Beginning in the late 1970s, Congress deregulated the railroad industry by giving railroads more flexibility to set rates and negotiate confidential contracts with their customers. The legal structure under which the rail industry now operates was put in place at a time when railroads were in financial peril. Over the last decade, as major railroads have consolidated and have achieved higher profitability, Some Members of Congress have questioned whether the present regime needs to be revised to protect the interests of rail customers who are poorly positioned to benefit from competition among freight transportation providers—a group often referred to as "captive shippers." Captive rail shippers often cannot ship their product economically by truck because of its bulk or the long distance of their shipments, and lack viable access to a navigable waterway to ship by barge. They typically claim that the railroad serving them acts like a monopoly, charging excessive rates and providing inadequate service. Organizations representing captive shippers have called upon Congress to reimpose regulation upon certain aspects of railroad operations in order to protect shippers' interests. Captive rail shippers are a small minority of all rail customers, and the argument between them and the railroads is long-standing. However, the captive shipper issue has wider economic implications than just the division of revenue between shippers and railroads. An important policy question for Congress is whether more competition will lead to a more robust and efficient railroad system or undermine it by discouraging investment in rail infrastructure. This report provides background on the current railroad regulatory regime. It then explains "bottlenecks" and "terminal switching arrangements," two of the main points of contention between railroads and their captive customers. The Surface Transportation Board (STB or Board) recently began a review of its policies regarding these two issues, and they are addressed in legislation supported by captive shippers. After reviewing shipper and railroad points of view, the last section of the report discusses the implications of injecting more rail-to-rail competition into the industry. The last major changes to U.S. law concerning the economic regulation of railroads were the Railroad Revitalization and Regulatory Reform Act of 1976 (the so-called "4R Act," P.L. 94-210 ; 90 Stat. 31) and the Staggers Rail Act of 1980 ( P.L. 96-448 ; 94 Stat. 1898). At that time, U.S. railroads, particularly those in the Northeast, were in a prolonged period of financial distress, and strict federal regulation of railroad activities was blamed for some of the railroads' difficulties. Railroad deregulation was part of a larger movement to deregulate all modes of transportation in the late 1970s and early 1980s. Before deregulation, railroads were required to post proposed freight rates for various commodities, and the Interstate Commerce Commission (ICC) reviewed proposed rates to determine whether they were "reasonable." Railroads were prohibited from discriminating between shippers in rates and quality of service. The 4R Act, which restructured the Northeast railroads and created Conrail from the remains of the bankrupt Penn Central Railroad, took the first step toward deregulation, exempting traffic from regulation if the regulation was deemed by the ICC to be an undue burden on commerce and served no useful purpose. The 4R Act also introduced the concept of "market dominance," which it described as the "absence of effective competition from other carriers or modes of transportation, for the traffic or movement to which the rate applies." The act directed the ICC to establish standards and procedures for determining when a railroad possessed market dominance. The Staggers Act greatly advanced the movement toward railroad deregulation by granting railroads more freedom to set rates, to provide different rates and service quality to different customers, and to enter into confidential contracts with customers. Contracts are not subject to regulatory review on the assumption that a contract reflects shipper and railroad agreement. However, the ICC retained authority over rates in situations where it determined a railroad to have market dominance. The Interstate Commerce Commission Termination Act of 1995 ( P.L. 104-88 ; 109 Stat. 803) eliminated many of the functions of the ICC, abolished the ICC itself, and transferred its remaining functions to STB. STB is bipartisan and decisionally independent from, but organizationally housed within, the U.S. Department of Transportation (DOT). The ICC Termination Act left largely intact the regulatory framework that governs captive rail shipper issues. In addition to determining market dominance, STB must determine that a rail rate exceeds a revenue to variable cost threshold of at least 180% before it can assert jurisdiction to judge the reasonableness of that rate. Depending on the total amount of freight costs in question, STB has different methodologies for rate reasonableness determinations. STB does not evaluate rates on its own initiative; it must receive a complaint from a shipper. Competition and railroad revenue adequacy figure prominently in national railroad