United States General Accounting Office

GAO Report to Congressional Requesters

April 1999 RAILROAD

REGULATION

Changes in Railroad

Rates and Service

Quality Since 1990

GAO/RCED-99-93

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-280294 

April 16, 1999

The Honorable Conrad Burns

The Honorable Byron L. Dorgan

The Honorable Pat Roberts

The Honorable John D. Rockefeller, IV

United States Senate

In response to your request, this report discusses how rates and service quality for freight rail

transportation have changed since 1990 and actions being taken by the Surface Transportation

Board and others to address service quality issues. We previously transmitted a companion

report to you entitled Railroad Regulation: Current Issues Associated With the Rate Relief

Process (GAO/RCED-99-46, Feb. 26, 1999).

Unless you publicly announce its contents earlier, we plan no further distribution of this report

until 14 days after the date of this letter. At that time, we will send copies of the report to

interested congressional committees with responsibilities for transportation and regulatory

issues; the Honorable Rodney E. Slater, Secretary of Transportation; the Honorable Linda J.

Morgan, Chairman of the Surface Transportation Board; and other interested parties. We will

also make copies available to others upon request. Please call me at (202) 512-3650 if you have

any questions about the report. Major contributors to the report are listed in appendix IV.

Phyllis F. Scheinberg

Associate Director,

 Transportation Issues
Executive Summary

Purpose The Railroad Revitalization and Regulatory Reform Act of 1976 and the

Staggers Rail Act of 1980 gave freight railroads increased freedom to price

their services according to market conditions. In response to this freedom

and to recent consolidations within the rail industry, some shippers have

raised concerns that freight railroads have abused their market power in

setting rates for those shippers with fewer alternatives to rail

transportation while at the same time providing poor service.

Concerned about the potential abuse of market power by freight railroads

in setting rates and a deterioration of service quality in recent years,

Senators Conrad Burns; Byron L. Dorgan; Pat Roberts; and John D.

Rockefeller, IV, asked GAO to examine issues related to railroad rates and

service. In particular, this report provides information on (1) the

environment within which railroad rates have been set since 1990, (2) how

railroad rates have changed since 1990, (3) how railroad service quality

has changed since 1990, and (4) actions taken by the Surface

Transportation Board and others to address railroad service quality

problems.

Background By the 1970s, many of the nation’s largest freight railroads (called Class I

railroads) were in poor financial health. With passage of the Railroad

Revitalization and Regulatory Reform Act and the Staggers Rail Act, the

Congress sought to improve the financial health of the rail industry by

reducing economic regulation of freight railroads and providing railroads

more freedom to price their services according to market demand. In

particular, the Staggers Rail Act made it federal policy for railroads to rely,

where possible, on competition and the demand for service to establish

reasonable rates. Under this policy, shippers with less effective

transportation alternatives pay a higher proportion of a railroad’s fixed

costs than those with more effective competitive alternatives (this is called

“differential pricing”). The Interstate Commerce Commission (ICC)

continued to regulate rates where there was an absence of effective

competition. During the 1980s, railroads used the increased freedoms to

improve their financial health and competitiveness.

The ICC Termination Act of 1995 abolished the ICC and created the Surface

Transportation Board (the Board), a bipartisan, independent adjudicatory

agency administratively housed within the U.S. Department of

Transportation. The Board has continued many of ICC’s rail regulatory

functions, including regulating rail rates where there is an absence of

effective competition and adjudicating disputes about service.

Page 2 GAO/RCED-99-93 Railroad Regulation
Executive Summary

As part of its review, GAO received survey responses from about 700

shippers on how the quality of service they have received from Class I

railroads has changed since 1990. GAO surveyed the major associations of

grain, coal, chemicals, and plastics industries—industries whose freight

constitutes the largest portion of rail shipments. GAO’s survey used a

statistical sample; as a result, when GAO reports survey results, they

represent estimates, based on the views and experiences of these groups.

Results in Brief The environment in which railroads set their rates has been influenced by

ongoing industry consolidation, competitive conditions, and railroads’

financial health. As a result of mergers, bankruptcies, and the redefinition

of what constitutes a major railroad, the number of independent Class I

railroad systems has been reduced from 30 in 1976 to 9 in early 1999, with

the 5 largest Class I railroads accounting for 94 percent of industry

operating revenue. This increased concentration has raised concerns

about potential abuse of market power in some areas due to railroads’ use

of market-based pricing. Under market-based pricing, rail rates in markets

with less effective competition may be higher than in markets that have

greater competition from railroads or other modes of transportation.

Railroads’ financial health has also improved since 1990. However, despite

these improvements, the Board has determined that most Class I railroads

are “revenue inadequate” because they do not generate enough revenue to

cover the industry’s cost of capital. Although such determinations are

sometimes controversial, revenue inadequacy affects the ability of a

railroad to attract and/or retain capital and remain financially viable.

Railroad rates have generally decreased since 1990. However, the decrease

has not been uniform, and in some cases, rail rates have stayed the same

as, or are higher than, they were in 1990. This was particularly true on

selected long distance (greater than 1,000 miles) rail shipments of wheat

from northern plains states like Montana and North Dakota to west coast

destinations. In general, rail routes with effective competitive

alternatives—either from railroads or from trucks and

barges—experienced greater decreases in rail rates.

As the rail industry has consolidated, shippers have complained that

service quality has deteriorated. Shippers’ complaints have included a lack

of railcars when and where they were needed and inconsistent pickup and

delivery of cars. Roughly 60 percent of the coal, grain, chemicals, and

plastics shippers responding to GAO’s survey (representing 329 shippers)

said that their service was somewhat or much worse in 1997 than it was in

Page 3 GAO/RCED-99-93 Railroad Regulation
Executive Summary

1990. In general, railroads believe the service they provide is adequate but

agree improvements can be made. According to railroads, service

problems have been caused by such things as capacity constraints and

industry downsizing. At the current time, the overall quality of rail service

cannot be measured. There are few industrywide measures of service, and

service measures recently developed are not comparable from one

railroad to another, nor do they fully address service quality.

Federal agencies and railroads have taken a number of actions to address

rail service problems. These include an October 1997 emergency service

order issued by the Board to facilitate the resolution of service problems

in the West that originated in the Houston/Gulf Coast area; the creation of

a government task force to disseminate information that can help railroads

and shippers to anticipate changes in transportation demand and supply;

and the Board’s adoption in December 1998 of procedures for expediting

relief from inadequate rail service. Although these actions are expected to

yield benefits, they do not address some shippers’ belief that greater

competition in the rail industry is needed to improve service. If it decides

to address this issue, the Congress will need to weigh the potential

benefits of increased competition with the potential financial and other

effects on the railroad industry.

Principal Findings

Rate Setting Influenced by

Numerous Factors

Since 1990, the environment within which railroads set their rates has

been influenced by a number of factors. One is continued consolidation

within the rail industry. While there were 30 independent Class I railroad

systems in 1976, by early 1999 the number had been reduced to 9, with half

of that reduction due to consolidations.1

 Although consolidations and

mergers were expected to yield cost efficiencies and improve service, they

have also concentrated the industry into fewer and larger railroads. The

five largest railroads accounted for about 94 percent of industry operating

revenue in 1997 (the latest year for which data are available). Rail shippers

and others have raised the issue of potential abuse of market power by

these larger railroads.

Differential pricing has also played a role. Under differential pricing,

shippers with less effective transportation alternatives generally pay

1

Conrail is expected to be formally absorbed by CSX Transportation and Norfolk Southern in 1999.

This will reduce the number of Class I railroads to eight.

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

proportionately greater shares of a railroad’s fixed costs than shippers

with more effective transportation alternatives. This allows railroads to

price their services more aggressively in areas where shippers have more

transportation alternatives. The effect of differential pricing can be seen

when railroad revenues from shipments are compared to railroad variable

costs (costs that vary according to the quantity shipped). In general,

railroads can obtain more revenue in relation to variable costs from

shippers with less effective transportation alternatives than from those

shippers with better alternatives—even though both groups of shippers

may share similar cost characteristics, such as the number of railcars to be

shipped or lengths of haul to destination.

The percent of rail industry revenue from shipments transported at rates

generating revenues exceeding 180 percent of variable costs (the current

threshold for the Surface Transportation Board’s jurisdiction over rail rate

complaints) has generally declined from about 33 percent in 1990 to

29 percent in 1996. However, the ratio of revenue to variable costs varied

widely by commodity.

Railroads’ financial health has also improved since 1990. From 1990

through 1996, railroads’ return on investment and return on equity (both

measures of profitability) averaged about 8.5 and 11 percent,

respectively—about 60 percent and 24 percent higher, respectively, than

railroads’ returns on investment and equity during the 1980s. Although

financial health has improved, the Board has found most Class I railroads

to be revenue inadequate, a condition that may induce investors to place

their money elsewhere and affect a railroad’s financial viability. Revenue

adequacy determinations for the railroad industry have been controversial.

In recent years, shippers and others have questioned the meaningfulness

of the current method of determining revenue adequacy, particularly when

railroads that are designated revenue inadequate are able to attract capital

to acquire other railroads.

Rail Rates Have Fallen, but

Not All Shippers Have

Benefited

The reduction in railroad regulation that began in the 1970s continues to

yield benefits for shippers. According to the Board, from 1982 through

1996, average real (inflation-adjusted) rail rates for Class I railroads had

fallen about 46 percent. However, rates had not necessarily decreased

proportionally for all shippers. GAO’s analysis of real rail rates since 1990

for coal, grain (corn and wheat), certain chemicals, and transportation

equipment (finished motor vehicles and parts) in selected transportation

corridors found that rates had generally fallen. However, for some

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

long-distance shipments of wheat from northern plains states such as

Montana and North Dakota, rates had stayed the same as, or were higher

than, they were in 1990. Rail rates were also sensitive to competition, and

GAO found that rates in some markets/corridors that are considered to have

less effective competition, such as the northern plains states, were

generally higher than rates where there may be more effective competitive

options, such as barges or other railroads.

Ratios of revenue to variable costs (R/VC) are often used as indicators of

railroads’ dominance of markets—by statute, a railroad does not dominate

a market if its revenue is less than 180 percent of its variable costs for

transporting the shipper’s commodities. GAO’s analysis of R/VC ratios

suggests that competition plays a role in ratios for specific commodities

and markets. In general, GAO found that R/VC ratios exceeded 180 percent

on some short-distance (500 miles or less) movements of coal and

long-distance movements of wheat—movements for which there may be

less effective competition. In contrast, R/VC ratios were 180 percent or less

on some long-distance movements of coal where there may be more

competition. Although R/VC ratios are used as proxies for railroad market

dominance, such ratios can be increasing at the same time rates are

decreasing and, conversely, decreasing at the same time rates are

increasing.

Quality of Service Cannot

Currently Be Measured

In recent years, shippers have increasingly criticized railroads for

providing poor service. These complaints include such things as a lack of

railcars when and where needed and inconsistent pickup and delivery of

cars. GAO’s survey of approximately 700 coal, grain, chemicals, and plastics

shippers found that roughly 60 percent believed their rail service in 1997

was somewhat or far worse than it was in 1990. Shippers and shipper

associations have attributed poor service, at least in part, to railroad

mergers and consolidations. Some shippers told us that they are

dependent on railroads to meet their transportation needs and that they

believe such dependence has reduced railroads’ incentives to provide good

service. In general, Class I railroad officials believe their railroads provide

adequate service and that rail service in 1997 was at least as good as it was

in 1990. However, the officials acknowledge that problems exist and that

improvements can be made. Among the reasons cited for service problems

were increased rail traffic and industry downsizing, which have created

capacity constraints in the rail system.

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

The quality of rail service cannot be measured currently. There are few

industrywide service measures, and service information from individual

railroads is either not available, inconsistently defined across and within

railroads, or not available going back in time. The rail industry has

recently developed quantitative measures of performance, such as average

train speed. Although these measures may be helpful in assessing some

aspects of service, they are more an evaluation of railroad operating

efficiency rather than quality of service.

Actions Taken to Resolve

Service Issues, but Some

Concerns of Shippers Not

Addressed

Actions have been taken by both federal agencies and railroads to address

service issues. These include the issuance of an emergency service order

by the Board to facilitate the resolution of recent service problems in the

West that originated in the Houston/Gulf Coast area and the creation of a

joint Board-U.S. Department of Agriculture Grain Logistics Task Force to

disseminate information on anticipated changes in transportation demand

and supply. In December 1998, the Board also adopted new procedures

allowing shippers to receive expedited temporary relief from inadequate

rail service through access to an alternative carrier. Unlike the procedures

for obtaining more permanent relief, the new procedures do not require a

shipper to show that a railroad has engaged in anticompetitive conduct.

All the actions taken are expected to yield benefits in addressing service

problems. However, the actions do not address some shippers’ belief that

increased competition in the rail industry is needed to improve service.

Because of the divergent views of railroads and shippers on this issue,

resolving service and competition issues will be difficult and may require

congressional action. If it decides to address this issue, the Congress will

need to weigh the potential benefits of increased competition against the

potential financial and other effects on the railroad industry.

Recommendations This report makes no recommendations.

Agency Comments

and GAO’s Evaluation

GAO provided a draft of this report to the Surface Transportation Board

and to the Department of Transportation for review and comment. GAO

met with a number of Board and Department officials, including the

Board’s Deputy General Counsel and the Director of the Office of

Intermodal Planning and Economics of the Federal Railroad

Administration. The Board agreed that the draft report was a fair

representation of the issues covered. The Department of Transportation

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

made no substantive comments on the draft report. Among the specific

comments made by the Board were that GAO should better depict that

(1) competition is better measured by the effectiveness of transportation

alternatives rather than the number of competitors; (2) the Board, in its

decisions on mergers, has taken actions to ensure that no shipper has

become captive to a single railroad; (3) controversy over revenue

adequacy issues is not new and that these issues were addressed at length

by the Board’s predecessor; (4) 1997 was not a typical year in terms of the

quality of railroad service due to the unusual, severe congestion that

occurred in the West; (5) the Board has an informal mechanism to handle

railroad service complaints through which many problems with service are

resolved; (6) as noted in its December 1998 report to Members of

Congress, providing open access (where one railroad is required to make

its tracks and facilities available to other railroads for a fee), or otherwise

dramatically modifying the current regulatory scheme, could have

far-reaching impacts for shippers and railroads; and (7) service problems

in the Houston/Gulf Coast area during 1997 were not caused by the Union

Pacific/Southern Pacific merger and that the merger’s implementation

helped resolve the problems. The Board also suggested that recently

developed performance measures by the railroad industry could be of

some usefulness in determining service quality.

GAO added information, or modified and/or clarified wording, in this report

to address each of these issues and to recognize the Board’s concerns

and/or position. For example, GAO modified the report’s language to better

recognize the importance of effective competition rather than the number

of competitors. Board and/or Department officials also made other

technical comments, which GAO incorporated where appropriate. The

Board’s comments and GAO’s responses are discussed in greater detail at

the end of chapters 1 through 5.

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

Executive Summary 2

Chapter 1 

Introduction

14

Reduced Regulation of the Railroad Industry 14

Consolidation Within the Railroad Industry 15

The Surface Transportation Board Replaces the ICC 22

Objectives, Scope, and Methodology 24

Agency Comments and Our Evaluation 28

Chapter 2 

Industry and Other

Factors Have

Influenced the

Rate-Setting

Environment Since

1990

30

Ongoing Industry and Economic Changes Influence Rate Setting 30

Using Differential Pricing, Railroads Set Rates According to

Competitive Conditions

38

Railroad Financial Health Has Improved, but Most Railroads Do

Not Earn the Industry Cost of Capital

40

Agency Comments and Our Evaluation 46

Chapter 3 

Rail Rates Have Fallen

Since 1990, but Not

All Shippers Have

Benefitted

47

Rail Rates Have Generally Decreased Since 1990 47

Rail Rates in Some Markets Have Not Fallen 51

Revenue to Variable Cost Ratios Reflect Differential Pricing, but

With Some Caveats

61

Agency Comments and Our Evaluation 65

Chapter 4 

Widespread Concerns

About Rail Service,

but Overall Quality of

Service Cannot Be

Assessed

66

Shippers Believe Railroad Service Has Been Poor 66

Railroads Believe That Service Is Adequate, but Improvements

Are Needed to Meet Shipper Expectations

71

Quality of Rail Service Cannot Be Determined Since Industrywide

Measures Do Not Exist

74

Railroad Industry Is Developing Limited Measures of

Performance

80

Agency Comments and Our Evaluation 80

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

Chapter 5 

Despite Recent

Actions to Address

Service Issues,

Concerns Continue

82

Union Pacific and the Board Address Service Problems Beginning

in Late 1997

82

Government Agencies and Railroads Take Some Actions to

Address Broader Service Issues

84

Railroads and Shippers Remain Far Apart on the Key Issue of

Competition

89

Agency Comments and Our Evaluation 91

Appendixes Appendix I: Class I Railroads in Selected States, 1980 and 1997 92

Appendix II: Real Rail Rates for Selected Commodities

Transported by Rail

98

Appendix III: Organizations Contacted 105

Appendix IV: Major Contributors to This Report 107

Tables Table 2.1: Revenue Adequacy of Class I Railroads, 1990 Through

1997

45

Table 3.1: Average Annual Change in Real Rail Rates for Selected

Commodities, 1982 Through 1996

48

Table 3.2: Percent of Rail Industry Revenue Exceeding 180

Percent R/VC for Selected Commodities, 1990 Through 1996

62

 Table 4.1: Percent of Shippers Responding to Our Survey

Experiencing Somewhat or Much Worse Service in 1997

Compared With 1990, by Commodity Type

68

Table 4.2: Average Railcar Cycle Time, Selected Car Types, 1990

Through 1995

77

Figures Figure 1.1: Class I Freight Railroads in the United States, 1997 18

Figure 1.2: Class I Railroads in Kansas, 1980 and 1997 21

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

Through 1997

33

Figure 2.2: Class I Railroad Employment, 1990 Through 1997 34

Figure 2.3: Class I Railroad Productivity, 1980 Through 1996 36

Figure 2.4: Railroad Industry Returns on Investment and Equity,

1990 Through 1997

41

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

1990 Through 1997

42

Figure 2.6: Railroad Market Share, 1990 Through 1997 44

Figure 3.1: Rail Rate Index for the Transportation of Selected

Products, 1990 Through 1996

49

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

Figure 3.2: Rail Transportation of Export Wheat and Domestic

Corn, 1990 Through 1996

50

Figure 3.3: Real Rail Rates for Coal, Selected Medium-Distance

Routes, 1990 Through 1996

52

Figure 3.4: Real Rail Rates for Wheat, Selected Medium-Distance

Routes, 1990 Through 1996

55

Figure 3.5: Real Rail Rates for Corn, Selected Medium-Distance

Routes, 1990 Through 1996

56

Figure 3.6: Average Shipment Size, Selected Wheat Routes, 1990

Through 1996

58

Figure 3.7: Real Rail Rates for Potassium/Sodium Shipments,

Selected Routes, 1990 Through 1996

60

Figure 3.8: R/VC Ratios for Medium-Distance Rail Shipments of

Wheat, 1990 through 1996

64

Figure 4.1: Railroad-Owned Revenue Freight Cars Undergoing or

Awaiting Repair, 1990 Through 1996

78

Figure I.1: Class I Railroads in Montana, 1980 and 1997 93

Figure I.2: Class I Railroads in North Dakota, 1980 and 1997 95

Figure I.3: Class I Railroads in West Virginia, 1980 and 1997 97

Figure II.1: Real Rail Rates for Coal, Selected Short- and

Long-Distance Routes, 1990 Through 1996

98

Figure II.2: Real Rail Rates for Wheat, Selected Short- and

Long-Distance Routes, 1990 Through 1996

99

Figure II.3: Real Rail Rates for Corn, Selected Short- and

Long-Distance Routes, 1990 Through 1996

100

Figure II.4: Real Rail Rates for Potassium/Sodium Compounds,

Selected Short- and Long-Distance Routes, 1990 Through 1996

101

Figure II.5: Real Rail Rates for Plastic Materials or Synthetic

Fibers, Resins, or Rubbers, Selected Short-, Medium-, and

Long-Distance Routes, 1990 Through 1996

102

Figure II.6: Real Rail Rates for Motor Vehicles, Selected Mediumand Long-Distance Routes, 1990 Through 1996103

Figure II.7: Real Rail Rates for Motor Vehicle Parts or

Accessories, Selected Medium- and Long-Distance Routes, 1990

Through 1996

104

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

Abbreviations

4RAct Railroad Revitalization and Regulatory Reform Act

AAR Association of American Railroads

CONRAIL Consolidated Rail Corporation

DOT U.S. Department of Transportation

GAO General Accounting Office

ICC Interstate Commerce Commission

R/VC revenue to variable cost

URCS Uniform Railroad Costing System

USDA U.S. Department of Agriculture

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

Introduction

Throughout this century, railroads have been a primary mode of

transportation for many products, especially for such bulk commodities as

coal and grain. Yet, by the 1970s American freight railroads were in a

serious financial decline. The Congress responded by passing landmark

legislation in 1976 and 1980 that reduced rail regulation and encouraged a

greater reliance on competition to set rates. Railroads also continued a

series of combinations to reduce costs, increase efficiencies, and improve

their financial health.2

 In 1995, the Congress abolished the Interstate

Commerce Commission (ICC)—the federal agency responsible for

overseeing rates, competition, and service in the rail industry—and

replaced it with the Surface Transportation Board (the Board).

