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RAIL FREIGHT.SERVICE REVIEW.

1.1.RATIONALE

The CTA is the framework for the economic regulation of railways in Canada. The CTA reflects the evolution of transportation policy, including rail transportation policy, over time. There was a comprehensive statutory review of the CTA in 2000-01. The CTA Review Panel concluded that “Canada’s rail freight system works well for most users most of the time.”  Nonetheless, the Panel recommended some changes to the Act. Between 2001 and 2007, there were extensive consultations with railways, shippers and others on potential changes to the shipper protection provisions. A number of bills to amend the CTA died on the Order Paper when Parliament was prorogued between 2003 and 2007.

During this period, the government received an increasing number of complaints from shippers and others about poor rail service. Stakeholders identified a number of chronic and widespread problems including poor railway performance (both overall car supply and spotting performance of cars, in particular cars supplied versus cars ordered) and the inability of railways to recover from service disruptions because of the railways’  practice of aggressive asset utilization and balanced operations. When the government tabled amendments to the shipper protection provisions in May 2007, it announced that it would initiate a review of rail freight service once the proposed amendments had been passed. The amendments were passed and received Royal Assent in February 2008. After consultations with interested parties, the government

released in August 2008, the terms of reference for the Rail Freight Service Review.

The review had two phases:

• Phase I consisted of quantitative and qualitative analytical work carried out by independent consultants for Transport Canada. This research work was important input for the Panel portion of the review.

• Phase II was the Panel process with a mandate to develop recommendations to address service problems within the rail-based logistics system, based on the results of the analytical phase, stakeholder input and other relevant information.

1.2 PANEL MANDATE

The terms of reference for the review were established by the government following consultations with stakeholders. In accordance with the final terms of reference, the objectives of the Rail Freight Service Review were to:

• conduct a review of the rail-based logistics chain (including railways, shippers, terminal operators, ports and vessel operators) with a focus on service provided to Canadian shippers and customers by Canadian National Railway (CN) and Canadian Pacific Railway (CP) within Canada, including to and from ports and border crossings;

• identify problems and issues with respect to railway service, including those stemming from other elements of the logistics chain;

• determine if there were any problems with logistics for shippers located on short lines and, if so, the source of the problem including service, operating, or marketing practices of the main-line carriers;

• identify best practices and how these could be expanded to address service issues; and

• make recommendations on how to address these problems and issues, including both commercial and, if necessary, regulatory solutions.

The review was focused on the railways but examined the full rail-based logistics system, including shippers, terminal operators, and ports since the performance of the system can be affected by any one of several stakeholders involved in the movement or handling of rail freight traffic.

The scope of the review was limited to service issues within the rail-based logistics chain.

1.2.1 The Panel is Terms of Reference

The Panel is terms of reference describe the objectives and the approach to be followed.

1.2.1.1 Objectives

The Panel was required to develop recommendations to address problems and issues with respect to service within the rail-based logistics system. The recommendations could include both commercial and, if necessary, regulatory solutions. The recommendations were to be aimed at improving the efficiency, effectiveness and reliability of service within the system, facilitating economic growth and trade expansion, and improving accountability among stakeholders.

In undertaking its work, the Panel was guided by the terms of reference for the review as well as its own terms of reference. This Report is based on the results of the work completed under Phase I plus the Panel’s consideration of stakeholder submissions, consultations, feedback on the Panel’s Interim Report, and other relevant information.

1.2.1.2 Approach

In conducting its work, the Panel was directed to:

• meet with the Phase I consultants to review and discuss their findings;

• undertake site visits of the rail transportation logistics operations in both western and eastern Canada;

• solicit comments from interested parties on issues, solutions, best practices, and factors the Panel should consider in developing its recommendations;

• conduct bilateral meetings with stakeholders, as required;

• develop draft recommendations based on the Phase I consultant reports, stakeholder input and other relevant information;

• release an interim report containing the draft recommendations and solicit comments from interested parties;

• conduct bilateral meetings with stakeholders following the release of the Interim Report, as required;

• finalize a set of recommendations after considering comments submitted by interested parties and other relevant information; and

• submit its final report and recommendations to the Minister by end of 2010.

1.3 PANEL PROCESS

Shortly after being appointed in September 2009, the Panel held meetings with Transport Canada, the Canadian Transportation Agency (the Agency), CN and CP, and the Coalition of Rail Shippers (CRS)2 to discuss the review objectives and process.

