Railroad Regulation: Changes in Railroad Rates and Service Quality Since
1990 (Chapter Report, 04/16/99, GAO/RCED-99-93).

Pursuant to a congressional request, GAO provided information on: (1)
the environment within which railroad rates have been set since 1990;
(2) how railroad rates have changed since 1990; (3) how railroad service
quality has changed since 1990; and (4) actions taken by the Surface
Transportation Board and others to address railroad service quality
problems.

GAO noted that: (1) the environment in which railroads set their rates
has been influenced by ongoing industry consolidation, competitive
conditions, and railroads' financial health; (2) as a result of mergers,
bankruptcies, and the redefinition of what constitutes a major railroad,
the number of independent Class I railroad systems has been reduced from
30 in 1976 to 9 in early 1999, with the 5 largest Class I railroads
accounting for 94 percent of industry operating revenue; (3) this
increased concentration has raised concerns about potential abuse of
market power in some areas due to railroads' use of market-based
pricing; (4) under market-based pricing, rail rates in markets with less
effective competition may be higher than in markets that have greater
competition from railroads or other modes of transportation; (5)
railroads' financial health has also improved since 1990; (6) however,
despite these improvements, the Board has determined that most Class I
railroads are revenue inadequate because they do not generate enough
revenue to cover the industry's cost of capital; (7) although such
determinations are sometimes controversial, revenue inadequacy affects
the ability of a railroad to attract or retain capital and remain
financially viable; (8) railroad rates have generally decreased since
1990; (9) the decrease has not been uniform, and in some cases, rail
rates have stayed the same as, or are higher than, they were in 1990;
(10) this was particularly true on selected long distance rail shipments
of wheat from northern plains states like Montana and North Dakota to
west coast destinations; (11) rail routes with effective competitive
alternatives--either from railroads or from trucks and
barges--experienced greater decreases in rail rates; (12) as the rail
industry has consolidated, shippers have complained that service quality
has deteriorated; (13) shippers' complaints have included a lack of
railcars when and where they were needed and inconsistent pickup and
delivery of cars; (14) roughly 60 percent of the coal, grain, chemicals,
and plastics shippers responding to GAO's survey said that their service
was somewhat or much worse in 1997 than it was in 1990; (15) the overall
quality of rail service cannot be measured; (16) federal agencies and
railroads have taken a number of actions to address rail service
problems; and (17) although these actions are expected to yield
benefits, they do not address some shippers' belief that greater
competition in the rail industry is needed to improve service.

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

 REPORTNUM:  RCED-99-93
     TITLE:  Railroad Regulation: Changes in Railroad Rates and Service 
             Quality Since 1990
      DATE:  04/16/99
   SUBJECT:  Railroad regulation
             Railroad transportation operations
             Comparative analysis
             Competition
             Interstate commerce
             Railroad industry
             Transportation costs
             Prices and pricing
             Corporate mergers
             Freight transportation rates

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

Report to Congressional Requesters

April 1999

RAILROAD REGULATION - CHANGES IN
RAILROAD RATES AND SERVICE QUALITY
SINCE 1990

GAO/RCED-99-93

Railroad Regulation

(348113)


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

  4RAct - Railroad Revitalization and Regulatory Reform Act
  AAR - Association of American Railroads
  CONRAIL - Consolidated Rail Corporation
  DOT - U.S.  Department of Transportation
  GAO - General Accounting Office
  ICC - Interstate Commerce Commission
  R/VC - revenue to variable cost
  URCS - Uniform Railroad Costing System
  USDA - U.S.  Department of Agriculture

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


B-280294

April 16, 1999

The Honorable Conrad Burns
The Honorable Byron L.  Dorgan
The Honorable Pat Roberts
The Honorable John D.  Rockefeller, IV
United States Senate

In response to your request, this report discusses how rates and
service quality for freight rail transportation have changed since
1990 and actions being taken by the Surface Transportation Board and
others to address service quality issues.  We previously transmitted
a companion report to you entitled Railroad Regulation:  Current
Issues Associated With the Rate Relief Process (GAO/RCED-99-46, Feb. 
26, 1999). 

Unless you publicly announce 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 with responsibilities for
transportation and regulatory issues; the Honorable Rodney E. 
Slater, Secretary of Transportation; the Honorable Linda J.  Morgan,
Chairman of the Surface Transportation Board; and other interested
parties.  We will also make copies available to others upon request. 
Please call me at (202) 512-3650 if you have any questions about the
report.  Major contributors to the report are listed in appendix IV. 

Phyllis F.  Scheinberg
Associate Director,
 Transportation Issues


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


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

The Railroad Revitalization and Regulatory Reform Act of 1976 and the
Staggers Rail Act of 1980 gave freight railroads increased freedom to
price their services according to market conditions.  In response to
this freedom and to recent consolidations within the rail industry,
some shippers have raised concerns that freight railroads have abused
their market power in setting rates for those shippers with fewer
alternatives to rail transportation while at the same time providing
poor service. 

Concerned about the potential abuse of market power by freight
railroads in setting rates and a deterioration of service quality in
recent years, Senators Conrad Burns; Byron L.  Dorgan; Pat Roberts;
and John D.  Rockefeller, IV, asked GAO to examine issues related to
railroad rates and service.  In particular, this report provides
information on (1) the environment within which railroad rates have
been set since 1990, (2) how railroad rates have changed since 1990,
(3) how railroad service quality has changed since 1990, and (4)
actions taken by the Surface Transportation Board and others to
address railroad service quality problems. 


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

By the 1970s, many of the nation's largest freight railroads (called
Class I railroads) were in poor financial health.  With passage of
the Railroad Revitalization and Regulatory Reform Act and the
Staggers Rail Act, the Congress sought to improve the financial
health of the rail industry by reducing economic regulation of
freight railroads and providing railroads more freedom to price their
services according to market demand.  In particular, the Staggers
Rail Act made it federal policy for railroads to rely, where
possible, on competition and the demand for service to establish
reasonable rates.  Under this policy, shippers with less effective
transportation alternatives pay a higher proportion of a railroad's
fixed costs than those with more effective competitive alternatives
(this is called "differential pricing").  The Interstate Commerce
Commission (ICC) continued to regulate rates where there was an
absence of effective competition.  During the 1980s, railroads used
the increased freedoms to improve their financial health and
competitiveness. 

The ICC Termination Act of 1995 abolished the ICC and created the
Surface Transportation Board (the Board), a bipartisan, independent
adjudicatory agency administratively housed within the U.S. 
Department of Transportation.  The Board has continued many of ICC's
rail regulatory functions, including regulating rail rates where
there is an absence of effective competition and adjudicating
disputes about service. 

As part of its review, GAO received survey responses from about 700
shippers on how the quality of service they have received from Class
I railroads has changed since 1990.  GAO surveyed the major
associations of grain, coal, chemicals, and plastics
industries--industries whose freight constitutes the largest portion
of rail shipments.  GAO's survey used a statistical sample; as a
result, when GAO reports survey results, they represent estimates,
based on the views and experiences of these groups. 


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

The environment in which railroads set their rates has been
influenced by ongoing industry consolidation, competitive conditions,
and railroads' financial health.  As a result of mergers,
bankruptcies, and the redefinition of what constitutes a major
railroad, the number of independent Class I railroad systems has been
reduced from 30 in 1976 to 9 in early 1999, with the 5 largest Class
I railroads accounting for 94 percent of industry operating revenue. 
This increased concentration has raised concerns about potential
abuse of market power in some areas due to railroads' use of
market-based pricing.  Under market-based pricing, rail rates in
markets with less effective competition may be higher than in markets
that have greater competition from railroads or other modes of
transportation.  Railroads' financial health has also improved since
1990.  However, despite these improvements, the Board has determined
that most Class I railroads are "revenue inadequate" because they do
not generate enough revenue to cover the industry's cost of capital. 
Although such determinations are sometimes controversial, revenue
inadequacy affects the ability of a railroad to attract and/or retain
capital and remain financially viable. 

Railroad rates have generally decreased since 1990.  However, the
decrease has not been uniform, and in some cases, rail rates have
stayed the same as, or are higher than, they were in 1990.  This was
particularly true on selected long distance (greater than 1,000
miles) rail shipments of wheat from northern plains states like
Montana and North Dakota to west coast destinations.  In general,
rail routes with effective competitive alternatives--either from
railroads or from trucks and barges--experienced greater decreases in
rail rates. 

As the rail industry has consolidated, shippers have complained that
service quality has deteriorated.  Shippers' complaints have included
a lack of railcars when and where they were needed and inconsistent
pickup and delivery of cars.  Roughly 60 percent of the coal, grain,
chemicals, and plastics shippers responding to GAO's survey
(representing 329 shippers) said that their service was somewhat or
much worse in 1997 than it was in 1990.  In general, railroads
believe the service they provide is adequate but agree improvements
can be made.  According to railroads, service problems have been
caused by such things as capacity constraints and industry
downsizing.  At the current time, the overall quality of rail service
cannot be measured.  There are few industrywide measures of service,
and service measures recently developed are not comparable from one
railroad to another, nor do they fully address service quality. 

Federal agencies and railroads have taken a number of actions to
address rail service problems.  These include an October 1997
emergency service order issued by the Board to facilitate the
resolution of service problems in the West that originated in the
Houston/Gulf Coast area; the creation of a government task force to
disseminate information that can help railroads and shippers to
anticipate changes in transportation demand and supply; and the
Board's adoption in December 1998 of procedures for expediting relief
from inadequate rail service.  Although these actions are expected to
yield benefits, they do not address some shippers' belief that
greater competition in the rail industry is needed to improve
service.  If it decides to address this issue, the Congress will need
to weigh the potential benefits of increased competition with the
potential financial and other effects on the railroad industry. 


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


      RATE SETTING INFLUENCED BY
      NUMEROUS FACTORS
-------------------------------------------------------- Chapter 0:4.1

Since 1990, the environment within which railroads set their rates
has been influenced by a number of factors.  One is continued
consolidation within the rail industry.  While there were 30
independent Class I railroad systems in 1976, by early 1999 the
number had been reduced to 9, with half of that reduction due to
consolidations.\1 Although consolidations and mergers were expected
to yield cost efficiencies and improve service, they have also
concentrated the industry into fewer and larger railroads.  The five
largest railroads accounted for about 94 percent of industry
operating revenue in 1997 (the latest year for which data are
available).  Rail shippers and others have raised the issue of
potential abuse of market power by these larger railroads. 

Differential pricing has also played a role.  Under differential
pricing, shippers with less effective transportation alternatives
generally pay proportionately greater shares of a railroad's fixed
costs than shippers with more effective transportation alternatives. 
This allows railroads to price their services more aggressively in
areas where shippers have more transportation alternatives.  The
effect of differential pricing can be seen when railroad revenues
from shipments are compared to railroad variable costs (costs that
vary according to the quantity shipped).  In general, railroads can
obtain more revenue in relation to variable costs from shippers with
less effective transportation alternatives than from those shippers
with better alternatives--even though both groups of shippers may
share similar cost characteristics, such as the number of railcars to
be shipped or lengths of haul to destination. 

The percent of rail industry revenue from shipments transported at
rates generating revenues exceeding 180 percent of variable costs
(the current threshold for the Surface Transportation Board's
jurisdiction over rail rate complaints) has generally declined from
about 33 percent in 1990 to 29 percent in 1996.  However, the ratio
of revenue to variable costs varied widely by commodity. 

Railroads' financial health has also improved since 1990.  From 1990
through 1996, railroads' return on investment and return on equity
(both measures of profitability) averaged about 8.5 and 11 percent,
respectively--about 60 percent and 24 percent higher, respectively,
than railroads' returns on investment and equity during the 1980s. 
Although financial health has improved, the Board has found most
Class I railroads to be revenue inadequate, a condition that may
induce investors to place their money elsewhere and affect a
railroad's financial viability.  Revenue adequacy determinations for
the railroad industry have been controversial.  In recent years,
shippers and others have questioned the meaningfulness of the current
method of determining revenue adequacy, particularly when railroads
that are designated revenue inadequate are able to attract capital to
acquire other railroads. 


--------------------
\1 Conrail is expected to be formally absorbed by CSX Transportation
and Norfolk Southern in 1999.  This will reduce the number of Class I
railroads to eight. 


      RAIL RATES HAVE FALLEN, BUT
      NOT ALL SHIPPERS HAVE
      BENEFITED
-------------------------------------------------------- Chapter 0:4.2

The reduction in railroad regulation that began in the 1970s
continues to yield benefits for shippers.  According to the Board,
from 1982 through 1996, average real (inflation-adjusted) rail rates
for Class I railroads had fallen about 46 percent.  However, rates
had not necessarily decreased proportionally for all shippers.  GAO's
analysis of real rail rates since 1990 for coal, grain (corn and
wheat), certain chemicals, and transportation equipment (finished
motor vehicles and parts) in selected transportation corridors found
that rates had generally fallen.  However, for some long-distance
shipments of wheat from northern plains states such as Montana and
North Dakota, rates had stayed the same as, or were higher than, they
were in 1990.  Rail rates were also sensitive to competition, and GAO
found that rates in some markets/corridors that are considered to
have less effective competition, such as the northern plains states,
were generally higher than rates where there may be more effective
competitive options, such as barges or other railroads. 

Ratios of revenue to variable costs (R/VC) are often used as
indicators of railroads' dominance of markets--by statute, a railroad
does not dominate a market if its revenue is less than 180 percent of
its variable costs for transporting the shipper's commodities.  GAO's
analysis of R/VC ratios suggests that competition plays a role in
ratios for specific commodities and markets.  In general, GAO found
that R/VC ratios exceeded 180 percent on some short-distance (500
miles or less) movements of coal and long-distance movements of
wheat--movements for which there may be less effective competition. 
In contrast, R/VC ratios were 180 percent or less on some
long-distance movements of coal where there may be more competition. 
Although R/VC ratios are used as proxies for railroad market
dominance, such ratios can be increasing at the same time rates are
decreasing and, conversely, decreasing at the same time rates are
increasing. 


      QUALITY OF SERVICE CANNOT
      CURRENTLY BE MEASURED
-------------------------------------------------------- Chapter 0:4.3

In recent years, shippers have increasingly criticized railroads for
providing poor service.  These complaints include such things as a
lack of railcars when and where needed and inconsistent pickup and
delivery of cars.  GAO's survey of approximately 700 coal, grain,
chemicals, and plastics shippers found that roughly 60 percent
believed their rail service in 1997 was somewhat or far worse than it
was in 1990.  Shippers and shipper associations have attributed poor
service, at least in part, to railroad mergers and consolidations. 
Some shippers told us that they are dependent on railroads to meet
their transportation needs and that they believe such dependence has
reduced railroads' incentives to provide good service.  In general,
Class I railroad officials believe their railroads provide adequate
service and that rail service in 1997 was at least as good as it was
in 1990.  However, the officials acknowledge that problems exist and
that improvements can be made.  Among the reasons cited for service
problems were increased rail traffic and industry downsizing, which
have created capacity constraints in the rail system. 

The quality of rail service cannot be measured currently.  There are
few industrywide service measures, and service information from
individual railroads is either not available, inconsistently defined
across and within railroads, or not available going back in time. 
The rail industry has recently developed quantitative measures of
performance, such as average train speed.  Although these measures
may be helpful in assessing some aspects of service, they are more an
evaluation of railroad operating efficiency rather than quality of
service. 


      ACTIONS TAKEN TO RESOLVE
      SERVICE ISSUES, BUT SOME
      CONCERNS OF SHIPPERS NOT
      ADDRESSED
-------------------------------------------------------- Chapter 0:4.4

Actions have been taken by both federal agencies and railroads to
address service issues.  These include the issuance of an emergency
service order by the Board to facilitate the resolution of recent
service problems in the West that originated in the Houston/Gulf
Coast area and the creation of a joint Board-U.S.  Department of
Agriculture Grain Logistics Task Force to disseminate information on
anticipated changes in transportation demand and supply.  In December
1998, the Board also adopted new procedures allowing shippers to
receive expedited temporary relief from inadequate rail service
through access to an alternative carrier.  Unlike the procedures for
obtaining more permanent relief, the new procedures do not require a
shipper to show that a railroad has engaged in anticompetitive
conduct. 

All the actions taken are expected to yield benefits in addressing
service problems.  However, the actions do not address some shippers'
belief that increased competition in the rail industry is needed to
improve service.  Because of the divergent views of railroads and
shippers on this issue, resolving service and competition issues will
be difficult and may require congressional action.  If it decides to
address this issue, the Congress will need to weigh the potential
benefits of increased competition against the potential financial and
other effects on the railroad industry. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report makes no recommendations. 


   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:6

GAO provided a draft of this report to the Surface Transportation
Board and to the Department of Transportation for review and comment. 
GAO met with a number of Board and Department officials, including
the Board's Deputy General Counsel and the Director of the Office of
Intermodal Planning and Economics of the Federal Railroad
Administration.  The Board agreed that the draft report was a fair
representation of the issues covered.  The Department of
Transportation made no substantive comments on the draft report. 
Among the specific comments made by the Board were that GAO should
better depict that (1) competition is better measured by the
effectiveness of transportation alternatives rather than the number
of competitors; (2) the Board, in its decisions on mergers, has taken
actions to ensure that no shipper has become captive to a single
railroad; (3) controversy over revenue adequacy issues is not new and
that these issues were addressed at length by the Board's
predecessor; (4) 1997 was not a typical year in terms of the quality
of railroad service due to the unusual, severe congestion that
occurred in the West; (5) the Board has an informal mechanism to
handle railroad service complaints through which many problems with
service are resolved; (6) as noted in its December 1998 report to
Members of Congress, providing open access (where one railroad is
required to make its tracks and facilities available to other
railroads for a fee), or otherwise dramatically modifying the current
regulatory scheme, could have far-reaching impacts for shippers and
railroads; and (7) service problems in the Houston/Gulf Coast area
during 1997 were not caused by the Union Pacific/Southern Pacific
merger and that the merger's implementation helped resolve the
problems.  The Board also suggested that recently developed
performance measures by the railroad industry could be of some
usefulness in determining service quality. 

GAO added information, or modified and/or clarified wording, in this
report to address each of these issues and to recognize the Board's
concerns and/or position.  For example, GAO modified the report's
language to better recognize the importance of effective competition
rather than the number of competitors.  Board and/or Department
officials also made other technical comments, which GAO incorporated
where appropriate.  The Board's comments and GAO's responses are
discussed in greater detail at the end of chapters 1 through 5. 


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

Throughout this century, railroads have been a primary mode of
transportation for many products, especially for such bulk
commodities as coal and grain.  Yet, by the 1970s American freight
railroads were in a serious financial decline.  The Congress
responded by passing landmark legislation in 1976 and 1980 that
reduced rail regulation and encouraged a greater reliance on
competition to set rates.  Railroads also continued a series of
combinations to reduce costs, increase efficiencies, and improve
their financial health.\2 In 1995, the Congress abolished the
Interstate Commerce Commission (ICC)--the federal agency responsible
for overseeing rates, competition, and service in the rail
industry--and replaced it with the Surface Transportation Board (the
Board). 

Rail shippers and others have expressed concern about the lack of
competition in the railroad industry, the extent to which railroads
are using their market power to set rates, and the quality of service
provided, especially for those shippers with fewer alternatives to
rail transportation to move their goods to market.  They have also
questioned whether the Board is adequately protecting shippers
against unreasonable rates and service. 


--------------------
\2 Combinations include mergers, purchases, changes in control,
acquisitions, and other forms of consolidations among railroads. 


