CTA Review Panel - October, 2000 Page 1
COMPETITION IN GRAIN TRANSPORTATION
A Submission to
The Canada Transportation Act Review Panel
By
Agricore Cooperative Ltd.
October, 2000
Introduction
Competition in Grain
Transportation
Agricore Cooperative Ltd. welcomes the opportunity to make input to the
panel reviewing the Canada Transportation Act. Agricore is one of Canada's
largest farmer owned grain handling cooperatives and is a major investor in the
economy of western Canada. We operate country elevators and inland
terminals in the provinces of British Columbia, Alberta, Saskatchewan and
Manitoba. Alone or in partnerships, we own and operate terminal facilities in
the ports of Vancouver, Prince Rupert and Thunder Bay. Our operations also
extend to the United States with a part ownership of a grain elevator in
Montana, and special crop handling facilities throughout the great plains.
Agricore is also a major supplier of farm inputs to producers throughout
western Canada.
Access to efficient, accountable and affordable transportation systems is
critical for our farmer owner/members and our business. Agricore has played
an active role throughout the process to reform the grain transportation system
in Canada. Our objectives for a reformed grain transportation system as set by
our farmer delegates and directors are:
1. Improved system efficiencies and accountability
2. Reduced costs for farmers
3. Strengthened our marketing systems
4. equitable access for farmers
5. improved customer service
It is Agricore's opinion that adequate competition for the transportation of
grains and oilseeds is a critical component of the effort to achieve these
objectives.
In general, the market place will determine efficient solutions to economic
problems if there is sufficient competition to ensure that no one holds
excessive market power. In the grain industry, there is adequate competition
in all levels (production, grain handling and marketing) except for
transportation..CTA Review Panel - October, 2000 Page 2
Little inter-modal competition
Geography prevents
competition from road or
water for grain transportation.
There is no waterway from the
prairies to export ports.
Economics, the large volume
of grain moved, and physical
road and port facilities
preclude competition from
trucking.
At best a duopoly in rail
transportation - often a
monopoly
In large parts of the northern
prairies, there is no
alternative to CN Rail. In
significant portions of the
southern prairies, CP Rail is
the only carrier.
Reasonable regulation
simulates competition
Agricore submits, that in the
case of grain transportation,
where effective inter-modal
and rail competition do not
exist, government intervention
in the form of reasonable
regulation is required to
mimic the effects of
competition. This is
acknowledged in Section 5 of
the Canada Transportation
Act
Regulation in Grain
Transportation
Agricore does not support a
return to the very highly
regulated and restricted grain
transportation environment of
the past, however we
acknowledge and recognize
the need for some regulation
to prevent an abuse of market
power by the railways.
The Canadian prairie region is a landlocked production base. Geography
prevents competition from road or water. A waterway from the prairies to
export ports does not exist, and long distance trucking is not a viable
alternative for both economic and physical reasons. Current trucking rates
from Alberta to the port of Vancouver are more than $10.00 per tonne higher
than rail, and increase with increasing distance. Given the volume of grain
that is moved, the highway system and port facilities are not conducive for
trucking. Rail is the only viable means of transportation for virtually all export
movement and more than two-thirds of the total transportation needs of the
prairie grain and oilseed industry.
There are only two national rail carriers in Canada, and in large areas of the
prairies, grain and oilseed producers have access to only one of the two
railways. In large parts of the northern prairies, there is no alternative to CN
Rail. In significant portions of the southern prairies, CP Rail is the only
carrier. A dramatic example of captivity can be found High Level, Alberta
where shippers are more than 500 km from the nearest alternate railway.
While less extreme, there are numerous other examples of captivity to one rail
carrier. This captivity prevents shippers from using the possibility of service
from the competitor railway to lever service or reasonable rates from the other.
The absence of effective competition gives rail carriers a great deal of market
power and disadvantages the producer and shipper of grain. The lack of
competition is recognized in Section 5 of the Canada Transportation Act,
which lays out the National Transportation Policy. This section recognizes the
need to use economic regulation where shippers do not benefit from market
competition. Agricore submits that in the case of grain transportation, where
effective inter-modal and rail competition do not exist, government
intervention in the form of reasonable regulation is required to mimic the
effects of competition.
