Canada's Parliament Building in Ottawa - Date/Photographer unknown.

5 October 2012

Will Rail Freight Service Review Lead to Interference in Railway Management?

Ottawa Ontario - The proposed amendments to the Canada Transportation Act allow the government to manage service contracts between railways and shippers. This supervisory role coupled with the ability to penalize performance represents an unprecedented interference in railway management and operation. Equally, it moves the government into the complex world of railway logistics. Known as the most operationally complicated system in the world, one forecasting mistake can, in the words of international rail logistics giant, Oliver Wyman, have impacts which "reverberate throughout the entire supply chain."
 
The government claim that its oversight of railway operations will enhance the movement of goods in Canada is questionable with the greater likelihood that it will negatively impact and bottleneck that movement. CN's CEO Claude Mongeau correctly characterizes the government proposal as one which allows "a shipper to show up and say I would like it on Tuesday." This is not how railways are run.
 
With the potential for serious consequences in the transportation of goods ahead, it is important that the reasons for this marked departure in the way railways are run be clear and the need for change urgent.
 
Prompting the proposed legislation is the Report of the Rail Freight Service Review. It found a need for intervention based on a survey of shippers by NRG and poor rail performance based on a report by QGI Consultants.
 
Yet the claim is made by Gandalf Group that the NRG survey lacks objectivity and is based on faulty methodology. As to railway performance, the findings by Edmonton consultants, QGI are challenged by Oliver Wyman Consultants on behalf of CN.
 
1. Did the communications and the methodology in the NRG survey compromise the reliability of the Rail Freight Service Review?
 
Communications:
 
Communications preceding the Rail Freight Service Review's report are contained in the Media Releases issued by Transport Canada. Transport Canada's important role as both sponsor of the Rail Freight Service Review and overseer of rail/shipper regulatory initiatives should have resulted in carefully worded communications to avoid any perception of bias.
 
According to the Gandalf Group, the below communications show significant bias and do not conform to industry best practices:
 
·  "There are high levels of dissatisfaction and complaints about the railways."
 
·  "As a shipper, this is your opportunity to tell us everything you would like changed about your relationship with the railways."
 
·  "The rail freight service review is being undertaken by the Government of Canada in response to complaints from shippers and other stakeholders about railway service over the last few years."
 
·  "The fact that we are moving forward with this review is good news for shippers of a broad range of commodity groups and will benefit grain farmers as well."
 
·  "Transport Canada is currently conducting a Rail Freight Service Review to investigate complaints by rail shippers. Transport Canada will also be analyzing potential remedies."
 
·  "A strong focus on identifying areas where performance is lacking and improvements can be made."
 
Gandalf Group found these communications compromised the study with shippers "primed" to provide negative answers.
 
It also found that NRG significantly overstated the extent of shipper dissatisfaction and provided a questionable analysis of its data.
 
Methodology:
 
From a total of 8,000 Canadian shippers, Transport Canada and the consultants derived a working sample of 585 from which they culled the list to 262 interviews without explanation of the methodology behind the culling. Gandalf Group calls the sample design "curious."
 
Satisfaction was rated on a range of 1-7 with 7 meaning very satisfied. NRG claims that the bar for satisfaction in the rail transportation survey should be at a 6 or 7. They base this claim on past studies where 50-70 percent of respondents had rated their satisfaction in that range. Gandalf Group claims that customer satisfaction responses vary depending on the industry. Retail, with its heavy branding, advertising, and customer service base, usually finds a greater number of 6 and 7 responses than in industrial or business-to-business surveys. The basis for the claim that 50-70 percent represents the norm in the 6-7 range in a rail transportation survey should have been provided. Its absence, claims the Gandalf Group, compromises the survey's reliability.
 
Equally, NRG categorized those respondents, amounting to about half, who gave the railways 6 out of 7 in the qualitative Stakeholder report as only "fairly satisfied." The Gandalf Group questions the meaning of a 5 rating and whether it was categorized as "dissatisfied".
 
In Gandalf Group's words, the "greatest flaw" of the report is that rather than drawing independent conclusions, NRG starts and proceeds on the assumption of railway fault. Interestingly, despite the communications which Gandalf Group say "primed" the respondents in one direction, NRG found that shippers with transportation options continue to ship by rail.
 
As with the "satisfied" category, Gandalf Group claims problems with the "dissatisfied" category.
 
Dissatisfaction at 1 or 2 (with 1 being very dissatisfied) is at 16 percent. By including a 1, 2, or 3, it stands at 35 percent. Gandalf Group states that the flip side means that two-thirds of respondents are satisfied with rail service. Yet, NRG curiously claimed a "significant dissatisfied shipper population."
 
Professional consistency states Gandalf Group requires that a survey which counts 6 and 7 as "satisfied" equally restrict "dissatisfied" to only 1 and 2 responses and not include a 3. If it is confined to 1 and 2 responses, it is surely a stretch to claim that a response of 16 percent amounts to a "significant dissatisfied shipper population."
 
