THE CANADIAN CHEMICAL PRODUCERS'
ASSOCIATION
SUBMISSION TO THE CANADA
TRANSPORTATION ACT REVIEW PANEL
OCTOBER, 2000.2
EXECUTIVE SUMMARY
The Canadian Chemical Producers' Association represents 75 manufacturers of
industrial chemicals which use chemistry to upgrade Canada's natural resources
into high value-added products for export and for use by other key players in the
national economy. Chemicals is an important component of the "industrial
products" category of rail traffic and an especially important component of rail
transborder traffic. Almost 50 of CCPA's member companies use rail
transportation and for half of these companies, transportation costs exceed 10%
of selling price, ranging up to 30-39% of selling price.
The 1987 National Transportation Act introduced expanded interswitching,
Competitive Line Rates (CLRs) and Final Offer Arbitration (FOA). Expanded
interswitching works well and it is used regularly by 20 of our member
companies. Despite considerable initial promise, CLRs have not proven to be
useful to CCPA members or other shippers. By 1993, the National
Transportation Act Review Commission reached the conclusion that the major
railways "have effectively declined to compete with each other through
competitive line rates (CLRs), and as a result the provision is largely inoperative
in Canada."
In 1996 the Canada Transportation Act (CTA) worsened this situation. It
introduced the substantial commercial harm test which applies to extended
interswitching, CLRs and some other shipper remedies. This test deters shipper
use of competitive access remedies since it has real potential to expose them to
considerable litigation and associated costs. As a result, many captive shippers,
including CCPA member companies, have no rapid, cost-effective means of
obtaining rail competition. These companies are subjected to Ramsey pricing by
the railways which means that their freight rates are considerably higher than if
they were in competitive situations. This seriously hinders such companies
competing in both domestic and global markets..3
This is a real issue for CCPA because among its member companies using rail
transportation. 24 have rail dependent plants. They list 45 such plants at 34
locations across Canada -- 17 in Ontario, 9 in Quebec, 7 in Alberta, 3 in British
Columbia and 1 in Manitoba. Only 17 out of these 34 plant locations have rail
competition through interswitching arrangements or direct competitive access.
Many other shippers are in similar situations. They have made their needs for
more rail competition known through vehicles such as the 1998 Grain Handling
and Transportation Review, the subsequent Consultations on the
Implementation of Grain Handling and Transportation Reform, and the Canadian
Transportation Agency's 1998 Ekos Research survey.
The railways argue that continuous gains in railway productivity are insufficient to
overcome railway prices and revenues that have not kept up with costs and
hence, they are unable to support increased competition. There is no basis for
this argument. The railways have made tremendous productivity gains and
retained at least half of those gains. Shippers have also benefited from the
productivity gains through lower prices but this has been uneven--captive
shippers subjected to Ramsey pricing have not had their fair share of the
benefits. The productivity gains and the aggressive pursuit of new business
opportunities have provided the railways with record profits. This is sustaining
record levels of capital investment. And investment analysts are very positive
about today's Canadian railway performance and the prospects for the future.
In the United States, railways make similar arguments about why they must
retain Ramsey or revenue-based pricing. Professor Robert E. McCormick,
however, demonstrates in Appendix "A" to this submission that the railways'
ability to engage in revenue-based pricing would not be eliminated by greater
competition. He asserts that:
"Free and open competition will not destroy the ability of railroads to
charge revenue-based differential rates, but in fact will ensure that the
optimal overall level of rates is achieved. The optimal overall level of.4
rates is one that provides revenues adequate to raise sufficient capital
and provide efficient service to shippers. Competition is the best, and
really, the only vehicle whereby optimal revenue-based prices can be
set."
Hence, there is no reason why in this review process, railway competition should
not be stimulated and competitive options should not provided for captive
shippers. CCPA is a participant in the Shippers' Summit which has made a
number of recommendations to the Review Panel, including recommendations
on competitive access mechanisms. CCPA supports the Shippers' Summit
recommendations which include the following:
• Retention of the current elements of the national transportation policy set
forth in section 5 of the CTA which are relevant to the objectives of
competition, efficiency and low cost in the delivery of transportation
services.
• Simplification and clarification of the provisions of the CTA related to
running rights so that the Canadian Transportation Agency has the power
to grant limited running rights to any person in appropriate circumstances.
• Adoption of the Competitive Access Rate (CAR) mechanism to simplify
CLRs and make them effective.
• Retention of the current interswitching provisions which are used regularly
by 20 CCPA member companies relying on rail transportation.
Confirmation of the Agency's power to set maximum interswitching rates
which provide the flexibility for negotiation of lower rates when that makes
commercial sense.
• Repeal of subsections 27 (2) and (3) and Section 112 of the CTA. These
subjective provisions deter shipper use of competitive access.5
mechanisms and their retention is not justified by any substantiated
concerns about railway viability.
• Support for the Bill C-34 amendments concerning the sale and
discontinuance of rail lines with recommendations for extending certain
amendments currently limited to grain dependent branch lines to all rail
lines.
• Restoration of the Agency's powers to review the effects of proposed rail
mergers or combinations through public hearing processes which take into
account the public interest.
• Support for the Bill C-34 amendments to the Final Offer Arbitration
provisions which are being used more and more by shippers as a
negotiating tool and in actual submissions to the Agency.
