Shippers' Council of Canada and The Western Grain Elevator Association

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Submission to the Canadian Transportation Agency

Regarding the Application of the Railway Interswitching Regulations Including Proposals for Amendments to the Regulations

The Shippers' Council of Canada ("SCC"), a coalition of:

Canadian Chemical Producers' Association

Canadian Fertilizer Institute

Canadian Industrial Transportation Association

Mining Association of Canada

Propane Gas Association of Canada

and:

The Western Grain Elevator Association

February 28, 2008

Executive Summary

The views and recommendations of the Shippers' Council of Canada ("SCC") and the Western Grain Elevator Association ("WGEA") respecting the current interswitching regulations and the proposed revised interswitching rates to be set by the Canadian Transportation Agency ("Agency") are summarized as follows:

Wherever possible, we believe that rail rates and services should be matters of commercial interest and negotiation between shippers and railways.  However, where a more effective or competitive service arrangement is not possible using an alternate carrier, resorting to Agency imposed regulated interswitching rates and services is both necessary and feasible. The continuation of regulated interswitching rates and services encourages competition between railways and promotes ongoing commercial negotiations between shippers and railways.  In the absence of such regulation, there is nothing to guarantee that inter-carrier rail competition will be maintained.

The current publication/methodology of establishing regulated interswitching rates with a contribution of 7.5 % over variable costs compensates the railways for the interswitching work performed while ensuring the maintenance of effective competition and should be continued.

The increased variable costs of interswitching in zones 1 and 2 for movements of cars in less than 60-car blocks are questionable and should be re examined and clarified.

Railway operations have changed significantly since the four interswitching zones were established in 1987. The changes in railway operations indicate a need for the Agency to re examine the zonal framework upon which the interswitching rates are established with the goal of extending the current distance zones or of establishing new zones beyond the existing 30 km limit to 50 km.

We request the Agency to undertake a comprehensive examination of all interchanges in Canada to determine whether CN's and CPR's rail infrastructure in any way detracts from, hinders or otherwise precludes the efficient interswitching of car-blocks of 60 or more cars at those interchanges, and that the Agency determine where the setting of interswitching rates for lower block sizes, such as in the 40-60 car range, may be warranted.  Some of our members, particularly in the grain industry, are capable of providing car blocks that cannot be accommodated at the interchanges designated as "interchange stations" by the railways.  Simply stated, the physical capacity of interchange points has not kept pace with the needs of the shipping community.

We oppose the deregulation of interswitching rates and the associated provisions of the regulations. Deregulating interswitching would place shippers at competitive risk. We would submit that the Agency continues to have a vital role to play in maintaining competitive access to rail service by retaining the right to establish interswitching rates and services.

Introduction

The Shippers' Council of Canada ("SCC") and the Western Grain Elevator Association ("WGEA") would like to thank the Canadian Transportation Agency (the Agency) for the opportunity to respond to its request for comments on its review of the Railway Interswitching Regulations pursuant to section 128 (5) of the Canada Transportation Act ("CTA"), and in particular, the application of the interswitching regulations and our views on the proposed changes in the interswitching rate scale.

The Shippers' Council of Canada is comprised of industry associations whose member companies account for over 50% of the Canadian revenues of CN and CPR. Coalition members represent major industrial sectors in Canada including agriculture, agri-business, metal and coal mining, fertilizer production, chemical production, propane gas production, manufacturing, and retailing.  The Western Grain Elevator Association represents the interests of the majority of grain handlers in western Canada.  WGEA members own country elevators and port terminal facilities across the country, and they collectively handle in excess of 90% of western Canada's bulk grain movements.

History and Importance of Regulated Interswitching

Regulated interswitching allows shippers who are located captive to the lines of a single railway to have physical access to the rates and services of a second, competing railway without the threat of rate or service abuse from the monopoly rail carrier to which they are otherwise captive. The interswitching rates benefit shippers by extending their access to the lines of competing railways at rates that are reasonably close to the cost of moving the traffic to or from the interchange point, thus ensuring that shippers derive the benefits of price competition, improved service levels and varying routing options.

Interswitching rates have evolved since 1908 from a measure designed to optimize track usage in urban areas to an important 'competitive access' provision that promotes competitive discipline in a duopoly service situation.  The changes introduced in the National Transportation Act, 1987, extended regulated interswitching from 4 miles to a radial distance of 30 kilometres, enabling some resource-based industries, as well as manufacturing-based industries, to obtain the competitive benefits of interswitching for the first time. 

