FREIGHT RAIL 

PRICING

Contracts Provide 

Shippers and 

Railroads Flexibility, 

but High Rates 

Concern Some 

Shippers

Report to Congressional Committees

December 2016

GAO-17-166

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-166, a report to 

congressional committees

December 2016

FREIGHT RAIL PRICING

Contracts Provide Shippers and Railroads 

Flexibility, but High Rates Concern Some 

Shippers

What GAO Found

While rail contracts and tariffs are similar, contracts offer the flexibility to

customize rates and terms to a specific shipper, according to selected 

stakeholders GAO interviewed. Both contract and tariff rates are based on 

market factors, such as competition, according to representatives from the four 

largest U.S. freight railroads. However, they noted that in developing contract 

rates, a railroad will also examine factors specific to each shipper and may 

negotiate discounts in exchange for the shipper committing to provide a specified 

volume over the contract’s duration. According to railroad representatives, the 

volume commitments negotiated in a contract allow the railroad to more 

efficiently allocate its resources and ensure consistent revenues. Also, selected 

shippers told GAO that they can more efficiently manage multiple shipping routes 

under one contract because of the stability in rates over the duration of the 

contract. In contrast, tariffs may be preferred for smaller shipments.

Despite the volume discounts contracts can offer, some selected shippers said 

that contracts that include rates for multiple origin-to-destination routes can 

contain high rates on some routes. This is particularly an issue for shippers that 

are “captive”—that is, shippers served by a single railroad without an 

economically viable transportation alternative. 

Captive versus Non-Captive Routes for Freight Rail

Representatives of the four largest freight railroads said they charge what 

shippers are willing to pay to cover infrastructure costs for the entire rail network. 

However, according to selected shippers GAO interviewed, combining captive 

and non-captive routes together in one contract can compel shippers to accept 

some unreasonable rates. Shippers subject to contract rates they view as 

unreasonable cannot challenge those rates at the Surface Transportation Board 

(STB) because contracts are not subject to STB oversight. A railroad official said 

that a shipper may ask the railroad to switch rates the shipper views as 

unreasonable to a tariff. However, selected shippers said that tariff rates are 

generally higher than contract rates, so they are reluctant to forgo a contract with 

a mix of rates in favor of using a tariff. While the STB process for reviewing tariff 

rates was designed, in part, to protect captive shippers from unreasonably high 

rates, selected shippers said the process is complicated, time-consuming, and 

expensive. In 2016, STB began to reform the tariff review process with the goal 

of improving its efficiency.

View GAO-17-166. For more information, 

contact Susan Fleming at (202) 512-2834 or 

flemings@gao.gov.

Why GAO Did This Study

The nation’s freight rail network is vital 

to the economy, moving about 40 

percent of U.S. freight and generating

over $73 billion in revenue in 2013. 

Railroads charge various rates for 

moving freight from a particular origin 

to a particular destination. A rate may 

be set by the railroad in a public pricing 

document—known as a tariff—or 

negotiated through a private contract 

with a shipper. While most freight ships 

under contract, some shippers have 

raised concerns with how railroads 

negotiate contracts that contain 

multiple origin-to-destination routes. 

Though shippers that use rail to 

transport freight under tariff may seek 

relief from STB for rates they view as 

unreasonable, STB has authority to 

review tariff rates, but not contract

rates.

The Surface Transportation Board 

Reauthorization Act of 2015 included a 

provision for GAO to review rail 

transportation contract proposals 

containing multiple origin-to-destination 

routes. This report addresses (1) 

similarities and differences in shipping 

freight under a tariff versus a contract, 

and the potential benefits to using 

each, and (2) views of selected 

stakeholders on the implications of 

shipping freight under a tariff versus a 

contract. GAO analyzed STB data from 

2005 to 2014, reviewed documents 

provided by and interviewed 

representatives of the four largest 

freight railroads, the Association of 

American Railroads, STB officials, and

representatives of nine shippers 

selected to represent a mix of 

commodities transported by rail.
Page i GAO-17-166 Freight Rail Pricing

Letter 1

Background 4

Contracts Provide Certain Advantages, and Their Use by Certain 

Shippers Has Increased 8

Some Selected Shippers with Fewer Shipping Options Said They 

Have High Rates for Some Contract Routes and Limited 

Recourse for Rate Relief for Tariffs 17

Agency Comments 21

Appendix I Contact and Staff Acknowledgments 23

Figures

Figure 1: Contracts for Shipment of Freight by Rail Can Contain 

Multiple Origin-to-Destination (O-D) Routes 6

Figure 2: Similarities and Differences between Rail Contracts and 

Tariffs, according to Selected Railroads and Shippers 9

Figure 3: Annual Percentage (by Ton-Mile) of Selected 

Commodities Shipped under Contract, 2005 through 

2014 15

Figure 4: Captive versus Non-Captive Routes for Freight Rail 18

Abbreviations

ICC Interstate Commerce Commission 

O-D origin-to-destination (route)

SAC Stand-Alone Cost 

STB Surface Transportation Board

Contents

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-17-166 Freight Rail Pricing

