Freight Railroads: Updated Information on Rates and Other Industry Trends
Published: 2007-10-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Staggers Rail Act of 1980 largely deregulated the freight railroad industry, encouraging greater reliance on competition to set rates. The act recognized the need for railroads to recover costs by setting higher rates for shippers with fewer transportation alternatives but also recognized that some shippers might be subject to unreasonably high rates. It established a threshold for rate relief and granted the Interstate Commerce Commission and the Surface Transportation Board (STB) the authority to develop a rate relief process for "captive" shippers. Since 1980 GAO has issued several reports on the freight railroad industry and issued the most recent report in October 2006 and, at the request of this Subcommittee, issued an updated report in August 2007. This statement is based on these recent reports and discusses (1) recent changes that have occurred in railroad rates and how those changes compare to changes in rail rates since 1985, (2) the extent of captivity in the industry and STB's efforts to protect captive shippers, and (3) STB's actions to address GAO's recent recommendations.
section_title: What GAO Found
paragraphs: While railroad rates have generally declined and declined for most shippers since 1985, in 2005 rates experienced a 9 percent annual increase over 2004 --the largest annual increase in twenty years--and rates increased for all 13 commodities that GAO reviewed. For example, rates for coal increased by nearly 8 percent while rates for grain increased by 8.5 percent. However, despite these increases, rates for 2005 remain below their 1985 levels and below the rate of inflation over the 1985 through 2005 period. Revenues that railroads report as "miscellaneous"--a category that includes some fuel surcharges--increased more than ten-fold from about $141 million in 2000 to over $1.7 billion in 2005. It is difficult to precisely determine how many shippers are "captive" because available proxy measures can overstate or understate captivity. However some data indicate that the extent of potentially captive traffic appears to have decreased, while at the same time, data also indicates that traffic traveling at rates significantly above the threshold for rate relief has increased. In October 2006, GAO reported that STB's rate relief process to protect captive shippers have resulted in little effective relief for those shippers. GAO also reported that economists and shipper groups have proposed a number of alternatives to address remaining concerns about competition--however, each of these alternative approaches have costs and benefits and should be carefully considered. STB has taken some actions to address our past recommendations, but it is too soon to determine the effect of these actions. Our October 2006 report noted that the continued existence of pockets of potentially "captive" shippers raised questions as to whether rail rates in selected markets reflected reasonable pricing practices, or an abuse of market power. GAO recommended that the Board undertake a rigorous analysis of competitive markets to identify the state of competition. STB has awarded a contract to conduct this study. It will be important that these analysts have STB's authority and access to information to determine whether rail rates in selected markets reflect reasonable pricing practices--the Chairman of the STB recently testified that these analysts would have that authority and access. GAO also recommended that STB ensure that freight railroads are consistently reporting all revenues, including miscellaneous revenues. While STB has revised its rules on fuel surcharges, these rules did not address how fuel surcharges are reported and STB has not yet taken steps to accurately collect data on other miscellaneous revenues. STB has also taken a number of steps to revise its rate relief process. While these appear to be promising steps, it is too soon to tell what effect these changes will have.

section_title: Letter
paragraphs: We appreciate the opportunity to testify on the freight railroad industry.  As you know, over 25 years ago, Congress transformed federal regulation  of the railroad industry. After almost 100 years of economic regulation, the  railroad industry was in serious economic trouble in the 1970s, with rising  costs, losses, and bankruptcies. In response, Congress passed the Railroad  Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail  Act of 1980. Together, these pieces of legislation substantially deregulated  the railroad industry. In particular, the 1980 act encouraged greater  reliance on competition to set rates and gave railroads increased freedom  to price their services according to market conditions, including the  freedom to use differential pricing—that is, to recover a greater proportion  of their costs from rates charged to shippers with a greater dependency on  rail transportation. At the same time, the 1980 act anticipated that some  shippers might not have competitive alternatives—commonly referred to  as “captive” shippers—and gave the Interstate Commerce Commission  (ICC), and later the Surface Transportation Board (STB), the authority to  establish a process so that shippers could obtain relief from unreasonably  high rates. However, only a rate that produces revenue equal to at least  180 percent of the variable cost of transporting the shipment can be  challenged.
