Canada - Recent federal legislation has raised the stakes in a decade-long battle between the railways and Canadian grain shippers.
 
The battle is over the interswitching radius.
 
Interswitching is a regulation to ensure that shippers located where only a single railway operates can access points that are not served by that railway.
 
The regulation kicks in when a shipper has immediate access to a single carrier, but is within a defined zone (radius) of one or more of that carrier's competitors.
 
The issue is particularly thorny for western Canadian grain shippers, since over 90 percent of their elevators are served by a single line.
 
Why it matters:
 
Grain companies argue that increasing the interswitching radius enhances competition between railways and ensures more efficient and reliable grain shipments.
 
Interswitching rolled back into the spotlight after the federal government announced it would set up an 18 month pilot program to test the idea of raising the radius from 30 kilometres to 160 kilometres.
 
The move was a response to a particularly bad shipping year in 2021-2022, and was passed in the omnibus budget, Bill C-47, in June.
 
The idea of the pilot, rather than maintaining the smaller radius, or permanently raising it, was meant to be a compromise between grain shippers, who like the idea of more carrier options, and the railways, who argue it will add hassle and bite at their financial footing and market share.
 
Both sides, however, have characterized the program as a cop-out intended to punt the issue down the road.
 
The Canadian Transport Agency tried a 160 kilometre radius between 2014 and 2017.
 
From the railways' perspective, that program ended for a reason, and they see no sense in re-testing the concept.
 
"Now, the government wants to resurrect a policy it already recognized was a failure," said Railway Association of Canada president Marc Brazeau.
 
However, shippers saw the 2014 trial as a success and think the policy should have continued.
 
"I don't know why we need a second pilot. It should have been made permanent right off the bat," said Wade Sobkowich, executive director of the Western Grain Elevator Association.
 
View from the Tracks
 
The railways mainly object to extended interswitching on three points.
 
For one, they say it will set the stage for U.S. railways to poach Canadian freight.
 
In an address to the Senate committee on national finance on 30 May 2023 Brazeau noted that regulated interswitching does not exist in the United States.
 
This creates an environment that will allow U.S. railways to solicit Canadian traffic at below market rates without any reciprocity for CPKC and CN to do the same south of the border.
 
"That means fewer available carloads for Canadian railroaders to move across Canada. It may also mean less available work for port workers if shipments end up in Seattle rather than Vancouver, for example," he told the committee.
 
The railways' second point is that the rate they receive for interswitching, as set by the CTA, does not fully offset the costs of doing it.
 
"Bill C-47 will force Canadian railways to move traffic, sometimes in the wrong direction, and always, at below-market rates," said Brazeau.
 
"The 2016 review found that below-market rates hurt railways' ability to reinvest. Railways cannot be the only part of our supply chain not operating at market rates."
 
The railways also contend that grain shippers already receive rock-bottom rates through the Maximum Revenue Entitlement regulation, which sets a limit on the income railways can earn for transporting regulated grains.
 
Because the process is costly and time-consuming, railways say it will tie up traffic and add complexity to the supply chain landscape.
 
"What those asking for this policy want is a cheaper rate," said Brazeau. "It is not about improving service. Nor will it improve competitiveness. Extended interswitching will do the exact opposite. The only winners with extended regulated interswitching are U.S. railways."
 
View from the Elevator
 
Canadian grain shippers say extended interswitching gives them more leverage when dealing with rail companies.
 
"What we're trying to do is create competitive tension," Sobkowich said.
 
Adding that the provision will only apply to a small number of shipments.
 
He estimated that, during the last pilot, interswitching was used in less than one percent of traffic, but it did leave companies in a better position those times it was used.
 
"It's like taking a flight. You prefer to take a direct flight, and if you can take a direct flight that gets you there in time, then you will. But if you can't get the direct link that gets you there in time, then it provides that option for you to take a connecting flight that does. You prefer to use your primary carrier, and if they can come to the table with proper service and decent rates, then you will use them. So it's completely within CN and CP's control as to whether they relinquish that business to a competing carrier or not," he said.
 
Sobkowich also disputed the railways' complaint that interswitching rates were non-compensatory.
 
