Canadian National
Submission
to the
Canada Transportation Act Review Panel
November 2000.Contents
Executive summary 1
1.0 History of rail deregulation 5
2.0 Enhancing competitiveness 7
2.1 NAFTA GROWTH 7
2.1.1 Deregulation has been a success 8
2.1.2 Regulatory harmonization 9
2.1.3 Trade Obligations 10
2.1.4 Mergers and Acquisitions 11
2.1.5 Recommendations 12
2.2 FURTHER DEREGULATION REQUIRED 13
2.2.1 Railroad financial performance is fragile 13
2.2.2 Key Drivers Of Railroad Competition 14
2.2.2.1 Differential Pricing 20
2.2.2.2 Extended Interswitching 21
2.2.2.3 Competitive Line Rates 22
2.2.2.4 Final Offer Arbitration 22
2.2.2.5 e-Commerce 23
2.2.3 Recommendations 25
2.3 MODAL BALANCE 26
2.3.1 National Transportation Policy 26
2.3.2 Recommendations 29
3.0 Maintaining rail system integrity 30
3.1 REGULATED ACCESS 30
3.2 THE SHORTLINE COMMUNITY 31
3.3 OTHER RAILROADS 31
3.3.1 OmniTRAX 32
3.3.2 B.C. Rail 32
3.4 LESSONS LEARNED IN OTHER CONTEXTS 33
3.4.1 European Union 34
3.4.2 United Kingdom 34
3.4.3 Australia 34
3.4.4 Utilities Comparison 35
3.5 RECOMMENDATIONS 36.4.0 Corridor and Commuter Services 38
4.1 RAIL LINE ABANDONMENT PROCESS 38
4.2 ELIMINATING DISCONTINUANCE DELAYS 39
4.3 URBAN CORRIDOR AND COMMUTER SERVICES 40
4.4 RECOMMENDATIONS 41
5.0 Conclusions and Recommendations 42.Submission to CTA Review Panel – November, 2000 1
Executive summary
The North American Free Trade Agreement, the cornerstone of Canada’s trade and
economic policy has triggered a period of unprecedented economic growth for Canada’s
manufacturers and exporters. It has fundamentally changed trade flows between
Canada, the United States and Mexico. Canada’s trade with the United States and
Mexico has increased by 80 per cent and 65 per cent respectively and now exceeds $1.5
billion per day. Growth is expected to continue at an annual double digit pace for the
foreseeable future.
Sustaining this level of activity requires an integrated transportation network with rail a
key component. Canada needs a transportation policy that will help the nation realize
the full benefits of NAFTA. The Canada Transportation Act Review Panel must consider
Canada’s competitiveness in the context of the NAFTA marketplace.
The impact of the integration of North America’s economy is clear at Canadian National
(CN). More than half the company’s revenues are generated from traffic moving to,
from or within the United States. Of CN’s top 20 customers, representing about one
third of company revenues, more than three quarters have plants in at least two of the
three NAFTA countries.
As North American and world economies integrate further, Canadian rail regulatory
policies – particularly the extent to which they are aligned with those that govern rail
transportation in Canada’s principal end market, the United States – will have a great
influence on the ability of CN and its customers to compete in the NAFTA marketplace.
Any new rail policies must reflect the economic realities of NAFTA and the need for the
Canadian economy, railroads and their customers included, to continue to compete.
For the past several years, it is this NAFTA environment and its related growth – more
than any other factor – that has influenced strategic decisions and corporate investment
at Canadian National.
Further deregulation – not re-regulation – is required to position railroads to better compete
and to help their customers succeed in their end markets.
In 1998, CN acquired the Illinois Central Railroad, extending customer reach from coast
to coast in Canada and south to the Gulf of Mexico. Recent service improvements mean
CN’s intermodal customers can reach major Canadian markets faster than if they used
competing long-haul trucking firms. CN’s participation in e-commerce alliances and
marketplaces builds on the advantages the Internet gives customers and suppliers.
Today, Canadian railroads still face conflicting and discriminatory regulations and tax
policies that inhibit their competitiveness and that of their customers. Continued
economic growth in Canada will depend, to a large extent, on the efficiency and
effectiveness of its national transportation network. Canada’s railroads have much to.Submission to CTA Review Panel – November, 2000 2
contribute to such a network. But that will require a national transportation policy that
treats all modes equitably and equally within a framework where outcomes are
determined by market forces.
The Canada Transportation Act of 1996 came at a crucial time for Canada’s railroads –
helping lift the domestic rail industry from deficits and economic decline. Shippers and
receivers have also been major beneficiaries. They now enjoy the lowest freight rates in the
western industrialized world – 60 per cent below the international average.
As measured by ton-miles, the 68 railroads that make up Canada’s rail transportation
sector account for more than 60 per cent of all transportation services provided. On a
revenue basis, however, railroads capture less than 25 cents of every dollar earned by
transportation service providers in Canada. The reason is intense competition, among
the railroads themselves, and with trucks, water carriers and pipelines, as well as
between competing plants and global sources for raw and manufactured material.
The one segment that has remained regulated – grain – has not experienced the full
range of market driven improvements, as have all other segments. Although the prices
of all other farm inputs, in real terms, have risen sharply over the past decade grain
freight rates have remained essentially flat. CN understands that grain transportation is
a sensitive issue for both regulators and legislators. The challenge for the Panel is to
ensure the special circumstances of grain do not overshadow consideration of the
benefits further deregulation can deliver to Canada’s economy.
Recent financial gains by Canada’s railroads have been largely achieved through the
elimination of surplus assets and rigorous cost containment. At CN these initiatives were
coupled with a major redesign of the operating plan to greatly improve service levels.
CN is now arguably the best railroad in North America – operationally. But future
success will depend on the ability to recapture market share lost to other modes,
especially trucks, through premium service offerings. And premium service can only be
offered if the industry can innovate and recover its costs through the rates it charges.
The industry needs to achieve a high rate of return to attract market capital to reinvest in
the network and new services.
CN is only now beginning to cover its cost of capital. CN requires more assets to
generate a dollar of revenue than does any other of Canada’s top 1000 corporations.
Every year, these assets need to be replaced, maintained and improved. CN will invest
$1 billion on its network and infrastructure in 2000 alone.
Capital markets will not respond if regulatory policies are seen to distort or displace
normal market-driven economic incentives. If capital investment does not occur,
Canadian producers and manufacturers cannot hope to compete with their North
American and global competitors.
The privatization of Canadian National levelled the playing field between CN and
Canadian Pacific. And the Canada Transportation Act allowed the railroads to make the.Submission to CTA Review Panel – November, 2000 3
network adjustments necessary for financial success in a competitive marketplace. Both
decisions also respected the need to reduce the gap between the Canadian and U.S.
regulatory frameworks and the need to respect Canada’s trade obligations under
NAFTA.
But despite these deregulation initiatives, the Canadian railroad industry, and by
extension its customers, have been unable to realize their full potential. One major
contributing factor is the absence of a national transportation policy that would treat
each mode equitably within a system driven by the discipline of the marketplace.
The Panel has an opportunity to recommend the federal and provincial governments
establish a more balanced tax and regulatory regime between rail and truck – one that
addresses market distortions that have resulted from public investment in highways.
The Panel must also examine ways in which the regulatory structure of the CTA can be
fine-tuned to remove existing barriers to increasing rail productivity and efficiency.
For example, CTA ’96 allowed CN and CP to more easily address the costs associated
with an overbuilt railroad system. This process of rationalizing the networks of the
country’s two major railroads has led directly to the development of a strong, vibrant
shortline rail industry in Canada. Currently, there are more than 40 shortlines and
regional railroads operating more than 16,000 kilometres of track in Canada. They are
vital components of regional economies across Canada through their partnership with
the mainline carriers.
However, rail line abandonment and transfer provisions are still not as streamlined and
efficient as they could be. There are several situations where communities have delayed
line acquisitions well beyond the reasonable time limits initially contemplated in the
CTA. This process should be clarified. In addition, urban centres that wish to acquire
abandoned rights-of-way for commuter services should do so under clear rules at fair
market value.
It is CN’s view that shipper protection regulations can also be streamlined. Final offer
arbitration, for example, is too cumbersome, costly, and therefore, ineffective. Adopting
commercial arbitration practices would address these concerns.
The competitive access issue the Panel is examining, and that CN responded to in its
October 6, 2000 submission, requires close and careful scrutiny. Competition for traffic
handled by railroads is fierce. It encompasses direct rail-to-rail competition, intermodal
competition, as well as product substitution and source competition.
Because competition is fierce and deregulation has delivered tangible benefits, open or
regulated access would be a fundamental change to a system that is performing to world
class standards. The Panel should perform rigorous, quantitative research to determine
the actual levels of existing competition. Any decisions on fundamental change to the
future structure of the industry should be based on sound analysis. In addition, any
changes must be fully consistent with all provisions of NAFTA, including avoiding.Submission to CTA Review Panel – November, 2000 4
indirect subsidies to shippers, and preserve the rail industry’s ability to recover its fixed
costs.
The Panel can improve the position of shippers and railroads by proposing changes that:
¨ Respect NAFTA and WTO obligations:
- avoid indirect subsidies;
- respect shareholder rights; and
- avoid confiscatory measures by insisting on full cost recovery.
¨ Result in further deregulation:
- remove regulation where market forces are efficient; and
- ensure remaining regulation is fair and reasonable to all parties.
¨ Fairly balance competing interests:
- between modes;
- between railroads; and
- between railroads and their customers.
The financial health of Canada’s rail industry is recovering from near collapse prior to
the CTA of 1996, but remains fragile. The CTA Review Panel is uniquely positioned to
balance the needs of shippers and railroads to ensure both can prosper under NAFTA..Submission to CTA Review Panel – November, 2000 5
1.0 History of rail deregulation
By the mid-1970s, the anachronistic regulation of the North American rail industry had
moved it to the edge of bankruptcy.
Governments in both Canada and the United States slowly came to realize that if the
industry were to survive it would either have to be deregulated and allowed to compete
on a commercial footing, or be heavily subsidized with public funds.
The United States was the first to move, with passage of the Staggers Rail Act in 1980.
The Act introduced a number of sweeping reforms, all adhering to the overriding
principle that railroads be allowed the freedom to manage their assets and price their
services like all other businesses.
