ARCHIVED — Vol. 146, No. 26 — June 30, 2012

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Regulations Amending the Railway Interswitching Regulations

Statutory authority

Canada Transportation Act

Sponsoring agency

Canadian Transportation Agency

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue

Interswitching is an operation performed by railway companies (carriers) where one carrier performs the pickup of cars from a customer (shipper) and hands off these cars to another carrier that performs the “line haul” (the majority of the linear distance of the overall railway movement). The interswitching arrangement is made in cases where a shipper has immediate access to a single carrier, but is within a reasonably close proximity to one or more of the competing carriers.

Under section 128 of the Canada Transportation Act (CTA), the Canadian Transportation Agency (Agency) may make regulations prescribing terms and conditions for the interswitching of traffic, as well as determine the rate per car to be charged for performing this operation and to establish distance zones for that purpose. The interswitching provisions of the CTA are considered to be competitive access provisions, allowing the shipper to choose their “line haul” carrier while having direct access to only one carrier.

To ensure fair and reasonable access to the entire railway system, interswitching has been regulated in Canada since 1904. The Railway Interswitching Regulations (Regulations) set the rates to be charged for interswitching services provided by the terminal carrier, thereby establishing a predictable and fair pricing regime that is applied equally to all terminal carriers providing interswitching services. Interswitching allows shippers to negotiate, through normal commercial processes, suitable terms and conditions of carriage with competing carriers from the interchange point onward, for the line haul portion of the overall car movement.

The Regulations have not been amended since 2004. During that time, there have been significant changes observed in railway company operating practices. The Agency has determined that its methodology for the development of interswitching service costs required review to ensure that the resulting rates accurately reflect current interswitching costs incurred by the railway companies.

Objectives

The proposed regulatory changes are part of the five-year statutory review of the interswitching rates and practices required under subsection 128(5) of the CTA, which provides that the Agency shall review the Regulations when warranted and at least once every five years.

The specific objective of the regulatory review is to determine whether the Regulations accurately and effectively reflect current railway company operating practices. Pursuant to section 128 of the CTA, the Agency shall, in determining the interswitching rate, take into consideration any costs that, in the opinion of the Agency, result from moving a greater number of cars or from transferring several cars at the same time. The Agency shall also consider the average variable costs of all movements of traffic that are subject to the rate, and the rate must not be less than the variable costs of moving the traffic. Further, the interswitching rates must comply with section 112 of the CTA, which states that interswitching rates must be commercially fair and reasonable to all parties.

Description

The Agency, pursuant to subsection 128(1) of the CTA, is proposing to amend the Regulations. The proposed amendment will affect new rates on a per car basis that more accurately reflect current interswitching costs. No other amendments to the Regulations are being proposed.

In determining the new interswitching rates, the Agency has considered 2007 traffic distribution patterns and 2009 costs, as those were the data available to the Agency at the time the new rates were developed. The rate proposal for interswitching car blocks of fewer than 60 cars would increase by 4.2% on average, while a reduction of 16.7% on average would occur for blocks of 60 cars or more. Table 1 below identifies the current rates as well as the proposed rates being established at this time.

Table 1

 

Interswitching distance zones

Rates Per Car for Interswitching Fewer
than 60 Cars

Rates Per Car for Interswitching a Block of
60 or More Cars

Current Rates ($)

Proposed Rates
($)

Variation (%)

Current Rates ($)

Proposed Rates
($)

Variation (%)

Zone 1

185

229

23.8

50

46

-8.0

Zone 2

200

248

24.0

60

55

-8.3

Zone 3

240

284

18.3

75

65

-13.3

Zone 4

315

251

-20.3

90

74

-17.8

Rate per kilometre

3.75

3.38

-9.9

1.45

1.20

-17.2

The Agency reviews key costing factors affecting the rates on an annual basis and makes adjustments as necessary to adequately represent the costs of interswitching operations and ensure that the rates are commercially reasonable.

