United States Government Accountability Office

Washington, DC 20548 

November 2, 2006 

The Honorable Charles D. Nottingham 

Chairman 

Surface Transportation Board 

Subject: Freight Railroads: Highlights of GAO Report on Freight Rail Industry 

Performance, Competition, and Capacity 

Mr. Chairman and Members of the Surface Transportation Board: 

We appreciate the opportunity to testify on our recently issued report on the freight 

railroad industry. As you know, over 25 years ago, Congress transformed federal freight 

rail transportation policy. At that time, after almost 100 years of economic regulation, 

the railroad industry was in serious economic decline, 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. As 

you know, this process establishes a threshold for rate relief, allowing a rate to be 

challenged if it produces revenue equal to or greater than 180 percent of the variable cost 

of transporting a shipment. Since the passage of the Staggers Rail Act in 1980, we have 

issued several reports on the freight railroad industry. 

In October 2006, we issued our most recent report on the freight rail industry.1

 The 

objectives of this report were to determine (1) 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; (2) the actions STB has taken to address

 1

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

Capacity Should Be Addressed, GAO-07-94 (Washington, D.C.: Oct. 6, 2006).

GAO-07-207R Freight Railroads 
concerns about competition and captivity and any alternative approaches that could be 

considered to address remaining concerns; and (3) the projections for freight traffic 

demand over the next 15 to 25 years, the freight railroad industry’s ability to meet that 

demand, and potential federal policy responses. Among other things, this report 

describes the significant changes that have taken place in the railroad industry and 

reports that from 1985 through 2004, rates generally decreased, but nominal grain rates 

increased 9 percent. We also found that, on some routes, the amount of grain traveling at 

rates significantly above the threshold for rate relief had increased since 1985. 

In light of these findings, you asked us to testify today on the results of our work. The 

findings and conclusions we reported are reflected in the attached slides. A copy of the 

report can be found at www.gao.gov. 

- - - - - 

Mr. Chairman, this concludes my prepared statement. I would be happy to respond to 

any questions you or other Members of the Board may have at this time. 

Sincerely yours, 

JayEtta Z. Hecker 

Director, Physical Infrastructure Issues

Enclosure

Page 2 GAO-07-207R Freight Railroads 
Enclosure I 

Freight Railroads: Highlights of GAO Report on Freight Rail Industry 

Performance, Competition, and Capacity 

Freight Railroads:

Highlights of GAO Report on Freight Rail Industry Performance,

Competition, and Capacity

Surface Transportation Board

November 2, 2006

Statement of JayEtta Z. Hecker

Director, Physical Infrastructure Issues

Page 3 GAO-07-207R Freight Railroads 
Enclosure I 

2

Objectives of GAO Review

1. Changes in the railroad industry since the Staggers Rail Act of

1980, including changes in rates and competition; 

2. STB actions to address competition and captivity concerns and 

alternatives that could be considered; and

3. freight traffic demand and capacity projections and potential 

federal policy responses.

• Report issued October 6, 2006; GAO-07-94 is available at

www.gao.gov

Page 4 GAO-07-207R Freight Railroads 
Enclosure I 

3

Scope and Methodology

• Reviewed STB data, including the unmasked Carload Waybill 

Sample1 from 1985 through 2004

• Interviewed railroad officials, shippers, and other parties

• Reviewed and analyzed projections for freight rail demand and

capacity

• Convened an expert panel 

• Review conducted from June 2005 to August 2006 in accordance

with generally accepted government auditing standards

1The unmasked Waybill Sample does not disguise revenue data

Page 5 GAO-07-207R Freight Railroads 
Enclosure I 

4

Changes Since Staggers:

Industry’s Financial Health Has Improved

Substantially

Railroads’ Tax-adjusted Return on Investment

Railroads’ Tax-adjusted Return on Investment

Page 6 GAO-07-207R Freight Railroads 
Enclosure I 

5

Changes Since Staggers:

Industry Rail Rates Declined from 1985 through 2000 

and Rose Slightly from 2001 through 2004

Page 7 GAO-07-207R Freight Railroads 
Enclosure I 

6

Changes Since Staggers:

Some Revenues Have Increased, Some Costs Have Been

Shifted to Shippers, and Some Charges Are Not Accurately 

Tracked

• Some revenues reported as miscellaneous have increased 

(e.g. fuel surcharges)

• Some costs have been shifted to shippers (e.g. railcars)

• Some charges are not accurately tracked (e.g. 

