Board also oversees mergers that have been approved.

Oversight is not statutorily required, but when imposed, it has focused on

determining whether conditions (such as granting the authority for one

 4

For the purposes of this report, the term “merger” includes merger, consolidation, and/or

acquisition transactions between Class I railroads.

5

The Carload Waybill Sample is a sample of railroad waybills (in general, documents

prepared from bills of lading that authorize railroads to move shipments and collect freight

charges); the sample contains information on rail rates.

Results in Brief
Page 3 GAO-01-689 Freight Railroad Regulation

railroad to operate over the tracks of another railroad) have been

implemented and have been effective in protecting against potential harm

to competition. As an adjudicatory agency, the Board relies on reports,

comments, and other information (called the merger record) submitted by

railroads, shippers, and others to conduct oversight. The merger record

serves as the basis for oversight decisions. In recent years, as the

complexity of mergers has increased and service disruptions associated

with the merger integration process and other problems have occurred,

the Board’s oversight activities and reporting requirements have increased

as well.

The Board has found little competition-related harm during oversight of

recent mergers. The Board’s action to address competition-related harm

largely depends on the sufficiency of the evidence presented. In some

cases, the Board has not acted to address competition-related concerns

during oversight because it determined that the evidence of harm was not

sufficient. In other cases, during oversight the Board has modified

conditions that it originally imposed to mitigate potential harm to

competition when it believed such action was necessary to preserve

competition. Shipper association representatives and railroad officials

with whom we spoke generally agreed that the Board’s oversight process

is a valuable mechanism that allows them to participate in the oversight of

mergers. But some shipper association officials told us they were

dissatisfied with the Board’s oversight because they believe that the Board

is not responsive to their concerns and the process is too time-consuming.

Railroad officials told us that shippers try to use the process to address

non-merger-related issues.

Using an econometric approach that isolated the specific effects of the

Union Pacific/Southern Pacific merger on rail rates for certain

commodities in two geographic areas—Reno, Nevada, and Salt Lake City,

Utah—we found that the merger reduced rates for four of the six

commodities we studied. However, for one of the commodities, the merger

placed upward pressure on rates, even though other factors caused the

overall rates to decrease. For the remaining commodity, rates were

relatively unchanged by the merger. In analyzing rail rates as part of

merger oversight, the Board examines the merger oversight record before

it, which has generally focused on the overall direction and magnitude of

rate changes. According to Board officials, in general, these records have

not permitted the Board to reliably and precisely isolate the effects of

mergers on rates from effects of other factors (such as the volume of

shipments). Obtaining evidence that quantitatively separates the effects of

mergers on rates from the effects of other factors, such as the volume of
Page 4 GAO-01-689 Freight Railroad Regulation

shipments, would help the Board identify whether competition-related

conditions imposed on mergers are meeting their objective. We are

recommending that, as part of merger oversight, the Board, when

appropriate, require the filing of information that identifies the effects of

specific factors, including mergers, on postmerger rail rates.

In 1995, the Congress passed the ICC Termination Act, which abolished

the Interstate Commerce Commission (ICC) and created the Board. The

act transferred many of ICC’s core rail functions to the Board, including

the responsibility to review and approve railroad mergers. The Board has

exclusive jurisdiction to review proposed rail mergers, and if approved by

the Board, such mergers are exempt from other laws (including federal

antitrust laws that would otherwise apply to the transaction) as necessary

to carry out the transaction. The Board also conducts oversight of mergers

that have been approved. However, there is no statutory requirement for

merger oversight. ICC had approximately 400 employees in 1995, its last

year of operation. For fiscal year 2001, the Board received an

appropriation to support 143 employees.

In October 2000, the Board proposed modifications to its regulations

governing major rail consolidations. According to the notice of proposed

rulemaking, the Board recognized that current merger regulations are

outdated and inappropriate for addressing future major rail mergers that,

if approved, would likely result in the creation of two North American

transcontinental railroads. In June 2001, the Board adopted final

regulations governing proposed major rail consolidations. The final

regulations recognize the Board’s concerns about what the appropriate rail

merger policy should be in light of a declining number of Class I railroads,

the elimination of excess capacity in the industry, and the serious service

problems that have accompanied recent rail mergers. The final rules

substantially increase the burden on applicants to demonstrate that a

merger is in the public interest, in part by providing for enhanced

competition and protecting service. The rules also establish a formal

annual oversight period of not less than 5 years following a merger’s

approval.

Background
Page 5 GAO-01-689 Freight Railroad Regulation

The Board is responsible for approving railroad mergers that it finds

consistent with the public interest. When necessary and feasible,

conditions are imposed by the Board to mitigate any potential harm to

competition. Oversight is designed to ensure that merger conditions have

been implemented and that they are meeting their intended purpose.

In determining, under the ICC Termination Act of 1995, whether proposed

mergers are consistent with the public interest,6

 the Board is required to

consider a number of factors that relate to competition. These include the

effect of a proposed transaction on the adequacy of transportation to the

public; the effect on the public interest of including, or failing to include,

other rail carriers in the area involved in the proposed transaction; and the

impact of the proposed transaction on competition among rail carriers in

the affected region or in the national rail system.7

 The act also establishes

a 15-month time limit for the Board to complete its review of accepted

applications for mergers between Class I railroads and reach a final

decision.8

 Since the Board was created, two applications for merger

between Class I railroads have been submitted—Conrail’s acquisition by

CSX and Norfolk Southern and Canadian National/Illinois Central—both

of which were approved. The Board also approved the Union Pacific’s

acquisition of Southern Pacific, an application that had originally been

submitted to ICC.

 6

The Board is charged with determining whether proposed transactions are in the public

interest, not determining whether they comply with the antitrust laws. The Board is

empowered to disapprove transactions that would not violate the antitrust laws and to

approve transactions even if they otherwise would violate the antitrust laws.

7

The Board is also required to consider the total debt (fixed charges) that would result

from the proposed transaction and the interest of rail carrier employees affected by the

proposed transaction. In addition, the Board must consider whether there will be

significant effects on the quality of the human environment and the conservation of energy

resources in its assessment of proposed merger transactions.

8

If a merger application is approved, parties that would be affected by the merger may ask

the Board to reconsider its decision. They may also appeal the decision directly to the

federal courts.

The Board

Determines Whether

Mergers Are in the

Public Interest and

Assesses the

Implementation of

Merger Conditions

Merger Approval Involves

Assessing the Public

Interest and Mitigating

Potential Harm to

Competition
Page 6 GAO-01-689 Freight Railroad Regulation

During the merger review process, the Board considers comments and

evidence submitted by all interested parties, which, together with the

application, form the record upon which the Board bases its decision. The

applicants as well as interested parties may submit information on the

potential public benefits and potential harm of a proposed merger. Public

benefits can include such things as gains in a railroad’s efficiency, cost

savings, and enhanced opportunities for single-line service.9

 Potential

harm can result from, among other things, reductions in competition and

harm to a competing carrier’s ability to provide essential services—that is,

services for which there is a public need but for which adequate

alternative transportation is not available.

Whenever necessary and feasible, the Board imposes conditions on

mergers that it approves so as to mitigate potential harm associated with a

merger, including harm to competition. In determining whether to approve

a merger and to impose conditions on its approval, the Board’s concern

has focused on the preservation of competition and essential services—

not on the survival of particular carriers or enhancing competition. Board

officials told us that, while the Board’s efforts to preserve competition

have primarily focused on maintaining competitive options for those

shippers that could face a reduction in service from two railroads to

service by only one railroad, competition that is the result of having two

“nearby” railroads has also been preserved.10

Conditions can include such things as trackage rights,11 switching

arrangements,12 access to another railroad’s facilities or terminal areas, or

divestiture of lines. For example, in the UP/SP merger, the Board granted

about 4,000 miles of trackage rights to the Burlington Northern and Santa

Fe Railway (BNSF) to address competition-related issues for those rail

 9

Single-line service is the ability to transport products from an origin to a final destination

without having to transfer the shipment to another railroad.

10Board officials said this has been accomplished by such things as conditioning approval

of a merger on preservation of shippers’ options to (1) build (or have some other party

build) a track connection to a competing railroad (called the build-in/build-out condition)

or (2) locate new facilities, including truck-to-rail or rail-to-truck “transload” facilities, on

the lines of competing railroads.

11Trackage rights are the authority of one railroad to use the tracks of another railroad for a

fee.

12Under switching arrangements, a carrier transports the railcars of a competing carrier at

origin or destination for a fee.
Page 7 GAO-01-689 Freight Railroad Regulation

corridors and shippers that could have potentially faced a reduction in

service from two railroads (UP and SP) to service by only one railroad

(UP). (See fig. 1.) The Board may also impose privately negotiated

settlement agreements as conditions to mergers.13 The Board will normally

impose conditions only when a merger would produce effects harmful to

the public interest (such as a significant reduction in competition) and the

condition will ameliorate or eliminate these harmful effects. In addition, a

condition must be operationally feasible, produce net public benefits, and

be tailored to address the adverse effects of a transaction.

 13The Board will impose a privately negotiated agreement as a condition only if the Board

would have imposed a condition to address the identified harm without the agreement or if

the parties to the agreement request its imposition. Board officials have stated that

privately negotiated terms and conditions are generally preferred over Board-crafted terms

and conditions.
Page 8 GAO-01-689 Freight Railroad Regulation

Figure 1: Trackage Rights Granted to, and Lines Purchased by, BNSF in the UP/SP Merger

Source: GAO’s analysis of data from the Federal Railroad Administration and Burlington Northern and

Santa Fe Railway.

If a merger is approved, the Board has broad discretion to impose

oversight conditions, as well as flexibility in how it conducts oversight.

Such oversight conditions establish the Board’s intent to monitor a

merger’s implementation and to conduct annual oversight proceedings

(called formal oversight in this report). An oversight condition may also

establish a time period during which the Board will monitor the effects of

The Board Conducts

Oversight of Mergers
Page 9 GAO-01-689 Freight Railroad Regulation

a merger. Although oversight conditions are not necessary for the Board to

retain jurisdiction over a merger—particularly with regard to carrying out

conditions the Board has imposed—oversight conditions ensure that the

Board’s retained jurisdiction will be meaningfully exercised and gives

parties an added opportunity to demonstrate any specific anticompetitive

effects of a merger. According to the Board, oversight also (1) permits the

Board to target potential problem areas for the subsequent imposition of

additional conditions if this proves warranted in light of experience, (2)

puts applicants on notice that they consummate the transaction subject to

reasonable future conditions to mitigate harm in limited areas, and (3)

helps to ensure cooperation by the merging carriers in addressing

problems and disputes that may arise following merger approval. As such,

oversight provides an additional check that Board-approved mergers are in

the public interest. When an oversight period ends, the Board has stated

that it continues to retain jurisdiction and can reopen a merger

proceeding, if necessary, to address concerns pertaining to competition

and other problems that might develop.

Board officials described postmerger oversight as a process consisting

mainly of an annual oversight proceeding. This proceeding is an

examination of the implementation of merger conditions and whether

conditions have effectively met their intended purpose. Oversight is

generally conducted each year for 5 years after a merger has been

approved.14 As part of the oversight proceeding, public comments and

supporting information are formally submitted into the record by shippers,

carriers, and other interested parties. Periodic progress reports, which

provide, among other things, details on the implementation of conditions,

are also submitted by merging railroads as required. Board officials told us

that reporting requirements are frequently used as part of oversight and

that such reporting has served to replace the industry and merger

monitoring once conducted by ICC’s field staff.15

As an adjudicatory body, the Board relies on parties affected by a merger

to identify whether a proposed transaction has harmed competition and, if

 14According to Board officials, this time period is based on an expected length of 1 to 2

years for the merging carriers to prepare to integrate computer systems and negotiate labor

contracts, and another 2 to 3 years to fully integrate the carriers operationally. In addition,

Board staff told us that the full range of anticipated merger benefits should begin to be

realized by about the third year following system integration.

15The Board has no field staff.
Page 10 GAO-01-689 Freight Railroad Regulation

so, to what extent; the Board does not independently collect this type of

information. Board officials noted that it has been standard practice in

merger oversight to require relevant railroads, such as UP and BNSF in

UP/SP oversight, to make available under seal to interested parties the

railroads’ confidential 100 percent traffic tapes—tapes that include

information such as shipments moved and freight revenue generated—so

that parties other than the merging carriers would also have the

opportunity to submit postmerger rate analyses to the Board. As part of

the oversight process, the Board may consider information obtained from

monitoring industry operations, such as service levels, as well as any

studies conducted, whether specific to that merger or industrywide. In

conducting formal oversight, the Board may modify existing conditions if

they are not achieving their intended purpose or may impose additional

reporting requirements if necessary. The Board also has the authority to

initiate a new proceeding to determine if additional conditions should be

imposed to address unforeseen merger-related issues.