In conclusion, CCPA urges the Review Panel to accept these recommendations
in the interests of improving the competitiveness of Canadian shippers in both
domestic and export markets. Many of these shippers do not have the
competitive transportation options available to their competition, especially
competition from those U.S. shippers who can access more locations on
tidewater, an inland waterway system and a substantial interstate highway
system. In contrast, many Canadian shippers, including CCPA members, are
truly rail dependent and they need effective rail competition in order to continue
making positive contributions to the Canadian economy.
INTRODUCTION
The Canadian Chemical Producers' Association (CCPA) represents 75
manufacturers of industrial chemicals accounting for almost $16 billion in
shipments annually. These companies use chemistry to upgrade Canada's
natural resources into high value-added products which are both exported to.6
global markets and used by other key players in the national economy. In doing
so, the industry purchases raw materials and goods from other important
industry sectors such as oil and gas; mining, metals and minerals; forestry; and
agriculture. Two industries consume almost half of industrial chemicals output,
plastic products and transportation equipment, reflecting the importance of
chemicals in the production of motor vehicles, auto parts, packaging and
construction materials. The sector also has important downstream linkages to
the electrical and electronics, textile and clothing, food and beverage, and
construction industries. The chemical industry provides 83,000 direct jobs
across Canada and supports a further 220,000 jobs in other sectors of the
Canadian economy.
Transportation safety is a priority for CCPA members. They implement our
Responsible Care transportation code of practice which is designed to ensure
that chemicals and chemical products are transported in ways that minimize
risks. They also implement our distribution code which covers members'
activities including the movement of goods from suppliers for conversion or
resale. Both major railways as well as firms in the trucking industry are
Responsible Care partners. They implement the codes of practice and work in
partnership with CCPA members in the TransCAER program which supports the
Responsible Care codes. TransCAER is aimed at reducing the number of
transportation incidents and their impact. The focus of this submission is,
however, on commercial rail transportation issues arising from the Canada
Transportation Act ("the Act") and the terms of reference for the Canada
Transportation Act Review Panel ("the Review Panel"). These issues include
whether amendments are needed to the national transportation policy set out in
section 5 of the Act; proposals for enhancing competition in the railway sector in
the broader context of increasing North American integration and ensuring cost
effective service for shippers over the long term; the manner of setting
interswitching rates; and the need to sustain high levels of capital expenditures in
the rail sector to enhance productivity and promote innovation..7
Chemicals is an important component of the "industrial products" category of rail
traffic which also includes automobiles and parts, refined petroleum products
and metals. Industrial products accounted for 15% of total rail traffic volume in
1998. Chemicals is the largest contributor to the industrial products traffic
category, accounting for 35% of this traffic. It is also an especially important
contributor to transborder rail traffic, the fastest growing traffic category for
Canadian railways as they acquire or make working arrangements with railways
in the United States. Chemical rail shipments to the United States are second
only to forest products in terms of tonnage and rank third in value behind
automotive products and forest products. As for rail imports from the United
States, chemicals ranks first in terms of tonnage and trails only automotive
products in value.
The comprehensive review of the CTA is very important for CCPA member
companies because over 40% of their shipments, in terms of value, move via the
rail mode to key domestic customers; to North American customers throughout
the United States and into Mexico; and to Canada’s ports for shipment to global
markets. Close to 50 of our 75 member companies rely upon rail transportation
and for half of these companies, transportation costs exceed 10% of selling
price, ranging up to 30–39% of selling price. One-third of the companies in this
grouping spend 50% or more of their freight budgets on rail transportation.
While chemicals is a keystone of the Canadian economy and a major exporting
sector, we are a relatively small player in the global market, representing just
1.5% of the $2.2 trillion chemical industry worldwide. Customers in all markets
are demanding on-time delivery at the lowest possible cost. In contrast to
chemical producers in most other competing countries, the Canadian industry
must ship longer distances to major markets and key production sites. Those in
Alberta, for example, are located far from tidewater. Moreover, in many
situations they lack the competitive options available to U.S. shippers through
the extensive interstate highway and inland waterway systems. As a result,
Canadian chemical producers must place a very strong emphasis on achieving.8
the best possible transportation rates and services in order to retain and expand
their market shares.
CANADA’S RAIL LEGISLATION AND INTRAMODAL RAIL COMPETITION
The 1987 National Transportation Act (the "NTA") introduced provisions intended
to foster more effective rail competitive access for captive shippers. These
provisions, which were designed to allow shippers to have access to more than
one rail carrier, consisted of increased interswitching limits with allowance for
extended limits, and competitive line rates (CLRs) for shippers located beyond
interswitching limits. In addition, while not categorized as a competitive access
mechanism, the legislation introduced a final offer arbitration process devised to
provide speedy dispute resolution of rate and service issues. It also provided for
confidential contracts between individual shippers and railways, a provision
which has been a resounding success for both shippers and rail carriers.
Shippers responded very favourably to the NTA. There is no question that the
expanded limits for regulated interswitching did enhance competitive access. In
1992, the then National Transportation Agency reported that CN and CPR
interswitched between 130,000 and 140,000 cars each year from 1988 to 1990,
of which 60,000 cars per year fell within the expanded limits. Initially chemical
shippers were also positive about CLRs because they promised competitive
access with minimal regulatory process or litigation costs, but this promise was
not fulfilled. National Transportation Agency "shipper surveys" conducted
between 1988 and 1995 consistently found the CLR provisions to be beneficial
to shippers in their negotiations with the railways, even though only two CLRs
were actually established by the Agency pursuant to legislation. And in its 1993
report to the Minister of Transport, the National Transportation Act Review
Commission (NTARC) stated:
"The NTA, 1987 contains a number of .... devices intended to encourage
competition, such as competitive line rates (CLR), final offer.9
arbitration..... However, while these devices appeared to be well
regarded, we saw little evidence that they were being broadly used,
although shippers claim that they are important bargaining tools."
