Consultation with Stakeholders on Limited Distribution Tariffs - Summary of What We Heard

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November, 2011

Table of Contents

• Introduction

• Points Raised

  • Process
  • Characteristics of LDTs
  • To what extent do LDTs reflect the agreement of the parties?
  • What options are available to a shipper that does not accept a railway company LDT?
  • Are LDTs the only hybrid mechanism currently being used by railway companies?
  • What are the advantages and disadvantages of LDTs?
  • Does the legislative scheme allow LDTs, and if not, should it allow them?
  • What are, or should be, the appropriate recourse for parties in the event of a dispute relating to an LDT or any other hybrid mechanisms?

• Summary of Feedback

  • Unanimous views
  • Differing views
  • Common views
• For further information

Introduction

On December 1, 2010, a Discussion Paper on the status of limited distribution tariffs (LDTs) under the Canada Transportation Act (Act) was distributed to railway companies and railway stakeholders and posted on the Canadian Transportation Agency (Agency) and the Government of Canada Consulting Canadians Web sites.

The purpose of this Discussion Paper was to:

• Solicit views from the railway and the shipping communities on the prevalence of the use and the forms of LDTs;
• Gain a better understanding of the current and future use of LDTs and their role in the marketplace; and
• Obtain comments on the permitted use of LDTs within the legislative framework contained in Division IV of the Act.

Consultations on LDTs came to a close on March 31, 2011. Submissions were received from three industry associations, three private companies, and one private individual as follows:

• Canadian Industrial Transportation Association;
• Western Canadian Shippers’ Coalition;
• Forest Products Association of Canada;
• Canadian Pacific Railway Company;
• Canadian National Railway Company;
• Forrest C. Hume Law Corporation; and
• James Nolan, Associate Professor, University of Saskatchewan.

This document provides a brief summary of the input and recommendations received through this consultation process. Actual submissions can be reviewed on the Agency’s Web site.

Note: This input has not been discussed or agreed to by Canadian regulatory departments or agencies and is solely a summary of input received by staff of the Agency from stakeholders in response to the call for consultations on the subject. This input does not reflect the views or position of the Agency.

Points Raised

Process

Mr. Nolan states that his knowledge of LDTs is limited and he suggests that this stage of the process should be about information gathering, with a call for input from the broader community, i.e. regional government, academics and lawyers, at a later date once they have had a chance to assimilate the characteristics of LDTs.

Characteristics of LDTs

The Forrest C. Hume Law Corporation (Forrest Hume) provides some historical background concerning LDTs, and takes the position that LDTs fall squarely within the parameters of tariffs that were once known as “Limited Freight Tariffs.”

Forrest Hume points out that Limited Freight Tariffs were:

• Previously authorized by Tariff Circular 1-A of the National Transportation Agency but that these tariffs are no longer authorized by the legislation;
• Transparent and that confidential contracts were unlawful prior to 1987;
• A mechanism specifically authorized by regulation because it was recognized by the regulator that:

1. situations might arise where it would be more appropriate for a railway company to issue and publish a limited freight tariff, to cover temporary situations that would arise infrequently, and
2. there had to be a specific legislative authorization to permit the use of such tariffs.

However, Limited Freight Tariffs had distinct requirements as set out in the regulation. After 1987, new regulations were passed which did not provide for Limited Freight Tariffs and no regulation has authorized them since;

• Never intended to be confidential contracts or have the attributes of confidential contracts; and
• Never intended to be hidden from view.

The Canadian Industrial Transportation Association (CITA) also provides historical context, and states that:

• LDTs are a carry-over form of rate publication dating before the National Transportation Act, 1987. At that time, LDTs and Agreed Charges were two forms of freight tariffs having very limited application under Canadian law. LDTs allowed railway companies to enter into short-term contracts for one-time “spot” movements, or for movements where lower rates could be offered for a limited period of time;
• Both Agreed Charges and LDTs had to be filed and made available for public inspection at various locations in accordance with extensive and strict regulations. Both could also be appealed to the Agency and its predecessors;
• While Agreed Charges died following the passage of the National Transportation Act, 1987 and the introduction of confidential contracts, LDTs have persisted and appear to be increasing in use. This may be due to the fact that LDTs are now being treated more as confidential contracts than tariffs for “spot” and other short-term traffic movements;
• LDTs are neither public tariffs nor confidential contracts. If they were confidential contracts, the contracts would dictate what changes could be made if both the railway company and the shipper agree, but the terms of LDTs can be unilaterally changed by the railway company. If they were tariffs, they would be subject to the Act’s tariff provisions; and
• Hybrid mechanisms are not authorized by the Act, and that LDTs are unlawful.

