We live in an era of the primacy of markets.
In particular, regulation of markets has been deemed as undesirable, a long-term trend that began with neo-conservatism in the late 1970s and early 1980s.
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But Canadians are increasingly being hit in the face with examples where greater regulation is becoming a necessary evil.
From price-fixing staple groceries like bread to a telecom compact that’s seemingly totally captured its federal regulator, examples abound where smart, consumer- and customer-focused regulation seems the only solution.
Nowhere is this more apparent than when it comes to Canada’s two major railways. I recently had the opportunity to take in a panel discussion of railways.
As the shippers — in particular the association that represents the grain companies — noted during the discussion, what they’re truly facing is two functional geographic monopolies.
Experience tells us, looking at the telecom sector, that you need at least four major competitors for a market to function properly. Fewer than that and you’re inevitably faced with tacit collusion.
Here in Manitoba when MTS, the fourth major cell carrier, was absorbed by a national competitor, rates rose, to become about what they are in the rest of the country. Meantime Saskatchewan, with its provincial carrier SaskTel still intact, continues to enjoy the lowest rates in the country.
So one has to wonder, what chance do shippers really have when they’re faced with even more market concentration in rail?
True, there’s already significant regulation in place, through the Canada Transportation Agency and the legislation that body enforces. For example, rates are kept under control through the maximum revenue entitlement for both railways, when moving grain. Any excess is funnelled back to farmers through public agronomic research.
But where it all falls apart is the question of service levels. Here the problem is no competition and captive shippers.
When it comes to bulk commodities that move by rail, there is no alternative. Trucking would be slow and prohibitively expensive. We lack a waterway on par with the Mississippi, and we have some very mountainous terrain between the Prairies and the main port used to export these commodities. And there’s no domestic market large enough to displace exports of any of these commodities.
That puts railways in the enviable — if you run a railway that is — position of knowing your customers can either accept your terms or go pound sand.
So that means railways have the clear incentive to keep their operating costs as low as possible, and their freight movement as even as possible throughout the year.
When it comes to railway management the most important number in the boardroom and to shareholders is ‘operating ratio.’ A railway’s operating ratio represents the ratio of its operating costs to its revenue — the relationship of its operating costs to its revenue.
The higher the revenue and the lower the costs, the happier executives and shareholders will be.
The missing piece of the puzzle for railways in Western Canada is any mechanism that would require them to maintain adequate resources to have some sort of surge capacity.
As we’ve seen this crop year, that’s not the case. Even with a dramatically smaller crop to move due to the drought last growing season, the two major railways have failed comprehensively in their duty to provide service.
The most recent revamp of the regulatory environment has failed to deliver relief. The legislation envisioned reciprocal penalties that would have held both shipper and railway accountable to each other.
But in practice they’ve simply failed to materialize. As one transportation insider I recently spoke to put it, railways write the contracts, and they’re not about to penalize themselves.
Perhaps the time has come for government to step into this void, with standardized shipping contracts that are fair to all. There’s a precedent for this in the agriculture sector, with standardized equipment purchase contracts.
If that’s not an option, perhaps it’s time to take a much more dramatic step, and allow true joint running rights in Canada’s rail sector.
The latest legislation did extend that somewhat, but it imposed geographic limits and only involved the major railways.
Perhaps it’s time to open it up further and allow some upstart short lines to start running trains to the coast.
What’s not sustainable for the national economy is the status quo.
That same transport insider summed the current situation up nicely, describing the major railways as meters, that limit the national economy for their own benefit.