441 G St. N.W.

Washington, DC 20548

December 7, 2016

The Honorable John Thune

Chairman

The Honorable Bill Nelson

Ranking Member

Committee on Commerce, Science, and Transportation

United States Senate

The Honorable Bill Shuster

Chairman

The Honorable Peter DeFazio

Ranking Member

Committee on Transportation and Infrastructure

House of Representatives

The nation’s freight transportation network is vital to the functioning of the 

national economy. The national rail network accounts for the movement 

of about 40 percent of U.S. freight.1 U.S. railroads reported over $73 

billion in revenue in 2013.2 Shippers have two options for arranging 

transport with railroads: a contract—which is a private agreement of 

terms, conditions, and rates for moving freight—or a tariff, which is a 

published rate railroads are required to provide to shippers when 

requested. Most freight ships under contract, but some freight-rail 

shippers have raised concerns about how railroads negotiate certain 

contracts. Specifically, these shippers claim that railroads package a mix 

of reasonable and unreasonable rates in contracts that contain multiple 

routes between multiple origins and destinations. The Surface 

Transportation Board (STB) is the economic regulator of the railroads and 

resolves rate and service disputes between shippers and railroads for 

regulated goods shipped under tariff, but does not have authority to 

address rate and service disputes for freight shipped by contract.

The Surface Transportation Board Reauthorization Act of 2015 included a 

provision for us to review the effects of railroad freight contracts that 

 1

U.S. intercity freight as measured in ton-miles. Federal Railroad Administration, National 

Rail Plan Progress Report, (September 2010).

2

Federal Railroad Administration, Office of Rail Policy and Development, Freight Railroads 

Background, (April 2015).

Letter
Page 2 GAO-17-166 Freight Rail Pricing

contain multiple origin-to-destination (O-D) routes.3 This report presents 

information on: (1) known similarities and differences in shipping freight 

under a tariff versus a contract, and the potential benefits to using each; 

and (2) views of selected stakeholders on the implications of shipping 

freight under a tariff versus a contract.

To address the similarities and differences in shipping freight under a 

tariff versus a contract, and the potential benefits to using each, we 

reviewed our past reports and other academic and governmental studies 

on the economics of rail rates. We also reviewed sample tariffs provided 

by the four largest Class I railroads (BNSF Railway, CSX, Norfolk 

Southern, and Union Pacific), as well as redacted sample contract 

templates provided by some of these railroads.

4 We interviewed 

representatives from these four railroads and the Association of American 

Railroads. As contracts between railroads and shippers are private, we 

were not able to analyze specific contract language, including specific 

rates and terms for a particular shipper. We also initially selected 20 

shippers or shipper associations to interview. We selected these shippers 

to represent five commodities: agriculture, chemicals, coal, food, and 

nonmetallic minerals. We chose these commodities because they were 

the five commodities with the largest shipments by weight in 2014 that are 

either wholly or partially subject to rate regulation by STB.5 To select 

shippers and associations, we reviewed comments filed by shippers in a 

2011 STB proceeding “Competition in the Railroad Industry” that discuss 

terms and rates of contracts as compared to tariffs.6 About half of the 

shippers and associations we contacted either did not respond to our 

requests or declined to meet with us. Some of these shippers stated that 

they or their members have no views on these issues. However, we 

interviewed representatives from nine shipper associations and 

companies and reviewed documents they provided. As a result, we are 

 3

Pub. L. No. 114-110, § 14, 129 Stat. 2228, 2238 (2015).

4

Freight railroads are categorized by class on the basis of their revenue, with Class I 

railroads generating annual operating revenue of $475.5 million or more in 2014 operating 

in the United States. Class II and III railroads, which generate less revenue, are outside 

the scope of this report. There are seven Class I railroads operating in the United States. 

For this report, we interviewed the four largest Class I railroads. 

5

Commodity-weights were measured in tonnage and based on STB’s 2014 Carload 

Waybill Sample. 

6

Surface Transportation Board, COMPETITION IN THE RAILROAD INDUSTRY, Docket 

Number Ex Parte 705, June 22, 2011.
Page 3 GAO-17-166 Freight Rail Pricing

reporting aggregate statements from the nine shippers across 

commodities.7 Further, these interviews are not generalizable to all 

shippers or all railroads.

To identify the views of selected stakeholders on the implications of 

shipping freight under a tariff versus a contract, we analyzed relevant 

economic literature on freight rail contracts and shipping rates to provide 

additional context for evaluating what we heard in interviews with 

railroads and shippers. We also interviewed representatives of the four 

Class I railroads and shippers selected as described above about their 

views. Finally, we reviewed documents filed in the 2011 STB proceeding 

that discuss terms and rates of contracts as compared to tariffs.8 We also 

interviewed STB staff about the agency’s rate-relief process for 

addressing unreasonable rates in tariffs and their efforts to improve it.

