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 Boardï¿½s 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 boardï¿½s 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 shippersï¿½ 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 ï¿½market dominant.ï¿½ 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 nationï¿½s 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 industryï¿½s 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 shipperï¿½s 

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 railroadï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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 competitorsï¿½ 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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 

railroadï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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 shippersï¿½ 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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 railroadsï¿½ greater liability exposure associated with 

transporting hazardous materials is not reflected in the costs 

attributable to this traffic under the boardï¿½s 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 boardï¿½s 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 railroadsï¿½ 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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 boardï¿½s 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 [email protected] or me at 

[email protected] . 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 industryï¿½s 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 commodityï¿½s 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 boardï¿½s 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 

Commerceï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s data.



[End of Figure]



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

1990-2000:



[See PDF for image]



Source: GAOï¿½s analysis of the Surface Transportation Boardï¿½s 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: GAOï¿½s analysis of the Surface Transportation Boardï¿½s data.



[End of Figure]



[End of Section]



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