Sept/Oct 2012

MAC Economic Commentary

Time to confront railway market power in Canada

By Pierre Gratton

Rail freight service is a key determinant of the Canadian mining industry’s ability to compete internationally. Given the significant prospects for continued growth in mining operations, overcoming the obstacles posed by Canada’s vast geography to deliver products to ports and smelters effectively is crucial. This is especially relevant when competing against countries with significantly shorter logistical supply chains.

Although many characteristics contribute to the quality of delivered service, a competitive market is perhaps the most essential in ensuring firms optimize their performance. As a general rule, the more competition there is, the more likely companies are to provide proficient service at lower prices.

Railways are often considered a typical example of a natural monopoly, and the Canadian context is a case in point. The costs associated with building and running a rival rail network that can service Canada’s vast geography act as a barrier, making competition economically unviable in many regions. The remote locations of many mining operations often leave mines captive to one of two railways – Canadian National or Canadian Pacific – and frequently stranded without an alternative mode of shipping.

The issue with natural monopolies boils down to market power. A firm with market power has the ability to influence prices, or to reduce service quality without losing customers. Given that shippers already pay significant freight rates to overcome obstacles posed by Canada’s vast geography, the use of market power exacerbates the situation.

The current economic framework regulating the railway industry, the Canadian Transportation Act (CTA), has largely been ineffective in protecting captive shippers against high prices and unreliable service. The Government of Canada’s Rail Freight Service Review report serves as an excellent benchmark by which to assess how effective the CTA has been in regulating the railways. Beyond acknowledging that “it has long been recognized in transportation law that regulations are required to address the potential abuse of market power by the railways” in Canada, the report reveals the following statistics:

  • On a week-to-week basis, each railway provided grain shippers with at least 90 per cent of cars ordered only 54 per cent of the time. CN performance was 57 per cent and CP performance was 51 per cent.
  • Railway performance in meeting shipper demand on a weekly basis for merchandise traffic differed between railways. CN provided at least 90 per cent of the cars ordered only 68 per cent of the time, while the figure for CP was 50 per cent.
Although service levels can be measured in different ways, the above indicates very poor performance of rail cars supplied versus cars ordered on a week-to-week basis, over a two-year period.

Think of this in another way: if your cable provider was only supplying the majority – not even all – of your television channels just over half the time, would you not switch providers?

The above serves as one example of how the railways’ use of market power has persisted under the current CTA. The biggest problem rail customers have is that they do not know what they are getting for the rail rates they pay. Also, many have no alternative service provider. Under the current CTA, railways unilaterally impose rates and have no obligation to provide any particular level of service.

Fortunately, the federal government appears poised to amend the CTA in order to rebalance the bargaining positions of those party to the monopoly market structure. Mining companies need more predictable and reliable rail service to maintain their customer relationships. To achieve these objectives, the mining industry is advocating that legislation tabled this fall enact a shipper’s right to negotiate service levels and a dispute resolution process should such negotiations fail. These enactments are big ticket items that can be remedied at no cost to government, allow for commercial negotiations, maintain Canada’s export success, and deliver revenues and jobs across the country.

The Canadian mining industry relies heavily on the rail system. In 2010, shipments of coal and processed minerals represented 56 per cent of total Canadian rail-freight revenue and one half of overall volume. In a truly competitive environment, wouldn’t you expect much better service?

It’s time to level the playing field.

Pierre Gratton is president and CEO of The Mining Association of Canada (MAC).

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