United States Government Accountability Office

GAO Report to Congressional Requesters

FREIGHT 

RAILROADS 

Industry Health Has 

Improved, but 

Concerns about 

Competition and 

Capacity Should Be 

Addressed 

October 2006 

 

GAO-07-94 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

October 2006

FREIGHT RAILROADS

Industry Health Has Improved, but 

Concerns about Competition and 

Capacity Should Be Addressed 

Highlights of GAO-07-94, a report to 

congressional requesters 

Changes in the railroad industry since the Staggers Rail Act are widely

viewed as positive, as the industry’s financial health has improved and most 

rates have declined; however, concerns over competition and captivity 

remain. Rail rates generally declined between 1985 and 2000, then increased 

slightly from 2001 through 2004. Concerns about competition and captivity 

remain as traffic is concentrated in fewer railroads. It is difficult to 

determine the number of “captive” shippers as proxy measures can overstate 

or understate captivity. Nevertheless, GAO’s analysis of limited available 

measures indicates that the extent of captivity appears to be dropping, but 

the percentage of traffic traveling at rates substantially over the threshold 

for rate relief has increased. Also, some areas with access to only one major 

railroad have higher percentages of traffic traveling at rates above the 

threshold. These findings may reflect reasonable economic practices by the 

railroads or a possible abuse of market power. GAO’s analysis is limited by 

available data and proxy measures but suggests that shippers in selected 

markets may be paying excessive rates, meriting further inquiry and analysis.

 

While STB has taken action, further efforts to improve its rate relief 

processes and assess competition could help address competition and 

captivity concerns and inform the merits of proposed alternative 

approaches. STB’s rate relief processes are largely inaccessible and rarely

used. STB recognizes this and is taking steps to improve its processes. STB 

has broad statutory authority to inquire into and report on railroad industry 

practices and, given a reasonable possibility that some shippers may be

paying excessive rates, an assessment of competition could determine 

whether there is sufficient evidence that market power is being abused in 

specific markets. While competition between railroads may not always be

feasible, alternative approaches have costs and benefits that should be 

carefully considered to ensure the balance envisioned in the Staggers Rail

Act—including the railroads’ need for adequate revenues. 

Significant increases in freight traffic are forecast, and the industry’s ability 

to meet them is largely uncertain. Investments in rail projects can produce 

public benefits, such as reducing highway congestion. As a result, federal 

and state governments have increasingly participated in freight rail projects. 

In 2005, for example, Congress provided $100 million for rail improvements 

in the Chicago area. Congress faces additional decisions about potential 

federal policy responses in years ahead. Responses should recognize that 

the freight transportation system includes many modes that are treated 

differently by the federal government and functions in a competitive 

marketplace and a constrained federal funding environment. In developing a 

National Freight Policy, the Department of Transportation (DOT) has made a 

good start by providing context for those decisions and DOT can help 

sustain the role of the competitive marketplace through strategies that 

promote a level playing field for freight transportation decision making and 

acknowledge the constrained federal fiscal environment by focusing federal 

involvement where demonstrable, wide-ranging public benefits exist. 

The Staggers Rail Act deregulated 

the freight rail industry, relying on

competition to set rates, and 

allowed for differential pricing 

(charging higher rates to those

more dependent on rail). The act 

gave the Surface Transportation

Board (STB) authority to develop 

remedies for shippers“captive” to

one railroad and set a threshold for 

shippers to apply for rate relief. 

GAO was asked to review (1) 

changes in the railroad industry

since the Staggers Rail Act, 

including rates and competition; (2) 

STB actions to address competition

and captivity concerns and 

alternatives that could be

considered; and (3) freight demand

and capacity projections and 

potential federal policy responses. 

GAO examined STB data, 

conducted interviews, and held an

expert panel.

What GAO Recommends

GAO recommends that STB analyze 

the state of competition and 

consider appropriate actions. GAO 

also recommends that DOT 

consider strategies to level the 

playing field for all freight modes to

maximize public benefits from 

federal investment. STB disagreed

with our recommendation because 

it would take resources from

efforts it believes will address GAO

concerns, among other reasons. We

recognize STB’s efforts, but believe

further analysis is needed. STB 

should seek more resources from

Congress if needed. DOT took no 

position on our recommendation. 

www.gao.gov/cgi-bin/getrpt?GAO-07-94.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact JayEtta Z. 

Hecker at (202) 512-2834 or 

heckerj@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 6

Railroad Industry Increasingly Healthy and Rates Generally Down 

Since Enactment of the Staggers Rail Act, but Concerns about 

Competition and Captivity Remain 9 

Despite STB’s Actions, Analysis of Competitive Markets Is Needed 

to Address Lack of Effective Relief for Captive Shippers 38 

Uncertainty about Future Freight Rail Demand and Capacity Points 

to Opportunities for a More Strategic Federal Approach to Rail 

Infrastructure 53

Conclusions 64

Recommendations for Executive Action 66 

Agency Comments and Our Evaluation 67 

Appendix I Participants in GAO’s Expert Panel 72 

Appendix II Objectives, Scope, and Methodology 74 

Appendix III Comments from the Surface Transportation Board 77 

GAO Comments 83 

Appendix IV GAO Contact and Staff Acknowledgments 87 

Related GAO Products 88 

Tables 

Table 1: Changes in Percentage of Industry Revenue and Tonnage 

on Origin and Destination Routes with Access to One 

Class I Railroad 28 

Table 2: Possible Changes in R/VC Ratios 30 

Table 3: Potential Public Benefits of Rail Transportation 

Investments 58

Page i GAO-07-94 Freight Railroads
Figures 

Figure 1: Railroads’ Tax-Adjusted Return on Investment, 1980-2004 10 

Figure 2: Trends in Industry Rail Rates, 1985-2004 12 

Figure 3: Commodity Rate Changes, 1985-1989, 1990-1999, and 

2000-2004 13

Figure 4: Rate Changes for Coal, Grain, Miscellaneous Mixed 

Shipments, and Motor Vehicles, 1985-2004 14 

Figure 5: Rail Rate Increases and Decreases across 604 Routes, and 

for Long-, Medium-, and Short-distance Routes, 2000 

through 2004 15 

Figure 6: Tonnage Carried by Railcar Ownership, 1987-2004 17 

Figure 7: Miscellaneous Revenue Tracked in Carload Waybill 

Sample, 2000-2004 18 

Figure 8: Percentage of Railroad Market Represented by Four 

Largest Class I Railroads, 1985-2004 20 

Figure 9: Comparison of Rates Charged on Long-distance Grain 

Routes, 1997-2004 22 

Figure 10: Rate Changes after the Introduction of a Second Carrier 23 

Figure 11: Comparison of Rate Changes from Champaign, Illinois, 

Economic Area to New Orleans, Louisiana, Economic 

Area and Champaign, Illinois, Economic Area to Atlanta, 

Georgia, Economic Area, 1990-2004 24 

Figure 12: Number of Class I Railroads Serving Economic Areas, 

2004 26

Figure 13: Percentage of All Industry Tonnage Originating in

Economic with Access to One Class I Railroad, 2004 27 

Figure 14: Changes in Percentage of All Industry Traffic Tonnage 

with Access to One Class I Railroad Originating in 

Economic Areas, 1994 through 2004 29 

Figure 15: Percentage of Industry Tonnage and Revenue Generated 

from Traffic Traveling at Rates Equal to or Greater Than 

180 Percent R/VC, 1985-2004 31 

Figure 16: Tonnage Traveling at Rates over 300 Percent R/VC, 1985-

2004 32

Figure 17: Percentage of Tonnage by R/VC, 1985 and 2004 33 

Figure 18: Changes in Percentage of Tonnage Traveling at Rates 

over 300 Percent R/VC, by Originating Economic Area, 

1985 through 2004 34 

Figure 19: Long-distance Grain Route Changes in Percentage of 

Tonnage Traveling at Rates over 300 Percent R/VC, 1985-

2004 35

Page ii GAO-07-94 Freight Railroads
Figure 20: Overlap between Percentage of Tonnage over Threshold 

for Rate Relief and Access to Only One Class I Railroad 37 

Figure 21: Reciprocal Switching 45 

Figure 22: Terminal Agreements 47 

Figure 23: Trackage Rights 48 

Figure 24: Bottleneck Rates 50 

Figure 25: Paper Barriers 51 

Abbreviations 

AASHTO American Association of State Highway and 

 Transportation Officials 

ATA American Trucking Association 

BEA Bureau of Economic Analysis 

CBO Congressional Budget Office 

CDOT Colorado Department of Transportation 

CREATE Chicago Region Environmental and Transportation 

 Efficiency program 

DOT Department of Transportation 

FAF Freight Analysis Framework 

FHWA Federal Highway Administration 

FOA Final Offer Arbitration 

GDP gross domestic product 

ICC Interstate Commerce Commission

RRIF Railroad Rehabilitation and Improvement Financing 

R/VC revenue to variable cost

RRIF Railroad Rehabilitation and Improvement Financing 

 program 

SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity 

 Act: A Legacy for Users 

STB Surface Transportation Board 

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

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reproduce this material separately. 

Page iii GAO-07-94 Freight Railroads
United States Government Accountability Office

Washington, DC 20548 

October 6, 2006 

Congressional Requesters: 

Over 25 years ago, Congress transformed federal regulation of the railroad 

industry. After almost 100 years of economic regulation, the railroad 

industry was in serious economic trouble in the 1970s, with rising costs, 

losses, and bankruptcies. In response, Congress passed the Railroad 

Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail 

Act of 1980. Together, these pieces of legislation substantially deregulated

the railroad industry. In particular, the 1980 act encouraged greater 

reliance on competition to set rates and gave railroads increased freedom 

to price their services according to market conditions, including the 

freedom to use differential pricing—that is, to recover a greater proportion 

of their costs from rates charged to shippers with a greater dependency on

rail transportation. At the same time, the 1980 act anticipated that some 

shippers might not have competitive alternatives—commonly referred to

as “captive shippers”—and gave the Interstate Commerce Commission 

(ICC), and later the Surface Transportation Board (STB), the authority to 

establish a process so that shippers could obtain relief from unreasonably 

high rates. However, only a rate that produces revenue equal to at least 

180 percent of the variable cost of transporting the shipment can be 

challenged. Since the passage of the Staggers Rail Act in 1980, we have 

issued several reports on the freight railroad industry.1

 These reports 

described the significant changes that have taken place in the railroad 

industry and reported that rates have generally decreased, but shippers 

and others have found the rate relief process long, complex, and 

expensive. 

Policymakers continue to believe that the federal government should 

provide a viable process to protect shippers against unreasonably high

rates, as well as address competition issues, while still balancing the 

interests of both railroads and shippers. Over the past 10 years, significant

consolidation has taken place in the freight railroad industry, while 

railroads—particularly Class I railroads2

— have seen their productivity 

and financial health improve. Railroad officials worry that any attempt to 

 1

See the list of related GAO products at the end of this report.

2

As of 2004, a Class I railroad is any railroad with operating revenue above $277.7 million. 

Page 1 GAO-07-94 Freight Railroads
increase economic regulation will reduce carriers’ ability to earn sufficient 

revenues and limit future infrastructure investment. At the same time, a 

number of academic and government studies are predicting a significant 

increase in the demand for freight rail over the next 10 to 15 years. In light

of these concerns, we reviewed 

• the changes that have occurred in the freight railroad industry since the 

enactment of the Staggers Rail Act, including changes in rail rates and 

competition in the industry; 

• the actions STB has taken to address concerns about competition and 

captivity and any alternative approaches that could be considered to 

address remaining concerns; and 

• the projections for freight traffic demand over the next 15 to 25 years, the 

freight railroad industry’s projected ability to meet that demand, and 

potential federal policy responses. 

To fulfill our objectives, we examined STB’s Carload Waybill Sample from 

1985 through 2004 (the latest data available at the time of our review).3

This database includes information on rail rates, tonnage, federal 

regulation, and other statistics but disguises some revenues to avoid 

disclosing confidential business information to the public. We obtained a 

version of the Carload Waybill Sample that did not disguise revenues. We 

held an expert panel consisting of 11 individuals with expertise in the 

freight railroad industry and the economics of transportation deregulation. 

Those individuals are listed in appendix I. We also interviewed, and 

reviewed information from, representatives of each Class I railroad in 

North America, shipper groups, economists, and experts in the rail 

industry. In addition, we reviewed pending legislation, transportation 

planning literature, and forecasts of future freight rail demand and 

capacity, including syntheses of such forecasts; and interviewed federal 

and state transportation officials, financial market analysts, national 

association representatives, and transportation experts. We determined 

that the data used in this report were sufficiently reliable for the purpose 

of our review. We conducted our review from June 2005 to August 2006 in 

accordance with generally accepted government auditing standards. 

Details of our objectives, scope, and methodology appear in appendix II.

 3

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.

Page 2 GAO-07-94 Freight Railroads
Results in Brief The changes that have occurred in the railroad industry since the 

enactment of the Staggers Rail Act are widely viewed as positive, since the 

financial health of the industry has improved and most rates have declined 

since 1985. However, concerns about competition and captivity in the 

industry remain. The freight railroad industry’s financial health improved 

substantially as railroads cut costs through productivity improvements; 

streamlined and right-sized their rail networks; implemented new 

technologies; and expanded business into new markets, such as the 

intermodal market.4

 Between 1985 and 2000, rail rates generally declined, 

but then increased slightly from 2001 through 2004.

5

 Although rates have 

declined since 1985, they have not done so uniformly, and rates for some

commodities are significantly higher than rates for others. Several factors 

could have contributed to recent rate increases, including broad changes 

in the domestic and world economy, the emergence of a capacityconstrained environment in which demand exceeds supply, and 

consolidation in the 1990s in the industry leading to changes in 

competition. Other costs, such as fuel surcharges, have also shifted to 

shippers, and STB has not clearly tracked the revenues the railroads have 

raised from some of these charges. Some concerns about competition and 

captivity in the industry remain because traffic is concentrated in fewer 

railroads. It is difficult to determine precisely how many shippers are 

captive because available proxy measures can overstate or understate 

captivity. In addition, STB does not accurately collect railroad revenue

data. Nevertheless, our analysis of available measures indicates that the 

extent of captivity appears to be dropping, but the percentage of industry 

traffic traveling at rates substantially over the statutory threshold for rate 

relief has increased. For example, the amount of traffic traveling at rates 

over 300 percent of the railroad’s variable cost increased from 4 percent in 

1985 to 6 percent in 2004. Furthermore, some areas with access to one 

Class I railroad have higher percentages of traffic traveling at rates that 

exceed the statutory threshold for rate relief. These findings may reflect 

reasonable economic practices by the railroads in an environment of 

excess demand, or they may indicate a possible abuse of market power. 

We are recommending that STB conduct a rigorous analysis of the state of 

competition nationwide and, where appropriate, consider the range of 

 4

The intermodal market consists of containers and trailers that can be carried on ships,

trucks, or rail.

5

While rate data are not available for 2005 and 2006, shippers, railroads, and financial 

analysts with whom we spoke told us that rates have generally increased during those 

years. 

Page 3 GAO-07-94 Freight Railroads
actions available to address problems associated with the potential abuse

of market power. In addition, we are recommending that STB review its 

method of data collection to ensure consistent and accurate reporting of 

railroad revenues, including fuel surcharges. 

STB has taken a number of actions to improve the rate relief process and 

assess competition, but further actions could help address remaining 

competition and captivity concerns. The Staggers Rail Act and the ICC 

Termination Act encouraged competition as the preferred method to 

protect shippers from unreasonable rates and granted STB broad 

legislative authority to monitor the performance of the railroad industry. 

Under this authority, STB established both a standard and a simplified rate 

relief process so that captive shippers could obtain relief from

unreasonable rates. However, these processes have proven to be largely 

inaccessible because the standard process is expensive, time consuming, 

and complex, and the simplified process has not been used. During our 

review, STB took steps to refine its processes, including issuing a 

proposed rule making to clarify eligibility for the simplified process. 

Ultimately, our analysis suggests a reasonable possibility that shippers in 

selected markets may be paying excessive rates, and an assessment of 

competition would determine if this situation reflects reasonable 

economic practices by the railroads in an environment of excess demand 

or an abuse of market power. This assessment could also provide further 

information about the extent of captivity and the merits of proposed 

approaches to enhance the competitive options available to shippers. 

These approaches—such as providing trackage rights to allow a railroad 

to run on another railroad’s track for a fee— have been suggested by 

shipper groups, economists, and others. Each of these approaches has 

costs and benefits and should be carefully considered to ensure that the 

approach is designed to achieve the balance set out in the Staggers Rail 

Act, including consideration of the revenue adequacy of the railroads. 

However, not all markets may have the demand needed to support 

competition among railroads, and so some areas where shippers are 

captive are likely to persist. In this regard, there are also a number of 

proposals to make the rate relief process more accessible, such as the 

increased use of arbitration to settle disputes, and each of these proposals 

has advantages and drawbacks. 