   REDUCED REGULATION OF THE
   RAILROAD INDUSTRY
---------------------------------------------------------- Chapter 1:1

By the 1970s, America's railroads were in serious financial trouble. 
In a 1978 report to the Congress, the U.S.  Department of
Transportation (DOT) indicated that in 1976, 11 of 36 Class I
railroads studied were earning negative rates of return on
investment, and at least 3 railroads were in reorganization under the
bankruptcy laws.\3 Some of the railroads' problems were due to
federal regulation of rates that reduced management control and the
flexibility railroads needed to react to changing market
conditions.\4 Prior to 1976, almost all rail rates were subject to
ICC oversight to ensure they were reasonable.  The Congress sought to
improve the financial health of the rail industry by reducing
railroad rate regulation and encouraging a greater reliance on
competition to set reasonable rail rates.  The Congress did so by
passing two landmark pieces of legislation--the Railroad
Revitalization and Regulatory Reform Act of 1976 (4R Act) and the
Staggers Rail Act of 1980. 

The 4R Act limited the ICC's authority to regulate rates to those
instances where there was an absence of effective competition--that
is, where a railroad is "market dominant." Furthermore, the Staggers
Rail Act made it federal policy to rely, where possible, on
competition and the demand for rail services (called differential
pricing)\5 to establish reasonable rates.  Among other things, this
act also allowed railroads to market their services more effectively
by negotiating transportation contracts (generally offering reduced
rates in return for guaranteed volumes) containing confidential terms
and conditions; limited collective rate setting to those railroads
actually involved in a joint movement of goods; and permitted
railroads to change their rates without challenge in accordance with
a rail cost adjustment factor.  Furthermore, both the 4R Act and the
Staggers Rail Act required the ICC (now the Board) to exempt certain
railroad transportation from economic regulation.  The Staggers Rail
Act required ICC to exempt railroad transportation from regulation
upon finding that the regulation was not necessary to carry out the
rail transportation policy and either (1) the transaction was of
limited scope or (2) regulation was not needed to protect shippers
from an abuse of market power.  During the 1980s, railroads used
their increased freedoms to improve their financial health and
competitiveness. 


--------------------
\3 Class I railroads are the nation's largest railroads as measured
by revenue.  In 1997, Class I railroads were those railroads with
operating revenues of $256 million or more.  Return on investment
measures the profit made on assets used to provide transportation
services. 

\4 Railroad Regulation:  Economic and Financial Impacts of the
Staggers Rail Act of 1980 (GAO/RCED-90-80, May 16, 1990). 

\5 Inherent in the rail industry cost structure are joint and common
costs that cannot be attributed to particular traffic.  Under
demand-based differential pricing, railroads recover a greater
proportion of these unattributable fixed costs from rates charged to
those with a greater dependency on rail transportation. 


   CONSOLIDATION WITHIN THE
   RAILROAD INDUSTRY
---------------------------------------------------------- Chapter 1:2

The railroad industry has continued to consolidate in the last 2
decades, a condition that has been occurring since the 19th century. 
In 1976, there were 30 independent Class I railroad systems
(comprised of 63 Class I railroads); by early 1999, there were 9
railroad systems (comprised of 9 Class I railroads) and half of that
reduction was due to consolidations.\6 (See fig.  1.1.) The nine
remaining Class I railroad systems are the Burlington Northern and
Santa Fe Railway Co.; Consolidated Rail Corporation (Conrail); CSX
Transportation, Inc.; Grand Trunk Western Railroad, Inc.; Illinois
Central Railroad Co.; Kansas City Southern Railway Co.; Norfolk
Southern Railroad Co.; Soo Line Railroad Co., and Union Pacific
Railroad Co.  In 1998, the Board approved the division of Conrail's
assets between CSX Transportation, Inc., and Norfolk Southern
Corporation.  Conrail is expected to be formally absorbed by CSX
Transportation and Norfolk Southern in 1999, leaving a total of eight
Class I railroad systems. 



   Figure 1.1:  Class I Freight
   Railroads in the United States,
   1997

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Railroads consolidated to reduce costs and increase efficiencies,
making them more competitive.  For example, one of the justifications
for the 1995 Burlington Northern-Santa Fe merger was to provide
shippers with more efficient and cost-effective "single line"
service.  Both the Board and the railroads involved expected reduced
costs and improved transit times because the railroad on which a
shipment originated would no longer have to transfer the shipment to
another railroad for routing to its final destination.  Cost
reductions and increased efficiencies were also expected from, among
other things, rerouting of traffic over shorter routes, more
efficient use of equipment, and increased traffic densities. 
Consolidations were also justified as providing competitive
benefits--both within the rail industry and between railroads and
other transportation modes.  For example, the Board in its 1996
approval of the Union Pacific/Southern Pacific merger expected the
merger would intensify rail competition in the West between
Burlington Northern and Santa Fe Railway and the combined Union
Pacific/Southern Pacific.  The acquisition of Conrail by Norfolk
Southern and CSX Transportation is expected to yield benefits--both
by diverting substantial amounts of highway freight traffic to
railroads and by introducing new railroad-to-railroad competition in
those areas previously served only by Conrail. 

   Figure 1.2:  Class I Railroads
   in Kansas, 1980 and 1997

   (See figure in printed
   edition.)

Source:  Federal Railroad Administration, Office of Policy. 

As Class I railroads consolidated, non-Class I railroads increased
their importance in providing service.  For example, in 1980, Kansas
was served by seven Class I railroads (see fig.  1.2); in 1997, this
number was three.  Between 1991 and 1996, Class I railroads reduced
their mileage operated in the state by about 1,400 miles while
non-Class I carriers increased their mileage by about 1,700 miles
(175 percent greater than in 1991).  (App.  I shows how Class I and
non-Class I rail mileage changed in Montana, North Dakota, and West
Virginia from 1980 to 1997.)


--------------------
\6 In addition to consolidation, other reasons for the reduction in
the number of Class I railroads were carrier bankruptcies and a 1992
ICC change in the threshold for qualifying as a Class I railroad
(from $50 million to $250 million).  Bankruptcies eliminated 2 of the
30 Class I railroad systems, while changes in the Class I standard
moved 9 systems out of Class I status. 


   THE SURFACE TRANSPORTATION
   BOARD REPLACES THE ICC
---------------------------------------------------------- Chapter 1:3

In 1995, the Congress passed the ICC Termination Act of 1995, which
abolished the ICC.  The act transferred many of ICC's core rail
functions and certain nonrail functions to the Board, a decisionally
independent adjudicatory agency that is administratively housed in
DOT.  Among other things, the Board approves market entry and exit of
railroads; approves railroad mergers and consolidations; determines
the adequacy of a railroad's revenues on an annual basis; adjudicates
complaints concerning rail rates on traffic over which a railroad has
market dominance; \7 adjudicates complaints alleging that carriers
have failed to provide service upon reasonable request; and exempts
railroad transportation from economic regulation under certain
circumstances.  The ICC Termination Act made several significant
changes to railroad regulation.  For example, the act eliminated the
requirement for railroad tariff filings.  \8 However, the act did not
alter railroads' authority to engage in demand-based differential
pricing or to negotiate transportation service contracts containing
confidential terms and conditions that are beyond the Board's
authority while in effect. 

Several of the Board's functions are particularly relevant to this
report:  the (1) responsibility for determining the adequacy of a
railroad's revenues, (2) jurisdiction over rail rate complaints, and
(3) jurisdiction over complaints alleging that carriers have failed
to provide service upon reasonable request.  First, the Board is
required to determine the adequacy of railroad revenues on an annual
basis.  In addition, the Board is required to make an adequate and
continuing effort to assist railroads in attaining adequate
revenues--that is, revenues that under honest, economical, and
efficient management cover total operating expenses plus a reasonable
and economic profit on capital employed in the business. 

Second, the Board is also responsible for protecting shippers without
feasible transportation alternatives from unreasonably high rail
rates.  Where the Board concludes that a challenged rate is
unreasonable, it may order the railroad to pay reparations on past
shipments and prescribe maximum rates for future shipments.  The
Board does not have authority over rail rates for car movements made
under contracts or for movements that it has exempted from economic
regulation.\9 Only about 18 percent of the tonnage moved in 1997 was
subject to rate reasonableness regulation by the Board.  The
remainder was either moved under contract (70 percent), according to
the Association of American Railroads (AAR),\10 or was exempt from
economic regulation (12 percent).\11 Furthermore, rates on rail
traffic priced below the 180-percent revenue-to-variable cost
threshold are not subject to regulation by the Board.  According to
the Board, over 70 percent of all rail traffic in 1997 was priced
below this threshold. 

Third, the Board has the authority to adjudicate service complaints
filed by shippers.  The Board's process for handling formal service
complaints, like its rate complaint process, is an administrative
litigation process, in which parties to the dispute file pleadings,
disclose and receive information from each other, and present
evidence.\12 If the Board decides a case in favor of the complainant,
it can require the carrier to provide the shipper with monetary
compensation or to adopt or stop a practice.  Moreover, the Board is
authorized to impose "competitive access" remedies, under which
shippers can obtain access to an alternative carrier.\13 However, to
obtain permanent relief, the complaining shipper must demonstrate
that the rail carrier currently providing the service (called the
incumbent carrier) has engaged in anticompetitive conduct--that is,
the carrier has used its market power to extract unreasonable terms
or, because of its monopoly position, has disregarded the shipper's
needs by not providing adequate service.  As discussed in chapter 5,
the Board also has other procedures for providing temporary relief
from service inadequacies without a showing of anticompetitive
conduct where the carrier is not providing adequate service. 

The Board may also address service deficiencies through emergency
service orders.  The Board may issue an emergency service order if it
determines that a failure of traffic movement has created an
emergency situation that has a substantial impact on shippers or
railroad service in a region or that a railroad cannot transport
traffic in a manner that properly serves the public.  Through
emergency service orders, the Board may, among other things, permit
the operation of one rail carrier over another carrier's line to
improve the flow of traffic.  The Board may also direct a rail
carrier to operate the lines of a carrier that has ceased operations. 
These arrangements may not exceed 270 days.  Since 1990, the ICC and
the Board have issued eight emergency service orders; prior to its
termination, the ICC, in five of these instances, directed a carrier
to operate the lines of another railroad. 


--------------------
\7 The Board's market dominance analysis 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 (R/VC) level.  Variable costs are those
costs that change according to the quantities shipped (e.g., fuel and
labor).  If the revenue produced by the traffic exceeds the statutory
threshold, the Board conducts a qualitative analysis of any
intramodal or intermodal competition. 

\8 A tariff is a schedule of rates and general terms and conditions
under which a product or service is supplied. 

\9 The Board may revoke exemptions from economic regulation when it
determines that such regulation is necessary to carry out the rail
transportation policy. 

\10 AAR is a railroad trade association. 

\11 Examples of commodities and services that have been exempted from
economic regulation include farm products (except grain, soybeans,
and sunflower seeds), fresh fruits and vegetables, boxcar traffic,
and new highway trailers or containers. 

\12 The Board also has a process for handling service complaints
informally, and, according to Board officials, many service
complaints are handled this way quickly and inexpensively. 

\13 Three kinds of competitive access remedies are available:  (1)
alternative through routes, under which railroads are required to
interline traffic with other railroads and provide through routes and
through rates for that traffic; (2) reciprocal switching, under which
a carrier must transport the railcars of a competing carrier for a
fee; or (3) terminal trackage rights, under which a carrier must
permit another carrier to use its lines in or near a terminal area
for a fee. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

Senators Conrad Burns, Byron Dorgan, Pat Roberts, and John D. 
Rockefeller, IV, expressed concern that the continued consolidation
within the rail industry has allowed railroads to charge unreasonably
high rates and provide poor service.  The Senators asked us to report
on (1) how the environment within which rail rates are set has
changed since 1990; (2) how rates for users of rail transportation
have changed since 1990; (3) how railroad service quality has changed
since 1990; and (4) what actions, if any, the Board and others have
taken (or propose to take) to address rail rate and service quality
issues.  The requesters also asked us to identify difficulties and
barriers for shippers, including small shippers, in obtaining relief
from unreasonable rates from the Board.  We addressed this latter
topic and actions that the Board and others have taken to address
rail rate issues in our companion report on issues associated with
the Board's rate relief process.\14

To identify how the environment within which rail rates have been set
has changed since 1990, we reviewed (1) legislation regarding the
economic regulation of railroads, (2) regulations and decisions
issued by ICC or the Board regarding rail rate and service issues,
and (3) literature available in professional journals and trade
publications.  We also used reports we have issued on various aspects
of the railroad industry and the Staggers Rail Act of 1980 and
reviewed selected position papers prepared by railroad and shipper
trade associations.  To identify the economic and financial status of
railroads in the 1990s, we collected information available from
various AAR surveys of Class I railroads on the percent of railroad
tonnage moved under contract and collected financial information from
ICC's Transport Statistics in the United States, the Board's
Statistics of Class I Freight Railroads in the United States, and
AAR's Railroad Facts.  We also obtained information on the amount of
intercity freight tonnage transported in the United States annually
by transportation mode from Transportation In America, published by
the Eno Transportation Foundation, Inc.  To identify structural
changes in the railroad industry since 1990, we reviewed information
from AAR on Class I status, information on railroad industry
combinations, and reviewed ICC's and the Board's decisions in
selected railroad merger cases. 

To identify how railroad rates have changed since 1990, we obtained
data from the Board's Carload Waybill Sample for the years 1990
through 1996 (latest data available at the time of our review).  The
Carload Waybill Sample is a sample of railroad waybills (in general,
documents prepared from bills of lading authorizing railroads to move
shipments and collect freight charges) submitted by railroads
annually.  We used these data to obtain information on rail rates for
specific commodities in specific markets by shipment size and length
of haul.  According to Board officials, revenues derived from the
Carload Waybill Sample are not adjusted for such things as year-end
rebates and refunds that may be provided by railroads to shippers
that exceed certain volume commitments. 

Some railroad movements contained in the Carload Waybill Sample are
governed by contracts between shippers and railroads.  To avoid
disclosure of confidential business information, the Board disguises
the revenues associated with these movements prior to making this
information available to the public.  Using our statutory authority
to obtain agency records, we obtained a version of the Carload
Waybill Sample that did not disguise revenues associated with
railroad movements made under contract.  Therefore, the rate analysis
presented in this report presents a truer picture of rail rate trends
than analyses that may be based solely on publicly available
information. 

The specific commodities selected for analysis were coal, grain
(wheat and corn), chemicals (potassium and sodium compounds and
plastic materials or synthetic fibers, resins, and rubber), and
transportation equipment (finished motor vehicles and motor vehicle
parts and accessories).  These commodities represented about 45
percent of total industry revenue in 1996 and, in some cases, had a
significant portion of their rail traffic transported where the ratio
of revenue to variable costs equaled or exceeded 180 percent.  Since
much of the information contained in the Carload Waybill Sample is
confidential, rail rates and other data contained in this report that
were derived from this data base have been aggregated at a level
sufficient to protect this confidentiality. 

We used rate indexes and average rates on selected corridors to
measure rate changes over time.  A rate index attempts to measure
price changes over time by holding constant the underlying collection
of items that are consumed (in the context of this report items
shipped).  This approach differs from comparing average rates in each
year because over time higher- or lower-priced items can constitute
different shares of the items consumed.  Comparing average rates can
confuse changes in prices with changes in the composition of the
goods consumed.  In the context of railroad transportation, rail
rates and revenues per ton-mile are influenced, among other things,
by average length of haul.  Therefore, comparing average rates over
time can be influenced by changes in the mix of long-haul and
short-haul traffic.  Our rate indexes attempted to control for the
distance factor by defining the underlying traffic collection to be
commodity flows occurring in 1996 between pairs of Census regions. 

To examine the rate trends on specific traffic corridors, we first
chose a level of geographic aggregation for corridor endpoints.  For
grain, chemical, and transportation equipment traffic, we defined
endpoints to be regional economic areas defined by the Department of
Commerce's Bureau of Economic Analysis.  For coal traffic, we used
economic areas to define destinations and used coal supply
regions--developed by the Bureau of Mines and used by the Department
of Energy--to define origins.  An economic area is a collection of
counties in and about a metropolitan area (or other center of
economic activity); there are 172 economic areas in the United States
and each of the 3,141 counties in the country is contained in an
economic area.  For each selected commodity and each corridor, we
determined the average shipment distance over the 1990 through 1996
time period.  We placed each corridor in one of three
distance-related categories:  0-500 miles, 501-1,000 miles, and more
than 1,000 miles.  We then determined, for each selected commodity,
the aggregate tonnage over the 1990 through 1996 time period and
selected the top five corridors (based on tons shipped) within each
distance category for further examination, including changes in
revenues and variable costs per ton-mile over the time period. 

To assess how railroad service quality has changed since 1990, we (1)
reviewed literature on how railroad service is (or can be) measured;
(2) reviewed railroad and shipper statements on the quality of rail
service in recent years; and (3) interviewed Class I railroads,
shipper associations, and several individual shippers.  To obtain a
wider perspective on shippers' views about the quality of service
they have received and how it might be improved, we sent a
questionnaire to members of 11 commodity associations that ship using
rail in the United States and to those shippers that had filed rate
complaints before the Board.  The member organizations represent
shippers of the four commodities that comprised the largest volume of
rail shipments--coal, chemicals, plastics, and bulk grain.\15 For
coal, chemicals, and plastics, we surveyed all members of the
associations, and this report provides the views of the 87 coal
shippers and 99 chemicals and plastics shippers that responded to our
survey. 

Because we used statistical sampling techniques to obtain the views
of members of one grain association, the National Grain and Feed
Association, the statistics we provide relating to the views of grain
shippers and of all shippers responding to our survey are presented
as estimates.  The report provides estimates of the views of 523
grain shippers.  In all cases, these estimated 709 coal, chemicals,
plastics, and grain shippers indicated that they had shipped goods by
rail in at least 1 year since 1990.  Some estimates presented in this
report do not represent the views of 709 shippers because some
shippers did not answer all the questions.  For more information on
how we conducted our survey, as well as responses to individual
questions, see our companion report on current issues associated with
the Board's rate relief process (GAO/RCED-99-46). 

We also determined the number of formal service complaints that were
being adjudicated by ICC on January 1, 1990, and the number that have
been filed with the ICC/Board from January 1, 1990, through December
31, 1998.  To do this, we asked the Board to identify all formal
service complaints between these two dates.  In order to test the
completeness of the Board's identification of service complaints, we
reviewed selected cases that the Board did not consider to be
service-related.  We found one service complaint not contained on the
Board's original list of complaints.  We discussed this complaint
with Board officials, who agreed that it should be considered a
formal service complaint.  We did not review the merits, or
appropriateness, of any ICC/Board decisions associated with these
complaints. 

To determine actions the Board and others have taken or have proposed
to take to address service issues, we interviewed officials from the
Board, DOT, and U.S.  Department of Agriculture (USDA); industry
association officials; and officials from Class I railroads and
reviewed the documents that they provided.  We also reviewed statutes
and regulations pertaining to service issues, recent Board decisions
on service issues, and emergency and directed service orders issued
by the ICC or the Board since 1990.  We interviewed officials from
the Board, DOT, and USDA about their recent and planned efforts to
address the needs of agricultural shippers and obtained and reviewed
relevant agency agreements and reports.  We interviewed Class I
railroad and AAR executives about, and obtained and reviewed
documentation on, their 1998 meetings with shippers; efforts to
develop and disseminate measures of service; agreements with grain
and feed shippers and small railroads; and efforts to improve
customer service.  We also attended the railroad/shipper meetings
held in Chicago in August 1998 and in Atlanta in October 1998. 

The organizations we contacted during our review are listed in
appendix III.  Our work was conducted from June 1998 through March
1999 in accordance with generally accepted government auditing
standards. 