“miscellaneous revenue”) which limits completeness of

Waybill data

Page 8 GAO-07-207R Freight Railroads 
Enclosure I 

7

Changes Since Staggers:

Unlike Rates for Other Commodities, Nominal Grain 

Rates Have Increased

Commodity Rate Changes

Page 9 GAO-07-207R Freight Railroads 
Enclosure I 

8

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Industry Has Become More Concentrated

Market Share of Four Largest Class I Railroads

Page 10 GAO-07-207R Freight Railroads 
Enclosure I 

9

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Competition can lower some rates

Rate changes after shipper gained

access to a second railroad at an

origin point that had previously been 

served by one Class I railroad. We

do not provide information on the 

location of the shipper involved 

because doing so could reveal 

proprietary information.

Page 11 GAO-07-207R Freight Railroads 
Enclosure I 

10

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Captive Shippers are difficult to identify because 

available proxy measures can overstate or understate 

captivity

• The Bureau of Economic Analysis’ (BEA) economic areas can be quite

large and our analysis does not include other transportation

alternatives

• Revenue to variable cost (R/VC) ratios can increase when the rate

decreases

Source: GAO

Year 2 $18.00 $10.00 180%

Year 1 $20.00 $12.00 167%

Year Revenue collected Variable costs R/VC

Page 12 GAO-07-207R Freight Railroads 
Enclosure I 

11

Changes Since Staggers:

Competition and Captivity Concerns Remain

• GAO’s analysis of limited available measures indicates 

that:

• extent of captivity appears to be dropping

• the percentage of traffic traveling at rates substantially 

over the threshold for rate relief (over 300 percent 

R/VC) has increased

Page 13 GAO-07-207R Freight Railroads 
Enclosure I 

12

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Less traffic is traveling at rates equal to or greater than 180 percent 

R/VC

Tonnage and revenue generated from traffic traveling at rates equal to or greater than 180 percent R/VC

Page 14 GAO-07-207R Freight Railroads 
Enclosure I 

13

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Tonnage with access to more than 1 Class I railroad appears to 

have increased

Change in Percentage of Tonnage

with Access to One Class I Railroad, 

1994 through 2004

Page 15 GAO-07-207R Freight Railroads 
Enclosure I 

14

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Amount of traffic traveling at rates over 300 percent R/VC has

increased

Tonnage traveling at Rates Over 300 Percent R/VC

Page 16 GAO-07-207R Freight Railroads 
Enclosure I 

15

Changes Since Staggers:

Competition and Captivity Concerns Remain

Percentage of Tonnage by R/VC, 1985 and 2004

•Amount of traffic traveling at rates over 300 percent R/VC has

increased

Page 17 GAO-07-207R Freight Railroads 
Enclosure I 

16

Changes Since Staggers:

Competition and Captivity Concerns Remain

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

appear widely distributed

Page 18 GAO-07-207R Freight Railroads 
Enclosure I 

17

Changes Since Staggers:

Grain Routes with High R/VC Ratio

• Some grain routes had significant increases in traffic traveling at 

rates over 300 percent R/VC

Percentage of tonnage traveling over 300 percent R/VC from Minot to Portland and Billings to Portland

Page 19 GAO-07-207R Freight Railroads 
Enclosure I 

18

Changes Since Staggers:

