Abolish the Canadian rail monopoly
June 24, 2008
Source: Francois Tougas, Financial Post
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National and Canadian Pacific operate monopolies on significant parts of
their railway networks. They enjoy almost unlimited power over rates and
service in uncontested or "captive" markets and at present there are no
market-based solutions to counteract that power. Why should Canadians
care? Because unfettered railway monopoly power is undermining the
competitiveness of a number of important Canadian industries, including
suppliers of steelmaking and thermal coal, base metal concentrate and
industrial minerals, lumber and pulp.
The best way to regulate a natural monopoly is to introduce competition
by allowing others (a "guest" railway, in this case) to access the track
infrastructure of the incumbent (the "host" railway) to vie for the
business. Modern economies already do this with other network industries
like telecom, cable and electricity and gas distribution.
This solution is commonly called "running rights" and it is not a new
idea. The Australians have forged ahead with running rights, realizing
efficiencies on various state rail systems. Railways throughout Canada
and the U. S. grant each other these rights regularly, by agreement. In
Canada, the statutory ability to compel those rights has been in force
for over a century.
The economic case justifies it. Not every Canadian shipper needs running
rights, as some already have truck or marine alternatives for the
shipment of their products. For others who are captive to a single
railway, limited running rights -- subject to certain tests to ensure
that the guest railway can demonstrate its fitness to operate a railway
-- may be appropriate. Of course, the guest railway would have to pay
the host railway for track access and there may be debates over the
appropriate level of that compensation.
For years, Canada addressed the railway monopoly problem by regulating
railways' rate-making ability and compelling them to provide service to
the far reaches of Canada. High government subsidies were needed to make
this possible. In 1988, regulatory reforms gave both railways control
over pricing, among other things, while rail users (shippers) were
granted three new remedies, to the extent they could use them.
For various reasons, none of these remedies intended to overcome railway
pricing power. Competitive line rates, interswitching and final offer
arbitration-- have proved useful or even available to most captive
Further reforms in 1996 continued the railways' steady ascent toward
financial success. Today, they are earning well in excess of their cost
of capital. However, that success has come by extracting high rates from
resource industries and even some grain growers -- and often service has
Resource shippers are the most captive. Typically, their mines and mills
are located in isolated areas on CP's or CN's rail lines. In these
circumstances, a railway enjoys tremendous market power: Its ability to
charge supra-competitive rates and to provide inadequate service is
unfettered by market discipline because there is no other railway
contesting those markets. Barriers to entry are tremendously high.
The result is an inefficient and inequitable transfer of wealth from
producers/ shippers to carriers. Railways are able to conduct themselves
free of the hallmarks of competition: low rates, rates coupled closely
to costs, innovation and good service. Instead of worrying about the
markets they serve, the railways focus on their customers' markets: If
commodity prices go up, the railways expect and even project rate
increases. When commodity prices are down, as many have been for most of
the past several decades, the railways set themselves a floor of
To a large extent, Canada's rail carriers decide which major industries
will participate in what downstream markets and whether these major
industries survive or excel. In a way, they manage the businesses of
Those who say that railways are charging "what the market will bear"
ignore the fact that there is no market. What is needed is effective
competition to create a market. Limited running rights will permit
resource industries to do what all companies seek to do -- namely, call
for tenders from more than one supplier (in this case, for the
transportation of their products).
All Canadian enterprises expect suppliers to compete to get their
business; in the case of essential facilities like rail, it is critical.
Easing access to railway infrastructure through limited running rights
will improve Canada's international competitiveness and allow resource
industries to take advantage of global value chains.
Despite increased fuel costs and a weakening economy, CN and CP are
financially healthy. They are very viable enterprises, paying their
capital expenditures and raising capital without difficulty. They are
also incumbents on their own systems, in the same way the original
telecom carriers are on theirs. New entrants have an inherent
disadvantage. CN and CP should be able to compete against new entrants,
and provide lower rates and better service to keep their customers.
It is simply in Canada's best interests for our resource industries to
realize the benefits of competition generally. Equity dictates that rail
carriers should not be preferred over those who are captive to rail. -
Francois Tougas is a partner with Lang Michener LLP and an adjunct
professor in competition policy at the University of British Columbia
Faculty of Law.