Significant increases in freight traffic over the next 10 to 15 years are 

forecasted, and the railroad industry’s ability to meet future demand is 

largely uncertain. Investments in rail projects can produce benefits for the 

public—for example, shifting truck freight traffic to railroads can reduce 

highway congestion. To obtain such benefits, governments have 

Page 4 GAO-07-94 Freight Railroads
increasingly been participating in freight rail improvement projects. For 

example, Missouri state and local governments supported two major railbridge projects to reduce delays in Kansas City. At the federal level, 

Congress, in 2005, provided $100 million for rail infrastructure 

improvements in the Chicago area. In the years ahead, Congress is likely to

receive further requests for funding and face additional decisions about 

potential federal policy responses and the federal role in the nation’s 

freight railroad infrastructure. Such policy responses need to recognize 

that the freight transportation system encompasses many modes that are 

treated differently by the federal government and are on systems owned, 

funded, and operated by both the public and private sectors. Furthermore, 

the freight transportation system functions in a competitive marketplace, 

and the federal fiscal funding environment is highly constrained. As a 

result, policy and decision makers are challenged to ensure that federal 

involvement is consistent with competition in the freight marketplace and 

that federal funding decisions reflect widespread public priorities. In 

developing a draft National Freight Policy, the Department of 

Transportation (DOT) has made a good start by providing a context for 

decisions about how to apply a more strategic, systemwide approach, in 

general, and how to craft a federal policy response to freight rail 

investment needs in particular. We are recommending that DOT, as it 

continues to draft a National Freight Policy, consider strategies to sustain 

the role of competitive market forces by creating a level playing field for 

all freight modes and recognize the highly constrained federal fiscal 

environment by developing mechanisms to assess and maximize public 

benefits from federally financed freight transportation investments. 

We provided a draft of this report to DOT and STB. In oral comments, DOT 

took no position on our recommendation related to the National Freight 

Policy. In written comments, STB stated that it has already responded to 

our recommendation on its method of data collection through a proposed 

rule making on collecting fuel surcharge data. While we commend STB for 

its proposed rule making, STB has not yet implemented this change, and 

other revenues may still not be accurately tracked. STB also disagreed 

with our recommendation to conduct a rigorous analysis of competitive 

markets to identify the state of competition nationwide, inquire into 

pricing practices in specific markets, and consider appropriate actions 

available to address problems associated with the potential abuse of 

market power. STB commented that this recommendation was based on 

inconclusive findings and would divert resources away from current 

initiatives. We disagree that our recommendation was based on 

inconclusive findings. Our analysis of multiple sources suggests a 

reasonable possibility that shippers in some markets may be paying 

Page 5 GAO-07-94 Freight Railroads
excessive rates. We believe that such a possibility merits further inquiry 

and analysis. We recognize that STB has limited resources and modified 

our draft to recommend that STB request additional resources from 

Congress if it determines that it needs more resources to conduct an 

analysis of competition. STB also stated that it has several rule makings 

under way that are designed to improve the rate relief process and would 

address many of our concerns. STB stated that it would be far more 

practical for STB to finish these reforms to ensure that captive shippers 

have an effective forum to seek rate relief. While we commend STB for 

recognizing and taking action to address problems with the rate relief 

process, we believe action beyond improvements to the rate relief process

is needed. In particular, these STB rule makings are designed to improve 

processes available to shippers after they have been charged a rate they

consider to be unreasonable. In contrast, we believe that an analysis of the 

state of competition and the possible abuse of market power, along with 

the range of options STB has to address competition issues, could more 

directly further the legislatively defined goal of ensuring effective

competition among rail carriers. STB’s comments are in appendix III. 

In the past, the ICC regulated almost all of the rates that railroads charged

shippers. The Railroad Revitalization and Regulatory Reform Act of 1976 

and the Staggers Rail Act of 1980 greatly increased reliance on competition 

to set rates in the railroad industry. Specifically, these acts allowed 

railroads and shippers to enter into confidential contracts that set rates 

and prohibited ICC from regulating rates where railroads had either 

effective competition or rates negotiated between the railroad and the 

shipper. Furthermore, the ICC Termination Act of 1995 abolished ICC and

transferred its regulatory functions to STB. Taken together, these acts 

anchor the federal government’s role in the freight rail industry by 

establishing numerous goals for regulating the industry, including to 

Background 

• allow, to the maximum extent possible, competition and demand for 

services to establish reasonable rates for transportation by rail; 

• minimize the need for federal regulatory control over the rail 

transportation system and require fair and expeditious regulatory 

decisions when regulation is required; 

• promote a safe and efficient rail transportation system by allowing rail 

carriers to earn adequate revenues, as determined by STB; 

Page 6 GAO-07-94 Freight Railroads
• ensure the development and continuation of a sound rail transportation 

system with effective competition among rail carriers and with other 

modes to meet the needs of the public and the national defense; 

• foster sound economic conditions in transportation and ensure effective 

competition and coordination between rail carriers and other modes: 

• maintain reasonable rates where there is an absence of effective 

competition and where rail rates provide revenues that exceed the amount 

necessary to maintain the rail system and attract capital; 

• prohibit predatory pricing and practices to avoid undue concentrations of 

market power; and 

• provide for the expeditious handling and resolution of all proceedings. 

While the Staggers Rail and ICC Termination Acts reduced regulation in

the railroad industry, they maintained STB’s role as the economic 

regulator of the industry. The federal courts have upheld STB’s general 

powers to monitor the rail industry, including its ability to subpoena 

witnesses and records and to depose witnesses. In addition, STB can 

revisit its past decisions if it discovers a material error, or new evidence,

or if circumstances have substantially changed. 

Two important components of the current regulatory structure for the 

railroad industry are the concepts of revenue adequacy and demand-based 

differential pricing. Congress established the concept of revenue adequacy 

as an indicator of the financial health of the industry. STB determines the 

revenue adequacy of a railroad by comparing the railroad’s return on 

investment with the industrywide cost of capital. For instance, if a 

railroad’s return on investment is greater than the industrywide cost of 

capital, STB determines that railroad to be revenue adequate. Historically, 

ICC and STB have rarely found railroads to be revenue adequate—a result 

that many observers relate to characteristics of the industry’s cost 

structure. Railroads incur large fixed costs to build and operate networks 

that jointly serve many different shippers. Some fixed costs can be 

attributed to serving particular shippers, and some costs vary with 

particular movements, but other costs are not attributable to particular 

shippers or movements. Nonetheless, a railroad must recover these costs 

if the railroad is to continue to provide service over the long run. To the 

extent that railroads have not been revenue adequate, they may not have 

been fully recovering these costs. 

Page 7 GAO-07-94 Freight Railroads
The Staggers Rail Act recognized the need for railroads to use demandbased differential pricing to promote a healthy rail industry and enable it

to raise sufficient revenues to operate, maintain and, if necessary, expand

the system in a deregulated environment. Demand-based differential 

pricing, in theory, permits a railroad to recover its joint and common 

costs—those costs that exist no matter how many shipments are 

transported, such as the cost of maintaining track— across its entire 

traffic base by setting higher rates for traffic with fewer transportation 

alternatives than for traffic with more alternatives. Differential pricing 

recognizes that some customers may use rail if rates are low—and have

other options if rail rates are too high or service is poor. Therefore, rail 

rates on these shipments generally cover the directly attributable 

(variable) costs, plus a relatively low contribution to fixed costs. In 

contrast, customers with little or no practical alternative to rail—”captive” 

shippers—generally pay a much larger portion of fixed costs. Moreover, 

even though a railroad might incur similar incremental costs while 

providing service to two different shippers that move similar volumes in 

similar car types traveling over similar distances, the railroad might charge 

the shippers different rates. Furthermore, if the railroad is able to offer 

lower rates to the shipper with more transportation alternatives, that 

shipper still pays some of the joint and common costs. By paying even a 

small part of total fixed cost, competitive traffic reduces the share of those 

costs that captive shippers would have to pay if the competitive traffic 

switched to truck or some other alternative. Consequently, while the 

shipper with fewer alternatives makes a greater contribution toward the 

railroad’s joint and common costs, the contribution is less than if the 

shipper with more alternatives did not ship via rail. 

The Staggers Rail Act further requires that the railroads’ need to obtain 

adequate revenues to be balanced with the rights of shippers to be free 

from, and to seek redress from, unreasonable rates. Railroads incur 

variable costs—that is, the costs of moving particular shipments—in 

providing service. The Staggers Rail Act stated that any rate that was 

found to be below 180 percent of a railroad’s variable cost for a particular 

shipment could not be challenged as unreasonable and authorized ICC, 

and later STB, to establish a rate relief process for shippers to challenge 

the reasonableness of a rate. STB may consider the reasonableness of a 

rate only if it finds that the carrier has market dominance over the traffic 

at issue—that is, if (1) the railroad’s revenue is equal to or above 180 

percent of the railroad’s variable cost (R/VC) and (2) the railroad does not 

face effective competition from other rail carriers or other modes of 

transportation. 

Page 8 GAO-07-94 Freight Railroads
Railroad Industry 

Increasingly Healthy 

and Rates Generally 

Down Since 

Enactment of the 

Staggers Rail Act, but 

Concerns about 

Competition and 

Captivity Remain 

The changes that have occurred in the railroad industry since the 

enactment of the Staggers Rail Act are widely viewed as positive. The

railroad industry’s financial health improved substantially as it cut costs, 

boosted productivity, and right-sized its networks. Rail rates generally

declined between 1985 and 2000 but increased slightly from 2001 through

2004. Likewise, rail rates have declined since 1985 for certain commodity 

groups and routes despite some increases since 2001, but rates have not 

declined uniformly, and some commodities are paying significantly higher

rates than others. For example, from 1985 through 2004, coal rates 

declined 35 percent while grain rates increased 9 percent.6

 Concerns about 

competition and captivity in the industry remain because traffic is 

concentrated in fewer railroads. It is difficult to determine precisely how 

many shippers are captive to one railroad. Nevertheless, our analysis 

indicates that the extent of potential captivity appears to be dropping, but 

that the percentage of all industry traffic running at rates substantially 

over the statutory threshold for rate relief—traffic traveling at rates over 

180 percent R/VC—has increased. Furthermore, some areas with access to 

only one Class I railroad have higher percentages of traffic traveling at 

rates that exceed the statutory threshold for rate relief. This situation may 

reflect reasonable economic practices by the railroads in an environment 

of excess demand, or it may represent an abuse of market power. 

There is widespread consensus that the freight rail industry has benefited 

from the Staggers Rail Act. Ten of the 11 members of our expert panel 

believed that the Staggers Rail Act has had a strongly positive overall 

effect on freight railroad companies, while 8 believed the Staggers Rail Act 

had a strongly positive effect on shipping companies. In addition, various

measures indicate an increasingly strong freight railroad industry. Freight 

railroads’ improved financial health is illustrated by a general increase in 

return on investment since 1980, as shown in figure 1.7

 Freight railroads 

have also cut costs by streamlining their workforces; right-sizing their rail 

Railroad Industry’s 

Financial Health Has 

Improved Substantially 

 6

All of our rate changes—increases and decreases—are presented in nominal terms. 

7

Return on investment measures the profit made on assets used to provide transportation

services. Return on investment is based on STB’s methodology for determining revenue

adequacy. 

Page 9 GAO-07-94 Freight Railroads
networks; and reducing track miles, equipment, and facilities to more 

closely match demand.8

Figure 1: Railroads’ Tax-Adjusted Return on Investment, 1980-2004

-1

0

1

2

3

4

5

6

7

8

9

10

199

1999

20002001

2002

20032004

8

199

1994

1995

1996

1997

3

19

1990

19911992

89

1988

1987

1986

1985

1984

1983

1982

1981

1980

Percentage

Source: STB.

Year

Freight railroads have also expanded their business into new markets—

such as the intermodal market—and implemented new technologies, 

including larger cars, and are currently developing new scheduling and 

train control systems. Some observers believe that the competition faced

by railroads from other modes of transportation has created incentives for 

innovative practices, and that the ability to enter into confidential 

contracts with shippers has permitted railroads to make specific 

investments and to develop service arrangements tailored to the 

requirements of different shippers.9

 8

Clifford Winston, Deregulation of Network Industries – What’s Next? (Washington: AEIBrookings Joint Center for Regulatory Studies: 2000), pp. 43-44. 

9

Gallamore, pp. 511-515. 

Page 10 GAO-07-94 Freight Railroads
Freight rail is an important component of our nation’s economy. 

Approximately 42 percent of all intercity freight in the United States, 

measured in ton-miles,10 moves on rail lines. Freight rail is particularly 

important to producers and users of certain commodities. For example, 

about 70 percent of automobiles manufactured domestically and about 70 

percent of coal delivered to power plants moves on freight rail. 

Industrywide Rates 

Declined from 1985 

through 2000 and Rose 

Slightly from 2001 through 

2004 

Rail rates across the freight railroad industry have generally declined since 

the enactment of the Staggers Rail Act. Because changes in traffic patterns 

over time (for example, hauls over longer distances) can result in a 

decrease in the average revenue per ton-mile, purely relying on cents per 

ton-mile can present misleading industrywide rate trends. Therefore, we 

developed a set of rail rate indexes11 to examine trends in rail rates over 

the 1985 through 2004 period. These indexes account for changes in traffic 

patterns over time that could affect revenue statistics but do not account

for inflation. To provide a measure for inflation, we also included the price 

index for the gross domestic product (GDP) in figure 2. 

From 1985 through 1987, rail rates dropped by 10 percent and then 

continued to decline, although not as steeply, through 1998. Rates 

increased in 1999, then dropped again in 2000. In 2001 and 2002 rates rose 

again. Rates were nearly flat in 2003 and 2004, finishing approximately 3 

percent above rates in 2000, but were 20 percent below 1985 rates (These 

trends are shown in figure 2). While our rail rate index does not reflect the 

general effects of inflation, the continuous increases in the GDP price 

index over this period indicate that real rates decreased by more than 20

 10A ton-mile is a standard industry measure that represents 1 ton of freight transported 1 

mile.

11We constructed rate indexes to examine trends in rail rates over the 1985 to 2004 period. 

These indexes define traffic patterns for a given commodity in terms of census region to

census region flows of that commodity, and we calculated the average revenue per ton-mile 

for each of these traffic flows. The index is calculated as the weighted average of these 

traffic flows in each year, expressed as a percentage of the value for 1985, where the

weights reflect the traffic patterns in 2004. By fixing the weights as of one period of time, 

we attempted to measure pure price changes rather than calculating the average revenue 

per ton-mile in each year. Over time, changes in traffic patterns could result in a 

substitution of lower priced traffic for higher priced traffic, or vice versa, so that a decrease

in average revenue per ton-mile might partly reflect this change in traffic patterns. The rate

index for the overall industry was defined similarly, except that the traffic pattern bundle 

was defined in terms of broad commodity, census region of origin, and mileage block

categories. For comparison purposes, we also present the price index for gross domestic 

product over this period. 

Page 11 GAO-07-94 Freight Railroads
percent from 1985 through 2004. Rate data are not available for 2005 and

2006, but shippers, railroad officials, and financial analysts with whom we

spoke told us that rates have generally increased during those years. 

Figure 2: Trends in Industry Rail Rates, 1985-2004 

0.70

0.85

1.00

1.15

1.30

1.45

1.60

GDP price index

Industry

199

1999

2000

2001

2002

2003

2004

8

19

1990

1991

1992

1993

1994

1995

1996

1997

89

1988

1987

1986

1985

0.00

Rate index

Year

Source: GAO analysis of STB data.

Page 12 GAO-07-94 Freight Railroads
Similar to industrywide changes in rail rates, the rates for many 

commodities have declined since 1985 and have recently increased. In 

2004, four commodities each made up 5 percent or more of freight railroad 

revenue—grain, coal, motor vehicles, and miscellaneous mixed shipments. 

In both the 1985 through 1989 and the 1990 through 1999 intervals, the 

rates for most of these commodities declined, while in 2000 through 2004, 

the rates increased for two commodities and decreased for two (see fig. 3). 

For Many Commodities 

and Particular Routes, 

Rates Have Also Declined 

Since 1985, but Declines 

Are Not Uniform 

Figure 3: Commodity Rate Changes, 1985-1989, 1990-1999, and 2000-2004 

-30

-25

-20

-15

-10

-5

0

5

10

Rate index 1985-1989 change Rate index 1990-1999 change Rate index 2000-2004 change

Percentage of rate index change

Coal

Grain

Miscellaneous mixed shipments

Motor vehicles

Source: GAO analysis of STB data.

Note: From 2000 to 2004, the rate index for coal was largely unchanged. 

Although many rates have decreased, rates have not declined uniformly, 

and rates for some commodities are significantly higher than for others. 

Figure 4 compares commodity rates for coal, grain, miscellaneous mixed 

shipments, and motor vehicles from 1985 through 2004 using our rail rate

index. Over the 20-year period most rates declined, with coal rates 

dropping the most sharply by 35 percent. Miscellaneous mixed shipments 

and motor vehicle rates also declined, although to a lesser extent than coal 

rates. Grain rates initially declined from 1985 through 1987, but then 

Page 13 GAO-07-94 Freight Railroads
diverged from the other commodity trends and increased, resulting in a 

net 9 percent increase by 2004.

Figure 4: Rate Changes for Coal, Grain, Miscellaneous Mixed Shipments, and Motor

Vehicles, 1985-2004

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Rates

Year

Coal

Grain

Miscellaneous mixed shipments

Motor vehicles

GDP price index

Source: GAO analysis of STB data.

We examined rate changes for commodities traveling along hundreds of 

particular routes and found that the rates on a majority of the routes we 

analyzed decreased from 2000 through 2004. Figure 5 shows that from 

2000 through 2004 rail rates decreased on about 55 percent of the routes in

our analysis12 (334 of 604 routes). More specifically, the rates for most 

long-distance (over 1,000 miles) and medium-distance (501 to 1,000 miles)

routes decreased. In one distance category, short-distance routes (up to 

500 miles), there were more routes with increases (103) than decreases

12Our initial route universe consisted of 932 commodity routes, but we removed 328 routes

that did not have large enough samples in some years to be valid, or they were not 

collected in the Carload Waybill Sample in either 2000 or 2004.