While the Act did not completely deregulate the industry, it did return U.S. railroads to
the path of financial health. U.S. railroads emerged from this period with a competitive
advantage over Canadian railroads.
The Canadian government followed in 1987 with passage of the National Transportation
Act (NTA). NTA ‘87, however, fell short of Staggers. It introduced market competition to
the revenue side of rail economics but left the cost side heavily regulated. And Canadian
railroads remained unable to tailor their networks in line with commercial principles.
As confirmed by the National Transportation Act Review Commission in 1993, the future
of the Canadian rail industry remained precarious. The Commission noted: ‘…if Canada
does not wish to pay the price of a serious deterioration of the rail industry in this
decade, it is essential that the carriers be allowed and encouraged to make the changes
needed to compete.’
During the same period, Harvard Professor Michael Porter’s highly publicized study of
the Canadian economy warned that Canada’s standard of living was destined to fall.
The study cited an insulated economic environment resulting from paternalistic
government policies and highly protected domestic markets.
Poor financial performance persisted to the extent Canadian National and Canadian
Pacific considered merging their eastern Canadian operations in 1994.
Canada signed the North American Free Trade Agreement (NAFTA) in 1994. The
agreement dramatically altered trade and traffic patterns between Canada and the
United States. That same year, the federal government announced a Federal Regulatory
Review ‘to ensure that the use of the government’s regulatory powers results in the
greatest prosperity for Canadians.’.Submission to CTA Review Panel – November, 2000 6
The 1995 privatization of Canadian National quickly followed by passage of the Canada
Transportation Act (CTA) were two of the many decisions taken in response to the
findings of this Review.
Combined with the CTA ’96, the privatization of Canadian National allowed CN and
Canadian Pacific to make the network adjustments necessary for financial success in a
competitive marketplace.
Both decisions also respected:
¨ the need to reduce the gap between Canada’s regulatory framework and that of its
largest trading partner, the United States; and
¨ the trade obligations Canada assumed as a signatory to NAFTA..Submission to CTA Review Panel – November, 2000 7
2.0 Enhancing competitiveness
2.1 NAFTA growth
The North American Free Trade Agreement (NAFTA) is the cornerstone of Canada’s
overall trade and economic policy.
The agreement recognizes that globalization means prosperity at home and depends on
a nation’s ability to integrate with economies throughout the world. NAFTA created the
world’s largest trading block, serving 400 million people and producing more than $8
trillion in goods and services.
Canada’s merchandise trade with the United States increased by 80 per cent in the first
five years of the agreement. Trade with Mexico doubled over the period. Canadian
trade with the U.S. and Mexico now exceeds $1.5 billion per day. Growth is expected to
continue at an annual double-digit pace for the foreseeable future.
For the past several years, it is this NAFTA-related growth – more than any other factor –
that has influenced strategic decisions and corporate spending in Canada and at
Canadian National.
CN is moving in tandem with its customers and the new economy. In the process, CN
has been transformed into a truly North American railroad. With its 1998 acquisition of
the Illinois Central Railroad, CN is now the only North American railroad to cross the
continent east - west and north - south.
CN trains serve 14 U.S. states and, as a result of a 1998 marketing alliance with the
Kansas City Southern Railway, provide Canadian customers access to Mexico.
More than half of Canadian National’s annual revenues are now generated by traffic
moving to, from, or within, the United States. Of CN’s top 20 customers - accounting for
34 per cent of revenues - almost three-quarters have plants in at least two of the three
NAFTA countries.
Clearly, Canada’s railroads have played, and must continue to play, a central role in the
realization of the benefits of domestic and international trade liberalization policies..Submission to CTA Review Panel – November, 2000 8
Canada’s freight rates are the lowest in the world
Comparative international rail
freight rates
0 .0 1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0
Switzerland
Austria
France
U.K.
Germany
Italy
Spain
Sweden
Australia (QR)
Australia (WR)
USA
Canada
(U.S. cents per tonne-kilometer)
Average length of haul has not increased significantly
in the last ten years
500
600
700
800
900
1000
1987 1989 1991 1993 1995 1997 1999
Average haul (miles)
2.1.1 Deregulation has been a success
The industry could not have fulfilled this role without the benefits derived from the
deregulatory provisions of the National Transportation Act, 1987 and the Canada
Transportation Act, 1996. CTA afforded Canada’s railroads the freedom to control costs
and the flexibility to adapt their rail networks to the changes in the flow of economic
activity.
The real winners have been Canadian producers, manufacturers and taxpayers. Canadian
rail freight rates, in real terms, have fallen over 35 per cent since 1987 and are now the
lowest in the western industrialized world – 60 per cent below the international average.
Applied in the context of an
expanded North American rail
network, lower rates have allowed
Canadian rail shippers to serve
dozens of markets that were
previously not within economic
reach. An example of this is the
significant increase of sales of
Quebec lumber in Georgia and the
Carolinas, a market not exploited
prior to 1990.
Canadian rail freight rates have declined
significantly over time
60
80
100
120
140
160
180
200
1968 1973 1978 1983 1988 1993 1998
Rates have declined significantly...
Freight Revenue per RTM and Price index
Index 1992=100 Rates declined 35%
since NTA - 1987
CN & CP.Submission to CTA Review Panel – November, 2000 9
CN revenues have been flat in spite of increased tonnage
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1991 1992 1993 1994 1995 1996 1997 1998 1999
GDP
Revenue
Ton-Miles
Total
Revenue
Revenue
Per Ton-Mile
CN is working harder for less return
CN Data (IC Excluded) In Constant Dollars 1992 = 100
Some shippers claim the reduction in average rates expressed in cents per ton per mile is
not appropriate as, during that period, average length of haul could have increased. But
the length of haul has not changed significantly in the past ten years.
The true contribution of CN to
Canada’s economic growth is well
illustrated in the relationship
between CN’s revenues and Gross
Domestic Product over the past
decade. Revenue ton-miles have
tracked GDP growth but revenue
per ton-mile is about 20 per cent
lower than it was at the start of
the decade. This reflects both
CN’s increased productivity and a
steady decline in rates.
2.1.2 Regulatory harmonization
As North American and world economies become further integrated, and as tariffs
between the three NAFTA countries progressively fall away, north-south trade will
continue to grow. To a large extent this growth will depend on the ability of Canadian
railroads to compete with U.S. railroads within an equitable regulatory framework.
Canadian railroads are subject to shipper protection regulation that far outweighs what
is available to shippers in the United States:
¨ in Canada all carload traffic is regulated. In the U.S. regulation applies only to
commodities that are deemed captive to rail;
¨ interswitching in Canada is mandated and the rates regulated. Interswitching
services and related rates in the U.S. are left to commercial negotiation between
individual railroads;
¨ all Canadian rail shippers (with the exception of intermodal) have access to final offer
arbitration. Only those U.S. rail customers that are captive to rail and can document
that a pre-established revenue/cost ratio has been exceeded and that this rate causes
commercial harm qualify for an STB rate review and decision;
¨ a Canadian shipper can ‘force’ a serving railroad to deliver traffic to a competing
railroad. There is no such provision in the U.S..Submission to CTA Review Panel – November, 2000 10
Canada – U.S. Regulatory Regimes Comparison
Canada U.S.
Applicable Traffic ¨ All carload ¨ Deregulated traffic is
exempt
Interswitching ¨ Mandated
¨ Rate regulated
¨ Voluntary
¨ Rate negotiated
Rate Arbitration ¨ Mandated Final Offer
Arbitration – available
to all shippers
¨ Only if:
¨ Revenue/cost
threshold exceeded
¨ No truck or rail
competition
¨ Stand-alone costs
exceeded
Competitive Line Rates ¨ Mandated ¨ None
Common Carrier Obligation ¨ Mandated ¨ Mandated
Recent financial gains by Canada’s railroads have been largely achieved through the
elimination of surplus assets and rigorous cost containment. At CN, these initiatives
were coupled with a major redesign of its network operating plan to greatly improve
service levels.
However, future gains for the industry will depend on an ability to grow business
volumes while maintaining a strong focus on cost containment. To do that, it won’t be
enough to be the best railroad in North America, CN will have to offer its customers the
best transportation solution. Market forces and policies balancing truck/rail competition,
as opposed to rail re-regulation, must drive this growth. The less regulated U.S. railroads
are already better positioned to compete for market share from the industries they serve.
2.1.3 Trade Obligations
Expanding trade through bilateral and multilateral agreements has always been a
cornerstone of Canadian trade policy and an economic pillar for GDP growth. The most
dramatic recent example is the North American Free Trade Agreement signed in 1994 by
Canada, the U.S. and Mexico.
NAFTA is the guiding economic framework for trade and investment for the three North
American partners. In Article 102 of the agreement, “Objectives,” the parties pledged to
’eliminate barriers to trade in, and facilitate the cross-border movement of, goods and
services’ between Canada, the U.S. and Mexico, and to, “increase substantially
investment opportunities” for NAFTA investors in North America. The overriding aim
of NAFTA is to achieve closer integration of the three North American economies, not
only in the provision of goods and services but in transportation and investment.
The applicability of NAFTA to freight railroads was a conscious decision of the NAFTA
signatories. The predecessor agreement, the Canadian American Free Trade Agreement.Submission to CTA Review Panel – November, 2000 11
(CAFTA), specifically excluded rail transportation from trade liberalization. Each of the
NAFTA signatories had the opportunity to exempt its rail sector from NAFTA
liberalization obligations. Each government did take such reservations in other
transportation sectors, such as air and trucking. But none did so with respect to rail,
indicating the commitment on the part of all three signatories to fully liberalize the
North American rail industry.
As the synopsis prepared by the three signatory countries states, NAFTA provides the
phase out of restrictions on cross-border land transportation services among the three
countries in order to create equal opportunities in the North American international land
transportation market. NAFTA is designed ’to ensure that the land transportation
services industries of the three countries will have full opportunity to enhance their
competitiveness without being placed at a disadvantage during the transition to
liberalized trade.’
Canada also relies on and accepts its obligation as a signatory of the GATT 1994
agreement, the WTO Agreement on Subsidies and Countervailing Measures, and the
WTO Agreement on Agriculture.
It is Canadian National’s view, with the support of independent legal counsel, that any
regulatory proposals that would artificially force access to rail infrastructure or force
average freight rate regulation would be in breach of these obligations and constitute
indirect subsidies to Canadian goods moving by rail to U.S. and world markets.
