British Columbia Railway Company
Submission to the
Canada Transportation Act Review Panel
on
Competitive Rail Access
October 6, 2000.British Columbia Railway Company
October 6, 2000
2
Contents
Part I: Background of British Columbia Railway Company .......................3
Part II: Introduction.........................................................................................6
Part III: The Current Competitive Environment .............................................7
Part IV: Future Competition Concerns........................................................10
Part V: Recommended Solutions………………………………………………11.British Columbia Railway Company
October 6, 2000
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PART I
BACKGROUND
British Columbia Railway Company is a group holding company, often referred to as the
BCR Group of Companies, comprised of three separate business units; BC Rail, BCR
Marine and BCR Properties. The company, owned by the Province of British Columbia,
was first incorporated under the British Columbia Railway Act. Its predecessor
companies were first incorporated in 1912.
BC Rail, Canada’s third largest railroad by revenues, operates 2,315 kilometres of
mainline track and 740 kilometres of industrial and yard track and sidings throughout
British Columbia. In addition, BC Rail owns and maintains a separate 37 kilometre rail
line connecting Canadian National Railway (CN), Canadian Pacific Railway (CP) and
Burlington Northern Santa Fe Railroad (BNSF) to the west coast’s largest coal terminal
and the new Deltaport container terminal at Roberts Bank. BC Rail is provincially
regulated and competes fully within the private sector in a market environment without
government subsidy.
BC Rail’s customers sell their commodities throughout the world. The overwhelming
majority of the tonnage originated by BC Rail is transported beyond the border of British
Columbia. Overseas markets are accessed primarily through port facilities located in
Vancouver, Squamish and Prince Rupert. The North American market is reached by
interchanging freight cars onto connecting railroads at Prince George and North
Vancouver. Working with other members of the Association of American Railroads
(AAR), BC Rail has the ability to forward its customers’ shipments to all rail-served
points in Canada, the United States and Mexico. Approximately 40 per cent of the rail
shipments originating on BC Rail are forwarded to other North American railroads. By
contrast, loaded rail cars forwarded to BC Rail by other railroads account for only 2 per
cent of all loaded rail cars handled (note: these figures are exclusive of terminal
switching within the port of Vancouver). This imbalance in traffic results in operating an
inordinate number of train-miles without revenue loads..British Columbia Railway Company
October 6, 2000
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BC Rail’s only direct rail link is with CN at Prince George and North Vancouver. To gain
access to the North American rail network, the railroad must rely on interchanging to CN
at Prince George and North Vancouver. CP and BNSF are accessed through CN in
North Vancouver. As well, a connection with the Union Pacific Railroad (UP) is
maintained through a rail car barging operation between North Vancouver and Seattle,
Washington.
Freight traffic involves originating approximately 200,000 revenue carloads annually from
more than 200 customer facilities. In 1999, transportation of forestry, mining, energy
and agricultural products accounted for about 80 per cent of the $329 million revenue
generated by BC Rail. Freight traffic for the year totaled 193,000 carloads and 5.1 billion
revenue ton-miles.
BC Rail’s traffic mix is fundamentally different from most other railroads with nearly 80
per cent of the freight revenue tied to forest products and coal. Unlike Class I railroads,
BC Rail has little traffic from the movement of containers, automobiles, potash, grain and
manufactured goods.
Meanwhile, revenue generated from barging, passenger services, intermodal operations
and car-hire for use of BC Rail cars by other railroads accounted for the remaining 20
per cent of revenue.
Traffic movement at BC Rail encompasses operating approximately 12,000 freight trains
and 1,000 passenger trains annually.
As an originating carrier for shipments destined all over North America, BC Rail owns,
leases and maintains a disproportionately large rail car fleet of over 9,500 cars. A fleet
of this size is required to enable the railroad to meet shippers’ needs for cars on a timely,
reliable basis. Approximately 50 per cent of the fleet spend the majority of their service
life off BC Rail’s system..British Columbia Railway Company
October 6, 2000
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BCR Marine includes the recently merged operations of Vancouver Wharves and
Canadian Stevedoring. Vancouver Wharves, located at the southern terminus of BC
Rail in North Vancouver, operates one of the largest deep-sea bulk-loading terminals in
North America. Canadian Stevedoring provides stevedoring services at 22 locations
along B.C.’s coast and operates the Fairview Terminal in Prince Rupert. Through its
third operating unit, Casco Terminals, BCR Marine also operates the Centerm container
terminal on the south shore of Vancouver’s inner harbour. Incidentally, BC Rail receives
in interchange nearly 3 million tons annually from Class I railroads for terminal switching
to and from Vancouver Wharves.