Page 14 GAO-07-94 Freight Railroads
(94), from 2000 through 2004. While figure 5 shows that, for the longdistance routes we examined, the number of routes with rate decreases 

was nearly twice the number of routes with rate increases. Many of the

largest rate increases were on long-distance routes carrying miscellaneous

mixed shipments—which include intermodal goods—that originated in the 

Los Angeles-Long Beach-Riverside, California, economic area and 

terminated at various destinations across the country. Several shipper 

groups reported that many rate increases occurred after 2004; however, 

data are not available for 2005 and 2006. 

Figure 5: Rail Rate Increases and Decreases across 604 Routes, and for Long-, 

Medium-, and Short-distance Routes, 2000 through 2004 

0

50

100

150

200

250

300

350

All routes Long-distance Medium-distance Short-distance

Number of routes

Source: GAO analysis of STB data.

Route types

Route rate increases

Route rate decreases

Many Factors May Have 

Contributed to Recent 

Rate Increases 

Several factors could have contributed to recent rate increases. Ongoing 

industry and economic changes have influenced how railroads have set 

their rates. Since the Staggers Rail Act was enacted, the railroad industry 

and the economic environment in which it operates have changed 

considerably. After years of reducing the size of its workforce and 

shedding track capacity, the industry is increasingly operating in a 

Page 15 GAO-07-94 Freight Railroads
capacity-constrained environment in which the demand for its services 

exceeds its capacity in some areas. In addition, the industry has more 

recently increased employment and invested in increased capacity in key 

traffic corridors. Additionally, changes in broader domestic and world 

economic conditions have led to changes in the mix and profitability of 

traffic carried by railroads. For example, railroads have developed highvolume traffic by shipping import and export containers, leading them to 

price these shipments differently. According to DOT officials, some 

shippers—such as those in the automobile and chemical industries—may 

pay higher rates in order to secure higher quality service or due to liability 

issues. Lastly, the rail industry has continued to consolidate, potentially 

increasing the market power of the largest railroads. Our analysis included 

rate data through 2004,13 and according to freight railroad officials, 

shippers, and financial analysts, since 2004, rates have continued to 

increase as the demand for freight rail service has increased, and rail 

capacity has not kept pace with demand. 

Other Costs Have Shifted 

to Shippers, and Some 

Charges Are Not 

Accurately Tracked 

While rates have generally decreased since 1985, other costs have been 

passed on to shippers, some of which STB has not accurately tracked. 

Several shippers with whom we spoke agreed that rates have dropped 

over the long-term, but they also said that rates do not reflect the total cost 

of shipping by rail. According to some shippers, costs have shifted from 

the railroads to shipping companies, including the costs of railcar 

ownership. Figure 6 shows that tons carried by railcar ownership has 

shifted nearly 20 percent since 1985, indicating less tonnage shipped on 

railcars owned by freight railroad companies. 

 13According to STB officials, the 2005 waybill data will become available in Fall 2006. 

Page 16 GAO-07-94 Freight Railroads
Figure 6: Tonnage Carried by Railcar Ownership, 1987-2004

0

10

20

30

40

50

60

70

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

19992000

2001

2002

2003

2004

Percentage of tons carried by railcar ownership

Year

Privately owned railcars

Railroad-owned railcars

Source: GAO analysis of STB data.

Besides rates, other costs that shippers reported were infrastructure 

upgrade costs, fuel surcharges, 14 and congestion fees. Conversely, one 

Class I railroad told us that some rates in the Carload Waybill Sample do 

not account for rebates or incentives that may change the actual rate paid

by the shipper. We are unable to report on the full extent of all costs 

because STB has not accurately tracked the railroad revenues associated 

with some of these charges. For example, freight railroad companies do 

not consistently report revenues raised from fuel surcharges for use in the 

Carload Waybill Sample. Some railroads report fuel surcharges as part of

their general revenues, while others categorize the surcharges separately 

under a miscellaneous revenue category, and still other railroads may not

report revenue collected from fuel surcharges at all. Shippers have 

expressed deep concerns over how fuel surcharges relate to actual fuel 

costs. Other railroad revenues, such as those generated at railcar

14Fuel surcharges are charges associated with recouping the cost of fuel. How fuel 

surcharges are calculated varies among Class I railroads because some use a mileage-based

system while others use a percentage of the base rate. 

Page 17 GAO-07-94 Freight Railroads
auctions15 and through congestion fees, may not be included in the waybill 

sample either. Understanding what railroads do and do not report as 

miscellaneous revenue in the waybill sample may be of increasing 

importance because fuel surcharges have become more prevalent, and 

railroad revenue reported as miscellaneous revenue has substantially risen 

in recent years. From 2000 through 2004, the miscellaneous revenue

reported in the waybill sample has more than quadrupled in value, from 

$141 million to $614 million (see fig. 7). Although an increase in value, 

$614 million still represents less than 1.5 percent of the approximately $42 

billion in freight railroad revenue reported for 2004. Since 2004, 

miscellaneous revenue may have further increased as railroad and shipper 

groups with whom we spoke said that many fuel surcharge increases took 

effect in 2005. During our review, STB proposed to more closely track and 

otherwise monitor revenues associated with fuel surcharges. 

Figure 7: Miscellaneous Revenue Tracked in Carload Waybill Sample, 2000-2004 

Dollars (in millions)

Year

Source: GAO analysis of STB data.

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004

 15At railcar auctions, railroad companies auction to the highest bidder the guaranteed 

delivery of a set number of railcars at specified future delivery dates. If railroads fail to

deliver the railcars at the specified time, the railroads may pay a penalty to the shippers; if 

shippers find they cannot use the railcars at the time delivered then the shipper may pay a

penalty to the railroad. 

Page 18 GAO-07-94 Freight Railroads
Concerns about competition and captivity in the railroad industry remain 

because traffic is concentrated in fewer railroads, although there is 

disagreement on the state of competition in the industry. It is difficult to 

determine the number of captive shippers, because proxy measures can 

overstate or understate captivity, but our analysis of available measures 

indicates that the extent of captivity is dropping. At the same time, the 

percentage of all industry traffic running substantially over the statutory 

threshold for rate relief has increased from about 4 percent of tonnage in 

1985 to about 6 percent of tonnage in 2004. Furthermore, some economic 

areas with access to one Class I railroad have higher percentages of traffic

traveling at rates that exceed the statutory threshold for rate relief. 

During the past 30 years, the freight railroad industry has become more 

concentrated. In 1976, there were 30 independent Class I railroad systems, 

consisting of 63 Class I railroads operating in the United States. Currently 

there are seven railroad systems, consisting of seven Class I railroads. 

Nearly half of that reduction was attributable to consolidations.16 The 

railroad industry is dominated by four Class I railroads—two in the East 

and two in the West. As figure 8 shows, the market share of these four 

Class I railroads has been increasing and accounted for over 89 percent of 

the industry’s revenues in 2004. 

Competition and Captivity 

Concerns Remain 

The Freight Railroad Industry 

Has Become More 

Concentrated 

 16Other reasons for the reduction in the number of Class I railroads include carrier 

bankruptcies and a series of changes in the threshold for qualifying as a Class I railroad

(from $5 million in annual revenue in 1976 to $250 million in 1992).

Page 19 GAO-07-94 Freight Railroads
Figure 8: Percentage of Railroad Market Represented by Four Largest Class I 

Railroads, 1985-2004 

0

20

40

60

80

100

Tonnage

Revenue

1985 1990 1995 2000 2004

Percentage

Year

Source: GAO analysis of STB data.

There is significant disagreement on the state of competition in the rail 

industry and on whether or not federal regulation—resulting from 

legislation such as the Staggers Rail Act—has ensured effective 

competition among railroads. This disagreement was represented on our 

panel of 11 experts, 6 of whom indicated that rail-to-rail competition has 

been achieved (either “greatly” or “somewhat”) and 4 of whom maintained 

that effective competition had not been achieved.

17 One member of our 

panel viewed less competition among rail carriers as a negative 

development because it can result in less efficient railroad companies and 

fewer options for shipping companies. Another member of our panel said

that industry consolidation was essential to achieving an efficient and

complete rail network under fewer, but ultimately stronger, railroad 

companies. Other experts also pointed to the hundreds of short-line 

 17One participant did not respond to this question. 

Page 20 GAO-07-94 Freight Railroads
railroads18 that have come into being since the enactment of the Staggers 

Rail Act, as well as increases in other competitive options for shippers 

from other modes such as trucks and barges. 

A reduction in competitive options can have a significant impact on the 

rates railroads charge shippers. There are a variety of contexts that affect 

how railroads compete with each other and with other modes, such as 

when route origins and destinations can both be reached by more than one 

railroad, or by multiple modes of transportation.19 Comparing two routes 

for shipping the same commodity, but using a different number of rail 

carriers, can illustrate this effect. Figure 9 shows two long-distance grain 

routes that both terminate in the Portland, Oregon, economic area from 

different origin points. Both routes carry comparable tonnage, but the 

route originating in the economic area in and around Sioux Falls, South 

Dakota, is served by two Class I railroads, whereas the route from the 

Minot, North Dakota, economic area is served by one Class I railroad. The 

rates for the Minot route are roughly double the rates for the Sioux Falls 

route. 

 18A short-line railroad is an independent railroad company that operates over a short

distance. 

19Winston, pp. 54-57. 

Page 21 GAO-07-94 Freight Railroads
Figure 9: Comparison of Rates Charged on Long-distance Grain Routes, 1997-2004

Cents per ton mile

Year

Source: GAO analysis of STB data.

Sioux Falls economic area to Portland economic area

Minot economic area to Portland economic area

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

199

1999

2000

2001

2002

2003

2004

8

1997

Note: For some years, data have been removed due to insufficient sample size. 

The ability to build out to another railroad can also create competition and 

improve railroad rates for some shippers. For example, following a buildout,20 a shipper gained access to a second railroad at an origin point that 

had previously been served by one Class I railroad.21 Figure 10 shows that 

within a few years after the introduction of service by the second railroad,

the rates had dropped significantly. Because even a short segment buildout can be quite costly, shippers are unlikely to pursue build-out options 

without a substantial traffic base. Some experts with whom we spoke said 

that situations like the one depicted in figure 9 reflect the reality of 

differential pricing in the freight railroad industry, or they suggest that 

other factors such as differences in the length of two different routes may 

be the cause of rate discrepancies. Others believe that a significant rate 

 20A build-out is a shipper’s option to build (or have some other party build) a track 

connection to a competing railroad. 

21We do not provide information identifying the location or the shipper involved because 

doing so could reveal proprietary information. 

Page 22 GAO-07-94 Freight Railroads
decrease after the introduction of competition is evidence that railroads 

are extracting monopoly rates from captive shippers. 

Figure 10: Rate Changes after the Introduction of a Second Carrier 

Source: GAO analysis of STB data.

Railroad 1—rates

Railroad 2—rates

Earlier to later

0x

2x

4x

6x

8x

Cents per ton mile—masked

While competition between rail carriers is particularly important in some 

cases, in other cases, competition between rail and other transportation 

modes, such as trucks and barges, may be more important. Particularly for 

bulk commodities (i.e., grain), when shipper locations can be served by 

barge transportation, rail rates will be lower relative to rail costs than on 

routes that are not conducive to barge competition. Figure 11 depicts costs 

and revenues for two routes, one (from the Champaign, Illinois economic 

area to the New Orleans, Louisiana economic area) with rail and barge 

options, and the other (from the Champaign, Illinois economic area to the 

Atlanta, Georgia economic area) with just a rail option. Although both 

routes have the same origin, for shipping the same commodity over a

comparable distance, the route with the barge option has consistently 

lower rates than the route with just rail service. 

Page 23 GAO-07-94 Freight Railroads
Figure 11: Comparison of Rate Changes from Champaign, Illinois, Economic Area 

to New Orleans, Louisiana, Economic Area and Champaign, Illinois, Economic Area 

to Atlanta, Georgia, Economic Area, 1990-2004 

Cents per ton mile

Year

Source: GAO analysis of STB data.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

199

1999

2000

2001

2002

2003

2004

8

1997

1996

199

1994

1995

3

1990

1991

1992

Champaign economic area to New Orleans economic area

Champaign economic area to Atlanta economic area

Besides the number of rail carriers serving a location, the use of contracts

for rail service can affect the competitive landscape. The Staggers Rail Act 

allowed railroad and shipping companies to enter into confidential 

contracts for rail service and also placed all traffic running under contract

outside the remaining rate regulations. According to railroad and shipper 

groups, the duration of contracts has declined, in part because of the 

railroads’ desire to quickly react to shifting market demand, which can 

result in charging higher rates. Other shippers were concerned that 

moving away from confidential contracts to public pricing could represent 

price signaling and further reduce competition between railroads. In 2004,

70 percent of tonnage and 71 percent of industry revenue moved under 

contract. 

Page 24 GAO-07-94 Freight Railroads
It is difficult to determine precisely how many shippers are “captive” to 

one railroad because the proxy measures that provide the best indication

can overstate or understate captivity.22 One way of determining potential 

captivity is to identify which Bureau of Economic Analysis (BEA) 

economic areas were served by only one Class I railroad.23 In 2004, 27 of 

the 177 BEA economic areas were served by only one Class I railroad.24 As 

shown in figure 12, these areas include parts of Montana, North Dakota, 

New Mexico, Maine, and smaller areas in several states. 

Captive Shippers Are 

Difficult to Identify, but 

Available Measures 

Indicate Captivity 

Dropping in the Railroad 

Industry 

 22Jerry Ellig, “Railroad Deregulation and Consumer Welfare,” Journal of Regulatory

Economics (The Netherlands: Klower Academic Publishers: 2002), p. 156. 

23Economic areas are those areas defined by BEA, which defines the relevant regional 

economic markets in the United States. 

24The number of carriers serving a given location is not indicated in the Carload Waybill 

Sample. We obtained this additional information from DOT.

Page 25 GAO-07-94 Freight Railroads
Figure 12: Number of Class I Railroads Serving Economic Areas, 2004 

Number of railroads (includes ownership and track rights)

5 or more

2-4

1

0

(11)

(137)

(27)

(2)

Source: GAO analysis of BEA and GIS data.

Another way of looking at potential captivity is to calculate how much 

route tonnage originating in a given economic area has access to only one 

Class I railroad. Figure 13 shows the percentage in 2004 of all industry 

tonnage originating in economic areas with access to only one Class I 

railroad. In particular, economic areas with more than 75 percent of 

tonnage shipped on one railroad appear most prevalent in states such as 

Montana, Idaho, North Dakota, and Texas. Tonnage originating in these 

economic areas varies widely, from a little over 55,000 tons to over 36 

million tons. 

Page 26 GAO-07-94 Freight Railroads
Figure 13: Percentage of All Industry Tonnage Originating in Economic with Access to One Class I Railroad, 2004 

Percentage of tonnage with access to one Class I railroad (2004)

N/A

25% or less

26% to 50%

51% to 75%

More than 75%

(2)

(133)

(13)

(4)

(25)

Source: GAO analysis of BEA, DOT, and STB data.

According to our analysis of available measures, the overall extent of 

captivity appears to be dropping in the freight railroad industry. We 

examined tonnage, revenue, and access statistics for all routes—

originating and terminating in economic areas—captured in the Carload 

Waybill Sample and other DOT data. In 2004, origin and destination routes 

with access to only one Class I railroad carried 12 percent of industry 

revenue and 10 percent of industry tonnage, which represents a decline 

Page 27 GAO-07-94 Freight Railroads
from 1994, when 22 percent of industry revenue and 21 percent of industry 

tonnage moved on routes served by one Class I railroad (see table 1).25

Table 1: Changes in Percentage of Industry Revenue and Tonnage on Origin and 

Destination Routes with Access to One Class I Railroad

Year Percentage of revenue Percentage of tonnage

1994 22.87 20.59

2004 12.29 10.43

Source: GAO analysis of BEA, DOT, and STB data. 

This decline suggests that more railroad traffic is traveling on routes with 

access to more than one Class I railroad. While overall industry tonnage 

with access to more than one Class I railroad appears to have increased,

some economic areas have a higher percentage of all industry traffic 

tonnage shipping on one Class I railroad. From 1994 through 2004, parts of 

states such as Texas, Tennessee, and Montana experienced increases of 25 

percent or more in tonnage with access to one Class I railroad while parts 

of other states such as Oregon, New York, and Florida saw their 

percentages of tonnage with access to one Class I railroad drop by more 

than 25 percent (see fig. 14). 

 25For our analysis of access to one or more Class I railroads, we examined data for 1994 

and 2004, the earliest and latest years for which such data were available. 

Page 28 GAO-07-94 Freight Railroads
Figure 14: Changes in Percentage of All Industry Traffic Tonnage with Access to One Class I Railroad Originating in

Economic Areas, 1994 through 2004 

Source: GAO analysis of BEA, DOT, and STB data.

Change in percentage of tonnage with access to one Class I railroad (1994-2004)

N/A

Decreases of 25% or more

Decreases of 0% to 25%

Increases of greater than 0% to 25%

Increases of 25% or more

(2)

(28)

(84)

(55)

(8)

While examining BEA areas provides a proxy measure for captivity, a 

number of factors may understate or overstate whether shippers are 

actually captive. The first three factors may work to understate the extent 

of captivity among shippers. First, routes originating within economic 

areas served by multiple Class I railroads may still be captive if only one 

Class I railroad serves their destination, and a shipper must use that one 

railroad for that particular route. Second, some BEA areas are quite large, 

so a shipper within the area may have access to only one railroad, even 

Page 29 GAO-07-94 Freight Railroads
though there are two or more railroads within the broader area. Third, an

origin may only be served by one Class I railroad, but one Class I railroad 

does not serve the entire route, meaning the route may be partially captive,

although more than one Class I railroad provides service between its 

origin and destination. Two additional limitations may work to overstate 

the number of locations captive to one railroad. First, this analysis 

accounts for Class I railroads only and does not account for competitive 

rail options that might be offered by Class II or III railroads26 such as the 

Guilford Rail System, which operates in northern New England. Second, 

this analysis considers only competition among rail carriers and does not 

examine competitive options offered by rail and other transportation 

alternatives such as trucks and barges. 

