February 8, 2008

VIA E-MAIL

Ms. Cathy Murphy
Secretary
Canadian Transportation Agency
15 Eddy Street
Hull QC  K1A 0N9

Attention:  Mr. Michel Maisonneuve

Dear Madam/Sir :

RE: REVIEW OF THE RAILWAY INTERSWITCHING REGULATIONS

This is further to the Agency's letter of December 20, 2007 in which the Agency is soliciting comments in connection with the above captioned matter. CN is pleased to participate in the consultation process and offers the following comments.

General

The new National Transportation Policy established by Parliament in the spring of 2007 states generally that a competitive, economic and efficient national transportation system that makes the best use of all modes of transportation at the lowest total cost is essential to serve the needs of its users […] and enable competitiveness and economic growth in Canada.  The policy statement goes on to state that to achieve this objective, regulation should only be used to achieve outcomes that cannot be achieved by competition and market forces.  In other words, the new policy statement makes clear that regulation and other government intervention is a last resort and should arise only when competition and market forces fail or are otherwise inadequate.

There are numerous examples in Canada where railway companies perform exchange switching for their customers without any regulatory direction in situations beyond those set out in the regulatory context.  In the U.S. all exchange switching is performed on a commercial basis.  This situation demonstrates that regulation is not required to achieve the policy objectives set out in the Canada Transportation Act.  To the extent that individual situations may warrant, the Agency could, upon application by the affected shipper and upon determination that a railway is abusing its position, impose a regulatory remedy.  In other words, commercial relationships should only be regulated when one party is abusing monopoly power. To impose interswitching regulations and remedies in advance of such determination presumes that railways are behaving in this manner.

Notwithstanding the above and in the event the Agency should choose to proceed with regulations in respect of interswitching, CN offers the following comments on the Agency's consultation document of December 20, 2007.

Compensation – Railway Fixed Costs

It is a fundamental principle that when regulatory intervention is deemed necessary to achieve a specified outcome such intervention should be made in such a way as to least distort the market place. Adherence to this principle is that much more important when the regulatory intervention results in the imposition of a public duty. In the present case, the public duty imposed on the railways is to interswitch traffic in accordance with the regulations.  Compensation for such imposed duty at any level that is less than the total costs incurred by the railways to perform such service will clearly result in a distortion of the market place and in inappropriate pricing signals. 

The consultation document proposes a contribution of 7.5% to the railways' constant costs. CN would clearly be an unprofitable company if all traffic it carried contributed only 7.5% to fixed costs. This means that at such a level of contribution, the regulated interswitching activities of CN must be cross-subsidized by CN's other traffic and businesses.  This is clearly not what is intended by Canada's National Transportation Policy. Consequently, the contribution to fixed costs for interswitching should be equivalent to the average contribution level of all other traffic.

That the proposed interswitching rates in the consultation document are not what the marketplace would dictate is made abundantly clear by the exchange switching rates that prevail in the U.S. and perhaps more importantly by the switching rates established by Essex Terminal Railway, a Canadian railway that escapes the application of the Interswitching Regulations.  In the latter case, these are the commercial rates that would prevail and which the regulations should reflect. It is surprising that such rates are considered acceptable for Essex but not for CN or CP. 

As the Agency is aware, the relationship with the customer in a regulated interswitching situation belongs to the long haul carrier and not with the origin or destination carrier who merely performs the interswitching services.  The rates and service issues are negotiated with the long haul carrier and it is the long haul carrier, not the customer, who pays the interswitching rates to the interswitching carrier. Indeed, the customer generally does not even see the interswitching rates as a separate item of his transportation rates. 

It has been suggested in the past that the level of contribution to fixed costs is of less concern given that CN benefits from CP's interswitching services and vice versa and that "everything comes out in the wash". This approach, while not economically sound, would indeed be less problematic if the percentage of regulated interswitching activities was more or less evenly distributed between CN and CP.  As it turns out, CN is a net provider of such regulated interswitching activities and CP is a net beneficiary of such services.  Therefore, to the extent that CN is not fully compensated for such activities and that CP is the net beneficiary of services, CN is in effect required to provide, below costs, more services to CP than it receives. This clearly is a market distortion.

Interswitching Zones and Car Blocks

To the extent that the Agency proceeds with regulated interswitching, CN considers that the Zones and Car Blocks being proposed in the Consultation Document are appropriate.

Yours truly,

Jean D. Patenaude
Assistant General Counsel

/sl