Summary

The environment in which railroads have set their rates has been influenced by ongoing industry consolidation, competitive conditions, and railroads' financial health. As a result of mergers, bankruptcies, and redefinition of what constitutes a major railroad, the number of the nation's largest freight railroads fell from 30 in 1976 to nine in early 1999, with the five largest accounting for 94 percent of the industry's operating revenues. Railroad rates have generally fallen 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 some long distance rail shipments of wheat from northern plains states like Montana and North Dakota to west coast destinations. In general, rail routes facing competition--either from railroads or from trucks and barges--saw 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 where they were needed and inconsistent pickup and delivery of cars. Railroads attribute service problems to such factors as capacity constraints and industry downsizing. Although the federal government and the railroads have taken several steps to address rail service problems, these actions do not address shippers' belief that greater competition is needed to improve services.

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.