Manufacturing-based industries, traditionally located in urban areas where most interswitching took place, no longer dominated the railways traffic base.  Resource-based commodities comprised an increasing and dominant share of Canadian railway traffic by 1987.  The extension of the interswitching limit to 30 km recognized that the very nature of the railways traffic base had changed dramatically.

The Competitive Nature of Regulated Interswitching

The SCC and WGEA strongly uphold the view that the real strength of the regulated interswitching provision continues to be its absence of regulatory application.  Agency interswitching regulations operate in the transportation marketplace as a tool of last resort for captive shippers. Where intra-rail competition is effective, traffic continues to move over the line of the local railway to destination and the use of regulated interswitching rates and services are not required. Where, however, intra-rail competition may be ineffective or a more effective service arrangement is possible using an alternative carrier, the use of regulated interswitching rates and services are necessary and feasible.  The interswitching rate structure, once set, encourages and allows both shippers and the railways to operate in harmony with the marketplace. Aside from the annual establishment of the interswitching rate scale by the Agency, there is virtually no regulatory intervention in the system.

This common sense solution to a difficult problem is a successful example of how carefully applied regulatory intervention can ensure the overall health of the marketplace. 

The regulations foster a timely, non-litigious, inexpensive, and straightforward approach to rail competitive access. Appeals and hearings are virtually non-existent.

Policy Objectives of Regulated Interswitching

We believe it is imperative that the policy objectives contained in the CTA and in the amending legislation, Bill C-8, remain paramount when addressing the continued establishment of interswitching rates, terms and conditions.  The Policy advocates competition and, where necessary, the economic regulation of carriers with the maintenance of regulated competitive access mechanisms like interswitching where location or market forces may not otherwise produce competitive alternatives.

The law also distinguishes interswitching rates from the other rate provisions under the CTA in the sense that subsection 128(3) of the CTA specifies that interswitching rates must be cost-based but not less than the variable costs of moving the traffic.  In 1997 and again in 2002 the Agency consulted extensively on the effect that this provision, as well as the "commercially fair and reasonable" rate requirement in section 112 of the CTA, may have on regulated interswitching rates.

On each occasion the Agency concluded that a contribution of 7.5 percent over variable costs represented an appropriate compensation towards the railway's fixed costs. The Agency found that the resulting rate levels reflected an appropriate balance of providing an effective access to competitive alternatives through interswitching on the one hand, while compensating the rail carriers for the costs incurred in providing the services as an imposed public duty on the other hand.

Any changes to the rate-setting publication/methodology that focuses on the revenue needs of railways, without also equally considering the competitive market pressures faced by shippers, could have a negative impact on Canadian shippers.  We note that previous Agency briefs would support this view.  The Regulatory Impact Analysis Statement that accompanied the interswitching regulations enacted for the period commencing November 20, 2004 included the following statement:

"The Agency is not convinced that market forces can ensure that unregulated rates would preserve the present level of competitive access to a second railway, either through interswitching or competitive line rates, at reasonable conditions. The Agency considers that the continued regulation of interswitching rates constitutes an important element of the competitive access provisions of the CTA and that any reduction in the effectiveness of this competitive access provision would clearly be contrary to the National Transportation Policy, as set out in Section 5 of the CTA."

Observations and Comments Respecting Proposed New Interswitching Rate Scale

The interswitching rates are developed by the Agency by estimating the costs[1] incurred by the railways in performing interswitching at selective major yards in Canada and by then adding a set percentage mark up over the costs to compensate the railway for the work and to provide a contribution towards the fixed costs of the railway.  As a general observation, we note that there are wide discrepancies between the proposed changes in the rates between the various zones attributable to the changes in interswitching costs within the different zones.

More specifically, we note that the rates for the switching of cars in less than 60-car blocks in zones 1 and 2 will increase significantly by 10.8 % and 7.5% respectively whereas the rate in zone 3 will increase only marginally by 2.5%.  The increases in the zone 1 and zone 2 rates are perplexing considering the significant productivity improvements that have been realized by both CN and CPR in their operations since 2004.  An indication of just how productive Canadian railways have become in recent years is illustrated by their operating ratios - the benchmark measurement of operating performance in the North American railway industry. It measures the amount of each dollar of revenues that is consumed by the railway's operating expenses to earn it. The lower the ratio, the lower the percentage of revenues required by the railway to cover expenses.