In the intervening years since the NTARC report, and particularly since passage
of the CTA, chemical shippers have concluded that CLRs are of very little use,
both in terms of actual applications to the Agency and their use in the negotiating
process with railways. This is partly due to changes to the legislation which are
discussed on the next page of this submission, and partly because the railways
have made it clear that they are not interested in competing for this traffic.
Indeed, even in 1993 the NTARC said that the major railways "have effectively
declined to compete with each other through competitive line rates (CLRs), and
as a result the provision is largely inoperative in Canada."
Some have suggested that the lack of use by shippers of competitive access
mechanisms like CLRs is merely evidence that the marketplace is working. That
is not the case. Between passage of the CTA and the end of 1999, companies
made 13 submissions for Final Offer Arbitration (FOA) and 18 Level of Service
applications in contrast to no applications at all for CLRs or extended
interswitching. While the FOA and Level of Service provisions of the CTA are
often helpful to shippers, neither of them was designed by policymakers to
provide captive shippers with quick, expedient access to a competing railway at
minimum transaction costs.
The CTA introduced a number of legislative changes to both the rail competitive
access and dispute resolution provisions of the NTA. While CLRs and regulated
interswitching were retained, a new and intrusive test was introduced by
subsection 27(2) that requires the Canada Transportation Agency (the “Agency”)
to be satisfied that a shipper would suffer "substantial commercial harm" before it
could grant any relief. This is a key weakness in the CTA as it exists today.
While Agency guidelines for the interpretation of "substantial commercial harm"
are of some help, there has not been any precedent-setting interpretation of the.10
test. It presents a formidable barrier to shippers in terms of uncertainty and
possible exposure to extensive litigation costs.
Provisions requiring all rates established by the Agency to be "commercially fair
and reasonable to all parties" were also added to the legislation, a further legally
cumbersome and unnecessary barrier for shippers. In addition, the CTA
reduced shippers' options for relief by removing the general complaint provisions
of the NTA, as well as provisions dealing with public interest and mediation,
leaving shippers with extremely limited avenues of recourse when disagreements
with the railways arise.
It is increasingly clear that the CTA's competitive access amendments were a
move in the wrong direction. They support the railways in reaching individual
decisions not to compete for certain traffic in order to help maintain their power
to apply differential pricing or Ramsey pricing to captive shippers, a pricing
approach which is extremely detrimental to the competitiveness of those
shippers. There is ample evidence of this which is discussed in the next section
of this submission.
EVIDENCE OF BARRIERS TO INTRAMODAL RAIL COMPETITION
In his report to the Minister of Transport on the 1998 Grain Handling and
Transportation Review, a comprehensive review of the handling and
transportation system for prairie grain and grain products which included 147
meetings with over 1,000 stakeholders and other interested parties, the Hon.
Willard Z. Estey stated:
"Many of those appearing before the Review, with the exception of the
railways, maintained that there is no competition in the real sense of that.11
term between the two railways in the delivery of transportation services
across this industry in western Canada".
and
"Many shippers expressed to the Review a desire to see the reduction or
elimination of the barriers to greater access. "
Mr. Justice Estey recommended "that the provisions of the CTA relating to
various methods of seeking access to other connecting rail lines be simplified
and clarified so as to better serve the national interest in obtaining competitive
and efficient transportation by rail. The general object of this recommendation is
the opening up of the Canadian rail system to competition by and between all
competent railway operators, including short-line railways..."
After receiving this report, in 1999 the Minister of Transport initiated
Consultations on the Implementation of Grain Handling and Transportation
Reform to develop the necessary operational details to implement Mr. Justice
Estey's recommendations. The Consultations failed to achieve this goal for rail
competition. The Stakeholders' Report on the Consultations states the following:
"With the exception of the railways, virtually all participants were of the
view that additional measures are required to increase competition in the
railway system. The uncertainty lies in the question of what measures
would be most effective in achieving this objective."
In the end, the participants agreed to leave the rail competition issues to be
addressed in the CTA Review Panel's interim report to be delivered by
December 31st, 2000.
While both the consultation processes referred to above focused primarily on
grain shippers, they also heard from many shippers in other sectors of the
economy. The conclusions they reached on rail competition are consistent with
other examinations of competition issues. For instance, in 1998 the Agency.12
engaged Ekos Research to survey a range of organizations interested in rail
transportation issues. Interviews were carried out with 20 carrier
representatives, 81 government and 82 shipper representatives. Ekos reported
that among shippers and governments, there was a strong perception that the
most significant problems facing shippers do not relate to the administration of
the CTA. Instead, the problems were seen as stemming from the reluctance on
the part of the national rail carriers to compete with one another, and the belief
that negotiations with carriers were one-sided when shippers have no alternative
forms of transportation.
Ekos Research reported that most shippers and governments expressed
concern over the extremely limited ability to take advantage of the CTA's
competitive access provisions. Excluding carriers, most survey participants
agreed that interswitching does contribute to competition and upon the need for
prescribed interswitching rates. Shippers and governments agreed that the CLR
provisions should be retained but there was a strong tendency to view them as
being ineffective due to the barriers in the CTA and the apparent lack of
willingness by railways to quote rates. All survey participants felt there was a
continuing need for the Level of Service provisions although shipper and
government respondents were most likely to support this. The continuing need
for final offer arbitration was endorsed by most shippers and governments and
less so by carriers. Finally, shippers and governments stated that the CTA's
substantial commercial harm requirement had negatively impacted upon the
negotiating position of shippers and had decreased shippers' scope for recourse
to the Agency.