BCR Properties manages all lands not directly required for railroad operating purposes.
In addition it leases industrial lands adjacent to the railroad, including many to key rail
shippers.
BCR Ventures, a subsidiary of BC Rail, was created in 1996 to develop new rail traffic
through joint ventures in resource development projects along the BC Rail system. It is
presently involved in a joint venture to develop a potential new semi-soft coal mine along
BC Rail’s right of way.
Although the BCR Group continues to diversify its revenue base, rail freight remains the
company’s core business. BCR Group operates as a commercial entity with all
operating companies competing fully with the private sector in a market environment.
Over the next few years, the key challenge facing the corporation is the need to diversify
its revenue base to offset anticipated reductions in traffic from traditional resource-based
commodities. In particular, the loss of all northeast coal traffic is forecast by 2004. As
recently as 1997, annual revenue of $54 million was derived from coal shipments
originated near Tumbler Ridge. The company took a special charge of $617 million to
1999 earnings resulting from an asset impairment review relating to the investment
infrastructure to service northeast coal and of other northern rail assets..British Columbia Railway Company
October 6, 2000
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PART II
INTRODUCTION
The continued ability to remain competitive is a matter of great concern to both BC Rail
and its shippers. The specific concerns relate to access to competing railroads, the
trend towards concentrated market power within the rail industry, and the need to
generate sufficient economic returns to sustain the required capital expenditures. In this
respect, the Canada Transportation Act (CTA) Review Panel’s mandate to consider
ways to enhance competition in the railroad sector in Canada is most timely and critical.
While it is the Review Panel’s mandate to consider rail competition enhancement
proposals, it is also important to preserve the existing competition within Canada and
avoid the burdens associated with new approaches. For instance, if CTA interswitching
regulations were applied not only to large railroads but also to regional railroads and
shortlines, the effect on the smaller carriers would be devastating. Eventually, a loss of
competition could result, as railroads such as BC Rail may be unable to maintain a
presence and service to its shippers.
To mount competitive service for shippers, regional railroads must be able to obtain
reasonable access – on reasonable terms and conditions - to competitive railroads’ lines
for the purposes of interlining cars for subsequent shipment to market and to access
export docks within rail terminal areas for the purpose of unloading shipments bound for
overseas markets. In this regard, BC Rail could consider similar access to the large,
federally regulated railroads.
To be clear, BC Rail does not recommend rate re-regulation, access to shippers located
on other railroads, or open access to new “any person” entrants. All of these oft-cited
mechanisms could adversely affect the fundamental economics of the industry, thereby
leading to a long-term deterioration of the rail network and the undermining of service
provisions..British Columbia Railway Company
October 6, 2000
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BC Rail’s business model involves stimulating demand for rail service by offering rates
and services that provide shippers with efficient access to key markets, while
concurrently providing an economic return on the railroad’s investment. Applying this
model within the British Columbia transportation marketplace, BC Rail currently
promotes true competition – both intermodal and intramodal - for shippers and
communities. At the same time, we feel strongly that many inherent inefficiencies do
exist in the status quo. The suggested recommendations to address these inefficiencies
would assist in promoting and preserving competition in the rail transportation system in
British Columbia for British Columbia shippers.
PART III
THE CURRENT COMPETITIVE ENVIRONMENT
In its market region, BC Rail promotes and creates competition both i) between trucks
and railroads, and ii) between railroads themselves. The competitive environment exists
within both the local and interline segments.
In terms of the local market segment, BC Rail provides an effective alternative to truck
transportation for shippers requiring service to export docks and domestic consumers. A
large, vibrant trucking industry within British Columbia provides a formidable competitive
force, evidenced by the significant share of truck shipments within BC Rail’s market
region. It is noteworthy that BC Rail maintains its own infrastructure from rates charged
to customers while truck competitors use a publicly-subsidized network of major
highways to access those same customers.