Board officials noted that the agency engages in other activities associated

with oversight. Included are such things as informal monitoring of merging

railroads’ operations and service performance16 and responding to certain

filings, such as petitions to clarify or modify a merger condition based on

competition-related issues or other claims of merger harm.

Although the Board retains some form of oversight jurisdiction for all rail

mergers, the use of formal merger oversight has become standard only

since the mid-1990s. Board officials told us that before 1995, formal

postapproval oversight of mergers was rare and was instituted only in

unusual situations when strong concerns about competition were present.

These officials pointed to only two cases when a period of formal

oversight was imposed prior to 1995: once in 1984 in a rail/barge merger

between CSX Corporation and American Commercial Lines, Inc., and in

1992 as part of the merger of Wisconsin Central Transportation

Corporation and Fox Valley & Western, Ltd. Neither case involved the

merger of two or more Class I railroads. In both cases, however, oversight

conditions were imposed in response to concerns raised about potential

harm to competition.

 16Board officials told us that in informal monitoring, the Board’s Office of Compliance and

Enforcement requires merged railroads to report various metrics, such as average train

speed, in order to monitor service levels and the operational performance of those carriers.

Oversight Has Changed

Over Time
Page 11 GAO-01-689 Freight Railroad Regulation

In recent years, in light of the complexity of transactions and the service

and competitive issues that have arisen, the Board has expanded its use of

formal oversight of railroad mergers. ICC did not impose specific oversight

conditions on its approval of the 1995 Burlington Northern and Santa Fe

Railway merger because, according to Board officials, there were few

concerns raised in that merger about service issues or potential harm to

competition.17 Since August 1995, when the BNSF merger was approved,

the Board has imposed oversight on all three Class I railroad mergers that

it has approved: the 1996 UP/SP merger, the 1998 Conrail acquisition by

CSX and Norfolk Southern, and the 1999 Canadian National/Illinois

Central merger. For two of the three transactions (UP/SP and Conrail), the

oversight period was set for 5 years. In the third merger—Canadian

National and Illinois Central—a 5-year oversight period was established

with continuation to be reviewed annually. All three oversight periods are

ongoing.

The Board has significant discretion and flexibility to adapt its oversight as

circumstances warrant. For example, in conducting oversight in recent

years, the Board has, when necessary, incorporated additional monitoring

elements to supplement its oversight activities. For example, it has added

more reporting requirements. The UP/SP merger provides a good

illustration of service monitoring. As the result of a service crisis18 that

developed during the implementation of this merger, the Board required

both UP/SP and BNSF to provide weekly and monthly reports to its Office

of Compliance and Enforcement—information which, according to Board

officials, had never been available before. These reports included statistics

on such things as average train speed, cars on line, and terminal dwell

time—the time loaded railcars spend in a terminal awaiting continued

 17The BNSF merger was largely an end-to-end merger, meaning there was little overlap in

routes and few locations where shippers could go from service by two railroads to one.

18The UP/SP system started experiencing service problems in July 1997 during integration

of the two railroads. As the result of aging rail infrastructure in the Houston area that was

inadequate to cope with a surge in demand, congestion on this system began affecting rail

service throughout the western United States. Rail service disruptions and lengthy

shipment delays continued throughout the rest of 1997 and into 1998. The Board issued a

series of decisions, many focused on the Houston/Gulf Coast area, including an emergency

service order, to address the service crisis. The Board also initiated a separate postmerger

proceeding to consider requests from various parties for additional merger conditions to

modify the way in which rail service was being provided in the Houston area. In that

proceeding, the Board added one condition and modified another to ease congestion in the

Houston/Gulf Coast area. The Board also concluded that the service crisis did not stem

from any competitive failure resulting from the UP/SP merger.
Page 12 GAO-01-689 Freight Railroad Regulation

movement.19 This information allowed the Board to monitor the operations

and service levels of both railroads. Similar reporting requirements were

imposed on both CSX and Norfolk Southern in the Conrail merger. In this

instance, the Board, anticipating possible transitional service problems

during the integration process, required the weekly and monthly reports

both to monitor the merger’s implementation and to identify potential

service problems.

Board officials told us that as a result of the lessons learned in the UP/SP

merger, oversight has expanded to incorporate monitoring of operational

and service issues—in part to serve as an early warning of problems that

might occur during the merger integration process. Future mergers will

also be subject to operational monitoring. The merger rules adopted by

the Board in June 2001 state that the Board will continue to conduct

significant postapproval operational monitoring of mergers to insure that

service levels after a merger are reasonable and adequate.

In general, the Board has found few competition-related problems when

conducting oversight of recent mergers but has acted to modify some

conditions designed to address such problems when it felt such action was

necessary. Even though many of the shipper and railroad trade

associations told us that the oversight process is valuable, some shippers

and small railroads are dissatisfied with aspects of the Board’s oversight.

In addition, some larger carriers are concerned that shippers are using the

oversight process to address issues not related to mergers. The Board’s

recently adopted merger rules could affect oversight by changing the focus

of merger approval toward enhancing rather than preserving competition.

 19A Board official said the latter does not include railcars waiting for repairs, maintenanceof-way equipment, or railcars arriving and departing on the same train.

The Board Has Acted

to Address Harm to

Competition, but

Some Shippers and

Carriers Are

Concerned About

Merger Oversight
Page 13 GAO-01-689 Freight Railroad Regulation

A review of oversight decisions in recent merger cases shows that the

Board has found few problems related to competition. Board officials also

told us they believe that, to date, the conditions originally imposed on

mergers have met their intended purpose and have mitigated any potential

harm to competition. In determining whether to modify a condition,20 the

Board reviews the evidence presented, considers the nature and extent of

the alleged harm, and assesses what action may be warranted. In general,

the Board has not found it necessary to modify or add conditions during

oversight of recent mergers. However, the Board has found such action to

be appropriate in some cases. For example, in December 1998, the Board

added a condition and modified a condition in the UP/SP merger. The

added condition addressed traffic congestion in the Houston/Gulf Coast

area; the modified condition changed the location where BNSF railcars are

transferred to another railroad. Similarly, in 1998 and 1999, the Board

modified four conditions in the Conrail transaction. These modifications

were designed to preserve competition by, among other things,

introducing a second carrier and requiring carriers to negotiate an

acceptable transfer point to interchange railcars bound for an Indiana

power plant.

Providing specific evidence of harm to competition is critical in obtaining

additional Board relief. According to the Board’s decisions, shippers and

others have sometimes alleged harm to competition during oversight

without presenting specific evidence of such harm. For example, as part of

the UP/SP merger, the Board granted over 2,100 miles of trackage rights to

BNSF on the Central Corridor21 to preserve competition for those shippers

that could have been reduced from service by two carriers (UP and SP) to

service by only one (the merged UP/SP) and for those exclusively served

shippers who benefited from having another railroad nearby. Some

organizations have asserted that, despite the trackage rights, postmerger

competition has not been adequate on this corridor. However, in its UP/SP

oversight decisions, the Board has concluded that postmerger competition

on this corridor has been adequate, in part because no shippers came

forward with specific evidence of harm. In another instance, in the Conrail

 20In addition to considering whether to modify or add conditions, Board officials said the

merger oversight process has also been used to clarify conditions imposed in the original

merger approval.

21The Central Corridor is generally defined as an area stretching from St. Louis, Missouri, to

Oakland, California, by way of Denver, Colorado; Salt Lake City, Utah; and Reno, Nevada.

BNSF’s trackage rights were over the Denver-to-Oakland segment of the corridor.

The Board Has Found Few

Postmerger Problems

Regarding Competition in

Recent Merger Oversight

Proceedings and Has

Acted to Address Them
Page 14 GAO-01-689 Freight Railroad Regulation

merger, the Board granted trackage rights to Norfolk Southern to access a

power plant in Indiana. In order to use the trackage rights, Norfolk

Southern negotiated a fee with CSX. The power plant owner believed that

the negotiated fee was too high to allow adequate competition between

the railroads and requested a lower fee so that Norfolk Southern could

compete for its business. In denying this request, the Board stated that the

evidence of harm presented was not sufficient, in part because both CSX

and Norfolk Southern demonstrated that the negotiated fee would amount

to only a minimal cost increase ($0.004 per ton) over the amount the

Board had previously found to be reasonable.

A review of merger oversight documents shows the Board has acted to

address competition-related postmerger issues when it believed such

action was necessary. For example, during oversight of the Conrail

acquisition, the Board reduced fees for trackage rights and switching

charged to Canadian Pacific to permit competition between CSX and

Canadian Pacific Railway in the Albany, New York, to New York City

corridor. Although the Board had initially set these fees in a postmerger

decision, the Board later determined that the fees were too high to allow

Canadian Pacific to use CSX tracks to provide meaningful competition

between the carriers. Consequently, the Board acted to reduce the fees to

promote competition. The Board also acted during the Conrail oversight

period to void provisions in two contracts between CSX Intermodal, Inc., a

rail shipper, and Norfolk Southern that required Norfolk Southern to be

the primary carrier of CSX Intermodal goods between northern New

Jersey and Chicago during the contract period. Voiding these provisions

allowed CSX immediately to compete with Norfolk Southern for these

shipments.

Shipper and railroad trade associations and railroad companies with

whom we spoke believe postmerger oversight is a valuable process.

Officials from the National Grain and Feed Association and the National

Industrial Transportation League told us that the Board has always been

willing to listen to their concerns. Officials from Norfolk Southern and

BNSF said the merger oversight process provides shippers and railroads

with an opportunity to submit merger-related questions, problems, and

concerns. Railroad and railroad association officials stated that the Board

acts to protect the interests of the public and the shipping community by

allowing railroads and shippers to work together during oversight to

resolve actual and potential merger-related problems. Officials from one

trade association said that without an oversight process, their members

might be faced with a less desirable alternative. For example, officials

All Parties Believe

Oversight Is Valuable, but

Some Shipper and Railroad

Associations Are

Dissatisfied
Page 15 GAO-01-689 Freight Railroad Regulation

from the American Chemistry Council told us that the only other option

for shippers would be to use the Board’s time-consuming and expensive

complaint process. Officials from the American Chemistry Council, as well

as officials from UP and BNSF, said a 5-year oversight period has been a

benefit to both railroads and shippers. However, an American Chemistry

Council official said some mergers may need oversight for a longer or

shorter period than 5 years and that it is unclear what type of oversight

will occur after the 5-year oversight period for the UP/SP merger expires

in 2002.

Despite seeing oversight as a valuable process, some shipper and small

railroad associations are dissatisfied with aspects of the Board’s oversight

procedures. A number of reasons were cited. The Board has been viewed

as unresponsive to concerns of shippers and small railroads. For example,

an official representing the Edison Electric Institute told us that it had

expressed concern to the Board in 2000 about the degree of competition

for the transport of Utah and Colorado coal in the Central Corridor, but

that the Board declined to answer questions about this issue.22 An official

from the American Chemistry Council expressed similar frustration that

the Board did not adopt any part of a plan developed by shippers and

others to address the Houston/Gulf Coast service crisis that occurred

during the implementation of the UP/SP merger. This plan had broad

support from both private sector and state government officials.23

Dissatisfaction was also expressed about the time and resources required

for preparing and submitting comments during the postmerger oversight

period, especially for small shippers. For example, officials from the

Edison Electric Institute and the American Chemistry Council told us that

small shippers might not have the time or the money to invest in the

formal oversight process. Finally, officials from several shipper

associations and the American Short Line and Regional Railroad

Association (an association representing smaller railroads) said their

 22Board officials told us that there was very little coal traffic affected by the merger

(primarily in Utah) involving shippers that could have been reduced in service from two

railroads to only one railroad. Board officials said that BNSF has competed for, and

obtained, some of this traffic.

23Board officials noted that the Board issued a series of decisions, many focused on

Houston, including an emergency service order, to address the service crisis. Board

officials said that the plan developed by the shippers and others would have taken property

from UP and injected additional operators without improving service.
Page 16 GAO-01-689 Freight Railroad Regulation

members are discouraged from participating in the oversight process, in

part because of the reasons cited above.24

Although generally satisfied with the Board’s oversight process, officials at

some Class I railroads have cited certain drawbacks to it. For example,

officials at Norfolk Southern, CSX Transportation, and UP said some

shippers use the formal oversight process as a mechanism to raise nonmerger-related issues, which they claim have protracted the oversight

process. Railroad officials told us that inviting comments by interested

parties allows them to reintroduce issues that were initially denied during

the merger approval process. They noted that, as a result, they must invest

their time to address non-merger-related issues. Officials with Norfolk

Southern said that if the Board allows parties to reintroduce issues already

decided, this could delay implementation of a merger.