Agricore supports the objective of the government as established in Section 5
of the Canada Transportation Act. We agree that "competition and market
forces are, whenever possible, the prime agents in providing viable and
effective transportation services". Agricore and other grain handling
companies have worked to increase competition between rail carriers by
constructing high through-put elevators at those points where the lines of both
rail companies are accessible, and using trucking programs and incentives to
attract the grain to those facilities. However competition and market forces
still do not fully operate in grain transportation. While Agricore does not
support a return to the very highly regulated and restricted grain transportation
environment of the past, we acknowledge and recognize the need for some
regulation to prevent an abuse of market power by the railways..CTA Review Panel - October, 2000 Page 3
Improving the Current
Provisions
Public Rail Bed
While in theory, a public rail
bed would provide the
environment for full
competition, it is unlikely that
the resources or the political
will to take the necessary
action, including expropriation
of property, to create a public
rail bed exists.
Improved Running Rights
Agricore sees merit in
improving the running rights
provisions of the current act,
to improve the environment for
competition.
Concerns include the
significant barriers to entry to
the business of rail service,
and potential that allowing
particularly foreign
participation on Canada's rail
lines could result in poorer or
no service for shippers.
However, despite the
concerns, The existence of
expanded running rights could
help to force competitive
behaviour.
The Canadian Transportation
Agency should be charged
with granting running rights,
and with conducting regular
reviews of cases where
running rights are being used,
to ensure that rail companies
maintain the incentive to
invest and shippers continue
to receive service and benefit
from competition.
Some stakeholders advocate the separation of rail infrastructure from the
provision of transportation service as is the case with Canada's highway
systems. While in theory, a public rail bed would provide the environment for
full competition, it is unlikely that the resources or the political will to take the
necessary action, including expropriation of property, to create a public rail
bed exists.
Agricore does see merit, however, in proposals to improve the current running
rights provisions in the CTA to facilitate the use of shortlines, regional and
provincial railways as competition to Canada's two main railway companies.
One of the purposes of the Canada Transportation Act was to increase
competition through the facilitation of short line railways and regional and
provincial rail ways. However the current Act falls short of ensuring that these
lines can be competitive options for shippers. Running rights provisions in the
Act only apply to federal railways. Because they cannot obtain the right to run
over the lines of other railway companies, regional and provincial railways are
essentially captive to the federal line to which they are attached.
This was recognized in the report of Honourable Justice Willard Estey, who
recommended that any person who is determined to be a fit carrier by the
Canadian Transportation Agency, should have the right to operate trains on
any rail line, upon providing suitable compensation for the use of the line.
We recognize the many significant barriers to entry to the business of
providing rail transportation service. Among the most serious are the large
investment in locomotives and labour, the existence of many different labour
contracts and agreements, safety concerns, and environmental rules and
standards. We are also concerned that large railway companies, including
those from the United States, could obtain running rights on line and only
provide service until more lucrative demand occurs elsewhere. Their presence
could have had a serious financial impact on the original service provider,
perhaps forcing that provider out of the area. There is the risk that shippers
could ultimately be left with no service at all.
Despite the concerns, even the existence of improved running rights provisions
may force better or more competitive service from the main railway
companies. Agricore suggests that the Canadian Transportation Agency
should be given the responsibility to review and grant applications for running
rights. While running rights would be more automatically granted than they
are currently, we that the CTA should conduct a regular review (annual?) of
cases where running rights are being used, to ensure that rail companies are
maintaining the incentive to invest, and that shippers continue to receive
service and benefit from competition..CTA Review Panel - October, 2000 Page 4
Improved running rights must
not be considered the only
pro-competitive measure
required.
Final Offer Arbitration
The new FOA provision
created by Bill C-34 is the
single most important
competitive access provision
in the CTA. It must be given
time to work before any
assessment of its effectiveness
is made.
Interswitching
Interswitching is one of the
most important and widely
used competitive access
provisions in the CTA. The
provision should be improved
by extending the radius from
30 km to 200 km, and by re-defining
"interchange" and
"interswitch".
Competitive Line Rates
The CLR provision has proved
ineffective in increasing rail
competition, due to the
reluctance of the rail
companies to compete through
CLRs and to the financial and
human resources costs of
applying for the provision.