Truck transportation also provides strong competition in BC Rail’s interline market. Most
shippers who are unable to negotiate what they feel are competitive prices are able to
easily access alternatives. Since the vast majority of BC Rail’s originated, interline
shipments is single-carload and short-haul (in terms of BC Rail’s portion of the through.British Columbia Railway Company
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movement), trucks can be readily used to access several Class I railroads’ rates and
services through the use of reload (or transload) facilities. Sometimes, this truck-to-railroad
alternative provides better customer service levels given that BC Rail must build
trains with the traffic of multiple customers, which requires considerably more time than
trucking the short distance to competitor railroads. The use of forest product reload
facilities in Edmonton, Alberta (served by CN and CP), greater Vancouver (served by
BNSF, CN, CP, and SRY) and Kamloops, BC (served by CN and CP) provides clear
evidence that BC Rail faces demanding competition for traffic within its market region.
These substitute transportation alternatives place a ceiling on the price BC Rail may
charge and immediately discipline any non-competitive behaviour.
BC Rail has very few shippers that would be deemed to be “captive” in the traditional
sense. As a result, competitive services provided by trucks and other railroads provide
an effective alternative for shippers to access their markets. While it may appear that
BC Rail has exclusive control over the shipments originated or destined to facilities on its
rail line, this is readily offset by the substitute transportation options. In other words, BC
Rail is never in the traditional “bottleneck” carrier role, as we must provide the cars to
someone else to get the shippers’ goods to market. Unlike our shippers – who have an
option to truck to either other railroads or directly to market – BC Rail is fully dependent
on rail transportation.
Not only do the large railroads behave as competitors of BC Rail - in terms of partnering
with truck and reload operators - they concurrently act as interline partners of BC Rail for
much of the same traffic. This “hedged” position of the large railroads provides a further
guard against any potential anti-competitive behaviour by BC Rail.
In the process of providing shippers with the most cost-effective access to their markets,
BC Rail promotes an open routing policy on all interline, through-rate shipments. To the
extent that connecting railroads choose to participate in the routing to certain markets,
BC Rail provides shippers access to each of the BNSF, CN, CP and UP networks. The
only railroad with a direct connection to BC Rail is CN at either North Vancouver or
Prince George. For efficiency reasons, interline forwarded traffic for CN’s long haul is.British Columbia Railway Company
October 6, 2000
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interchanged at Prince George. It is necessary to access the BNSF and CP systems via
private arrangements that those railroads have with CN to transport interline shipments
originating on BC Rail from North Vancouver to their terminals in the Vancouver area. In
the case of UP, a rail car barge service generates the access through hauling traffic
between BC Rail’s southern terminus in North Vancouver and Seattle, Washington. In
this instance, BC Rail works jointly with UP and a local marine freight company to
provide additional competitive access for shippers where it normally would not have
existed.
Dependency on a single Class I railroad for handling a regional railroad’s interline traffic,
makes shippers sensitive to the slightest operational breakdown. When difficult
operating challenges arise at a key gateway, a Class I railroad is bound to reflect their
self-interest at the expense of the effective interchanging on which the smaller carrier
must depend. For instance, the inability to switch to another carrier than CN when
service problems arise at the North Vancouver gateway often has had an adverse affect
on BC Rail and its customers.
It is felt that some of the interchange challenges faced by exclusive Class I connections
might be better met if regional railroads had limited, direct access to other carriers. This
could effectively prevent further service and competitive problems, thereby allowing
interline rail movements to compete effectively with truck-direct and truck-to-reload
shipping options. Limiting the traffic density of interline shipments because of service
failures at the interchange serves only to improve the relative competitive position of
trucks and reloads at the expense of the regional railroad.
In terms of an example of competitive access, BC Rail currently provides a unique role in
maintaining access for BNSF, CN, and CP to the west coast’s largest coal terminal and
the new Deltaport container terminal at Roberts Bank. In addition to owning and
maintaining this separate 37-kilometre rail line, BC Rail provides centralized dispatching
to ensure efficient and fair access for all other railroads moving shipments to and from
Roberts Bank. Maintenance and ownership costs for this separate rail line are covered
on a user-pay basis. BC Rail does not currently ship rail cars on this rail line. In the.British Columbia Railway Company
October 6, 2000
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event that shipments did occur, access between the BC Rail mainline and the Roberts
Bank line would have to be handled exclusively by CN.
It is clear that BC Rail is influential in stimulating and balancing competition in the
transportation marketplace. Should BC Rail be unable to maintain a presence,
competition for British Columbia shippers’ goods could be adversely impacted.
PART IV
FUTURE COMPETITION CONCERNS
Several factors serve to raise very significant concerns about regional railroads’ abilities
to compete effectively over the long-term. These factors can be summarized as:
• A general trend towards larger railroads.