Regulatory and non-regulatory options considered

As this is a review of the Railway Interswitching Regulations as required by subsection 128(5) of the CTA, non-regulatory options will not be considered at this time, as regulated interswitching is a legislative requirement.

Benefits and costs

The Agency, through its mandate as an economic regulator, performs various economic determinations, including the establishment of interswitching rates. In establishing interswitching rates and in other economic determinations, the Agency uses system-wide, average railway company costs, which incorporate a contribution towards constant costs. The system-wide average contribution to constant costs is derived from the empirical data provided by the railway companies and verified by Agency staff.

Benefits

Interswitching represents an important part of the competitive access provisions that are available under the CTA. Regulated interswitching rates benefit shippers by extending their access to the lines of competing railway companies at rates that cover the cost of moving the traffic to or from the interchange point. Regulated rates thus ensure that rail shippers derive, where available, the benefits of price competition, improved service levels and varying routing options. The railway companies receive, in turn, compensation for the costs in providing interswitching services.

The current Railway Interswitching Regulations have been in force in a similar format since 1988. The economic impact of these Regulations on shippers is generally positive because it allows more competitive shipping options. Moreover, the regulated interswitching rates, which reflect the total costs but not the commercial profits, are below the unregulated market rates. The savings, however, are difficult to quantify because the Agency does not have complete information on various market rates being used across the country. In some cases, because of changes to the formula, individual shippers may experience increases in the regulated rate.

Costs

The anticipated annual decrease in railway company revenue arising from the interswitching rate proposal is about $800,000, which is the difference between the current $49.8 million per year being earned by the railway companies under the current Regulations and an anticipated $49 million per year under the amended Regulations, nationally. Table 2 provides a full breakdown of the numbers by zone; these numbers are derived by multiplying the car count and the specific rate for each zone.

Table 2

1–59 Cars Interswitching Distance Zone

Car Count

Current Rates ($)

Revenue ($)

Proposed Rates ($)

Revenue ($)

Revenue Change ($)

1

58,252

185

10,776,620

229

13,339,708

2,563,088

2

20,880

200

4,176,000

248

5,178,240

1,002,240

3

25,528

240

6,126,720

284

7,249,952

1,123,232

4

60,274

315

18,986,310

251

15,128,774

-3,857,536


Blocks of 60 or More Cars

Car Count

Current Rates ($)

Revenue ($)

Proposed Rates
($)

Revenue ($)

Revenue Change
($)

1

74

50

3,700

46

3,404

-296

2

17,323

60

1,039,380

55

952,765

-86,615

3

2,437

75

182,775

65

158,405

-24,370

4

95,132

90

8,561,880

74

7,039,768

-1,522,112

Total revenue

49,853,385

 

49,051,016

 

Total change

-802,369

Methodology

The method for determining railway companies’ variable costs are set out in the Railway Costing Regulations (SOR/80-310), and stipulate that variable costs shall include the increases and decreases in rail operating expenses resulting from changes in the volume of traffic. In addition, certain costs are incurred by railway companies independent of traffic. These costs are called fixed or constant costs. For example, the cost of maintaining a tunnel or removing snow must be incurred regardless of the amount of traffic carried.

While the Railway Costing Regulations (SOR/80-310) set out various factors considered in making costing determinations, including the cost of capital and depreciation, the Uniform Classification of Accounts (UCA), which is prescribed by the Agency under section 156 of the CTA, is used by railway companies under federal jurisdiction to report their operating expenses, revenues and other statistics to the Agency, as well as to Transport Canada and Statistics Canada. This serves as a principal source of financial and operating data used in railway costing. Financial and accounting data on capital and operating expenditures come from over 40 property accounts and 160 expense accounts identified in the UCA manual.

