    Railroad Regulation: Changes in Freight Railroad Rates from 1997 through 2000 (06/07/2002, GAO-02-524}

    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-02-524
        TITLE:   Railroad Regulation: Changes in Freight Railroad Rates from 1997 through 2000
         DATE:   06/07/2002

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    GAO: Report to the Chairman, Committee on Transportation and
    Infrastructure,

    House of Representatives:

    June 2002: Railroad Regulation: Changes in Freight Railroad Rates from
    1997

    through 2000:

    GAO-02-524:

    Contents:

    Letter:

    Results in Brief:

    Background:

    Rail Rates Generally Continued to Fall:

    Proportion of Rail Industry Revenues Exceeding 180 Percent of Variable

    Costs Generally Were Stable:

    Agency Comments and Our Evaluation:

    Appendixes:

    Appendix I: Scope and Methodology:

    Appendix II: Real Rail Rates for Coal:

    Appendix III: Real Rail Rates for Wheat and Corn Shipments:

    Appendix IV: Real Rail Rates for Chemicals and Transportation
    Equipment:

    Figure 1: Rail Rate Index for the Transportation of Selected

    Commodities, 1990-2000:

    Figure 2: Real Rail Rates for Coal, Selected Medium-Distance Routes,

    1990-2000:

    Figure 3: Real Rail Rates for Wheat, Selected Medium-Distance Routes,

    1990-2000:

    Figure 4: Real Rail Rates for Corn, Selected Medium-Distance Routes,

    1990-2000:

    Figure 5: Real Rail Rates for Plastic Materials or Synthetic Fibers,

    Resins, or Rubbers, Selected Short-Distance Routes, 1990-2000:

    Figure 6: Real Rail Rates for Motor Vehicles, Selected Medium-Distance

    Routes, 1990-2000:

    Figure 7: Percentage of Rail Industry Revenue Exceeding 180 Percent of

    Variable Costs for Selected Commodities, 1990-2000:

    Figure 8: R/VC Ratios for Medium-Distance Shipments of Wheat, 1990-
    2000:

    Figure 9: Real Rail Rates for Coal, Selected Short-Distance Routes,

    1990-2000:

    Figure 10: Real Rail Rates for Coal, Selected Long-Distance Routes,

    1990-2000:

    Figure 11: Real Rail Rates for Wheat, Selected Short- and Long-Distance

    Routes, 1990-2000:

    Figure 12: Real Rail Rates for Corn, Selected Short- and Long-Distance

    Routes, 1990-2000:

    Figure 13: Real Rail Rates for Potassium/Sodium Compounds, Selected

    Short-, Medium-, and Long-Distance Routes, 1990-2000:

    Figure 14: Real Rail Rates for Plastic Materials or Synthetic Fibers,

    Resins, or Rubbers, Selected Medium- and Long-Distance Routes, 1990-

    2000:

    Figure 15: Real Rail Rates for Motor Vehicles, Selected Long-Distance

    Routes, 1990-2000:

    Figure 16: Real Rail Rates for Motor Vehicle Parts or Accessories,

    Selected Medium- and Long-Distance Routes, 1990-2000:

    Abbreviations:

    Conrail: Consolidated Rail Corporation:

    R/VC: revenue-to-variable cost:

    June 7, 2002:

    The Honorable Don Young Chairman, Committee on Transportation and

    Infrastructure House of Representatives:

    Dear Mr. Chairman:

    The Railroad Revitalization and Regulatory Reform Act of 1976 and the

    Staggers Rail Act of 1980 gave freight railroads increased freedom to

    price their services according to market conditions. A number of

    shippers are concerned that freight railroads have used these pricing

    freedoms to unreasonably exercise their market power in setting rates

    for shippers with fewer alternatives to rail transportation. In 1999,

    we generally reported that most rail rates had decreased from 1990

    through 1996, and that rates for shipments of selected commodities with

    effective competitive transportation alternatives--such as from other

    railroads, trucks, or barges--generally had decreased to a greater

    extent than rates for shipments without such alternatives. [Footnote 1]

    However, some rates had increased. These results were consistent with

    the pricing freedoms provided by federal law that allows railroads to

    price their service in relation to market demand and competition.

    This report responds to your request that we update the rate

    information in our 1999 report using the same commodities and markets.

    For the period from 1997 through 2000, we (1) examine changes in rates

    and (2) describe changes in the proportion of shipments above the

    Surface Transportation Board�s statutory jurisdictional threshold for

    rate relief actions (shipments in which revenues exceed 180 percent of

    variable costs). [Footnote 2] To do so, we used the Carload Waybill

    Sample maintained by the Surface Transportation Board to determine

    rates for coal, grain (wheat and corn), chemicals (potassium and sodium

    compounds and plastic materials or synthetic fibers, resins, or

    rubber), and transportation equipment (finished motor vehicles and

    motor vehicle parts or accessories). [Footnote 3] These commodities

    represented a substantial portion of total industry revenue. We

    analyzed rate changes for these commodities in the top five

    transportation corridors (measured by tons shipped) according to length

    of haul (short, medium, and long). (See app. I for additional

    discussion of our methodology.) Although the focus of our work centered

    on the 1997-2000 period, we also present the results of our previous

    work covering the 1990- 1996 period for perspective.

    Results in Brief:

    From 1997 through 2000, rail rates generally decreased, both nationwide

    and for many of the specific commodities and markets that we examined.

    [Footnote 4] However, rail rates for some commodities and distance

    categories--such as wheat moving long distances (over 1,000 miles) and

    coal moving short distances (up to 500 miles)--have stayed about the

    same or increased. In other instances, such as wheat moving medium

    distances (501 to 1,000 miles), rail rates stayed about the same or

    decreased. There may be a variety of reasons why rail rates change over

    time, including increases or decreases in production or export of

    various commodities (such as coal or grain); changes in railroad costs;

    changes in use of contracts that tie rates to specific volumes of

    business; service problems that could affect the ability of railroads

    to supply railcars, crews, and locomotive power to meet the demand for

    rail transportation; or the degree of competition from other rail or

    nonrail (such as barge or truck) transportation providers. In general,

    as expected, rail rates were lower in areas with more, rather than

    less, competition from other transportation providers.

