Railroad Regulation: Current Issues Associated With the Rate Relief
Process (Chapter Report, 02/26/99, GAO/RCED-99-46).

As a result of mergers, bankruptcies, and the redefinition of what
constitutes a major railroad, the number of major freight railroads in
the United States collectively known as class I freight railroads
declined from 63 in 1976 to nine in 1997. These major railroads moved
almost 1.6 billion tons of freight in 1997, generating $35 billion in
revenue. Some shippers and their associations have raised concerns that
mergers and consolidations in the railroad industry have significantly
reduced competition and have given large railroads wide latitude in
controlling the rates that they charge companies that use rail to
transport their commodities. This report describes (1) the Surface
Transportation Board's rate relief complaint process and how it has
changed since the Interstate Commerce Commission's Termination Act of
1995 became law, (2) the number and the outcome of rate relief cases
pending or filed since 1990, and (3) the opinions of shippers about the
barriers they face when bringing rate complaints to the Board and the
potential changes to the process to reduce these barriers.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-46
     TITLE:  Railroad Regulation: Current Issues Associated With the 
             Rate Relief Process
      DATE:  02/26/99
   SUBJECT:  Freight transportation rates
             Railroad regulation
             Railroad transportation operations
             Transportation costs
             Competition
             Interstate commerce
             Administrative remedies
             Railroad industry
             Dispute settlement

             
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Cover
================================================================ COVER


Report to Congressional Requesters

February 1999

RAILROAD REGULATION - CURRENT
ISSUES ASSOCIATED WITH THE RATE
RELIEF PROCESS

GAO/RCED-99-46

Railroad Rate Relief Process

(348071)


Abbreviations
=============================================================== ABBREV

  AAR - Association of American Railroads
  ASLRRA - American Short Line and Regional Railroad Association
  CMP - Constrained Market Pricing
  DOT - Department of Transportation
  FRA - Federal Railroad Administration
  ICC - Interstate Commerce Commission
  NCGA - National Corn Growers Association
  NGFA - National Grain and Feed Association
  STB - Surface Transportation Board

Letter
=============================================================== LETTER


B-279888

February 26, 1999

The Honorable Byron L.  Dorgan
United States Senate

The Honorable John D.  Rockefeller IV
United States Senate

The Honorable Conrad R.  Burns
United States Senate

The Honorable Pat Roberts
United States Senate

In response to your request, this report describes (1) the Surface
Transportation Board's (Board) relief process for rail rate
complaints and how it has changed since the ICC Termination Act of
1995 became law, (2) the number and outcome of rate relief cases
pending or filed since 1990, and (3) the barriers that shippers face
when bringing rate complaints to the Board and potential changes to
the process to reduce these barriers. 

As arranged with your offices, unless you publicly anounce its
contents earlier, we plan no further distribution of this report
until 14 days after the date of this letter.  At that time, we will
send copies of the report to interested congressional committees, the
Secretary of Transportation, and the Chairman, Surface Transportation
Board.  We will also make copies available to others upon request. 

If you or your staff have any questions about this report, I can be
reached at (202) 512-2834.  Major contributors to this report are
listed in appendix V. 

Phyllis F.  Scheinberg
Associate Director,
 Transportation Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

As a result of mergers, bankruptcies and the redefinition of what
constitutes a major railroad, the number of major freight railroads
in the United States--collectively known as class I freight
railroads--declined from 63 in 1976 to 9 in 1997.\1 These major
railroads moved almost 1.6 billion tons of freight in 1997,
generating $35 billion in revenue.  Some shippers and their
associations have raised concerns that mergers and consolidations in
the railroad industry have significantly reduced competition and have
given large railroads wide latitude in controlling the rates they
charge the many companies that use rail to transport their
commodities.  In 1995, the Congress passed the ICC Termination Act,
which eliminated the Interstate Commerce Commission (ICC) and
transferred various functions--including the adjudication of rail
rate complaints--to the new Surface Transportation Board.  The Board
is a bipartisan, independent, adjudicatory body within the Department
of Transportation. 

Concerned about the potential barriers that shippers face in seeking
relief from allegedly unreasonable rail rates, Senators Byron L. 
Dorgan, Conrad R.  Burns, John D.  Rockefeller IV, and Pat Roberts
asked GAO to examine issues related to the Board's oversight of rates
shippers pay.  This report describes (1) the Board's rate relief
complaint process and how it has changed since the ICC Termination
Act of 1995 became law, (2) the number and outcome of rate relief
cases pending or filed since 1990, and (3) the opinions of shippers
about the barriers they face when bringing rate complaints to the
Board and potential changes to the process to reduce these barriers. 
In the spring of 1999, GAO will issue a companion report that will
address how freight railroad rates and service have changed since
1990. 


--------------------
\1 In July 1998, the Surface Transportation Board approved the
division of the Consolidated Rail Corporation's (Conrail) assets
between CSX Transportation and Norfolk Southern, further reducing the
number of class I railroads to eight. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

In the late 1970s, the freight railroad industry underwent severe
financial distress.  Several of the nation's largest freight
railroads earned a negative rate of return on investment, and at
least three railroads were in bankruptcy reorganization.  The
Railroad Revitalization and Regulatory Reform Act of 1976 (P.L. 
94-210) and the Staggers Rail Act of 1980 (P.L.  96-448) facilitated
changes in the freight railroad industry, providing the railroads
with greater flexibility to negotiate or set freight rates and
respond to market conditions.  In particular, the Staggers Rail Act
made it federal policy for freight railroads to rely, where possible,
on competition and the demand for services, rather than on
regulation, to establish reasonable rates.  As a result of the
changes fostered by the acts, the freight railroads' financial health
has improved. 

Prior to 1976, the ICC regulated almost all the rates that railroads
charged shippers.  The 1976 and 1980 acts limited the regulation of
the freight rail industry by allowing the ICC to regulate rates only
where railroads had no effective competition and required that the
ICC's process for resolving rate disputes address the issue of
effective competition.  The Board, the successor to the ICC, has no
jurisdiction over rates that are negotiated between shippers and
railroads--referred to as contract rates.  Most rail tonnage in
1997--70 percent--moved under contracts and therefore was not subject
to the Board's rate regulation.  In addition, as a result of the
statutory directive to exempt rail transportation from regulation
where regulation is not needed, the Board has exempted from
regulation the transportation of certain recyclable materials, some
agricultural products, and intermodal containers.  Traffic exempted
from rate regulation accounted for 12 percent of all rail tonnage
moved in 1997.  As a result, in 1997, only about 18 percent of rail
transportation rates in the United States was potentially subject to
the Board's regulation.  In addition to assessing the reasonableness
of rates, the Board also approves mergers, acquisitions, line
constructions, and line abandonments and must take into account the
need of freight railroads to attain adequate revenues to cover their
operating costs and provide a reasonable return on capital. 

As part of GAO's methodology, GAO surveyed over 1,600 shippers and
all nine class I railroads to obtain information about potential
barriers to the rate complaint process and possible solutions to
these potential barriers.  GAO surveyed the members of the major
associations of grain, coal, chemicals, and plastics shippers whose
freight constitutes the largest portion of rail shipments.  GAO's
survey used a statistical sample from one of the associations GAO
surveyed because the association's membership list was large.  As a
result, when GAO reports survey results, they are statistically
projectable to the groups that responded to the survey. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The Surface Transportation Board's standard procedures for obtaining
rate relief are highly complex and time-consuming.  Under these
standard procedures, the Board (1) evaluates all competition within
the market allegedly dominated by a railroad and (2) typically
assesses the results of a shipper-developed model of a hypothetical,
optimally efficient railroad that could provide comparable service in
place of the shipper's railroad.  The process reflects a statutory
scheme whereby the Board must balance two competing objectives: 
considering the need of the railroad industry for adequate revenues
while simultaneously ensuring that the industry does not exert an
unfair advantage over shippers without competitive alternatives. 
Since the ICC Termination Act, the Board has attempted to improve the
rate complaint process and simplify the process for shippers.  For
example, the Board has implemented alternative, simplified rate
complaint procedures for cases that cannot be processed under the
standard procedures; imposed case-processing deadlines; encouraged
railroads and shippers to engage in an open dialogue about problems;
and reduced its criteria for assessing whether a railroad dominates a
shipper's market.  It is too early to tell if these steps will
significantly lessen the burden of the rate complaint process. 

Very few shippers served by class I railroads have complained to the
Board about the railroads' rates.  As of January 1, 1990, 17 rate
complaints were active with the Board's predecessor.  Between January
1, 1990, and December 31, 1998, shippers filed 24 additional rate
complaints with the Board (or its predecessor).  The low number of
complaints (41) is attributable to a number of factors, including
growth in the number of private transportation contracts between
railroads and shippers as well as a significant decline in railroad
rates over the past 10 to 15 years.  Shipper associations also noted
that the complexity of the rate complaint process may have reduced
the number of complaints.  Generally, only those shippers that depend
on rail transportation, such as coal, chemical, and grain shippers,
have filed complaints.  Eighteen of these complaints were resolved by
negotiated settlements with the railroads before the Board or its
predecessor determined whether the contested rate was reasonable.  In
addition, seven complaints were dismissed in favor of the railroad,
five were dismissed for other reasons, and two complaints resulted in
rate relief to shippers.  Nine complaints remain before the Board. 

GAO's results suggest that of the 709 rail shippers that responded,
531 do not believe that their rail rates are always reasonable and
therefore might use the rate complaint process.  Of the shippers who
expressed an opinion about the rate complaint process, GAO estimates
that over 70 percent believe that the time, complexity, and costs of
filing complaints are barriers that often preclude them from seeking
rate relief.  All the major U.S.  railroads, on the other hand, are
generally satisfied with the standard rate complaint process,
contending that it is well suited to determining whether a railroad
dominates the shipper's market and what rate relief may be needed. 
However, railroads do not support the simplified procedures or the
Board's December 1998 decision to change aspects of its market
dominance approach.  This divergence of opinion may make responding
to shippers' concerns about the barriers in the rate relief process
difficult to resolve.  Some shippers view the improvements to the
rate complaint process that the Board has made as helpful in easing
the process's administrative burdens but unresponsive to what they
see as underlying inadequacies in the level of competition in the
railroad industry.  They assert that adequate competition would
negate the need for this complex process.  Railroads maintain that
competition is adequate and therefore no Board actions to promote
competition are needed.  These divergent and seemingly intractable
views mirror the competing goals that the Board is charged with
balancing as an agency and during a rate complaint case. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      THE SURFACE TRANSPORTATION
      BOARD'S STANDARD RATE
      COMPLAINT PROCESS IS
      TIME-CONSUMING, COSTLY AND
      COMPLEX
-------------------------------------------------------- Chapter 0:4.1

As a result of the 1976 and 1980 legislation that limited the
regulation of the rail industry, the ICC and its successor, the
Board, retained rate regulation only over freight traffic not subject
to competition.  Since the ICC was terminated, the Board has the
authority to determine the reasonableness of challenged rates in the
absence of competition.  After a shipper files a complaint, the Board
assesses whether the railroad dominates the shipper's transportation
market.  To determine this ï¿½market-dominance,ï¿½ the Board conducts
quantitative and qualitative analyses.  The Board first determines
the railroad's revenues and variable costs (costs that vary with the
quantity shipped) associated with moving the shipper's commodities. 
By statute, a railroad does not dominate the market if its revenue is
no greater than 180 percent of its variable costs for transporting
the shipper's commodities.  If the railroad's percentage exceeds the
statutory level, the Board next determines whether the shipper has a
competitive alternative in the form of access to other railroads or
other forms of transportation (trucks or barges).  Until January
1999, the Board also considered two other forms of competition:  the
ability to ship from or to alternative locations (known as geographic
competition) and the ability to effectively substitute other products
for the one the railroad currently ships (known as product
competition).  If the Board finds that a railroad dominates the
shipper's market, the Board proceeds with further assessments to
determine whether the actual rate the railroad charges the shipper is
reasonable. 

Under its standard guidelines, to determine whether a rate is
reasonable, the Board requires the shipper to demonstrate how much an
optimally efficient railroad would need to charge.  To accomplish
this task, the shipper must construct a model of a hypothetical,
optimally efficient railroad to replace the dominant railroad. 
Shippers' associations and nearly 72 percent of rail shippers
responding to GAO's survey indicated that constructing a hypothetical
railroad is a difficult task, particularly for small shippers,
because the time and cost associated with the model's development may
outweigh the compensation afforded the shipper should the Board
determine that the challenged rate was unreasonable.  The 41 rate
complaints that GAO reviewed cost shippers from about $500,000 to $3
million each and required a few months to about 16 years to resolve
through the rate complaint process.  The process is lengthy because
the legal procedures afford the railroad and shipper a full
opportunity to present their facts and viewpoints as well as the
opportunity to present new evidence.  The process also provides the
opportunity for either side to respond to and challenge each other's
information.  In addition, Board officials stated that court reviews
and the lack of rate standards when some complaints were filed have
contributed to lengthy rate complaint cases. 

Since the ICC Termination Act, the Board has attempted to reduce the
potential barriers in the rate complaint process.  The Board has
implemented alternative guidelines to simplify complaints involving
lower dollar amounts, and it has established specific deadlines for
accelerating steps in the rate relief process.  To further simplify
the process, the Board eliminated product and geographic competition
as criteria for determining market dominance, which many shippers had
identified as a major barrier.  The Board concluded that these
elements of competition complicated and prolonged rate complaint
proceedings and discouraged shippers from pursuing rate complaints. 
In addition, the Board has encouraged private discussions between
shippers and railroads to settle their differences.  It is too early
to assess the collective results of these recent actions because the
Board has not rendered a decision under the simplified guidelines or
the accelerated schedule. 


      FEW SHIPPERS FILE
      COMPLAINTS, AND FEW RATES
      ARE FOUND TO BE UNREASONABLE
-------------------------------------------------------- Chapter 0:4.2

Since January 1, 1990, 41 complaints have been filed with or are
pending before the ICC or the Board; only two shippers filed a rate
complaint in 1998.  The low number of complaints may be attributed to
the growth in the number of private transportation contracts between
railroads and shippers not subject to rate regulation, a general
decline in railroad rates over the past 10 to 15 years, or the
perceived complexity of the rate complaint process.  Coal, chemical,
and grain shippers that accounted for 60 percent of the total rail
traffic for large railroads in 1997 filed 31 of the 41 complaints. 

The Board or its predecessor dismissed nearly half--18 of the
41--complaints because the shipper and railroad settled their
differences during the rate review process and then requested the
case to be dismissed.  Five additional complaints were dismissed
primarily because the rate was either subject to a contract or the
remedy that the shipper wanted was not available.  Seven complaints
were dismissed in favor of the railroad when it was found that either
the railroad did not dominate the shipper's market or the rate was
reasonable.  In two cases, the Board decided in favor of the shipper,
awarded damages and prescribed maximum rates for the future.  As of
December 31, 1998, the Board has not rendered a final decision on the
nine remaining complaints. 


      OPINIONS DIFFER ON THE
      BARRIERS AND SOLUTIONS TO
      THE RATE COMPLAINT PROCESS
-------------------------------------------------------- Chapter 0:4.3

GAO surveyed over 1,600 shippers, and we are reporting on 709 that
use rail to transport their products.  The survey results suggest
that about 75 percent of these rail shippers believe that at times,
they were charged rates they did not consider reasonable.  However,
they assert that barriers to seeking rate relief precluded them from
using the Board's rate complaint process.  In response to GAO's
survey and in discussions with commodity shipping associations,
shippers cited several barriers to using the rate complaint process
but particularly emphasized the time, cost and complexity involved in
filing a rate complaint.  Shippers' associations contend that these
barriers, as well as the low number of rate complaints that shippers
have won, demonstrate a regulatory environment that does not
adequately address shippers' rate complaints.  GAO's estimates show
that at least 70 percent of shippers want the Board to shorten the
time for deciding rate complaints, reduce the costs associated with
preparing and filing complaints, and take measures to simplify the
process.  Some shippers and their associations also contend that the
improvements already made to the rate complaint process are at best
incremental steps and point to a lack of competition in the railroad
industry as the underlying problem.  Some rail shippers believe that
greater competition would lower rates and diminish the need for the
rate relief process. 

In response to a separate GAO survey, the nine class I freight
railroads offer a different view on the rate complaint process and
railroad competition.  In general, railroads disagree with shippers
about the extent to which the rate complaint process is burdensome. 
While the railroads acknowledge the importance of shippers' concerns,
they state that the standard rate complaint process is well suited to
determining the reasonableness of rates, and therefore no changes in
the process are necessary.  Railroad officials state that they are
willing to work with shippers and the Board to improve the process
and reduce the burden on shippers, provided that the process
maintains the necessary elements to effectively determine market
dominance.  The officials contend that shipping rates declined by 46
percent from 1982 through 1996 and that market forces continue to
provide adequate competition.  The railroads assert that increasing
competition through additional regulation is not appropriate in
situations in which market dominance has not been shown.  They are
concerned that increased federal regulation could stifle the growth
of the industry and hinder the capital investment necessary to
maintain and expand the rail infrastructure in the United States. 


   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:5

GAO provided a draft of this report to the Department of
Transportation and the Surface Transportation Board for review and
comment.  GAO also discussed the report with officials from the
Department and the Board, including the Board's Deputy General
Counsel, directors of three board offices, and a representative from
the Chairman's office; as well as a representative from the Federal
Railroad Administration's Office of Policy.  The Board indicated that
the draft report should provide additional information to better
depict (1) the complex task the Board faces in balancing competing
statutory policy objectives, (2) the strides the Board has undertaken
to streamline and simplify the rail rate complaint process, and (3)
external factors that can affect the length of time required to
complete action on a rate complaint.  In addition, the Board
expressed concerns about the methodology GAO used to conduct its
survey of rail shippers, such as how the results of the survey were
portrayed. 