Board officials told us that oversight is an open process and anyone can

submit comments. The basis for making decisions is the merger and

postmerger oversight record and Board officials said they encourage

parties such as shippers, railroads, and others to submit information into

the record so that the Board can act with as much information as possible.

However, Board officials acknowledged that parties sometimes reargue

issues during oversight that were not decided in their favor in the merger

decision. For example, in its November 2000 oversight decision in the

Canadian National/Illinois Central merger, the Board refused to require

that Canadian National sell its share of the Detroit River Tunnel as

requested by various parties. The parties were concerned that Canadian

National would competitively disadvantage the Detroit River Tunnel by

not allowing needed capital investments to be made and favoring another

nearby tunnel it owned. The Board found that this issue was not directly

related to the merger and was a matter being privately negotiated between

the parties. Finally, Board officials have said the oversight process has

evolved over time and the Board has incorporated additional reporting and

other requirements to provide more information on actual and potential

problems experienced during merger implementation. Moreover, the

Board has focused on preserving, not enhancing, competition and does not

seek to restructure the competitive balance of the railroad industry during

postmerger oversight.

 24Board officials noted, however, that numerous regional and shortline railroads, as well as

smaller shipper interests and communities, participated in recent merger and merger

oversight proceedings.
Page 17 GAO-01-689 Freight Railroad Regulation

Both shipper association and railroad officials with whom we spoke

recognized that the Board has a limited number of staff to conduct formal

oversight. According to officials from the American Short Line and

Regional Railroad Association, the Board’s perceived slowness in handling

oversight issues may be attributable to the significant amount of

information that needs to be processed during the annual oversight

proceeding—information that is generally handled by a core team of 15

employees (who, Board officials noted, also work on agency matters other

than mergers). Board officials acknowledged that their resources are

limited. However, they said oversight offers an open, no-fee process in

which any interested party may participate. They also said the Board has

issued in a timely manner its decisions in the annual oversight

proceeedings, as well as in matters involving specific material issues

during oversight.

The rail consolidation rules issued in June 2001 could change how the

Board conducts oversight by providing for merger applications to include

plans to enhance competition and to ensure reasonable service and by

holding applicants accountable if they do not act reasonably to achieve

promised merger benefits. Shifting the focus of merger review towards

enhancing competition and ensuring reasonable service, as well as

including some degree of accountability for postmerger benefits, could

require the Board to expend additional time and resources reviewing these

issues. For example, the final rules would call upon merger applicants to

enhance competition so as to offset any negative effects resulting from a

merger, such as potential harm to competition and disruptions of service.

This could affect the way the Board uses and oversees conditions during

the merger approval and oversight processes. Similarly, to require

railroads to calculate the net public benefits to be gained through a

proposed merger and to hold them accountable for acting reasonably to

achieve these benefits, such as improved service, the Board will monitor

as part of the general oversight proceeding the realization of merger

benefits claimed. These activities would enlarge the current focus of

assessing whether conditions are working as intended. In the event that

public benefits fail to materialize after a merger is approved, the Board

said it would consider the applicant’s proposals for additional measures.25

 25The Board did not specify what these additional measures might be in the final rules.

New Merger Rules Could

Change Oversight but May

Not Address All Concerns

of Shippers and Carriers
Page 18 GAO-01-689 Freight Railroad Regulation

It is not likely that the final merger rules will resolve all concerns

expressed by shipper and railroad organizations about oversight. The final

rules will not change the basic process established for oversight. While the

final rules may address concerns of shippers and railroads about service

levels by requiring merger applicants to develop service assurance plans,

they will not address more general concerns that the Board is not

responsive to their issues.26 Furthermore, the final rules will not likely

address concerns about the time and resources necessary to participate in

postmerger oversight. Rather, the amount of time and resources required

could increase, given that during oversight the Board will assess

enhancement of competition, service issues, and accountability for

proposed merger benefits as well as whether conditions are working as

intended. In addition, issues may continue to be introduced that are not

directly related to the merger under review. Board officials said they do

not consider participation in oversight to be an expensive or burdensome

process. However, they acknowledged that the new merger rules would

require applicants to provide more detailed information on competition,

service, and benefits as part of the merger application and that the amount

of time and resources required during oversight could increase.

Finally, the final rules may also not address all of the shippers’ concerns

about the extent of competition in the rail industry resulting from mergers.

While provisions regarding the enhancement of competition may address

some competition-related issues, it is not clear how these provisions will

be implemented. Both shipper and railroad officials told us that enhanced

competition had not been defined in the proposed rules and, therefore,

they were not clear how the provisions might affect specific situations

involving competition. The final rules acknowledge that the Board cannot

predict in advance the type and quantity of competitive enhancements that

would be appropriate in a particular merger proposal. Lastly, the new

merger rules make clear that the Board will not use its authority to impose

conditions during merger approval to provide a broad program of open

access.27

 26However, the final rules will require merging railroads to address regional and shortline

railroad issues as part of oversight in order to monitor potential adverse effects of a merger

on these railroads.

27A system of open access would allow shippers, wherever possible, to be served by more

than one railroad even if, to produce such a system, railroads that own the rail

infrastructure used would be required to share their property with others that do not own

this property.
Page 19 GAO-01-689 Freight Railroad Regulation

We analyzed the effects of the 1996 UP/SP merger on rail rates28 in two

selected geographic markets that have high concentrations of shippers

that faced a reduction in service by two railroads to service by only one

railroad (called 2-to-1 shippers). We found that the merger reduced rail

rates for four of the six commodities we reviewed. However, in one

instance, the merger placed upward pressure on rates, even though other

factors caused overall rate decreases. For the remaining commodity, rates

were relatively unchanged. Our analysis illustrates that the Board could

make more informed decisions during oversight about whether merger

conditions are protecting against harm to competition, as measured by the

merger’s effect on rates, if it had information that separated rate changes

specifically resulting from a merger from rate changes caused by other

factors.

A merger reduces the number of rail carriers and can potentially enhance

the market power of remaining carriers. This enhanced market power

could be used to profitably increase rail rates if no action were taken to

preserve competition. Board officials told us that rate trends are a good

indicator of postmerger competition. In 1996, UP acquired SP in a

transaction that raised significant competition-related issues. This merger

encompassed a number of geographic areas where the loss of competition

from SP could have reduced the number of carriers from 2 to 1. Most of

these areas were in Texas and Louisiana, but some were in the Central

Corridor between California and Colorado. (See fig. 1.) In granting

trackage rights to BNSF in this merger, the Board sought to replace the

competition for potential 2-to-1 shippers in these geographic areas. To

understand how the UP/SP merger affected rail rates, we looked at rail

rates in two geographic areas—Reno, Nevada, and Salt Lake City, Utah—

both in the Central Corridor. We selected these areas because they had

high concentrations of potential 2-to-1 shippers and, according to BNSF

and UP/SP officials, were less affected by the service crisis that developed

during implementation of the UP/SP merger.29 They also provided

relatively clear examples of where BNSF service substituted for SP

service.

The primary commodities shipped to and from Reno and Salt Lake City

were nonmetallic minerals (such as barites) and chemicals (such as

 28Rail rates in this section are inflation-adjusted gross revenue per ton-mile of freight

originated, in 1996 dollars.

29A more complete discussion of our rate analysis is presented in app. III.

The Board Could

Benefit From

Evidence Better

Identifying How

Mergers Affect Rail

Rates

UP/SP Merger Expected to

Affect Competition in

Selected Geographic Areas
Page 20 GAO-01-689 Freight Railroad Regulation

sulfuric acid or sodium). (See table 1.) Farm products (such as corn and

wheat) accounted for about 13 percent of the traffic shipped to Salt Lake

City. We also included coal in our analysis of Salt Lake City rail rates,

since it accounted for the highest percentage of carloads shipped to and

from that area. However, BNSF officials told us that, in general, they have

not yet used the trackage rights they were granted to transport coal to or

from the Salt Lake City area. In its decision approving the UP/SP merger,

the Board noted that BNSF was granted access to only a small portion of

coal traffic on the Central Corridor, mostly in the northwestern section of

Utah. As the table shows, the potential 2-to-1 shippers served by BNSF, as

a percentage of total shippers in these geographic areas, ranged from 10 to

22 percent. This is consistent with comments made by Board officials that

BNSF received trackage rights to serve about 20 percent of the postmerger

UP/SP traffic on the Central Corridor.
Page 21 GAO-01-689 Freight Railroad Regulation

Table 1: Volume of Shipments, in Carloads, From the Reno and Salt Lake City

Areas, 1994-99

Location of

shipmenta Commodityb

Commodity’s

carload share of

area traffic

( in percent)

BNSF 2-to-1 shippers

 to all shippers

(in percent)

From the Salt

Lake City area Chemicals 44c

15

From the Salt

Lake City area Coal 69 d

To the Salt Lake

City area Farm products 13e

22

To the Salt Lake

City area Coal 52 d

From the Reno

area

Nonmetallic

minerals

79 10

To the Reno area Chemicals 32f15

a

The areas are business economic areas. An economic area is a collection of counties used by the

Bureau of Economic Analysis, within the U.S. Department of Commerce, for statistical reporting of

regional economic activity.

 bThe commodities reported are generally those with the highest share of area carloads, from 1994

through 1999, excluding 1996 and intermodal traffic.

c

Excludes coal shipments.

d

Not applicable.

e

Excluding coal shipments, the commodity with the largest market share of traffic to the Salt Lake City

area (in carloads) was waste and scraps (28 percent). However, the BNSF share of this traffic was

only 1 percent. Consequently, we used the commodity with the next highest percentage of joint

traffic—farm products. fThe commodity with the largest market share of traffic to the Reno area (in carloads) was coal (50

percent). However, BNSF did not ship coal to the Reno area in 1999, the most recent year of our

study. Consequently, we used the commodity with the next highest percentage of joint traffic—

chemicals.

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

Our analysis found that by itself the merger would have served to reduce

rates for four of the six commodities shipped to or from the geographic

areas we chose. (See table 2.) Specifically, the merger would have reduced

rates for coal shipments to and from the Salt Lake City area (by 8 percent

and 10 percent, respectively), chemical shipments from the Salt Lake City

area (by 6 percent), and farm products to the Salt Lake City area (by 5

percent). However, the rates for shipments of chemicals to the Reno area

UP/SP Merger Generally

Decreased Rail Rates, but

Not for All Commodities

and Not for All Shippers
Page 22 GAO-01-689 Freight Railroad Regulation

would have increased by 21 percent because of the merger,30 while rates

for shipments of nonmetallic minerals originating in the Reno area would

have been relatively unchanged by the merger (i.e., the merger-related

change was not statistically significant).31 The effect of a merger on rail

rates depends on the cost savings the merger might generate relative to the

exercise of any enhanced market power by the railroad carriers. Since the

Board acted to preserve the level of competition by granting trackage

rights to BNSF to serve potential 2-to-1 shippers in these geographic areas,

the rate decreases from the merger likely reflect cost savings from the

consolidation. Another way in which the merger could result in lower

rates is if BNSF provided more effective competition to UP in the

postmerger period than SP did in the premerger period.

 30This result may be attributable to changes in competition between the premerger and

postmerger periods. Compared with the Salt Lake City area, the Reno area has a very small

volume of chemicals shipments—based on carloads, the Salt Lake City area has more than

three times the volume of the Reno area. Given the high fixed costs in the rail industry,

large volumes of shipments are generally necessary to attract competition. This result may

also reflect cost differences between SP and BNSF. According to BNSF officials, SP,

because it had access to both 2-to-1 and non-2-to-1 shippers in the Reno area, had

substantially more customers in the premerger period than BNSF (which has access only to

2-to-1 shippers) has in the postmerger period. As a result, SP could have spread its costs

among more customers and therefore offered more competitive rates to UP than rates

currently offered by BNSF. Without commenting on Reno or Salt Lake City, Board officials

also noted that, overall, SP’s premerger rates were not covering all its costs and were thus

not sustainable. Board officials further noted that BNSF has been able to successfully

compete for the business of a facility near Reno after the Board clarified that this facility

qualified for BNSF service under the Board’s new facility condition. Finally, Board officials

said that business from new facilities such as this would add to BNSF’s volumes and enable

it to compete more effectively for other traffic.