Amount of Potentially 

Captive Traffic Traveling at 

Rates at Levels 

Substantially above the 

Threshold for Rate Relief 

Has Increased 

To determine potential captivity, we applied another measure— traffic 

traveling at rates equal to or greater than 180 percent R/VC, which is part 

of the statutory threshold for bringing a rate relief case before STB. STB 

regards traffic at or above this threshold as “potentially captive.” As with 

BEA areas, examining R/VC levels as a proxy measure for captivity can 

also understate or overstate captivity. For example, it is possible for the 

R/VC ratio to increase while the rate paid by a shipper is declining. 

Assume that in Year 1, a shipper is paying a rate of $20 and the railroad’s 

variable cost is $12; the R/VC ratio—a division of the rate and the variable

cost—would be 167 percent. If in Year 2, the variable costs decline by $2 

from $12 to $10 and the railroad passes this cost savings directly on to the 

shipper in the form of a reduced rate, the shipper would pay $18 instead of

$20. However, as shown in table 2, because both revenue and variable cost 

decline, the R/VC ratio increases to 180 percent.

Table 2: Possible Changes in R/VC Ratios

Year 

Revenue

collected

Variable 

 costs R/VC

Year 1 $20.00 $12.00 167%

Year 2 $18.00 $10.00 180%

Source: GAO.

 26STB classifies railroads according to operating revenues. Class II railroads had revenues

of $20 million to $250 million, and class III railroads had revenues of less than $20 million 

in 1991 dollars. 

Page 30 GAO-07-94 Freight Railroads
Since 1985, and as a percentage of all traffic, the amount of potentially 

captive traffic traveling at rates over 180 percent R/VC and the revenue

generated from that traffic have both declined. Revenue generated from 

traffic traveling at rates over 180 percent R/VC decreased from 41 percent 

of all industry revenue in 1985 to 29 percent in 2004 (see fig. 15). 

Figure 15: Percentage of Industry Tonnage and Revenue Generated from Traffic 

Traveling at Rates Equal to or Greater Than 180 Percent R/VC, 1985-2004 

Industry percentage

Year

Source: GAO analysis of STB data.

0

5

10

15

20

25

30

35

40

45

199

1999

2000

2001

2002

2003

2004

8

19

1990

1991

1992

1993

1994

1995

1996

1997

89

1988

1987

1986

1985

Percentage of industry revenue from tonnage equal to or greater than 180% R/VC

Percentage of industry tonnage equal to or greater than 180% R/VC

However, since 1985, tonnage from traffic traveling at rates substantially 

over the threshold for rate relief has increased. Total industry tonnage has

increased significantly (from 1.37 billion tons in 1985 to 2.14 billion tons in 

2004), with the tonnage traveling at rates above 300 percent R/VC more 

than doubling—from about 53 million tons in 1985 to over 130 million tons 

in 2004 (see fig. 16). 

Page 31 GAO-07-94 Freight Railroads
Figure 16: Tonnage Traveling at Rates over 300 Percent R/VC, 1985-2004 

Tons (in millions)

Year

Source: GAO analysis of STB data.

0

20

40

60

80

100

120

140

160

180

199

1999

2000

2001

2002

2003

2004

8

19

1990

1991

1992

1993

1994

1995

1996

1997

89

19881987

1986

1985

As a percentage of all industry traffic, traffic traveling at rates between 180 

and 300 percent R/VC decreased from 36 percent in 1985 to 25 percent in 

2004. In contrast, the percentage of all industry traffic traveling at rates 

above 300 percent R/VC increased from 4 percent in 1985 to 6 percent in 

2004 (see fig. 17). 

Page 32 GAO-07-94 Freight Railroads
Figure 17: Percentage of Tonnage by R/VC, 1985 and 2004 

4% ton

share

6% ton

share

0

500

1,000

1,500

2,000

2,500

1985 2004

Tons (in millions)

Year

Total tons greater than 300 R/VC

Total tons between 180 and 300 R/VC

Total tons less than 180 R/VC

Source: GAO analysis of STB data.

36%

ton

share

25%

ton

share

60%

ton

share

69%

ton

share

Increases in traffic traveling at rates over 300 percent R/VC appear widely

distributed throughout the country, although in some areas increases have 

been higher than in others. Four economic areas located in parts of 

Montana, New Mexico, North Dakota, and West Virginia had the largest 

increases in traffic traveling at rates over 300 percent R/VC, with an 

increase of more than 25 percent from 1985 through 2004 (see fig. 18). 

Page 33 GAO-07-94 Freight Railroads
Figure 18: Changes in Percentage of Tonnage Traveling at Rates over 300 Percent R/VC, by Originating Economic Area, 1985 

through 2004 

Changes in percentage of tonnage traveling at rates over 300 percent R/VC, by originating

economic area

N/A

Decreases of 0% to 25%

Increases of greater than 0% to 25%

Increases of 25% or more

(2)

(70)

(101)

(4)

Source: GAO analysis of BEA, DOT, and STB data.

In addition to national changes, significant increases in traffic traveling at

rates over 300 percent R/VC can be seen in certain states, for certain 

commodities, and for certain routes. For example, in 1985 virtually no coal 

originating in Ohio traveled at rates over 300 percent R/VC. In 2004, nearly 

half of coal traffic originating in Ohio traveled at rates over 300 percent 

R/VC. Increases in traffic traveling at rates over 300 percent R/VC can also

be seen at the route level. Figure 19 shows the amount of traffic traveling 

at rates over 300 percent R/VC on long-distance grain routes from the 

Minot, North Dakota, and Billings, Montana, economic areas to the 

Page 34 GAO-07-94 Freight Railroads
Portland-Vancouver-Beaver Falls, Oregon, economic area. Of the routes 

we examined, these two had the highest percentage of traffic traveling at 

rates over 300 percent R/VC for 2004, and on both routes, this traffic had 

substantially increased over 1985 levels.27

Figure 19: Long-distance Grain Route Changes in Percentage of Tonnage Traveling

at Rates over 300 Percent R/VC, 1985-2004

Percentage

Year

Source: GAO analysis of STB data.

0

10

20

30

40

50

60

70

199

1999

2000

2001

2002

2003

2004

8

19

1990

1991

1992

1993

1994

1995

1996

1997

89

1988

1987

1986

1985

Minot economic area to Portland economic area

Billings economic area to Portland economic area

For both the Minot and Billings routes, increases in R/VC from 1985 

through 2004 were driven more by increases in revenue than by changes in

variable cost. From 1985 through 2004, revenue from all grain traffic—not 

just traffic traveling at rates above the statutory threshold for rate relief—

on the Minot, North Dakota, to the Portland-Vancouver-Beaver Falls, 

Oregon, economic area increased from approximately $18.4 million to 

approximately $30.8 million. Variable cost increased at a much slower 

 27By contrast, the long-distance grain route shown in figure 9 (from the Sioux Falls, South

Dakota, economic area to the Portland, Oregon, economic area) had no traffic traveling at 

rates over 300 percent R/VC for 2004. 

Page 35 GAO-07-94 Freight Railroads
pace, rising from approximately $12.2 million to approximately $12.4 

million. For the route from the Billings, Montana, economic area to the 

Portland-Vancouver-Beaver Falls, Oregon, economic area, grain revenue

more than tripled, from approximately $11.2 million in 1985 to

approximately $42.7 million in 2004. Variable cost also increased 

substantially—although still not as much as revenue—rising from 

approximately $5.5 million to approximately $15.1 million. 

Some Areas with Access to 

One Railroad Have Higher 

Percentages of Traffic 

Traveling at Rates That 

Exceed the Threshold for 

Rate Relief 

Some economic areas with access to one Class I railroad also have more 

than half of their traffic traveling at rates that exceed the statutory 

threshold for rate relief. For example, parts of New Mexico and Idaho with 

access to one Class I railroad have more than half of all traffic originating 

in those same areas traveling at rates over 180 percent R/VC (see fig. 20). 

However, there are instances in which an economic area may have access 

to two or more Class I railroads and still have more than 75 percent of its 

traffic traveling at rates over 180 percent R/VC, as well as other instances 

in which an economic area may have access to one Class I railroad and 

have less than 25 percent of its traffic traveling at rates over 180 percent 

R/VC. Yet there are parts of the country with access to one Class I railroad 

that also have higher percentages of traffic traveling at rates over the 

statutory threshold for rate relief. 

Page 36 GAO-07-94 Freight Railroads
Figure 20: Overlap between Percentage of Tonnage over Threshold for Rate Relief and Access to Only One Class I Railroad

Source: GAO analysis of BEA, DOT, and STB data.

Percentage of tonnage over 180 R/VC (2004)

Area with access to one Class 1 railroad

N/A

25% or less

26% to 50%

51% to 75%

More than 75%

(27)

(2)

(90)

(63)

(16)

(6)

Our analysis shows that some areas of the country with access to only one 

Class I railroad have higher levels of traffic traveling at rates over the 

statutory threshold for rate relief. This situation may reflect reasonable 

economic practices by railroads in an environment of excess demand, or it 

may represent an abuse of market power. Our analysis provides an 

important first step in assessing competitive markets nationally, but it is 

imperfect given the inherent limitations of the Carload Waybill Sample

and of the proxy measures available for weighing captivity. When 

Page 37 GAO-07-94 Freight Railroads
combined with comments from participants on our expert panel and 

interviews with shipper and railroad groups, the results of our analysis 

suggest that shippers in selected markets may be paying excessive rates, 

meriting further inquiry and analysis.

The Staggers Rail and ICC Termination Acts promoted greater reliance on

competition as the preferred method to protect shippers from 

unreasonable rates and granted STB broad authority to monitor the 

performance of the railroad industry. STB has taken a number of actions

to provide protections for captive shippers from unreasonable rates in the 

absence of effective competition, including establishing a process for 

captive shippers to obtain relief from unreasonable rates. Despite STB’s 

actions, there is little effective relief for captive shippers because STB’s 

standard rate relief process is largely inaccessible. While STB continues to 

refine its practices, an assessment of competitive markets would provide 

further information about the extent of captivity among shippers and the 

merits of a range of proposed actions to enhance competitive options 

available to shippers. In addition, changes to the rate relief process could 

provide greater protection from unreasonable rates. 

The Staggers Rail and ICC Termination Acts encourage competition as the 

preferred way to protect shippers and to promote the financial health of 

the railroad industry. At the same time, the acts give STB the authority to

Despite STB’s 

Actions, Analysis of 

Competitive Markets 

Is Needed to Address 

Lack of Effective 

Relief for Captive 

Shippers 

STB Has Broad Authority 

to Monitor the Railroad 

Industry 

• adjudicate rate cases to resolve disputes between captive shippers and 

railroads upon receiving a complaint from a shipper; 

• approve rail transactions, such as mergers, consolidations, acquisitions, 

and trackage rights; 

• prescribe new regulations, such as rules for competitive access and 

merger approvals; and 

• inquire into and report on rail industry practices, including obtaining 

information from railroads on its own initiative and holding hearings to 

inquire into areas of concern, such as competition. 

The federal courts have upheld STB’s general powers to monitor the rail 

industry, including its ability to subpoena witnesses and records and 

depose witnesses. 

Page 38 GAO-07-94 Freight Railroads
STB has the authority and ability to inquire into and report on railroad 

practices, and it also has authority to take a number of actions based on 

the results of that inquiry. First, STB could issue a general rule making that 

would alter the administrative rules for the industry. For example, STB has 

the authority to require a railroad to make their terminal facilities available 

to another railroad under certain circumstances. Second, STB could 

reopen a past decision if it found a material error in the case, new 

evidence emerged, or circumstances affecting the case substantially 

changed. Finally, if STB received a complaint from a shipper, it could then

launch a formal investigation and prescribe specific remedies to address 

the complaint. 

Under its adjudicatory authority, STB has taken a number of actions to 

provide protection for captive shippers. STB determines the 

reasonableness of challenged rates in the absence of competition upon 

receiving a complaint from a shipper. The rate relief process is the 

principal method by which shippers seek relief from unreasonable rates. 

STB developed standard rate case guidelines, under which captive 

shippers can challenge a rail rate and appeal to STB for rate relief. Under 

the standard rate relief process, STB assesses whether the railroad 

dominates the shipper’s transportation market and, if it finds market 

dominance, proceeds with further assessments to determine whether the 

actual rate the railroad charges the shipper is reasonable. STB requires 

that the shipper demonstrate how much an optimally efficient railroad 

would need to charge the shipper and construct a hypothetical, perfectly

efficient railroad that would replace the shipper’s current carrier. As part 

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

opportunity to present their facts and views to STB, as well as to present 

new evidence. In 1999,28 we reported that shippers and shippers’ 

associations indicated that constructing a hypothetical railroad is difficult,

particularly for small shippers, because the time and cost associated with 

the model’s development may outweigh the compensation afforded the 

shipper should STB determine that the challenged rate was unreasonable. 

Since we reported on the process in 1999, STB has taken several actions to 

reduce potential barriers for filing a complaint. For example, STB now 

conducts mediation to begin cases, has added staff to process cases, and 

STB Has Taken Actions to 

Protect Captive Shippers 

 28GAO, Railroad Regulation: Current Issues Associated with the Rate Relief Process, 

GAO/RCED-99-46 (Washington, D.C.: Feb. 26, 1999). 

Page 39 GAO-07-94 Freight Railroads
has eliminated certain criteria for assessing whether a railroad dominates 

a shipper’s market.29

STB also created alternatives to the standard rate relief process, 

developing simplified guidelines, as Congress required, for cases in which 

the standard rate guidelines would be too costly or infeasible given the 

value of the cases. Under these simplified guidelines, captive shippers who 

believe that their rate is unreasonable can appeal to STB for rate relief,

even if the value of the disputed traffic makes it too costly or infeasible to

apply the standard guidelines. In addition, STB created a voluntary 

arbitration option that parties can use to resolve disputes over rates. 

Under its authority to approve rail transactions, STB has approved railroad 

mergers that it finds consistent with the public interest. STB has also 

taken action to ensure that any potential merger-related harm to 

competition is mitigated. STB’s mitigation efforts have focused on 

preserving competition where it could be lost at 2-to-1 points,

30 for 

example, by imposing conditions that allow one railroad to operate over 

the tracks of another railroad (called trackage rights). STB has historically 

not taken action to introduce service where shippers have service by only 

one carrier.

Under its authority to prescribe new regulations, STB established a 

process by which shippers can file a complaint if they are captive to one 

railroad and believe that the railroad is engaged in anticompetitive 

behavior. Under this process, if the shipper proves that the railroad is 

engaged in anticompetitive behavior, STB can prescribe remedies such as

trackage rights that would give the shipper access to another railroad. 

 29In December 1998 and July 1999, STB excluded product and geographic competition as 

factors to be considered in market dominance proceedings, finding that the applicable law 

did not require consideration of those factors; that consideration of those factors unduly

burdened shippers attempting to bring rate cases; and that the exclusion of those factors 

would not have any substantial effect on the rates that the railroads could charge in the 

marketplace (See Surface Transportation Board “News” releases Nos. 99-32, issued on Jul.

2, 1999, and 98-82, issued on Dec. 21, 1998). The railroad industry sought judicial review of

the Board’s decisions, and in Association of Am. Railroads v. STB, 237 F.3d 676 (D.C. Cir.

2001), the United States Court of Appeals for the District of Columbia Circuit (Court)

remanded (returned) the matter for the Board’s further consideration. On remand, STB 

provided additional analysis to support its earlier decision, and the court then affirmed

(upheld) STB’s action, in Association of Am. Railroads v. STB, 306 F.3d 1108 (D.C. Cir.

2002). 

302-to-1 points are where shippers currently have access to two carriers but could lose

access to one of them through a merger or acquisition. 

Page 40 GAO-07-94 Freight Railroads
Finally, under its authority to inquire into and report on the rail industry, 

STB instituted proceedings to review rail access and competition issues. 

For example, in April 1998, at the request of Congress, STB commenced a 

review of access and competitive service in the rail industry. In April 1998, 

STB decided to consider revising its competitive access rules. However, in 

its December 1998 report to Congress, STB declined to take further action 

on this issue because it had adopted new rules giving shippers temporary 

access to alternative routing options during periods of poor service. In

addition, STB observed that the competitive access issue raises basic 

policy questions that are more appropriately resolved by Congress. In 

2001, STB adopted new regulations for rail mergers that require the 

applicant to demonstrate that the merger would enhance, not just 

preserve, competition. 

Despite STB’s efforts, there is widespread agreement that STB’s standard 

rate relief process is inaccessible to most shippers and does not provide 

for expeditious handling and resolution of complaints. The process 

remains expensive, time consuming, and complex. While STB does not 

keep records of the cost of a rate case, shippers we interviewed agreed 

that the process can cost approximately $3 million per litigant. Shippers 

told us that, to initiate a case, the case would need to involve several 

million dollars so that it would be worthwhile to spend $3 million on a 

case that they could possibly lose. Thus, shippers noted that only largevolume shippers, such as coal shippers, with set origins and destinations 

have the money to be able to afford the STB rate relief process. In 

addition, shippers said that they do not use the process because it takes so 

long for STB to reach a decision. Lastly, shippers continue to state that the 

process is both time consuming and difficult because it calls for them to 

develop a hypothetical competing railroad to show what the rate should be

and to demonstrate that the existing rate is unreasonable. Since 2001, only 

10 cases have been filed, and these cases took between 2.6 and 3.6 years—

an average of 3.3 years per case—to complete. Of those 10 cases, 9 were 

filed by coal shippers. 