In response, GAO has added information in the report to better
reflect the competing policy objectives that the Board must balance
as it reviews rate complaints.  GAO has also cited additional factors
in the report that the Board noted can affect the length of time
required to complete rate complaints.  GAO believes that it has
sufficiently depicted the strides the Board has undertaken to
simplify the rate complaint process.  In the absence of any cases
initiated under the simplified procedures since they were instituted
in 1996, GAO has not revised the report because GAO believes that it
is too early to declare the simplified procedures a success. 
Finally, GAO has added information to better explain the methodology
used to survey rail shippers and more clearly convey the survey's
results.  The Board's comments and GAO's evaluation appear at the end
of each report chapter.  In addition, the Board provided technical
comments on the report, including updated information on the 41 cases
GAO reviewed.  Where appropriate, GAO incorporated these comments
into the report. 


INTRODUCTION
============================================================ Chapter 1

In response to financial stresses in the railroad industry, the
Congress passed legislation in 1976 and 1980 that dramatically
reduced federal regulation over the industry.  As a result of the
1976 and 1980 legislation, most rail traffic in the United States is
not subject to the Surface Transportation Board's (the Board) rate
regulation, and fewer large railroads account for most of the
industry's revenue and mileage operated.  The Board, established
pursuant to the ICC Termination Act of 1995, is a bipartisan,
independent, adjudicatory body that is organizationally housed within
the Department of Transportation (DOT).  The Board is responsible for
the economic and rate regulation of freight railroads and certain
pipelines, as well as some aspects of motor and water carrier
transportation. 


   CHANGES IN THE FREIGHT RAILROAD
   INDUSTRY
---------------------------------------------------------- Chapter 1:1

The Railroad Revitalization and Regulatory Reform Act of 1976 and the
Staggers Rail Act of 1980 facilitated changes in the freight railroad
industry.  These acts provided the railroads with greater flexibility
to negotiate freight rates and respond to market conditions.  The
Staggers Act in particular made it federal policy that freight
railroads would rely, where possible, on competition and the demand
for services rather than on regulation to establish reasonable rates. 
As a result of mergers and acquisitions fostered by these statutes,
as well as changes in bankruptcies and changes in the definition of a
class I railroad, the number of large railroads in the United States
has declined substantially from the 63 class I railroads operating in
1976 to nine by 1997.\1

In spite of the reduction in the number of class I freight railroads,
these railroads accounted for 91 percent of the industry's freight
revenue and 71 percent of the industry's mileage operated.  In 1997,
class I freight railroads originated almost 1.6 billion tons of
freight, of which coal, farm products, and chemicals accounted for
about 61 percent.  The nine class I freight railroads in 1997 were
the Burlington Northern and Santa Fe Railway Co.; CSX Transportation;
Consolidated Rail Corporation; Grand Trunk Western Railroad, Inc.;
Illinois Central Railroad Co.; Kansas City Southern Railway Co.;
Norfolk Southern Corp.; Soo Line Railroad Co.; and Union Pacific
Railroad Co. 

Since 1997, additional railroad consolidations have occurred.  In
July 1998, the Board approved the division of the Consolidated Rail
Corporation's (Conrail) assets between CSX Transportation and Norfolk
Southern Railway.  This will reduce the number of class I freight
railroads to eight in 1999.  Also, in July 1998, Canadian National
Railway, the Canadian parent of Grand Trunk Western Railroad, Inc.,
requested the Board's authorization to acquire Illinois Central
Railroad Company.  The Board's proposed schedule provides for a final
decision on the proposed acquisition no later than May 25, 1999. 
Officials from the Federal Railroad Administration (FRA) believe that
within the next 5 to 10 years, the remaining class I railroads could
be merged into two transcontinental railroads.\2


--------------------
\1 According to Board officials, these 63 class I railroads
represented independent 30 rail systems.  The Board classifies
railroads according to operating revenues.  For 1997, class I
railroads had annual operating revenue of $256.4 million or more;
class II railroads had revenues of $20.5 million to $256.4 million;
and class III railroads had revenues of less than $20.5 million. 

\2 FRA enforces federal railroad safety statutes under a delegation
of authority from the Secretary of Transportation.  FRA's mission is
to protect railroad employees and the public by ensuring the safe
operation of freight and passenger trains. 


   THE SURFACE TRANSPORTATION
   BOARD
---------------------------------------------------------- Chapter 1:2

The ICC Termination Act of 1995 eliminated the ICC and transferred
its core rail adjudicative functions and certain non-rail functions
to the Board.  Among other things, the Board has economic regulatory
authority over freight railroads, addressing such matters as the
reasonableness of rates, mergers and line acquisitions, line
constructions, and line abandonments.  Under the statute, the Board
is responsible for balancing shipper and railroad interests by
assisting railroads in their efforts to earn adequate revenue to
cover their costs and provide a reasonable return on capital while
ensuring that shippers that depend on one railroad are protected from
unreasonably high rates. 


      THE BOARD'S OVERSIGHT OF
      RAILROAD RATES
-------------------------------------------------------- Chapter 1:2.1

The 1976 and 1980 acts provided railroads with significant
flexibility to negotiate freight rates and respond to market
conditions.  The 1976 act retained federal rate regulation only for
traffic where the railroad dominates the market, that is, it provides
service for which there is no effective competition to otherwise
control rates.  In such cases, the ICC had jurisdiction to determine
whether a challenged rate was reasonable and, if unreasonable, to
award reparations and prescribe a maximum rate.  The Staggers Rail
Act built on the reforms of the 1976 act by establishing a threshold
under which railroads would not be considered market dominant.  The
ICC Termination Act transferred this regulatory function to the
Board. 

The Staggers Rail Act permitted railroads to negotiate transportation
contracts containing confidential terms and conditions that are
beyond the Board's authority while in effect.  As figure 1.1 shows,
most rail tonnage in 1997--70 percent--moved under contracts between
the railroads and shippers involved and therefore was not subject to
the Board's rate regulation. 

   Figure 1.1:  Percent of Rail
   Tonnage Moved in 1997

   (See figure in printed
   edition.)

Source:  Association of American Railroads. 

Shipments exempted from rate regulation accounted for an additional
12 percent of all rail tonnage moved in 1997.  The Board is required
to exempt any person or class of persons, or a transaction or
service, from regulation, where regulation is not needed to carry out
congressionally set rail transportation policy and either the
transaction or service is of limited scope or regulation is not
needed to protect shippers from an abuse of market power.  For
example, in April 1998, the Board exempted 29 nonferrous recyclable
commodity groups from the Board's regulation.  The Board found that
trucks play a significant role in the transportation of these
commodity groups.  Therefore, the Board found that railroads do not
possess sufficient market power to abuse shippers.  Other exemptions
issued for the same reason include those for boxcar traffic, certain
agricultural products, and intermodal transportation. 

The remaining traffic, potentially subject to rate regulation,
accounted for 18 percent of rail tonnage in 1997.  However, the
Board's jurisdiction over this traffic is further limited because it
may only provide rate relief where the revenue-to-variable cost
percentage exceeds 180 percent and where there is no effective
competition.\3


--------------------
\3 According to Board officials, 70 percent of rail traffic is
removed from the Board's rate reasonableness jurisdiction because it
yields revenue-to-variable cost percentages below the statutory 180
percent threshold. 


      THE BOARD'S OVERSIGHT OF
      REVENUE ADEQUACY
-------------------------------------------------------- Chapter 1:2.2

During the 1970s, the railroad industry was in weak financial
condition with a rate of return on net investment of 1.2 percent in
1975,\4

and a return on shareholders' equity of about 1.9 percent.  By
contrast, manufacturing companies and utilities earned rates of
return in 1975 of about 15 and 12 percent, respectively.\5

The financial community was concerned about the railroads' long-term
viability, since the industry faced cash flow difficulties and
marginal credit ratings.  The 1976 act required the ICC to develop
standards for determining whether railroads' were earning adequate
revenues to cover their operating costs and provide a reasonable
return on capital.  The act provided that railroads' revenue should
(1) provide a flow of net income plus depreciation adequate to
support prudent capital outlays, ensure the repayment of a reasonable
level of debt, permit the raising of needed equity capital, and cover
the effects of inflation and (2) attract and retain capital in
amounts adequate to provide a sound transportation system.  Despite
the reforms of the 1976 act, in 1980, the Congress found that
railroads' earnings were still insufficient to generate the funds
they needed to make improvements to their rail facilities.  While the
1976 act required the ICC to develop standards for the adequacy of
railroad revenue, the Staggers Rail Act of 1980 required the ICC to
determine annually which railroads were earning adequate revenues and
to consider revenue adequacy goals when it reviewed the
reasonableness of rates.  According to Board officials, even today,
the profitability of class I railroads is among the lowest of major
industries. 


--------------------
\4 The rate of return on net investment is the relationship of
railroads' net operating income to average net investment in
transportation property. 

\5 These returns may not be directly comparable because before 1983
the railroad industry used the retirement-replacement-betterment
accounting system for reporting on rail track and structures.  In
1983, ICC adopted the depreciation basis of accounting for these
items. 


      THE BOARD'S OTHER OVERSIGHT
      RESPONSIBILITIES
-------------------------------------------------------- Chapter 1:2.3

When two or more railroads seek to consolidate through a merger or
common control arrangement, they must obtain the Board's approval;
transactions requiring the Board's approval are not subject to the
antitrust laws or other federal, state, and municipal laws.  During a
merger proceeding involving two or more class I railroads, the Board
is required to consider, among other things, how the merger will
affect competition among railroads (either in the affected region or
in the national transportation system), railroad employees, the
environment, and the adequacy of transportation provided to the
public. 

As part of its regulatory responsibilities, the Board also addresses
informal and formal complaints that railroads have failed to provide
reasonable rail service to shippers.  The Board oversees other rail
matters, such as line constructions and abandonments.  Railroads that
want to either construct a new rail line or abandon an existing one
must generally obtain the Board's approval. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

Concerned about the potential barriers that shippers face in seeking
relief from allegedly unreasonable rail rates, Senators Byron L. 
Dorgan, Conrad R.  Burns, John D.  Rockefeller IV, and Pat Roberts
asked us to describe (1) the Board's rate relief complaint process
and how it has changed since the ICC Termination Act of 1995 became
law, (2) the number and outcome of rate relief cases pending or filed
since 1990, and (3) the opinions of shippers as to the barriers they
face when bringing rate complaints to the Board and potential changes
to the process to reduce these barriers.  At their request, we are
also providing information on McCarty Farms, Inc.  et al.  v. 
Burlington Northern, Inc.  In addition, in the spring of 1999, GAO
will issue a companion report that will address how freight railroad
rates and service have changed since 1990. 

To describe the rate complaint process and how it has changed since
the ICC Termination Act, we reviewed prior GAO reports and the
Board's documents, applicable statutes and regulations, and
decisions.  We met with Board officials, shippers' organizations, and
the AAR to gain a thorough understanding of the process.  We then
summarized the rate relief process and obtained comments on our
summary from the Board.  Board officials provided clarification where
necessary, and their comments are included in our report.  Our
description of the rate relief process is contained in chapter 2. 

To determine the number and outcome of rate relief cases filed and/or
pending since 1990, we obtained the rate complaints either filed with
or pending before the Board or its predecessor, the ICC, from January
1, 1990, through December 31, 1998.  We compared the number of
complaints filed between January 1, 1990, and December 31, 1998, with
the number of complaints that shippers filed from 1980 through 1990. 
We reviewed the complaints to determine, among other things, their
nature, the complaint process used in filing them and their outcome. 
We also examined the complaints to determine the types of commodities
involved, whether the railroad was found to be market dominant, how
much time the agency required to make a rate-reasonableness
determination, and the rationale for the determination.  The Board's
requirement that railroads demonstrate product and geographic
competition for traffic subject to a challenged rate was in effect
during the course of our review.  We did not independently verify the
information provided by the Board regarding the number of complaints
filed or pending since January 1, 1990.  In addition, we did not
review the merits of the ICC's or the Board's decisions or the
appropriateness of the outcome. 

To determine shippers' views on the rate relief process and
suggestions for improvement, we mailed a questionnaire to members of
11 commodity associations that ship using rail in the United States. 
To identify the individual shippers of each commodity, we obtained
the membership lists from each association we contacted.  To identify
these shippers, we selected three commodity classifications
representing four commodities that constitute the largest volume of
rail shipments--bulk grain,\6 coal, chemicals, and plastics.\7 In
order to identify a sufficient cross-section of wheat shippers, we
selected wheat associations in states with the largest wheat
production (by volume) for 1997, using data on wheat production from
the U.S.  Department of Agriculture's Economic Research Service.  We
selected the top three wheat-producing states--Kansas, North Dakota,
and Montana--and contacted the grain shipper associations in these
states.  For the remaining commodity classifications, we contacted
the national associations representing the shippers of each
commodity. 

For the nine associations that provided a relatively small number of
members, we surveyed all of the members contained on the lists
provided.  For the two associations that provided a relatively large
number of members, we selected a random sample of members for our
survey.  In instances where a random sample was conducted, the sample
can be generalized to the association's membership.  Table 1.1 lists
the associations we contacted, the number of members in each
association, the number of shippers we selected from each list to
represent a statistically valid sample of each association, and the
response rate. 



                               Table 1.1
                
                   Association Memberships Selected,
                Shippers Surveyed by GAO, and the Survey
                             Response Rate

                                                      Number
                                            Number        of     Valid
                                                of  shippers  response
Association contacted                      members  surveyed      rate
----------------------------------------  --------  --------  --------
Chemical Manufacturers Association             160       160      57.5
Edison Electric Institute                       91        91      67.0
Kansas Grain and Feed Association              320       320      66.9
Montana Grain Elevator Association              93        93      36.6
National Corn Growers Association           52,353       400      54.0
National Grain and Feed Association            747       399      67.9
National Mining Association                    113       113      43.4
North Dakota Grain Dealers Association         280       280      50.7
Society of the Plastics Industry               237       237      47.3
Western Coal Traffic League                     15        15      86.7
Western Fuels Association                        9         9      44.4
======================================================================
Subtotal                                    54,418     2,117
Shippers with complaints filed or               32        32      12.5
 pending since 1990\a
======================================================================
Total                                       54,450     2,149      60.1
----------------------------------------------------------------------
\a We mailed surveys to the shippers who had complaints filed or
pending with the ICC and the Board since 1990.  These shippers are
not included in the number of shippers surveyed from the
associations.  Two shippers filed complaints with the Board in 1998,
after our survey was mailed to shippers. 

The selection of 2,149 shippers was reduced by 92 to account for
shippers who were members of more than one association, leaving
2,057.  In analyzing the questionnaires that were returned, we
discovered that a very small percentage of National Corn Growers
Association (NCGA) members were rail shippers.  Of the questionnaires
returned by NCGA members, only six indicated they were rail shippers. 
This does not yield a statistically valid result, and therefore we
dropped the NCGA membership from our statistical analysis.  As a
result, we reduced our sample of 2,057 by the 400 NCGA members we
sampled.  This results in an adjusted sample size of 1,657.  Of the
1,657 grain, coal, chemicals and plastics shippers we surveyed, 996
(or 60.1 percent) returned our survey.  The response rates for grain,
coal, chemicals and plastics shippers were 61 percent, 62 percent,
and 55 percent, respectively. 

Because the National Grain and Feed Association's (NGFA) membership
was large, we sent our survey to a randomly selected sample of NGFA
members.  Our sample was statistically drawn and weighted so that we
could generalize the responses of the NGFA members we surveyed to the
entire membership for each question in the survey.  The weights apply
only to NGFA member responses and not the responses of the other
shippers because we surveyed the entire membership of the other
associations.  We statistically combined the sample with the
responses from the other 10 groups and reported weighted estimates
for each question in the survey.  As a result, the views and opinions
of the shippers we surveyed are generalizable to the views and
opinions of the 11 groups we surveyed. 

Not all shippers who responded to our survey were rail shippers,
however.  Therefore, our analysis only considers the responses of
shippers that indicated that they were rail shippers, and have used
rail in at least one year since 1990.  Based on our sampling and
analysis techniques, our results are based on an estimate of 709
shippers who shipped grain, coal, chemicals, or plastics by rail in
at least one year since 1990.  The responses of the 709 rail shippers
are used as the core of our statistical analysis. 

Some of our estimates do not always represent the entire population
because some shippers did not answer all questions.  We have
indicated the number of missing responses for each question in
appendix III.  In all instances where we discuss our survey results,
we are referring to the rail shippers belonging to the groups we
surveyed.  Our statistical analyses of data collected are presented
in chapter 4.  A detailed technical appendix and our questionnaire
results are presented in appendix III. 

To determine the railroad industry's views on shippers' suggestions
to improve the rate relief process and competition in the railroad
industry and to collect additional data on rate complaint cases, we
mailed a questionnaire to each of the nine class I railroads with
operations in the United States.  The questionnaires asked the
railroads to indicate the significance of barriers caused by the
standard rate complaint process and their opinions regarding
shippers' suggestions to improve the process and increase competition
in the railroad industry.  In addition, we asked them for information
regarding any rate complaint cases in which they were involved,
including the number of complaints and the outcome of each complaint. 
AAR officials answered questions pertaining to the rate relief
process and competition issues on behalf of the railroads.  Each
individual railroad was asked to answer questions regarding rate
complaints pertaining to its company.  We did not receive a
sufficient number of responses from the railroads regarding the rate
complaints to provide any additional data on the cases filed and or
pending since 1990.  We therefore relied on our independent analysis
of the Board's case files and did not include the small number of
responses from the class I railroads.  We summarized the data
collected through the use of the railroad questionnaire and summaries
of that analysis are presented in chapter 4 and appendix IV. 

We performed our work from February 1998 through February 1999 in
accordance with generally accepted government auditing standards. 


--------------------
\6 Corn, wheat, soybeans, sorghum, barley and rye, and oats represent
nearly all grain movements in the United States. 

\7 Railroad Facts, 1998 Edition, Association of American Railroads,
Oct.  1998. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 1:4

In commenting on a draft of this report, the Board disagreed with our
statistic that 88 class I railroads operated in 1976 and contended
that 63 class I railroads, representing 30 independent rail systems,
operated in that year.  Furthermore, the Board noted that of these 30
rail systems, 9 were subsequently reclassified as smaller (class II
or III) railroad systems as the revenue thresholds for class I status
were raised, and 2 systems ceased operations as a result of
bankruptcy.  Thus, officials stated, the actual reduction in the
number of class I railroad systems from 1976 to 1998 that resulted
from mergers and consolidations was from 19 to 9. 