    Overall, the proportion of rail shipments above the board�s statutory

    jurisdictional threshold for considering rate relief actions--where

    railroad revenues for the shipment exceed 180 percent of variable costs

    (variable costs are those costs that change with the quantities

    shipped)--stayed relatively constant at about 30 percent from 1997

    through 2000. However, the proportion of shipments for which revenues

    exceeded variable costs by 180 percent varied depending on commodity

    and markets. For example, in 2000, 62 percent of chemicals were

    transported at rates generating revenues exceeding 180 percent of

    variable costs. However, in the same year, only 17 percent of

    transportation equipment (which includes motor vehicles and motor

    vehicle parts or accessories) was transported at rates above this

    level. Although revenue-to-variable cost ratios are often used as

    indicators of shippers� captivity to railroads, changes in such ratios

    over time may not be a reliable indicator of trends in the actual rates

    being paid by shippers. Such ratios can be increasing at the same time

    as rates are decreasing and, conversely, decreasing at the same time as

    rates are increasing. In particular, if industry productivity increases

    and the cost savings are passed entirely on to customers in the form of

    rate reductions, revenue-to-variable cost (R/VC) ratios may increase,

    since both the numerator and denominator would be decreased by the same

    amount.

    In commenting on a draft of this report, both the board and the

    Department of Transportation generally agreed that it accurately

    portrayed rail rate trends over the 1997 through 2000 period. The board

    said it is difficult to identify with specificity why rail rates change

    in the short run, especially for specific commodities over specific

    routes. The board suggested that our report recognize additional

    factors, such as commodity supply, that influence rate changes. The

    department suggested that our Results in Brief could better recognize

    that R/VC ratios by themselves are not good indicators of railroad

    market power. We revised the report to reflect these comments.

    Background:

    Railroads are the primary mode of transportation for many products,

    especially for such bulk commodities as coal and grain. Yet by the

    1970s, American freight railroads were in a serious financial decline.

    Congress responded by passing the Railroad Revitalization and

    Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980. These

    acts reduced rail regulation and encouraged greater reliance on

    competition to set rates. Railroads have also continued to consolidate

    (through such actions as mergers, purchases, changes in control, and

    acquisitions) to reduce costs, increase efficiencies, and improve their

    financial health.

    The 1976 act limited the authority of the Interstate Commerce

    Commission (now the Surface Transportation Board) to regulate rates to

    instances in which there is an absence of effective competition--that

    is, where a railroad is �market dominant.� The 1980 act made it federal

    policy to rely, where possible, on competition and the demand for rail

    services (called demand-based differential pricing) to establish

    reasonable rates. Differential pricing recognizes that inherent in the

    rail industry cost structure are joint and common costs that cannot be

    attributed to particular traffic. Under demand-based differential

    pricing, railroads recover a greater proportion of these unattributable

    costs from rates charged to those with a greater dependency on rail

    transportation. Among other things, the 1980 act also (1) allowed

    railroads to market their services more effectively by negotiating

    transportation contracts (generally offering reduced rates in return

    for guaranteed volumes) containing confidential terms and conditions;

    (2) limited collective rate-setting to those railroads actually

    involved in a joint movement of goods; and (3) permitted railroads to

    change their rates without challenge in accordance with a rail cost

    adjustment factor. Furthermore, both acts required the Interstate

    Commerce Commission to exempt railroad transportation from economic

    regulation in certain instances. The Staggers Rail Act required

    exemptions where regulation is not necessary to carry out rail

    transportation policy and where a transaction or service is of limited

    scope, [Footnote 5] or where regulation is not needed to protect

    shippers from an abuse of market power. During the 1980s and 1990s,

    railroads used their increased pricing freedoms to improve their

    financial health and competitiveness.

    In addition, the railroad industry has continued to consolidate in the

    last 2 decades to become more competitive by reducing costs and

    increasing efficiencies. (This consolidation continues a trend that has

    been occurring since the nineteenth century.) In 1976, there were 30

    independent Class I railroad systems, consisting of 63 Class I

    railroads. (Class I railroads are the nation�s largest railroads.)

    Currently there are 7 railroad systems, consisting of 8 Class I

    railroads. Half of that reduction was attributable to consolidations.

    [Footnote 6] The 8 Class I railroads are the Burlington Northern and

    Santa Fe Railway Co.; CSX Transportation, Inc.; Grand Trunk Western

    Railroad, Inc.; Illinois Central Railroad Co.; Kansas City Southern

    Railway Co.; Norfolk Southern Railroad Co.; Soo Line Railroad Co., and

    Union Pacific Railroad Co.

    The Surface Transportation Board is the industry�s economic regulator.

    The board is a decisionally independent adjudicatory agency

    administratively housed within the Department of Transportation. Among

    other things, board approval is needed for market entry and exit of

    railroads and for railroad mergers and consolidations. The board also

    adjudicates complaints concerning the quality of rail service and the

    reasonableness of rail rates. Under the ICC Termination Act of 1995,

    the board may review the reasonableness of a rate only upon a shipper�s

    complaint. Moreover, the board may consider the reasonableness of a

    rate only if (1) the revenue produced is equal to or greater than 180

    percent of the railroad�s variable costs for providing the service and

    (2) it finds that the railroad in question has market dominance for the

    traffic at issue. If the revenue produced by that traffic equals or

    exceeds the statutory threshold, then the board examines intramodal and

    intermodal competition to determine whether the railroad has market

    dominance for that traffic and, if so, whether the challenged rates are

    reasonable.

    From 1997 through 2000, there were two periods during which major

    portions of the rail industry experienced serious service problems. The

    first began in July 1997, during implementation of the Union Pacific

    Railroad and Southern Pacific Transportation Company merger. As a

    result of aging infrastructure in the Houston, Texas, area that was

    inadequate to cope with a surge in demand, congestion on this system

    began affecting rail service throughout the western United States. Rail

    service disruptions and lengthy shipment delays continued through the

    rest of 1997 and into 1998. The board issued a series of decisions that

    generally were designed to enhance the efficiency of freight movements

    by changing the way rail service is provided in and around the Houston

    area. These decisions principally focused on the Houston/Gulf Coast

    area and included an emergency service order to address the service

    crisis. In addition, CSX Transportation and Norfolk Southern

    Corporation began experiencing service problems in the summer and early

    fall of 1999, shortly after they began absorbing their respective parts

    of the Consolidated Rail Corporation (Conrail). These service problems

    caused congestion and shipment delays, primarily in the Midwest and

    Northeastern parts of the country. By early 2000, those service

    problems had largely been resolved without formal board action.

    Rail Rates Generally Continued to Fall:

    Rail rates generally have continued to fall nationwide for the

    commodities we studied and in the specific markets we reviewed.

    However, in several markets rates either increased over the 4-year

    period for certain commodities or increased and then later fell,

    resulting in an overall decrease for the period. There may be a variety

    of reasons why rail rates change over time, including increases or

    decreases in production or export of various commodities (such as coal

    or grain); changes in railroad costs; changes in use of contracts that

    tie rates to specific volumes of business; service problems that could

    affect the ability of railroads to supply railcars, crews, and

    locomotive power to meet the demand for rail transportation; or the

    degree of competition. We do not attempt to identify and explain all

    the various reasons for changes in the rail rates we examined. Rather,

    our aim is to put rate changes for particular commodities into context

    with some of the economic or rail industry conditions that might have

    affected them from 1997 through 2000.