Due to irreconcilable gaps, the Gandalf Group claims questionable reliability to answers on whether there has been an increase in shipper dissatisfaction over the past three years and whether the shipper has experienced financial consequences. On this latter question, Gandalf claims it is impossible to reconcile NRG's finding of 62 percent of shippers having experienced financial consequences with only 16 percent dissatisfied with the level of service from the railways.
 
After reviewing the NRG survey, the Gandalf Group concludes that its statistics show that "trains are getting from point A to point B in good time" but customer relations could be improved.
 
2. Did the lack of an end-to-end evaluation in the QGI Report compromise the Rail Freight Service Review report?
 
The QGI report lacks an end-to-end evaluation. End-to-end evaluations have the advantage in that they consider the relationship between the many players in the supply chain and assess the impact of each on rail transportation.
 
In the Terms of Reference, Transport Canada acknowledges that there are "many players" in the supply chain with "shippers, receivers, terminal operators, ports, or vessel operators... similarly responsible" and concluding that "an analysis will have to include an assessment of the cause of the problems." Yet, an end-to-end evaluation, known as the only type of study able to get to the cause of the problem, did not materialize.
 
Instead, QGI looked exclusively at rail assuming that shippers, terminal operators, trans-loaders, ports, shipping lines, trucks, shortlines, and all the many players behind the movement of goods are performing at 100 percent. If the purpose of the Report was to ensure the smooth functioning of the supply chain, then an end-to-end analysis should have been done. This type of analysis, claims Oliver Wyman, ensures that disruptions in the supply chain are located:
 
"All stakeholders must be considered as sources of potential delays, this includes parties that have a relatively small part in the supply chain but who can set off variability that ripples through to impact all parties and that, depending on the type and magnitude of the disruption may take from days to weeks to dampen back to a steady state."
 
"Misleading assumptions" are the result of a narrow and isolated focus. Oliver Wyman claims that if an end-to-end evaluation is not conducted, an alternative test is to assess rail performance through three metrics and measure performance vis-a-vis international peers. The three fail-safe metrics are:
 
1. Train speed;
 
2. Car velocity, or the overall average car miles that a railcar travels per day, and;
 
3. Terminal dwell time which assesses the efficiency in car handling and rail co-ordination of planning and operating functions. (Oliver Wyman claims this is a less reliable metric)
 
In reviewing these metrics and comparing Canadian railways and their peers worldwide, Canadian railways performed favourably with CN considered "world class". As to terminal dwell time, Oliver Wyman claims that recessionary pressures have shown a negative effect on dwell time due to fewer cars on the network from which to make trains. World leader in the reduction of dwell time was UP at nine percent, followed by BNSF at four percent, and CN at three percent, all accomplished during the recessionary period of 2006-09. Given the global recession which accompanied these years, Oliver Wyman finds the statistics "all the more noteworthy".
 
QGI did not perform an end-to-end evaluation. Nor did it compare CN and CP to its North American peers based on these metrics. Rather, QGI chose its own metrics and without any form of comparison, claimed problems in car order fulfillment and variability in transit time.
 
Yet, QGI also acknowledged that car ordering is an area of "high volatility" which impacts fleet distribution all along the line, that the extent to which car orders reflect demand is "impossible to determine from the data made available to QGI" and that "caution should be used in interpreting the car order fulfillment statistics." Limiting the QGI Report are the numerous unexamined factors affecting car supply.
 
Although Transport Canada found "poor forecasting by shippers" and the "over-ordering of cars" as "some of the issues... attributable to non-railway stakeholders", it did not become a variable. Other variables that should have been included are seasonality of shipments, peaks in the demand for products, port yard capacity, empty car delays by US railways, the weather conditions en route or at destination, delays in loading and unloading caused by shippers and receivers not being available on weekends, late vessel arrivals at ports, and adjustment by shippers after the cut-off date, deemed "significant" by Transport Canada.
 
Similar limitations attach to the QGI findings on transit times. Transit time, which measures "the time it takes loaded cars to move from origin to destination and the consistency of transit times" by its very definition suggests an examination of the supply chain is required. In fact, QGI noted an increase in transit times by 23 percent where cars arrived towards week's end due to receivers' facilities not being open on weekends. Although QGI alluded to the fact that there are factors beyond rail's control, it did not assess how they would skewer findings.
 
In its examination of transit times, QGI found that Canadian railways do not discriminate based on shipper size, access to rail competition, core as opposed to non-core railway origins, and shortline as opposed to CN/CP lines. This suggests that the railways are running efficiently, transparently, and without structural or systemic issues. The finding that rail does not discriminate based on access to rail competition should lay to rest claims of railway abuse of market power.
 
