    Freight Railroads: Highlights of GAO Report on Freight Rail
    Industry Performance, Competition, and Capacity (08-NOV-06,
    GAO-07-207R).

    Over 25 years ago, Congress transformed federal freight rail
    transportation policy. At that time, after almost 100 years of
    economic regulation, the railroad industry was in serious
    economic decline, with rising costs, losses, and bankruptcies. In
    response, Congress passed the Railroad Revitalization and
    Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980.
    Together, these pieces of legislation substantially deregulated
    the railroad industry. Since the passage of the Staggers Rail Act
    in 1980, we have issued several reports on the freight railroad
    industry. In October 2006, we issued our most recent report on
    the freight rail industry. The objectives of this report were to
    determine (1) the changes that have occurred in the freight
    railroad industry since the enactment of the Staggers Rail Act,
    including changes in rail rates and competition in the industry;
    (2) the actions STB has taken to address concerns about
    competition and captivity and any alternative approaches that
    could be considered to address remaining concerns; and (3) the
    projections for freight traffic demand over the next 15 to 25
    years, the freight railroad industry's ability to meet that
    demand, and potential federal policy responses.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-207R
        ACCNO:   A62844
      TITLE:     Freight Railroads: Highlights of GAO Report on Freight
    Rail Industry Performance, Competition, and Capacity
         DATE:   11/08/2006
      SUBJECT:   Competition
    	     Economic analysis
    	     Freight transportation rates
    	     Prices and pricing
    	     Railroad industry
    	     Railroad regulation
    	     Shipping industry
    	     Strategic planning
    	     Policy evaluation

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    GAO-07-207R

         * [1]Letter
         * [2]Enclosure I

    United States Government Accountability Office Washington, DC 20548

    November 2, 2006

    The Honorable Charles D. Nottingham
    Chairman
    Surface Transportation Board

    Subject: Freight Railroads: Highlights of GAO Report on Freight Rail
    Industry Performance, Competition, and Capacity

    Mr. Chairman and Members of the Surface Transportation Board:

    We appreciate the opportunity to testify on our recently issued report on
    the freight railroad industry. As you know, over 25 years ago, Congress
    transformed federal freight rail transportation policy. At that time,
    after almost 100 years of economic regulation, the railroad industry was
    in serious economic decline, with rising costs, losses, and bankruptcies.
    In response, Congress passed the Railroad Revitalization and Regulatory
    Reform Act of 1976 and the Staggers Rail Act of 1980. Together, these
    pieces of legislation substantially deregulated the railroad industry. In
    particular, the 1980 act encouraged greater reliance on competition to set
    rates and gave railroads increased freedom to price their services
    according to market conditions, including the freedom to use differential
    pricing--that is, to recover a greater proportion of their costs from
    rates charged to shippers with a greater dependency on rail
    transportation. At the same time, the 1980 act anticipated that some
    shippers might not have competitive alternatives-- commonly referred to as
    "captive shippers"--and gave the Interstate Commerce Commission (ICC), and
    later the Surface Transportation Board (STB), the authority to establish a
    process so that shippers could obtain relief from unreasonably high rates.
    As you know, this process establishes a threshold for rate relief,
    allowing a rate to be challenged if it produces revenue equal to or
    greater than 180 percent of the variable cost of transporting a shipment.
    Since the passage of the Staggers Rail Act in 1980, we have issued several
    reports on the freight railroad industry.

    In October 2006, we issued our most recent report on the freight rail
    industry.^1 The objectives of this report were to determine (1) the
    changes that have occurred in the freight railroad industry since the
    enactment of the Staggers Rail Act, including changes in rail rates and
    competition in the industry; (2) the actions STB has taken to address

    GAO, Freight Railroads: Industry Health Has Improved, but Concerns about
    Competition and
    Capacity Should Be Addressed, GAO-07-94 (Washington, D.C.: Oct. 6, 2006).

    concerns about competition and captivity and any alternative approaches
    that could be considered to address remaining concerns; and (3) the
    projections for freight traffic demand over the next 15 to 25 years, the
    freight railroad industry's ability to meet that demand, and potential
    federal policy responses. Among other things, this report describes the
    significant changes that have taken place in the railroad industry and
    reports that from 1985 through 2004, rates generally decreased, but
    nominal grain rates increased 9 percent. We also found that, on some
    routes, the amount of grain traveling at rates significantly above the
    threshold for rate relief had increased since 1985.

    In light of these findings, you asked us to testify today on the results
    of our work. The findings and conclusions we reported are reflected in the
    attached slides. A copy of the report can be found at www.gao.gov.

    Mr. Chairman, this concludes my prepared statement. I would be happy to
    respond to any questions you or other Members of the Board may have at
    this time.

    Sincerely yours,

    JayEtta Z. Hecker Director, Physical Infrastructure Issues

    Enclosure

          Freight Railroads: Highlights of GAO Report on Freight Rail Industry
                         Performance, Competition, and Capacity

                                      Enclosure I

                                        (544133)

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