The Panel conducted site visits in November and early December to observe rail-based logistics operations, including the interfaces between various stakeholders. It also discussed the approach to the review and heard preliminary stakeholder views on issues. Site visits took place across Canada, and included trips to various shipper locations, port and terminal operations in Vancouver, Prince Rupert, Montreal and Halifax, and a number of railway yard operations.

The Panel also met with Phase I research consultants to discuss their work and findings. Meetings were held with CPCS Transcom Limited, QGI Consulting Ltd. and NRG Research Group.

On November 9, 2009, the Panel called for submissions from interested parties, to be filed by February 26, 2010 In its call letter, the Panel requested stakeholders to:

• articulate the nature and extent of service issues;

• describe the nature and extent of adverse impacts;

• propose concrete and realistic solutions that could be implemented in a practical manner;

• explain how the recommended solutions addressed the identified issues or problems;

• highlight best practices that might be adopted to improve service; and

• identify key principles or factors the Panel should consider in developing its recommendations to improve service in the rail-based logistics system in Canada.

In response to its call letter, the Panel received submissions from 141 stakeholders – including 35 that were not posted on the Panel’s website4 at the request of the stakeholder. Most of the submissions focused on issues and proposed solutions. The Panel met with many of the stakeholders to discuss their submissions. Since the Panel received a number of submissions from shipper associations it asked the associations how they involved their members in developing their submissions. The Panel is satisfied that the submissions from associations reflect the views of senior executives from their member organizations.

In total, the Panel met with 85 stakeholders, including shippers, shipper organizations, ports, terminals, railways, shipping lines and others across the rail-based logistics chain.

The Panel prepared an Interim Report based on the Phase I research work, the written submissions, and comments it received during its consultations. The Panel released its Interim Report, including draft recommendations, on October 8, 2010. The draft recommendations were aimed at rebalancing commercial relationships between railways and non-railway stakeholders based on a commercial approach with a regulatory fallback. In its letter regarding the release of the Interim Report (Appendix G), the Panel gave stakeholders a one-month period to review the report and provide written comments on:

• the acceptability and in particular, the feasibility of the draft recommendations;

• specific improvements to the draft recommendations;

• the relative priority of the draft recommendations;

• the impact of the draft recommendations on stakeholders and on service within the system; and

• other possible solutions to service-related problems that might not have been reflected in the draft recommendations.

The Panel received 46 submissions from stakeholders on the Panel’s Interim Report, including three that were not.

In its Interim Report, the Panel asked the railways to provide letters outlining their respective commitments to the Panel’s commercial recommendations. Consequently, the Panel met with both railways to discuss and clarify specific aspects of their commitments. The Panel also met with the CRS and many of its members to discuss the conclusions from a November 15, 2010 forum held by the CRS to prepare a response to the Panel’s Interim Report.

The Panel has been supported by a small secretariat and has consulted legal counsel to discuss legal matters surrounding rail service issues.

2. CURRENT REGULATORY FRAMEWORK

The CTA is the framework for the economic regulation of railways in Canada and relies primarily on market forces to govern relationships between shippers and railways. Nonetheless, the CTA recognizes the market power of the railways, and contains a number of provisions designed to provide protection to shippers against the potential abuse of this market power by the railways. This chapter briefly describes the various “shipper protection” provisions5 – in particular those that could potentially be used to address railway service issues.

2.1 TRANSPORTATION POLICY STATEMENT

Section 5 of the CTA contains the statement on the National Transportation Policy that guides the development of transportation policy. This policy statement was considered by the Panel in the development of its recommendations. The statement reads as follows:

It is declared that a competitive, economic and efficient national transportation system that meets the highest practical safety and security standards and contributes to a sustainable environment and makes the best use of all modes of transportation at the lowest total cost is essential to serve the needs of its users, advance the well-being of Canadians and enable competitiveness and economic growth in both urban and rural areas throughout Canada. Those objectives are most likely to be achieved when:

(a) competition and market forces, both within and among the various modes of transportation, are the prime agents in providing viable and effective transportation services;

(b) regulation and strategic public intervention are used to achieve economic, safety, security, environmental or social outcomes that cannot be achieved satisfactorily by competition and market forces and do not unduly favour, or reduce the inherent advantages of, any particular mode of transportation;

(c) rates and conditions do not constitute an undue obstacle to the movement of traffic within Canada or to the export of goods from Canada;

(d) the transportation system is accessible without undue obstacle to the mobility of persons, including persons with disabilities; and

(e) governments and the private sector work together for an integrated transportation system.

2.2 LEVEL OF SERVICE

In terms of addressing service issues, the main regulatory remedy is the level of service (LOS) provisions of the CTA. These provisions impose LOS obligations on railways, authorize the Agency to investigate complaints, and provide broad authority for the Agency to order corrective action, if warranted. The railways’ obligations are, however, subject to a reasonableness test. In other words, a shipper’s right to rail service is not absolute.

