Staying on the Right Track

Executive Summary

Amid a national discussion about freight rail in the aftermath of the terrible 2013 Lac-Mégantic derailment disaster, and signiﬁcant government intervention into the movement of western grain by rail, a government-appointed panel, headed by the Hon. David Emerson, is under-taking a statutory review of the Canada Transportation Act.

The review, launched on June 25, 2014 by the federal Minister of Transport, will likely have a signiﬁ-cant focus on freight rail, as such reviews have in the past. It is therefore timely to provide a general review of current public policy issues.

While calls for more regulation are a common response to issues of safety, competition, capacity, and labour negotiations to name a few, Canadians should understand that freight railways in this country are already heavily regulated by governments and their agencies, and are recognized as world-class. Canadian freight railways are private, proﬁtable, have a stellar productivity record, have met the de-mands of an increasing Canadian economy, and are unsubsidized by government – unlike most rail-ways outside North America. To choose just one measure of success, CN and CP have accomplished average annual total factor productivity growth of 3 percent, compared to a national average of less than 1 percent.

There will be critics of this point of view, especially shipper associations, whose function is to lobby for better terms from the rail industry, but it is the role of policy-makers to weigh the factual evidence and provide a balance in their deliberations between competing interests.

Importantly, the current review panel should recognize that any increase in the level of regulatory activity is largely unwarranted and could do signiﬁcant harm to railway investment and performance.

This was the case in the furor over the perceived failure of the railways to move sufﬁcient volumes of western grain during the extreme winter conditions of 2013/14. The concept of mandating grain volumes in the face of adverse weather brings to mind the legendary King Canute’s attempt to hold back the tide, but legislative amendments have, among other matters, given the Governor-in-Council the authority to order the minimum amount of grain that CP and CN must move in a given crop year. This is a deeply disturbing development. Government’s efforts to meddle in the commercial deci-sions of railways have a long and inglorious history – they have usually led to the eventual need for government subsidies or even bankruptcy.

While rail safety trends in general have been improving for years in absolute terms despite increases in trafﬁc, following the Lac-Mégantic tragedy, the worst North American rail disaster in 100 years, the public has a legitimate concern whether dangerous goods handled by freight rail pose an undue threat to their communities, and whether more should be done to ensure rail safety. Much has been done by Transport Canada, as well as authorities in the US, to address the safety issues raised by Lac-Mégantic, and in the years to come these measures can be expected to further improve safety for the public and communities – more resilient tank cars, slower train speeds, and increased monitoring of the affected rail routes.

On these, and a number of other regulatory issues analysed in this paper, the following policy rec-ommendations can be drawn:

Allow extended “interswitching” – whereby railways are required by regulation to exchange trafﬁc – to lapse in 2016 as it undermines pricing freedom, distorts competition in favour of US railroads, and will deter future investment;
attempts to micro-manage western grain traffic should be resisted as they harm shippers of other commodities and again will deter future investment;
consideration should be given to eliminating the maximum revenue entitlement for western grain as a further step towards a fully commercial grain transportation system;
expanding running rights – whereby railways are required by regulation to allow trains of an-other railway to run over their privately-owned tracks – is unnecessary and should be avoided, as it would be very difﬁcult to implement and would upset the competitive balance;
if and when there appears to be a strategic need for greater transportation investment, consider-ation should be given to an approach similar to the Asia-Paciﬁc Gateway model, which involved investments from a range of stakeholders – governments, municipalities, ports, railways – to enhance access to and from international trade corridors;
the regulatory approach to noise and vibration complaints and requests for rail crossings should be reviewed in light of the need to preserve railway property for future capacity expansion;
the regulatory changes regarding the transportation of dangerous goods currently underway should be harmonized with those being made in the US to avoid disruption of the integrated North American freight rail industry;
changes to railway liability in the event of catastrophic accidents currently under consideration –such as establishing a fund to cover liabilities beyond a cap – should be implemented;
existing Final Offer Arbitration provisions to address the issue of potential abuse of market power are working well and are not in need of amendment; and
recent changes to the regulations concerning rail service should be given time to see how they are working.

In reviewing how Canada’s freight rail is regulated, the Emerson panel will need to exercise prudence to ensure the industry continues to maximise its contribution to the national economy, and retains its position as a world leader.