1. Railway Regulatory Freedoms: Rights and Obligations PRESENTATION TO THE REGULATORY GOVERNANCE INITIATIVE BY NICK MULDER CARLETON UNIVERSITY, OTTAWA OCTOBER 16, 2014

2. Freedoms over the Decades (1) 1) In the 1970s, consistent with the policy statement of the 1967 NTA: ◦the transfer of rail passenger services and deficits to VIA Rail; and ◦a partial offset for mounting grain transportation losses through government purchases of many hopper cars and the branch line rehabilitation program 2) In the 1980s: ◦repeal of the very low Crow Rate; ◦payment to the railways of the Crow Benefit of about $600 million per year with many conditions; and ◦through the 1987 Freedom to Move legislation, revised but more targeted rail regulations 2

3. Freedoms over the Decades (2) 3) In the 1990s: ◦the privatization of CN; ◦fewer and simplified rail regulations for grain and other shipments; ◦reduced role of the Canadian Transportation Agency; ◦elimination of all freight rate subsidies; and ◦much simpler branch line abonnement procedures. 4) In the 2000s: ◦steps for improved Final Offer Arbitration; ◦dispute arbitration procedures; ◦more focus on service obligations; and ◦revised grain transportation regulations. 3

4. Very Impressive Results Canada’s railways went from the worst (especially CN) to the best in North America Through proactive management, mergers, many operating improvements, large capital investments, new labour rules, etc As RAC and StatsCan data show, there have been major gains in shipments, revenues and capital investments over the past 3 decades Revenue per tonne mile has increased as has employee productivity Freight rates per tonne mile have on average decreased in real terms, not nominally Safety records have steadily improved as has fuel efficiency 4

5. Operating Ratios: How Low Can They Go? Operating ratios (OR) have gone from the 90s and 80s to the low 60s No other major Canadian industry has made so much progress in last two decades There have been large benefits to many shippers through better and faster service and equipment at relatively lower rates Other major gains have gone to shareholders, employees, executives and government Still, there are adverse consequences: loss of many branch lines, service east of Montreal, for rural and small shippers, and several weak short lines How low can the OR go? Is there a limit? Are there not consequences? Service? Safety? Capacity? Response? Employees? Shippers? The public? Politics? 5

6. Problems and Issues(1) 1) Services ◦Mounting concerns about railways’ service levels: focus on the main line, not on door-to-door service, smaller shippers, “first and last mile” ◦Lack of information to, and communications with shippers; limited legal and financial recourse to railway service failures – left-over issues from changes in the 1990s ◦Hence, the Government has undertaken various rail service discussions and reviews over two decades ◦Concluded with Bill C-52 - restoring balance between railway obligations and shippers’ rights ◦Good success so far but needs simplification and consistent arbitration 2) Grain Transportation ◦Huge crop, very cold winter, lack of service, farmers’ losses, lack of industry co-ordination, co-operative action ◦With no Grain Administrator nor the Wheat Board to inform and level the shipments, industry on both sides failed to act ◦Led to new regs and Bill C-30 (railway obligations and penalties and new inter-switching rules) ◦Mixed success so far. Micro management? Industry can’t do it alone? 6

7. Problems and Issues(2) 3) Safety ◦Overall a very good record, but Lac-Mégantic demonstrated a serious lack of up-to-date regs, standards, enforcement, information and problems with new large oil shipments ◦Good progress: many new regs now in place and more action underway, plus work on liability issues ◦However, still many problems. If it bleeds, it leads! If more, expect more regulations. 4) Review of the Canada Transportation Act ◦Comprehensive review underway until end of 2015. A good start. ◦But too much focus on the same old rail issues – what will be new? ◦Are there not more important issues? Making real change? 7

8. Tragedy of the Commons ? Interesting concept but not relevant to rail; rails are not a free resource and have restricted access, costs and conditions Except for the occasional surges, there are no real capacity problems; plus mostly large entities (shippers and railways) with ample money. Is there a need for peak capacity? As per the service reviews, the railways ought to focus more on needs/service agreements and invest in equipment/tracks and both parties meet their obligations With their new freedoms, railways have increased obligations - a two-way deal with mutual conditions It is a supply and logistics chain - all parties have to co-operate with mutual shared obligations 8

9. Politics of Freight Rates The railways seem to have limited institutional memory about the Politics of Freight Rates (see book by Howard Darling) Given the focus on efficiency and the bottom line, railways ignored key concerns, many shippers (including captive shippers), service obligations, communications and even politicians (especially in Western Canada) Railways forgot that for decades, if Western farmers had a problem it was “God damn the CPR” As Judy LaMarsh said: “If you scratch a Canadian’s back, you will find a railway track” Pools are gone but now there are even bigger grain players in the West and for other products; volume and service needs are increasing Further, many farmers have political clout in many ridings; small shippers too 9

10. Railway Obligations With more regulatory freedoms, there are more obligations but railways need to decide how to meet them Railways are common carriers and have to meet traffic service offered; that’s how they make money For all and “captive” and small shippers Service with joint shared obligations and penalties Safety too Trade off between efficiency and profitability versus service needs for all 10

11. Government’s Role and the Look-Ahead Government has effectively deregulated the railways over last 40 years Railways have done very well - maybe they went too far too fast? There is a need to focus on service, both large and small shippers with balanced obligations and financial/legal recourses as per Bill C-52 provisions Need to resist new regulations. Get commercial parties to sort it out - most are not small Fundamentally, there are more important transportation issues to focus on Railways and most rail shippers have done well Canada does not need more railway conservations but commercial action among all parties We have to move to and act on other issues: gateways, bottle necks and congestion in urban areas, air sector, among others 11