--------------------
\14 Railroad Regulation:  Current Issues Associated With the Rate
Relief Process (GAO/RCED-99-46, Feb.  26, 1999). 

\15 Corn, wheat, sorghum grains, barley, rye, and oats represented
nearly all grain shipments by rail in the United States in 1996. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 1:5

In commenting on a draft of this report, the Board noted that our map
of Class I freight railroads in the United States in 1997 (fig.  1.1)
did not include trackage rights of Class I railroads over other Class
I railroads, including about 4,000 miles of Burlington Northern and
Santa Fe trackage rights over Union Pacific.  The Board also noted
that it has an informal process for handling railroad service
complaints and that this process can be used to resolve service
problems quickly and inexpensively.  In response to these issues, we
modified the note to figure 1.1 to indicate that Class I trackage
rights over other Class I railroads is not shown on the map,
including the 4,000 miles of Burlington Northern and Santa Fe
trackage rights over Union Pacific.  We also added language better
recognizing the Board's informal service complaint process. 


INDUSTRY AND OTHER FACTORS HAVE
INFLUENCED THE RATE-SETTING
ENVIRONMENT SINCE 1990
============================================================ Chapter 2

Railroads' rate setting since 1990 has increasingly been influenced
by ongoing industry and economic changes such as continued rail
industry consolidation, which has concentrated the industry into
fewer and bigger railroads, and the need for investment capital to
address infrastructure constraints.  Rail rates are also a function
of market competition.  Using differential pricing, railroads
continued to set rates in the 1990s according to the demand for their
services.  Overall railroad financial health has improved during the
1990s, and railroads increased their share of the freight
transportation market.  However, many Class I railroads continued to
earn less than what it costs them to raise capital (called the
revenue adequacy standard). 


   ONGOING INDUSTRY AND ECONOMIC
   CHANGES INFLUENCE RATE SETTING
---------------------------------------------------------- Chapter 2:1

Ongoing industry and economic changes have influenced how railroads
have set their rates.  Since 1990, there has been considerable change
in the rail industry and the economic environment in which it
operates.  Not only has the rail industry continued to consolidate,
potentially increasing market control by the largest firms, but
capacity constraints have led to an increased need for capital;
industry growth has raised the specter that productivity gains may
moderate; and domestic and worldwide economic changes have caused
fluctuations in the demand for rail transportation.  Many of these
changes are expected to continue into the future.  Other actions are
also expected to influence the rate-setting environment, including
ongoing actions to deregulate the electricity generating industry. 


      CONTINUED RAILROAD INDUSTRY
      CONSOLIDATION HAS
      POTENTIALLY INCREASED
      RAILROADS' CONTROL OVER
      INDUSTRY REVENUES AND RAIL
      MARKETS
-------------------------------------------------------- Chapter 2:1.1

The 1990s have seen significant consolidation within the railroad
industry.  For the most part, this consolidation has concentrated the
rail industry in fewer and larger companies and potentially increased
market control by these firms.  The number of independent Class I
railroad systems has decreased from 13 in 1990 to 9 in early 1999.\16
These firms control a significant portion of industry revenues as
well as traffic.  In 1990, the five largest railroads accounted for
about 74 percent of total rail industry operating revenue.\17 In
1997, this percentage had increased to about 94 percent.\18 In fact,
the two largest Class I railroads (Union Pacific and Burlington
Northern and Santa Fe Railway) accounted for about 55 percent of
total industry operating revenue.  An analysis of ton-miles of
revenue freight transported shows similar results.  In 1990, the five
largest railroads accounted for about three-fourths of total revenue
ton-miles transported by the railroad industry.  In 1997, the five
largest railroads accounted for about 95 percent of revenue ton-miles
transported.  Again, the two largest Class I railroads accounted for
just under two-thirds of all revenue ton-miles transported in 1997. 

Some shipper groups and others have expressed concerns about industry
consolidation.  For example, the Railroad-Shipper Transportation
Advisory Council, created by the ICC Termination Act, reported in
1998 that, because of rail industry consolidation, some shippers have
developed fears that the railroad that serves them not only dictates
the terms of their relationship but also whether they remain
economically viable.  The Consumers United For Rail Equity,
representing various shipper and industry trade associations, has
also expressed concerns that dwindling competitive rail options
resulting from industry consolidation have increased the number of
shippers that consider themselves captive to railroads.  Finally, the
Alliance for Rail Competition, also representing various shipper and
industry trade associations, has expressed concern that deteriorating
rail service and the potential for monopoly rate abuse by railroads
have resulted from the creation of fewer and bigger railroads.  This
organization believes increased competition in the railroad industry,
rather than regulation, would better protect shippers against abuses. 

The Board plays a role in rail industry consolidation.  Not only does
the Board approve proposed mergers and acquisitions when it finds
them in the public interest, but monitors them once they have been
approved.\19 As part of the review and approval process, the Board
has the authority to attach conditions to a merger or acquisition. 
In general, these conditions are designed to protect the public
against any harm that might otherwise be experienced as the result of
one railroad taking over another and to protect against the potential
loss of competition or protect affected shippers from the loss by
another rail carrier of the ability to provide essential service. 
According to the Board, merger conditions are routinely imposed to
ensure that any shipper that was capable of being served by more than
one railroad before a merger will continue to have more than one
railroad available after the merger.  These conditions typically
involve granting another railroad either rights to operate on the
combining railroads' track or some form of switching rights to gain
access to affected customers of the combining railroads.  These
conditions have been imposed in all large mergers occurring during
the 1990s.  Board officials have acknowledged, however, that due to
staff and resource limitations they must by necessity be less
proactive in monitoring mergers to ensure that conditions imposed are
working properly to preserve pre-merger competition. 


--------------------
\16 This includes one railroad (the Florida East Coast Railway) that
was reclassified from Class I to Class II in 1992. 

\17 The five largest railroads in terms of operating revenues were
Burlington Northern; Conrail; CSX Transportation; Norfolk Southern;
and Union Pacific.  The analysis excluded the Florida East Coast
Railroad because it was reclassified to Class II in 1992. 

\18 In terms of total operating revenues for 1997, these railroads
were Burlington Northern and Santa Fe Railway, Conrail, CSX
Transportation, Norfolk Southern, and Union Pacific. 

\19 During a proceeding involving two or more Class I railroads, the
Board considers, among other things, how the transaction will affect
competition among railroads (in the affected region or in the
national transportation system), railroad employees, and the adequacy
of transportation provided to the public. 


      CAPACITY CONSTRAINTS AND
      MODERATION OF PRODUCTIVITY
      GAINS MAY SLOW RAILROAD COST
      REDUCTION
-------------------------------------------------------- Chapter 2:1.2

The rate-setting environment has also been increasingly affected by
railroads' infrastructure needs.  Railroads have increased their
market share and the amount of tonnage they carry each year. 
However, even with the increased demand for rail transportation, real
rail rates have declined, necessitating that railroads seek ways to
continue to reduce costs.  Two ways such costs have been cut are
reductions in miles of road operated and employment levels.\20 (See
figs.  2.1 and 2.2.) From 1990 to 1997, the miles of road operated by
Class I railroads decreased about 15 percent (from about 119,800
miles to about 102,000 miles), and Class I employment decreased by
about 18 percent (from 216,000 employees to 178,000 employees). 

   Figure 2.1:  Miles of Road
   Owned by Class I Railroads,
   1990 Through 1997

   (See figure in printed
   edition.)

Source:  AAR. 

   Figure 2.2:  Class I Railroad
   Employment, 1990 Through 1997

   (See figure in printed
   edition.)

Source:  AAR. 

Although reductions in miles of road operated and employment have
helped to reduce costs, they have also created capacity constraints
and a need for investment capital to address these constraints as the
rail market has grown in recent years.  Obtaining this capital has
become a concern of the rail industry, particularly given falling
rates and revenue trends.  Some of the railroad officials we spoke
with acknowledged this concern and were unsure about how this problem
would be addressed.  For example, officials of one Class I railroad
told us that, in the future, their company would have a difficult
time meeting increased market demand because of a lack of equipment
and inadequate track and rail facility infrastructure.  The officials
suggested that additional capital investment would be needed to
address choke points--that is, sections of track and facilities that
have more traffic than they can handle.  However, making such
investments would be difficult given falling rail rates.  Officials
at two other Class I railroads also expressed concern about market
growth and capacity constraints and said that additional investment
would be needed.  The officials also agreed that this would be
difficult, at best, given rail rate trends and the need to price
their services to be competitive. 

The rate-setting environment has also been influenced by productivity
gains.  In particular, productivity gains have helped railroads
reduce costs, which in turn has allowed railroads to reduce rates in
order to be competitive.\21 The productivity gains achieved in the
1980s have largely continued into the 1990s.  (See fig.  2.3.) We
looked at three measures of productivity--net ton-miles per train
hour,\22 revenue ton-miles per gallon of fuel consumed, and revenue
ton-miles per employee-hour worked.  In general, each of these
measures, except net ton-miles per train-hour, increased since 1990. 
Net ton-miles per train-hour has fluctuated since 1990, and in 1996,
was about 2 percent lower than it was in 1990.  Revenue ton-miles per
employee-hour worked, in particular, has shown dramatic increases
since the late 1980s.  Using an index based on 1980 (1980 equals
100), revenue ton-miles per employee-hour worked more than doubled
from 1986 through 1996--rising from an index value of 151 to an index
value of 344. 

   Figure 2.3:  Class I Railroad
   Productivity, 1980 Through 1996

   (See figure in printed
   edition.)

Source:  GAO's analysis of AAR's data. 

According to railroad officials, most of the productivity gains
achieved have been shared with customers through rate reductions. 
Although productivity gains have played a significant role in past
rate making, there is some question as to whether these gains can
continue to be achieved.  One recent study suggests that the
prospects for continued productivity improvements may be
diminishing.\23 This was attributed to the expectation that, because
industry consolidation has permitted significant reduction in miles
of road operated and employment levels, the next round of industry
consolidation and mergers (network rationalization) might yield only
modest productivity benefits.  If so, then there may be fewer
opportunities for the rail industry to rely on productivity gains to
achieve cost reductions and therefore rate reductions.  In fact,
future productivity gains may be reduced because what was once
redundant track and facilities (and therefore eliminated to reduce
costs) might have to be brought back into service to meet market
growth.  Doing so could minimize productivity improvement. 


--------------------
\20 A mile of road operated represents the aggregate length of
roadway, excluding yard tracks, sidings, and parallel lines.  Some of
the reductions in miles of road operated resulted from lines sold to
non-Class I railroads, while in other cases, lines were abandoned. 

\21 For more information see GAO/RCED-90-80. 

\22 A net ton-mile is the movement of one ton of revenue or
nonrevenue freight, or both, a distance of 1 mile. 

\23 Sources of Financial Improvement In the U.S.  Rail Industry,
1966-1995, Carl D.  Martland, Massachusetts Institute of Technology,
as presented in the Proceedings of the Transportation Research Forum,
39th Annual Meeting (1997). 


      ECONOMIC AND REGULATORY
      CHANGES HAVE AND WILL
      CONTINUE TO AFFECT RAIL
      MARKETS
-------------------------------------------------------- Chapter 2:1.3

The rate-setting environment has been affected by domestic and world
economic changes.  This is especially true for rail commodities that
are exported.  For railroads, volatility in world grain markets can
affect the volume of grain transported by rail.  Over the last 10
years, the volume of export grain transported by rail has ranged from
a low of about 28 million tons in 1994 to a high of about 56 million
tons in 1988.  Other rail commodities can also show fluctuations over
time.  From 1992 through 1996, the nation's coal exports ranged from
a low of about 71 million tons in 1994 to a high of about 103 million
tons in 1992.  The volatility in commodity markets can affect
railroad rates because it affects the demand for rail transportation. 
As demand changes, railroads adjust rates to attract or retain
business.  For example, officials at one Class I railroad told us
that it has a wide range of pricing policies for chemicals that allow
it to react to changes in world chemicals markets.  Officials from
the same railroad said that export demand can play a particularly
strong role for grain.  Although grain rates can be affected by
decreases in demand, there is more of an impact when exports are
strong and their railroad is trying to keep business away from a
competitor. 

The rate-setting environment has also been affected by legislative
and/or regulatory actions.  In 1990, the Clean Air Act was amended
to, among other things, reduce sulfur dioxide emissions by electric
generating plants.  The act spurred the demand for low sulfur coal
for use in generating electricity.  This increased the demand for
western coal, especially from the Powder River Basin area of Wyoming
and Montana, which is known for its low sulfur content.  In 1996,
Wyoming produced more coal than any other state in the nation (about
278 million tons or about 63 percent more than the next highest
state, West Virginia).  About 85 percent of this coal moved by rail. 
Although demand for Powder River Basin coal has increased
substantially, our analysis shows that inflation-adjusted Powder
River Basin rail rates on both long (over 1,000 miles) and medium
distance (over 500 miles) routes have generally decreased since 1990. 

Ongoing efforts to deregulate the electricity generation industry can
be expected to affect future rail rates.  Electricity generation is
heavily dependent on coal as a fuel source.  A recent Energy
Information Administration study found that over 87 percent of all
coal consumed in the United States was for electricity generation by
utilities.\24 Moreover, railroads are the largest carrier of coal,
and transportation is a major component of the price of coal
delivered to electric power generators.  The study suggested that as
the electricity generating industry becomes more competitive there
will be pressure for the industry to reduce its costs, including the
price it pays for coal and the transportation of coal.  These cost
reductions may have significant impacts on the railroad industry and
future rail rates. 


--------------------
\24 Challenges of Electric Power Industry Restructuring for Fuel
Suppliers, Energy Information Administration (Sept.  1998). 


   USING DIFFERENTIAL PRICING,
   RAILROADS SET RATES ACCORDING
   TO COMPETITIVE CONDITIONS
---------------------------------------------------------- Chapter 2:2

In reducing the economic regulation of railroads through the 4R Act
and Staggers Rail Act, the Congress expected that rates determined by
market competition would, in general, benefit both railroads and
shippers.  In many instances, railroads faced competition from other
railroads or modes of transportation, and the new congressionally set
rail transportation policy recognized the broader nature of this
competition by permitting railroads the flexibility to set their
rates in response to rates and services available to shippers from
other transportation options.  In particular, railroad rates set in
response to truck, barge, or railroad competition would typically be
different (lower) than rates based primarily on a railroad's full
cost to provide service.  Differential pricing then is a means by
which railroads set rates reflecting the demand characteristics of
shippers, with the result that shippers with similar cost
characteristics (such as the number of railcars to be shipped or
lengths of haul to destination) can pay quite different rates. 

Although rail rates set using demand-based differential pricing
reflect the demand characteristics of shippers and market
competition, such rates are also linked to railroad costs. 
Generally, the nature of a railroad's fixed costs (e.g., physical
plant such as rail, bridges, and signalling) is such that the costs
of providing it are (1) incurred before any traffic moves and (2)
insensitive to the level of rail traffic.  Fixed costs are also
largely unattributable to any particular shipper.  For a railroad to
be profitable, it must recover all of its costs--fixed as well as
variable costs.  Differential pricing is a pricing mechanism in which
a railroad's fixed costs can be recovered collectively from all
shippers but not necessarily proportionately from each shipper. 
Under differential pricing, shippers without effective alternatives
to a railroad's transportation generally pay proportionately greater
shares of the railroad's fixed costs, while shippers with more
alternatives pay proportionately less. 

Differential pricing was envisioned as benefitting both railroads and
shippers.  Railroads were expected to benefit from gaining the
pricing flexibility to retain or attract shippers that would
otherwise choose other transportation modes.  In this way, railroads
were expected to benefit from a larger and more diversified traffic
base than under the previous regulatory scheme.  Those shippers with
competitive alternatives were expected to benefit from lower rail
rates.  Shippers without competitive alternatives were also expected
to benefit.  In theory, these shippers would pay less than if
competitive traffic were diverted to an alternative transportation
mode, thus leaving those shippers without alternatives to bear the
unattributable costs previously assigned to the diverted traffic.\25

The Congress expected that the transition to differential pricing and
a more market-oriented system would not affect all shippers equally
because, in general, transportation characteristics and market
conditions vary among commodities.\26 In practice, these expectations
have been met.  Data from the Board show that in 1990 about one-third
of all rail traffic (as measured by revenues) was transported at
rates generating revenues exceeding 180 percent of variable costs. 
By 1996, this percentage had decreased to 29 percent.\27 That means
that about 70 percent was transported at rates generating revenues
that were less than 180 percent of variable costs.  In addition, in
1996, the percent of commodity revenue for shipments transported at
rates generating revenues exceeding 180 percent of variable costs
fluctuated widely by commodity--ranging from a low of near 0 percent
for fresh fish and tobacco products to a high of about 73 percent for
crude petroleum and gasoline.\28 Among the commodities included in
our analysis of rail rates (coal, grain, chemicals, and
transportation equipment), the percent of commodity revenue for
shipments transported at rates generating revenues exceeding 180
percent of variable costs ranged from about 23 percent for farm
products (grain) to about 54 percent for chemicals. 


--------------------
\25 Railroad Regulation:  Shipper Experiences and Current Issues in
ICC Regulation of Rail Rates (GAO/RCED-87-119, Sept.  9, 1987). 

\26 See GAO/RCED-90-80. 

\27 According to the Board, this decrease was remarkable since the
level of rates needed to reach 180 percent of variable costs fell as
rail productivity gains reduced Board-measured variable costs. 

\28 The commodity groups in this example accounted for less than
one-tenth of 1 percent of total industry revenue. 


   RAILROAD FINANCIAL HEALTH HAS
   IMPROVED, BUT MOST RAILROADS DO
   NOT EARN THE INDUSTRY COST OF
   CAPITAL
---------------------------------------------------------- Chapter 2:3

One important factor that has played a role in how railroads set
their rates has been the financial health of the railroad industry. 
During the 1990s, railroad financial health generally improved
compared with the 1980s.  Not only were returns on investment and
equity higher, but railroads were able to increase their market
share.  However, most railroads have been determined by the Board to
be "revenue inadequate"--that is, their earnings were less than the
railroad industry's cost of capital.  Revenue adequacy determinations
have been controversial, and some shippers have questioned the
meaningfulness of the current method of determining revenue adequacy. 
Not being able to earn the cost of capital can affect a railroad's
ability to attract and/or retain capital and remain financially
viable. 


      RAILROAD FINANCIAL HEALTH
      HAS IMPROVED, AND MARKET
      SHARE HAS INCREASED
-------------------------------------------------------- Chapter 2:3.1

In general, railroad financial health improved in the 1990s.  For
example, railroad returns on investment and returns on equity--both
measures of profitability\29 --were higher during the 1990s than they
were in the 1980s.  From 1990 through 1997, returns on investment
averaged 8.5 percent per year while returns on equity averaged 10.7
percent per year.  (See fig.  2.4.) This was about 61 percent and 24
percent greater, respectively, than the 5.3 percent and 8.7 percent
returns on investment and equity achieved during the 1980s.  The
operating ratio, which shows how much of a railroad's operating
revenues are taken up by operating expenses, also showed improvement. 
From 1990 through 1997, railroad operating expenses accounted for, on
average, about 87 percent of operating revenues annually--about 1
percentage point less than the average from 1980 through 1988. 
According to a Board official, every 1-percentage point change in the
operating ratio can be significant to the railroad industry. 

   Figure 2.4:  Railroad Industry
   Returns on Investment and
   Equity, 1990 Through 1997

   (See figure in printed
   edition.)

Note:  Excludes special charges taken by railroads. 

Source:  AAR. 