We must also point out that improved running rights is not the only pr-competitive
measure that is required, and should not be considered the "silver
bullet" for shipper concerns.
The current final offer arbitration provision implemented by amendments to
the CTA by Bill C-34 in July, 2000 is the single most important competitive
access provision of the CTA. It is a quick, unencumbered provision by which
shippers can secure competitive rates and service without regulatory
intervention.
It is important to give the newly developed provision time to work before any
assessment of its effectiveness is made.
"Interswitching", which allows some shippers served by a single railway at
origin or destination to switch cars from one carrier to another at prescribed
rates is one of the most important and widely used competitive access
provisions in the CTA. It effectively increases competition between railways
within the prescribed 30 km. radius.
Agricore submits that interswitching provisions could be even more effective
for increasing competition between railways if the following amendments are
made to Sections 127 and 128 of the CTA:
1. Extend the radius - given the geography in western Canada and the vast
distances that over which grain is moved, interchange points are often
outside the 30 km. limit. While the Act does provide for the Agency to
grant interswitching rates outside of the 30 km radius, we believe it would
be more efficient and conducive to competition if the prescribed radius was
extended. Agricore suggests that the limit be increased to 200 km., by
adding additional interswitching distance zones in 10 km. increments.
2. Re-define "Interswitch" and "Interchange" - The current definitions of
these terms are dependent on track ownership. As such, the use of
interswitching provisions are not available to railway companies who do not
own the lines on which they operate. For example the companies may
operate on the lines by lease or running rights. Agricore submits that the
definitions should be amended to remove the concept of ownership.
The Competitive Line Rate provision of the CTA was intended to simulate
competition for shippers beyond the 30 km interswitching radius. However to
date, it has proved ineffective for a number of reasons, the most important
being the need to reach prior agreement with a connecting carrier. Neither of
Canada's main rail companies have demonstrated interest in competing
through CLRs. In addition, the provision is very complex, requiring an
application to the Canadian Transportation Agency, which is both time
consuming and costly..CTA Review Panel - October, 2000 Page 5
Agricore supports the
development of a replacement
for CLRs to effectively expand
interswitching provisions and
ensure easy access to the
provision and effectiveness in
generating competition.
Competitive Access Rates
Agricore sees merit in the
Competitive Access Rate
concept as a replacement for
CLRs as long as the
calculation is not commodity
specific.
Access to the Agency
Agricore submits that
subsections 27(2) and (3), and
section 112 constitute
unwarranted barriers to relief
from the Agency and should be
deleted.
Interim Ex-Parte Orders
The Agency should be given
the power to order interim ex-parte
orders.
It may be possible to correct the shortcomings of the CLR provisions in the
CTA, but given the magnitude of the changes that would be required, it may be
desirable to start over and develop a replacement for CLRs which would
effectively expand the interswitching provisions while maintaining the
principles of easy access to the provision and effectiveness in generating
competition.
The concept of a competitive access rate (CAR) to replace CLR provisions has
some merit. The CAR concept proposed by some shippers attempts to expand
access to interswitching provisions by establishing a regulated rate for
movement outside the interswitching radius.
Agricore can support the CAR concept as a replacement for CLRs only if the
calculation is based on the system average revenue-per-tonne-kilometre of
traffic that is the same as or substantially similar to the traffic moved. We
cannot support the calculation of the rate on a commodity specific basis. In
grain commodity specific rates only encourage discriminatory pricing of rail
service according to product value, even if rail costs for the movement of each
grain commodity on a per car basis are similar.
Currently, when the Canadian Transportation Agency receives a complaint
from a shipper with respect to a transportation rate or service, the Agency must
determine that the applicant will suffer "substantial commercial harm" if the
relief requested by the shipper is not granted (subsection 27(2) and (3)). In
addition any rate or condition of service that is established by the Agency in
response to a complaint, must be "commercially fair and reasonable" to all
parties (section 112) .
These subjective determinations, which are not defined in the Act, can and do
result in contested proceedings before the Agency which are time consuming
and costly. These provisions serve as a barrier to shippers seeking relief from
unreasonable rates or services.