    Rates for Selected Commodities Have Generally Continued to Fall

    Nationally:

    Rates for coal, grain (wheat and corn), chemicals (potassium and sodium

    compounds and plastic materials or synthetic fibers, resins, or

    rubber), and transportation equipment (finished motor vehicles and

    motor vehicle parts or accessories) generally fell from 1997 through

    2000. [Footnote 7] (See fig. 1.) These decreases followed the general

    trend we previously reported on for the 1990-1996 period and, as

    before, tended to reflect railroad cost reductions brought about by

    continuing productivity gains in the railroad industry that have

    allowed railroads to reduce rates in order to be competitive.

    Figure 1. Rail Rate Index for the Transportation of Selected
    Commodities, 1990-

    2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    From 1997 through 2000, the rates for coal decreased slightly but

    steadily from about 1.5 cents per ton-mile to about 1.4 cents per ton-

    mile. Coal production fluctuated over this period but generally

    decreased from about 1.12 billion tons in 1998 to about 1.08 billion

    tons in 2000. The production of coal shipped for export also generally

    decreased from about 83.5 million tons in 1997 to 58.5 million tons in

    2000. The Energy Information Administration attributed these decreases

    to, among other things, a draw down in coal stocks by utilities and

    reluctance on the part of some coal producers to expand production.

    [Footnote 8] Lower demand for rail transportation resulting from lower

    production generally results in lower rail rates. However, the demand

    for rail transportation (and consequently rail rates) can also be

    affected by changes in coal held as inventory and other supply- related

    factors. Board officials suggested that the decrease in coal rates

    during this period could also be attributed in part to increasing

    competition between low-sulfur Powder River Basin coal from the West

    and higher- sulfur Eastern coal, and to the expiration and resulting

    renegotiation of many long-term coal transportation contracts.

    The rates for wheat increased slightly from 1997 to 1998--from about

    2.46 cents per ton-mile in 1997 to about 2.47 cents per ton-mile--

    before falling back in 1999 and 2000 to just under 2.4 cents per ton-

    mile. Rates for wheat may have decreased because overall production

    decreased, from 67.5 million tons for the 1997-1998 season to 60.5

    million tons for the 2000-2001 season, despite a modest increase in

    demand for exports (from 28.1 million tons to 30.0 million tons over

    the same period). Preliminary information indicates that in 1998, the

    most recent year for which data were available, railroads transported

    over half (about 55 percent) of all wheat shipments.

    Corn rates generally decreased from about 2 cents per ton-mile in 1997

    to about 1.8 cents per ton-mile in 2000. Corn production fluctuated

    between 1997 and 1999 (the latest year for which data are available),

    increasing from 9.2 million bushels in 1997 to 9.8 million bushels in

    1998 before falling back to 9.4 million bushels in 1999. However, the

    domestic use of corn (the primary use of corn) increased by about 4

    percent--from 7.3 million bushels in 1997 to 7.6 million bushels in

    1999. This increase suggests, all else being equal (including rail

    costs), greater demand for transportation and possibly higher rail

    rates. Yet, rail rates for corn are influenced by a number of factors.

    Significant amounts of corn are produced in areas accessible to

    navigable waterways and, therefore, the transportation of corn is less

    dependent on rail. (About 25 percent of corn was shipped by rail in

    1998, the latest year for which data are available.) In addition, rates

    may be affected by the supply of corn. From 1997 through 1999 (the

    latest year for which data are available) the total supply of corn

    increased from 10.1 million bushels to 11.2 million bushels. [Footnote

    9] It is possible that intermodal:

    competition, increased domestic use of corn, and an increasing supply

    of corn may have all influenced rail rates for corn. [Footnote 10]

    The rates for chemicals (as illustrated by rates for potassium/sodium

    and plastics) decreased slightly from 1997 through 2000 at a steady

    rate. According to data from the American Chemistry Council, the

    production of chemicals in the potassium/sodium classification

    increased between 1997 and 1999. Plastics production also steadily

    increased over the period. [Footnote 11] These data suggest that, all

    things being equal, rail rates should have increased over the period

    because of a higher demand for rail transportation. However, over 65

    percent of chemicals are transported less than 250 miles, a distance

    that is truck competitive, which may indicate that railroad rates are

    sensitive to truck competition. In addition, not all chemicals that are

    produced require immediate transportation. An official with the

    American Chemistry Council told us that chemical manufacturers often

    produce a product, load it onto railcars, and store the railcars until

    the product is sold, at which point it is transported to destination.

    Although the tonnage of chemicals shipped by rail generally increased

    between 1997 and 2000, railroads accounted for only 20 percent of the

    tonnage transported in 2000. This is up slightly from the 19 percent

    transported in 1997. [Footnote 12]

    Rates for motor vehicles and parts also generally decreased over the 4-

    year period, but not at a steady rate. This occurred during a time when

    U.S. car and truck production generally fluctuated between 12 million

    and 13 million units. Car production, in particular, generally

    decreased over the period from about 5.9 million units to about 5.5

    million units, according to Crain Communications, Inc., a publisher of

    Automotive News . The automotive industry is heavily dependent on

    railroads, and the Association of American Railroads--a railroad trade

    group--estimates that railroads transport about 70 percent of finished

    motor vehicles. Automotive production declines, among other things,

    might have contributed to generally decreasing rail rates. Data on auto

    parts production were not available.

    In its own study, the board found that the average, inflation-adjusted

    rail rate had continued a multi-year decline in 1999 and that, since

    1984, real rail rates had fallen 45 percent. [Footnote 13] It found

    that real rail rates had decreased for both eastern and western

    railroads. According to the board, the results of its study implied

    that, although railroads retain a degree of pricing power in some

    instances, nearly all productivity gains achieved by railroads since

    the 1980s (when railroad economic regulation was reduced) have been

    passed on to rail customers in the form of lower rates. The board

    estimated that rail shippers would have paid an additional $31.7

    billion for rail service in 1999 if revenue per ton-mile had remained

    equal to its 1984 inflation-adjusted level. The board acknowledged,

    however, that even though real rail rates had decreased overall,

    individual rates might have increased and, further, that some rail

    customers might feel disadvantaged if their rates did not fall to the

    same extent as their competitors� rates.

    Rail Rates for Specific Markets Generally Have Continued to Fall:

    Our analysis of rail rates for coal, grain (corn and wheat), chemicals

    (potassium, sodium, plastics, and resins), and motor vehicles and motor

    vehicle parts in selected high-volume transportation markets generally

    showed that rates continued to decrease from 1997 through 2000.

    However, this was not true in all markets. Rail rates may have been

    sensitive to competition, and rail rates were generally higher in areas

    considered to have less railroad-to-railroad competition.

