Freight Railroads: Updated Information on Rates and Other
Industry Trends (15-AUG-07, GAO-07-291R).
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 those shippers with a greater dependency on
rail transportation. At the same time, the 1980 act anticipated
that some shippers--commonly referred to as "captive
shippers"--might not have competitive alternatives and gave the
Interstate Commerce Commission (ICC), and later the Surface
Transportation Board (STB), the authority to establish a process
through which shippers could obtain relief from unreasonably high
rates. 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 of 1980,
we have issued several reports on the freight railroad industry.
On October 6, 2006, we issued our most recent report, in which we
reported that industry rates and the rates for many commodities
(e.g., coal and motor vehicles) had generally declined from 1985
through 2004. We also reported that freight railroad companies do
not consistently report revenues raised from fuel surcharges.
Some railroads report fuel surcharges as part of their general
revenues, others categorize the surcharges separately as
"miscellaneous revenue," and still others may not report revenue
collected from fuel surcharges at all. This inconsistent
reporting led us to recommend that STB review its method of data
collection to ensure that all freight railroads are consistently
and accurately reporting all revenues collected from shippers.
Congress asked us to update our October report using 2005 data,
which became available after we issued our report. This report
provides that update, including changes in industry and commodity
rates, other costs to shippers (such as railcar ownership and
miscellaneous revenue), and data on traffic traveling at rates
equal to or greater than 180 percent revenue to variable cost
(R/VC).
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-291R
ACCNO: A74547
TITLE: Freight Railroads: Updated Information on Rates and Other
Industry Trends
DATE: 08/15/2007
SUBJECT: Competition
Data collection
Freight trains
Freight transportation
Freight transportation rates
Inflation
Policy evaluation
Railroad industry
Records
Transportation policies
Transportation rates
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GAO-07-291R
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August 15, 2007
Congressional Requesters:
Subject: Freight Railroads: Updated Information on Rates and Other
Industry Trends
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 those shippers with a
greater dependency on rail transportation. At the same time, the 1980 act
anticipated that some shippers--commonly referred to as "captive
shippers"--might not have competitive alternatives and gave the Interstate
Commerce Commission (ICC), and later the Surface Transportation Board
(STB), the authority to establish a process through which shippers could
obtain relief from unreasonably high rates. 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 of 1980, we have issued several
reports on the freight railroad industry. On October 6, 2006, we issued
our most recent report,1 in which we reported that industry rates and the
rates for many commodities (e.g., coal and motor vehicles) had generally
declined from 1985 through 2004. We also reported that freight railroad
companies do not consistently report revenues raised from fuel surcharges.
Some railroads report fuel surcharges as part of their general revenues,
others categorize the surcharges separately as "miscellaneous revenue,"
and still others may not report revenue collected from fuel surcharges at
all. This inconsistent reporting led us to recommend that STB review its
method of data collection to ensure that all freight railroads are
consistently and accurately reporting all revenues collected from
shippers. Furthermore, we reported that while it is difficult to determine
precisely how many shippers are "captive" to a single Class I railroad,
the percentage of traffic traveling at rates over 180 percent of revenue
to
variable cost (R/VC)--that is, the traffic STB regards as potentially
captive--and the revenue generated from that traffic have declined. We
also reported that traffic traveling substantially over the statutory
threshold for rate relief (rates over 300 percent R/VC) has increased
since 1985.
1GAO, Freight Railroads: Industry Health Has Improved, but Concerns about
Competition and Capacity Should Be Addressed, GAO-07-94 (Washington, D.C.:
Oct. 6, 2006).
You asked us to update our October report using 2005 data, which became
available after we issued our report. This report provides that update,
including changes in industry and commodity rates, other costs to shippers
(such as railcar ownership and miscellaneous revenue), and data on traffic
traveling at rates equal to or greater than 180 percent R/VC. Also, we are
providing additional information and analysis of these data--including
rates, tonnage, and revenue from 1985 through 2005--in the form of an
e-supplement, which can be viewed at GAO-07-292SP.2
To update our October 2006 report, we examined STB's Carload Waybill
Sample3 from 1985 through 2005 (the latest year for which data were
available at the time of this review). This database includes information
on rail rates across the industry and by commodity, as well as tonnage,
federal regulation, and other statistics. STB disguises some revenues to
avoid disclosing confidential business information to the public, but we
obtained a version of the Carload Waybill Sample that does not disguise
revenues. Data derived from this database have been aggregated at a level
sufficient to protect confidentiality. We used rate indexes and average
rates to measure rate changes over time. A rate index attempts to measure
rate changes over time by holding constant the underlying collection of
items that are shipped. For issues related to R/VC ratios, 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 areas whose R/VC ratios were above or below the 180 percent R/VC
level, as well as those areas above the 300 percent R/VC level.