The simplified guidelines also have not effectively provided relief for 

captive shippers. Although these simplified guidelines have been in place 

since 1997, a rate case has not been decided under the process set out by 

the guidelines. STB held public hearings in April 2003 and July 2004 to 

examine why shippers have not used the guidelines and to explore ways to 

improve them. At these hearings, numerous organizations provided 

comments to STB on measures that could clarify the simplified guidelines, 

but no action was taken. STB observed that parties urged changes to make 

Efforts Have Led to Little 

Effective Relief 

Page 41 GAO-07-94 Freight Railroads
the process more workable, but disagreed on what those changes should 

be. Several shipper organizations told us that shippers are concerned 

about using the simplified guidelines because they believe the guidelines 

will be challenged in court, resulting in lengthy litigation. STB officials told

us that they—not the shippers—would be responsible for defending the 

guidelines in court. STB officials also said that if a shipper won a small 

rate case, STB could order reparations to the shipper before the case was

appealed to the courts. 

STB’s arbitration option has never been used. Under this approach, an

arbitrator would decide the rate, using a “give and take” approach—that is, 

the arbitrator would determine the rate without being required to pick one 

of the two offers. According to STB officials, this option has not been 

used, in part, because the cases that go before STB are contentious, with 

high monetary stakes. As a result, there is less willingness from either side 

to arbitrate.

Shippers have not obtained relief through STB’s “competitive access” 

rules. Under these rules, shippers can file a complaint to request that one 

railroad obtain access to another railroad’s tracks when necessary to 

remedy anticompetitive behavior by the owning railroad. Shippers who file 

a complaint must show that the owning railroad has engaged in

anticompetitive behavior. To date, STB has found that all complaints have 

failed to prove that the owning railroad has engaged in anticompetitive 

behavior. 

During our review, STB has continued to refine its processes for shippers 

to obtain relief from unreasonable rates and competitive access. For 

example, STB recently proposed a rule making to make changes to the 

simplified guidelines in order to respond to comments gathered at the STB 

hearings held in April 2003 and July 2004 to examine why those guidelines 

have not been used by shippers and to explore ways to improve the 

guidelines. In addition, STB is seeking public comment on several 

measures it has proposed to adopt regarding railroad practices involving 

fuel surcharges. The proposals follow STB’s May 2006 public hearing on

how railroads calculate and charge fuel surcharges and respond to 

extensive testimony on these charges submitted to STB by the rail 

industry, the public, and railroad customers. STB announced its intent to 

hold a public hearing on certain issues related to rail transportation rates 

for grain. Lastly, STB recently requested written comments and held a 

public hearing in response to a petition filed by a shipper group to prevent, 

or put a time limit on, paper barriers, which are contractual agreements 

STB Continues to Refine 

the Process 

Page 42 GAO-07-94 Freight Railroads
that may be made when a Class I railroad either sells or leases some of its 

track to another railroad (typically a short line railroad or regional 

railroad), but stipulates that virtually all traffic that originates on that line

must interchange with the Class I railroad that sold the tracks or pay a 

penalty. 

The results of our analysis suggest a reasonable possibility that shippers in 

selected markets may be paying excessive rates related to a lack of 

competition in these markets. While our analysis of available measures 

shows that the extent of captivity appears to be dropping in the freight 

railroad industry, shippers that may be captive are paying substantially 

over the statutory threshold for initiating a rate relief case. This situation 

may simply reflect reasonable economic practices by railroads in an 

increasingly constrained environment in which demand for rail services 

increasingly exceeds supply, or it may represent an abuse of market 

power. Our analysis provides an important first step in assessing 

competitive markets nationally, but it is imperfect given the inherent 

limitations of the Carload Waybill Sample and the proxy measures 

available for weighing captivity. A more rigorous analysis of competitive 

markets nationally is needed—one that identifies the state of competition 

nationwide and inquires into pricing practices in specific markets. If this 

assessment determines that market power is being abused or the goals of 

the Staggers Rail Act are not being met, STB could consider several 

methods to ease competition concerns, such as initiating a generally 

applicable rule making; or, if a complaint is filed, providing specific 

remedies to increase competition. 

Shipper groups, economists, and other experts in the rail industry have 

suggested several alternative approaches as remedies that could provide 

more competitive options to shippers in areas of inadequate competition 

or excessive market power. These groups view these approaches as more 

effective than the rate relief process in promoting a greater reliance on

competition to protect shippers against unreasonable rates. Some 

Assessment of Competitive 

Markets and Changes to 

Rate Relief Process Could 

Provide More Relief 

Page 43 GAO-07-94 Freight Railroads
proposals would require legislative change, or a reopening of past STB 

decisions.31

These approaches each have potential costs and benefits. On the one 

hand, they could expand competitive options, reduce rail rates, and 

decrease the number of captive shippers as well as reduce the need for 

both federal regulation and a rate relief process. On the other hand, 

reductions in rail rates could affect railroad revenues and limit the 

railroads’ ability and potential willingness to invest in their infrastructure. 

In addition, some markets may not have the level of demand needed to

support competition among railroads. However, in markets that do, the 

targeted approaches frequently proposed by shipper groups and others 

include the following: 

• Reciprocal switching: This approach would allow STB to require railroads 

serving shippers that are close to another railroad to transport cars of a 

competing railroad for a fee. The shippers would then have access to 

railroads that do not reach their facilities. This approach is similar to the 

mandatory interswitching in Canada, which enables a shipper to request a 

second railroad’s service if that second railroad is within approximately 18 

miles. Some Class I railroads already interchange traffic using these 

agreements, but they oppose being required to do so. Under this approach,

STB would oversee the pricing of switching agreements. This approach 

could also reduce the number of captive shippers by providing a 

competitive option to shippers with access to a proximate but previously 

inaccessible railroad and thereby reduce traffic eligible for the rate relief 

process (see fig. 21). 

 31Another proposal, articulated by economists Curtis Grimm and Cliff Winston, calls for the

elimination of STB. This proposal recognizes that captive shippers have likely been hurt by

a lack of competition, but it states that allowing the Department of Justice to review rail 

mergers instead of STB and ending the potential for reregulation of the industry could lead 

railroad officials and shippers to negotiate an agreement to address remaining rail 

competition concerns. Curtis Grimm and Clifford Winston, “Competition in the 

Deregulated Railroad Industry: Sources, Effects, and Policy Issues,” (AEI – Brooking 

Institution. Washington, D.C.: 2000). 

Page 44 GAO-07-94 Freight Railroads
Figure 21: Reciprocal Switching

Railroad 1

Railroad 2

Railroad 1 tracks

Railroad 2 tracks

Railroad 1 traffic on its own tracks

Railroad 1 cars transported by Railroad 2

Shipping destination

Source: GAO.

Railroad 2 transports

Railroad 1 cars to shipping 

destination for a fee

X

X

• Terminal agreements: This approach would require one railroad to grant 

access to its terminal facilities or tracks to another railroad, enabling both

railroads to interchange traffic or gain access to traffic coming from 

shippers off the other railroad’s lines for a fee. Current regulation requires 

a shipper to demonstrate anticompetitive conduct by a railroad before 

STB will grant access to a terminal by a nonowning railroad unless there is 

an emergency or when a shipper can demonstrate poor service and a 

second railroad is willing and able to provide the service requested. This 

Page 45 GAO-07-94 Freight Railroads
approach would require revisiting the current requirement that railroads 

or shippers demonstrate anticompetitive conduct in making a case to gain 

access to a railroad terminal in areas where there is inadequate 

competition. The approach would also make it easier for competing 

railroads to gain access to the terminal areas of other railroads and could 

increase competition between railroads. However, it could also reduce 

revenues to all railroads involved and adversely affect the financial 

condition of the rail industry. Also, shippers could benefit from increased 

competition but might see service decline (see fig. 22). 

Page 46 GAO-07-94 Freight Railroads
Figure 22: Terminal Agreements 

Railroad 1

Railroad 2

Railroad 1 tracks

Railroad 2 tracks

Railroad 1 traffic on its own tracks

Railroad 1 traffic on Railroad 2 tracks

Railroad 2 terminal (used by Railroad 1 in accordance with terminal agreement)

Source: GAO.

Railroad 1 allowed access

to Railroad 2 tracks, 

terminals, and other facilities

• Trackage rights: This approach would require one railroad to grant access 

to its tracks to another railroad, enabling railroads to interchange traffic 

beyond terminal facilities for a fee. In the past, STB has imposed 

conditions requiring that a merging railroad must grant another railroad 

trackage rights to preserve competition when a merger would reduce a 

shipper’s access to railroads from two to one. While this approach could 

potentially increase rail competition and decrease rail rates, it could also 

discourage owning railroads from maintaining the track or providing highquality service, since the value of lost use of track may not be

Page 47 GAO-07-94 Freight Railroads
compensated by the user fee and may decrease return on investment (see 

fig. 23). 

Figure 23: Trackage Rights 

Railroad 1

Railroad 2

Railroad 1 tracks

Railroad 2 tracks

Railroad 1 traffic on its own tracks

Railroad 1 traffic on Railroad 2 tracks, per trackage rights agreement

Railroad 1 terminal

Shipping destinations

Source: GAO.

X

X

X

X

Railroad 1 granted trackage 

rights to serve specified 

points on Railroad 2 tracks

“Bottleneck” rates: This approach would require a railroad to establish a 

rate, and thereby offer to provide service, for any two points on the 

railroad’s system where traffic originates, terminates, or can be 

interchanged. Some shippers have more than one railroad that serves them 

at their origin and/or destination points, but have at least one portion of a 

Page 48 GAO-07-94 Freight Railroads
rail movement for which no alternative rail route is available. This portion 

is referred to as the “bottleneck segment.” STB’s decision that a railroad is 

not required to quote a rate for the bottleneck segment has been upheld in

federal court.32 STB’s rationale was that statute and case law precluded it 

from requiring a railroad to provide service on a portion of its route when 

the railroad serves both the origin and destination points and provides a 

rate for such movement. STB requires a railroad to provide service for the

bottleneck segment only if the shipper had prior arrangements or a 

contract for the remaining portion of the shipment route. On the one hand, 

requiring railroads to establish bottleneck rates would force short-distance 

routes on railroads when they served an entire route and could result in 

loss of business and potentially subject the bottleneck segment to a rate 

complaint. On the other hand, this approach would give shippers access to 

a second railroad, even if a single railroad was the only railroad that 

served the shipper at its origin and/or destination points, and could 

potentially reduce rates (see fig. 24).

 32The U.S. Court of Appeals for the Eighth Circuit affirmed STB decision that a bottleneck 

carrier generally need not quote a separate rate for the bottleneck portion of the route.

Mid-American Energy Co. v. Surface Transportation Board, 169 F. 3d 1099 (8th Cir.: Feb. 

10, 1999). The D.C. Circuit affirmed STB holding that separately challengeable bottleneck 

rates can be required whenever a shipper has a contract over the nonbottleneck segment of 

a through movement. Union Pacific Railroad v. Surface Transportation Board, 202 F. 3d

337 (D.C. Cir.: 2000). 

Page 49 GAO-07-94 Freight Railroads
Figure 24: Bottleneck Rates

Railroad 1

Railroad 2

Railroad 1 tracks

Railroad 2 tracks

Source: GAO.

A

B

C

Railroad 1 does not have to quote 

a rate from A to B, only A to C. 

Railroad 2 can quote B to C, but 

generally does not.

Paper barriers: This approach would prevent or, put a time limit on, paper 

barriers, which are contractual agreements that can occur when a Class I 

railroad either sells or leases long term some of its track to other railroads

(typically a short-line railroad and/or regional railroad). These agreements 

stipulate that virtually all traffic that originates on that line must 

interchange with the Class I railroad that originally leased the tracks or 

pay a penalty. Since the 1980s, approximately 500 short lines have been 

created by Class I railroads selling a portion of their lines; however, the 

extent to which paper barriers are a standard practice is unknown because 

they are part of confidential contracts. When this type of agreement exists, 

it can inhibit smaller railroads that connect with or cross two or more 

Class I rail systems from providing rail customers access to competitive 

service. Eliminating paper barriers could affect the railroad industry’s 

overall capacity since Class I railroads may abandon lines instead of 

selling them to smaller railroads and thereby increase the cost of entering 

Page 50 GAO-07-94 Freight Railroads
a market for a would-be competitor. In addition, an official from a railroad 

association told us that it is unclear if a federal agency could invalidate 

privately negotiated contracts (see fig. 25). 

Figure 25: Paper Barriers 

Railroad 1

Railroad 3

Railroad 2

Railroad 1 tracks

Railroad 2 tracks

Railroad 3 tracks

Source: GAO.

B 

A

Railroad 1 may not carry traffic 

on Railroad 3 due to a

contractual agreement, or 

“paper barrier,” with Railroad 2 

Railroad 1 traffic on Railroad 2 tracks

Railroad 1 traffic on its own tracks

It will be important for policymakers, in evaluating these alternative 

approaches, to carefully consider the impact of each approach on the 

balance set out in the Staggers Rail Act. One significant consideration is 

the revenue adequacy of the railroads. The Staggers Rail Act established 

revenue adequacy as a goal for the industry and allowed the railroads to 

use differential pricing to increase their revenues. While the specific 

method for determining revenue adequacy has been controversial, the 

overall trend in revenue adequacy may be more important. In its last 

Page 51 GAO-07-94 Freight Railroads
report for 2004, STB determined that one railroad is revenue adequate and 

that others are approaching revenue adequacy. It is too early to determine 

that the industry as a whole is achieving revenue adequacy. Nevertheless, 

this improvement in the railroads’ financial condition represents a 

significant shift in the rail industry because for decades after the 

enactment of the Staggers Rail Act, the railroads were all considered 

revenue inadequate. The railroads need sufficient revenue for 

infrastructure investment to keep pace with increased demand. However, 

each of these changes could decrease the amount of revenue the railroads 

receive. Yet, as the railroad’s revenue adequacy improves, the question 

arises as to what degree the railroads should continue to rely, for their 

investment needs, on obtaining significantly higher prices from those with 

greater reliance on rail transportation. 

To prevent problems with unreasonable rates, some shipper groups 

propose targeted approaches that would provide them with more 

competitive options. A number of different approaches have also been 

suggested to make the rate relief process less expensive, more 

expeditious, and therefore potentially more accessible. Each of the 

proposed approaches has both advantages and drawbacks. These 

approaches include the following: 

• Increase the use of simplified guidelines: The simplified guidelines use 

standard industry average figures for revenue data instead of requiring the 

shipper to create a hypothetical railroad. This approach would reduce the 

time and complexity of the process; however, it may not provide such an

accurate and precise a measure as the standard process. Both shippers 

and railroad officials with whom we spoke agree that it is confusing to 

determine who is eligible to use the process and how it would work. STB 

recently issued a proposed rule making to pursue changes to the simplified 

guidelines to provide captive shippers greater access to regulatory 

remedies for unreasonable rail rates.

• Increase the use of arbitration: Under arbitration, two parties present 

their case before an arbitrator, who determines the rate. This process 

replaces the shipper’s requirement to create a hypothetical railroad. 

Proponents of arbitration argue that the threat of arbitration can induce 

railroads and shippers to resolve their own problems and limit the need

for federal regulation. In addition, the process is quicker and cheaper than

the standard rate relief process. For example, Canada offers an arbitration 

process known as Final Offer Arbitration (FOA), under which both parties 

submit their best and final offers, and the arbitrator considers the 

argument from both sides and picks one rate offer from either the railroad 

Page 52 GAO-07-94 Freight Railroads
or the shipper. FOA is quicker—statutorily, once the process begins it has

to be completed within 60 days, or 30 days for disputes involving freight

charges of less than $750,000, unless the parties agree to a different time 

frame. In addition, FOA is cheaper—estimates ranged up to $1 million 

Canadian dollars, for both parties. On the other hand, the decisions are 

good for only 1 year, so the process could in theory be revisited annually. 

Critics of this approach suggest that arbitration decisions may not be 

based on economic principles, such as the revenue and cost structure of 

the railroad, and arbitrators may not be knowledgeable about the railroad 

industry. Furthermore, opinions differ significantly about which types of 

disputes should be covered and what standards (if any) should apply. 

• Develop an alternative cost methodology: STB could develop an 

alternative to the cost methodology used under the standard process in 

which a shipper must demonstrate how much an optimally efficient 

railroad would need to charge a shipper by constructing a hypothetical, 

perfectly efficient railroad that would replace its current carrier. For 

example, STB could use a long-run incremental cost approach to evaluate

and decide rate cases. This process, which is used by the Federal Energy 

Regulatory Commission for regulating rates charged by pipeline 

companies, bases rates on the actual incremental cost of moving a 

particular shipment, plus a reasonable rate of return. This approach allows 

for a quick, standard method for setting prices, but does not take into 

account the need for differential pricing or the railroad’s need to charge 

higher rates in order to become revenue adequate. Structuring rate 

regulation around actual costs can also create potential disincentives for 

the regulated entity to control its costs. 

Recent forecasts predict that the demand for freight and freight rail 

transport will grow significantly in the future. While forecasts have 

limitations as guides to investing in new transportation infrastructure, they 

can present a plausible picture of future freight demand and capacity. 