"The agency's rate is set in a fair way by the CTA. It doesn't set the rate in such a way as to regulate the railways into unprofitability. It's set in such a way so that the railways make money on the movement," he said.
 
If the rate set by the CTA doesn't cover the costs of the operation, Sobkowich said that's a case to be made to the CTA, not the shipper.
 
Rates set by the federal agency keep them predicable and easy to budget, he added.
 
"It needs to be set by the CTA, or the railways will set the interswitching rate so high as to make it cost prohibitive."
 
Sobkowich argued that the Long Haul Interswitching (LHI) provision introduced in 2018 to replace extended interswitching has been a failure largely because it takes leverage away from shippers.
 
"Since it was introduced in 2018, not one application for LHI has been submitted to the federal government in any sector. The simple act of applying would draw the ire of the serving carrier," he said.
 
He also pointed to the extra red tape involved in that provision.
 
"Because of bureaucratic and legal hoops and hurdles, it would take many months to apply for and receive a rate for LHI, which is then only valid for one year. Any opportunity that presented itself would disappear over that amount of time, leading to lost sales and unhappy customers," he said.
 
Vested Interests
 
Barry Prentice, a professor of supply chain management at the University of Manitoba's Asper School of Business, doesn't have a horse in the race, but he aligns with the railways' position.
 
"The railways have always complained that the maximum rate they're allowed to charge to do an interswitch is not fully compensatory. They do it, but they're losing money doing it because of opportunity costs. Your locomotive is tied up doing this instead of something you want to do. Losing money needs an asterisk," he said.
 
The CTA sets the interswitching rates based on a formula that looks at all the costs involved and averages them out.
 
The intent is to ensure the operation doesn't cost more than the compensation the railway receives.
 
Nevertheless, the locomotives could be making the company more money than they do during interswitching.
 
Prentice says the railways were also disappointed that the legislation was pushed through in an omnibus budget bill.
 
"It doesn't affect taxation. It doesn't affect government spending. It's a regulatory change. Why is it in an omnibus bill? It just means that it doesn't get the same kind of scrutiny. To me, this is just an open door for vested interests to insert regulations that benefit themselves," he said.
 
Prentice sees the push for extended interswitching as rent-seeking behaviour, a subsidy under a different name.
 
"Farmers are maybe not weaned off the idea of subsidies yet because they enjoyed them for 100 years," said Prentice, referencing the Crow Rate that regulated freight rates for grain until the latter part of the 20th century.
 
"Of course, subsidies are very visible. But if you can get the same thing in a regulation, then it becomes very difficult to change that regulation. So your benefit can be secured for a much longer period of time. vested interests don't represent the best interests of Canadians. They can abuse their access to the government to get special privileges for themselves. Where's the logic of this from society's point of view?" he said.
 
He also suggested the whole exercise could backfire on grain shippers.
 
"We start to make one component of our supply chain less efficient, and that has an impact on the rest of the supply chain."
 
Fear Mongering
 
Sobkowich said complaints that railways are losing business to the U.S. are largely overblown.
 
"When people say it's going to bring in U.S. carriers, or it's going to ensnarl supply chains, it's just fear mongering. You need to create competitive alternatives, and if that includes access to class one carriers that have a strong presence in the U.S., then so be it. But the operational impact is going to be negligible because it's not even going to be used much, if at all," he said.
 
The cross-border imbalance in regard to interswitching may soon change.
 
Interswitching (known as "reciprocal switching" in the U.S.) has been a hot topic south of the border.
 
The U.S. Surface Transportation Board was expected to add the regulation last August, but delayed the decision to focus on its own supply-chain crisis in 2022, as well as the merger of Canadian Pacific and Kansas City Southern.
 
However, a decision is expected in August.
 
More Needed
 
While Sobkowich said grain shippers consider the reintroduction of extended interswitching as a victory, it doesn't go far enough.
 
The WGEA has said it would like to see the pilot made permanent, and Sobkowich suggested the radius should be 500 kilometres so every elevator in Western Canada would have access to an interchange.
 
Now, more remote areas like the Peace River region in northern Alberta are not within even the expanded interswitching zone.
 
"Nobody wants the railways to be unprofitable. The railways need to be profitable. But they also need to be priced in such a way that it recognizes that we're in a monopoly situation," he said.
 
Don Norman.