We determined that the data used in this report were sufficiently reliable
for the purpose of our review. However, during our work we noted anomalous
tonnage data estimated by one carrier in 2005 for one commodity
(miscellaneous mixed shipments, including intermodal shipments). This
carrier reported a significant number of waybill records with a single
tonnage value rather than the range of values reported by other carriers
and by this carrier in years prior to 2005. This lack of variation caused
us to question the reliability of these records and to work with STB
officials to investigate further. STB officials stated that the anomaly
resulted from a change this carrier instituted in its methodology for
estimating the tonnage of certain railcars and that despite the lack of
variation STB had no basis for believing these data were in error. STB
provided us additional information on this new methodology; however, we
remained concerned about the lack of conformity with the reporting
practices of other railroads for similar movements. As a result, we
explored with STB various
options for handling these 2005 data, including excluding them from our
analysis. However, we determined that because a significant number of
waybill records would be excluded, excluding these data would dramatically
understate the amount of overall industry tonnage. We also discussed with
STB not reporting 2005 data for some of the records in question. However,
STB believed that any such action to exclude selective data in this manner
represented a significant distortion of the data. We therefore decided to
include these 2005 data because despite the lack of variation in the
reporting, the average tonnage transported is relatively consistent with
prior year data and data reported by other carriers and thus, we believe,
provides a more accurate estimate than would the alternatives of excluding
or modifying these data. We conducted our review from October 2006 to June
2007 in accordance with generally accepted government auditing standards.
2GAO, Freight Railroads: Electronic Supplement on Rates and Other Industry
Trends, 1985-2005, GAO-07-292SP (Washington, D.C.: August 15, 2007).
3The Carload Waybill Sample is a sample of railroad waybills (in general,
documents prepared from bills of lading that authorize railroads to move
shipments and collect freight charges); the sample contains information on
rail rates.
Results in Brief
In 2005, industry rail rates increased 7 percent over their 2004 levels,
the largest annual increase over the past 20 years, outpacing the rate of
inflation for only the second time in 20 years. Rates also increased for
the commodities we reviewed--including such commodities as coal and grain.
Freight railroad companies continued a 20-year trend of shifting other
costs to shippers, including railcar ownership. Revenues railroads
reported as miscellaneous revenue--a category that includes fuel
surcharges--nearly tripled from $633 million4 in 2004 to $1.7 billion in
2005. While it remains difficult to precisely determine how many shippers
are captive to a single Class I railroad because available proxy measures
can overstate or understate captivity, 2005 data indicate that potentially
captive traffic continued to drop. At the same time, traffic traveling at
rates significantly above the threshold for rate relief increased in 2005.
Industry Rates Rose in 2005
In 2005, industry rail rates rose 7 percent over their 2004 levels.5 This
represents the largest annual increase in rates during the 20-year period
from 1985 through 2005, and
outpaced changes to inflation--5 percent in 2005. Despite this increase,
rates for 2005 remain below their 1985 levels. Because the set of rail
rate indexes we used to examine trends in rail rates over time does not
account for inflation we also included the price index for the gross
domestic product (GDP) in figure 1. While rate increases in 2005 outpaced
inflation for just the second time since 1985, over the long term, rate
increases have lagged behind inflation rates.
4Dollar amounts in this update will not have exactly the same value as
those we reported in October 2006. For our October report, 2004 was the
most recent year for which data were available and we adjusted price
levels for all years to 2004 levels. Because we use 2005 data for this
update, we adjusted price levels to 2005 levels.