31For the nonmetallic minerals, the changes were not statistically significant, meaning there

was no meaningful difference between premerger and postmerger rates.
Page 23 GAO-01-689 Freight Railroad Regulation

Table 2: Changes in Postmerger Rail Rates Due to Merger and Other Factors, 1994-

99

Changes in percent

Shipments Commodity

Shipper/

postmerger

railroad

Rate

changes

due to

merger

Rate

changes

due to

other

factors

Overall

changes

in rates

From the Salt Lake

City area

Chemicals All shippers/

BNSF & UP -6 16 10

From the Salt Lake

City area

Coal All shippers/

UP -10 20 10

To the Salt Lake

City area

Farm

products

All shippers/

BNSF & UP -5 6 1

To the Salt Lake

City area

Coal All shippers/

UP -8 23 15

From the Reno area Nonmetallic

minerals

All shippers/

BNSF & UP 4 -26 -22

To the Reno area Chemicals All shippers/

BNSF & UP 21 -27 -6

Notes: The overall rate changes and the rate changes reflecting effects of the merger are determined

by two different methods. Overall rate changes, which are unweighted, are based on a meandifference analysis that subtracts the premerger rates from the postmerger rates. Results for the rate

changes due to the merger are based on an econometric analysis. For the overall changes in rates

and the merger effects, all values in bold/italics are statistically significant at the 5-percent level. The

effects due to changes in other factors are calculated as the overall changes in rates less the merger

effects.

See also notes to table 1.

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

While the effects of a merger can put downward (or upward) pressure on

rates, an analysis focused on overall rate changes alone could lead to an

inaccurate conclusion about whether conditions imposed on a merger to

mitigate potential harm to competition have been effective. The results of

our analysis indicate that, in addition to merger effects, other factors, such

as the volume of shipments, had an equal or greater influence on overall

rate changes for the specific movements we examined. In some cases, the

effects of these other factors were strong enough to offset or even reverse

the downward pressure of the merger on rates. (See table 2.) For example,

for shipments of chemicals from the Salt Lake City area and for shipments

of coal to and from the Salt Lake City area, while the merger alone would

have decreased rates, the rates nevertheless increased overall. On the
Page 24 GAO-01-689 Freight Railroad Regulation

other hand, while rates decreased overall for chemicals shipments to the

Reno area, the merger by itself put an upward pressure on rates.32

Finally, we found that postmerger rates for potential 2-to-1 shippers

(served by BNSF) in the Reno and Salt Lake City areas decreased for one

of the commodities we looked at but were essentially unchanged in three

other instances.33 (See table 3.) The rate changes for potential 2-to-1

shippers (served by BNSF) shipping chemicals from the Salt Lake City

area were about 16 percentage points less than similar rates for shippers

shipping similar products but served solely by UP.34 However, rail rate

changes for potential 2-to-1 shippers (served by BNSF) who shipped farm

products to the Salt Lake City area, nonmetallic minerals from the Reno

area, and chemicals to the Reno area were all higher than for shippers

served exclusively by UP, but this difference was not statistically

significant, meaning that the rates were essentially unchanged. These

results are not wholly unexpected, since the levels of rail competition for

the two kinds of shippers—potential 2-to-1 and non-2-to-1—differ and rail

rates are set using differential pricing.35 Under differential pricing, shippers

 32As table 2 shows, the overall changes in rates are different between the Salt Lake City and

Reno areas. This may be attributable to several reasons. First, the volume of shipments

from the Reno area is much smaller compared with the Salt Lake City area. This difference

in volume can magnify the impact of slight changes in tonnage on our measured rail rates

(revenue per ton-mile). Second, costs between the two areas were different. For the

commodities that we examined, postmerger costs were slightly lower in the Reno area

compared with the Salt Lake City area (see app. III). Finally, there was a change in demand

for some products shipped from the Reno area. According to UP officials, the decline in the

prices of oil, gold, and copper in the latter part of the 1990s reduced the demand for the

mining-related products shipped from the Reno area. Each of these nonmerger factors may

have contributed to decreased overall rates in the Reno area.

33Although the UP traffic used in our analysis consists of both 2-to-1 shippers and non-2-to1 shippers, according to UP officials, most of the postmerger traffic in Reno and Salt Lake

City retained by UP after the merger was solely served by UP prior to the merger.

34Similar statistical analyses could not be performed for the overall rate changes because

the data were unbalanced—that is, the sample sizes were not the same. See app. III for

more information.

35These results were similar to those found in other recent studies of rail rates (see Curtis

Grimm and Clifford Winston, “Competition in the Deregulated Railroad Industry: Sources,

Effects, and Policy Issues” in Deregulation of Network Industries: What’s Next?, Peltzman

and Winston (ed.), AEI-Brookings Joint Center for Regulatory Studies: Washington, DC:

2000. This study, which is based on a survey of shippers who are members of the National

Industrial Transportation League, Edison Electric Institute, and the Alliance for Rail

Competition, and which uses a more restrictive definition of shippers served solely by one

railroad than the definition we applied here, estimated that shippers served solely by one

railroad paid freight charges that were about 21 percent higher than those paid by other

shippers.
Page 25 GAO-01-689 Freight Railroad Regulation

with less effective transportation alternatives generally pay a

proportionately greater share of a railroad’s fixed costs than shippers with

more effective transportation alternatives.36

Table 3: Changes in Postmerger Rail Rates for Potential 2-to-1 Shippers Compared

With Rail Rates for Shippers Served Solely by UP

Shipments Commoditya

Shipper category

Rate changes

due to mergerb

(in percentage

points)

From the Salt Lake

City area

Chemicals 2-to-1 shippers compared

with shippers served solely

by UP

-16

To the Salt Lake

City area

Farm products 2-to-1 shippers compared

with shippers served solely

by UP

0.3

From the Reno area Nonmetallic

minerals

2-to-1 shippers compared

with shippers served solely

by UP

6

To the Reno area Chemicals 2-to-1 shippers compared

with shippers served solely

by UP

4

a

Coal is excluded from this table because there were no potential 2-to-1 shippers for this commodity

in either the Salt Lake City or the Reno areas.

b

This column shows the rate changes for potential 2-to-1 shippers (served by BNSF) less the rate

changes for shippers served solely by UP/SP. A negative value indicates that rates for potential 2-to1 shippers decreased more than the rates for shippers served solely by UP. The numbers are shown

as percentage point differences. This is the difference between two percentage values. All values in

bold /italics are statistically significant at the 5-percent level.

See also notes to table 1.

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

There are limitations in the analysis and data we used. The results

presented are only for the two geographic markets we reviewed and

cannot be generalized to other geographic locations or for rate changes

from the UP/SP merger as a whole. In addition, although econometric

models of the factors that determine rail rates have been used to analyze a

variety of policy-related issues in rail transportation37 and have been

useful, such a model can be sensitive to how it is specified. We tested the

 36For more information on differential pricing, see Railroad Regulation: Changes in

Railroad Rates and Service Quality Since 1990 (GAO/RCED-99-93, Apr. 16, 1999).

37See, for example, studies of the 1980 Staggers Rail Act on rail rates by Wesley Wilson,

“Market-Specific Effects of Rail Deregulation,” Journal of Industrial Economics, Vol. XLII

(1994), pp. 1-22.
Page 26 GAO-01-689 Freight Railroad Regulation

model’s key results to ensure that our findings were reliable and are

confident that the results are reasonable for the commodities in the

geographic areas we examined. Finally, the Carload Waybill Sample data

used in our model also have limitations. For example, these data do not

necessarily reflect discounts or other rate adjustments that might be made

retroactively by carriers to shippers exceeding certain volume

requirements.38

Our analysis provides an example of how rates subject to merger

conditions could be analyzed. Although the results in this study are not

directly comparable to those in other studies of rates that are based on

broader geographic areas, our analysis suggests that overall rate changes

do not identify the specific impact of mergers on rates. In general, the

Board has been presented with rate studies that have focused on overall

rate changes, not on the portion of changes caused by a merger. For

example, rate studies39 prepared by UP during merger oversight indicate

that, overall, rates decreased immediately after the merger and have

continued to decrease at 2-to-1 points and for traffic moving in the

Houston-Memphis and Houston-New Orleans corridors. Similarly, both

CSX and Norfolk Southern have conducted studies of rail rates in the

Buffalo, New York, area since their acquisition of Conrail in 1999. Again,

these studies have focused on the overall direction of rate changes and

have shown that rail rates in the Buffalo area have generally decreased.

Neither the UP nor the CSX/Norfolk Southern rate studies identified the

specific effects of mergers on rates—effects that could have potentially

been different from the overall rate trends.

According to Board officials, in general, the parties in merger oversight

proceedings have focused on determining the overall magnitude and

direction of rate changes without trying to relate such changes to specific

causes, and the Board’s own December 2000 staff study of nationwide

 38For additional information on the data and model used in this analysis as well as

limitations, see apps. I and III.

39UP has conducted three studies of rail rates associated with its merger with SP. They

compare the periods October 1995-March 1996 to October 1996-March 1997, October 1996-

March 1997 to October 1997-March 1998, and October 1997-March 1998 to October 1998-

March 1999. These studies have been used during oversight of the UP/SP merger.

The Board’s Oversight

Could Benefit From

Evidence Better

Identifying Merger-Related

Rail Rate Changes
Page 27 GAO-01-689 Freight Railroad Regulation

changes in rail rates took this approach.40 Board officials said they have

attempted to take into account, in the context of postmerger oversight,

such non-merger-related factors as the recent significant rise in diesel fuel

prices but have not been presented with an econometric approach to

analyze rail rates in the context of merger oversight. They said that they

had questions and concerns about the precision and reliability of the

analysis we conducted. However, the Board is amenable to seeing this

general approach developed in the context of a public merger oversight

record where it would be subject to scrutiny and refinement by relevant

parties. Board officials noted that presenting and rebutting econometric

studies, because of their sophisticated nature, could increase the burden

of participating in the merger oversight process. It is important to note

that the Board, in approving the UP/SP merger, was provided with various

empirical rate studies by the applicants and interested parties that

included econometric analyses.41 In addition, econometric evidence has

played an important role in merger-related cases that have been reviewed

by courts and other government agencies.42

As an adjudicatory agency, the Board relies on affected parties to identify

alleged harm when it exercises oversight to ensure that conditions

 40See Surface Transportation Board, Rail Rates Continue Multi-Year Decline, Office of

Economics, Environmental Analysis, and Administration (Dec. 2000). See also

GAO/RCED-99-93, which reviewed an earlier similar Board rate study. According to Board

officials, the Board’s 2000 staff study showed that rail rates in the West were stable from

1992 to 1994, but resumed their long-term decline once the restructuring of the western rail

network had begun, and fell 9 percent, or about 3.1 percent per year, during the 3-year

period following the UP/SP merger. Rail rates on coal movements in the West declined

even faster during this 3-year period—14.2 percent, or about 5 percent per year. The Board

stated that rate decreases of this magnitude could not have been realized if the UP/SP and

BNSF mergers had substantially decreased rail competition in the region.

41See Surface Transportation Board, Finance Docket No. 32760, Decision 44 (Aug. 6, 1996),

pp. 119-121 and 267-273. According to Board officials, these studies were considered but

were found to contain certain flaws that limited their applicability in that proceeding.

Board officials also noted that no party has attempted to submit such an analysis in an

oversight proceeding to date.

42For instance, in FTC v. Staples, Inc., 970 F Supp. 1066 (D.D.C. 1997) the court relied

heavily on the results of econometric analysis. According to a Federal Trade Commission

official, one of the first examples of the use of econometrics in a regulatory proceeding was

in connection with the hearings on concentration in American industry conducted by the

Temporary National Economic Committee on the iron and steel industry in 1940. (See

prepared remarks of Jonathan B. Baker, Director, Bureau of Economics, Federal Trade

Commission, Before the George Mason University Law Review Symposium, Oct.11, 1996.)

Conclusions
Page 28 GAO-01-689 Freight Railroad Regulation

imposed in railroad mergers are working and that competition has not

been harmed. Therefore, it is necessary for shippers, railroads, or others

not only to identify instances when they have been, or might be, harmed,

but also to present evidence to the Board demonstrating this harm. For the

Board to make sound decisions about the extent to which mergers affect

rate changes, the Board should have information that separately identifies

the factors that affect rates and the specific impact of these factors.

Without such information, the Board’s ability to evaluate whether merger

conditions have been effective in protecting against potential harm to

competition may be limited.

To better assist the Board in the oversight of railroad mergers and in

ensuring that conditions imposed in such mergers protect against potential

harm to competition, we recommend that the Board, when appropriate,

require railroads and others to provide information to the Board that

separately identifies the factors affecting postmerger changes in rail rates

and the specific impact of these factors on rate changes. In particular, the

Board, when appropriate, should require railroads and others to provide

information that identifies the effects of mergers on changes to rail rates,

particularly in those geographic areas subject to potential reductions in

competition. This information should be considered in deliberations on

the need to modify conditions, add reporting requirements, or initiate

proceedings to determine if additional conditions are required to address

competition-related issues.