2.1.4 Mergers and Acquisitions
The Review Panel has asked all participants to comment on the appropriateness of the
existing regulatory framework to deal with public policy issues that might arise from
mergers or acquisitions in the rail transportation sector.
CN sees no compelling reason why such mergers or acquisitions should be treated any
differently than those in other industry sectors.
Railroad transactions have been subject to general competition laws for many decades.
In 1996, Parliament gave the Canadian Competition Bureau sole jurisdiction over
transactions in the transportation sector.
CN fully recognizes the important responsibility parliamentarians and Ministers have in
addressing public policy issues.
Parliament has, in the past, assigned a role in merger review to relevant Ministers of the
Crown only in instances where bona fide public interest concerns have been established.
Canadian National would not object to an amendment to the Competition Act to give
the Minister of Transportation standing to make representation to the Commissioner of.Submission to CTA Review Panel – November, 2000 12
the Competition Bureau where public opposition to a proposed rail sector transaction
exists.
Canadian National would not object to a further amendment to the Competition Act that
would require the Commissioner to take into consideration the views of the Minister.
The Minister would have authority to make representations to the Bureau within 42 days
of a transaction having been filed. The Bureau would consider the representations as
part of its decision-making process. But it would remain the sole body charged with
approving or rejecting a proposed transaction and it would continue to be guided by its
mandate to protect and enhance competition, consistent with the merger review
provisions of the Competition Act.
2.1.5 Recommendations
As North American and world economies become further integrated, and as tariffs
between the three NAFTA countries progressively fall away, north-south trade will
continue to grow. This growth will, however, depend on the ability of Canadian
railroads to compete with U.S. railroads within an equitable regulatory framework.
CN recommends:
¨ That Canadian rail regulation be compatible with U.S. rail regulation to ensure
Canadian carriers, shippers and receivers are not disadvantaged vis-ŕ-vis U.S.
competitors.
¨ That Canadian rail regulation be consistent with all aspects of NAFTA and WTO
including meeting the rules against hidden subsidies and countervailing measures.
¨ That rail mergers in Canada continue to be subject to review and approval by the
Competition Bureau but that the Competition Act be modified to give the Minister of
Transport standing to intervene before the Bureau on a notifiable transaction in the
rail sector where public interest concerns have been expressed. And that the Act be
further modified to require the Commission to take the Minister’s view into
consideration..Submission to CTA Review Panel – November, 2000 13
Private investments by the railroads in
Canada will be $1.5 billion in 2000
907
1,032
837
1,467
1,846
1,573 1,500
1994 1995 1996 1997 1998 1999 2000(
1)
CN & CP Investments
Cdn $ M
Significant private investments
by railroads
(1) Estimate
Source: RAC
CN - lowest operating ratio among
Class I railroads
0
10
20
30
40
50
60
70
80
90
100
1992 1994 1996 1998 2000(1)
CN: most improved railroad in North America
Percentage
Industry-leading
operating ratio
of 72% in 1999
(1) Estimate
1993 1995 1997 1999
2.2 Further Deregulation Required
2.2.1 Railroad financial performance is fragile
Railroads compete in the most competitive of
all markets – the global capital markets. There
they compete not only with other railroads,
but with every other opportunity available to
investors that poses comparable risks. If
equity investors ever were to perceive that a
railroad were not a profit-making enterprise,
they would simply invest elsewhere.
Canadian National is in the most capital
intensive sector of the economy. It requires
more assets to generate a dollar of revenue
than does any other of Canada’s top 1000
corporations.
Every year these assets need to be replaced,
maintained, and improved. CN will invest
more than $1 billion on its network
infrastructure in 2000 alone.
As competition is intense and because of rail
sensitivity to economic cycles, Canada’s
railroads lag virtually every major industry
group in terms of return on capital employed.
Canadian National has registered remarkable
successes over the past five years. The
company is particularly proud of the fact that
its operating ratio – the key measure of efficacy
– is the best of all the major North American
railroads.
In 1999, CN’s returns equalled its cost of capital.
There is, however, an expectation in capital
markets that the company must continue to do so
over a complete economic cycle, not just a single
year..Submission to CTA Review Panel – November, 2000 14
Railroads: one of the lowest ranked industries in
terms of return on capital
Five year average return on capital by Canadian industry group
15.5% 15.2%
10.7% 10.4% 10.3% 9.6%
8.4% 8.1%
5.6%
0.0%
5.0%
10.0%
15.0%
20.0%
Steel Paper
Products
Railroads Integrated
Oils
Chemicals Industrial
Products
Automotive Fertilizer
& Potash
Oil
& Gas
Percentage
Railroad
Industry
Source: Conference Board of Canada
Railroads are in the most capital-intensive
sector of the economy
1.09
1.12
1.20
1.40
1.46
2.58
2.90
1.42
Railroads
Gas Electrical
Chemicals
Integrated
Forest Products
Telephone
Steel
Industrial Products
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50
Capital intensiveness of Canadian industries
as a ratio of assets to revenues
Source: Globe & Mail Report - July 1999
Global capital markets have
responded well to CN’s successes.
CN shares have outperformed all
other North American railroads in
the five years they have been
publicly traded.
But with little the industry can do
to increase world demand for its
traditional long-haul bulk
business, and with competitive
pressures continuing to compress
Canadian rail freight rates, future
growth will depend on an ability
to recapture market share lost to
trucks. Here, growth will come
through the addition of premium service offerings.
The challenge will be met
only if service can be
improved. Service will
improve only if the industry
can continue to attract the
capital necessary to acquire
new locomotives and rolling
stock, to improve the quality
of its plant and infrastructure,
and to develop the
information technology
needed to monitor and track
shipments and to better
manage asset utilization.
Furthermore, it is important to underline that capital markets will only respond if
regulatory policies are fair and do not distort or displace normal market-driven economic
incentives. Otherwise, investors will abandon the sector with the result that the cost of
capital will become prohibitive, forcing railroads to cut back on investments.
2.2.2 Key Drivers Of Railroad Competition
As measured by ton-miles, the 68 railroads that make up Canada’s rail transportation
sector account for more than 60 per cent of all transportation services provided.
On a revenue basis, however, railroads capture less than 25 cents of every dollar earned
by transportation companies operating in Canada..Submission to CTA Review Panel – November, 2000 15
Rail competition profile
The reason is competition, among the railroads themselves, and with trucks, water
carriers and pipelines. Pervasive ‘product substitution’ and ‘source’ competition as well
as the ability to aggregate purchasing power also provide rail shippers and receivers
with significant leverage when negotiating for transportation services.
By Canadian National’s analysis, almost all rail business in Canada is subject to intense
competitive pressure. More than half – 52 per cent – of the combined business of CN
and Canadian Pacific Railway is subject to direct competition from trucks.
In addition to direct truck competition, Canadian rail traffic is subject to a combination of
various forms of competition. Specifically:
¨ 41 per cent is subject to direct rail-to-rail competition. This extends to the nine U.S.
railroads currently operating into and out of five Canadian provinces. And because
U.S. roads have access to the Canadian Transportation Agency’s interswitching
provisions, their reach is broadened considerably. Canadian railroads have no
similar reciprocal rights forced by regulation in the United States.
¨ 22 per cent is subject to multi-plant and/or multi-shipper competition. Many rail
shippers are large multi-plant corporations whose revenues exceed those of the
entire railroad industry. For instance, the intense consolidation that took place
Rail competition profile
Million Tons
(Combined CN & CP)
233
22%
18%
18%
1%
Total Rail
Tonnage
Direct Rail
Competition
Multi-Plant
Competition
Source
Competition
Reload
Competition
Other Shippers
52%
Subject
to direct
truck
competition
Truck to
reloads on
other
railroads Other
product
sources
41%
Within
interswitching
Key shipper
sectors
consolidating.Submission to CTA Review Panel – November, 2000 16
Rail freight rates continue to be lower
than other inputs.
Rail rates have not increased, unlike the prices of
other farm inputs or services.
Price Index (%) 1986=100
80%
90%
100%
110%
120%
130%
140%
150%
160%
86/87 88/89 90/91 92/93 94/95 96/97 98/99
R a i l R a t e
P r i m a r y E l e v a t i o n & C l e a n i n g
T e r m i n a l E l e v a t i o n
Farm Inputs
Rail rate
excludes $2.05/ mt
in voluntary
value sharing
recently in the forest products and chemicals sectors increased shipper leverage
considerably. These companies negotiate price and service concessions by bundling
some or all of their plants before purchasing rail services. Other shippers contract
with third parties and thus gain leverage by having their rail services purchased on
behalf of multiple shippers at once.
¨ 18 per cent is subject to competition from trucks to re-load centres on other railroads.
A great number of Canadian rail shippers are located within easy trucking distance of
another Canadian railroad or U.S. rail lines. Canadian and U.S. railroads actively
solicit Canadian traffic by absorbing the cost of having product shipped by truck to
re-load centres located on their lines. Examples include potash from Saskatchewan,
automobile parts from south western Ontario, lumber from British Columbia, and
pulp and paper from Quebec.
In addition to these competitive options available to shippers, another 18 per cent is
subject to product source competition. Newsprint produced in Quebec for markets in
New York, Pennsylvania and New Jersey vies for market share with newsprint produced
in Georgia and Alabama. Ontario and Alberta plastics and petrochemical producers
compete for markets with producers in Louisiana and Mississippi.
The above forms of competition are not mutually exclusive as more than one form
usually applies.
Canadian railroads, therefore, must price their transportation services so as to ensure
that the products they carry can be sold competitively throughout North America. The
same is true for virtually all export traffic that the railroads move to world markets.
CN’s competition profile by sector
Intense competition characterizes each of CN’s commodity groups as the following
profiles clearly indicate.
Grain:
The one segment of CN’s business that remains
highly regulated is grain. As a result, rates in
this sector have not declined to the same extent
as in other markets.
