STB has no authority to  review the terms or rates for freight shipped by contract. To protect  shippers served by only one railroad with no competitive shipping  alternatives—known as “captive” shippers—from unreasonably high  rates, STB established a process in which shippers that transport their  freight by tariff could potentially challenge the reasonableness of a rail  rate and seek financial relief from the railroads, a process that we refer to  as a “rate-relief” process. For example, selected  stakeholders said that contracts are often customized to a specific  shipper and may reflect the railroad’s and shipper’s preferences for a  given route or shipment. Contract and Tariff Rates Are Based on Similar Market Factors

According to representatives from the four Class I railroads we  interviewed, they individually determine contract and tariff rates based on  a number of similar market factors associated with the supply and  demand for the commodity the shipper plans to transport. Selected shippers told us that tariff rates are usually, but not always,  higher than contract rates, and sometimes are the same, in part, because  contract rates, according to a railroad representative, can be negotiated  and reflect market factors specific to the shipper as well as discounts for  volume commitments. A shipper association said shippers can more  efficiently manage multiple routes under one contract because of the  stability in rates over the duration of the contract. Another railroad representative said the railroad can also  provide additional logistics services at a lower cost within a contract that  contains multiple routes because the economy of scale offered by a large  contract allows the railroad to provide services at a lower rate due to  gains in efficiency. Specifically, one railroad representative  said a contract allows the railroad to allocate locomotives and rail crews  more efficiently and ensure a consistent source of revenue. As a result,  contracts generally include agreements on the amount of volume a  shipper is willing to commit. However, some selected shippers said tariffs may provide advantages in  certain situations. However,  according to railroad representatives, each railroad’s business differs. Figure 3 shows the percent of selected commodities with regulated rates  by ton-miles shipped under contract from 2005 through 2014. Some Selected Shippers with Fewer Shipping Options Said They Have High Rates for Some Contract Routes and Limited Recourse for Rate Relief for Tariffs

		Selected Shippers with Fewer Options Said They May Have High Rates for Some Routes in Contracts

Despite the volume discounts and other advantages to contracts with  multiple O-D routes, some shippers said that contracts effectively  constrain them into paying higher rates on some routes, because  railroads will propose contracts with multiple O-D routes where some of  the routes are priced unreasonably high, in the shippers’ view. This is  particularly an issue for shippers that are “captive”—that is, shippers  served by a single railroad without an economically viable transportation  alternative because a trucking or barge route either does not exist or  would be too costly. All four railroads and the Association of American Railroads  also said that railroads use differential pricing to charge the highest rate  shippers are willing to pay so railroads can cover infrastructure costs. Although shippers have the option of challenging a tariff rate before the  STB, they do not have this option for challenging rates they view as unfair  if agreed to in a contract, since the STB has authority to review tariff rates  but not contract rates. According to two of the shippers we interviewed, combining captive and competitive routes together in one large contract  can create high rates on captive routes. In contrast, officials from one  railroad said that the STB tariff rate-relief process prevents railroads from  forcing shippers to pay unreasonable rates, even in contracts. STB is currently reviewing its rate relief process as required in the  Surface Transportation Board Reauthorization Act of 2015. Agency Comments

We provided a draft of this product to STB for comment prior to finalizing  this report.
Why GAO Did This Study

The nation's freight rail network is vital to the economy, moving about 40 percent of U.S. freight and generating over $73 billion in revenue in 2013. Railroads charge various rates for moving freight from a particular origin to a particular destination. A rate may be set by the railroad in a public pricing document—known as a tariff—or negotiated through a private contract with a shipper. While most freight ships under contract, some shippers have raised concerns with how railroads negotiate contracts that contain multiple origin-to-destination routes. Though shippers that use rail to transport freight under tariff may seek relief from STB for rates they view as unreasonable, STB has authority to review tariff rates, but not contract rates.
The Surface Transportation Board Reauthorization Act of 2015 included a provision for GAO to review rail transportation contract proposals containing multiple origin-to-destination routes. This report addresses (1) similarities and differences in shipping freight under a tariff versus a contract, and the potential benefits to using each, and (2) views of selected stakeholders on the implications of shipping freight under a tariff versus a contract. GAO analyzed STB data from 2005 to 2014, reviewed documents provided by and interviewed representatives of the four largest freight railroads, the Association of American Railroads, STB officials, and representatives of nine shippers selected to represent a mix of commodities transported by rail.

What GAO Found

While rail contracts and tariffs are similar, contracts offer the flexibility to customize rates and terms to a specific shipper, according to selected stakeholders GAO interviewed. Both contract and tariff rates are based on market factors, such as competition, according to representatives from the four largest U.S. freight railroads. However, they noted that in developing contract rates, a railroad will also examine factors specific to each shipper and may negotiate discounts in exchange for the shipper committing to provide a specified volume over the contract's duration. According to railroad representatives, the volume commitments negotiated in a contract allow the railroad to more efficiently allocate its resources and ensure consistent revenues. Also, selected shippers told GAO that they can more efficiently manage multiple shipping routes under one contract because of the stability in rates over the duration of the contract. In contrast, tariffs may be preferred for smaller shipments.
Despite the volume discounts contracts can offer, some selected shippers said that contracts that include rates for multiple origin-to-destination routes can contain high rates on some routes. This is particularly an issue for shippers that are “captive”—that is, shippers served by a single railroad without an economically viable transportation alternative.
Representatives of the four largest freight railroads said they charge what shippers are willing to pay to cover infrastructure costs for the entire rail network. However, according to selected shippers GAO interviewed, combining captive and non-captive routes together in one contract can compel shippers to accept some unreasonable rates. Shippers subject to contract rates they view as unreasonable cannot challenge those rates at the Surface Transportation Board (STB) because contracts are not subject to STB oversight. A railroad official said that a shipper may ask the railroad to switch rates the shipper views as unreasonable to a tariff. However, selected shippers said that tariff rates are generally higher than contract rates, so they are reluctant to forgo a contract with a mix of rates in favor of using a tariff. While the STB process for reviewing tariff rates was designed, in part, to protect captive shippers from unreasonably high rates, selected shippers said the process is complicated, time-consuming, and expensive. In 2016, STB began to reform the tariff review process with the goal of improving its efficiency.