Policymakers continue to believe that the federal government should  provide a viable process to protect shippers against unreasonably high  rates, as well as address competition issues, while still balancing the  interests of both railroads and shippers. Over the past 10 years, significant  consolidation has taken place in the freight railroad industry, while  railroads—particularly Class I railroads— have seen their productivity  and financial health improve. Railroad officials express concern that any  attempt to increase economic regulation will reduce carriers’ ability to  earn sufficient revenues and limit future infrastructure investment.
Since the passage of the Staggers Rail Act in 1980, we have issued several  reports on the freight railroad industry. We issued our most recent report  in October 2006 and, at your request and the request of other members of  this Subcommittee, issued an updated report in August 2007 to include  2005 data that was not yet available in October 2006.  My comments today  are based on those recent reports and will focus primarily on the updated  information, including (1) recent changes that have occurred in railroad  rates and how those changes compare to changes in rail rates since 1985,  (2) the extent of captivity in the industry and STB’s efforts to protect  captive shippers, and (3) STB’s actions to address our recent  recommendations. We reviewed STB documents in September and  October 2007 to update the information in our recent reports and  conducted our review in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: In the past, the ICC regulated almost all of the rates that railroads charged  shippers. The Railroad Revitalization and Regulatory Reform Act of 1976  and the Staggers Rail Act of 1980 greatly increased reliance on competition  to set rates in the railroad industry. Specifically, these acts allowed  railroads and shippers to enter into confidential contracts that set rates  and prohibited ICC from regulating rates where railroads had either  effective competition or rates negotiated between the railroad and the  shipper. Furthermore, the ICC Termination Act of 1995 abolished ICC and  transferred its regulatory functions to STB. Taken together, these acts  anchor the federal government’s role in the freight rail industry by  establishing numerous goals for regulating the industry, including to    allow, to the maximum extent possible, competition and demand for  services to establish reasonable rates for transportation by rail;    minimize the need for federal regulatory control over the rail  transportation system and require fair and expeditious regulatory  decisions when regulation is required;    promote a safe and efficient rail transportation system by allowing rail  carriers to earn adequate revenues, as determined by STB;    ensure the development and continuation of a sound rail transportation  system with effective competition among rail carriers and with other  modes to meet the needs of the public and the national defense;  foster sound economic conditions in transportation and ensure  effective competition and coordination between rail carriers and other  modes;    maintain reasonable rates where there is an absence of effective  competition and where rail rates provide revenues that exceed the  amount necessary to maintain the rail system and attract capital;    prohibit predatory pricing and practices to avoid undue concentrations  of market power; and    provide for the expeditious handling and resolution of all proceedings.
While the Staggers Rail and ICC Termination Acts reduced regulation in  the railroad industry, they maintained STB’s role as the economic  regulator of the industry. The federal courts have upheld STB’s general  powers to monitor the rail industry, including its ability to subpoena  witnesses and records and to depose witnesses. In addition, STB can  revisit its past decisions if it discovers a material error, or new evidence,  or if circumstances have substantially changed.
Two important components of the current regulatory structure for the  railroad industry are the concepts of revenue adequacy and demand-based  differential pricing. Congress established the concept of revenue adequacy  as an indicator of the financial health of the industry. STB determines the  revenue adequacy of a railroad by comparing the railroad’s return on  investment with the industrywide cost of capital. For instance, if a  railroad’s return on investment is greater than the industrywide cost of  capital, STB determines that railroad to be revenue adequate. Historically,  ICC and STB have rarely found railroads to be revenue adequate—a result  that many observers relate to characteristics of the industry’s cost  structure. Railroads incur large fixed costs to build and operate networks  that jointly serve many different shippers. Some fixed costs can be  attributed to serving particular shippers, and some costs vary with  particular movements, but other costs are not attributable to particular  shippers or movements. Nonetheless, a railroad must recover these costs  if the railroad is to continue to provide service over the long run. To the  extent that railroads have not been revenue adequate, they may not have  been fully recovering these costs.