The Agency, through its review of the Railway Interswitching Regulations, made changes to its methodology for calculating interswitching rates to better reflect costs associated with interswitching operations. Specifically, Agency staff eliminated the use of linear regression as it forces a relationship which the current data does not support. Linear regression was previously used in the development of interswitching rates to smooth out the results so that the rates increased proportionately with an increase in distance from the interchange. Agency staff found that rates do not necessarily increase proportionately with increases in distance from the interchange. The reasons for this include the fact that the rail network is composed of different grades of track and that customers and their sidings are not identical.

Also, in previous determinations, the Agency had based its assessment of the interswitching variable costs, in respect of trains of 1 to 59 cars, on a three-year moving average of the traffic counts to minimize the effect of the variations in the traffic distribution patterns and ultimately reduce the variability of the results. In the present proposal, the process was modified to use only data relating to the actual traffic interswitched from the most recent year available. This change will allow the analysis to more closely capture the evolving operational environment and respond to observed material changes in the work activities, and reflect more accurately the cost of interswitching.

Consistent with the current interswitching rate structure, the interswitching costs were developed for trains of fewer than 60 cars and for block trains of 60 cars or more in each of the four interswitching zones. In addition, the costs per each additional kilometre beyond Zone 4 were computed for these two categories of interswitching movements.

A contribution towards constant costs of 20.3% of variable costs was then added to the variable costs to establish the proposed interswitching rates. The resulting rates were rounded down to the nearest dollar to ensure that the effective contribution does not exceed the proposed level of 20.3%.

During this review, the Agency adopted a more robust methodology that captures the operating data of the railway companies more effectively. The 20.3% contribution reflects what the Agency considers to be “required” contribution. It is based entirely on railway costs and reflects the difference between the variable costs as calculated by the Agency’s Regulatory Costing Model and the total costs incurred by the railway companies as supplied to the Minister of Transport and used in the Agency’s variable cost calculations.

Table 3 again illustrates the proposed rate changes for each interswitching zone for interswitching fewer than 60 cars as well as for interswitching a block of 60 or more cars. The table presents for comparative purposes the current regulated rates, which became effective on November 5, 2004, and are based on the interswitching variable cost estimates for the year 2002 and a contribution towards constant costs of 7.5%, as well as the present proposal, which has been developed on the basis of the 2009 interswitching variable cost estimates and the increase in the level of the contribution to railway constant costs to 20.3%.

Table 3

Interswitching distance zones

Rates Per Car for Interswitching Fewer
than 60 Cars

Rates Per Car for Interswitching a Block
of 60 or More Cars

Current Rates ($)

Proposed Rates
($)

Variation (%)

Current Rates ($)

Proposed Rates
($)

Variation (%)

Zone 1

185

229

23.8

50

46

-8.0

Zone 2

200

248

24.0

60

55

-8.3

Zone 3

240

284

18.3

75

65

-13.3

Zone 4

315

251

-20.3

90

74

-17.8

Rate per kilometre

3.75

3.38

-9.9

1.45

1.20

-17.2

The assessment of the variable costs associated with trains of fewer than 60 cars produced diverging results. The variable costs associated with Zones 1 to 3 increased from their level in 2002, contributing to an increase in the proposed rates ranging from 18.3% to 24%.

Conversely, the variable costs for Zone 4 declined, resulting in a reduction in the proposed rate of 20.3%. Coincidentally, this figure is the same as, but unrelated to, the figure for the level of contribution to constant cost. The change in the proposed rate for Zone 4 is the result of several contributing factors. It should be noted that, in respect of trains of fewer than 60 cars, Zone 4 constitutes a major part of the total traffic, with approximately one third of the total number of interswitched carloads for this category of traffic. The traffic originating or terminating in Zone 4 is highly concentrated in a limited number of interchanges located in the Vancouver and Edmonton areas. The geography and the operational conditions prevailing at these interchanges and their associated rail yards are such that their inherent work activities and costs are either similar or lower than the system weighted average cost for Zone 3 traffic. But even more significant in the explanation of this disparity is the fact that some major components of the Zone 4 traffic are substantially lower than their comparative counterparts in the Zones 2 and 3 traffic. (See attached Appendix A for a graphic representation of the interswitching zones.)