Our count of 88 class I railroads was based on information from FRA's
annual safety bulletins.  To be consistent with the Board, we changed
the number of class I railroads in 1976 to 63 and provided additional
information on the 30 systems these class I railroads represented. 
However, we disagree with the Board's assertion that the number of
1976 railroad systems should be further reduced to 19.  While the
number of systems may have declined after 1976, Board statistics show
that 30 railroad systems operated in 1976. 


THE BOARD'S RAIL RATE COMPLAINT
PROCESS
============================================================ Chapter 2

While there have been some changes to the rate complaint process
since the ICC Termination Act, the process continues to be relatively
complex and time-consuming.  However, within the limits of the law,
the Board has taken steps to reduce the complexity of the process,
such as adopting simplified guidelines for determining the
reasonableness of challenged rates and addressing some of the
barriers to filing a complaint. 


   THE STANDARD RATE COMPLAINT
   PROCESS IS COMPLEX
---------------------------------------------------------- Chapter 2:1

The rate complaint process in larger cases is a complex
administrative proceeding involving difficult issues.  When a shipper
files a rate complaint, the Board must assess many factors related to
competition and the disputed rate.  The Board first determines
whether the railroad dominates the shipper's transportation market. 
If the Board finds that a railroad is market dominant, the Board then
conducts an economic analysis designed to determine the lowest rate
than an optimally efficient railroad would need to charge to cover
its costs.  If the hypothetical railroad's rate is less than the rate
that the dominant railroad charges, the Board may order reparations
for past shipments or prescribe rates for future shipments. 


      THE BOARD MUST ADDRESS MANY
      PROCEDURAL ISSUES
-------------------------------------------------------- Chapter 2:1.1

The Board addresses a shipper's complaint in an administrative
proceeding during which the shipper and the railroad have the
opportunity to develop and present evidence supporting their
positions.  Under the ICC Termination Act, a case may only be
initiated upon a shipper's complaint.  A complaint must indicate
whether the Board should examine the challenged rate under the
Board's more complex standard or its simplified guidelines and
provide information to enable the Board to decide which guidelines to
apply.\1 The Board charges a fee to process the complaint.  In
February 1999, the Board raised the filing fee for a case brought
under the standard guidelines to $54,500--20 percent of the 1999 cost
to the agency of adjudicating a rate complaint.  The Board also
raised the fee for cases brought under the simplified guidelines
issued after the ICC Termination Act to $5,400.  After the case is
initiated, the parties use a variety of tools to obtain information
from each other and present evidence supporting their positions under
a schedule established by regulation or by the Board.  The Board must
decide cases under the standard guidelines within 9 months after the
close of the administrative record and cases under the simplified
guidelines within 6 months.  For cases under the standard guidelines,
the Board's goal is to complete the entire process in 16 months.  The
railroad or shipper may make an administrative appeal to the Board or
request judicial review of the Board's decision after exhausting all
administrative options.  According to shipper representatives, a
complaint can cost a shipper from about $500,000 to $3 million. 
Figure 2.1 illustrates the dates that govern key parts of the
process, including discovery, filing of evidence, and the date by
which the Board has to make a final decision. 

   Figure 2.1:  The Board's Rail
   Rate Complaint Process

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Sources:  Surface Transportation Board; ICC Termination Act of 1995;
49 CFR Parts 1002 through 1115. 

The Board's regulations require the parties to discuss discovery
matters within 7 days after a complaint is filed.  However, either
side may be reluctant to share information, particularly information
that may damage its case.  Disputes have also arisen when a shipper
contended that a railroad's discovery requests were unfairly
burdensome.  For example, in a 1998 case, FMC Wyoming Corporation and
FMC Corporation v.  Union Pacific Railroad Company, the Board limited
the railroad's broad requests for information on possible product-
and geographic-based competition.  The Board found that through its
broad discovery requests, the railroad had improperly attempted to
shift the burdens of identifying product and geographic competition
to the complaining shipper.  As a result, the Board imposed
restrictions limiting discovery requests.  The Board later removed
product and geographic competition from consideration in all cases. 

Shipping groups told us that obtaining information during the
discovery process can be difficult and that railroads make it
burdensome and time-consuming for them.  Furthermore, shippers are
reluctant to challenge railroads during discovery, fearing that an
extended schedule will lead to added costs and the continued
disruption of daily operations.  On the basis of survey responses, we
estimate that about 67 percent of the rail shippers indicated that
difficulty in getting necessary data from the railroads would
preclude them from filing a rate complaint.  While railroads told us
that procedural barriers should not be an obstacle in a rate
complaint process, they believe that product and geographic
competition tests are important aspects of proving that shippers have
alternatives to the dominant railroad. 


--------------------
\1 The standard guidelines are often referred to as Constrained
Market Pricing (CMP) or ï¿½coal rateï¿½ guidelines.  These guidelines
were originally designed for challenges to coal rates.  However, they
have since been applied to challenges for rates on other commodities. 


      RATE RELIEF CASES REQUIRE
      DETERMINATION OF MARKET
      DOMINANCE
-------------------------------------------------------- Chapter 2:1.2

By statute, the Board may assess whether a challenged rate is
reasonable only if the railroad dominates the shipper's
transportation market.  The requirement to determine market dominance
originated with the 1976 act, which broadly defined market dominance
as the absence of effective competition from other railroads or other
modes of transportation.  Underlying this statutory directive was the
theory that if the railroad did not dominate the market, competitive
pressures would keep rail rates at a reasonable level.  The Staggers
Rail Act retained this requirement and tied the definition of market
dominance to rail rates exceeding a certain revenue-to-variable cost
percentage. 

An analysis of market dominance contains both quantitative and
qualitative components.  Quantitatively, the Board first determines
if the revenue produced by the traffic transported is less than 180
percent of the railroad's variable cost of providing the service.  By
statute, a railroad is not considered to dominate the market for
traffic that is priced below the 180-percent revenue-to-variable cost
level.  If the revenue produced by the traffic exceeds the statutory
threshold, the Board conducts a qualitative analysis using data the
shipper and railroad provide on competition.  The shipper must prove
that it does not have (1) access to more than one competing railroad
or combination of railroads that can transport the same commodity
between the same origin and destination points (intramodal
competition) or (2) access to other competing modes of
transportation, such as trucks or barges, that could transport the
same commodity between the same origin and destination points
(intermodal competition).  Until January 1999, the railroad had to
show that the shipper had (1) access to alternative origin or
destination points for the same commodity (geographic competition)
and (2) access to alternative products that could be substituted for
the commodity in question (product competition).\2


--------------------
\2 Ex Parte No.  627, Market Dominance Determinations:  Product and
Geographic Competition, Dec.  21, 1998. 


      THE BOARD DETERMINES WHETHER
      THE MARKET-DOMINANT
      RAILROADS' RATES ARE
      REASONABLE
-------------------------------------------------------- Chapter 2:1.3

Until the 1976 act, the ICC regulated almost all rates and judged
their reasonableness by various cost formulas and/or by comparing a
challenged rate with an established rate for similar freight
movements.  Together, the 1976 act and the Staggers Rail Act provided
railroads with significant flexibility to set rates in response to
market conditions.\3 However, neither the Staggers Rail Act nor the
1976 act prescribed quantitative measures for the ICC to use in
determining rate reasonableness.  In February 1983, the ICC proposed
new Constrained Market Pricing (CMP) guidelines for coal shipped in
markets where there was only one railroad.  After more than 2-1/2
years of comment, the ICC adopted these final standard guidelines. 
Since the standard guidelines' adoption, the ICC and the Board have
used the guidelines to evaluate the reasonableness of rates for
noncoal shipments.  The ICC Termination Act retained the basic
statutory framework for rate reasonableness determinations but, as
discussed below, directed the Board to complete the development of
alternative, simplified guidelines for rate relief cases. 

The CMP concept relies on railroads' setting rates in all markets
according to their own estimates of demand--just as many firms set
their own prices in other industries--but subjects rates on captive
traffic to reasonable constraints.  ICC believed that CMP allowed it
both to assist railroads in attaining adequate revenues and protect
shippers from monopolistic pricing practices.  CMP provides for the
following: 

Revenue adequacy:  A captive shipper should not have to pay more than
is necessary for the railroad to earn adequate revenues.\4

Management efficiency:  A captive shipper should not pay more than is
necessary for efficient service. 

Stand-alone cost:  The rate should not exceed what a hypothetical
efficient competitor would charge for providing comparable service;
the shipper should not bear any costs from which it derives no
benefit. 

Phasing of rate increases:  Changes in rates should not be so sudden
as to cause severe economic dislocations. 

Under the stand-alone cost approach routinely used in rate cases, a
shipper develops a model of a hypothetical, optimally efficient
railroad that could serve the complaining shipper.  With the aid of a
variety of experts, the shipper and railroad develop information
regarding the hypothetical railroad's traffic, operating plan,
capital investment requirements, costs, and revenues.  If the
hypothetical railroad's rate, including revenues sufficient to cover
all costs and a reasonable profit, would be less than the rate the
railroad charged the shipper, the Board will conclude that the
challenged rate is unreasonable and may order the railroad to pay
reparations on past shipments and prescribe rates for future
shipments.  Conversely, if the hypothetical railroad's rate would be
greater than the challenged rate, the Board will conclude that the
rate is reasonable and dismiss the complaint. 

To reach its final decision, the Board typically employs a
multidisciplinary team that includes a civil engineer to review the
shipper's assumptions in building the hypothetical railroad, a
transportation analyst to review the shipper's operational
assumptions for the hypothetical railroad, and a financial analyst to
prepare discounted cash flows.  According to Board officials, the
complexity of current rate cases and resource constraints on the
Board allow the agency to work on two standard procedures cases
concurrently at an average cost to the agency of $270,000 per case
for staff directly assigned to a given case.\5 According to shippers'
associations, developing a model of a hypothetical railroad requires
a shipper to hire numerous consultants at significant cost.  Of the
shippers that expressed an opinion in our survey, an estimated 72
percent might not file a rate complaint because developing the model
would be too costly. 


--------------------
\3 Demand-based differential pricing recognizes that railroads, in
order to recover all of their costs, should be able to set rates in
competitive markets below fully allocated costs to meet competitors'
rates and to set other rates above fully allocated costs.  Fully
allocated costs is the sum of variable costs plus an apportionment of
fixed costs (those that do not vary with quantity, such as land). 

\4 A captive shipper is one that can only use one railroad to ship
its goods and has no other shipping alternatives. 

\5 This amount also includes the costs associated with making the
market-dominance determination. 


   TOO EARLY TO ASSESS THE BOARD'S
   ACTIONS TO EASE SHIPPERS'
   BURDENS
---------------------------------------------------------- Chapter 2:2

The ICC Termination Act of 1995 directed the Board to complete an ICC
proceeding to develop a simplified alternative to the standard
coal-rate guidelines within 1 year of enactment.  While the Board
adopted simplified guidelines in December 1996, no cases had been
filed under the simplified procedures as of January 1999.  In
addition to the simplified guidelines, the Board has implemented
other measures to reduce the barriers that shippers experience when
bringing rate complaints.  These measures include establishing
procedural deadlines for standard cases as well as more limited
deadlines for cases under the simplified guidelines and requiring the
parties to discuss discovery matters at the beginning of the
proceeding.  Furthermore, the Board has eliminated the product- and
geographic-based competition aspect of its market-dominance
determination.  The Board has also encouraged increased communication
between the railroad and shipper communities so that they may better
resolve their differences outside the regulatory process. 


      THE BOARD HAS ADOPTED
      ALTERNATIVE, SIMPLIFIED
      GUIDELINES
-------------------------------------------------------- Chapter 2:2.1

The Board's simplified guidelines are intended for complaints in
which it would be too costly for the shipper to develop a cost model
of a competitive railroad.  Since 1986, the Board or its predecessor
has attempted to develop simplified guidelines.  According to Board
officials, efforts to adopt the procedures have often been blocked by
the courts.  After the Board adopted the simplified guidelines in
1996, AAR challenged the simplified guidelines in federal court,
contending that the guidelines did not fulfill the Congress's
directive to establish a simple and expedited method to determine
whether rates in small cases were reasonable.  AAR asserted that the
guidelines were ï¿½vague and could undermine the revenue adequacy of
railroads.ï¿½ On June 30, 1998, the court found that the challenge to
the simplified guidelines was premature because the Board had not yet
applied them to invalidate a specific rate.\6 The shippers'
representatives that we contacted expect that AAR will challenge the
results of the first case in which the Board decides that a
challenged rate is not reasonable under the simplified guidelines. 
These representatives contend that shippers may be reluctant to file
a case under the simplified guidelines because they expect the
results to be appealed and they would incur additional legal costs in
subsequent litigation.  In addition, they contend that if the court
ruling invalidates the simplified guidelines, shippers would then
have to decide whether to pursue complaints under the more complex
standard guidelines.  Nonetheless, Board officials noted that the
Board would defend the simplification procedures in court and
therefore believes that eligible shippers should not be deterred from
their use because the procedures have not been judicially affirmed. 
Board officials expressed confidence that the courts would affirm the
simplified procedures. 


--------------------
\6 Association of American Railroads v.  Surface Transportation
Board, 146 F.  3d 942 (D.C.  Cir.  1998). 


      THE BOARD HAS IMPLEMENTED
      SOME IMPROVEMENTS TO THE
      RATE COMPLAINT PROCESS
-------------------------------------------------------- Chapter 2:2.2

In addition to establishing simplified guidelines, the Board has
implemented procedures designed to expedite the rate complaint
process.  For example, in September 1996, the Board issued a 7-month
procedural schedule for complaints under the standard guidelines to
ensure that the proceeding would be completed within 16 months.  In
January 1998, the Board issued expedited procedures for complaints
brought under the simplified guidelines.  These procedures
established a 50-day schedule for the Board's determination as to
whether simplified guidelines should be used in the complaint. 
Despite these efforts, the Board has either suspended or extended the
proceedings for most of the shippers' complaints as a result of
shippers' and railroads' requests.  Furthermore, in an effort to
speed up the process and develop realistic time frames, the parties
confer with each other at the outset of a rate case to set the ground
rules for the proceedings.  During the conference, the parties
identify and resolve disputes relating to discovery or the
evidentiary schedule.  Finally, the Board eliminated product- and
geographic-based competition from its market-dominance analysis. 
While the Board had tried to mitigate problems associated with
discovery pertaining to product and geographic competition
proceedings, it concluded that such actions were not sufficient to
address shippers' concerns.  The railroads sought agency
reconsideration of that decision. 


      THE BOARD HAS PROMOTED
      COMMUNICATION BETWEEN
      SHIPPERS AND RAILROADS
-------------------------------------------------------- Chapter 2:2.3

The Board prefers that shippers and railroads settle their
differences without regulatory interference and has made various
efforts to facilitate such agreements.  The ICC Termination Act
established the Railroad-Shipper Transportation Advisory Council to
advise the Board, the Secretary of Transportation, and congressional
oversight committees on rail transportation policy issues of
particular interest to small shippers and small railroads.  As a
result of a proposal by the Council, the Board established a
voluntary arbitration process as an alternative to traditional
proceedings.  The regulations establish a 120-day time frame for
arbitration proceedings.  Arbitrators' decisions are binding and
judicially enforceable, subject to a limited right of appeal to the
Board.  Arbitration has not been used as a substitute for a rate
complaint.  According to officials of the National Grain and Feed
Association, arbitration is suitable for service problems, such as
the misrouting of cars, but mediation is preferred to resolve rate
complaints. 

As a result of April 1998 hearings, the Board has encouraged further
private-sector discussions to address access and competition issues. 
At the hearings, shippers called for a greater role for smaller
railroads, particularly in rural areas.  In September 1998, the
American Short Line and Regional Railroad Association (ASLRRA) and
AAR announced an agreement to improve service.  The agreement
provides for the arbitration of certain issues contested by class I
and smaller railroads.  However, the Board also mandated that the
railroads and shippers establish a formal dialogue to address
concerns raised during the April hearings.  In response to the
Board's directive, the National Grain and Feed Association and AAR
entered into an agreement to address rate and service issues in the
grain industry.  The agreement provides for confidential, nonbinding
mediation of certain rate disputes and mandatory binding arbitration
of service disputes. 

Other mechanisms to encourage discussions between the railroad and
shipper communities include the National Grain Car Council and the
Joint Grain Logistics Task Force.  The ICC Termination Act directed
the Board to consult as necessary with the National Grain Car
Council, previously established by the ICC as a means for assisting
the Board in addressing problems arising in transporting grain by
rail.  According to a Board official, the National Grain Car Council
generally focuses on addressing issues for the grain industry as a
whole, and not necessarily for individual shippers.  The Board also
established the Task Force in cooperation with the U.  S.  Department
of Agriculture.  The Task Force will address shippers' and railroads'
information needs concerning recurring seasonal problems that affect
the transportation of grain and grain products. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:3

In commenting on a draft of this report, Board officials stated we
should provide more information on the complex task the Board faces
in balancing competing policy objectives set forth under statute and
the strides the Board has undertaken to streamline and simplify the
rate complaint process.  Officials stated that the standard complaint
procedures that the Board currently uses for large cases resulted
from many years of debate and judicial interpretations.  These
standard procedures address the concerns that the Board must consider
under the statute as it seeks to balance two competing goals: 
considering the needs of the railroad industry for adequate revenues
while simultaneously ensuring that the industry does not exert an
unfair advantage over captive shippers.  Board officials noted that
the agency has streamlined the standard process for handling large
cases (such as modifying the market-dominance rule).  However, they
stated that the complexity of the standard procedures for larger rate
cases is largely unavoidable, given the complexity of the underlying
issues to be resolved and the need to balance competing policy
objectives laid out by the Congress.  Thus, officials contend that to
further substantially reduce the complexity, time, and expense
involved in handling these rate complaints would require legislative
action. 