We provided a draft of this report to the Surface Transportation Board and

the Department of Transportation for their review and comment. The

Board did not express an overall opinion on the draft report, but rather

supplied suggested revisions to it. Most importantly, while the Board is

amenable to seeing an econometric approach developed in the context of

a public oversight record, it commented that such an approach could

increase the burden of the parties participating in the merger oversight

process. This increased burden might occur because of the effort entailed

to develop, present, and rebut econometric studies. We agree that an

increased burden might occur and incorporated this view into our report.

Allowing parties to critique the usefulness of our recommendation and the

effort involved in implementing it should provide the Board with the

information it needs on implementation. The Board offered extensive

clarifying, presentational, and technical comments which, with few

exceptions, we incorporated into our report.

Recommendation for

Executive Action

Agency Comments

and Our Evaluation
Page 29 GAO-01-689 Freight Railroad Regulation

The Department of Transportation did not express an overall opinion on

the draft report. Its comments were limited to noting that several Class I

railroads were under common control. We incorporated this change into

our report.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 15 days after the

date of this letter. At that time, we will send copies of the report to

congressional committees with responsibilities for transportation issues;

the Secretary of Transportation; the Acting Administrator of the Federal

Railroad Administration; the Chairman of the Surface Transportation

Board; and the Director, Office of Management and Budget. We will also

make copies available to others upon request. This report will also be

available on our home page at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me

at (202) 512-2834. Key contributors to this report were Stephen Brown,

Helen Desaulniers, Leonard Ellis, John Karikari, Tina Kinney, Richard

Jorgenson, Mehrzad Nadji, Melissa Pickworth, James Ratzenberger, and

Phyllis Scheinberg.

Sincerely yours,

John H. Anderson, Jr.

Managing Director, Physical

 Infrastructure Issues
Appendix I: Chronology of Class I Railroad

Mergers—August 1995 Through June 2001

Page 30 GAO-01-689 Freight Railroad Regulation

1995

Burlington Northern Inc. and Burlington Northern Railroad Company –

Control and Merger – Santa Fe Pacific Corporation and the Atchison,

Topeka and Santa Fe Railway Company

Merger approval date: August 16, 1995

Total route mileage: 35,400

Service area: Western United States and Canada

Acquisition cost: $1.3 billion, plus assumed liabilities

Type of merger: Largely end-to-end. However, in approving

 this merger, ICC found that of the

 approximately 29 locations that were served

 by both railroads, only a few would have

 potentially sustained harm from reduced

 competition given the presence of other

 railroads and of extensive truck competition

 at many of the locations. Conditions were

 attached to preserve competition where

 necessary.

1996

Union Pacific Corporation, Union Pacific Railroad Company, and

Missouri Pacific Railroad Company – Control and Merger – Southern

Pacific Rail Corporation, Southern Pacific Transportation Company, St.

Louis Southwestern Railway Company, SPCSL Corp., and The Denver

and Rio Grande Western Railroad Company

Merger approval date: August 6, 1996

Total route mileage: 38,654

Service area: Western United States

Acquisition cost: $3.3 billion in cash and stock, plus assumed

 liabilities

Type of merger: Significant parallel components. In

 approving this merger, the Board granted

 about 4,000 miles of trackage rights to BNSF

 and other railroads to protect potential

 2-to-1 shippers and others from loss of

 competition.

Appendix I: Chronology of Class I Railroad

Mergers—August 1995 Through June 2001
Appendix I: Chronology of Class I Railroad

Mergers—August 1995 Through June 2001

Page 31 GAO-01-689 Freight Railroad Regulation

1997

No Class I merger transactions.

1998

CSX Corporation and CSX Transportation, Inc., Norfolk Southern

Corporation and Norfolk Southern Railway Company – Control and

Operating Leases/Agreements – Conrail, Inc. and Consolidated Rail

Corporation

Merger approval date: July 20, 1998

Route mileage (CSX and CSX

portion of Conrail): About 23,000

Route mileage (Norfolk Southern

and Norfolk Southern portion

of Conrail): About 21,800

Service area: Eastern United States and Canada

Acquisition cost: $9.9 billion, plus assumed liabilities

 and fees

Type of merger: Largely end-to-end.

Additional information:

Although CSX Corporation and Norfolk Southern Corporation jointly

acquired Conrail and then divided most of the assets between them,

Conrail continues to operate certain shared assets areas for the joint

benefit of CSX and Norfolk Southern. These shared assets areas are

located in North Jersey (generally from northern New Jersey to Trenton,

New Jersey), South Jersey/Philadelphia (generally from Trenton, New

Jersey, to Philadelphia and southern New Jersey), and Detroit. Both CSX

and Norfolk Southern have the right to operate their own trains, with their

own crews and equipment and at their own expense, over any track

included in the shared assets areas. Various other areas formerly operated

by Conrail are subject to special arrangements that provide for a sharing

of routes or facilities to a certain extent. For example, the Monongahela

Area in Pennsylvania and West Virginia, although conveyed to Norfolk

Southern, is available to CSX on an equal-access basis for 25 years, subject

to renewal.
Appendix I: Chronology of Class I Railroad

Mergers—August 1995 Through June 2001

Page 32 GAO-01-689 Freight Railroad Regulation

1999

Canadian National Railway Company, Grand Trunk Corporation, and

Grand Trunk Western Railroad Incorporated – Control – Illinois Central

Corporation, Illinois Central Railroad Company, Chicago, Central and

Pacific Railroad Company and Cedar River Railroad Company

Merger approval date: May 21, 1999

Total route mileage: 18,670

Service area: Midwestern United States and Canada

Acquisition cost: $1.8 billion, plus the value of 10.1 million

 common shares of Canadian National stock

Type of merger: End-to-end.

2000

No Class I merger transactions.

2001

No Class I merger transactions proposed through June 2001.
Appendix II: Scope and Methodology

Page 33 GAO-01-689 Freight Railroad Regulation

Our review focused primarily on the Board’s oversight of Class I railroad

mergers that occurred since its creation in January 1996. These mergers

included (1) the Union Pacific Railroad Company (UP) with the Southern

Pacific Transportation Company (SP), (2) the Canadian National Railway

Company with the Illinois Central Railroad and (3) the acquisition of the

Consolidated Rail Corporation (Conrail) by CSX Transportation, Inc., and

the Norfolk Southern Corporation. However, to aid in showing how

merger oversight has changed over time, we also included information on

the Burlington Northern Railroad Company merger with the Atchison

Topeka and Santa Fe Railway Company, which was approved by ICC in

August 1995.

To address the role of the Board in approving and overseeing railroad

mergers and to determine how merger oversight is conducted, we

reviewed relevant laws and regulations and analyzed documents prepared

by the Board addressing its merger authority and functions. We also

discussed with the Board’s staff how merger oversight is conducted and

how such oversight has changed over time. In addition, we discussed with

the Board’s staff the activities conducted as part of formal oversight—that

is, activities included in an annual general oversight proceeding—as well

as informal oversight activities (such as monitoring of railroad

performance data) associated with mergers.

To address how the Board acts to mitigate potential merger-related harm

to competition, we reviewed documents contained in its merger dockets,

including merger approval and oversight decisions and progress reports

filed by merged railroads. We discussed with Board officials how oversight

of conditions is conducted and the factors considered by the Board in

determining if conditions imposed have been effective in mitigating

potential harm to competition. We also discussed oversight issues with

various trade associations representing shipper and railroad interests as

well as with officials from Class I railroads. (The organizations we

contacted are listed at the end of this app.) The shipper trade associations

represented major commodities shipped by rail. Finally, to identify how

merger oversight might change in the future, we reviewed the Board’s

notice of proposed rulemaking on major rail consolidations published in

October 2000 and the final regulations issued in June 2001. We discussed

with the Board how the final merger rules differed from the proposed

rules.

To address how the UP/SP merger affected rail rates in selected

geographic areas, we obtained data from the Board’s Carload Waybill

Sample for the years 1994 through 1999. The Carload Waybill Sample is a

Appendix II: Scope and Methodology
Appendix II: Scope and Methodology

Page 34 GAO-01-689 Freight Railroad Regulation

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 charged by different railroads for specific

commodities in specific markets subject to potential reduction in

competition in the UP/SP merger. We focused on this merger because it

was identified by the Board as having significant competition-related

issues, especially in the number of shippers potentially going from service

by two railroads to service by only one railroad (called 2-to-1 shippers).

Using documents submitted by the Union Pacific Railroad, as well as

discussions with officials from both the Union Pacific Railroad and the

Burlington Northern and Santa Fe Railway, we identified those locations

and corridors containing the majority of potential 2-to-1 shippers. Using

economic areas defined by the Department of Commerce’s Bureau of

Economic Analysis, our analysis focused on those economic areas

containing the majority of these potential 2-to-1 shippers. We used the

Carload Waybill Sample instead of more specific data on rates for

individual shippers because of the lack of sufficient premerger rate data

from SP’s operations. Although it is possible to get rates for 2-to-1 shippers

from the Carload Waybill Sample, the sample is not designed for use in

analyzing rates for specific shippers. However, the sample can be used to

analyze rail rates within and between geographic areas. For these reasons,

we used economic areas containing a majority of potential 2-to-1 points in

conjunction with the Carload Waybill Sample to conduct our analysis. The

rate data obtained from the Carload Waybill Sample were then used in an

econometric model that analyzed the effects of the UP/SP merger on

changes to rail rates for various commodity shipments to and from the

economic areas with the majority of potential 2-to-1 shippers. A detailed

description and discussion of this model can be found in appendix III.

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 provides for

railroads to mask the revenues associated with these movements prior to

making this information available to the public. We obtained a version of

the Carload Waybill Sample that did not mask revenues associated with

railroad movements made under contract. Therefore, the rate analysis

presented in this report presents a truer picture of rail rates than analyses

that are based solely on publicly available information. There are also

limitations associated with data from the Carload Waybill Sample. For

example, according to Board officials, revenues derived from this sample

are not adjusted for such things as year-end discounts and refunds that
Appendix II: Scope and Methodology

Page 35 GAO-01-689 Freight Railroad Regulation

may be provided by railroads to shippers that exceed certain volume

requirements. However, both Board and railroad officials agreed that,

given the lack of sufficient premerger SP data, the Carload Waybill

Sample was the best data source available for conducting our analysis.

We performed our work from July 2000 through June 2001 in accordance

with generally accepted government auditing standards.

Department of Transportation

 Federal Railroad Administration

Surface Transportation Board

American Chemistry Council

Edison Electric Institute

National Grain and Feed Association

National Industrial Transportation League

National Mining Association

Society of the Plastics Industry

American Short Line and Regional Railroad Association

Association of American Railroads

Burlington Northern and Santa Fe Railway Co.

CSX Transportation, Inc.

Norfolk Southern Corporation

Union Pacific Railroad Co.

Covington and Burling

Gollatz, Griffin & Ewing, P.C.

LeBoeuf, Lamb, Greene, MacRae, LLP

Thompson, Hine, and Flory

Organizations

Contacted

Federal Agencies

Shipper Associations

Railroad Associations

Railroads

Law Firms Representing

Railroads or Shipper

Associations
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 36 GAO-01-689 Freight Railroad Regulation

This appendix describes and discusses our analysis of the effects of the

1996 UP/SP merger on rail rates in selected geographic areas where the

merger had the potential for harm to competition because 2-to-1 shippers

could have lost one of the two railroad carriers upon which they had

relied. In particular, we discuss (1) the econometric model we developed

to analyze separately the effects of the merger and of other factors on rail

rates, (2) the construction of the data used for the analysis, and (3) our

analysis, including a comparison of overall changes in rates, based on

mean-difference analysis, with the results of the econometric model.

We developed an econometric model to examine both the specific impact

of the 1996 UP/SP merger and the impact of other factors on rates in

selected geographic areas where competition could have been potentially

reduced. In developing the model, we focused on the trackage rights

granted to BNSF by the Board, and applied existing empirical literature on

how rail rates are determined.

The UP/SP merger covered areas where the services provided by UP

overlapped those provided by SP. As a result, some rail shippers could

have been reduced from being directly served by both SP and UP to being

directly served by UP only. In order to preserve competition in those

potential 2-to-1 situations and for those shippers exclusively served by UP

or SP who benefited from having another independent railroad nearby, the

Board granted trackage rights to BNSF in order to replace the competition

that would be lost when SP was absorbed by UP.1

As done in previous studies, we use an econometric model to identify the

factors affecting rail rates following the UP/SP merger—rail rates being

the dependent variable used in the model.2

 1

For the most part, the BNSF trackage rights condition imposed by the Board does not

provide for direct access by BNSF to 3-to-2 shippers (shippers who could obtain service

from UP, SP, and one other rail carrier before the merger, but would have only two carriers

available to them after the UP/SP merger).