However, not all aspects of financial health improved.  For example,
railroads' ability to meet their short-term and long-term obligations
were either about the same as, or worse than, during the 1980s.  The
current ratio, which compares the dollar value of current assets
(such as cash) to the dollar value of current liabilities (such as
short-term debt), averaged about 64 percent from 1990 through 1997. 
(See fig.  2.5.) In contrast, this ratio averaged about 113 percent
from 1980 through 1988.  Maintaining a current ratio of less than 100
percent may jeopardize a firm's ability to pay its short-term debts
when they come due.  A firm's ability to pay its long-term debt is
generally measured by the fixed charge coverage ratio, which compares
the income available to pay fixed charges with the interest expense
that must be paid on debt outstanding.  Since 1990, the fixed charge
coverage ratio for the railroad industry was only marginally better
than it was during the 1980s.  From 1990 through 1997, the fixed
charge coverage ratio averaged about 4.7--that is, the income
available to pay fixed charges was about 4.7 times the interest to be
paid.  From 1980 though 1988, the ratio averaged about 4.6. 

   Figure 2.5:  Short- and
   Long-term Solvency of Class I
   Railroads, 1990 Through 1997

   (See figure in printed
   edition.)

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

Railroads have also increased their market share during the 1990s. 
(See fig.  2.6.) In 1990, railroads transported almost 38 percent of
intercity revenue freight ton-miles.\30 By 1997, the market share had
increased to 39 percent.  This increase came despite a general
slowdown in the growth of intercity freight traffic handled by
railroads in this decade.  From 1990 through 1997, the amount of
intercity freight tonnage handled by railroads grew, on average,
about 2 percent annually.  This compares with about a 3-percent
average annual growth in the 1982 through 1989 period.\31 The market
share change may be a reflection of railroads' increased use of
contracts to tailor their rates and service to meet customer needs. 
According to AAR, in 1997 about 70 percent of all railroad tonnage
moved under contract--up 10 percentage points from 1988.  However,
contracts are more prevalent for the shipment of some commodities
than others.  AAR statistics show that, in 1997, over 90 percent of
all coal tonnage, but only about 26 percent of grain tonnage, moved
under contract.  In fact, the percentage of grain tonnage moved under
contract has decreased over time.  In 1994, about 50 percent of grain
tonnage moved under contract compared with 26 percent in 1997. 
According to an AAR official, this decrease was primarily
attributable to (1) an increased use by railroads of noncontract car
reservation/guarantee programs to supply grain cars to shippers and
(2) a 1988 regulatory change that increased the amount of public
information about grain contracts.\32 Under car reservation/guarantee
programs, for a fee, shippers can obtain a set number of railcars for
delivery at a future date(s). 

   Figure 2.6:  Railroad Market
   Share, 1990 Through 1997

   (See figure in printed
   edition.)

Note:  The 1997 figures are preliminary. 

Source:  GAO's analysis of Transportation In America data, Eno
Foundation for Transportation, Inc., (1998). 


--------------------
\29 Return on investment measures the profit made on assets used to
provide transportation services.  Return on equity measures the
profit made on funds provided by stockholders. 

\30 A revenue ton-mile is 1 ton of freight carried 1 mile for
revenue. 

\31 The reduced growth in tonnage for railroads and for all modes in
the 1990s probably reflects slower economic growth during the period. 
Real gross domestic product grew, on average, 2.4 percent annually
from 1990 through 1997--about half the 4-percent annual growth rate,
on average, from 1982 through 1989. 

\32 In February 1988, ICC issued final rules implementing the Conrail
Privatization Act.  In general, the act required that, for the
shipment of agricultural commodities, such information as the
identities of the shipper parties to a contract and actual volume
requirements, if any, be disclosed in contract summaries filed with
ICC.  While the ICC Termination Act eliminated the general
requirement to file contract summaries, it retained the requirement
to file summaries of agricultural contracts. 


      MOST RAILROADS DO NOT MEET
      REVENUE ADEQUACY CRITERION
-------------------------------------------------------- Chapter 2:3.2

Although railroad financial health has improved, most Class I
railroads are still not earning revenues adequate to meet the
industry cost of capital.  From 1990 through 1997, in any one year no
more than three of nine Class I railroads were determined by the
ICC/Board to be revenue adequate.  From 1990 through 1994, in any one
year no more than 2 of 12 Class I railroads were determined to be
revenue adequate.\33 The returns on investment of the remaining
railroads have been below the railroad industry's cost of capital. 
The degree that Class I railroads did not earn the industry's cost of
capital has fluctuated since 1990.  (See table 2.1.) This appears to
reflect fluctuations in average return on investment more than a
change in the cost of capital.  The cost of capital has generally
remained between 11.4 percent and 12.2 percent from 1990 through
1997.  In contrast, return on investment has ranged from just over 1
percent to just under 9.5 percent.  As we reported in 1990, revenue
inadequacy affects the ability of a railroad to attract and/or retain
capital.\34 Insufficient profit not only makes it difficult for
railroads to cover costs, maintain operations, and remain financially
viable, but may also induce investors to place their funds elsewhere. 



                               Table 2.1
                
                 Revenue Adequacy of Class I Railroads,
                           1990 Through 1997

                             (In percents)

                                                             Degree of
                                 Return on       Cost of       revenue
Year                            investment       capital    inadequacy
----------------------------  ------------  ------------  ------------
1990                                   8.1          11.8          -3.7
1991                                   1.3          11.6         -10.3
1992                                   6.3          11.4          -5.1
1993                                   7.1          11.4          -4.3
1994                                   9.4          12.2          -2.8
1995                                   6.9          11.7          -4.8
1996                                   9.4          11.9          -2.5
1997                                   7.6          11.8          -4.2
----------------------------------------------------------------------
Note:  Return on investment is based on the Board's methodology for
determining revenue adequacy.  These returns may not be the same as
returns on investment calculated for nonregulatory purposes. 

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

Revenue adequacy determinations for the railroad industry have been
controversial.  According to Board officials, controversy over
revenue adequacy determinations is not new and that these issues have
been addressed at length by the Board's predecessor.  However, in
recent years, shippers and others have again questioned the
meaningfulness of the current method of determining revenue adequacy,
particularly railroads' ability to attract capital for mergers and
acquisitions.  For example, in 1996, Union Pacific was expected to
spend about $1.6 billion to acquire Southern Pacific Railroad. 
Nevertheless, in this same year, the Board determined Union Pacific
to be revenue-inadequate.  Similarly, in 1998, CSX Transportation
estimated that it would incur over $4 billion in acquisition costs in
the joint CSX Transportation/Norfolk Southern acquisition of
Conrail.\35 In 1997, CSX Transportation was determined by the Board
to be revenue-inadequate. 

In April 1998, the Board began a proceeding to address issues related
to railroad access and competition.  As part of this proceeding, the
Board called upon both railroads and shippers to mutually agree on an
independent panel of disinterested experts to review how revenue
adequacy is determined and to develop recommendations as to how, if
at all, this determination should be changed.  According to the
Board, as of February 1999, although railroad representatives were
satisfied with the neutral panel approach, shipper representatives
opposed it and suggested instead that the Board initiate a rulemaking
proceeding to address revenue adequacy issues. 


--------------------
\33 Excludes the Florida East Coast Railway Co., which was
reclassified as a Class II carrier in 1992. 

\34 Railroad Regulation:  Economic and Financial Impacts of the
Staggers Rail Act of 1980 (GAO/RCED-90-80, May 16, 1990). 

\35 This amount excludes Conrail's current and long-term liabilities
to be assumed by CSX Transportation. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:4

In commenting on a draft of this report, Board officials said that we
should better explain that the Board, in its merger decisions, has
taken actions to ensure that no shipper has become captive to a
single railroad.  The Board also said we should better recognize that
controversy over revenue adequacy determinations is not new and that
these issues have been addressed at length by the Board's
predecessor.  To address these concerns, we have modified the report
to acknowledge that the Board imposes merger conditions to ensure
that any shipper that was capable of being served by more than one
railroad before a merger would continue to have more than one
railroad available after the merger.  We also added language to
better recognize that revenue adequacy determinations have been
controversial for some time and that these issues had been dealt with
by the Board's predecessor. 


RAIL RATES HAVE FALLEN SINCE 1990,
BUT NOT ALL SHIPPERS HAVE
BENEFITTED
============================================================ Chapter 3

Since 1990, railroad rates have generally fallen both overall as well
as for specific commodities.  However, rail rates have not decreased
proportionately for all shippers and users of rail transportation. 
Some shippers, like those transporting coal, have experienced larger
rate decreases than other shippers.  In addition, in other cases,
such as long-distance wheat shipments from Montana and North Dakota
to west coast destinations for export, real rail rates have stayed
about the same as, or were slightly higher than, they were in
1990.\36 We also found that revenues were 180 percent or more of
variable costs for a number of routes, including short-distance
movements of coal and long-distance movements of wheat from northern
plains states such as Montana and North Dakota.  The degree of
competition on a route may have played a role in both how rates
changed and/or how high or low a revenue to variable cost ratio may
be for a specific commodity or route.  While the revenue to variable
cost ratio is often used as a proxy for market dominance, use of the
ratio for this purpose may lead to misinterpretations.  For example,
even when railroads pass all cost reductions along to shippers in
terms of reduced rates, the ratio can increase.  Conversely, the
ratio can decrease if railroads pass all cost increases along to
shippers in the form of higher rates. 


--------------------
\36 Unless noted otherwise, all rates discussed in this chapter are
cents per ton-mile stated in 1996 dollars.  Also, the analysis was
based on the following distance categories:  long, medium, and short. 
Long is over 1,000 miles from origin to destination, medium is
between 501 and 1,000 miles, and short is 500 miles or less. 


   RAIL RATES HAVE GENERALLY
   DECREASED SINCE 1990
---------------------------------------------------------- Chapter 3:1

In general, real (inflation-adjusted) rail rates have decreased since
1990.  In fact, real rail rates have been falling since the early
1980s.  In February 1998, the Board found that the average,
inflation-adjusted Class I railroad rate had decreased by about 46
percent from 1982 through 1996.\37 The Board found that rates in all
major commodity groups decreased, including coal and farm products,
which, as bulk commodities, have historically been shipped by rail. 
However, the decreases were not uniform.  (See table 3.1.) Also, in
general, the average annual rate of decrease in rail rates was
somewhat lower in the 1990s (about 4 percent annually) compared with
what it was from 1982 through 1989 (4.6 percent annually).  The
average annual rate of decrease in rail rates for farm products
(which include grains such as corn and wheat) was about 7 percent in
the 1980s, compared with only about 1 percent in the 1990s.  In
contrast, the average annual rate of decrease for coal was just over
3 percent in the 1980s, compared with almost 8 percent in the 1990s. 



                               Table 3.1
                
                Average Annual Change in Real Rail Rates
                 for Selected Commodities, 1982 Through
                                  1996

                             (In percents)

                                  Average annual change in real rail
                                                rates
                                --------------------------------------
Category                                   1982-89             1990-96
------------------------------  ------------------  ------------------
Farm products                                 -6.7                -1.1
Metallic ores                                 -5.2                -5.2
Coal                                          -3.3                -7.9
Food and kindred products                     -6.9                -3.7
Lumber and wood                               -6.2                -4.0
Chemicals                                     -3.9                -2.4
Petroleum and coal products                   -5.6                -3.0
Stone, clay, glass, and                       -5.5                -0.5
 concrete
Transportation equipment                      -2.4                -2.5
Intermodal                                    -5.8                -2.9
Average annual rate change                    -4.6                -4.1
 (all commodities)
----------------------------------------------------------------------
Source:  GAO's analysis of the Board's data. 

Our analysis of overall real rail rates showed similar results, with
certain exceptions.  Using the Board's Carload Waybill Sample--a data
base of actual rail rates provided to the Board annually by
individual railroads--we constructed rate indexes\38 for coal, grain,
certain chemicals, and transportation equipment for the period from
1990 through 1996.  (See fig.  3.1.) As the figure illustrates, in
general, rail rates for most of these commodities decreased over
time.  The exceptions were wheat, corn, and chemicals (potassium and
sodium; plastics and resins).  Wheat in particular showed general
rate increases from 1992 through 1994--from about 2.1 cents per
ton-mile to about 2.5 cents per ton-mile--before falling back to
about 2.4 cents per ton-mile in 1996.  Corn also showed increases
from 1990 through 1995--from about 1.8 cents per ton-mile to just
under 2.1 cents per ton-mile--before decreasing in 1996 to about 1.9
cents per ton-mile. 

   Figure 3.1:  Rail Rate Index
   for the Transportation of
   Selected Products, 1990 Through
   1996

   (See figure in printed
   edition.)

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

There may be a variety of reasons behind the rate changes shown in
figure 3.1.  As we reported in 1990, to become more competitive
railroads reduced rates.  In addition, railroads have made extensive
use of contracts to do business.  Finally, rail rates reflect the
specific characteristics of each commodity and the demand for rail
transportation.  According to USDA, transportation of wheat is
dominated by railroads--in 1996 railroads transported about 57
percent of all wheat in the nation--and exports greatly affect the
demand for rail transportation.\39 Since 1990, the demand for rail
transportation of wheat for export has fluctuated from a high of
about 25 million tons in 1993 to a low of about 15 million tons in
1994.  (See fig.  3.2.) In contrast, transportation of corn is more
dependent on trucks--in 1996, trucks transported about 41 percent of
corn production compared with about 38 percent for rail--and corn is
primarily used for domestic poultry and cattle feed, domestic
processing into ethanol alcohol, and other purposes.  Also,
significant amounts of corn are grown in areas accessible to
navigable waterways, and much of the corn exported is transported by
barge to such ports as New Orleans.  As shown in figure 3.2, since
1990 the rail transportation of domestic corn has fluctuated from
about 58 million tons in 1995 to about 45 million tons in 1991. 
These commodity characteristics may at least partially account for
the overall difference in prices between wheat and corn--2 to 2.5
cents per ton-mile for wheat and less than 2 cents per ton-mile for
corn. 

   Figure 3.2:  Rail
   Transportation of Export Wheat
   and Domestic Corn, 1990 Through
   1996

   (See figure in printed
   edition.)

Source:  USDA. 


--------------------
\37 The inflation-adjusted railroad rate is gross revenue produced
per ton-mile of freight originated, in 1982 dollars. 

\38 A rate index attempts to measure price changes over time by
holding constant the underlying collection of items that are
consumed.  This differs from comparing average rates in each year
because over time higher- or lower-priced items can constitute
different shares of the items consumed.  Although an index is a pure
number in which each year's value is expressed relative to a common
base year, because we wanted to maintain a sense of the magnitude of
the revenues per ton-mile of the various commodities, we did not
express each year's value relative to a base year (that is, we did
not divide each year's value by the value in 1996).  We did not
adjust for general effects of inflation.  The specific commodities we
reviewed were coal (bituminous); wheat; corn; potassium or sodium
compounds; plastic materials or synthetic fibers, resins, or rubbers;
motor vehicles; and motor vehicle parts or accessories. 

\39 See Transportation of U.S.  Grains:  A Modal Share Analysis,
1978-95, U.S.  Department of Agriculture, Agriculture Marketing
Service, Transportation and Marketing, Marketing and Transportation
Analysis Program (Mar.  1998). 


   RAIL RATES IN SOME MARKETS HAVE
   NOT FALLEN
---------------------------------------------------------- Chapter 3:2

Our analysis of rail rates since 1990 for coal, grain (corn and
wheat), chemicals, and transportation equipment in selected
transportation markets/corridors generally showed that real rail
rates have fallen.\40 However, not all rates have fallen, and rail
rates were sensitive to competition--both intermodal (competition
between railroads, trucks, and other transportation modes) and
intramodal (rail to rail).  For example, we found that real rail
rates for corn shipments from the Midwest, where there is barge
competition, to the Gulf Coast were significantly less than rail
rates for corn shipments on similar distance routes that appeared to
offer little nonrailroad competition.  We also found that rates in
markets/corridors that are considered to have less
railroad-to-railroad competition, such as the plains states of North
Dakota and Montana, were generally higher than rail rates on similar
distance corridors that might offer more railroad options.  Finally,
we found that the relationship of shipment size (number of railcars)
to rates varied by commodity.  Typically, as shipment size increases,
rates charged per ton decrease, reflecting increased efficiencies in
train operations.  For coal and some other commodities we reviewed,
we generally found that the size of shipments remained relatively
constant from 1990 through 1996.  However, at the same time rates
were generally falling.  This implies that factors other than
shipment size accounted for the rate decreases.  We also found that
on at least one northern plains wheat corridor we reviewed, railroad
rates generally did not decrease even as average shipment size
increased. 


--------------------
\40 The markets/corridors selected for this analysis are those with
the highest average annual tonnage (over the 1990-96 period) within
each of the distance categories we used.  Except for coal and
Canadian origins, these markets/corridors represent Bureau of
Economic Analysis economic areas.  Unless there are problems of data
confidentiality, we present information on the leading five corridors
for each commodity group and distance category.  Where
confidentiality problems preclude reporting on a corridor, we
substituted the corridor with the next highest tonnage.  Even though
these corridors are the highest-volume corridors for the particular
commodities--the 10 highest-volume short-, medium- and long-distance
routes accounted for over 50 percent of tons and over 60 percent of
ton-miles of coal, and over 40 percent of tons and ton-miles of
wheat--those selected do not represent a statistical sample drawn
from the population of all corridors.  Thus it is not appropriate to
generalize our findings to a population larger than the corridors we
analyzed.  See chapter 1 for how we selected specific corridors. 


      RAIL RATES FOR COAL HAVE
      GENERALLY DECREASED SINCE
      1990
-------------------------------------------------------- Chapter 3:2.1

In general, real rail rates for coal shipments have fallen since
1990.  This was true for overall rates and for the specific long-,
medium-, and short-distance transportation corridors/markets.  The
rates on medium-distance routes (between 501 and 1,000 miles) provide
a good illustration of the changes we found in coal rates.\41 (See
fig.  3.3.) As figure 3.3 shows, real rail rates for both the eastern
(Central Appalachia) and western (Powder River Basin) coal routes
that we looked at generally decreased since 1990.\42 On the eastern
medium-distance coal routes, rates generally decreased one-half to 1
cent per ton-mile.  On the western medium-distance coal routes, rates
generally decreased between two-thirds of a cent and one cent per
ton-mile.  The only real exception to the rate decreases was a slight
increase in real rail rates from 1994 through 1996 on a route from
Central Appalachia to Orlando.  However, the rate in 1996 was still
about seven-tenths of a cent less than the rate in 1990. 

   Figure 3.3:  Real Rail Rates
   for Coal, Selected
   Medium-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

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

There may be a number of reasons why rail rates for the
transportation of coal have fallen.  Although changes in shipment
size may affect rail rates, in general we did not find any
significant changes in shipment sizes from the 1990 through 1996
period for the routes/corridors we reviewed.  On the medium-distance
routes, shipment size for the eastern coal routes generally remained
between 80 and 90 railcars over the entire period, except for the
Central Appalachia to Norfolk, Virginia, route where shipment size
generally stayed between 40 and 50 railcars.\43 Shipment size on the
medium-distance western coal routes generally remained between 100
and 115 railcars.  Shipment size on western long-distance routes
(over 1,000 miles) also generally remained in the 100 to 120 railcar
range, while shipment size on the shorter distance coal routes (500
miles or less) generally remained in the 70 to 90 car range.  One
exception was a short-distance route between Central Appalachia and
Charleston, West Virginia.  On this route, the average shipment size
increased from about 70 railcars in 1990 to about 100 cars in 1996. 
Over the same time period, the rail rate decreased about 30
percent--from about 6.5 cents per ton-mile in 1990 to about 4.5 cents
per ton-mile in 1996. 