• Market dominance by large railroads is being leveraged more prevalently.
The most vulnerable parties likely to be affected by these trends are the regional
railroads’ customers and the railroads themselves. For instance, recent Class I merger
plans highlighted the potential future problems for BC Rail and its customers. While the
planned BNSF/CN combination was generally viewed to be “end-to-end”, this was not
the case for all British Columbia shippers. While a detailed merger filing did not occur,
the initial response underscored significant competitive concerns. Rail industry
consolidation will continue to have an effect in reducing competitive options for BC Rail
and its shippers without the introduction of specific mechanisms to alleviate the
foreseeable harm associated with the planned merger.
Generally, BC Rail’s relationships with the large railroads have been cooperative and of
mutual benefit. More recently, however, certain interline relationships have been
strained due to the unilateral imposition by Class I carriers on BC Rail of new tariffs and.British Columbia Railway Company
October 6, 2000
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operating conditions. Associated costs and delays to customer shipments are
significant.
It is noteworthy that there is no effective regulatory protection against unilateral actions
by the dominant Class I carriers. New mechanisms must be developed to ensure that
smaller, regional railroads can provide competitive service levels and effectively serve
their local markets. Without changes, smaller railroads will be unable to remain a long-term,
viable component of the national rail system.
PART V
RECOMMENDED SOLUTIONS
It is clear that the further consolidation of market power by the Class I railroads
potentially threatens the continued competitive impact of BC Rail on traffic to and from
shippers served by BC Rail throughout the province of British Columbia. Unfortunately,
amendments to provincial rail regulation cannot bring about the kinds of changes that
are necessary to protect and enhance competition in these circumstances. The question
becomes, what amendments can be implemented to existing federal policy and
legislation to preserve and enhance a regional railroad’s competitive role? We would
offer the following for your consideration:
1. Competitive Access - consistent with the Estey and Kroeger reports, we support
amendments to the Canada Transportation Act which would permit a regional
railroad to obtain running rights over the federal railroad to which it connects, for the
purpose of creating a competitive access point for the interchange of traffic to
destination. The regional railroad should have no right to solicit traffic from customers
located on the connecting federal railroad. The purpose of this competitive access is
not to permit the regional railroad to target the traffic of the connecting federal carrier
- the purpose of this kind of competitive access would be simply to promote.British Columbia Railway Company
October 6, 2000
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competition for the interchange of traffic, and to counterbalance the market power of
the bottleneck federal railroad.
Such an arrangement would eliminate the competitive distortions which exist for BC
Rail and its customers throughout the province, and it could – with gained
operational efficiencies - result in lower freight rates (not as a result of the
consolidation of market power brought about by business combinations among the
federal railroads, but as a result of the operation of competition, which is the primary
point).
In this case, BC Rail would be required to compensate the host railroad on a
reasonable basis. A compensation formula for this purpose would be easy to
develop. We would recommend that the Canadian Transportation Agency be
empowered to resolve disputes that might arise on the calculation of the
compensation formula.
A primary location for the creation of competitive alternatives for BC Rail interchange
traffic is Edmonton, Alberta (where CN and CP can interchange B.C. originated
traffic for delivery to points in Canada and the U.S.). Much of the BC Rail originated
traffic should be routed through Edmonton because of the efficiencies that that route
enables. For instance, a rail shipment of lumber from a sawmill in Fort St. John, BC
to (or via) North America’s railroad hub in Chicago, Illinois must travel anywhere from
24 to 39 per cent further via the North Vancouver gateway than the Prince George
gateway (see Table I below, which outlines the mileage involved to Chicago, Illinois
through Edmonton as opposed to other routings). Meanwhile, when the same
Chicago-destined shipment is trucked from the sawmill for rail car loading at
Edmonton, it travels at least 27 per cent fewer miles than if it was shipped all-rail via
North Vancouver..British Columbia Railway Company
October 6, 2000
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Table I
Shipment Mileage: Fort St. John, BC to Chicago, Illinois
Traffic Route Miles
Relative to
BC Rail-Prince George-CN
Route Miles
BC Rail-Prince George-CN 2379
BC Rail-N. Vancouver-CP 2945 + 24%
BC Rail-N. Vancouver-BNSF 3133 + 32%
BC Rail-N. Vancouver-UP 3295 + 39%
BC Rail-Prince George-CN-Edmonton-CP 2520 + 6%
Truck-Edmonton-CP 2156 - 9%
(Source: PC*Rail and Rand McNally)
Because this interchange is located outside of British Columbia, the implementation
of our recommended solution would require BC Rail to cross a provincial boundary.