    Coal:

    Real rail rates for coal, although fluctuating in some markets,

    generally decreased from 1997 through 2000. In virtually every market

    we analyzed--both in the East (Appalachia) and in the West (Powder

    River Basin)--rates decreased. For example, on a medium-distance route

    from Central Appalachia to Orlando, Florida, rates decreased from about

    2.2 cents per ton-mile in 1997 to 1.7 cents per ton-mile in 2000.

    [Footnote 14] (See fig. 2.) The 2000 rate was also substantially less

    than the rate of 2.6 cents per ton- mile in 1990.

    Figure 2. Real Rail Rates for Coal, Selected Medium-Distance Routes,
    1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Competition may have played a role in the decrease in coal rates that

    we examined. In the West, the two Class I railroads that served the

    Powder River Basin during the 1990-1996 period, the Burlington Northern

    and Santa Fe Railway and the Union Pacific, continued to serve the

    market from 1997-2000. In the East, three Class I railroads served

    Central Appalachia until mid-1999: Conrail, CSX Transportation, and

    Norfolk Southern. [Footnote 15] Following its acquisition by the latter

    two carriers, Conrail began being absorbed into CSX Transportation and

    Norfolk Southern in June 1999, with the latter two carriers continuing

    to serve the market. As part of this transaction, certain areas of

    Pennsylvania and West Virginia (part of the Appalachia Coal Supply

    Region) that had been served exclusively by Conrail, although conveyed

    to Norfolk Southern, are available to CSX on an equal-access basis for

    25 years, subject to renewal.

    Finally, rail rates for coal can be influenced by coal production as

    well as existing supplies of coal. In general, coal production in the

    Appalachian area decreased from 1997 to 2000--from about 468 million

    tons to about 421 million tons. On the other hand, coal production in

    the Western region (which includes the Powder River Basin) increased

    between 1997 and 1999--from about 451 million tons to about 512 million

    tons--before falling back to 510 million tons in 2000. In its 2000

    review, the Energy Information Administration noted that coal

    production in Wyoming (which dominates coal production in both the West

    and the United States) was driven higher by an increasing penetration

    of Powder River Basin coal into Eastern markets--an action creating

    competition for coal produced in the East. [Footnote 16] Board

    officials told us that in order for Powder River Basin coal to

    penetrate Eastern markets, railroads have had to offer very low

    transportation rates. In addition, they suggested that rail rates for

    Powder River Basin coal are lower than rail rates for Appalachian coal

    because of the ability of railroads to use larger (110-car unit) trains

    to pick up the coal and because of more favorable terrain (flatter and

    straighter routes) to transport the coal from the mines. Coal supply

    (as measured by year-end coal stocks) generally fluctuated over the

    1997 through 2000 period-- increasing from about 140 million tons in

    1997 to 183 million tons in 1999, before falling back to 142 million

    tons in 2000.

    Wheat and Corn:

    From 1997 through 2000, real rail rates for shipments of wheat and corn

    generally stayed the same or decreased for the markets that we

    reviewed. [Footnote 17] For example, wheat shipments moving over

    medium-distance (501 miles to 1,000 miles) routes generally followed

    this pattern. (See fig. 3.) The exception was wheat shipped from the

    Oklahoma City, Oklahoma, economic area to the Houston, Texas, economic

    area. [Footnote 18] On this route, rail rates generally increased by 12

    percent--from 1.9 cents per ton-mile in 1997 to 2.2 cents per ton-mile

    in 2000. The largest increase occurred between 1997 and 1998, when

    rates went from 1.9 to 2.1 cents per ton-mile. This increase came at

    about the same time as the service crisis in the Houston/Gulf Coast

    area that delayed the delivery of railcars and, in some cases, halted

    freight traffic. Although board officials did not think railroads used

    rail rates to allocate the supply of railcars during this time, such an

    action could have occurred for particular commodities on particular

    routes. The increases also came at the same time as wheat production in

    Oklahoma rose from about 170 million bushels in 1997 to just under 200

    million bushels in 1998. This may be consistent with an increase in the

    handling of bulk grain by the Port of Houston Authority between 1997

    and 1998, from about 388,000 tons to 1.2 million tons. [Footnote 19]

    These factors may also have contributed to a general increase in rail

    rates for these movements. Even with these increases, the rail rate in

    2000 was still less than it was in 1990--about 2.2 cents per ton-mile

    in 2000, as compared with 2.5 cents per ton-mile in 1990.

    Figure 3. Real Rail Rates for Wheat, Selected Medium-Distance Routes,
    1990-2000:

    [See PDF for image]

    Note: For confidentiality, data points for the route from the Duluth

    economic area to the Chicago economic area for 1993 and 1999 were

    excluded.

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Rail rates for wheat from the northern plains locations of the Great

    Falls, Montana, and Grand Forks, North Dakota, economic areas on

    medium- distance routes generally decreased over the period. [Footnote

    20] Wheat production and demand for rail transportation may have been

    influencing factors. Although the volume of export wheat was increasing

    over the 1997 to 2000 period, wheat production in various states

    fluctuated. For example, wheat production in Montana steadily declined

    between 1997 and 2000, from about 182 million bushels to about 154

    million bushels. In contrast, wheat production in North Dakota (the

    second highest wheat producing state behind Kansas in 2000) fluctuated

    between about 240 million bushels and 315 million bushels, alternately

    increasing and decreasing beginning in 1997. Whether wheat is

    transported or not depends on many factors, including the price of

    wheat and the amount of carryover stocks from year to year. In 2001,

    the U.S. Department of Agriculture reported that grain car loadings on

    railroads had steadily decreased over the previous 5 years, with the

    exception of 1999. [Footnote 21] This was attributed, at least

    partially, to farmers holding on to grain because of large harvests,

    large carryover stocks, and low prices.

    Rate trends between 1997 and 2000 for the shipment of corn were similar

    to those for wheat. Again, rate trends for corn can be illustrated in

    the rail rates for medium-distance routes. (See fig. 4.) The rates for

    most of these routes generally either stayed about the same or

    decreased over the period. Similar patterns are seen in the other

    distance categories. However, some rail rates on short-distance routes

    increased between 1999 and 2000. This was particularly true for corn

    shipments within the Minneapolis, Minnesota, economic area, where rates

    went from about 3.5 cents per ton- mile in 1999 to about 4.2 cents per

    ton-mile in 2000. The specific reasons for this increase are not clear.

    Corn production in Minnesota generally decreased during this period,

    from about 990 million bushels in 1999 to about 957 million bushels in

    2000. However, in November 1999, the U.S. Department of Agriculture

    reported that, while corn production and exports were expected to

    decrease, the domestic use of corn was expected to remain strong, and

    that domestic use of corn was heavily dependent on rail and truck

    transportation. [Footnote 22] Other than livestock feed, domestic use

    of corn includes corn sweeteners (used in the soft drink industry) and

    ethanol (a fuel additive). Minnesota also has an active livestock

    industry, and the state ranked third highest in the country in the

    number of hogs and pigs produced and hogs marketed in 1999 (behind Iowa

    and North Carolina).

