Canadian National
Initial Submission
to the
Canada Transportation Act Review Panel
Perspectives on Competitive Rail Access Issues
October 6, 2000.Contents
1.0 Executive Summary
2.0 Canadian Rail Freight Deregulation is Working
2.1 The best rail freight system in the world 4
2.1.1 For shippers: competitive rates, improved service 4
2.1.2 For governments: subsidies eliminated, private
investment at record levels 6
2.2 But rail recovery is fragile 7
2.2.1 Economic growth has increased traffic volume but not
revenues 7
2.2.2 Need to increase market share against truck competition 7
2.2.3 Shipper choices drive competition 8
2.2.4 The challenge in north-south trade 10
2.2.5 Canadian railroads more regulated than U.S. roads 11
3.0 Full Cost Recovery is Necessary to Preserve Gains Made
3.1 Differential pricing: a key element in recovering system costs 12
4.0 Perspectives on Competitive Rail Access Issues
4.1 Defining access 15
4.1.1 Access lessons from around the world 15
4.1.2 Key principles 16
4.2 Response to competitive access proposals 17
4.2.1 Regional railroad concept 17
4.2.2 Interswitching and Competitive Access Rates (CAR) 18
5.0 Summary.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 1
1.0 Executive Summary
Canadian rail freight deregulation has been a success for the Canadian economy,
shippers and taxpayers. It has significantly contributed to the substantial economic
recovery of Canada's railroads, but this recovery is incomplete and fragile.
A Conference Board of Canada study released earlier this year concluded there is a
strong, positive correlation between deregulation, freight rates, rail productivity, and
financial performance. Canadian shippers now enjoy the lowest rail freight rates in the
developed world and improved productivity has resulted in better customer service.
Equally significant, subsidies that were costing Canadian taxpayers hundreds of
millions of dollars every year have been eliminated.
Reforms to Canada's rail policy have helped lift the domestic rail industry from deficits
and economic decline. Deregulation, along with rigorous cost containment,
investments, network rationalization, improved asset utilization and acquisitions and
strategic alliances, has created a platform for growth at CN.
But the recovery is not yet complete. Despite impressive service performance and
productivity gains, rail's share of the growing freight transportation market is still
shrinking and more than eight years of sustained economic growth has increased rail
traffic volume, but not revenues.
The challenge before Canadian railroads today is to grow the business, to recapture
market share from trucks, and compete head-to-head with U.S. railroads for business
in the fast growing, but intensely competitive North American market.
Canada has always been a nation of traders with around 40 per cent of our Gross
Domestic Product earmarked for export and 85 per cent of all exports destined for the
U.S. But Canadian goods face a distance disadvantage to U.S. markets compared to
U.S.-based goods. Canada's future economic prosperity is directly dependent on an
internationally competitive rail transportation system.
Cost recovery and investment is key to a competitive rail system. Railroads are highly
capital intensive, much more than most industries. Railroads depend on investment.
Investment, in turn, depends on capital markets getting adequate returns.
In this period of sustained economic growth, CN is now beginning to earn its cost of
capital, but CN is far from earning its cost of capital over a full economic cycle.
To achieve both full cost recovery and the lowest rates for shippers, railroads rely on
differential pricing. This approach is based on pricing in accordance with demand - a
standard practice in North American industries with high fixed costs. It optimizes
contribution to fixed costs to the benefit of all stakeholders, especially shippers that
are highly rail-dependent..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 2
Another key to an internationally competitive rail system is the alignment of the
Canadian and U.S. regulatory environments. Currently, Canadian railroads are subject
to more regulation than are U.S railroads.
It is against this background that the CTA Review Panel, in preparing its interim report
on competitive access issues, will have to evaluate a number of proposals based on
open access concepts. The challenge facing Review Panel members is to balance the
legitimate concerns of shippers with the fundamental requirement for an
internationally competitive rail system. No one benefits more from preserving balance
than shippers.
