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. Rail Rates Have Increased Recently But Have Generally Declined Since 1985, While Railroads Have Shifted Other Costs To Shippers

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. 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. 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. 3). Reported Miscellaneous Revenue, Including Fuel Surcharges, Increased Ten- Fold Since 2000

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. Captive Shippers Are Difficult to Identify But Concerns Remain and Past STB Actions Have Led to Little Effective Relief

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. Captive Shippers Remain Difficult to Identify, but Some Measures Indicate Captivity Is Dropping in the Railroad Industry

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. Since our report in October 2006, STB has taken steps to refine the rate  relief process. 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. 8). STB Has Taken Steps to Address Problems, but Actions Are Too Recent to Be Evaluated

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. 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. While these are  positive steps, these rules did not address how surcharges are reported in  the Carload Waybill Sample. As stated earlier, STB has also taken steps to refine the rate relief process  since our 2006 report. Related GAO Products

Freight Railroads: Updated Information on Rates and Competition  Issues. Shipper Rail Rates: Interstate Commerce Commission’s Handling of  Complaints.
Why GAO Did This Study

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.

What GAO Found

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.