Most would agree that the so-called revenue cap on Canada’s two national railways is an imperfect solution to a complicated problem.
Officially called the Maximum Revenue Entitlement (MRE), it was implemented as part of a major reform of grain transportation policy by Justice Willard Estey in 2000. It was an alternative to his proposal to increase competition by requiring the railways to allow others to use their lines. The MRE was actually the railways’ idea, which might have been the first clue that it wouldn’t necessarily work to farmers’ advantage over the long run.
But it was never envisaged as a long-term policy. Nor was it expected that the railways’ revenues would come anywhere close to meeting or exceeding the MRE, as is routinely the case. At the time, people thought — and the railways attested — that competition would keep rail revenue well below the cap.
The MRE was supposed to give farmers protection from gouging while the grain-handling and transportation system evolved to a fully commercial system — whatever that means when 94 per cent of Canada’s grain exports depends on a railway duopoly to reach market.
Sure enough, a subcommittee of the federally appointed Grain Logistics Working Group found last year that railway earnings under the MRE are as close as possible to the maximum. We have a hunch that the penalties they sometimes have to pay into grain research for going over is a small price to pay for achieving the maximum returns year in and year out.
Sixteen years later, the Canadian Transportation Act review panel is suggesting it is time to phase it out — not because it is a poor substitute for competition, but because the railways view it as a disincentive to investing in providing better service.
This recommendation came in the absence of any evidence presented by the review panel or any description of process to explain how one will contribute to the other — other than some hazy references to how “an unfettered commercial framework provides greater assurance that supply chain partners who handle and transport grain will invest in innovative supply chain solutions.”
Nevertheless, farmers should embrace this recommendation — on one condition: that ownership of the country’s railroads is decoupled from the operations of Canada’s two national railways. Precedents for this approach already exist in telecommunications and energy pipelines.
The railways are entitled to a return on their investment in infrastructure, as is the case with any utility, but it should no longer be parcelled with service.
CP’s CEO Hunter Harrison has recently offered up competitor access to its railroads in the U.S. as part of its bid for U.S. Surface Transportation Board approval of CP’s $32-billion takeover of Norfolk Southern Corp.
In a November Financial Post article, Harrison is quoted as saying the combined company would allow other railroads to operate on its tracks and into its terminals “if the combined CP-NS failed to provide adequate service or competitive rates.”
Interestingly, the CTA review panel doesn’t even mention open access as an option. That absence is even more bizarre given its recommendation to allow the existing railways to set aside up to one-third of their respective rail car fleets, for which shippers may pay “freight premiums” to guarantee rail car supply and service.
“These ‘premiums’ would be excluded from the railways’ respective Maximum Revenue Entitlement and charged under specific programs or conditions,” the review panel says.
Under this scenario, the railways could continue collecting the maximum under the MRE, plus a premium. How does that encourage better service?
If shippers have to bid for service, then those premiums would be more effectively paid to competing operators.
What little work that has been done investigating the potential of open access for improving competition in Canada’s rail service suggests entrants would need to charge more than standard rates to make it worth their while to step in where service was lacking.
A 2015 paper pending publication by three University of Saskatchewan agricultural economists led by James Nolan found that while the cost of entry would be high — the threat of entry could prove valuable as a means of keeping rates in check and even more importantly, securing service.
“Rail access will not guarantee a set of rates in a given market that would exist under perfect competition, but it will keep in check any tendencies towards monopoly behaviour,” Nolan said in an email.
It’s not perfect, but paying more to get more is a far more palatable option than paying more and getting less.