Rail shippers and others have expressed concern about the lack of

competition in the railroad industry, the extent to which railroads are

using their market power to set rates, and the quality of service provided,

especially for those shippers with fewer alternatives to rail transportation

to move their goods to market. They have also questioned whether the

Board is adequately protecting shippers against unreasonable rates and

service.

Reduced Regulation

of the Railroad

Industry

By the 1970s, America’s railroads were in serious financial trouble. In a

1978 report to the Congress, the U.S. Department of Transportation (DOT)

indicated that in 1976, 11 of 36 Class I railroads studied were earning

negative rates of return on investment, and at least 3 railroads were in

reorganization under the bankruptcy laws.3

 Some of the railroads’

problems were due to federal regulation of rates that reduced management

control and the flexibility railroads needed to react to changing market

conditions.4

 Prior to 1976, almost all rail rates were subject to ICC oversight

to ensure they were reasonable. The Congress sought to improve the

financial health of the rail industry by reducing railroad rate regulation and

encouraging a greater reliance on competition to set reasonable rail rates.

The Congress did so by passing two landmark pieces of legislation—the

Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) and

the Staggers Rail Act of 1980.

2

Combinations include mergers, purchases, changes in control, acquisitions, and other forms of

consolidations among railroads.

3

Class I railroads are the nation’s largest railroads as measured by revenue. In 1997, Class I railroads

were those railroads with operating revenues of $256 million or more. Return on investment measures

the profit made on assets used to provide transportation services.

4

Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980

(GAO/RCED-90-80, May 16, 1990).

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

Introduction

The 4R Act limited the ICC’s authority to regulate rates to those instances

where there was an absence of effective competition—that is, where a

railroad is “market dominant.” Furthermore, the Staggers Rail Act made it

federal policy to rely, where possible, on competition and the demand for

rail services (called differential pricing)5

 to establish reasonable rates.

Among other things, this act also allowed railroads to market their

services more effectively by negotiating transportation contracts

(generally offering reduced rates in return for guaranteed volumes)

containing confidential terms and conditions; limited collective rate

setting to those railroads actually involved in a joint movement of goods;

and permitted railroads to change their rates without challenge in

accordance with a rail cost adjustment factor. Furthermore, both the 4R

Act and the Staggers Rail Act required the ICC (now the Board) to exempt

certain railroad transportation from economic regulation. The Staggers

Rail Act required ICC to exempt railroad transportation from regulation

upon finding that the regulation was not necessary to carry out the rail

transportation policy and either (1) the transaction was of limited scope or

(2) regulation was not needed to protect shippers from an abuse of market

power. During the 1980s, railroads used their increased freedoms to

improve their financial health and competitiveness.

Consolidation Within

the Railroad Industry

The railroad industry has continued to consolidate in the last 2 decades, a

condition that has been occurring since the 19th century. In 1976, there

were 30 independent Class I railroad systems (comprised of 63 Class I

railroads); by early 1999, there were 9 railroad systems (comprised of 9

Class I railroads) and half of that reduction was due to consolidations.6

(See fig. 1.1.) The nine remaining Class I railroad systems are the

Burlington Northern and Santa Fe Railway Co.; Consolidated Rail

Corporation (Conrail); CSX Transportation, Inc.; Grand Trunk Western

Railroad, Inc.; Illinois Central Railroad Co.; Kansas City Southern Railway

Co.; Norfolk Southern Railroad Co.; Soo Line Railroad Co., and Union

Pacific Railroad Co. In 1998, the Board approved the division of Conrail’s

5

Inherent in the rail industry cost structure are joint and common costs that cannot be attributed to

particular traffic. Under demand-based differential pricing, railroads recover a greater proportion of

these unattributable fixed costs from rates charged to those with a greater dependency on rail

transportation.

6

In addition to consolidation, other reasons for the reduction in the number of Class I railroads were

carrier bankruptcies and a 1992 ICC change in the threshold for qualifying as a Class I railroad (from

$50 million to $250 million). Bankruptcies eliminated 2 of the 30 Class I railroad systems, while

changes in the Class I standard moved 9 systems out of Class I status.

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

Introduction

assets between CSX Transportation, Inc., and Norfolk Southern

Corporation. Conrail is expected to be formally absorbed by CSX

Transportation and Norfolk Southern in 1999, leaving a total of eight Class

I railroad systems.

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

Introduction

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

Introduction

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

Union Pacific Railroad

Burlington Northern and Santa Fe Railway

Canadian National

Conrail

Norfolk Southern

CSX Transportation

Canadian Pacific Railway System

Illinois Central Railroad

Kansas City Southern Railway

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

Page 18 GAO/RCED-99-93 Railroad Regulation
Chapter 1 

Introduction

Note: This map includes Class I trackage rights--that is, the authority of 

one railroad to operate over another railroad's track--over non-Class I 

railroads and/or over government owned track and joint ownership of track. 

The map does not reflect Class I trackage rights over other Class I railroads, 

including the 4,000 miles of Burlington Northern and Santa Fe Railway 

trackage rights over Union Pacific imposed as a condition in the 

Union Pacific/Southern Pacific merger.

Source: Federal Railroad Administration, Office of Policy.

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

Introduction

Railroads consolidated to reduce costs and increase efficiencies, making

them more competitive. For example, one of the justifications for the 1995

Burlington Northern-Santa Fe merger was to provide shippers with more

efficient and cost-effective “single line” service. Both the Board and the

railroads involved expected reduced costs and improved transit times

because the railroad on which a shipment originated would no longer have

to transfer the shipment to another railroad for routing to its final

destination. Cost reductions and increased efficiencies were also expected

from, among other things, rerouting of traffic over shorter routes, more

efficient use of equipment, and increased traffic densities. Consolidations

were also justified as providing competitive benefits—both within the rail

industry and between railroads and other transportation modes. For

example, the Board in its 1996 approval of the Union Pacific/Southern

Pacific merger expected the merger would intensify rail competition in the

West between Burlington Northern and Santa Fe Railway and the

combined Union Pacific/Southern Pacific. The acquisition of Conrail by

Norfolk Southern and CSX Transportation is expected to yield

benefits—both by diverting substantial amounts of highway freight traffic

to railroads and by introducing new railroad-to-railroad competition in

those areas previously served only by Conrail.

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

Introduction

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

Kansas 1997

Kansas 1980

Missouri Pacific Railroad 

Missouri-Kansas-Texas Railroad

Chicago Rock Island & Pacific 

Railroad

Kansas City Southern Railway

Burlington Northern Railroad

Union Pacific Railroad

Atchison Topeka & Santa Fe 

Railway

Kansas City Southern Railway

Burlington Northern and Santa Fe 

Railway

Union Pacific Railroad

Non-Class I railroads

Source: Federal Railroad Administration, Office of Policy.

Page 21 GAO/RCED-99-93 Railroad Regulation
Chapter 1 

Introduction

As Class I railroads consolidated, non-Class I railroads increased their

importance in providing service. For example, in 1980, Kansas was served

by seven Class I railroads (see fig. 1.2); in 1997, this number was three.

Between 1991 and 1996, Class I railroads reduced their mileage operated

in the state by about 1,400 miles while non-Class I carriers increased their

mileage by about 1,700 miles (175 percent greater than in 1991). (App. I

shows how Class I and non-Class I rail mileage changed in Montana, North

Dakota, and West Virginia from 1980 to 1997.)

The Surface

Transportation Board

Replaces the ICC

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

abolished the ICC. The act transferred many of ICC’s core rail functions and

certain nonrail functions to the Board, a decisionally independent

adjudicatory agency that is administratively housed in DOT. Among other

things, the Board approves market entry and exit of railroads; approves

railroad mergers and consolidations; determines the adequacy of a

railroad’s revenues on an annual basis; adjudicates complaints concerning

rail rates on traffic over which a railroad has market dominance; 7

adjudicates complaints alleging that carriers have failed to provide service

upon reasonable request; and exempts railroad transportation from

economic regulation under certain circumstances. The ICC Termination Act

made several significant changes to railroad regulation. For example, the

act eliminated the requirement for railroad tariff filings. 8

 However, the act

did not alter railroads’ authority to engage in demand-based differential

pricing or to negotiate transportation service contracts containing

confidential terms and conditions that are beyond the Board’s authority

while in effect.

Several of the Board’s functions are particularly relevant to this report: the

(1) responsibility for determining the adequacy of a railroad’s revenues,

(2) jurisdiction over rail rate complaints, and (3) jurisdiction over

complaints alleging that carriers have failed to provide service upon

reasonable request. First, the Board is required to determine the adequacy

of railroad revenues on an annual basis. In addition, the Board is required

to make an adequate and continuing effort to assist railroads in attaining

7

The Board’s market dominance analysis contains both quantitative and qualitative components.

Quantitatively, the Board first determines if the revenue produced by the traffic transported is less

than 180 percent of the railroad’s variable cost of providing the service. By statute, a railroad is not

considered to dominate the market for traffic that is priced below the 180-percent revenue-to-variable

cost (R/VC) level. Variable costs are those costs that change according to the quantities shipped (e.g.,

fuel and labor). If the revenue produced by the traffic exceeds the statutory threshold, the Board

conducts a qualitative analysis of any intramodal or intermodal competition.

8

A tariff is a schedule of rates and general terms and conditions under which a product or service is

supplied.

Page 22 GAO/RCED-99-93 Railroad Regulation
Chapter 1 

Introduction

adequate revenues—that is, revenues that under honest, economical, and

efficient management cover total operating expenses plus a reasonable

and economic profit on capital employed in the business.

Second, the Board is also responsible for protecting shippers without

feasible transportation alternatives from unreasonably high rail rates.

Where the Board concludes that a challenged rate is unreasonable, it may

order the railroad to pay reparations on past shipments and prescribe

maximum rates for future shipments. The Board does not have authority

over rail rates for car movements made under contracts or for movements

that it has exempted from economic regulation.9

 Only about 18 percent of

the tonnage moved in 1997 was subject to rate reasonableness regulation

by the Board. The remainder was either moved under contract

(70 percent), according to the Association of American Railroads (AAR),10

or was exempt from economic regulation (12 percent).11 Furthermore,

rates on rail traffic priced below the 180-percent revenue-to-variable cost

threshold are not subject to regulation by the Board. According to the

Board, over 70 percent of all rail traffic in 1997 was priced below this

threshold.

Third, the Board has the authority to adjudicate service complaints filed

by shippers. The Board’s process for handling formal service complaints,

like its rate complaint process, is an administrative litigation process, in

which parties to the dispute file pleadings, disclose and receive

information from each other, and present evidence.12 If the Board decides

a case in favor of the complainant, it can require the carrier to provide the

shipper with monetary compensation or to adopt or stop a practice.

Moreover, the Board is authorized to impose “competitive access”

remedies, under which shippers can obtain access to an alternative

carrier.13 However, to obtain permanent relief, the complaining shipper

9

The Board may revoke exemptions from economic regulation when it determines that such regulation

is necessary to carry out the rail transportation policy.

10AAR is a railroad trade association.

11Examples of commodities and services that have been exempted from economic regulation include

farm products (except grain, soybeans, and sunflower seeds), fresh fruits and vegetables, boxcar

traffic, and new highway trailers or containers.

12The Board also has a process for handling service complaints informally, and, according to Board

officials, many service complaints are handled this way quickly and inexpensively.

13Three kinds of competitive access remedies are available: (1) alternative through routes, under which

railroads are required to interline traffic with other railroads and provide through routes and through

rates for that traffic; (2) reciprocal switching, under which a carrier must transport the railcars of a

competing carrier for a fee; or (3) terminal trackage rights, under which a carrier must permit another

carrier to use its lines in or near a terminal area for a fee.

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

must demonstrate that the rail carrier currently providing the service

(called the incumbent carrier) has engaged in anticompetitive

conduct—that is, the carrier has used its market power to extract

unreasonable terms or, because of its monopoly position, has disregarded

the shipper’s needs by not providing adequate service. As discussed in

chapter 5, the Board also has other procedures for providing temporary

relief from service inadequacies without a showing of anticompetitive

conduct where the carrier is not providing adequate service.

The Board may also address service deficiencies through emergency

service orders. The Board may issue an emergency service order if it

determines that a failure of traffic movement has created an emergency

situation that has a substantial impact on shippers or railroad service in a

region or that a railroad cannot transport traffic in a manner that properly

serves the public. Through emergency service orders, the Board may,

among other things, permit the operation of one rail carrier over another

carrier’s line to improve the flow of traffic. The Board may also direct a

rail carrier to operate the lines of a carrier that has ceased operations.

These arrangements may not exceed 270 days. Since 1990, the ICC and the

Board have issued eight emergency service orders; prior to its termination,

the ICC, in five of these instances, directed a carrier to operate the lines of

another railroad.

Objectives, Scope,

and Methodology

Senators Conrad Burns, Byron Dorgan, Pat Roberts, and John D.

Rockefeller, IV, expressed concern that the continued consolidation

within the rail industry has allowed railroads to charge unreasonably high

rates and provide poor service. The Senators asked us to report on

(1) how the environment within which rail rates are set has changed since

1990; (2) how rates for users of rail transportation have changed since

1990; (3) how railroad service quality has changed since 1990; and (4) what

actions, if any, the Board and others have taken (or propose to take) to

address rail rate and service quality issues. The requesters also asked us to

identify difficulties and barriers for shippers, including small shippers, in

obtaining relief from unreasonable rates from the Board. We addressed

this latter topic and actions that the Board and others have taken to

address rail rate issues in our companion report on issues associated with

the Board’s rate relief process.14

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

Feb. 26, 1999).

Page 24 GAO/RCED-99-93 Railroad Regulation
Chapter 1 

Introduction

To identify how the environment within which rail rates have been set has

changed since 1990, we reviewed (1) legislation regarding the economic

regulation of railroads, (2) regulations and decisions issued by ICC or the

Board regarding rail rate and service issues, and (3) literature available in

professional journals and trade publications. We also used reports we have

issued on various aspects of the railroad industry and the Staggers Rail Act

of 1980 and reviewed selected position papers prepared by railroad and

shipper trade associations. To identify the economic and financial status

of railroads in the 1990s, we collected information available from various

AAR surveys of Class I railroads on the percent of railroad tonnage moved

under contract and collected financial information from ICC’s Transport

Statistics in the United States, the Board’s Statistics of Class I Freight

Railroads in the United States, and AAR’s Railroad Facts. We also obtained

information on the amount of intercity freight tonnage transported in the

United States annually by transportation mode from Transportation In

America, published by the Eno Transportation Foundation, Inc. To identify

structural changes in the railroad industry since 1990, we reviewed

information from AAR on Class I status, information on railroad industry

combinations, and reviewed ICC’s and the Board’s decisions in selected

railroad merger cases.

To identify how railroad rates have changed since 1990, we obtained data

from the Board’s Carload Waybill Sample for the years 1990 through 1996

(latest data available at the time of our review). The Carload Waybill

Sample is a sample of railroad waybills (in general, documents prepared

from bills of lading authorizing railroads to move shipments and collect

freight charges) submitted by railroads annually. We used these data to

obtain information on rail rates for specific commodities in specific

markets by shipment size and length of haul. According to Board officials,

revenues derived from the Carload Waybill Sample are not adjusted for

such things as year-end rebates and refunds that may be provided by

railroads to shippers that exceed certain volume commitments.

Some railroad movements contained in the Carload Waybill Sample are

governed by contracts between shippers and railroads. To avoid

disclosure of confidential business information, the Board disguises the

revenues associated with these movements prior to making this

information available to the public. Using our statutory authority to obtain

agency records, we obtained a version of the Carload Waybill Sample that

did not disguise revenues associated with railroad movements made under

contract. Therefore, the rate analysis presented in this report presents a

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

Introduction

truer picture of rail rate trends than analyses that may be based solely on

publicly available information.

The specific commodities selected for analysis were coal, grain (wheat

and corn), chemicals (potassium and sodium compounds and plastic

materials or synthetic fibers, resins, and rubber), and transportation

equipment (finished motor vehicles and motor vehicle parts and

accessories). These commodities represented about 45 percent of total

industry revenue in 1996 and, in some cases, had a significant portion of

their rail traffic transported where the ratio of revenue to variable costs

equaled or exceeded 180 percent. Since much of the information contained

in the Carload Waybill Sample is confidential, rail rates and other data

contained in this report that were derived from this data base have been

aggregated at a level sufficient to protect this confidentiality.

We used rate indexes and average rates on selected corridors to measure

rate changes over time. A rate index attempts to measure price changes

over time by holding constant the underlying collection of items that are

consumed (in the context of this report items shipped). This approach

differs from comparing average rates in each year because over time

higher- or lower-priced items can constitute different shares of the items

consumed. Comparing average rates can confuse changes in prices with

changes in the composition of the goods consumed. In the context of

railroad transportation, rail rates and revenues per ton-mile are influenced,

among other things, by average length of haul. Therefore, comparing

average rates over time can be influenced by changes in the mix of

long-haul and short-haul traffic. Our rate indexes attempted to control for

the distance factor by defining the underlying traffic collection to be

commodity flows occurring in 1996 between pairs of Census regions.

To examine the rate trends on specific traffic corridors, we first chose a

level of geographic aggregation for corridor endpoints. For grain,

chemical, and transportation equipment traffic, we defined endpoints to be

regional economic areas defined by the Department of Commerce’s

Bureau of Economic Analysis. For coal traffic, we used economic areas to

define destinations and used coal supply regions—developed by the

Bureau of Mines and used by the Department of Energy—to define origins.

An economic area is a collection of counties in and about a metropolitan

area (or other center of economic activity); there are 172 economic areas

in the United States and each of the 3,141 counties in the country is

contained in an economic area. For each selected commodity and each

corridor, we determined the average shipment distance over the 1990

Page 26 GAO/RCED-99-93 Railroad Regulation
Chapter 1 

Introduction

through 1996 time period. We placed each corridor in one of three

distance-related categories: 0-500 miles, 501-1,000 miles, and more than

1,000 miles. We then determined, for each selected commodity, the

aggregate tonnage over the 1990 through 1996 time period and selected the

top five corridors (based on tons shipped) within each distance category

for further examination, including changes in revenues and variable costs

per ton-mile over the time period.

To assess how railroad service quality has changed since 1990, we

(1) reviewed literature on how railroad service is (or can be) measured;

(2) reviewed railroad and shipper statements on the quality of rail service

in recent years; and (3) interviewed Class I railroads, shipper associations,

and several individual shippers. To obtain a wider perspective on shippers’

views about the quality of service they have received and how it might be

improved, we sent a questionnaire to members of 11 commodity

associations that ship using rail in the United States and to those shippers

that had filed rate complaints before the Board. The member organizations

represent shippers of the four commodities that comprised the largest

volume of rail shipments—coal, chemicals, plastics, and bulk grain.15 For

coal, chemicals, and plastics, we surveyed all members of the associations,

and this report provides the views of the 87 coal shippers and 99 chemicals

and plastics shippers that responded to our survey.