In addition, to provide contextual information on shippers using contracts 

and tariffs, we analyzed STB’s Carload Waybill Sample, from 2005 to 

2014 (the most recent year available) to determine the total volume and 

trends of freight moved under contract and tariff, by commodity, in tonmiles, which is a measurement of weight and distance. STB requires the 

railroads to compile a random sample of their waybills (a document that 

accompanies a shipment and describes its characteristics). The Carload 

Waybill Sample consists of over 600,000 records and contains 

information on various characteristics of the freight being shipped, 

including tonnage, revenue, and miles, among others. The sample is 

statistically weighted to be nationally representative of all rail freight 

movements that occur in the United States each year. We used agency 

technical documentation for the Carload Waybill Sample and guidance 

from STB to estimate the sampling error associated with our estimates 

derived from the waybill data. We express our confidence in the precision 

of estimates derived from the Carload Waybill Sample as 95 percent 

confidence intervals. This is the interval that would contain the actual 

population values for 95 percent of the waybill samples that STB could 

have drawn. We determined that STB’s Carload Waybill Sample data 

were sufficiently reliable for our purposes of our reporting objectives by 

 7

Specifically, the nine shippers we interviewed included an association representing 

multiple types of shippers and between one and three shippers of each commodity type 

except nonmetallic minerals, since shippers of that commodity we contacted declined to 

be interviewed or did not respond to our requests.

8

Surface Transportation Board, COMPETITION IN THE RAILROAD INDUSTRY, Docket 

Number Ex Parte 705, June 22, 2011.
Page 4 GAO-17-166 Freight Rail Pricing

comparing our analysis with published STB figures and by interviewing 

STB staff and STB’s contractor about their data collection and validation 

efforts.

We conducted this performance audit from February 2016 to December 

2016 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Freight shipped by rail travels over an extensive network that consists of 

140,000 route-miles across the United States. Freight railroads are 

generally privately owned and rely on their revenues to invest in 

maintenance and operations that support safe and efficient transportation 

services. During the last 40 years, the freight railroad industry has 

consolidated. Currently, the U.S. railroad industry includes seven major 

Class I freight railroads. Railroads carry a variety of commodities and may 

compete with each other and other shipping modes such as trucks and 

barges for business.

The Interstate Commerce Commission (ICC) was established in 1887, 

originally to regulate almost all of the rates that railroads charged 

shippers to ensure that the rates were reasonable and just. The Railroad 

Revitalization and Regulatory Reform act of 19769 and the Staggers Rail 

Act of 198010 were enacted in response to economic slowdown in the 

1970s, with rising costs, losses in traffic and revenues to motor carriers, 

and bankruptcies affecting the railroad industry. These laws substantially 

reduced federal regulation and encouraged greater reliance on 

competition to set rates. In particular, the Staggers Rail Act gave railroads 

increased freedom to price their services according to market conditions, 

including the freedom to use differential pricing, a practice in which 

railroads can charge higher rates to shippers of commodities such as coal 

and chemicals, which are more dependent on the rail network. The ICC 

Termination Act of 1995 transferred the ICC’s regulatory functions to the 

 9

Pub. L. No. 94-210, 90 Stat. 31 (1976).

10Pub. L. No. 96-448, 94 Stat. 1895 (1980).

Background
Page 5 GAO-17-166 Freight Rail Pricing

Surface Transportation Board (STB), an independent adjudicatory body.11

The STB now serves as the industry’s economic regulator, resolving rate 

and service disputes between shippers and railroads for regulated goods 

shipped under tariff. The acts also allowed railroads and shippers to enter 

into confidential contracts to set terms and rates. STB has no authority to 

review the terms or rates for freight shipped by contract.12 To protect 

shippers served by only one railroad with no competitive shipping 

alternatives—known as “captive” shippers—from unreasonably high 

rates, STB established a process in which shippers that transport their 

freight by tariff could potentially challenge the reasonableness of a rail 

rate and seek financial relief from the railroads, a process that we refer to 

as a “rate-relief” process.

Some commodities were later exempted from STB’s jurisdiction, primarily 

commodities that could be shipped by boxcar or intermodal containers, in 

part because these goods can also be transported by other competitive 

alternatives such as barge or truck and are therefore unlikely to be 

captive. According to a Department of Agriculture report, these 

exemptions, in addition to contracts, effectively freed about 75 to 85 

percent of freight traffic from economic regulation by STB.13 Currently, the 

most frequently transported commodities that could be subject to STB 

rate regulation, by tons shipped, are agricultural, specifically, grain 

soybeans, and sunflower seeds; assorted food items; coal; chemicals; 

and nonmetallic minerals.

Railroads are required, upon request, to offer tariff terms and rates to 

shippers, but railroads are not required to offer a contract. Contracts are 

confidential, mutually agreed upon, and may contain rates for specific 

routes and other service terms for a specific shipper. According to the 

selected railroads and shippers we spoke to, contracts generally contain 

multiple, shipper-specific O-D routes—agreements on terms and rates for 

specific shipments over specific shipping routes—because a shipper may 

have multiple routes. For example, according to a Class I railroad 

representative, a chemical production facility may receive its raw 

materials from multiple origins, with each route having agreed upon terms 

and rates, as shown in figure 1.

 11Pub. L. No. 104-88, 109 Stat. 803 (1995).

1249 U.S.C. § 10709(c).

13Department of Agriculture, Agricultural Marketing Service, Study of Rural Transportation 

Issues (Washington, D.C.: April 2010).
Page 6 GAO-17-166 Freight Rail Pricing

Figure 1: Contracts for Shipment of Freight by Rail Can Contain Multiple Origin-toDestination (O-D) Routes

STB has the authority to review the reasonableness of rates and service 

terms for regulated commodities if shipped by tariff. Tariffs are a pricing 

document issued by the railroads showing rates that are usually not 

customer-specific. Tariffs also spell out the standard terms of the railroad. 