The coal rates we examined may have been affected by rail
competition.  Currently, two Class I railroads serve the Powder River
Basin--the Burlington Northern and Santa Fe Railway and Union Pacific
Railroad--and three Class I's serve the Central Appalachia
region--Conrail, CSX Transportation, and Norfolk Southern.  Whether
these or other railroads have the market power to extract higher
rates from coal shippers is unclear.  On the one hand, data from the
Board show that from 1990 through 1996 the percent of coal shipments
transported where revenues exceeded 180 percent of variable costs
averaged about 53 percent.  However, in 1996, 47 percent of the coal
shipments were transported at rates where revenue exceeded 180
percent of variable costs.  This was the lowest percentage since
1987.  On the other hand, if the number of rate complaints filed with
ICC or the Board is indicative of shippers' views of market power
wielded by railroads, about half of the approximately 40 rate
complaints filed since January 1, 1990 (or were pending on that
date), involved coal rates.\44


--------------------
\41 See app.  II for illustrations of real rail rates for coal
shipments in the long- and short-distance categories. 

\42 The Central Appalachia Coal Supply Region includes eastern
Kentucky, Virginia, and southern West Virginia.  The Powder River
Basin Coal Supply Region includes Montana and Wyoming. 

\43 Board officials indicated that the comparatively small average
shipment size found on this route reflects the waybill creation and
reporting practices that a particular railroad uses for its export
coal traffic.  Although the waybill indicates shipments of only one
or small groups of cars, Board officials believe the railroad in
question gathers these cars into one or more larger shipments for
transport to destination. 

\44 See GAO/RCED-99-46. 


      RAIL RATES FOR SOME GRAIN
      SHIPMENTS HAVE REMAINED FLAT
      OR INCREASED SINCE 1990
-------------------------------------------------------- Chapter 3:2.2

As discussed earlier, rail rates for transporting grain such as wheat
and corn have generally stayed the same or increased since 1990.\45
However, rail rates for medium-distance routes (501 to 1,000 miles),
such as from central plains origins around Oklahoma City and Wichita
to Houston, showed some decreases.\46 (See fig.  3.4.) On the other
hand, rail rates from Great Falls, Montana, to Portland, Oregon,
stayed about the same or increased slightly between 1990 and 1996. 
We found similar trends in other distance categories, particularly
long-distance (greater than 1,000 miles) wheat routes.  The rail
rates on long-distance wheat routes from Billings, Montana, and
Minot, North Dakota, to Portland both stayed relatively constant, at
about 3 cents per ton-mile over the entire 7-year period.  Rate
trends for corn shipments were similar to those of wheat.  Again, the
variety of rate trends we found for shipments of corn can be seen on
the rates for medium-distance routes.  (See fig.  3.5.) Although the
rates on some of the routes, most notably those routes from the
midwest to Atlanta, showed decreases, rates for corn shipments from
selected origins in Illinois to New Orleans showed some increases. 
As with wheat, rail rates for long-distance corn shipments on the
routes we reviewed generally varied little, remaining in the 1.4 to
1.6 cents per ton-mile range from 1990 through 1996. 

   Figure 3.4:  Real Rail Rates
   for Wheat, Selected
   Medium-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

Note:  Due to confidentiality, data point for Duluth economic area to
Chicago economic area for 1993 was excluded. 

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

   Figure 3.5:  Real Rail Rates
   for Corn, Selected
   Medium-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

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

We also found that rail rates for wheat and corn shipments appeared
to be sensitive to both inter- and intramodal competition.  For
example, as shown in figure 3.4, rail rates for shipments of wheat
from Duluth, Minnesota, to Chicago, Illinois--a route that is
potentially competitive with Great Lakes water transportation--were
significantly less--generally between 0.75 to almost 2 cents less per
ton-mile--than rail rates on other medium-distance wheat routes. 
This includes rail rates for shipments from Great Falls, Montana, to
Portland, Oregon, which some consider to lack effective
transportation alternatives to rail.  The same was true for corn
shipments.  The rail rates for corn shipments from Chicago and
Champaign, Illinois, to New Orleans--routes which are barge
competitive--were substantially less (in some years over 2 cents per
ton-mile less) than rail rates on the other medium distance corn
routes.  (See fig.  3.5.) The sensitivity to intramodal competition
is best seen by comparing rail rates for wheat shipments originating
in the central plains states with the rail rates for shipments
originating in the northern plains states.  As figure 3.4
illustrates, rail rates for wheat shipments originating in Oklahoma
City and Wichita were generally about 1 cent per ton-mile less than
rates on the Great Falls, Montana, to Portland, Oregon, route which
originated in the northern plains.  Northern plains states, such as
Montana and North Dakota, generally have fewer Class I railroad
alternatives than the central plains states, such as Kansas.  (See
fig.  1.1.)

Shipment size is an important factor influencing railroad costs and
hence rates, particularly for agricultural commodities.  Loading more
cars at one time increases railroad efficiency and reduces a
railroad's costs.  We found that the average shipment size of wheat
originating in the northern plains was typically smaller than for
wheat shipments originating in the central plains.  For example,
average shipment size on the Great Falls, Montana, to Portland,
Oregon, route was about half that of shipments going from Wichita to
Houston--about 40 railcars from Great Falls compared with about 70
railcars from Wichita.  (See fig.  3.6.) This may partially explain
why rail rates and costs for wheat shipments are higher in the
northern plains than in the central and southern plains. 

   Figure 3.6:  Average Shipment
   Size, Selected Wheat Routes,
   1990 Through 1996

   (See figure in printed
   edition.)

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

To investigate further the effects of shipment size on railroad rates
and variable costs, we developed regression equations using waybill
data in which annual average revenues per ton-mile and average
variable costs per ton-mile were calculated for export wheat
corridors and shipment size categories, and then regressed on
distance, a time trend, and indicators of the shipment size category. 
For a set of northern plains export corridors, the effects of
increased shipment size on revenues were modest compared with the
effects of shipment size on variable costs per ton-mile on these
routes, and compared with the effects of shipment size on both
revenues and variable costs for a set of central and southern plains
export corridors.  Specifically, revenues per ton-mile for the
northern plains corridors were estimated to be 0.2 of a cent less on
shipments between 5 and 50 cars than for shipments of fewer than 5
cars, while revenues per ton-mile for the central and southern plains
corridors were estimated to be 0.6 of a cent less for a similar
shipment size increase.\47 Additionally, revenue per ton-mile in the
central and southern plains for shipments exceeding 50 cars were
estimated to decrease an additional 0.3 of a cent, while in the
northern plains, the estimated reduction in revenue per ton-mile for
this increase in shipment size was not statistically significant. 
For variable costs per ton-mile, there was more similarity between
northern plains and central and southern plains states.  For example,
estimated cost reductions were statistically significant for all
shipment size categories, although the magnitudes were greater in the
central and southern plains case. 


--------------------
\45 In 1996, of grain transported by rail, corn represented about 49
percent of total rail industry revenue, with wheat an additional 40
percent.  According to USDA, in 1997 the top three corn producing
states in the United States were Iowa, Illinois, and Nebraska, while
the top three wheat producing states were Kansas, North Dakota, and
Montana. 

\46 App.  II contains illustrations of the real rail rates on
selected long- and short-distance wheat and corn routes. 

\47 In the northern plains sample--Great Falls and Billings, Montana,
and Minot, Bismarck, and Grand Forks, North Dakota, to
Portland--average revenue per ton-mile was 2.99 cents, and average
variable cost per ton-mile was 1.55 cents.  In the central and
southern plains sample--Wichita and Topeka, Kansas; Oklahoma City,
Oklahoma; Dallas-Ft.  Worth and Amarillo, Texas; and Denver,
Colorado, to Houston as well as Denver to Beaumont, Texas--average
revenue per ton-mile was 2.41 cents, and average variable cost per
ton-mile was 1.75 cents. 


      RAIL RATE CHANGES FOR
      CHEMICAL AND TRANSPORTATION
      EQUIPMENT SHIPMENTS WERE
      SIMILAR TO COAL AND GRAIN
-------------------------------------------------------- Chapter 3:2.3

For comparison purposes, we also reviewed rail rates for certain
chemicals and transportation equipment.\48 In general, we found that
real rail rates for chemical shipments exhibited many of the
characteristics of coal and grain discussed previously--that is, many
of the rail rates on various routes fell, but rates did not fall on
all routes.  An illustration of these trends can be seen for
shipments of potassium/sodium on medium distance routes.\49 (See fig. 
3.7.) As figure 3.7 shows, rail rates from Canadian origins to
Minneapolis, Minnesota, decreased about one-third over the 7-year
period--from about 5.4 cents per ton-mile to about 3.7 cents per
ton-mile.  However, rates from Casper, Wyoming, to Portland, Oregon,
remained relatively stable at 3.4 cents per ton-mile.  One of the
largest rate changes was a decrease in rail rates for transportation
of plastics and resins within the New Orleans, Louisiana, economic
area (a short-distance route).  On this route, rail rates decreased
about 70 percent from 1990 through 1996--from about 47 cents per
ton-mile to about 14 cents per ton-mile.  (See app.  II.) According
to the Chemical Manufacturers Association, nearly two-thirds of the
tonnage of chemicals and allied products shipped are transported less
than 250 miles.  At these distances, trucks are a competitive option
for chemical shippers, and in 1996, about 52 percent of the tonnage
of all chemicals and allied products shipped were by truck, with
railroads only accounting for 21 percent. 

   Figure 3.7:  Real Rail Rates
   for Potassium/Sodium Shipments,
   Selected Routes, 1990 Through
   1996

   (See figure in printed
   edition.)

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

Rail rates for shipments of finished motor vehicles and motor vehicle
parts and accessories also showed a variety of patterns.  One of the
most dramatic rate changes was a decrease in rail rates for the
transportation of finished motor vehicles from Ontario, Canada, to
Chicago, Illinois.  On this route, rates fell about 40 percent--from
19.5 cents per ton-mile to 11.7 cents per ton-mile.  In general, most
rail traffic in motor vehicles and motor vehicle parts or accessories
is under contract or has been exempt from economic regulation. 
According to AAR surveys, the percent of motor vehicle traffic that
moved under contract increased from 55 percent in 1994 to 81 percent
in 1997.  Whether railroads have the market power to charge high
rates is unclear.  Officials from Norfolk Southern told us that
automotive shippers "pay a premium rate for premium service." This
suggests that rates may be related to factors other than market
power.  In addition, officials from Union Pacific said their company
has offered shippers reduced rates in return for guaranteed high
volumes of shipments, again suggesting that rates are related to
factors other than market power. 


--------------------
\48 The chemicals we included (potassium and sodium compounds and
plastic materials or synthetic fibers, resins, rubbers) and the
transportation equipment categories we included (motor vehicles and
motor vehicle parts or accessories) accounted for about 49 percent
and 97 percent, respectively, of total rail industry revenue for
these commodities in 1996. 

\49 See app.  II for illustrations of rail rates for chemicals and
transportation equipment shipments in other distance categories. 


   REVENUE TO VARIABLE COST RATIOS
   REFLECT DIFFERENTIAL PRICING,
   BUT WITH SOME CAVEATS
---------------------------------------------------------- Chapter 3:3

Revenue to variable cost ratios are often used as indicators of
shipper captivity to railroads.  If used in this way, the higher the
R/VC ratio the more likely it is that the shipper has used only rail
to meet its transportation needs and the more likely it is that the
railroad can use its market power to set rates that extract revenues
much greater than its variable costs.  Since 1990, about one-third of
all railroad revenue has come from shipments transported at rates
that generate revenues exceeding 180 percent of variable costs. 
However, the percentage varies by commodity and has changed over
time.  Our analysis suggests that competition can influence specific
R/VC ratios for specific routes and commodities.  In general, we
found that R/VC ratios exceeded 180 percent on short-distance
movements of coal and long-distance movements of wheat from northern
plains states--movements where there may be less competition for the
railroad.  In contrast, R/VC ratios were consistently 180 percent or
less on a wide variety of routes, including long-distance movements
of coal.  While R/VC ratios are often used as proxies for market
dominance, use of such ratios for this purpose may lead to
misinterpretations because R/VC ratios can increase as rail rates go
down and, conversely, can decrease as rail rates go up. 


      R/VC RATIOS REFLECT
      DIFFERENTIAL PRICING
-------------------------------------------------------- Chapter 3:3.1

Overall, the percent of railroad revenue from shipments transported
at rates generating revenues exceeding 180 percent of variable costs
differs by commodity.  (See table 3.2.) As table 3.2 shows, from 1990
through 1996, for all commodities, about one-third of all revenues
generated by railroads came from movements transported at rates
generating revenues exceeding 180 percent of variable costs. 
However, several commodities, such as coal, chemicals, and
transportation equipment, had higher percentages of revenue from
shipments at rates generating revenues exceeding 180 percent of
variable costs.  Farm products (which include grain shipments) had a
lesser percentage.  As table 3.2 shows, these percentages can change
over time.  For example, for coal and transportation equipment, in
1996, the percentage of revenue generated from shipments at rates
generating revenues exceeding 180 percent of variable costs were the
lowest they had been since 1990.  By contrast, for chemicals, in
1996, the percentage of revenue generated from shipments at rates
generating revenues exceeding 180 percent of variable costs was the
highest it had been since 1990. 



                               Table 3.2
                
                    Percent of Rail Industry Revenue
                Exceeding 180 Percent R/VC for Selected
                     Commodities, 1990 Through 1996

                       Percent of revenue exceeding 180 percent R/VC
                      ------------------------------------------------
                                                              Transpor
                           All                                  tation
                      commodit                Farm  Chemical  equipmen
Year                       ies      Coal  products         s         t
--------------------  --------  --------  --------  --------  --------
1990                        34        55        22        44        66
1991                        29        54        22        45        48
1992                        30        55        21        46        48
1993                        32        54        26        48        53
1994                        34        54        32        50        59
1995                        32        54        26        46        54
1996                        29        47        23        54        33
----------------------------------------------------------------------
Source:  GAO's analysis of the Board's data. 

We found a wide variety of R/VC results for the specific commodities
and routes that we looked at.  In general, R/VC ratios were
consistently above 180 percent on short-distance movements of coal
(such as from Central Appalachia) and certain long-distance movements
of wheat.  The R/VC ratios were consistently below 180 percent on
long-distance movements of corn and of coal from the Powder River
Basin and on medium-distance movements of corn and wheat.  The ratios
for the other commodities and routes that we reviewed showed no
consistent pattern. 

The ratio results suggest that demand-based differential pricing may
have played a role in how railroads set their rates.  The fact that
R/VC ratios were typically higher for short-distance movements of
coal than for medium- and long-distance movements reflects the
possibility that, as shipping distance increases, the shipper or
receiver is better able to substitute other sources of coal.  This
same distance-related pattern of R/VC ratios was found for corn,
illustrating both the nature of domestic corn markets as well as
geographic considerations that favor barge options for the
transportation of corn.  In both the coal and corn cases, various
competitive pressures may constrain the rates that railroads were
able to charge for longer-distance movements, and this resulted in
lower R/VC ratios. 

Long-distance movements of wheat often occurred at much higher R/VC
ratios than were typically found for corn and coal.  For example, the
R/VC ratios for long-distance wheat movements originating in Montana
and North Dakota were consistently at 180 percent or higher from 1990
through 1996.  In contrast, the R/VC ratios on a Minneapolis,
Minnesota, to New Orleans, Louisiana, route--where barges offer
competition--were always below 100 percent.  We also found
differences in the ratio between northern and central plains routes
for the medium-distance shipments of wheat.  (See fig.  3.8.) The
northern plains states are considered by some to have fewer rail
alternatives than the central plains states.  As figure 3.8 shows,
the R/VC ratios for those wheat shipments originating in Wichita and
Oklahoma City were consistently below 180 percent from 1990 through
1996.  On the other hand, the R/VC ratio for wheat shipments
originating in Great Falls, Montana, were consistently above 180
percent over the entire period. 

   Figure 3.8:  R/VC Ratios for
   Medium-Distance Rail Shipments
   of Wheat, 1990 through 1996

   (See figure in printed
   edition.)

Note:  Due to confidentiality, data point for Duluth economic area to
Chicago economic area for 1993 was excluded. 

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


      R/VC RATIOS ARE SUBJECT TO
      LIMITATIONS
-------------------------------------------------------- Chapter 3:3.2

R/VC ratios have their limitations.  One of these is how variable
costs are determined.  According to the Board, variable costs are
developed in accordance with the Uniform Railroad Costing System
(URCS).  URCS is a general purpose costing system used by the Board
for jurisdictional threshold determinations and other purposes.  By
necessity, URCS incorporates a number of assumptions and
generalizations about railroad operations to determine variable
costs.  Because of these assumptions and generalizations, the
variable costs developed under URCS may not necessarily represent the
actual costs attributable to the particular shipment involved.  The
revenues used to calculate R/VC ratios may also not be actual.  Board
officials told us that revenues shown in the Carload Waybill Sample
are not adjusted for such things as the year-end rebates and refunds
often provided to shippers exceeding minimum volume commitments.  As
a result of these limitations, it is possible that some of the R/VC
ratios used in our analysis would be different if actual revenues and
variable costs were known. 

Perhaps a more serious limitation is possible misinterpretations of
R/VC ratios.  Because an R/VC ratio is a simple division of revenues
by variable costs, it is possible an R/VC ratio could be increasing
at the same time revenues and variable costs are both decreasing. 
For example, if rail revenues are $2 and variable costs are $1, the
R/VC ratio would be 200.  However, if revenues decrease to $1.50 and
variable costs decrease to $0.50, the ratio becomes 300.  Under this
scenario, although railroads have passed all cost reductions along to
shippers in terms of lower rates, the increased R/VC ratio makes it
appear as though the shipper is worse off.  On the other hand, R/VC
ratios could be decreasing at the same time revenues and variable
costs are increasing.  For example, using the example above ($2 in
revenues and $1 in variable costs with a ratio of 200), if revenues
increase to $2.50 and variable costs increase to $1.50, the ratio
becomes 167. 


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

In commenting on a draft of this report, the Board noted that
competition is better measured by the effectiveness of transportation
alternatives rather than the number of competitors.  In response to
this issue, we modified report language to better recognize the
importance of effective competition in measuring the effects of
competition on rail rates. 


WIDESPREAD CONCERNS ABOUT RAIL
SERVICE, BUT OVERALL QUALITY OF
SERVICE CANNOT BE ASSESSED
============================================================ Chapter 4

In recent years, shippers have increasingly criticized Class I
railroads for providing poor service.  Rail service disruptions in
the western United States in the summer and fall of 1997 brought
national attention to these concerns.  Among the problems cited by
shippers were an insufficient supply of railcars when and where
needed, inconsistent pickup and delivery of cars, and longer than
necessary transit times to a destination.  In general, railroad
officials believe the railroads provide adequate service.  However,
they agree that service is not what it could be and that the industry
has failed to meet shipper expectations. 

The quality of railroad service, over time for individual rail
carriers or between specific railroads, cannot be measured currently. 
The Board determines whether service is reasonable on a case-by-case
basis.  In addition, the railroad industry has been reluctant to
develop specific service measures for fear they could be
misinterpreted or misused by the public or might reveal
business-sensitive information.  In reaction to widespread criticism
of rail service, however, railroads have developed four performance
indicators.  Although these indicators may be helpful in assessing
certain aspects of service, they are more an evaluation of operating
efficiency than of quality of service. 