The operating ratios of both railways have improved markedly over the past four years. CN's operating ratio has decreased dramatically during the period 2003-2006 since the last interswitching review was carried out from 69.8 in 2003 to 61.8 in 2006.  CPR's operating ratio has decreased from 80.1 in 2003 to 75.4 in 2006.  We accordingly question the increased variable costs of interswitching in zones 1 and 2 for movements of cars in less than 60-car blocks and request that the costing publication/methodology employed by the Agency in the development of these rates be re examined and clarified.

We welcome the 4.8 % reduction in the zone 4 rate for movements of cars in less than 60-car blocks. This reduction will be of considerable benefit to our members who are located between 20 and 30 kilometres from interchanges where competitive rail services can be obtained to move their products to domestic, off-shore and international markets in competition with producers who have two or more railways directly serving their facilities.

We are similarly pleased that no changes in costs were experienced for the interswitching of car blocks of 60 or more cars in zone 1 (the rates will remain unchanged) and that the rates for the interswitching of car blocks of 60 or more cars will decrease in zones 2, 3 and 4.  We believe these changes reflect the continued productivity improvements in CN's and CPR's operations.

We recognize that there are many factors that come into play in the determination of the railway interswitching costs and that can contribute to the variation in the costs from year to year.  We are also cognizant that the Agency does not perform a sensitivity analysis in order to isolate which factors are contributing more significantly to a reduction/increase in the costs.  It is clear, however, that the interswitching costing model currently being applied by the Agency for the movements of cars in less than 60 car blocks has not produced uniform variations for each distance zone.

The Need for Interswitching Regulations to Reflect Changing Railway Operating Practices and Traffic Flows

We question whether the increased costs in zones 1 and 2 are due to recent shifts in the interswitching traffic pattern distribution.  For instance, shifts resulting in less traffic at a low cost yard or more traffic at a high cost yard can negatively impact on interswitching costs and contribute to higher interswitching costs in a specific zone.  Railway operations have continued to evolve and have changed dramatically since 1987. Improvements in railway operating practices over the past three years have resulted in less traffic being switched between the carriers in the urban cores, particularly in western Canada and, in particular, in the greater Vancouver area. 

New co-production agreements and routing protocols between CN, CPR and other class 1 railways have resulted in more traffic being switched in outlying regions - in some cases - at a considerable distance from the urban cores. Examples include traffic previously switched in the greater Vancouver area now being switched between CN and CPR at Kamloops and Boston Bar BC.  Other examples include traffic historically switched between CN and BNSF in the greater Vancouver area now being switched at gateways near or within the state of Washington.  There have been similar changes in traffic patterns in other regions of the country.

Clearly, in the efforts to improve the efficiency of railway operations and to better meet shippers' service requirements, cars are now being switched further out from the urban cores. In our opinion, these significant changes in railway operations point to a need for the Agency to re examine the whole zonal framework upon which the interswitching rates are established. 

There is a need in our view to extend the distance to which the zone 3 and 4 rates apply beyond the current 30 km limit to 50 kilometres or to establish one or more new zones beyond the current zone 4 limit with rates that reflect the additional switching distance.

Some of our members, particularly in the grain industry, are capable of providing car blocks that cannot be accommodated at the interchanges designated as "interchange stations" by the railways.  Simply stated, the physical capacity of the interchange has not kept pace with the needs of the shipping community.  We would ask that the Agency undertake a comprehensive examination of all interchanges in Canada where loaded and empty cars can be switched between the railways pursuant to the definition of interchange[2] contained at section 111 of the CTA in order to determine whether CN's and CPR's rail infrastructure in any way detracts from, hinders or otherwise precludes the efficient interswitching of traffic at those interchanges. Such an investigation, we submit, will require the Agency to document the number of cars that can be accommodated at each interchange with a view to determining whether the interchange can accommodate the traffic needs of the shippers in the area. 

We would further submit that the current multiple block of 60 or more cars is excessive relative to the shipping patterns of many of our members.  A multiple car block less than 60 cars would be more desirable for many shippers.  We believe that the Agency investigation we are requesting herein will further serve to identify those interchanges where the setting of interswitching rates for lower block sizes, such as in the 40-60 car range, may be warranted and feasible.

Commercially Fair and Reasonable Rates

Section 112 of the CTA requires all rates established by the Agency be commercially fair and reasonable "to all parties".  The Agency is proposing a rate scale for all zones that maintains the 7.5% contribution level to variable costs.  We believe this to be an appropriate level of compensation. We understand a "fair and reasonable" rate to be a rate that reimburses the provider of a service for the actual work performed in carrying out the service.  Such rates should, of necessity, cover the out-of-pocket costs. The addition of the word "commercially" also implies some level of contribution.  A "fair and reasonable" rate by definition is a rate that allows the traffic to move without being constrained.  It also provides a return to the shareholders of the carrier.  We believe that these criteria are being met through the present system of Agency rate determination. 

