NEW YORK — U.S. ports in the last five years have struggled to increase their operations and capacity in order to handle goods coming from Asia.

The resulting pressure on the nation’s railroad system has received far less attention, even as a recent study by the U.S. Government Accountability Office concluded that the system will be pushed to the limit if it isn’t expanded and updated.

JayEtta Hecker, director of physical infrastructure issues for the GAO, testified before a Senate subcommittee this month about some of the critical challenges facing the domestic rail industry. Hecker’s testimony was based on preliminary results of a GAO study examining the condition of the rail system and its ability to operate efficiently in the future.

Railroads are a vital mode of transportation for shippers. According to the GAO study, 42 percent of freight travels by rail.

“Major freight railroads have reported that they expect to invest about $8 billion in infrastructure during 2006 — a 21 percent increase over 2005,” Hecker said, according to a transcript of the testimony. “Although railroads are sufficiently profitable to be investing at record levels today, it is not certain whether in the future investments will keep pace with the projected demand.”

Meeting capacity demands already has become a challenge. Hecker noted that freight rates “generally declined” between 1985 and 2000, largely because of consolidation.

“In 1976, there were 63 Class I railroads operating in the U.S. compared with seven Class I railroads in 2004,” Hecker told the subcommittee.

In 2004, four of those Class I railroads, defined as having operating revenue of more than $277.7 million, accounted for more than 89 percent of the rail industry’s revenues. Consolidation also has helped significantly reduce labor costs and allowed companies to use track more efficiently.

However, freight rates have inched up between 2001 and 2004, a trend Hecker attributed to increased investment in key routes and employment. Adding to that is a growing problem with supply and demand.

“The industry is increasingly operating in a capacity-constrained environment where demand for their services exceeds their capacity,” Hecker said.

There is also concern that, as a result of consolidation, shippers have few, if any, choices when it comes to shipping by rail. In order to make up costs across their systems, railroads charge more to shippers that have fewer transportation alternatives. Government regulations allow shippers to recover some of those costs if they reach a certain level. However, the process of recovering the costs is so lengthy and expensive that it has been virtually unused.

This story first appeared in the June 27, 2006 issue of WWD. Subscribe Today.

“There is widespread agreement the rate relief process is inaccessible to most shippers and does not provide expeditious handling and resolution of complaints,” Hecker said. “The process is expensive, time-consuming and complex, and, as a result, several shippers’ organizations told us that it is unlikely they would ever file a rate case.”

Hecker explained that since 2001, only 10 cases have been filed, taking between 2.6 and 3.6 years — or an average of 3.3 years per case — to complete. The cost was upward of $3 million, making it prohibitive to go through the process unless millions were at stake.

“Our preliminary work shows there has been little assessment by the federal government of where areas of inadequate competition might exist or how changes in industry concentration might be resulting in the inappropriate exercise of market power,” Hecker added.

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