Because we used statistical sampling techniques to obtain the views of

members of one grain association, the National Grain and Feed

Association, the statistics we provide relating to the views of grain

shippers and of all shippers responding to our survey are presented as

estimates. The report provides estimates of the views of 523 grain

shippers. In all cases, these estimated 709 coal, chemicals, plastics, and

grain shippers indicated that they had shipped goods by rail in at least 1

year since 1990. Some estimates presented in this report do not represent

the views of 709 shippers because some shippers did not answer all the

questions. For more information on how we conducted our survey, as well

as responses to individual questions, see our companion report on current

issues associated with the Board’s rate relief process (GAO/RCED-99-46).

We also determined the number of formal service complaints that were

being adjudicated by ICC on January 1, 1990, and the number that have

been filed with the ICC/Board from January 1, 1990, through December 31,

1998. To do this, we asked the Board to identify all formal service

15Corn, wheat, sorghum grains, barley, rye, and oats represented nearly all grain shipments by rail in

the United States in 1996.

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

complaints between these two dates. In order to test the completeness of

the Board’s identification of service complaints, we reviewed selected

cases that the Board did not consider to be service-related. We found one

service complaint not contained on the Board’s original list of complaints.

We discussed this complaint with Board officials, who agreed that it

should be considered a formal service complaint. We did not review the

merits, or appropriateness, of any ICC/Board decisions associated with

these complaints.

To determine actions the Board and others have taken or have proposed

to take to address service issues, we interviewed officials from the Board,

DOT, and U.S. Department of Agriculture (USDA); industry association

officials; and officials from Class I railroads and reviewed the documents

that they provided. We also reviewed statutes and regulations pertaining to

service issues, recent Board decisions on service issues, and emergency

and directed service orders issued by the ICC or the Board since 1990. We

interviewed officials from the Board, DOT, and USDA about their recent and

planned efforts to address the needs of agricultural shippers and obtained

and reviewed relevant agency agreements and reports. We interviewed

Class I railroad and AAR executives about, and obtained and reviewed

documentation on, their 1998 meetings with shippers; efforts to develop

and disseminate measures of service; agreements with grain and feed

shippers and small railroads; and efforts to improve customer service. We

also attended the railroad/shipper meetings held in Chicago in August 1998

and in Atlanta in October 1998.

The organizations we contacted during our review are listed in appendix

III. Our work was conducted from June 1998 through March 1999 in

accordance with generally accepted government auditing standards.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Board noted that our map of

Class I freight railroads in the United States in 1997 (fig. 1.1) did not

include trackage rights of Class I railroads over other Class I railroads,

including about 4,000 miles of Burlington Northern and Santa Fe trackage

rights over Union Pacific. The Board also noted that it has an informal

process for handling railroad service complaints and that this process can

be used to resolve service problems quickly and inexpensively. In

response to these issues, we modified the note to figure 1.1 to indicate that

Class I trackage rights over other Class I railroads is not shown on the

map, including the 4,000 miles of Burlington Northern and Santa Fe

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

Introduction

trackage rights over Union Pacific. We also added language better

recognizing the Board’s informal service complaint process.

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

Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

Railroads’ rate setting since 1990 has increasingly been influenced by

ongoing industry and economic changes such as continued rail industry

consolidation, which has concentrated the industry into fewer and bigger

railroads, and the need for investment capital to address infrastructure

constraints. Rail rates are also a function of market competition. Using

differential pricing, railroads continued to set rates in the 1990s according

to the demand for their services. Overall railroad financial health has

improved during the 1990s, and railroads increased their share of the

freight transportation market. However, many Class I railroads continued

to earn less than what it costs them to raise capital (called the revenue

adequacy standard).

Ongoing Industry and

Economic Changes

Influence Rate Setting

Ongoing industry and economic changes have influenced how railroads

have set their rates. Since 1990, there has been considerable change in the

rail industry and the economic environment in which it operates. Not only

has the rail industry continued to consolidate, potentially increasing

market control by the largest firms, but capacity constraints have led to an

increased need for capital; industry growth has raised the specter that

productivity gains may moderate; and domestic and worldwide economic

changes have caused fluctuations in the demand for rail transportation.

Many of these changes are expected to continue into the future. Other

actions are also expected to influence the rate-setting environment,

including ongoing actions to deregulate the electricity generating industry.

Continued Railroad

Industry Consolidation Has

Potentially Increased

Railroads’ Control Over

Industry Revenues and Rail

Markets

The 1990s have seen significant consolidation within the railroad industry.

For the most part, this consolidation has concentrated the rail industry in

fewer and larger companies and potentially increased market control by

these firms. The number of independent Class I railroad systems has

decreased from 13 in 1990 to 9 in early 1999.16 These firms control a

significant portion of industry revenues as well as traffic. In 1990, the five

largest railroads accounted for about 74 percent of total rail industry

operating revenue.17 In 1997, this percentage had increased to about

94 percent.18 In fact, the two largest Class I railroads (Union Pacific and

16This includes one railroad (the Florida East Coast Railway) that was reclassified from Class I to Class

II in 1992.

17The five largest railroads in terms of operating revenues were Burlington Northern; Conrail; CSX

Transportation; Norfolk Southern; and Union Pacific. The analysis excluded the Florida East Coast

Railroad because it was reclassified to Class II in 1992.

18In terms of total operating revenues for 1997, these railroads were Burlington Northern and Santa Fe

Railway, Conrail, CSX Transportation, Norfolk Southern, and Union Pacific.

Page 30 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

Burlington Northern and Santa Fe Railway) accounted for about

55 percent of total industry operating revenue. An analysis of ton-miles of

revenue freight transported shows similar results. In 1990, the five largest

railroads accounted for about three-fourths of total revenue ton-miles

transported by the railroad industry. In 1997, the five largest railroads

accounted for about 95 percent of revenue ton-miles transported. Again,

the two largest Class I railroads accounted for just under two-thirds of all

revenue ton-miles transported in 1997.

Some shipper groups and others have expressed concerns about industry

consolidation. For example, the Railroad-Shipper Transportation Advisory

Council, created by the ICC Termination Act, reported in 1998 that, because

of rail industry consolidation, some shippers have developed fears that the

railroad that serves them not only dictates the terms of their relationship

but also whether they remain economically viable. The Consumers United

For Rail Equity, representing various shipper and industry trade

associations, has also expressed concerns that dwindling competitive rail

options resulting from industry consolidation have increased the number

of shippers that consider themselves captive to railroads. Finally, the

Alliance for Rail Competition, also representing various shipper and

industry trade associations, has expressed concern that deteriorating rail

service and the potential for monopoly rate abuse by railroads have

resulted from the creation of fewer and bigger railroads. This organization

believes increased competition in the railroad industry, rather than

regulation, would better protect shippers against abuses.

The Board plays a role in rail industry consolidation. Not only does the

Board approve proposed mergers and acquisitions when it finds them in

the public interest, but monitors them once they have been approved.19 As

part of the review and approval process, the Board has the authority to

attach conditions to a merger or acquisition. In general, these conditions

are designed to protect the public against any harm that might otherwise

be experienced as the result of one railroad taking over another and to

protect against the potential loss of competition or protect affected

shippers from the loss by another rail carrier of the ability to provide

essential service. According to the Board, merger conditions are routinely

imposed to ensure that any shipper that was capable of being served by

more than one railroad before a merger will continue to have more than

one railroad available after the merger. These conditions typically involve

19During a proceeding involving two or more Class I railroads, the Board considers, among other

things, how the transaction will affect competition among railroads (in the affected region or in the

national transportation system), railroad employees, and the adequacy of transportation provided to

the public.

Page 31 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

granting another railroad either rights to operate on the combining

railroads’ track or some form of switching rights to gain access to affected

customers of the combining railroads. These conditions have been

imposed in all large mergers occurring during the 1990s. Board officials

have acknowledged, however, that due to staff and resource limitations

they must by necessity be less proactive in monitoring mergers to ensure

that conditions imposed are working properly to preserve pre-merger

competition.

Capacity Constraints and

Moderation of Productivity

Gains May Slow Railroad

Cost Reduction

The rate-setting environment has also been increasingly affected by

railroads’ infrastructure needs. Railroads have increased their market

share and the amount of tonnage they carry each year. However, even with

the increased demand for rail transportation, real rail rates have declined,

necessitating that railroads seek ways to continue to reduce costs. Two

ways such costs have been cut are reductions in miles of road operated

and employment levels.20 (See figs. 2.1 and 2.2.) From 1990 to 1997, the

miles of road operated by Class I railroads decreased about 15 percent

(from about 119,800 miles to about 102,000 miles), and Class I employment

decreased by about 18 percent (from 216,000 employees to 178,000

employees).

20A mile of road operated represents the aggregate length of roadway, excluding yard tracks, sidings,

and parallel lines. Some of the reductions in miles of road operated resulted from lines sold to

non-Class I railroads, while in other cases, lines were abandoned.

Page 32 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

Figure 2.1: Miles of Road Owned by

Class I Railroads, 1990 Through 1997 Miles

Year

1990 1991 1992 1993 1994 1995 1996 1997

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

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

Source: AAR.

Page 33 GAO/RCED-99-93 Railroad Regulation
Chapter 2 

Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

Figure 2.2: Class I Railroad

Employment, 1990 Through 1997

1990 1991 1992 1993 1994 1995 1996 1997

0

50

100

150

200

250

216

206

197 193 190 188 182 178

Number of employees (in thousands)

Year

Source: AAR.

Although reductions in miles of road operated and employment have

helped to reduce costs, they have also created capacity constraints and a

need for investment capital to address these constraints as the rail market

has grown in recent years. Obtaining this capital has become a concern of

the rail industry, particularly given falling rates and revenue trends. Some

of the railroad officials we spoke with acknowledged this concern and

were unsure about how this problem would be addressed. For example,

officials of one Class I railroad told us that, in the future, their company

would have a difficult time meeting increased market demand because of a

lack of equipment and inadequate track and rail facility infrastructure. The

officials suggested that additional capital investment would be needed to

address choke points—that is, sections of track and facilities that have

more traffic than they can handle. However, making such investments

would be difficult given falling rail rates. Officials at two other Class I

railroads also expressed concern about market growth and capacity

constraints and said that additional investment would be needed. The

officials also agreed that this would be difficult, at best, given rail rate

trends and the need to price their services to be competitive.

Page 34 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

The rate-setting environment has also been influenced by productivity

gains. In particular, productivity gains have helped railroads reduce costs,

which in turn has allowed railroads to reduce rates in order to be

competitive.21 The productivity gains achieved in the 1980s have largely

continued into the 1990s. (See fig. 2.3.) We looked at three measures of

productivity—net ton-miles per train hour,22 revenue ton-miles per gallon

of fuel consumed, and revenue ton-miles per employee-hour worked. In

general, each of these measures, except net ton-miles per train-hour,

increased since 1990. Net ton-miles per train-hour has fluctuated since

1990, and in 1996, was about 2 percent lower than it was in 1990. Revenue

ton-miles per employee-hour worked, in particular, has shown dramatic

increases since the late 1980s. Using an index based on 1980 (1980 equals

100), revenue ton-miles per employee-hour worked more than doubled

from 1986 through 1996—rising from an index value of 151 to an index

value of 344.

21For more information see GAO/RCED-90-80.

22A net ton-mile is the movement of one ton of revenue or nonrevenue freight, or both, a distance of 1

mile.

Page 35 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

Figure 2.3: Class I Railroad Productivity, 1980 Through 1996

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

0

50

100

150

200

250

300

350

400

Net ton-miles per train-hour

Revenue ton-miles per gallon of fuel consumed

Revenue ton-miles per employee-hour

Index value

Year

Source: GAO’s analysis of AAR’s data.

According to railroad officials, most of the productivity gains achieved

have been shared with customers through rate reductions. Although

productivity gains have played a significant role in past rate making, there

is some question as to whether these gains can continue to be achieved.

Page 36 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

One recent study suggests that the prospects for continued productivity

improvements may be diminishing.23 This was attributed to the

expectation that, because industry consolidation has permitted significant

reduction in miles of road operated and employment levels, the next round

of industry consolidation and mergers (network rationalization) might

yield only modest productivity benefits. If so, then there may be fewer

opportunities for the rail industry to rely on productivity gains to achieve

cost reductions and therefore rate reductions. In fact, future productivity

gains may be reduced because what was once redundant track and

facilities (and therefore eliminated to reduce costs) might have to be

brought back into service to meet market growth. Doing so could

minimize productivity improvement.

Economic and Regulatory

Changes Have and Will

Continue to Affect Rail

Markets

The rate-setting environment has been affected by domestic and world

economic changes. This is especially true for rail commodities that are

exported. For railroads, volatility in world grain markets can affect the

volume of grain transported by rail. Over the last 10 years, the volume of

export grain transported by rail has ranged from a low of about 28 million

tons in 1994 to a high of about 56 million tons in 1988. Other rail

commodities can also show fluctuations over time. From 1992 through

1996, the nation’s coal exports ranged from a low of about 71 million tons

in 1994 to a high of about 103 million tons in 1992. The volatility in

commodity markets can affect railroad rates because it affects the demand

for rail transportation. As demand changes, railroads adjust rates to attract

or retain business. For example, officials at one Class I railroad told us

that it has a wide range of pricing policies for chemicals that allow it to

react to changes in world chemicals markets. Officials from the same

railroad said that export demand can play a particularly strong role for

grain. Although grain rates can be affected by decreases in demand, there

is more of an impact when exports are strong and their railroad is trying to

keep business away from a competitor.

The rate-setting environment has also been affected by legislative and/or

regulatory actions. In 1990, the Clean Air Act was amended to, among

other things, reduce sulfur dioxide emissions by electric generating plants.

The act spurred the demand for low sulfur coal for use in generating

electricity. This increased the demand for western coal, especially from

the Powder River Basin area of Wyoming and Montana, which is known

for its low sulfur content. In 1996, Wyoming produced more coal than any

23Sources of Financial Improvement In the U.S. Rail Industry, 1966-1995, Carl D. Martland,

Massachusetts Institute of Technology, as presented in the Proceedings of the Transportation

Research Forum, 39th Annual Meeting (1997).

Page 37 GAO/RCED-99-93 Railroad Regulation
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Industry and Other Factors Have Influenced

the Rate-Setting Environment Since 1990

other state in the nation (about 278 million tons or about 63 percent more

than the next highest state, West Virginia). About 85 percent of this coal

moved by rail. Although demand for Powder River Basin coal has

increased substantially, our analysis shows that inflation-adjusted Powder

River Basin rail rates on both long (over 1,000 miles) and medium distance

(over 500 miles) routes have generally decreased since 1990.

Ongoing efforts to deregulate the electricity generation industry can be

expected to affect future rail rates. Electricity generation is heavily

dependent on coal as a fuel source. A recent Energy Information

Administration study found that over 87 percent of all coal consumed in

the United States was for electricity generation by utilities.24 Moreover,

railroads are the largest carrier of coal, and transportation is a major

component of the price of coal delivered to electric power generators. The

study suggested that as the electricity generating industry becomes more

competitive there will be pressure for the industry to reduce its costs,

including the price it pays for coal and the transportation of coal. These

cost reductions may have significant impacts on the railroad industry and

future rail rates.

Using Differential

Pricing, Railroads Set

Rates According to

Competitive

Conditions

In reducing the economic regulation of railroads through the 4R Act and

Staggers Rail Act, the Congress expected that rates determined by market

competition would, in general, benefit both railroads and shippers. In

many instances, railroads faced competition from other railroads or modes

of transportation, and the new congressionally set rail transportation

policy recognized the broader nature of this competition by permitting

railroads the flexibility to set their rates in response to rates and services

available to shippers from other transportation options. In particular,

railroad rates set in response to truck, barge, or railroad competition

would typically be different (lower) than rates based primarily on a

railroad’s full cost to provide service. Differential pricing then is a means

by which railroads set rates reflecting the demand characteristics of

shippers, with the result that shippers with similar cost characteristics

(such as the number of railcars to be shipped or lengths of haul to

destination) can pay quite different rates.

Although rail rates set using demand-based differential pricing reflect the

demand characteristics of shippers and market competition, such rates are

also linked to railroad costs. Generally, the nature of a railroad’s fixed

24Challenges of Electric Power Industry Restructuring for Fuel Suppliers, Energy Information

Administration (Sept. 1998).

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costs (e.g., physical plant such as rail, bridges, and signalling) is such that

the costs of providing it are (1) incurred before any traffic moves and

(2) insensitive to the level of rail traffic. Fixed costs are also largely

unattributable to any particular shipper. For a railroad to be profitable, it

must recover all of its costs—fixed as well as variable costs. Differential

pricing is a pricing mechanism in which a railroad’s fixed costs can be

recovered collectively from all shippers but not necessarily

proportionately from each shipper. Under differential pricing, shippers

without effective alternatives to a railroad’s transportation generally pay

proportionately greater shares of the railroad’s fixed costs, while shippers

with more alternatives pay proportionately less.

Differential pricing was envisioned as benefitting both railroads and

shippers. Railroads were expected to benefit from gaining the pricing

flexibility to retain or attract shippers that would otherwise choose other

transportation modes. In this way, railroads were expected to benefit from

a larger and more diversified traffic base than under the previous

regulatory scheme. Those shippers with competitive alternatives were

expected to benefit from lower rail rates. Shippers without competitive

alternatives were also expected to benefit. In theory, these shippers would

pay less than if competitive traffic were diverted to an alternative

transportation mode, thus leaving those shippers without alternatives to

bear the unattributable costs previously assigned to the diverted traffic.25

The Congress expected that the transition to differential pricing and a

more market-oriented system would not affect all shippers equally

because, in general, transportation characteristics and market conditions

vary among commodities.26 In practice, these expectations have been met.

Data from the Board show that in 1990 about one-third of all rail traffic (as

measured by revenues) was transported at rates generating revenues

exceeding 180 percent of variable costs. By 1996, this percentage had

decreased to 29 percent.27 That means that about 70 percent was

transported at rates generating revenues that were less than 180 percent of

variable costs. In addition, in 1996, the percent of commodity revenue for

shipments transported at rates generating revenues exceeding 180 percent

of variable costs fluctuated widely by commodity—ranging from a low of

near 0 percent for fresh fish and tobacco products to a high of about

25Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation of Rail Rates

(GAO/RCED-87-119, Sept. 9, 1987).

26See GAO/RCED-90-80.

27According to the Board, this decrease was remarkable since the level of rates needed to reach

180 percent of variable costs fell as rail productivity gains reduced Board-measured variable costs.

Page 39 GAO/RCED-99-93 Railroad Regulation
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73 percent for crude petroleum and gasoline.28 Among the commodities

included in our analysis of rail rates (coal, grain, chemicals, and

transportation equipment), the percent of commodity revenue for

shipments transported at rates generating revenues exceeding 180 percent

of variable costs ranged from about 23 percent for farm products (grain) to

about 54 percent for chemicals.

Railroad Financial

Health Has Improved,

but Most Railroads Do

Not Earn the Industry

Cost of Capital

One important factor that has played a role in how railroads set their rates

has been the financial health of the railroad industry. During the 1990s,

railroad financial health generally improved compared with the 1980s. Not

only were returns on investment and equity higher, but railroads were able

to increase their market share. However, most railroads have been

determined by the Board to be “revenue inadequate”—that is, their

earnings were less than the railroad industry’s cost of capital. Revenue

adequacy determinations have been controversial, and some shippers have

questioned the meaningfulness of the current method of determining

revenue adequacy. Not being able to earn the cost of capital can affect a

railroad’s ability to attract and/or retain capital and remain financially

viable.

Railroad Financial Health

Has Improved, and Market

Share Has Increased

In general, railroad financial health improved in the 1990s. For example,

railroad returns on investment and returns on equity—both measures of

profitability29 —were higher during the 1990s than they were in the 1980s.

From 1990 through 1997, returns on investment averaged 8.5 percent per

year while returns on equity averaged 10.7 percent per year. (See fig. 2.4.)