Officials noted that the Congress could choose to adopt even simpler
maximum rate formulas for certain traffic.  However, officials
continued, a substantial retreat from differential pricing principles
could have a noticeable effect on the railroad industry's financial
health and the type and scope of services provided and thus could
affect the shippers that rely upon that industry to meet their
transportation needs.  Similarly, officials noted that the
suggestions for increasing rail competition, such as through open
access, would require substantial changes to the statute, could alter
the shape and condition of the rail system, and limit the ability of
the nation's rail system to meet the needs of some of the shippers
that use the current system. 

In response, we recognize that the Board faces competing policy
objectives as a result of existing laws.  These competing policies
come to the forefront not just with rail rate complaints but with
many other Board proceedings, such as actions to approve railroad
mergers and consolidations.  Throughout this report, we repeatedly
cite the competing policies, embodied in statute, that the Board must
employ in making its rail-related decisions.  However, we have
modified the report to reflect the Board's views that important
aspects of the rate-relief process or the competitive structure of
the railroad industry can only be changed with the support and
approval of the Congress. 

Board officials also stated that the report does not adequately
address the simplified procedures.  Officials stated that the new
procedures were designed to provide a shorter, simpler, and less
expensive means to address cases in which the more complex standard
procedures are not cost effective.  Board officials stated that the
report, as well as our survey, generally focused on the standard rate
complaint process--a process that is inherently more complex and
time-consuming.  Board officials stated that the report does not
adequately reflect the value that the new, simplified procedures
could have for the shippers that will use them.  Although shippers
have complained that the simplified procedures are also complex,
Board officials stated that the procedures are user-friendly and
based on readily available and inexpensive data.  Because the Board
would defend the simplified procedures against railroad challenges in
court, Board officials stated that eligible shippers should not be
deterred from using them simply because the procedures have not yet
been judicially affirmed.  Officials expressed confidence that the
courts would affirm the Board's simplified procedures, when they are
applied. 

In response, we note that since the Board issued its simplified
procedures in December 1996, no shipper has asked the Board to review
a rate complaint under them.  As this chapter notes, shippers and
their associations are reluctant to use the simplified procedures
because they believe that AAR will challenge the first rate complaint
filed under the new procedures.  Shipper associations have noted that
Board statements declaring the Board's intended defense of the
simplified guidelines offer little encouragement for any shipper to
be the first to file a complaint under these new procedures.  While
the new procedures offer shippers the prospect of resolving their
complaints faster, the prospect of future litigation provides little
incentive for shippers to initiate such a complaint.  Accordingly, we
believe that it is still too early to declare the simplified
procedures a success. 


DECLINE IN COMPLAINTS FILED, AND
FEW RATES HAVE BEEN FOUND
UNREASONABLE
============================================================ Chapter 3

Very few shippers served by class I railroads have complained to the
Board or the ICC about the railroads' rates.  After filing 130 rate
complaints from 1980 through 1989, shippers filed only 24 rate
complaints from 1990 through 1998.  Furthermore, in the 41 complaints
we reviewed that were filed or pending since the beginning of 1990,\1
the shipper and the railroad were able to settle their differences on
18 complaints before completing the formal complaint process.  In
addition, the challenged rates were found to be unreasonable in two
cases, seven complaints were dismissed in favor of the railroad, and
five were dismissed for other reasons.  The Board is still examining
the remaining nine complaints.  Shippers of coal, farm products, and
chemicals filed the greatest number of rate complaints.  The rate
complaint process was quite long for some shippers--time for
resolution ranged from a few months to about 16 years. 


--------------------
\1 As of Jan.  1, 1990, 17 rate complaints were active with the
Board's predecessor.  Between Jan.1, 1990 and Dec.  31, 1998,
shippers filed 24 additional rate complaints with the Board or its
predecessor. 


   FEW SHIPPERS COMPLAINED ABOUT
   RAIL RATES
---------------------------------------------------------- Chapter 3:1

Despite the fact that thousands of shippers transport their products
by rail, very few have filed complaints about rates to either the ICC
or the Board over the past 20 years.  From 1980 through 1989, the ICC
received 130 rate complaints.  The number of rate complaints has
declined almost every year since 1980, and as figure 3.1 shows, two
shippers filed rate complaints in 1998.\2

   Figure 3.1:  Rate Complaints
   Filed With ICC/Board, 1980-98

   (See figure in printed
   edition.)

Source:  Surface Transportation Board. 

According to a Board official, the decline in the number of rate
complaints filed may be attributed to the growth in the number of
private transportation contracts between railroads and shippers, as
well as a significant general decline in railroad rates over the past
10 to 15 years.  However, some of the rail shippers that responded to
our survey indicated that the complexity of the rate complaint
process also had influenced their decisions not to file rate
complaints.  As a result of the Staggers Rail Act of 1980, railroads
could establish rates through contracts with individual shippers
rather than only through tariffs--predetermined rate schedules for
particular routes--filed with the ICC.  Contracts reflect negotiated
agreements for rates and service levels tailored to the shippers'
needs.  A 1988 AAR survey found that 60 percent of all rail traffic
was subject to private transportation contracts between the shippers
and the railroads.  By 1997, AAR found that the amount of rail
traffic subject to a contract had increased to 70 percent.  In
addition, according to the Board, the average inflation-adjusted
class I railroad rate steadily declined 46 percent from 1982 through
1996, perhaps also leading to a decline in the number of rate
complaints.  Of the 709 shippers that responded to our survey, 25
percent indicated that they found their freight rates reasonable and
therefore found no reason to file a complaint.  However, an estimated
75 percent of the remaining rail shippers that responded to our
survey indicated that administrative and legal barriers in the rate
complaint process may have precluded them from filing a complaint. 

Since 1990, 41 complaints have either been filed with or are pending
before the ICC/Board.  Shippers of bulk commodities like coal, grain
and chemicals are highly dependent on rail for their transportation
needs and filed the most rate complaints.  Coal, grain, and chemical
shipments constituted about 60 percent of total traffic on class I
railroads in 1997, and accounted for 76 percent (31) of the
complaints either pending or filed since January 1, 1990.  Coal
shippers alone filed 21 of the 41 complaints, as shown in figure 3.2. 

   Figure 3.2:  41 Complaints
   Pending or Filed Since January
   1, 1990, by Commodity

   (See figure in printed
   edition.)

Source:  GAO's analysis of the Board's information. 

The six chemical and four grain complaints represented 24 percent of
the complaints either pending or filed since 1990.  Commodities other
than coal, grain, and chemicals identified in these complaints
include corn syrup, sugar, pulpwood and woodchips, electric
transformers, spent nuclear fuel, railroad cars, and perlite rock. 
Appendix II contains a list of the commodities associated with each
complaint.  Board officials believe that the number of rate
complaints from coal shippers will increase partly because many
long-term private transportation contracts between railroads and
utility companies are expiring and there may be disputes regarding
rates in the absence of contracts.  According to the Board, coal
shippers have the most incentive for bringing a rate complaint
because of the large amount of dollars potentially in dispute.  For
example, in 1998, the Board awarded the Arizona Public Service
Company and PacifiCorp over $23 million plus interest in their joint
complaint against the Atchison, Topeka, and Santa Fe Railway Company. 
In addition, the stand-alone cost model is relatively less
complicated to apply to coal shipments than it is to other
commodities, such as chemicals.  Railroads usually transport coal
shipments between few origins and destinations--mainly between the
coal mine and the utility company's generating plant--over a limited
segment of a railroad's system.  Chemical shippers, on the other
hand, typically send smaller shipments to many destinations. 
However, officials from the Western Coal Traffic League stressed that
bringing a rate complaint to the Board is the last resort for a
utility company because in addition to the extremely high cost of
bringing a rate complaint, the effort distracts from and disrupts the
company's everyday operations. 


--------------------
\2 In 1981, shippers filed 864 rate complaints as a result of section
229 of the Staggers Act.  This provision gave shippers 180 days from
Oct.  1, 1980, to challenge railroad rates in existence on that date. 
Rates not challenged during this time period were presumed to be
lawful and not subject to further challenge through the ICC or in
court.  We did not include these complaints in our analysis because
we could not determine whether shippers would have filed these rate
complaints in the absence of section 229 of the Staggers Act. 


   RESOLVING RATE CASES CAN TAKE
   CONSIDERABLE TIME
---------------------------------------------------------- Chapter 3:2

The resolution of rate complaint cases has often taken a number of
years under the standard guidelines.  In some instances, complaints
were prolonged because either the railroad or the shipper appealed an
ICC/Board decision to a federal court, which subsequently remanded
the complaint to the agency for another review.  Since 1990, the
ICC/Board has completed 32 rate complaint cases.  As table 3.1 shows,
some complaints were resolved in a few months, while others took more
than 16 years.  According to the Board, some cases were lengthy
because the standards were not in place when the cases were filed
and/or because of extensive litigation. 



                               Table 3.1
                
                   Resolution of Rate Reasonableness
                           Decisions, 1990-98

                                                Average time for final
                                                   decision (years)
                                                ----------------------
                                    Range of
                                    time for
                                    complaint
                        Number of   resolution  Per
Commodity               complaints  (years)     complaint   Per case
----------------------  ----------  ----------  ----------  ----------
Coal                    18\a        0.3 -16.1   4.8         3.9

Chemicals               4           0.7 -2.7    1.5         1.5

Grain                   3\b         15.1 -      16.0        16.4
                                    16.4

Other                   7           0.2 -15.2   8.4         8.4

Pending complaints      9           Not         Not         Not
                                    applicable  applicable  applicable

Total                   41          0.2 -16.4   6.3         5.1
----------------------------------------------------------------------
\a ICC consolidated Increased Rates on Coal, Louisville and Nashville
Railroad and Dayton Power and Light Co.  v.  Louisville and Nashville
Railroad into a single proceeding.  ICC also consolidated Bituminous
Coal, Hiawatha, Utah to Moapa, Nevada and Aggregate Volume Rate on
Coal, Acco, Utah to Moapa, Nevada into a single proceeding. 

\b ICC consolidated these three grain complaints into a single
proceeding--McCarty Farms v.  Burlington Northern, Inc. 

Source:  GAO's analysis of the Board's information. 

The time required for resolving a complaint varied by commodity. 
Three complaints filed by grain shippers, which were combined into a
single proceeding, McCarty Farms, Inc.  et al.  v.  Burlington
Northern, Inc., took about 16 years to resolve.  According to Board
officials, this is principally because the complaints were filed
before the ICC had developed rate standards and because the parties
challenged various ICC and Board decisions in court.  In 1980, about
10,000 Montana farmers and owners of grain elevators (the McCarty
Farms Group) filed a class action lawsuit against the railroad in
federal district court, challenging Burlington Northern's rates on
wheat shipped from Montana to Oregon and Washington State.  After
numerous reviews by the agency and the courts, the Board found the
rates not to be unreasonable in August 1997 and discontinued the
proceedings.  In October, 1997, the McCarty Farms Group appealed the
Board's decision to the U.S.  Court of Appeals for the District of
Columbia Circuit.  In October 1998, the court upheld the Board's
decision that the rates were not unreasonable.\3 (See app.  I for a
more detailed description of the McCarty Farms case.)

Coal and chemical complaints have generally been resolved more
quickly; average reviews have taken about 5 and 2 years respectively. 
However, the ICC/Board dismissed some of these complaints in less
than 12 months.\4 For example, the Board dismissed one coal
complaint--Omaha Public Power District v.  Union Pacific Railroad
Company--after 4 months.  Two of the nine pending cases--all
concerning disputes over the same traffic--have been active for over
16 years.  The Department of Energy and the Department of Defense
filed complaints against various railroads in 1978 and 1981 regarding
the transportation of spent nuclear fuel.  The ICC found that the
railroads' practice of requiring special trains to handle this
material was unreasonable.  On appeal, the court held that the agency
must rule on the rate levels instead.  The Board told the parties
that it will not resolve these cases until it receives information on
their progress in settling the dispute.  If the information provided
shows that there is little or no prospect that the parties will
resolve these complaints, the Board will move the case forward.  (See
app.  II for a complete list of the complaints pending with the
Board.) Of the complaints we reviewed, those filed after January 1,
1990, were generally completed more quickly. 


--------------------
\3 McCarty Farms, Inc.  et al.  v.  Surface Transportation Board, 158
F.  3d 1294 (D.C.  Cir.  1998).  The court held that it did not have
jurisdiction over claims that were initially raised by the McCarty
Farms Group's complaint in federal district court and subsequently
referred to the ICC.  Accordingly, the court did not rule on the
Board's decision as it pertained to those claims.  The district court
has since dismissed its portion of the case at the request of the
parties. 

\4 The ICC and the Board dismissed the four chemical complaints
either because the shipper and railroad resolved the dispute outside
of the rate complaint process or for lack of jurisdiction over the
disputed rate. 


   FEW CASES COMPLETE THE RATE
   COMPLAINT PROCESS
---------------------------------------------------------- Chapter 3:3

Many complaints filed or pending since January 1990 did not complete
the entire rate complaint process.  Eighteen of the 41 cases we
reviewed did not complete the rate complaint process.  In these
cases, the shippers reached agreements with the railroads and
requested that the ICC/Board dismiss the complaint.  The ICC/Board
dismissed many complaints in the early phases of the rate complaint
process without rendering a decision regarding whether the rates were
reasonable.  Ten of the 41 complaints reached the rate-reasonableness
phase of the process.  In two cases, the rates were found to be
unreasonable, and in six cases, they were found to be reasonable. 
While the ICC or the Board considered rate reasonableness in the
remaining two cases, the complaints were not ultimately resolved on
this basis but were dismissed at the request of the shippers. 


      SHIPPERS AND RAILROADS
      NEGOTIATED SETTLEMENTS
      OUTSIDE THE RATE COMPLAINT
      PROCESS
-------------------------------------------------------- Chapter 3:3.1

Often, a shipper files a rate complaint with the ICC/Board after the
shipper and railroad have tried to negotiate terms for rail rates and
service.  According to Western Coal Traffic League officials,
shippers initially use the leverage of possible or actual outside
competition and negotiations to obtain favorable rates.  If this does
not work, the shipper's last opportunity to try and obtain lower
rates is to file a complaint.  The ICC/Board dismissed 18 of the 41
complaints because the shipper and railroad reached a settlement. 
(See fig.  3.3)

   Figure 3.3:  Status of 41 Rate
   Complaints, as of December 31,
   1998

   (See figure in printed
   edition.)

Source:  GAO's analysis of the Board's information. 

In some instances, the shippers requested that the Board dismiss the
complaint because they had resolved their differences and entered
into a transportation contract with the railroad.  Board officials
stated that in this instance they view a dismissal as a success
because the parties were able to settle their differences.  According
to a Board official, however, the shippers are not required to
provide details of any agreement or settlement they may reach with
the railroad in requesting dismissal.  Therefore, we were only able
to determine that five of these dismissals were most likely due to
private transportation contracts.  (See table II.1 in app.  II for a
full list of complaints that the ICC/Board dismissed at the shipper's
request.)


      OUTCOME OF NONNEGOTIATED
      COMPLAINTS
-------------------------------------------------------- Chapter 3:3.2

In two cases, the Board found the railroads' rates to be unreasonable
and awarded the shippers reparations.  The Board is still examining
nine rate cases.  In other cases, the Board found that relief was not
appropriate under the law.  The ICC/Board dismissed seven complaints
in favor of the railroad because the railroad was not market dominant
or because the rates were reasonable.  The ICC/Board dismissed five
complaints primarily because the rate was either subject to a
contract or the remedy that the shipper wanted was not available. 
(See tables II.2 through II.5 in app.  II for a complete list of
these complaints.)

In one case in which the Board found the rates unreasonable, Arizona
Public Service Company and PacifiCorp (jointly, Arizona) had filed a
complaint with the ICC challenging the Atchison, Topeka, and Santa
Fe's rates for transporting coal from New Mexico to Arizona for
electric power generation.  The railroad asserted that it faced a
hybrid form of product and geographic competition because the
electric utility--Arizona--could produce power or purchase power
elsewhere on the nation's electric power grid.  However, the Board
disagreed, citing significant costs and barriers to Arizona's
obtaining substitute power and found that the revenues produced by
the railroad's rates exceeded the revenues that would be required by
Arizona's hypothetical railroad.  The Board awarded the utility more
than $23 million plus interest and prescribed future rates.  In the
second case, West Texas Utilities Company filed a complaint with the
ICC challenging Burlington Northern's rates for transporting coal
from Wyoming to Texas.  In this case, the railroad also alleged that
it faced a hybrid form of product and geographic competition because
the electric utility could either produce or purchase power
elsewhere.  The Board disagreed and found that Burlington Northern
dominated the market with respect to the coal shipments at issue. 
The Board found the rates unreasonable and awarded West Texas more
than $11 million plus interest. 

The Board is currently reviewing nine rate complaints, including
three filed by the Department of Energy and the Department of Defense
against the numerous railroads that transport spent nuclear fuel. 
While these complaints involve the same traffic, the Board has not
officially consolidated these three complaints into a single
proceeding.  The Board is also considering three complaints filed by
electric utility companies for the transport of coal, one complaint
regarding the transport of grain, and two chemicals complaints.  (See
table II.5 in app.  II for a complete list of these complaints.)


      MANY COMPLAINTS ENDED DURING
      EARLY PHASES OF THE RATE
      COMPLAINT PROCESS
-------------------------------------------------------- Chapter 3:3.3

Many of the complaints did not go through the entire rate complaint
process.  These complaints usually ended after reaching the discovery
phase (where the railroad and shipper disclose information) or the
evidentiary phase (where the railroad and shipper file evidence with
the Board).  As table 3.2 demonstrates, the ICC/Board dismissed 14
complaints during or prior to the evidentiary phase and 2 complaints
during the evidentiary phase. 