Grain freight rates, in real terms, have been
essentially flat over the past 14 years, a sharp
contrast to other input costs. CN believes grain
transportation rates would decline if the
efficiencies of a fully deregulated grain
transportation marketplace were available to it..Submission to CTA Review Panel – November, 2000 17
Grain competition profile
14%
3%
17 M
47%
4%
32%
Total CN
Tonnage
Rail Contiguous
to CP
Elevators
Truck Shipper
Leverage
Captive to
CN
1999 Million Tons
Metals and Minerals competition profile
Million Tons
6%
11% 5%
44%
34% 15.8M
Total CN Tonnage Rail Truck Water Shipper Leverage Market
Many farmers, farm organizations and industry participants argue that freight rates
would be lower if CN and CP were forced to compete more vigorously against one
another or together against new entrants.
But vigorous competition for market share already exists.
CN estimates that almost 80 per cent of CN’s originating tonnage is subject to either
interswitching or is within 50 kilometres of a competing point served by CP. Since all
grain begins its journey to an elevator in a truck, proximity to a CP served elevator is an
important competitive factor.
Shipper leverage is another factor
that increases competition. With
only five big grain companies, CN
and CP compete vigorously for a
share of their traffic which CN
estimates to be about 14 per cent of
its total tonnage.
Approximately four per cent of CN
tonnage is traffic now moved by rail
but could be trucked to border states.
The remaining three per cent is traffic originating with small grain companies outside
interswitching limits and beyond 50 kilometres to the nearest CP-served location.
This competition profile applies in CN other business units as well.
Metals and Minerals:
CN estimates that trucks compete for
close to 45 per cent of CN’s tonnage
in this segment. Furthermore, rail-to-
rail competition is a factor for
about one-third of rail traffic.
Finally, reload centres are playing a
larger role in increasing shipper
choice. Therefore, there are virtually
no shippers truly captive to rail in
this sector..Submission to CTA Review Panel – November, 2000 18
Automotive competition profile
Million Tons
8% 2%
90% 3.7M
Total CN Tonnage Rail Truck Shipper Leverage
Coal competition profile
Million Tons
16.8M 6% 94%
Total CN Tonnage Rail World Market
Sulphur competition profile
Million Tons
81%
14% 5% 2.9M
Total CN Tonnage Rail Shipper Leverage Market
Automotive:
Every major automotive
production plant in Canada is
located at a competitive rail point.
Furthermore, all CN’s automobile
and automotive parts business is
subject to direct truck competition.
For smaller parts plants, just-in-time
business requirements favour
trucks. No shipper can be
considered truly captive in this
sector.
Coal:
While rail competition exists for only
six per cent of CN’s coal traffic,
source competition to market has a
significant effect on rail rates. For
example, Australian coal competes
for Japanese markets displacing
Canadian coal. To help the Alberta
and British Columbia coal producers
maintain volumes, CN’s average rate
for export coal has declined by one–
third since 1990.
Sulphur:
Similar to coal, rail competition for
sulphur is only present for
approximately five per cent of CN’s
sulphur tonnage. However, sulphur
is a by-product of the oil and gas
industry, and only moves when
market prices cover marketing and
transportation costs. Therefore,
volume fluctuations are significant.
Market and source competition serve
as levers for shippers when
negotiating rates..Submission to CTA Review Panel – November, 2000 19
Fertilizers competition profile
Million Tons
10.7M 75%
12%
11%
1%
Total CN
Tonnage
Rail Truck Shipper
Leverage
Market
Petroleum & Chemicals competition profile
Million Tons
3%
6% 5% 4%
14%
68% 25.2M
Total CN Tonnage Rail Truck Water Shipper Leverage Market Captive to CN
Forest Products competition profile
Million Tons
2% 7%
16%
42%
33% 26.1M
Total CN Tonnage Rail Truck Reload Shipper Leverage Market
Fertilizers:
Rail-to-rail competition is present for
75 per cent of CN fertilizer traffic. The
remainder is subject to strong shipper
leverage in a very concentrated
industry. Truck competition in short
haul markets is intense.
Petroleum and Chemicals:
Rail-to-rail competition is present for
almost 70 per cent of CN’s tonnage in
the petroleum and chemicals sector.
The balance is subject to significant
shipper leverage in a sector where
significant industry consolidation has
taken place. In recent years, truck
reloads have been used extensively.
Forest Products:
In addition to rail competition for
one-third of forest products and
extensive shipper leverage through
recent industry consolidations,
virtually all forest products can be
trucked to market or to reload
centres located on another railroad.
Those who seek to increase regulation of the Canadian rail industry often challenge the
analysis in support of the existence of competition. The evidence in support of these
challenges is invariably anecdotal.
One of Canadian National’s important recommendations to the Canada Transportation Act
Review Panel is that the Panel undertakes or commissions quantitative research to
determine actual levels of existing competition. Decisions bearing on the future regulation
of the industry should be based on definitive, rigorous research..Submission to CTA Review Panel – November, 2000 20
Railroads need the contribution from all
customers to cover fixed costs
$30
$60
$90
$130
$160
$190
Rail Rates Contribution to Fixed Costs
low rail dependency
medium rail dependency
high rail dependency
Example: A railroad with $180 of fixed costs to recover
Differential pricing is a sustainable model
2.2.2.1 Differential Pricing
Railroads price their services based on demand rather than according to cost formulas. It
is a practice employed by virtually every Canadian business with high fixed costs,
including those that advocate that its application should be denied the railroads.
For example, in the airline industry, fares paid by passengers travelling in economy class
on any particular flight will vary widely. Last minute business travellers will pay full
fare for the convenience of booking late, while another traveller, with months of advance
planning, will pay a fraction of the full fare. Scheduled airlines count on a mixture of
travellers on every flight to recover variable and fixed costs.
Shippers that place a high value on rail service – producers of bulk commodities, for
example – generally pay a higher contribution to fixed costs than do those shippers
where rail service is but one option and alternatives are readily available.
If rail rates for high-value users were compressed through rate regulation or improper
access rules, the railroads would have but two choices:
¨ increase rates for all remaining shippers, or
¨ lower service levels because of a diminished ability to invest.
For many customers with alternative options an increase in rail freight rates would
prompt them to simply stop using the rail mode.
At the end of the cycle, the most rail dependent shippers would have to pay an even
higher rate than was in place originally or have a non-commercial regulated rate
supported by government subsidy.
When a shipper leaves for another
mode, full costs cannot be met
by remaining shippers
$160
$60
$160
$60
Rail Rates Contribution to Fixed Costs
medium rail dependency
high rail dependency
Eliminating differential pricing
is not sustainable
Low rail
dependency
shipper leaves the
rail network
Only $120 of
fixed costs
contribution
-$30.Submission to CTA Review Panel – November, 2000 21
Only by pricing their services in accordance with varying demand can railroads
efficiently recover all of their costs, serve the largest number of rail customers at the
lowest possible rate, and maintain the viability of the Canadian rail network.
Forced access by third party railroads to the physical plant of CN and CP or the
imposition of regulated average rates would present a serious challenge to the financial
sustainability of both Canadian National and Canadian Pacific.
It would seriously inhibit their ability to recover costs and would, over the long term,
force the industry to either increase rates or lower service levels. Perhaps both.
2.2.2.2 Extended Interswitching
Current CTA regulations entitle shippers located within a 30-kilometre radius of two
federal railroad interchanges to a competitive choice between the railroads at a rate set
by the Agency.
Under the guise of increasing competition among railroads, a minority of western -based
shippers advocate the ‘simple’ extension of the 30-kilometre radius to some
undefined limit.
A variation on this theme, as put forward by the Canadian Fertilizer Institute (CFI),
would dismiss the distance limit entirely, by requiring railroads to compete for the
business beyond the interchange. Further, the Institute suggests a rate that would
combine the current cost-based formula for the first 30 kilometres with a second
component based on the system average revenue-per-tonne-kilometre of the commodity
being moved for the remaining distance.
Current interswitching rates already constitute a problem for Canada’s major railroads.
Rates are regulated at a level such that they contribute but a small portion to the fixed
costs of the network. The result is an income transfer, from railroads to their customers.
CFI’s formula would add to this inequity by eliminating differential pricing at the
commodity level.
The objective in tampering with the existing 30-kilometre interswitching limit is to
provide shippers on the connecting carrier access to the originating railroad’s trackage,
for long-haul or ultimate hand-off to any Canadian or U.S. mainline railroad.
That’s regulated access by another name. And the harmful effects on the Canadian rail
industry would be the same as those identified by the elimination of differential pricing.
Rail revenues would be reduced. To compensate, Canadian National would either have
to reduce costs – and thus service levels – or increase freight rates for other shipper
groups with the risk that these shippers choose other transportation options..Submission to CTA Review Panel – November, 2000 22
2.2.2.3 Competitive Line Rates
Competitive Line Rates, that allow a shipper located outside interswitching on one
federal railroad to force the routing of traffic to the nearest interchange for delivery to a
competing railroad, are rarely used.
Shippers contend that CLRs are little used because they must demonstrate ‘substantial
commercial harm’ before such rates apply. It must be noted that this test was introduced
in 1996, but CLRs were introduced in 1987. They were rarely used between 1987 and
1996.
However, other competitive forces such as trucking, reloads and customer purchasing
power are usually sufficient to discipline rail rates. Furthermore, these customers have
access to rate arbitration – a sufficient remedy in itself.
Therefore, Canadian National recommends that:
¨ competitive line rate provisions are redundant and should be abolished.
2.2.2.4 Final Offer Arbitration
Many of the shipper associations that have made representations to CTA Panel members
support existing Final Offer Arbitration (FOA) provisions. The provisions are described
as equitable and fair. Other shippers, however, believe the process is expensive and
inappropriate.
From Canadian National’s perspective, FOA is problematic. It is not applied uniformly
and constitutes an inappropriate intrusion in the marketplace. It is also inconsistent with
rules governing U.S. railroads.
Only a shipper can apply for Final Offer Arbitration. And it applies to all shippers, with
the exception of the intermodal sector, regardless of the competitive options available, or
of the value of the contract being negotiated. This process does not properly recognize
that where competition exists no regulatory intervention is required.
Shippers using Final Offer Arbitration assume virtually no risk.
Having completed negotiations on a range of issues including service, car supply, etc.
and received a final rate quotation from the railroad, the shipper can then apply to the
Agency for arbitration.
The arbitrator must choose one of the two proposals submitted. There is no exposure for
the shipper since the assigned rate cannot be any higher than the one quoted by the
railroad in negotiations..Submission to CTA Review Panel – November, 2000 23
The pernicious issue is that along with assuming no risk, the shipper has no obligation,
regardless of the outcome, to use the rail mode to ship any of the goods in question.