Whether private rail companies will be able and willing to invest in new 

infrastructure capacity to meet projected future demand is uncertain. New 

rail capacity not only benefits each private rail company network, but it 

also has the potential to benefit the public by improving traffic flow, air 

quality, and safety at the national, state, and local levels. As a result, the 

public sector has increasingly been investing in freight rail projects. 

Federal involvement in the freight system should be consistent with the 

competitive marketplace and ensure that funding decisions reflect 

widespread public priorities. 

Uncertainty about 

Future Freight Rail 

Demand and Capacity 

Points to 

Opportunities for a 

More Strategic 

Federal Approach to 

Rail Infrastructure 

Page 53 GAO-07-94 Freight Railroads
The demand for freight transportation in general and freight rail 

specifically is forecasted to increase, according to recent studies.33 Several

of these studies also quantify their projections of the volume and value of 

future freight demand. The Freight Analysis Framework (FAF) is a 

comprehensive database and policy analysis tool maintained by DOT to 

help identify needed freight capacity improvements. In 2002, DOT 

projected, using this tool, that overall domestic and international freight 

demand would increase by more than 65 percent and 84 percent, 

respectively, by 2020. In 2003, the American Association of State Highway 

and Transportation Officials (AASHTO) released the Freight Rail Bottom 

Line Report, prepared by a consulting firm. This report describes the 

industry and its benefits to the nation, estimates the industry’s investment 

needs and capacity to meet these needs, and quantifies the consequences

of underinvestment, including highway deterioration and congestion. The 

AASHTO study projected that, by 2020, overall domestic freight demand by

ton would increase by 57 percent and international demand would 

increase by 99 percent. In 2005, the American Trucking Association’s 

(ATA) report U.S. Freight Transportation Forecast to 2016 projected 

tonnage and revenues for all freight modes. The report predicted that 

overall freight volume would increase by about 32 percent between 2004 

and 2016. 

Freight rail demand is projected to increase less than overall freight 

demand and to grow at a slower rate than demand for other modes—such

as truck and air freight. FAF projects that freight rail tonnage will grow 

about 55 percent by 2020, but this growth will not be as dramatic as for 

truck and air, and will account for a much smaller share of the market 

when measured on the basis of shipment value. AASHTO predicts that 

freight rail tonnage will increase 44 percent by 2020. However, it notes that 

this forecast actually indicates that rail will lose some market share. This 

estimate also assumes that considerable investment will be required—up 

to about $4 billion annually—to meet future demand. According to ATA’s 

forecast, freight rail tonnage will grow annually by 2.4 percent to 2010 and 

by 2.1 percent to 2016. While rail intermodal traffic is forecast to grow 

rapidly, the study anticipates that rail’s overall share of total freight 

Forecasts of Significant 

Freight Rail Traffic Growth 

Provide a Plausible 

Outlook for the Future 

 33Studies by the AASHTO, DOT, and American Trucking Association made specific freight 

and freight rail forecasts. Studies by the Transportation Research Board (TRB), the 

National Cooperative Research Program (NCHRP 20-24(33)) administered by TRB, and a

consortium of Midwestern states and universities (Upper Midwest Freight Corridor Study)

also assessed future freight demand and capacity issues. 

Page 54 GAO-07-94 Freight Railroads
tonnage will decrease slightly from about 15.6 percent in 2004 to about 

15.4 percent in 2016. 

However, ow many factors can affect the accuracy of these predictions. 

Freight markets are volatile and unpredictable, and thus freight demand 

forecasts may prove to be off the mark. Similarly, much freight traffic is 

determined by trade that originates outside the United States. Moreover, 

since the data and models used to develop these freight demand forecasts 

are largely proprietary,34 we could not assess the validity or 

reasonableness of the assumptions used to develop the predictions.35

Nevertheless, forecasts of freight and freight rail demand are useful as one 

plausible scenario for the future. As the Congressional Budget Office 

(CBO) observed in a January 2006 report, forecasts of demand are best 

viewed as illustrative rather than quantitatively accurate.36

If demand does develop as forecasted, it is uncertain how able and willing 

railroads will be to invest in new capacity. Railroads do not prepare longterm capacity plans because of concern about the potential for significant 

economic changes—for example, officials at one Class I railroad stated 

that they prepare capacity improvements plans and demand projections 

for 3 to 5 years into the future, with frequent revisions. In addition, the 

railroads we interviewed were generally unwilling to discuss their future 

investment plans with us in any detail because this is business proprietary 

information. It is therefore difficult to comment on how railroads are 

likely to choose among their competing investment priorities for the future 

compared with various demand scenarios. 

Railroads’ ability and willingness to invest in new capacity to meet 

demand reflects a number of key considerations. For privately owned rail

companies, a key business consideration is maximizing returns for 

shareholders. To do so, realizing the greatest return on investment from 

Railroads’ Investments in 

Capacity to Meet Potential 

Demand Are Uncertain 

 34The 2002 FAF used proprietary models to describe domestic and international commodity 

flows for rail, water, air, and highways and forecasted freight flows for 2010 and 2020. A 

second generation DOT FAF (being published in 2006) does not use proprietary models and 

covers commodity flows for 2002 to 2035. 

35We were able to interview some of the consultants who authored these reports and other

rail experts. We also independently corroborated information in these reports through our 

expert panel.

36Congressional Budget Office, Freight Rail Transportation: Long Term Issues 

(Washington, D.C.: January 2006). 

Page 55 GAO-07-94 Freight Railroads
each investment decision is essential and is reinforced by pressure from 

shareholders. Rail investment involves private companies taking a 

substantial risk which becomes a fixed cost on their balance sheets, one 

on which they are accountable to stockholders and for which they must 

make capital charges year in and year out for the life of the investment. A 

railroad contemplating such an investment must be confident that the 

market demand for that infrastructure will hold up for 30 to 50 years. This 

is in sharp contrast to other modes such as highway infrastructure, which 

is paid for largely by public funds. Maximizing a rail company’s 

competitive position in key markets is important in deciding on

investments in the company network’s size and facilities. For example, the 

growth of intermodal transport is a major development for freight rail 

because it stands to be the largest revenue generator for the Class I 

railroads. As a result, there is intense competition for this business, 

although intermodal business also means that freight rail both competes 

and cooperates with other freight modes. However, intermodal growth 

depends on the railroads’ ability to invest in the new capacity needed to 

meet this demand. 

Investment considerations are complicated by the current status of rail 

infrastructure. Although the rail network has been downsized, the 

infrastructure remains extensive but aging. Replacing, maintaining, and

upgrading this infrastructure is extremely costly, as the Transportation 

Research Board emphasized in its analysis of critical transportation 

issues.37 Predicting the extent to which future rail investments will keep 

pace with projected freight rail demand is complicated by the extent of 

current rail needs. For example, an annual assessment of America’s 

infrastructure38 conducted by the American Society of Civil Engineering 

gave rail infrastructure a “C-” grade and noted that, for the first time in 90 

years, limited capacity has created significant bottlenecks in the national

rail network. However, railroads must invest in new infrastructure, new 

equipment, and substantial new capacity to handle additional traffic in 

order to remain viable and effective, a rail industry representative told our 

expert panel.

 37Transportation Research Board, Critical Issues in Transportation (Washington, D.C.: 

Jan. 2006). 

38American Society of Civil Engineering, 2005 Report Card for America’s Infrastructure

(Washington, D.C.: 2005). 

Page 56 GAO-07-94 Freight Railroads
Today, freight railroads are sufficiently profitable to be investing at record

levels. Major freight railroads have reported39 that they expect to invest 

about $8 billion in infrastructure during 2006—a 21 percent increase over 

2005—and have told us that they plan to continue making infrastructure 

investments. However, not all of this investment is planned for capital or 

new capacity. Although we requested additional detail about how the rail 

industry’s $8 billion estimated investment was divided between new 

capacity and maintenance or renewal of existing capacity, the Association 

of American Railroads indicated that this information is not currently 

available but will be part of a special study on railroad spending trends. 

While private rail networks obtain benefits and improve their profitability 

from investments in their capacity, these investments also can benefit the 

public. In fact, some public benefits can be large in comparison to 

anticipated benefits to the private rail network, as the CBO report pointed

out. For example, shifting truck freight traffic to railroads can reduce 

highway congestion for passenger and commercial vehicles, potentially 

reducing or avoiding public expenditures that otherwise would be needed 

to build additional highway capacity or provide additional maintenance to

accommodate growing truck traffic. Depending on the rail infrastructure 

project, the public could realize several types of benefits, as described in

table 3. 

Rail Capacity Investments 

Can Produce Private and 

Public Sector Benefits 

 39Association of American Railroads (AAR), (Washington, D.C.: Mar. 16, 2006). 

Page 57 GAO-07-94 Freight Railroads
Table 3: Potential Public Benefits of Rail Transportation Investments

Category Potential public benefit 

Economic • Lower transportation costs through higher productivity, making it cheaper to produce and distribute 

goods/services

• Improve global competitiveness through increased efficiency 

• Strengthen local, regional, state economies 

• Expand industry, employment, tax base 

Transportation system • Capture each mode’s advantages in moving passengers/freight 

• Improve overall system performance 

• Strengthen intermodal connections 

• Improve transportation network efficiency for the future 

• Improve passenger/freight rail interactions 

Mobility/Congestion • Relieve highway congestion by shifting highway freight to rails 

• Reduce public investment to prevent highway deterioration by preventing diversion of heavy rail 

freight to roads

• Give passengers/freight access to more modes 

• Decrease travel time, increase reliability 

Environmental/Air quality • Reduce emissions/improve air quality by reducing congestion 

• Consume about one-fourth to one-third less fuel than trucks 

Safety and security • Reduce crashes through redesigned/eliminated highway-rail crossings 

• Provide redundant capacity to respond to operational/congestion, national security, and weather 

problems 

Source: GAO analysis.

Rail projects can vary widely in the extent to which they may generate

public as well as private benefits; whether benefits are realized by the 

private or public sector at the national, state, and local levels; and how the 

benefits are quantified for the purpose of fairly apportioning project 

financing. Determining what benefits and costs are associated with a rail 

infrastructure project and who benefits is important in deciding whether 

public funds for public benefits are justified—but this is a difficult 

determination.40 For example, one rail infrastructure project that reduces 

system bottlenecks may generate benefits to the national economy by 

lowering the costs of producing and distributing goods. Another rail 

project that eliminates or improves highway-rail crossings may primarily 

produce local benefits by reducing accidents, time lost waiting for trains 

to pass, pollution and noise from idling trains, and delays of emergency 

 40GAO, Highway and Transit Investments: Options for Improving Information on 

Projects’ Benefits and Costs and Increasing Accountability for Results, GAO-05-172

(Washington, D.C.: Jan. 24, 2005). 

Page 58 GAO-07-94 Freight Railroads
vehicles at crossings. The same project also may produce national benefits 

by reducing the impact of train delays on the system. 

Public Sector’s Growing 

Freight Rail Investments 

Focus on Securing Public 

Benefits 

Increasingly, governments at all levels have been investing in freight rail 

improvement projects that offer potential public benefits. At the state and

local levels, government involvement has ranged from planning and 

coordination to collaboration and investment with freight rail companies 

and other stakeholders. Some states have been investing to help short-line 

railroads maintain track in their states for almost 20 years. Other states—

such as Florida, Virginia, New York, and Pennsylvania—are creating 

significant new programs to invest in rail projects. Over 30 states have 

published freight plans that describe their goals and approach to freight 

and freight rail. 

The scope of state and local freight rail investments continues to expand. 

For example, Missouri state and local governments, in partnership with 

railroads and other stakeholders, supported two major rail bridge flyover41

projects to reduce rail delays in Kansas City. These projects—totaling $134 

million—were expected to provide economic benefits and reduce rail 

transit time through the city by about 2 hours. The project also used an 

innovative institutional arrangement that created a special type of 

corporation to facilitate its funding. Colorado’s Department of 

Transportation (CDOT), other public entities, and two Class I railroads are 

exploring an ambitious partnership to relocate freight train facilities away 

from the heavily populated Front Range area of the state, as the two 

railroads proposed. CDOT initiated a benefit-cost study42 that found 

sufficient public transportation, economic development, land use, safety, 

environmental, and passenger rail facilitation benefits to warrant investing 

public dollars in the project—estimated to cost about $1.17 billion. 

The federal government also has been involved in freight rail projects. In 

1997, DOT provided a $400 million loan for the $2.4 billion Alameda 

Corridor project to leverage funds from ports, railroads, and local 

governments. As a result, a 20-mile trench for trains was constructed to 

 41Railroad flyover bridges separate one set of tracks from another—such as freight and 

passenger trains. 

42DMJM+Harris and HDR (the Consultant Team), Final Report Project No. C SWOO-242

Public Benefits & Costs Study of the Proposed BNSF/UP Front Range Railroad

Infrastructure Rationalization Project (May 18, 2005). 

Page 59 GAO-07-94 Freight Railroads
eliminate numerous rail-highway crossings and reduce rail transport time 

to and from the ports of Los Angeles and Long Beach—a significant 

gateway for freight imported from Asia and distributed throughout the 

United States. In 2005, Congress provided $100 million to the $1.5 billion

Chicago Region Environmental and Transportation Efficiency (CREATE) 

program. Its objective is to cut train delays and congestion and improve 

passenger rail service by separating 25 rail-highway crossings, building 6 

passenger/freight train flyovers, and upgrading tracks and controls to 

improve service for the one-third of the nation’s rail traffic that comes 

through Chicago each day. Railroads and state and local governments are 

contributing to the program’s financing. In 2005, Congress also passed the

Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy 

for Users (SAFETEA-LU), which increased the authorized level of funds 

available under the Railroad Rehabilitation and Improvement Financing 

(RRIF) program from $3.5 billion to $35 billion over a 5-year period. This 

program provides loans or loan guarantees that are available to states or 

railroads for projects to acquire, improve, or rehabilitate rail

infrastructure. 

A number of proposals before Congress would increase federal funding for 

freight railroad projects. One proposal calls for the creation of a Railroad 

Trust Fund that would be similar to the Highway Trust Fund, which is 

used to pay for highway construction and improvements. Another 

proposal calls for a railroad investment tax credit. Under this proposal, 

railroads or shippers would receive a 25 percent tax credit for money 

spent to expand rail infrastructure. 

Page 60 GAO-07-94 Freight Railroads
Federal decision makers face considerable uncertainty about the future of 

freight transportation coupled with considerable certainty that the federal

deficit will be a long-term constraint on federal investment. At the same 

time, Congress will continue to face policy and funding decisions that will 

affect all freight modes and have a critical impact in shaping the nation’s 

rail system and infrastructure. As we have noted in our past work,43 a 

strategic systemwide approach to transportation planning and funding that 

focuses on all modes is increasingly important to meet expectations for 

more efficient freight transport, growing freight demand, and more 

connections between modes. 

Federal Response to 

Freight Investments 

Should Reflect a National 

Policy That Is Impartial 

Toward All Modes and 

Produces Maximum Public 

Benefits from Public 

Investments 

Federal funding constraints enhance the need for a strategic federal 

approach to freight infrastructure investment, and the implications of 

these constraints are a critical feature of a national freight policy. Given

major projected demographic shifts and future federal health and 

retirement commitments, federal revenues may barely cover interest on 

the federal debt by 2040—leaving no money for either mandatory or 

discretionary programs. According to our simulations, balancing the 

budget could require cutting federal spending by as much as 60 percent,

raising taxes by up to 2-1/2 times their current level, or some combination 

of the two.44 We have concluded that the impending federal fiscal crisis 

will require a fundamental reexamination of all federal programs.45 For 

example, our assessment of the federal highway grant program raised 

significant issues, such as the absence of a clear federal mission and role 

since the completion of the interstate highway system and the absence of a

link between federal funding and goals or outcome measures. 

DOT has taken an important step toward a more comprehensive freight 

strategy by publishing a draft Framework for a National Freight Policy46

for comment. It is a step for which we found considerable support among 

 43GAO, 21st Century Challenges, GAO-05-325SP (Washington, D.C.: Feb. 1, 2005), GAO,

Freight Transportation: Short Sea Shipping Option Shows Importance of Systematic 

Approach to Public Investment Decisions, GAO-05-768 (Washington, D.C.: July 29, 2005),

and GAO, Freight Transportation: Strategies Needed to Address Planning and Financing

Limitations, GAO-04-165 (Washington, D.C.: Dec. 19, 2003).

44GAO, Highway Finance: States’ Expanding Use of Tolling Illustrates Diverse Challenges 

and Strategies, GAO-06-554 (Washington, D.C.: Jun. 28, 2006). 

45GAO-05-325SP. 

46DOT, (Draft) A Framework for a National Freight Policy, (Washington, D.C.: Apr. 10,

2006). 

Page 61 GAO-07-94 Freight Railroads
public and private freight stakeholders. A systemwide, rather than a 

modal, perspective is critical to a national freight policy. As the AASHTO 

study emphasized, investments at the freight system level are needed to 

respond to nationally significant corridor choke points, intermodal 

connections, and urban rail interchanges. 

With federal fiscal constraints as the backdrop, two major policy 

principles will need to be considered as DOT continues to develop this 

national policy. These principles are, first, to adopt a mode-neutral 

approach—one that takes a consistent policy and funding approach to all

modes and establishes a level playing field for competition in the freight 

marketplace—and, second, to maximize public benefits—particularly 

benefits to the national transportation system—from public transportation 

investments. 