   SHIPPERS BELIEVE RAILROAD
   SERVICE HAS BEEN POOR
---------------------------------------------------------- Chapter 4:1

In recent years, railroad shippers, shipper associations, and local
communities have complained in various forums about poor railroad
service.  Complaints have been particularly strong from agricultural
shippers and communities in the West and Midwest.  Union Pacific
Railroad's merger with the Southern Pacific Railroad in 1996 and the
subsequent widespread delays in delivering railcars to destinations
brought national attention to the seriousness of railroad service
problems.  Shippers attribute many of the problems they experience to
a decrease in competitive transportation options as a result of
railroad mergers.  In addition, some shippers believe railroads must
improve the consistency of their operations and increase the number
of available railcars, among other things, in order to improve
service levels.\50


--------------------
\50 The subsequent discussion includes references to the year 1997. 
In responding to a draft of this report, Board officials noted that,
in its opinion, 1997 was an atypical year in terms of quality of rail
service.  They cited the Board's emergency service order in the
Houston/Gulf Coast service breakdown as reflecting this aberration
and pointed out that service problems in this area of the country
began before the Union Pacific/Southern Pacific merger had been fully
implemented.  They also said that rail service has improved since
1997. 


      SHIPPERS BELIEVE THE QUALITY
      OF RAIL SERVICE HAS
      DETERIORATED IN RECENT YEARS
-------------------------------------------------------- Chapter 4:1.1

Many rail shippers believe service has been poor.  Events in recent
years may have exacerbated the problems.  For example, in the summer
of 1997, during implementation of the Union Pacific/Southern Pacific
merger, rail lines in the Houston/Gulf Coast area became severely
congested, and freight shipments in some areas came to a complete
halt.  As the problem spread, many grain shippers experienced delays
in railcar deliveries of 30 days or more, while some grain shippers
in Texas did not receive railcars for up to 3 months.  Transit times
for movements of wheat from Kansas to the Gulf of Mexico in some
cases exceeded 30 days--four to five times longer than normal.  In
late 1997, the Board determined that the service breakdown, which had
a broad impact throughout the western United States, constituted an
emergency and, among other things, ordered Union Pacific to
temporarily release its Houston area shippers from their service
contracts so that they could use other railroads serving Houston, and
to cooperate with other carriers in the region that could accept
Union Pacific traffic for movement, to help ease the gridlock. 

The lack of predictable, reliable rail service has been a common
complaint among some shippers.  For example, during public hearings
conducted by USDA in 1997, over 400 grain shippers and rural
residents from Iowa, Kansas, Minnesota, Montana, and North Dakota
expressed their concerns about cars not being delivered; little, or
no, notification when railcars would be delivered; little or no
success in trying to reach appropriate railroad officials for
information on car deliveries; and the general lack of available cars
when and where needed.  These same types of problems were identified
by shippers and shipper associations during additional hearings in
Montana and North Dakota conducted in December 1997 by a Senate
Subcommittee and in April 1998 by the Board during hearings on
railroad access and competition issues. 


      SURVEY RESULTS ALSO INDICATE
      SHIPPER DISSATISFACTION WITH
      RAIL SERVICE
-------------------------------------------------------- Chapter 4:1.2

Our survey responses from about 700 bulk grain, coal, chemicals, and
plastics shippers conducted in the fall of 1998 also reflect concerns
about railroad service.\51 An estimated 63 percent of the shippers
responding to our survey (329 of 525 shippers that answered this
question) said that the overall quality of their rail service was
somewhat or far worse in 1997 than it was in 1990.  Chemicals and
plastics shippers were among the most dissatisfied with the overall
quality of their rail service--approximately 80 percent of these
shippers indicated that the overall quality of rail service they
received in 1997 was somewhat or much worse than in 1990.  About 71
percent of coal shippers indicated that the overall service levels
provided by the railroads serving them were somewhat or much worse. 
Finally, echoing the complaints expressed during congressional
hearings, an estimated 57 percent of grain shippers responding to our
survey indicated their overall quality of rail service was somewhat
or much worse in 1997 than it was in 1990.\52

On the basis of our survey results, the types of problems experienced
since 1990 have varied by commodity.  (See table 4.1.) About 66
percent of coal shippers responding to our survey indicated that they
experienced somewhat or much worse service in terms of car cycle
time--that is, the amount of time it takes to deliver a commodity to
its destination and return--in 1997 compared with 1990.  Chemicals
and plastics shippers identified problems with the consistency of
on-time delivery as most problematic; about 84 percent of the
shippers responding to our survey identified this problem as worse in
1997 compared with 1990.  Grain shippers identified railcar
availability as their most troublesome problem.  An estimated 67
percent of grain shippers indicated that railcar availability during
peak periods was somewhat or much worse in 1997 than it was in 1990. 
Railcar availability, in general, was rated as worse by an estimated
63 percent of the grain shippers. 



                               Table 4.1
                
                 Percent of Shippers Responding to Our
                  Survey Experiencing Somewhat or Much
                  Worse Service in 1997 Compared With
                        1990, by Commodity Type

                                                            Chemicals/
                                     Grain          Coal      plastics
Aspect of service                 shippers      shippers      shippers
----------------------------  ------------  ------------  ------------
Car transit time                        41            65            78
Car availability during peak            67            65            73
 periods
Car cycle time                          47            66            78
Car availability in general             63            61            69
Consistency of on-time pick             48            58            46
 up
Consistency of on-time                  53            57            84
 delivery
----------------------------------------------------------------------
Note:  Not every shipper provided a response for each aspect of
service.  Between 138 and 261 grain shippers, between 34 and 47 coal
shippers, and between 24 and 69 chemicals/plastics shippers provided
responses to each aspect of service. 

Shippers responding to our survey also indicated that the quality of
service provided by the railroads has decreased relative to the
amount paid for that service.  This was particularly true in 1997
compared with 1990.  An estimated 43 percent of those shippers (247
of 570 shippers) indicated that the quality of service provided by
railroads in 1990 was somewhat or far less relative to the amount
paid in 1990.  In contrast, the percent of shippers indicating that
the quality of service they received from railroads in 1997 was
either somewhat or far less relative to the amount paid for that
service had increased to an estimated 71 percent of those responding
to our survey.  Coal shippers and chemicals and plastics shippers
were the most dissatisfied--about 80 percent and 88 percent,
respectively, were dissatisfied with the value of their service.  An
estimated 66 percent of grain shippers responding to our survey said
the quality of rail service was somewhat or far less relative to the
amount that they paid for such service in 1997. 


--------------------
\51 See chapter 1 for details on how we conducted our survey. 

\52 Surveys inherently have sampling errors.  Sampling errors define
the upper and lower bounds of the estimates made for our survey
results and were calculated at the 95-percent confidence level.  This
means that 19 out of 20 times, the sampling procedures used would
produce a range that includes the true value.  For the information in
this report, all sampling errors were less than 5 percent.  The
specific sampling errors are included in our companion report
(GAO/RCED-99-46). 


      RELATIVELY FEW SHIPPERS HAVE
      FILED FORMAL SERVICE
      COMPLAINTS BEFORE THE BOARD
-------------------------------------------------------- Chapter 4:1.3

The widespread dissatisfaction with railroad service has not
necessarily resulted in many formal service complaints being filed
with the ICC or the Board.  Only 25 formal service-related complaints
were pending with the ICC as of January 1, 1990, or were subsequently
filed with the ICC or the Board.\53 These complaints involved a wide
range of alleged service problems, including failure to provide a
sufficient supply of railcars; late inbound and outbound deliveries;
and other kinds of inconsistent service.  Of the seven cases that had
completed the adjudicatory process as of February 1999, five were
decided in favor of railroads and two in favor of shippers.  Thirteen
cases did not result in a decision because ICC/the Board did not have
jurisdiction over the matter or the shipper withdrew the complaint. 
Five formal service complaints were pending as of February 1999. 

Typically, no more than two or three complaints were filed each year,
except in 1995, when seven complaints were filed.  Most of the
complaints were filed against Class I railroads (68 percent), with
the rest filed against smaller railroads (32 percent).  Of the Class
I railroads involved in these complaints, Burlington Northern had the
greatest number of complaints filed against it (six) followed by
Conrail (five) and CSX Transportation (three).  On a commodity basis,
customers who shipped grain products represented the largest
proportion of complaints (20 percent), followed by customers who
shipped steel and railcars (12 percent each). 


--------------------
\53 There were also four petitions for declaratory orders relating to
service matters.  The statutory authority for declaratory orders and
associated relief differ from those of formal complaints.  However,
the petitions for declaratory orders reflect the petitioners'
attempts to use a formal mechanism to resolve service problems. 


      MANY SHIPPERS BELIEVE
      RAILROAD MERGERS AND LACK OF
      COMPETITIVE ALTERNATIVES
      HAVE CONTRIBUTED TO POOR
      SERVICE PERFORMANCE
-------------------------------------------------------- Chapter 4:1.4

Many shippers and their associations have attributed service
problems, at least in part, to railroad mergers or consolidations. 
When asked in our survey the extent to which mergers or
consolidations since 1990 (excluding the Union Pacific merger with
Southern Pacific) have affected the quality of rail service they
received, an estimated 50 percent of the shippers (268 of 536
shippers responding) indicated that service levels were somewhat or
much worse as a result of mergers or consolidations.  When asked
specifically about the effects of the Union Pacific merger with
Southern Pacific on service levels, an estimated 84 percent of the
shippers (371 shippers) indicated that the quality of rail service
they received was either somewhat or much worse since the merger. 
Chemicals and plastics shippers indicated they were most affected by
the Union Pacific/Southern Pacific merger--about 97 percent indicated
that the rail service their companies received was somewhat or much
worse.  Similarly, about 94 percent of the coal shippers indicated
that the Union Pacific merger had resulted in worse rail service.  An
estimated 77 percent of the grain shippers indicated they received
somewhat or much worse rail service after the merger than before the
merger.\54

Shippers have also attributed service problems to a lack of
competitive alternatives to rail transportation.  Some shippers who
told us that historically they have only been served by a single
railroad or have no access to other transportation modes maintain
that the rail service they receive is poor.  For example, some North
Dakota grain shippers told us that they are heavily dependent upon
railroads to transport their grain because shipping grain by truck
(the only other major mode of freight transportation available in the
state) over long distances to mills, processors, and export markets
is not economically feasible.  As a result of this dependence, they
claim there is little incentive or reason for the one railroad that
serves them to provide quality service.  These shippers told us that
not only have railroads become more arrogant and stopped providing
good service to those shippers for which they no longer face rail
competition, but also railroads have tended to serve those customers
with competitive alternatives first--leaving those shippers without
competitive alternatives to receive the last and worst service. 

Shippers responding to our survey identified several changes that
they believe railroads should make to increase rail service quality. 
Although grain shippers cited the lack of available cars as the
aspect of service that has caused them the most problems, an
estimated 68 percent of the grain shippers (331 of 485 shippers
responding) indicated that they would like to see the consistency of
on-time delivery of cars improved.  An estimated 51 percent of the
grain shippers (246 of 485 shippers responding) believe the number of
available cars should be increased, and an estimated 33 percent (162
of 484 shippers responding) want to see the consistency of on-time
pick up of cars improved.  While both coal shippers and chemicals and
plastics shippers identified consistency of on-time delivery as among
the three most important changes needed to improve service, they
identified improving transit times as among the most important
changes that should be made by the railroads--about 75 percent of the
coal shippers (62 of 83 shippers responding) and about 84 percent of
the chemicals and plastics shippers surveyed (81 of 97 shippers
responding) expressed the need for improved transit times. 


--------------------
\54 These percentages represent results from 87 of 90
chemical/plastics, 51 of 54 coal, and an estimated 175 of 227 grain
shippers.  The remaining respondents did not answer this series of
questions; indicated they did not know; or it was not applicable to
them because they indicated that they were not served by the Union
Pacific/Southern Pacific Railroad. 


   RAILROADS BELIEVE THAT SERVICE
   IS ADEQUATE, BUT IMPROVEMENTS
   ARE NEEDED TO MEET SHIPPER
   EXPECTATIONS
---------------------------------------------------------- Chapter 4:2

In general, rail industry officials believe the service they provide
to their customers is adequate.  In fact, railroads have made capital
expenditures in recent years to improve system capacity and service
levels.  However, railroad officials recognize that railcar
availability and the timeliness of rail shipments, among other
things, do not always meet shipper expectations.  Some industry
officials believe capacity constraints, industry downsizing, and an
inadequate railcar supply are among the factors that have contributed
to the difficulties in meeting shipper service expectations.  In
addition, some railroad officials agree that rail mergers and
consolidations, in particular the Union Pacific merger with Southern
Pacific, have exacerbated service problems.  Addressing service
problems can be a challenge; railroad officials told us that they
often face the difficult task of balancing the service needs of
customers with the financial viability of the railroads. 


      RAILROADS BELIEVE SERVICE IS
      GENERALLY ADEQUATE
-------------------------------------------------------- Chapter 4:2.1

In general, railroad officials believe that current service is
adequate.  This is particularly true when compared with 1990.  With
the exception of service problems associated with the Union
Pacific/Southern Pacific service crisis, officials from the four
largest Class I railroads we spoke with about service said overall
service in 1997 was at least as good as it was in 1990.  They
provided a number of illustrations for why service was as good as or
better than in 1990.  For example, Norfolk Southern officials said
that their railroad and other railroads have made significant
investments in cars, locomotives, and people to improve service. 
Officials from CSX Transportation said that investments in such
things as the installation of continuously welded rail throughout the
network, purchase of new cars and locomotives, and the development of
better information technology to respond to customer problems have
all contributed to improved service.  There was also general
agreement that rail industry consolidation, including the Union
Pacific merger with Southern Pacific, has benefitted shippers by
creating more single-line service that reduces the number of trains
that must handle goods enroute, thereby reducing costs and transit
times. 

However, many railroad officials also agree that service is not what
it should be and may not have met shipper expectations for various
reasons.  For example, some railroad officials told us that delays on
rail systems have been primarily caused by capacity constraints.  As
railroad traffic has been growing in recent years, and as railroads
have been scaling back operations in order to cut costs, system
capacity has become inadequate.  In addition, to cut costs, railroads
have reduced employment levels.  Now, given the growth in railroad
traffic, railroads have had insufficient people or crews available to
provide the required service.  For example, train delay data we
obtained from one Class I railroad indicated that both a shortage of
locomotives and crews were major causes of train delays from 1992
through 1996.  Finally, an inadequate supply of railcars, especially
for grain shippers, has contributed to shipper dissatisfaction.  As
one railroad official told us, railcar availability will always be a
point of contention between railroads and shippers, and some
railroads are reluctant to invest in the number of cars needed to
handle peak demand if those cars might sit idle for a significant
portion of the year. 


      RAILROADS ACKNOWLEDGE THE
      UNION PACIFIC/SOUTHERN
      PACIFIC MERGER CONTRIBUTED
      TO PROBLEMS
-------------------------------------------------------- Chapter 4:2.2

Some rail industry officials we spoke with, including those at the
Union Pacific Railroad, acknowledged that the Union Pacific merger
with Southern Pacific contributed to the service crisis which began
in the late summer of 1997 in and around Houston, Texas.  According
to Union Pacific officials, Southern Pacific had more problems than
Union Pacific officials expected, especially a substantial amount of
deferred track maintenance.  In general, these officials said that
Southern Pacific had made a lot of operating decisions based on
short-term cash flow considerations rather than long-term financial
health.  As a result, Union Pacific's high traffic levels and a
series of external stresses overwhelmed a weak Southern Pacific
infrastructure.  Union Pacific officials expect that as the railroad
recovers from its difficulties, service levels will return to their
pre-merger levels--which in their opinion, had improved since 1990. 

The difficulties experienced by Union Pacific affected other
railroads as well.  For example, officials at Norfolk Southern told
us that because Norfolk Southern receives cars from Union Pacific
Railroad for shipment to ultimate destinations and sends other cars
to destinations that are on Union Pacific's tracks, the Union
Pacific's problems adversely affected Norfolk Southern's customer
commitments.  Officials at Burlington Northern and Santa Fe Railway
told us that it took on a significant amount of additional business
during the service crisis that would usually have been carried on
Union Pacific, which resulted in a trade-off:  railroad officials
decided it was better to serve more shippers with a lower level of
service rather than a more limited number of customers at a higher
level of service.  Officials from CSX Transportation also said the
Union Pacific/Southern Pacific failures were a "wake up call" to the
railroad industry to do a better job of serving its shippers. 


      PROVIDING HIGH-QUALITY
      SERVICE INVOLVES TRADE-OFFS
      BETWEEN INVESTMENT AND
      SERVICE
-------------------------------------------------------- Chapter 4:2.3

In providing high-quality service, railroad management faces the
difficult task of balancing the needs of shippers with the financial
viability of the railroad.  In discussing service adequacy and
shipper dissatisfaction, railroad officials made clear the role
financial tradeoffs play in service decisions.  Officials from CSX
Transportation told us that their company could hire more crews and
invest in assets to address capacity problems.  However, in their
opinion, the competitive nature of today's railroad business
precludes these extra costs from being passed on to shippers. 
Officials from other railroads agreed, saying that railroads need to
add capacity--which will require a significant capital investment. 
In considering this investment, their companies will have to weigh
issues such as the potential for future traffic growth; cost of
adding capacity; and effects on rates and service.  Tradeoffs will
also be a part of the decision making process regarding railcars. 
Some railroad officials noted that shippers and railroads
historically have disagreed on the adequacy of the supply of
railcars, but actual investment in such cars involves a tradeoff
between the investment in railcars and the return on that investment. 
Often, the return on investment is not sufficient to justify the
investment cost. 

Management discretion that is inherent in railroad operations can
also influence the quality of rail service.  The logistics of moving
different kinds of freight to a myriad of markets in different
geographical locations can be a difficult task.  Management decision
making may play a larger role than technology in influencing service
levels.  This was the conclusion of a 1993 study conducted by the
Massachusetts Institute of Technology, Center for Transportation
Studies, on freight railroad reliability.\55 This study concluded
that decisions regarding power management (availability and
positioning of locomotives), train operations (which trains to run,
with what cars, and at what time), and the management of railroad
terminals all had important consequences on railroad reliability. 
Some railroad officials we spoke with agreed that management decision
making plays a significant role in the quality of service.  For
example, officials at Norfolk Southern told us that, although it has
taken actions to minimize management decisions in providing service,
there is still a fairly high degree of management discretion in
service decisions.  Officials at CSX Transportation told us that 85
to 90 percent of service performance involves management decision
making about capital expenditures and operating expenses.  In their
opinion, at the local level, service decisions are very much
influenced by budget and financial decisions, and insufficient
funding could lead to reductions in such things as train service. 


--------------------
\55 Causes of Unreliable Service in North American Railroads, Little,
P., Martland, C.D., Proceedings of the 35th Annual Meeting,
Transportation Research Forum (1993). 


   QUALITY OF RAIL SERVICE CANNOT
   BE DETERMINED SINCE
   INDUSTRYWIDE MEASURES DO NOT
   EXIST
---------------------------------------------------------- Chapter 4:3

Currently, the overall quality of railroad service provided by
railroads cannot be measured.  While the legislation governing
railroad service requires that railroads provide service upon
reasonable request, the Board and federal courts determine what
constitutes reasonable service and whether a railroad has satisfied
its service obligations in the context of deciding specific
complaints.  Industrywide measures of rail service for the most part
do not exist.  In general, the very limited industrywide measures we
were able to obtain suggest some improvement in these measures in
recent years.  However, these measures are not enough to conclude
that service has improved overall.  Railroad officials told us they
have been reluctant to develop service measures, fearing they could
be misinterpreted or misused by customers and/or the public or that
they may reveal business-sensitive information.  According to AAR,
individual rail carriers have developed measures of service over time
that, while addressing carrier and/or customer specific service
performance, are not necessarily consistent or continuous measures of
service either between carriers or over time for individual carriers. 