These standard terms differ by commodity, covering everything from 

loading specifications to billing procedures.

Under STB’s rate-relief process, in which it resolves disputes regarding 

the terms or rates in a tariff, in order for STB to review a rate as 

potentially unreasonable, the rate must not be under contract and the 

commodity must not be exempt from STB rate regulation. STB may then 

consider the reasonableness of a rate only if it also finds that the railroad 

has market dominance over the shipment at issue—that is, if (1) the rate 

is equal to or exceeds 180 percent of the railroad’s variable costs for 

providing specific services to the shipper and (2) the railroad does not 
Page 7 GAO-17-166 Freight Rail Pricing

face effective competition from other railroads or other modes of 

transportation. If STB decides the rate is unreasonable, it can order the 

railroad to pay reparations to the shipper for past shipments and decide 

the maximum rate the railroad is permitted to charge for future shipments.

Under its authority, STB considers the reasonableness of a challenged 

rate using one of its three tests, as chosen by the shipper. There is a 

financial limit imposed on the relief available depending on the test 

chosen:

• Stand-Alone Cost (SAC): The most commonly used test is the StandAlone Cost test, which requires the shipper to design a hypothetical 

railroad, tailored to serve the specific route(s), to simulate the 

competitive rate that would exist in a perfectly efficient network. STB 

then compares the challenged rate to the hypothetical rate. During the 

rate relief process, both the railroad and the shipper have the 

opportunity to present their views to STB.

• Simplified SAC: The simplified SAC seeks to create a cost-effective 

alternative to the SAC test. The simplified test eliminates or restricts 

the evidence parties can submit to the actual operations and services 

provided by the railroad.

• Three Benchmark: The Three Benchmark test is faster and less 

rigorous, but limits the potential return for a successful rate challenge. 

STB determines the reasonableness of a challenged rate by 

examining three benchmarks, or tests, that assess rate markups.

Between 1996 and 2016, STB reviewed 50 rate reasonableness cases.14

Of these cases, 36 used the SAC rate case process, 5 used the simplified 

SAC, 5 used the three benchmark process, and 4 used a different 

methodology.15 To date, most of the 50 STB rate cases have been for 

coal (32) or chemical (16) shippers. Among the 50 cases brought before 

STB since 1996, about half (26) were settled without an STB decision, 

while those that were decided by STB were split fairly evenly in favor of 

the shippers (11) or the railroads (10).16

 14The timespan includes all cases with final outcomes since STB’s inception in 1996. 

15The fourth methodology was used in cases between 2001 and 2009 where the railroad 

did not wish to undergo a SAC test, and therefore the railroad and shipper agreed to use a 

different methodology instead.

16Rates were prescribed for 1 case and 2 other cases were withdrawn.
Page 8 GAO-17-166 Freight Rail Pricing

According to representatives of the four Class I railroads we spoke to, 

while contracts’ and tariffs’ terms and rates are developed using similar 

methodologies, they may contain key differences. For example, selected 

stakeholders said that contracts are often customized to a specific 

shipper and may reflect the railroad’s and shipper’s preferences for a 

given route or shipment. Figure 2 describes the similarities and 

differences between contracts and tariffs, based on our interviews with 

representatives from the four largest Class I railroads and selected 

shippers, pertinent laws, as well as sample contract language and tariffs 

provided by the railroads.

Contracts Provide 

Certain Advantages,

and Their Use by 

Certain Shippers Has 

Increased

Contracts Are Private and 

Include Negotiable Terms
Page 9 GAO-17-166 Freight Rail Pricing

Figure 2: Similarities and Differences between Rail Contracts and Tariffs, according to Selected Railroads and Shippers

Railroad representatives said they rely on publicly available standard 

terms to govern shipments over their network, regardless of whether the 

shipments are moving under contract or tariff. These terms are unique to 

each railroad and potentially negotiable for shipments under contract—as 

are all aspects of a contract. A railroad’s standard terms cover all aspects 

of a shipment, from loading specifications to billing procedures, and may 

be contained in multiple documents. As a result, according to one railroad 

representative, contracts typically incorporate or reference all of the 
Page 10 GAO-17-166 Freight Rail Pricing

railroad’s applicable standard terms unless certain terms are specifically 

negotiated by the shipper.

Sample contract language provided by three Class I railroads show 

contracts may also include negotiable terms not typically found in tariffs, 

such as volume commitments, discounts, and service standards. 

However, according to two shipping associations representing coal 

shippers, in recent years, contracts have become more standardized and 

often reference other governing documents that spell out additional rules 

and conditions. More specifically, a representative from one of these 

shipper associations said that some contract features have become more 

difficult to negotiate, in part, because of the increased standardization. 

For example, they told us most contract negotiations now are generally 

limited to rates, fuel surcharges, train size, loading and unloading 

timeframes, and volume commitments.

According to three of the selected Class I railroads and a representative 

from a shipper association, to start a contract negotiation, typically a 

shipper may issue a request for proposal outlining its needs or informally 

contact the railroad. Railroad representatives said the railroad will 

typically respond with a standard contract. One railroad representative 

told us the railroad may administer thousands of contracts at any given 

time, so maintaining standard terms across their contracts allows the 

railroad to manage its business portfolio and operations more efficiently. 