                               Table 3.2
                
                 Phase in Which the Parties Settled or
                   the ICC/Board Dismissed Complaint

                                                  Number of complaints
Rate reasonableness phases                      dismissed during phase
----------------------------------------  ----------------------------
Settled or dismissed before submission                              12
 of evidence
Settled or dismissed during evidentiary                              2
 phase
Settled or dismissed after evidentiary                               2
 record closes
Settled or dismissed after market-                                   7
 dominance determination
Settled or dismissed during or after                                 8
 rate reasonableness determination
Rate relief granted                                                  2
Other pending complaints                                             9
======================================================================
Total                                                             42\a
----------------------------------------------------------------------
\a The table totals 42 because the Board dismissed a complaint for
one of four shippers involved in a case after the market-dominance
determination.  The Board dismissed the complaint for the other three
shippers after they had made tentative rate-reasonableness findings. 

Source:  GAO's analysis of the Board's information. 

Seventeen of the 41 complaints were active after the ICC/Board closed
the evidentiary record.  Of these complaints, the ICC/Board dismissed
seven after it had examined market dominance and eight during or
after a review of the reasonableness of the rates.  The ICC/Board
found that the rates in six of these eight cases were reasonable; the
other two complaints were ultimately dismissed at the shippers'
requests.  In two cases, the Board found rates to be unreasonable and
awarded reparations to Arizona Public Service and PacifiCorp
(jointly, Arizona) and West Texas Utilities. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:4

In commenting on a draft of this report, the Board indicated that
additional factors beyond those cited in this chapter can affect the
time required to complete a rate complaint.  The Board noted that
some cases were protracted for two important reasons:  The rate
complaints were filed before the Board's predecessor had developed
rate standards and/or the parties took various Board decisions to
court.  Delays in deciding rate cases in the 1980s, for example, were
a transitional problem resulting from the process of developing and
interpreting rate reasonableness standards.  The Board noted that
cases initiated in the 1990s were handled significantly faster.  In
addition, the Board concluded that our approach of counting
consolidated rate complaints separately overstated the average time
required to resolve rate complaints and suggested that we also
include an analysis of what the average time would be to resolve the
cases separately. 

We agree with the Board's comments and added information in this
chapter to reflect the other factors that can affect the time
required to complete a rate complaint case.  We have also added
information on the average time to complete a rate complaint on the
basis of the separate cases. 


BARRIERS TO THE RATE COMPLAINT
PROCESS AND POSSIBLE SOLUTIONS
============================================================ Chapter 4

In response to our survey of shippers and discussions with commodity
shipping associations, shippers cited several reasons for not using
the standard rate complaint process but particularly emphasized its
time, cost, and complexity.  Shippers suggested methods to simplify
the filing process and thereby reduce the time and costs involved. 
Furthermore, they indicated that increasing competition in the
railroad industry would lower freight rates and diminish the need to
file rate complaints.  In response to our survey, the nine class I
railroads stated that maintaining the current regulatory environment
is crucial to retaining and improving the financial stability of the
railroad industry.  They stated that the current process for deciding
rate complaints, while not perfect, is an appropriate system in the
current regulatory environment.  Furthermore, the railroads contend
that adequate competition currently exists and that their ability to
determine freight rates in a competitive market is key to the
railroad industry's financial stability. 


   TIME, COST, AND COMPLEXITY KEEP
   SHIPPERS FROM FILING RATE
   COMPLAINTS
---------------------------------------------------------- Chapter 4:1

On the basis of our survey responses, we estimate that 25 percent of
the rail shippers consider their rates to be reasonable.  Our survey
responses suggest that the remaining 75 percent believe that their
rates were unreasonable and that barriers kept them from filing a
complaint under the standard procedures.\1 These shippers found the
rate complaint process to be time-consuming, costly, and complex. 
They cited the legal costs associated with filing a complaint, the
complexity of the process, the time involved in seeking relief, and
the overall costs associated with developing their cases as the most
significant barriers to seeking relief with the Board. 

During our interviews with shipping association officials, they
highlighted several potential barriers that could keep shippers from
filing complaints under the standard procedures.  On the basis of our
questionnaire responses, we estimate that 178 shippers (25 percent)
of the 709 shippers that use rail consider their freight shipping
rates to be reasonable and therefore had no reason to file a
complaint.  We asked the remaining 531 shippers (75 percent) to
indicate whether the barriers that the shipping associations had
highlighted were a reason for not filing a rate complaint.\2 Table
4.1 shows the barriers we presented to these shippers and the percent
of the 531 shippers that found the barriers to be a major or moderate
reason for not filing a rate complaint. 



                               Table 4.1
                
                 Percentage of Rail Shippers Responding
                 That a Barrier Was a Major or Moderate
                 Reason for Not Filing a Rate Complaint

                                                 Chemicals
                                                       and
                             Grain        Coal    plastics
Barrier                   shippers    shippers    shippers     Total\a
----------------------  ----------  ----------  ----------  ----------
Legal costs associated          78          65          76          76
 with filing
 complaints outweigh
 the benefits
The rate complaint              78          73          75          76
 process
 is too complex
Rate complaint process          74          86          64          74
 takes
 too long
Developing the stand            72          76          64          72
 alone-cost model is
 too costly
The STB will most               69          81          61          69
 likely decide on
 behalf of the
 railroads, so it is
 not worth our effort
 to file a complaint
Too hard to get                 69          67          55          67
 necessary data from
 railroads (discovery
 process)
Consulting costs                68          55          64          66
 (other than legal)
 associated with
 filing complaints are
 too high
Responding to railroad          68          59          63          66
 requests for data is
 difficult and time
 consuming
Fear of reprisal from           64          55          44          60
 railroads
The STB filing fee is           62          44          42          57
 cost prohibitive
Other parts of the              40          28          41          39
 complaint
 process are too
 costly
----------------------------------------------------------------------
Note:  Each percentage represents rail shippers who expressed an
opinion regarding a particular barrier.  Some shippers did not
express an opinion for some barriers.  App.  III lists the sampling
error and the number of missing or "Don't Know" responses associated
with these estimates. 

Source:  GAO's survey of railroad shippers. 

While rail shippers found most of the barriers cited in our survey to
be significant, they found some to be more significant than others.\3
Generally, shippers found cost, complexity, and time to be
significant barriers that kept them from filing standard rate
complaints.  Seven out of 10 shippers responding to our survey cited
the following reasons as important barriers to filing a complaint: 
the legal costs for filing a complaint, the costs associated with
developing a stand-alone cost model, the length of the rate complaint
process, and the overall complexity of the process.  In addition, 6
out of 10 shippers responding indicated that high consulting costs,
the difficulties of the discovery process, the high level of the
filing fee, or fear that railroads might retaliate against them were
important reasons for not filing rate complaints under the standard
process. 

The barriers most significant to shippers as a whole are not
necessarily the most significant barriers for shippers in each
commodity group.  Shippers of specific commodities (grain, coal,
chemicals, and plastics) have unique characteristics that may have
affected their responses.  For example, coal shippers make very
large, routine shipments throughout the course of the year and often
have few alternatives to using rail; thus, rail shipping costs are a
significant portion of their total shipping costs.  Coal shippers
believed that the most significant barrier is the time involved in
filing a complaint.  This is because coal shippers would have to
continue to pay the disputed rate over the length of the rate
complaint process.  However, they can obtain reparations plus
interest if the rate is found to be unreasonable.  Grain shippers
cited legal costs as the most significant barrier.  Grain shippers
make the highest volume of their shipments during the harvest season
and generally have more transportation options available to them.  As
a result, they spend relatively less on rail shipping, and therefore
the costs of a complaint may offset or exceed the potential benefits
of filing. 

The shippers' concerns identified in our survey are similar to those
we found in 1987, when we examined the rate complaint process and
contacted shippers that had filed complaints with the ICC.\4 At that
time, we found that shippers were generally dissatisfied with the
rate complaint process.  Shippers were concerned about the complexity
of the stand-alone cost model, the costs and time involved in
adjudicating a rate complaint, the lack of clear criteria for
determining rate reasonableness, and fear that railroads would most
likely win any rate complaint case.  Of the shippers we contacted in
1987 that used the process, 53 percent indicated that they would
probably use the complaint process again if they believed their rates
to be unreasonable.  This compares to 68 percent of rail shippers in
our 1998 survey who responded that they would probably or definitely
use the rate complaint process again.  This could indicate that,
while some shippers are dissatisfied with the rate relief process,
they may recognize it as their only alternative for seeking relief
from unreasonable rates.  Board officials provided an alternative
interpretation of the results.  They stated that shippers may
recognize that the process has been improved and that it provides a
clear basis for leverage in negotiating private contracts or
obtaining relief from unreasonable rates. 

Railroads disagree with shippers about the extent to which the rate
complaint process is burdensome.  In responding for the class I
railroads, AAR stated that it understood that the rate complaint
process can be difficult for shippers and noted that barriers should
not be an obstacle for seeking rate relief.  AAR and its member
railroads stated that while they believed that the process was
generally suitable for determining rate reasonableness, they would
not object to the Board adopting more efficient procedures for rate
complaint cases.  The railroads, however, want the standard for
determining market dominance to remain.  This is generally the same
position that the railroads held in 1987, when AAR officials stated
that the railroads were generally satisfied with the standard rate
complaint process and viewed the criteria for jurisdictional
threshold, market dominance, and rate reasonableness as clear.  In
our discussions at that time, railroad officials said they found the
process suitable for adjudicating larger rate complaints.  However,
representatives from five of the eight railroads we contacted stated
that contract negotiations, rather than the potential for being
involved in litigation over published rates, was the preferred method
of setting rates.  One railroad official noted that it was not in the
railroad's interest to charge a rate that a shipper would challenge
and that contract rates were preferred for their predictability and
stability. 

The Board has conducted hearings to identify barriers to the rate
relief process.  On April 17, 1998, the Board instituted a forum for
shippers and railroads to voice their opinions on a variety of rail
access and competition issues.  Board officials generally support any
action that reduces barriers while maintaining the integrity of the
process.  The Board asked railroads and shipper groups to work
together to find solutions outside of the regulatory framework--an
environment that the Board contends is a better framework to resolve
private-sector disputes.  In addition, the Board eliminated product
and geographic competition from its market-dominance analysis.  The
railroads have filed a petition requesting for the Board's
reconsideration of its decision. 


--------------------
\1 Our survey did not differentiate between the standard and
simplified rate processes.  Some questions concerning possible
barriers and improvements to the current rate process focused on the
standard process.  No cases have been filed under the simplified
procedures. 

\2 Those that did not consider their rates to be reasonable were (by
commodity) grain (74 percent), coal (83 percent), and chemicals and
plastics (70 percent). 

\3 Our analysis did not seek to rank the importance of each barrier
but rather to show the relative significance to shippers.  While a
distinction can be drawn between the responses by commodity, one
cannot be drawn between barriers because of the similarity in
responses and the sampling error associated with each response. 

\4 Railroad Regulation:  Shipper Experiences and Current Issues in
ICC Regulation of Rail Rates (GAO/RCED-87-119, Sept.  9, 1987). 


   CHALLENGES IN IMPROVING THE
   RATE COMPLAINT PROCESS
---------------------------------------------------------- Chapter 4:2

In our discussions with shippers' associations and AAR officials, we
identified potential options for addressing shippers' concerns about
the rate complaint process.  In our surveys, we asked shippers and
railroads to rate methods that would improve the rate complaint
process and address shippers' concerns.  In response to options for
improving the rate complaint process, shippers supported methods to
simplify and accelerate the process and reduce the costs they incur
when filing rate complaints.  The class I railroads contend that the
current rate complaint process is well suited to determining rate
reasonableness in larger cases and therefore saw no need for
substantive changes to the standard process.  Board officials stated
that in trying to improve the rate complaint process, they must
balance the needs of shippers seeking relief from unreasonable rates
with the railroads' need for adequate revenues to continue operating. 

We estimate that nearly 64 percent of the 709 rail shippers believed
that the standard rate complaint process should be changed to a very
great or great extent and over 86 percent believed that the process
should be changed to at least a moderate extent.  Our survey asked
the 709 rail shippers to identify what changes should be made to the
rate complaint process to make it more useful to them.  Table 4.2
lists the options we presented to shippers for improving the rate
complaint process.  The percentages, for all shippers and by
commodity group, indicate the proportion of shippers that indicated
that the options were either extremely or very important. 



                               Table 4.2
                
                 Percentage of Rail Shippers Responding
                  That Options for Improving the Rate
                Complaint Process Were Extremely to Very
                               Important

                                                 Chemicals
Suggestions for                                        and
improving the rate           Grain        Coal    plastics
complaint process         shippers    shippers    shippers       Total
----------------------  ----------  ----------  ----------  ----------
Shorten STB's time              76          77          73          76
 limits for deciding
 rate relief cases
 (currently, the
 guideline is no more
 than 16 months)
Reduce or eliminate             68          42          56          63
 the complaint
 fees that shippers
 must pay in order to
 file a complaint with
 the STB
Simplify the STB                57          82          63          62
 requirement to prove
 market dominance by
 eliminating the
 product and/or
 geographic
 competition
 criteria\a
Use mandatory binding           67          30          41          58
 arbitration between
 shippers and
 railroads to resolve
 rate disputes
Lower STB's                     51          67          47          53
 jurisdictional
 threshold from the
 current level of 180
 percent of revenue-
 to-variable cost
Increase the use of             58          30          37          52
 voluntary binding
 arbitration between
 shippers and
 railroads to resolve
 rate disputes
Use mandatory                   20           5           8          16
 arbitration with
 nonbinding results
----------------------------------------------------------------------
Note:  Each percentage represents rail shippers that expressed an
opinion regarding a particular suggestion.  Some shippers did not
express an opinion for some suggestions.  There is a sampling error
associated with these estimates.  App.  III lists the sampling error
and the number of missing or ï¿½Don't Knowï¿½ responses associated with
these estimates. 

\a The Board eliminated product and geographic competition after
shippers responded to the survey. 

Source:  GAO's survey of railroad shippers. 

Table 4.2 shows that reducing the time involved in filing and
deciding a case is generally most important to shippers.  In general,
the options most favored by shippers relate directly to reducing the
time involved in case decisions, reducing the costs involved in
filing a complaint, and eliminating product and geographic
competition criteria.  According to Board officials, some of the
options presented in table 4.2 are beyond the Board's ability to
implement. 


      SHORTENING THE TIME TO
      DECIDE RATE COMPLAINTS
-------------------------------------------------------- Chapter 4:2.1

We estimate that about 76 percent of rail shippers believed that
shortening the time involved in filing and completing a complaint
would improve the rate complaint process.  Although a shipper would
obtain reparations, with interest, for rates paid during the
complaint process if the rate is eventually found to be unreasonable,
the shipper must continue to pay the higher rate until the case is
resolved. 

The railroads recognize that the standard rate complaint process
takes time and agree that the Board should pursue changes to shorten
the time involved and reduce the barriers that shippers face.  The
railroads did not make any specific recommendations to address
timeliness.  They said that they stand ready to work with shippers
and the Board to reduce the barriers inherent in the process but seek
to maintain the process's effectiveness.  While the railroads
recognize shippers' concerns, they contend that the Board's process
is well suited to determining rate reasonableness. 

The shippers' concerns about the timeliness of the rate complaint
process may partly be due to the ICC's and the Board's experience
with rate complaint cases filed or pending since 1990.  As discussed
earlier, the elapsed time for such cases ranged from a few months to
about 16 years.  This historical record may have affected shippers'
calls for faster rate complaint decisions.  The Board has established
an expedited procedural schedule designed to ensure that cases under
the standard guidelines are completed within 16 months.  As of
January 1999, no cases had been decided under the expedited
procedural schedule. 


      REDUCING OR ELIMINATING THE
      BOARD'S COMPLAINT FEES
-------------------------------------------------------- Chapter 4:2.2

The current filing fee for complaints filed under the standard
guidelines is $54,500.\5 The fee is substantially less for cases
under the simplified guidelines ($5,400).\6 We estimate that about 63
percent of the rail shippers believe that reducing or eliminating the
Board's filing fee is an important step toward improving the rate
complaint process.  While a majority of grain, chemical and plastics
shippers concurred in this suggestion, we estimate that only 42
percent of coal shippers cited the need to eliminate the fee.  The
$54,500 filing fee may not be a determining factor in large coal
complaint cases where the reparations sought are measured in millions
of dollars.  However, it can present a barrier to small grain
shippers whose rail shipping costs constitute a smaller portion of
their total shipping costs and where the damages sought are much
lower. 

The class I railroads did not express an opinion regarding the
Board's filing fee.  In a 1996 decision, the Board noted that it was
sympathetic to shippers' concerns that increasing the filing fee
could impede the filing of complaints.\7 In an effort intended to
lessen the burden of the fees, the Board tentatively set the
complaint filing fee at 10 percent of the full cost of adjudicating a
complaint and proposed increasing the fee 10 percent annually until
the fully allocated cost level was achieved.  In 1998, the Board
chose to increase the fee in proportion to increases in its costs
rather than by the annual 10-percent adjustment.  A report by DOT's
Office of Inspector General recommended that the Board either
annually increase the fee to recover the full cost of complaint
adjudication or convene a new proceeding to determine whether such
increases are feasible and warranted.\8 In February 1999, the Board
updated its fee schedule and adjusted its complaint filing fees.  As
a result, the fee for filing a standard rate complaint increased from
$27,000 to $54,500.  The new fee represents 20 percent of the Board's
fully allocated costs. 


--------------------
\5 The Board established this filing fee under the governing statute
and Office of Management and Budget guidelines. 

\6 At the time we surveyed the shippers, the filing fee was $27,000
for the cases under the standard guidelines and $2,600 for the cases
under the simplified guidelines. 

\7 Ex Parte 542, Regulations Governing Fees for Service Performed in
Connection With Licensing and Related Services (Aug.  14, 1996). 

\8 Report on Surface Transportation Board's User Fees, U.S. 
Department of Transportation, Office of Inspector General
(CE-1999-021, Nov.  17, 1998). 


