Freight Railroad Regulation: Surface Transportation Board's Oversight Could Benefit From Evidence Better Identifying How Mergers Affect Rates

GAO-01-689 Published: Jul 05, 2001. Publicly Released: Jul 20, 2001.
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Railroads have been a primary mode of freight transportation for many years, especially for bulk commodities such as coal and grain. Over the last 25 years, the freight railroad industry has undergone substantial consolidation largely to reduce costs and increase efficiency and competitiveness. Some companies that rely on rail shipments are concerned that the mergers have reduced railroad competition and led to higher rail rates and poorer service. This report reviews (1) the role the Surface Transportation Board plays in reviewing proposed railroad mergers and overseeing mergers that have been approved and how post-merger oversight is conducted, (2) how the Board mitigates potential harm to competition, and (3) how the Union Pacific/Southern Pacific merger affected rail rates in selected geographic areas. GAO found that the Board reviews railroad merger proposals and approves those that are consistent with the public interest, ensures that any potential merger-related harm to competition is mitigated to preserve competition, and oversees mergers that have been approved. The Board imposes conditions on mergers to mitigate potential harm to competition. The Board also focuses on the overall direction and magnitude of rate changes when analyzing rail rates as part of merger oversight. It does not isolate the effects of mergers on rates from other effects. When GAO used this approach to analyze how the Union Pacific/Southern Pacific merger affected rail rates, it found that the merger reduced rates in four of six commodities studied. However, for two of the commodities, the merger put upward pressure on rates, even though other factors caused overall rates to decrease. By focusing on overall rate decreases, the Board will be unable to determine whether the decrease is due to the merger or other factors.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Surface Transportation Board To better assist the Board in the oversight of railroad mergers and in ensuring that conditions imposed in such mergers protect against potential harm to competition, the Chairman, Surface Transportation Board, should require railroads and others, when appropriate, to provide information to the Board that separately identifies the factors affecting post-merger changes in rail rates and the specific impact of these factors on rate changes. In particular, when appropriate, the Board should require railroads and others to provide information that identifies the effects of mergers on changes to rail rates, particularly in those geographic areas subject to potential reductions in competition. This information should be used in deliberations on the need to modify conditions, add reporting requirements, or initiate proceedings to determine if additional conditions are required to address competition-related issues.
Closed – Not Implemented
The Surface Transportation Board (Board) has indicated that it is amenable to seeing the general approach suggested by this recommendation developed within the context of a public merger oversight record where it would be subject to scrutiny and refinement by relevant parties. However, the Board has not had an opportunity to apply the recommendation since there has been no vehicle (merger oversight) in which to implement it. There are no merger applications pending at the current time, and it is not certain when, if at all, the Board would be in a position to implement this recommendation. Therefore, it is being closed without implementation.

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