The Staggers Rail Act recognized the need for railroads to use demand- based differential pricing to promote a healthy rail industry and enable it  to raise sufficient revenues to operate, maintain and, if necessary, expand  the system in a deregulated environment. Demand-based differential  pricing, in theory, permits a railroad to recover its joint and common  costs—those costs that exist no matter how many shipments are  transported, such as the cost of maintaining track— across its entire  traffic base by setting higher rates for traffic with fewer transportation  alternatives than for traffic with more alternatives. Differential pricing  recognizes that some customers may use rail if rates are low—and have  other options if rail rates are too high or service is poor. Therefore, rail  rates on these shipments generally cover the directly attributable  (variable) costs, plus a relatively low contribution to fixed costs. In  contrast, customers with little or no practical alternative to rail—”captive”  shippers—generally pay a much larger portion of fixed costs. Moreover,  even though a railroad might incur similar incremental costs while  providing service to two different shippers that move similar volumes in  similar car types traveling over similar distances, the railroad might charge  the shippers different rates. Furthermore, if the railroad is able to offer  lower rates to the shipper with more transportation alternatives, that  shipper still pays some of the joint and common costs. By paying even a  small part of total fixed cost, competitive traffic reduces the share of those  costs that captive shippers would have to pay if the competitive traffic  switched to truck or some other alternative. Consequently, while the  shipper with fewer alternatives makes a greater contribution toward the  railroad’s joint and common costs, the contribution is less than if the  shipper with more alternatives did not ship via rail.
The Staggers Rail Act further requires that the railroads’ need to obtain  adequate revenues to be balanced with the rights of shippers to be free  from, and to seek redress from, unreasonable rates. Railroads incur  variable costs—that is, the costs of moving particular shipments—in  providing service. The Staggers Rail Act stated that any rate that was  found to be below 180 percent of a railroad’s variable cost for a particular  shipment could not be challenged as unreasonable and authorized ICC,  and later STB, to establish a rate relief process for shippers to challenge  the reasonableness of a rate. STB may consider the reasonableness of a  rate only if it finds that the carrier has market dominance over the traffic  at issue—that is, if (1) the railroad’s revenue is equal to or above 180  percent of the railroad’s variable cost (R/VC) and (2) the railroad does not  face effective competition from other rail carriers or other modes of  transportation.
section_title: Rail Rates Have Increased Recently But Have Generally Declined Since 1985, While Railroads Have Shifted Other Costs To Shippers
paragraphs: Rail rates have generally declined since 1985, but experienced a 9 percent  annual increase between 2004 and 2005—the largest annual increase in 20  years. Although rates have generally declined, railroads have also shifted  other costs to shippers, such as the cost of rail car ownership, and have  increased the revenue they report as miscellaneous more than 10-fold  between 2000 and 2005.
subsections: section_title: Rail Rates Have Recently Increased But Generally Declined Since 1985
paragraphs: Following a period of general decline since 1985, rates began to increase in  2001.  Rates experienced a 9 percent annual increase from 2004-2005,  which represents the largest annual increase in rates during the 20-year  period from 1985 through 2005. This annual increase also outpaced  inflation—about 3 percent in 2005. However, despite these increases, rates  for 2005 remain below their 1985 levels and below the rate of inflation for  the 1985 through 2005 period, and rates overall have declined since 1985.   Because the set of rail rate indexes we used to examine trends in rail rates  over time does not account for inflation we also included the price index  for the gross domestic product (GDP) in figure 1.
section_title: While Generally Declining over the Long Term, Rates for Several Commodities Have Recently Increased
paragraphs: Similar to overall industry trends, rates for individual commodities have  increased from 2004-2005. In 2005, rates increased for all 13 commodities  that we reviewed. Rates for coal increased by 7.9 percent while rates for  grain increased by 8.5 percent.  In 2005, the largest rate increase (for  fireboard and paperboard) exceeded 11 percent, while the smallest  increase (for motor vehicles) was about 2.7 percent.  Figure 2 depicts rate  changes for coal, grain, miscellaneous mixed shipments, and motor  vehicles from 1985 through 2005.
section_title: Railroads Have Shifted Costs to Shippers
paragraphs: In 2005, freight railroad companies continued a trend of shifting other  costs to shippers. Our analysis shows a 20 percentage point increase shift  in railcar ownership (measured in tons carried) since 1987. In 1987,  railcars owned by freight railroad companies moved 60 percent of tons  carried. In 2005, they moved 40 percent of tons carried, meaning that  freight railroad company railcars no longer carry the majority of tonnage  (see fig. 3).