Open access, allowing multiple carriers access to a network owned by another carrier,
would constitute a major structural change to Canada's rail transportation system.
The story of open access around the world is a cautionary tale. Open access regimes in
the United Kingdom, the European Community and Australia, are all significantly
subsidized and fall well short of the performance and policy objectives met by
Canada's current system.
Any recommendations for regulatory change based on access - including access
provisions for regional railroads - must maintain the integrity of differential pricing
and be measured against a set of core principles that first addresses:
ú full cost recovery
ú access reciprocity
Then includes:
ú full deregulation
ú commercial arbitration
ú respect for NAFTA and WTO rules
Any access proposal that fails to address each of these principles constitutes regulated
or forced access and may constitute a subsidy and/or expropriation under WTO or
NAFTA respectively.
Current proposals, such as a regional railroad focussed on grain transportation or the
CAR (competitive access rates) proposal, fail to meet the core principles outlined above
and both would undermine differential pricing. To respond such proposals would
quite simply constitute an unwarranted and possibly unlawful transfer of wealth from
one participant in the transportation system to another.
CN is firmly of the view that the principles that underlie Canada's current legislative
and regulatory system should be the basis for the future. Deregulation has significantly
contributed to a safe, efficient, flexible, affordable and competitive rail transportation
system for Canadian shippers..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 3
The Canadian transportation system must be a key contributor to Canada's
competitiveness, particularly in NAFTA markets. The public policy imperatives to realize
this vision and ensure railroad sustainability are continued deregulation, a National
Transportation Policy that is effective for all modes, and taxation equity between
modes of transport and between jurisdictions.
In its submission of November 17, 2000, CN will develop recommendations that
advance this vision..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 4
2.0 Canadian Rail Freight Deregulation is Working
2.1 The best rail freight system in the world
Deregulation of the rail industry in Canada has created stronger railroads and more
competitive transportation options for shippers with improved access to more North
American markets. The process of deregulation has taken place in two major phases
over the past 14 years.
In 1987, the National Transportation Act allowed railroads and their customers to
enter into mutually agreed confidential contracts. At the same time, the NTA
introduced significant shipper protection measures.
In 1996, the Canada Transportation Act recognized the need to reorganize feeder lines
to address the costs associated with an overbuilt railroad system. This process of
rationalizing the networks of the country's two major railroads has led directly to the
development of a strong, vibrant shortline rail industry in Canada. Currently, there are
56 shortlines and regional railroads operating 10,000 miles of track in Canada. The
shortlines took over local service to shippers on former CN and CP feeder lines while
delivering, in partnership with CN and CP, the long-haul benefits of a mainline
railroad.
These significant moves to deregulate the industry in Canada have made the rail
industry much more productive and efficient and have produced substantial,
quantifiable benefits for shippers. Public benefits include the elimination of costly
taxpayer-funded subsidies and a more competitive rail system within North America.
2.1.1 For shippers: competitive rates, improved service
An element of a competitive rail system is competitive rates for shippers. Today, rail
freight rates paid by Canadian shippers are the lowest in the world - 60 per cent
below the international average. Since deregulation of the rail industry in 1987,
shippers have benefited from a 35 per cent decline in real freight rates. The Canadian
rail system is now one of the most efficient in the world..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 5
Shippers have also benefited from CN's faster transit times and on-time delivery
performance levels better than 90 per cent for carload traffic.
Rates have declined significantly...
Freight Revenue per RTM and Price Index
Index 1992 = 100
Rates declined 35%
since NTA - 1987
60
80
100
120
140
160
180
200
1968 1973 1978 1983 1988 1993 1998
CN & CP
.and on-time
" A scheduled railroad
" Faster transit times
" On-time performance
over 90%
.safe .
