CN concerned that panel’s menu of recommendations runs risk of rail industry re-regulation

In his initial response to yesterday’s release of the Canada Transportation Act review panel report, Paul M. Tellier, president and chief executive officer of Canadian National says he is concerned the long list of recommendations relating to rail could potentially lead back to unnecessary re-regulation.

Tellier questioned the need for the long list of recommendations given the panel’s conclusions about the presence of substantial rail competition, the absence of market abuse, and that commercial transactions are preferable to regulatory intervention.

“This menu of recommendations – if adopted in its entirety and stripped of the context provided by the panel – could, at the end of the day, constitute a fundamental reversal of policy, a step back to unnecessary re-regulation of the industry,” Tellier said. “This is an outcome the panel, in its own wisdom, is not recommending.”

CN, for example, is concerned that the panel is urging the repeal of an existing CTA provision ensuring only shippers suffering substantial commercial harm are entitled to various regulatory remedies. This recommendation could result in CN’s customers seeking rates set by regulatory intervention rather than through commercial negotiation.

CN is also troubled by a panel recommendation that, in certain ill-defined circumstances, could widen the scope of existing running rights provisions to permit one railroad to solicit traffic on another. In CN’s view, running rights for a rail operator with the authority to solicit traffic must only apply in cases where the host railroad clearly fails to meet its level of service obligation.

CN is further troubled by the fact that certain recommendations might "confer unfair and unwarranted advantages on U.S. rail competitors, advantages that are not afforded to Canadian railroads operating in the US," according to company release produced shortly after the report was made public.

“CN believes the realities of the NAFTA marketplace demand greater rail deregulation,” Tellier said. “The fact is Canada, in making NAFTA the cornerstone of its trade and investment policies, is committed to an integrated North American transportation system with equal competitive opportunities for all carriers.

“Canada’s rail regulatory environment is already significantly more restrictive than the one in the United States, and Canada cannot afford to widen the regulatory gap between the two countries by instituting policies that would not be reciprocated in the U.S. Such a course of action would damage Canadian railroads and shippers by giving U.S. railroads and their customers unfair competitive advantages.”

CN will assess the panel’s report in depth in the weeks ahead. It notes that the panel’s report will be one of a number of building blocks used by Minister Collenette in preparing his Transportation Blueprint for Canada. CN will continue to be an active participant in that blueprint process.

In the report released by Transport Minister David Collenette yesterday today, the panel made the following recommendations about rail transportation:

 “The succession of legislative and regulatory reforms begun in 1967 and accelerated in 1987 and 1996 is responsible for the resurgence of the Canadian railway industry and its renewed ability to provide efficient and effective services.”

 “the overarching policy goal [for government] should be to build on the new-found vigour of the rail system, target the problems that persist, and resist sweeping measures that hold the potential to create more difficulties than they solve.”

 Freight rates have declined – average revenue per tonne-kilometer declined by 26 per cent in real terms between 1988 and 1999.

 Rail productivity grew by nearly 50 per cent in the last decade. About 40 per cent of productivity gains were passed on to shippers between 1995 and 1999. Over the 1988-1999 period, an estimated 75 per cent of the gains in productivity were passed through to shippers. “The considerable pass-through of productivity gains suggests the presence of substantial competition, overall, in rail markets.”

 “railway profitability is comparable to but certainly not greater than that of other Canadian businesses”

 Canada’s grain handling and transportation system should be “moved to a more commercial basis, which could lead to repeal of the revenue cap on grain rates.”

 “…How the government addresses the cluster of policy issues – potential rail mergers, taxation, proposals for rail access, and the grain regime – will all feed into investor calculations about CN and CPR.”