We would caution that allowing interswitching rates to be set in a 'deregulated' environment outside of the regulation would place Canadian shippers at risk of rate and service abuse at the hands of monopoly service providers.  This would also contradict the policy objectives contained in section 5 of the CTA.

Continuing the Establishment of System Average Interswitching Rates

We support the continuation of the setting of system average interswitching rates which results in a single rate for each zone at all interchanges across the country.  Although the present publication/methodology may not reflect the actual costs at any given rail yard or interchange, we believe it creates a balance for shippers across the system.

This approach also minimizes the time and resources required by the Agency to establish the regulation as well as the administration of the interswitching tariffs by the railways.

Recommendations and Conclusion

Our views and recommendations respecting the current interswitching regulations and the proposed revised interswitching rates to be set by the Agency are summarized as follows:

Wherever possible, we believe that rail rates and services should be matters of commercial interest and negotiation between shippers and railways.  However, where a more effective or competitive service arrangement is not possible using an alternate carrier, resorting to Agency imposed regulated interswitching rates and services is both necessary and feasible. The continuation of regulated interswitching rates and services encourages competition between railways and promotes ongoing commercial negotiations between shippers and railways.  In the absence of such regulation, there is nothing to guarantee that inter-carrier rail competition will be maintained.

The current publication/methodology of establishing regulated interswitching rates with a contribution of 7.5 % over variable costs compensates the railways for the interswitching work performed while ensuring the maintenance of effective competition and should be continued.

The increased variable costs of interswitching in zones 1 and 2 for movements of cars in less than 60-car blocks are questionable and should be re examined and clarified.

Railway operations have changed significantly since the four interswitching zones were established in 1987. The changes in railway operations indicate a need for the Agency to re examine the zonal framework upon which the interswitching rates are established with the goal of extending the current distance zones or of establishing new zones beyond the existing 30 km limit to 50 km.

We request the Agency to undertake a comprehensive examination of all interchanges in Canada to determine whether CN's and CPR's rail infrastructure in any way detracts from, hinders or otherwise precludes the efficient interswitching of car-blocks of 60 or more cars at those interchanges, and that the Agency determine where the setting of interswitching rates for lower block sizes, such as in the 40-60 car range, may be warranted.  Some of our members, particularly in the grain industry, are capable of providing car blocks that cannot be accommodated at the interchanges designated as "interchange stations" by the railways.  Simply stated, the physical capacity of interchange points has not kept pace with the needs of the shipping community.

We oppose the deregulation of interswitching rates and the associated provisions of the regulations. Deregulating interswitching would place shippers at competitive risk. We would submit that the Agency continues to have a vital role to play in maintaining competitive access to rail service by retaining the right to establish interswitching rates and services.

The SCC and WGEA thank you for the opportunity to present our views on the importance of interswitching, our concerns respecting the zone 1 and 2 proposed rate increases, the need to undertake a comprehensive inventory and examination of all interchanges in Canada, and our proposal to either extend the current zones or establish new zones with interswitching rates that reflect the evolving operating practices of CN and CPR.  If you have any questions or require further clarification, please do not hesitate to contact the undersigned.

Yours sincerely,

R.H. Ballantyne, P.Eng.
Chairman
Shippers' Council of Canada


[1] Interswitching costs are based on average interswitching times for each zone at each yard.  Interswitching times are a function of the time that yard crew spends handling insterswitched traffic, which is usually intermingled with the traffic of the railway's own customers.  The resulting average costs by yard are then weighted by the interswitched traffic at each yard, to arrive at a system average cost. Then the system average costs for both CN and CP are averaged to arrive at a final cost for each zone.

Interswitching times are updated annually as a result of on-site inspections of selected yards by Agency staff. Different yards are visited each year so that, over time, most yards have been inspected. As a result of these visits, switching times in specific yards may be adjusted to reflect observed changes in operations and traffic volumes.  Generally, changes in operations result in more efficient operations and lower interswitching times.  However, decreases in traffic volumes can result in increased average interswitching times as the time that the yard crew spends in switching cars is spread over less cars, thus increasing the average time per car. Finally, changes in the railways' unit or operating costs impact on the determination of the interswitching costs.

[2] "Interchange means a place where the line of one railway company connects with the line of another railway company and where loaded or empty cars may be stored until delivered or received by the other railway company;"

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