2

Some of the previous models examined the effects of the Staggers Rail Act of 1980 on

rates. See, for example, Mark Burton, “Railroad Deregulation, Carrier Behavior, and

Shipper Response: A Disaggregated Analysis,” Journal of Regulatory Economics, Vol. 5

(1993), pp. 417-434; and Wilson (1994).

Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail

Rate Analysis

An Econometric

Model of the Impact

of the UP/SP Merger

on Rail Rates

The Board Granted

Trackage Rights to

Preserve Competition in

the UP/SP Merger

Factors Affecting Rail

Rates in the UP/SP Merger
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 37 GAO-01-689 Freight Railroad Regulation

Rail Rates: We measured rail rates—the freight rate charged by a railroad

to haul a commodity from an origin to a destination—by revenue per tonmile, adjusted for inflation.3

 We used data from 1994 and 1995 for the

premerger period, and data from 1997 through 1999 for the postmerger

period. We excluded 1996 data, since the UP/SP merger was approved in

August 1996. We also excluded shipments with rail transportation charges

less than $20,000 (in 1996 dollars) in order to focus on the major

movements. The level of each observation was shipments at the 7-digit

Standard Transportation Commodity Code—a classification system used

to group similar types of commodities such as grains—between an origin

and a destination. The factors that explained the rail rates were generally

those related to market structure and regulatory conditions, as well as cost

and demand factors.

Market Structure and Regulatory Conditions: We included the

variable MERGER to capture the effect of the merger on rates. The extent

of rail competition is expected to affect rail rates.4 We used a variable that

would reflect the difference in rates charged to shippers with competitive

options—SP and UP before the merger, and BNSF and UP afterwards—

and shippers served solely by one railroad both before and after the

 3

Although revenue per ton-mile is not the actual rail rate that is paid to transport freight, it

is the most widely accepted measure of rates in the rail industry. (See, for example, Rail

Rates Continue Multi-Year Decline, Surface Transportation Board, Office of Economics,

Environmental Analysis, and Administration (2000), and the academic studies cited in this

report.)

4

A full assessment of the effects of mergers on the extent of competition and rates should

consider their impact on origin-to-destination rivalry among existing railroads (intramodal

competition) as well as competition from nonrail carriers (intermodal competition). We

could not include intermodal competition in the analysis because of data limitations. Other

sources of competition in the rail industry include geographic or source competition—that

is, the ability of customers to use an alternative carrier to obtain similar products from

another source (origin or destination)—and product competition—the ability of customers

to use an alternative carrier to obtain a substitute product. Since 1999, the Board has

excluded geographic and product competition from consideration in determining whether

a rail rate can be subjected to regulatory review for practical reasons, and the Board has

recently reaffirmed that policy. (See Surface Transportation Board, Market Dominance

Determinations--Product and Geographic Competition, STB Ex Parte No. 627, Apr. 6,

2001. Note: This decision has been appealed to the United States Court of Appeals for the

District of Columbia Circuit.) Board officials said they continue to assess the need to

preserve product and geographic competition in the context of rail merger applications.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 38 GAO-01-689 Freight Railroad Regulation

merger to capture the influence of this fact on rates. The variable is

RAILROAD-BNSF.5

Cost and Demand Factors: These factors are generally captured by the

shipment and shipper characteristics of the traffic.6

 As in previous studies,

we use the following variables to measure the influence of cost and

demand factors: variable cost per ton-mile (COST), the weight of

shipments (TON), the length of haul (DISTANCE), the annual tonnage

shipped between an origin-destination pair (DENSITY), and OWNERSHIP

of railcars.7

In addition to the explanatory factors mentioned above, we included the

following factors: First, we introduced a variable for contract rates

(CONTRACT) to account for possible differences between contract rates

and noncontract rates. Second, we included a variable to account for the

possible effects of the service crisis that arose after the merger and lasted

through 1998 (CRISIS). Third, following previous studies, we included the

squared terms for the variables TON (TON_SQ) and DISTANCE

(DISTANCE_SQ), to account for possible nonlinear relationships between

these variables and rates.8

 We also included dummy variables for the major

commodity groups (COMMODITY) where appropriate.

We selected geographic markets that had high concentrations of potential

2-to-1 shippers because of the possibility for harm to competition in those

areas. Using the Carload Waybill Sample, we performed several dataprocessing tasks that included matching similar sets of traffic before and

after the merger, and selecting the primary commodities that were

shipped, based on carloads, for analysis.

 5

The procedure for constructing the traffic for only 2-to-1 shippers and other shippers is

detailed in the data section below.

6

See, for example, Curtis Grimm and Clifford Winston (2000), and Stephen Schmidt,

“Market Structure and Market Outcomes in Deregulated Rail Freight Markets,”

International Journal of Industrial Organization, Vol. 19 (2001), pp. 99-131.

7

Based on previous studies, COST is expected to be positively related to rates, while TON,

DISTANCE, and DENSITY are negatively related to rates. The impact of OWNERSHIP is

inconclusive. (See, for example, Wilson (1994), and Grimm and Winston (2000)). However,

Board officials told us that the use of railroad-owned cars invariably is reflected in higher

rates than if shipper-owned cars had been used.

8

See, for example, Grimm and Winston (2000).

Data Sources,

Selection, and

Processing
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 39 GAO-01-689 Freight Railroad Regulation

All the data used for the study were constructed from the Carload Waybill

Sample, which is a sample of railroad waybills (in general, documents

prepared from bills of lading that authorize railroads to move shipments

and collect freight charges) that are submitted annually by the railroads.9

However, there are limitations in using the Carload Waybill Sample for

rate analysis. Among these limitations is that no specific information is

provided about the identity of the shippers. This makes it difficult to

identify potential 2-to-1 traffic by shipper name. Also, data for rates for

shipments moved under contract between railroads and shippers (called

contract rates), which are masked or disguised in the Carload Waybill

Sample, may be incomplete.10

We selected the Reno, Nevada, and Salt Lake City, Utah, business

economic areas, which are in the Central Corridor and which had high

concentrations of potential 2-to-1 shippers.11 Both SP and UP served these

two areas prior to the merger; BNSF service was not available in the area

at that time.12 Also, according to BNSF officials, the Central Corridor was

relatively less affected by the service crisis that emerged after the UP/SP

merger. In addition, UP fully integrated its computer and information

systems with SP in the Central Corridor much earlier than in the other

regions, making rate and other data there more reliable. However, there

 9

An alternative data source would be a survey of shippers, as was done by Grimm and

Winston (2000). However, this approach has the potential problem of shipper bias—that is,

shippers could provide biased responses or the self-selected nature of those choosing to

respond could result in a sample that is not representative of the group. In addition, there is

the potential problem of allocating revenues to multiple origin-destination pairs of traffic.

Furthermore, this approach typically yields data for a single year, which means we could

have been limited to data for 1999 or 2000 only. Finally, we could have obtained data on all

car movements directly from the railroads. Unfortunately, data of sufficient quality on

individual potential 2-to-1 shippers were not available for the premerger period.

10About 70 percent of the tonnage in 1997 moved under contract. Contracts generally offer

reduced rates in return for guaranteed volumes. However, even unmasked Carload Waybill

Sample revenues may not reflect the actual rates paid. This is because negotiated contract

volumes may not always materialize and subsequent upward adjustments are thus made to

the rates, or, more typically, rebates are offered late in the year or early in the next year

when minimum volume commitments have been met. However, according to BNSF and UP

officials, the margin of error in using Carload Waybill Sample revenues as a surrogate for

contract rates is likely to be very small and within a few percentage points of actual rates.

11See figure 1.

12BNSF had provided some services in the Reno economic area, in Lassen County,

California, hauling primarily lumber/wood in the premerger period. However, this did not

affect our analysis, since this traffic was not utilized in our analysis.

Data Sources

Selection of Geographic

Markets
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 40 GAO-01-689 Freight Railroad Regulation

are limitations in using the Central Corridor to illustrate the possible

effects of the UP/SP merger on rates. According to the Board, BNSF

generally had problems ramping-up its trackage-rights service in the

Central Corridor. Also, the Reno and Salt Lake City areas are not typical

rail hubs, because the traffic to and from these areas is not high volume,

compared with other areas, such as the Houston-Gulf Coast area. Despite

these limitations, the two selected areas provide an opportunity to

illustrate the impact of the UP/SP merger on rates in predominantly

potential 2-to-1 situations.

We performed several tasks to organize the Carload Waybill Sample for

our analysis.13 We identified traffic by origin and destination, and at the 7-

digit Standard Transportation Commodity Code level separately for

periods before the merger and periods after the merger.

We then matched similar sets of railroad traffic existing before and after

the merger. The matching involved shipments that we could determine, on

a commodity and origin-and-destination basis, that were made in both

periods. To help identify traffic associated with BNSF’s trackage rights, we

also identified the railroad carrier(s) associated with the shipments that

we matched for both periods. There were two Class I railroads serving the

two geographic areas before the merger (SP and UP). After the UP/SP

merger, all the traffic belonging to SP and UP came under the merged UP’s

sole control, except for potential 2-to-1 shippers and shippers that could

take advantage of such provisions as build-in/build-out and new facilities

conditions. As a result of the trackage rights imposed by the Board as part

of the merger conditions, BNSF obtained access to the potential 2-to-1

traffic, regardless of whether the traffic had been carried by SP or UP prior

to the merger. Our matching process was intended to identify this

potential 2-to-1 traffic. The following matching was done in the following

sequence:

1. SP premerger traffic was matched to BNSF postmerger traffic—this is

BNSF trackage rights over SP (BNSF-SP).

2. UP premerger traffic was matched to BNSF postmerger traffic that is

still unmatched—this is BNSF trackage rights over UP (BNSF-UP).

 13Using data provided by the Board, we converted the economic areas used in 1994 and

1995 to the new economic areas issued by the Bureau of Economic Analysis in 1996.

Data Processing
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 41 GAO-01-689 Freight Railroad Regulation

3. SP premerger traffic that was still unmatched was matched to UP

postmerger traffic—this is UP traffic over SP (UP-SP).

4. UP premerger traffic that was still unmatched was matched to UP

postmerger traffic that is still unmatched—this is UP traffic over UP

(UP-UP).

The BNSF-SP and BNSF-UP traffic (henceforth BNSF) consists of only

potential 2-to-1 traffic that was served by SP or UP before the merger but

served by BNSF in the postmerger period. The UP-SP and UP-UP traffic

(henceforth UP) includes potential 2-to-1 traffic as well as non-2-to-1

traffic.14 However, according to UP officials, the latter traffic substantially

comprises shippers that are served solely by one railroad because they

could be served in the premerger period only by UP or SP, but not both,

and in the postmerger period, only by UP. The two broad types of shippers

identified reflect different levels of rail competition. The potential 2-to-1

traffic (served by BNSF) is considered more competitive than the traffic

served solely by UP because direct rail competition was preserved or

maintained for the potential 2-to-1 shippers, while the traffic solely-served

by UP had only indirect competition, which was preserved through buildin/build-out and new facilities conditions.

Finally, because our study focuses on potential 2-to-1 shippers, we

included only the commodity groups for which BNSF had presence.

Although BNSF officials told us they had not aggressively exercised their

trackage rights for coal shipments in the Salt Lake City area, we included

these shipments because coal is a major commodity shipped to and from

the Salt Lake City area. Summary statistics of the commodities shipped to

and from the Salt Lake City and Reno economic areas are provided in

tables 4 and 5. The commodities include coal, chemicals, primary metals,

farm products (such as corn and wheat), petroleum/coal, food,

nonmetallic minerals, lumber/wood, and stone/clay/glass/concrete. Each

of these commodities accounted for at least 10 percent of the traffic to or

from an area.15 The share of BNSF’s potential 2-to-1 shippers to all shippers

was mostly between 10 and 25 percent. (See table 4.) Also, the rail rates

 14Board officials indicated that both BNSF and UP used a mix of former SP and former UP

routes to reach potential 2-to-1 shippers. This activity is not expected to affect the

matching since the matching is not based on the ownership of the railroad routes that were

used.