On receipt of a complaint from a shipper, the Agency may investigate and determine whether the railway is fulfilling its LOS obligations. If the Agency concludes that a carrier has not fulfilled its service obligations, the Agency has wide-ranging powers to order the railway to remedy the situation.

Any regulatory intervention by the Agency, however, must respect the terms of service, if any, established by a confidential contract. Furthermore, the Agency does not have the authority to order a railway to pay damages if the railway is found in breach of its service obligations. The shipper must seek damages through the courts.

In summary, under the LOS provisions in the CTA, a railway company is required, in accordance with its powers, to:

1. furnish adequate and suitable accommodation for receiving and unloading all traffic offered for carriage;

2. furnish adequate and suitable accommodation for carriage, unloading and delivery of traffic;

3. receive, carry and deliver traffic without delay and with due care and diligence;

4. furnish and use all proper appliances, accommodations and means necessary for those functions; and

5. furnish any other customary or usual service incidental to railway transportation. Traffic must be taken, carried and delivered upon payment of the lawfully payable rate.

A railway company must afford all persons adequate and suitable accommodation for receiving, carrying and delivering traffic on and from its railway, for the transfer of traffic between railways, and for the return of rolling stock. Furthermore, railway companies are required to afford to abutting or intersecting railways all reasonable facilities for delivering to or receiving from, or carrying by its railway without unreasonable delay, all traffic of that other railway.

Any person may file a complaint with the Agency about railway service. The Agency has up to 120 days to investigate the complaint and determine whether the railway is fulfilling its obligations.

Agency powers

If the Agency finds that a railway company is not fulfilling its service obligations, it has extremely broad remedial powers. It may order that:

1. specific works be constructed or carried out;

2. property be acquired;

3. railway equipment be allotted or used as specified by the Agency; or

4. any specified steps, systems or methods be taken or followed by the railway.

The Agency may also specify maximum charges that may be made by the company, pursuant to an Agency Order, and order that the company fulfill the obligation in any manner and within any time or during any period that the Agency deems expedient.

2.3 COMPETITIVE ACCESS PROVISIONS

There are two competitive access provisions aimed at encouraging rail competition for captive shippers, for the long haul portion of the movement. These provisions authorize the Agency to set rates for captive shippers for the movement of traffic to an interchange point, which is a point served by both CN and CP with a physical connection that allows traffic to be transferred from one railway to the other.

To the extent that railways use these provisions to compete for traffic, shippers should benefit from better service.

Competitive line rates

The competitive line rate (CLR) provisions  apply to movements to an interchange point that are greater than 30 kilometres. The CLR rates, established by the Agency, are based on a formula that includes the interswitching rate for the first 30 kilometres plus an amount for the balance of the distance based on the originating carrier’s average revenue per tonne-kilometre for moving similar traffic over a similar distance.

There are two main differences between interswitching rates and CLRs:

• Unlike interswitching rates, which are prescribed in advance by the Agency and apply to all eligible movements, CLRs are calculated on a case-by-case basis. This creates uncertainty for the shipper and the “connecting” carrier, which may be trying to assess the costs and benefits of entering into a contract based on a CLR rate.

• Before a shipper can apply to the Agency for a CLR to the interchange point, the shipper must have an agreement with the “connecting” railway for the movement from the interchange point to destination.

2.4 ANCILLARY CHARGES

In addition to freight rates for moving cars, railways also apply charges for activities incidental to the movement of traffic and for other services they provide to customers. These are referred to as incidental, optional or ancillary charges. Examples include charges for demurrage, cleaning cars, storing cars and weighing product.

Railway ancillary charges have become an issue for shippers in recent years. The railways have increased charges and revised their associated conditions to encourage efficiencies and reduce costs. Shippers often find that these charges are not fair and do not reflect “balanced accountability” in that there are no comparable reciprocal penalties for poor railway performance.

2.5 RUNNING RIGHTS

Running rights enable a railway to run over the tracks of a second railway. For example, most of VIA Rail’s trains run over track owned by CN and CP under separate agreements. VIA pays an access fee for the use of the tracks. In addition, CN and CP have a number of commercial running rights agreements under which the two railways have negotiated the terms and conditions of access.

Railways cannot always negotiate commercial running rights agreements. The CTA provisions permit any federally regulated railway (including railways based in the United States) to apply to the Agency for “regulated”  running rights.