FRA Train Accidents - CN
Ratio per Million Train Miles
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1986 1989 1992 1995 1998
Note: 1999 includes IC
Percentage
Efficient
0
10
20
30
40
50
60
70
80
90
100
1992 1993 1994 1995 1996 1997 1998 1999
Industry-leading
Operating Ratio
of 72 in 1999
Comparative International Rail
Freight Charges
(U.S. cents per tonne-kilometer)
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Switzerland
Austria
France
U.K.
Germany
Italy
Spain
Sweden
Australia (QR)
Australia (WR)
USA
Canada
Today CN is
Competitive Freight Rates.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 6
2.1.2 For governments: subsidies eliminated, private investment at
record levels
Deregulation has led to improved service, improved safety and lower rates. In addition,
under deregulation, subsidies that were costing Canadian taxpayers hundreds of
millions of dollars every year have been eliminated. The virtual elimination of federal
government freight subsidies, except for grade crossing upgrades, has been a further
benefit of deregulation in Canada. In 1994, these annual subsidies were nearly $700
million. Since 1994, Canada's two major railroads have doubled their investment in
plant and infrastructure. In 1999, CN and CP together invested more than $1.5 billion
to ensure continued service improvements for their customers.
.significant private investments
by railroads
CN & CP Investments
Cdn $ M
1,573
1,846
1,467
837
1,032
907
1994 1995 1996 1997 1998 1999
Source: RAC
Government subsidies abolished...
Federal Freight Subsidies
Cdn $ M
683 696
248
25 29
1994 1995 1996 1997 1998
Source: RAC.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 7
2.2 But rail recovery is fragile
2.2.1 Economic growth has increased traffic volume but not
revenues
The railroad industry has been successful in substantially reducing costs. However, it
still faces significant revenue challenges. Canada is in a sustained period of economic
expansion and growth. Rail freight volumes are at record levels, keeping pace with the
expanding economy. But rail freight revenues have been virtually flat during this
period, because average rates per tonne-kilometer have fallen dramatically. Impressive
productivity gains have helped CN deliver the efficient service that shippers demand.
However, increased workloads combined with flat revenues jeopardize CN's, and
indeed the industry's, long term ability to sustain the level of investment necessary to
maintain and continuously improve the network.
2.2.2 Need to increase market share against truck competition
While shippers' transportation requirements are growing, rail's comparative share of
this growing market is shrinking. Truck competition is fierce. Technical innovations,
coupled with expanded size and weight limits as well as extended hours of service,
mean trucks can compete for freight that was once exclusive to rail. For railroads to
grow their business they need to meet truck competition head-on with new service
innovations and better reliability.
CN has introduced several new services in 2000 targeted specifically at winning back
some of this traffic. The company has shaved 24 hours off its transit time between
CN Growth
GDP
Revenue
Ton-Miles
Total
Revenue
Revenue
Per Ton Per
Mile 0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1991 1992 1993 1994 1995 1996 1997 1998 1999
CN Data (IC Excluded) In Constant Dollars 1992 = 100.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 8
Toronto and Vancouver, reduced Toronto-Moncton service to less than 24 hours,
introduced overnight RoadRailer intermodal service between Montreal and Toronto
and recently announced its expansion to Chicago. Continued investment in new
services is required if rail is to win back market share.
2.2.3 Shipper choices drive competition
To increase market share and ensure financial durability, railroads must shift their
focus from cost containment to growing their business. This is an enormous challenge
in today's highly competitive market where shippers have transportation choices and
shippers' customers have greater sourcing options. Approximately 99 per cent of rail
business is subject to intense competitive pressures. CN's freight service offerings must
compete with many other options available to shippers and receivers. Most benefit
from a combination of the following forms of competition, which are not mutually
exclusive.
ú Direct truck competition - over half of the combined tonnage of CN and CP can
also be moved over-the-road.
ú Direct rail competition - 41 per cent of the combined tonnage of CN and CP where
shippers have fully competitive rail options.
ú Multi-plant competition - For 22 per cent of the combined tonnage of CN and CP,
shippers have the flexibility to bundle plant shipments resulting in further leverage
with the railroads on rates and volumes.