In the final analysis, Oliver Wyman concludes that by ignoring the inter-dependencies in the supply chain, the QGI report loses significant value and the only fair way to deal with the lack of performance attribution is to assess all players equally responsible:
 
The analysis presented in QGI's reports focuses on variability in transit time and car order fulfillment and is presented in the context of railroad performance. It would be more accurate, however, to interpret these performance metrics as indicators of supply chain-wide performance rather than rail performance alone. The only fair and accurate way to measure rail performance would be either:  a) hold the performance of other stakeholders in the supply chain constant, or b) conduct an end-to-end performance evaluation taking into account the impact that disruptions originating with any one stakeholder could have on other stakeholders in the supply chain."
 
"In the absence of an end-to-end supply chain evaluation, the variability demonstrated in the QGI analysis does not indicate significant railroad performance issues. Canadian railroads' favourable performance relative to international peers confirms this assessment."
 
3. Are shippers without recourse? Are the proposed amendments necessary?
 
The Rail Freight Service Review had available to it the CPCS Transcom report which outlined the current robust menu of choices available to shippers in the event they are dissatisfied with rail service. CPCS Transcom confirmed that:
 
1. Current shipper recourse against railways vastly exceeds that of other regulated industries.
 
2. Current shipper recourse in rail vastly exceeds that of the other transportation modes of air and marine.
 
3. Current shipper recourse in Canada greatly exceeds the range of remedies available to US shippers.
 
Yet, the Rail Freight Service Review claimed a further level of protection for shippers was necessary. While recognizing that shippers have a wide array of remedies under the Canada Transportation Act (CTA), the facilitator's report proposes a belt-and-suspenders approach, further layering shipper protection. The response of remedy overkill is all the more odd given that shippers had not complained under the CTA.
 
The facilitator's report, to be considered in CTA amendments, creates a complicated and convoluted three-tiered system of service agreements, arbitration, awards and penalties, requiring the Government to oversee railway logistics and, by extension, the supply chain. The proposal would allow a shipper to claim a need "for a car Tuesday" as CN has claimed and will turn railway operations over to the Government.
 
There are about 1,500 trains operating every day, with a daily interchange with shortlines of about 10,000 cars. Rail serves hundreds of customers and co-ordinates 2,000 train crews, 3,000 locomotives, and 200,000 rail cars. In the dense maze of railway logistics, known as the most complicated in the world, the current proposal will have serious repercussions on the supply chain. It is the equivalent of new and untested oversight in air navigation.
 
The proposed tiers move from a basic service for small shippers to a tier 2 level based on forecasting and proposed commitment of volumes. Tier 3 creates penalties which attach to situations where shippers not only forecast but equally commit. This is an over-simplification of the plan for its mind numbing flow-chart with accompanying arrows and side-bar explanatory notes means protracted arbitration lies ahead.
 
How did we get here? This part is somewhat unclear as past reviews of railways including the extensive 2001 Canadian Transportation Act Review found that railways are doing their job, are not making excessive profits, have increased productivity by 44 percent, and while retaining about 15 percent of the cost reductions, which in turn allowed them to gain greater financial self-sufficiency, have passed on gains to shippers with prices falling by 35 percent. To this day, Canada and the U.S. continue to lead the world in low rail freight rates. With adjustment for recent years, studies in the U.S. including Christiansen Associate show similar results.
 
For years, coal has claimed that it will move its agenda forward until it has created a Hobson's choice where the government options are reduced to one. That option would result in the carving off of the railway network, similar to Australia with its "patchwork of rail regimes". Under the Australian regime, the benefactor has been coal.
 
Yet, a full and public discussion should precede such a radical change to the way rail is done in Canada. Whether the carving up of the rail system is in the public interest, its effect on government, railway shareholders, shippers, ports, and cross-border rail movements are some immediate challenges worth discussion.
 
Mark Fagan of Harvard University's Taubman Center provides an extensive study of the Australian model in Introducing Competition into Natural Monopolies:  An Evaluation of Mandated Access to Australian Freight Railroads of the Australian regime. It shows that there are a multitude of problems with these systems including railway infrastructure not earning a market rate of return requiring government subsidization of operations. Heavy regulatory oversight, losses in rail operation efficiency, and increases in cost, are the side effect of these systems.
 
On the other hand, rail today is three times as efficient as other transportation modes. Not only fuel efficient, Canadian railways are self sufficient maintaining their own infrastructure, tracks, signals, sidings, cars, and locomotives at a cost of over $2 billion annually. It employs about 35,000 employees and with Canadian rail rates the lowest in the world, Canadian railways have literally helped reduce the cost of doing business in Canada.
 
Given the Government proposal to radically alter the Canadian railway industry, a reliable study of all the players is required. From that study, a compelling and urgent need for change should emerge. The Rail Freight Service Review and its proposals do not meet those criteria.
 
Mary-Jane Bennett.