Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990
Published: 1999-04-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO provided 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.
section_title: What GAO Found
paragraphs: GAO noted that: (1) the environment in which railroads set their rates has been influenced by ongoing industry consolidation, competitive conditions, and railroads' financial health; (2) 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; (3) this increased concentration has raised concerns about potential abuse of market power in some areas due to railroads' use of market-based pricing; (4) 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; (5) railroads' financial health has also improved since 1990; (6) 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; (7) although such determinations are sometimes controversial, revenue inadequacy affects the ability of a railroad to attract or retain capital and remain financially viable; (8) railroad rates have generally decreased since 1990; (9) 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; (10) this was particularly true on selected long distance rail shipments of wheat from northern plains states like Montana and North Dakota to west coast destinations; (11) rail routes with effective competitive alternatives--either from railroads or from trucks and barges--experienced greater decreases in rail rates; (12) as the rail industry has consolidated, shippers have complained that service quality has deteriorated; (13) shippers' complaints have included a lack of railcars when and where they were needed and inconsistent pickup and delivery of cars; (14) roughly 60 percent of the coal, grain, chemicals, and plastics shippers responding to GAO's survey said that their service was somewhat or much worse in 1997 than it was in 1990; (15) the overall quality of rail service cannot be measured; (16) federal agencies and railroads have taken a number of actions to address rail service problems; and (17) 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.

section_title: Letter
paragraphs: 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.
subsections: section_title: Introduction
paragraphs: 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. 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.
subsections: section_title: Reduced Regulation of the Railroad Industry
paragraphs: 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. 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. 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.
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) 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.
section_title: Consolidation Within the Railroad Industry
paragraphs: 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.(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 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.
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.
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.)
section_title: The Surface Transportation Board Replaces the ICC
paragraphs: 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; 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.  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 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. 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),or was exempt from economic regulation (12 percent). 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. 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. However, to obtain permanent relief, the complaining shipper 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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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.
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 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 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. 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 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 trackage rights over Union Pacific. We also added language better recognizing the Board’s informal service complaint process.
section_title: Industry and Other Factors Have Influenced the Rate-Setting Environment Since 1990
paragraphs: 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).
subsections: section_title: Ongoing Industry and Economic Changes Influence Rate Setting
paragraphs: 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.
subsections: section_title: Continued Railroad Industry Consolidation Has Potentially Increased Railroads’ Control Over Industry Revenues and Rail Markets
paragraphs: 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. 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. In 1997, this percentage had increased to about 94 percent. In fact, the two largest Class I railroads (Union Pacific and 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. 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 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.
section_title: Capacity Constraints and Moderation of Productivity Gains May Slow Railroad Cost Reduction
paragraphs: 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. (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).
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.
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. 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, 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.
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.
One recent study suggests that the prospects for continued productivity improvements may be diminishing. 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.
section_title: Economic and Regulatory Changes Have and Will Continue to Affect Rail Markets
paragraphs: 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 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. 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.
section_title: Using Differential Pricing, Railroads Set Rates According to Competitive Conditions
paragraphs: 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 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.
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. 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. 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 73 percent for crude petroleum and gasoline. 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.
section_title: Railroad Financial Health Has Improved, but Most Railroads Do Not Earn the Industry Cost of Capital
paragraphs: 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.
subsections: section_title: Railroad Financial Health Has Improved, and Market Share Has Increased
paragraphs: In general, railroad financial health improved in the 1990s. For example, railroad returns on investment and returns on equity—both measures of profitability —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.
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 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.
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. 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 grew, on average, about 2 percent annually. This compares with about a 3-percent average annual growth in the 1982 through 1989 period. 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. Under car reservation/guarantee programs, for a fee, shippers can obtain a set number of railcars for delivery at a future date(s).
section_title: Most Railroads Do Not Meet Revenue Adequacy Criterion
paragraphs: 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. 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 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. 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.
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 acquisition of Conrail. 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Rail Rates Have Fallen Since 1990, but Not All Shippers Have Benefitted
paragraphs: 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. 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.
subsections: section_title: Rail Rates Have Generally Decreased Since 1990
paragraphs: 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.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.
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 indexes 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.