These views were mirrored in CCPA’s 1998 survey of its own member
companies. That survey found that some members having large volume
shipments to offer at locations within regulated interswitching limits do benefit
from rail competition. The railways are prepared to offer these members
competitive rail rates and to work with them to continuously improve service.
Other members, however, particularly those captive to one railway with no other.13
viable transportation options, reported deteriorating service levels and tough
negotiations. Significantly, over 80% of our members reported that they need
more competitive rail options. Specific results from CCPA’s rail survey are
referenced in relevant sections of this submission.
In our view, the results of the current review process should include removal of
the barriers to competitive access introduced by the CTA; enhancements, where
necessary, to the existing competitive access and dispute resolution
mechanisms to make them more useful to shippers; and introduction of new
approaches to competitive access to help overcome failures of the current
mechanisms.
TODAY'S NORTH AMERICAN RAIL SYSTEM
The North American rail system has undergone a substantial transformation
since passage of the NTA in 1987, and the changes have accelerated in the
period since the CTA came into force in 1996. This latter period has been
marked by a consolidation of Class I railways in the United States, a process
accompanied by acquisition of U.S. rail assets by Canadian railways
supplemented by operating agreements with other U.S. railways. North-south rail
traffic has increased by more than 50 percent since 1987 1 but it is still
substantially less than the east-west traffic volumes which are also growing. The
Canadian railways suggest that they are finding it increasingly difficult to improve
productivity and operate profitably in this new rail environment, an argument
which CCPA rejects other than in one respect concerning railway taxation. This
section of our submission explains why the Review Panel should very carefully
examine the railway submissions on these matters.
In Canada, mainline rail carriers are increasingly concentrating on long haul,
high-volume corridors. Regional and short line railways are focused on the light
to medium density lines. Between passage of the CTA in 1996 and the end of
1 Data in this section is sourced from Transportation in Canada, the Annual Reports required by S.52 of the CTA.14
1998, more than 7,200 kilometres of track were transferred by the two major
railways to short lines, a four-fold increase over the previous 10 years. Transfers
of significant trackage in Ontario, Quebec and New Brunswick have transformed
CN into a spinal network for much of eastern Canada. CPR had already moved
in this direction. Today, only about 60 percent of the rail network east of
Winnipeg is represented by CN and CPR, while the remaining 40 percent or so
now consists of a system of Class II carriers, with well over half operating as
feeders to the Class I system. Those developments have substantially improved
the Class I carriers’ profitability and the effectiveness of their investment plans.
The Railway Association of Canada reports that for CN and CPR, partnerships
with the short lines have enabled them to increase traffic density on main lines
and to better focus capital investment on their strengths in the long haul freight
sector.
Since 1986, the Canadian rail freight industry has undergone a full business
cycle. It achieved strong revenue growth in the mid-1980s, experienced a
revenue slowdown from 1988 to 1989, followed by a financial downturn in the
early 1990s, entered a period of recovery from 1993 to 1996, and finally
achieved record revenues and operating profits in 1997 and 1998. In many
respects, this mirrors the performance of the chemical industry and other sectors
of the Canadian economy. By 1997, the profit margin of the two Class I railways
was seven percentage points higher than in 1986, which was also a year of
relatively good performance for the railways. In dollar terms, operating profits
increased $486 million, reflecting higher railway profitability in recent years than
a decade ago.
This is not surprising because the railways are capitalizing on many new
business opportunities and positioning themselves to capture even more such
opportunities in the future, especially in the rapidly expanding transborder
market. Just a few examples of the many initiatives of this type follow.2 Last
year, CPR signed deals with U.S. railways giving it access to a population base.15
of about 80 million people, including a direct run into the cores of New York and
Philadelphia, and access rights to Boston, Baltimore, Washington, Atlanta and
even Miami. It has positioned itself as one of only two railways allowed access
to New York City and become a key player in the intermodal market between
that city and the U.S. Midwest. One of its aims under these deals is to take truck
traffic from major U.S. interstate highways. CPR's traffic to and from Mexico
increased by 25% in 1999, much of this coming from a new NAFTA-targeted rail
service called CPR-MEX. The company says that the potential for growth in the
Mexican market is tremendous.
Among other initiatives, CN is aggressively pursuing development of its
Canadian National-Illinois Central-Kansas City Southern "alliance" to boost
revenue growth across all business segments by improving service between
Canada and the strategic Texas, Missouri and Mexican markets. Last year, for
example, the company won the contract to move General Motors aftermarket
automotive parts to key facilities based on its consistent and timely service
package. Both CN and CPR are working with U.S. states in a government-initiated
program designed to reduce highway congestion and to make more
effective use of border gateways. In commenting on this program, the Railway
Association of Canada said that the potential for rail to carry more of North
America's freight load is significant.
This year's track sharing agreement between CN and CPR will also provide new
business opportunities by expanding the reach of each railway. Standard &
Poor's Ratings Services said that the deal is "going to be a nice little pickup in
business for each of them in eastern North America. " Both railways should be
able to use the agreement to offer viable alternatives to trucking for important
U.S. and Canadian markets. The positive financial and business performance
outlined above has helped to allow the two railways to significantly increase
capital investment and boost productivity performance. CN's capital investment
increased by 79 percent between 1992 and 1999. The Illinois Central
2 See Journal of Commerce July 31 – August 6, 2000, p.18; The Globe and Mail, December 31, 1999, p.B3; and recent.16
transaction alone was a $2.3 billion deal. CPR has also experienced a capital
investment surge of more than $3 billion between 1995 and 1998. Its 1998
investment program of $1.1 billion is described as the largest in Canadian
railway history.