This was about 61 percent and 24 percent greater, respectively, than the

5.3 percent and 8.7 percent returns on investment and equity achieved

during the 1980s. The operating ratio, which shows how much of a

railroad’s operating revenues are taken up by operating expenses, also

showed improvement. From 1990 through 1997, railroad operating

expenses accounted for, on average, about 87 percent of operating

revenues annually—about 1 percentage point less than the average from

1980 through 1988. According to a Board official, every 1-percentage point

change in the operating ratio can be significant to the railroad industry.

28The commodity groups in this example accounted for less than one-tenth of 1 percent of total

industry revenue.

29Return on investment measures the profit made on assets used to provide transportation services.

Return on equity measures the profit made on funds provided by stockholders.

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Figure 2.4: Railroad Industry Returns

on Investment and Equity, 1990

Through 1997

Percent

1990 1991 1992 1993 1994 1995 1996 1997

0

2

4

6

8

10

12

14

Return on investment

Return on equity

Year

Note: Excludes special charges taken by railroads.

Source: AAR.

However, not all aspects of financial health improved. For example,

railroads’ ability to meet their short-term and long-term obligations were

either about the same as, or worse than, during the 1980s. The current

ratio, which compares the dollar value of current assets (such as cash) to

the dollar value of current liabilities (such as short-term debt), averaged

about 64 percent from 1990 through 1997. (See fig. 2.5.) In contrast, this

ratio averaged about 113 percent from 1980 through 1988. Maintaining a

current ratio of less than 100 percent may jeopardize a firm’s ability to pay

its short-term debts when they come due. A firm’s ability to pay its

long-term debt is generally measured by the fixed charge coverage ratio,

which compares the income available to pay fixed charges with the

interest expense that must be paid on debt outstanding. Since 1990, the

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fixed charge coverage ratio for the railroad industry was only marginally

better than it was during the 1980s. From 1990 through 1997, the fixed

charge coverage ratio averaged about 4.7—that is, the income available to

pay fixed charges was about 4.7 times the interest to be paid. From 1980

though 1988, the ratio averaged about 4.6.

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

1990 1991 1992 1993 1994 1995 1996 1997

0

0.5

1

1.5

2

2.5

3

Ratio

Year

Current ratio

1990 1991 1992 1993 1994 1995 1996 1997

0

1

2

3

4

5

6

7

Year

Fixed-charge coverage ratio

Ratio

Short-term Solvency Long-term Solvency

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

Railroads have also increased their market share during the 1990s. (See

fig. 2.6.) In 1990, railroads transported almost 38 percent of intercity

revenue freight ton-miles.30 By 1997, the market share had increased to

39 percent. This increase came despite a general slowdown in the growth

of intercity freight traffic handled by railroads in this decade. From 1990

through 1997, the amount of intercity freight tonnage handled by railroads

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

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grew, on average, about 2 percent annually. This compares with about a

3-percent average annual growth in the 1982 through 1989 period.31 The

market share change may be a reflection of railroads’ increased use of

contracts to tailor their rates and service to meet customer needs.

According to AAR, in 1997 about 70 percent of all railroad tonnage moved

under contract—up 10 percentage points from 1988. However, contracts

are more prevalent for the shipment of some commodities than others. AAR

statistics show that, in 1997, over 90 percent of all coal tonnage, but only

about 26 percent of grain tonnage, moved under contract. In fact, the

percentage of grain tonnage moved under contract has decreased over

time. In 1994, about 50 percent of grain tonnage moved under contract

compared with 26 percent in 1997. According to an AAR official, this

decrease was primarily attributable to (1) an increased use by railroads of

noncontract car reservation/guarantee programs to supply grain cars to

shippers and (2) a 1988 regulatory change that increased the amount of

public information about grain contracts.32 Under car

reservation/guarantee programs, for a fee, shippers can obtain a set

number of railcars for delivery at a future date(s).

31The reduced growth in tonnage for railroads and for all modes in the 1990s probably reflects slower

economic growth during the period. Real gross domestic product grew, on average, 2.4 percent

annually from 1990 through 1997—about half the 4-percent annual growth rate, on average, from 1982

through 1989.

32In February 1988, ICC issued final rules implementing the Conrail Privatization Act. In general, the

act required that, for the shipment of agricultural commodities, such information as the identities of

the shipper parties to a contract and actual volume requirements, if any, be disclosed in contract

summaries filed with ICC. While the ICC Termination Act eliminated the general requirement to file

contract summaries, it retained the requirement to file summaries of agricultural contracts.

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Figure 2.6: Railroad Market Share,

1990 Through 1997

Rail

Truck

River and canal

Other transportation modes

Percent

Year

1990 1991 1992 1993 1994 1995 1996 1997

0

5

10

15

20

25

30

35

40

45

Note: The 1997 figures are preliminary.

Source: GAO’s analysis of Transportation In America data, Eno Foundation for Transportation,

Inc., (1998).

Most Railroads Do Not

Meet Revenue Adequacy

Criterion

Although railroad financial health has improved, most Class I railroads are

still not earning revenues adequate to meet the industry cost of capital.

From 1990 through 1997, in any one year no more than three of nine Class

I railroads were determined by the ICC/Board to be revenue adequate.

From 1990 through 1994, in any one year no more than 2 of 12 Class I

railroads were determined to be revenue adequate.33 The returns on

investment of the remaining railroads have been below the railroad

industry’s cost of capital. The degree that Class I railroads did not earn the

industry’s cost of capital has fluctuated since 1990. (See table 2.1.) This

appears to reflect fluctuations in average return on investment more than

a change in the cost of capital. The cost of capital has generally remained

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

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between 11.4 percent and 12.2 percent from 1990 through 1997. In

contrast, return on investment has ranged from just over 1 percent to just

under 9.5 percent. As we reported in 1990, revenue inadequacy affects the

ability of a railroad to attract and/or retain capital.34 Insufficient profit not

only makes it difficult for railroads to cover costs, maintain operations,

and remain financially viable, but may also induce investors to place their

funds elsewhere.

Table 2.1: Revenue Adequacy of Class

I Railroads, 1990 Through 1997 In percents

Year

Return on

investment Cost of capital

Degree of

revenue

inadequacy

1990 8.1 11.8 –3.7

1991 1.3 11.6 –10.3

1992 6.3 11.4 –5.1

1993 7.1 11.4 –4.3

1994 9.4 12.2 –2.8

1995 6.9 11.7 –4.8

1996 9.4 11.9 –2.5

1997 7.6 11.8 –4.2

Note: Return on investment is based on the Board’s methodology for determining revenue

adequacy. These returns may not be the same as returns on investment calculated for

nonregulatory purposes.

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

Revenue adequacy determinations for the railroad industry have been

controversial. According to Board officials, controversy over revenue

adequacy determinations is not new and that these issues have been

addressed at length by the Board’s predecessor. However, in recent years,

shippers and others have again questioned the meaningfulness of the

current method of determining revenue adequacy, particularly railroads’

ability to attract capital for mergers and acquisitions. For example, in 1996,

Union Pacific was expected to spend about $1.6 billion to acquire

Southern Pacific Railroad. Nevertheless, in this same year, the Board

determined Union Pacific to be revenue-inadequate. Similarly, in 1998,

CSX Transportation estimated that it would incur over $4 billion in

acquisition costs in the joint CSX Transportation/Norfolk Southern

34Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980

(GAO/RCED-90-80, May 16, 1990).

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acquisition of Conrail.35 In 1997, CSX Transportation was determined by

the Board to be revenue-inadequate.

In April 1998, the Board began a proceeding to address issues related to

railroad access and competition. As part of this proceeding, the Board

called upon both railroads and shippers to mutually agree on an

independent panel of disinterested experts to review how revenue

adequacy is determined and to develop recommendations as to how, if at

all, this determination should be changed. According to the Board, as of

February 1999, although railroad representatives were satisfied with the

neutral panel approach, shipper representatives opposed it and suggested

instead that the Board initiate a rulemaking proceeding to address revenue

adequacy issues.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, Board officials said that we should

better explain that the Board, in its merger decisions, has taken actions to

ensure that no shipper has become captive to a single railroad. The Board

also said we should better recognize that controversy over revenue

adequacy determinations is not new and that these issues have been

addressed at length by the Board’s predecessor. To address these

concerns, we have modified the report to acknowledge that the Board

imposes merger conditions to ensure that any shipper that was capable of

being served by more than one railroad before a merger would continue to

have more than one railroad available after the merger. We also added

language to better recognize that revenue adequacy determinations have

been controversial for some time and that these issues had been dealt with

by the Board’s predecessor.

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

Transportation.

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All Shippers Have Benefitted

Since 1990, railroad rates have generally fallen both overall as well as for

specific commodities. However, rail rates have not decreased

proportionately for all shippers and users of rail transportation. Some

shippers, like those transporting coal, have experienced larger rate

decreases than other shippers. In addition, in other cases, such as

long-distance wheat shipments from Montana and North Dakota to west

coast destinations for export, real rail rates have stayed about the same as,

or were slightly higher than, they were in 1990.36 We also found that

revenues were 180 percent or more of variable costs for a number of

routes, including short-distance movements of coal and long-distance

movements of wheat from northern plains states such as Montana and

North Dakota. The degree of competition on a route may have played a

role in both how rates changed and/or how high or low a revenue to

variable cost ratio may be for a specific commodity or route. While the

revenue to variable cost ratio is often used as a proxy for market

dominance, use of the ratio for this purpose may lead to

misinterpretations. For example, even when railroads pass all cost

reductions along to shippers in terms of reduced rates, the ratio can

increase. Conversely, the ratio can decrease if railroads pass all cost

increases along to shippers in the form of higher rates.

Rail Rates Have

Generally Decreased

Since 1990

In general, real (inflation-adjusted) rail rates have decreased since 1990. In

fact, real rail rates have been falling since the early 1980s. In

February 1998, the Board found that the average, inflation-adjusted Class I

railroad rate had decreased by about 46 percent from 1982 through 1996.37

The Board found that rates in all major commodity groups decreased,

including coal and farm products, which, as bulk commodities, have

historically been shipped by rail. However, the decreases were not

uniform. (See table 3.1.) Also, in general, the average annual rate of

decrease in rail rates was somewhat lower in the 1990s (about 4 percent

annually) compared with what it was from 1982 through 1989 (4.6 percent

annually). The average annual rate of decrease in rail rates for farm

products (which include grains such as corn and wheat) was about

7 percent in the 1980s, compared with only about 1 percent in the 1990s. In

contrast, the average annual rate of decrease for coal was just over

3 percent in the 1980s, compared with almost 8 percent in the 1990s.

36Unless noted otherwise, all rates discussed in this chapter are cents per ton-mile stated in 1996

dollars. Also, the analysis was based on the following distance categories: long, medium, and short.

Long is over 1,000 miles from origin to destination, medium is between 501 and 1,000 miles, and short

is 500 miles or less.

37The inflation-adjusted railroad rate is gross revenue produced per ton-mile of freight originated, in

1982 dollars.

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Table 3.1: Average Annual Change in

Real Rail Rates for Selected

Commodities, 1982 Through 1996 Average annual change in real rail rates

In percents

Category 1982-89 1990-96

Farm products –6.7 –1.1

Metallic ores –5.2 –5.2

Coal –3.3 –7.9

Food and kindred products –6.9 –3.7

Lumber and wood –6.2 –4.0

Chemicals –3.9 –2.4

Petroleum and coal products –5.6 –3.0

Stone, clay, glass, and

concrete –5.5 –0.5

Transportation equipment –2.4 –2.5

Intermodal –5.8 –2.9

Average annual rate change

(all commodities) –4.6 –4.1

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

Our analysis of overall real rail rates showed similar results, with certain

exceptions. Using the Board’s Carload Waybill Sample—a data base of

actual rail rates provided to the Board annually by individual

railroads—we constructed rate indexes38 for coal, grain, certain chemicals,

and transportation equipment for the period from 1990 through 1996. (See

fig. 3.1.) As the figure illustrates, in general, rail rates for most of these

commodities decreased over time. The exceptions were wheat, corn, and

chemicals (potassium and sodium; plastics and resins). Wheat in particular

showed general rate increases from 1992 through 1994—from about 2.1

cents per ton-mile to about 2.5 cents per ton-mile—before falling back to

about 2.4 cents per ton-mile in 1996. Corn also showed increases from

1990 through 1995—from about 1.8 cents per ton-mile to just under 2.1

cents per ton-mile—before decreasing in 1996 to about 1.9 cents per

ton-mile.

38A rate index attempts to measure price changes over time by holding constant the underlying

collection of items that are consumed. This differs from comparing average rates in each year because

over time higher- or lower-priced items can constitute different shares of the items consumed.

Although an index is a pure number in which each year’s value is expressed relative to a common base

year, because we wanted to maintain a sense of the magnitude of the revenues per ton-mile of the

various commodities, we did not express each year’s value relative to a base year (that is, we did not

divide each year’s value by the value in 1996). We did not adjust for general effects of inflation. The

specific commodities we reviewed were coal (bituminous); wheat; corn; potassium or sodium

compounds; plastic materials or synthetic fibers, resins, or rubbers; motor vehicles; and motor vehicle

parts or accessories.

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

Rail Rate Index for Transportation of Coal, Wheat, 

and Corn, 1990-96

Cents per ton mile

1990 1991 1992 1993 1994 1995 1996

0

0.5

1

1.5

2

2.5

3

Coal

Wheat

Corn

Year

1990 1991 1992 1993 1994 1995 1996

0

2

4

6

8

10

12

14

Cents per ton mile

Year

Rail Rate Index for Transportation of Potassium/ 

Sodium, Plastics/Resins, Motor Vehicles, and Motor 

Vehicle Parts, 1990-96

Potassium and sodium

Plastics and resins

Motor vehicles

Motor vehicle parts

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

There may be a variety of reasons behind the rate changes shown in figure

3.1. As we reported in 1990, to become more competitive railroads

reduced rates. In addition, railroads have made extensive use of contracts

to do business. Finally, rail rates reflect the specific characteristics of each

commodity and the demand for rail transportation. According to USDA,

transportation of wheat is dominated by railroads—in 1996 railroads

transported about 57 percent of all wheat in the nation—and exports

greatly affect the demand for rail transportation.39 Since 1990, the demand

39See Transportation of U.S. Grains: A Modal Share Analysis, 1978-95, U.S. Department of Agriculture,

Agriculture Marketing Service, Transportation and Marketing, Marketing and Transportation Analysis

Program (Mar. 1998).

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for rail transportation of wheat for export has fluctuated from a high of

about 25 million tons in 1993 to a low of about 15 million tons in 1994. (See

fig. 3.2.) In contrast, transportation of corn is more dependent on

trucks—in 1996, trucks transported about 41 percent of corn production

compared with about 38 percent for rail—and corn is primarily used for

domestic poultry and cattle feed, domestic processing into ethanol

alcohol, and other purposes. Also, significant amounts of corn are grown

in areas accessible to navigable waterways, and much of the corn

exported is transported by barge to such ports as New Orleans. As shown

in figure 3.2, since 1990 the rail transportation of domestic corn has

fluctuated from about 58 million tons in 1995 to about 45 million tons in

1991. These commodity characteristics may at least partially account for

the overall difference in prices between wheat and corn—2 to 2.5 cents

per ton-mile for wheat and less than 2 cents per ton-mile for corn.

Figure 3.2: Rail Transportation of

Export Wheat and Domestic Corn,

1990 Through 1996

Millions of tons

Year

1990 1991 1992 1993 1994 1995 1996

0

10

20

30

40

50

60

Export wheat

Domestic corn

Source: USDA.

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Rail Rates in Some

Markets Have Not

Fallen

Our analysis of rail rates since 1990 for coal, grain (corn and wheat),

chemicals, and transportation equipment in selected transportation

markets/corridors generally showed that real rail rates have fallen.40

However, not all rates have fallen, and rail rates were sensitive to

competition—both intermodal (competition between railroads, trucks,

and other transportation modes) and intramodal (rail to rail). For

example, we found that real rail rates for corn shipments from the

Midwest, where there is barge competition, to the Gulf Coast were

significantly less than rail rates for corn shipments on similar distance

routes that appeared to offer little nonrailroad competition. We also found

that rates in markets/corridors that are considered to have less

railroad-to-railroad competition, such as the plains states of North Dakota

and Montana, were generally higher than rail rates on similar distance

corridors that might offer more railroad options. Finally, we found that the

relationship of shipment size (number of railcars) to rates varied by

commodity. Typically, as shipment size increases, rates charged per ton

decrease, reflecting increased efficiencies in train operations. For coal and

some other commodities we reviewed, we generally found that the size of

shipments remained relatively constant from 1990 through 1996. However,

at the same time rates were generally falling. This implies that factors

other than shipment size accounted for the rate decreases. We also found

that on at least one northern plains wheat corridor we reviewed, railroad

rates generally did not decrease even as average shipment size increased.

Rail Rates for Coal Have

Generally Decreased Since

1990

In general, real rail rates for coal shipments have fallen since 1990. This

was true for overall rates and for the specific long-, medium-, and

short-distance transportation corridors/markets. The rates on

medium-distance routes (between 501 and 1,000 miles) provide a good

illustration of the changes we found in coal rates.41 (See fig. 3.3.) As figure

3.3 shows, real rail rates for both the eastern (Central Appalachia) and

40The markets/corridors selected for this analysis are those with the highest average annual tonnage

(over the 1990-96 period) within each of the distance categories we used. Except for coal and

Canadian origins, these markets/corridors represent Bureau of Economic Analysis economic areas.

Unless there are problems of data confidentiality, we present information on the leading five corridors

for each commodity group and distance category. Where confidentiality problems preclude reporting

on a corridor, we substituted the corridor with the next highest tonnage. Even though these corridors

are the highest-volume corridors for the particular commodities—the 10 highest-volume short-,

medium- and long-distance routes accounted for over 50 percent of tons and over 60 percent of

ton-miles of coal, and over 40 percent of tons and ton-miles of wheat—those selected do not represent

a statistical sample drawn from the population of all corridors. Thus it is not appropriate to generalize

our findings to a population larger than the corridors we analyzed. See chapter 1 for how we selected

specific corridors.

41See app. II for illustrations of real rail rates for coal shipments in the long- and short-distance

categories.

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western (Powder River Basin) coal routes that we looked at generally

decreased since 1990.42 On the eastern medium-distance coal routes, rates

generally decreased one-half to 1 cent per ton-mile. On the western

medium-distance coal routes, rates generally decreased between

two-thirds of a cent and one cent per ton-mile. The only real exception to

the rate decreases was a slight increase in real rail rates from 1994 through

1996 on a route from Central Appalachia to Orlando. However, the rate in

1996 was still about seven-tenths of a cent less than the rate in 1990.

Figure 3.3: Real Rail Rates for Coal,

Selected Medium-Distance Routes,

1990 Through 1996

Central Appalachia to Norfolk economic area

Powder River Basin to Minneapolis economic area

Powder River Basin to Kansas City economic area

Central Appalachia to Macon economic area

Central Appalachia to Orlando economic area

Year

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

Cents per ton mile (in 1996 dollars)

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

42The Central Appalachia Coal Supply Region includes eastern Kentucky, Virginia, and southern West

Virginia. The Powder River Basin Coal Supply Region includes Montana and Wyoming.

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There may be a number of reasons why rail rates for the transportation of

coal have fallen. Although changes in shipment size may affect rail rates, in

general we did not find any significant changes in shipment sizes from the

1990 through 1996 period for the routes/corridors we reviewed. On the

medium-distance routes, shipment size for the eastern coal routes

generally remained between 80 and 90 railcars over the entire period,

except for the Central Appalachia to Norfolk, Virginia, route where

shipment size generally stayed between 40 and 50 railcars.43 Shipment size

on the medium-distance western coal routes generally remained between

100 and 115 railcars. Shipment size on western long-distance routes (over

1,000 miles) also generally remained in the 100 to 120 railcar range, while

shipment size on the shorter distance coal routes (500 miles or less)

generally remained in the 70 to 90 car range. One exception was a

short-distance route between Central Appalachia and Charleston, West

Virginia. On this route, the average shipment size increased from about 70

railcars in 1990 to about 100 cars in 1996. Over the same time period, the

rail rate decreased about 30 percent—from about 6.5 cents per ton-mile in

1990 to about 4.5 cents per ton-mile in 1996.

