Freight Railroads:

Industry Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed

GAO-07-94: Published: Oct 6, 2006. Publicly Released: Oct 6, 2006.

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The Staggers Rail Act deregulated the freight rail industry, relying on competition to set rates, and allowed for differential pricing (charging higher rates to those more dependent on rail). The act gave the Surface Transportation Board (STB) authority to develop remedies for shippers "captive" to one railroad and set a threshold for shippers to apply for rate relief. GAO was asked to review (1) changes in the railroad industry since the Staggers Rail Act, including rates and competition; (2) STB actions to address competition and captivity concerns and alternatives that could be considered; and (3) freight demand and capacity projections and potential federal policy responses. GAO examined STB data, conducted interviews, and held an expert panel.

Changes in the railroad industry since the Staggers Rail Act are widely viewed as positive, as the industry's financial health has improved and most rates have declined; however, concerns over competition and captivity remain. Rail rates generally declined between 1985 and 2000, then increased slightly from 2001 through 2004. Concerns about competition and captivity remain as traffic is concentrated in fewer railroads. It is difficult to determine the number of "captive" shippers as proxy measures can overstate or understate captivity. Nevertheless, GAO's analysis of limited available measures indicates that the extent of captivity appears to be dropping, but the percentage of traffic traveling at rates substantially over the threshold for rate relief has increased. Also, some areas with access to only one major railroad have higher percentages of traffic traveling at rates above the threshold. These findings may reflect reasonable economic practices by the railroads or a possible abuse of market power. GAO's analysis is limited by available data and proxy measures but suggests that shippers in selected markets may be paying excessive rates, meriting further inquiry and analysis. While STB has taken action, further efforts to improve its rate relief processes and assess competition could help address competition and captivity concerns and inform the merits of proposed alternative approaches. STB's rate relief processes are largely inaccessible and rarely used. STB recognizes this and is taking steps to improve its processes. STB has broad statutory authority to inquire into and report on railroad industry practices and, given a reasonable possibility that some shippers may be paying excessive rates, an assessment of competition could determine whether there is sufficient evidence that market power is being abused in specific markets. While competition between railroads may not always be feasible, alternative approaches have costs and benefits that should be carefully considered to ensure the balance envisioned in the Staggers Rail Act--including the railroads' need for adequate revenues. Significant increases in freight traffic are forecast, and the industry's ability to meet them is largely uncertain. Investments in rail projects can produce public benefits, such as reducing highway congestion. As a result, federal and state governments have increasingly participated in freight rail projects. In 2005, for example, Congress provided $100 million for rail improvements in the Chicago area. Congress faces additional decisions about potential federal policy responses in years ahead. Responses should recognize that the freight transportation system includes many modes that are treated differently by the federal government and functions in a competitive marketplace and a constrained federal funding environment. In developing a National Freight Policy, the Department of Transportation (DOT)has made a good start by providing context for those decisions and DOT can help sustain the role of the competitive marketplace through strategies that promote a level playing field for freight transportation decision making and acknowledge the constrained federal fiscal environment by focusing federal involvement where demonstrable, wide-ranging public benefits exist.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When Congress substantially deregulated the railroad industry in the 1970s and 1980s, it intended that competition and demand for services would establish reasonable rail rates and minimize the need for federal regulatory control over the rail industry. However, our October 2006 report raised questions about the state of competition in the railroad industry and whether rail rates in selected markets reflected justified and reasonable pricing practices or an abuse of market power by the railroads. We recommended that the Surface Transportation Board undertake a rigorous analysis of competitive markets to identify the state of competition nationwide; in specific markets, determine whether the inappropriate exercise of market power is occurring; and, where appropriate, consider the range of actions available to address problems associated with the potential abuse of market power. In September 2007 the Board announced that, in response to our recommendation, it had awarded a contract to a firm to conduct a comprehensive and independent study of competition and related issues in the freight railroad industry. The firm released its initial report in November 2008; subsequently the Board directed the firm to update its study to include more recent information. A second report was released in January 2010. In September 2010, the Board Chairman testified before Congress that he intended to proactively reexamine the Board's rules on competition in the rail industry. In June 2011 the Board held hearings to explore the current state of competition in the railroad industry and possible policy alternatives to facilitate more competition, where appropriate. The Board held these hearings to help it decide what measures the Board could and should consider to modify its competitive access rules and policies. Our work helped focus the Board on the important issues of competition, consistent with the intent of Congress that competition and demand for services establish reasonable rail rates in the industry.

    Recommendation: To ensure an appropriate balance between the interests of railroads and shippers, the Chairman of the Surface Transportation Board should undertake a rigorous analysis of competitive markets to identify the state of competition nationwide; in specific markets, determine whether the inappropriate exercise of market power is occurring; and, where appropriate, consider the range of actions available to address problems associated with the potential abuse of market power. If the Chairman determines that STB requires more resources to conduct this analysis, then STB should request additional resources from Congress.

    Agency Affected: Department of Transportation: Surface Transportation Board

  2. Status: Closed - Implemented

    Comments: In December 2007, the Board substantially implemented this recommendation when it issued a ruling (Ex Part 385(Sub No. 6)) instructing the freight railroads to report fuel surcharges as revenue in the freight revenue field of the Waybill Sample.

    Recommendation: To ensure an appropriate balance between the interests of railroads and shippers, the Chairman of the Surface Transportation Board should review STB's 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.

    Agency Affected: Department of Transportation: Surface Transportation Board

  3. Status: Closed - Implemented

    Comments: DOT considered these among other factors in formulating its draft National Freight Policy.

    Recommendation: As DOT continues to develop a national freight policy and a possible federal policy response, and to ensure the efficiency and effectiveness of our nation's freight system, the Secretary of Transportation should consider strategies to (1) sustain the role of competitive market forces by creating a level playing field for all freight modes and (2) recognize the fiscally constrained federal funding environment by developing mechanisms to assess and maximize public benefits from federally financed freight transportation investments.

    Agency Affected: Department of Transportation

 

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