For example, a representative from another Class I railroad said its 

standard terms allow it to efficiently handle different shippers’ cars on the 

same train.

According to representatives from the four Class I railroads we 

interviewed, they individually determine contract and tariff rates based on 

a number of similar market factors associated with the supply and 

demand for the commodity the shipper plans to transport. Because 

railroads must offer a tariff rate upon request, railroad representatives 

said they consider more general market factors in determining tariff rates. 

Selected shippers told us that tariff rates are usually, but not always, 

higher than contract rates, and sometimes are the same, in part, because 

contract rates, according to a railroad representative, can be negotiated 

and reflect market factors specific to the shipper as well as discounts for 

Contract and Tariff Rates Are 

Based on Similar Market 

Factors
Page 11 GAO-17-166 Freight Rail Pricing

volume commitments.17 In our discussions with the four Class I railroads, 

they said they look at the extent of competition when determining contract 

and tariff rates. According to one railroad representative, this includes 

considering customer feedback, past experience, and market research to 

determine the level of three types of competition:

• Competition from other forms of transportation: Generally, a railroad 

can charge more if it does not have to compete with another railroad 

or other transportation forms, such as barge, pipeline, or truck. As a 

result, a shipper served by more than one railroad or competitive 

alternative can create more leverage during contract negotiations. For 

example, representatives of the selected railroads told us if they are 

competing with the trucking industry for business, they may offer 

lower rates to obtain the shipper’s business.

• Competition from other freight being shipped to the same market: A 

chemical shipper, as part of its comments to STB’s 2011 competition 

proceeding, stated that rail rates may impact a shipper’s ability to 

compete nationally and globally. According to railroad representatives 

we spoke to, they examine commodity markets to ensure they are 

pricing rates to allow shippers to be competitive. For example, a 

railroad representative told us it examines the rates it charges 

domestic crude oil shippers to ensure it remains competitive with 

imported crude oil. Representatives from the railroad industry also 

said understanding the extent of geographic competition within a 

market ensures the railroad maintains volume over their network. If 

rates are priced too high, a shipper may lose business and transport 

less freight. However, according to coal and grain shippers we 

interviewed, tariff rates may not always reflect current commodity 

market conditions.

• Competition through substitution: Some shippers may be able to 

obtain a commodity it needs from a different location, or it may use an 

alternative commodity. For example, a railroad told us a power plant 

 17Depending on their duration, contracts may also include agreed upon rate adjustments, 

which according to railroad representatives we spoke to, may adjust the rate on a periodic 

basis and consider changes in the market over time. These representatives also said 

tariffs do not need similar adjustment factors because railroads can increase tariff-rates 

with 20 days’ notice (decreases require no advance notice), thereby eliminating the need 

to consider market changes over time. Rate adjustments agreed upon in contracts are not 

uniformly applied and typically take into account various market factors, including inflation. 

Fuel costs often are not included as an adjustment factor because railroads often use a 

separate charge to take into account fuel costs, which are also adjustable. According to 

railroad representatives, rate adjustments can be negotiated by the shipper.
Page 12 GAO-17-166 Freight Rail Pricing

may choose to obtain its coal from another mine or switch from coal to 

natural gas if prices make doing so advantageous and the plant is 

able and configured to do so.

Contract and tariff rates also reflect the characteristics of a given 

shipment. More specifically, representatives from the four Class I 

railroads we interviewed said the rates reflect the characteristics of the 

commodity being shipped and its particular origin and destination. For 

example, a shipper association representing chemical shippers and a 

railroad representative said that commodities such as toxic inhalation 

hazards are more expensive to ship under contract and tariff because of 

their hazardous nature and liability concerns. In addition, railroad 

representatives also told us rates may vary by distance, and longer routes 

may be more expensive.

Railroads rely on selling freight transportation services at a particular rate 

to recover their operating and infrastructure costs. However, while 

representatives from all four Class I railroads we spoke to told us they do 

not develop their rates to provide transportation based on these costs, 

they also said they will not typically set rates below the cost of providing 

rail transportation. According to a Department of Agriculture report,18 the 

costs associated with providing rail transportation for each shipment, such 

as maintenance and rail crew costs, serve only as a floor below which 

rates should not go and bears little relationship to individual rail rates, 

which are closer to what the shippers are willing and able to pay. 

According to a representative from one Class I railroad, competitive 

factors may sometimes require the railroad to charge less than its costs to 

ship. However, railroads can also charge higher rates where its network is 

highly valuable to its shippers.

Selected shippers and railroad representatives also said contracts 

generally provide key advantages by allowing for increased financial and 

logistical certainty for both parties. According to selected shippers we 

spoke to, they prefer to maintain the minimal number of contracts to meet 

their transportation needs. A shipper association said shippers can more 

efficiently manage multiple routes under one contract because of the 

stability in rates over the duration of the contract. As a result, according to 

the railroad representatives, shippers often request contracts covering 

 18Department of Agriculture, Agricultural Marketing Service, Study of Rural Transportation 

Issues, (Washington, D.C.: April 2010).

