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    provide for the expeditious handling and resolution of all proceedings. Railroad Industry Increasingly Healthy and Rates Generally Down Since Enactment of the Staggers Rail Act, but Concerns about Competition and Captivity Remain

The changes that have occurred in the railroad industry since the  enactment of the Staggers Rail Act are widely viewed as positive. Rail rates generally  declined between 1985 and 2000 but increased slightly from 2001 through  2004. Concerns about  competition and captivity in the industry remain because traffic is  concentrated in fewer railroads. This situation may  reflect reasonable economic practices by the railroads in an environment  of excess demand, or it may represent an abuse of market power. 3). It is difficult to  determine the number of captive shippers, because proxy measures can  overstate or understate captivity, but our analysis of available measures  indicates that the extent of captivity is dropping. Some Areas with Access to One Railroad Have Higher Percentages of Traffic Traveling at Rates That Exceed the Threshold for Rate Relief

Some economic areas with access to one Class I railroad also have more  than half of their traffic traveling at rates that exceed the statutory  threshold for rate relief. When  combined with comments from participants on our expert panel and  interviews with shipper and railroad groups, the results of our analysis  suggest that shippers in selected markets may be paying excessive rates,  meriting further inquiry and analysis. Despite STB’s  actions, there is little effective relief for captive shippers because STB’s  standard rate relief process is largely inaccessible. While our analysis of available measures  shows that the extent of captivity appears to be dropping in the freight  railroad industry, shippers that may be captive are paying substantially  over the statutory threshold for initiating a rate relief case. These approaches each have potential costs and benefits. As a result, the  public sector has increasingly been investing in freight rail projects. In contrast, STB has the statutory authority to inquire into and report on  railroad practices and could conduct a rigorous analysis of competition in  the freight rail industry that would rely on more than sample data and  could determine whether the inappropriate exercise of market power is  occuring in specific markets. Should STB find evidence of abuse, it could  consider several methods for creating the balance envisioned by the  Staggers Rail Act. Additional investment in freight rail infrastructure can produce  public benefits, and many state and local governments are involved in  freight rail infrastructure projects. DOT’s draft National Freight Policy represents a good start in this  direction. To ensure the efficiency and effectiveness of our nation’s freight system,  we are making the following recommendation to the Secretary of  Transportation:    As DOT continues to develop a national freight policy and a possible  federal policy response, 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. Our study included a  broad focus on changes in the freight railroad industry since the  Staggers Rail Act, the actions STB has taken to address concerns about  competition and captivity, and future freight demand and capacity.
Why GAO Did This Study

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.

What GAO Found

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.