Overall, five of the eight rate zones will see a reduction and thus will benefit shippers in general, while ensuring railway companies are fairly compensated for the imposed service they provide.

Rationale

Based on the Agency’s review of its previous methodology, a number of fine-tuning modifications were made to improve its accuracy in reflecting the actual costs of providing interswitching services by the railway companies. These modifications include the use of actual data recently collected by the Agency for railway operations, which allows for greater accuracy in setting rates as well as the use of a revised contribution to constant costs.

The regulated rates are based on actual system-wide costs incurred by the railway industry. The amount of time, effort and equipment required in performing interswitching activities, such as the number of cars handled, the distance travelled to/from the interchange point and the amount of sorting and classification of cars required in each interswitching operation, is also part of the interswitching rate determination. The work activities vary from one interchange to another, based mainly on the configuration of the rail yard and the location of customers.

In the course of the current review, the Agency calculated the average variable costs of all movements of traffic that are subject to interswitching rates, using the work activities information, and determined that these rates are not less than the variable costs of the movement of traffic as per subsection 128(3) of the CTA. In addition to variable costs associated with the movement, the Agency calculates a contribution to constant costs. These costs are added to variable costs to produce an interswitching rate that covers the railway costs.

In consideration of all of the above, the Agency has determined that a contribution of 20.3% of variable costs represents, at this time, an appropriate compensation for railway constant costs. The Agency is satisfied that the resulting rate levels represent the right balance, a balance which ensures the maintenance of effective competitive access through interswitching while providing rail carriers with fair and reasonable compensation for services provided as an imposed public duty. The Agency considers that the rates established under the new methodology are commercially fair and reasonable to all parties.

Consultation

Starting in December 2007, the Agency began soliciting comments as part of its ongoing review of the Railway Interswitching Regulations. Over the course of the next two years, the Agency engaged with various stakeholders on a variety of questions related to interswitching. The responses received were grouped and integrated into a consultation paper. On April 21, 2010, the Agency released its consultation paper back to the stakeholders, requesting comments in regard to the interswitching rate changes. The Agency received 10 responses through this round of consultations from interested shippers, shipper groups, railway companies and provincial governments.

Stakeholders were asked to comment on the following eight topics: (1) the contribution toward railway companies constant costs, (2) the methodology for the determination of the interswitching variable costs, (3) the use of linear regression, (4) the use of single-year results versus multi-year average, (5) the cost methodology for interswitching block trains, (6) the co-production agreements and non-conventional handling arrangements, (7) the interswitching rate proposal and (8) the impact of the rate proposal. The comments received focused primarily on the following three topics: (1) the contribution to constant costs, (2) the methodology for the determination of interswitching variable costs and (3) the cost methodology for interswitching block trains.

(1) Contribution toward railway companies constant costs

The comments received indicated that most shippers and shipper groups were not supportive of the increase in the contribution to constant costs and, consequently, the interswitching rate increases. They felt this would impact single-car shippers by increasing the overall rail freight rates.

Conversely, the railway community welcomes the increase, claiming that the current interswitching rates are artificially low and are thus being subsidized by other rail traffic. The railway community argues that the proposed rate increases are insufficient and still result in rates that are lower than the total cost of operations, including a reasonable return.

The Agency is of the opinion that the proposed contribution to constant costs is fair and reasonable, as supported by evidence and actual data collected. Since the last review in 2004, the Agency adjusted its methodology to be more robust in calculating the contribution to constant costs based on actual railway data to better reflect the difference between variable costs calculated pursuant to the Agency’s Regulatory Costing Model and the total costs incurred by the railway companies as part of information supplied to the Minister of Transport. The Agency finds that using contribution to constant costs based on actual empirical data is a valid practice and the proposed contribution of 20.3% is fair and reasonable to all parties.