Given this strong performance and positive outlook for the future, it is not
surprising that the railways are finding favour with investment analysts. In June,
analysts with Newcrest Capital Inc., Salomon Smith Barney and HSBC Securities
Canada Inc. were described as finding much to like about CN, even without the
proposed combination with BNSF.3 CN was given high marks for having the
lowest operating ratio in the rail industry, the best balance sheet, the best growth
prospects, a better service product and strong dedication to cost cutting. While
its share prices do not yet fully reflect the value seen by analysts, the same is
true of many strong companies in the so-called "old economy" and investors are
likely to return to those companies as the current fascination with growth stocks
continues to fade. Canadian Pacific Ltd. is described by analysts as “firing on all
cylinders” with strong increases in share prices this year.4 The rail business is
making its contribution. Analysts at Odlum Brown Ltd. comment that aggressive
cost-cutting has led to record profits at CPR.
While acknowledging this strong financial performance to some extent, CN and
CPR, through the Railway Association of Canada, argue that continuous gains in
railway productivity are insufficient to overcome railway prices and revenues that
have not kept up with costs, and they complain that in this respect, they are
worse off than their U.S. counterparts. Other than their points about impacts of
railway taxation in Canada, the railways' productivity arguments are highly
suspect. As demonstrated by the review in this submission of the transformation
of the Canadian rail system into a network of main lines and feeder short lines,
the CTA does not pose a barrier to rail rationalization and associated productivity
gains. In addition, CN and CPR have achieved substantial workforce
issues of Railway Association of Canada Interchange. 3 The Globe and Mail, June 2, 2000, p. B 12.17
adjustments which are still continuing. Between 1986 and 1998, employment in
their Canadian operations fell by 34,000 employees, a 47% reduction in
workforce. In 1986, labour costs represented 43% of the total costs of Class I
railways, compared with an average of 39% in the transportation sector as a
whole. By 1997, the labour cost share in rail freight was reduced to 36 percent,
about the same as in total transportation, and it has continued to fall.
The results of this extensive restructuring show up in the productivity data. With
1991 as the base year, productivity performance allowed the rail industry to
achieve total costs in 1998 which were $2.1 billion lower than they would have
been without the productivity improvement. These savings are significant as
they represent 32 percent of the industry cost base. As for prices, in 1998 the
average rail price was 7 percent lower than in 1991. 5 While this indicates that
shippers did receive some of the benefits of railway productivity gains, total rail
freight cost reductions for shippers in this period were $1.1 billion, indicating that
the railways have been able to retain about half of the productivity gains.
As for comparisons with U.S. railways, much of the data is reported on a revenue
per ton-mile or revenue per tonne-kilometer basis which introduces distortions
into the analysis. There are claims, however, that U.S. railway prices are the
lowest in the developed world, due in part to the highway and barge competition
which is largely absent in a country like Canada.6 Major CCPA member
companies believe that when they are in direct competition for chemical markets
with U.S. manufacturers, one way or another the U.S. producer can obtain freight
rates which allow them to beat the competition into any North American market.
In a recent STB filing, for example, CSX reported that a large U.S. chemical
manufacturer began to switch the previously all-rail (CSX) shipments of one of its
products to barge. CSX responded with new lower contract rates and retained
the business. The same chemical manufacturer also switched previously CSX
4 The Globe and Mail, Report on Business, August 18, 2000. 5 The Statistics Canada/Transport Canada rail freight price index is based on confidential data provided by the railways.
It is based on revenue per tonne-kilometer and includes confidential contract rates, without rebates. “Rail Freight Rates
in the Post – Staggers Era” by R.L. Banks & Associates, Inc. and Fieldston Company, Inc. (April, 1998) explains why
revenue per ton-mile (and hence, revenue per tonne-kilometre) can be a misleading surrogate for real freight rates. 6 See, for example, Louis Thompson, “U.S. Rails: A World Apart”, Journal of Commerce, July 29, 1998..18
rail direct shipments of caustic soda to barge/truck and barge/short haul rail. For
these shipments, CSX could not match the alternative rates and either lost the
business or was reduced to a short haul. This type of rate leverage based on the
barge system is not available to Canadian chemical shippers.
Turning to railway taxation, some provincial governments have taken initial steps
towards easing Canadian taxes on locomotive fuel and railway rights of way. In
the federal Budget 2000, the government made a commitment to reduce the
corporate tax rate applicable to companies including the railways from 28% to
21% over the next five years. The budget also increased depreciation rates on
railway locomotives and freight cars from 10% to 15%. The railways point out
that this still leaves them with a less competitive tax system than their U.S.
competition. CCPA agrees that the railways should be placed on a level tax
playing field with their U.S. counterparts. They would receive broader and
stronger support from the shipping community on this issue if they would commit
themselves to providing rail competition for all shippers.
To sum up, the financial and productivity records demonstrate that Canada's
Class I railways can operate profitably in today's North American rail
environment. The effects of the business cycle they have faced over the past 10
years are no different than those faced by other Canadian industries like
chemicals which are subject to global competition. Railway arguments about
revenue and profitability levels compared with their U.S. counterparts,
government regulatory barriers or workforce adjustment requirements do not
stand up as justification for the maintenance of "Ramsey pricing" or the rejection
of improved competitive access for shippers. As we have said, however, we do
support a competitive tax system for Canadian railways compared to their U.S.
counterparts.