Shippers can thus use the process as a simple means of leveraging a lower rate from
another mode. If the arbitrator chooses the railroad’s offer, there is no guarantee the
railroad will win the business.
If arbitration is to be practical, and serve a fair and reasonable end, CN recommends
these amendments to the FOA process:
¨ all applications be made subject to a ‘prima facie’ test to determine whether the
shipper has other competitive means of transporting the goods.
¨ If the shipper faces commercial harm caused by the current rate and arbitration
proceeds:
¨ applicants must be made to commit to use rail to ship all of the goods under
arbitration; and
¨ the existing winner-take-all process be replaced by the Canadian Commercial
Arbitration Act process that applies to any other commercial relationship.
The railroads and shippers generally agree that a more streamlined and abbreviated
process should exist for smaller disputes – for example those where the annual revenues
in question are below $500,000. This streamlined process should also be based on
commercial arbitration principles rather than FOA.
2.2.2.5 e-Commerce
As a business tool, e-commerce will significantly increase choice for Canadian buyers of
transportation. Shippers will be empowered with more information than ever before
and have access to an increased array of transportation solutions. In response, the rail
industry will have to invest, to ensure that its customers will be able to negotiate and
execute freight transactions online, and do so reliably.
Internet-based electronic commerce provides leverage to shippers and presents
opportunities for Canada’s railroads.
Leverage for shippers:
¨ demand aggregation. Downward pressure on rail freight rates is an expected result of
shippers collaborating online to leverage size.
¨ greater competition from trucks. With an ability to communicate more quickly and
accurately, manufacturers will need less inventory and require smaller shipments.Submission to CTA Review Panel – November, 2000 24
delivered just-in-time. Because the trucking industry is less regulated, and thus more
flexible and nimble than rail, it is the mode most likely to benefit.
Opportunities for railroads include:
¨ increased market reach. The Internet offers CN the ability to advertise its services to
smaller shippers who cannot be economically reached by traditional means. Many of
these shippers see themselves as captive to truck and are unfamiliar with the
capabilities of the rail mode.
¨ fewer third parties. With an ability to serve customers cheaply and directly, there will
be less of a need for those who serve as intermediaries between shipper and carrier.
¨ ability to sell excess capacity. Empty rolling stock running on ‘backhaul’ will be able to
be offered to shippers online. This presumes non-regulated pricing flexibility.
¨ reduced costs. Business processes will be made more efficient with the growing
number of paperless transactions.
¨ inter-railroad collaboration. With an ability to increase the standard and speed of
communication among themselves, railroads will become more responsive to the
competitive pressures of inter-line movements.
¨ intermodal collaboration. Same as for inter-railroad collaboration, communication will
favor integration of modal activities.
It is in this context that Canadian National recently acquired an equity stake in
FreightWise Inc., an internet-based, neutral, multi-modal, North American
transportation marketplace, and the first such freight exchange available in Canada.
FreightWise does away with the inefficiency and expense of the traditional
paper/phone/fax process of filling last-minute capacity requirements. It provides load
matching for buyers and sellers of transportation and fulfilment capability through
committed carrier capacity, enabling complete multi-modal freight movements.
FreightWise also allows exchange users to conduct entire transactions online – from load
matching through financial settlement. Sellers on FreightWise can offer their capacity
through standard rates and auctions.
While e-commerce presents very interesting opportunities, it will enhance customer
leverage moving closer to a ‘perfect competition model’ where regulation is less and less
required..Submission to CTA Review Panel – November, 2000 25
2.2.3 Recommendations
Almost all rail business in Canada is subject to intense competitive pressure – particularly
from trucks. The review Panel has an obligation to consider levels and sources of
competition. Deregulation has worked to the benefit of railroads, shippers and
taxpayers and more is required.
CN recommends:
¨ That Canadian rail freight legislation and regulation recognize that Canadian
railroads already face strong competition in a context where railroads are capital
intensive businesses requiring an adequate return on investment. This is critical for
railroads to remain competitive in capital markets and renew their extensive
infrastructure and equipment.
¨ That the Canada Transportation Act Review Panel undertake or commission rigorous
quantitative research to determine actual levels of existing competition for the
various industries served by rail. Decisions bearing on the future regulation of the
industry should be based on definitive, rigorous research.
¨ That current interswitching rates be adjusted to be fully cost recoverable.
¨ That competitive line rate provisions be abolished.
¨ That the FOA process be amended as follows:
¨ all applications be made subject to a ‘prima facie’ test to determine whether the
shipper has other competitive means of transporting the goods.
¨ If the shipper faces commercial harm caused by the current rate and arbitration
proceeds:
¨ applicants be made to commit to use rail to ship all of the goods under
arbitration; and
¨ the existing winner-take-all approach process must be replaced by the
Canadian Commercial Arbitration Act process that applies to any other
commercial relationship.
¨ Establish a shorter process, along commercial arbitration principles, for smaller claims
involving less than $500,000 in annual transportation costs..Submission to CTA Review Panel – November, 2000 26
2.3 Modal Balance
2.3.1 National Transportation Policy
Regulation by all levels of government is estimated to cost the Canadian economy
between $30 and $50 billion per year, according to a February 2000 report of the Public
Policy Forum, a non-partisan, non-profit organization aimed at improving the quality of
government in Canada.
Furthermore, Canada’s current regulatory regime continues to put the country’s
enterprises at a significant competitive disadvantage and if not reformed, the report said,
runs the risk of driving investment and employment south of the border.
The CTA Review is of vital importance and concern to Canada’s railroads, as much for
the issues that will not be taken into account, as because of those that will be.
Canada’s trucking industry is not subject to federal regulation and is unaffected by the
CTA Review process. U.S. railroads are, per force, similarly excluded.
Yet trucks dominate the surface transportation market in Canada with a 68 per cent
revenue share. And U.S. railroads are strong competitors of Canadian National, for
business to and from Canada and for freight moving within the United States.
This inconsistency is one of many that impede the Canadian railroad industry from
realizing its full potential. They are rooted:
¨ in the absence of a national transportation policy that would treat each mode
equitably within a system driven by the discipline of the marketplace; and
¨ in unbalanced regulations whose lack of harmony, between modes and with
regulatory regimes in the United States, retard Canadian economic growth.
The transportation industry in Canada suffers from a lack of harmonization, not only vis-ŕ-
vis the U.S. but among federal, provincial and municipal governments, and also within
the governments themselves with respect to each of the modes.
Canada’s railroads pay the full cost for the operation, maintenance and renewal of their
infrastructure from revenues generated by transporting the goods of their customers.
For Canadian National, these costs for the current year alone will exceed $1 billion.
The nation’s trucking industry has seen its share of Canada’s surface transportation
revenues grow from about 30 per cent in the 1950s to approximately 70 per cent today
and is under no such obligation. Indeed, every major study conducted on highway cost
allocation, at both the federal and provincial levels, has concluded that heavy trucks pay
but a fraction of their share of the costs associated with the highways they use..Submission to CTA Review Panel – November, 2000 27
Railroads paid $95 million in fuel taxes in 1999
19
7.0 7.0
10.3
8.5 7.0 8.3
4.0
2.5
0
2
4
6
8
10
12
14
16
18
20
U.S. Average Nova Scotia
New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta
British Columbia
Provincial
Federal - 4 cents
Fuel taxes paid by railroads
CDN Cents per Litre
It is these ‘hidden’ subsidies to the trucking industry that explain, in large part, the shift
in traffic from rail to highways. In some cases this shift has been legitimate and
desirable. Trucks have much greater flexibility than railroads and are able to serve some
shippers more effectively and efficiently. Much of the traffic moving by truck, however,
is the result of inequitable variances in government philosophy, funding, and regulation.
Canada’s railroads have the capacity to handle significantly more freight traffic. They
are more fuel efficient, safer, and more environmentally friendly than large trucks. They
are also willing and able to finance the required investments in infrastructure and
physical plant with no need for public funds.
The Railway Association of Canada in its submission to the CTA argues that rail is a more
environmentally sustainable form of freight transportation than trucking. The RAC says
that increased use of rail will reduce the amount of emission credits that Canada would
have to purchase abroad to offset increased emissions from trucking. CN supports the
RAC’s submission and recommends the panel recognize the environmental efficiency of
rail as a means of helping Canada achieve its greenhouse gas emission targets.
At the federal level, it is highway issues – and virtually only highway issues – that
precipitated the recent signing of a Canada-U.S. Memorandum of Co-operation ‘to
enhance co-operation on surface transportation matters.’
Canada’s transportation policy environment is replete with inequities and distortions that
harm the national interest. Inconsistencies in the provision of, and the charging for,
transportation infrastructure are rooted in conflicting policies at the federal and provincial
government levels.
The National Transportation Agency, forerunner to today’s CTA, noted in its first annual
review in 1988 that ‘…decisions affecting roads and railways are usually made in a
separate arena and often do not produce the most effective use of scarce transportation
resources, resulting in higher than necessary total costs.’
Little has changed.
Canadian railroads remain highly
regulated at the federal level but without
the guaranteed return on investment that
normally accompanies such regulation.
Regulation of their primary competitor,
the trucking industry, is the responsibility
of provincial governments.
A major effect is the provincial tax
burden that the rail industry is required
to bear..Submission to CTA Review Panel – November, 2000 28
In Canada, taxes on rail inputs are 50 per cent
higher than in the U.S.
13.8%
10.4%
7.5% 6.9%
CDN Rail CDN Trucks U.S. Rail U.S. Trucks
Taxes as a percentage of revenues (1)
84%
more
than
U.S. rail
(1) Includes: fuel, property, payroll, etc...
Canada’s railroads paid $95 million in locomotive diesel fuel taxes to provincial
governments in 1999. The railroads pay this money without any corresponding benefit
in terms of provincial investment in rail infrastructure.
Another $70+ million in fuel taxes is paid by the railroads to the federal government.
Introduced as a ‘temporary, deficit-reduction tax’ of two per cent in 1985, the rate was
doubled two years later. While the federal deficit has been eliminated for several years,
the federal government continues to collect its temporary deficit reduction tax.
It can be argued that a portion of these federal tax revenues are applied to improving the
national highway system through the Federal Infrastructure Program to the benefit of
our competitors.
