Freight Railroads:

Updated Information on Rates and Other Industry Trends

GAO-07-291R: Published: Aug 15, 2007. Publicly Released: Aug 15, 2007.

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Jayetta Z. Hecker
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Over 25 years ago, Congress transformed federal freight rail transportation policy. At that time, after almost 100 years of economic regulation, the railroad industry was in serious economic decline, with rising costs, losses, and bankruptcies. In response, Congress passed the Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980. Together, these pieces of legislation substantially deregulated the railroad industry. In particular, the 1980 act encouraged greater reliance on competition to set rates and gave railroads increased freedom to price their services according to market conditions, including the freedom to use differential pricing--that is, to recover a greater proportion of their costs from rates charged to those shippers with a greater dependency on rail transportation. At the same time, the 1980 act anticipated that some shippers--commonly referred to as "captive shippers"--might not have competitive alternatives and gave the Interstate Commerce Commission (ICC), and later the Surface Transportation Board (STB), the authority to establish a process through which shippers could obtain relief from unreasonably high rates. This process establishes a threshold for rate relief, allowing a rate to be challenged if it produces revenue equal to or greater than 180 percent of the variable cost of transporting a shipment. Since the passage of the Staggers Rail Act of 1980, we have issued several reports on the freight railroad industry. On October 6, 2006, we issued our most recent report, in which we reported that industry rates and the rates for many commodities (e.g., coal and motor vehicles) had generally declined from 1985 through 2004. We also reported that freight railroad companies do not consistently report revenues raised from fuel surcharges. Some railroads report fuel surcharges as part of their general revenues, others categorize the surcharges separately as "miscellaneous revenue," and still others may not report revenue collected from fuel surcharges at all. This inconsistent reporting led us to recommend that STB review its method of data collection to ensure that all freight railroads are consistently and accurately reporting all revenues collected from shippers. Congress asked us to update our October report using 2005 data, which became available after we issued our report. This report provides that update, including changes in industry and commodity rates, other costs to shippers (such as railcar ownership and miscellaneous revenue), and data on traffic traveling at rates equal to or greater than 180 percent revenue to variable cost (R/VC).

In 2005, industry rail rates increased 7 percent over their 2004 levels, the largest annual increase over the past 20 years, outpacing the rate of inflation for only the second time in 20 years. Rates also increased for the commodities we reviewed--including such commodities as coal and grain. Freight railroad companies continued a 20-year trend of shifting other costs to shippers, including railcar ownership. Revenues railroads reported as miscellaneous revenue--a category that includes fuel surcharges--nearly tripled from $633 million4 in 2004 to $1.7 billion in 2005. While it remains difficult to precisely determine how many shippers are captive to a single Class I railroad because available proxy measures can overstate or understate captivity, 2005 data indicate that potentially captive traffic continued to drop. At the same time, traffic traveling at rates significantly above the threshold for rate relief increased in 2005. In 2005, industry rail rates rose 7 percent over their 2004 levels. This represents the largest annual increase in rates during the 20-year period from 1985 through 2005, and outpaced changes to inflation--5 percent in 2005. Despite this increase, rates for 2005 remain below their 1985 levels. While rate increases in 2005 outpaced inflation for just the second time since 1985, over the long term, rate increases have lagged behind inflation rates. Similar to overall industry trends, rates for individual commodities have increased. In 2005, rates increased for all 13 commodities that we reviewed. Despite this increase, 2005 rates for several commodities remain lower than in 1985. In 2005, the largest rate increase exceeded 12 percent, while the smallest increase was about 2 percent. In 2005, freight railroad companies continued a 20-year trend of shifting other costs to shippers. With the addition of the 2005 data, our analysis shows a 20 percent shift in railcar ownership since 1987. In 1987, railcars owned by freight railroad companies moved 60 percent of tons carried. In 2005, they moved 40 percent of tons carried, meaning that freight railroad company railcars no longer carry the majority of tonnage. In 2005, the amount of industry revenue reported as miscellaneous nearly tripled over 2004 levels, rising from about $633 million to over $1.7 billion. STB has proposed to more closely track and otherwise monitor revenues associated with fuel surcharges, but it is too soon to tell whether STB's proposal will affect the reporting and tracking of miscellaneous revenue in the Carload Waybill Sample. It remains difficult to determine precisely how many shippers are captive to one railroad because the proxy measures that provide the best indication can overstate or understate captivity. While traffic traveling at rates over 180 percent R/VC declined in 2005, traffic traveling at rates substantially over the threshold for rate relief increased. In 2005, traffic traveling at rates over 300 percent R/VC increased. This increase followed declines in 2003 and 2004 but continued a general upward trend since 1985. Data for 2005 confirm the trends and findings we reported and support the recommendations we made in October 2006.

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