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In the Interim Report (October 2010), the Rail Freight Service Review Panel provides a clear, consistent, and convincing analysis of the lack of competition in the rail transportation industry and the preponderance of power possessed by the railways in the marketplace. Non-railway stakeholders have long-identified lack of competition as the problem behind the poor service levels. When the Panel applied the Competition Bureau’s methodology to determine if there was competition in the rail transportation industry, it concluded: “An assessment based on these criteria would confirm that CN and CP possess market power over their customers.” (p. 37)
Indeed, the Panel acknowledges that a lack of competition in the industry is the problem: “In the Panel’s view, the major cause of rail service problems is railway market power, which leads to an imbalance in the commercial relationships between the railways and other stakeholders. This, in turn, reduces the railways’ accountability for performance. As a result, railways do not always face the consequences that come from offering poor service that occur in other sectors in which competition is more prevalent.” (p. 37)
The Panel goes on to say that “If more stakeholders had access to effective competition and/or effective regulatory tools … it is unlikely that the government would have felt the need to undertake the current service review.” (p. 38)
The interim report makes a few things very clear:
Thus, it is surprising that the Panel chose to recommend neither immediate regulatory intervention – clearly called for by the market environment and stakeholder submissions – nor the commercial solutions that are readily identified and clearly available. The question arises – does this Service Review function only to provide a rationale for a pre-determined outcome rather than follow the evidence to more logical conclusions? If so, it is an unfortunate use of a democratic process in which grain producers had high hopes for results that would improve service to their farms.
Yet, strikingly, this was pretty much predicted by grain shippers in an April 17, 2008 Western Producer article titled “Shippers charge bias in rail review”, published when the Service Review was first announced. Citing the terms of reference set for the Service Review, specifically that "commercial solutions are preferable to increased regulation", the Western Grain Elevator Association (WGEA) correctly asked whether "It seems like a predetermination that the commercial system is the best, but isn't that what the review is intended to look at, whether the commercial system is working?"
The WGEA also noted that there was clearly no need for the Panel to be reminded in its terms of reference that the railways "need to generate sufficient revenues and profits to maintain and improve existing rail services”. (How prophetic. Recent reports from Reuters, Oct. 26/27, show Q3 profits for CN at $556 million and $338 million for CP, suggesting 2010 annual railway profits in the range of $3-$4 BILLION. It goes without saying that the railways have plenty of profits to generate investment capital or shareholder value.)
Likewise, calling the government’s assumptions embedded in the terms of reference “gratuitous”, the Canadian Industrial Transportation Association identified the bias even before the Panel was named: "To start off with the assumption that the commercial system provides the best answer assumes that the commercial system is functioning properly.”
Now, the Panel does say that there is a chance that regulatory intervention will be needed. They recommend the railways be given three years to improve service. According to the Panel’s interim report, if it is determined at the end of those three years that service has not improved, only then regulations should be enacted to require improvements.
But, let us recall that improvements to rail service have been long overdue even though commercial freedom for the railways was a result of deregulation of grain transportation brought about by the Estey Review (1998) and Kroeger Commission (1999).
When the Transportation Service Review Panel Act was changed in February, 2008 and the level-of-service review announced, the Western Producer (Feb. 21, 2008) described the review as being “sought by shippers for more than seven years”, i.e. since the post-Kroeger deregulation of grain transportation after 2000. One of the government’s own Prairie MPs went so far as to say that "shippers have been waiting many years for the government to rebalance the legislation provisions of the act.”
Seven years in the making, the current Service Review, itself, is taking three years. The result? Recommending the status quo for another three years. Thirteen years of hurt without action. Thirteen years that farmers and shippers have absorbed the impact of poor service on their bottom lines. Thirteen years with no guarantee that things will change.
The possibility of action sometime after 2013 clearly does not address the needs of shippers and grain producers. The response from the WGEA is not surprising: “We are profoundly disappointed in the report. The report, issued more than two years after the review was announced, amounts to little more than saying we should wait another three to five years before doing anything.” (W-P, Oct. 14, 2010) The same response comes from the Rail Shippers Coalition, saying that their members “ … (who) account for over 80 per cent of the revenues of the national rail freight carriers, simply cannot wait until 2013 … it is objectionable to suggest the government sit back and wait yet three more years to see whether the railways voluntarily improve service”. (M-C, Nov. 4, 2010)
Perhaps the Panel really isn’t recommending the status quo – since it suggests the federal government begin drafting regulations that could be “triggered” if service levels are deemed inadequate in three years. But, given the trajectory toward deregulation in grain transportation over the past several decades, and the continuing inaction on inadequate service during that time, this really isn’t a credible recommendation.
Indeed, the Panel makes a special note in the Interim Report to identify a bias in favour of the railways within the Panel itself: “NOTE: One Panel member does not concur with this particular recommendation. He supports the regulatory package, but believes that advanced legislative drafting will be a disincentive for many stakeholders, particularly shippers, to enter into meaningful negotiations with the railroads prior to the 2013 assessment ... these stakeholders will simply wait for the 2013 assessment in the expectation that the Governor in Council will trigger the amendments that are sitting on the shelf ... he does not believe there is sufficient incentive for these stakeholders to expend the time, effort or money to reach commercial agreements relating to service agreements and a dispute resolution process ... (he) believes that many stakeholders are seeking a return to railroad regulations and this recommendation would work in their favour; that the continuing efforts of the railroads to improve service issues would be impeded by some stakeholders as they wait for legislation. One railway has indicated this is already happening; and that the Panel’s terms of reference encourage commercial resolutions and this recommendation bypasses that opportunity and steers the Report directly to regulatory measures.” (p. 45, emphasis added)
The final point in the preceding passage closes the logical loop in analyzing why the Panel has avoided recommending regulatory intervention or any “commercial solutions” that would increase competition. At least for a minority of the Panel, it is precisely because the terms of reference and the interests of the railways demanded it in the first place.
And, what reason is given by the Panel member to oppose simply drafting stronger regulations that might not even be implemented in three years? Because it is the shippers(!) who have been and will be bad actors in the marketplace. The question is inescapable – why are we spending taxpayers’ money to blame the victim(s)?
At least, that’s how it looks from this side of the tracks.
Policy Manager, Agricultural Producers Association of Saskatchewan (APAS)