The coal rates we examined may have been affected by rail competition.

Currently, two Class I railroads serve the Powder River Basin—the

Burlington Northern and Santa Fe Railway and Union Pacific

Railroad—and three Class I’s serve the Central Appalachia

region—Conrail, CSX Transportation, and Norfolk Southern. Whether

these or other railroads have the market power to extract higher rates

from coal shippers is unclear. On the one hand, data from the Board show

that from 1990 through 1996 the percent of coal shipments transported

where revenues exceeded 180 percent of variable costs averaged about

53 percent. However, in 1996, 47 percent of the coal shipments were

transported at rates where revenue exceeded 180 percent of variable

costs. This was the lowest percentage since 1987. On the other hand, if the

number of rate complaints filed with ICC or the Board is indicative of

shippers’ views of market power wielded by railroads, about half of the

approximately 40 rate complaints filed since January 1, 1990 (or were

pending on that date), involved coal rates.44

43Board officials indicated that the comparatively small average shipment size found on this route

reflects the waybill creation and reporting practices that a particular railroad uses for its export coal

traffic. Although the waybill indicates shipments of only one or small groups of cars, Board officials

believe the railroad in question gathers these cars into one or more larger shipments for transport to

destination.

44See GAO/RCED-99-46.

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Rail Rates for Some Grain

Shipments Have Remained

Flat or Increased Since

1990

As discussed earlier, rail rates for transporting grain such as wheat and

corn have generally stayed the same or increased since 1990.45 However,

rail rates for medium-distance routes (501 to 1,000 miles), such as from

central plains origins around Oklahoma City and Wichita to Houston,

showed some decreases.46 (See fig. 3.4.) On the other hand, rail rates from

Great Falls, Montana, to Portland, Oregon, stayed about the same or

increased slightly between 1990 and 1996. We found similar trends in other

distance categories, particularly long-distance (greater than 1,000 miles)

wheat routes. The rail rates on long-distance wheat routes from Billings,

Montana, and Minot, North Dakota, to Portland both stayed relatively

constant, at about 3 cents per ton-mile over the entire 7-year period. Rate

trends for corn shipments were similar to those of wheat. Again, the

variety of rate trends we found for shipments of corn can be seen on the

rates for medium-distance routes. (See fig. 3.5.) Although the rates on

some of the routes, most notably those routes from the midwest to

Atlanta, showed decreases, rates for corn shipments from selected origins

in Illinois to New Orleans showed some increases. As with wheat, rail

rates for long-distance corn shipments on the routes we reviewed

generally varied little, remaining in the 1.4 to 1.6 cents per ton-mile range

from 1990 through 1996.

45In 1996, of grain transported by rail, corn represented about 49 percent of total rail industry revenue,

with wheat an additional 40 percent. According to USDA, in 1997 the top three corn producing states in

the United States were Iowa, Illinois, and Nebraska, while the top three wheat producing states were

Kansas, North Dakota, and Montana.

46App. II contains illustrations of the real rail rates on selected long- and short-distance wheat and corn

routes.

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Figure 3.4: Real Rail Rates for Wheat,

Selected Medium-Distance Routes,

1990 Through 1996

Great Falls economic area to Portland economic area

Wichita economic area to Houston economic area

Oklahoma City economic area to Houston economic area

Duluth economic area to Chicago economic area

Grand Forks economic area to St. Louis economic area

Year

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

Cents per ton mile (in 1996 dollars)

Note: Due to confidentiality, data point for Duluth economic area to Chicago economic area for

1993 was excluded.

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

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Figure 3.5: Real Rail Rates for Corn,

Selected Medium-Distance Routes,

1990 Through 1996

Indianapolis economic area to Atlanta economic area

Champaign economic area to New Orleans economic area

Evansville economic area to Atlanta economic area

Chicago economic area to New Orleans economic area

Indianapolis economic area to Knoxville economic area

Year

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

Cents per ton mile (in 1996 dollars)

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

We also found that rail rates for wheat and corn shipments appeared to be

sensitive to both inter- and intramodal competition. For example, as

shown in figure 3.4, rail rates for shipments of wheat from Duluth,

Minnesota, to Chicago, Illinois—a route that is potentially competitive

with Great Lakes water transportation—were significantly less—generally

between 0.75 to almost 2 cents less per ton-mile—than rail rates on other

medium-distance wheat routes. This includes rail rates for shipments from

Great Falls, Montana, to Portland, Oregon, which some consider to lack

effective transportation alternatives to rail. The same was true for corn

shipments. The rail rates for corn shipments from Chicago and

Champaign, Illinois, to New Orleans—routes which are barge

competitive—were substantially less (in some years over 2 cents per

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ton-mile less) than rail rates on the other medium distance corn routes.

(See fig. 3.5.) The sensitivity to intramodal competition is best seen by

comparing rail rates for wheat shipments originating in the central plains

states with the rail rates for shipments originating in the northern plains

states. As figure 3.4 illustrates, rail rates for wheat shipments originating in

Oklahoma City and Wichita were generally about 1 cent per ton-mile less

than rates on the Great Falls, Montana, to Portland, Oregon, route which

originated in the northern plains. Northern plains states, such as Montana

and North Dakota, generally have fewer Class I railroad alternatives than

the central plains states, such as Kansas. (See fig. 1.1.)

Shipment size is an important factor influencing railroad costs and hence

rates, particularly for agricultural commodities. Loading more cars at one

time increases railroad efficiency and reduces a railroad’s costs. We found

that the average shipment size of wheat originating in the northern plains

was typically smaller than for wheat shipments originating in the central

plains. For example, average shipment size on the Great Falls, Montana, to

Portland, Oregon, route was about half that of shipments going from

Wichita to Houston—about 40 railcars from Great Falls compared with

about 70 railcars from Wichita. (See fig. 3.6.) This may partially explain

why rail rates and costs for wheat shipments are higher in the northern

plains than in the central and southern plains.

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Figure 3.6: Average Shipment Size,

Selected Wheat Routes, 1990 Through

1996

Great Falls economic area to Portland economic area

Wichita economic area to Houston economic area

Year

1990 1991 1992 1993 1994 1995 1996

0

10

20

30

40

50

60

70

80

Average Cars Per Shipment

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

To investigate further the effects of shipment size on railroad rates and

variable costs, we developed regression equations using waybill data in

which annual average revenues per ton-mile and average variable costs

per ton-mile were calculated for export wheat corridors and shipment size

categories, and then regressed on distance, a time trend, and indicators of

the shipment size category. For a set of northern plains export corridors,

the effects of increased shipment size on revenues were modest compared

with the effects of shipment size on variable costs per ton-mile on these

routes, and compared with the effects of shipment size on both revenues

and variable costs for a set of central and southern plains export corridors.

Specifically, revenues per ton-mile for the northern plains corridors were

estimated to be 0.2 of a cent less on shipments between 5 and 50 cars than

for shipments of fewer than 5 cars, while revenues per ton-mile for the

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central and southern plains corridors were estimated to be 0.6 of a cent

less for a similar shipment size increase.47 Additionally, revenue per

ton-mile in the central and southern plains for shipments exceeding 50

cars were estimated to decrease an additional 0.3 of a cent, while in the

northern plains, the estimated reduction in revenue per ton-mile for this

increase in shipment size was not statistically significant. For variable

costs per ton-mile, there was more similarity between northern plains and

central and southern plains states. For example, estimated cost reductions

were statistically significant for all shipment size categories, although the

magnitudes were greater in the central and southern plains case.

Rail Rate Changes for

Chemical and

Transportation Equipment

Shipments Were Similar to

Coal and Grain

For comparison purposes, we also reviewed rail rates for certain

chemicals and transportation equipment.48 In general, we found that real

rail rates for chemical shipments exhibited many of the characteristics of

coal and grain discussed previously—that is, many of the rail rates on

various routes fell, but rates did not fall on all routes. An illustration of

these trends can be seen for shipments of potassium/sodium on medium

distance routes.49 (See fig. 3.7.) As figure 3.7 shows, rail rates from

Canadian origins to Minneapolis, Minnesota, decreased about one-third

over the 7-year period—from about 5.4 cents per ton-mile to about 3.7

cents per ton-mile. However, rates from Casper, Wyoming, to Portland,

Oregon, remained relatively stable at 3.4 cents per ton-mile. One of the

largest rate changes was a decrease in rail rates for transportation of

plastics and resins within the New Orleans, Louisiana, economic area (a

short-distance route). On this route, rail rates decreased about 70 percent

from 1990 through 1996—from about 47 cents per ton-mile to about 14

cents per ton-mile. (See app. II.) According to the Chemical Manufacturers

Association, nearly two-thirds of the tonnage of chemicals and allied

products shipped are transported less than 250 miles. At these distances,

trucks are a competitive option for chemical shippers, and in 1996, about

47In the northern plains sample—Great Falls and Billings, Montana, and Minot, Bismarck, and Grand

Forks, North Dakota, to Portland—average revenue per ton-mile was 2.99 cents, and average variable

cost per ton-mile was 1.55 cents. In the central and southern plains sample—Wichita and Topeka,

Kansas; Oklahoma City, Oklahoma; Dallas-Ft. Worth and Amarillo, Texas; and Denver, Colorado, to

Houston as well as Denver to Beaumont, Texas—average revenue per ton-mile was 2.41 cents, and

average variable cost per ton-mile was 1.75 cents.

48The chemicals we included (potassium and sodium compounds and plastic materials or synthetic

fibers, resins, rubbers) and the transportation equipment categories we included (motor vehicles and

motor vehicle parts or accessories) accounted for about 49 percent and 97 percent, respectively, of

total rail industry revenue for these commodities in 1996.

49See app. II for illustrations of rail rates for chemicals and transportation equipment shipments in

other distance categories.

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52 percent of the tonnage of all chemicals and allied products shipped

were by truck, with railroads only accounting for 21 percent.

Figure 3.7: Real Rail Rates for

Potassium/Sodium Shipments,

Selected Routes, 1990 Through 1996

Casper economic area to Portland economic area

Saskatchewan to Minneapolis economic area

Saskatchewan to Wausau economic area

Chicago economic area to Philadelphia economic area

Casper economic area to Los Angeles economic area

Year

1990 1991 1992 1993 1994 1995 1996

0

1.5

3

4.5

6

Cents per ton mile (in 1996 dollars)

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

Rail rates for shipments of finished motor vehicles and motor vehicle parts

and accessories also showed a variety of patterns. One of the most

dramatic rate changes was a decrease in rail rates for the transportation of

finished motor vehicles from Ontario, Canada, to Chicago, Illinois. On this

route, rates fell about 40 percent—from 19.5 cents per ton-mile to 11.7

cents per ton-mile. In general, most rail traffic in motor vehicles and motor

vehicle parts or accessories is under contract or has been exempt from

economic regulation. According to AAR surveys, the percent of motor

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vehicle traffic that moved under contract increased from 55 percent in

1994 to 81 percent in 1997. Whether railroads have the market power to

charge high rates is unclear. Officials from Norfolk Southern told us that

automotive shippers “pay a premium rate for premium service.” This

suggests that rates may be related to factors other than market power. In

addition, officials from Union Pacific said their company has offered

shippers reduced rates in return for guaranteed high volumes of

shipments, again suggesting that rates are related to factors other than

market power.

Revenue to Variable

Cost Ratios Reflect

Differential Pricing,

but With Some

Caveats

Revenue to variable cost ratios are often used as indicators of shipper

captivity to railroads. If used in this way, the higher the R/VC ratio the more

likely it is that the shipper has used only rail to meet its transportation

needs and the more likely it is that the railroad can use its market power

to set rates that extract revenues much greater than its variable costs.

Since 1990, about one-third of all railroad revenue has come from

shipments transported at rates that generate revenues exceeding

180 percent of variable costs. However, the percentage varies by

commodity and has changed over time. Our analysis suggests that

competition can influence specific R/VC ratios for specific routes and

commodities. In general, we found that R/VC ratios exceeded 180 percent

on short-distance movements of coal and long-distance movements of

wheat from northern plains states—movements where there may be less

competition for the railroad. In contrast, R/VC ratios were consistently

180 percent or less on a wide variety of routes, including long-distance

movements of coal. While R/VC ratios are often used as proxies for market

dominance, use of such ratios for this purpose may lead to

misinterpretations because R/VC ratios can increase as rail rates go down

and, conversely, can decrease as rail rates go up.

R/VC Ratios Reflect

Differential Pricing

Overall, the percent of railroad revenue from shipments transported at

rates generating revenues exceeding 180 percent of variable costs differs

by commodity. (See table 3.2.) As table 3.2 shows, from 1990 through 1996,

for all commodities, about one-third of all revenues generated by railroads

came from movements transported at rates generating revenues exceeding

180 percent of variable costs. However, several commodities, such as coal,

chemicals, and transportation equipment, had higher percentages of

revenue from shipments at rates generating revenues exceeding

180 percent of variable costs. Farm products (which include grain

shipments) had a lesser percentage. As table 3.2 shows, these percentages

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can change over time. For example, for coal and transportation equipment,

in 1996, the percentage of revenue generated from shipments at rates

generating revenues exceeding 180 percent of variable costs were the

lowest they had been since 1990. By contrast, for chemicals, in 1996, the

percentage of revenue generated from shipments at rates generating

revenues exceeding 180 percent of variable costs was the highest it had

been since 1990.

Table 3.2: Percent of Rail Industry

Revenue Exceeding 180 Percent R/VC

for Selected Commodities, 1990

Through 1996

Percent of revenue exceeding 180 percent R/VC

Year

All

commodities Coal

Farm

products Chemicals

Transportation

equipment

1990 34 55 22 44 66

1991 29 54 22 45 48

1992 30 55 21 46 48

1993 32 54 26 48 53

1994 34 54 32 50 59

1995 32 54 26 46 54

1996 29 47 23 54 33

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

We found a wide variety of R/VC results for the specific commodities and

routes that we looked at. In general, R/VC ratios were consistently above

180 percent on short-distance movements of coal (such as from Central

Appalachia) and certain long-distance movements of wheat. The R/VC ratios

were consistently below 180 percent on long-distance movements of corn

and of coal from the Powder River Basin and on medium-distance

movements of corn and wheat. The ratios for the other commodities and

routes that we reviewed showed no consistent pattern.

The ratio results suggest that demand-based differential pricing may have

played a role in how railroads set their rates. The fact that R/VC ratios were

typically higher for short-distance movements of coal than for mediumand long-distance movements reflects the possibility that, as shipping

distance increases, the shipper or receiver is better able to substitute other

sources of coal. This same distance-related pattern of R/VC ratios was

found for corn, illustrating both the nature of domestic corn markets as

well as geographic considerations that favor barge options for the

transportation of corn. In both the coal and corn cases, various

competitive pressures may constrain the rates that railroads were able to

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

ratios.

Long-distance movements of wheat often occurred at much higher R/VC

ratios than were typically found for corn and coal. For example, the R/VC

ratios for long-distance wheat movements originating in Montana and

North Dakota were consistently at 180 percent or higher from 1990

through 1996. In contrast, the R/VC ratios on a Minneapolis, Minnesota, to

New Orleans, Louisiana, route—where barges offer competition—were

always below 100 percent. We also found differences in the ratio between

northern and central plains routes for the medium-distance shipments of

wheat. (See fig. 3.8.) The northern plains states are considered by some to

have fewer rail alternatives than the central plains states. As figure 3.8

shows, the R/VC ratios for those wheat shipments originating in Wichita and

Oklahoma City were consistently below 180 percent from 1990 through

1996. On the other hand, the R/VC ratio for wheat shipments originating in

Great Falls, Montana, were consistently above 180 percent over the entire

period.

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Figure 3.8: R/VC Ratios for

Medium-Distance Rail Shipments of

Wheat, 1990 Through 1996

Year

1990 1991 1992 1993 1994 1995 1996

0

20

40

60

80

100

120

140

160

180

200

220

240

260

Percent

Great Falls economic area to Portland economic area

Wichita economic area to Houston economic area

Oklahoma City economic area to Houston economic area

Duluth economic area to Chicago economic area

Grand Forks economic area to St. Louis economic area

Note: Due to confidentiality, data point for Duluth economic area to Chicago economic area for

1993 was excluded.

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

R/VC Ratios Are Subject to

Limitations

R/VC ratios have their limitations. One of these is how variable costs are

determined. According to the Board, variable costs are developed in

accordance with the Uniform Railroad Costing System (URCS). URCS is a

general purpose costing system used by the Board for jurisdictional

threshold determinations and other purposes. By necessity, URCS

incorporates a number of assumptions and generalizations about railroad

operations to determine variable costs. Because of these assumptions and

generalizations, the variable costs developed under URCS may not

necessarily represent the actual costs attributable to the particular

shipment involved. The revenues used to calculate R/VC ratios may also not

be actual. Board officials told us that revenues shown in the Carload

Waybill Sample are not adjusted for such things as the year-end rebates

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and refunds often provided to shippers exceeding minimum volume

commitments. As a result of these limitations, it is possible that some of

the R/VC ratios used in our analysis would be different if actual revenues

and variable costs were known.

Perhaps a more serious limitation is possible misinterpretations of R/VC

ratios. Because an R/VC ratio is a simple division of revenues by variable

costs, it is possible an R/VC ratio could be increasing at the same time

revenues and variable costs are both decreasing. For example, if rail

revenues are $2 and variable costs are $1, the R/VC ratio would be 200.

However, if revenues decrease to $1.50 and variable costs decrease to

$0.50, the ratio becomes 300. Under this scenario, although railroads have

passed all cost reductions along to shippers in terms of lower rates, the

increased R/VC ratio makes it appear as though the shipper is worse off. On

the other hand, R/VC ratios could be decreasing at the same time revenues

and variable costs are increasing. For example, using the example above

($2 in revenues and $1 in variable costs with a ratio of 200), if revenues

increase to $2.50 and variable costs increase to $1.50, the ratio becomes

167.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Board noted that competition

is better measured by the effectiveness of transportation alternatives

rather than the number of competitors. In response to this issue, we

modified report language to better recognize the importance of effective

competition in measuring the effects of competition on rail rates.

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In recent years, shippers have increasingly criticized Class I railroads for

providing poor service. Rail service disruptions in the western United

States in the summer and fall of 1997 brought national attention to these

concerns. Among the problems cited by shippers were an insufficient

supply of railcars when and where needed, inconsistent pickup and

delivery of cars, and longer than necessary transit times to a destination.

In general, railroad officials believe the railroads provide adequate service.

However, they agree that service is not what it could be and that the

industry has failed to meet shipper expectations.

The quality of railroad service, over time for individual rail carriers or

between specific railroads, cannot be measured currently. The Board

determines whether service is reasonable on a case-by-case basis. In

addition, the railroad industry has been reluctant to develop specific

service measures for fear they could be misinterpreted or misused by the

public or might reveal business-sensitive information. In reaction to

widespread criticism of rail service, however, railroads have developed

four performance indicators. Although these indicators may be helpful in

assessing certain aspects of service, they are more an evaluation of

operating efficiency than of quality of service.

Shippers Believe

Railroad Service Has

Been Poor

In recent years, railroad shippers, shipper associations, and local

communities have complained in various forums about poor railroad

service. Complaints have been particularly strong from agricultural

shippers and communities in the West and Midwest. Union Pacific

Railroad’s merger with the Southern Pacific Railroad in 1996 and the

subsequent widespread delays in delivering railcars to destinations

brought national attention to the seriousness of railroad service problems.

Shippers attribute many of the problems they experience to a decrease in

competitive transportation options as a result of railroad mergers. In

addition, some shippers believe railroads must improve the consistency of

their operations and increase the number of available railcars, among

other things, in order to improve service levels.50

50The subsequent discussion includes references to the year 1997. In responding to a draft of this

report, Board officials noted that, in its opinion, 1997 was an atypical year in terms of quality of rail

service. They cited the Board’s emergency service order in the Houston/Gulf Coast service breakdown

as reflecting this aberration and pointed out that service problems in this area of the country began

before the Union Pacific/Southern Pacific merger had been fully implemented. They also said that rail

service has improved since 1997.