These taxes constitute a tax on productivity. Fuel taxes increase with workload not
revenue. So the harder the railroads work for their customers the more tax they pay
regardless of how much revenue they earn.
An additional, if unintended, effect of these taxes is to limit the effectiveness of Canada’s
railroads vis-ŕ-vis their U.S. counterparts.
Taxes on rail inputs – fuel,
material, equipment purchases
and railroad rights-of-way – are
almost 50 per cent higher in
Canada than they are in the
United States. As a percentage
of revenues the U.S. railroad
industry’s tax burden is 7.5 per
cent; in Canada it is 13.8 per
cent.
A Seattle-to-Buffalo freight train,
for example, pays approximately
$7000 less in federal and regional
taxes than does a like-sized train
operating from Vancouver to
Toronto. As a result, more than half of all container traffic originating from Pacific Rim
countries and destined for Ontario markets is moved cross-country by U.S. railroads and
trucked to destination from Buffalo – to the disadvantage of Canadian railroads,
Canadian ports, and even the Canadian trucking industry.
More than 40 per cent of Canada’s Gross Domestic Product is tied to exports. Some 40
per cent of these exports move by rail. With the emergence of Pacific Rim nations as
major trading blocs, and with continuing double-digit growth in NAFTA-related trade,
Canadian economic prosperity will depend, to a large degree, on the efficiency and
effectiveness of its national transportation network..Submission to CTA Review Panel – November, 2000 29
Canada’s railroads have much to contribute to such a network. Relative to other modes,
they are safer, more efficient, consume less land and energy, reduce highway congestion
and impact less on the environment.
Applying these inherent strengths, however, requires a national transportation policy
that treats all modes equitably and equally within a framework where outcomes are
determined by market forces.
Indeed, Parliament’s overriding instruction to the Canadian Transportation Agency
when putting it in place in 1996 was ‘…unless absolutely necessary to let the marketplace
prevail without interference to ensure that Canada’s transportation industry can
compete with the best in the world.’
The Railway Association of Canada in its submission to the Panel recommends that the
Panel assess the current situation of taxation as it affects railroads in Canada. The RAC
identifies several opportunities for change - including accelerated capital cost allowance
for railroad equipment – to match the trucking industry and U.S. railroads. CN supports
the RAC’s call for a review of railroad taxes and a move toward more equitable tax
treatment.
2.3.2 Recommendations
The transportation industry in Canada suffers from a lack of harmonization, not only vis-ŕ-
vis the U.S. but among federal, provincial and municipal governments. The Review
Panel must consider how this hodgepodge of conflicting regulations introduces
inefficiencies.
CN recommends:
¨ That the Panel recognize the environmental efficiency of rail as a means of helping
Canada achieve its greenhouse gas emission targets and adopt the sustainable
development proposals advanced by the Railway Association of Canada.
¨ That Canada adopt a National Transportation policy, with the objective of optimizing
each mode, by treating all modes equitably and equally within a framework where
outcomes are determined by market forces.
¨ CN supports the Railway Association of Canada’s call for a review of railroad taxes
and a move toward more equitable tax treatment..Submission to CTA Review Panel – November, 2000 30
3.0 Maintaining rail system integrity
3.1 Regulated Access
In establishing the terms of reference for the CTA Review, the Minister of Transport
curiously instructed Panel members to consider proposals for ‘enhancing competition in
the railway industry…’
In interpreting the instruction, a component of western Canadian rail shippers saw an
opportunity to achieve further regulation of the Canadian rail industry and obtain lower
rates.
These shippers - most of them members of a loose alliance of western-based rail
customers called the Western Canadian Shippers’ Coalition - are producers of resource-based
products for export, and thus heavy users of rail.
In what they label as ‘open’ access, these shippers advocate that third parties be
permitted to operate trains and/or crews over the lines of Canada’s two major mainline
railroads.
The term ‘open’ access is used indiscriminately and inaccurately by advocates of the
principle. In fact, ‘forced’ or ‘regulated’ access would be a more appropriate term.
As proposed, neither Canadian National nor Canadian Pacific would have reciprocal
access to the third party railroads that would be operating over their track.
Nor would the terms of this ‘open’ access be determined according to commercial
principles. The Canadian Transportation Agency, it is suggested, would determine the
access fees to be paid by third party operators and, in doing so, would ensure that
shippers benefit.
The suggestion then, is not being advanced from an ideological or philosophical base.
Rather it is put forward as a form of contrived competition for the purported purpose of
reducing Canadian rail freight rates, already the lowest in the industrialized world. And it
comes from a segment of the Canadian shipping community where many enjoy greater
returns than do Canada’s railroads, and whose enterprises require far less capital to
maintain than do Canada’s railroads..Submission to CTA Review Panel – November, 2000 31
Shortline traffic has grown consistently
5.3%
12.1%
1.9%
4.6%
1999 vs. 1998 2000 H1 vs . 1999 H1
CN CN Shortlines
Shortline traffic growth
% Change over previous period
3.2 The Shortline Community
Canadian National has played a leading role in the creation of Canada’s shortline
industry. Since the Canada Transportation Act became law in 1996, CN has transferred
in excess of 4600 miles of track to shortline operators. In the process, CN has
conclusively demonstrated an ability to successfully work with a diverse range of parties
interested in operating local rail services. Today more than 30 profitable and efficient
shortline railroads operate lines that CN once owned.
On its network as a whole, CN
connects with 80 shortline operators.
And these connections account for a
significant part of Canadian
National’s overall business. Almost
one quarter of all the tonnage that
CN moves is either received from, or
delivered to, shortline carriers. Five
years ago this volume represented
less than five per cent of the total.
More importantly, shortlines have
been key to growing rail business at
CN. Shortlines are well positioned to
offer premium service and grow the
business significantly to the benefit of both the shortlines and CN in partnership spirit.
Virtually every member of the Canadian shortline community is on record as being
opposed to enhanced access in any form. They believe that the future of the Canadian
rail industry – and their own commercial interests – are best served when working in
partnership with mainline carriers to seize and create business opportunities, as dictated
by market forces.
3.3 Other Railroads
Canada’s regional and shortline railroads are overwhelmingly opposed to any re-regulation
of the industry that would afford them forced or regulated access to Canadian
National or Canadian Pacific trackage.
Only two of the country’s 68 railroads favour such a step..Submission to CTA Review Panel – November, 2000 32
3.3.1 OmniTRAX
OmniTRAX, Inc. is a U.S.-owned and Denver-based real estate conglomerate, operating
15 railroad companies and shortlines, three of them in western Canada. None of their
three Canadian holdings are members of the Railway Association of Canada, the national
body that represents the interests of the Canadian rail industry.
The largest OmniTRAX Canadian property is the 1300-kilometre Hudson Bay Railway
that carries resource-based products, primarily grain, for export through the Port of
Churchill.
With $16 million of Canadian taxpayer money, OmniTRAX purchased the line from CN
in 1997. Management of the Port of Churchill was turned over to OmniTRAX. As part of
the transaction, the company received more than $30 million in federal and provincial
subsidies for infrastructure improvements and dredging at the Port.
Subsidies of another kind, in the form of a transfer of CN and Canadian Pacific revenues,
are at the core of the OmniTRAX ‘managed access’ proposal. In fact, OmniTRAX is on
record as opposed to ‘open access’ and this is why they named their proposal ‘managed
access’.
The proposal would see OmniTRAX gain access to CN and CP lines in Manitoba and
Saskatchewan and ‘bridge’ traffic over one to reach the other. Further, OmniTRAX
would have the right to service customers on lines owned by CN and CP.
None of these forms of access would be reciprocal, thus ensuring that current
OmniTRAX customers would continue to be served exclusively by it.
Access fees, in the absence of an ability to negotiate terms, would be set by the Canadian
Transportation Agency.
The OmniTRAX proposal is put forward out of self-interest. The objective is to establish
a regional rail monopoly with the power to ‘expropriate’ those parts of the CN and CP
franchises that would increase OmniTRAX revenues without regard to the effects of this
‘poaching’ on the overall financial health of the two mainline carriers.
3.3.2 B.C. Rail
B.C. Rail, a provincially-regulated regional railroad owned by the Government of British
Columbia, also seeks running rights and forced haulage over the trackage of CN and CP.
B.C. Rail wants the access federal regulations will give it while at the same time hiding
behind its provincial status to protect it from competition..Submission to CTA Review Panel – November, 2000 33
B.C. Rail rejects the idea that shortline and regional carriers be able to serve customers on
lines owned by others. In its October submission to the Panel, B.C. Rail said this would
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.’
There is a further irony in the B.C. Rail proposal.
The company is prohibited from operating over provincial boundaries without first
relinquishing its status as a provincially-regulated railroad. Doing so would require it to
accommodate higher federal standards for safety and would subject B.C. Rail to federal
interswitching rates and rate arbitration. On those lines that cross provincial boundaries,
therefore, B.C. Rail seeks a less intrusive form of access known as ‘haulage’ agreements.
This inconsistency has been noted by B.C. Rail customers. During a stakeholders session
organized by the B.C. government, most participants supported a recommendation that
B.C. Rail be subject to the same rules as federally regulated railroads so that its
customers, now prevented from directly accessing competing railroads could access
federal remedies.
Finally, both B.C. Rail and OmniTRAX describe their proposals as equating to further
deregulation of the industry. Discounted are the cumbersome and costly bureaucratic
processes that would have to be put in place to determine access fees, resolve operational
disputes, establish train priorities, adjudicate disagreements over rates, and ensure that
rail operations remain safe.
3.4 Lessons Learned In Other Contexts
Some of those who see review of the Canada Transportation Act as an opportunity to
increase regulation of Canada’s railroads often point to regulatory regimes in other
countries. Specific references usually relate to ‘open’ access models in the United
Kingdom, Australia, and some member countries of the European Union.
Before rail restructuring efforts were introduced in these countries in the 1980s and 1990s
all, or nearly all, of the railroads were government-owned and heavily subsidized. Most
were operated under severe management constraints and were technologically
backward.
By introducing change, in the form of broadened access to rail infrastructure, all of the
countries had a common objective: reduce the financial burden on taxpayers by
attracting private investment to drive innovation, not to drive more competition.