section_title: Reported Miscellaneous Revenue, Including Fuel Surcharges, Increased Ten- Fold Since 2000
paragraphs: In 2005 the amount of industry revenue reported as miscellaneous  increased ten-fold over 2000 levels, rising from about $141 million to over  $1.7 billion (see fig. 4). Miscellaneous revenue is a category in the Carload  Waybill Sample for reporting revenue outside the standard rate structure.  This miscellaneous revenue can include some fuel surcharges, as well as  revenues such as those derived from congestion fees and railcar auctions  (in which the highest bidder is guaranteed a number of railcars at a  specified date). In 2004, miscellaneous revenue accounted for 1.5 percent  of freight railroad revenue reported. In 2005, this percentage had risen to  3.7 percent. Also, in 2005, 20 percent of all tonnage moved in the United  States generated miscellaneous revenue.
section_title: Captive Shippers Are Difficult to Identify But Concerns Remain and Past STB Actions Have Led to Little Effective Relief
paragraphs: In October 2006 and August 2007, we reported that captive shippers are  difficult to identify and STB’s efforts to protect captive shippers have  resulted in little effective relief for those shippers. We also reported that  economists and shipper groups have proposed a number of alternatives to  address remaining concerns about competition – however, each of these  alternative approaches have costs and benefits and should be carefully  considered to ensure the approach will achieve the important balance set  out in the Staggers Act.
subsections: section_title: Captive Shippers Remain Difficult to Identify, but Some Measures Indicate Captivity Is Dropping in the Railroad Industry
paragraphs: It remains difficult to determine precisely how many shippers are “captive”  to one railroad because the proxy measures that provide the best  indication can overstate or understate captivity. One measure of potential  captivity—traffic traveling at rates equal to or greater than 180 percent  R/VC—is part of the statutory threshold for bringing a rate relief case  before STB. STB regards traffic at or above this threshold as “potentially  captive,” but, like other measures, R/VC levels can understate or overstate  captivity. Since 1985, tonnage and revenue from traffic traveling at rates  over 180 percent R/VC have generally declined, while traffic traveling at  rates substantially over the threshold for rate relief (greater than 300  percent R/VC) has generally increased. This trend continued in 2005, as  industry revenue generated by traffic traveling at rates over 180 percent  R/VC dropped by roughly half a percent. Tonnage traveling at rates over  180 percent R/VC dropped by a smaller percentage.
Traffic traveling at rates substantially over the threshold for rate relief has  generally increased from 1985 to 2005 (see fig. 6). In 2003 and 2004, the  percentage of both tonnage and revenue traveling at rates above 300  percent R/VC declined from the previous year, but each increased again in  2005. For example, the share of tonnage traveling at rates over 300 percent  R/VC increased from 6.1 percent in 2004 to 6.4 percent in 2005. Figure 6  shows tonnage traveling at rates above 300 percent R/VC from 1985  through 2005.
Some areas with access to one Class I railroad also have more than half of  their traffic traveling at rates that exceed the statutory threshold for rate  relief. For example, parts of New Mexico and Idaho with access to one  Class I railroad had more than half of all traffic originating in those same  areas traveling at rates over 180 percent R/VC. However, we also found  instances in which an economic area may have access to two or more  Class I railroads and still have more than 75 percent of its traffic traveling  at rates over 180 percent R/VC, as well as other instances in which an  economic area may have access to one Class I railroad and have less than  25 percent of its traffic traveling at rates over 180 percent R/VC.
section_title: STB Has Taken Actions to Protect Captive Shippers but Efforts Have Led to Little Effective Relief
paragraphs: STB has taken a number of actions to provide relief for captive shippers.  While the Staggers Rail and ICC Termination Acts encourage competition  as the preferred way to protect shippers and to promote the financial  health of the railroad industry, they also give STB the authority to    adjudicate rate cases to resolve disputes between captive shippers and  railroads upon receiving a complaint from a shipper;    approve rail transactions, such as mergers, consolidations,  acquisitions, and trackage rights;    prescribe new regulations, such as rules for competitive access and  merger approvals; and  inquire into and report on rail industry practices, including  obtaining information from railroads on its own initiative and holding  hearings to inquire into areas of concern, such as competition.
Under its adjudicatory authority, STB has developed standard rate case  guidelines, under which captive shippers can challenge a rail rate and  appeal to STB for rate relief. Under the standard rate relief process, STB  assesses whether the railroad dominates the shipper’s transportation  market and, if it finds market dominance, proceeds with further  assessments to determine whether the actual rate the railroad charges the  shipper is reasonable. STB requires that the shipper demonstrate how  much an optimally efficient railroad would need to charge the shipper and  construct a hypothetical, perfectly efficient railroad that would replace the  shipper’s current carrier. As part of the rate relief process, both the  railroad and the shipper have the opportunity to present their facts and  views to STB, as well as to present new evidence.