    Figure 4. Real Rail Rates for Corn, Selected Medium-Distance Routes,
    1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Rail rates for wheat and corn shipments appear to be sensitive to both

    inter- and intramodal competition. As shown in figure 3, rates for

    wheat shipments from the Duluth, Minnesota, to the Chicago, Illinois,

    economic areas--a potential Great Lakes water competitive route--

    continued to be between 0.72 cents to just under 2 cents per ton-mile

    lower in 2000 than rates on other medium-distance routes we examined

    that potentially had fewer transportation alternatives (for example,

    shipments from Great Falls). In addition, as shown in figure 4, rail

    rates for corn shipments from the Chicago and Champaign, Illinois,

    economic areas to the New Orleans, Louisiana, economic area--

    potentially barge-competitive routes--were substantially lower (up to

    1.7 cents per ton-mile in 2000) than rates on other medium-distance

    corn routes we examined that potentially had fewer transportation

    choices (for example, shipments from the northern plains states).

    Sensitivity to intramodal (railroad-to-railroad) competition also

    continued to be evident. For example, rail rates from 1997 through 2000

    for wheat shipments originating in the Wichita, Kansas, and Oklahoma

    City, Oklahoma, economic areas were about 1.4 cents per ton-mile lower

    than rail rates for wheat shipments from the Great Falls economic area

    to the Portland, Oregon, economic area over the same period. The

    central plains area is considered to have more railroad competition

    than the northern plains area.

    Shipment size can also influence railroad costs and, therefore, rates.

    Loading more cars at one time increases efficiency and reduces a

    railroad�s costs. From 1997 through 2000, the average shipment size for

    wheat continued to be higher in the central plains than in the northern

    plains. For example, the average shipment size for wheat from the

    Wichita economic area from 1997 through 2000 was about 88 railcars, as

    compared with about 43 railcars for wheat shipments from the Great

    Falls economic area. In both instances, the average shipment size

    increased in the 1997 through 2000 period as compared with the 1990

    through 1996 period--by about 17 railcars for wheat shipments from the

    Wichita area (from about 71 railcars to about 88 railcars) and by about

    5 railcars for wheat shipments from the Great Falls area (from about 38

    railcars to about 43 railcars). As discussed above, rates in the

    central plains states were typically lower than those in the northern

    plains states for the routes we examined.

    Chemicals and Transportation Equipment:

    Real rail rate changes for chemical and transportation equipment (motor

    vehicles and motor vehicle parts) shipments were mixed for the 1997

    through 2000 period for the markets we reviewed--some rates fell while

    others stayed the same or increased. These trends can be seen in short-

    distance (500 miles or less) shipments of plastics. [Footnote 23] (See

    fig. 5.) Two of the more notable trends are shipments within the

    Beaumont, Texas, and Lake Charles, Louisiana, economic areas. In the

    Beaumont economic area, real rail rates increased from 42.6 cents per

    ton-mile in 1997 to 55.8 cents in 1998 before falling to 29.1 cents in

    2000. In the Lake Charles economic area, rail rates increased from 25.9

    cents per ton-mile in 1996 to 29.7 cents per ton-mile in 1997 before

    falling (by about 78 percent) to 6.5 cents per ton-mile in 1998. After

    increasing again in 1999, the rates decreased to 4.8 cents per ton-mile

    in 2000 on this route. Rates in the other markets generally stayed

    about the same or decreased. While it is not clear why these rates

    changed the way they did, the changes came at the time (1997- 1998) of

    a severe service crisis in the Houston/Gulf Coast area. Board officials

    said that generally, in their view, it did not appear that railroads

    used rail rates to allocate resources during the service crisis; they

    suggested that the erratic nature of the year-by-year rate changes

    reported for certain of these intra-terminal movements (which,

    according to the board, tend to be small shipment sizes) may have been

    related to the heterogeneous nature of this chemicals traffic and to

    the low sampling rates for smaller shipment sizes--1 in 40 waybills for

    movements of 1 to 2 car shipments, and 1 in 12 waybills for 3 to 15 car

    shipments--in the stratified Carload Waybill Sample .

    Figure 5. Real Rail Rates for Plastic Materials or Synthetic Fibers,
    Resins, or

    Rubbers, Selected Short-Distance Routes, 1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Real rail rates for shipments of finished motor vehicles and motor

    vehicle parts or accessories also showed a variety of trends. In 1999,

    we reported that one of the more dramatic changes in rates was for the

    transportation of finished motor vehicles from Ontario, Canada, to

    Chicago. (See fig. 6.) The rates on this route decreased about 40

    percent between 1990 and 1996. Since that time, the rates on this route

    have largely stabilized at about 12 cents per ton-mile, with a slight

    increase between 1997 and 2000. In general, rail rates for the

    transportation of motor vehicle parts or accessories on both long- and

    medium-distance routes decreased. The notable exception is rates for

    the transportation of motor vehicle parts or accessories between the

    Detroit, Michigan, and Dallas, Texas, economic areas. On this route,

    the rates generally increased from about 9 cents per ton-mile in 1997

    to about 22 cents per ton-mile in 2000--about a 139 percent increase.

    Most traffic in motor vehicles and motor vehicle parts or accessories

    is either under contract or exempt from economic regulation. Use of

    contracts suggests that rate decreases may be related to price

    discounts offered in return for guaranteed volumes of business.

    However, board officials noted that in recent years, railroads have

    increasingly been offering motor vehicle manufacturers service packages

    in which railroads provide premium service for higher rates. This may

    account for rate increases on specific routes.

    Figure 6. Real Rail Rates for Motor Vehicles, Selected Medium-Distance
    Routes,

    1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Proportion of Rail Industry Revenues Exceeding 180 Percent of Variable

    Costs Generally Were Stable:

    Between 1997 and 2000, the proportion of all railroad revenue that came

    from shipments transported at rates that generated revenues exceeding

    180 percent of variable costs stayed relatively constant at just under

    30 percent. (See fig. 7.) This result is about 2 percentage points less

    than the average for the 1990-1996 period. In addition to being a

    jurisdictional threshold for the board to review the reasonableness of

    rates, revenue-to-variable cost ratios are sometimes used as indicators

    of shippers� captivity to railroads. If used in this way, the higher

    the R/VC ratio, the more likely it is that a shipper can use only rail

    to meet its transportation needs. [Footnote 24]

    Figure 7. Percentage of Rail Industry Revenue Exceeding 180 Percent of
    Variable

    Costs for Selected Commodities, 1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Individual commodity results differed markedly. In 2000, 62 percent of

    chemicals (which include potassium, sodium, and plastics) and 42

    percent of coal were transported at rates generating revenues exceeding

    180 percent of variable costs. [Footnote 25] However, only 17 percent

    of transportation equipment (which includes motor vehicles and motor

    vehicle parts or accessories) and 32 percent of farm products (which

    includes wheat and corn) were transported at rates above this level.