There have been few successes to date. Most countries have failed in reducing the flow
of subsidies to the rail industry and very few private investors have come forward..Submission to CTA Review Panel – November, 2000 34
3.4.1 European Union
With a view to increasing cross-border rail traffic, the European Union, in 1993, issued a
directive calling for ‘open access’ on all movements of international freight. Open access
in the European Union has failed to achieve its objectives and new legislation is under
development. The fluid cross-border system originally envisioned has not been realized.
Rail’s share of the freight market has failed to grow. There have been few new entrants
and little new rail-to-rail competition. Finally, the governments continue to subsidize rail
operations.
As a result, Europe’s railroad network remains balkanized – made up of a number of
non-integrated national rail systems. Its primary use remains the provision of publicly
funded passenger services.
3.4.2 United Kingdom
In an effort to reduce subsidies of more than a billion dollars per year, the United
Kingdom adopted the EU’s open access policy in 1996.
Six freight companies were sold, 25 passenger companies were created, and a single
company established to own and operate track infrastructure.
With the U.S.-based Wisconsin Central Railway winning five of the six freight
concessions, the transaction clearly attracted little interest from investors. Recently,
Wisconsin Central advised its intention to withdraw from the market citing, among
other concerns, the fact that the infrastructure owner ‘exhibits the characteristics of a
high-cost, inefficient and indifferent monopoly protected from market forces.’
The U.K. model has proved difficult to implement. Network safety has become a major
issue. Government financial support, rather than decreasing has, and, for the
foreseeable future at least, will continue to increase dramatically.
Recent media reports state the British government is going back to the drawing board in
an attempt to sort out what is referred to as a rail crisis.
3.4.3 Australia
Like many European countries, the Australian rail network is composed of several state-owned
operators, few of which are integrated.
In the mid 1990s, the Australian government created a separate corporation with formal
authority to sell access to this interstate rail network. The purpose was three-fold: to.Submission to CTA Review Panel – November, 2000 35
reduce the then level of subsidies, counter market domination by the trucking industry
and implement an integrated national network with compatible rail gauge.
While the threat of competition has encouraged cost reductions, and reduced subsidies,
the six new entrants handle only three per cent of the freight market. Rail-to-rail
competition has not materially increased and trucks remain the dominant mode.
In response, the state of Western Australia recently gave notice of its intention to
privatize its railroad and apply North American standards in doing so. It will be
established as a vertically integrated freight operation and the new entity will both own
and operate all of the transportation components required to deliver service.
3.4.4 Utilities Comparison
The argument that the characteristics of the Canadian rail sector parallel those of the
telecommunications industry, and other ‘network’ industries – as posited by those who
seek imposed access to rail infrastructure – is specious.
Regulated access in the telecommunications industry was introduced as a means of
forcing competition, by imposing a ‘common carrier obligation’ into a monopoly market
that had existed for 50 years. And regulated access in utilities still includes full cost
recovery for system owners.
Canada’s two major railroads are not monopolies. They have competed with each other,
and with trucks, virtually since their inception. Together they capture less than one
quarter of all freight revenues; continue to lose market share to trucks; and for several
years have seen their average yields fall sharply.
Network industries such as telecommunications and electric utilities sell homogenous –
or virtually interchangeable – products. Induced competition in these industries is
related to the commodity being sold, not to the infrastructure over which it moves.
The business of railroads is to move commodities they do not sell, with equipment it
owns, or leases, over infrastructure it owns and maintains. Train operations account for
the majority of a railroad’s total operating expenses.
There is no direct equivalent expense in the electricity and telecommunications
industries. Their ‘traffic’ costs represent but a fraction of the operating expenses
incurred by railroads. And they can increase the volume moved with little impact on
costs and capacity.
The overriding purpose of imposing access regulations in the telecommunications,
natural gas, and electric utility industries was to create a competitive structure where
member companies would be required to carry each others’ product over their lines..Submission to CTA Review Panel – November, 2000 36
Railroads have had this ‘common carrier’ requirement for years. They are required to
receive, carry, and deliver all traffic offered for movement and to do so according to
standards set by the Agency. In the event of a breach, the Agency has pervasive powers
to ensure that these standards are met, including the power to order the purchase of
equipment and the construction of facilities.
Another hidden consequence of utility deregulation is the additional oversight required
by regulators to ensure industry players treat consumers fairly. A recent example is
electricity deregulation in Alberta that has resulted in new rate setting and monitoring
bureaucracies at the municipal level.
3.5 Recommendations
In CN’s October 6 submission to the CTA Review Panel, the company asked the Panel to
make clear that any access models proposed for consideration respect a set of principles
that would ensure the economic integrity of the rail system without taxpayers subsidies.
Specifically CN called for:
¨ Full cost recovery – Access fees must be market-based and negotiated rather than
regulated. Failing a negotiated agreement of the access fee, commercial arbitration
must consider the following principles of cost recovery:
¨ increased operating costs due to a new entrant
¨ return on embedded capital
¨ payment for new capital
¨ lost contribution to fixed costs, including opportunity cost
¨ Enhance efficient competition – Given full cost recovery to preserve infrastructure
quality, railroads would compete on service and variable costs.
¨ Full deregulation – With open access, market forces and not regulation, drive industry
efficiency, service and price. Perfect competition and customer protections cannot co-exist.
¨ Maintain vertical integration – The North American model allows for efficient
allocation of capital to maintain and improve the network and protect safety
standards.
¨ Access reciprocity – CN and CP will insist on full reciprocity rights to each other and to
shortlines and regional railroads that are granted access on their lines. Particularly
critical is the need to balance access between Canadian and U.S. carriers operating in
both countries; otherwise U.S. railroads could ’cherry pick‘ Canadian traffic.
¨ Commercial arbitration – Commercial arbitration would be used to resolve access fee
and rate disputes..Submission to CTA Review Panel – November, 2000 37
¨ Maintain a Canadian rail system that is competitive in North America – To succeed,
Canadian shippers need an efficient rail system that allows them to be competitive in
their end markets.
¨ Respect NAFTA rules – Under NAFTA and WTO, access rules that are, in effect,
disguised subsidies would be counter to Canada’s international trade obligations.
CN further recommends:
¨ That open access regimes implemented elsewhere in the world be rejected as models
for Canada because of their failure to eliminate government subsidies and improve
rail efficiency.
¨ That provincial regional rail networks be subject to the same regulatory regime as
federal railroads for safety standards as well as for shipper relief provisions..Submission to CTA Review Panel – November, 2000 38
0
200
400
600
800
1 0 0 0
1 2 0 0
1 4 0 0
A B S K M B
M i l e s A b a n d o n e d
M i l e s S h o r t l i n e d
1459
26
314 275
1078
351
Track
Miles
Post - CTA CN line rationalization
CN Prairie Line Rationalization Shortlined: 2851 Miles - 82%
Abandoned: 652 Miles - 18%
4.0 Corridor and Commuter Services
4.1 Rail Line Abandonment Process
The Review Panel has asked whether the existing rail line abandonment process
accommodates the need to preserve corridors for future use.
Canadian National believes that current CTA provisions do, indeed, provide the means
of protecting these corridors. These measures fall short in two important areas, however.
¨ the provisions are susceptible to political and public pressure, pressure to which the
railroads often have to succumb; and
¨ the inappropriate use of net salvage value in establishing the worth of transportation
corridors in high-density urban areas.
The line discontinuance process contained in the Canada Transportation Act was
introduced, in part, to encourage the development of a Canadian shortline industry and
has been exceptionally successful in this regard.
The provisions were also meant to
protect the public interest. When
looking to dispose of an uneconomic
section of line, the railroads have an
initial obligation to offer the line for
commercial sale. In the event of a
lack of interest, the lines must then be
offered for sale, at no more than net
salvage value and in priority order, to
each of the three levels of
government – federal, provincial, and
municipal.
The railroads are prohibited,
therefore, from abandoning trackage without every level of government having the right
to acquire ownership of the line, even if for a future use that is but at the moment
conceptual, at a net salvage value as set by the Agency.
These provisions were intended, correctly, to place responsibility for the public interest
with those duly elected to expend public funds in support of that interest..Submission to CTA Review Panel – November, 2000 39
4.2 Eliminating discontinuance delays
In practice, especially in respect of grain dependent branch lines, some governments
have blatantly ignored the provisions, or applied a number of disingenuous means, to
either try to acquire the lines for nothing, or burden the railroads with the continuing
costs of ownership. Heritage designation and onerous reclamations by-laws are two
current examples.
Some communities also routinely express concern that the current process does not
allow them enough time to react to discontinuance decisions made by CN and its
customers. However, CN has worked hard with rural communities to ensure they have
ample opportunity to participate in the discontinuance process and, if they wish, to
acquire discontinued lines.
There are two current examples, both in western Canada.
For the Cowan Subdivision in Northern Manitoba, CN first notified the public that it
intended to discontinue the line in July of 1996. In August 1997, the Village of Ethelbert
accepted CN’s offer to sell the line but disputed net salvage value. An agreement was
finally signed in January 1998. Unable to quickly conclude an agreement, based on its
original terms, CN consented to a revised agreement in March of 1999, with closure
scheduled for May of 1999. Closing, with a signing ceremony, was delayed at the
purchaser’s request until September, but at the last moment the Village withdrew its
acceptance of CN’s offer. In June 2000, CN sold the Cowan Subdivision to Cando
Contracting of Brandon.
Following the sale to Cando, every local government along the Cowan then applied to
the Canada Transportation Agency to have CN’s original discontinuance disallowed.
The CTA, in October 2000, dismissed the complaints, saying CN took extraordinary
measures to accommodate local concerns. In November 2000, the R.M. of Ethelbert
asked CN to forward the branchline abandonment proceeds to the Village so it could
invest the money in community improvements.
The Tisdale Subdivision in Saskatchewan followed a similar path. In July 1996, CN
placed the line on its three-year plan as a discontinuance candidate. It advertised the
line for sale in December 1997. In March 1998, CN offered to sell the line to local
governments which they accepted in principle. Negotiations on acquisition price began
in May 1998.
The local government purchasers then felt it necessary to apply to the CTA in September,
1998 for a net salvage value determination claiming that the line was negatively valued
and that CN should in effect pay them to purchase it. While the determination process
was to take 120 days, it did not. CN agreed to an extension and in April of 1999, the
Agency determined that the net salvage value of the Tisdale branchline is $297,000. In
May 1999, the purchasers told CN that they did not intend to comply with the Agency’s
decisions. As a result, CN was forced to absorb the cost of this exception. Eighteen.Submission to CTA Review Panel – November, 2000 40
months after the Agency’s determination of net salvage value, the purchasers have yet to
pay CN for its asset.