STB also created alternatives to the standard rate relief process,  developing simplified guidelines, as Congress required, for cases in which  the standard rate guidelines would be too costly or infeasible given the  value of the cases. Under these simplified guidelines, captive shippers who  believe that their rate is unreasonable can appeal to STB for rate relief,  even if the value of the disputed traffic makes it too costly or infeasible to  apply the standard guidelines.
Despite STB’s efforts, we reported in 2006 that there was widespread  agreement that STB’s standard rate relief process was inaccessible to most  shippers and did not provide for expeditious handling and resolution of  complaints. The process remained expensive, time consuming, and  complex. Specifically, shippers we interviewed agreed that the process  could cost approximately $3 million per litigant. In addition, shippers said  that they do not use the process because it takes so long for STB to reach  a decision. Lastly, shippers stated that the process is both time consuming  and difficult because it calls for them to develop a hypothetical competing  railroad to show what the rate should be and to demonstrate that the  existing rate is unreasonable.
We also reported that the simplified guidelines also had not effectively  provided relief for captive shippers. Although these simplified guidelines  had been in place since 1997, a rate case had not been decided under the  process set out by the guidelines when we issued our report in 2006. STB  had held public hearings in April 2003 and July 2004 to examine why  shippers have not used the guidelines and to explore ways to improve  them. At these hearings, numerous organizations provided comments to  STB on measures that could clarify the simplified guidelines, but no action  was taken. STB observed that parties urged changes to make the process  more workable, but disagreed on what those changes should be. We  reported that several shipper organizations told us that shippers were  concerned about using the simplified guidelines because they believe the  guidelines will be challenged in court, resulting in lengthy litigation. STB  officials told us that they—not the shippers—would be responsible for  defending the guidelines in court. STB officials also said that if a shipper  won a small rate case, STB could order reparations to the shipper before  the case was appealed to the courts.
Since our report in October 2006, STB has taken steps to refine the rate  relief process. Specifically, in October 2006, STB revised procedures for  deciding large rate relief cases. By placing restraints on the evidence and  arguments allowed in these cases, STB predicted that the expense and  delay in resolving these rate disputes would be reduced substantially. In  September 2007, STB altered its simplified guidelines for small shippers to  enable shippers who are seeking up to $1 million in rate relief over a 5- year period to receive a STB decision within 8 months of filing a  complaint. STB also created a new rate relief process for medium size  shipments to allow shippers who are seeking up to $5 million in rate relief  over a 5-year period to receive a STB decision within 17 months of filing a  complaint. Additionally, STB also stated that all rail rate disputes would  require nonbinding mediation.
section_title: Shipper Groups and Others Have Suggested Alternative Approaches That Have Costs and Benefits
paragraphs: Shipper groups, economists, and other experts in the rail industry have  suggested several alternative approaches as remedies that could provide  more competitive options to shippers in areas of inadequate competition  or excessive market power. These groups view these approaches as more  effective than the rate relief process in promoting a greater reliance on  competition to protect shippers against unreasonable rates. Some  proposals would require legislative change, or a reopening of past STB  decisions.
These approaches each have potential costs and benefits. On the one  hand, they could expand competitive options, reduce rail rates, and  decrease the number of captive shippers as well as reduce the need for  both federal regulation and a rate relief process. On the other hand,  reductions in rail rates could affect railroad revenues and limit the  railroads’ ability and potential willingness to invest in their infrastructure.  In addition, some markets may not have the level of demand needed to  support competition among railroads. It will be important for  policymakers, in evaluating these alternative approaches, to carefully  consider the impact of each approach on the balance set out in the  Staggers Act. The targeted approaches frequently proposed by shipper  groups and others include the following:    Reciprocal switching: This approach would allow STB to require  railroads serving shippers that are close to another railroad to  transport cars of a competing railroad for a fee. The shippers would  then have access to railroads that do not reach their facilities. This  approach is similar to the mandatory interswitching in Canada, which  enables a shipper to request a second railroad’s service if that second  railroad is within approximately 18 miles. Some Class I railroads  already interchange traffic using these agreements, but they oppose  being required to do so. Under this approach, STB would oversee the  pricing of switching agreements. This approach could also reduce the  number of captive shippers by providing a competitive option to  shippers with access to a proximate but previously inaccessible  railroad and thereby reduce traffic eligible for the rate relief process  (see fig. 7).