REVENUE-BASED PRICING IN A FULLY COMPETITIVE RAIL REGIME.19
The railways' primary argument against providing and improving competitive
access for all shippers appears to be that for reasons of viability, they require the
ability to engage in revenue-based pricing, commonly referred to as differential
pricing or Ramsey pricing, with shippers which remain captive to one railway.
This means that captive shippers pay rates far above competitive levels. In the
United States, members of the American Chemistry Council have sufficient
captive and non-captive locations within their companies to permit comparisons
to be made. They find that rail rates from captive points are 15% to 60% higher
than from competitive points, with an average premium of approximately 25%.
Introducing rail-to-rail competition through competitive access mechanisms
should reduce this premium but it would not eliminate it. In other words, the
railways' revenue-based pricing practices would not be destroyed by a regime of
greater competition. One reason for this is that in Canada, competitive access
invariably means providing a choice of one additional railway for a captive
shipper which, in effect, transforms a monopoly situation into a duopoly. Grimm
states that while two firms in any industry will in most instances compete to some
degree with each other, a rivalry will generally be more vigorous when a third firm
is present, with customers receiving more options, better service and lower
prices.7 Levin has developed simulations on the social benefits of increasing
competition in concentrated rail markets.8 He has demonstrated that, under
various assumptions concerning demand elasticity and revenue/variable cost
ratios, the social benefit of adding a second, equal-sized competitor to a
monopoly market ranges from 6.8% to 18.9% of the revenues in that market.
Adding a third railway in a two railway market yields social benefits of from 2.4 %
to 6.6% of revenues. This suggests that as theory predicts, duopolists do limit
the extent of their competition.
7 Verified Statement of Curtis M. Grimm. Comments of The Kansas City Southern Railway Company in STB Ex Parte
No. 582 (Sub-No.1), Major Rail Consolidation Procedures. 8 Levin, Richard, “Railroad Rates, Profitability, and Welfare under Deregulation,” Bell Journal of Economics, Vol. 12,
Spring 1981, pp. 1-26.20
In the current STB hearings, the U.S. American Chemistry Council demonstrates
that providing rail competition for every shipper captive to one railway would not
financially ruin the railways. Statements by Professor Robert E.McCormick and
Professor Thomas M.Corsi are attached to the American Chemistry Council
submission. For ease of reference, copies of these statements are attached to
this submission as Appendices “A” and “B” respectively. Professor McCormick's
statement explains that just as in other deregulated industries such as
telecommunications, increasing competition will further revitalize the rail industry
and provide new incentives for it to expand and develop new markets. He
demonstrates that contrary to statements by railways opposing further
competition, the ability to engage in revenue-based pricing will not be eliminated
by providing greater competition. At page v of his statement, Prof. McCormick
asserts that:
"[F]ree and open competition will not destroy the ability of railroads to
charge revenue-based differential rates, but in fact will ensure that the
optimal overall level of rates is achieved. The optimal overall level of
rates is one that provides revenues adequate to raise sufficient capital
and provide efficient service to shippers. Competition is the best, and
really, the only vehicle whereby optimal revenue-based prices can be
set."
Professor McCormick provides a number of examples of multi-tier and demand-based
pricing in fully competitive industries including airlines, hotels and
publishing. He shows that rail customers are not a static "revenue base" with
unvarying demand but rather, provide a fluid grouping of markets to be captured
and developed under the incentive of marketplace competition. As Professors
McCormick and Corsi discuss, there are many new and expanding markets for
the railways to pursue. Expanded intermodal service as part of the internet
revolution and tightened supply chain management is just one of them..21
It is noteworthy that when Reply Comments were filed in the STB hearing,
Professor McCormick's statement was referenced favourably by trade
associations and individual companies from a wide range of industry sectors
including the National Industrial Transportation League, electric utilities, grain
shippers and a major pipeline company.
In the U.S., a recent analysis by L.E. Peabody & Associates confirms that
increased competition at captive shipper locations, combined with better
customer service, would increase railroad profits by some $4.9 billion by 2005. 9
In Canada, enhanced competition would help to ensure the continued financial
health of the railways by further spurring the trend towards innovation and
greater emphasis on customer service commenced by the 1987 National
Transportation Act.
RECOMMENDATIONS FOR ENHANCING RAIL COMPETITION
CCPA is a member of the Shippers' Summit which brings together national and
regional associations whose member companies are major users of rail freight
services. The Shippers' Summit proposals for enhancing Rail Competition have
been provided to to the Review Panel so they will not be repeated in detail here.
For ease of reference, a copy of the Shippers' Summit position is attached as
Appendix “C”. CCPA fully supports the Shippers' Summit recommendations .
The Shippers' Summit competitive access recommendations have been
developed because many shippers which are captive to the rail mode and are
served by a single railway at origin or destination have no economically
competitive means to ship their products. These shippers must have access to
more than one railway to obtain the benefits of competitive rates and services.
Within CCPA's membership, for example, a 1998 survey showed that 47
companies rely on rail transportation. They identified 45 rail dependent plants at
9 L.E. Peabody & Associates, “The Effects of Increased Competition and Improved Service on the Railroad Industry”,
(Sept. 1999)..22
34 locations across Canada-- 14 in Ontario, 9 in Quebec, 7 in Alberta, 3 in British
Columbia and 1 in Manitoba. Only 17 of these plant locations have
interswitching arrangements or direct competitive access which provide the
benefits of competitive freight rates and services.