      SIMPLIFYING OR ELIMINATING
      PRODUCT AND GEOGRAPHIC
      COMPETITION CRITERIA
-------------------------------------------------------- Chapter 4:2.3

According to our survey responses, an estimated 62 percent of the
rail shippers believed that eliminating the product and geographic
competition criteria would improve the rate complaint process. 
During discovery, railroads request operating information from
shippers in order to prove the existence of product and geographic
competition.  However, shippers stated that railroads use these
discovery requests to delay the process.  In a recent rate complaint
case, FMC Corporation and FMC Wyoming Corporation v.  Union Pacific
Railroad Co., the Board agreed with the shippers' contention.  In
addition, in December 1998, the Board issued a decision revising its
procedures for market-dominance determinations and eliminated the
consideration of product and geographic competition.  However, the
railroads filed a petition for reconsideration of the petition. 

In comments submitted for the Board's proceeding on product and
geographic competition, the National Industrial Transportation
League\9 noted that the consideration of product and geographic
competition unduly complicated the Board's market-dominance
determination.  The League assembled and analyzed the disclosure
requests that railroads served on the complaining shippers in seven
rate cases.  On the basis of its analysis, the League found that
railroads submitted hundreds of questions to the shippers that
required hundreds of hours of effort by lawyers, consultants, and
staff.  In addition, many of the questions asked for multiple pieces
of information and thus complicated the shippers' efforts to answer
the questions.  The League contended that market-dominance discovery
of this magnitude constituted a formidable barrier for the shippers. 

The railroads contended that, in order for them to successfully
challenge a complaint, product and geographic competition tests are
crucial to showing that sufficient alternatives exist for the
shipper.  The railroads acknowledged that the product and geographic
competition criteria can make it unduly burdensome to litigate rate
reasonableness cases before the Board.\10 They contended that a core
premise of the economics of competition is that market power can be
constrained by a range of competitive forces, including product and
geographic competition.  The railroads agreed, however, that
procedural obstacles and the cost of litigation should not be
barriers to obtaining regulatory relief when such relief is
warranted.  After considering both the shippers' and railroads'
perspectives, the Board eliminated product and geographic competition
criteria from market-dominance determinations.  The Board is now in
the process of reviewing the railroads' petition for reconsideration. 


--------------------
\9 The National Industrial Transportation League is a voluntary
organization of shippers and groups and associations of shippers
conducting industrial and/or commercial enterprises in the United
States. 

\10 The Surface Transportation Board Ex Parte No.  627,
Market-dominance Determinations:  Product and Geographic Competition. 


      USING ARBITRATION AND
      MEDIATION
-------------------------------------------------------- Chapter 4:2.4

We estimate that from 52 to 58 percent of the rail shippers we
surveyed support certain types of arbitration as an alternative to
bringing a complaint before the Board.  Our estimates show that 58
percent of the rail shippers supported mandatory binding arbitration;
52 percent favored voluntary arbitration; and 16 percent supported
voluntary arbitration with nonbinding results.  Shippers' support for
arbitration as an alternative to the rate complaint process not only
differed by the type of arbitration proposed but by the type of
commodity shipped.  Grain shippers generally favored arbitration more
than coal, chemicals, and plastics shippers.  In October 1998, the
National Grain and Feed Association's (NGFA) signed an agreement with
the class I railroads to submit certain disputes to mandatory,
binding arbitration.  While rate disputes are excluded from the
mandatory aspect of the agreement, they can be mediated on a
voluntary basis. 

AAR officials point to the NGFA arbitration agreement as evidence
that the railroads are willing to work with shippers to address their
concerns.  Furthermore, the officials added, the agreement is a
solution that addresses shippers' concerns outside of the regulatory
framework--at the Board's request.  As a result of April 1998
hearings, the Board asked shippers and railroads to work together to
recommend solutions that would improve the existing process.  The
railroads cite the arbitration agreement as evidence that they are
seeking to address shippers' concerns.  Board officials generally
support any settlement agreements between shippers and railroads that
reduce the burdens that shippers face resulting from the rate
complaint process. 

It is too early to tell whether the use of mediation to resolve rate
disputes between shippers and their railroads will have a positive
impact.  As of November 1998, no rate disputes had been mediated
under the process.  Furthermore, the mediation agreement only extends
to NGFA members, not to nonmembers and shippers of other commodities. 
The mediation process, if successful, could reduce the number of
complaints.  Board officials note that railroads and shippers
currently have the option of agreeing to voluntary mediation or
voluntary arbitration of a dispute.  Thus, no regulatory or
legislative action is required to use such alternative dispute
resolution procedures.  In addition, Board officials do not believe
it has the authority to require mandatory (nonconsensual)
arbitration. 


      LOWERING THE BOARD'S
      JURISDICTIONAL THRESHOLD
-------------------------------------------------------- Chapter 4:2.5

Some shippers suggested that the Board's current statutory
jurisdictional threshold for rate reasonableness complaints is too
high and that a rate that is below 180 percent of a railroad's
variable cost of transporting the traffic can still be unreasonable. 
We estimate that about 53 percent of the rail shippers believed that
lowering the statutory threshold for determining Board jurisdiction
would improve the rate complaint process.  Of those who suggested a
different jurisdictional threshold, the average suggested threshold
was 118 percent, while the most common suggestion was 100 percent. 
However, because of the large percentage of shippers that did not
answer the question, few conclusions about the jurisdictional
threshold can be drawn. 

AAR stated that the current revenue-to-variable-cost ratio of 180
percent is an effective and appropriate level for a jurisdictional
threshold.  One AAR official stated that 180 percent, on average, was
not significantly greater than the breakeven point for all railroad
traffic.  AAR cited past Board decisions showing that rates greater
than 180 percent of variable costs were found to be reasonable.  AAR
is further concerned about some shippers' proposals suggesting that
the Board should consider rates in excess of 180 percent to be a
demonstration of market dominance.  The railroads contend that they
would not be able to make the capital improvements necessary to meet
current and future demand and earn a fair return on that investment
without being able to set differential prices and, when necessary,
charge rates in excess of 180 percent. 

Board officials told us that because the jurisdictional threshold is
legislatively set, the Board has not initiated a proceeding to
consider whether it should be reduced to a level below 180 percent. 
Board officials also stated that legislative action to reduce the
jurisdictional threshold could lower rates that the Board believes
are at reasonable levels as a result of competition, involve the
Board in reviewing rates that are not unreasonable, and result in the
Board's needing more staff and resources to accommodate a potential
increase in rate complaint cases. 


   PROSPECTS FOR INCREASING
   COMPETITION IN THE RAILROAD
   INDUSTRY
---------------------------------------------------------- Chapter 4:3

While shipper groups suggest that improving the rate complaint
process would reduce the barriers they face when filing rate
complaints, they contend that increased competition in the railroad
industry would do more--it would lower rates and diminish the need
for the process itself.  Shippers and railroads disagree, however, on
the need to increase competition.  Shipper groups contend that
increasing competition would enhance the viability of their
businesses, lower the freight rates they currently pay, and diminish
the overall need for the rate complaint process.  The class I
railroads contend that competition is greater than it has ever been
and note that current rates are 46 percent lower than they were in
1982.  According to the railroads, the deregulation of the industry
has increased their revenue, decreased rates, and improved the
overall financial viability of the industry--all critical goals of
the Staggers Rail Act. 

Some shippers want the ability to choose between railroads when there
is an option and contend that in certain situations, they are unable
to do so.  In our discussions with shipper groups, the following five
different methods emerged as suggestions to increase competition in
the railroad industry: 

  -- require the Board to make a track segment owned by one railroad
     available to competing railroads for a fee (grant trackage
     rights),

  -- increase shippers' access to smaller regional or shortline
     railroads,

  -- require the Board to grant reciprocal switching
     agreements--making a railroad transport the cars of a competing
     railroad, for a fee,

  -- reverse the Board's "bottleneck decision,"\11

  -- and allow shippers to dictate the routing of their shipments,
     including interchange points (commonly called open routing). 

Of the rail shippers that responded to our survey, an average of 436
expressed opinions on different aspects of the rate complaint
process, and an average of 567 expressed opinions on increasing
competition in the railroad industry.  Table 4.3 shows the options we
presented to shippers and their response.  The percentages reflect
the number of shippers that responded that the option was extremely
to very important.  We did not analyze the implications for
implementing these options or the effects these options would have on
shippers or the railroad industry. 



                               Table 4.3
                
                 Percentage of Rail Shippers Responding
                That Increasing Aspects of the Railroad
                   Competition Was Extremely to Very
                               Important

                                                 Chemicals
                                                       and
Options to increase          Grain        Coal    plastics
competition               shippers    shippers    shippers       Total
----------------------  ----------  ----------  ----------  ----------
Require the Board to            79          86          86          81
 grant
 trackage rights if it
 is found that
 competition is not
 adequate
Require railroads to            74          75          79          75
 increase rail access
 for shortline and/or
 regional railroads
Require STB to grant            72          73          84          74
 reciprocal switching
 at the nearest
 junction or
 interchange upon
 reasonable request of
 a shipper or railroad
Require railroads to            67          84          78          71
 quote rates for all
 route ï¿½segments,ï¿½
 including those
 subject to
 ï¿½bottleneckï¿½
 conditions
Allow shippers to               45          42          43          49
 specify the routing
 of their shipments,
 including interchange
 points (commonly
 called open routing)
----------------------------------------------------------------------
Note:  Each percentage represents rail shippers that expressed an
opinion regarding a particular option.  Some shippers did not express
an opinion for some options.  App.  III lists the sampling error and
the number of missing or "Don't Know" responses associated with these
estimates. 

Source:  GAO's survey of railroad shippers. 

Most shippers support four of the five options for increasing
competition; shippers gave less support to the option of allowing
them to specify the routing of their shipments.  Of the 709 rail
shippers we surveyed, an estimated 81 percent said that the Board
should grant trackage rights to competing railroads to improve
competition in the railroad industry.  Furthermore, our estimates
show that from 71 to 75 percent favored granting reciprocal switching
agreements, increasing shortline railroad access to the major
railroads, and expanding the relief provided in the Board's
bottleneck decision. 

The railroads and AAR disagree with shippers on the need for
additional competition.  AAR officials contend that the Board may
currently grant trackage rights and reciprocal switching where there
are competitive abuses.  AAR sees additional efforts to impose
reciprocal switching agreements and trackage rights as a kind of
"forced" access and greater government regulation of shipping rates
that would return the industry to the poor financial condition it was
in before deregulation.  Furthermore, AAR stated that these methods
should be used only as a remedy when needed, not as a means to create
additional competition.  Regarding increased access to shortline
railroads, AAR officials noted that the association has recently
entered into a cooperative agreement with the American Shortline and
Regional Railroad Association.  The 5-year agreement seeks to improve
customer service through a mutual car supply policy, cooperative
interchange service agreements, and reduced switching barriers.  AAR
officials challenged the Board's bottleneck decision in court on the
grounds that it went too far in requiring railroads to provide
separately challengeable rates in certain circumstances. 

Board officials agreed with AAR that requiring trackage rights and
reciprocal switching agreements are remedies that are currently
available to shippers and that they have been used where appropriate. 
However, Board officials stated that it is not authorized to grant
trackage rights or reciprocal switching as a remedy for a complaint
about the reasonableness of a rate because the only statutory
remedies for an unreasonable rate are reparations and rate
prescriptions.  The Board has approved certain aspects of the
AAR/ASLRRA cooperative agreement.  With respect to the bottleneck
decision, Board officials stated that the decision was required by
existing law. 

Board officials stated that the suggestions for increasing rail
competition--primarily through various means of ï¿½open accessï¿½ to
private sector rail lines--would require substantial changes to the
underlying statute and could alter the shape and condition of the
rail system.  They stated that many shippers assume that greater
competition would lead to lower rates and improved service, without
the need for differential pricing.  Board officials cited a
countervailing concern, however, that not all shippers would benefit
equally from such changes and that the result could be a smaller rail
system serving fewer shippers and a different mix of customers than
are served today.  Officials contend that many shippers (particularly
small shippers on remote lines) might not benefit from an ï¿½open
accessï¿½ system in the way that they might expect. 


--------------------
\11 Some shippers have more than one rail carrier that serves them at
their origin and/or destination points and have at least one segment
of a shipping route that is served by a single railroad.  Such a
segment is referred to as a bottleneck.  The Board's bottleneck
decision held that, under the current statute, if a railroad can
provide single-line service from origin to destination, it is not
required to quote a separate rate for the bottleneck portion of the
route, except under certain circumstances.  The U.S.  Court of
Appeals for the Eighth Circuit recently affirmed the Board's decision
that a bottleneck carrier generally need not quote a separate rate
for the bottleneck portion of the route.  However, the court declined
to rule on the railroads' appeal of the Board's holding that
separately challengeable bottleneck rates are required whenever a
shipper has a contract over the non-bottleneck segment of a through
movement.  Mid-American Energy Co.  v.  Surface Transportation Board,
No.  97-1081 (8\th Cir.  Feb.  10, 1999). 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:4

In commenting on a draft of this report, the Board noted that our
survey did not distinguish captive shippers from those with
competitive transportation alternatives, which by statute are not
eligible to use the rate complaint process.  Thus, the Board
indicated that the views of shippers with competitive options are not
instructive in assessing the effectiveness of the rate complaint
process.  The Board also believed that we should clarify that the
survey asked shippers to comment on the standard process and not the
simplified procedures, even though the majority of the survey
respondents would likely qualify for the simplified procedures. 

We disagree that our survey should have sought comments only from
captive shippers.  Such an approach would inject excessive bias into
the survey and would have produced results that represented only a
small segment of the shipper community.  More importantly, we
disagree that only captive shippers would be in a position to provide
informed analysis of the rate complaint process and methods to
improve it.  The consolidation in the railroad industry has made all
shippers keenly aware of their potential for becoming captive to only
one railroad and equally aware of the means available to seek
recourse should they believe that their rates are unreasonable.  In
addition, the Board's position is contrary to its standard practice
of inviting comments from all parties during its
deliberations--deliberations that can vary from improvements to the
rate complaint process to more complex issues, such as railroad
mergers and consolidations.  Therefore, we chose to survey all
shippers and class I railroads to garner their insights into the rate
complaint process; to discount any comment minimizes the views and
opinions of the shipper community. 

Regarding the Board's comment on distinguishing between the standard
and simplified procedures in the report and the survey, we have
clarified the report to better differentiate between the two
processes.  In addition, when presenting survey results, we note that
the survey refers to the standard rate complaint process. 

The Board stated that the results of our survey reflect the natural
response to be expected from customers when asked if they would like
lower prices and the ability to obtain lower prices through a faster,
simpler, and less costly process.  In addition, the Board noted that
the report did not address whether the surveyed shippers were being
charged higher rates than they should reasonably be expected to pay. 
The Board indicated that, under the demand-based differential pricing
principles that the Congress has determined should apply to the rail
industry, it is not necessarily unreasonable to have even one shipper
paying a higher rail rate than a comparable shipper with greater
transportation alternatives. 

The Board's characterization of our survey is not accurate.  We did
not ask shippers if they wanted lower prices.  Rather, we sought to
determine the barriers shippers face in filing rate complaints with
the Board and options for improving this process.  Furthermore, the
survey was not limited to the Board's rate complaint process but also
sought information about the quality of service that shippers had
received from 1990 to 1997.  This information is presented in our
companion report.  We agree with the Board's comment that we did not
address whether the surveyed shippers were being charged higher rates
than they should reasonably be expected to pay.  Because this is the
stated purpose of the highly complex and time-consuming rate
complaint process, we defer these judgments to the Board. 

Finally, the Board believed we should more clearly identify the
percentage of shippers that expressed a specific opinion on issues
presented in the survey to avoid misleading interpretations of the
survey results.  For example, because 25 percent of the surveyed rail
shippers found their rates to be reasonable, our presentation of the
barriers shippers encounter in filing a rate complaint should only be
attributed to the remaining 75 percent of rail shippers responding. 
In addition, the Board noted that those shippers that responded
ï¿½Don't Knowï¿½ or that did not answer specific questions should be
included among those shippers that did not assign great importance to
the choices identified rather than excluded from the total count. 

We have clarified our presentation of the survey responses to
distinguish between those shippers that consider their rates to be
reasonable and other shippers.  However, we disagree with the Board's
assertion that we include ï¿½Don't Knowï¿½ or missing responses with
those shippers that were satisfied with certain aspects of the rate
complaint process.  We have no basis for inferring such a precise
meaning from the ï¿½Don't Knowï¿½ or missing response categories.  Such
responses could mean that the respondents did not understand the
question, answered only those questions for which they had a strong
opinion, did not believe their responses would be kept confidential,
or erroneously skipped a question.  Accordingly, the report only
tabulates data where the shippers' responses are clearly marked. 


MCCARTY FARMS, INC.  ET AL.  V. 
BURLINGTON NORTHERN, INC. 
=========================================================== Appendix I

In 1980, a group of approximately 10,000 Montana farmers and grain
elevator operators (the McCarty Farms Group) filed a class action
suit against Burlington Northern Railroad in the U.S.  District Court
for the District of Montana.  McCarty Farms alleged that Burlington
Northern Railroad was charging unreasonable rates for transporting
wheat from Montana to ports in Oregon and Washington State for the
2-year period ending September 12, 1980.  The district court referred
the matter to the Interstate Commerce Commission (ICC) to determine
the reasonableness of the rates.  On March 27, 1981, McCarty Farms
filed a complaint with the ICC challenging not only Burlington
Northern's wheat rates but also its rates for barley.  McCarty Farms
asked ICC to prescribe future rates.  It did not limit its request
for reparations to the 2-year period specified in its complaint filed
with the district court.  In a December 1981 decision, an
administrative law judge found that (1) Burlington Northern had
market dominance over wheat and barley traffic, (2) Burlington
Northern's present and past rates were unreasonable insofar as they
exceeded 200 percent of the variable cost of service, and (3) a
revenue-to-variable-cost ratio of 200 percent would constitute the
maximum reasonable rate for the transportation of wheat and barley. 