Terminal agreements: This approach would require one railroad to  grant access to its terminal facilities or tracks to another railroad,  enabling both railroads to interchange traffic or gain access to traffic  coming from shippers off the other railroad’s lines for a fee. Current  regulation requires a shipper to demonstrate anticompetitive conduct  by a railroad before STB will grant access to a terminal by a nonowning  railroad unless there is an emergency or when a shipper can  demonstrate poor service and a second railroad is willing and able to  provide the service requested. This approach would require revisiting  the current requirement that railroads or shippers demonstrate  anticompetitive conduct in making a case to gain access to a railroad  terminal in areas where there is inadequate competition. The approach  would also make it easier for competing railroads to gain access to the  terminal areas of other railroads and could increase competition  between railroads. However, it could also reduce revenues to all  railroads involved and adversely affect the financial condition of the  rail industry. Also, shippers could benefit from increased competition  but might see service decline (see fig. 8).  to its tracks to another railroad, enabling railroads to interchange traffic  beyond terminal facilities for a fee. In the past, STB has imposed  conditions requiring that a merging railroad must grant another railroad  trackage rights to preserve competition when a merger would reduce a  shipper’s access to railroads from two to one. While this approach could  potentially increase rail competition and decrease rail rates, it could also  discourage owning railroads from maintaining the track or providing high- quality service, since the value of lost use of track may not be  compensated by the user fee and may decrease return on investment (see  fig. 9). “Bottleneck” rates: This approach would require a railroad to establish a  rate, and thereby offer to provide service, for any two points on the  railroad’s system where traffic originates, terminates, or can be  interchanged. Some shippers have more than one railroad that serves them  at their origin and/or destination points, but have at least one portion of a  rail movement for which no alternative rail route is available. This portion  is referred to as the “bottleneck segment.” STB’s decision that a railroad is  not required to quote a rate for the bottleneck segment has been upheld in  federal court. STB’s rationale was that statute and case law precluded it  from requiring a railroad to provide service on a portion of its route when  the railroad serves both the origin and destination points and provides a  rate for such movement. STB requires a railroad to provide service for the  bottleneck segment only if the shipper had prior arrangements or a  contract for the remaining portion of the shipment route. On the one hand,  requiring railroads to establish bottleneck rates would force short-distance  routes on railroads when they served an entire route and could result in  loss of business and potentially subject the bottleneck segment to a rate  complaint. On the other hand, this approach would give shippers access to  a second railroad, even if a single railroad was the only railroad that  served the shipper at its origin and/or destination points, and could  potentially reduce rates (see fig. 10).
Paper barriers: This approach would prevent or, put a time limit on, paper  barriers, which are contractual agreements that can occur when a Class I  railroad either sells or leases long term some of its track to other railroads  (typically a short-line railroad and/or regional railroad). These agreements  stipulate that virtually all traffic that originates on that line must  interchange with the Class I railroad that originally leased the tracks or  pay a penalty. Since the 1980s, approximately 500 short lines have been  created by Class I railroads selling a portion of their lines; however, the  extent to which paper barriers are a standard practice is unknown because  they are part of confidential contracts. When this type of agreement exists,  it can inhibit smaller railroads that connect with or cross two or more  Class I rail systems from providing rail customers access to competitive  service. Eliminating paper barriers could affect the railroad industry’s  overall capacity since Class I railroads may abandon lines instead of  selling them to smaller railroads and thereby increase the cost of entering  a market for a would-be competitor. In addition, an official from a railroad  association told us that it is unclear if a federal agency could invalidate  privately negotiated contracts (see fig. 11).
section_title: STB Has Taken Steps to Address Problems, but Actions Are Too Recent to Be Evaluated
paragraphs: STB has taken some actions to address our past recommendations, but it  is too soon to determine the effect of these actions. In October 2006 we  reported that the continued existence of pockets of potential captivity at a  time when the railroads are, for the first time in decades, experiencing  increasing economic health, raises the question whether rail rates in  selected markets reflect justified and reasonable pricing practices, or an  abuse of market power by the railroads. While our analysis provided an  important first step, we noted that STB has the statutory authority and  access to information to inquire into and report on railroad practices and  to conduct a more rigorous analysis of competition in the freight rail  industry. As a result, we recommended that the Board undertake a  rigorous analysis of competitive markets to identify the state of  competition nationwide and to determine in specific markets whether the  inappropriate exercise of market power is occurring and, where  appropriate, to consider the range of actions available to address such  problems.