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Shippers Believe the

Quality of Rail Service Has

Deteriorated in Recent

Years

Many rail shippers believe service has been poor. Events in recent years

may have exacerbated the problems. For example, in the summer of 1997,

during implementation of the Union Pacific/Southern Pacific merger, rail

lines in the Houston/Gulf Coast area became severely congested, and

freight shipments in some areas came to a complete halt. As the problem

spread, many grain shippers experienced delays in railcar deliveries of 30

days or more, while some grain shippers in Texas did not receive railcars

for up to 3 months. Transit times for movements of wheat from Kansas to

the Gulf of Mexico in some cases exceeded 30 days—four to five times

longer than normal. In late 1997, the Board determined that the service

breakdown, which had a broad impact throughout the western United

States, constituted an emergency and, among other things, ordered Union

Pacific to temporarily release its Houston area shippers from their service

contracts so that they could use other railroads serving Houston, and to

cooperate with other carriers in the region that could accept Union Pacific

traffic for movement, to help ease the gridlock.

The lack of predictable, reliable rail service has been a common complaint

among some shippers. For example, during public hearings conducted by

USDA in 1997, over 400 grain shippers and rural residents from Iowa,

Kansas, Minnesota, Montana, and North Dakota expressed their concerns

about cars not being delivered; little, or no, notification when railcars

would be delivered; little or no success in trying to reach appropriate

railroad officials for information on car deliveries; and the general lack of

available cars when and where needed. These same types of problems

were identified by shippers and shipper associations during additional

hearings in Montana and North Dakota conducted in December 1997 by a

Senate Subcommittee and in April 1998 by the Board during hearings on

railroad access and competition issues.

Survey Results Also

Indicate Shipper

Dissatisfaction With Rail

Service

Our survey responses from about 700 bulk grain, coal, chemicals, and

plastics shippers conducted in the fall of 1998 also reflect concerns about

railroad service.51 An estimated 63 percent of the shippers responding to

our survey (329 of 525 shippers that answered this question) said that the

overall quality of their rail service was somewhat or far worse in 1997 than

it was in 1990. Chemicals and plastics shippers were among the most

dissatisfied with the overall quality of their rail service—approximately

80 percent of these shippers indicated that the overall quality of rail

service they received in 1997 was somewhat or much worse than in 1990.

About 71 percent of coal shippers indicated that the overall service levels

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

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provided by the railroads serving them were somewhat or much worse.

Finally, echoing the complaints expressed during congressional hearings,

an estimated 57 percent of grain shippers responding to our survey

indicated their overall quality of rail service was somewhat or much worse

in 1997 than it was in 1990.52

On the basis of our survey results, the types of problems experienced

since 1990 have varied by commodity. (See table 4.1.) About 66 percent of

coal shippers responding to our survey indicated that they experienced

somewhat or much worse service in terms of car cycle time—that is, the

amount of time it takes to deliver a commodity to its destination and

return—in 1997 compared with 1990. Chemicals and plastics shippers

identified problems with the consistency of on-time delivery as most

problematic; about 84 percent of the shippers responding to our survey

identified this problem as worse in 1997 compared with 1990. Grain

shippers identified railcar availability as their most troublesome problem.

An estimated 67 percent of grain shippers indicated that railcar availability

during peak periods was somewhat or much worse in 1997 than it was in

1990. Railcar availability, in general, was rated as worse by an estimated

63 percent of the grain shippers.

Table 4.1: Percent of Shippers

Responding to Our Survey

Experiencing Somewhat or Much

Worse Service in 1997 Compared With

1990, by Commodity Type

Aspect of service Grain shippers Coal shippers

Chemicals/

plastics shippers

Car transit time 41 65 78

Car availability during

peak periods 67 65 73

Car cycle time 47 66 78

Car availability in general 63 61 69

Consistency of on-time

pick up 48 58 46

Consistency of on-time

delivery 53 57 84

Note: Not every shipper provided a response for each aspect of service. Between 138 and 261

grain shippers, between 34 and 47 coal shippers, and between 24 and 69 chemicals/plastics

shippers provided responses to each aspect of service.

Shippers responding to our survey also indicated that the quality of service

provided by the railroads has decreased relative to the amount paid for

52Surveys inherently have sampling errors. Sampling errors define the upper and lower bounds of the

estimates made for our survey results and were calculated at the 95-percent confidence level. This

means that 19 out of 20 times, the sampling procedures used would produce a range that includes the

true value. For the information in this report, all sampling errors were less than 5 percent. The specific

sampling errors are included in our companion report (GAO/RCED-99-46).

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that service. This was particularly true in 1997 compared with 1990. An

estimated 43 percent of those shippers (247 of 570 shippers) indicated that

the quality of service provided by railroads in 1990 was somewhat or far

less relative to the amount paid in 1990. In contrast, the percent of

shippers indicating that the quality of service they received from railroads

in 1997 was either somewhat or far less relative to the amount paid for that

service had increased to an estimated 71 percent of those responding to

our survey. Coal shippers and chemicals and plastics shippers were the

most dissatisfied—about 80 percent and 88 percent, respectively, were

dissatisfied with the value of their service. An estimated 66 percent of

grain shippers responding to our survey said the quality of rail service was

somewhat or far less relative to the amount that they paid for such service

in 1997.

Relatively Few Shippers

Have Filed Formal Service

Complaints Before the

Board

The widespread dissatisfaction with railroad service has not necessarily

resulted in many formal service complaints being filed with the ICC or the

Board. Only 25 formal service-related complaints were pending with the

ICC as of January 1, 1990, or were subsequently filed with the ICC or the

Board.53 These complaints involved a wide range of alleged service

problems, including failure to provide a sufficient supply of railcars; late

inbound and outbound deliveries; and other kinds of inconsistent service.

Of the seven cases that had completed the adjudicatory process as of

February 1999, five were decided in favor of railroads and two in favor of

shippers. Thirteen cases did not result in a decision because ICC/the Board

did not have jurisdiction over the matter or the shipper withdrew the

complaint. Five formal service complaints were pending as of

February 1999.

Typically, no more than two or three complaints were filed each year,

except in 1995, when seven complaints were filed. Most of the complaints

were filed against Class I railroads (68 percent), with the rest filed against

smaller railroads (32 percent). Of the Class I railroads involved in these

complaints, Burlington Northern had the greatest number of complaints

filed against it (six) followed by Conrail (five) and CSX Transportation

(three). On a commodity basis, customers who shipped grain products

represented the largest proportion of complaints (20 percent), followed by

customers who shipped steel and railcars (12 percent each).

53There were also four petitions for declaratory orders relating to service matters. The statutory

authority for declaratory orders and associated relief differ from those of formal complaints. However,

the petitions for declaratory orders reflect the petitioners’ attempts to use a formal mechanism to

resolve service problems.

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Many Shippers Believe

Railroad Mergers and Lack

of Competitive Alternatives

Have Contributed to Poor

Service Performance

Many shippers and their associations have attributed service problems, at

least in part, to railroad mergers or consolidations. When asked in our

survey the extent to which mergers or consolidations since 1990

(excluding the Union Pacific merger with Southern Pacific) have affected

the quality of rail service they received, an estimated 50 percent of the

shippers (268 of 536 shippers responding) indicated that service levels

were somewhat or much worse as a result of mergers or consolidations.

When asked specifically about the effects of the Union Pacific merger with

Southern Pacific on service levels, an estimated 84 percent of the shippers

(371 shippers) indicated that the quality of rail service they received was

either somewhat or much worse since the merger. Chemicals and plastics

shippers indicated they were most affected by the Union Pacific/Southern

Pacific merger—about 97 percent indicated that the rail service their

companies received was somewhat or much worse. Similarly, about

94 percent of the coal shippers indicated that the Union Pacific merger

had resulted in worse rail service. An estimated 77 percent of the grain

shippers indicated they received somewhat or much worse rail service

after the merger than before the merger.54

Shippers have also attributed service problems to a lack of competitive

alternatives to rail transportation. Some shippers who told us that

historically they have only been served by a single railroad or have no

access to other transportation modes maintain that the rail service they

receive is poor. For example, some North Dakota grain shippers told us

that they are heavily dependent upon railroads to transport their grain

because shipping grain by truck (the only other major mode of freight

transportation available in the state) over long distances to mills,

processors, and export markets is not economically feasible. As a result of

this dependence, they claim there is little incentive or reason for the one

railroad that serves them to provide quality service. These shippers told us

that not only have railroads become more arrogant and stopped providing

good service to those shippers for which they no longer face rail

competition, but also railroads have tended to serve those customers with

competitive alternatives first—leaving those shippers without competitive

alternatives to receive the last and worst service.

Shippers responding to our survey identified several changes that they

believe railroads should make to increase rail service quality. Although

grain shippers cited the lack of available cars as the aspect of service that

54These percentages represent results from 87 of 90 chemical/plastics, 51 of 54 coal, and an estimated

175 of 227 grain shippers. The remaining respondents did not answer this series of questions; indicated

they did not know; or it was not applicable to them because they indicated that they were not served

by the Union Pacific/Southern Pacific Railroad.

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has caused them the most problems, an estimated 68 percent of the grain

shippers (331 of 485 shippers responding) indicated that they would like to

see the consistency of on-time delivery of cars improved. An estimated

51 percent of the grain shippers (246 of 485 shippers responding) believe

the number of available cars should be increased, and an estimated

33 percent (162 of 484 shippers responding) want to see the consistency of

on-time pick up of cars improved. While both coal shippers and chemicals

and plastics shippers identified consistency of on-time delivery as among

the three most important changes needed to improve service, they

identified improving transit times as among the most important changes

that should be made by the railroads—about 75 percent of the coal

shippers (62 of 83 shippers responding) and about 84 percent of the

chemicals and plastics shippers surveyed (81 of 97 shippers responding)

expressed the need for improved transit times.

Railroads Believe

That Service Is

Adequate, but

Improvements Are

Needed to Meet

Shipper Expectations

In general, rail industry officials believe the service they provide to their

customers is adequate. In fact, railroads have made capital expenditures in

recent years to improve system capacity and service levels. However,

railroad officials recognize that railcar availability and the timeliness of

rail shipments, among other things, do not always meet shipper

expectations. Some industry officials believe capacity constraints, industry

downsizing, and an inadequate railcar supply are among the factors that

have contributed to the difficulties in meeting shipper service

expectations. In addition, some railroad officials agree that rail mergers

and consolidations, in particular the Union Pacific merger with Southern

Pacific, have exacerbated service problems. Addressing service problems

can be a challenge; railroad officials told us that they often face the

difficult task of balancing the service needs of customers with the

financial viability of the railroads.

Railroads Believe Service

Is Generally Adequate

In general, railroad officials believe that current service is adequate. This

is particularly true when compared with 1990. With the exception of

service problems associated with the Union Pacific/Southern Pacific

service crisis, officials from the four largest Class I railroads we spoke

with about service said overall service in 1997 was at least as good as it

was in 1990. They provided a number of illustrations for why service was

as good as or better than in 1990. For example, Norfolk Southern officials

said that their railroad and other railroads have made significant

investments in cars, locomotives, and people to improve service. Officials

from CSX Transportation said that investments in such things as the

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installation of continuously welded rail throughout the network, purchase

of new cars and locomotives, and the development of better information

technology to respond to customer problems have all contributed to

improved service. There was also general agreement that rail industry

consolidation, including the Union Pacific merger with Southern Pacific,

has benefitted shippers by creating more single-line service that reduces

the number of trains that must handle goods enroute, thereby reducing

costs and transit times.

However, many railroad officials also agree that service is not what it

should be and may not have met shipper expectations for various reasons.

For example, some railroad officials told us that delays on rail systems

have been primarily caused by capacity constraints. As railroad traffic has

been growing in recent years, and as railroads have been scaling back

operations in order to cut costs, system capacity has become inadequate.

In addition, to cut costs, railroads have reduced employment levels. Now,

given the growth in railroad traffic, railroads have had insufficient people

or crews available to provide the required service. For example, train

delay data we obtained from one Class I railroad indicated that both a

shortage of locomotives and crews were major causes of train delays from

1992 through 1996. Finally, an inadequate supply of railcars, especially for

grain shippers, has contributed to shipper dissatisfaction. As one railroad

official told us, railcar availability will always be a point of contention

between railroads and shippers, and some railroads are reluctant to invest

in the number of cars needed to handle peak demand if those cars might

sit idle for a significant portion of the year.

Railroads Acknowledge

the Union Pacific/Southern

Pacific Merger Contributed

to Problems

Some rail industry officials we spoke with, including those at the Union

Pacific Railroad, acknowledged that the Union Pacific merger with

Southern Pacific contributed to the service crisis which began in the late

summer of 1997 in and around Houston, Texas. According to Union Pacific

officials, Southern Pacific had more problems than Union Pacific officials

expected, especially a substantial amount of deferred track maintenance.

In general, these officials said that Southern Pacific had made a lot of

operating decisions based on short-term cash flow considerations rather

than long-term financial health. As a result, Union Pacific’s high traffic

levels and a series of external stresses overwhelmed a weak Southern

Pacific infrastructure. Union Pacific officials expect that as the railroad

recovers from its difficulties, service levels will return to their pre-merger

levels—which in their opinion, had improved since 1990.

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The difficulties experienced by Union Pacific affected other railroads as

well. For example, officials at Norfolk Southern told us that because

Norfolk Southern receives cars from Union Pacific Railroad for shipment

to ultimate destinations and sends other cars to destinations that are on

Union Pacific’s tracks, the Union Pacific’s problems adversely affected

Norfolk Southern’s customer commitments. Officials at Burlington

Northern and Santa Fe Railway told us that it took on a significant amount

of additional business during the service crisis that would usually have

been carried on Union Pacific, which resulted in a trade-off: railroad

officials decided it was better to serve more shippers with a lower level of

service rather than a more limited number of customers at a higher level of

service. Officials from CSX Transportation also said the Union

Pacific/Southern Pacific failures were a “wake up call” to the railroad

industry to do a better job of serving its shippers.

Providing High-Quality

Service Involves

Trade-Offs Between

Investment and Service

In providing high-quality service, railroad management faces the difficult

task of balancing the needs of shippers with the financial viability of the

railroad. In discussing service adequacy and shipper dissatisfaction,

railroad officials made clear the role financial tradeoffs play in service

decisions. Officials from CSX Transportation told us that their company

could hire more crews and invest in assets to address capacity problems.

However, in their opinion, the competitive nature of today’s railroad

business precludes these extra costs from being passed on to shippers.

Officials from other railroads agreed, saying that railroads need to add

capacity—which will require a significant capital investment. In

considering this investment, their companies will have to weigh issues

such as the potential for future traffic growth; cost of adding capacity; and

effects on rates and service. Tradeoffs will also be a part of the decision

making process regarding railcars. Some railroad officials noted that

shippers and railroads historically have disagreed on the adequacy of the

supply of railcars, but actual investment in such cars involves a tradeoff

between the investment in railcars and the return on that investment.

Often, the return on investment is not sufficient to justify the investment

cost.

Management discretion that is inherent in railroad operations can also

influence the quality of rail service. The logistics of moving different kinds

of freight to a myriad of markets in different geographical locations can be

a difficult task. Management decision making may play a larger role than

technology in influencing service levels. This was the conclusion of a 1993

study conducted by the Massachusetts Institute of Technology, Center for

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Transportation Studies, on freight railroad reliability.55 This study

concluded that decisions regarding power management (availability and

positioning of locomotives), train operations (which trains to run, with

what cars, and at what time), and the management of railroad terminals all

had important consequences on railroad reliability. Some railroad officials

we spoke with agreed that management decision making plays a

significant role in the quality of service. For example, officials at Norfolk

Southern told us that, although it has taken actions to minimize

management decisions in providing service, there is still a fairly high

degree of management discretion in service decisions. Officials at CSX

Transportation told us that 85 to 90 percent of service performance

involves management decision making about capital expenditures and

operating expenses. In their opinion, at the local level, service decisions

are very much influenced by budget and financial decisions, and

insufficient funding could lead to reductions in such things as train

service.

Quality of Rail Service

Cannot Be

Determined Since

Industrywide

Measures Do Not

Exist

Currently, the overall quality of railroad service provided by railroads

cannot be measured. While the legislation governing railroad service

requires that railroads provide service upon reasonable request, the Board

and federal courts determine what constitutes reasonable service and

whether a railroad has satisfied its service obligations in the context of

deciding specific complaints. Industrywide measures of rail service for the

most part do not exist. In general, the very limited industrywide measures

we were able to obtain suggest some improvement in these measures in

recent years. However, these measures are not enough to conclude that

service has improved overall. Railroad officials told us they have been

reluctant to develop service measures, fearing they could be

misinterpreted or misused by customers and/or the public or that they may

reveal business-sensitive information. According to AAR, individual rail

carriers have developed measures of service over time that, while

addressing carrier and/or customer specific service performance, are not

necessarily consistent or continuous measures of service either between

carriers or over time for individual carriers.

55Causes of Unreliable Service in North American Railroads, Little, P., Martland, C.D., Proceedings of

the 35th Annual Meeting, Transportation Research Forum (1993).

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Governing Legislation

Does Not Prescribe

Specific Service Levels

Railroads are required by statute to provide service upon reasonable

request; furnish safe and adequate car service; and establish, observe, and

enforce reasonable rules and practices on car service.56 The Board (and its

predecessor, ICC) and federal courts determine what constitutes

reasonable service and whether a railroad has satisfied its service

obligations in the context of deciding specific complaints. For example, in

a 1992 case, the ICC addressed the issue of railcar supply in connection

with a complaint challenging the legality of Burlington Northern Railroad’s

Certificate of Transportation Program. The ICC held that Burlington

Northern had not violated its statutory obligations and observed that the

common carrier obligation requires that a railroad maintain a fleet

sufficient to meet average—not peak—demand for service. According to

the ICC, a requirement for a fleet sufficient to meet peak demand would

result in a wasteful surplus of equipment detracting from a railroad’s

long-term financial health.57 Other cases have involved such matters as

whether a railroad was justified in refusing a shipper’s request to restore

service on an embargoed line. However, ICC and the Board’s decisions are

situation-specific and do not easily lend themselves to developing a single

set of measures that would allow an assessment of a railroad’s—or the

industry’s—quality of service in all circumstances.

Few Industrywide

Performance Measures

Exist

For the most part, industrywide measures of service performance do not

exist. For example, according to AAR, there is no standard railroad industry

definition of transit time and no central clearinghouse to collect industry

service performance data. As a result, the types of service measurements

maintained can vary from one railroad to another. The officials told us that

trying to understand and develop industrywide service measures has been

an important issue in the rail industry but “the least fertile area for

information.” In addition, officials said that some industrywide service

data that used to be collected have been discontinued. For example, AAR

used to prepare reports on car cycle times, the percent of the railcar fleet

that was out-of-service, and car shortages. These reports are no longer

prepared because of data quality problems.

56These statutory requirements, found in sections 11101(a) and 11121(a)(1) of title 49, United States

Code, are collectively referred to as the common carrier obligation.

57National Grain and Feed Association v. Burlington Northern Railroad Co., 8 I.C.C.2d 421, 427 (1992).

The United States Court of Appeals for the Eighth Circuit subsequently reversed ICC’s decision and

remanded the case to ICC for a further examination of whether the Certificate of Transportation

program was consistent with the common carrier obligation. However, the court specifically held that

ICC’s ruling regarding fleet size was permissible. National Grain and Feed Association v. United States,

5 F.3d 306, 311 (8th Cir. 1993). At the National Grain and Feed Association’s request, the ICC

proceeding was ultimately dismissed.

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A factor complicating the collection of industrywide service measures is

that individual railroads have been reluctant to make such information

public. According to AAR and officials at some Class I railroads we spoke

with, this reluctance is based on concerns that service information could

be misinterpreted or misused by the public, customers, or others or that

the information may be proprietary. For example, AAR noted that providing

information such as railcar transit and cycle times can be misleading

because (1) cycle times are typically increased when additional railcars

are added to the fleet (because it may take longer to load and unload

trains with additional cars), (2) cycle times should be compared with

target performance levels or standards which reflect seasonal fluctuations,

(3) an increase in long-haul business may lead to a lengthening of cycle

and transit times, and (4) a railroad cannot control what happens to a car

once it leaves its tracks for movement to a final destination via another

railroad. Regarding the latter, AAR said meaningful data on interline traffic

(traffic which interchanges from one railroad to another), which

represents roughly one-third of all rail freight revenue, are generally not

maintained by individual railroads and would, therefore, not be captured

in measuring railroad performance. As officials from one Class I railroad

told us, just getting raw service data may not indicate the root cause of

problems.