Under a mode-neutral approach, each mode would pay the full costs for 

the infrastructure facilities and services that it used as well as the costs 

that its use imposed on others—such as added air pollution, congestion, 

and accident risks47—through taxes and user fees. No single mode would 

be at a competitive disadvantage. A mode-neutral federal freight policy

and investment strategy would be consistent with the competitive 

market’s central role in the freight system. Encouraging a market-based 

approach and competition that fosters economic efficiency and innovation 

is a key consideration in dealing with the privately owned freight rail 

industry, as we have reported.48

Adopting a Mode-Neutral 

Approach 

Currently, as we have pointed out, federal programs treat different freight 

modes differently. For example, trucks and barges use infrastructure that 

is owned and maintained by the government, while rail companies use 

infrastructure that they pay to own and maintain. The trucking and barge 

industries pay fees and taxes to use this government-funded infrastructure, 

but their payments generally do not cover the costs they impose on 

highways and waterways, thereby giving the trucking and barge industries 

a competitive price advantage over railroads.49 The most recent Federal 

 47Transportation Research Board/National Research Council, Paying Our Way: 

Estimating Marginal Social Costs of Freight Transportation, National Academy Press

(Washington, D.C.: 1996). 

48GAO, Physical Infrastructure: Crosscutting Issues Planning Conference Report, 

GAO-02-139 (Washington, D.C.: Oct. 1, 2001). 

49GAO, Railroad Competitiveness: Federal Laws and Policies Affect Railroad

Competitiveness, GAO/RCED-92-16 (Washington, D.C.: Nov. 5, 1991).

Page 62 GAO-07-94 Freight Railroads
Highway Administration (FHWA) highway cost allocation study50 evaluates

highway costs attributable to different vehicle classes and the extent to

which their user fees cover their responsibility for highway costs. 

According to the study, combination unit trucks51 paid 80 percent of their 

cost responsibility and the heaviest combinations paid half of their cost 

responsibility. The study concluded that only the very lightest combination 

trucks pay their share of federal highway cost responsibility. A recent CBO 

report52 also concluded that trucks and barges do not pay their full share of

highway costs and reported that rail may be at a competitive disadvantage, 

since other modes are effectively being subsidized. CBO also observed 

that if all modes do not pay their full costs, the result is inefficient use of 

roads and waterways and greater government spending than otherwise 

would be necessary if capacity investments are made in anticipation of 

demand that does not occur. 

Maximizing Public 

Benefits from Public 

Transportation 

Investments 

As DOT develops and applies a national freight policy, our second critical

principle will be an important consideration—public investments should 

depend on clearly defined public benefits.53 Benefit-cost analysis can be a 

useful tool to define benefits, as our expert panel on this subject 

concluded.

54 Because this analysis identifies the greatest net benefits by 

comparing the monetary value of each project’s benefits and costs, it can 

help public and private stakeholders evaluate project alternatives. 

States have had experience in evaluating whether rail projects could yield 

sufficient public benefits to warrant investments of public dollars in the 

projects, and their experience can inform a national freight policy. For 

 50DOT/Federal Highway Administration. Office of Transportation Policy Studies, 

Addendum to the 1997 Federal Highway Cost Allocation Study Final Report

(Washington, D.C.: May 2000). 

51Combination unit trucks are trucks that weigh 50,000-100,000 pounds. 

52CBO, Freight Rail Transportation: Long-Term Issues, p. 22.

53This observation parallels the conclusion and recommendations by the Transportation

Research Board (TRB), which called for the development of a national policy to promote 

better management and investment decisions to maintain and improve freight capacity. 

TRB described detailed principles to guide future decisions about using, enlarging, funding

or regulating the freight transportation system. TRB, Freight Capacity for the 21st 

Century, (Washington, D.C.: 2003) pp. 5-13. 

54GAO, Highlights of an Expert Panel: The Benefits and Costs of Highway and Transit 

Investments, GAO-05-423SP (Washington, D.C.: May 6, 2005). 

Page 63 GAO-07-94 Freight Railroads
example, the state of Washington’s Freight Mobility Strategic Investment 

Board leverages transportation dollars by working with public and private 

stakeholders to fund projects that deliver public benefits. The board’s 

project scoring criteria reflect anticipated benefits, such as freight mobility 

for the project area; freight mobility for the region, state, and nation; 

general mobility; safety; freight and economic value; environment; project 

partnership; consistency with regional and state plans; location on a 

Strategic Freight Corridor; and cost benefit. 

However, federal decision makers have no such criteria to use in 

considering potential freight rail investments. As we have pointed out, the

federal funding structure for surface transportation and federal program 

incentives tend to focus decision makers’ attention on highway and transit 

projects, rather than on freight or freight rail concerns. And, although state 

and local transportation decision makers consider benefit-cost analyses, 

these analyses often do not have a decisive impact on investment 

decisions.55 As DOT has noted, a fair, balanced approach to allocating 

public and private funding is a prerequisite for public-private 

partnerships.56 We have also raised concerns about federal tax policies. 

For railroads, some industry groups have proposed freight rail tax credits

to encourage investment. However, our work has shown that it is difficult 

to target tax credits to the desired activities and outcomes and ensure that

tax credits generate the desired new investments, as opposed to 

substituting for investment that would have occurred anyway.

57

The Staggers Rail Act achieved far-ranging benefits in helping to create

and sustain a healthy and vibrant freight railroad industry, as well as an 

efficient rail transportation system that supports the important role freight

plays in the nation’s economy. Critical to the Staggers Rail Act was the 

concept of balance—on one hand, the act sought to allow rail carriers to 

earn adequate revenues so that they could meet their current and future 

capital needs. On the other hand, the act recognized the need for a 

Conclusions 

 55GAO, Surface Transportation: Many Factors Affect Investment Decisions, GAO-04-744 

(Washington, D.C.: Jun. 30, 2004). 

56U.S. Department of Transportation, Report to Congress on Public-Private Partnerships

(Washington, D.C.: December 2004). 

57GAO, Government Performance and Accountability: Tax Expenditures Represent a

Substantial Federal Commitment and Need to be Reexamined, GAO-05-690 (Washington,

D.C.: Sept. 23, 2005). 

Page 64 GAO-07-94 Freight Railroads
remnant regulatory regime that would maintain reasonable rates and 

prohibit undue concentrations of market power in areas where no 

effective competition existed. The act recognized that it was vital for the 

federal government to promote competition and rely on it to set rates. 

Without a doubt, rates have decreased for most shippers, and most 

shippers are better off in the post-Staggers environment than they were 

previously. This outcome suggests that widespread and fundamental 

changes to the relationship between the railroads and their customers are 

not needed. Nevertheless, the evidence also suggests some basis for 

believing that—more than 25 years after the act’s passage—the balance it

envisioned has not been fully achieved. 

The continued existence of pockets of potential captivity, together with 

the increase in traffic at higher thresholds, at a time when the railroads 

are, for the first time in decades, experiencing increasing economic health, 

raises the question whether rail rates in selected markets reflect justified 

and reasonable pricing practices, or an abuse of market power by the 

railroads. Answering this question requires a rigorous, national analysis of 

competitive markets. Our analysis provides an important first step; 

however, we are constrained by the inherent limitations of the Carload 

Waybill Sample and the available proxy measures for assessing captivity. 

In contrast, STB has the statutory authority to inquire into and report on 

railroad practices and could conduct a rigorous analysis of competition in 

the freight rail industry that would rely on more than sample data and

could determine whether the inappropriate exercise of market power is 

occuring in specific markets. Should STB find evidence of abuse, it could 

consider several methods for creating the balance envisioned by the 

Staggers Rail Act. For example, STB could consider initiating a generally

applicable rule making to address competition issues or prescribe specific 

remedies in response to a complaint.

In assessing competition within the freight rail industry, STB needs 

accurate data on railroad revenues. The data that STB currently collects—

in particular, the use of the Carload Waybill Sample to report on the 

railroads’ finances—are not always captured consistently, making it 

difficult to accurately track railroad revenues. Specifically, while we 

determined that, in general, the data in the Waybill were suitably reliable 

for our reporting purposes, we also found that some data, including data 

on fuel surcharges, were not accurately captured. Accurate data would 

provide for more accurate tracking of railroad revenues and railroad 

charges to potentially captive shippers and other shippers. This 

information would help STB to obtain a clearer picture of the actual fees 

paid by shippers. 

Page 65 GAO-07-94 Freight Railroads
STB is also responsible for ensuring the expeditious handling and 

resolution of rate disputes, but the current process for settling these 

disputes is ineffective. There are a number of potential alternatives to the 

current process, and STB has recognized the limits of the process and 

taken further action to improve it. These actions are commendable and 

need to be pursued; absent further action, the promise of the Staggers Rail

Act and the balance it envisioned may never be fully realized.

These are difficult issues that require careful balancing of the railroads’ 

need to earn adequate revenues with shippers’ need for competition and 

reasonable rates during a time of uncertainty about the capacity of freight 

railroads to meet future demand for freight rail service. While predictions 

and scenarios for the future of freight rail vary, it is likely that multiple 

levels of government will continue to be involved in the nation’s freight 

system. Additional investment in freight rail infrastructure can produce 

public benefits, and many state and local governments are involved in

freight rail infrastructure projects. Congress has provided federal 

assistance as well, and further requests for and decisions about federal 

assistance to rail infrastructure are likely. Decision makers will be 

challenged to ensure that federal involvement is consistent with 

competition in the freight marketplace, reflects widespread public 

priorities, and offers benefits that warrant the commitment of federal 

funds. DOT’s draft National Freight Policy represents a good start in this 

direction. 

To ensure an appropriate balance between the interests of railroads and 

shippers, we recommend that the Chairman of the Surface Transportation 

Board take the following two actions: 

Recommendations for 

Executive Action 

• Undertake a rigorous analysis of competitive markets to identify the state 

of competition nationwide; in specific markets, determine whether the 

inappropriate exercise of market power is occuring; and, where 

appropriate, consider the range of actions available to address problems 

associated with the potential abuse of market power. If the Chairman 

determines that STB requires more resources to conduct this analysis, 

then STB should request additional resources from Congress. 

• Review STB’s method of data collection to ensure that all freight railroads 

are consistently and accurately reporting all revenues collected from 

shippers, including fuel surcharges and other costs not explicitly captured

in all railroad rate structures. 

Page 66 GAO-07-94 Freight Railroads
To ensure the efficiency and effectiveness of our nation’s freight system, 

we are making the following recommendation to the Secretary of 

Transportation: 

• As DOT continues to develop a national freight policy and a possible 

federal policy response, consider strategies to (1) sustain the role of 

competitive market forces by creating a level playing field for all freight 

modes and (2) recognize the fiscally constrained federal funding 

environment by developing mechanisms to assess and maximize public 

benefits from federally financed freight transportation investments. 

STB provided written comments on a draft of this report. These comments 

are presented and evaluated in appendix III. STB generally agreed with our 

assessment of the improving financial health of the freight railroad 

industry and potential public benefits for freight rail infrastructure 

projects. However, STB disagreed with our recommendation to undertake 

a rigorous analysis of competitive markets in the rail industry because it

believed the findings underlying the recommendation were inconclusive,

their on-going efforts will address many of our concerns, and a rigorous 

analysis would divert resources from other efforts. Specifically, STB stated 

that our recommendation was based on two findings—first, that rail rates

have increased for some shippers and, second, that the amount of traffic 

with rates reflecting high R/VC ratios has increased in some areas. STB 

stated that recent increases in rail rates are not surprising and that R/VC 

ratios can increase when rates and costs are falling and that these findings 

do not suggest market abuses. STB also noted that it has several rule 

makings under way related to the standard rate relief process and the 

simplified rate relief process. STB suggested that, given the limitations on 

its resources and the aggressive agenda already under way, rather than 

undertake this competitive markets analysis, a more practical approach 

would be for STB to finish its reforms to ensure that captive shippers have 

an effective forum to seek rate relief if a railroad is charging unreasonable

rates. Concerning our recommendation that STB review its method of data

collection to ensure that all freight railroads are consistently and 

accurately reporting all revenues collected from shippers, STB stated that

the revenue in question represents a small portion of all revenues and that

revenue data submitted by freight railroads are audited and otherwise 

checked to ensure quality. Furthermore, STB has initiated a rule making to

improve the tracking of fuel surcharges. 

While STB’s efforts have been helpful, we continue to believe that STB 

should undertake a rigorous analysis of competitive markets to identify 

Agency Comments 

and Our Evaluation 

Page 67 GAO-07-94 Freight Railroads
the state of competition nationwide; in specific markets, determine 

whether the inappropriate exercise of market power is occuring; and, 

where appropriate, consider the range of actions available to address 

problems associated with the potential abuse of market power. STB’s 

comments do not accurately characterize the underlying support for our 

recommendation. We did not base this recommendation on an increase in

rail rates or suggest that rate increases alone suggest increased captivity.

On the contrary, we recognize that rates have declined and that available 

measures suggest that the extent of captivity has dropped. Furthermore, 

STB’s response suggests that rail rates and the amount of traffic with high 

R/VC ratios were the only data we examined—they were not. We 

examined several factors, including data on the amount of tonnage 

originating in economic areas that have access to only one Class I railroad, 

data on the amount of tonnage traveling over 300 percent R/VC, and the 

amount of tonnage that originates in areas with access to only one Class I

railroad and travels at rates that exceed the statutory threshold for rate 

relief. Our report explicitly acknowledges the limitations in the Carload 

Waybill Sample and of the proxy measures available for weighing 

captivity, including R/VC levels. At the same time, our analyses, when 

combined with comments from participants on our expert panel and 

interviews with shipper and railroad groups, suggest a reasonable 

possibility that shippers in selective markets may be paying excessive 

rates related to a lack of competition. This provides the impetus for STB—

which has the statutory authority to inquire into and report on railroad 

practices—to analyze competitive markets in the rail industry and, where 

appropriate, consider the range of actions to address problems associated 

with the potential abuse of market power. Also, this analysis would rely on 

more than sample data and could analyze the exercise of market power in 

specific markets. 

Regarding STB’s position that it has several rule makings under way that

address many of our concerns, we commend STB for recognizing and 

taking action to address problems with the rate relief process, but we 

believe action is needed beyond improvements to the rate relief process. 

These rule makings, if implemented, are designed to improve the 

processes available to shippers, after shippers have been charged a rate

that they consider to be unreasonable. In contrast, we believe that an 

analysis of the state of competition and the possible abuse of market 

power, along with the range of options STB has to address competition 

issues, could more directly further legislatively defined goals to ensure 

effective competition among rail carriers as the preferred means to both

promoting a sound rail transportation system and maintaining reasonable 

rates. Regarding STB’s assertion that conducting a rigorous analysis of 

Page 68 GAO-07-94 Freight Railroads
competition would divert resources away from its on-going initiatives, we 

modified our draft to recommend that STB request additional resources 

from Congress if it determines it needs more resources to conduct an 

analysis of competition. We also believe that STB should review its 

method of data collection to ensure that all freight railroads are 

consistently and accurately reporting all revenues. STB commented that it 

had already responded to this concern by proposing a standardized report 

for fuel surcharges; however, while we commend STB for its efforts to 

capture these data, we also note STB has not yet implemented 

standardized reporting of fuel surcharges and that other revenues besides 

fuel surcharges may not be included in the Waybill. STB also provided 

technical comments that we incorporated in this report, as appropriate. 

We requested comments on a draft of this report from the Acting Secretary 

of Transportation or her representative. On September 21, 2006, DOT 

officials, including the Deputy Associate Administrator for Policy, Federal

Railroad Administration, and the Chief Economist, Office of 

Transportation Policy, Office of the Secretary, provided us with oral 

comments on the draft. In its comments, DOT emphasized the need for the 

report to clearly recognize the rationale and importance of differential 

pricing; the nature and relatively small extent of potentially unreasonable

pricing in the rail freight marketplace; and the impact of capacity 

constraints on rail pricing and services. DOT also suggested that our 

report should recognize certain factors, including that competition 

between railroads is not possible in all markets because the level of 

demand may not support more than one railroad, and that investment in 

freight rail infrastructure entails substantial private risk. In contrast, 

highway investment has been largely publicly financed. DOT did not take a 

position on our recommendation concerning the draft National Freight 

Policy, but stated that efforts are under way to develop more effective 

tools for gauging the extent to which proposed freight investments provide 

public benefits. DOT also endorsed the views contained in STB’s 

September 15, 2006, letter (see app. III). We made changes to this report to 

reflect DOT’s comments, as appropriate. DOT also provided a number of 

technical corrections, which we incorporated as appropriate.

We will send copies to the appropriate congressional committees, the 

Chair and Vice-Chairs of the Surface Transportation Board, and the 

Secretary of Transportation. We will also make copies available to others

on request. In addition, the report will be available at no charge on the 

GAO Web site at http://www.gao.gov. 

Page 69 GAO-07-94 Freight Railroads
If you or your staff has any questions, please contact me at (202) 512-2834

or heckerj@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

See appendix V for a list of major contributors to this report. 

JayEtta Z. Hecker 

Director, Physical Infrastructure Issues 

Page 70 GAO-07-94 Freight Railroads
List of Congressional Requesters 

The Honorable Daniel K. Inouye 

Co-Chairman, Committee on Commerce, Science, and Transportation 

United States Senate 

The Honorable Conrad Burns 

United States Senate 

The Honorable Byron Dorgan 

United States Senate 

The Honorable Frank Lautenberg 

United States Senate 

The Honorable Trent Lott 

United States Senate 

The Honorable John McCain 

United States Senate 

The Honorable Mark Pryor 

United States Senate 

The Honorable Gordon Smith 

United States Senate 

Page 71 GAO-07-94 Freight Railroads
Appendix I: Participants in GAO’s Expert

Appendix I: Participants in GAO’ Panel s Expert 

Panel 

Louis S. Thompson (Moderator) 

Principal 

Thompson, Galenson and Associates, LLC 

Paul Bingham 

Global Insights 

George Borts 

Department of Economics 

Brown University 

George Eads

Vice President 

CRA International 

Robert Gallamore 

Director 

Transportation Center 

Northwestern University 

Darius Gaskins 

Founding Partner 

Norbridge, Inc. 