The Forest Products Association of Canada (FPAC) states that LDTs:

• Are similar in appearance to published tariffs with respect to their form and content yet what differentiates them from a published tariff is that LDTs are only available for scrutiny by customers of the Canadian National Railway Company (CN) that are party to it; and
• Were developed by CN in the 1990s and may contain a list of items such as the CN shipper, origin-destination pairings, types of equipment that would be available, participating carriers including both Canadian railway companies and U.S. railroads, commodities, rates and a fuel charge tariff, optional services tariff and other such applicable tariffs.

The Western Canadian Shippers’ Coalition (WCSC) states that:

• LDTs are confusing in nature and are not specifically authorized by the Act. The use of the term “tariff” suggests a non-confidential rate, with the weight of the law behind it. “Limited distribution” implies a smaller circulation than a normal tariff and reinforces its non-confidential nature;
• LDTs, like tariffs, can contain clauses that incorporate by reference items such as fuel surcharges and modifications to loading and unloading practices; and
• It is not aware of any LDTs being signed by shippers.

Canadian National Railway Company (CN), which is the primary user of LDTs, claims that LDTs:

• Are confidential, giving them the advantages of the legal weight of a tariff and the protection of confidentiality;
• Are rate publications applicable to specific shippers, typically a single shipper per publication. Save for certain exceptions, the rates contained therein reflect an agreement between carriers and subject shippers concerning those rates;
• Deal only with transportation rates. Items such as service levels, volume commitments or optional service rate exceptions, which are addressed exclusively in the context of traditional confidential contracts, are not included in an LDT;
• Generally have a one-year term;
• Are rarely amended or increased prior to the expiration of their term unless the parties agree; and
• Typically document an agreement that the parties wish to maintain confidential as per section 126^{Note 1} of the Act. Otherwise, LDTs are in all other respects treated the same as tariffs under the Act.

Canadian Pacific Railway Company (CP) is of the view that:

• The Act authorizes two mechanisms governing the commercial relationship between railway companies and parties: tariffs and confidential contracts. The Act does not authorize the creation of a separate category called LDTs. Parties seeking the benefits of confidentiality have the ability to use the confidential contract provisions of the Act.

To what extent do LDTs reflect the agreement of the parties?

CITA submits that:

• Agency Decision No. 9-R-2009^{Note 2} appears to have accepted the notion that LDTs are agreed to between the railway companies and customers and while this may be true in some cases, it is not so in others;
• LDTs differ from confidential contracts to the extent that the rates in LDTs can be unilaterally cancelled, increased or changed by the railway company on 30-day notice, and to this extent, LDTs have the characteristics of published tariffs; and
• Where rates or related conditions of service in an LDT are increased on 30-day notice and the shipper does not consent, the LDT should be considered as terminated, at the shipper’s option.

FPAC submits that:

• Periodically, an LDT could be a stop-gap measure for a shipper and a railway company to determine if a freight rate to a new origin-destination pair is appropriate before being incorporated into a confidential contract;
• Further, if both parties can agree on the rate but not on the terms and conditions, placing the agreement in an LDT represents an appropriate temporary measure until terms can be worked out; and
• An LDT will not reflect an agreement if the railway company uses it to impose a freight rate increase against the objections of the shipper. Like CITA, FPAC points out that the rate in an LDT can be increased by the railway company on 30-day notice.

WCSC states that:

• LDTs are imposed when contract arrangements are not possible within a prescribed time frame or on other occasions for the convenience of the railway company.

Forrest Hume submits that:

• The position that LDTs are not required to be disclosed implies that LDTs are always the result of an agreement between the railway company and shipper.

CN states that:

• LDTs are commonly issued only once the parties have agreed on the applicable rates. However, there are also exceptions where LDTs are issued on a temporary basis, for short-term situations when traffic has to be moved pending, for example, negotiation of a new contract, or if the parties have exercised the option to utilize final offer arbitration (FOA); and
• Shippers can move the traffic under an open, published tariff, however most prefer to ship under a more limited distribution publication that usually offers lower rates and which remain confidential.

What options are available to a shipper that does not accept a railway company LDT?

While other stakeholders did not specifically address this issue, CN and FPAC state that shippers have the option of requesting a published tariff rather than moving traffic under an LDT. FPAC further states that a shipper may file a request for FOA.

Are LDTs the only hybrid mechanism currently being used by railway companies?

CITA indicates that:

• The railway companies issue LDTs in the form of “express contracts,” which are essentially one-page confidential contracts of limited duration, generally a year; and
• It is in favour of express contracts, only if they are agreed to between the railway company and shipper, and not if they are imposed.

FPAC submits that:

• It became aware of situations where some shippers were requested to execute a document converting an LDT into an “express contract.”

CN states that:

• It is aware of no so-called hybrid pricing mechanisms used by carriers, other than LDTs.

What are the advantages and disadvantages of LDTs?

