One of the most heated farm policy debates of late has been over the fate of the maximum revenue entitlement (MRE) keeping a lid on grain freight rates.
In the debate that emerged from the abysmal railway performance through the winter of 2013-14, axing the MRE has increasingly been portrayed as a quid pro quo for better service.
The MRE was introduced in 2000 to replace the arbitrary rate cap imposed when the government axed the Crow Benefit. It was never intended to be a long-term policy, but rather part of a five-year transition to a more commercialized (read deregulated) pricing environment.
It’s designed to protect shippers while allowing the railways to set individual rates for shipping western grain, while requiring them to stay within a total revenue limit based on all movements.
But is it good public policy or is it standing in the way of railways’ investment in modernizing the system or unduly hurting their revenues?
Even Murad Al-Katib, the grain sector lead adviser to the Canadian Transportation Act review secretariat, hinted at a grain transportation forum in Saskatoon last week that if it comes down to a discussion between freight rates and service, it’s service that shippers care the most about.
“I cannot recall one non-revenue entitlement sector talking about how their rates were their biggest concern — rates did not come up on my committee,” Al-Katib said. “Service is really the issue everyone is talking about.”
Mary Jane Bennett, representing the Frontier Centre for Public Policy, told that same conference the railways are being choked by regulation under the MRE.
“Rates under the revenue cap are below market so you are getting a good deal for the grain; it is at 25 per cent less than other commodities. But that low rate comes with a problem and conditions are being created not unlike that of the 1950s and ’60s when grain commitments to the USSR and China could not be honoured. Yet despite the crisis… the people around this room say keep the revenue cap, tinker with it a bit, introduce running rights, which is basically state-ordered taking of rail’s private property and conduct intrusive review of railway costs — all so farmers can get a cheaper rate.”
Bennett cited the 2013-14 winter as the end result of too much regulation, rather than not enough.
Service is indeed key to getting western grain to markets and there is little argument that it has been lacking of late.
But a newly released report by a subcommittee of the Crop Logistics Working Group says the MRE debate should be decoupled from the question of service.
“It is well established that there is no relationship between the cost of freight and the provision of service in the rail market,” the committee report says.
The MRE does not cap how much grain the railways can move, nor does it cap how much they earn. It merely caps the average rate they can charge per tonne, adjusted for railway inflation and the distance travelled. In other words, the more grain the railways move, the more they can earn.
The report noted commodities that don’t fall under the MRE criteria do not receive better service or lower rates.
In the grain sector, where the railways have a monopoly position at 88 per cent of the delivery points, “there is no practical or competitive alternative for grain transport, so the business and volumes will always be there and will move subject to the operational planning of the railway, not the commercial timing of the shipper.”
The subcommittee review found it was never anticipated that railway revenues would meet or exceed the MRE as is routinely the case. Rather, it was thought that overall rates would decrease due to competition — which has never materialized.
It would appear railway earnings from hauling grain are as close to the maximum as possible without going over, which would result in penalties paid to the Western Grain Research Foundation.
The railways have done quite well as a result of the MRE, rather than it being a drag on earnings. The evidence would suggest that in the absence of any competition, railway service is driven by shareholders’ priorities rather than shippers’.
So on one hand, the MRE is working; it protects producers from being gouged in a non-competitive market. But on the other, it also ensures the railways earn more hauling grain than they would if they had to compete for it.
But while the MRE has little impact on service, the lack of competition does.
It’s unlikely a solution will be found to the non-competitive nature of Canadian rail network any time soon. Even greater interswitching and open running rights offer limited gains. That leaves regulatory intervention as the best means of assuring reasonable service at a reasonable cost.