    Board officials suggested that the comparatively high and rising R/VC

    ratios for chemicals traffic is likely attributable in part to the fact

    that the railroads� greater liability exposure associated with

    transporting hazardous materials is not reflected in the costs

    attributable to this traffic under the board�s rail costing system.

    Board officials told us that higher rail rates for transporting

    hazardous chemicals are reflected in higher revenues for a railroad.

    However, additional costs incurred because of the higher liability

    exposure (such as court judgments against a company and set asides for

    future claims) are shown as special or extraordinary charges that do

    not become part of the variable costs of a movement in the board�s rail

    costing system.

    In contrast to the fairly constant overall proportion of goods shipped

    with revenues exceeding 180 percent, the results for four broad classes

    of commodities decreased or increased noticeably. For example, the

    proportion of farm products transported at above 180 percent R/VC

    increased from 23 percent to 32 percent from 1997 through 2000,

    following an increase from 1990 to 1994 (from 22 to 32 percent) and a

    decline from 1994 to 1996 (from 32 to 23 percent). The proportion of

    coal shipped above this ratio decreased from 50 percent to 42 percent

    from 1997 through 2000, continuing a gradual overall decrease from

    1990.

    In some instances, the average R/VC ratios for the 1997-2000 period

    were considerably higher or lower than the average R/VC ratios for the

    1990- 1996 period. For example, the largest increase in average R/VC

    ratios for the routes that we reviewed was for medium-distance

    shipments of plastics from the Houston, Texas, economic area to the

    Little Rock, Arkansas, economic area. On this route, the average R/VC

    ratio increased by about 64 percentage points--from an average of 154

    percent (1990-1996) to an average of 218 percent (1997-2000). The R/VC

    ratio on this route peaked at 250 percent in 1999. The R/VC ratio on

    this route was generally increasing while the rail rate was generally

    decreasing, suggesting that both rates and variable costs were

    decreasing and that railroads did not pass on all cost reductions to

    customers in the form of rate reductions. In contrast, the largest

    decrease in average R/VC ratios for the routes we examined was about

    116 percentage points, which occurred for motor vehicle shipments

    between the Chicago economic area and the Dallas economic area--from an

    average of 240 percent (1990-1996) to an average of 124 percent (1997-

    2000). Over this latter period, rail rates on this route decreased from

    about 8.7 cents per ton-mile in 1997 to about 8 cents per ton-mile in

    2000. This suggests that variable costs increased during this period.

    The R/VC ratios we observed are consistent with railroads� ability to

    use differential pricing, and they are sensitive to competition. For

    example, over the 1997-2000 period and the 1990-1996 period, the R/VC

    ratio for medium-distance shipments of wheat from the Great Falls

    economic area (a northern plains location) exceeded those for wheat

    shipments from the Wichita, Oklahoma City, and Duluth economic areas

    for the specified destinations. (See fig. 8.) There are fewer

    potentially competitive alternatives to rail in the northern plains

    states. In contrast, shipments originating in the central plains states

    (for example, from Wichita and Oklahoma City) are considered by some to

    have more alternatives to rail than in the northern plains. Duluth (a

    northern plains origin) offers a competitive alternative of

    transportation by water. The anomaly appears to be medium-distance

    wheat shipments originating in the Grand Forks, North Dakota, economic

    area (a northern plains origin) transported to the St. Louis, Missouri,

    economic area. The R/VC ratio for this route, although consistently

    above the R/VC ratio for shipments from the Duluth economic area (with

    potential water competition), was generally below that of Wichita and

    Oklahoma City (with potentially more rail competition) from 1997

    through 2000. This suggests that wheat shipments on this route may have

    been sensitive to barge competition from the Mississippi River or rail

    competition in the central plains states or the Midwest.

    Figure 8. R/VC Ratios for Medium-Distance Shipments of Wheat, 1990-
    2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    The use of R/VC ratios has limitations. In particular, the ratios are

    subject to misinterpretation because they are simple divisions of

    revenues by variable costs. It is possible for rates paid by shippers

    to be dropping while the R/VC ratio is increasing--a seemingly

    contradictory result. For example, if revenues (which are the rates

    paid by shippers) are $2 and variable costs are $1, then the R/VC ratio

    is 200 percent. If costs decrease by 50 cents and railroads pass this

    cost decrease on to shippers by decreasing rates by 50 cents, the R/VC

    ratio becomes 300 percent. Therefore, by itself, the R/VC ratio could

    suggest that railroads are using their market power to make shippers

    worse off when this might not be the case. Board officials suggested

    that the R/VC ratio shown in figure 8 for the movement of wheat from

    the Great Falls economic area to the Portland economic area is one such

    instance of this. In this case, rail rates from Great Falls generally

    decreased over the 1997 through 2000 period from about 3.5 cents per

    ton-mile in 1997 to about 3.2 cents per ton-mile in 2000. Board

    officials said unit costs were also decreasing, in part, because of

    increases in shipment size and various carrier-specific productivity

    improvements related to the 1995 Burlington Northern Railroad merger

    with the Atchison Topeka & Santa Fe Railway Company. The R/VC ratio on

    this route increased from 240 percent in 1997 to 308 percent in 2000.

    Similarly, using the example above, if variable costs increase by 50

    cents (from $1 to $1.50) and railroads increase their rates by the same

    amount (from $2 to $2.50), then the R/VC ratio becomes 167 percent.

    Again, the R/VC ratio alone would suggest that shippers are better off-

    -because the R/VC ratio decreased from 200 percent--when this might not

    necessarily be the case.

    Although R/VC ratios have limitations, they can be useful indicators of

    railroad pricing and of whether railroads may be using their market

    power to set rates. As described previously, the R/VC ratio is a

    jurisdictional threshold for the Surface Transportation Board to

    consider rate relief cases. The board uses other analytical techniques

    to determine whether rates are reasonable.

    Agency Comments and Our Evaluation:

    We provided a draft of this report to the Surface Transportation Board

    and the Department of Transportation for their review and comment. The

    board provided its comments in a meeting that included its general

    counsel and chief economist. In general, the board agreed with the

    material presented in our draft report and stated that it accurately

    portrayed rail rate trends over the period of our study. It said that

    the overall trend of declining rates that we found is consistent with

    studies and analyses prepared by the board. Board officials said that,

    while it can be difficult to identify with specificity the reasons why

    rail rates might change in the short run, especially rates for specific

    commodities over specific routes, the draft report did an admirable job

    in discussing factors that could influence rate changes. Among the

    specific comments made were (1) that low rail rates have allowed

    Western coal to penetrate Eastern coal markets and (2) that R/VC ratios

    for chemicals may not fully reflect the costs of increased liability

    exposure faced by railroads in transporting hazardous chemicals. We

    made changes to the report to reflect the board�s comments. The board

    offered additional clarifying, presentational, and technical comments

    that, with few exceptions, we incorporated into our report.