CITA is of the opinion that:

• The prime advantages of LDTs are the maintenance of a confidential rate and related terms of service in the form of a short, one-page confidential contract and that LDTs can be entered into without a formal and possibly lengthy negotiation;
• The main disadvantage is the uncertainty regarding dispute resolution over a rate set out in an LDT, as LDTs have no legal standing under the Act; and
• Rates and associated terms and conditions, when set out in tariffs, can be contested under the shipper-protection provisions of the Act. However, when traffic is moving under a confidential contract, the shipper cannot apply for FOA, nor can the confidential contract be examined by those who are not party to it.

FPAC states that:

• The LDT can be used as a “place-holder” to allow traffic to move under an agreed-to rate while a confidential contract is being negotiated. During this period, the rate contained in the LDT is kept confidential;
• If the LDT is imposed by CN and if the shipper wishes to challenge the freight rate using FOA under the Act, the shipper will likely need to prove that it did not agree to the LDT;
• CN will likely argue that the shipper is not entitled to pursue FOA as the shipments are moving under a confidential contract;
• The advantage of an LDT compared to a published tariff is that, assuming the shipper agrees to the LDT, it protects the confidentiality of the freight rate;
• The advantage of an LDT compared to a confidential contract is that, in theory, an LDT should allow the shipper to use the FOA provisions or ancillary charge provisions of the Act;
• If an LDT is imposed by the railway company, it can also include or incorporate by reference the ancillary charges contained in Optional Services tariffs, which creates a significant disadvantage to the shipper, which may be invoiced for charges not agreed upon;
• A shipper is disadvantaged by an LDT compared to a confidential contract because the latter is an agreement reached by both parties and precludes the shipper from filing for FOA while the contract is in effect;
• If an LDT is imposed and the shipper decides to file for FOA, the railway company will likely argue that the shipper agreed to the LDT and is not entitled to file for FOA, citing Agency Decision No. 9-R-2009; and
• From time to time, there have been instances where a railway company has imposed an LDT on a shipper who refused to sign a confidential contract.

CN is of the view that:

• LDTs offer a quick and flexible means by which customer-specific pricing can be made effective.
• When parties have agreed on the applicable rates without further agreement on volume commitments or service levels, LDTs also offer a simple and readily available alternative to confidential contracts, assuming such rates remain confidential;
• It is unaware of any disadvantages to the use of LDTs;
• Published tariffs are less advantageous as they offer no confidentiality and they limit a party’s ability to negotiate exclusive transportation rates, but that in all other respects, LDTs are identical to published tariffs; and
• Confidential contracts do offer confidentiality, but are typically used when parties have agreed to additional terms, like volume commitments and service obligations, which are not ordinarily contained in a tariff, or when parties wish to lock in specific rate increases for a longer period of time.

Does the legislative scheme allow LDTs, and if not, should it allow them?

CITA’s view is that:

• LDTs cannot be said to be lawful, but submits that LDTs should be allowed in law as valid rate-setting mechanisms, only as long as shipper and other non-railway members of the supply chain are not placed at any disadvantage and retain appropriate protection under the Act that is no less than that applicable to tariffs;
• “Limited distribution tariff” should be defined in the Act;
• The Act should be amended to allow LDTs;
• LDTs should be treated as confidential only if the terms and conditions are entered into and mutually agreed to in writing between the railway company and shipper;
• LDTs should contain all the information that is required to be contained in a published tariff; and
• The provisions of Division IV of the Act should apply to LDTs.

FPAC states that:

• LDTs and other hybrid mechanisms should be available to shippers, but only if they are agreed to and not imposed by the railway companies; and
• They are concerned that existing shipper remedies under the Act may not be available to a shipper who challenges a rate or ancillary charge contained in an LDT, and further, the specific concern that the FOA provisions of the Act would not be available to shippers who are parties to an LDT as the railway company would likely invoke the Agency ruling that LDTs have the attributes of confidential contracts.

WCSC states that:

• It is difficult to see how LDTs can be considered a valid rate-setting mechanism as the Act is very clear on this question;
• It is hard to understand why legislative changes to accommodate such mechanisms would be of interest to shippers, as LDTs can only increase the imbalance in market power between railway companies and shippers;
• The Act provides ample latitude for creative rate setting in section 126. With the agreement of the parties, any manner of arrangements can be made;
• Any impediment to progress in rate setting and service is not rooted in an inflexible legislative regime, but rather in the railway companies’ market dominance; and
• The industry would be better served by considering the legislative changes required to rebalance the rail freight marketplace, rather than affirming another product of market dominance.