Agricore submits that subsections 27(2) and (3), and section 112 constitute
unwarranted barriers to relief from the Agency and should be deleted.
The predecessor to the CTA, the National Transportation Act of 1987
contained a provision which gave the Agency the power to make interim ex-parte
orders. This provision ensured that shippers who were receiving or who
were about to receive inadequate service could obtain an quick order from the
Agency to ensure that adequate service is provided.
This provision was not carried through to the CTA. Agricore submits that it
should be re-enacted by amendment to the CTA..CTA Review Panel - October, 2000 Page 6
Level of Service
Level of service provisions
could be improved by ensuring
that the carrier is required to
provide estimate times of
arrival which are clearly
understood between the
railway and the user of the
service.
The level of service burden
must be imposed on all carrier
companies operating on a line,
whether as the owner of the
line, or through running
rights.
Tariffs
Section 118 of the CTA should
be amended to require rail
service providers to include
detailed service obligations
and rate reductions should the
obligations not be met.
Conclusion
Level of Service provisions contained in section 113 of CTA are very
important to captive grain shippers. These provisions require that the railways
"without delay, and with due care and diligence, receive, carry and deliver
traffic".
We submit that the provision could be improved by further ensuring
accountability for the timely delivery of traffic with the injection of wording to
require the railways to provide service users with estimated times of arrival
which are clearly understood between the railway and the user of the service.
Agricore also recognizes the concerns expressed by carriers when level of
service requirements are considered along with improved running rights. The
level of service burden must be imposed on all carrier companies operating on
a line, whether as the owner of the line, or through running rights.
The current tariff setting process contained in Sections 118 to 120 of the CTA
should be amended to include service or performance criteria along with the
rate.
In establishing a tariff, the rail service provider often does not include
commitments on the service to which the rate applies. Grain shippers can and
do incur substantial costs when time parameters set by the railway for car
spotting, pick up and delivery are not adhered to. For example grain
companies at time incur significant labour costs for overtime to ensure that rail
cars are loaded and ready for pick up by the rail company, only to have the
cars picked up late. In this case, had the service parameters been contained in
the tariff, overtime charges could have been avoided, or penalties could have
been imposed on the rail service provider.
Due to the lack of competition, rail companies do not feel the need to negotiate
these detailed service obligations. Therefore Agricore submits that section 118
of the CTA should be amended to require that the railways itemize and clarify
the detailed railway service obligations associated with the tariff, and include
rate reductions should the obligations in the tariff not be met.
Depending on the commodity, between 50 and 80% of the grains and oilseeds
produced in western Canada are destined for export markets. Given the
dependence on exports, efficient, affordable and accountable transportation
services are vital.
The large volume of product which must be moved from many shipping points
over difficult terrain and large distances makes the grain and oilseed almost
totally dependent on rail for transportation..CTA Review Panel - October, 2000 Page 7
Grain shippers are captive to at best two, and often only one railway company
for that important transportation service. Given the lack of inter-modal, and
intra-modal competition, government intervention through reasonable
regulation is required to "simulate" a competitive environment.
Agricore submits that the competitive environment created by the Canada
Transportation Act could be improved by:
 Improving running rights provisions to facilitate the better use of short
lines, and regional and provincial railway companies
 Making the Canadian Transportation Agency responsible for granting
running rights to ensure that the railways maintain the incentives to invest,
and shippers benefit from improved competition
 Maintaining the new Final Offer Arbitration provisions created in Bill C-34
which was implemented August 1, 2000.
 Expanding the interswitching radius in 10 km intervals from the present 30
km to 200 km.
 Redefining "interchange" and "interswitch" to improve the competition
provided by the interswitching provision
 Replacing the Competitive Line Rate provision with something that is
easily accessible and is effective in stimulating competition
 Removing the "substantial commercial harm" and "commercially fair and
reasonable" barriers to access to the Agency, from the CTA
 Restoring to the Agency the power to issue interim ex-parte orders
 Injecting performance requirements in the establishment of tariffs by the
railways
Agricore is confident that in the absence of real competition, these measures
will ensure that the excessive market power currently held by the railways is
diluted, and that the interests of grain and oilseed shippers will be protected.