    The Department of Transportation, in oral comments made by the

    director, Office of Intermodal Planning and Economics, Federal Railroad

    Administration, said that the report fairly and accurately portrayed

    the changes in railroad freight rates over the study period, and that

    rail rates were responsive to market conditions and competition. The

    department suggested that our Results in Brief section should indicate

    that R/VC ratios cannot be relied upon as measures of railroad market

    power. We modified the Results in Brief to provide a fuller discussion

    of R/VC limitations.

    As arranged with your office, unless you publicly announce its contents

    earlier, we plan no further distribution of this report until 21 days

    after the date of this letter. At that time, we will send copies of

    this report to congressional committees with responsibilities for

    freight railroad competition issues; the administrator, Federal

    Railroad Administration; the chairman, Surface Transportation Board;

    and the director, Office of Management and Budget. We will also make

    copies available to others upon request. This report will also be

    available on our home page at http://www.gao.gov .

    If you or your staff have any questions about this report, please

    contact either James Ratzenberger at ratzenbergerj@gao.gov or me at

    heckerj@gao.gov . Alternatively, we may be reached at (202) 512-2834.

    Key contributors to this report were Stephen Brown, Richard Jorgenson,

    and James Ratzenberger.

    Sincerely yours,

    JayEtta Z. Hecker Director, Physical Infrastructure Issues:

    Signed by JayEtta Z. Hecker.

    (544029):

    FOOTNOTES

    [1] U.S. General Accounting Office, Railroad Regulation: Changes in

    Railroad Rates and Service Quality Since 1990, GAO/RCED-99-93

    (Washington, D.C.: Apr. 16, 1999).

    [2] The Surface Transportation Board is the industry�s economic

    regulator. Among other things and upon request, it decides disputes

    between shippers and railroads over the reasonableness of rates. Rates

    are not presumed unreasonable solely because they are above this

    threshold.

    [3] The Carload Waybill Sample is a sample of documents prepared from

    bills of lading (authorizing railroads to move shipments and collect

    freight charges) that are submitted by railroads annually.

    [4] Rates are measured as cents per ton-mile. A ton-mile is 1 ton of

    freight transported 1 mile. Unless otherwise noted, all rates are in

    1996 dollars. We used 1996 dollars to facilitate comparisons of the

    results in this report with those presented in our 1999 report.

    [5] A transaction is something other than a continuing service provided

    by railroads that requires board approval (such as the control of one

    railroad by another or an abandonment of track).

    [6] Other reasons for the reduction in the number of Class I railroads

    were carrier bankruptcies and various changes in the threshold for

    qualifying as a Class I railroad (from $5 million in 1976 to $250

    million in 1992, as measured in 1991 dollars, and adjusted for

    inflation since then). Bankruptcies eliminated 2 of the 30 Class I

    railroad systems, while changes in the Class I standard moved 9 systems

    out of Class I status.

    [7] For this analysis we used rate indexes. A rate index attempts to

    measure price changes over time by holding constant the underlying

    collection of items that are consumed (for example, items shipped). See

    appendix I for a discussion of the rate indexes that we constructed.

    [8] Fred Freme, U.S. Energy Information Administration, U.S. Coal

    Supply and Demand: 2000 Review (undated).

    [9] The total supply of corn is a combination of carryover stock,

    production, and imports.

    [10] According to the board, corn rates also tend to be lower than

    wheat rates, in part, because corn is more likely than wheat to move in

    longer 110-car unit trains which are more cost efficient than shorter

    trains.

    [11] Potassium/sodium production increased from about 69 million tons

    in 1997 to about 70 million tons in 1999 before falling back in 2000 to

    just under 68 million tons. Plastics production increased from about

    52.6 million tons in 1997 to about 58 million tons in 2000.

    [12] In contrast, the tonnage of chemicals transported by truck

    remained at about 55 percent between 1997 and 2000.

    [13] Surface Transportation Board, Rail Rates Continue Multi-Year

    Decline, Office of Economics, Environmental Analysis, and

    Administration (Dec. 2000). The board measured rail rates as gross

    revenue per ton-mile of freight originated and stated these rates in

    1999 dollars. The board used a rate index in which it aggregated annual

    rate changes for the 1984 to 1999 period for different commodity groups

    by weighting each commodity�s year-by-year rate change by its share of

    total rail revenue in those two years.

    [14] Appendix II contains illustrations of real rail rates for coal

    shipments on short- and long-distance routes.

    [15] The Central Appalachia Coal Supply Region includes eastern

    Kentucky, Virginia, and southern West Virginia.

    [16] Fred Freme, Energy Information Administration.

    [17] Appendix III contains illustrations of the real rail rates on

    selected long- and short-distance routes for wheat and corn.

    [18] An economic area is a collection of counties in and about a

    metropolitan area (or other center of economic activity); there are 172

    economic areas in the United States, and each of the 3,141 counties in

    the country is contained in an economic area.

    [19] Wheat production in Oklahoma subsequently declined to about 143

    million bushels (preliminary estimate) in 2000. Bulk grain statistics

    for the Port of Houston Authority may include shipments from other

    domestic locations as well as imports.

    [20] Real rail rates for other distance categories reflected similar

    trends, except for rate increases between 1999 and 2000 on three of the

    five short-distance (500 miles or less) routes we examined.

    [21] U.S. Department of Agriculture, Agricultural Marketing Service,

    Grain Transportation Prospects (Feb./Mar. 2001).

    [22] U.S. Department of Agriculture, Agricultural Marketing Service,

    Grain Transportation Prospects (Nov. 1999).

    [23] Appendix IV contains illustrations of real rail rates for

    chemicals and transportation equipment shipments in other distance

    categories.

    [24] Generally, greater competition results in lower rates charged for

    goods and services. In a competitive market, producers will offer goods

    or services if, over the short term, they can at least recover those

    costs that vary with the level of production.

    [25] Consistent with our 1999 report, we examined changes in R/VC

    ratios for broader categories of products than we did for changes in

    rates.