The Shippers' Summit submission includes recommendations for limited running
rights and a Competitive Access Rate to simplify the CLR provisions. CCPA is
reviewing these recommendations with representative member companies to
assess how they might make use of such provisions in legislation. The results of
that review will be provided to the Review Panel as soon as it is available.
This section of our submission provides CCPA's perspective on specific
elements of the Shippers' Summit position.
The National Transportation Policy
The national transportation policy set forth in section 5 of the CTA provides a
useful overview of the objectives of the legislation. In our view, the policy
statement remains relevant today and there is no pressing need to amend it at
this time. The 1993 NTARC report did, however, recommend some changes to
streamline the policy statement and the Review Panel may wish to revisit those
recommendations in the course of its deliberations.
In addition, earlier this year the Vancouver Port Authority brought together a
group representing producer, shipper, academic, rail, air, truck/transport, airport
and maritime representatives to develop a vision statement for transportation in
Canada. With one major exception, CCPA suggests that this vision statement
should be considered by the Review Panel in relation to the national
transportation policy since it does bring together a broad cross section of
participants. Our one major reservation relates to the treatment of competition in
the vision statement..23
Regarding competition, CCPA strongly supports without change the elements of
the existing policy statement which are relevant to the objectives of competition,
efficiency and low cost in the delivery of transportation services. These elements
consist of the following parts of the current section 5:
• The reference to "a safe, economic, efficient and adequate network of
viable and effective transportation services"
• The wording describing a transportation network "that makes the best use
of all available modes of transportation at the lowest total cost is essential
to serve the transportation needs of shippers and travellers"
• The statement that "objectives are most likely to be achieved when all
carriers are able to compete, both within and among the various modes of
transportation"
• Paragraph (b) of the current policy statement which states that
"competition and market forces are, whenever possible, the prime agents
in providing viable and effective transportation services "
These elements of the national transportation policy are critical for shippers. For
instance, the Canadian Transportation Agency has relied upon them in
upholding the fundamental right of shippers to choose their own routings for the
movement of their goods, to choose which carrier or combination of carriers will
carry those goods, and to obtain the best prices in making these decisions.
Limited Running Rights
CCPA supports the Shippers' Summit recommendation for limited running rights.
It is generally consistent with the running rights recommendation made by Mr..24
Justice Estey in his Final Report on the Grain Handling and Transportation
Review. Recommendation 8 of that Report states the following:
"It is recommended that the provisions of the CTA relating to various
methods of seeking access to other connecting rail lines be simplified
and clarified so as to better serve the national interest in obtaining
competitive and efficient transportation by rail. The general object of
this recommendation is the opening up of the Canadian rail system to
competition by and between all competent railway operators, including
short line railways. Competency shall be determined by the Agency."
Mr. Justice Estey then made a number of recommendations for broadening the
application of the current running rights provisions.
The thorough discussion and debate concerning running rights in the
consultations carried out on behalf of the Minister of Transport by first, Mr.
Justice Estey, and then by Mr. Arthur Kroeger, demonstrate that a number of
shippers and other participants in the transportation system are interested in
making greater use of them. The Shippers' Summit recommendations for limited
running rights upon application to the Agency, with the Agency having the power
to develop the scope of the running rights order, to establish the compensation
to be paid for running rights and to deny such an order where appropriate, would
permit this. Mr. Justice Estey referred to his recommendations as offering "open
access" to the rail system but we believe that is a misnomer. The Shippers'
Summit recommendations would leave the Agency with considerable power to
determine when and how running rights should be ordered, resulting in far less
than "open access" to the rail system.
Competitive Access Rate (CAR)
CCPA's 1998 survey of its members showed that since 1996, only two of them
had raised the possibility of a CLR with railways during negotiations. The rest.25
had given up on CLRs in the firm belief that the railways do not wish to compete
for their business using this competitive access mechanism. Our members did,
however, urge that the CLR mechanism should be re-designed in an attempt to
make it more effective. The CAR mechanism, developed by the Canadian
Fertilizer Institute, does that. Basically, it provides a simplified process for
obtaining a fair rate to a competitive interchange.
If captive shippers located on short line railways could designate the juncture of
the short line and the connecting major railway as the origin of traffic for the
CAR, this would make CARs available to such shippers even when the short line
railway is provincially incorporated.
Our member companies are far from unanimous on whether the simplified CAR
approach would work to stimulate competition. Some believe that it would create
new competition between originating and connecting carriers while others feel
that basically, the CLR mechanism cannot be fixed. All of our members do
agree, however, that CAR should be given an opportunity to test whether it can
deliver the competitive access originally promised by the CLR mechanism.
Interswitching/Extended Interswitching
CCPA strongly supports the Shipper Summit comments on the vital role of
interswitching in providing competitive access for captive shippers. Within
CCPA's membership, 20 out of 47 member companies relying on rail
transportation regularly make use of the interswitching provisions. The Review
Panel should be aware that in the U.S. Surface Transportation Board's current
hearings on Major Rail Consolidation Procedures, some major U.S. shippers and
the Department of Transportation have recommended either adoption of
Canada's interswitching system or a similar system, and commented positively
on other aspects of competitive access and dispute resolution in Canada. A
compendium of these comments appears in Appendix “D”. In the U.S., of.26
course, shippers who advocate some form of the Canadian system advocate
implementing it in a way that guarantees rail competition for all shippers.