Carl Martland 

Senior Research Associate 

Massachusetts Institute of Technology 

Department of Civil and Environmental Engineering 

Michael F. McBride 

Partner 

LeBouef, Lamb, Greene & MacRae, LLP 

Gerard McCullough 

Department of Applied Economics 

University of Minnesota 

Linda Morgan 

Chair of the Transportation Practice Group 

Covington & Burling, LLP 

Page 72 GAO-07-94 Freight Railroads
Appendix I: Participants in GAO’s Expert

Panel 

John V. Wells 

Chief Economist 

U.S. Department of Transportation 

Page 73 GAO-07-94 Freight Railroads
Appendix II: Objectives, Scope, and Appendix II: Objectives, Scope, and Methodology 

Methodology 

We used the Surface Transportation Board’s (STB) Carload Waybill 

Sample to identify railroad rates from 1985 through 2004 (the latest rate 

data available at the time of our review), which we then analyzed to 

determine rate changes. The Carload Waybill Sample is a sample of 

railroad waybills (in general, documents prepared from bills of lading 

authorizing railroads to move shipments and collect freight charges) 

submitted by railroads annually. We used these data to obtain information 

on rail rates across the industry, for certain commodities and for certain 

routes by shipment size and length of haul. According to STB officials, 

revenues derived from the Carload Waybill Sample are not adjusted for

such things as year-end rebates and refunds that may be provided by 

railroads to shippers that exceed certain volume commitments. 

Some railroad movements contained in the Carload Waybill Sample are 

governed by contracts between shippers and railroads. To avoid 

disclosure of confidential business information, STB disguises the 

revenues associated with these movements before making this information 

available to the public. Consistent with our statutory authority to obtain 

agency records, we obtained a version of the Carload Waybill Sample that 

did not disguise revenues associated with railroad movements made under 

contract. Therefore, the rate analysis presented in this report presents a 

truer picture of rail rate trends than analyses that may be based solely on 

publicly available information. Since much of the information contained in

the Carload Waybill Sample is confidential, rail rates and other data 

contained in this report that were derived from this database have been 

aggregated at a level sufficient to protect this confidentiality. 

We used rate indexes and average rates to measure rate changes over 

time. A rate index attempts to measure price changes over time by holding 

constant the underlying collection of items that are consumed (in the 

context of this report, items shipped). This approach differs from 

comparing average rates in each year because, over time, higher- or lowerpriced items can constitute different shares of the items consumed. 

Comparing average rates can confuse changes in prices with changes in

the composition of the goods consumed. In the context of railroad 

transportation, rail rates and revenues per ton-mile are influenced, among

other things, by the average length of haul. Therefore, comparisons of 

average rates over time can be influenced by changes in the mix of longand short-haul traffic. Our rate indexes attempted to control for the 

distance factor by defining the underlying traffic as 2004 commodity flows 

between pairs of census regions. To examine the rate trends on specific 

traffic corridors, we first chose a level of geographic aggregation for 

corridor end points. We defined end points as the regional economic areas 

Page 74 GAO-07-94 Freight Railroads
Appendix II: Objectives, Scope, and

Methodology 

defined by the Department of Commerce’s Bureau of Economic Analysis. 

An economic area is a collection of counties in and about a metropolitan 

area (or other center of economic activity); there are 179 economic areas1

in the United States, and each of the nation’s 3,141 counties is included in

an economic area.2

 We placed each corridor in one of three distancerelated categories: 0 to 500 miles, 501 to 1,000 miles, and more than 1,000 

miles. Although these distance categories are somewhat arbitrary, they 

represent reasonable proxies for short-, medium-, and long-distance 

shipments by rail. 

To determine the areas with access to one or more Class I railroads, we 

obtained railroad systems data from the Department of Transportation, 

which accounted for trackage rights, mergers, and other industry 

developments affecting access. For issues related to revenue-to-variable 

cost ratios, we used data from the Carload Waybill Sample to identify the 

specific revenues and variable costs and to compute R/VC ratios for the 

commodities and markets we examined. Using this information, we then

identified those commodities and areas whose R/VC ratios were above or

below the 180 percent R/VC level, as well as those areas above the 300 

percent R/VC level. 

To identify the actions STB has taken to address competition and captivity 

concerns, we interviewed officials and reviewed information from all 

seven North American Class I railroads, several shipper groups and 

associations and STB officials; and we met with experts in the railroad 

industry. We reviewed characteristics of STB’s current rate relief process, 

as well as changes STB has made to the process, and conducted a 

comprehensive analysis of STB cases since 2000. We also held an expert 

panel through the National Academy of Sciences, consisting of 11 

individuals with expertise in the freight railroad industry and the 

economics of transportation deregulation. Moreover, we conducted a legal

analysis of current statutes related to STB’s authority. To discern potential

alternatives, we reviewed pending legislation, testimonies before 

Congress, previous GAO reports, STB decisions, rule makings, and 

proposed rule makings, and conducted a summary analysis of interviews. 

 1

Our analysis included 177 economic areas because we did not include the two economic 

areas in Alaska and Hawaii. 

2

The Bureau of Economic Analysis updated definitions of each economic area in November

2004. 

Page 75 GAO-07-94 Freight Railroads
Appendix II: Objectives, Scope, and

Methodology 

To assess future freight demand and the freight railroad industry’s ability 

to meet such demand, we reviewed transportation planning literature and 

forecasts of future freight rail demand and capacity in the United States. 

This review also included state freight plans and major freight rail 

projects. We synthesized information on freight and freight rail, as well as 

various forecasts to identify similar and dissimilar themes. We also 

reviewed involvement by the federal government in freight railroad 

projects, including related legislation and funding decisions. We 

interviewed several state and federal transportation officials to gather 

further information on public-private partnerships, freight railroad 

projects, and DOT’s draft National Freight Policy. We also interviewed 

freight railroad representatives, financial market analysts, national 

association representatives, and transportation experts. For selected 

public-private partnerships, we analyzed the genesis of such projects, 

motivations for involvement from the public and private sectors, and 

benefit-cost analyses that were conducted to support project funding 

decisions. 

We determined that the data used in this report were sufficiently reliable 

for the purpose of our review. We conducted our review from June 2005 to

August 2006 in accordance with generally accepted government auditing

standards. 

Page 76 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Appendix III: Comments from the Surface Transportation Board 

Transportation Board 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Page 77 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

See comment 1. 

Page 78 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

See comment 2. 

See comment 3. 

See comment 4. 

Page 79 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

See comment 5 and 6. 

See comment 7. 

See comment 8. 

Page 80 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

See comment 8. 

See comment 9. 

See comment 6. 

See comment 10. 

Page 81 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

Page 82 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

The following are GAO’s comments on the Surface Transportation Board’s 

letter dated September 15, 2006. 

1. STB commented that we conducted a national study into the state of 

competition. We did not conduct such a study. Our study included a 

broad focus on changes in the freight railroad industry since the 

Staggers Rail Act, the actions STB has taken to address concerns about 

competition and captivity, and future freight demand and capacity. The 

data we collected and analysis we performed—such as a review of rate 

changes over 20 years—were too broad to represent a national study 

of the state of competition. It is the limitations in the scope of our 

analysis of competition, along with limitations in the data available to 

us and a reasonable possibility that shippers in selected markets may 

be paying excessive rates, which led us to recommend that STB 

conduct a more rigorous analysis of competition. 

GAO Comments 

2. STB commented that it has already addressed our recommendation to 

improve data collection by proposing standardized monthly reports of 

fuel surcharges and also described its efforts to ensure the accuracy 

and reliability of data in the Waybill. We commend STB for its recent 

action on fuel surcharges, which occurred during our review, but we 

also note STB has not yet implemented standardized reporting of fuel 

surcharges. In addition, other revenues besides fuel surcharges may 

not be included in the Waybill. Specifically, revenues generated 

through railcar auctions and congestion fees may not be included. 

While the reported miscellaneous revenue is a small percentage of all 

revenue, it is not known how much miscellaneous revenue is not 

reported. Complete data would provide for more accurate tracking of 

railroad revenues and would help STB to obtain a clearer picture of 

actual fees paid by shippers. While we commend STB for its actions to 

audit and review Waybill data, these accuracy checks do not address 

our concern that STB is not collecting the full range of revenue data. 

3. STB commented that our recommendation for STB to conduct an 

analysis of competition is based on two findings—that rail rates have 

increased since 1980 and that the amount of traffic with high R/VC 

ratios has increased in some areas. Our recommendation is not based 

on these two findings, but on an analysis of multiple sources, such as 

data on the amount of tonnage originating in economic areas that have 

access to only one Class I railroad, data on the amount of tonnage 

traveling over 300 percent R/VC, and the amount of tonnage that 

originates in areas with access to only one Class I railroad and travels 

at rates that exceed the statutory threshold for rate relief. This analysis 

Page 83 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

provides an important first step in assessing competitive markets 

nationally; but it is imperfect, given the limitations of measures used to 

weigh captivity and limitations in the Carload Waybill Sample. The 

results of our analysis, when combined with comments from 

participants on our expert panel and interviews with shipper and 

railroad groups, suggest a reasonable possibility that shippers in 

selective markets may be paying excessive rates related to a lack of 

competition in these markets. It is precisely the inconclusiveness of 

the available data—and STB’s authority and responsibility to monitor 

and ensure effective competition in the freight rail industry—that led 

us to recommend a rigorous analysis of competition by STB. Also, we 

examined rates since 1985, not 1980. 

4. STB commented that an increase in rates does not suggest market 

abuses and that the rate changes in our report were not adjusted for 

inflation. We agree that a change in a rate does not necessarily suggest 

the exercise of market power. While our rates were not adjusted for 

inflation, we constructed rate indexes, which account for changes in 

traffic patterns over time that could affect revenue statistics. We also 

included the price index for the GDP to provide a measure for 

inflation. However, our recommendation is not based on recent rate 

increases. Our recommendation is based on our analyses of multiple 

sources, such as data on the amount of tonnage originating in 

economic areas that have access to only one Class I railroad, data on 

the amount of tonnage traveling over 300 percent R/VC, and the 

amount of tonnage that originates in areas with access to only one 

Class I railroad and travels at rates that exceed the statutory threshold 

for rate relief. 

5. STB commented that figure 19 shows an increase in grain traffic which 

traveled at rates above 300 percent R/VC and figure 9 shows that grain 

rates per ton-mile had fallen along that same route, so the change in 

R/VC must be due to a drop in costs per ton-mile. We disagree that the 

change in R/VC in figure 19 must be due to a drop in costs per ton-mile. 

Figure 19 shows only the amount of traffic on the route that traveled at 

rates above 300 percent R/VC, while figure 9 shows the cents per tonmile for all traffic along that route (not just traffic that traveled at rates 

above 300 percent R/VC). Therefore, the decrease in cents per ton mile 

shown in figure 9 may reflect a decrease in rates for traffic along that 

route that traveled at rates below 300 percent R/VC. 

6. STB commented that the measures used in our analysis are not 

conclusive. The fact that our analysis is inherently limited by available 

data and proxy measures lends more weight to our recommendation. 

Page 84 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

Specifically, our analysis provides an important first step in assessing 

competitive markets nationally, but it is imperfect given the limitations 

of measures used to weigh captivity and limitations in the Carload 

Waybill Sample. We do not conclusively state that there are shippers 

who are captive to one railroad and paying rates that reflect an abuse 

of market power. However, the results of our analysis, when combined 

with comments from participants on our expert panel and interviews 

with shipper and railroad groups, suggest a reasonable possibility that 

shippers in selective markets may be paying excessive rates related to 

a lack of competition in these markets. We believe that STB is the 

agency that has the authority and responsibility to conduct an inquiry 

into the potential abuse of market power and utilize its range of 

options to address competition issues. 

7. STB commented that R/VC levels do not provide a reliable measure of 

changes in captivity because they can increase when rates are falling. 

We agree that an analysis of R/VC levels is not a conclusive measure of 

the use of market power. However, the use of R/VC as an indicator of 

railroad pricing power is well-documented both by Congress in the 

Staggers Rail Act and by STB, which uses R/VC levels in its process for 

determining unreasonable rates. While we acknowledge the limitations 

of the ratio in our report, and even include an example like the one 

cited above, we believe that R/VC ratios can be used as one of several 

proxy measure to determine potential captivity. In fact, STB refers to 

traffic traveling at or above 180 percent R/VC as “potentially captive.” 

8. STB commented that they have several important rule makings under 

way which bear directly on our concerns, including changes to the 

standard and simplified rate relief processes. While we commend STB 

for taking action to improve its rate relief processes, we note that 

these rule makings are designed to make changes to the standard and 

simplified rate relief processes and are not designed to analyze the 

state of competition or the possible abuse of market power. In 

contrast, we believe that an analysis of the state of competition or the 

possible abuse of market power, along with the range of options STB 

has to address competition issues, could more directly further 

legislatively defined goals to ensure effective competition among rail 

carriers as the preferred means to both promoting a sound rail 

transportation system and maintaining reasonable rates. 

9. STB commented that it is hesitant to divert resources away from its 

pending initiatives to respond to our recommendation. We have 

modified our draft to recommend that, if STB determined that it needs 

more resources to undertake a rigorous analysis of competitive 

Page 85 GAO-07-94 Freight Railroads
Appendix III: Comments from the Surface

Transportation Board 

markets to identify the state of competition nationwide, it should 

request additional resources from Congress. 

10. STB commented that, as a small agency, a more practical approach to 

addressing concerns about captive shippers would be for STB to 

continue reforming its rate complaint procedures, rather than conduct 

another analysis. While we commend STB for continuing its efforts to 

improve its standard and simplified rate relief processes, these rule 

makings will not address our concerns. Specifically, these rule 

makings are designed to improve processes available to shippers after

they have been charged a rate they consider to be unreasonable; these 

rule makings are not designed to analyze the state of competition or 

the possible abuse of market power. In contrast, we believe that an 

analysis of the state of competition or the possible abuse of market 

power, along with the range of options STB has to address competition 

issues, could more directly further legislatively defined goals to ensure 

effective competition among rail carriers as the preferred means to 

both promoting a sound rail transportation system and maintaining 

reasonable rates. We believe that STB is the agency that is uniquely 

positioned to inquire into and report on railroad practices and could 

conduct an analysis of competition that would rely on more than 

sample data and could determine whether the inappropriate exercise 

of market power is occuring in specific markets. STB has the authority 

to subpoena witnesses and records. Following its inquiry, STB could 

also consider initiating a generally applicable rule making to address 

competition issues or prescribe specific remedies in response to a 

complaint. We recognize that STB has limited resources, and we have 

modified our draft to recommend that, if STB determines that it needs 

more resources to conduct an analysis of competition, it should 

request additional resources from Congress. 

Page 86 GAO-07-94 Freight Railroads
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 87 GAO-07-94

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact JayEtta Z. Hecker, (202) 512-2834 

In addition to those named above, individuals making key contributions to 

this report include Ashley Alley, Steve Brown, Matthew T. Cail, Sheranda 

S. Campbell, Steve Cohen, Elizabeth Eisenstadt, Libby Halperin, Richard 

Jorgenson, Tom McCool, John Mingus, Josh Ormond, and John W. 

Shumann. 

Staff 

Acknowledgments 

 Freight Railroads
Related GAO Products Related GAO Products 

Freight Railroads: Preliminary Observations on Rates, Competition, 

and Capacity Issues. GAO-06-898T. Washington, D.C.: June 21, 2006. 

Freight Transportation: Short Sea Shipping Option Shows Importance of 

Systematic Approach to Public Investment Decisions. GAO-05-768. 

Washington, D.C.: July 29, 2005. 

Freight Transportation: Strategies Needed to Address Planning and 

Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 

2003. 

Railroad Regulation: Changes in Freight Railroad Rates from 1997 

through 2000. GAO-02-524. Washington, D.C.: June 7, 2002. 

Freight Railroad Regulation: Surface Transportation Board’s Oversight 

Could Benefit from Evidence Better Identifying How Mergers Affect 

Rates. GAO-01-689. Washington, D.C.: July 5, 2001. 

Railroad Regulation: Current Issues Associated with the Rate Relief 

Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999. 

Railroad Regulation: Changes in Railroad Rates and Service Quality 

Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999. 

Interstate Commerce Commission: Key Issues Need to Be Addressed in

Determining Future of ICC’s Regulatory Functions. GAO-T-RCED-94-261

Washington, D.C.: July 12, 1994. 

Railroad Competitiveness: Federal Laws and Policies Affect Railroad 

Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991.

Railroad Regulation: Economic and Financial Impacts of the Staggers 

Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990. 

Railroad Regulation: Shipper Experiences and Current Issues in ICC 

Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: 

September 9, 1987. 

Railroad Regulation: Competitive Access and Its Effects on Selected 

Railroads and Shippers. GAO/RCED-87-109, Washington, D.C.: June 18,

1987. 

Page 88 GAO-07-94 Freight Railroads
Related GAO Products 

Railroad Revenues: Analysis of Alternative Methods to Measure Revenue 

Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986. 

Shipper Rail Rates: Interstate Commerce Commission’s Handling of 

Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986. 

(544105) Page 89 GAO-07-94 Freight Railroads
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