5We constructed rate indexes to examine trends in rail rates over the 1985
through 2005 period. These indexes define traffic patterns for a given
commodity in terms of census region to census region flows of that
commodity, and we calculated the average revenue per ton-mile for each of
these traffic flows. The index is calculated as the weighted average of
these traffic flows in each year, expressed as a percentage of the value
for 1985, where the weights reflect the traffic patterns in 2005. By
fixing the weights as of one period of time, we attempted to measure pure
price changes rather than calculating the average revenue per ton-mile in
each year. Over time, changes in traffic patterns could result in a
substitution of lower priced traffic for higher priced traffic, or vice
versa, so that a decrease in average revenue per ton-mile might partly
reflect this change in traffic patterns. The rate index for the overall
industry was defined similarly, except that the traffic pattern bundle was
defined in terms of broad commodity, census region of origin, and mileage
block categories. For comparison, we also present the price index for
gross domestic product over this period.
Figure 1: Trends in Industry Rail Rates, 1985-2005
While Generally Declining over the Long Term, Rates for Several
Commodities Have Increased in Recent Years
Similar to overall industry trends, rates for individual commodities have
increased. In 2005, rates increased for all 13 commodities that we
reviewed. Despite this increase, 2005 rates for several commodities remain
lower than in 1985. In 2005, the largest rate increase (for fireboard and
paperboard) exceeded 12 percent, while the smallest increase (for motor
vehicles) was about 2 percent. Figure 2 depicts rate changes for coal,
grain, miscellaneous mixed shipments, and motor vehicles from 1985 through
2005.
Figure 2: Rate Changes for Coal, Grain, Miscellaneous Mixed Shipments, and
Motor Vehicles, 1985-2005
Railroads Continued to Shift Costs to Shippers
In 2005, freight railroad companies continued a 20-year trend of shifting
other costs to shippers. With the addition of the 2005 data, our analysis
shows a 20 percent shift in railcar ownership (measured in tons carried)
since 1987. In 1987, railcars owned by freight railroad companies moved 60
percent of tons carried. In 2005, they moved 40 percent of tons carried,
meaning that freight railroad company railcars no longer carry the
majority of tonnage (see fig. 3).
Figure 3: Tonnage Carried by Railcar Ownership, 1987-2005
Reported Miscellaneous Revenue, Including Fuel Surcharges, Nearly Tripled
in 2005
In 2005, the amount of industry revenue reported as miscellaneous nearly
tripled over 2004 levels, rising from about $633 million to over $1.7
billion (see fig. 4). This miscellaneous revenue includes some fuel
surcharges6 and other charges for providing rail service. In 2004,
miscellaneous revenue accounted for 1.5 percent of freight railroad
revenue reported, while in 2005 this percentage had risen to 3.7 percent.
Also, in 2005, 20 percent of all tonnage moved in the United States
generated miscellaneous revenue. STB has proposed to more closely track
and otherwise monitor revenues associated with fuel surcharges, but it is
too soon to tell whether STB's proposal will affect the reporting and
tracking of miscellaneous revenue in the Carload Waybill Sample.7
6Fuel surcharges are associated with recouping the cost of fuel. How fuel
surcharges are calculated varies among Class I railroads because some use
a mileage-based system while others use a percentage of the base rate.
7On January 25, 2007 STB finalized rules stating that it was an
unreasonable practice for freight railroads to compute fuel surcharges as
a percentage of the base rate, as well as "double dipping"--i.e., applying
to the same traffic both a fuel surcharge and a rate increase based on a
cost index that includes a fuel cost component. STB has proposed rules for
railroads to report revenues raised from fuel surcharges, but these have
not yet been finalized.
Figure 4: Miscellaneous Revenue Tracked in Carload Waybill Sample,
2000-2005
Captive Shippers Remain Difficult to Identify, but Some Measures Indicate
Captivity Is Dropping in the Railroad Industry
It remains difficult to determine precisely how many shippers are captive
to one railroad because the proxy measures that provide the best
indication can overstate or understate captivity. One measure of
potential captivity--traffic traveling at rates equal to or greater than
180 percent R/VC--is part of the statutory threshold for bringing a rate
relief case before STB.8 STB regards traffic at or above this threshold as
"potentially captive." Like other measures, R/VC levels can understate or
overstate captivity. In 2005, industry revenue generated by traffic
traveling at rates over 180 percent R/VC dropped by roughly half a
percent. Tonnage traveling at rates over 180 percent R/VC dropped by a
smaller percentage. This continued the generally downward trend since 1985
(see fig. 5).
8Another condition for bringing a rate relief case before STB is a
railroad not facing effective competition from other rail carriers or
other modes of transportation.