CCPA recommends that the Canadian Transportation Agency should have the
power to set "maximum" as opposed to "actual" interswitching rates. This would
continue current practice whereby the parties participating in specific switches
can negotiate lower interswitching rates when it makes commercial sense to do
so.
Repeal of Subsections 27(2) and (3) and Section 112 of the CTA
CCPA supports the Shippers' Summit recommendation to repeal these sections
of the legislation, particularly subsections 27(2) and (3), which deter shipper
applications to the Canadian Transportation Agency. The provisions of the Act
dealing with CLRs, joint rates, extended interswitching and level of service
obligations require applicants to satisfy the Agency that they would suffer
substantial commercial harm if the relief sought is not granted. Because there
are no binding legal precedents, the Agency has drafted guidelines on factors it
may consider under subsection 27 (2) and they are helpful. The guidelines are,
however, no substitute for a sound, precedent-setting legal interpretation of the
subsection.
Analysis by the Agency shows that the substantial commercial harm test has
influenced the types of applications made to it by shippers. Generally, shippers
have been forced to use remedies which are more costly and expose them to
extensive litigation. The records of the Level of Service applications brought by
the Wheat Board, Eagle Forest Products Limited Partnership and Naber Seed
and Grain Co., Ltd. demonstrate that substantial commercial harm will be
litigated. At the same time, the strong improvements in railway financial viability
discussed in this submission demonstrate that the railways do not require this
protection..27
Sale and Discontinuance of Rail Lines
By 1998, 10 out of the 47 CCPA members relying on rail transportation had
plants located on short line railways. When some of those short lines were
created, serious issues arose which would have benefited from consideration by
the Canadian Transportation Agency. Bill C-34 has made appropriate
amendments to the CTA on the sale and discontinuance of railway lines which
will enable those types of issues to be addressed by the Agency in the future.
CCPA supports the Shippers' Summit recommendations to extend specific Bill C-34
amendments currently limited to grain dependent branch lines to all rail lines,
and to address other deficiencies in the CTA.
Role of the Canadian Transportation Agency
CCPA supports the Shippers' Summit recommendations to restore the public
interest provisions of the CTA as well as the Agency's jurisdiction to review rail
mergers or combinations. As the Shippers' Summit document indicates, those
provisions will be especially important if the expected new round of North
American rail restructuring takes place once the U.S. STB's merger rules are
revised. Such mergers will certainly affect Canadian shippers and as future
combinations materialize, they will require means to ensure that promises to
maintain or enhance competition are kept and that promised efficiencies do
materialize.
CCPA believes that the Competition Bureau should continue to review the
effects of proposed rail mergers or combinations. We also believe that there is a
need for the Agency to have a role as well, while avoiding overlap with the
Competition Bureau to the maximum extent possible..28
On May 17th, the Minister of Transport asked the House of Commons Standing
Committee on Transport to initiate an examination of the then proposed
CN/BNSF combination. In doing so, he said that the Standing Committee would
provide Canadian stakeholders and other interested parties with a public forum
to express their views and opinions, and that the Standing Committee was to
determine whether the proposed combination would be in the public interest and
consistent with national transportation policy. Prior to 1996, this is exactly the
mandate that the Agency would have exercised under its merger review powers.
CCPA recommends that those powers should be restored to the Agency.
Final Offer Arbitration (FOA)
As mentioned elsewhere in this submission, FOA is being used more and more
by shippers as a negotiating tool and in actual submissions to the Agency. While
the FOA provisions were used only nine times under the NTA between 1988 and
1996, they were used on a further 13 occasions up to the end of 1999. 10 CCPA
endorses the Bill C-34 amendments to the FOA provisions and does not believe
that further amendments should be considered at this time.
The Agency has commenced publishing summaries of its FOA decisions dealing
with procedural challenges. They will increase the understanding of shippers
seeking to make use of these provisions. They will also identify the numerous
preliminary objections which the railways have raised in FOA cases, at least
partly in efforts to frustrate the FOA remedy. Documenting these matters will
allow future consideration of whether additional amendments to the FOA
provisions are needed to curtail this practice.
CONCLUSION
10 Canadian Transportation Agency, Annual Report, 1999, pp. 44-46..29
In its 1993 report, the National Transportation Act Review Commission (NTARC)
set the tone for its recommendations by stating that "today we know that our
transportation industries cannot be protected from domestic and international
competitive pressures without paying a heavy price elsewhere in our economy,
and at the cost of undermining of our export industries." It also said that it should
not be necessary for Canada to choose between Canadian carriers and the
success of exporters--the country should be able to have it both ways.
CCPA believes that these conclusions generally remain valid today. In our view,
if the railways are permitted to continue Ramsey pricing with captive shippers,
Canada's export economy will pay a heavy price as those shippers decline under
global market pressures. It is no use saying that U.S. shippers are subject to the
same conditions. They have many transportation options outside of the rail
system and moreover, legislative proposals for enhancing rail competition in that
country are likely to find favour following this year's presidential election.
There is no need for this detrimental outcome to occur. As Professor McCormick
has demonstrated in his statement appended to this submission, revenue-based
pricing (i.e. Ramsey pricing) will not be eliminated by providing rail competition
for captive shippers. It can be applied in a competitive marketplace and we do
not take issue with that. CCPA urges the Review Panel to take this into account
and to adopt the recommendations for Limited Running Rights, the Competitive
Access Rate and the other proposals made by the Shippers' Summit
participants.
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