STB initially disagreed with our recommendation because it believed the  findings underlying the recommendation were inconclusive, their on-going  efforts would address many of our concerns, and a rigorous analysis  would divert resources from other efforts. However, in June 2007, STB  stated that it intended to implement our recommendation using funding  that was not available at the time of our October report to solicit proposals  from analysts with no connection to the freight railroad industry or STB  proceedings to conduct a rigorous analysis of competition in the freight  railroad industry. On September 13, 2007, STB announced that it had  awarded a contract for a comprehensive study on competition, capacity,  and regulatory policy issues to be completed by the fall of 2008. We  commend STB for taking this action. It will be important that these  analysts have the ability that STB has through its statutory authority to  inquire into railroad practices as well as sufficient access to information to  determine whether rail rates in selected markets reflect justified and  reasonable pricing practices, or an abuse of market power by the  railroads.  The Chairman of the STB has recently testified that these  analysts would have that authority and access.
We also recommended that STB review its method of data collection to  ensure that all freight railroads are consistently and accurately reporting  all revenues collected from shippers, including fuel surcharges and other  costs not explicitly captured in all railroad rate structures. In January  2007, STB finalized rules that require railroads to ensure that fuel  surcharges are based on factors directly affecting the amount of fuel  consumed. In August 2007, STB finalized rules that require railroads to  report their fuel costs and revenue from fuel surcharges. While these are  positive steps, these rules did not address how surcharges are reported in  the Carload Waybill Sample. In addition, STB has not taken steps to  address collection and reporting of other miscellaneous revenues— revenues deriving from sources other than fuel surcharges.
As stated earlier, STB has also taken steps to refine the rate relief process  since our 2006 report. STB has made changes to the rate relief process that  it believes will reduce the expense and delay of obtaining rate relief. While  these appear to be positive steps that could address longstanding concerns  with the rate relief process, it is too soon to determine the effect of these  changes to the process, and we have not evaluated the effect of these  changes.
Mr. Chairman, this concluded my prepared statement. I would be happy to  respond to any questions you or other Members of the Committee may  have at this time.
section_title: Contact and Acknowledgements
paragraphs: For questions regarding this testimony, please contact JayEtta Z. Hecker  on (202) 512-2834 or heckerj@gao.gov. Individuals making key  contributions to this testimony include Steve Cohen (Assistant Director),  and Matt Cail.
section_title: Related GAO Products
paragraphs: Freight Railroads: Updated Information on Rates and Competition  Issues. GAO-07-1245T. Washington, D.C.: Sept. 25, 2007).
Freight Railroads: Updated Information on Rates and Other Industry  Trends. GAO-07-291R. Washington, D.C.: Aug. 15, 2007.
Freight Railroads: Industry Health Has Improved, but Concerns About  Competition and Capacity Should Be Addressed. GAO-07-94. Washington,  D.C.: Oct. 6, 2006).
Freight Railroads: Preliminary Observations on Rates, Competition,  and Capacity Issues. GAO-06-898T. Washington, D.C.: June 21, 2006.
Freight Transportation: Short Sea Shipping Option Shows Importance of  Systematic Approach to Public Investment Decisions. GAO-05-768.  Washington, D.C.: July 29, 2005.
Freight Transportation: Strategies Needed to Address Planning and  Financing Limitations. GAO-04-165. Washington, D.C.: December 19,  2003.
Railroad Regulation: Changes in Freight Railroad Rates from 1997  through 2000. GAO-02-524. Washington, D.C.: June 7, 2002.
Freight Railroad Regulation: Surface Transportation Board’s Oversight  Could Benefit from Evidence Better Identifying How Mergers Affect  Rates. GAO-01-689. Washington, D.C.: July 5, 2001.
Railroad Regulation: Current Issues Associated with the Rate Relief  Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999.
Railroad Regulation: Changes in Railroad Rates and Service Quality  Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999.
Interstate Commerce Commission: Key Issues Need to Be Addressed in  Determining Future of ICC’s Regulatory Functions. GAO-T-RCED-94-261  Washington, D.C.: July 12, 1994.
Railroad Competitiveness: Federal Laws and Policies Affect Railroad  Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991.
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