An Inside View of Railway Economic Regulation in Canada

Transcription

1 An Inside View of Railway Economic Regulation in Canada Claude Mongeau President and Chief Executive Officer C.D. Howe Roundtable - Toronto April

2 A Quick Look at CN Global West 26% Domestic Canada 20% Global East 3% Breakdown of Revenues Intermodal 21% Petroleum and Chemicals 18% Grain and Fertilizers 15% Forest Products 13% Metals and Minerals 12% Coal 7% Automotive 5% Other Revenues 9% Transborder 32% Domestic U.S. 16% Global South 3% 23,000 employees 22,000 route-miles 210B revenue-ton-miles $8B of acquisitions Moving over $250B of goods a year 1

3 What We Stand For Delivering Operational & Service Excellence Creating Value for Shareholders What CN Stands For Creating Value for Customers Delivering Responsibly Playing our Role as a Backbone of the Economy 2

4 Aiming to Become a True Supply Chain Enabler End-to-end visibility Few precious metrics Daily engagement Trust and collaboration 3

5 Why Regulation? The official view from the Canada Transportation Act: It is declared that a competitive, economic and efficient national transportation system that meets the highest practicable safety and security standards and contributes to a sustainable environment and makes the best use of all modes of transportation at the lowest total cost is essential to serve the needs of its users, advance the well-being of Canadians and enable competitive and economic growth in both urban and rural areas throughout Canada. CN fully subscribes to this policy statement: CN competes heavily across all markets CN seeks to provide the efficient and quality service customers need CN has embedded the pursuit of environmental sustainability in its business agenda CN knows it is a true backbone of the economy 4

6 Major Forms of Canadian Railway Regulation Freight Rates Exit Conditions Service Levels Safety Regulations Access Provision Grain Singled Out 5

7 Focus on Freight Rate Regulation Final Offer Arbitration (FOA), main regulatory provision dealing with rail rates since 1987 Shipper-triggered, shipper-specific Baseball arbitration, with basis for decision not communicated to parties Selected offer is valid for one year Not the best situation Process has become extremely legalistic The customers have much more time to prepare their case And the arbitrators knowledge of railway issues varies widely Process could be improved Threshold to demonstrate competitive conditions could be imposed up front Economic and commercial considerations should dominate Shippers already enjoying strong regulatory safeguards 6

8 Level of Service Regulation Starting point: Common Carrier Obligation (since 1904) A railway is required to provide suitable and adequate accommodation to handle all traffic offered for carriage on its network. This is unique to rail Dating from when there was effectively no other mode of transport available Level of Service complaint process put in place at the same time Dissatisfied shipper may file a complaint to the CTA CTA may order the railway to correct with specific works or other capital Bill C-52 (dated 2013) Shippers can request a service level agreement and ask for arbitration in case of failure Reduces shippers incentive to negotiate and leaves determination of service parameters in arbitrators hands Bill C-30 (dated 2014) Establishes penalties for non-performance through regulatory means Turning the clock back, clearly a slippery slope 7

9 The Question of Access An interchange is a place where the line of one railway connects with the line of another and where loaded or empty cars may be stored until exchanged Rates are set by the CTA All shippers entitled to take advantage of such rates, regardless of competitive conditions Key issue is such rates are not compensatory and average down The CTA Review Panel stated in its report of year 2000: expanding the interswitching limits would worsen the market-distorting aspects of the interswitching rate regime and would be a step backward. [ ] Although interswitching rates have long been a feature of the regulatory landscape, the Panel sees them partly as an anomaly, representing a trade-off between regulation and the market. Until recently, regulated interchanges were available within a radius of 30 kilometers Bill C-30 extends the radius to 160 kilometers, without any assessment of potential consequences Opens the door to full-fledged re-regulation of rail rates 8

10 Extending Interswitching Limits is Bad Policy CN CP Shortlines U.S. Railroads Interchange points 9 9

11 The Question of Grain Forever the most regulated sector of Canadian rail transportation Strength of farmer lobby Key feature since 1995 is Revenue Cap Sunset provision, never applied Subsequent amendments have imposed a significant reduction in grain rates Limiting incentive for railways to invest Fair Rail for Grain Farmers Act (Bill C-30) Key feature, extension of I/C Singles out and penalizes railways for exceptional circumstances 10

12 11/1 11/4 11/7 11/10 11/13 11/16 11/19 11/22 11/25 11/28 12/1 12/4 12/7 12/10 12/13 12/16 12/19 12/22 12/25 12/28 12/31 1/3 1/6 1/9 1/12 1/15 1/18 1/21 1/24 1/27 1/30 2/2 2/5 2/8 2/11 2/14 2/17 2/20 2/23 2/26 3/1 3/4 3/7 3/10 3/13 3/16 3/19 3/22 3/25 3/28 3/ year Crop and the Winter of a Lifetime CN Tonnages 17M 50%+ more grain than normal 13M 10M 8M 5M Normal Grain Year Record Crop Potash Exports Lumber Exports Coal Exports Weather Severity Index* Winter started early, hit hard, and was wide spread 4 0 * Severity Index - represents the number of CN corridors requiring winter operating restrictions for temperatures below -25 C. Over 4, major problems surface across the network. 11

13 Bottom Line Long history of railway de-regulation in Canada since 1967 Textbook case of increasing reliance on market forces A success on all fronts Safety Lowest rates in the world Profitable Innovative Investing heavily in the future A world-class railway system Should be the pride of all Canadians Should not mess with success 12