Volume Commitments and 

Other Contract Features 

Provide Advantages to 

Shippers and Railroads
Page 13 GAO-17-166 Freight Rail Pricing

multiple routes—potentially up to thousands of routes, according to one 

railroad representative—because managing each route under a separate 

contract, or by tariff, would be too complex to administer. For example, 

one chemical shipper told us it may move one or two carloads per day 

across 1,000 separate routes over a year. In addition, contracts allow 

shippers and railroads to customize terms to better fit their shipping 

needs, such as offering guaranteed pickup and delivery times or specific 

services. For example, according to one railroad representative, in a 

contract with multiple routes, a railroad may offer a lower rate on some 

routes, while increasing rates on others, to allow a shipper to break into a 

new market. Another railroad representative said the railroad can also 

provide additional logistics services at a lower cost within a contract that 

contains multiple routes because the economy of scale offered by a large 

contract allows the railroad to provide services at a lower rate due to 

gains in efficiency.

Furthermore, according to representatives from three Class I railroads, a 

contract’s overall volume commitment and certainty helps the railroads 

better plan future investments. Specifically, one railroad representative 

said a contract allows the railroad to allocate locomotives and rail crews 

more efficiently and ensure a consistent source of revenue. As a result, 

contracts generally include agreements on the amount of volume a 

shipper is willing to commit. Railroad representatives and selected 

shippers told us that the guaranteed volume from a contract may also 

create additional leverage for the shipper during contract negotiations. To 

gain additional volume guarantees, railroads and shippers said railroads 

typically offer discounted rates to shippers in exchange for volume 

commitments. Railroad representatives also said these discounts may be 

for one, multiple, or all of the routes in contract, and they said the more 

volume a shipper is willing to commit, the better deal it can expect to 

receive. However, if the shippers fail to meet their expected volume 

commitment, they may be subject to financial penalties. Moreover, 

according to one railroad representative, higher-volume shippers are also 

more likely to request custom terms.

However, some selected shippers said tariffs may provide advantages in 

certain situations. For example, they said contract negotiations may be 

too long and costly for shippers with infrequent or small volume 

shipments. Furthermore, according to coal shippers, in some instances, 

the tariff rate may be the same as the contract rate, and shippers incur 

potential penalties associated with failing to meet contractual volume 

commitments.
Page 14 GAO-17-166 Freight Rail Pricing

Contract usage across the most frequently transported commodities 

regulated by STB has generally increased or stayed relatively the same in 

recent years.19 Specifically, from 2005 through 2014, the ton-miles 

shipped under contract for these commodities have increased by 6 

percent, from about 705,000 ton-miles to about 800,000 ton-miles, a 

measurement that combines weight and mileage. In 2014, about 76 

percent of regulated freight was shipped by contract.20 However, 

according to railroad representatives, each railroad’s business differs. 

Figure 3 shows the percent of selected commodities with regulated rates

by ton-miles shipped under contract from 2005 through 2014.

 19We chose these commodities because they were the five commodities with the largest 

shipments by tons in 2014 that are either wholly or partially subject to STB rate regulation.

20As part of our analysis of the Carload Waybill Sample, we excluded boxcar and 

intermodal shipments, both of which are exempt from STB rate regulation. Shipments 

moving by equipment not classified as boxcar or intermodal, based on STB guidance, are 

included in our analysis. 

Freight by Contract Has 

Increased, and Shippers 

Said Some Contract 

Features Have Changed
Page 15 GAO-17-166 Freight Rail Pricing

Figure 3: Annual Percentage (by Ton-Mile) of Selected Commodities Shipped under 

Contract, 2005 through 2014

Note: The data are estimates from a sample and have a margin of error no greater than plus or minus 

1.5 percentage points at the 95 percent level of confidence.

From 2005 to 2014, the percentage of coal and chemicals shipped under 

contract has increased when measured on a ton-mile basis. Specifically, 

in 2005, 55 percent of all chemical shipments, measured in ton-miles, 

were shipped by contract; by 2014, that percentage had increased to 85 

percent. Similarly, over the same time period, the ton-miles of coal 

shipped increased from 86 percent to 94 percent. A representative of a 

shipper association said chemical shipments under contract increased, in 

part, because the potential for improved negotiated terms may provide 

additional certainty and lower rates. Both coal and chemicals are also 

heavily dependent on the railroad’s network.

We were unable to obtain contract duration data from selected railroads 

and shippers, but selected coal and grain shippers as well as a railroad 

representative told us that the duration of contracts has generally 
Page 16 GAO-17-166 Freight Rail Pricing

decreased during the last 10 years. According to another rail 

representative, contract duration depends on the commodity and the 

market; for example, this official said shippers in markets that change 

frequently may prefer shorter contracts. Additionally, representatives from 

two selected shipper associations that represent various commodities told 

us the duration of contracts has decreased over the years, with longer 

contracts becoming increasingly uncommon, though they prefer longer 

contracts because of their rate stability. A coal-shipper association 

representative also told us current coal contracts are typically for about 3 

to 5 years, in part because a shorter contract would result in more 

frequent contract renegotiation. Another coal shipper association 

representative said the duration of contracts to transport coal has gotten 

shorter, mostly because of the increased uncertainty in the energy 

market. In the past, we have reported that the duration of contracts has 

declined, in part, because of the railroads’ desire to quickly react to 

shifting market demand.21 One railroad representative we spoke to said 

as markets become more dynamic, shippers can continue to expect to 

receive shorter contracts.