It is understandable that provincial and municipal governments may want lines kept in
place for uses that are foreseen to arise in but five or ten years’ time. CN is firmly of the
view that in such circumstances, local governments, as intended by the law, should
assume ownership of the line and thus the costs of maintaining it over that period of
time.
Similarly, if the federal government wants a line maintained for passenger rail purposes,
the costs of ownership and maintenance should be borne by either the federal
government or the Crown Corporation charged with the provision of passenger services.
The process needs to be amended to ensure would-be government purchasers respect
the reasonable timelines that currently govern line discontinuance processes.
4.3 Urban Corridor And Commuter Services
Canadian National believes it unreasonable to use net salvage value methods in
establishing the worth of transportation corridors in high-density urban areas.
These properties are often unique.
¨ if the corridor did not exist the cost of recreating it would be prohibitive; and
¨ in converting these corridors to commuter use governments invariably avoid the
expense of having to expand highway networks and/or the costs related to increased
automobile traffic in downtown cores.
When the above circumstances apply CN submits that the value of adjacent property –
the ‘across the fence’ (ATF) value – should apply as the means of establishing the
minimum value of these corridors, to which a premium should be applied to recognize
the corridor assembly value.
Recent sales of similar corridors in the United States were transacted at prices that
averaged 108 per cent of ATF values. And, as reported by the management consulting
firm of Arthur Andersen, the seven urban corridors sold between 1980 and 1993 attracted
prices ranging from 114 to 150 per cent of ATF value.
Rail commuter services represent an important component of Canadian National’s
business base.
CN provides important services to commuters in both Montreal and Toronto. Together
these services encompass the operation of almost 200 trains per day with daily ridership
approaching 150,000..Submission to CTA Review Panel – November, 2000 41
Services in both cities continue to grow. Expanded service to Montreal’s south shore has
just begun and, in Toronto, CN recently reached agreement to sell its Uxbridge and
Newmarket subdivisions to GO Transit by year-end.
The agreements that led to the establishment of these services were reached on
commercial bases and took account of market values for both property and assets.
4.4 Recommendations
The current rail line abandonment process needs to be clear and parties wishing to
acquire lines held accountable.
CN recommends:
¨ Where a level of government chooses to accept an offer from a railroad to transfer a
rail line at net salvage value, the level of government shall, within 30 days of the date
of acceptance, deposit, with the Agency, a sum of money equivalent to $5,000 per
mile of railroad.
¨ A railroad ceases to have any obligation to continue to operate that line 60 days after
the Agency determines the net salvage value of that line; or where the Agency is not
able to determine the net salvage value of a line in 120 days or less, the railroad
ceases to have any obligation to continue to operate that rail line 240 days after the
date on which the Agency became seized with an application to determine the net
salvage value.
¨ Where the Agency determines the net salvage value of a rail line the purchaser shall
tender the proceeds to the railroad within 60 days thereof; where the purchaser does
not tender the proceeds, in full, within that time, then the net salvage value shall be
increased by an amount equal to the Bank rate for the quarter plus 2%. This
additional sum shall be payable from the purchaser to the railroad.
¨ The original timelines for the line discontinuance process under the CTA in 1996
need to be re-instated for non-grain lines; the longer timelines set out in the new
Schedule I of the Act as amended by Bill C-34 should only apply to grain-dependent
branch lines.
¨ For rail corridors intended for commuter rail use, across the fence valuations, with a
premium for corridor assembly in urban areas, should be recognized as the most
appropriate basis for negotiations between railroads and communities.
¨ Similarly, if the federal government wants a line maintained for passenger rail
purposes, the costs of ownership and maintenance should be borne by either the
federal government or the Crown Corporation charged with the provision of
passenger services..Submission to CTA Review Panel – November, 2000 42
5.0 Conclusions and Recommendations
Though modest in its deregulation of the rail industry, the 1996 Canada Transportation
Act has improved the competitiveness of Canadian producers and manufacturers and
thus moved the strength of the nation’s economy forward.
Canadian rail freight rates are now the lowest in the developed world.
Government subsidies, that for the rail industry approached $700 million prior to
passage of the CTA, have been virtually eliminated.
The railroads themselves have made remarkable gains. Canadian National and
Canadian Pacific, once woefully inefficient compared to U.S. railroads, are now one and
two, respectively, among all North American carriers. The Canadian shortline industry,
small and of no consequence before CTA 1996, now comprises more than 40 members
operating more than 16,000 kilometres of track.
The challenge for the Canadian rail industry is to consolidate these gains – largely
achieved through one-time reductions in surplus costs – and increase its North American
market share.
Without change to the Canadian rail regulatory regime, the challenge will be daunting.
The Canadian rail regulatory regime is more constraining of its railroads than are
regulations that govern the industry in the United States. It is also significantly more
restrictive than are the rules that apply to the trucking industry in either country.
It is only by regaining market share lost to trucks, and by maintaining its relative
strength compared to U.S. railroads – in a North American marketplace – that the Canadian
rail industry can remain a sustainable, long-term competitive option for Canadian
shippers.
The North American Free Trade Agreement changed the transportation needs of many
shippers. In 1989, the value of Canada’s trade with the United States was 83 per cent of
Canadian inter-provincial trade. In the two years after NAFTA, the value of Canada-U.S.
trade had grown to exceed inter-provincial trade by 42 per cent.
It is within the reality of this free market economy that the value and effectiveness of
regulatory reform must be weighed.
Regulation is effective when limited to correcting deficiencies in the market; when it
imposes the least burden necessary to achieve its objective; and when its benefits justify its
costs. In the final analysis, however, the regulated industry must be allowed to prosper..Submission to CTA Review Panel – November, 2000 43
It is Canadian National’s proposition that the recommendations put forward in this brief
meet all of these criteria.
1. That Canadian rail regulation should be compatible with U.S. rail regulation to
ensure Canadian carriers and shippers are not disadvantaged vis-ŕ-vis U.S.
competitors.
2. That Canadian rail regulation should be consistent with all aspects of NAFTA
including hidden subsidies and compensation provisions.
3. That rail mergers in Canada continue to be subject to review and approval by the
Competition Bureau but that the Competition Act be modified to give the Minister of
Transport standing to intervene before the Bureau on a notifiable transaction in the
rail sector where bona fide public opposition has been expressed. The amendments
should, however, be pro-competitive and not be based on any return to subjective
notions of public convenience and necessity.
4. That Canadian rail freight legislation and regulation recognize that Canadian
railroads are shareholder-owned, capital intensive businesses requiring an adequate
return on investment to remain competitive in capital markets and renew their
extensive infrastructure and equipment.
5. That the Canada Transportation Act Review Panel undertake or commission rigorous
quantitative research to determine actual levels of existing competition. Decisions
bearing on the future regulation of the industry should be based on definitive,
rigorous research.
6. That current interswitching rates be adjusted to properly contribute to fixed costs.
7. That competitive line rate provisions be abolished and the substantial commercial
harm test be established as a prerequisite for those seeking rate arbitration.
8. That the FOA process be amended as follows:
¨ all applications be made subject to a ‘prima facie’ test to determine whether the
shipper has other competitive means of transporting the goods.
¨ If the shipper faces commercial harm caused by the current rate and arbitration
proceeds:
¨ applicants must be made to commit to use rail to ship all of the goods under
arbitration; and
¨ the existing winner-take-all process be replaced by the Canadian Commercial
Arbitration Act process that applies to any other commercial relationship..Submission to CTA Review Panel – November, 2000 44
¨ Establish a shorter process, based on commercial arbitration principles, for
smaller claims involving less than $500,000 in annual transportation costs.
9. That the Panel recognize the environmental efficiency of rail as a means of helping
Canada achieve its greenhouse gas emission targets and adopt the sustainable
development proposals advanced by the Railway Association of Canada.
10. That Canada adopt a National Transportation policy that treats all modes equitably
and equally within a framework where outcomes are determined by market forces.
11. That any access models proposed for consideration must respect a set of principles
that will ensure the economic integrity of the rail system without taxpayer subsidies.
12. That open access regimes implemented elsewhere in the world be rejected as models
for Canada because of their failure to eliminate government subsidies and improve
rail efficiency.
13. That provincial regional rail networks be subject to the same regulatory regime as
federal railroads for safety standards as well as for shipper relief provisions.
14. That the current rail line abandonment process be amended:
¨ Where a level of government chooses to accept an offer from a railroad to transfer
a rail line for net salvage value, the level of government shall, within 30 days of
the date of acceptance, deposit, with the Agency, a sum of money equivalent to
$5,000 per mile of rail.
¨ A railroad company ceases to have any obligation to continue to operate that line
60 days after the Agency determines the net salvage value of that rail line; or
where the Agency is not able to determine the net salvage value of a rail line in
120 days or less, the railroad ceases to have any obligation to continue to operate
that line 240 days after the date on which the Agency became seized with an
application to determine the net salvage value.
¨ Where the Agency determines the net salvage value of a rail line the purchaser
shall tender the proceeds to the railroad within 60 days thereof; where the
purchaser does not tender the proceeds, in full, within that time, then the net
salvage value shall be increased by an amount equal to the Bank rate for the
quarter plus 2%. This additional sum shall be payable by the purchaser to the
railroad.
¨ The original timelines for the line discontinuance process under the CTA in 1996
need to be re-instated; CN only agreed to the longer timelines for the grain-dependent
branch lines set out in the new Schedule I of the Act as amended by
Bill C-34..Submission to CTA Review Panel – November, 2000 45
¨ For rail corridors intended for commuter rail use, across the fence valuations,
with a premium for corridor assembly in urban areas, be recognized as the most
appropriate basis for negotiations between railroads and communities.
¨ Similarly, if the federal government wants a line maintained for passenger rail
purposes, the costs of ownership and maintenance should be borne by either the
federal government or the Crown Corporation charged with the provision of
passenger services.
CN recommends that Canada’s railroad industry continue along a path of deregulation.
The review Panel needs to take a fact-based approach to competition and be careful with
changes it proposes to a system that is now arguably the best in the world. CN will be an
active participant in the review process and looks forward to working closely with the
Panel and other stakeholders..