15The matched traffic, compared with all the traffic in an area, excluded traffic no longer

transported by rail, new traffic, and traffic from new facilities.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 42 GAO-01-689 Freight Railroad Regulation

and the direct costs for the total traffic were very similar to the rates for

the matched traffic. (See table 5.)16

 16The rail rates we calculated had some extreme values. This could be due to contract rates

for which the guaranteed volume may not have been realized or to local shipments

(shipments over very short distances). After examining the distributions of the calculated

rates, we deleted the top 1 percent and the bottom 1 percent of the data. The Board had

mentioned that outliers represent about one-quarter to one-half of 1 percent of all Carload

Waybill Sample records.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 43 GAO-01-689 Freight Railroad Regulation

Table 4: Shipments to and From the Salt Lake City and Reno Areas, in Carloads,

1994-99

Area/Commoditya

Commodity share of area

traffic, by carloads (in

percent)b

BNSF 2-to-1 shippers to all

shippers, by carload

(in percent)

From the Salt Lake City areac

Coal 69 d

Chemicals 44 15

Primary metals 30 3

To the Salt Lake City areae

Coal 52 c

Farm products 13 22

Chemicals 12 25

Petroleum/Coal 11 25

Food 10 20

From the Reno areaf

Nonmetallic minerals 79 10

Lumber/Wood 21 21

To the Reno areaf

Coal 50 10

Chemicals 32 15

Stone/Clay/Glass/

Concrete

10 10

a

The values reported are averages for 1994 through 1999, excluding 1996.

b

The share of commodity in area traffic, excluding coal.

c

For shipments from the Salt Lake City area, the following commodities were excluded: food,

petroleum/coal, farm products, metallic ores, miscellaneous manufacturing, and mail/express/other

contract traffic.

d

Not applicable.

e

For shipments to the Salt Lake City area, the following commodities were excluded:

stone/clay/glass/concrete, primary metals, lumber/wood, pulp/paper, mail/other contract traffic,

furniture/fixtures, and electrical machinery. Waste/scrap was excluded from the analysis because

BNSF’s share of this traffic was only 1 percent.

f

For shipments to the Reno area, the following commodities were excluded: food, petroleum/coal,

farm products, metallic ores, miscellaneous manufacturing, and mail/other contract traffic. BNSF did

not ship coal to the area in 1999, the most recent year of our study.

Source: GAO’s analysis of STB’s Carload Waybill Sample.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 44 GAO-01-689 Freight Railroad Regulation

Table 5: Rates and Costs of Shipments to and From the Salt Lake City and Reno Areas, 1994-99

Total traffic (in cents) Matched traffic (in cents)a

Premerger Postmerger Premerger Postmerger

Area/Commodityb

RatecCostcRatecCostcRatecCostcRatecCostc

From the Salt Lake City area

Coal 2.8 1.3 2.5 1.1 2.6 1.2 2.8 1.3

Chemicals 2.4 2.4 2.4 2.3 2.3 2.4 2.5 2.5

Primary metals 2.2 2.0 2.1 2.3 2.2 2.1 2.1 2.3

To the Salt Lake City area

Coal 4.3 1.7 4.1 1.6 3.6 1.5 4.1 1.6

Farm products 2.6 2.5 2.6 2.3 2.5 2.2 2.6 2.3

Chemicals 3.8 2.7 3.6 2.6 3.7 2.7 4.1 2.8

Petroleum/Coal 4.2 3.1 3.1 2.4 3.8 2.8 3.7 2.7

Food 3.3 3.2 3.0 2.7 3.0 3.0 3.0 2.8

From the Reno area

Nonmetallic minerals 2.5 2.6 2.1 2.2 2.8 2.6 2.1 2.2

Lumber/Wood 3.6 2.3 2.9 2.3 3.1 2.0 2.8 2.2

To the Reno area

Coal 1.7 0.9 1.8 0.9 1.8 1.0 1.8 0.9

Chemicals 3.2 2.4 3.1 2.2 3.1 2.4 3.0 2.1

Stone/Clay/Glass/

Concrete

2.5 2.2 2.9 3.3 2.5 2.1 3.1 2.7

Note: See also notes to table 4.

a

Matched traffic is similar sets of traffic before and after the merger, excluding intermodal.

b

The values reported are averages for 1994 through 1999, excluding 1996.

c

Rate is weighted average of revenue per ton-mile; weights are based on the Carload Waybill Sample

sampling rates. Cost is weighted average of variable costs per ton-mile; weights are based on the

Carload Waybill Sample sampling rates.

Source: GAO’s analysis of STB’s Carload Waybill Sample.

The econometric model that we developed was estimated using an

appropriate estimation technique. We also discuss the results of our study

in terms of the effects on rail rates attributable to the merger and the

effects of other factors.

We used a reduced-form rate model of shipping a commodity between an

origin and a destination because such a model is useful for analyzing the

Methodology for

Estimation and Its

Results

Estimation of the Model
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 45 GAO-01-689 Freight Railroad Regulation

impact of a regulatory policy, such as a merger, on rates.17 The service

crisis of 1997 and 1998 could potentially make the estimation results less

reliable because the rates may not be at the market-clearing level.

However, we included a CRISIS variable to account for this possible

structural shift.18 The reduced-form model we used was as follows:

The term “ln” is a natural logarithm, and “i” is representative of a

commodity group.19 The β‘s are parameters to be estimated, and ε is the

random-error term. A complete list of the variables used to estimate the

regression model is presented in table 6. We could not directly incorporate

certain factors into the model primarily because of data limitations.20

 17Furthermore, reduced-form estimates are preferred when determining the net effect of

the merger on rates after all other endogenous variables have been adjusted. Also, a

reduced-form specification may provide more robust and reliable estimates. (See, for

example, Stephen Schmidt (2001).)

18A similar approach was used in the Grimm and Winston study (see Grimm and Winston

2000).

19All the variables are expressed in natural logarithms, except for the dummy variables.

This is done, following previous studies, to obtain a better fit for the estimates and to help

deal with potential problems of heteroscedasticity. (See, for example, Schmidt (2001), and

Wilson (1994).)

20For instance, railroad carriers may react to changes in their economic environment by

changing rates and/or the quality of services, meaning that service quality information

would be useful for explaining rates. Also, because shippers might incur additional

investment costs (for such activities as extending track and adding storage capacity), rates

could be affected by such behavior. (See, for example, Traffic World, July 17, 2000, p. 11).
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 46 GAO-01-689 Freight Railroad Regulation

Table 6: List of Variables Used in Our Econometric Analysis of Rail Rates

Variable Definition

RATE Real revenue per ton-mile (adjusted by the Gross Domestic Product

Deflator), in 1996 dollars

MERGER A dummy variable, equals 1 if postmerger period (1997-99), 0

otherwise

COST Variable costs per ton-mile (in 1996 dollars), as defined by the Board’s

Uniform Rail Costing System (URCS)

TON Billed weight of shipments (in tons)

TON_SQ Squared value of TON

DISTANCE Length of haul (in miles)

DISTANCE_SQ Squared value of DISTANCE

DENSITY Total tonnage shipped from origin to destination (in tons)

OWNERSHIP A dummy variable, equals 1 if railcars are railroad-owned, 0 otherwise

RAILROADBNSFA dummy variable, equals 1 if traffic is potential 2-to-1 and postmerger

railroad carrier is BNSF, 0 otherwise

CRISIS A dummy variable, equals 1 if crisis period (1997-98), 0 otherwise

CONTRACT A dummy variable, equals 1 if rate is based on contract, 0 otherwise

BNSF*MERGER Interaction term for RAILROAD-BNSF and MERGER—equals 1 if

traffic is potential 2-to-1, postmerger railroad carrier is BNSF, and the

period is postmerger, 0 otherwise

COMMODITYCOALaA commodity dummy variable, equals 1 if major commodity group is

coal, 0 otherwise

a

Similar dummy variables were created for the other major commodity groups.

We estimated the regression model using the SAS SURVEYREG

procedure, since the data are from stratified samples. This procedure is

appropriate for dealing with a stratified sample because it adjusts both the

coefficients and the standard errors of the estimates to account for the

sampling design.21 The econometric model was run for different samples—

shipments of the primary commodities to or from an economic area, and

for subsamples of individual commodities and shippers.

We tried different specifications of our basic model to check the

robustness of our key model results. We found that the results were not

 21We preferred the SURVEYREG procedure to the Weighted Least Squares method, which

adjusts only the coefficients and assumes a simple random sampling design. However, the

econometric results were generally consistent with either method, probably because most

of the observations were concentrated in only one or two sampling strata. With the

SURVEYREG procedure, we could not check for possible problems of heteroscedasticity

or serial correlation because these tests are not available for this procedure. We believe

that since the data are from a stratified sample, it is more appropriate to use SURVEYREG,

which is consistent with the data design.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 47 GAO-01-689 Freight Railroad Regulation

highly sensitive to model specification. While we used a reduced-form

specification, it is still possible that some of the explanatory variables on

the right-hand side of the equation may be endogenous. Since there are no

available instruments in a reduced-form model, we could not perform the

usual test.22 Rather, we checked the robustness of our results by excluding

possible endogenous variables.23 In particular, when DENSITY was

excluded from the model, our findings regarding the effects of mergers on

rates and the effects of the other factors on rates were essentially

unchanged. It is also likely that COST is related to the variables TON,

DISTANCE, and OWNERSHIP, which could produce unreliable results. In

other specifications of the model, we eliminated the COST variable, but

our key findings were robust to such specifications.

Summaries of the effects of the merger on rates, based on the econometric

results, are presented in table 7.24 The rates for shipments to and from the

Reno and Salt Lake City areas generally would have declined for all the

shippers as a result of the merger, especially in the Salt Lake City area.

Although the effects of the merger on rates depend on both the potential

cost savings from the merger and the exercise of any enhanced market

power by the railroads, the UP/SP merger is generally expected to lower

rates in those areas where the Board imposed trackage rights.

 22This is a Hausman test. See J. Hausman, “Specification Tests in Econometrics,”

Econometrica, Vol. 46 (1978), pp. 1251-1271.

23See, for example, Wilson (1994) for a similar approach.

24The complete econometric results are presented in tables 8-11. The overall econometric

results are very significant, based on the significance levels of the prob-F values. The

econometric results are presented for only the commodities that are discussed in table 1 in

the text above.

Econometric Results of

Effects of Merger and

Other Factors on Rates
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 48 GAO-01-689 Freight Railroad Regulation

Table 7: Changes in Rail Rates, for Shipments to and From the Salt Lake City and

Reno Areas

In percent

Shipments Commodity

Shipper/post

merger

railroada

Rate

changes

due to

mergerb

Rate changes

due to other

factorsc

Overall

changes in

ratesd

From the Salt

Lake City

area

Coal All shippers/

UP

-10 20 10

Chemicals All shippers/

BNSF & UP

-6 16 10

Chemicals BNSF v UP -16 e e

To the Salt

Lake City

area

Coal All shippers/

UP

-8 23 15

Farm

products

All shippers/

BNSF & UP

-5 6 1

Farm

products

BNSF v UP 0.3 e e

From the

Reno area

Nonmetallic

minerals

All shippers/

BNSF & UP

4 -26 -22

Nonmetallic

minerals

BNSF v UP 6 e e

To the Reno

area

Chemicals All shippers/

BNSF & UP

21 -27 -6

Chemicals BNSF v UP 4 e e

a

BNSF & UP is for all the shippers—potential 2-to-1 shippers served by BNSF and shippers served

solely by UP. On the other hand, BNSF v UP is the changes in BNSF rates less changes in UP rates.

The results for the rate changes are based on the estimated coefficients for BNSF*MERGER from the

regression equations in tables 8-11. Since the dependent variable is in logs, the percentage change

in rates between the BNSF shippers and the UP shippers as a result of the merger is obtained as:

[exp (β) – 1] x 100, where “exp” is an exponential, and β is the estimated coefficient for

BNSF*MERGER.

b

The results for the rate changes due to the merger are based on econometric results, using the

estimated coefficients for MERGER from the regression equations in tables 8-11. See also note “a”

above.

c

The effects of changes in rates due to other factors are calculated as the overall changes in rates

less the merger effects on rates.

d

The overall changes in rates, which are unweighted, are based on a mean-difference test that

subtracts the premerger rates from the postmerger rates. The BNSF v UP values are not available for

the mean-difference tests because the samples were unbalanced (unequal sample sizes) for the

postmerger and premerger periods. For the overall changes in rates and the rate changes due to the

merger, values in bold/italics are significant at the 5-percent level or better.

e

Not applicable.