      GOVERNING LEGISLATION DOES
      NOT PRESCRIBE SPECIFIC
      SERVICE LEVELS
-------------------------------------------------------- Chapter 4:3.1

Railroads are required by statute to provide service upon reasonable
request; furnish safe and adequate car service; and establish,
observe, and enforce reasonable rules and practices on car
service.\56 The Board (and its predecessor, ICC) and federal courts
determine what constitutes reasonable service and whether a railroad
has satisfied its service obligations in the context of deciding
specific complaints.  For example, in a 1992 case, the ICC addressed
the issue of railcar supply in connection with a complaint
challenging the legality of Burlington Northern Railroad's
Certificate of Transportation Program.  The ICC held that Burlington
Northern had not violated its statutory obligations and observed that
the common carrier obligation requires that a railroad maintain a
fleet sufficient to meet average--not peak--demand for service. 
According to the ICC, a requirement for a fleet sufficient to meet
peak demand would result in a wasteful surplus of equipment
detracting from a railroad's long-term financial health.\57 Other
cases have involved such matters as whether a railroad was justified
in refusing a shipper's request to restore service on an embargoed
line.  However, ICC and the Board's decisions are situation-specific
and do not easily lend themselves to developing a single set of
measures that would allow an assessment of a railroad's--or the
industry's--quality of service in all circumstances. 


--------------------
\56 These statutory requirements, found in sections 11101(a) and
11121(a)(1) of title 49, United States Code, are collectively
referred to as the common carrier obligation. 

\57 National Grain and Feed Association v.  Burlington Northern
Railroad Co., 8 I.C.C.2d 421, 427 (1992).  The United States Court of
Appeals for the Eighth Circuit subsequently reversed ICC's decision
and remanded the case to ICC for a further examination of whether the
Certificate of Transportation program was consistent with the common
carrier obligation.  However, the court specifically held that ICC's
ruling regarding fleet size was permissible.  National Grain and Feed
Association v.  United States, 5 F.3d 306, 311 (8th Cir.  1993).  At
the National Grain and Feed Association's request, the ICC proceeding
was ultimately dismissed. 


      FEW INDUSTRYWIDE PERFORMANCE
      MEASURES EXIST
-------------------------------------------------------- Chapter 4:3.2

For the most part, industrywide measures of service performance do
not exist.  For example, according to AAR, there is no standard
railroad industry definition of transit time and no central
clearinghouse to collect industry service performance data.  As a
result, the types of service measurements maintained can vary from
one railroad to another.  The officials told us that trying to
understand and develop industrywide service measures has been an
important issue in the rail industry but "the least fertile area for
information." In addition, officials said that some industrywide
service data that used to be collected have been discontinued.  For
example, AAR used to prepare reports on car cycle times, the percent
of the railcar fleet that was out-of-service, and car shortages. 
These reports are no longer prepared because of data quality
problems. 

A factor complicating the collection of industrywide service measures
is that individual railroads have been reluctant to make such
information public.  According to AAR and officials at some Class I
railroads we spoke with, this reluctance is based on concerns that
service information could be misinterpreted or misused by the public,
customers, or others or that the information may be proprietary.  For
example, AAR noted that providing information such as railcar transit
and cycle times can be misleading because (1) cycle times are
typically increased when additional railcars are added to the fleet
(because it may take longer to load and unload trains with additional
cars), (2) cycle times should be compared with target performance
levels or standards which reflect seasonal fluctuations, (3) an
increase in long-haul business may lead to a lengthening of cycle and
transit times, and (4) a railroad cannot control what happens to a
car once it leaves its tracks for movement to a final destination via
another railroad.  Regarding the latter, AAR said meaningful data on
interline traffic (traffic which interchanges from one railroad to
another), which represents roughly one-third of all rail freight
revenue, are generally not maintained by individual railroads and
would, therefore, not be captured in measuring railroad performance. 
As officials from one Class I railroad told us, just getting raw
service data may not indicate the root cause of problems. 

Despite these limitations, two measures of industrywide service offer
a narrow view of how service has changed since 1990.  One is cycle
time for freight railcars, which shows a slight improvement.  (See
table 4.2.) (In general, the faster the cycle time the more readily
cars are available for additional trips.) In 1990, the average cycle
time for all railcars was just under 18 days.  In 1995 (the last year
data were available), the average cycle time was just under 17 days. 
However, as table 4.2 shows, cycle time can fluctuate over time and,
as AAR has pointed out, cycle time may be influenced by several
factors, such as change in trip length. 



                               Table 4.2
                
                Average Railcar Cycle Time, Selected Car
                        Types, 1990 Through 1995

                               (In days)

                                            Car cycle time
                                --------------------------------------
                                           Covered  Open top      Tank
Year                            All cars   hoppers   hoppers      cars
------------------------------  --------  --------  --------  --------
1990                                17.8      27.0      10.8      42.9
1991                                18.9      28.5      12.1      44.5
1992                                18.0      27.0      11.6      42.4
1993                                17.6      27.4      11.3      42.4
1994                                16.4      27.0      10.1      41.0
1995                                16.7      26.8      10.0      41.0
----------------------------------------------------------------------
Notes:  Covered hoppers are typically used to transport grain; open
top hoppers to transport coal; and tank cars to transport chemicals
and plastics. 

Cycle time was calculated by dividing 365 by the average number of
revenue trips per year by car type.  Industrywide information on car
cycle times was discontinued in 1995. 

Source:  GAO's analysis of AAR's data. 

Another measure, the number of revenue freight cars undergoing or
awaiting repairs (and, therefore, not available for active revenue
service), also dropped slightly since 1990.\58 (See fig.  4.1.) In
1990, about 52,000 of 677,800 cars (about 8 percent of railcars
owned) were undergoing or awaiting repairs.  In 1996 (the last year
data were available), about 27,000 of 576,800 cars (about 5 percent
of railcars owned) were in this category.  However, this measure does
not shed any light on how efficiently these cars were deployed or
whether an adequate supply existed. 

   Figure 4.1:  Railroad-Owned
   Revenue Freight Cars Undergoing
   or Awaiting Repair, 1990
   Through 1996

   (See figure in printed
   edition.)

Note:  As of June 1 each year (except as of Jan.  1 in 1992). 

Source:  AAR. 


--------------------
\58 Revenue freight cars provide revenue to railroads by carrying
goods.  Railroads also operate nonrevenue freight cars, such as those
used to maintain roadbed and track. 


      INFORMATION FROM INDIVIDUAL
      RAILROADS HAS LIMITATIONS
-------------------------------------------------------- Chapter 4:3.3

Measuring service performance of the rail industry is further
complicated by the fact that individual railroads do not maintain
measures of service performance that are continuous or consistent
across the industry.  For example, we asked for, but generally did
not obtain, information from individual Class I railroads about their
service performance since 1990 in the following areas:  (1) average
car transit time--the amount of time from the departure of a shipment
from an origin to delivery to a destination; (2) average car cycle
time for unit trains;\59 (3) car availability, during both peak and
nonpeak periods--this would include the identification of car
surpluses and shortages at each period; (4) on-time pickup of
shipments; (5) on-time delivery of shipments; and (6) train delay
summaries, including causes of train delays.  Although some of the
railroads we contacted maintained some of this information, including
on-time pick up and delivery of cars and causes of train delays, most
of this information was either not available going back to 1990 or
was only used for specific analyses. 

In general, railroad representatives told us that railroads develop
and maintain their own unique set of service performance measures
that are tailored to their needs and their customers' needs.  Because
no two rail customers may have identical service demands, and what is
acceptable service to one shipper might not be acceptable to another,
most railroads have developed service measures that meet the needs of
their specific customers' situations.  The type and level of service
can also be commodity-specific.  For example, officials from CSX
Transportation told us that shippers of different types of
commodities demand different levels of service.  For some commodities
(such as intermodal containers and auto parts), on-time pick up and
delivery are very important.  For other commodities (such as coal and
grain), through-put (total amount of tonnage) may be more important
than timeliness.  Finally, officials from Norfolk Southern also
pointed out that differences exist between eastern and western
railroads in terms of the types of service measures a railroad might
keep, because eastern railroads carry, for example, more coal and
western railroads carry more grain.  As a result, eastern railcar
delivery delays are generally measured in hours, not days as they
might be in the west. 

Railroad mergers have also influenced the availability and
consistency of service measures.  As an illustration, Burlington
Northern and Santa Fe Railway officials noted that, prior to the
Burlington Northern merger with Santa Fe in 1995, each railroad
collected its own unique service data.  Because of this, data for the
pre-merger period may not be available in all cases or may be
inconsistent in what it measured.  In addition, officials from Union
Pacific Railroad told us they had concerns about providing us with
service data because the type of measures collected had changed over
the last 10 years--Union Pacific Railroad today is the product of
mergers of several railroads, each of which had maintained unique
data systems.  Union Pacific officials also noted that computer
technology advances have allowed Union Pacific to generate new types
of data that were previously impossible to generate and that are not
comparable with any data from pre-merger periods. 


--------------------
\59 In general, unit trains are a dedicated set of cars and
locomotives that run in a continuous cycle from an origin to a
destination and return. 


   RAILROAD INDUSTRY IS DEVELOPING
   LIMITED MEASURES OF PERFORMANCE
---------------------------------------------------------- Chapter 4:4

In part due to the widespread criticism of the industry over the
quality of its service, railroads are developing industrywide
performance measures.  As part of its overall review of railroad
access and competition issues, the Board directed railroads to
establish a more formal dialogue with shippers for this purpose.  In
response, from August to November 1998, AAR held a series of meetings
across the country between Class I railroad executives and shippers
to discuss service issues.  As a result of these meetings, the Class
I railroads decided to make available, through the Internet, actual
data (not an index) on four measures of performance directed at
providing shippers and others with a means to evaluate how well
traffic moves over railroad systems.  These measures, which the
railroads began reporting in January 1999, include (1) total
railcars, by type, currently on the rail system; (2) average train
speed by type of service; (3) average time railcars spend in major
terminals; and (4) timeliness of bills-of-lading (a receipt listing
goods shipped).  These measures are updated weekly and broken out by
individual railroad.  According to AAR, these measures are
informational in nature, but consideration is being given to
establishing standards and goals in these four areas. 

According to AAR, it is expected that rail customers will be able to
use the data to determine what is happening in terms of performance
on each railroad.  However, according to AAR, these measures are not
uniformly calculated across the industry and may be influenced by
operating differences among railroads, including traffic mix, weather
conditions, and terrain.  Therefore, AAR cautions that this
information should not be used to compare one railroad against
another. 

Although these measures may be helpful in assessing certain aspects
of service, they are more an evaluation of railroad operating
efficiency rather than of quality of service.  They also may not
resolve more fundamental concerns about service.  For example, in a
November 1998 letter to the Board, several shipper associations and
shippers expressed their concern that better information alone will
not solve the service problems resulting from railroad consolidations
and enhanced market power. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:5

In commenting on a draft of this report, the Board indicated that
1997 was not a typical year in terms of the quality of railroad
service due to the unusual, severe congestion that occurred in the
West.  The Board also suggested that performance measures recently
developed by the railroad industry can be helpful in measuring some
aspects of service quality.  In response to the these comments, we
added material to the report reflecting the Board's assessment that
railroad service in 1997 was atypical and that service has improved
since that time.  We also revised the report to better recognize that
recently developed performance measures may be helpful in measuring
some aspects of service quality.  However, we continue to believe
that these measures are more an evaluation of railroad operating
efficiency than of quality of service. 


DESPITE RECENT ACTIONS TO ADDRESS
SERVICE ISSUES, CONCERNS CONTINUE
============================================================ Chapter 5

Federal agencies and railroads have taken a number of actions to
address the service problems that originated in the Houston/Gulf
Coast area in 1997 during the implementation of the Union
Pacific/Southern Pacific merger as well as service issues that are
more longstanding and widespread.  These actions have led to some
progress, particularly the dissemination of new information regarding
rail service and additional options for shippers and carriers to
resolve disputes.  However, in spite of the various actions to
address service issues, shippers remain concerned about a lack of
access of many shippers to competitive rail alternatives and the
effect of this lack of competition on service levels.  Shippers and
railroads hold widely differing views on this key issue.  The Board
has tried, without success, to get the two sides to reach some
agreement on this issue and has suggested that these issues are more
appropriately resolved by the Congress.  If the Congress decides to
address this issue, it will need to weigh the potential of increased
competition to improve service against the potential financial and
other effects on the railroad industry. 


   UNION PACIFIC AND THE BOARD
   ADDRESS SERVICE PROBLEMS
   BEGINNING IN LATE 1997
---------------------------------------------------------- Chapter 5:1

The Union Pacific/Southern Pacific system started experiencing
serious service problems in July 1997 during the process of
implementing the merger of the two railroads.  Congestion on this
system spread to the Burlington Northern and Santa Fe Railway system,
affecting rail service throughout the western United States.  Serious
rail service disruptions and lengthy shipment delays continued
throughout the last half of 1997, particularly in the Houston area. 
To address service problems on the Union Pacific/Southern Pacific
system, Union Pacific adopted a Service Recovery Plan in September
1997.  Under this plan, the railroad, among other things, took
actions to reduce train movements on the Union Pacific/Southern
Pacific system and manage traffic flows into congested areas,
acquired additional locomotives, and hired additional train and
engine crew employees. 

In response to growing concerns about the deteriorating quality of
rail service in the West, the Board issued an emergency service order
in October 1997.  This order, and subsequent amendments to it,
directed a number of actions aimed at resolving service problems in
the Houston area, the source of the crisis.  In particular, the order
directed temporary changes in the way rail service was provided in
and around the Houston area to provide additional options for
shippers and carriers and required weekly reporting by Union Pacific
on a variety of service measurements, such as system train speed and
locomotive fleet size.  In December 1997, the service order was
expanded to require grain loading and cycle time information to be
submitted by Burlington Northern and Santa Fe Railway.  In August
1998, the order expired and the Board decided not to issue another
emergency service order, finding that there was no longer any basis
for such an order given the significant improvements in Houston area
rail service.  However, the Board noted that service was still not at
uniformly improved levels, as reflected by congestion in Southern
California.  Accordingly, the Board ordered Union Pacific/Southern
Pacific and Burlington Northern and Santa Fe Railway to continue the
required reporting on a biweekly basis so that it could continue to
monitor service levels.  In December 1998, the Board discontinued
this requirement, citing further service improvements and the
intention of all of the Class I railroads to start issuing weekly
performance reports in January 1999. 

As part of its oversight of the Union Pacific/Southern Pacific
merger, the Board has considered requests by various parties for
additional merger conditions that would modify the way in which rail
service is provided in the Houston area.  In its December 1998
decision, the Board announced several changes in response to these
requests in order to enhance the efficiency of freight movements in
the area.  Most significantly, the Board authorized the joint Union
Pacific/Burlington Northern and Santa Fe Railway dispatching center
at Spring, Texas, to route traffic through the Houston terminal over
any available route, even a route over which the owner of the train
does not have operating authority.  However, the Board declined to
adopt a plan sponsored by a group of shippers, two affiliated
railroads, and the Railroad Commission of Texas that would have
displaced the current Union Pacific operations in the Houston
terminal area by establishing neutral switching and dispatching
operations by a third party, the Port Terminal Railroad Association,
in order to increase competition in the area.  According to the
Board, implementing this plan would have required Union Pacific to
give trackage rights to this association and all other railroads
serving Houston. 

In making its decision not to adopt the plan, the Board concluded
that the service crisis in Houston did not stem from any competitive
failure of the Union Pacific/Southern Pacific merger.  The Board
further concluded that the plan was not necessary to remedy any
merger-related harm because it would add new competitors for many
shippers in the Houston area that were served by only one carrier
prior to the merger and, therefore, had not experienced a decrease in
competition as a result of the merger.  According to the Board,
absent merger-related competitive harm, such an arrangement would
thus constitute "open access"--an idea that shippers should, wherever
possible, be served by more than one railroad, even if, in order to
produce such a system, railroads that own a majority of an area's
rail infrastructure would be required to share their property with
others that do not--an action which Board officials said the law does
not provide for at this time. 

Union Pacific has recently taken further actions aimed at improving
its service levels.  These actions have included decentralizing
railroad operations and implementing capital and maintenance
projects, such as projects to improve, expand, and maintain its
railroad track.  Also, in August 1998, the railroad created a new
internal organization, called Network Design and Integration, which
will be responsible for identifying the services most needed by
shippers and developing plans for delivering them.  This organization
is expected to serve as a link between the marketing and operating
departments, to ensure that service commitments to shippers match the
railroad's capacity to deliver these services.  In December 1998,
Union Pacific reported to the Board that its operations had returned
to normal levels, citing its average system train speed that had
risen above 17 miles per hour for the first time since July 1997,
when its service crisis began.  The railroad acknowledged that its
service levels still needed improvement but maintained that its
latest service measures demonstrated a recovery from its prior
serious service problems. 


   GOVERNMENT AGENCIES AND
   RAILROADS TAKE SOME ACTIONS TO
   ADDRESS BROADER SERVICE ISSUES
---------------------------------------------------------- Chapter 5:2

Federal agencies as well as railroads have recently taken a number of
actions aimed at addressing freight rail service issues of a broader
nature than the recent service crisis in the West.  These issues
include the need to foresee and prevent service problems and
expeditiously resolve them when they do arise and the need to expand
the capacity of the railroad system to provide service.  Among the
actions by federal agencies are efforts by the USDA and the Board to
disseminate information that can help railroads, shippers, and
receivers anticipate changes in transportation demand and supply and
the adoption by the Board of new procedures allowing it to authorize
temporary alternative rail service more quickly for shippers affected
by serious service disruptions.  In addition, individual railroads
have recently made efforts to improve service through changes in
their customer service organizations and increased investments in
infrastructure.  Finally, partly at the urging of the Board, the
railroad industry has acted to address some service issues.  Actions
include a commitment by the Class I railroads to issue weekly
measures of their service performance, an agreement between Class I
railroads and grain and feed shippers to resolve some service-related
disputes through binding arbitration, and an agreement between Class
I and smaller railroads aimed at allowing smaller railroads to play a
greater role in providing service to shippers. 


      THE BOARD AND USDA TAKE THE
      INITIATIVE IN ADDRESSING
      SERVICE ISSUES
-------------------------------------------------------- Chapter 5:2.1

The rail congestion that occurred during the 1997 rail crisis in the
West severely affected the movement of grain to market.  This
situation illustrated the need to better monitor production levels,
the transportation needs of grain shippers, and the capacity of the
railroads to meet those needs, so that shippers and railroads could
anticipate changes in transportation demand and supply and make
adjustments that could lessen the severity of such changes.  To meet
this need, the Board and USDA signed an agreement in May 1998 to
create a Grain Logistics Task Force.  This task force, made up of
Board and USDA officials, was tasked with identifying and
disseminating information on grain production and consumption and
transportation requirements.  The task force began issuing reports in
August 1998 and expects to issue them five times a year.  These
reports contain information on such things as expected production
levels of various grains (by state), grain supplies and storage
capacity, and railcar loadings and the demand for rail
transportation. 