(2) Methodology for the determination of the interswitching variable costs

The Agency received comments concerning the above, in which some groups were in support of the change to the methodology for determination of interswitching variable costs as it reflects the changes to railway companies operational practices, while others were concerned that the changes would have an adverse effect on single-car shippers because the increase in single-car interswitching rates would cause increases in rail freight rates and would limit the shippers’ competitive access. It should be noted, however, that the interswitching rates for block trains would decline as a result of the proposed changes in the methodology.

A review of the empirical data, which pointed to some significant operational changes since 2003, suggested the need for three changes to the methodology used to calculate interswitching rates: discontinuing the use of linear regression, using single-year results in place of multi-year averages, and using a more accurate cost methodology for interswitching block trains.

In particular, some stakeholders voiced their concerns in regard to the removal of the use of linear regression and the switch from multi-year averages to single-year results in the methodology for the determination of interswitching variable costs, and therefore the interswitching rates.

The Agency made the change to remove the use of linear regression as it forces a relationship between the variables that the current data does not support. The Agency found that rates do not necessarily increase with increases in distance from the interchange (Zone 4) for various reasons, including variations in the rail network that is a combination of different grades of track, and different customers’ sidings. Handling of freight is also different based on transit speed, complexity and geographic orientation. All of these factors cause the variable costs and workloads to vary in a way that has no linear relationship to the distance from a historic interchange.

In regard to multi-year averages, the Agency has moved towards the use of single-year results as it allows for the analysis to more closely capture the evolving railway operational environment and respond to observed material changes in the work activities, and ultimately reflect more accurately the costs of interswitching.

(3) Cost methodology for interswitching block trains

Some comments received with regard to the cost methodology for interswitching block trains were in favour and some were not in favour of the increase in rates for the interswitching of single cars (fewer than 60 cars), this increase being potentially detrimental to the “small shippers.” However, the contention that shipping a small number of cars means the shipper is small is not necessarily correct. Many large companies ship single cars based on their own operational requirements which take into consideration rail network and siding capacities, as well as the type of product shipped. In fact, the Agency is aware of several large shippers who prefer to ship their freight in single rather than block car formations to respond to the demands of their customers for just-in-time products. Block customers of 60 cars or more are a group of shippers whose position in the network, operating capacity and commodities interact to make them much more efficient for the railway companies to handle than other single-car customers. It is proposed that, to reflect this operational reality, the rates for shipping car blocks of 60 cars or more decline.

As per subsection 128(2) of the CTA, in determining an interswitching rate, the Agency shall take into consideration any reduction in costs that, in its opinion, results from moving a greater number of cars or from transferring several cars at the same time. As per the CTA, the Agency has taken into consideration the reduction in costs that result from moving a greater number of cars.

There are no provisions within the CTA or the Regulations that would allow the Agency to shift costs from one group of shippers to another, based on their size.

To lower costs for “small” or single-car shippers, either the railway company would have to be under-compensated or the cost shifted to shippers of large blocks. In both cases, these actions would be in direct contravention of the CTA.

The Agency carefully reviewed and considered all the comments received by the various stakeholders and finds it appropriate to move forward with the proposed rate changes. The Agency finds that the revised interswitching rates are commercially fair and reasonable to all parties.

Implementation plan

The interswitching of railway traffic has been regulated for over 100 years and is a commercial agreement between railway companies whereby one railway company will carry traffic for the other railway company and vice versa to ensure that captive shippers have access to the rail system at a rate that is below market rates. Railway companies are fully responsible for reimbursing each other on a yearly basis in regard to this line of business. When rates are revised, the railway companies will then apply the new rate or rates for billing purposes to one another. If railway companies interswitched a similar amount of traffic with each other, the net effect on revenue would be neutral.

To fully implement the new rates, the Agency would produce an Order which would direct the stakeholders involved to incorporate the amended rates. The stakeholders would then be responsible for ensuring the use of the amended rates in their day-to-day interswitching operations.

Implementation, enforcement and service standards

There are no enforcement provisions contained within the CTA for interswitching. With that said and as mentioned above, railway companies reimburse each other in regard to providing interswitching services and, as a result, police each other in relation to the application of the prescribed rates.