In addition, selected shippers told us the railroads may also be shifting 

certain costs to shippers. More specifically, according to a grain shipper, 

railroad service commitments that used to be common are no longer 

included in contracts. Further, one coal shipper said the railroad 

previously supplied its own personnel to load the coal, but now, with no 

reduction in rates, the shipper is required to do so.

 21GAO, Freight Railroads: Industry Health Has Improved, but Concerns about Competition 

and Capacity Should Be Addressed, GAO-07-94, (Washington, D.C.: Oct. 6, 2006).
Page 17 GAO-17-166 Freight Rail Pricing

Despite the volume discounts and other advantages to contracts with 

multiple O-D routes, some shippers said that contracts effectively 

constrain them into paying higher rates on some routes, because 

railroads will propose contracts with multiple O-D routes where some of 

the routes are priced unreasonably high, in the shippers’ view. This is 

particularly an issue for shippers that are “captive”—that is, shippers 

served by a single railroad without an economically viable transportation 

alternative because a trucking or barge route either does not exist or 

would be too costly.22 Figure 4 below illustrates the ways in which a 

shipper can be captive on all routes or just some routes.

 22Captive shippers can either be entirely captive or captive only on specific routes.

Some Selected 

Shippers with Fewer 

Shipping Options 

Said They Have High 

Rates for Some 

Contract Routes and 

Limited Recourse for 

Rate Relief for Tariffs

Selected Shippers with 

Fewer Options Said They 

May Have High Rates for 

Some Routes in Contracts
Page 18 GAO-17-166 Freight Rail Pricing

Figure 4: Captive versus Non-Captive Routes for Freight Rail

Eight of the nine shippers we interviewed stated that captive shippers 

have no other options than the one railroad that serves them, which can 

result in higher freight rail rates. Further, according to our analysis of a 

2011 STB proceeding on rail competition, 6 of the 11 shippers that 

provided comments to the proceeding about being a captive shipper said 

that captive shippers have no other options than the railroad that serves 
Page 19 GAO-17-166 Freight Rail Pricing

them, which can result in higher rates.23 Additionally, a 2010 study 

commissioned by the STB concluded that captive shippers tend to pay 

higher shipping rates than otherwise similar shippers with access to 

additional railroad or water competition.24

As previously discussed, the selected railroads we interviewed said they 

develop prices based on market forces and the railroad’s supply of 

available equipment and rail lines. This is the basis for differential pricing, 

a pricing strategy where railroads charge shippers with few or no other 

options more than shippers with more options for their freight. Differential 

pricing is permitted and encouraged in the rail freight market by design. 

The Staggers Rail Act of 1980, which reduced the economic regulation of 

railroads, provided that rail rates should be set by the competitive market 

forces to the maximum extent possible. According to railroad officials, 

railroads make up for lower revenues from highly competitive routes by 

charging higher rates in less competitive routes where they have market 

dominance. All four railroads and the Association of American Railroads 

also said that railroads use differential pricing to charge the highest rate 

shippers are willing to pay so railroads can cover infrastructure costs.

Although shippers have the option of challenging a tariff rate before the 

STB, they do not have this option for challenging rates they view as unfair 

if agreed to in a contract, since the STB has authority to review tariff rates 

but not contract rates. Although contracts are negotiated between 

railroads and shippers, some shippers told us that because contracts 

often contain rates for multiple routes, they may be pressured to accept 

higher rates they view as unfair as part of the package of rates they agree 

to, particularly if some of the shipper’s routes are captive. Specifically, 

three selected shippers said this situation can arise when faced with a 

contract containing multiple O-D routes where they view some routes as 

priced too high by the railroads. In this situation, they have two choices: 

1) accept the contract and pay higher rates for some routes, or 2) reject 

the contract and opt instead to move their freight by tariff, which could 

result in higher prices for all the routes since, as previously discussed, 

shippers and railroads said that tariff rates are generally higher than 

contract rates. According to two of the shippers we interviewed, 

 23Surface Transportation Board, COMPETITION IN THE RAILROAD INDUSTRY, Docket 

Number Ex Parte 705, June 22, 2011.

24Christensen Associates, An Update to the Study of Competition in the U.S. Freight 

Railroad Industry, Final Report. Prepared for the Surface Transportation Board, (January 

2010).
Page 20 GAO-17-166 Freight Rail Pricing

combining captive and competitive routes together in one large contract 

can create high rates on captive routes. In contrast, officials from one 

railroad said that the STB tariff rate-relief process prevents railroads from 

forcing shippers to pay unreasonable rates, even in contracts. The 

railroad representatives said this occurs because railroads do not want to 

have a rail rate case before the STB and a shipper that thought a contract 

rate was unreasonable could always ask for the tariff in place of the 

contract to be able to file a rate case.