    [End of section]

    Appendix I: Scope and Methodology:

    As for our 1999 report, we used the board�s Carload Waybill Sample to

    identify railroad rates from 1997 through 2000 (the latest data

    available at the time of our review), which we then analyzed to

    determine rate changes. The Carload Waybill Sample is a sample of

    railroad waybills (in general, documents prepared from bills of lading

    authorizing railroads to move shipments and collect freight charges)

    submitted by railroads annually. We used these data to obtain

    information on rail rates for specific commodities in specific markets

    by shipment size and length of haul. According to board officials,

    revenues derived from the Carload Waybill Sample are not adjusted for

    such things as year-end rebates and refunds that may be provided by

    railroads to shippers who exceed certain volume commitments.

    Some railroad movements contained in the Carload Waybill Sample are

    governed by contracts between shippers and railroads. To avoid

    disclosure of confidential business information, the board disguises

    the revenues associated with these movements before making this

    information available to the public. Consistent with our statutory

    authority to obtain agency records, we obtained a version of the

    Carload Waybill Sample that did not disguise revenues associated with

    railroad movements made under contract. Therefore, the rate analysis

    presented in this report presents a truer picture of rail rate trends

    than analyses that may be based solely on publicly available

    information. Since much of the information contained in the Carload

    Waybill Sample is confidential, rail rates and other data contained in

    this report that were derived from this database have been aggregated

    at a level sufficient to protect this confidentiality.

    As in our 1999 report, we analyzed coal, grain (wheat and corn),

    chemicals (potassium and sodium compounds and plastic materials or

    synthetic fibers, resins, or rubber), and transportation equipment

    (finished motor vehicles and motor vehicle parts or accessories)

    shipments. These commodities represented about 52 percent of total

    industry revenue in 2000 and, in some cases, had a significant portion

    of their rail traffic transported on routes where the ratio of revenue

    to variable costs equaled or exceeded 180 percent.

    We used rate indexes and average rates on selected corridors to measure

    rate changes over time. A rate index attempts to measure price changes

    over time by holding constant the underlying collection of items that

    are consumed (in the context of this report, items shipped). This

    approach differs from comparing average rates in each year because,

    over time, higher- or lower-priced items can constitute different

    shares of the items consumed. Comparing average rates can confuse

    changes in prices with changes in the composition of the goods

    consumed. In the context of railroad transportation, rail rates and

    revenues per ton-mile are influenced, among other things, by average

    length of haul. Therefore, comparing average rates over time can be

    influenced by changes in the mix of long- and short-haul traffic. Our

    rate indexes attempted to control for the distance factor by defining

    the underlying traffic collection to be commodity flows occurring in

    2000 between pairs of census regions.

    To examine the rate trends on specific traffic corridors, we first

    chose a level of geographic aggregation for corridor endpoints. For

    grain, chemical, and transportation equipment traffic, we defined

    endpoints to be regional economic areas defined by the Department of

    Commerce�s Bureau of Economic Analysis. For coal traffic, we used

    economic areas to define destinations and used coal supply regions--

    developed by the Bureau of Mines and used by the Department of Energy-

    -to define origins. An economic area is a collection of counties in and

    about a metropolitan area (or other center of economic activity); there

    are 172 economic areas in the United States, and each of the 3,141

    counties in the country is contained in an economic area. As in our

    1999 report, we placed each corridor in one of three distance-related

    categories: 0-500 miles, 501-1,000 miles, and more than 1,000 miles.

    Although these distance categories are somewhat arbitrary, they

    represent reasonable proxies for short-, medium-, and long- distance

    shipments by rail.

    To address issues related to revenue-to-variable cost ratios we

    obtained data from the board identifying revenues, variable costs, and

    R/VC ratios for commodities shipped by rail at the two-digit Standard

    Transportation Commodity Code level. We used data from the Carload

    Waybill Sample to identify the specific revenues and variable costs and

    to compute R/VC ratios for the commodities and markets we examined.

    Using this information we then identified those commodities and markets

    whose R/VC ratios were consistently above or below the 180 percent R/VC

    level.

    We performed our work from December 2001 through May 2002, in

    accordance with generally accepted government auditing standards.

    [End of Section]

    Appendix II: Real Rail Rates for Coal:

    The following are real (inflation-adjusted) rail rates for coal

    shipments in the various markets and distance categories we reviewed.

    The distance categories are as follows: short is 0 to 500 miles, medium

    is 501 to 1,000 miles, and long is greater than 1,000 miles.

    Figure 9. Real Rail Rates for Coal, Selected Short-Distance Routes,
    1990-2000:

    [See PDF for image]

    Note: The Central Appalachia Coal Supply Region includes eastern

    Kentucky, Virginia, and southern West Virginia. The Northern Appalachia

    Coal Supply Region includes Maryland, Ohio, Pennsylvania, and northern

    West Virginia. The Illinois Basin Coal Supply Region includes western

    Kentucky, Illinois, and Indiana.

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Figure 10. Real Rail Rates for Coal, Selected Long-Distance Routes,
    1990-2000:

    [See PDF for image]

    Note: The Powder River Basin Coal Supply Region includes Montana and

    Wyoming.

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    [End of Section]

    Appendix III: Real Rail Rates for Wheat and Corn Shipments:

    The following are real (inflation-adjusted) rail rates for wheat and

    corn shipments in the various markets and distance categories we

    reviewed. The distance categories are as follows: short is 0 to 500

    miles, medium is 501 to 1,000 miles, and long is greater than 1,000

    miles.

    Figure 11. Real Rail Rates for Wheat, Selected Short- and Long-Distance
    Routes,

    1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Figure 12. Real Rail Rates for Corn, Selected Short- and Long-Distance
    Routes,

    1990-2000:

    [See PDF for image]

    Note: For confidentiality, data points for 1996, 1998, and 1999 within

    the Des Moines economic area were excluded.

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    [End of Section]

    Appendix IV. Real Rail Rates for Chemicals and Transportation
    Equipment:

    The following are real (inflation-adjusted) rail rates for selected

    chemical and transportation equipment shipments in the various markets

    and distance categories we reviewed. The distance categories are as

    follows: short is 0 to 500 miles, medium is 501 to 1,000 miles, and

    long is greater than 1,000 miles.

    Figure 13. Real Rail Rates for Potassium/Sodium Compounds, Selected
    Short-,

    Medium-, and Long-Distance Routes, 1990-2000:

    [See PDF for image]

    Note: For confidentiality, the 1997 data point for the route from the

    New Orleans economic area to the Baton Rouge economic area was

    excluded.

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Figure 14. Real Rail Rates for Plastic Materials or Synthetic Fibers,
    Resins, or

    Rubbers, Selected Medium- and Long-Distance Routes, 1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Figure 15. Real Rail Rates for Motor Vehicles, Selected Long-Distance
    Routes,

    1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    Figure 16. Real Rail Rates for Motor Vehicle Parts or Accessories,
    Selected

    Medium- and Long-Distance Routes, 1990-2000:

    [See PDF for image]

    Source: GAO�s analysis of the Surface Transportation Board�s data.

    [End of Figure]

    [End of Section]

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