policy. As stated in the Staggers Act and amended by the ICC Termination Act of 1995 ( P.L. 104-88 ; 109 Stat. 803), in regulating the railroad industry, it is the policy of the United States government "to allow, to the maximum extent possible, competition and the demand for service to establish reasonable rates" and "to minimize the need for Federal regulatory control over the rail transportation system and to require fair and expeditious regulatory decisions when regulation is required." The law also states a goal "to promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate revenues, as determined by the Board." (STB conducts an annual evaluation to determine railroad revenue adequacy based on established standards and procedures.) DOT under the Obama Administration shares the view of its predecessors that "overall, the regulatory environment since the Staggers Act was enacted has allowed the railroads to respond to market forces that demanded lower costs, greater productivity, and innovation in the form of new transportation products and services." The Obama Administration believes there are public benefits associated with shifting more freight from truck to rail, and has provided federal funds to upgrade rail infrastructure for this purpose. A 2006 Government Accountability Office (GAO) study found that the rail industry's health had improved since Staggers but that while rates have declined, "they have not done so uniformly, and rates for some commodities are significantly higher than rates for others." The GAO study noted that "the extent of captivity appears to be dropping, but the percentage of industry traffic traveling at rates substantially over the statutory threshold for rate relief has increased from about four percent of tonnage in 1985 to about six percent of tonnage in 2004." GAO stated that "these findings may reflect reasonable economic practices by the railroads in an environment of excess demand, or they may indicate a possible abuse of market power." "Captive shipper" is not a term found in statute and is subject to interpretation. Most shippers claiming to be captive handle bulky materials, such as coal, chemicals, grain, and construction materials. About 70% of the nation's coal, which generates over half of the nation's electricity, is delivered by rail. According to one report, an electric utility in Arkansas was forced to switch to more expensive natural gas, in part, because the railroad failed to deliver coal to its power plants on time. Some utilities have even begun to import coal from South America or Indonesia, in part to lessen their dependence on what they perceive as overpriced and unreliable rail service. Likewise, railroads haul about 40% of the nation's grain. Grain producers have complained about railroads not providing enough hopper cars at harvest time. In an attempt to resolve this problem, many grain shippers purchased their own hopper cars, but now complain that railroads fail to provide the locomotives and crews to move their cars. They contend that poor and expensive rail service is driving their customers to overseas sources of grain. Few if any shippers are absolutely limited to a single railroad for moving their freight. The question of whether a particular shipper is a "captive" has less to do with physical availability of alternatives to a single railroad than with the economic viability of those alternatives: a North Dakota wheat farmer always has the option of hiring trucks to haul grain to the Pacific coast for export, but if the cost would make his wheat uncompetitive, rail may be the only economically feasible alternative. If that is the case, and if only one railroad is able to serve his needs, then he could be deemed a captive shipper under STB rules. In some cases, captivity could be due to the fact that an area does not have the density of production to sustain the existence of more than one railroad. Northern Maine, northern Michigan, and parts of Montana, Idaho, and South Dakota may be examples of this. In other locations, such as Tampa, Nashville, and Green Bay, mergers among railroads have reduced the extent of rail competition. Yet evaluating captivity is complex. No railroad has unrestrained market power, because it is not in the railroad's interest to make a freight rate so high that its customer is driven out of business. The owner of any facility built since 1980 had the opportunity to avoid captivity by negotiating terms of service with a railroad before starting construction or by locating in a place with access to more than one railroad. And shippers with multiple facilities may have bargaining power even if an individual plant or distribution center appears to be a captive, as the shippers can agree to tender freight at competitive locations in return for favorable treatment at captive locations. Some shippers that seemingly have access to alternatives nevertheless claim to be captive. For instance, DuPont considers its largest North American plant, located in Richmond, VA, to be captive to CSX Railroad. It is one of 32 North American plants (out of a total of 39) that it considers captive. The Richmond plant is located just south of the city of Richmond along CSX tracks. Bordering the other side of the plant is Interstate 95.