When an STB rate case is an option, six of the interviewed shippers said 

that STB tariff rate-relief cases are complicated, time consuming, and 

expensive, in part, due to the challenges in determining reasonable and 

unreasonable rates. Consequently, these shippers said they are deterred 

from pursuing cases or from requesting tariff rates from railroads in order 

to pursue a rate case. An STB staff member said that when a rate case 

involves hundreds of O-D pairs, resolving the case can take substantial 

resources and time for STB, the railroads, and the shippers involved in 

the litigation. This STB staff member also stated that cases can take up to 

3 years and be so costly that some shippers may think it is not worth 

bringing a case.

The STB rate-relief process was designed, in part, to maintain reasonable 

rates for captive shippers. However, determining reasonable versus 

unreasonable rates can be challenging given the market forces involved. 

Once a rate case is filed, STB must determine whether the rate is 

reasonable because it allows a railroad to earn adequate revenue for its 

fixed costs, or whether the rate is unreasonable because it allows the 

railroad to earn more than adequate revenue from its market dominance. 

According to economic literature, differential pricing allows railroads to 

collect adequate revenue to cover all costs and earn a reasonable return 

on their investments. Railroads not earning adequate revenue to remain 

in business and to adapt their network to meet future shipper demands 

would be problematic for both railroads and the shippers that rely on 

them. However, some research shows that railroads may be recovering 

from the rising costs, losses, and bankruptcies in the 1970s. For example, 

according to two economic studies of railroad economics, the Class I 

railroads may now be earning adequate returns on investment, and 

perhaps sometimes in excess of adequate returns, so measures to 

reduce the amount contributed by captive shippers to railroad returns may 

The STB Tariff Rate-Relief 

Process Can Be 

Complicated and 

Expensive
Page 21 GAO-17-166 Freight Rail Pricing

be appropriate.25 More recently, in September 2016, STB determined that 

four Class I railroads were revenue-adequate for the year 2015, 

specifically that these railroads achieved a rate of return equal to or 

greater than STB’s calculation of the average cost of capital to the freight 

rail industry.26

STB is currently reviewing its rate relief process as required in the 

Surface Transportation Board Reauthorization Act of 2015. In June 2016, 

STB released an Advance Notice of Proposed Rulemaking outlining 

measures to expedite its handling of SAC rate cases.27 Comments were 

due in August 2016. STB staff said that measures such as standardizing 

evidence submissions would expedite SAC cases for purposes of fairness 

to litigants and improving overall agency efficiency. They also said that 

since the current proceeding on expediting SAC rate cases had just 

begun, it was too soon to know how changes might affect the SAC 

process.

We provided a draft of this product to STB for comment prior to finalizing 

this report. We received technical comments from STB which we 

incorporated as appropriate.

We will send copies of this report to appropriate congressional 

committees. In addition, we will make copies available to others upon 

request, and the report will be available at no charge on the GAO website 

at http://www.gao.gov.

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

me at (202) 512-2834 or Flemings@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

 25Christensen Associates, An Update to the Study of Competition in the U.S. Freight 

Railroad Industry, Final Report. Prepared for the Surface Transportation Board, 

(November 2010). & Pittman, Russell; The Economics of Railroad “Captive Shipper”

Legislation; EAG 10-1 (January 2010).

26 Surface Transportation Board, RAILROAD REVENUE ADEQUACY—2015 

DETERMINATION, Docket No. EP 552 (Sub-No. 20), September 6, 2016.

27Surface Transportation Board, EXPEDITING RATE CASES, Docket Number Ex Parte 

733, June 15, 2016.

Agency Comments
Page 22 GAO-17-166 Freight Rail Pricing

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix I.

Susan A. Fleming

Director,

Physical Infrastructure
Appendix I: Contact and Staff 

Acknowledgments

Page 23 GAO-17-166 Freight Rail Pricing

Susan A. Fleming, (202) 512-2834, Flemings@gao.gov

In addition to the individual named above, other key contributors to this 

report were Andrew Huddleston, Assistant Director; Sarah R. Jones, 

Analyst-in-Charge; Namita Bhatia Sabharwal; Herbert J. Bowsher; 

Stephen M Brown; Russell C. Burnett; Ross A. Gauthier; Richard A. 

Jorgenson; Grant M. Mallie; Cheryl M. Peterson; Malika Rice; Kelly L. 

Rubin; Amelia (Michelle) Weathers; Alwynne Wilbur; and William T. 

Woods.

Appendix I: Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100655)
The Government Accountability Office, the audit, evaluation, and investigative 

arm of Congress, exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability of the 

federal government for the American people. GAO examines the use of public 

funds; evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through GAO’s website (http://www.gao.gov). Each weekday afternoon, GAO 

posts on its website newly released reports, testimony, and correspondence. To 

have GAO e-mail you a list of newly posted products, go to http://www.gao.gov

and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of production and 

distribution and depends on the number of pages in the publication and whether 

the publication is printed in color or black and white. Pricing and ordering 

information is posted on GAO’s website, http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537.

Orders may be paid for using American Express, Discover Card, MasterCard, 

Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube.

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.

Visit GAO on the web at www.gao.gov.

Contact:

Website: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-4400, 

U.S. Government Accountability Office, 441 G Street NW, Room 7125, 

Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

James-Christian Blockwood, Managing Director, spel@gao.gov, (202) 512-4707

U.S. Government Accountability Office, 441 G Street NW, Room 7814, 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations

Public Affairs

Strategic Planning and 

External Liaison

Please Print on Recycled Paper.