Despite these limitations, two measures of industrywide service offer a

narrow view of how service has changed since 1990. One is cycle time for

freight railcars, which shows a slight improvement. (See table 4.2.) (In

general, the faster the cycle time the more readily cars are available for

additional trips.) In 1990, the average cycle time for all railcars was just

under 18 days. In 1995 (the last year data were available), the average

cycle time was just under 17 days. However, as table 4.2 shows, cycle time

can fluctuate over time and, as AAR has pointed out, cycle time may be

influenced by several factors, such as change in trip length.

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Table 4.2: Average Railcar Cycle Time,

Selected Car Types, 1990 Through

1995 Car cycle time

In days

Year All cars

Covered

hoppers

Open top

hoppers Tank cars

1990 17.8 27.0 10.8 42.9

1991 18.9 28.5 12.1 44.5

1992 18.0 27.0 11.6 42.4

1993 17.6 27.4 11.3 42.4

1994 16.4 27.0 10.1 41.0

1995 16.7 26.8 10.0 41.0

Notes: Covered hoppers are typically used to transport grain; open top hoppers to transport coal;

and tank cars to transport chemicals and plastics.

Cycle time was calculated by dividing 365 by the average number of revenue trips per year by

car type. Industrywide information on car cycle times was discontinued in 1995.

Source: GAO’s analysis of AAR’s data.

Another measure, the number of revenue freight cars undergoing or

awaiting repairs (and, therefore, not available for active revenue service),

also dropped slightly since 1990.58 (See fig. 4.1.) In 1990, about 52,000 of

677,800 cars (about 8 percent of railcars owned) were undergoing or

awaiting repairs. In 1996 (the last year data were available), about 27,000

of 576,800 cars (about 5 percent of railcars owned) were in this category.

However, this measure does not shed any light on how efficiently these

cars were deployed or whether an adequate supply existed.

58Revenue freight cars provide revenue to railroads by carrying goods. Railroads also operate

nonrevenue freight cars, such as those used to maintain roadbed and track.

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Figure 4.1: Railroad-Owned Revenue

Freight Cars Undergoing or Awaiting

Repair, 1990 Through 1996

Percent of Cars Owned

Year

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

5

6

7

8

9

10

Percent of freight cars undergoing or awaiting repair

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

Source: AAR.

Information From

Individual Railroads Has

Limitations

Measuring service performance of the rail industry is further complicated

by the fact that individual railroads do not maintain measures of service

performance that are continuous or consistent across the industry. For

example, we asked for, but generally did not obtain, information from

individual Class I railroads about their service performance since 1990 in

the following areas: (1) average car transit time—the amount of time from

the departure of a shipment from an origin to delivery to a destination;

(2) average car cycle time for unit trains;59 (3) car availability, during both

peak and nonpeak periods—this would include the identification of car

surpluses and shortages at each period; (4) on-time pickup of shipments;

(5) on-time delivery of shipments; and (6) train delay summaries, including

causes of train delays. Although some of the railroads we contacted

maintained some of this information, including on-time pick up and

59In general, unit trains are a dedicated set of cars and locomotives that run in a continuous cycle from

an origin to a destination and return.

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delivery of cars and causes of train delays, most of this information was

either not available going back to 1990 or was only used for specific

analyses.

In general, railroad representatives told us that railroads develop and

maintain their own unique set of service performance measures that are

tailored to their needs and their customers’ needs. Because no two rail

customers may have identical service demands, and what is acceptable

service to one shipper might not be acceptable to another, most railroads

have developed service measures that meet the needs of their specific

customers’ situations. The type and level of service can also be

commodity-specific. For example, officials from CSX Transportation told

us that shippers of different types of commodities demand different levels

of service. For some commodities (such as intermodal containers and auto

parts), on-time pick up and delivery are very important. For other

commodities (such as coal and grain), through-put (total amount of

tonnage) may be more important than timeliness. Finally, officials from

Norfolk Southern also pointed out that differences exist between eastern

and western railroads in terms of the types of service measures a railroad

might keep, because eastern railroads carry, for example, more coal and

western railroads carry more grain. As a result, eastern railcar delivery

delays are generally measured in hours, not days as they might be in the

west.

Railroad mergers have also influenced the availability and consistency of

service measures. As an illustration, Burlington Northern and Santa Fe

Railway officials noted that, prior to the Burlington Northern merger with

Santa Fe in 1995, each railroad collected its own unique service data.

Because of this, data for the pre-merger period may not be available in all

cases or may be inconsistent in what it measured. In addition, officials

from Union Pacific Railroad told us they had concerns about providing us

with service data because the type of measures collected had changed

over the last 10 years—Union Pacific Railroad today is the product of

mergers of several railroads, each of which had maintained unique data

systems. Union Pacific officials also noted that computer technology

advances have allowed Union Pacific to generate new types of data that

were previously impossible to generate and that are not comparable with

any data from pre-merger periods.

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Railroad Industry Is

Developing Limited

Measures of

Performance

In part due to the widespread criticism of the industry over the quality of

its service, railroads are developing industrywide performance measures.

As part of its overall review of railroad access and competition issues, the

Board directed railroads to establish a more formal dialogue with shippers

for this purpose. In response, from August to November 1998, AAR held a

series of meetings across the country between Class I railroad executives

and shippers to discuss service issues. As a result of these meetings, the

Class I railroads decided to make available, through the Internet, actual

data (not an index) on four measures of performance directed at providing

shippers and others with a means to evaluate how well traffic moves over

railroad systems. These measures, which the railroads began reporting in

January 1999, include (1) total railcars, by type, currently on the rail

system; (2) average train speed by type of service; (3) average time railcars

spend in major terminals; and (4) timeliness of bills-of-lading (a receipt

listing goods shipped). These measures are updated weekly and broken

out by individual railroad. According to AAR, these measures are

informational in nature, but consideration is being given to establishing

standards and goals in these four areas.

According to AAR, it is expected that rail customers will be able to use the

data to determine what is happening in terms of performance on each

railroad. However, according to AAR, these measures are not uniformly

calculated across the industry and may be influenced by operating

differences among railroads, including traffic mix, weather conditions, and

terrain. Therefore, AAR cautions that this information should not be used to

compare one railroad against another.

Although these measures may be helpful in assessing certain aspects of

service, they are more an evaluation of railroad operating efficiency rather

than of quality of service. They also may not resolve more fundamental

concerns about service. For example, in a November 1998 letter to the

Board, several shipper associations and shippers expressed their concern

that better information alone will not solve the service problems resulting

from railroad consolidations and enhanced market power.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Board indicated that 1997 was

not a typical year in terms of the quality of railroad service due to the

unusual, severe congestion that occurred in the West. The Board also

suggested that performance measures recently developed by the railroad

industry can be helpful in measuring some aspects of service quality. In

response to the these comments, we added material to the report

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reflecting the Board’s assessment that railroad service in 1997 was atypical

and that service has improved since that time. We also revised the report

to better recognize that recently developed performance measures may be

helpful in measuring some aspects of service quality. However, we

continue to believe that these measures are more an evaluation of railroad

operating efficiency than of quality of service.

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Federal agencies and railroads have taken a number of actions to address

the service problems that originated in the Houston/Gulf Coast area in

1997 during the implementation of the Union Pacific/Southern Pacific

merger as well as service issues that are more longstanding and

widespread. These actions have led to some progress, particularly the

dissemination of new information regarding rail service and additional

options for shippers and carriers to resolve disputes. However, in spite of

the various actions to address service issues, shippers remain concerned

about a lack of access of many shippers to competitive rail alternatives

and the effect of this lack of competition on service levels. Shippers and

railroads hold widely differing views on this key issue. The Board has

tried, without success, to get the two sides to reach some agreement on

this issue and has suggested that these issues are more appropriately

resolved by the Congress. If the Congress decides to address this issue, it

will need to weigh the potential of increased competition to improve

service against the potential financial and other effects on the railroad

industry.

Union Pacific and the

Board Address

Service Problems

Beginning in Late 1997

The Union Pacific/Southern Pacific system started experiencing serious

service problems in July 1997 during the process of implementing the

merger of the two railroads. Congestion on this system spread to the

Burlington Northern and Santa Fe Railway system, affecting rail service

throughout the western United States. Serious rail service disruptions and

lengthy shipment delays continued throughout the last half of 1997,

particularly in the Houston area. To address service problems on the

Union Pacific/Southern Pacific system, Union Pacific adopted a Service

Recovery Plan in September 1997. Under this plan, the railroad, among

other things, took actions to reduce train movements on the Union

Pacific/Southern Pacific system and manage traffic flows into congested

areas, acquired additional locomotives, and hired additional train and

engine crew employees.

In response to growing concerns about the deteriorating quality of rail

service in the West, the Board issued an emergency service order in

October 1997. This order, and subsequent amendments to it, directed a

number of actions aimed at resolving service problems in the Houston

area, the source of the crisis. In particular, the order directed temporary

changes in the way rail service was provided in and around the Houston

area to provide additional options for shippers and carriers and required

weekly reporting by Union Pacific on a variety of service measurements,

such as system train speed and locomotive fleet size. In December 1997,

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the service order was expanded to require grain loading and cycle time

information to be submitted by Burlington Northern and Santa Fe Railway.

In August 1998, the order expired and the Board decided not to issue

another emergency service order, finding that there was no longer any

basis for such an order given the significant improvements in Houston

area rail service. However, the Board noted that service was still not at

uniformly improved levels, as reflected by congestion in Southern

California. Accordingly, the Board ordered Union Pacific/Southern Pacific

and Burlington Northern and Santa Fe Railway to continue the required

reporting on a biweekly basis so that it could continue to monitor service

levels. In December 1998, the Board discontinued this requirement, citing

further service improvements and the intention of all of the Class I

railroads to start issuing weekly performance reports in January 1999.

As part of its oversight of the Union Pacific/Southern Pacific merger, the

Board has considered requests by various parties for additional merger

conditions that would modify the way in which rail service is provided in

the Houston area. In its December 1998 decision, the Board announced

several changes in response to these requests in order to enhance the

efficiency of freight movements in the area. Most significantly, the Board

authorized the joint Union Pacific/Burlington Northern and Santa Fe

Railway dispatching center at Spring, Texas, to route traffic through the

Houston terminal over any available route, even a route over which the

owner of the train does not have operating authority. However, the Board

declined to adopt a plan sponsored by a group of shippers, two affiliated

railroads, and the Railroad Commission of Texas that would have

displaced the current Union Pacific operations in the Houston terminal

area by establishing neutral switching and dispatching operations by a

third party, the Port Terminal Railroad Association, in order to increase

competition in the area. According to the Board, implementing this plan

would have required Union Pacific to give trackage rights to this

association and all other railroads serving Houston.

In making its decision not to adopt the plan, the Board concluded that the

service crisis in Houston did not stem from any competitive failure of the

Union Pacific/Southern Pacific merger. The Board further concluded that

the plan was not necessary to remedy any merger-related harm because it

would add new competitors for many shippers in the Houston area that

were served by only one carrier prior to the merger and, therefore, had not

experienced a decrease in competition as a result of the merger.

According to the Board, absent merger-related competitive harm, such an

arrangement would thus constitute “open access”—an idea that shippers

Page 83 GAO/RCED-99-93 Railroad Regulation
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Despite Recent Actions to Address Service

Issues, Concerns Continue

should, wherever possible, be served by more than one railroad, even if, in

order to produce such a system, railroads that own a majority of an area’s

rail infrastructure would be required to share their property with others

that do not—an action which Board officials said the law does not provide

for at this time.

Union Pacific has recently taken further actions aimed at improving its

service levels. These actions have included decentralizing railroad

operations and implementing capital and maintenance projects, such as

projects to improve, expand, and maintain its railroad track. Also, in

August 1998, the railroad created a new internal organization, called

Network Design and Integration, which will be responsible for identifying

the services most needed by shippers and developing plans for delivering

them. This organization is expected to serve as a link between the

marketing and operating departments, to ensure that service commitments

to shippers match the railroad’s capacity to deliver these services. In

December 1998, Union Pacific reported to the Board that its operations

had returned to normal levels, citing its average system train speed that

had risen above 17 miles per hour for the first time since July 1997, when

its service crisis began. The railroad acknowledged that its service levels

still needed improvement but maintained that its latest service measures

demonstrated a recovery from its prior serious service problems.

Government Agencies

and Railroads Take

Some Actions to

Address Broader

Service Issues

Federal agencies as well as railroads have recently taken a number of

actions aimed at addressing freight rail service issues of a broader nature

than the recent service crisis in the West. These issues include the need to

foresee and prevent service problems and expeditiously resolve them

when they do arise and the need to expand the capacity of the railroad

system to provide service. Among the actions by federal agencies are

efforts by the USDA and the Board to disseminate information that can help

railroads, shippers, and receivers anticipate changes in transportation

demand and supply and the adoption by the Board of new procedures

allowing it to authorize temporary alternative rail service more quickly for

shippers affected by serious service disruptions. In addition, individual

railroads have recently made efforts to improve service through changes in

their customer service organizations and increased investments in

infrastructure. Finally, partly at the urging of the Board, the railroad

industry has acted to address some service issues. Actions include a

commitment by the Class I railroads to issue weekly measures of their

service performance, an agreement between Class I railroads and grain

and feed shippers to resolve some service-related disputes through binding

Page 84 GAO/RCED-99-93 Railroad Regulation
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Issues, Concerns Continue

arbitration, and an agreement between Class I and smaller railroads aimed

at allowing smaller railroads to play a greater role in providing service to

shippers.

The Board and USDA Take

the Initiative in Addressing

Service Issues

The rail congestion that occurred during the 1997 rail crisis in the West

severely affected the movement of grain to market. This situation

illustrated the need to better monitor production levels, the transportation

needs of grain shippers, and the capacity of the railroads to meet those

needs, so that shippers and railroads could anticipate changes in

transportation demand and supply and make adjustments that could

lessen the severity of such changes. To meet this need, the Board and USDA

signed an agreement in May 1998 to create a Grain Logistics Task Force.

This task force, made up of Board and USDA officials, was tasked with

identifying and disseminating information on grain production and

consumption and transportation requirements. The task force began

issuing reports in August 1998 and expects to issue them five times a year.

These reports contain information on such things as expected production

levels of various grains (by state), grain supplies and storage capacity, and

railcar loadings and the demand for rail transportation.

To address long-term transportation issues facing the nation’s agriculture

sector in the 21st century, USDA also held a National Agricultural

Transportation Summit in Kansas City in July 1998. This meeting provided

a forum for agricultural shippers and others to express their concerns

about grain marketing and demand, and railroad service quality issues. A

significant outcome of this summit was an agreement between USDA and

DOT to create a Rural Transportation Advisory Task Force. The objectives

of this task force include undertaking joint outreach to users and

providers of agricultural and rural transportation services to further

identify transportation challenges and ways in which these challenges can

be met and considering joint research efforts and policy initiatives to

address these challenges. While the scope of the task force’s

responsibilities will be broad, freight rail service to the nation’s

agricultural community will be a key component of its work.

At hearings held by the Board in April 1998 to review issues concerning

rail access and competition, shippers complained about a number of

service problems, including the difficulties in seeking relief from serious

service disruptions through the Board’s existing procedures.60 In response,

60See Surface Transportation Board, Ex Parte No. 575, Review of Rail Access and Competition Issues

(Apr. 17, 1998).

Page 85 GAO/RCED-99-93 Railroad Regulation
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Issues, Concerns Continue

the Board adopted new procedures in December 1998 providing temporary

relief from serious service problems, through service from an alternative

rail carrier, more quickly.61 Shippers and smaller railroads can seek

temporary alternative service in two ways: (1) through an 8-day

evidentiary process for requesting short-term emergency relief for up to

270 days or (2) through a 45-day evidentiary process for requesting

longer-term relief for serious, though not emergency, service inadequacies.

Prior to obtaining either type of relief, the petitioning shipper or railroad

must discuss the service issues with the incumbent rail carrier and obtain

the commitment from another rail carrier to meet the identified service

needs. These expedited procedures do not require a showing that the rail

carrier has engaged in anticompetitive conduct. Rather, the petitioning

shipper or railroad must show a substantial, measurable deterioration or

other demonstrated inadequacy in rail service over an identified period of

time.

Individual Railroads

Attempt to Improve

Service

In order to be better able to resolve service problems brought to their

attention by customers, individual Class I railroads have recently taken a

number of actions to improve their customer service organizations. For

example, some railroads have removed their local customer service

personnel from field offices and replaced them with centralized customer

service centers. At these service centers, service representatives either

route the customer to the appropriate department at the railroad for

problem resolution or handle the calls directly. As noted previously, Union

Pacific Railroad expects to improve its ability to meet its customers’

service expectations through the creation of its new organization that will

serve as a link between its marketing and operating departments. In its

attempts to improve customer service, Norfolk Southern has added yard

operations, billing, and freight claim settlement to the responsibilities of

its customer service center. Finally, Burlington Northern and Santa Fe

Railway has instituted a Grain Operations Desk that serves as a point of

contact for grain shippers throughout its rail system for obtaining

information on the arrival of empty grain cars, improving the spotting of

loaded cars, and improving overall communications between the railroad

and its customers.

The Class I railroads have also been attempting to improve service through

capital investments to improve their infrastructure and expand their

capacity to provide service. Class I railroad capital expenditures in 1997

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

1998).

Page 86 GAO/RCED-99-93 Railroad Regulation
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Issues, Concerns Continue

were about 31 percent higher (in constant dollars) than they were in 1990.

Rail industry officials told us that these investments are important because

they help relieve capacity constraints caused by restructuring of railroad

operations and the growth of traffic in recent years. Investments have

included new rail yards and terminals, additional sidings and track, and

additional cars and locomotives. However, these railroad representatives

believe that further capital investments are needed to address service

problems. Railroad officials also told us that hiring new employees is

important to increase the number of train crews available.

Railroad Industry and

Shippers Address Some

Service Issues, With the

Board’s Encouragement

In April 1998, following its hearings on rail access and competition issues,

the Board issued a decision that called on railroads and shippers to

discuss and identify solutions to a number of service-related problems.

One problem that the Board noted was the need for greater

communications between railroads and their customers and the need for

railroads to find a more systematic way of addressing customer concerns.

Accordingly, the agency directed the railroads to establish formal dialogue

with shippers. In response, from August through November 1998 the AAR

held five meetings across the country, attended by the Board’s chairman,

between Class I railroad executives and their customers to discuss service

issues. At these meetings, the railroads introduced four proposed

measures of railroad service predictability and asked for feedback on their

usefulness.62 The industry had developed these measures in July 1998 in

response to customer suggestions that such measures were needed. The

industry maintains that these indicators will reflect the general health of

each railroad and will provide an early warning of developing operational

problems. The Class I railroads began making these measures available on

the Internet in January 1999; they plan to update the measures weekly.

In addition, AAR held a “customer service symposium” in March 1999 in

order to facilitate further dialogue with shippers on aspects of service

such as shipment tracking and problem resolution. Although many

shippers have welcomed these efforts, some have expressed skepticism

about their impact on broader transportation issues. For example, in

November 1998, 27 shipper associations sent a letter to the Board noting

that, while they welcomed the railroads’ efforts to improve service

predictability, the meetings have not addressed shipper concerns

regarding systemic issues such as the lack of competitive rail alternatives

and the effectiveness of available regulatory remedies.

62The proposed measures were total cars on-line, average train speed, average terminal dwell time

(average time a railcar is at a specified terminal), and timeliness of bills-of-lading.