Source: GAO’s analysis of STB’s Carload Waybill Sample.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 49 GAO-01-689 Freight Railroad Regulation

We also compared the effects of the merger on rates charged to potential

2-to-1 shippers served by BNSF to rates charged to shippers served solely

by UP in the same general locations. In particular, the results show that

the rates charged to the potential 2-to-1 shippers served by BNSF were

lower than the rates charged to the shippers served solely by UP for

shipments of chemicals from the Salt Lake City area. The rate differentials

for the Reno area were positive, but none was statistically significant. The

result that rates for the potential 2-to-1 shippers served by BNSF were

generally lower than rates charged to shippers served solely by UP is

consistent with demand-based differential pricing, which reflects the

differing transportation alternatives available to shippers.

We found that the effects of other factors on rail rates during the period

are generally consistent with what has been found in previous studies.

(See results in tables 8 through 11 for all commodities.) We used the

econometric results for all the commodities because most of these effects

are not commodity-specific and can be better captured across

commodities. The impact of COST on rates was positive and significant for

traffic in each of the selected areas, meaning that rates were lower (or

higher) as costs decreased (or increased).25 TON had mixed results,

meaning that larger shipment volumes sometimes resulted in higher or

lower rates. DISTANCE generally decreased rates.26 DENSITY, which

captures the volume of traffic on the route used for a particular shipment,

unambiguously decreased rates. This effect is consistent with decreasing

costs in railroad operations, since increased shipment levels over a rail

route spread fixed costs over larger volumes and reduce rates.27

OWNERSHIP had mixed results. CONTRACT rates were generally lower.

Finally, the impact of CRISIS on rates was generally inconclusive. This is

not unexpected, since most shipments are under contract and the crisis

affected primarily the services that were provided rather than the rates.

 25The estimated coefficients were also reasonable, between zero and one, except for

shipments from the Reno area.

26The squared terms for TON (TON_SQ) and DISTANCE (DISTANCE_SQ) were generally

significant, implying that these variables had nonlinear relationships with rates.

27Other previous studies have found evidence of decreasing costs. See, for example, Burton

(1993).
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 50 GAO-01-689 Freight Railroad Regulation

To compare the changes in rates due to the merger that we obtained from

the econometric analysis to the overall changes in rates, we separated the

overall changes in rates into changes due to the merger and changes due

to other factors, such as costs and volume of shipments. The overall

changes in rates were estimated using a difference in means analysis that

compares the rates in the postmerger period with rates in the premerger

period.28

We found that the overall changes in rates could be in the opposite

direction from the rate changes due to the merger. For instance, for coal

shipments from the Salt Lake City area, the overall changes in rates were

about 10 percent higher, while the rate changes due to the merger alone

would have been about 10 percent lower. On the other hand, for shipments

of chemicals to the Reno area, the overall changes in rates were about 6

percent lower, while the rate changes due to the merger alone would have

been about 21 percent higher. These illustrations indicate that a complete

analysis of merger-related rate changes could benefit from the application

of an analytical approach that identifies and determines the separate

effects of the various factors, including those associated with a merger,

affecting rail rates.

 28The mean-difference test uses the TTEST procedure in SAS.

Direction of Rate Changes

Due to a Merger Could

Differ From Overall

Changes in Rates
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 51 GAO-01-689 Freight Railroad Regulation

Table 8: Econometric Results of Rail Rates, for Shipments From the Salt Lake City

Area

Variable All commoditiesa

Coal

UP

Chemicals

BNSF & UP

Chemicals

BNSF v UP

MERGER -0.0658

[0.0001]

-0.1057

[0.0001]

-0.0640

[0.0018]

-0.0312

[0.1728]

CRISIS 0.0170

[0.1164]

0.0049

[0.6897]

0.0535

[0.0004]

0.0524

[0.0005]

CONTRACT -0.0773

[0.0001]

-0.1438

[0.0001]

0.0379

[0.1076]

0.0495

[0.0382]

COST 0.3286

[0.0001]

0.1145

[0.0112]

0.1501

[0.0001]

0.1141

[0.0012]

TON 0.0697

[0.2325]

4.2914

[0.0001]

-0.8073

[0.0001]

-0.8560

[0.0001]

TON_SQ -0.0080

[0.0774]

-0.2786

[0.0001]

0.0800

[0.0001]

0.0836

[0.0001]

DISTANCE -0.7108

[0.0001]

0.5624

[0.0001]

-1.9305

[0.0001]

-1.9862

[0.0001]

DISTANCE_SQ 0.0190

[0.0010]

-0.0855

[0.0001]

0.1060

[0.0001]

0.1094

[0.0001]

DENSITY -0.0268

[0.0001]

0.0270

[0.0001]

-0.0268

[0.0001]

-0.0259

[0.0001]

OWNERSHIP -0.0089

[0.5234]

-0.0809

[0.0001]

0.0612

[0.0010]

0.0690

[0.0002]

RAILROAD-BNSF -0.0134

[0.4503] b

0.0572

[0.0098]

0.1585

[0.0001]

BNSF*

MERGER bb b

-0.1703

[0.0001]

Chemicals -0.3939

[0.0001] b bb

Primary metals -0.1221

[0.0005] b bb

INTERCEPT 1.7921

[0.0001]

-19.6003

[0.0001]

7.0212

[0.0001]

7.2153

[0.0001]

Prob-F 0.0001 0.0001 0.0001 0.0001

R20.64 0.84 0.71 0.71

Sample size 6359 2227 2323 2323

Note: P-values are in brackets.

a

Includes all chemicals, primary metals, and coal shipments. Coal was the excluded commodity

dummy.

b

Not applicable.

Source: GAO’s analysis of STB’s Carload Waybill Sample.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 52 GAO-01-689 Freight Railroad Regulation

Table 9: Econometric Results of Rail Rates, for Shipments to the Salt Lake City

Area

Variable All commoditiesa

Coal

UP

Farm products

BNSF & UP

Farm products

BNSF v UP

MERGER 0.0628

[0.0023]

-0.0838

[0.0001]

-0.0462

[0.0360]

-0.0468

[0.0203]

CRISIS -0.0681

[0.0006]

-0.0084

[0.5394]

-0.0280

[0.2466]

-0.0281

[0.2517]

CONTRACT -0.0812

[0.0001]

-0.1454

[0.0001]

0.1727

[0.0001]

0.1729

[0.0001]

COST 0.5191

[0.0001]

0.0979

[0.0077]

0.5313

[0.0001]

0.5315

[0.0001]

TON -0.4302

[0.0001]

0.7310

[0.0037]

-0.6961

[0.0002]

-0.6960

[0.0002]

TON_SQ 0.0387

[0.0001]

-0.0581

[0.0013]

0.0614

[0.0001]

0.0614

[0.0001]

DISTANCE -0.6732

[0.0001]

0.4639

[0.0001]

2.5095

[0.0001]

2.5124

[0.0001]

DISTANCE_SQ 0.0263

[0.0024]

-0.0733

[0.0001]

-0.2309

[0.0001]

-0.2312

[0.0001]

DENSITY -0.0442

[0.0001]

0.1095

[0.0001]

-0.0392

[0.0001]

-0.0393

[0.0001]

OWNERSHIP -0.0430

[0.0602]

-0.2059

[0.0001]

-0.0621

[0.0012]

-0.0622

[0.0017]

RAILROAD-BNSF -0.1216

[0.0001] b

-0.1367

[0.0001]

-0.1379

[0.0001]

BNSF*

MERGER bb b

0.0025

[0.9534]

Farm products 0.3243

[0.0018] bbb

Chemicals 0.5001

[0.0001] bbb

Petroleum/Coal 0.3969

[0.0002] bbb

Food 0.3514

[0.0011] bbb

INTERCEPT 2.9016

[0.0001]

-6.6043

[0.0001]

-5.6704

[0.0001]

-5.6781

[0.0001]

Prob-F 0.0001 0.0001 0.0001 0.0001

R20.63 0.88 0.84 0.84

Sample size 3079 954 492 492

Note: P-values are in brackets.

a

Includes farm, chemicals, petroleum/coal, food, and coal shipments. Coal was the excluded

commodity dummy.

b

Not applicable.

Source: GAO’s analysis of STB’s Carload Waybill Sample.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 53 GAO-01-689 Freight Railroad Regulation

Table 10: Econometric Results of Rail Rates, for Shipments From the Reno Area

Variable All commoditiesa

Nonmetallic minerals

BNSF & UP

Nonmetallic

minerals

BNSF v UP

MERGER -0.0230

[0.4164]

0.0361

[0.3093]

-0.1209

[0.0043]

CRISIS -0.0235

[0.2494]

-0.0035

[0.8912]

0.0324

[0.2817]

CONTRACT -0.0162

[0.5981]

-0.0212

[0.5720]

-0.1392

[0.0072]

COST 1.1828

[0.0001]

1.2656

[0.0001] b

TON 0.6393

[0.0001]

0.7497

[0.0001]

-0.4051

[0.0106]

TON_SQ -0.0525

[0.0001]

-0.0599

[0.0001]

0.0303

[0.0566]

DISTANCE -1.1022

[0.0527]

-1.8058

[0.0185]

-4.0021

[0.0001]

DISTANCE_SQ 0.0749

[0.0685]

0.1296

[0.0204]

0.2693

[0.0001]

DENSITY -0.0436

[0.0001]

-0.0467

[0.0001]

-0.0598

[0.0001]

OWNERSHIP -0.1080

[0.0001]

-0.1423

[0.0001]

0.0146

[0.7428]

RAILROAD-BNSF 0.0424

[0.2572]

 0.0428

[0.4405]

-0.1076

[0.2325]

BNSF*

MERGER c c

0.0627

[0.5488]

Lumber/Wood 0.2609

[0.0001] c c

INTERCEPT 3.4396

[0.0777]

5.6220

[0.0292]

12.6568

[0.0001]

Prob-F 0.0001 0.0001 0.0001

R20.60 0.55 0.24

Sample size 933 708 708

Note: P-values are in brackets.

a

Includes nonmetallic minerals and lumber/wood. Nonmetallic minerals was the excluded commodity

dummy.

b

The COST variable was deleted from the regression because it was very significantly correlated with

BNSF*MERGER. See also footnote 25.

c

Not applicable.

Source: GAO’s analysis of STB’s Carload Waybill Sample.
Appendix III: Description and Discussion of

Econometric Model Used to Conduct Rail Rate

Analysis

Page 54 GAO-01-689 Freight Railroad Regulation

Table 11: Econometric Results of Rail Rates, for Shipments to the Reno Area

Variable All commoditiesa

Chemicals

BNSF & UP

Chemicals

BNSF v UP

MERGER 0.1103

[0.0001]

0.1914

[0.0001]

0.1902

[0.0001]

CRISIS -0.0027

[0.8921]

-0.0231

[0.3418]

-0.0235

[0.3361]

CONTRACT 0.0633

[0.0146]

0.1291

[0.0001]

0.1278

[0.0001]

COST 0.1691

[0.0094]

0.2891

[0.0047]

0.2996

[0.0047]

TON -1.0161

[0.0001]

-0.9636

[0.0003]

-0.9458

[0.0004]

TON_SQ 0.0954

[0.0001]

0.0994

[0.0001]

-0.0978

[0.0002]

DISTANCE -1.3817

[0.0001]

-1.9342

[0.0001]

-1.9242

[0.0001]

DISTANCE_SQ 0.0836

[0.0004]

0.1236

[0.0001]

0.1231

[0.0001]

DENSITY -0.0845

[0.0001]

-0.1070

[0.0001]

-0.1072

[0.0001]

OWNERSHIP 0.0199

[0.5562]

-0.0888

[0.2386]

-0.0889

[0.2353]

RAILROAD-BNSF -0.2071

[0.0001]

-0.1760

[0.0001]

-0.2039

[0.0005]

BNSF*

MERGER b b

0.0352

[0.5691]

Chemicals 0.0600

[0.1023] b b

INTERCEPT 5.9309

[0.0001]

8.1804

[0.0001]

8.1334

[0.0001]

Prob-F 0.0001 0.0001 0.0001

R20.42 0.41 0.41

Sample size 1116 866 866

Note: P-values are in brackets.

a

Includes chemicals and stone/clay/concrete/glass. Stone/clay/concrete/glass shipments was the

excluded commodity dummy.

b

Not applicable.

Source: GAO’s analysis of STB’s Carload Waybill Sample.

(348244)
The first copy of each GAO report is free. Additional copies of reports are

$2 each. A check or money order should be made out to the

Superintendent of Documents. VISA and MasterCard credit cards are also

accepted.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St., NW (corner of 4th and G Sts. NW)

Washington, DC 20013

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and testimony. To

receive facsimile copies of the daily list or any list from the past 30 days,

please call (202) 512-6000 using a touchtone phone. A recorded menu will

provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email message with “info” in the body to:

Info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• E-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

Ordering Information

To Report Fraud,

Waste, and Abuse in

Federal Programs