In 1976, there were 30 independent Class I railroad systems (comprised of 63 Class I railroads); by early 1999, there were 9 railroad systems (comprised of 9 Class I railroads) and half of that reduction was due to consolidations. The Senators asked us to report on (1) how the environment within which rail rates are set has changed since 1990; (2) how rates for users of rail transportation have changed since 1990; (3) how railroad service quality has changed since 1990; and (4) what actions, if any, the Board and others have taken (or propose to take) to address rail rate and service quality issues. Industry and Other Factors Have Influenced the Rate-Setting Environment Since 1990

Railroads’ rate setting since 1990 has increasingly been influenced by ongoing industry and economic changes such as continued rail industry consolidation, which has concentrated the industry into fewer and bigger railroads, and the need for investment capital to address infrastructure constraints. Rail rates are also a function of market competition. The number of independent Class I railroad systems has decreased from 13 in 1990 to 9 in early 1999. In 1990, the five largest railroads accounted for about 74 percent of total rail industry operating revenue. Railroad Financial Health Has Improved, but Most Railroads Do Not Earn the Industry Cost of Capital

One important factor that has played a role in how railroads set their rates has been the financial health of the railroad industry. However, most railroads have been determined by the Board to be “revenue inadequate”—that is, their earnings were less than the railroad industry’s cost of capital. 2.5.) 2.6.) As we reported in 1990, revenue inadequacy affects the ability of a railroad to attract and/or retain capital. In addition, in other cases, such as long-distance wheat shipments from Montana and North Dakota to west coast destinations for export, real rail rates have stayed about the same as, or were slightly higher than, they were in 1990. However, the decreases were not uniform. 3.5.) 3.7.) Among the problems cited by shippers were an insufficient supply of railcars when and where needed, inconsistent pickup and delivery of cars, and longer than necessary transit times to a destination. Chemicals and plastics shippers were among the most dissatisfied with the overall quality of their rail service—approximately 80 percent of these shippers indicated that the overall quality of rail service they received in 1997 was somewhat or much worse than in 1990. This was particularly true in 1997 compared with 1990. Shippers have also attributed service problems to a lack of competitive alternatives to rail transportation. However, these measures are not enough to conclude that service has improved overall. 4.1.) Despite Recent Actions to Address Service Issues, Concerns Continue

Federal agencies and railroads have taken a number of actions to address the service problems that originated in the Houston/Gulf Coast area in 1997 during the implementation of the Union Pacific/Southern Pacific merger as well as service issues that are more longstanding and widespread.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on: (1) the environment within which railroad rates have been set since 1990; (2) how railroad rates have changed since 1990; (3) how railroad service quality has changed since 1990; and (4) actions taken by the Surface Transportation Board and others to address railroad service quality problems.

What GAO Found

GAO noted that: (1) the environment in which railroads set their rates has been influenced by ongoing industry consolidation, competitive conditions, and railroads' financial health; (2) as a result of mergers, bankruptcies, and the redefinition of what constitutes a major railroad, the number of independent Class I railroad systems has been reduced from 30 in 1976 to 9 in early 1999, with the 5 largest Class I railroads accounting for 94 percent of industry operating revenue; (3) this increased concentration has raised concerns about potential abuse of market power in some areas due to railroads' use of market-based pricing; (4) under market-based pricing, rail rates in markets with less effective competition may be higher than in markets that have greater competition from railroads or other modes of transportation; (5) railroads' financial health has also improved since 1990; (6) however, despite these improvements, the Board has determined that most Class I railroads are revenue inadequate because they do not generate enough revenue to cover the industry's cost of capital; (7) although such determinations are sometimes controversial, revenue inadequacy affects the ability of a railroad to attract or retain capital and remain financially viable; (8) railroad rates have generally decreased since 1990; (9) the decrease has not been uniform, and in some cases, rail rates have stayed the same as, or are higher than, they were in 1990; (10) this was particularly true on selected long distance rail shipments of wheat from northern plains states like Montana and North Dakota to west coast destinations; (11) rail routes with effective competitive alternatives--either from railroads or from trucks and barges--experienced greater decreases in rail rates; (12) as the rail industry has consolidated, shippers have complained that service quality has deteriorated; (13) shippers' complaints have included a lack of railcars when and where they were needed and inconsistent pickup and delivery of cars; (14) roughly 60 percent of the coal, grain, chemicals, and plastics shippers responding to GAO's survey said that their service was somewhat or much worse in 1997 than it was in 1990; (15) the overall quality of rail service cannot be measured; (16) federal agencies and railroads have taken a number of actions to address rail service problems; and (17) although these actions are expected to yield benefits, they do not address some shippers' belief that greater competition in the rail industry is needed to improve service.