In order to avoid any possibility that BC Rail would relinquish its provincial status as
a result of the creation of this competitive interchange point, we would recommend
that the legislation specify that the carriage of BC Rail’s traffic over CN to Edmonton
be accomplished by way of haulage rights rather than running rights. In this way, the
competitive alternative can be created for interchange of through traffic, without
altering the nature of BC Rail’s operation or jeopardizing its status as a provincial
railroad. Again, any disputes over the money that should be paid by BC Rail to
properly compensate CN for these hauling rights to Edmonton could be resolved by
the introduction of a new remedy by the Canadian Transportation Agency.
2. Access to final offer arbitration - to resolve problems which regional railroads and
their customers could potentially face as a result of the unilateral imposition of tariffs
and operating conditions by federal railroads, a new mechanism is required. In
order to level the playing field, it is recommended that regional railroads be given
access to final offer arbitration as a means of resolving these disputes. We view the
final offer arbitration provisions of the legislation (as amended recently by Bill C-34).British Columbia Railway Company
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as being fair and balanced. It provides a forum for the timely and reasonable
resolution of disputes.
Access to this remedy for regional carriers could be easily accomplished by
following the example set in the Canada Transportation Act for commuter rail
authorities (see section 160). The remedy has been tested and it works.
3. Regulatory oversight for major mergers - the following is an excerpt from an
announcement made by the U.S. Surface Transportation Board October 2, 2000:
“Surface Transportation Board (Board) Chairman Linda J. Morgan announced today
that the Board has issued a Notice of Proposed Rulemaking (NPR) proposing new
rules for major railroad mergers and consolidations (those involving two or more
"Class I" railroads, that is, railroads each with annual revenues of at least $250
million). The new rules would significantly increase the burden on applicants to
demonstrate that a proposed merger transaction is in the public interest, reflecting
what Chairman Morgan notes as an awareness of the great risk of failure and the
competitive, service, and financial concerns raised in connection with what could be
the final round of consolidation in the rail industry. In particular, the new rules would
require applicants to show that the transaction would enhance competition, and they
would require much more accountability with respect to claimed merger benefits and
service. At the same time, in proposing these new rules, the Board indicated that it
does not intend to prevent transactions genuinely in the public interest and would
continue to look with favor upon private-sector initiatives in the public interest.”
The STB is taking this initiative because of the consolidation of market power which
rail mergers are causing. The BNSF/CN combination was the catalyst for this
regulatory initiative.
In this latest round of railroad merger mania, many Canadian parties were very
concerned that there was no vehicle in Canada for the transaction to receive the kind
of regulatory scrutiny that would be required in order to assess how a merger could.British Columbia Railway Company
October 6, 2000
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potentially affect other Canadian railroads and their shippers. The fact that
Canadians appeared in Washington, D.C. to plead their case before the STB is
illustrative of the problem. The concerns of those Canadians, based on Canadian
public interest and transportation policy, were given a reasonable reception by the
STB, but the STB was obviously constrained to assess the situation from an
American policy point of view.
BC Rail believes strongly that an effective mechanism should be in place in Canada
to require that major mergers be subject to Canadian regulation. The Canada
Transportation Act should be amended to empower the Canadian Transportation
Agency (in consultation with the Competition Bureau) to review and support or
disallow a proposed merger, or to impose pro-competitive conditions on a proposed
merger. The primary purpose of this authority should be to preserve and enhance
competition. The criteria for the exercise of this authority, in our view, should be:
1) The proponent(s) of the merger should be required to demonstrate that the
merger would be pro-competitive.
2) The proponent(s) of the merger should be required to demonstrate that the
merger will not negatively impact existing Canadian competitive access
remedies. If the merger will negatively impact existing Canadian competitive
access remedies, the proponent(s) of the merger should be required to propose
solutions that will fully ameliorate such impacts
3) The proponent(s) of the merger should be required to demonstrate that the
merger would not be an impediment to the interchange of traffic between
railroads, both federal and provincial. If the merger will negatively impact the
interchange of traffic between railroads, the proponent(s) of the merger should be
required to propose solutions that will fully ameliorate such impacts.