ú Source competition - 18 per cent of the combined tonnage of CN and CP is in
commodities such as coal, for example, which are sensitive to alternate source
competition.
Operating Revenues
Cdn $ Billions
$13.1
$12.1
$11.0
$9.2
$14.3
1993 1994 1995 1996 1997
For-hire trucks
CAGR 11.7%
$6.0
$6.6 $6.4 $6.4
$7.1
Gap is
widening
Rail CAGR
4.3%
% of Canadian Freight Revenues
Source: Statistics Canada (excludes pipelines)
Market Share
Rail
24%
Marine
8%
Truck
68%.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 9
ú Truck to reloads on other railroads - for 18 per cent of the combined tonnage of
CN and CP, a shipper can use over-the-road transport to reach a competitor
railroad including U.S. rail terminals in Canada or the U.S.
Further competitive pressures are emerging as a result of structural and technological
changes in the marketplace.
Shipper consolidations are creating more and more customers with the flexibility to
move product from one plant to another. As a result, these customers are able to
"bundle" their shipping requirements and leverage their market power in rate
negotiations.
Similarly, e-commerce is putting added pressure on the railroads to increase their
efficiency. E-commerce provides new means of aggregating demand, providing
shippers with added pricing leverage. In addition, e-commerce accelerates the move
toward just-in-time delivery and fragmentation into smaller shipment sizes. This trend
poses a major service challenge for the railroad industry.
Rail Competition Profile
Million Tons
(Combined CN & CP )
233
22%
18%
18%
1%
Total Rail
Tonnage
Direct Rail
Competition
Multi-Plant
Competition
Source
Competition
Reload
Competition
Other Shippers
Key shipper
sectors
consolidating
52%
Subject to
direct truck
competition
Truck to reloads
on other
railroads
Other
product
sources
Within
interswitching
41%.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 10
2.2.4 The challenge in north-south trade
Further to the competitive pressures of shipper choice and market trends, globalization
generally, and the North American Free Trade Agreement in particular, are
reconfiguring Canadian shippers' transportation requirements. Canada-U.S. trade is
growing by approximately 10 per cent annually leading to an increasingly integrated
North American marketplace and an intense need for efficient north-south
transportation services for Canadian shippers.
Another contributing factor to the growth in north-south transportation requirements
is the rise in transborder mergers of the railroads' customers. For example, of CN's top
20 customers, nearly 75 per cent have plants in at least two of the three NAFTA
countries. These shippers require integrated and efficient North American
transportation solutions.
Given that 85 per cent of Canadian exports are to the U.S. and that 40 per cent of this
trade moves by rail, it is clear that efficient railroads are vital to Canada and its ability
to compete. Currently, Canadian shippers benefit from the lowest rail freight rates in
the world, which helps compensate for the longer distances goods must be
transported to reach their destination in the competitive North American market.
But market developments - such as further consolidation among U.S. railroads - could
quickly tip the balance of competitive advantage in favor of U.S. suppliers.
Should U.S. transcontinental mergers occur, the longer singleline service created would
push U.S. railroads to favor U.S. originated goods over Canadian ones.
CN customers are
North American in scope
Top 20 CN Customers = 34% of CN revenues
Plants in
Canada, U.S.,
Mexico
14
Plants in
Canada only
6.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 11
2.2.5 Canadian railroads more regulated than U.S. roads
In the context of growing north-south trade, the Canadian rail industry's ability to
continue to deliver efficient, integrated and cost-effective service depends, in
significant part, on the alignment of the Canadian regulatory regime with that
governing rail transportation in Canada's principal end market, the United States.
Regulation imposed in one country can produce competitive consequences that could
directly impede a shipper's ability to compete in its end-market. Shipper protection
regulation for example, can impede flexibility, efficiency and the revenue flows
required for re-investment in the rail network.
Currently, Canada provides the highest level of shipper protection of any jurisdiction
and significantly more shipper protection than does the regulatory system of the
United States our primary competitor.