Page 87 GAO/RCED-99-93 Railroad Regulation
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Shippers with specific complaints regarding rail service may seek a

resolution of the problem through the Board’s formal complaint

adjudication process. However, in order to establish an alternative private

sector process for resolving disputes between agricultural shippers and

rail carriers, the National Grain and Feed Association reached an

agreement with Class I railroads and the AAR in August 1998 that provides

for compulsory, binding arbitration—as well as nonbinding mediation—to

resolve specific types of disputes.63 Although this initiative was not

specifically called for by the Board, the Board noted that it is consistent

with its preference that private parties resolve disputes without Board

involvement and the litigation that it involves. The agreement covers a

wide range of grain and feed products and covers such disputes as the

misrouting of loaded railcars, disputes arising from contracts, and disputes

involving the application of rules governing car guarantee programs.

Those parties agreeing to use this arbitration process are not obligated to

arbitrate claims that exceed $200,000. Officials from one Class I railroad

we spoke with said this agreement is like a small claims court for handling

small rate and service problems. The agreement is not designed to handle

multimillion dollar cases.

The role of non-Class I railroads in providing freight service has been

another issue of concern. These railroads, as well as shippers, have

expressed concerns regarding obstacles, such as inadequate railcar supply

and lack of alternative routings, that prevent small railroads from

expanding their business and providing increased service options to their

customers. In its April 1998 decision, the Board directed short line and

regional railroads (collectively called small railroads) and Class I railroads

to complete discussions they had begun on these problems. In

September 1998, the American Short Line and Regional Railroad

Association and the AAR announced that they had reached agreement on

provisions aimed at giving short line and regional railroads access to new

routing arrangements to develop new business. The agreement also

contains guidelines for how certain fees and rates charged by Class I

railroads to provide service to small railroads will be set and how revenue

would be divided between Class I and smaller railroads.64 As part of the

63The Board also has a voluntary binding arbitration process that offers parties involved in a service

dispute a means of informally resolving their differences through arbitration, with limited Board

involvement. The Board adopted rules for this process in August 1997 to promote private sector

dispute resolution and reduce the litigation burdens—particularly to smaller entities—associated with

the Board’s formal complaint process. As of February 1999, this process had not yet been used.

64A division of revenue involves an agreement between railroads on how to allocate revenue when a

car travels over two or more railroads’ track. The rate-related aspects of the agreement were subject to

Board approval, which was granted on an interim basis on September 22, 1998, and on a final basis on

December 11, 1998.

Page 88 GAO/RCED-99-93 Railroad Regulation
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Despite Recent Actions to Address Service

Issues, Concerns Continue

agreement, the railroads agreed to submit disputes regarding these

provisions to binding arbitration. The president of the American Short Line

and Regional Railroad Association described the agreement as a

“framework of partnership and growth for years to come.” In a survey

conducted by the association at the end of 1998, executives of small

railroads were also optimistic but cautioned that the implementation of

the agreement depended on cooperation by Class I railroads.

Railroads and

Shippers Remain Far

Apart on the Key

Issue of Competition

While the actions described above have addressed some service-related

issues, some shippers remain concerned regarding the systemic issue of

increasing consolidation within the railroad industry. They complain that

this consolidation has reduced competition within the railroad industry,

leading to a situation in which many shippers are without competitive rail

alternatives and must pay higher rates for inadequate service.65 The

divergent views held by railroads and shippers on this issue make it much

more difficult to address than the issues described previously.

The Board is authorized to impose remedies giving shippers access to

more routing options—alternative through routes, reciprocal switching,

and terminal trackage rights—on a permanent basis. However, under its

competitive access regulations, the shipper must demonstrate that its

incumbent rail carrier has engaged in anticompetitive conduct.66

Specifically, the shipper must show that the carrier has used its market

power to extract unreasonable terms or, because of its monopoly position,

has disregarded the shipper’s needs by providing inadequate service.67

Some shippers have complained that this requirement is too difficult to

meet, and as a result, the Board has not imposed competitive routing

options where shippers believe such options are needed. Some shippers

consider the requirement to demonstrate anticompetitive conduct to be

the most problematic aspect of the Board’s interpretation of its statutory

authority on this issue. The shippers believe that the elimination of this

requirement is essential. However, the railroads believe that the

demonstration of anticompetitive conduct is a necessary prerequisite to

the imposition of a competitive routing option. Railroads cite concerns

65Regarding this concern, Board officials have noted that, while mergers have changed the way the rail

system looks, the mergers that have been approved have had conditions placed upon them to ensure

that no facility served by more than one railroad before the merger would be limited to service by only

one railroad afterwards.

6649 C.F.R. § 1144.5 (1998).

67Midtec Paper Corp. v. Chicago and N.W. Transp. Co., 3 I.C.C.2d 171 (1986), aff’d sub nom. Midtec

Paper Corp. v. United States, 857 F.2d 1487 (D.C. Cir. 1988).

Page 89 GAO/RCED-99-93 Railroad Regulation
Chapter 5 

Despite Recent Actions to Address Service

Issues, Concerns Continue

that increased competition imposed through regulation would undermine

the industry’s ability to cover their high fixed costs and earn adequate

returns.

In its April 1998 decision regarding rail access and competition issues, the

Board stated that it would consider whether to revise its competitive

access rules. However, the Board directed that, first, railroads should

arrange meetings with a broad range of shipper interests under the

supervision of an administrative law judge to examine the issue. In these

meetings, shippers and railroads were to try to mutually identify

appropriate changes to the Board’s rules that would facilitate greater

access to competitive rail alternatives where needed. In response, shippers

and railroads held discussions in May and June 1998 on proposed revisions

to these rules but, due to widely divergent views on the topic, could not

come to any agreement.

In its December 1998 report to Members of Congress on rail access and

competition issues, the Board declined to initiate further action on this

issue, pointing to its adoption of new rules, described previously, that

allow shippers temporary access to alternative routing options during

periods of poor service. In response to the impasse between the

representatives of railroads and shippers, the Board observed that the

competitive access issue raises basic policy questions that are more

appropriately resolved by the Congress.68 These questions include the

appropriate role of competition, differential pricing, and how railroads

earn revenues and structure their services. The Board noted that this issue

is complex, and it is unclear how changes in its rules pertaining to

competitive routing options would affect the nation’s rail system and the

level of service provided by this system. In its December 1998 decision in

the Houston/Gulf Coast oversight proceeding, the Board recognized the

possibility that opening up access could fundamentally change the nation’s

rail system, possibly benefitting some shippers with high-volume traffic

while reducing investment elsewhere in the system and ultimately

reducing or eliminating service for small, lower-volume shippers in rural

areas. Board officials noted that many small, low-volume shippers have

already lost service options as larger railroads shed their low-density and

otherwise unprofitable lines.

68Similarly, as previously explained, the Board recently declined to provide for an open access

arrangement in the Houston area in response to requests from area shippers and others. The Board

explained that the proposed arrangement was not tailored to any demonstrated merger-related harm

and, therefore, was not within the scope of its statutory authority.

Page 90 GAO/RCED-99-93 Railroad Regulation
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Issues, Concerns Continue

Fundamental differences exist between shippers and railroads on the issue

of mandating additional competition in the railroad industry. If it decides

to address this issue, the Congress will need to weigh the potential

benefits of increased competition with the potential financial and other

effects on the railroad industry. In deliberating this issue, the Congress

will need to consider such things as the potential impacts of proposed

changes on shipper routing options and railroad service levels as well as

the rail system as a whole, including railroad revenues, infrastructure

investment, capacity, and operations.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Board suggested that we

modify our characterization of the 1997 service problems in the West to

make clear that these problems were not the result of the Union

Pacific/Southern Pacific merger and that implementation of this merger

helped solve the problems. In addition, the Board suggested changes to

present a more complete and precise portrayal of both its October 1997

emergency service order in response to these service problems and its

December 1998 decision in the Houston/Gulf Coast oversight proceeding.

Finally, the Board suggested we expand our discussion of the Board’s

assessment of the possible impacts of providing “open access” throughout

the nation’s rail system. In response to these comments, we revised our

description of the service problems in the West to eliminate the

impression that these problems were caused by the Union

Pacific/Southern Pacific merger; we revised the report to provide a more

complete discussion of the Board’s emergency service order and decision

in the Houston/Gulf Coast oversight proceeding; and we added material to

the report discussing the Board’s views on the potential impacts of

implementing railroad open access.

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

Class I Railroads in Selected States, 1980

and 1997

The maps in this appendix show how the number of Class I railroads has

decreased between 1980 and 1997 in Montana, North Dakota, and West

Virginia. Although the number of Class I railroads operating in each state

decreased markedly, a substantial portion of the track that is no longer

owned by Class I railroads has been acquired and is operated by smaller,

non-Class I railroads. While non-Class I railroads can compete with Class I

railroads to provide better service, some are restricted from offering better

rates and service than the neighboring Class I railroad.

Four Class I railroads operated in Montana in 1980; in 1997 there were

two. (See fig. I.1)

Page 92 GAO/RCED-99-93 Railroad Regulation
Appendix I 

Class I Railroads in Selected States, 1980

and 1997

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

Montana 1980

Union Pacific Railroad

Milwaukee Road 

Burlington Northern Railroad

Soo Line 

Montana 1997

Union Pacific Railroad

Burlington Northern and Santa Fe Railway

Non-Class railroads

Source: Federal Railroad Administration, Office of Policy.

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

Class I Railroads in Selected States, 1980

and 1997

The number of Class I railroads in North Dakota decreased from four to

two between 1980 and 1997. (See fig. I.2.)

Page 94 GAO/RCED-99-93 Railroad Regulation
Appendix I 

Class I Railroads in Selected States, 1980

and 1997

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

North Dakota 1980

Chicago & Northwestern Railroad

Milwaukee Road 

Burlington Northern Railroad

Soo Line 

North Dakota 1997

Canadian Pacific Railway

Burlington Northern and Santa Fe Railway

Non-Class I railroads 

Source: Federal Railroad Administration, Office of Policy.

Page 95 GAO/RCED-99-93 Railroad Regulation
Appendix I 

Class I Railroads in Selected States, 1980

and 1997

Five Class I railroads operated in West Virginia in 1980; in 1997 the number

had been reduced to three. (See fig. I.3.)

Page 96 GAO/RCED-99-93 Railroad Regulation
Appendix I 

Class I Railroads in Selected States, 1980

and 1997

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

West Virginia 1980

Baltimore & Ohio Railroad 

Norfolk & Western Railroad 

Chesapeake & Ohio Railroad 

Western Maryland Railway

Conrail

West Virginia 1997 

Conrail

CSX Transportation

Norfolk Southern

Non-Class I railroads

Source: Federal Railroad Administration, Office of Policy.

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

Real Rail Rates for Selected Commodities

Transported by Rail

The following are real (inflation-adjusted) rail rates for selected

commodities and markets/corridors that we reviewed in various distance

categories. The selection of the commodities and routes is discussed in

chapter 1 of this report. The distance categories are as follows: short is 0

to 500 miles; medium is 501 to 1,000 miles; and long is over 1,000 miles.

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

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

5

6

7

8

9

10

Year

Central Appalachia to Charleston economic area

Northern Appalachia to Washington, D.C./Baltimore economic area

Illinois Basin to Evansville economic area

Illinois Basin to St. Louis economic area

Central Appalachia to Atlanta economic area

Selected Short Routes, 1990-96

Cents per ton mile (in 1996 dollars)

1990 1991 1992 1993 1994 1995 1996

0

0.5

1

1.5

2

Year

Powder River Basin to Duluth economic area

Powder River Basin to Chicago economic area

Powder River Basin to St. Louis economic area

Powder River Basin to Paducah economic area

Powder River Basin to Tulsa economic area

Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)

Note: The Northern Appalachia Coal Supply Region includes Maryland, Ohio, Pennsylvania, and

northern West Virginia. The Illinois Basin Coal Supply Region includes western Kentucky, Illinois,

and Indiana.

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

Page 98 GAO/RCED-99-93 Railroad Regulation
Appendix II 

Real Rail Rates for Selected Commodities

Transported by Rail

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

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

5

6

7

8

9

10

Year

Wichita economic area to Wichita economic area

Fargo economic area to Minneapolis economic area

Wichita economic area to Kansas City economic area

Dallas economic area to Houston economic area

Grand Forks economic area to Duluth economic area

Selected Short Routes, 1990-96

Cents per ton mile (in 1996 dollars)

1990 1991 1992 1993 1994 1995 1996

0

1

2

3

4

Year

Billings economic area to Portland economic area

Minneapolis economic area to New Orleans economic area

Minot economic area to Portland economic area

Denver economic area to Houston economic area

Grand Forks economic area to Portland economic area

Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)

Note: Origins and destinations with the same label (e.g., Wichita to Wichita) may cover a large

area. Routes were not further identified to preserve confidentiality.

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

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

Real Rail Rates for Selected Commodities

Transported by Rail

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

1990 1991 1992 1993 1994 1995 1996

0

2

4

6

8

Year

Des Moines economic area to Davenport economic area

Champaign economic area to Champaign economic area

Minneapolis economic area to Minneapolis economic area

Des Moines economic area to Des Moines economic area

Des Moines economic area to Madison economic area

Selected Short Routes, 1990-96

Cents per ton mile (in 1996 dollars)

1990 1991 1992 1993 1994 1995 1996

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Year

Grand Island economic area to Portland economic area

Minneapolis economic area to Seattle economic area

Sioux Falls economic area to Seattle economic area

Omaha economic area to Portland economic area

Sioux Falls economic area to Portland economic area

Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)

a

Note: Origins and destinations with the same label (e.g., Des Moines to Des Moines) may cover a

large area. Routes were not further identified to preserve confidentiality. Also, due to

confidentiality, the data point for 1996 on shipments within the Des Moines economic area was

excluded.

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

Page 100 GAO/RCED-99-93 Railroad Regulation
Appendix II 

Real Rail Rates for Selected Commodities

Transported by Rail

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

1996

1990 1991 1992 1993 1994 1995 1996

0

5

10

15

20

Year

Los Angeles economic area to Los Angeles economic area

Minneapolis economic area to Minneapolis economic area

Chicago economic area to Indianapolis economic area

New Orleans economic area to Baton Rouge economic area

Minneapolis economic area to Des Moines economic area

Selected Short Routes, 1990-96

Cents per ton mile (in 1996 dollars)

1990 1991 1992 1993 1994 1995 1996

0

1.5

3

4.5

Year

Casper economic area to Chicago economic area

Saskatchewan to Chicago economic area

Casper economic area to Beaumont economic area

Casper economic area to St. Louis economic area

Saskatchewan to Huntsville economic area

Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)

Note: Origins and destinations with the same label (e.g., Los Angeles to Los Angeles) may cover

a large area. Routes were not further identified to preserve confidentiality.

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

Page 101 GAO/RCED-99-93 Railroad Regulation
Appendix II 

Real Rail Rates for Selected Commodities

Transported by Rail

Figure II.5: Real Rail Rates for Plastic Materials or Synthetic Fibers, Resins, or Rubbers, Selected Short-, Medium-, and

Long-Distance Routes, 1990 Through 1996

1990 1991 1992 1993 1994 1995 1996

0

2.5

5

7.5

10

Selected Medium Routes, 1990-96

Year

Houston economic area to

St. Louis economic area 

Houston economic area to 

Little Rock economic area

Houston economic area to 

Memphis economic area

1990 1991 1992 1993 1994 1995 1996

0

10

20

30

40

50

Cents per ton mile (in 1996 dollars)

Year

Houston economic area to 

Houston economic area

Houston economic area to 

Dallas/Fort Worth economic area

New Orleans economic area to 

New Orleans economic area

Selected Short Routes, 1990-96

Lake Charles economic area to

Lake Charles economic area 

Beaumont economic area to 

Beaumont economic area

Baton Rouge economic area to 

Memphis economic area

Houston economic area to 

Kansas City economic area

1990 1991 1992 1993 1994 1995 1996

0

2.5

5

7.5

10

Cents per ton mile (in 1996 dollars)

Houston economic area to 

Atlanta economic area

Houston economic area to 

Los Angeles economic area

Houston economic area to 

Chicago economic area

Selected Long Routes, 1990-96

Year

Houston economic area to 

New York City economic area 

Houston economic area to 

Boston economic area

Cents per ton mile (in 1996 dollars)

Note: Origins and destinantions with the same label (e.g., 

Houston to Houston) may cover a large area. Routes were 

not further identified to preserve confidentiality.

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

Page 102 GAO/RCED-99-93 Railroad Regulation
Appendix II 

Real Rail Rates for Selected Commodities

Transported by Rail

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

1990 1991 1992 1993 1994 1995 1996

0

5

10

15

20

Year

Detroit economic area to Philadelphia economic area

Chicago economic area to Kansas City economic area

Detroit economic area to Washington, D.C./Baltimore economic area

Detroit economic area to Kansas City economic area

Ontario (Canada) to Chicago economic area

Selected Medium Routes, 1990-96

Cents per ton mile (in 1996 dollars)

1990 1991 1992 1993 1994 1995 1996

0

5

10

15

20

Year

Chicago economic area to Los Angeles economic area

Kansas City economic area to Los Angeles economic area

Detroit economic area to Jacksonville economic area

Chicago economic area to Dallas/Fort Worth economic area

Kansas City economic area to San Francisco economic area

Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)

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

Page 103 GAO/RCED-99-93 Railroad Regulation
Appendix II 

Real Rail Rates for Selected Commodities

Transported by Rail

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

Through 1996

1990 1991 1992 1993 1994 1995 1996

0

5

10

15

20

25

30

Year

Detroit economic area to St. Louis economic area

Detroit economic area to Kansas City economic area

Detroit economic area to Atlanta economic area

Detroit economic area to Norfolk economic area

Detroit economic area to New York economic area

Selected Medium Routes, 1990-96

Cents per ton mile (in 1996 dollars)

1990 1991 1992 1993 1994 1995 1996

0

5

10

15

Year

Chicago economic area to San Antonio economic area

Chicago economic area to San Francisco economic area

Detroit economic area to Dallas/Fort Worth economic area

Detroit economic area to San Antonio economic area

Los Angeles economic area to Chicago economic area

Selected Long Routes, 1990-96

Cents per ton mile (in 1996 dollars)

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

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

Organizations Contacted

Federal Agencies Department of Agriculture

Department of Energy

Department of Transportation

Surface Transportation Board

Railroad Associations American Short Line and Regional Railroad Association

Association of American Railroads

Class I Railroads Burlington Northern and Santa Fe Railway Company

Canadian National Railway

Consolidated Rail Corporation

CSX Transportation

Illinois Central Railroad Company

Kansas City Southern Railway Company

Norfolk Southern Corporation

Union Pacific Railroad Company

Other Than Class I

Railroads

Red River Valley and Western Railroad Company

San Joaquin Valley Railroad Company

Railroad Shipper

Associations

Alliance for Rail Competition

American Automobile Manufacturers Association

National Association of Wheat Growers

National Automobile Transporters Association

National Industrial Transportation League

North American Millers Association

North Dakota Grain Dealers Association

Pacific Northwest Grain and Feed Association

Shippers Agri Sales, Inc. (North Dakota)

Berthold Farmers Elevator Company (North Dakota)

BTR Farmers Co-op (North Dakota)

Columbia Grain Company (Montana)

Crete Grain Company (North Dakota)

Enderlin Farmers Elevator (North Dakota)

Farmers Union Grain (North Dakota)

Harvest States (North Dakota)

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

Organizations Contacted

Hunter Grain Company (North Dakota)

Kindred Farmers Elevator (North Dakota)

Marion Equity Elevator (North Dakota)

Mayport Farmers Co-op (North Dakota)

Northwest Equity Elevator (North Dakota)

Otter Tail Power Company (Minnesota)

Wyndmere Farmers Elevator (North Dakota)

Others Fieldston Company, Inc.

GW Fauth & Associates

LeBoeuf, Lamb, Green & McRae

L.E. Peabody & Associates

Massachusetts Institute of Technology, Center for

 Transportation Studies

North Dakota Public Service Commission

North Dakota Wheat Commission

Upper Great Plains Transportation Institute

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

Major Contributors to This Report

Stephen Brown

Helen Desaulniers

Lynne Goldfarb

Judy Guilliams-Tapia

Michael Ibay

Richard Jorgenson

Mitchell Karpman

Lewison Lem

Luann Moy

James Ratzenberger

Deena Richart

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