In a separate proceeding filed with the ICC on March 26, 1981, the
Montana Department of Agriculture and the Montana Wheat Research and
Marketing Committee (state of Montana) challenged Burlington
Northern's rates for multiple-car and trainload shipments of wheat
and barley and asked the ICC to prescribe rates for future shipments. 
In a July 1982 decision, the ICC reopened the McCarty Farms complaint
and instituted a separate proceeding regarding the reasonableness of
barley rates because it did not believe they were part of the
district court's referral.  The ICC consolidated the McCarty Farms
and state of Montana proceedings. 

According to Board officials, in 1983, the ICC vacated the
administrative law judge's opinion because the rate reasonableness
standard used had been discredited and held the three consolidated
cases in abeyance, pending its search for appropriate rate standards
for noncoal cases.  The ICC reopened the proceedings in September
1984 in response to a district court directive to move forward with
the case.  In an April 1986 decision, the ICC reopened the record for
additional market-dominance evidence because of the changes made to
its market-dominance guidelines in 1985.  After extensive discovery,
in May 1987, the ICC ruled that Burlington Northern dominated the
market over wheat and barley movements from Montana to the Pacific
Northwest.  Having determined that Burlington Northern dominated the
market for the shipments at issue, ICC turned to the
rate-reasonableness analysis.  ICC decided to use this case to
develop a new rate test--the revenue-to-variable-cost comparison.  In
1988, applying the new comparison, the ICC found some of the rates
unreasonable for some years (1981 through 1986) and directed the
parties to calculate reparations. 

In 1991, the ICC affirmed its earlier decisions, concluding that
Burlington Northern dominated the movement of wheat and barley and
that Burlington Northern's rates for this traffic were unreasonable. 
According to Board officials, the ICC calculated the amount of
reparations owed by Burlington Northern through 1988 to be $8.97
million plus interest and prescribed the level of future rates.  The
ICC subsequently updated the amount of reparations and interest due
to $16.6 million through July 1, 1991, and removed the rate
prescription as unnecessary since the rates had been in compliance
with the rate reasonableness standard for the prior 5 years. 

Both Burlington Northern and McCarty Farms sought judicial review of
the ICC's decision.  In 1993, the U.S.  Court of Appeals for the
District of Columbia Circuit questioned the ICC's use of the
revenue-to-variable-cost comparison and the reasons for not applying
the stand-alone cost test to this large volume of traffic.  The court
sent the case back to the ICC to reconsider whether the stand-alone
cost model would be more appropriate.  On remand, both parties agreed
to apply the stand-alone cost test and from 1993 through 1995,
prepared and presented their stand-alone cost evidence.  According to
Board officials, the review of the stand-alone cost evidence was
delayed somewhat because key ICC staff who had been working on the
case left the agency as a result of the reduction-in-force
implemented following the ICC Termination Act of 1995. 

In an August 1997 decision, the Board found that McCarty Farms had
failed to show that Burlington Northern's rates were unreasonably
high on the basis of its review of the evidence of the stand-alone
cost model.  According to the Board, this conclusion is consistent
with the ICC's prior conclusion that certain rates during 1981
through 1986 were unreasonable.  On the basis of the 20-year analysis
presented in the discounted cash flow analysis in the stand-alone
cost model, Burlington Northern earned more revenues in 1981 through
1986 than was necessary to cover the stand-alone costs allocated to
those years.  However, those additional earnings were needed to make
up for shortfalls in other years.  The Board discontinued the
proceedings. 

In October 1997, McCarty Farms appealed the Board's August 1997
decision to the U.S.  Court of Appeals for the District of Columbia
Circuit.  After examining McCarty Farms' brief to the court, the
Board agreed that there were certain errors in the August 1997
decision and issued a supplemental decision to correct those
determinations that it agreed were erroneous.  Even after it made
these corrections, the Board still concluded that Burlington
Northern's rates were reasonable.  In a decision issued on October
20, 1998, the court affirmed the Board's decision, agreeing that the
challenged rates had not been shown to be unreasonable under the
stand-alone cost test.  As noted earlier, the court held that it did
not have jurisdiction over claims that were initially raised by the
McCarty Farms Group's complaint in federal district court and
subsequently referred to the ICC.  Accordingly, the court did not
rule on the Board's decision as it pertained to those claims.  The
district court has since dismissed its portion of the case at the
request of the parties. 


RATE COMPLAINTS EITHER PENDING OR
FILED WITH THE BOARD, 1990-98
========================================================== Appendix II



                                        Table II.1
                         
                            Complaints Dismissed at Shipper's
                                         Request

                                                           Market-
                                                           dominance       Date of
 No.  Title                Commodity       Date filed      present?\a      dismissal\b
----  -------------------  --------------  --------------  --------------  --------------
   1  Increased rates on   Coal            Investigation   Yes             Dec. 26, 1991
      coal, Louisville                     instituted,
      and Nashville                        Oct. 30, 1978
      Railroad, ICC 37063

   2  Dayton Power and     Coal            Mar. 27, 1981   Yes             Dec. 26, 1991
      Light Co. v.
      Louisville and
      Nashville Railroad,
      ICC 38025S

   3  Consolidated         Pulpwood,       Feb. 27, 1981   Yes             Mar. 25, 1992
      Papers, Inc. et al.  woodchips
      v. Chicago and
      North Western
      Transportation Co.,
      et al.,
      ICC 37626

   4  McGraw Edison v.     Electric        Mar. 27, 1981   Yes             July 27, 1990
      Alton and Southern   transformers
      Railway Company, et
      al., ICC 38238S

   5  Amstar Corporation   Sugar           Mar. 27,        Yes, for some   Oct. 18, 1990
      v. Alabama Great                     1981\C          movements
      Southern Railroad
      et al., ICC 38239S
      (pre-1983
      information only)
      (post-1982 was
      38239S (Sub-No.1))

   6  Coal Trading         Coal            Mar. 27, 1981   Yes (for three  June 13, 1990
      Corporation et al.                                   of four
      v. Baltimore and                                     complainants)
      Ohio Railroad Co.
      et al., ICC 38301S

   7  Iowa Power Inc. v.   Coal            Apr. 27, 1989   Not determined  Nov. 1, 1991
      Burlington Northern
      RR Co., ICC 40224

   8  Kaiser Aluminum &    Coal            May 22, 1989    Not determined  Jan. 5, 1990
      Chemical
      Corporation v. CSX
      Transportation,
      Inc. et al., ICC
      40228

   9  Exxon Coal USA,      Coal            Mar. 30, 1990   Not determined  Feb. 24, 1992
      Inc. and PSI
      Energy, Inc. v.
      Norfolk Southern
      Corporation, ICC
      40424

  10  Cabot Corporation    Carbon black    July 16, 1990   Not determined  Mar. 28,
      v. Southern Pacific  (chemical)                      1991
      Transportation Co.,
      et al., ICC 40464

  11  Degussa Corp. v.     Tread and       Jan. 8, 1993    Not determined  Jan. 12, 1995
      Southern Pacific     carcass grade
      Transportation Co.,  carbon black
      et al., ICC 40903    (chemical)

  12  Mobil Oil            Synthetic       Aug. 24, 1994   Not determined  May 23, 1995
      Corporation v.       plastic resin
      Daniel R. Murray,    (chemical)
      Trustee of the
      Chicago, Missouri
      and Western Railway
      Co., ICC 41449

  13  Kansas City Power    Coal            Dec. 30, 1994   Not determined  Dec. 19, 1995
      and Light v.
      Missouri Pacific
      Railroad Co., et
      al., ICC 41528

  14  South-West Railroad  Retired         Dec. 12, 1985   Tentatively     Apr. 9, 1998
      Car Parts Co. v.     railroad cars                   found no
      Missouri Pacific                                     market
      Railroad, ICC 40073                                  dominance
                                                           based on
                                                           finding
                                                           geographic
                                                           competition

  15  Western Resources,   Coal            July 31, 1995   Not determined  Aug. 12, 1997
      Inc. v. Atchison,
      Topeka and Santa Fe
      Railway Co., ICC
      41604

  16  Potomac Electric     Coal            Jan. 3, 1997    Not determined  June 18, 1998
      Power Company v.
      CSX Transportation,
      Inc., STB 41989

  17  Armstrong World      Perlite rock    Jan. 10, 1997   Not determined  Mar. 31, 1997
      Industries, Inc. v.
      Conrail
      Corporation, STB
      41990

  18  Sierra Pacific       Coal            Aug. 1, 1997    Not determined  July 17, 1998
      Power Company and
      Idaho Power Co. v.
      Union Pacific
      Railroad Company,
      STB 42012
-----------------------------------------------------------------------------------------
\a Present for at least some of the traffic in question but not
necessarily for all of it. 

\b In at least five of the complaints, the shipper requested that the
ICC/Board dismiss the complaint because the shipper entered into a
private transportation contract with the railroad.  This information
was not available for all complaints. 

\c In a decision served on June 7, 1989, the ICC divided the
proceeding that originated with one complaint into two proceedings in
order to assess the reasonableness of the rates for the period
through 1982, while reconsidering whether market dominance existed
after 1982.  The ICC designated the post-1982 part of this case as
38239S (Sub-No.1).  For the purposes of this analysis, we considered
this as one complaint. 

Source:  GAO's analysis of Surface Transportation Board information. 



                                        Table II.2
                         
                           Complaints Dismissed/Discontinued in
                                  Favor of the Railroad

                                                           Market-
                                                           dominance
No.   Title                Commodity           Date filed  present?\a              Status
----  -------------------  --------------  --------------  --------------  --------------
1     Bituminous Coal,     Coal             Investigation  Yes              The ICC found
      Hiawatha, Utah to                        instituted                    the rates to
      Moapa, Nevada, ICC                     Oct. 5, 1978                  be reasonable;
      37038                                                                   proceedings
                                                                             discontinued
                                                                              on Oct. 24,
                                                                                     1994

2     Aggregate Volume     Coal             Investigation  Yes              The ICC found
      Rate on Coal, Acco,                      instituted                    the rates to
      Utah to Moapa,                         Apr. 4, 1980                  be reasonable;
      Nevada, ICC 37409                                                       proceedings
                                                                             discontinued
                                                                              on Oct. 24,
                                                                                    1994.

3     Amstar Corporation   Corn syrup       July 16, 1980  Yes, for some    ICC dismissed
      v. Atchison,                                         but not all      the complaint
      Topeka, and Santa                                    movements         on Sept. 28,
      Fe Railway Company,                                                    1995 because
      et al., ICC 37478                                                    it found rates
                                                                                    to be
                                                                              reasonable.

4     Georgia Power        Coal               May 7, 1991  No                     The ICC
      Company, et al. v.                                                    dismissed the
      Southern Railway                                                      complaint due
      Co. and Norfolk                                                          to lack of
      Southern Corp., ICC                                                         market-
      40581                                                                  dominance on
                                                                            Nov. 8, 1993.

5     McCarty Farms, Inc.  Wheat            Mar. 27, 1981  Yes                  The Board
      et al. v.            (grain)                                         found rates to
      Burlington                                                           be reasonable;
      Northern, Inc., ICC                                                     proceedings
      37809                                                                  discontinued
                                                                              on Aug. 20,
                                                                                1997; the
                                                                               Board made
                                                                                technical
                                                                           corrections on
                                                                            May 11, 1998.

6     McCarty Farms, Inc.  Wheat and        July 30, 1982  Yes                  The Board
      et al. v.            barley                                          found rates to
      Burlington           (grain)                                         be reasonable;
      Northern, Inc., ICC                                                     proceedings
      37809 (Sub-No.1)                                                       discontinued
                                                                              on Aug. 20,
                                                                                    1997.

7     McCarty Farms, Inc.  Wheat and        Mar. 26, 1981  Yes                  The Board
      et al. v.            barley                                          found rates to
      Burlington           (grain)                                         be reasonable;
      Northern, Inc., ICC                                                     proceedings
      37815S                                                                 discontinued
                                                                              on Aug. 20,
                                                                                    1997.
-----------------------------------------------------------------------------------------
\a Present for at least some of the traffic in question, but not
necessarily for all of it. 

Source:  GAO's analysis of Surface Transportation Board information. 



                                        Table II.3
                         
                              Complaints Otherwise Dismissed

                                                           Market-
                                                           dominance
No.   Title                Commodity           Date filed  present?\a              Status
----  -------------------  --------------  --------------  --------------  --------------
1     Central Power and    Coal             Apr. 12, 1994  Not determined       The Board
      Light Co. v.                                                          dismissed the
      Southern Pacific                                                       complaint on
      Transportation Co.,                                                  Dec. 31, 1996,
      ICC 41242                                                               because the
                                                                               regulatory
                                                                            relief sought
                                                                                  was not
                                                                               available.
                                                                                Shipper's
                                                                                   appeal
                                                                                 pending.

2     MidAmerican Energy   Coal            Sept. 27, 1995  Not determined       The Board
      Co. v. Union                                                          dismissed the
      Pacific Railroad                                                       complaint on
      Co., et al., ICC                                                     Dec. 31, 1996,
      41626                                                                   because the
                                                                               regulatory
                                                                            relief sought
                                                                                  was not
                                                                               available.
                                                                                Shipper's
                                                                                   appeal
                                                                                 pending.

3     H.B. Fuller Co. v.   Vinyl acetate     Dec. 8, 1994  Not determined       The Board
      Southern Pacific,    (chemical)                                       dismissed the
      ICC 41510                                                             complaint for
                                                                                  lack of
                                                                             jurisdiction
                                                                              on Aug. 22,
                                                                                1997. The
                                                                           transportation
                                                                            was performed
                                                                                    under
                                                                                contract.

4     Shore Line           Cars for         July 17, 1996  Not determined       The Board
      Enterprises v.       scenic                                           dismissed the
      Southern Pacific     railroad                                          complaint on
      Transportation Co.,                                                  Aug. 28, 1997,
      STB 41907                                                               because the
                                                                            shipper never
                                                                                 filed an
                                                                                  opening
                                                                            statement and
                                                                                failed to
                                                                           respond by the
                                                                                appointed
                                                                                   dates.

5     Omaha Public Power   Coal             June 20, 1997  Not determined       The Board
      District v. Union                                                     dismissed the
      Pacific Railroad                                                       complaint on
      Co., STB 42006                                                        Oct. 17, 1997
                                                                              because the
                                                                           transportation
                                                                            was performed
                                                                                    under
                                                                                contract.
                                                                                Shipper's
                                                                                   appeal
                                                                                 pending.
-----------------------------------------------------------------------------------------
\a Present for at least some of the traffic in question, but not
necessarily for all of it. 

Source:  GAO's analysis of Surface Transportation Board information. 



                                        Table II.4
                         
                            Complaints Decided in Favor of the
                                         Shipper

                                                           Market-
                                                           dominance
No.   Title                Commodity           Date filed  present?\a              Status
----  -------------------  --------------  --------------  --------------  --------------
1     Arizona Public       Coal              Jan. 3, 1994  Yes               Decided July
      Service Company and                                                       29, 1997.
      PacifiCorp v.                                                          Shipper won;
      Atchison, Topeka,                                                       reparations
      and Santa Fe                                                                    and
      Railway Co., ICC                                                      prescriptions
      41185                                                                      awarded.

2     West Texas           Coal             Jan. 12, 1994  Yes             Decided May 3,
      Utilities Company                                                     1996. Shipper
      v. Burlington                                                                  won;
      Northern Railroad                                                       reparations
      Co., ICC 41191                                                                  and
                                                                            prescriptions
                                                                                 awarded.
-----------------------------------------------------------------------------------------
\a Present for at least some of the traffic in question, but not
necessarily for all of it. 

Source:  GAO's analysis of Surface Transportation Board information. 



                                           Table II.5
                            
                               Complaints Pending With the Board

                                                                             Market-dominance
No.             Title                Commodity                   Date filed  present?\a
--------------  -------------------  ------------------  ------------------  ------------------
1               DOE and DOD v.       Spent nuclear fuel       Mar. 27, 1981  Yes
                Baltimore and Ohio
                Railroad Co. et
                al., ICC 38302S

2               DOE and DOD v.       Spent nuclear fuel       Mar. 27, 1981  Yes
                Baltimore and Ohio
                Railroad Co. et
                al., ICC 38376S

3               DOE and DOD v.       Spent nuclear fuel      Oct. 3, 1994\b  Yes
                Baltimore and Ohio
                Railroad Co., et
                al., I&S 9205

4               Pennsylvania Power   Coal                      Aug. 4, 1994  The parties have
                and Light Co. v.                                             asked the Board to
                Conrail, ICC 41295                                           hold the
                                                                             proceedings in
                                                                             abeyance, pending
                                                                             possible
                                                                             settlement.

5               Shell Chemical       Polyethylene             Dec. 26, 1995  Not determined
                Company and Shell    terephthalate
                Oil Company v.       (chemical)
                Boston and Maine
                Corporation, et
                al., ICC 41670

6               Grain Land Coop v.   Grain                     Apr. 5, 1996  Not determined
                Canadian Pacific
                Rail System and Soo
                Line Railroad Co.
                D/B/A CP Rail
                System, STB 41687

7               FMC Wyoming          Soda ash,                Oct. 31, 1997  Not determined
                Corporation & FMC    phosphorus,
                Corporation v.       phosphate rock,
                Union Pacific        coke, sodium
                Railroad Co., STB    bicarobonate,
                42022                including sodium
                                     sesqui carbonate
                                     (chemical)

8               PSI Energy v. CSX    Coal                      July 6, 1998  Not determined
                Transportation,
                Inc. and Soo Line
                Railroad Co. D/B/A
                Canadian Pacific
                Railway, STB 42034

9               Minnesota Power,     Coal                     Dec. 30, 1998  Not determined
                Inc. v. Duluth,
                Missabe and Iron
                Range Railway
                Company, STB 42038
-----------------------------------------------------------------------------------------------
Legend: 

DOD = Department of Defense
DOE = Department of Energy

Note:  Other complaints may also be pending because either the
shipper or railroad appealed the Board's decision to the U.S.  Court
of Appeals. 

\a Present for at least some of the traffic in question, but not
necessarily for all of it. 

