A New Train of Thought: Rail Regulation in Context

Rail transport issues have gotten a lot of attention lately, with concerns about oil by rail and challenges of shipping grain. Definitely issues that need to be addressed, but we should not be doing so through micro management and reverting back to policies from 50 years ago.

Regulatory activity from the 1880s through to the 1950s was very extensive, based on the belief that transportation policy was a key component of  “national policy” and on the commonly-held view that railways had a monopoly in transportation.

Then, in the 1950s, four important developments eroded the foundation of railway rate regulation in Canada:

• The expansion of the national highway network enabled trucks to carry traffic which had previously been captive to the railways and made short-haul, intercity trips by road more attractive than short-haul rail travel;

• Coal and petroleum rail traffic was either significantly reduced or shifted to oil and gas pipelines;

• Grain, petroleum and other bulk traffic moving from the Lakehead to the Atlantic Ocean was diverted to marine with the opening of the St. Lawrence Seaway; and

• Long-haul passenger travel was accommodated increasingly by a growing airline industry to the detriment of transcontinental passenger services.

The 1963 report of the MacPherson Royal Commission to study Canada’s transportation system, clearly established that monopoly-based regulation was inappropriate in light of pervasive competition in the transportation sector.  It recommended a competitive approach be used to determine freight rates and that minimal regulation be the order of the day.

The federal government adopted many of the Commission’s recommendations through the passage of the National Transportation Rail Safety ImageAct (NTA) in 1967. Amendments to the Act consequently led to major changes over the past four decades including the elimination of large rail passenger and grain transportation losses for the railways, the Freedom to Move regulatory reform that included new provisions for shipper rate recourse and branch line sales or abandonment, commercialization and privatization initiatives including the sale of CN and, lastly, a renewed focus on rail service obligations and on grain transportation issues.

With all these changes, railways have made immense progress and more productivity gains than any other segment of the transportation sector.  However, with more regulatory freedoms come more obligations. Railways are common carriers and have to meet traffic offered with shared obligations and penalties, plus ongoing improvements to safety regimes.

The recent grain backlog facing the North American rail sector has to be understood as a single unique occurrence resulting from a record crop and extremely cold weather. The solution to this situation is not to make arbitrary changes, as Bill C-30, the Fair Rail for Grain Farmers Act, does to a regulatory framework that generally works well. A look at a few of the latest proposals from some Members of Parliament hearkens back to rail “over-regulation” before the 1960s. It did not work then—why would it now?

Rather, mechanisms must be found that ensure effective collaboration among all the players, the total supply chain: railways, producers, grain handling companies, terminal operators, and port authorities. An institutional gap has developed since the demise of the grain transportation role of the Canadian Wheat Board and the elimination of other functions such as the Grain Transportation Commission and the Grain Administrator, which provided collective information for, oversight of, and logistics support of the complex grain transportation system. It would be more effective if the Fair Rail for Grain Farmers Act was not renewed and instead get the industry itself—many of them very big companies—to deal with efficient grain shipment through joint new institutional initiatives. They don’t need the Government to sort things out.

As per the government’s Bill C-52 legislation, the Fair Rail Freight Service Act, there is a need to focus on service for large and small shippers with balanced obligations and financial and legal recourses for shippers and railways.  However, there should be an objective to resist new detailed regulations, to avoid costly, complicated and inconsistent arbitration and to encourage commercial parties to resolve issues themselves.

So, what’s next? A comprehensive review of the Canada Transportation Act (CTA) is currently underway until the end of 2015. It is an important opportunity for making real future changes. It has a broad multi-modal mandate and has been undertaking extensive consultations. However, given its mandate to give priority to grain transportation, there is a risk of having too much focus on the same old rail issues and begs the question: are there not more important issues to make transport more of a growth engine, with a renewed effort to increase transport productivity in other sectors such as air, urban transit, and gateways?

Canada has an impressive record in transportation policy changes few would have imagined 25 years ago: deregulation of all modes, commercialization and privatization of airports, ports, air navigation services, Air Canada, and CN plus major subsidy changes and large scale infrastructure investments. These have allowed the transport sector to be an engine for growth; its productivity has increased much more than the overall economy’s. The next 10 to 20 years should be just as visionary and not solely consist of a few micro changes, such as those in recent months, including Bill C-30. Focus ought to be on key import-export gateways and on the future of the transportation and logistics needs of the top 10 cities in Canada within a comprehensive long-term strategy. In addition, other opportunities for change exist in the air sector, in urban transit, highway funding and more commercialization and privatization of government transport entities.

Nick Mulder is a former federal deputy minister of Transport and a senior associate at Global Public Affairs in Ottawa. This piece is an abridged version of a research paper he recently co-authored for the Canadian Transportation Research Forum’s upcoming 50th Annual Conference.