Compliance mechanisms are contained within the CTA and may include administrative sanctions, in particular subsection 120.1(1) of the CTA, which allows for shippers to file a complaint to the Agency for unreasonable charges and/or terms and conditions for the movement of traffic, as well as various appeal provisions that are available to affected parties. Also, subsection 161(1) of the CTA allows for final offer arbitration (FOA). This allows a shipper who is dissatisfied with a rate or rates charged or proposed to be charged to file an application with the Agency for FOA, at which time the Agency will refer the matter to an independent arbitrator for a final judgment. This judgment is binding on all parties for a period of one year.

The Agency reviews the railway interswitching costs annually and revises the rates accordingly to reflect any changes in the costs.

Contact

Stephan Coqueux
Canadian Transportation Agency
15 Eddy Street
Gatineau, Quebec
K1A 0N9
Email: Stephan.coqueux@otc-cta.gc.ca
Telephone: 819-997-7702

Appendix A — Interswitching Zones Graphic Representation

The information about this graphic is in the surrounding text

The following interswitching distance zones are established:

  • (a) interswitching distance zone 1, being a zone that includes sidings located wholly or partly within 6.4 km of an interchange;

  • (b) interswitching distance zone 2, being a zone that includes sidings located

    • (i) wholly or partly within 10 km of an interchange, and

    • (ii) wholly outside interswitching distance zone 1;

  • (c) interswitching distance zone 3, being a zone that includes sidings located

    • (i) wholly or partly within 20 km of an interchange, and

    • (ii) wholly outside interswitching distance zones l and 2; and

  • (d) interswitching distance zone 4, being a zone that includes sidings located

    • (i) wholly or partly within a radius of 30 km of an interchange, and

    • (ii) wholly outside interswitching distance zones 1, 2 and 3.

Where a siding is located wholly or partly within the interswitching distance zone 4 and the point of connection with the siding is more than 40 km from an interchange along the line of track of a terminal carrier, the interswitching rate for each car is increased for each kilometre over 40 km by an amount equal to the rate per kilometre set out in column IV or V.

PROPOSED REGULATORY TEXT

Notice is hereby given that the Canadian Transportation Agency, pursuant to paragraph 128(1)(b) of the Canada Transportation Act (see footnote a) and subject to the approval of the Governor in Council pursuant to subsection 36(1), proposes to make the annexed Regulations Amending the Railway Interswitching Regulations.

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Stephan Coqueux, Analyst, Rail, Air and Marine Disputes Directorate, Dispute Resolution Branch, Canadian Transportation Agency, Gatineau, Quebec K1A 0N9 (tel.: 819-997-7702; fax: 819-953-5564; email: Stephan.Coqueux@otc-cta. gc.ca).

Ottawa, June 19, 2012

JURICA ČAPKUN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE RAILWAY
INTERSWITCHING REGULATIONS

AMENDMENT

1. The schedule to the Railway Interswitching Regulations (see footnote 1) is replaced by the schedule set out in the schedule to these Regulations.

COMING INTO FORCE

2. These Regulations come into force 30 days after the day on which they are registered.

SCHEDULE
(Section 1)

SCHEDULE
(Sections 8 to 10)

INTERSWITCHING RATES

Item

Column I





Interswitching distance zone

Column II

Rate per
car for interswitching traffic to or from a
siding ($)

Column III


Rate per
car for interswitching a car block ($)

Column IV


Additional
rate per kilometre for interswitching a car ($)

Column V

Additional
rate per kilometre for interswitching a car in a car block ($)

1.

Zone 1

229

46

N/A

N/A

2.

Zone 2

248

55

N/A

N/A

3.

Zone 3

284

65

N/A

N/A

4.

Zone 4

251

74

3.38

1.20

[26-1-o]

Footnote a
S.C. 1996, c. 10

Footnote 1
SOR/88-41