Canada - U.S. Regulatory Regimes Comparison
3.0 Full Cost Recovery is Necessary to Preserve Gains Made
The Canadian rail system has made tremendous gains under deregulation. For
shippers, the rates are lowest in the world, and service has continued to improve.
Government subsidies have been abolished and private investment is at record levels.
But we have also seen that rail recovery is fragile as a result of revenue challenges,
market share shrinkage and shipper choice.
In a highly competitive market, the railroad industry's capacity to compete is
dependent on its ability to continue to invest in its network and, in so doing, provide
shippers with better service. This investment necessitates that railroads cover their cost
of capital.
Applicable Traffic
Interswitching
Rate Arbitration
Competitive Line Rates
Common Carrier Obligation
Canada U.S.
 All
 Mandated
 Rate regulated
 Mandated Final Offer
Arbitration - available to all
shippers
 Deregulated traffic is
exempt
 Voluntary
 Rate negotiated
Only if:
 Revenue/cost
threshold exceeded
 No truck or rail
competition
 Stand-alone costs
exceeded
 None
 Mandated
 Mandated
 Mandated.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 12
3.1 Differential pricing: a key element in recovering system costs
Railroad investments in fixed plant and equipment are four times higher than the
average of other industries and three times higher than the trucking sector. Today, CN
invests roughly $1 billion annually in capital improvements. The high fixed costs - the
right-of-way and the equipment running on it - are incurred whatever the volume of
traffic in the system.
Ensuring the investment needed to cover high fixed costs and improve service depends
on a railroad's ability to achieve revenue adequacy, in other words earning the cost of
capital. In this period of sustained economic growth, CN is now beginning to earn its
cost of capital, but CN is far from earning its cost of capital over a full economic cycle.
To achieve both full cost recovery, and the lowest rates for shippers, railroads rely on
differential pricing. This approach requires pricing in accordance with demand rather
than by cost formulas. Differential pricing is a standard practice in most North
American industries with high fixed costs. It optimizes contribution to fixed costs for
the benefit of all stakeholders, and especially the most rail-dependent shippers as the
following charts demonstrate.
Capital Intensiveness of Canadian Industries
as a Ratio of Assets to Revenues
Source: Globe & Mail Report - July 1999
Assets to
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Industrial Prods.
Steel
Telephone
Forest Prods.
Integrated
Chemicals
Gas & Electrical
Railroads 2.90
2.58
1.46
1.42
1.40
1.20
1.12
1.09.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 13
Differential Pricing
In the long run, the inability to price according to demand would lead to lower levels
of service and either higher rates or subsidies.
Even with differential pricing, the rate of return on capital in the rail industry is lower
than in most other major industry groups.
Differential pricing is a
sustainable model
Example: A railroad with $180
of fixed costs to recover
$190
$90
$130
$30
$60
$160
Rail Rates Contribution to Fixed Costs
low rail dependency
medium rail dependency
high rail dependency
Eliminating differential pricing
is not sustainable
high rail dependency
Rail Rates Contribution to Fixed Costs
medium rail dependency
$60
$160
$60
$160 Only $120 of
fixed cost
contribution
Low rail
dependency
shipper leaves
the rail network
-$30
Differential Pricing
Model
Differential Pricing
Eliminated
 The most rail-dependent
shippers pay a greater
proportion of fixed costs
than less rail-dependent
shippers
 Average pricing results in
lower costs for some
customers and higher for
others
 Same proportion of
contribution to fixed costs
paid by all shippers
Consequence
 The least rail-dependent shippers
leave the network to competing
option
 This leaves a proportion of fixed
costs not recovered, necessitating
higher average costs for those
remaining
 Government subsidies required
Current Practice Consequences of the Loss of Differential Pricing.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 14
Any initiative, including those that would prevent the railroads from having the
opportunity to recover their cost of capital would result in a deterioration of the rail
network, undermining service quality and efficiency. Without an efficient rail service,
Canadian shippers would have fewer transportation options, inhibiting their ability to
compete effectively in the NAFTA marketplace.