Figure 5: Tonnage and Revenue Generated from Traffic Traveling at Rates
Equal to or Greater than 180 Percent R/VC, 1985-2005
Amount of Potentially Captive Traffic Traveling at Levels Substantially
above the Threshold for Rate Relief Increased in 2005.
While traffic traveling at rates over 180 percent R/VC declined in 2005,
traffic traveling at rates substantially over the threshold for rate
relief increased. In 2005, traffic traveling at rates over 300 percent
R/VC increased. This increase followed declines in 2003 and 2004 but
continued a general upward trend since 1985 (see fig. 6).
Figure 6: Tonnage Traveling at Rates over 300 Percent R/VC, 1985-2005
Concluding Observations
Data for 2005 confirm the trends and findings we reported and support the
recommendations we made in October 2006. The 2005 data provide more
definitive evidence that after a period of decline, rates are increasing
in the freight rail industry as a whole as well as across a range of
commodities. Moreover, the continued increases in traffic at higher
thresholds shown in the 2005 data affirm our (1) conclusions that STB has
the statutory authority and access to information to conduct a rigorous
analysis of competition in the freight rail industry that would rely on
more than sample data and (2) recommendation that STB undertake such an
analysis to determine whether rail rates in selected markets reflect
justified and reasonable pricing practices or an abuse of market power by
the railroads. Finally, the continued increase in the amount of
miscellaneous revenue reported in 2005 lends further support for our
recommendation that STB review its method of data collection to ensure
data are accurately and consistently reported.
Agency Comments
We provided a draft of this report to STB and DOT for review and comment.
STB provided written comments, which are reproduced in the enclosure to
this letter. STB generally agreed with our updated assessment of the
freight railroad industry. However, STB suggested that we present our
findings on rates using inflation-adjusted measures in order to provide
context. As in our October report, we developed and used a set of rail
rate indexes to examine trends in rail rates over the 1985 through 2005
period that account for changes in traffic patterns over time but do not
account for inflation. To account for inflation, we included the price
index for the gross domestic product in our analysis (see figures 1 and
2).
STB also stated that it intends to implement our recommendation that it
undertake a rigorous analysis of competition in the freight railroad
industry. STB stated that it has identified funding not available at the
time of our October report that it intends to use to solicit proposals
from analysts with no connection to the freight railroad industry or STB
proceedings to conduct such a study. While we commend STB for taking this
action, it remains to be seen whether these analysts would have STB's
statutory authority and sufficient access to information to determine
whether rail rates in selected markets reflect justified and reasonable
pricing practices or an abuse of market power by the railroads.
STB also stated that it has taken action to address our recommendation
that it review its method of data collection to ensure that all freight
railroads are consistently and accurately reporting all revenues collected
from shippers. In January 2007, STB finalized rules requiring, among other
things, that carrier fuel surcharges be based on factors directly
affecting the amount of fuel consumed. Furthermore, STB stated it is in
the process of finalizing new reporting requirements for fuel surcharges.
We recognize STB's action in this area and modified our report to reflect
these actions; however, STB has yet to finalize and implement standardized
reporting of fuel surcharges. Furthermore, revenues other than fuel
surcharges are included in reported miscellaneous revenues. Thus it
remains for STB to review its method of data collection to ensure that all
freight railroads are consistently and accurately reporting all revenues.
DOT provided us with e-mail comments on the draft from the Federal
Railroad Administration (FRA). Like STB, FRA suggested that we recognize
STB's new rules regarding how carriers can calculate fuel surcharges. FRA
provided additional technical comments that we have incorporated as
appropriate.
If you or your staffs have any questions about this report, please contact
me at (202) 512-2834 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this report were Steve Cohen
(Assistant Director), Steve Brown, Matt Cail, and John Mingus.
JayEtta Z. Hecker
Director, Physical Infrastructure Issue
List of Congressional Requesters
The Honorable Daniel K. Inouye
Chairman
Committee on Commerce, Science, and Transportation
United States Senate
The Honorable Byron Dorgan
United States Senate
The Honorable Frank Lautenberg
United States Senate
The Honorable Trent Lott
United States Senate
The Honorable John McCain
United States Senate
The Honorable Mark Pryor
United States Senate
The Honorable Gordon Smith
United States Senate
Enclosure: Comments from the Surface Transportation Board
(544132)
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