\b According to Board officials, Investigation and Suspension Docket
Number 9205 was initiated on Dec.  8, 1978.  The ICC resolved the
case by decisions issued in 1980 and 1981.  In 1991, the ICC denied a
request from certain railroads involved in the case that had asked
the ICC to reopen the proceeding.  However, in Oct.  1994, the
Department of Defense and the Department of Energy asked the ICC to
reopen the proceeding.  The petition to reopen is still pending. 

Source:  GAO's analysis of Surface Transportation Board information. 


SURVEY RESPONSE FREQUENCIES
========================================================= Appendix III

This appendix presents the results of our shipper survey in summary
form.  It discusses the methodology used in controlling for sampling
error, nonsampling error, and presentation.  In administering this
survey, we agreed to hold the responses of individual shippers
confidential.  In the few instances where the responses of individual
shippers could be determined from the data, we have not presented the
results. 


      SAMPLING ERRORS AND
      CONFIDENCE INTERVALS OF
      ESTIMATES
----------------------------------------------------- Appendix III:0.1

Since we used a sample (called a probability sample) of grain, coal,
chemicals and plastics shippers to develop our estimates, each
estimate has a measurable precision, or sampling error, that may be
expressed as a plus/minus figure.  A sampling error indicates how
closely we can reproduce from a sample the results that we would
obtain if we were to take a complete count of the universe using the
same measurement methods.  By adding the sampling error to and
subtracting it from the estimate, we can develop upper and lower
bounds for each estimate.  This range is called a confidence
interval.  Sampling errors and confidence intervals are stated at a
certain confidence level--in this case, 95 percent.  For example, a
confidence interval at the 95-percent confidence level means that in
95 out of 100 instances, the sampling procedure we used would produce
a confidence interval containing the universe value we are
estimating. 

We obtained a response rate of 60 percent.  We did not test for
potential differences between the respondents who did and did not
respond to our survey because we had little or no information about
the nonrespondents.  As a result, we do not know the effect of these
nonrespondents on the results of our survey.  Our results are
generalizable to the views and opinions of the groups we surveyed. 
In addition, some estimates do not always represent the entire
population because some shippers did not answer all of the questions. 


      CONTROLLING FOR NONSAMPLING
      ERRORS
----------------------------------------------------- Appendix III:0.2

In addition to the reported sampling errors, the practical
difficulties of conducting any survey may introduce other types of
errors, commonly referred to as nonsampling errors.  For example,
differences in how questions are interpreted, errors in entering
data, incomplete sampling lists, and the types of people who do not
respond can all introduce unwanted variability into the survey
results.  We included steps in both the data collection and data
analysis stages to minmize such nonsampling errors.  Some of these
steps included pretesting questionnaires with members of shipping
associations, obtaining comments on the questionnaire from shipper
and railroad associations, reviewing answers during follow-up visits
with shippers and railroads, double-keying and verifying all data
during data entry, and checking all computer analyses with a second
analyst. 


      DATA PRESENTATION
----------------------------------------------------- Appendix III:0.3

Our analysis represents those shippers who expressed an opinion
regarding each question.  Shippers who did not choose to answer a
question have been included with those that indicated "Don't Know". 
In instances where "Don't Know" is an option, we show the combined
number who actually checked "Don't Know" and those who did not
answer.  All responses are presented in percentages.  Each response
was weighted to represent the group to which it belonged. 
Percentages were rounded to their nearest whole number; totals may be
greater or less than 100 percent.  We also show where a low number of
responses did not yield a statistically valid result.  Questions 5
through 10 have been converted to ranges and are included in tables
III.1 through III.6.  Any technical notes regarding the data
presented appear at the end of this appendix. 



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


      TABLE III.1:  SURVEY
      QUESTION 5
----------------------------------------------------- Appendix III:0.4

We asked survey respondents to indicate the percentage of their
shipments made using various transportation modes.  Specifically,

  -- In 1997, about what percentage of your company's shipments of
     bulk grain, coal, chemicals or plastics went by the following
     modes of transportation?  (Enter percent; Please make sure your
     responses total 100%.)

We selected four categorical ranges for the question, and counted the
number of responses that fit into each category.  Table III.1 shows
the percentage of respondents whose answers fit each category. 



                                       Table III.1
                         
                           Percentage of Shippers Using Various
                            Transportation Modes, 1997 (Survey
                                      Question 5)\c

                             0 -25     26 -50    51 -75    76 -100
Transportation Mode          percent   percent   percent   percent         Missing
---------------------------  --------  --------  --------  --------------  --------------
Class I railroad             54.5      10.5      13.1      21.9            [n=42]
                             +3.20     +2.00     +2.20     +2.58

Short-line or regional       90.2      3.6       1.5       4.6             [n=84]
railroad                     +2.00     +1.16     +0.88     +1.48

A combination of class I     78.6      9.4       5.0       7.0             [n=69]
and short-line or regional   +2.78     +1.92     +1.50     +1.80
railroads

Semi-tractor or other truck  46.4      22.2      11.9      19.4            [n=24]
                             +3.16     +2.74     +2.08     +2.56

Inland waterway (including   94.7      3.1       1.8       1               [n=84]
barges)                      +1.50     +1.16     +0.96     +0.28

Deep water great lakes       100       0         0         0               [n=91]
vessel                       + 0.00    +0.00     +0.00     +0.00

Ocean                        98.3      <1        <1        <1              [n=83]
                             +0.76     +0.50     +0.36     +0.44

Air                          100       0         0         0               [n=91]
                             +0.00     +0.00     +0.00     +0.00

Intermodal (a combination    98.7      <1        <1        <1              [n=83]
of railroad and other        +0.56     +0.40     +0.30     +0.28
modes)

Intermodal (a combination    99.1      <1        <1        <1              [n=84]
of modes not including       +0.68     +0.48     +0.22     +0.44
rail)

Other                        98.9      <1        <1        <1              [n=86]
                             +0.56     +0.44     +0.20     +0.30
-----------------------------------------------------------------------------------------
Source:  GAO's survey of railroad shippers. 


      TABLE III.2:  SURVEY
      QUESTION 6
----------------------------------------------------- Appendix III:0.5

We asked survey respondents to indicate the average number of loaded
out-bound rail shipments.  they had made since 1990.  Specifically,

  -- Since 1990, on average, how many loaded rail cars has your
     company used for out-bound shipments of bulk grain, coal,
     chemicals or plastics per year?  (Enter Number)



                              Table III.2
                
                Average Annual Out-bound Rail Shipments
                   by Commodity (Survey Question 6)\c

Commodity                                     Average annual rail cars
----------------------------------------  ----------------------------
Grain                                                            4,546
                                                                +1,288
                                                                62,962
 Coal                                                           +8,495
                                                                 7,727
 Chemicals/plastics                                               +944
----------------------------------------------------------------------
Source:  GAO's survey of railroad shippers. 


      TABLE III.3:  SURVEY
      QUESTION 7
----------------------------------------------------- Appendix III:0.6

We asked survey respondents to indicate the percentage of their rail
shipments made using rail cars owned or leased by their company. 
Specifically,

  -- Since 1990, on average, what percentage of your annual out-bound
     shipments (that you identified in the previous question) of bulk
     grain, coal, chemicals or plastics were shipped in rail cars
     owned or leased (except leased from a railroad) by your company? 
     (Enter percent, if none, enter 0)

We selected four categorical ranges for the question, and counted the
number of responses that fit into each category.  Table III.3 shows
the percentage of respondents whose answers fit each category. 



                              Table III.3
                
                  Percentage of Annual Rail Shipments
                 Using Company-owned Rail Cars (Survey
                             Question 7)\c

                      0 -25     26 -50    51 -75    76 -100
                      percent   percent   percent   percent   Missing
--------------------  --------  --------  --------  --------  --------
Average annual out-   75.2      4.3       3.6       17.0      [n=24]
bound shipments in    +2.30     +1.28     +1.12     +1.82
owned or leased rail
cars
----------------------------------------------------------------------
Source:  GAO's survey of railroad shippers. 


      TABLE III.4:  SURVEY
      QUESTION 8
----------------------------------------------------- Appendix III:0.7

We asked survey respondents to indicate the percentage of their
shipments that were made using contract versus tariff rates. 
Specifically,

  -- Since 1990, what percentage of each of the following rate
     setting methods (contract or published tariff rate) were used to
     set the freight rates of your annual out-bound shipments? 
     (Enter percent; if none, enter '0')

We selected four categorical ranges for the question, and counted the
number of responses that fit into each category.  Table III.4 shows
the percentage of respondents whose answers fit each category. 



                              Table III.4
                
                 Percentage of Shipments Using Contract
                 Rates or Published Tariff Rates Since
                       1990 (Survey Question 8)\c

                      0 -25     26 -50    51 -75    76 -100
                      percent   percent   percent   percent   Missing
--------------------  --------  --------  --------  --------  --------
                      47.6      8.1       5.8       38.5      [n=91]
Contract rate         +3.20     +1.94     +1.64     +2.96

                      41.3      8.4       4.4       45.9      [n=69]
Tariff                +3.00     +1.92     +1.44     +3.16
----------------------------------------------------------------------
Source:  GAO's survey of railroad shippers. 


      TABLE III.5:  SURVEY
      QUESTION 9
----------------------------------------------------- Appendix III:0.8

We asked survey respondents to indicate the percentage of their
shipments made that were exempt from federal rate regulation. 
Specifically,

  -- Of the published tariff or public rate shipments identified in
     question 8 what percentage was exempt from regulation -- that
     is, commodities, or classes of transportation (such as box car)
     that have been granted exemption by STB or its predecessor the
     Interstate Commerce Commission (ICC) from economic regulation? 
     (Enter Percent)

We selected four categorical ranges for the question, and counted the
number of responses that fit into each category.  Table III.5 shows
the percentage of respondents whose answers fit each category. 



                              Table III.5
                
                 Percentage of Public Tariff Shipments
                 Exempt From Federal Regulation (Survey
                             Question 9)\c

                      0 -25     26 -50    51 -75    76 -100
                      percent   percent   percent   percent   Missing
--------------------  --------  --------  --------  --------  --------
Percent of shippers   87.7      1.8       <1        9.8       [n=294]
responses in each     +2.86     +1.22     +0.74     +2.58
category
----------------------------------------------------------------------
Source:  GAO's survey of railroad shippers. 


      TABLE III.6:  SURVEY
      QUESTION 10
----------------------------------------------------- Appendix III:0.9

We asked survey respondents to indicate the percentage of their
shipments that were limited to a single railroad from origin to
destination.  Specifically,

  -- Consider the out-bound movements of bulk grain, coal, chemicals,
     or plastics that your company made by railroad.  About what
     percentage, if any, of these shipments could only go from origin
     to destination using a single railroad in 1997 as compared to
     1990?  (Enter Percent, if none, enter '0')

We selected five categorical ranges for the question, and counted the
number of responses that fit into each category.  Table III.6 shows
the percentage of respondents whose answers fit each category. 



                                       Table III.6
                         
                             Percentage of Rail Shippers Who
                         Indicated that Their Shipments Went From
                           Origin to Destination Using Only One
                         Railroad, 1990 and 1997 (Survey Question
                                          10)\c

Percentage of
shipments using
one railroad from
origin to                      1 -20       21 -40      41 -60      61 -100
destination        0 percent   percent     percent     percent     percent     Missing
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
                   26.6        10.6        10.1        9.2         43.4        [n=105]
1990               +2.98       +1.86       +2.06       +1.92       +3.38

                   25.8        8.7         9.3         7.7         48.5        [n=101]
1997               +2.94       +1.84       +1.90       +1.74       +3.38
-----------------------------------------------------------------------------------------
Source:  GAO's survey of railroad shippers. 


      CHAPTER 4 ANALYSIS ESTIMATES
      AND SAMPLING ERROR
---------------------------------------------------- Appendix III:0.10

Tables III.7 through III.9 present the sampling error associated with
the estimates we present in Chapter 4.  Our estimates for coal,
chemical and plastics shippers do not include sampling error because
we sent our survey to 100 percent of these shippers in our universe. 
In addition, the estimates shown in tables III.7 through III.9 differ
from the data presented in questions 15, 17 and 18 above because we
have collapsed certain categories for our analysis. 



                              Table III.7
                
                Percentage of Rail Shippers Who Believed
                 That A Barrier Was a Major or Moderate
                 Reason for Not Filing a Rate Complaint
                              (Table 4.1)

                                                            Chemicals
                                                            and
                                    Grain       Coal        plastics
Barrier\a               Total       shippers    shippers    shippers
----------------------  ----------  ----------  ----------  ----------
Legal costs associated  75.9        78.1        65.1        75.8
with filing outweigh    +3.30       +4.12
the benefits

Rate complaint process  76.5        77.6        73.4        74.6
is too complex          +3.30       +4.20

Rate complaint process  74.1        73.6        85.9        64.5
takes too long          +3.48       +4.48

Stand-alone cost model  71.7        72.3        76.2        64.5
is too costly to        +3.58       +4.56
prepare

Railroad will most      69.4        68.8        80.6        61.3
likely win case         +3.70       +4.74

Getting information     66.9        69.3        67.2        54.8
from railroads is too   +3.72       +4.68
difficult

Consulting costs are    66.5        68.2        54.7        64.5
too high                +3.74       +4.72

Discovery requests      65.6        67.5        59.0        62.9
from railroad           +3.78       +4.80
difficult

Fear of reprisal from   60.0        64.4        54.7 4      3.6
railroads               +3.86       +4.88

Filing fee too costly   56.6        62.1        43.6        41.9
                        +3.90       +4.90

Other parts of the      39.0        40.5        27.9        40.8
process are too costly  +4.42       +5.58
----------------------------------------------------------------------
\a Each percentage represents rail shippers who expressed an opinion
regarding a particular barrier.  We estimate that the total number of
shippers eligible to answer this question is 531.  Some shippers did
not express an opinion for some barriers. 



                                       Table III.8
                         
                         Percentage of Rail Shippers That Believe
                         Suggested Changes for Improving the Rate
                         Complaint Process Were Extremely to Very
                                  Important (Table 4.2)

Suggestions for
improving the STB's                                            Chemicals
rate complaint                     Grain         Coal          and plastics
process              Total\a       shippers      shippers      shippers      Missing
-------------------  ------------  ------------  ------------  ------------  ------------
Shorten STB's time   75.9          76.3          77.1          72.8          n=206
limits for deciding  +3.20         +4.12         +6.22         +6.60
rate complaint
cases

Reduce or eliminate  63.1          68.4          41.9          56.2          n=222
complaint filing     +3.62         +4.58         +7.76         +7.42
fees

Eliminate product &  62.2          57.0          82.1          63.0          n=298
geographic           +3.98         +5.46         +5.80         +7.56
competition
criteria

Use mandatory        58.5          66.7          29.6          41.3          n=229
binding arbitration  +3.74         +4.60         +7.68         +7.60

Lower revenue to     52.9          50.8          66.7          46.6          n=396
variable cost ratio  +4.56         +6.34         +7.72         +8.76

Use voluntary        51.9          58.5          30.2          37.0          n=243
binding arbitration  +3.90         +4.86         +7.80         +7.56

Use mandatory        16.4          20.2          4.80          7.60          n=319
nonbinding           +3.22         +4.26         +4.06         +4.36
arbitration
(mediation)
-----------------------------------------------------------------------------------------
\a Each percentage represents rail shippers who expressed an opinion
regarding a particular suggestion.  Some shippers did not express an
opinion for some suggestions. 



                                       Table III.9
                         
                         Percentage of Rail Shippers Who Believed
                             That Increasing Aspects of Rail
                            Competition Was Extremely to Very
                                  Important (Table 4.3)

Suggestions to                                                 Chemicals
increase                           Grain         Coal          and plastics
competition          Total\a       shippers      shippers      shippers      Missing
-------------------  ------------  ------------  ------------  ------------  ------------
Require STB to       81.2          79.1          86.1          86.4          n=128
grant trackage       +2.76         +3.62         +4.82         +4.88
rights to competing
railroads

Increase access for  75.2          74.5          75.0          78.6          n=133
short line           +3.02         +3.88         +6.14         +5.80
railroads

Require STB to       73.9          71.6          73.1          84.4          n=143
grant reciprocal     +3.06         +4.02         +6.22         +5.10
switching
agreements

Overturn STB's       71.0          67.0          83.5          77.5          n=142
"bottleneck"         +3.24         +4.26         +5.16         +5.92
decision

Allow shippers to    49.4          45.1          42.5          73.3          n=166
specify routing      +3.56         +4.64         +7.16         +6.24
-----------------------------------------------------------------------------------------
\a Each percentage represents rail shippers who expressed an opinion
regarding a particular option.  Some shippers did not express an
opinion for some options. 

Endnotes: 

\a Due to the low number of responses to this question, we are either
unable to generalize to the universe, or unable to report for reasons
of confidentiality. 

\b Includes missing responses. 

\c We estimate that a total of 709 shippers were eligible to answer
this question.  Not all shippers chose to answer the question. 


SURVEY OF U.S.  CLASS I RAILROADS
========================================================== Appendix IV

In order to obtain the major U.S.  railroads' views of the Surface
Transportation Board's rate relief process, we mailed the class I
railroads a survey similar to the survey we mailed to shippers (See
app.  III).  The class I railroads determined that it would be
appropriate for the Association of American Railroads (AAR) to
respond to our questions regarding changes to the process. 
Therefore, AAR answered questions 6 and 7 of our survey.  The
remaining questions dealt with the railroads' experiences using the
process during any rate complaint cases involving movements on their
lines.  Four of the nine class I railroads we surveyed responded to
this set of questions.  The information provided by the railroads
augmented the information we developed from reviewing the Board's
case files.  However, because of the low response rate and the nature
of the information provided, there was not sufficient information to
present it in summary form in this appendix.  We have provided a copy
of the survey we mailed to the class I railroads for reference
purposes. 



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)



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   edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V


   RESOURCES, COMMUNITY, AND
   ECONOMIC DEVELOPMENT DIVISION
--------------------------------------------------------- Appendix V:1

Joseph A.  Christoff
Helen T.  Desaulniers
Lynne L.  Goldfarb
Alexander G.  Lawrence, Jr.
Bonnie Pignatiello Leer
David R.  Lehrer
Luann M.  Moy


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