Forrest Hume states that:

• LDTs are not permitted within the legislative regime contained in Division IV of the Act;
• There are only two sections in the Act which deal with the charging of rates;
• The Act does not authorize any hybrid mechanism; and
• The rate mechanism for charging freight rates requires them to be set out in a tariff that has been issued and published in accordance with Division IV of the Act or in a confidential contract pursuant to section 126 of the Act.

CP states that:

• LDTs are not permitted within the Act, which only authorizes tariffs and confidential contracts;
• A tariff, including an LDT, is subject to the requirements related to tariffs in the Act, including the requirement that they be made public;
• In the absence of an amendment to the Act, CP is not open to the creation through policy of a new category of tariff that is being treated as a confidential contract; and
• Parties wishing to benefit from confidentiality should use the confidential contract provision of the Act.

CN submits that:

• LDTs should be recognized as confidential consistent with Agency Decision No. 9-R-2009, which created the expectation that LDTs are confidential.

What are, or should be, the appropriate recourse for parties in the event of a dispute relating to an LDT or any other hybrid mechanisms?

CITA submits that:

• For shippers who are party to an LDT, recourse to all the shipper protection provisions applicable to those moving or proposing to move traffic under published tariffs should be made available; and
• The Agency and Transport Canada should consider whether any additional legislative or regulatory mechanisms respecting LDTs are necessary.

FPAC states that:

• It supports the use of LDTs only if they are a result of an agreement between a shipper and a railway company;
• The Act should be amended to clarify that LDTs or any other hybrid mechanism cannot be imposed on shippers, but should be negotiated and agreed upon; and
• The Act should be amended to enable shippers to use the existing provisions under the Act to challenge freight rates or ancillary charges contained in an LDT or any other hybrid mechanism.

CN states that:

• In the event of a dispute relating to LDTs, the parties can resort to existing rate dispute mechanisms, including all those provided by the Act; and
• If a carrier unilaterally increases an LDT rate and the shipper disagrees, the shipper retains its recourse to all of its usual rights and remedies provided for in the Act, including those provided under section 161 of the Act (FOA provisions).

Summary of Feedback

Unanimous views

The general consensus is that LDTs are a hybrid between a public tariff and a confidential contract, containing elements of both:

• The form and content of an LDT is similar to a tariff.
• The main distinguishing feature between an LDT and a public tariff appears to be that the LDT is not available for public distribution and is only available to a single shipper.
• It is kept confidential between the single shipper and the carrier.
• An LDT usually deals with a rate for the movement of traffic and excludes those elements contained in a confidential contract such as service levels and traffic commitments. However, it might incorporate by reference some ancillary charges.
• Generally, an LDT is in effect for one year.

Differing views

• Respondents did not always agree on all issues.
• One industry respondent suggested that an LDT is commonly issued subsequent to an agreement on an applicable rate, while others were not of the same view.
• CN’s notion of an LDT being a simple alternative to a confidential contract is contrary to the view of the shippers.

Common views

• Most submissions indicate that an LDT is a quick way to establish a rate in situations where contract arrangements cannot be concluded within a certain time frame.
• An LDT could be used as a bridge between the time when an old contract has expired and a new contract is not yet in place. However, unlike a contract which is negotiated, an LDT can be imposed on a shipper by a railway company.
• Some shippers indicate that LDTs can be unilaterally cancelled, increased or imposed by the railway company on a 30-day notice.
• Submissions suggest that a shipper could decline an LDT and accept a rate stated in a public tariff. However, that rate would normally be higher than the LDT rate.
• There is mixed reaction to the question of whether LDTs are the only hybrid mechanism currently used to establish a rate for the movement of traffic. But whether or not there are other mechanisms, all agree that LDT is not mentioned in the Act, which specifies only tariffs and confidential contracts as mechanisms to establish a rate for movement of traffic by rail. There are two sections of the Act which are available for rate setting purposes. Freight rates must be:

1. published in a tariff that has been issued as set out in Division IV of the Act, or
2. set out in a confidential contract pursuant to section 126 of the Act.

• Two shippers suggested that the Act should be amended to address the use of LDTs. On the question of the appropriate recourse/remedies in a dispute concerning an LDT, shippers who addressed the question expressed the view that access to the recourse available to shippers moving traffic under public tariffs was a necessary minimum.
• Suggestions were made that the Act should be amended to not only introduce LDTs but also specify that they cannot be imposed on the shippers. One shipper took it a step further and suggested additional legislative or regulatory mechanisms to protect the shippers who are moving, or are proposing to move traffic under an LDT. On that point, CN submitted that in the event of a dispute involving an LDT, the parties can resort to existing dispute resolution mechanisms, including all those provided for in the Act.

For further information

Canadian Transportation Agency
Ottawa, Ontario K1A 0N9
Tel: 1-888-222-2592
TTY: 1-800-669-5575
Web: www.cta.gc.ca
E-mail: info@otc-cta.gc.ca