Competition and Captivity Concerns Remain

• Some areas with access to only one Class I railroad have a higher

percentage of traffic traveling at rates over 180 percent R/VC

Page 20 GAO-07-207R Freight Railroads 
Enclosure I 

19

STB Actions and Alternative

Approaches

• STB has broad statutory authority to monitor the railroad 

industry, including the authority to inquire into and report 

on rail industry practices

• STB has taken actions to protect captive shippers

• simplified guidelines

• reviewed rail access and competition

• Efforts have led to little effective relief

Page 21 GAO-07-207R Freight Railroads 
Enclosure I 

20

STB Actions and Alternative

Approaches

• Assessment of competitive markets could more clearly identify areas for 

targeting STB action

• 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

• A number of approaches could make the rate relief process more accessible but 

each has both advantages and drawbacks

• Increase the use of simplified guidelines

• Increase the use of arbitration

• Develop an alternative cost methodology

• Any alternative approach requires careful balancing between the railroads’ need

for revenue and shippers’ need for reasonable rates

Page 22 GAO-07-207R Freight Railroads 
Enclosure I 

21

Future Demand, Capacity, and Potential 

Federal Response

• Forecasts of significant future freight rail traffic growth 

• DOT projects domestic and international freight demand increases of more than 

65 percent and 84 percent, respectively, from 2002 to 2020

• Railroads’ ability and willingness to invest in new capacity to meet demand reflects a 

number of key considerations, and capacity to meet potential demand is uncertain

• Rail capacity investments can produce private and public sector benefits

• Reduces highway traffic congestion

• Improves air quality

• Enhances intermodal connections

• Public sector investment in freight rail is growing

• Over 30 states have published freight rail plans

• Federal investment includes $100 million for Chicago’s freight rail infrastructure

Page 23 GAO-07-207R Freight Railroads 
Enclosure I 

22

Future Demand, Capacity, and Potential 

Federal Response

• The Department of Transportation (DOT) is developing a national freight 

policy 

• The federal response to freight investments should be impartial toward all 

modes and produce maximum public benefits from public investments 

• A mode neutral approach

• Federal programs treat different freight modes differently

• Maximizing public benefits

• Benefit-cost tools often not effectively used

• States have experience evaluating whether freight rail projects warrant 

investing public dollars

• Federal decision makers have no such criteria

Page 24 GAO-07-207R Freight Railroads 
Enclosure I 

23

Conclusions

• The Staggers Rail Act achieved far-ranging benefits, most shippers are

better off, and widespread changes to the relationship between railroads

and their customers are not needed

• Pockets of potential captivity and other factors raise the question of whether

some rates reflect reasonable pricing practices or an abuse of market power

• Although our analysis is constrained by the limitations in the Waybill and

available proxy measures, it is an important first step

• STB has broad statutory authority to inquire into and report on rail industry

practices

• Further actions require careful balancing between the railroads’ need for

revenue and shippers’ need for reasonable rates

• Federal policy responses on rail capacity should reflect a mode-neutral

national policy that produces maximum public benefits

Page 25 GAO-07-207R Freight Railroads 
Enclosure I 

24

Recommendations 

(from October 6, 2006 report)

• STB should undertake a rigorous analysis of competitive markets,

determine whether the inappropriate exercise of market power is

occurring in specific markets, and, where appropriate, consider the 

range of access available to address problems associated with the 

potential abuse of market power.

• If STB determines that it requires more resources to conduct this

analysis, then STB should request additional resources from 

Congress

• STB should review its method of data collection to ensure railroads are

consistently and accurately reporting all revenues

• As DOT continues to develop a national freight policy and a possible 

federal policy response, it should consider strategies to (1) create a level 

playing field for all freight modes and (2) develop mechanisms to assess

and maximize public benefits from federal investments.

Page 26 GAO-07-207R Freight Railroads 
Enclosure I 

25

Report available at www.gao.gov

GAO-07-94

(544133) 

Page 27 GAO-07-207R Freight Railroads 
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