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. Since 1990, the demand 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.
section_title: Rail Rates in Some Markets Have Not Fallen
paragraphs: 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.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.
subsections: section_title: Rail Rates for Coal Have Generally Decreased Since 1990
paragraphs: 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. (See fig. 3.3.) As figure 3.3 shows, real rail rates for both the eastern (Central Appalachia) and western (Powder River Basin) coal routes that we looked at generally decreased since 1990. 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.
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. 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.
section_title: Rail Rates for Some Grain Shipments Have Remained Flat or Increased Since 1990
paragraphs: As discussed earlier, rail rates for transporting grain such as wheat and corn have generally stayed the same or increased since 1990. 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. (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.
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 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.
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 central and southern plains corridors were estimated to be 0.6 of a cent less for a similar shipment size increase. 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.
section_title: Rail Rate Changes for Chemical and Transportation Equipment Shipments Were Similar to Coal and Grain
paragraphs: For comparison purposes, we also reviewed rail rates for certain chemicals and transportation equipment. 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. (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 52 percent of the tonnage of all chemicals and allied products shipped were by truck, with railroads only accounting for 21 percent.
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 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.
section_title: Revenue to Variable Cost Ratios Reflect Differential Pricing, but With Some Caveats
paragraphs: 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.
subsections: section_title: R/VC Ratios Reflect Differential Pricing
paragraphs: 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 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.
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 medium- and 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 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.
section_title: R/VC Ratios Are Subject to Limitations
paragraphs: 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 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Widespread Concerns About Rail Service, but Overall Quality of Service Cannot Be Assessed
paragraphs: 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.
subsections: section_title: Shippers Believe Railroad Service Has Been Poor
paragraphs: 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.
subsections: section_title: Shippers Believe the Quality of Rail Service Has Deteriorated in Recent Years
paragraphs: 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.
section_title: Survey Results Also Indicate Shipper Dissatisfaction With Rail Service
paragraphs: 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. 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 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.
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.
Shippers responding to our survey also indicated that the quality of service provided by the railroads has decreased relative to the amount paid for 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.
section_title: Relatively Few Shippers Have Filed Formal Service Complaints Before the Board
paragraphs: 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. 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).
section_title: Many Shippers Believe Railroad Mergers and Lack of Competitive Alternatives Have Contributed to Poor Service Performance
paragraphs: 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.
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 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.
section_title: Railroads Believe That Service Is Adequate, but Improvements Are Needed to Meet Shipper Expectations
paragraphs: 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.
subsections: section_title: Railroads Believe Service Is Generally Adequate
paragraphs: 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 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.
section_title: Railroads Acknowledge the Union Pacific/Southern Pacific Merger Contributed to Problems
paragraphs: 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.
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.
section_title: Providing High-Quality Service Involves Trade-Offs Between Investment and Service
paragraphs: 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 Transportation Studies, on freight railroad reliability. 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.
section_title: Quality of Rail Service Cannot Be Determined Since Industrywide Measures Do Not Exist
paragraphs: 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.
subsections: section_title: Governing Legislation Does Not Prescribe Specific Service Levels
paragraphs: 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. 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. 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.
section_title: Few Industrywide Performance Measures Exist
paragraphs: 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.
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.
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. (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.
section_title: Information From Individual Railroads Has Limitations
paragraphs: 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; (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 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.
section_title: Railroad Industry Is Developing Limited Measures of Performance
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 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.
section_title: Despite Recent Actions to Address Service Issues, Concerns Continue
paragraphs: 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.
subsections: section_title: Union Pacific and the Board Address Service Problems Beginning in Late 1997
paragraphs: 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, 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 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.
section_title: Government Agencies and Railroads Take Some Actions to Address Broader Service Issues
paragraphs: 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 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.
subsections: section_title: The Board and USDA Take the Initiative in Addressing Service Issues
paragraphs: 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. In response, the Board adopted new procedures in December 1998 providing temporary relief from serious service problems, through service from an alternative rail carrier, more quickly. 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.
section_title: Individual Railroads Attempt to Improve Service
paragraphs: 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 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.
section_title: Railroad Industry and Shippers Address Some Service Issues, With the Board’s Encouragement
paragraphs: 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. 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.
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. 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. As part of the 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.
section_title: Railroads and Shippers Remain Far Apart on the Key Issue of Competition
paragraphs: 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. 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.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.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 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. 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.
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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.