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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