5 Year Average Return on Capital by Canadian Industry Group
15.5% 15.2%
10.7% 10.4% 10.3% 9.6%
8.4% 8.1%
5.6%
0.0%
5.0%
10.0%
15.0%
20.0%
Steel Paper
Products
Railroads Integrated
Oils
Chemicals Industrial
Products
Automotive Fertilizer &
Potash
Oil & Gas
Source: Conference Board of Canada
Percentage
Railroad
industry.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 15
4.0 Perspectives on Competitive Rail Access Issues
Cost recovery and investment are key to a competitive rail system. It is within this
context, and against a background which demonstrates that deregulation is working,
that the CTA Review Panel must consider any competitive access proposals.
4.1 Defining access
In his report of December 21, 1998, Grain Handling & Transportation Review, Justice
Estey recommended, that any "person" should be allowed access to a railroad's right-of-
way. This has become the trigger for extensive discussion and a wide variety of
proposals concerning what is termed open access.
The term open access requires definition and clarity on five key variables:
ú Ownership structure - Is it based on the current vertically integrated North
American model, or on a separation of infrastructure and operating entities?
ú Access pricing - Is it keyed to market-based full cost recovery, or an indirect
subsidy to shippers through low access fees?
ú Access reciprocity - Will all railroads have fully reciprocal rights to each
others' lines, or will access rights favor some railroads and not others?
ú Shipper protections - Will access replace existing shipper protections or become
another layer of shipper protections?
ú Government subsidies - Is the access regime based on fully commercial principles
or does it require significant public subsidies to operate?
The definition of any access model is complex and would result in a dramatically
different framework than the one in which Canadian railroads currently operate.
4.1.1 Access lessons from around the world
Coincident with the debate here in Canada, open access regimes have been adopted in
other jurisdictions around the world. Of particular note are those in Australia, the
United Kingdom and the European Union. While industry structures vary in these
jurisdictions, results to date indicate significant government subsidies are still required.
Furthermore, these are considered perfect competition models where customer
protections are not necessary..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 16
World Experience with Open Access
Given the top-rated performance of Canadian railroads and the questionable results of
open access regimes elsewhere, there is an onus on proponents of open access here in
Canada to demonstrate that such a system will improve efficiency and deliver
economic benefits to all stakeholders while maintaining the competitiveness of
Canadian railroads in the North American marketplace.
4.1.2 Key principles
In evaluating any access proposal, the CTA Review Panel must also ensure that the
economic integrity of the rail system is preserved without subsidies. To this end, the
following principles must be adhered to:
ú Full cost recovery - Access fees must be market-based and negotiated rather than
regulated. Failing a negotiated agreement of the access fee, commercial arbitration
must consider the following principles of cost recovery:
ú increased operating costs due to a new entrant
ú return on embedded capital
ú payment for new capital
ú lost contribution to fixed costs
ú Enhance efficient competition - Given full cost recovery to preserve infrastructure
quality, railroads would compete on service and variable costs.
ú Full deregulation - With open access, market forces, not regulation, drive industry
efficiency, service and price. Perfect competition and customer protections cannot
co-exist.
ú Maintain vertical integration - The North American model allows for efficient
allocation of capital to maintain and improve the network and protect safety
standards.
Infrastructure
Ownership
Access Pricing
Government
Subsidies
Shipper Protections
Australia
 Mixed
 Regulated at partial
cost recovery
 Significant
 None
United
Kingdom
 Separated
 Regulated at full cost
plus profit
 Very Significant
 None
European Union
 Mixed
 Regulated at partial
cost recovery
 Very Significant
 None.CN Perspectives on Competitive Rail Access Issues - October 6, 2000 17
ú Access reciprocity - CN and CP will insist on and are entitled to full reciprocity
rights to run on any other line including shortlines and regional railroads that are
given rights to run on their lines. In particular it is critical to balance access
between Canadian and U.S. carriers operating in both countries otherwise U.S.
railroads could "cherry pick" Canadian traffic.