The regulated running rights provisions are not currently used because of two Agency decisions in the early 2000s that placed restrictions on their application. In May 2001, the Agency decided it did not have the authority to grant running rights that included traffic solicitation. In a subsequent decision dated September 10, 2002 the Agency determined that a statutory running right is an “exceptional remedy” that can be granted only if there is evidence of market abuse or market failure.

2.6 COMMERCIAL MECHANISMS

Confidential contracts are commercial mechanisms to address service and/or rate issues under which both parties must agree to the terms and conditions. Other potential commercial mechanisms include commercial mediation and arbitration. Commercial dispute resolution solutions are often quicker and less expensive than the remedies available under the CTA.

While commercial contracts are common (CP reported in its submission that 75 percent of its business is covered in confidential contracts), a large number of shippers indicated that they do not have the leverage to negotiate effective service conditions. They also point to inclusion by reference provisions for ancillary/optional service charges that allow railways to unilaterally add or increase charges within established contracts.

In 2006, the Minister of Transport wrote to CN and CP to encourage the railways to work with shipper representatives on a package of commercial solutions to rail service issues. This eventually led to negotiations on a commercial dispute resolution (CDR) process. While some progress was made, consultations eventually broke down, in large part because there was no agreement on whether or not to include the United States portion of movements in the proposed CDR process.

 

 

 

 

 

 

3. KEY RECOMMENDATIONS

3.1 INTRODUCTION

In developing its final recommendations to address problems and issues with respect to railway service, including those stemming from other elements of the logistics system, the Panel carefully considered and evaluated all issues, impacts and proposed solutions raised by stakeholders.

The Panel’s mandate is to make recommendations that provide commercial and, if necessary, regulatory solutions to address railway service issues within the rail-based logistics chain, with a focus on service provided by CN and CP. The Panel believes its mandate gives it fairly broad discretion in developing its recommendations. In principle, the Panel believes commercial solutions will address issues and problems better than increased regulation. However, the Panel also recognizes that effective legislation and regulation may be necessary to foster an environment that encourages commercial solutions to service problems and disputes.

In its Interim Report, the Panel developed a general approach that emphasized commercial solutions, but provided for a regulatory fallback in the event commercial solutions did not result in adequate service. The Panel continues to recommend this general approach, with some modifications. The Panel’s recommendations are based on the following conclusions:

• The rail-based logistics system, as documented in the Phase I results and reflected in stakeholder comments, has gone through a period during which rail service was less than adequate.

• While some of the service issues are attributable to non-railway stakeholders (these include poor forecasting and port and terminal congestion), most of the issues raised relate to railway behaviour. The Panel encourages more customer-centric behaviour by the railways, either commercially or through regulation.

• There are no practical ways to directly increase rail competition.

• The railways have commenced a number of initiatives, which are generating service improvements to railway customers. These should continue.

• While there have been some positive results to date from the railways’ initiatives, continued improvement in rail service is required, and these changes need to be lasting. It will take some time for the railway initiatives to be fully implemented and for the benefits to be fully achieved.

• When railways consult/negotiate with their stakeholders to implement their initiatives, they have an opportunity to address adverse impacts on rail service attributable to the behaviour of other stakeholders. Because of a relative lack of market power, many other stakeholders do not have this same opportunity.

• The Panel believes that at some point, there should be an assessment to determine whether or not the government should proceed with drafting and implementing legislation. The Panel is not unanimous as to when and how this assessment should be conducted as explained in section 3.6 (Implementation of Legislation).

• The Panel believes that the commercial measures and, if necessary, the regulatory measures that are being recommended will rebalance relationships between railways and their stakeholders.

The Panel’s recommendations contain the following four key elements:

• notification of service changes;

• implementation of service agreements;

• establishment of a fair and balanced dispute resolution process; and

• enhanced performance reporting.

The principles underlying the key elements are described in the Panel’s commercial approach below.

The recommendations will require additional changes by the railways, over and above those they are implementing. The Panel notes that the railways expressed considerable concern during previous legislative reforms when concepts such as final offer arbitration and competitive line rates were introduced. As it turned out, the impacts on the railways from these provisions have been manageable. The Panel is confident that the railways will also be able to manage impacts from the changes recommended herein.

3.2 GENERAL APPROACH

The Panel is recommending a two-phased strategy to address service issues – a commercial approach, to be followed by an assessment and, if necessary, by the implementation of regulatory remedies. In so doing, the Panel acknowledges the railways’ recent efforts to address service issues. Non-railway stakeholders have generally indicated that communications are more frequent, that there is a renewed willingness to cooperate, and that rail service is improving in some sectors.