Competition Bureau obtains remedies in BC Rail merger

Backgrounder

July 02, 2004

---

Background

On November 25, 2003, the Government of British Columbia announced that Canadian National Railway ("CN") was the successful bidder to operate BC Rail. Under the terms of the transaction, CN will acquire all the shares of BC Rail Ltd. and partnership units in the BC Rail Partnership and the long-term right to operate over its railbed. The B.C. Government will retain ownership of the track and railbed with CN assuming responsibility for rail transportation and infrastructure maintenance.

The Competition Bureau conducted a comprehensive merger review to determine the competitive effects of this very complex transaction. The Bureau contacted market participants and gathered information from a wide range of sources, including shippers with facilities located on or near the BC Rail network, reload operators performing truck-rail movements, competing railways and other stakeholders.

The transaction raised serious competition issues in two main areas: rail interline transportation of commodities, such as lumber, between the BC Rail territory and various markets throughout North America and rail transportation of grain from the Peace River area.

The Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose specific information obtained during the course of a merger review. However, general findings on the relevant competition issues are summarized below.

Rail Interline Transportation

Shippers on the BC Rail line have been able to reach various markets in North America by routing their traffic through CN at Prince George or through Canadian Pacific Railway Company, Burlington Northern and Santa Fe Railway Company or Union Pacific Corporation in Vancouver. Maintaining these competitive options was a major concern for the Bureau. The Consent Agreement provides the following remedies:

Open Gateway Rates

• CN must publish and maintain Open Gateway Tariffs. These tariffs will give shippers direct access to competing rail carriers in Vancouver for the long haul transportation of their products to markets.
• Tariffs will include rates charged by CN to connecting rail carriers for haulage of traffic between BC Rail points and Vancouver where these competing carriers pick up the cars for transportation to final destinations. Specific rates will be provided for each of BC Rail's five distinct geographic zones and four different load weight categories.
• Rates will be adjusted annually, using an index well-known to the North American rail industry, called the Rail Cost Adjustment Factor (adjusted for productivity gains) ("RCAF-A").
• Published rates cannot be adjusted below initial levels but they are maximum rates. CN and connecting carriers can still agree to lower rates in confidential contracts, a practice which currently exists in the industry.

Transit Times

• CN's performance on transit times will be measured against the 2003 BC Rail average transit time data on interchange traffic from each of the five zones identified in the Open Gateway Tariffs to the Vancouver interchanges as follows:

BC Rail benchmark transit in hours

Zone	BC Rail benchmark transit in hours
Vancouver — Lillooet	95
Exeter — Williams Lake	100
Quesnel — Prince George	120
Mackenzie — Fort St John	150
Fort Nelson	170

• Financial penalties will be assessed against CN when its average transit performance for a specific zone in a given period exceeds one of the corresponding transit time benchmarks identified above. The penalties will go into a trust fund maintained by the British Columbia Railway Company ("BCRC") and dedicated to fund upgrades of the BC Rail line. Disputes about penalties will be referred to commercial arbitration.
• Post-merger, CN has a penalty-free transition period of one year followed by a four-year period with the penalty regime in place.
• The Commissioner of Competition will be entitled to reinstate the penalty regime for a further period of five years, if the Commissioner determines that CN has not respected its transit time covenants.

Car Allocation

• Safeguards have been added to ensure that shippers are not discriminated against through unfavourable car supply conditions for choosing competing carriers over CN for long haul transportation.
• Shippers will be allowed to order through CN additional cars from connecting carriers during times of car shortage and will continue to be able to lease additional cars as required.

Transportation of Grain from the Peace River Area

Pre-merger, CN and BC Rail competed vigorously through rates and services provided to grain elevators located on their respective lines at Dawson Creek, B.C., and Rycroft in north-western Alberta. The Consent Agreement includes the following remedies which are aimed at preventing CN from materially increasing rates or curtailing service levels in the transportation of grain from the Peace River area:

• pricing levels for Single Car Rates have been linked on export grain movements to Vancouver and Prince Rupert to competitive zones;
• multi-car incentives in the Peace River area will continue to be available to the extent they are available at competitive points;
• frequency of pre-existing switching service levels have been maintained, and
• safeguards have been added to ensure non-discriminatory supply of covered hopper cars for the transportation of grain.

Monitoring and Compliance

Under the Consent Agreement, the Commissioner of Competition has specific authority for the purpose of assessing and securing CN's compliance with its commitments. The Commissioner may appoint a monitor with the authority to obtain records from CN and interview CN officials, and designate an auditor to examine CN records to ensure compliance.