ú Commercial arbitration - Commercial arbitration would be used to resolve access
fee disputes and rate disputes in circumstances where there is no competition.
ú Maintain a Canadian rail system that is competitive in North America - To
succeed, Canadian shippers need an efficient rail system that allows them to be
competitive in their end markets.
ú Respect NAFTA rules - Under NAFTA and WTO, access rules that are, in effect,
disguised subsidies would be counter to Canada's international trade obligations.
4.2 Response to competitive access proposals
Access proposals advanced to date in Canada either violate or do not address these
important principles.
4.2.1 Regional railroad concept
CN has actively participated in the creation of regional railroads and shortlines through
private commercial transactions. We value and constantly seek to enrich these
relationships. In addition, CN has actively partnered with long-established regional
railroads such as British Columbia Railway and Ontario Northland.
The proposal for a regional railroad focussed on grain transportation, advanced by
OmniTRAX in its public statement of September 15, 2000, is of a different order. It is a
railroad that would be based on forced access to CN and CP systems and, as such,
should be evaluated against the principles outlined above. A summary of the proposal
and its weaknesses follows..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 18
OmniTRAX : Comparison to Key Access Principles
OmniTRAX Proposes Key Weaknesses
ú Access to CN and CP:
ú To use one railroad to connect to
another as a bridge
ú To serve their own customers to a
point on the connecting railroad
ú To solicit customers on the other
railroads' lines once accessed
ú No reciprocity with CN and CP - results
in a local rail monopoly
ú Access fees not defined - no reference
to commercial principles for setting
rates
ú Loss of efficiency through traffic
configuration
ú Ability to arbitrarily change the terms of
the commercial transaction between
OmniTRAX and CN, and unilaterally
change agreed upon revenue division
with all railroads
ú Violates the initial commercial
transaction and long-term agreements
ú Violates generally accepted and
respected commercial principles
ú Financial windfall gained through
subsidies from CN and CP
ú No capital contribution for use of rolling
stock
ú The right to acquire lines from CN and CP
at below market rates
ú Amounts to confiscation
4.2.2 Interswitching and competitive access rates (CAR)
Two alternate proposals to expand access have also been discussed. The first, extended
interswitching, proposes to simply move the current interswitching limit from 30
kilometers to some undefined limit. The second, competitive access rates (CAR),
proposes to use the current interswitching rates and limit, then apply an average rate
per ton per mile for the specific commodity handled, without any distance limit from
the interchange.
Both proposals fail to meet the principle of full cost recovery. The reality is that current
interswitching rates are not revenue adequate. They cover only a very small fraction of
the fixed costs of the network. (This needs to be corrected in the current CTA review
process). Extending interswitching would undermine, on a larger scale, the recovery of
fixed costs through differential pricing. Differential pricing is crucial to optimizing fixed
cost recovery and lower rates for all network users, especially those who are most rail
dependant. The CAR proposal, through its reliance on average pricing, simply
compounds the problem..CN Perspectives on Competitive Rail Access Issues - October 6, 2000 19
5.0 Summary
CN is firmly of the view that the principles that currently underlie Canada's legislative
and regulatory system should be the basis for the future. Deregulation has significantly
contributed to a safe, efficient, flexible, affordable and competitive rail transportation
system for Canadian shippers. Canadian railroads, however, still face major challenges
to sustain their financial viability through a full economic cycle.
CN's vision for the Canadian transportation system is that it must be a key contributor
to Canada's competitiveness, particularly in NAFTA markets. The public policy
imperatives to realize this vision and ensure railroad sustainability are continued
deregulation, a National Transportation Policy that is effective for all modes, and
taxation equity between modes of transport and between jurisdictions.
In its submission of November 17, 2000, CN will develop recommendations that
advance this vision.