To address long-term transportation issues facing the nation's
agriculture sector in the 21st century, USDA also held a National
Agricultural Transportation Summit in Kansas City in July 1998.  This
meeting provided a forum for agricultural shippers and others to
express their concerns about grain marketing and demand, and railroad
service quality issues.  A significant outcome of this summit was an
agreement between USDA and DOT to create a Rural Transportation
Advisory Task Force.  The objectives of this task force include
undertaking joint outreach to users and providers of agricultural and
rural transportation services to further identify transportation
challenges and ways in which these challenges can be met and
considering joint research efforts and policy initiatives to address
these challenges.  While the scope of the task force's
responsibilities will be broad, freight rail service to the nation's
agricultural community will be a key component of its work. 

At hearings held by the Board in April 1998 to review issues
concerning rail access and competition, shippers complained about a
number of service problems, including the difficulties in seeking
relief from serious service disruptions through the Board's existing
procedures.\60 In response, the Board adopted new procedures in
December 1998 providing temporary relief from serious service
problems, through service from an alternative rail carrier, more
quickly.\61 Shippers and smaller railroads can seek temporary
alternative service in two ways:  (1) through an 8-day evidentiary
process for requesting short-term emergency relief for up to 270 days
or (2) through a 45-day evidentiary process for requesting
longer-term relief for serious, though not emergency, service
inadequacies.  Prior to obtaining either type of relief, the
petitioning shipper or railroad must discuss the service issues with
the incumbent rail carrier and obtain the commitment from another
rail carrier to meet the identified service needs.  These expedited
procedures do not require a showing that the rail carrier has engaged
in anticompetitive conduct.  Rather, the petitioning shipper or
railroad must show a substantial, measurable deterioration or other
demonstrated inadequacy in rail service over an identified period of
time. 


--------------------
\60 See Surface Transportation Board, Ex Parte No.  575, Review of
Rail Access and Competition Issues (Apr.  17, 1998). 

\61 See Surface Transportation Board, Ex Parte 628, Expedited Relief
for Service Inadequacies (Dec.  21, 1998). 


      INDIVIDUAL RAILROADS ATTEMPT
      TO IMPROVE SERVICE
-------------------------------------------------------- Chapter 5:2.2

In order to be better able to resolve service problems brought to
their attention by customers, individual Class I railroads have
recently taken a number of actions to improve their customer service
organizations.  For example, some railroads have removed their local
customer service personnel from field offices and replaced them with
centralized customer service centers.  At these service centers,
service representatives either route the customer to the appropriate
department at the railroad for problem resolution or handle the calls
directly.  As noted previously, Union Pacific Railroad expects to
improve its ability to meet its customers' service expectations
through the creation of its new organization that will serve as a
link between its marketing and operating departments.  In its
attempts to improve customer service, Norfolk Southern has added yard
operations, billing, and freight claim settlement to the
responsibilities of its customer service center.  Finally, Burlington
Northern and Santa Fe Railway has instituted a Grain Operations Desk
that serves as a point of contact for grain shippers throughout its
rail system for obtaining information on the arrival of empty grain
cars, improving the spotting of loaded cars, and improving overall
communications between the railroad and its customers. 

The Class I railroads have also been attempting to improve service
through capital investments to improve their infrastructure and
expand their capacity to provide service.  Class I railroad capital
expenditures in 1997 were about 31 percent higher (in constant
dollars) than they were in 1990.  Rail industry officials told us
that these investments are important because they help relieve
capacity constraints caused by restructuring of railroad operations
and the growth of traffic in recent years.  Investments have included
new rail yards and terminals, additional sidings and track, and
additional cars and locomotives.  However, these railroad
representatives believe that further capital investments are needed
to address service problems.  Railroad officials also told us that
hiring new employees is important to increase the number of train
crews available. 


      RAILROAD INDUSTRY AND
      SHIPPERS ADDRESS SOME
      SERVICE ISSUES, WITH THE
      BOARD'S ENCOURAGEMENT
-------------------------------------------------------- Chapter 5:2.3

In April 1998, following its hearings on rail access and competition
issues, the Board issued a decision that called on railroads and
shippers to discuss and identify solutions to a number of
service-related problems.  One problem that the Board noted was the
need for greater communications between railroads and their customers
and the need for railroads to find a more systematic way of
addressing customer concerns.  Accordingly, the agency directed the
railroads to establish formal dialogue with shippers.  In response,
from August through November 1998 the AAR held five meetings across
the country, attended by the Board's chairman, between Class I
railroad executives and their customers to discuss service issues. 
At these meetings, the railroads introduced four proposed measures of
railroad service predictability and asked for feedback on their
usefulness.\62 The industry had developed these measures in July 1998
in response to customer suggestions that such measures were needed. 
The industry maintains that these indicators will reflect the general
health of each railroad and will provide an early warning of
developing operational problems.  The Class I railroads began making
these measures available on the Internet in January 1999; they plan
to update the measures weekly. 

In addition, AAR held a "customer service symposium" in March 1999 in
order to facilitate further dialogue with shippers on aspects of
service such as shipment tracking and problem resolution.  Although
many shippers have welcomed these efforts, some have expressed
skepticism about their impact on broader transportation issues.  For
example, in November 1998, 27 shipper associations sent a letter to
the Board noting that, while they welcomed the railroads' efforts to
improve service predictability, the meetings have not addressed
shipper concerns regarding systemic issues such as the lack of
competitive rail alternatives and the effectiveness of available
regulatory remedies. 

Shippers with specific complaints regarding rail service may seek a
resolution of the problem through the Board's formal complaint
adjudication process.  However, in order to establish an alternative
private sector process for resolving disputes between agricultural
shippers and rail carriers, the National Grain and Feed Association
reached an agreement with Class I railroads and the AAR in August
1998 that provides for compulsory, binding arbitration--as well as
nonbinding mediation--to resolve specific types of disputes.\63

Although this initiative was not specifically called for by the
Board, the Board noted that it is consistent with its preference that
private parties resolve disputes without Board involvement and the
litigation that it involves.  The agreement covers a wide range of
grain and feed products and covers such disputes as the misrouting of
loaded railcars, disputes arising from contracts, and disputes
involving the application of rules governing car guarantee programs. 
Those parties agreeing to use this arbitration process are not
obligated to arbitrate claims that exceed $200,000.  Officials from
one Class I railroad we spoke with said this agreement is like a
small claims court for handling small rate and service problems.  The
agreement is not designed to handle multimillion dollar cases. 

The role of non-Class I railroads in providing freight service has
been another issue of concern.  These railroads, as well as shippers,
have expressed concerns regarding obstacles, such as inadequate
railcar supply and lack of alternative routings, that prevent small
railroads from expanding their business and providing increased
service options to their customers.  In its April 1998 decision, the
Board directed short line and regional railroads (collectively called
small railroads) and Class I railroads to complete discussions they
had begun on these problems.  In September 1998, the American Short
Line and Regional Railroad Association and the AAR announced that
they had reached agreement on provisions aimed at giving short line
and regional railroads access to new routing arrangements to develop
new business.  The agreement also contains guidelines for how certain
fees and rates charged by Class I railroads to provide service to
small railroads will be set and how revenue would be divided between
Class I and smaller railroads.\64 As part of the agreement, the
railroads agreed to submit disputes regarding these provisions to
binding arbitration.  The president of the American Short Line and
Regional Railroad Association described the agreement as a "framework
of partnership and growth for years to come." In a survey conducted
by the association at the end of 1998, executives of small railroads
were also optimistic but cautioned that the implementation of the
agreement depended on cooperation by Class I railroads. 


--------------------
\62 The proposed measures were total cars on-line, average train
speed, average terminal dwell time (average time a railcar is at a
specified terminal), and timeliness of bills-of-lading. 

\63 The Board also has a voluntary binding arbitration process that
offers parties involved in a service dispute a means of informally
resolving their differences through arbitration, with limited Board
involvement.  The Board adopted rules for this process in August 1997
to promote private sector dispute resolution and reduce the
litigation burdens--particularly to smaller entities--associated with
the Board's formal complaint process.  As of February 1999, this
process had not yet been used. 

\64 A division of revenue involves an agreement between railroads on
how to allocate revenue when a car travels over two or more
railroads' track.  The rate-related aspects of the agreement were
subject to Board approval, which was granted on an interim basis on
September 22, 1998, and on a final basis on December 11, 1998. 


   RAILROADS AND SHIPPERS REMAIN
   FAR APART ON THE KEY ISSUE OF
   COMPETITION
---------------------------------------------------------- Chapter 5:3

While the actions described above have addressed some service-related
issues, some shippers remain concerned regarding the systemic issue
of increasing consolidation within the railroad industry.  They
complain that this consolidation has reduced competition within the
railroad industry, leading to a situation in which many shippers are
without competitive rail alternatives and must pay higher rates for
inadequate service.\65 The divergent views held by railroads and
shippers on this issue make it much more difficult to address than
the issues described previously. 

The Board is authorized to impose remedies giving shippers access to
more routing options--alternative through routes, reciprocal
switching, and terminal trackage rights--on a permanent basis. 
However, under its competitive access regulations, the shipper must
demonstrate that its incumbent rail carrier has engaged in
anticompetitive conduct.\66 Specifically, the shipper must show that
the carrier has used its market power to extract unreasonable terms
or, because of its monopoly position, has disregarded the shipper's
needs by providing inadequate service.\67 Some shippers have
complained that this requirement is too difficult to meet, and as a
result, the Board has not imposed competitive routing options where
shippers believe such options are needed.  Some shippers consider the
requirement to demonstrate anticompetitive conduct to be the most
problematic aspect of the Board's interpretation of its statutory
authority on this issue.  The shippers believe that the elimination
of this requirement is essential.  However, the railroads believe
that the demonstration of anticompetitive conduct is a necessary
prerequisite to the imposition of a competitive routing option. 
Railroads cite concerns that increased competition imposed through
regulation would undermine the industry's ability to cover their high
fixed costs and earn adequate returns. 

In its April 1998 decision regarding rail access and competition
issues, the Board stated that it would consider whether to revise its
competitive access rules.  However, the Board directed that, first,
railroads should arrange meetings with a broad range of shipper
interests under the supervision of an administrative law judge to
examine the issue.  In these meetings, shippers and railroads were to
try to mutually identify appropriate changes to the Board's rules
that would facilitate greater access to competitive rail alternatives
where needed.  In response, shippers and railroads held discussions
in May and June 1998 on proposed revisions to these rules but, due to
widely divergent views on the topic, could not come to any agreement. 

In its December 1998 report to Members of Congress on rail access and
competition issues, the Board declined to initiate further action on
this issue, pointing to its adoption of new rules, described
previously, that allow shippers temporary access to alternative
routing options during periods of poor service.  In response to the
impasse between the representatives of railroads and shippers, the
Board observed that the competitive access issue raises basic policy
questions that are more appropriately resolved by the Congress.\68
These questions include the appropriate role of competition,
differential pricing, and how railroads earn revenues and structure
their services.  The Board noted that this issue is complex, and it
is unclear how changes in its rules pertaining to competitive routing
options would affect the nation's rail system and the level of
service provided by this system.  In its December 1998 decision in
the Houston/Gulf Coast oversight proceeding, the Board recognized the
possibility that opening up access could fundamentally change the
nation's rail system, possibly benefitting some shippers with
high-volume traffic while reducing investment elsewhere in the system
and ultimately reducing or eliminating service for small,
lower-volume shippers in rural areas.  Board officials noted that
many small, low-volume shippers have already lost service options as
larger railroads shed their low-density and otherwise unprofitable
lines. 

Fundamental differences exist between shippers and railroads on the
issue of mandating additional competition in the railroad industry. 
If it decides to address this issue, the Congress will need to weigh
the potential benefits of increased competition with the potential
financial and other effects on the railroad industry.  In
deliberating this issue, the Congress will need to consider such
things as the potential impacts of proposed changes on shipper
routing options and railroad service levels as well as the rail
system as a whole, including railroad revenues, infrastructure
investment, capacity, and operations. 


--------------------
\65 Regarding this concern, Board officials have noted that, while
mergers have changed the way the rail system looks, the mergers that
have been approved have had conditions placed upon them to ensure
that no facility served by more than one railroad before the merger
would be limited to service by only one railroad afterwards. 

\66 49 C.F.R.  ï¿½ 1144.5 (1998). 

\67 Midtec Paper Corp.  v.  Chicago and N.W.  Transp.  Co., 3
I.C.C.2d 171 (1986), aff'd sub nom.  Midtec Paper Corp.  v.  United
States, 857 F.2d 1487 (D.C.  Cir.  1988). 

\68 Similarly, as previously explained, the Board recently declined
to provide for an open access arrangement in the Houston area in
response to requests from area shippers and others.  The Board
explained that the proposed arrangement was not tailored to any
demonstrated merger-related harm and, therefore, was not within the
scope of its statutory authority. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 5:4

In commenting on a draft of this report, the Board suggested that we
modify our characterization of the 1997 service problems in the West
to make clear that these problems were not the result of the Union
Pacific/Southern Pacific merger and that implementation of this
merger helped solve the problems.  In addition, the Board suggested
changes to present a more complete and precise portrayal of both its
October 1997 emergency service order in response to these service
problems and its December 1998 decision in the Houston/Gulf Coast
oversight proceeding.  Finally, the Board suggested we expand our
discussion of the Board's assessment of the possible impacts of
providing "open access" throughout the nation's rail system.  In
response to these comments, we revised our description of the service
problems in the West to eliminate the impression that these problems
were caused by the Union Pacific/Southern Pacific merger; we revised
the report to provide a more complete discussion of the Board's
emergency service order and decision in the Houston/Gulf Coast
oversight proceeding; and we added material to the report discussing
the Board's views on the potential impacts of implementing railroad
open access. 


CLASS I RAILROADS IN SELECTED
STATES, 1980 AND 1997
=========================================================== Appendix I

The maps in this appendix show how the number of Class I railroads
has decreased between 1980 and 1997 in Montana, North Dakota, and
West Virginia.  Although the number of Class I railroads operating in
each state decreased markedly, a substantial portion of the track
that is no longer owned by Class I railroads has been acquired and is
operated by smaller, non-Class I railroads.  While non-Class I
railroads can compete with Class I railroads to provide better
service, some are restricted from offering better rates and service
than the neighboring Class I railroad. 

Four Class I railroads operated in Montana in 1980; in 1997 there
were two.  (See fig.  I.1)

   Figure I.1:  Class I Railroads
   in Montana, 1980 and 1997

   (See figure in printed
   edition.)

Source:  Federal Railroad Administration, Office of Policy. 

The number of Class I railroads in North Dakota decreased from four
to two between 1980 and 1997.  (See fig.  I.2.)

   Figure I.2:  Class I Railroads
   in North Dakota, 1980 and 1997

   (See figure in printed
   edition.)

Source:  Federal Railroad Administration, Office of Policy. 

Five Class I railroads operated in West Virginia in 1980; in 1997 the
number had been reduced to three.  (See fig.  I.3.)

   Figure I.3:  Class I Railroads
   in West Virginia, 1980 and 1997

   (See figure in printed
   edition.)


REAL RAIL RATES FOR SELECTED
COMMODITIES TRANSPORTED BY RAIL
========================================================== Appendix II

The following are real (inflation-adjusted) rail rates for selected
commodities and markets/corridors that we reviewed in various
distance categories.  The selection of the commodities and routes is
discussed in chapter 1 of this report.  The distance categories are
as follows:  short is 0 to 500 miles; medium is 501 to 1,000 miles;
and long is over 1,000 miles. 

   Figure II.1:  Real Rail Rates
   for Coal, Selected Short- and
   Long-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

Note:  The Northern Appalachia Coal Supply Region includes Maryland,
Ohio, Pennsylvania, and northern West Virginia.  The Illinois Basin
Coal Supply Region includes western Kentucky, Illinois, and Indiana. 

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

   Figure II.2:  Real Rail Rates
   for Wheat, Selected Short- and
   Long-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

Note:  Origins and destinations with the same label (e.g., Wichita to
Wichita) may cover a large area.  Routes were not further identified
to preserve confidentiality. 

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

   Figure II.3:  Real Rail Rates
   for Corn, Selected Short- and
   Long-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

Note:  Origins and destinations with the same label (e.g., Des Moines
to Des Moines) may cover a large area.  Routes were not further
identified to preserve confidentiality.  Also, due to
confidentiality, the data point for 1996 on shipments within the Des
Moines economic area was excluded. 

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

   Figure II.4:  Real Rail Rates
   for Potassium/Sodium Compounds,
   Selected Short- and
   Long-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

Note:  Origins and destinations with the same label (e.g., Los
Angeles to Los Angeles) may cover a large area.  Routes were not
further identified to preserve confidentiality. 

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

   Figure II.5:  Real Rail Rates
   for Plastic Materials or
   Synthetic Fibers, Resins, or
   Rubbers, Selected Short-,
   Medium-, and Long-Distance
   Routes, 1990 Through 1996

   (See figure in printed
   edition.)

   Figure II.6:  Real Rail Rates
   for Motor Vehicles, Selected
   Medium- and Long-Distance
   Routes, 1990 Through 1996

   (See figure in printed
   edition.)

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

   Figure II.7:  Real Rail Rates
   for Motor Vehicle Parts or
   Accessories, Selected Medium-
   and Long-Distance Routes, 1990
   Through 1996

   (See figure in printed
   edition.)

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


ORGANIZATIONS CONTACTED
========================================================= Appendix III


   FEDERAL AGENCIES
------------------------------------------------------- Appendix III:1

Department of Agriculture
Department of Energy
Department of Transportation
Surface Transportation Board


   RAILROAD ASSOCIATIONS
------------------------------------------------------- Appendix III:2

American Short Line and Regional Railroad Association
Association of American Railroads


   CLASS I RAILROADS
------------------------------------------------------- Appendix III:3

Burlington Northern and Santa Fe Railway Company
Canadian National Railway
Consolidated Rail Corporation
CSX Transportation
Illinois Central Railroad Company
Kansas City Southern Railway Company
Norfolk Southern Corporation
Union Pacific Railroad Company


   OTHER THAN CLASS I RAILROADS
------------------------------------------------------- Appendix III:4

Red River Valley and Western Railroad Company
San Joaquin Valley Railroad Company


   RAILROAD SHIPPER ASSOCIATIONS
------------------------------------------------------- Appendix III:5

Alliance for Rail Competition
American Automobile Manufacturers Association
National Association of Wheat Growers
National Automobile Transporters Association
National Industrial Transportation League
North American Millers Association
North Dakota Grain Dealers Association
Pacific Northwest Grain and Feed Association


   SHIPPERS
------------------------------------------------------- Appendix III:6

Agri Sales, Inc.  (North Dakota)
Berthold Farmers Elevator Company (North Dakota)
BTR Farmers Co-op (North Dakota)
Columbia Grain Company (Montana)
Crete Grain Company (North Dakota)
Enderlin Farmers Elevator (North Dakota)
Farmers Union Grain (North Dakota)
Harvest States (North Dakota)
Hunter Grain Company (North Dakota)
Kindred Farmers Elevator (North Dakota)
Marion Equity Elevator (North Dakota)
Mayport Farmers Co-op (North Dakota)
Northwest Equity Elevator (North Dakota)
Otter Tail Power Company (Minnesota)
Wyndmere Farmers Elevator (North Dakota)


   OTHERS
------------------------------------------------------- Appendix III:7

Fieldston Company, Inc.
GW Fauth & Associates
LeBoeuf, Lamb, Green & McRae
L.E.  Peabody & Associates
Massachusetts Institute of Technology, Center for
 Transportation Studies
North Dakota Public Service Commission
North Dakota Wheat Commission
Upper Great Plains Transportation Institute


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

Stephen Brown
Helen Desaulniers
Lynne Goldfarb
Judy Guilliams-Tapia
Michael Ibay
Richard Jorgenson
Mitchell Karpman
Lewison Lem
Luann Moy
James Ratzenberger
Deena Richart


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